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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x Annual report pursuant to Section 13 or 15(d) of the Securities
- ------ Exchange Act of 1934. For the fiscal year ended December 31, 2000
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
000-29815
ALLOS THERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 54-1655029
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7000 NORTH BROADWAY, SUITE 400
DENVER, COLORADO 80221
(303) 426-6262
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to be best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of February 23, 2001, there were 22,957,251 shares of the Registrant's
common stock outstanding and the aggregate market value of such shares held by
nonaffiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on February 23, 2001) was approximately
$82,257,406. Shares of the Registrant's common stock held by each officer and
director and by each person who owns 10% or more of the outstanding common stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
report on Form 10-K to the extent stated therein.
Certain Exhibits filed with the Registrant's Registration Statement on Form
S-1 (Registration No. 333-95439), are incorporated by reference into Part IV of
this report on Form 10-K.
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TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS.............................................................................. 1
ITEM 2. PROPERTIES............................................................................ 19
ITEM 3. LEGAL PROCEEDINGS..................................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................... 19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................................... 20
ITEM 6. SELECTED FINANCIAL DATA............................................................... 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................. 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK............................... 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................... 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................................... 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................... 25
ITEM 11. EXECUTIVE COMPENSATION................................................................ 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................................ 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON
FORM 8-K.............................................................................. 26
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PART I
Unless the context requires otherwise, references in this report to
"Allos," the "Company," "we," "us," and "our" refer to Allos Therapeutics, Inc.
This report contains forward-looking statements. These forward-looking
statements include, but are not limited to, statements concerning our plans to
continue development of our current product candidates; conduct clinical trials
with respect to our product candidates; seek regulatory approvals; address
certain markets; engage third-party manufacturers to supply our clinical trial
and commercial requirements; hire sales and marketing personnel; and evaluate
additional product candidates for subsequent clinical and commercial
development. In some cases, these statements may be identified by terminology
such as "may," "will," "should," "expects," "plans," anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms and other comparable terminology. These statements involve known and
unknown risks and uncertainties that may cause our or our industry's results,
levels of activity, performance or achievements to be materially different from
those expressed or implied by the forward-looking statements. Factors that may
cause or contribute to such differences include, among other things, those
discussed under the captions "Business," "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Forward-looking statements not specifically described above also may be found in
these and other sections of this report.
ITEM 1. BUSINESS
OVERVIEW
We are a pharmaceutical company focused on developing and commercializing
innovative small molecule drugs, initially for improving cancer treatments.
Small molecule drugs, in general, are non-protein products produced by chemical
synthesis rather than biologic methods. Our lead product candidate is RSR13.
RSR13 is a synthetic small molecule that increases the release of oxygen from
hemoglobin, the oxygen-carrying protein contained within red blood cells. We
believe RSR13 can be used to improve existing cancer treatments and treat many
diseases and clinical conditions attributed to or aggravated by oxygen
deprivation. Deprivation of oxygen in the body is called hypoxia.
The presence of oxygen in tumors is an essential element for the
effectiveness of radiation therapy in the treatment of cancer. We have
demonstrated in Phase II clinical trials that RSR13 significantly improves the
efficacy of radiation therapy for treating brain metastases, or tumors which
have spread to the brain, and glioblastoma multiforme, a highly aggressive form
of primary brain cancer. In February 2000, we commenced a Phase III trial of
RSR13 in combination with radiation therapy for the treatment of brain
metastases. We believe that this trial, if positive, will serve as the basis for
seeking marketing approval for RSR13 from the FDA for this indication. In
October 2000, we announced extended survival data of two Phase II clinical
trials of RSR13 combined with cranial radiation therapy in patients with
glioblastoma multiforme (GBM) and patients with brain metastases. In addition,
in November 2000, we announced positive preliminary response rate data from our
Phase II clinical trial of induction chemotherapy followed by radiation therapy
in combination with RSR13 for the treatment of patients with locally advanced,
inoperable non-small cell lung cancer (NSCLC). We are also developing RSR13 for
improving the efficacy of radiation therapy in treating other forms of cancer.
We believe RSR13 can be used to treat many other diseases and clinical
conditions. We intend to seek corporate partners to jointly develop RSR13 for
treating the hypoxic effects of acute blood loss and decreased blood flow
encountered in surgical procedures and also for improving the effectiveness of
treatments for cardiovascular disease and stroke. In addition, we plan to extend
our expertise in developing drugs to other compounds and technology platforms to
which we have access through our research collaborations or that we may acquire
or in-license from third parties.
Since July 1994, we have focused substantially all of our attention on
research and development activities for pharmaceutical product development.
These efforts include pre-clinical and clinical development of RSR13 aimed
toward commercialization and use in cancer and cardiovascular disease, and the
discovery and development of new products.
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SCIENTIFIC BACKGROUND
Oxygen is indispensable to all human tissues. It is transported through the
body by hemoglobin, a protein contained within red blood cells, and is consumed
in the production of energy for sustaining life. Each hemoglobin protein can
bind up to four molecules of oxygen. After picking up oxygen in the lungs and
circulating to various tissues in the body, each hemoglobin protein, on average,
releases one of its four oxygen molecules and retains the other three in
reserve. Thus, approximately 75% of the oxygen carried by hemoglobin represents
an untapped reservoir of oxygen potentially available to the body. When
hemoglobin returns to the lungs, it replenishes its store of oxygen for its next
round trip through the body.
Although oxygen is ordinarily vital for life, in some instances, energized
forms of oxygen, called oxygen radicals, can be toxic to cells. For example,
during radiation therapy for a cancerous tumor, radiation-induced oxygen
radicals contribute to the death of cells in the tumor. Therapies that increase
oxygen levels in tumors at the time of radiation can therefore enhance the
cytotoxicity of radiation therapy.
Malignant tumors often have a poorly regulated blood supply caused by the
disorganized growth of new blood vessels into the tumor. This, in addition to
the rapid cell growth of malignant tumors, leads to the formation of hypoxic
regions within the tumor, a phenomenon known as tumor hypoxia. Research shows
that hypoxic regions within malignant tumors are substantially more resistant to
cell damage from radiation than oxygenated regions. Even small hypoxic regions
in a tumor may affect the overall response to radiation therapy and increase the
number of surviving tumor cells. Tumor cells that survive radiation therapy can
become resistant to therapy, and can cause the tumor to recur in the same
location and metastasize to distant sites, causing continued illness and death.
Tissue hypoxia is also a factor in many other diseases and clinical
conditions. For example, during cardiac and other types of surgery, tissue
hypoxia can occur from decreased oxygen carrying capacity caused by acute blood
loss or decreased blood flow to major organs, such as the brain, heart, liver
and kidneys. In addition, hypoxia caused by the acute blockage of a major blood
vessel can lead to conditions that cause significant morbidity and mortality,
such as acute angina, or chest pain caused by decreased blood flow to the heart,
myocardial infarction, or heart attack, and stroke.
The body has developed certain natural responses to mitigate or reverse the
damage of some forms of hypoxia. For example, when the body is suddenly
subjected to acute hypoxia, such as during acute blood loss, several highly
predictable responses occur. Initially, the body increases the rate of breathing
to more fully oxygenate the blood as it passes through the lungs. The body also
attempts to improve blood flow by increasing the rate and force of cardiac
contractions. Subsequently, the red blood cells produce increased amounts of
2,3-diphosphoglycerate (2,3-DPG), a naturally occurring small molecule that
chemically decreases the oxygen binding affinity of hemoglobin. 2,3-DPG
essentially taps into hemoglobin's oxygen reservoir, and increases the average
unloading of oxygen from hemoglobin from 25% to approximately 35%. Finally, over
the next several weeks to months, the body produces a natural hormone known as
erythropoetin to stimulate production of new red blood cells.
Although production of 2,3-DPG is effective as a natural response
mechanism, it is not a viable candidate for therapeutic applications. 2,3-DPG is
produced inside the red blood cells and cannot by itself penetrate the red blood
cell membrane if medically administered to a patient. As a result, therapeutic
administration of 2,3-DPG cannot be used to oxygenate cancerous tumors to
enhance the effectiveness of radiation therapy. In addition, the natural
increase of 2,3-DPG levels during acute hypoxic episodes takes several hours to
days to reach a peak effect. 2,3-DPG, therefore, is not effective in treating or
preventing acute hypoxic conditions associated with surgical blood loss or
cardiovascular disease, conditions that require an immediate response.
THE ALLOS SOLUTION
In traditional approaches to drug development, a small molecule drug is
used to bind to the active site of a protein to modify the protein's function.
In some cases, the drug activates, and in others it inhibits, the protein's
function.
In contrast to traditional approaches, our core technology is based on
using small molecules to modify a protein's function by altering the protein's
three-dimensional structure. This is called allosteric modification. In
allosteric modification, a small molecule drug alters a protein's
three-dimensional structure by binding to the protein at a site different from
the protein's active site. This change in conformational structure affects the
binding affinity of the protein for the molecules that normally bind to its
active site. The ability of a drug to increase or decrease this affinity can
have important clinical implications. For example, an allosteric modifier that
decreases the oxygen-
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binding affinity of hemoglobin, and thereby stimulates the release of oxygen
into tissues, can be used to mitigate the adverse effects of many forms of
tissue hypoxia.
RSR13
Our lead product candidate, RSR13, is designed to mitigate the effects of
tissue hypoxia. RSR13 has been administered safely to several hundred patients,
most of whom were cancer patients receiving concurrent radiation therapy. Our
clinical studies have indicated that RSR13 is generally well tolerated and has
an acceptable safety profile.
RSR13 has a well-defined mechanism of action and is the first synthetic
drug to emulate and amplify the action of 2,3-DPG, the naturally occurring
allosteric modifier of hemoglobin. Like 2,3-DPG, RSR13 binds to hemoglobin away
from the hemoglobin's oxygen-binding site and increases the unloading of oxygen
from hemoglobin, thus increasing the amount of oxygen deliverable to hypoxic
tissues. RSR13 has several distinguishing characteristics from 2,3-DPG that make
it particularly well suited for therapeutic applications:
- RSR13 is able to cross the red blood cell membrane when medically
administered to a patient;
- RSR13 has an immediate onset of action;
- on average, RSR13 increases the normal 25% unloading of oxygen from
hemoglobin to an estimated 50% by increasing oxygen release from the
large reservoir of unused hemoglobin-bound oxygen in the blood; and
- RSR13 remains in the bloodstream while oxygen naturally diffuses into
the surrounding tissue.
By emulating and amplifying the body's natural response to acute hypoxia,
RSR13 has the potential for treating a wide variety of diseases and clinical
conditions caused by tissue hypoxia. We believe that increasing oxygen levels in
hypoxic tumors can enhance the effects of radiation therapy. In addition, we
believe RSR13 could also be used to prevent complications associated with tissue
hypoxia that frequently occur during or after surgery. In the cardiovascular
area, we believe RSR13 can be used to help treat acute angina, myocardial
infarction and stroke, among other conditions.
PRODUCTS UNDER DEVELOPMENT
We currently retain exclusive, worldwide commercial rights for all of our
product candidates for all target indications. The table below summarizes our
current product candidates, their target indications, and clinical program
status.
PRODUCT CANDIDATE TARGET INDICATION CLINICAL PROGRAM STATUS
- --------------------------- ---------------------------------- ----------------------------
RSR13
Radiation Enhancer Brain metastases Phase III
Non-small cell lung cancer Phase II
Glioblastoma multiforme Phase II complete
Other cancer types Phase II's planned
Chemotherapy Enhancer Recurrent glioblastoma multiforme Phase Ib/II
Surgical Hypoxia Cardiopulmonary bypass surgery Phase II
Cardiovascular Disease Angina Phase II
Myocardial infarction Preclinical
Stroke Preclinical
RSR46 Acute hypoxia Preclinical
JP7 Acute hypoxia Preclinical
PYRUVATE KINASE INHIBITORS Chronic hypoxia Research
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RSR13 for Treating Cancer
The worldwide oncology drug market was estimated at $14.6 billion in 1998,
representing 13% growth from 1997. Despite the enormous effort undertaken by the
pharmaceutical industry to develop oncology products, cancer remains the
second-leading cause of death in the United States and remains a largely unmet
medical need. Over 1.2 million new cases of cancer are diagnosed each year in
the United States, and approximately 565,000 patients die each year of cancer.
The appropriate cancer therapy for each patient depends on the cancer type
and careful assessment of the size, location and extent to which the tumor has
spread. Therapy typically includes some combination of surgery, radiation
therapy or chemotherapy. Radiation therapy is used to cure certain cancers, to
control local tumor invasion and thus prolong life, and to treat symptomatic
problems in patients who are expected to die of their cancer. Chemotherapy is
used to cure certain cancers or prolong life in some patients with malignant
tumors.
RSR13 as a Radiation Enhancer. Radiation therapy is the principal
non-surgical means of treating malignant tumors in patients with cancer. Each
year in the United States, approximately 50% of all newly diagnosed cancer
patients, or 600,000 patients, receive radiation therapy as part of their
primary treatment, in addition to 150,000 patients who receive radiation therapy
for persistent or recurrent cancer. The 750,000 cancer patients who receive
radiation therapy annually is approximately twice the number of cancer patients
who are treated with chemotherapy. A course of radiation therapy can cost
between $10,000 and $25,000 depending on the complexity and duration of
treatment. Although radiation therapy can be effective in treating certain types
of cancer, an unmet medical need exists for products to increase the
effectiveness of radiation therapy.
RSR13 is administered by a 30-minute intravenous infusion through a central
venous catheter commencing approximately one hour before scheduled radiation
therapy. Patients are also given supplemental oxygen, like that commonly
administered to individuals with chronic lung disease, to fully saturate
hemoglobin and increase the therapeutic potential of RSR13. RSR13 has an
immediate onset of action after administration and has a duration of action of
several hours.
Unlike existing drugs and other attempts to enhance the effects of
radiation therapy, the radioenhancement effect of RSR13 is not dependent on its
direct diffusion into the cancerous tumor. Instead, the beneficial effects of
RSR13 are the result of causing increased amounts of oxygen release from blood
flowing through the tumor. It is the oxygen, and not the drug, which diffuses
across the cancer cell membranes to oxygenate the tumors. This is particularly
important in the case of primary or metastatic brain tumors, where the blood
brain barrier acts to exclude or impede the entry of most chemical agents into
the brain tissue. The fact that RSR13 does not have to actually enter the cancer
cell to increase radiosensitivity is an important difference between RSR13 and
other pharmacologic attempts to improve the efficacy of radiation therapy.
We have completed five clinical trials of RSR13 in patients receiving
radiation therapy and have shown that RSR13 is generally well tolerated and has
an acceptable safety profile for use in cancer patients. The most common side
effects of RSR13 in cancer patients are dose and frequency related. These side
effects include low hemoglobin oxygen saturation (which is readily treated with
supplemental oxygen like that used in patients with chronic lung disease),
reversible kidney dysfunction (typically in patients who are also taking blood
pressure medications or common anti-inflammatory drugs), allergic rash and other
symptoms often seen in cancer patients receiving radiation therapy, such as
headache, nausea and vomiting.
RSR13 in the Treatment of Brain Metastases
We intend to seek FDA approval of RSR13 first for treatment of patients who
are receiving radiation therapy for brain metastases. This condition occurs in
approximately one out of five cancer patients, most often in patients with lung
or breast cancer. Radiation therapy for treatment of brain metastases is
administered to approximately 170,000 patients per year in the United States and
is intended to prevent or reduce complications and increase survival. The median
survival of all patients with brain metastases is about four months and can vary
depending on various clinical factors such as age, general health, whether the
primary cancer is controlled, and the extent of cancer metastases to other
regions in the body. Approximately 30% to 50% of patients with brain metastases
will die from disease progression in the brain, and the remainder will die from
disease progression in other regions in the body.
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We previously completed a 20-patient Phase Ib safety study in patients
receiving RSR13 in combination with radiation therapy that suggested a potential
role for RSR13 in treating patients with brain metastases. Based on this study,
we completed a 69-patient, multi-center, open-label, Phase II clinical trial to
evaluate the efficacy and safety of RSR13 in cancer patients receiving standard
radiation therapy for treatment of brain metastases. The primary efficacy
endpoint of this study was survival compared to historical data using the Brain
Metastases Database, or BMD, maintained by the Radiation Therapy Oncology Group,
or RTOG, of the American College of Radiology. The study results showed that
RSR13-treated patients demonstrated overall median survival time of 6.4 months
compared to 4.1 months for the BMD control group, representing a statistically
significant improvement in median survival of 56%. In addition, the
RSR13-treated group had one-year survival rates of 23%, compared to the one-year
survival rate of 15% for the BMD control group. In patients where the cause of
death was determined, death due to tumor progression in the brain was seen in
only 12% of the RSR13-treated patients compared to 37% of the BMD control group.
When case-match analysis was performed using patients in the BMD that most
closely paralleled the RSR13-treated patients, the median survival time of RSR13
treated patients was increased by 115% and one-year survival rates were
increased to 24%, compared to 8% for the BMD control group.
Based on this positive Phase II trial, we received concurrence from the FDA
to proceed with a Phase III trial of RSR13 in patients with brain metastases.
This study began in February 2000. We plan to enroll a minimum of 408 adult
patients at approximately 60 to 70 investigative sites in North America.
Patients will be randomly assigned to treatment with either standard whole brain
radiation therapy or treatment with standard whole brain radiation therapy plus
RSR13. The primary efficacy endpoint is survival. The secondary endpoints are
time to tumor progression in the brain, response rate in the brain, cause of
death and quality of life. Under the trial protocol, a 35% improvement in median
survival will be considered as satisfying the primary end point of the trial,
and may provide the basis for marketing approval of RSR13. If the Phase III
trial is positive, we will file a new drug application with the FDA to obtain
marketing approval for RSR13 for the treatment of patients who are receiving
radiation therapy for brain metastases.
In October 2000, we announced that the FDA had designated RSR13 a Fast
Track Product for the treatment of brain metastases. Designation as a Fast Track
Product, under the FDA Modernization Act of 1997, means that the FDA will
facilitate the development and expedite the review of a drug if it is intended
for the treatment of a serious or life-threatening condition, and it
demonstrates the potential to address unmet medical needs for such a condition.
RSR13 in the Treatment of Non-Small Cell Lung Cancer
Non-small cell lung cancer, or NSCLC, is a type of cancer that occurs in
approximately 130,000 patients per year in the United States. We are currently
evaluating RSR13 as a radiation enhancer for the treatment of patients with
locally advanced, inoperable NSCLC, also known as Stage III NSCLC. Radiation
therapy for treatment of Stage III NSCLC is administered to approximately 60,000
patients per year in the United States and is intended to prevent or reduce
complications and control local tumor growth in the chest. The median survival
time of patients with Stage III NSCLC is approximately nine to twelve months. In
addition to patients with Stage III NSCLC, we believe RSR13 could also be used
to treat approximately 70,000 patients with other Stages of NSCLC who are
treated with radiation therapy each year in the United States.
In November 2000, we announced positive preliminary response rate data for
treatment of patients with locally advanced, inoperable NSCLC. The results come
from an open-label, multi-center, Phase II clinical trial of induction
chemotherapy followed by radiation therapy in combination with RSR13 for Stage
IIIA and IIIB NSCLC. Analyzing preliminary data from the first 30 of 47 patients
receiving RSR13 plus radiation therapy, 87% were found to have a complete or
partial response of their tumors within the radiation therapy portal in the
chest. Based on previous induction chemotherapy plus radiation therapy studies
of patients with Stage IIIA and IIIB NSCLC, a positive study was specified in
the protocol as a response rate greater than 60%. A complete summary of the data
is being prepared for submission to a national meeting.
RSR13 in the Treatment of Glioblastoma Multiforme
Glioblastoma multiforme, or GBM, is a deadly form of primary brain cancer.
This condition occurs in approximately 20% of all brain cancer patients in the
United States, or approximately 3,400 people per year. The median survival time
of patients with GBM is approximately nine to ten months. Radiation therapy is
administered to most patients with GBM and is intended to prevent or reduce
complications and improve survival time.
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We have collaborated with the National Cancer Institute, or NCI, sponsored
New Approaches to Brain Tumor Therapy, or NABTT, Consortium to complete Phase Ib
and Phase II clinical trials of RSR13 in patients with GBM. Based on a
19-patient Phase Ib study which showed RSR13 was safe and well-tolerated, the
NABTT consortium conducted a 50-patient, multi-center, Phase II efficacy and
safety study of RSR13 combined with a standard six-week course of cranial
radiation therapy in newly diagnosed GBM patients. The primary efficacy endpoint
of the study was survival time. The Phase II study showed that RSR13-treated
patients demonstrated overall survival time of 12.3 months compared to 9.7
months for the NABTT historical control group. The survival rate of
RSR13-treated patients at 6 months, 12 months and 18 months were 86%, 54% and
22.2% versus 72.3%, 34.7% and 6.2% for the NABTT control group. With a median
follow-up time of 17.6 months, there was a very significant 258% improvement in
18-month survival. Based on these positive survival results, the NABTT
consortium has recommended that a Phase III trial be conducted with RSR13 in
patients with newly diagnosed GBM.
We have also completed a 67-patient, multi-center, Phase II companion trial
of RSR13 and cranial radiation therapy in newly diagnosed GBM patients. The
trial was comparable in design and methods to the NABTT Phase II trial. Per
protocol, the survival results were compared to historical data using the RTOG
GBM database instead of the NABTT database. The RTOG GBM database consists
primarily of older RTOG studies of patients who, for 75% of them, had received
treatment with aggressive BCNU (carmustine) chemotherapy in addition to cranial
radiation therapy, early in the course of treatment. Treatment with BCNU is
considered efficacious and is a FDA approved therapy for the treatment of
malignant glioma (high-grade brain cancer, including GBM). BCNU therapy is an
independent prognostic factor for survival in the RTOG GBM database.
When compared to the RTOG GBM database, including BCNU treated patients,
the RSR13-treated patients demonstrated comparable overall survival. When
compared to a subset of patients from the RTOG GBM database that had not
received aggressive BCNU therapy, the RSR13-treated patients demonstrated a 29%
improvement in median survival. However, this result was not statistically
significant. The magnitude of survival improvement was quite comparable to that
observed in the statistically significant 50-patient NABTT sponsored study.
Additional follow-up is ongoing prior to final analysis.
We have also received concurrence from the FDA to proceed with a Phase III
trial of RSR13 in patients receiving radiation therapy for the treatment of GBM.
We expect to begin this trial in the first half of 2001.
RSR13 in the Treatment of Other Cancers
We believe that RSR13 eventually could be used in many other tumor types
and clinical situations requiring radiation therapy, such as pediatric brain,
head and neck, uterine cervix, prostate, rectal and breast cancers. We have been
asked by NCI-sponsored consortia to consider collaborating on Phase I/II
clinical trials in pediatric brain cancer. Similarly, various United States and
Canadian consortia have proposed conducting Phase II trials in head and neck and
uterine cervix cancers. We anticipate conducting one or more of these Phase II
trials in the future.
RSR13 as a Chemotherapy Enhancer. Chemotherapy is administered to more than
350,000 cancer patients each year in the United States. Depending on the
complexity and duration of treatment, a course of chemotherapy can cost between
$6,000 and $10,000. As with radiation therapy, certain types of chemotherapy
drugs require the presence of oxygen for optimal cytotoxic effects on cancer
cells. Thus, stimulating oxygen release from hemoglobin to hypoxic tumor tissue,
by the administration of RSR13, may also enhance the beneficial effects of
certain types of chemotherapy.
We have conducted preclinical studies with RSR13 as a chemotherapy enhancer
for use in conjunction with certain chemotherapy agents. Our preclinical studies
suggest that RSR13 increases the activity of certain chemotherapy agents in
animal tumor models and enhances tumor response. We believe this effect may be
related to increasing the oxygen level in the tumors and enhancing the effect of
specific chemotherapy agents.
In December 2000, we initiated a Phase Ib/II study evaluating the safety
and efficacy of RSR13 administered with BCNU (carmustine) chemotherapy for the
treatment of recurrent malignant glioma, a type of primary brain cancer. The
study is being conducted by the NCI sponsored NABTT Consortium. This group
previously completed two positive clinical studies of RSR13 combined with whole
brain radiation therapy for the treatment of newly diagnosed GBM.
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RSR13 for Treating Surgical Hypoxia
Each year in the United States, approximately 600,000 people undergo
cardiopulmonary bypass surgery, or CPB, and approximately seven million patients
who have significant cardiovascular risk factors undergo non-cardiac surgery.
Over one million of these patients experience cardiovascular complications which
frequently result in death or permanent disability. In patients undergoing
non-cardiac surgery who have chronic medical conditions, such as coronary artery
disease, diabetes and hypertension, complications resulting from tissue hypoxia
can be as high as 20%. By inducing hemoglobin to release a greater amount of
oxygen during surgery, we believe RSR13 can help mitigate tissue hypoxia
resulting from decreased oxygen carrying capacity, decreased blood flow, and, in
the case of CPB, decreased body temperature.
Based on preclinical studies of RSR13 in CPB and a successful Phase Ib
study in elective surgery patients, we conducted a randomized 30-patient Phase
II clinical trial of RSR13 in patients undergoing CPB for first time coronary
artery bypass grafting. This study demonstrated that RSR13 can be safely given
during CPB and provided preliminary evidence of a protective effect on heart
function. Although the patients undergoing this surgery were generally healthy
beyond having coronary artery disease, myocardial protective effects from RSR13
were still observed. There was also a trend toward a lower blood transfusion
requirement in the RSR13-treated group.
Based on the results of the Phase Ib general surgery study and the Phase II
CPB study, an additional randomized 164-patient Phase II study was initiated.
The purpose of this trial was to assess the ability of RSR13 treatment to
decrease the morbidity and mortality associated with heart and brain hypoxia in
patients with moderate to high risk factors undergoing CPB. This study was
terminated when it was determined in an interim safety analysis of 62 patients,
32 of whom received RSR13 and 30 of whom received placebo, that there was a
significant imbalance of patients with high risk factors in the RSR13-treated
group compared to the placebo group. Based on these findings, we are considering
conducting a new Phase II trial designed to better account for stratification of
risk factors in the treatment groups and would perform this study in conjunction
with a corporate partner.
RSR13 for Treating Cardiovascular Disease and Stroke
There are approximately 1.7 million hospitalizations per year in the United
States for acute coronary syndrome, which includes unstable angina and
myocardial infarction. We believe that RSR13 could play a major role in the
treatment of patients with acute coronary syndrome. We currently anticipate
clinical development for this indication would be in cooperation with a
corporate partner, although we are not in discussions with any parties in this
regard.
We have demonstrated that increasing oxygen release from hemoglobin with
RSR13 results in a significant decrease in myocardial hypoxia experienced in
animals during reduced coronary artery blood flow. We have also shown that
treatment with RSR13 results in a decrease in the release of a biochemical
marker associated with heart damage in animal models of myocardial infarction.
Based on these findings, an initial Phase Ib safety study was performed in 24
patients with chronic angina taking multiple medications for treatment of their
heart disease. This study demonstrated that RSR13 was safe and well tolerated in
this patient population. In addition, a 10-patient Phase II clinical trial is
being performed to determine if RSR13 can improve the exercise tolerance of
patients with coronary artery disease.
Additionally, our preclinical studies have demonstrated that RSR13 may play
a beneficial role in the treatment of stroke.
Other Synthetic Allosteric Modifiers
We have evaluated over 250 other synthetic allosteric modifiers of
hemoglobin which are analogues of RSR13. Two of these analogues, RSR46 and JP7,
are second-generation molecules to RSR13, and, based on preliminary animal
studies, are potential candidates for clinical development. In addition, through
our research collaborations, we have expanded our drug discovery efforts on the
development of synthetic allosteric modifiers for targets of therapeutic
interest other than hemoglobin. One such target is red blood cell pyruvate
kinase, an enzyme central to the control of red blood cell 2,3-DPG metabolism.
Red blood cell pyruvate kinase is an allosteric protein that is structurally
very similar to hemoglobin. Increasing red blood cell 2,3-DPG levels by
inhibiting red blood cell pyruvate kinase may lead to the development of orally
administered products for chronic hypoxic indications, such as peripheral
vascular disease, chronic angina and congestive heart failure.
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MANUFACTURING
We have entered into arrangements with two third-party manufacturers for
the supply of RSR13 bulk drug substance and formulated drug product,
respectively. This enables us to focus on our clinical development strengths,
minimize fixed costs and capital expenditures, and gain access to advanced
manufacturing process capabilities and expertise.
Hovione Group, our supplier of RSR13 sodium salt, the bulk drug substance,
operates under current Good Manufacturing Practices using cost-effective and
readily available materials and reliable processes. Under the terms of our
contract, Hovione is committed to manufacture sufficient quantities to support
commercial scale manufacturing for the foreseeable future. Hovione is currently
manufacturing RSR13 sodium salt in commercial-scale batches.
Pursuant to our agreement, Hovione will manufacture and deliver quantities
of the bulk drug substance as determined by us for both pre-commercialization
and post-commercialization phases of production. Prior to commercialization,
Hovione has agreed to complete several objectives, including: process scale-up
and validation, manufacture and delivery of independent validation batches,
which demonstrate successful validation, and successful characterization and
delivery of samples of final bulk drug substance. All bulk drug substance
batches must meet certain performance criteria and Hovione has assured us an
uninterrupted supply of the bulk drug substance. We have the exclusive right to
sublicense inventions, process improvements and analytical methods developed
under this agreement in return for certain payments to Hovione.
After manufacture, RSR13 sodium salt is formulated under contract for us
into the drug product under current Good Manufacturing Practice guidelines by
Akorn, Inc. (formerly known as Taylor Pharmaceuticals, Inc.), a company that
specializes in the manufacture of sterile injectable products. Under our
contract with Akorn, Akorn has agreed to manufacture stability batches, clinical
batches and placebo, and support full release and stability testing. We have
agreed to provide release specifications for active drug substance, furnish
released and certified active substance for development and manufacture of at
least one pilot formulation and the required exhibit batches, provide
camera-ready artwork for labeling, and prepare any applicable product
import/export registrations. We anticipate that Akorn will be able to provide
sufficient drug product to complete our ongoing and currently planned clinical
trials and early commercial needs.
We are in the process of establishing a manufacturing agreement with an
additional supplier of RSR13 bulk drug substance. We may establish manufacturing
agreements with other parties for additional commercial scale manufacturing of
RSR13 bulk drug substance and formulated drug product.
SALES AND MARKETING
We intend to market RSR13 directly to the approximately 3,700 radiation
therapists in the United States through a specialty sales force of 25-40 sales
representatives. We expect to begin hiring this sales force around the time we
submit a New Drug Application to the FDA for the use of RSR13 in an oncology
indication.
To penetrate the non-oncology markets in North America, and all markets
outside North America, we will seek to develop relationships with one or more
pharmaceutical companies with established distribution systems and direct sales
forces. We expect these relationships will help us achieve our sales objectives
for RSR13 in these markets while allowing us to focus on the oncology market in
the United States.
GOVERNMENT REGULATION
FDA Regulation and Product Approval
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our product candidates.
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The process required by the FDA before our product candidates may be
marketed in the United States generally involves the following:
- preclinical laboratory and animal tests;
- submission to the FDA of an Investigational New Drug, or IND,
application which must become effective before clinical trials may
begin;
- adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed pharmaceutical in our intended
use; and
- submission to the FDA of a New Drug Application that must be approved.
The testing and approval process requires substantial time, effort, and
financial resources and we cannot be certain that any approval will be granted
on a timely basis, if at all.
Preclinical tests include laboratory evaluation of the product candidate,
its chemistry, formulation and stability, as well as animal studies to assess
its potential safety and efficacy. We then submit the results of the preclinical
tests, together with manufacturing information and analytical data, to the FDA
as part of an IND application, which must become effective before we may begin
human clinical trials. The IND automatically becomes effective 30 days after the
FDA acknowledges that the filing is complete, unless the FDA, within the 30-day
time period, raises concerns or questions about the conduct of the trials as
outlined in the IND. In such a case, the IND sponsor and the FDA must resolve
any outstanding concerns before clinical trials can begin. Further, an
independent Institutional Review Board at each medical center proposing to
conduct the clinical trials must review and approve any clinical study.
Human clinical trials are typically conducted in three sequential phases,
which may overlap:
- PHASE I: The drug is initially administered into healthy human
subjects or patients and tested for safety, dosage tolerance,
absorption, metabolism, distribution and excretion.
- PHASE II: The drug is administered to a limited patient population to
identify possible adverse effects and safety risks, to determine the
efficacy of the product for specific targeted diseases and to
determine dosage tolerance and optimal dosage.
- PHASE III: When Phase II evaluations demonstrate that a dosage range
of the drug is effective and has an acceptable safety profile, Phase
III trials are undertaken to further evaluate dosage, clinical
efficacy and to further test for safety in an expanded patient
population at geographically dispersed clinical study sites.
In the case of product candidates for severe or life-threatening diseases
such as cancer, the initial human testing is often conducted in patients rather
than in healthy volunteers. Since these patients already have the target
disease, these studies may provide initial evidence of efficacy traditionally
obtained in Phase II trials and thus these trials are frequently referred to as
Phase Ib trials.
We cannot be certain that we will successfully complete Phase I, Phase II
or Phase III testing of our product candidates within any specific time period,
if at all. Furthermore, the FDA or the Institutional Review Boards or the
sponsor 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.
The results of product development, preclinical studies and clinical
studies are submitted to the FDA as part of a new drug application for approval
of the marketing and commercial shipment of the product candidate. The FDA may
deny a new drug application if the applicable regulatory criteria are not
satisfied or may require additional clinical data. Even if such data is
submitted, the FDA may ultimately decide that the new drug application does not
satisfy the criteria for approval. Once issued, the FDA may withdraw product
approval if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market. In addition, the FDA may
require testing and surveillance programs to monitor the effect of approved
products which have been commercialized, and the agency has the power to prevent
or limit further marketing of a product based on the results of these
post-marketing programs.
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On November 21, 1997, President Clinton signed into law the Food and Drug
Administration Modernization Act. That act codified the FDA's policy of granting
"Fast Track" approval for cancer therapies and other therapies intended to treat
severe or life-threatening diseases. Previously, the FDA approved cancer
therapies primarily based on patient survival rates and/or data on improved
quality of life. This new policy is intended to facilitate the study of cancer
therapies and shorten the total time for marketing approvals; however, it is too
early to tell what effect, if any, these provisions may actually have on product
approvals. In November 2000, we announced that the FDA had designated RSR13 a
Fast Track Product for the treatment of brain metastases.
Satisfaction of the above FDA requirements or similar requirements of
state, local and foreign regulatory agencies typically takes several years and
the actual time required may vary substantially, based upon the type, complexity
and novelty of the pharmaceutical product candidate. Government regulation may
delay or prevent marketing of potential products for a considerable period of
time and to impose costly procedures upon our activities. We cannot be certain
that the FDA or any other regulatory agency will grant approval for any of our
product candidates on a timely basis, if at all. Success in preclinical or early
stage clinical trials does not assure success in later stage clinical trials.
Data obtained from preclinical and clinical activities is not always conclusive
and may be susceptible to varying interpretations, which could delay, limit or
prevent regulatory approval. Even if a product candidate receives regulatory
approval, the approval may be significantly limited to specific indications.
Further, even after regulatory approval is obtained, later discovery of
previously unknown problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the market. Delays in
obtaining, or failures to obtain regulatory approvals would have a material
adverse effect on our business. Marketing our product candidates abroad will
require similar regulatory approvals and is subject to similar risks. In
addition, we cannot predict what adverse governmental regulations may arise from
future United States or foreign governmental action.
Any products manufactured or distributed by us pursuant to FDA clearances
or approvals are subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experiences with
the drug. Drug manufacturers and their subcontractors are required to register
their establishments with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for
compliance with current Good Manufacturing Practices, which impose certain
procedural and documentation requirements upon us and our third-party
manufacturers. We cannot be certain that we or our present or future suppliers
will be able to comply with the current Good Manufacturing Practices and other
FDA regulatory requirements.
The FDA regulates drug labeling and promotion activities. The FDA has
actively enforced regulations prohibiting the marketing of products for
unapproved uses. Under the Modernization Act of 1997, the FDA will permit the
promotion of a drug for an unapproved use in certain circumstances, but subject
to very stringent requirements.
We and our product candidates are also subject to a variety of state laws
and regulations in those states or localities where they are or will be
marketed. Any applicable state or local regulations may hinder our ability to
market our product candidates in those states or localities.
The FDA's policies may change and additional government regulations may be
enacted which could prevent or delay regulatory approval of our potential
products. Moreover, increased attention to the containment of health care costs
in the United States and in foreign markets could result in new government
regulations, which could have a material adverse effect on our business. We
cannot predict the likelihood, nature or extent of adverse governmental
regulation, which might arise from future legislative or administrative action,
either in the United States or abroad.
Foreign Regulation and Product Approval
Outside the United States, our ability to market a product candidate is
contingent upon receiving a marketing authorization from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. At present, foreign marketing authorizations are applied for
at a national level, although within the European Community, or EC, registration
procedures are available to companies wishing to market a product in more than
one EC member state. If the regulatory authority is satisfied that adequate
evidence of safety, quality and efficiency has been presented, a
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marketing authorization will be granted. This foreign regulatory approval
process involves all of the risks associated with FDA clearance discussed above.
Other Regulations
We are also subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control, and disposal of hazardous or potentially
hazardous substances. We may incur significant costs to comply with such laws
and regulations now or in the future.
INTELLECTUAL PROPERTY
We believe that patent protection and trade secret protection are important
to our business and that our future success will depend, in part, on our ability
to maintain our technology licenses, maintain trade secret protection, obtain
patents and operate without infringing the proprietary rights of others both in
the United States and abroad. We believe that obtaining patents in countries
other than the United States may, in some cases, be more difficult than
obtaining United States patents because of differences in patent laws. In
addition, the protection provided by non-U.S. patents may be weaker than that
provided by United States patents.
Under a 1994 agreement with the Center for Innovative Technology, or CIT,
we have obtained exclusive worldwide rights to 16 United States patents, a
European patent which has been validated in the United Kingdom, France, Italy,
and Germany, two pending patent applications which have been approved in Canada,
two pending patent applications which have been approved in Japan, and one
pending patent application in Europe. Pursuant to this agreement, we have agreed
to sponsor research at Virginia Commonwealth University, or VCU, relating to
allosteric hemoglobin modifier compounds, and are entitled to an exclusive
worldwide license of any technology developed in connection with such research.
We will be required to pay a quarterly royalty based on percentages, as defined
in the agreement, of either net revenues arising from sales of products produced
in Virginia or net revenues from sales of products produced outside Virginia.
This agreement was assigned by CIT to the Virginia Commonwealth University
Intellectual Property Foundation, or VCUIPF, in 1997. Under the agreement, we
have the right to grant sublicenses, for which we must also pay royalties to
VCUIPF for products produced by the sublicensees. VCUIPF has the primary
responsibility to file, prosecute, and maintain intellectual property
protection, but we have agreed to reimburse costs incurred by VCUIPF after July
1, 1993 related to obtaining and maintaining intellectual property protection.
Also, pursuant to the agreement, we will pay VCUIPF a running royalty of 1.25%
of our worldwide net revenue arising from the sale, lease or other
commercialization of the allosteric hemoglobin modifier compounds. This
agreement terminates on the date the last United States patent licensed to us
under the agreement expires, which is October 2016.
The licensed patents, which expire at various times between February 2010
and October 2016, contain claims covering methods of allosterically modifying
hemoglobin with RSR13 and other compounds, the site within hemoglobin where
RSR13 binds, and certain clinical applications of RSR13 and other allosteric
hemoglobin modifier compounds, including, among others:
- treating cancerous tumors;
- treating ischemia or oxygen deprivation;
- treating stroke or cerebral ischemia;
- treating surgical blood loss;
- performing cardiopulmonary bypass surgery; and
- treating hypoxia.
Under a separate agreement with VCUIPF, we have rights to acquire an
exclusive worldwide license to any technology, which is developed using research
funding provided by us to VCU under a Sponsored Research Agreement. This
agreement allows us to access a drug discovery presence without having to
develop in-house research and development capabilities. We have the option to
acquire a license for six months from the date any
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developed technology is disclosed to us. All that is required to exercise our
option is to provide notification to VCUIPF, and to assume responsibility for
all legal expenses for securing intellectual property protection for technology
developed under the Sponsored Research Agreement. We have the exclusive right to
sublicense any technology to third parties and affiliates. We are required to
pay VCUIPF a running royalty on our worldwide net revenue arising from
commercialization of the technology developed. We have exercised our option on
one technology under this agreement which pertains to allosteric inhibitors and
activators of pyruvate kinase. We may terminate this agreement without cause by
giving VCUIPF ninety days written notice. VCUIPF may terminate this agreement
upon certain payment and reporting breaches by us. Either party may terminate
this agreement for certain uncured breaches.
In order to protect the confidentiality of our technology, including trade
secrets and know-how and other proprietary technical and business information,
we require all of our employees, consultants, advisors and collaborators to
enter into confidentiality agreements that prohibit the use or disclosure of
confidential information. The agreements also oblige our employees, consultants,
advisors and collaborators to assign to us ideas, developments, discoveries and
inventions made by such persons in connection with their work with us. We cannot
be sure that these agreements will maintain confidentiality, will prevent
disclosure, or will protect our proprietary information or intellectual
property, or that others will not independently develop substantially equivalent
proprietary information or intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with those being developed by us. Therefore, our product candidates may give
rise to claims that they infringe the patents or proprietary rights of other
parties now and in the future. Furthermore, to the extent that we, or our
consultants or research collaborators, use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions. An
adverse claim could subject us to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. A license
required under any such patents or proprietary rights may not be available to
us, or may not be available on acceptable terms. If we do not obtain such
licenses, we may encounter delays in product market introductions, or may find
that we are prevented from the development, manufacture or sale of products
requiring such licenses. In addition, we could incur substantial costs in
defending ourselves in legal proceedings instituted before the United States
Patent and Trademark Office or in a suit brought against us by a private party
based on such patents or proprietary rights, or in a suit by us asserting our
patent or proprietary rights against another party, even if the outcome is not
adverse to us.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving technology
and intense competition. Many companies of all sizes, including a number of
large pharmaceutical companies as well as several specialized biotechnology
companies, are developing cancer drugs similar to ours. There are products on
the market that will compete directly with the products that we are developing.
In addition, colleges, universities, governmental agencies and other public and
private research institutions will continue to conduct research and are becoming
more active in seeking patent protection and licensing arrangements to collect
license fees, milestone payments and royalties in exchange for license rights to
technologies that they have developed, some of which may directly compete with
our technologies. These companies and institutions also compete with us in
recruiting qualified scientific personnel. Many of our competitors have
substantially greater financial, research and development, human and other
resources than do we. Furthermore, large pharmaceutical companies have
significantly more experience than we do in preclinical testing, human clinical
trials and regulatory approval procedures.
Our competitors may:
- develop safer and more effective products;
- obtain patent protection or intellectual property rights that limit
our ability to commercialize products; or
- commercialize products earlier than we.
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We expect technology developments in our industry to continue to occur at a
rapid pace. Commercial developments by our competitors may render some or all of
our potential products obsolete or non-competitive, which would materially harm
our business and financial condition.
HUMAN RESOURCES
As of December 31, 2000, we had a total of 45 full-time employees and five
part-time employees. Of those, 32 are in research and development and thirteen
are in general and administrative. We believe that we have good relationships
with our employees. We have never had a work stoppage, and none of our employees
is represented under a collective bargaining agreement.
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RISK FACTORS
Our business faces significant risks. These risks include those described
below and may include additional risks of which we are not currently aware or
which we currently do not believe are material. If any of the events or
circumstances described in the following risks actually occurs, our business,
financial condition or results of operations could be materially adversely
affected. These risks should be read in conjunction with the other information
set forth in this report.
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT, AND WE MAY NOT
ACHIEVE OR MAINTAIN REVENUE OR PROFITABILITY IN THE FUTURE.
We have experienced operating losses since we began operations in 1994. As
of December 31, 2000, we had an accumulated deficit of approximately $67
million. We expect to incur additional operating losses over the next several
years and expect cumulative losses to increase substantially as our research and
development, preclinical, clinical and manufacturing efforts expand. We have had
no revenue to date. Our ability to achieve revenue and profitability is
dependent on our ability, alone or with partners, to successfully complete the
development of our product candidates, conduct clinical trials, obtain the
necessary regulatory approvals, and manufacture and market our product
candidates. We cannot assure you that we will achieve revenue or profitability.
OUR PRODUCT CANDIDATES ARE IN THE EARLY STAGES OF DEVELOPMENT AND MAY NEVER BE
FULLY DEVELOPED IN A MANNER SUITABLE FOR COMMERCIALIZATION. IF WE DO NOT DEVELOP
COMMERCIALLY SUCCESSFUL PRODUCTS, OUR ABILITY TO GENERATE REVENUE WILL BE
LIMITED.
If we are unable to successfully commercialize our product candidates, we
will be unable to generate any meaningful amounts of revenue and will incur
continued losses. We may not be able to continue as a going concern if we are
unable to generate meaningful amounts of revenue to support our operations or
cannot otherwise raise the necessary funds to support our operations. We have no
products that have received regulatory approval for commercial sale. All of our
product candidates are in early stages of development, and significant research
and development, financial resources and personnel will be required to develop
commercially viable products and obtain regulatory approvals. Substantially all
of our efforts and expenditures over the next few years will be devoted to
RSR13. Accordingly, our future prospects are substantially dependent on
favorable results from clinical trials utilizing RSR13. None of our product
candidates, including RSR13, is expected to be commercially available until at
least 2003.
WE CANNOT PREDICT WHEN OR IF WE WILL OBTAIN REGULATORY APPROVAL TO COMMERCIALIZE
OUR PRODUCT CANDIDATES.
A pharmaceutical product cannot be marketed in the United States or most
other countries until it has completed a rigorous and extensive regulatory
approval process. If we fail to obtain regulatory approval to market our product
candidates, we will be unable to sell our products and generate revenue, which
would jeopardize our ability to continue operating our business. Satisfaction of
regulatory requirements typically takes many years, is dependent upon the type,
complexity and novelty of the product and requires the expenditure of
substantial resources. Of particular significance are the requirements covering
research and development, testing, manufacturing, quality control, labeling and
promotion of drugs for human use. We may not obtain regulatory approval for any
product candidates we develop, including RSR13, or we may not obtain regulatory
review of such product candidates in a timely manner. See "Business--
Government Regulation" for a detailed discussion of the regulatory approval
process.
In October 2000, we announced that the FDA had designated RSR13 a Fast
Track Product for the treatment of brain metastases. Designation as a Fast Track
Product, under the FDA Modernization Act of 1997, means that the FDA will
facilitate the development and expedite the review of a drug if it is intended
for the treatment of a serious or life-threatening condition, and it
demonstrates the potential to address unmet medical needs for such a condition.
WE WILL NOT BE ABLE TO OBTAIN REGULATORY APPROVAL TO COMMERCIALIZE OUR PRODUCT
CANDIDATES IF WE FAIL TO ADEQUATELY DEMONSTRATE THEIR SAFETY AND EFFICACY.
Product candidates developed by us, alone or with others, may not prove to
be safe and efficacious in clinical trials and may not meet all of the
applicable regulatory requirements needed to receive regulatory approval. To
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demonstrate safety and efficacy, we must conduct significant additional
research, animal testing, referred to as preclinical testing, and human testing,
referred to as clinical trials, for our product candidates. Preclinical testing
and clinical trials are long, expensive and uncertain processes. It may take us
several years to complete our testing, and failure can occur at any stage. We
have limited experience in conducting and managing clinical trials.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations that could delay, limit or prevent regulatory
clearances, and the FDA can request that we conduct additional trials. For
example, we are currently planning to perform only one Phase III clinical trial
prior to seeking FDA approval for our first product candidate. We believe that
if the results of this Phase III clinical trial are consistent with our prior
Phase II clinical results, this Phase III clinical trial can serve as the basis
for obtaining FDA approval. Although the FDA has indicated its agreement with
this if the results are sufficiently positive, it has recommended that we
conduct two Phase III clinical trials concurrently to protect against the risk
that the results of one trial may be inconclusive as to necessary efficacy and
safety for approval. If we have to conduct further clinical trials, whether for
RSR13 or other product candidates we develop in the future, it would
significantly increase our expenses and delay marketing of our product
candidates. See "Business--Government Regulation" for a detailed discussion of
the regulatory approval process.
WE MAY EXPERIENCE DELAYS IN OUR CLINICAL TRIALS THAT COULD ADVERSELY AFFECT OUR
FINANCIAL POSITION AND OUR COMMERCIAL PROSPECTS.
We do not know whether planned clinical trials will begin on time or
whether any of our clinical trials will be completed on schedule or at all. Our
product development costs will increase if we have delays in testing or
approvals or if we need to perform more or larger clinical trials than planned.
If the delays are significant, our ability to generate revenue from product
sales will be correspondingly delayed, and we may have insufficient capital
resources to support our operations. Even if we do have sufficient capital
resources, our ability to become profitable will be delayed. We typically rely
on third-party clinical investigators at medical institutions to conduct our
clinical trials and we occasionally rely on other third-party organizations to
perform data collection and analysis. As a result, we may face additional
delaying factors outside our control.
WE MAY BE REQUIRED TO SUSPEND, REPEAT OR TERMINATE OUR CLINICAL TRIALS IF THEY
ARE NOT CONDUCTED IN ACCORDANCE WITH REGULATORY REQUIREMENTS, THE RESULTS ARE
NEGATIVE OR INCONCLUSIVE, OR THE TRIALS ARE NOT WELL DESIGNED.
Clinical trials must be conducted in accordance with the FDA's Good
Clinical Practices and are subject to oversight by the FDA and institutional
review boards at the medical institutions where the clinical trials are
conducted. In addition, clinical trials must be conducted with product
candidates produced under the FDA's Good Manufacturing Requirements, and may
require large numbers of test subjects. Clinical trials may be suspended by us
or the FDA at any time if it is believed that the subjects participating in
these trials are being exposed to unacceptable health risks or if the FDA finds
deficiencies in the conduct of these trials.
Even if we achieve positive interim results in clinical trials, these
results do not necessarily predict final results, and acceptable results in
early trials may not be repeated in later trials. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. Negative or inconclusive
results or adverse medical events during a clinical trial could cause a clinical
trial to be repeated or terminated. In addition, failure to construct clinical
trial protocols to screen patients for risk profile factors relevant to the
trial for purposes of segregating patients into the patient populations treated
with the drug being tested and the control group could result in either group
experiencing a disproportionate number of adverse events and could cause a
clinical trial to be repeated or terminated.
ACCEPTANCE OF OUR PRODUCTS IN THE MARKETPLACE IS UNCERTAIN, AND FAILURE TO
ACHIEVE MARKET ACCEPTANCE WILL LIMIT OUR ABILITY TO GENERATE REVENUE AND BECOME
PROFITABLE.
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Even if approved for marketing, our products may not achieve market
acceptance. The degree of market acceptance will depend upon a number of
factors, including:
- the receipt of regulatory approval for the uses that we are studying;
- the establishment and demonstration in the medical community of the
safety and efficacy of our products and their potential advantages
over existing and newly developed therapeutic products;
- ease of use of our products;
- pricing and reimbursement policies of government and third-party
payors such as insurance companies, health maintenance organizations
and other plan administrators; and
- the effectiveness of our sales and marketing efforts.
Physicians, patients, payors or the medical community in general may be
unwilling to accept, utilize or recommend any of our products.
IF WE FAIL TO OBTAIN THE CAPITAL NECESSARY TO FUND OUR OPERATIONS, WE WILL BE
UNABLE TO SUCCESSFULLY DEVELOP OUR PRODUCT CANDIDATES.
We expect that significant additional financing will be required in the
future to continue our research and development efforts and to commercialize our
product candidates. If adequate funds are not available to us, we will be
required to delay, reduce the scope of or eliminate one or more of our
development programs and our business and future prospects for revenue and
profitability may be harmed. We do not know whether additional financing will be
available when needed, or that, if available, we will obtain financing on terms
favorable to our stockholders or us. We have consumed substantial amounts of
cash to date and expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure and preclinical and
clinical trial activities. We may raise this financing through public or private
equity offerings, debt financings or additional corporate collaboration and
licensing arrangements.
We believe that our existing cash and investment securities will be
sufficient to support our current operating plan through at least the end of
2002. We have based this estimate on assumptions that may prove to be wrong. Our
future capital requirements depend on many factors that affect our research,
development, collaboration and sales and marketing activities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
To the extent we raise additional capital by issuing equity securities, our
stockholders may experience substantial dilution. To the extent that we raise
additional funds through collaboration and licensing arrangements, we may be
required to relinquish some rights to our technologies or product candidates, or
grant licenses on terms that are not favorable to us.
IF WE ARE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY, WE WOULD BE
UNABLE TO PREVENT THIRD PARTIES FROM USING OUR TECHNOLOGY, WHICH WOULD IMPAIR
OUR COMPETITIVENESS AND ABILITY TO COMMERCIALIZE OUR PRODUCT CANDIDATES. IN
ADDITION, THE COST OF ENFORCING OUR PROPRIETARY RIGHTS MAY BE EXPENSIVE AND
RESULT IN INCREASED LOSSES.
Our success will depend in part on our ability to obtain and maintain
meaningful patent protection for our products, both in the United States and in
other countries. We rely on patents to protect a large part of our intellectual
property and our competitive position. We currently license 25 patents and
patent applications, both in the United States and in other countries, in
addition to owning one patent ourselves. Any patents issued to or licensed by us
could be challenged, invalidated, infringed, circumvented or held unenforceable.
In addition, it is possible that no patents will issue on any of our licensed
patent applications. It is possible that the claims in patents that have been
issued or licensed to us or that may be issued or licensed to us in the future
will not be sufficiently broad to protect our intellectual property or that the
patents will not provide protection against competitive products or otherwise be
commercially valuable. Failure to obtain and maintain adequate patent protection
for our intellectual property would impair our ability to be commercially
competitive.
Our commercial success will also depend in part on our ability to
commercialize our product candidates without infringing patents or other
proprietary rights of others or breaching the licenses granted to us. We may not
be able to obtain a license to third-party technology that we may require to
conduct our business or, if obtainable, we may not be able to license such
technology at a reasonable cost. If we fail to obtain a license to any
technology that we may
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require to commercialize our technologies or product candidates, or fail to
obtain a license at a reasonable cost, we will be unable to commercialize the
affected product or to commercialize it at a price that will allow us to become
profitable.
In addition to patent protection, we also rely upon trade secrets,
proprietary know-how and technological advances which we seek to protect through
confidentiality agreements with our collaborators, employees and consultants.
Our employees and consultants are required to enter into confidentiality
agreements with us. We also have entered into non-disclosure agreements, which
are intended to protect our confidential information delivered to third parties
for research and other purposes. However, these agreements could be breached and
we may not have adequate remedies for any breach, or our trade secrets and
proprietary know-how could otherwise become known or be independently discovered
by others.
Furthermore, as with any pharmaceutical company, our patent and other
proprietary rights are subject to uncertainty. Our patent rights related to our
product candidates might conflict with current or future patents and other
proprietary rights of others. For the same reasons, the products of others could
infringe our patents or other proprietary rights. Litigation or patent
interference proceedings, either of which could result in substantial costs to
us, may be necessary to enforce any of our patents or other proprietary rights,
or to determine the scope and validity or enforceability of other parties'
proprietary rights. The defense and prosecution of patent and intellectual
property claims are both costly and time consuming, even if the outcome is
favorable to us. Any adverse outcome could subject us to significant liabilities
to third parties, require disputed rights to be licensed from third parties, or
require us to cease selling our future products. We are not currently a party to
any infringement claims.
IF OUR COMPETITORS DEVELOP AND MARKET PRODUCTS THAT ARE MORE EFFECTIVE THAN
OURS, OUR COMMERCIAL OPPORTUNITY WILL BE REDUCED OR ELIMINATED.
Even if we obtain the necessary governmental approvals to market RSR13 or
other product candidates, our commercial opportunity will be reduced or
eliminated if our competitors develop and market products that are more
effective, have fewer side effects or are less expensive than our product
candidates. Our potential competitors include large fully integrated
pharmaceutical companies and more established biotechnology companies, both of
which have significant resources and expertise in research and development,
manufacturing, testing, obtaining regulatory approvals and marketing. Academic
institutions, government agencies, and other public and private research
organizations conduct research, seek patent protection and establish
collaborative arrangements for research, development, manufacturing and
marketing. It is possible that competitors will succeed in developing
technologies that are more effective than those being developed by us or that
would render our technology obsolete or noncompetitive. We are not aware of any
products in research or development by any potential competitors, which address
allosteric regulation of proteins in the way being targeted by us. There are,
however, other companies addressing the same indications as we are.
WE RELY ON THIRD-PARTY COLLABORATORS TO CONDUCT OUR RESEARCH AND DEVELOPMENT
ACTIVITIES AND MANUFACTURE OUR PRODUCT CANDIDATES. IF OUR COLLABORATIVE PARTNERS
DO NOT PERFORM AS EXPECTED, WE MAY BE UNABLE TO DEVELOP AND COMMERCIALIZE OUR
PRODUCT CANDIDATES, WHICH WOULD LIMIT OUR ABILITY TO GENERATE REVENUE AND BECOME
PROFITABLE AND OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCT CANDIDATES
COULD BE SEVERELY LIMITED.
We do not have our own research or manufacturing facilities and currently
do not plan to establish such facilities. Instead, we depend upon academic,
research and non-profit institutions and commercial service and manufacturing
organizations for chemical synthesis and analysis, product formulation, assays,
preclinical and clinical testing, and manufacture of our product candidates. If
our collaborative partners do not perform these functions satisfactorily, our
ability to develop and commercialize our product candidates could be severely
limited which would limit our ability to sell our products or to sell them in
quantities sufficient to generate enough revenue to allow us to become
profitable.
Currently, we are supporting research with respect to allosteric
modification of proteins at Virginia Commonwealth University in the laboratories
of Dr. Donald Abraham, a founder, stockholder and director. In addition, we
currently have contracts with two third-party manufacturers. One is with our
sole source supplier of RSR13 bulk drug substance, and the other is with our
sole source supplier of formulated drug product. Our current supply of finished
product of RSR13 is limited and is not sufficient for completion of all phases
of clinical
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development. Any failure by our two third-party manufacturers to supply our
requirements for clinical trial materials would jeopardize the completion of
such trials and our ultimate ability to commercialize RSR13. Prior to regulatory
approval of RSR13, we may seek to establish supply agreements with alternative
sources of supply for bulk drug substance and formulated drug product. However,
only a limited number of contract manufacturers are both capable of
manufacturing our product candidates and complying with current federal and
state good manufacturing practice regulations. Accordingly, we may not be able
to enter into supply agreements on commercially acceptable terms and, even if we
do, any manufacturers with which we contract may not be able to deliver supplies
in appropriate quantity.
If conflicts arise between us and our academic collaborators, scientific
advisors, manufacturers or other suppliers, including Dr. Abraham, the other
party may act in its self-interest and not in the interest of our stockholders.
We generally do not have control over the resources or degree of effort that any
of our existing collaborative partners may devote to our collaborations. If our
collaborators breach or terminate their agreements with us or otherwise fail to
conduct their collaborative activities successfully and in accordance with
agreed upon schedules, our ability to develop, commercialize and sell products
would be limited. In addition, our collaborative partners could cease operations
or offer, design, manufacture or promote competing products. Any of these
occurrences could materially limit our potential revenue and profitability.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
PRODUCT CANDIDATES.
The testing and marketing of pharmaceutical products entail an inherent
risk of product liability. Product liability claims might be brought against us
by consumers, health care providers or by pharmaceutical companies or others
selling our future products. If we cannot successfully defend ourselves against
such claims, we may incur substantial liabilities or be required to limit the
commercialization of our product candidates. We have obtained limited product
liability insurance coverage for our human clinical trials. However, insurance
coverage is becoming increasingly expensive, and no assurance can be given that
we will be able to maintain insurance coverage at a reasonable cost or in
sufficient amounts to protect us against losses due to liability. A successful
product liability claim in excess of our insurance coverage could have a
material adverse effect on our business, financial condition and results of
operations. We may not be able to obtain commercially reasonable product
liability insurance for any products approved for marketing.
OUR OPERATING RESULTS MAY FLUCTUATE, AND ANY FAILURE TO MEET FINANCIAL
EXPECTATIONS MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A
DECLINE IN OUR STOCK PRICE, CAUSING INVESTOR LOSSES.
Our results of operations have fluctuated in the past and are likely to do
so in the future. These fluctuations could cause our stock price to decline.
Some of the factors that could cause our results of operations to fluctuate
include:
- the status of development of our various product candidates;
- the time at which we enter into research and license agreements with
corporate partners, if any, that provide for payments to us, and the
timing and accounting treatment of payments to us under those
agreements;
- whether or not we achieve specified research or commercialization
milestones;
- timely payment by our corporate partners, if any, of amounts payable
to us;
- the addition or termination of research programs or funding support;
and
- variations in the level of expenses related to our proprietary product
candidates during any given period.
We believe that period-to-period comparisons of our results of operations
are not necessarily meaningful and should not be relied upon as an indication of
future performance. It is possible that in some future quarter or quarters, our
operating results will be below the expectations of securities analysts or
investors. In that case, our stock price could fluctuate significantly or
decline.
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FAILURE TO ATTRACT, RETAIN AND MOTIVATE SKILLED PERSONNEL AND CULTIVATE KEY
ACADEMIC COLLABORATIONS WILL DELAY OUR PRODUCT DEVELOPMENT PROGRAMS AND OUR
RESEARCH AND DEVELOPMENT EFFORTS.
We are a small company with only 45 employees, and our success depends on
our continued ability to attract, retain and motivate highly qualified
management and scientific personnel and on our ability to develop and maintain
important relationships with leading academic institutions and scientists.
Competition for personnel and academic collaborations is intense. In particular,
our product development programs depend on our ability to attract and retain
highly skilled chemists and clinical development personnel. The loss of any of
these personnel, in particular, Dr. Stephen J. Hoffman, our President and Chief
Executive Officer, or Dr. Michael J. Gerber, our Senior Vice President, Clinical
Development and Regulatory Affairs, could significantly impede the achievement
of our research and development objectives. Even though we have an employment
agreement with each of Dr. Hoffman and Dr. Gerber, as well as an employment
agreement with Michael E. Hart, our Chief Financial Officer and Senior Vice
President, Operations, they and any other of our key personnel may leave us at
any time. In addition, we will need to hire additional personnel and develop
additional academic collaborations as we continue to expand our research and
development activities. We do not know if we will be able to attract, retain or
motivate personnel or maintain relationships. If we fail to negotiate additional
acceptable collaborations with academic institutions and scientists, or if our
existing academic collaborations were to be unsuccessful, our product
development programs may be delayed.
ITEM 2. PROPERTIES
Our corporate headquarters facility consists of approximately 14,300 square
feet in Denver, Colorado. We lease our corporate headquarters facility pursuant
to a lease agreement that expires in July 2002. We believe that our leased
facilities are adequate to meet our needs for the next 12 months and that
additional facilities in the area are available for lease to meet our future
needs. We also lease approximately 1,800 square feet of office and laboratory
space in Richmond, Virginia. We lease this space under a renewable operating
lease, which expires in October 2004.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the Nasdaq National Market under the symbol
"ALTH." Trading of our Common Stock commenced on March 28, 2000, following
completion of our initial public offering. The following table sets forth, for
the periods indicated, the high and low sales prices for our Common Stock as
reported by the Nasdaq National Market:
Year Ended December 31, 2000 HIGH LOW
---- ---
First Quarter (from March 28)................ $16.00 $12.75
Second Quarter............................... $15.06 $8.50
Third Quarter................................ $15.06 $8.38
Fourth Quarter............................... $11.25 $4.75
On February 23, 2001, the last reported sale price of our Common Stock on
the Nasdaq National Market was $6.31 per share. On February 23, 2001, we had
approximately 129 holders of record of our Common Stock.
We have never paid any cash dividends on our capital stock and do not
intend to pay any such dividends in the foreseeable future.
On March 27, 2000, we commenced our initial public offering, which
consisted of 5,000,000 shares of our Common Stock at $18.00 per share pursuant
to a registration statement (No. 333-95439) declared effective by the Securities
and Exchange Commission. The offering has been completed and all shares have
been sold. The managing underwriters for the initial public offering were SG
Cowen, Prudential Vector Healthcare and U.S. Bancorp Piper Jaffray. Aggregate
gross proceeds from the offering were $90,000,000.
We incurred the following expenses in connection with the offering:
underwriters' discounts and commissions of $6.3 million and approximately $0.9
million in other expenses, for total expenses of approximately $7.2 million.
After deducting expenses of the offering, we received net offering proceeds of
approximately $82.8 million. As of December 31, 2000, the entire net proceeds
from the offering were invested in short-term and long-term financial
instruments.
No payments constituted direct or indirect payments to any of our
directors, officers or general partners or their associates, to persons owning
10% or more of any class of our equity securities or to any of our affiliates.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our financial statements and the related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included in this
report. The statement of operations data for the years ended December 31, 1998,
1999 and 2000 and the balance sheet data as of December 31, 1999 and 2000, are
derived from, and qualified by reference to, our audited financial statements
included elsewhere in this report. The statement of operations data for the
years ended December 31, 1996 and 1997, and the balance sheet data as of
December 31, 1996, 1997 and 1998 are derived from our audited financial
statements that do not appear in this report. The historical results are not
necessarily indicative of the operating results to be expected in the future.
CUMULATIVE
PERIOD FROM
SEPTEMBER 1,
1992 (DATE OF
INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------------------------------- DECEMBER 31,
1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Operating expenses
Research and development .................. $ 2,842 $ 3,865 $ 5,941 $ 7,836 $ 10,737 $ 33,683
Clinical manufacturing .................... 269 1,564 1,768 1,382 3,200 8,365
General and administrative ................ 1,262 1,262 1,486 2,379 13,775 20,946
-------- -------- -------- -------- -------- --------
Total operating expenses ........... 4,373 6,691 9,195 11,597 27,712 62,994
Loss from operations ........................ (4,373) (6,691) (9,195) (11,597) (27,712) (62,994)
Interest and other income, net .............. 320 178 621 309 4,351 5,897
-------- -------- -------- -------- -------- --------
Net loss .................................... (4,053) (6,513) (8,574) (11,288) (23,361) (57,097)
Dividend related to beneficial
conversion feature of preferred stock...... -- -- -- (9,613) -- (9,613)
Net loss attributable to common
Stockholders .............................. $ (4,053) $ (6,513) $ (8,574) $(20,901) $(23,361) $(66,710)
======== ======== ======== ======== ======== ========
Weighted-average basic and diluted net
loss per share............................. $ (2.46) $ (3.52) $ (4.38) $ (10.48) $ (1.29)
Weighted-average shares used in
computing basic and diluted net loss
per share.................................. 1,645 1,848 1,959 1,995 18,059
AS OF DECEMBER 31,
-------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments ... $ 6,043 $ 479 $ 9,582 $ 9,475 $ 61,777
Long-term marketable securities ..................... -- -- -- -- 23,906
Working capital (deficiency) ........................ 5,411 (1,149) 8,146 8,784 59,170
Total assets ........................................ 6,357 830 10,480 10,206 86,259
Long-term obligations, less current portion ......... 102 89 147 69 8
Convertible preferred stock ......................... 12,804 12,804 30,751 49,899 --
Common stock ........................................ 134 204 207 7,022 156,625
Accumulated deficit ................................. (7,361) (13,874) (22,447) (43,348) (66,710)
Total stockholders' equity (deficit) ................ 5,487 (1,005) 8,371 8,991 83,411
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a pharmaceutical company focused on developing and commercializing
innovative small molecule drugs initially for improving cancer treatments. Our
lead product candidate is RSR13. RSR13 is a synthetic small molecule that
increases the release of oxygen from hemoglobin, the oxygen carrying protein
contained within red blood cells. We believe RSR13 can be used to improve
existing treatments for cancer and treat many diseases attributed to or
aggravated by tissue oxygen deprivation.
To date, we have devoted substantially all of our resources to research and
clinical development. We have not derived any commercial revenues from product
sales, and we do not expect to receive product revenues for at least the next
several years. We have incurred significant operating losses since our inception
in 1992 and, as of December 31, 2000, had an accumulated deficit of $66,709,620.
There can be no assurance if or when we will become profitable. We expect to
continue to incur significant operating losses over the next several years as we
continue to incur increasing research and development costs, in addition to
costs related to clinical trials and manufacturing activities. We expect that
losses will fluctuate from quarter to quarter and that such fluctuations may be
substantial. Our achieving profitability depends upon our ability, alone or with
others, to successfully complete the development of our product candidates, and
obtain required regulatory clearances and successfully manufacture and market
our future products.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Expenses
Research and Development. Research and development expenses were
$10,737,000 for the year ended December 31, 2000, compared to $7,836,000 for the
year ended December 31, 1999 and $5,942,000 for the year ended December 31,
1998. The $2,901,000, or 37%, increase from 1999 to 2000 was due primarily to
increased non-cash charges comprising amortization of deferred compensation
expense of $754,000 and stock compensation expense of $2,079,000 resulting from
the forgiveness of notes receivable from Dr. Gerber initially issued in exchange
for the exercise of stock options. We expect research and development expenses
to increase in 2001 as we continue our first Phase III clinical trial of RSR13
and begin a second Phase III clinical trial of RSR13. The $1,894,000, or 32%,
increase in research and development spending from 1998 to 1999 was due
primarily to non-cash charges comprised of amortization of deferred compensation
expense of $1,533,000 and stock compensation expense of $156,000 resulting from
the extension of notes receivable from Dr. Gerber initially issued in exchange
for the exercise of stock options. In addition, increased clinical trial costs
were offset by the completion of one Phase II clinical trial.
Clinical Manufacturing. Clinical manufacturing expenses include the cost of
manufacturing RSR13 for use in clinical trials and costs associated with the
scale-up of manufacturing to support commercial requirements. Clinical
manufacturing expenses for the years ended December 31, 2000, 1999 and 1998 were
$3,201,000, $1,382,000 and $1,768,000, respectively. The $1,819,000, or 132%,
increase in 2000 compared to 1999 primarily resulted from costs incurred in
manufacturing more bulk drug substance and drug product for our clinical trials.
The $386,000, or 22%, decrease in 1999 compared to 1998 primarily resulted from
lower RSR13 clinical trial requirements.
General and Administrative. General and administrative expenses for the
years ended December 31, 2000, 1999 and 1998 were $13,775,000, $2,379,000 and
$1,486,000, respectively. The $11,396,000, or 479%, increase for 2000 compared
to 1999 primarily resulted from non-cash charges comprising amortization of
deferred compensation expense of $4,642,000 and stock compensation expense of
$4,843,000 resulting from the forgiveness of notes receivable from Dr. Hoffman
initially issued in exchange for the exercise of stock options. Excluding the
impact of non-cash charges of $10,165,000 for fiscal 2000 and $680,000 for
fiscal 1999, general and administrative expenses increased $1,911,000, or 112%
in 2000 compared to 1999. This increase is primarily the result of additional
costs associated with being a public company and increased personnel costs.
General and administrative expenses increased $893,000, or 60%, for 1999
compared to 1998. The increase in fiscal 1999 expense primarily resulted
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from non-cash charges comprising amortization of deferred compensation expense
of $21,000 and stock compensation expense of $659,000 resulting from the
extension of notes receivable from Dr. Hoffman initially issued in exchange for
the exercise of stock options. In addition, we incurred additional costs
associated with hiring new employees.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation was $7,181,000 and $1,554,000 in 2000 and 1999, respectively. There
was no amortization of deferred stock compensation in 1998. In 2000 and 1999, we
recorded deferred stock compensation of $9,272,000 and $5,996,000, respectively,
for options awarded to employees with exercise prices below the deemed fair
value for financial reporting purposes of our common stock on their respective
grant dates. At December 31, 2000, the Company had $6,505,000 of deferred
compensation remaining to be amortized.
Interest and Other Income, Net
Interest income, net of interest expense, was $4,351,000, $310,000 and
$621,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The
$4,041,000 increase in 2000 as compared to 1999 was attributable to increased
average investment balances from the proceeds of our initial public offering and
higher yields on U.S. government securities, high-grade commercial paper and
corporate notes and money market funds held by us. The $311,000, or 50%,
decrease in 1999 as compared to 1998 was primarily the result of a decrease in
the amount of cash available for investing.
Income Taxes
As of December 31, 2000, we had net operating loss carryforwards and
research and development credit carryforwards of $37,261,000 and $2,625,000,
respectively, available to offset future regular and alternative taxable income.
These net operating loss carryforwards expire between 2009 and 2015. The
research and development credit carryforwards will expire between 2009 and 2015.
The utilization of the loss carryforwards to reduce future income taxes will
depend on our ability to generate sufficient taxable income prior to the
expiration of the net operating loss carryforwards and research and development
credit carryforwards. In addition, the maximum annual use of the net operating
loss carryforwards is limited in certain situations where changes occur in our
stock ownership.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
placements of preferred stock and a public equity financing, which have resulted
in net proceeds to us of $123,161,000 through December 31, 2000. Since
inception, we have used $38,351,000 of cash for operating activities. Cash, cash
equivalents and marketable securities were $85,683,000 at December 31, 2000,
compared with $9,475,000 at December 31, 1999 and $9,582,000 at December 31,
1998. Working capital at December 31, 2000 was $59,170,000, as compared to
$8,784,000 at December 31, 1999, and $8,146,000 at December 31, 1998. Long-term
debt was $8,000, $69,000 and $147,000 for the years ending December 31, 2000,
1999 and 1998, respectively. Long-term debt consists primarily of capital
equipment lease obligations.
Net cash used in operating activities was $7,861,000, $9,502,000 and
$8,803,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Uses of cash in operating activities were primarily to fund net losses,
excluding non-cash charges.
Net cash used in investing activities was $75,936,000 for the year ended
December 31, 2000 and consisted primarily of net purchases of investments and
property and equipment. Net cash provided by investing activities was $1,024,000
for the year ended December 31, 1999 and consisted primarily of proceeds from
the maturities of short-term investments, partially offset by the purchase of
short-term investments and property and equipment. Net cash used in investing
activities was $7,929,000 for the year ended December 31, 1998 and consisted
primarily of net purchases of investments.
Net cash provided by financing activities was $82,764,000 for the year
ended December 31, 2000 and consisted primarily of proceeds from our initial
public offering. Net cash provided by financing activities for the years ended
December 31, 1999 and 1998 was $9,420,000 and $17,910,000, respectively, and
consisted primarily of proceeds from the sale of preferred stock.
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Based upon the current status of our product development and
commercialization plans, we believe that our existing cash, cash equivalents and
investments, will be adequate to satisfy our capital needs through at least the
calendar year 2002. However, our actual capital requirements will depend on many
factors, including the status of product development; the time and cost involved
in conducting clinical trials and obtaining regulatory approvals; filing,
prosecuting and enforcing patent claims; competing technological and market
developments; and our ability to market and distribute our future products and
establish new collaborative and licensing arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK
We own financial instruments that are sensitive to market risks as part of
its investment portfolio. The investment portfolio is used to preserve the
Company's capital until it is required to fund operations. All of these
market-risk sensitive instruments are classified as held-to-maturity. We do not
own derivative financial instruments in our investment portfolio. The investment
portfolio contains instruments that are subject to the risk of a decline in
interest rates. We maintain a non-trading investment portfolio of investment
grade, liquid debt securities that limits the amount of credit exposure to any
one issue, issuer or type of instrument. Due to the short duration and
conservative nature of these instruments, we do not believe that we have a
material exposure to interest rate risk.
The Company prepared sensitivity analyses of its interest rate exposures and
its exposure from anticipated investment for fiscal 2001 to assess the impact of
hypothetical changes in interest rates. Based on the results of these analyses,
a 10% adverse change in interest rates from the 2000 fiscal year-end rates would
not have a material adverse effect on the fair value of investments and would
not materially impact the Company's results of operations, cash flows, or
financial condition for the next twelve months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required pursuant to this item are included in Item
14 of this report and are presented beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
Not Applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the Company's directors is
incorporated by reference to the information set forth in the sections entitled
"Proposal 1 - Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement for the 2001
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended December 31, 2000 (the "Proxy
Statement"). The information required by this Item concerning the executive
officers of the Company is incorporated by reference to the information set
forth in the section of the Proxy Statement entitled "Executive Officers and Key
Employees."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item regarding executive compensation is
incorporated by reference to the information set forth in the section of the
Proxy Statement entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section of the Proxy Statement entitled "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section of the Proxy Statement entitled "Certain Transactions."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are being filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Financial Statements of Allos
Therapeutics, Inc. appearing on page F-1 of this report.
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are
not applicable or not required or because the information is included
elsewhere in the Financial Statements or the Notes thereto.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fiscal year ended
December 31, 2000.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.01(1) Certificate of Incorporation, as amended to date.
3.02(1) Form of Amended and Restated Certificate of Incorporation
filed upon closing of the initial public offering.
3.03(1) Bylaws, as amended to date.
3.04(1) Form of Bylaws adopted upon closing of the initial public
offering.
10.01(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.02(1) Hemotech and CIT Amended and Restated Allosteric Modifiers
of Hemoglobin Agreement with Center for Innovative
Technology dated January 12, 1994.
10.03(1) Amendment to Allos Therapeutics, Inc. and CIT Amended and
Restated Allosteric Modifiers of Hemoglobin Agreement with
Center for Innovative Technology dated January 17, 1995.
10.04(1) Amendment to Allos Therapeutics, Inc. and CIT Amended and
Restated Allosteric Modifiers of Hemoglobin Agreement with
Center for Innovative Technology dated March 12, 1996.
10.05(1) Assignment and Assumption Agreement with Amendment with
Center for Innovative Technology and Virginia Commonwealth
University Intellectual Property Foundation dated July 28,
1997.
10.06(1) Exercise of Option to Nonheme Protein License Agreement with
VCU-Intellectual Property Foundation dated March 23, 1998.
10.07(1) Warrant Agreement to purchase shares of Series B Preferred
Stock with Comdisco, Inc. dated April 15, 1996.
10.08(1) Warrant Agreement to purchase shares of Series C Preferred
Stock with Comdisco, Inc. dated May 5, 1998.
10.09(1) Allos Therapeutics, Inc. Series C Convertible Preferred
Stock Purchase Agreement dated October 4, 1999.
10.10(1) Allos Therapeutics, Inc. Fourth Amended and Restated
Stockholder Rights Agreement dated October 4, 1999.
10.11(1) Allos Therapeutics, Inc. 1995 Stock Option Plan, as amended
to date.
10.12(1) Office Lease with Denver Jack Limited Partnership dated
October 30, 1995.
10.13(1) First Amendment to 7000 Broadway Building Office Lease with
Denver Jack Limited Partnership dated October 30, 1995.
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10.14(1) Second Amendment to 7000 Broadway Building Office Lease with
Denver Jack Limited Partnership dated June 7, 1996.
10.15(1) Third Amendment to 7000 Broadway Building Office Lease with
Denver Jack Limited Partnership dated March 26, 1998.
10.16(1) Fourth Amendment to 7000 Broadway Building Office Lease with
Denver Jack Limited Partnership dated June 29, 1998.
10.17(1) Lease Agreement with Virginia Biotechnology Research Park
Authority dated July 28, 1999.
10.18(1) Term Sheet for Contract API Supply between Allos and Hovione
dated March 25, 1999.
10.19(1) Confirmatory letter agreement with Hovione Inter Limited
dated January 13, 2000.
10.20(1) Development and Investigational Supply Proposal between
Taylor Pharmaceuticals and Allos Therapeutics, Inc. dated
December 30, 1998.
10.21 Employment Agreement between Dr. Hoffman and Allos
Therapeutics, Inc. dated January 17, 2001.
10.22 Employment Agreement between Dr. Gerber and Allos
Therapeutics, Inc. dated January 17, 2001.
10.23 Employment Agreement between Michael E. Hart and Allos
Therapeutics, Inc. dated January 17, 2001.
10.24 Allos Therapeutics, Inc. Severance Benefit Plan, effective
January 16, 2001, and related benefit schedule thereto.
10.25 Fifth Amendment to 7000 Broadway Building Office Lease with
7K Broadway, LLC (as successor in interest to Denver Jack
Limited Partnership) dated January 18, 2001.
10.26 Allos Therapeutics, Inc. 2001 Employee Stock Purchase Plan
and form of Offering.
23.01 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24.01 Power of Attorney (see page 28 herein)
- ----------
(1) Incorporated by reference to our Registration Statement on Form S-1 (File
No. 333-95439) and amendments thereto, declared effective March 27, 2000
27
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALLOS THERAPEUTICS, INC.
Date: March 7, 2001 By: /s/ Stephen J. Hoffman
----------------------------------
Stephen J. Hoffman
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Stephen J. Hoffman and Michael E. Hart,
and each of them, his true and lawful attorneys-in-fact and agents with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Form 10-K, and to file the
same, with all exhibits thereto and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT ON MARCH 7, 2001, AND IN THE CAPACITIES INDICATED:
NAME TITLE
- ---- -----
/s/ Stephen J. Hoffman President and Chief Executive Officer,
- ------------------------------ Director
Stephen J. Hoffman (Principal Executive Officer)
/s/ Michael E. Hart Chief Financial Officer and
- ------------------------------ Senior Vice President, Operations
Michael E. Hart (Principal Financial and Accounting
Officer)
/s/ Donald J. Abraham Director
- ------------------------------
Donald J. Abraham
/s/ Stephen K. Carter Director
- ------------------------------
Stephen K. Carter
/s/ Mark G. Edwards Director
- ------------------------------
Mark G. Edwards
/s/ Marvin E. Jaffe Director
- ------------------------------
Marvin E. Jaffe
31
ALLOS THERAPEUTICS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants...................................... F-2
Balance Sheets......................................................... F-3
Statements of Operations............................................... F-4
Statements of Changes in Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows............................................... F-6
Notes to Financial Statements.......................................... F-7
F-1
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Allos Therapeutics, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Allos
Therapeutics, Inc. (a company in the development stage) at December 31, 1999 and
2000, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000 and the cumulative period from
September 1, 1992 (date of inception) through December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Broomfield, Colorado
February 9, 2001
F-2
33
ALLOS THERAPEUTICS, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------------
1999 2000
------------- -------------
Current assets:
Cash and cash equivalents .......................................................... $ 2,597,884 $ 1,565,693
Short-term investments ............................................................. 6,877,303 60,211,791
Prepaid expenses -- research ....................................................... 223,117 134,777
Prepaid expenses -- other .......................................................... 45,311 95,040
Other assets ....................................................................... 185,898 3,294
------------- -------------
Total current assets ........................................................ 9,929,513 62,010,595
------------- -------------
Long-term marketable securities ...................................................... -- 23,905,763
Property and equipment (net of accumulated depreciation of $322,227 and $444,408,
respectively) ........................................................................ 230,360 326,266
Other assets ......................................................................... 45,641 16,530
------------- -------------
Total assets ................................................................ $ 10,205,514 $ 86,259,154
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- related parties ................................................ $ 8,087 $ 97,889
Accounts payable -- research ....................................................... 768,592 2,043,246
Accrued expenses -- trade .......................................................... 65,123 212,015
Accrued compensation and employee benefits ......................................... 224,379 426,052
Current portion of capital lease obligations ....................................... 79,042 61,506
------------- -------------
Total current liabilities ................................................... 1,145,223 2,840,708
Long-term portion of capital lease obligations ....................................... 69,320 7,814
------------- -------------
Total liabilities ........................................................... 1,214,543 2,848,522
Commitments (Note 7)
Stockholders' equity:
Convertible preferred stock, Series A: $0.001 par value; 5,000,000 shares
and 0 shares authorized, issued and outstanding at December 31, 1999 and
2000, respectively (liquidation value:
$6,718,107 at December 31, 1999) ................................................. 5,000 --
Convertible preferred stock, Series B: $0.001 par value;
5,050,000 shares and 0 shares authorized at December 31, 1999 and 2000,
respectively; 5,032,500 and 0 shares issued and outstanding at December
31, 1999 and 2000, respectively (liquidation value:
$10,191,261 at December 31, 1999) ................................................ 5,033 --
Convertible preferred stock, Series C: $0.001 par value;
16,610,000 and 0 shares authorized at December 31, 1999 and 2000,
respectively; 15,255,786 and 0 shares issued and outstanding at December
31, 1999 and 2000, respectively (liquidation value:
$30,161,846 at December 31, 1999) ................................................ 15,256 --
Preferred Stock, $0.001 par value; 10,000,000 shares authorized at
December 31, 2000, no shares issues or outstanding ............................... -- --
Common stock, $0.001 par value; 31,000,000 and 75,000,000 shares
authorized at December 31, 1999 and 2000, respectively; 2,022,138 and
22,954,876 shares issued and outstanding at December 31, 1999 and ................ 2,022 22,955
2000, respectively
Additional paid-in capital preferred stock ........................................... 49,873,495 --
Additional paid-in capital common stock .............................................. 7,020,291 156,602,391
Notes receivable -- related parties .................................................. (139,687) --
Accumulated deficit .................................................................. (43,348,145) (66,709,620)
Deferred compensation ................................................................ (4,442,294) (6,505,094)
------------- -------------
Total stockholders' equity .................................................. 8,990,971 83,410,632
------------- -------------
Total liabilities and stockholders' equity .................................. $ 10,205,514 $ 86,259,154
============= =============
The accompanying notes are an integral part of these financial statements.
F-3
34
ALLOS THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
CUMULATIVE
PERIOD FROM
SEPTEMBER 1, 1992
(DATE OF INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
-------------------------------------------- DECEMBER 31,
1998 1999 2000 2000
------------ ------------ ------------ -------------------
Operating expenses:
Research and development ................... $ 5,941,523 $ 7,836,281 $ 10,736,503 $ 33,682,390
Clinical manufacturing ..................... 1,767,707 1,381,722 3,200,548 8,365,381
General and administrative ................. 1,485,735 2,379,435 13,775,248 20,945,981
------------ ------------ ------------ ------------
Total operating expenses ........... 9,194,965 11,597,438 27,712,299 62,993,752
Loss from operations ......................... (9,194,965) (11,597,438) (27,712,299) (62,993,752)
Interest and other income, net ............... 621,042 309,698 4,350,824 5,897,107
------------ ------------ ------------ ------------
Net loss ........................... (8,573,923) (11,287,740) (23,361,475) (57,096,645)
Dividend related to beneficial conversion
feature of preferred stock ................. -- (9,612,975) -- (9,612,975)
------------ ------------ ------------ ------------
Net loss attributable to common
stockholders ............................... $ (8,573,923) $(20,900,715) $(23,361,475) $(66,709,620)
============ ============ ============ ============
Net loss per share:
Basic and diluted .......................... $ (4.38) $ (10.48) $ (1.29)
============ ============ ============
Weighted average shares -- basic and
diluted ................................. 1,959,071 1,994,764 18,058,802
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
35
ALLOS THERAPEUTICS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE NOTES
COMMON STOCK PREFERRED STOCK ADDITIONAL RECEIVABLE
------------------ ------------------ PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS
------ ------ ------ ------ ---------- ------------
Subscription receivable for common stock
at $1.61 per share............................ -- $ 90 -- $ -- $ -- $ --
---------- -------- ---------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1992................... -- 90 -- -- -- --
Subscription receivable for common stock
at $1.61 per share............................ -- 10 -- -- -- --
Issuance of common stock for
subscription receivable....................... 992,000 892 -- -- (892) --
Net loss....................................... -- -- -- -- -- --
---------- -------- ---------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1993................... 992,000 992 -- -- (892) --
Issuance of $.001 par value common stock
in exchange for license agreement............. 248,000 248 -- -- 39,752 --
Issuance of Series A convertible
preferred stock ($.001 par value)
together with Series A and Series B
stock warrants at $1.00 per share............. -- -- 700,000 704 529,023 --
Issuance of Series A convertible
preferred stock upon exercise of
Series A warrants at $1.00 per
share......................................... -- -- 1,300,000 1,300 1,298,700 --
Accretion to redemption value of
preferred stock............................... -- -- -- -- 58,839 --
Net loss....................................... -- -- -- -- -- --
---------- -------- ---------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1994................... 1,240,000 1,240 2,000,000 2,004 1,925,422 --
Issuance of Series A convertible
preferred stock at $1.00 per share............ -- -- 3,000,000 3,000 2,973,454 --
Accretion to redemption value of
preferred stock............................... -- -- -- -- 229,837 --
Net loss....................................... -- -- -- -- -- --
---------- -------- ---------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1995................... 1,240,000 1,240 5,000,000 5,004 5,128,713 --
Issuance of Series B convertible
preferred stock at $1.60 per share,
net of issuance costs......................... -- -- 5,032,500 5,033 7,992,705 --
Cancellation of Series B warrants
previously issued with Series A............... -- -- -- (4) 4 --
Cancellation of Series A redemption
rights........................................ -- -- -- -- (288,676) --
Issuance of common stock upon exercise
of stock options for cash of $4,024
and notes receivable of $90,000 at
$0.16 per share............................... 582,950 583 -- -- 93,441 (90,000)
Net loss....................................... -- -- -- -- -- --
---------- -------- ---------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1996................... 1,822,950 1,823 10,032,500 10,033 12,926,187 (90,000)
Issuance of common stock upon exercise
of stock options for cash of $20,288
and notes receivable of $49,687 at
$0.16-$0.40 per share......................... 175,770 176 -- -- 69,799 (49,687)
Net loss....................................... -- -- -- -- -- --
---------- -------- ---------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1997................... 1,998,720 1,999 10,032,500 10,033 12,995,986 (139,687)
Issuance of Series C convertible
preferred stock at $1.81 per share,
net of issuance costs......................... -- -- 9,944,750 9,945 17,937,102 --
Issuance of common stock upon exercise
of stock options for cash of $3,464 at
$0.16-$0.40 per share......................... 13,239 13 -- -- 3,451 --
Net loss....................................... -- -- -- -- -- --
---------- -------- ---------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1998................... 2,011,959 2,012 19,977,250 19,978 30,936,539 (139,687)
Issuance of Series C convertible
preferred stock at $1.81 per share,
net of issuance costs......................... -- -- 5,311,036 5,311 9,529,532 --
Issuance of common stock upon exercise
of stock options for cash of $3,695 at
$0.16-$0.56 per share......................... 10,179 10 -- -- 3,685 --
Deferred compensation related to
options....................................... -- -- -- -- 6,811,055 --
Beneficial conversion feature related to
issuance of preferred stock................... -- -- -- -- 9,612,975 --
Net loss....................................... -- -- -- -- -- --
---------- -------- ---------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1999................... 2,022,138 2,022 25,288,286 25,289 56,893,786 (139,687)
Issuance of 5,000,000 shares of common
stock, net of issuance costs.................. 5,000,000 5,000 -- -- 82,764,396 --
Conversion of preferred stock to common
stock upon IPO................................ 15,678,737 15,679 (25,288,286) (25,289) 9,610 --
Extinguishment of notes receivable............. -- -- -- -- -- 139,687
Issuance of common stock upon exercise
of stock options for cash of $76,358 at
$0.16 - $0.56 per share....................... 254,001 254 -- -- 73,601 --
Deferred compensation related to options....... -- -- -- -- 16,860,998 --
Net loss....................................... -- -- -- -- -- --
---------- -------- ---------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 2000................... 22,954,876 $ 22,955 -- $ -- $156,602,391 $ --
========== ======== ========== ========= ============ =========
TOTAL
STOCKHOLDERS'
ACCUMULATED DEFERRED EQUITY
DEFICIT COMPENSATION (DEFICIT)
----------- ------------- -------------
Subscription receivable for common stock
at $1.61 per share............................ $ -- $ -- $ 90
------------ ----------- -----------
BALANCE AT DECEMBER 31, 1992................... -- -- 90
Subscription receivable for common stock
at $1.61 per share............................ -- -- 10
Issuance of common stock for
subscription receivable....................... -- -- --
Net loss....................................... (24,784) -- (24,784)
------------ ----------- -----------
BALANCE AT DECEMBER 31, 1993................... (24,784) -- (24,684)
Issuance of $.001 par value common stock
in exchange for license agreement............. -- -- 40,000
Issuance of Series A convertible
preferred stock ($.001 par value)
together with Series A and Series B
stock warrants at $1.00 per share............. -- -- 529,727
Issuance of Series A convertible
preferred stock upon exercise of
Series A warrants at $1.00 per
share......................................... -- -- 1,300,000
Accretion to redemption value of
preferred stock............................... (58,839) -- --
Net loss....................................... (898,929) -- (898,929)
------------ ----------- -----------
BALANCE AT DECEMBER 31, 1994................... (982,552) -- 946,114
Issuance of Series A convertible
preferred stock at $1.00 per share............ -- -- 2,976,454
Accretion to redemption value of
preferred stock............................... (229,837) -- --
Net loss....................................... (2,384,176) -- (2,384,176)
------------ ----------- -----------
BALANCE AT DECEMBER 31, 1995................... (3,596,565) -- 1,538,392
Issuance of Series B convertible
preferred stock at $1.60 per share,
net of issuance costs......................... -- -- 7,997,738
Cancellation of Series B warrants
previously issued with Series A............... -- -- --
Cancellation of Series A redemption
rights........................................ 288,676 -- --
Issuance of common stock upon exercise
of stock options for cash of $4,024
and notes receivable of $90,000 at
$0.16 per share............................... -- -- 4,024
Net loss....................................... (4,053,027) -- (4,053,027)
------------ ----------- -----------
BALANCE AT DECEMBER 31, 1996................... (7,360,916) -- 5,487,127
Issuance of common stock upon exercise
of stock options for cash of $20,288
and notes receivable of $49,687 at
$0.16-$0.40 per share......................... -- -- 20,288
Net loss....................................... (6,512,591) -- (6,512,591)
------------ ----------- -----------
BALANCE AT DECEMBER 31, 1997................... (13,873,507) -- (1,005,176)
Issuance of Series C convertible
preferred stock at $1.81 per share,
net of issuance costs......................... -- -- 17,947,047
Issuance of common stock upon exercise
of stock options for cash of $3,464 at
$0.16-$0.40 per share......................... -- -- 3,464
Net loss....................................... (8,573,923) -- (8,573,923)
------------ ----------- -----------
BALANCE AT DECEMBER 31, 1998................... (22,447,430) -- 8,371,412
Issuance of Series C convertible
preferred stock at $1.81 per share,
net of issuance costs......................... -- -- 9,534,843
Issuance of common stock upon exercise
of stock options for cash of $3,695 at
$0.16-$0.56 per share......................... -- -- 3,695
Deferred compensation related to
options....................................... -- (4,442,294) 2,368,761
Beneficial conversion feature related to
issuance of preferred stock................... (9,612,975) -- --
Net loss....................................... (11,287,740) -- (11,287,740)
------------ ----------- -----------
BALANCE AT DECEMBER 31, 1999................... (43,348,145) (4,442,294) 8,990,971
Issuance of 5,000,000 shares of common
stock,
net of issuance costs......................... -- -- 82,769,396
Conversion of preferred stock to common
stock upon IPO................................ -- -- --
Extinguishment of notes receivable............. -- -- 139,687
Issuance of common stock upon exercise
of stock options for cash of $76,358 at
$0.16 - $0.56 per share....................... -- -- 73,855
Deferred compensation related to options....... -- (2,062,800) 14,798,198
Net loss....................................... (23,361,475) -- (23,361,475)
------------ ----------- -----------
BALANCE AT DECEMBER 31, 2000................... $(66,709,620 $(6,505,094) $83,410,632
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
36
ALLOS THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
CUMULATIVE
PERIOD FROM
SEPTEMBER 1,
1992
(DATE OF
INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
--------------------------------------------- DECEMBER 31,
1998 1999 2000 2000
------------- ------------- ------------- -------------
Cash Flows From Operating Activities
Net loss ........................................................ $ (8,573,923) $ (11,287,740) $ (23,361,475) $ (57,096,645)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization ................................. 101,118 146,413 122,181 474,203
Stock-based compensation expense .............................. -- 2,368,761 14,888,198 17,256,959
Other ......................................................... (2,823) -- -- 52,406
Changes in operating assets and liabilities:
Decrease (increase) in prepaids and other assets ............ (407,177) 61,794 250,326 (249,641)
(Increase) decrease in interest receivable on short-term
investments .............................................. (80,682) (13,810) (1,472,798) (1,567,290)
Increase (decrease) in accounts payable -- research ......... 303,390 (737,018) 1,274,655 2,043,247
Increase (decrease) in accounts payable -- related parties .. (51,865) (108,929) 89,802 97,889
Increase (decrease) in accounts payable -- trade ............ (15,320) (45,523) 146,892 212,015
Increase (decrease) in accrued compensation and employee
benefits ................................................. (75,994) 113,664 201,673 426,052
------------- ------------- ------------- -------------
Net cash used in operating activities .................... (8,803,276) (9,502,388) (7,860,546) (38,350,805)
------------- ------------- ------------- -------------
Cash Flows From Investing Activities
Acquisition of property and equipment ........................... (85,029) (37,901) (218,087) (511,279)
Purchases of short-term investments ............................. (21,450,298) (11,713,177) (97,994,487) (145,931,665)
Proceeds from maturities of short-term investments .............. 13,605,992 12,774,672 22,227,033 63,381,400
Payments received on notes receivable ........................... -- -- 49,687 49,687
------------- ------------- ------------- -------------
Net cash provided by (used in) investing activities ...... (7,929,335) 1,023,594 (75,935,854) (83,011,857)
------------- ------------- ------------- -------------
Cash Flows From Financing Activities
Principal payments under capital leases ......................... (84,524) (118,406) (79,042) (352,768)
Proceeds from sale leaseback .................................... 43,908 -- -- 120,492
Proceeds from stockholder loan .................................. -- -- -- 12,000
Repayment of stockholder loan ................................... -- -- -- (12,000)
Proceeds from issuance of convertible preferred
stock, net of issuance costs .................................. 17,947,047 9,534,843 -- 40,285,809
Proceeds from issuance of common stock .......................... 3,464 3,695 82,843,251 82,874,822
------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities ...... 17,909,895 9,420,132 82,764,209 122,928,355
------------- ------------- ------------- -------------
Net increase (decrease) in cash ................................... 1,177,284 941,338 (1,032,191) 1,565,693
Cash and cash equivalents, beginning of period .................... 479,262 1,656,546 2,597,884 --
------------- ------------- ------------- -------------
Cash and cash equivalents, end of period .......................... $ 1,656,546 $ 2,597,884 $ 1,565,693 $ 1,565,693
============= ============= ============= =============
Supplemental Schedule of Noncash Operating And Financing
Activities
Cash paid for interest ............................................ -- -- 170,172 180,172
Issuance of stock in exchange for license agreement ............. -- -- -- 40,000
Capital lease obligations incurred for purchase of
property and equipment ........................................ 197,334 2,105 -- 422,088
Issuance of stock in exchange for notes receivable .............. -- -- -- 139,687
The accompanying notes are an integral part of these financial statements.
F-6
37
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY
Allos Therapeutics, Inc. (the "Company") is a pharmaceutical company
focused on developing and commercializing innovative small molecule drugs,
initially for improving cancer treatments.
The Company was incorporated in the Commonwealth of Virginia on September
1, 1992 as HemoTech Sciences, Inc. and filed amended Articles of Incorporation
to change its name to Allos Therapeutics, Inc. on October 19, 1994. The Company
reincorporated in Delaware on October 28, 1996.
The Company's lead product candidate (RSR13) is a synthetic small molecule
that increases the release of oxygen from hemoglobin, the oxygen carrying
protein contained within red blood cells. The Company is currently conducting
clinical trials for RSR13. Prior to commercial sales of the product, the Company
must complete the clinical trials and receive the necessary Food and Drug
Administration ("FDA") approval. Should the Company be unable to obtain the
necessary FDA approvals, there could be a materially adverse effect on the
Company's financial condition, operating results and cash flows.
To date, the Company has devoted substantially all of its resources to
research and clinical development. The Company has not derived any commercial
revenues from product sales, and does not expect to receive product revenues for
at least the next several years. The Company has incurred significant operating
losses since its inception in 1992. The Company expects to continue to incur
significant operating losses over the next several years as it continues to
incur increasing research and development costs, in addition to costs related to
clinical trials and manufacturing activities. There can be no assurance if or
when the Company will become profitable. The Company's achieving profitability
depends upon its ability, alone or with others, to successfully complete the
development of its products, and obtain required regulatory clearances and
successfully manufacture and market its products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company has not generated any revenue to date and its activities have
consisted primarily of developing products, raising capital and recruiting
personnel. Accordingly, the Company is considered to be in the development stage
at December 31, 2000 as defined in Statement of Financial Accounting Standards
("SFAS") No. 7, Accounting and Reporting by Development Stage Enterprises.
Certain amounts in the prior years have been reclassified to be consistent
with current year presentation. These changes had no impact on previously
reported results of operations or stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of expenses during the reporting period.
Actual results could differ materially from these estimates.
Cash and Cash Equivalents and Marketable Securities
All highly liquid investments with a maturity of three months or less are
considered to be cash equivalents. The carrying values of the Company's cash
equivalents and short-term and long-term marketable securities approximate their
market values based on quoted market prices. The Company accounts for marketable
securities in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Short-term and long-term marketable securities
are classified as held to maturity and are carried at cost plus accrued interest
and consist of
F-7
38
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
commercial paper, government obligations and corporate notes having maturities
of longer than three months, held at financial institutions.
Prepaid Expenses -- Research
In accordance with various research and development contracts, the Company
is obligated to pay a portion of the fee upon execution. The asset balance is
expensed as milestones within the contract are reached. In the event milestones
within the contract are not reached, the Company evaluates whether events and
circumstances have occurred that indicate impairment of remaining prepaid
research expenses may be appropriate. Included in other assets at December 31,
1999 is $178,000 related to a settlement agreement reached with a third party
for failure to achieve specified milestones; this amount was paid in 2000.
Property and Equipment
The components of property and equipment are as follows:
DECEMBER 31,
----------------------------- ESTIMATED
1999 2000 LIVES
------------ ------------ ------------
Office furniture and equipment ......................... $ 15,598 $ 70,305 5 years
Office furniture and equipment under capital leases .... 197,379 185,503 3.5 years
Computer hardware and software ......................... 58,208 225,915 3 years
Computer hardware under capital leases ................. 205,588 199,411 3.5 years
Lab equipment owned .................................... 31,670 45,396 5 years
Lab equipment under capital leases ..................... 23,217 23,217 3.5 years
Leasehold improvements ................................. 20,927 20,927 3-5 years
------------ ------------
552,587 770,674
Less accumulated depreciation and amortization ......... (322,227) (444,408)
------------ ------------
$ 230,360 $ 326,266
============ ============
Property and equipment is recorded at cost and is depreciated using the
straight-line method over estimated useful lives. Property and equipment
acquired under capital lease agreements are amortized using the straight-line
method over the shorter of the estimated useful life or the related lease term.
Accumulated amortization for leased equipment was $277,000 and $341,000 at
December 31, 1999 and 2000, respectively.
Long-lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate revision to the remaining useful life or impairment of remaining
balances of long-lived assets may be appropriate. Such events and circumstances
include, but are not limited to, change in business strategy or change in
current and long-term projected operating performance. The carrying value of
long-lived assets is considered impaired when the anticipated undiscounted cash
flows from the lowest level of assets for which there are identifiable cash
flows is less than the carrying value. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair value of the
long-lived assets. Fair value is determined using the anticipated cash flows
discounted at a rate commensurate with the risk involved.
Stock-Based Compensation
The Company accounts for grants of stock options according to Accounting
Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees and related Interpretations. Proforma net loss information, as
required by SFAS No. 123, Accounting for Stock-Based Compensation, is included
in Note 4. Any deferred stock compensation calculated according to APB No. 25 is
amortized over the vesting period of the individual options,
F-8
39
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
generally four years, in accordance with FASB Interpretation No. 28, Accounting
for Stock Appreciation Rights and Other Variable Stock Option and Award Plans.
In March 2000, the FASB issued Interpretation (FIN) No. 44 "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of APB No.
25. FIN No. 44 clarifies the application of APB No. 25 for: (a) the definition
of the employee for purposes of applying APB No. 25; (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan; (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award; and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 became effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 15, 2000. The adoption of the provisions of FIN
No. 44 did not have a material impact on the Company's financial position or
results of operations.
Research and Development
Research and development expenditures are charged to operations as
incurred.
Income Taxes
Income taxes are accounted for under SFAS No. 109, Accounting for Income
Taxes. Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities at each year end and their
respective tax bases using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount more
likely than not to be realized.
Concentration of Credit
The Company's cash and cash equivalents and marketable securities at
December 31, 1999 and 2000 are maintained in two financial institutions in
amount that, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk in this area. It is the Company's practice to place its
investments in high-quality securities.
Net Loss Per Share
Net loss per share is calculated in accordance with SFAS No. 128, Earnings
Per Share. Under the provisions of SFAS 128, basic net loss per common share is
computed by dividing the net loss for the period by the weighted average number
of vested common shares outstanding during the period. Diluted net loss per
common share is computed giving effect to all dilutive potential common stock,
including options, non-vested common stock, convertible preferred stock and
convertible preferred stock warrants. Diluted net loss per share for the years
ended December 31, 1998, 1999 and 2000 is the same as basic net loss per share
because potential common shares were anti-dilutive.
Anti-dilutive securities as of December 31, 1998, 1999 and 2000 not
included in the diluted net loss per share calculations, are as follows:
1998 1999 2000
------------ ------------ ------------
Non-vested common stock ................ 32,593 8,680 171
Common stock options ................... 448,260 822,120 1,859,903
Common stock warrants .................. -- -- 14,275
Convertible preferred stock ............ 12,385,895 15,678,737 --
Convertible preferred stock warrants ... 14,275 31,402 --
------------ ------------ ------------
12,881,023 16,540,939 1,874,349
============ ============ ============
F-9
40
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income includes all changes in equity during a period from
non-owner sources. During each of the three years ended December 31, 2000 and
for the cumulative period from inception, the Company has not had any
significant transactions that are required to be reported as adjustments to
determine comprehensive income.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
short-term investments, long-term marketable securities, prepaid expenses,
accounts payable and accrued liabilities. The carrying amounts of financial
instruments approximate their fair value due to their short maturities.
Additionally, based upon the borrowing rates available to the Company for debt
agreements with similar terms and average maturities, management believes the
carrying amount of capital lease obligations approximates their fair value.
3. MARKETABLE SECURITIES
The Company accounts for investments in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. In accordance
with SFAS No. 115, investments that the Company has the positive intent and
ability to hold to maturity are reported at amortized cost, which approximates
fair market value, and are classified as held-to-maturity. The investments that
the Company has deemed to be held-to-maturity include securities held in high
grade commercial paper and corporate notes with maturities ranging from three
months to two years, which total approximately $6,877,303 and $84,117,554 at
December 31, 1999 and 2000, respectively.
4. STOCKHOLDERS' EQUITY
COMMON STOCK
On March 27, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, the Company
completed an Initial Public Offering ("IPO") of 5,000,000 shares of its common
stock at an IPO price of $18.00 per share (the "Offering"). Proceeds to the
Company from the Offering, after calculation of the underwriters' discount and
commission, totaled approximately $82.8 million, net of offering costs of
approximately $1 million. Concurrent with the closing of the IPO, all
outstanding shares of the Company's convertible preferred stock were
automatically converted into 15,678,737 shares of common stock.
At December 31, 2000, the Company has reserved shares of common stock for
future issuance as follows:
1995 Stock Option Plan.............................. 1,708,103
2000 Stock Option Plan.............................. 758,858
Warrants............................................ 14,275
-----------
Total 2,481,236
===========
Concurrent with the close of the Company's initial public offering, the
Company's articles of incorporation were amended to authorize 10,000,000 shares
of undesignated preferred stock, none of which are issued or outstanding. The
Company's board of directors is authorized to fix the designation, powers,
preferences, and rights of any such series. The Company's articles of
incorporation were also amended to increase the authorized number of shares of
common stock to 75,000,000 shares.
F-10
41
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
WARRANTS
In April 1996, the Company issued warrants to purchase 17,500 shares of the
Company's Series B convertible preferred stock in conjunction with an equipment
lease line at an exercise price of $1.60 per share that expire at the later of
April 15, 2006, or five years from the effective date of an initial public
offering. In May 1998, the Company issued warrants to purchase 5,524 shares of
the Company's Series C convertible preferred stock in conjunction with an
equipment lease with an exercise price of $1.81 per share that expire at the
later of May 5, 2008, or five years from the effective date of an initial public
offering. Upon completing the IPO, the Series B and Series C warrants were
converted to purchase 10,850 shares at $2.58 and 3,425 shares at $2.92,
respectively, of the Company's common stock.
STOCK OPTIONS
During 1995, the Board of Directors terminated the 1992 Stock Plan (the
"1992 Plan") and adopted the 1995 Stock Option Plan (the "1995 Plan"). The 1995
Plan was amended and restated in 1997. Termination of the 1992 Plan had no
effect on the options outstanding under that plan, as they were assumed under
the 1995 Plan. Under the 1995 Plan, the Company may grant fixed and
performance-based stock options and stock appreciation rights to officers,
employees, consultants and directors. The stock options are intended to qualify
as "incentive stock options" under Section 422 of the Internal Revenue Code,
unless specifically designated as non-qualifying stock options or unless
exceeding the applicable statutory limit.
During 2000, concurrent with the Company's IPO, the Board suspended the
1995 option plan and adopted the 2000 Incentive Compensation Plan (the "2000
Plan"). The 2000 Plan provides for the granting of stock options similar to the
terms of the 1995 Plan as described above. Any shares remaining for future
option grants and any future cancellations of options from our 1995 Plan will be
available for future grant under the 2000 Plan. Suspension of the 1995 Plan had
no effect on the options outstanding under that plan.
As of December 31, 2000, the Company had 607,058 shares of common stock
available for grant under the 2000 Plan. The 1995 and 2000 Plans provide for
appropriate adjustments in the number of shares reserved and granted options in
the event of certain changes to the Company's outstanding common stock by reason
of merger, recapitalization, stock split or other similar events. Options
granted under the Plan may be exercised for a period of not more than ten years
from the date of grant or any shorter period as determined by the Board of
Directors. Options vest as determined by the Board of Directors, generally over
a period of two to four years, subject to acceleration under certain events. The
exercise price of any incentive stock option shall equal or exceed the fair
market value per share on the date of grant, or 110% of the fair market value
per share in the case of a 10% or greater stockholder.
The Company has granted to selected officers and other key employees stock
option awards whose vesting is contingent upon achieving specific criteria. The
options will vest based upon meeting certain clinical milestones, finalizing a
corporate partnership and/or co-licensing of an additional compound for
development, and the earlier of the Company's stock trading at or above a
certain level for a certain number of consecutive trading days prior to June 30,
2001, or seven years. If such criteria are not met, these options will become
fully vested after 7 years from the date of grant. For the options described
above, deferred stock-based compensation was recorded at the date of grant,
representing the difference between the exercise price and the fair value of the
Company's common stock on the date these options were granted, as both the
number of shares and the option price were fixed. Deferred stock-based
compensation is amortized over the predefined vesting period until it becomes
probable that the performance goals will be met; at that time, the amortization
of the remaining deferred stock-based compensation will be accelerated so as to
be amortized over the period to the date the performance goal is expected to be
reached.
During the years ended December 31, 1999 and 2000, in connection with the
grant of certain stock options to employees, the Company recorded deferred
stock-based compensation of $9,272,011 representing the difference between the
exercise price and the deemed fair value of the Company's common stock on the
date these stock
F-11
42
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
options were granted. Deferred compensation is included as a reduction of
stockholders' equity and is being amortized in accordance with the accelerated
method as described in FASB Interpretation No. 28 over the vesting periods of
the related options, which is generally four years. During the year ended
December 31, 2000, the Company recorded amortization of deferred stock
compensation expense of $7,180,823 of which $2,286,597 related to R&D personnel,
$4,663,238 related to G&A personnel and $230,987 related to clinical
manufacturing personnel. At December 31, 2000, the Company had $6,505,094 of
deferred compensation remaining to be amortized.
Pro forma net loss and net loss per share information is required by SFAS
No. 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options and rights granted
subsequent to December 31, 1994 under the fair value method. The fair value for
these options and the purchase rights was estimated at the date of grant using
the minimum value method with the following weighted-average assumptions for
1998, 1999, and 2000, respectively: risk free interest rates of between 4.25%
and 10.37%; no dividend yield; and a weighted-average expected life of the
options of 8.5 years. Based on calculations using a Black-Scholes-type minimum
value option pricing model, the weighted-average fair value of options at grant
date was $0.08, $6.77 and $6.76 for the years ended December 31, 1998, 1999 and
2000, respectively.
YEARS ENDED
DECEMBER 31,
----------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
Net loss attributable to common stockholders:
As reported ................................... $ (8,573,923) $ (20,900,715) $ (23,361,475)
============== ============== ==============
Pro forma ..................................... $ (8,583,501) $ (20,925,607) $ (24,008,494)
============== ============== ==============
Net loss per share:
As reported ................................... $ (4.38) $ (10.48) $ (1.29)
============== ============== ==============
Pro forma ..................................... $ (4.38) $ (10.49) $ (1.33)
============== ============== ==============
F-12
43
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity, and related information
follows:
INCENTIVE AND NON-INCENTIVE
STOCK OPTIONS
-------------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------------- ----------------
(IN THOUSANDS)
OUTSTANDING AT DECEMBER 31, 1997 ....... 544 .31
Granted .............................. 262 .56
Exercised ............................ (13) .25
Canceled ............................. (84) .40
---------------- ----------------
OUTSTANDING AT DECEMBER 31, 1998 ....... 709 .39
Granted .............................. 584 .56
Exercised ............................ (10) .37
Canceled ............................. (58) .39
---------------- ----------------
OUTSTANDING AT DECEMBER 31, 1999 ....... 1,225 .48
Granted .............................. 898 4.14
Exercised ............................ (254) .34
Canceled ............................. (9) 3.90
---------------- ----------------
OUTSTANDING AT DECEMBER 31, 2000 ....... 1,860 $ 2.25
================ ================
VESTED OPTIONS AT DECEMBER 31, 2000 .... 599 $ .55
================ ================
For the periods December 31, 1997, 1998 and 1999, options exercisable and
weighted average exercise price are equal to options outstanding. As of December
31, 1997, 1998, 1999 and 2000 options vested were 237,223, 249,371, 592,206 and
599,134 respectively.
An analysis of options outstanding at December 31, 2000 follows:
WEIGHTED
OPTIONS AVERAGE EXERCISABLE AS WEIGHTED
OUTSTANDING AT REMAINING WEIGHTED OF AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, EXERCISE
EXERCISE PRICE 2000 LIFE EXERCISE PRICE 2000 PRICE
-------------- -------------- ------------ -------------- ---------------- --------------
$0.00-$ 1.38 966,522 7.8 $ 0.51 580,535 $ 0.49
$1.39-$ 5.50 691,981 9.0 2.42 18,600 2.42
$5.51-$ 9.62 123,100 9.7 8.31 0 0.00
$9.63-$13.75 78,300 9.5 12.62 0 0.00
------------ ------------ -------------- ---------------- --------------
1,859,903 8.5 $ 2.25 599,135 $ 0.55
============ ============ ============== ================ ==============
5. INCOME TAXES
As stated in Note 2, the Company changed its tax status from an
S-Corporation to a C-Corporation as of January 1, 1994. Since that time, no
income tax provision or benefit has been recognized due to the Company incurring
net operating losses and other tax benefits that have been fully offset by a
valuation allowance.
F-13
44
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income taxes computed using the federal statutory income tax rate differs
from the Company's effective tax primarily due to the following:
YEARS ENDED
DECEMBER 31,
----------------------------------
1998 1999 2000
---------- ---------- ----------
Federal income tax benefit at 35% ................ $ (2,915) $ (3,838) $ (8,176)
State income tax, net of federal benefit ......... (343) (452) (254)
Stock-based compensation amortization expense .... -- 924 4,966
Change in valuation allowance .................... 3,406 3,645 4,675
Other ............................................ (148) (279) (1,211)
---------- ---------- ----------
Benefit for income taxes ............... $ -- $ -- $ --
========== ========== ==========
The components of the Company's deferred tax assets under SFAS 109 are as
follows:
DECEMBER 31,
---------------------------------
1999 2000
-------------- --------------
Deferred tax assets:
Temporary differences ............................ $ 64,100 $ 299,600
Research and development credit carryforwards .... 2,120,300 2,625,000
Net operating loss carryforwards ................. 10,259,300 14,194,000
-------------- --------------
Total deferred tax assets ...... 12,443,700 17,118,600
Valuation allowance .............................. (12,443,700) (17,118,600)
-------------- --------------
Net deferred tax assets .......................... $ -- $ --
============== ==============
The Company's deferred tax assets represent unrecognized future tax
benefit. A valuation allowance has been established for the entire tax benefit
as the Company believes that it is more likely than not that such assets will
not be realized.
At December 31, 2000, the Company has approximately $37 million of net
operating loss ("NOL") carryforwards and approximately $3 million of research
and development ("R&D") credit carryforwards. These carryforwards will expire
beginning 2009. The Internal Revenue Code of 1986, as amended, contains
provisions that may limit the NOL and R&D credit carryforwards available for use
in any given year upon the occurrence of certain events, including significant
changes in ownership interest. A greater than 50% change in ownership of a
company within a three-year period results in an annual limitation on the
Company's ability to utilize its NOL and R&D credit carryforwards from tax
periods prior to the ownership change. The Company's NOL and R&D credit
carryforwards as of December 31, 2000 are subject to annual limitation due to
changes in ownership. Future ownership changes could further limit the
utilization of the Company's NOL and R&D credit carryforwards.
6. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan covering substantially
all employees under Section 401(k) of the Internal Revenue Code. The Company did
not provide for a match in 1998, but amended the Plan documents on January 1,
1999 to provide a 50% match of employees' contributions up to $2,000 per
employee per year. During 2000, the Company made a contribution of $55,842.
7. COMMITMENTS
The Company leases office and research and development facilities as well
as certain office and lab equipment under agreements that expire at various
dates through 2002. Total rent expense in 1998, 1999 and 2000 and the cumulative
period from inception was $140,192, $179,792, $207,389 and $719,461,
respectively.
F-14
45
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company entered into an equipment lease line in 1996, which provided
for additional draws through September 30, 1997. The original lease line was
$350,000, and the Company utilized $222,650 of the line before the funding
period expired. In May 1998, the Company entered into another equipment lease
line with a term of 42 months. This lease line provided for draws through
September 30, 1999. The original lease line was $250,000 of which $199,439 had
been utilized before the financing period expired. Under the terms of both
master lease agreements, the Company has the option to purchase the leased
equipment at its fair market value at the end of the lease term.
The aggregate future minimum rental commitments as of December 31, 2000,
for capital and noncancelable operating leases with initial or remaining terms
in excess of one year are as follows:
OPERATING CAPITAL
LEASES LEASES
------------ ------------
Year Ending December 31:
2001 ........................................... $ 214,260 $ 64,745
2002 ........................................... 128,102 7,901
2003 ........................................... 57,969 --
2004 ........................................... 59,471 --
2005 ........................................... 4,874 --
------------ ------------
Minimum lease payments ........................... $ 464,676 72,646
============
Less amount representing interest ................ (3,326)
------------
Present value of future minimum lease payments ... 69,320
Less portion due within one year ................. (61,506)
------------
$ 7,814
============
8. ROYALTY AND LICENSE FEE COMMITMENTS
On January 14, 1994, the Company entered into a license agreement with the
Center for Innovative Technology ("CIT"), under which CIT grants to the Company
an exclusive, worldwide license to practice, develop and use its technology and
licensed patent rights to develop and market the Company's products. In exchange
for the license agreement, the Company paid CIT $50,000 in cash and issued
248,000 shares of its common stock valued at $0.16 per share. The license
agreement will remain in effect until the last U.S. patent expires or, if no
U.S. patent is granted, the license will expire on December 31, 2009. Under the
license agreement, the Company will be required to pay a royalty based on
percentages, as defined in the agreement, of either net revenues arising from
sales of products produced in and outside of Virginia. Quarterly royalty
payments are due within 30 days from the end of each calendar quarter. The terms
of the agreement also require the Company to reimburse CIT for all costs related
to obtaining and maintaining patents on the technology. As of December 31, 2000,
no royalty payments have been incurred.
In addition, the CIT license agreement requires the Company to sponsor
research at Virginia Commonwealth University ("VCU"). As of December 31, 2000,
the Company entered into sponsored research agreements with VCU which extend
through August 31, 2001. The Company has an aggregate commitment under the
agreement to pay VCU $473,311.
9. RELATED PARTY TRANSACTIONS
In December 1994, the Company renegotiated a consulting agreement for
scientific advisory services with Dr. Marvin Jaffe, a director of the Company.
Under the agreement, which is renewable annually upon mutual consent, the
Company will pay Dr. Jaffe consulting fees at $2,000 per month. For 1998, 1999
and 2000 and the cumulative period from inception, the Company paid Dr. Jaffe
consulting fees of $24,000, $24,000, $24,000 and $185,017, respectively. Of
these amounts, $2,000 was included in accounts payable at December 31, 1999 and
2000. In addition, the Company granted Dr. Jaffe stock options to purchase a
total of 55,800 shares of the Company's common stock at $0.16 to $2.42 per share
under its Stock Option Plans in 1994, 1995, 1997 and 2000.
F-15
46
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In July 1997, the Company entered into a consulting agreement for
scientific advisory services with Dr. Stephen K. Carter, a director of the
Company. Under the three-year agreement, which is renewable annually upon mutual
consent, the Company will pay Dr. Carter consulting fees at $2,000 per month.
For 1998, 1999 and 2000 and the cumulative period, the Company paid Dr. Carter
consulting fees of $18,000, $24,000, $24,000 and $74,000, respectively. Of these
amounts, $2,000 was included in accounts payable only at December 31, 1999. In
addition, the Company granted Dr. Carter stock options to purchase a total of
34,100 shares of the Company's common stock at $0.40 to $2.42 per share under
its Stock Option Plan in 1997 and 2000.
The Company entered into several research and development contracts during
1996. Under these contracts, Donald J. Abraham, Ph.D., director, and Beverly A.
Teicher, Ph.D., former member of the Company's disbanded Scientific Advisory
Board, acted as Principal Investigators for the contracts with VCU and the
Dana-Farber Cancer Institute, Inc., respectively. During 1998 and 1999, services
provided under these contracts totaled $642,705, and $498,335 respectively, of
which $112,923 was included in accounts payable at December 31, 1998. During
2000, services provided under these contracts totaled $487,557, of which $95,889
was included in accounts payable at December 31, 2000.
In March 1996, the Company obtained recourse notes receivable (the "1996
Notes") from two officers in the amount of $90,000 upon the officers' exercise
of 558,000 stock options. The notes accrued interest at 8% annually with
interest and principal originally due March 1998. In December 1997, the maturity
dates for the 1996 Notes were extended by two years and extended by an
additional year in January 2000. In March 2000, the 1996 Notes were forgiven. In
connection therewith, the Company recorded $7,617,000 in stock compensation
expense for the quarter ended March 31, 2000 based on the difference between the
fair market value of the underlying common stock and option exercise prices.
This expense was allocated as $2,200,000 related to research and development and
$5,417,000 related to general and administrative.
In December 1997, the Company obtained additional notes receivable (the
"1997 Notes") from these officers in the amount of $49,687 upon the officers'
exercise of stock options to acquire 123,225 shares. These notes accrued
interest at 6% annually with interest and principal originally due December
1999. The maturity dates for the 1997 Notes were extended by one year in January
2000. The Company treated the underlying stock options as variable awards and
recorded $815,000 of stock compensation expense during 1999 based on the
difference between the fair market value of the underlying common stock and
option exercise prices. The 1997 Notes were repaid during the fourth quarter of
2000.
10. SUBSEQUENT EVENT
During February 2001, the Company signed a building lease agreement to rent
additional space of 2,680 square feet and to extend the term of the lease for a
portion of the existing space to January 31, 2002. This Amendment resulted in
additional rent expense to be incurred of $69,836.
F-16
47
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY INFORMATION (UNAUDITED)
The results of operations on a quarterly basis were as follows:
December 31, September 30, June 30, March 31, December 31,
2000 2000 2000 2000 1999
------------ ------------ ------------ ------------ ------------
Operating Expenses:
Research & Development $ 2,832,232 $ 2,024,245 $ 2,033,409 $ 3,846,617 $ 2,494,902
Clinical Manufacturing 1,095,178 958,526 801,866 344,978 512,299
General & Administrative 2,310,592 2,103,630 1,960,520 7,400,506 1,173,048
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 6,238,002 5,086,401 4,795,795 11,592,101 4,180,249
Loss from Operations (6,238,002) (5,086,401) (4,795,795) (11,592,101) (4,180,249)
Interest and other income, net 1,286,354 1,482,687 1,466,430 115,353 120,211
------------ ------------ ------------ ------------ ------------
Net loss (4,951,648) (3,603,714) (3,329,365) (11,476,748) (4,060,038)
Dividend related to beneficial
conversion feature of preferred stock -- -- -- -- (9,612,975)
------------ ------------ ------------ ------------ ------------
Net loss attributable to common
stockholders (4,951,648) (3,603,714) (3,329,365) (11,476,748) (13,673,013)
Net loss per share:
Basic and diluted $ (0.22) $ (0.16) $ (0.15) $ (3.51) $ (6.80)
============ ============ ============ ============ ============
Weighted average shares - basic &
Diluted 22,950,446 22,871,795 22,837,154 3,270,720 2,010,310
============ ============ ============ ============ ============
September 30, June 30, March 31,
1999 1999 1999
------------- ------------ ------------
Operating Expenses:
Research & Development $ 962,396 $ 2,401,676 $ 1,977,307
Clinical Manufacturing 193,092 268,157 408,174
General & Administrative 418,165 360,455 427,767
------------ ------------ ------------
Total Operating Expenses 1,573,653 3,030,288 2,813,248
Loss from Operations (1,573,653) (3,030,288) (2,813,248)
Interest and other income, net 34,009 60,382 95,096
------------ ------------ ------------
Net loss (1,539,644) (2,969,906) (2,718,152)
Dividend related to beneficial
conversion feature of preferred stock -- -- --
------------ ------------ ------------
Net loss attributable to common
stockholders (1,539,644) (2,969,906) (2,718,152)
Net loss per share:
Basic and diluted $ (0.77) $ (1.49) $ (1.37)
============ ============ ============
Weighted average shares - basic &
Diluted 1,997,306 1,989,347 1,981,753
============ ============ ============
F-17
48
INDEX TO EXHIBITS
-----------------
EXHIBIT
NUMBER DESCRIPTION
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3.01(1) Certificate of Incorporation, as amended to date.
3.02(1) Form of Amended and Restated Certificate of Incorporation
filed upon closing of the initial public offering.
3.03(1) Bylaws, as amended to date.
3.04(1) Form of Bylaws adopted upon closing of the initial public
offering.
10.01(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.02(1) Hemotech and CIT Amended and Restated Allosteric Modifiers
of Hemoglobin Agreement with Center for Innovative
Technology dated January 12, 1994.
10.03(1) Amendment to Allos Therapeutics, Inc. and CIT Amended and
Restated Allosteric Modifiers of Hemoglobin Agreement with
Center for Innovative Technology dated January 17, 1995.
10.04(1) Amendment to Allos Therapeutics, Inc. and CIT Amended and
Restated Allosteric Modifiers of Hemoglobin Agreement with
Center for Innovative Technology dated March 12, 1996.
10.05(1) Assignment and Assumption Agreement with Amendment with
Center for Innovative Technology and Virginia Commonwealth
University Intellectual Property Foundation dated July 28,
1997.
10.06(1) Exercise of Option to Nonheme Protein License Agreement with
VCU-Intellectual Property Foundation dated March 23, 1998.
10.07(1) Warrant Agreement to purchase shares of Series B Preferred
Stock with Comdisco, Inc. dated April 15, 1996.
10.08(1) Warrant Agreement to purchase shares of Series C Preferred
Stock with Comdisco, Inc. dated May 5, 1998.
10.09(1) Allos Therapeutics, Inc. Series C Convertible Preferred
Stock Purchase Agreement dated October 4, 1999.
10.10(1) Allos Therapeutics, Inc. Fourth Amended and Restated
Stockholder Rights Agreement dated October 4, 1999.
10.11(1) Allos Therapeutics, Inc. 1995 Stock Option Plan, as amended
to date.
10.12(1) Office Lease with Denver Jack Limited Partnership dated
October 30, 1995.
10.13(1) First Amendment to 7000 Broadway Building Office Lease with
Denver Jack Limited Partnership dated October 30, 1995.
10.14(1) Second Amendment to 7000 Broadway Building Office Lease with
Denver Jack Limited Partnership dated June 7, 1996.
10.15(1) Third Amendment to 7000 Broadway Building Office Lease with
Denver Jack Limited Partnership dated March 26, 1998.
10.16(1) Fourth Amendment to 7000 Broadway Building Office Lease with
Denver Jack Limited Partnership dated June 29, 1998.
10.17(1) Lease Agreement with Virginia Biotechnology Research Park
Authority dated July 28, 1999.
10.18(1) Term Sheet for Contract API Supply between Allos and Hovione
dated March 25, 1999.
10.19(1) Confirmatory letter agreement with Hovione Inter Limited
dated January 13, 2000.
10.20(1) Development and Investigational Supply Proposal between
Taylor Pharmaceuticals and Allos Therapeutics, Inc. dated
December 30, 1998.
10.21 Employment Agreement between Dr. Hoffman and Allos
Therapeutics, Inc. dated January 17, 2001.
10.22 Employment Agreement between Dr. Gerber and Allos
Therapeutics, Inc. dated January 17, 2001.
10.23 Employment Agreement between Michael E. Hart and Allos
Therapeutics, Inc. dated January 17, 2001.
10.24 Allos Therapeutics, Inc. Severance Benefit Plan, effective
January 16, 2001, and related benefit schedule thereto.
10.25 Fifth Amendment to 7000 Broadway Building Office Lease with
7K Broadway, LLC (as successor in interest to Denver Jack
Limited Partnership) dated January 18, 2001.
10.26 Allos Therapeutics, Inc. 2001 Employee Stock Purchase Plan
and form of Offering.
23.01 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24.01 Power of Attorney (see page 28 herein)
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(1) Incorporated by reference to our Registration Statement on Form S-1 (File
No. 333-95439) and amendments thereto, declared effective March 27, 2000