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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 0-19651
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GENAERA CORPORATION
(FORMERLY MAGAININ PHARMACEUTICALS INC.)
(Exact name of registrant as specified in its charter.)
Delaware 13-3445668
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5110 Campus Drive, Plymouth Meeting, PA 19462
(Address of principal executive offices) (Zip Code)
(610) 941-4020
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
None N/A
(Title of each class) (Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.002 par value per share
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $49,727,762. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the National Market System of The Nasdaq Stock Market on March 7, 2001. For
purposes of this calculation only, the registrant has defined affiliates as all
directors and executive officers and beneficial owners of 5% or more of the
registrant's Common Stock. The number of shares of the registrant's Common
Stock outstanding as of March 7, 2001 was 32,393,886.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Registrant's 2001 Annual
Meeting of Stockholders to be filed within 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K are incorporated by reference
into Part III of this Form 10-K.
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GENAERA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
INDEX
Page
Description No.
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Part I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 21
Item 3 Legal Proceedings........................................... 21
Item 4 Submission of Matters to a Vote of Security Holders......... 21
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters...................................... 22
Item 6 Selected Financial Data..................................... 24
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 25
Item 7A Quantitative and Qualitative Disclosure About Market Risk... 28
Item 8 Financial Statements and Supplementary Data................. 28
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 28
Part III
Item 10 Directors and Executive Officers of the Registrant.......... 29
Item 11 Executive Compensation...................................... 29
Item 12 Security Ownership of Certain Beneficial Owners and
Management............................................... 29
Item 13 Certain Relationships and Related Transactions.............. 29
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K...................................................... 30
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PART I
ITEM 1. Business
Our disclosure and analysis in this Annual Report on Form 10-K contains some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements
by the fact that they do not relate strictly to historical or current facts.
Such statements may include words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," "hope," and other words and terms of
similar meaning in connection with any discussion of future operating or
financial performance. In particular, these include statements relating to
present or anticipated scientific progress, development of potential
pharmaceutical products, future revenues, capital expenditures, research and
development expenditures, future financing and collaborations, personnel,
manufacturing requirements and capabilities, and other statements regarding
matters that are not historical facts or statements of current condition.
Any or all of our forward-looking statements in this Annual Report on Form
10-K may turn out to be wrong. They can be affected by inaccurate assumptions
we might make or by known or unknown risks and uncertainties. Many factors
mentioned in the discussion below will be important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our filings with the U.S. Securities and Exchange Commission. Also
note that we provide a cautionary discussion of risks and uncertainties
relevant to our business included below. These are factors that we think could
cause our actual results to differ materially from expected results. Other
unanticipated occurrences besides those listed here could also adversely affect
us. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
Genaera Corporation, formerly known as Magainin Pharmaceuticals Inc., is a
biopharmaceutical company committed to developing medicines for serious
diseases from genomics and natural products. Our research and development
efforts are focused on anti-angiogenesis, obesity, infectious diseases and
respiratory diseases. We changed our name from Magainin Pharmaceuticals Inc. to
Genaera Corporation on March 9, 2001.
Research & Development Programs
Anti-Angiogenesis Program
Squalamine is our lead product development candidate and currently is being
evaluated in clinical studies for the treatment of solid tumors. Specifically,
clinical studies currently are ongoing in non-small cell lung cancer and
preliminary results were released in November 2000. The ongoing phase 2a trial
in non-small cell lung cancer is a multi-center, open-label design examining
the preliminary efficacy and safety of squalamine, combined with standard
chemotherapy, in patients with advanced disease. We also are currently
conducting studies in primary and recurrent ovarian cancer at multiple clinical
sites. We expect to focus our efforts going forward in recurrent and resistant
disease patients, where we have seen encouraging early objective responses of
tumor size reduction. Other Genaera clinical studies are ongoing in other adult
solid tumors and we plan additional studies in cancer. We also plan studies in
fibrodysplasia ossificans progressiva, or FOP, a rare genetic disorder of the
musculoskeletal system in which there is progressive immobility and disability.
The cancer studies will evaluate intravenously administered squalamine in
combination with leading chemotherapeutics in each indication or radiation
therapy.
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Squalamine was originally discovered in the tissues of the dogfish shark and
is part of a class of naturally occurring, pharmacologically active small
molecules known as aminosterols. The shark was initially examined because of
its apparent resistance to infection and cancer. The chemical structure of
squalamine uniquely combines a steroid and a polyamine, two classes of systemic
agents that generally are well tolerated in humans. Squalamine is an anti-
angiogenic molecule with a unique mechanism of action that we believe has shown
broad application for the treatment of several cancer types in preclinical
testing.
Within the human body, a network of arteries, capillaries and veins, known
as the vasculature, functions to transport blood throughout the body. The basic
network of the vasculature is developed through angiogenesis, a fundamental
process by which new blood vessels are formed. This growth process primarily
occurs during the first three months of embryonic development. Once the general
network of the blood vessels is complete, certain inhibitory factors balance
and stabilize the stimulators of new blood vessel formation. Although
angiogenesis occurs in human embryonic development, wound healing and in
certain reproductive processes in women, angiogenesis is also associated with
several diseases, including cancer.
Cancer is the second most common cause of death in the Western world. Cancer
patients are usually treated with a combination of surgery, radiation therapy
and chemotherapy. Surgery and radiation therapy can be particularly effective
in patients in which the disease has not yet spread to other tissue or organs.
Chemotherapy is the principal treatment for tumors that have spread from
primary to secondary sites, or metastasized. Chemotherapy involves the
administration of cytotoxic drugs designed to kill cancer cells, or the
administration of hormone analogues designed to either reduce the production
of, or block the action of, certain hormones that affect the growth of tumors.
Because chemotherapeutic agents generally attack rapidly dividing cells
indiscriminately, damaging both normal and cancerous cells, chemotherapy
patients often suffer serious side effects. Additionally, resistance to
chemotherapy often occurs over time.
Cancer includes many different types of uncontrolled cellular growth.
Clusters of cancer cells, referred to as tumors, may invade and destroy
surrounding organs, impair physiological function and lead to death. To
survive, cancer cells require oxygen and nutrients, which are received from the
body's blood supply. In order to access this blood supply, cancer cells
initiate a biochemical mechanism that stimulates angiogenesis, which provides
the blood supply that nourishes the tumor. As cancer cells grow and metastasize
they require continuous angiogenesis. Anti-angiogenic substances are intended
to inhibit the growth of new blood vessels and thereby suppress tumor growth.
Squalamine may be of benefit in the treatment of solid tumors by inhibiting
new blood vessel growth required for tumor nourishment. Squalamine has
exhibited anti-angiogenic properties in a number of in vitro and in vivo
assays, conducted in multiple independent laboratories, including animal models
of cancer and angiogenic diseases of the eye. We believe squalamine may inhibit
the growth of primitive or embryonic capillaries associated with tumor growth.
Squalamine has the potential to be used in combination with a number of
cytotoxic drugs in the treatment of solid tumors, and we have observed
synergies with certain of such cytotoxic therapies in animal testing.
Anti-angiogenic substances may also be useful in certain eye diseases,
including diabetic retinopathy and macular degeneration. In addition to our
anti-angiogenesis research program focused on cancers, we also maintain a
research program to evaluate squalamine in eye disease. Georgetown University
Medical Center has recently begun to study squalamine as a therapy for diabetic
retinopathy, a leading cause of blindness that results from abnormal blood
vessel growth in the eye. We also are focusing efforts on preparing for future
clinical studies in patients with macular degeneration.
Respiratory Disease Program
Our respiratory program is designed to discover and develop treatment
alternatives for chronic respiratory diseases, a large and growing market that
we believe is currently underserved by medical therapeutics. These diseases
include asthma, chronic bronchitis, cystic fibrosis, and chronic sinusitis. In
the United States, about 15
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million people suffer from asthma, and recently there has been an increase in
the incidence of this disease. The recognition that specific genetic and
environmental factors appear to be important in the susceptibility to asthma
has led to an intensive search for those specific factors. Additionally,
approximately 15 million people suffer from chronic bronchitis and
approximately 33 million patients are reported annually with chronic sinusitis.
We are also focused on the development of treatments for respiratory and other
complications of cystic fibrosis. These respiratory diseases have in common the
overproduction of mucus secretions and an underlying inflammatory process.
Current research and development efforts at Genaera are focused on the
development of therapeutics that decrease mucus production, or mucoregulators,
and anti-inflammatory treatments that may be useful in these diseases.
Functional Genomics Program
Advances in genetics and molecular biology have significantly enhanced the
ability of scientists to clone and sequence genes and identify the causes of
disease at the molecular level. Genomics, or the study of the genome, can be
applied to the examination of the genetic influences on human disease.
Functional genomics refers to the determination of the manner in which genes
specifically impact the disease process. In contrast to traditional drug
discovery and development, a genetic approach commences by identifying those
genes that are responsible for the initiation or progression of disease.
Analysis of deoxyribonucleic acid (DNA) helps characterize the specific role of
genes in the disease process. The information stored in the DNA of a gene acts
as a set of instructions to living cells of the organism. These instructions
direct the cells to synthesize specific proteins, such as hormones or enzymes
that perform the basic biochemical and physiological functions of the cells.
Disease may occur when a defect (mutation) occurs in a gene or genes, resulting
in incorrect instructions being sent to cells, and disrupting the normal
balance or function of these essential proteins. The ability to detect such a
mutation and to understand how the disruption of normal protein function
contributes to the initiation and progression of the resultant disease are
potentially valuable aids to pharmaceutical discovery and development. To
identify an appropriate molecular target for therapeutic intervention, it may
also be necessary to characterize fully the biochemical pathway in which the
disease gene functions.
Respiratory Gene Database (Screening Program)
We employ functional genomics to discover additional therapeutic targets for
respiratory disease. We have identified numerous targets that have been
validated and added to our Respiratory Gene Database, including genes and gene
products that can be antagonized by biological therapeutics, such as proteins
and traditional small molecules. We can screen chemical libraries for activity
against these targets using our high throughput screening programs.
Respiratory Product Development
.Anti-IL9 Therapeutics
Our first genomics-based product development program involves the
development of a blocking antibody to IL9, to treat the root cause of asthma.
Asthma is a serious, chronic illness characterized by one or more symptoms,
including episodic shortness of breath, wheezing, coughing and chest tightness,
that has been documented by public health officials to be increasing in
prevalence and severity. The complex physiological changes associated with
asthma are under intensive scrutiny; however, their precise causes are not well
understood. The recognition that specific genetic and environmental factors
appear to be important in the susceptibility to asthma has led to an intensive
search for those specific factors. Genetic studies to identify the root cause
of asthma, in both human families and animal models, have pinpointed IL9 as a
mediator of asthma, and functional genomic analyses are consistent with these
findings. IL9 is a gene that varies in DNA structure and function in asthmatic
and allergic humans and animals. Over the past five years, Genaera scientists
and a number of academic investigators have published peer-reviewed articles
that indicate that IL9 acts directly and specifically to promote lung
inflammation in asthma. We believe that we have developed a strong patent
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position in anti-IL9 therapeutics having first discovered and documented a role
for this cytokine in asthma. While genetic susceptibility to bronchial
hyperresponsiveness and asthma is likely due to multiple genes acting together,
the identification of specific susceptibility genes provides valuable insight
into the molecular pathways associated with this condition.
We believe an antibody to IL9 has significant promise as a therapy for
asthma as it targets the root cause of the disease rather than the symptoms. In
December 1998, we entered into a collaborative research and option agreement
with Genentech, Inc. relating to the development of a protein therapeutic in
asthma, which was replaced by a May 2000 research, development and
commercialization collaboration agreement with Genentech. In December 2000,
Genentech elected to terminate the collaboration agreement covering the IL9
antibody development program and related respiratory technology. As a result,
all licensed technology under this agreement, exclusive of Genentech-improved
technology, will be returned to us. Although we have no current development
collaborations regarding this program, we hope to repartner this antibody
development program in 2001.
.Mucoregulator Product Development
Our second genomics-based product development program is focused on several
small molecules that we believe will lead to drug development candidates to
inhibit the overproduction of mucin. Mucoregulators have the potential to yield
novel therapeutics for mucus overproduction in a number of chronic diseases.
For example, excess mucus production is an important clinical feature of
chronic sinusitis and chronic obstructive pulmonary diseases, including asthma,
chronic bronchitis and cystic fibrosis. In many lung diseases, excess mucus
production leads to airway pulmonary obstruction and contributes to a
significant deterioration of lung function.
We have developed a novel strategy to downregulate, or prevent, the
production of mucin that leads to airway obstruction dysfunction and disease.
We discovered an anion channel that regulates the production of gel-forming
mucins in the cells lining the airways and gastrointestinal tracts along with
small molecule anti-inflammatory and analgesic mucoregulators. We have patents
pending on target uses and mucoregulator molecules.
Obesity Program
Produlestan is our second natural aminosterol product in development.
Preclinical data on this compound demonstrate it is a potent appetite
suppressant in numerous animal models of obesity. In these models, in
additional to controlling weight, produlestan seems to normalize blood sugar,
as well as high blood cholesterol levels. Genaera researchers have shown
efficacy with produlestan and demonstrated that animal food intake can be
regulated in a reversible manner, leading to changes in body weight.
Produlestan has a similar chemical structure to squalamine.
Development goals for produlestan currently are focused on demonstrating
safety and early evidence of appetite suppression in medically significant
obesity. Produlestan targets the substantial market of 10-12 million medically
significant obese Americans, which is expected to grow to well over $1 billion
in drug product sales in the near future.
Infectious Disease Program
We have conducted research and development in infectious diseases over many
years. The magainin class of compounds, originally discovered in frogs, have
been shown to have activity against a variety of pathogens, including bacteria,
amoebae, fungi and parasites. Magainins are peptides. A peptide is a chain of
molecules, known as amino acids, that are considered to be one of the basic
building blocks of the human body. Chains of 2 to 50 amino acids are generally
referred to as peptides, while longer chains are referred to as proteins. We
have modified natural peptides by rearranging the order and combination of
amino acids and by substituting and deleting additional amino acids to produce
magainins having a broader spectrum of therapeutic activity and improved
potency.
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Antibiotic resistance, an increasing problem, is the process by which
antibiotics lose their effectiveness over time as bacteria, through mutation,
develop the means to produce enzymes capable of diminishing the utility of an
antibiotic. We have not noted the development of any antibiotic resistance to
the magainins. We believe this is due to the unique mechanism of action of the
magainins; magainins puncture the cell membrane and break down the integrity of
the cell, killing bacteria differently than traditional antibiotics.
LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of infection
in diabetic foot ulcers, had been our lead product development candidate.
LOCILEX(TM) Cream did not obtain approval from the U.S. Food and Drug
Administration, or FDA, in July 1999, and we have since refocused our near-term
product development efforts on the other programs discussed above. We continue
to seek new opportunities to capitalize on our past development efforts in this
program.
Other Programs
We continue to work on feasibility studies in a number of other areas. Any
of these programs could become more significant over the next 12 months;
however, there can be no assurance that any of the new programs under review
will generate viable product opportunities.
We have engaged in extensive research and development efforts on compounds
derived from the host-defense systems of animals. The host-defense system is
the complex of natural processes and mechanisms used by animals and humans to
protect against disease. Naturally occurring molecules, such as the magainins
and aminosterols, provide a first line of defense against infection and other
diseases. Our intent for research and development in host-defense is to
leverage our knowledge of how these compounds have worked in animal systems in
evaluating the pharmacologic activity of such compounds in human disease.
Other Applications For Magainin Peptides
Magainin peptides have demonstrated in preclinical testing the potential for
broad application in a number of indications, including:
Cancer/Tumorcidal: Various chemically modified magainin peptides have shown
promising anti-tumor activity. In preclinical animal models, such peptides
enhanced the cellular uptake and activity of standard chemotherapeutics against
tumors.
Other Topical Infections: Various magainin peptides have shown promise in a
broad variety of applications including eye infections, acne, sexually
transmitted diseases and yeast infections. There may also be potential use
against viruses, including rhinoviruses that cause the common cold.
Systemic Infections: Magainin peptides are broad spectrum antibiotics that
have shown no resistance or cross-resistance to other anti-infectives in
testing to date. Preclinical data demonstrated activity against pathogens in
various infectious disease models.
Agricultural Anti-Fungal: Ornamental plants genetically altered to express
certain magainins have shown resistance to fungal and other crop diseases.
Other Aminosterols
Beyond squalamine, we have discovered a number of other aminosterol
compounds in the shark, each differing from squalamine in chemical structure
and interacting with a separate, specific receptor. These compounds affect the
intracellular metabolism in a manner that disturbs the target cell responses to
certain growth factors, hormones and other signals. Therapeutic opportunities
for these compounds may include various malignancies, inflammatory diseases,
and viral infections. There are additional aminosterols earlier in the
development process, including a set of unique synthetic blockers of T-helper
cell adhesion and activation, which may be useful for asthma or other T-helper
cell mediated diseases.
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Defensins
In the process of researching animal host-defenses across different species,
we have helped demonstrate that all species, including humans, utilize some
form of local antimicrobial defense beyond their systemic immune systems. Our
approach to identifying pharmaceutically-active compounds in the host-defense
systems of animals involves the extraction of compounds from animal tissues.
The extracts are assayed for activity against selected pathogens, such as
bacteria, fungi, viruses and certain cancers. We then purify the active
compounds and determine the precise chemical structure of the purified
molecule. Once naturally occurring molecules have been isolated, we analyze the
relationship between the molecular structure of the compound and its biological
activity. In general, this requires that we identify the structures in the
compound that are believed to have therapeutic effects and analyze how the
compounds could be modified to improve the desired therapeutic effects. We then
utilize our combinatorial chemistry capabilities to modify the molecules to
alter biological activity or increase stability. In humans, we have identified
host-defense molecules (defensins) in the lungs, the gastrointestinal tract and
the skin. We have also identified several natural "inducers" of local
antimicrobial defenses. Some of these compounds, such as isoleucine, a natural
amino acid, are found in nature, are generally regarded as safe and may possess
novel nutritional, as well as pharmaceutical, immunostimulant applications.
Research and Development Costs
We have incurred costs of $10.1 million, $9.9 million and $21.5 million for
research and development in the years ended December 31, 2000, 1999 and 1998,
respectively.
Collaborative Arrangements
Collaborations may allow us to leverage our scientific and financial
resources and gain access to markets and technologies that would not otherwise
be available to us. In the long term, development and marketing arrangements
with established companies in the markets in which our potential products will
compete may provide us with more efficient access to intended markets and may,
accordingly, conserve our resources. We expect that we will enter into
development and marketing arrangements for most of the products we may develop.
From time to time, we hold discussions with various potential partners.
In February 1997, we entered into a development, supply and distribution
agreement in North America with GlaxoSmithKline for LOCILEX(TM) Cream.
GlaxoSmithKline has paid us $10,000,000 under this agreement, which we received
in 1997. We had hoped to commercialize LOCILEX(TM) Cream in the near-term.
However, as a result of the FDA's decision, near-term commercialization of
LOCILEX(TM) Cream will not occur, and we will generate no revenues from
LOCILEX(TM) Cream in the near future. The GlaxoSmithKline agreement also gives
GlaxoSmithKline rights to terminate the arrangement, and, under certain
conditions, the right to negotiate for rights to another Genaera product
development candidate. GlaxoSmithKline remains our exclusive sales, marketing
and distribution partner for the North American territory for LOCILEX(TM)
Cream.
In December 1998, we entered into a collaborative research and option
agreement with Genentech relating to a protein therapeutic in asthma. Under
this agreement, we jointly conducted a collaborative program to evaluate the
utility of a blocking antibody to IL9 in suppressing the asthmatic response.
Genentech made an initial equity investment of $2,000,000 in us in 1998, and
had an option to enter into a development and commercialization agreement with
us. In May 2000, we entered into a research, development and commercialization
collaboration agreement with Genentech, which replaced the December 1998
collaboration agreement. In December 2000, Genentech elected to terminate the
collaboration agreement covering the IL9 antibody development program and
related respiratory technology. As a result, all licensed technology under this
agreement, exclusive of Genentech-improved technology, will be returned to us.
Although we have no current development collaborations regarding this program,
we hope to repartner this antibody development program in 2001.
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In December 2000, we entered into a new collaborative agreement with the
Ludwig Institute for Cancer Research (LICR) on the discovery and development of
novel genes and proteins as pharmaceutical targets and therapeutics. Under the
agreement, Genaera and LICR are assigned primary commercial rights to
intellectual property for a number of novel genes and proteins with therapeutic
potential. The novel genes and proteins were discovered during joint genomics
and biological research conducted under a prior research agreement from 1996.
Also covered in the agreement were novel genes and proteins initially
discovered by the Brussels branch of LICR. Genaera obtains exclusive rights to
certain intellectual property pertinent to its development programs, along with
owing certain payments and royalties to LICR. LICR obtains exclusive rights to
certain other jointly discovered intellectual property, along with owing
certain payments and royalties to Genaera. In addition, the joint research
program has been extended for at least two additional years.
Research and License Agreements
We have rights to several patents and patent applications under certain
license agreements pursuant to which we expect to owe royalties on sales of
products that incorporate issued patent claims. Additionally, certain of these
agreements also provide that if we elect not to pursue the commercial
development of any licensed technology, or do not adhere to an acceptable
schedule of commercialization, then our exclusive rights to such technology
would terminate. We also fund research at certain institutions, and these
relationships may provide us with an option to license any results of the
research.
Manufacturing
We currently have neither the resources, facilities nor capabilities to
manufacture any of our proposed products in the quantities and quality required
for commercial sale. We have no current plans to establish a manufacturing
facility. We depend upon contract manufacturers for commercial scale
manufacturing of our proposed products in accordance with regulatory standards.
This dependence may restrict our ability to develop and deliver products on a
timely, profitable and competitive basis. Additionally, the number of companies
capable of producing our proposed products is limited. We may be unable to
maintain arrangements with qualified outside contractors to manufacture
materials at costs which are affordable to us, if at all.
Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a
manufacturing process. In order to engage another manufacturer, we may need to
obtain a license or other technology transfer from the original contract
manufacturer. Even if a license is available from the original contract
manufacturer on acceptable terms, we may be unable to successfully effect the
transfer of the technology to the new contract manufacturer. Any such
technology transfer may also require the transfer of requisite data for
regulatory purposes, including information contained in a proprietary drug
master file held by a contract manufacturer. If we rely on a contract
manufacturer that owns the drug master file, our ability to change contract
manufacturers may be more limited.
Government Regulation
Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, such as that which has
occurred for LOCILEX(TM) Cream, will materially affect our business. Even if we
receive approval of a product candidate, it may be conditioned upon certain
limitations and restrictions as to the drugs used and may be subject to
continuous review. If we fail to comply with any applicable regulatory
requirements, we could be subject to penalties, including:
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. warning letters;
. fines;
. withdrawal of regulatory approval;
. product recalls;
. operating restrictions;
. injunctions; and
. criminal prosecution.
FDA Marketing Approval
The primary regulatory agency overseeing all phases of our drug development
and marketing programs is the FDA. In order to obtain approval from the FDA to
market any drug, we must submit proof of safety, efficacy and quality for each
of our proposed products for each indication, which requires extensive and time
consuming preclinical and clinical testing. The results of preclinical studies
are submitted to the FDA as part of an Investigational New Drug Application, or
IND. Once the IND is effective, human clinical trials may be conducted. The
results of the clinical trials are submitted to the FDA as part of a New Drug
Application, or NDA. Following review of the NDA, the FDA may:
. grant marketing approval;
. require additional testing or information; or
. deny the application.
FDA Manufacturing Approval
Detailed manufacturing information is also required to be included in the
NDA for review and approval by the FDA. All manufacturing facilities and
processes must comply with good manufacturing practices, or GMP, regulations
prescribed by the FDA. All manufacturers must, among other things, pass
manufacturing plant inspections and provide records of detailed manufacturing
processes. Among other things, it must be demonstrated that:
. the drug product can be consistently manufactured at the same quality
standard;
. the drug product is stable over time; and
. the level of chemical impurities in the drug product are under a
designated level.
Ongoing FDA Oversight
We will continue to be subject to regulation by the FDA even after our drug
products have been approved and commercialized. Among other things, the FDA
may:
. require additional submissions if there are any modifications to the drug
product including, for example, any changes in manufacturing process,
labeling, or manufacturing facility;
. require post-marketing testing and surveillance to monitor the effects of
approved drug products; and
. enforce conditional approvals that restrict the commercial applications
of a drug product.
Further, the FDA has numerous requirements governing labeling, promotional
material, storage, record keeping and reporting.
The Prescription Drug User Fee Act of 1992 imposes substantial fees on a
one-time basis for applications for approval, and on an annual basis for
manufacturing and marketing of prescription drugs.
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Other Regulatory Bodies
We are also subject to regulation by other regulatory authorities, including
the Occupational Safety and Health Administration, the Environmental Protection
Agency, the Nuclear Regulatory Commission, the Drug Enforcement Agency and the
United States Department of Agriculture, and to regulation under regulatory
statutes such as the Toxic Substances Control Act and the Resource Conservation
and Recovery Act.
Drug product marketing outside the United States is subject to foreign
regulatory requirements which may or may not be influenced by FDA approval.
While the requirements vary widely from country to country, generally, the drug
product must be approved by a foreign regulatory authority comparable to the
FDA prior to marketing the product in those countries. The time required to
obtain foreign approvals may be longer than that in the United States.
In the future, we may be subject to additional federal, state or local
regulations or additional fees. Efforts are continually underway to reform
federal regulation of drug products. Although some of these changes could
streamline and otherwise benefit development, marketing and related
requirements for drugs, others could increase regulatory requirements.
Patent and Proprietary Rights; Licensed Technology
Patents
Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. Our ability to
recoup these expenditures and realize profits upon commercialization could be
diminished.
We cannot be certain that:
. patents will issue from any of our patent applications;
. our patent rights will be sufficient to protect our technology;
. our patents will not be successfully challenged or circumvented by our
competitors; or
. our patent rights will provide us with any commercial advantages.
The process of obtaining patents can be time consuming and expensive. Even
after significant expenditure, a patent may not issue. We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because U.S. patent
applications are maintained in secrecy until a patent issues and publications
in the scientific or patent literature lag behind actual discoveries.
Even after we are issued patent rights, we cannot be certain that:
. others will not develop similar technologies or duplicate the technology;
. others will not design around the patented aspects of the technology;
11
. we will not be obliged to defend ourselves in court against allegations
of infringement of third-party patents;
. our issued patents will be held valid in court; or
. an adverse outcome in a suit would not subject us to significant
liabilities to third parties, require rights to be licensed from third
parties, or require us to cease using such technology.
The cost of litigation can be substantial, regardless of the outcome.
Potential Ownership Disputes
There may be disputes arising as to the ownership of our technology. Most of
our research and development personnel previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when technology was developed, and
assert rights to the technology. These kind of disputes have occurred in the
past. We may not prevail in any such disputes.
Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There may be disputes as to the capacity in which consultants
are operating when they make certain discoveries. We may not prevail in any
such disputes.
Other Intellectual Property
In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators, and other advisors.
We may find that these agreements will be breached, or that our trade secrets
have otherwise become known or independently developed or discovered by our
competitors.
Certain of our exclusive rights to patents and patent applications are
governed by contract. Generally, such contracts require that we pay royalties
on sales of any products which are covered by patent claims. If we are unable
to pay the royalties we may lose our patent rights. Additionally, some of these
agreements also require that we develop the licensed technology under certain
timelines. If we do not adhere to an acceptable schedule of commercialization,
we may lose our rights.
Competition
The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
Most of these entities have substantially greater financial, technical,
manufacturing, marketing, distribution and other resources. We may also face
competition from companies using different or advanced techniques that could
render our products obsolete.
We expect technological developments in the biopharmaceutical field to occur
at a rapid rate and expect competition to intensify as advances in this field
are made. Accordingly, we must continue to devote substantial resources and
efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that
have significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining
regulatory approvals of such products. Some of these companies may be in
advanced phases of clinical testing of various drugs that may be competitive
with our proposed products.
12
Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology that they
have developed, some of which may be directly competitive with our technology.
In addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting
highly qualified scientific personnel.
Even if eventually approved, LOCILEX(TM) Cream may not be successfully
marketed against oral antibiotics for the treatment of infection in diabetic
foot ulcers. These infections have historically been treated with systemically
administered antibiotics, which may be perceived by some medical professionals
as having certain advantages over LOCILEX(TM) Cream. In addition, we may be
unable to manufacture LOCILEX(TM) Cream at a cost which will allow it to be
sold at a competitive price relative to oral antibiotics or other topical
antibiotics that may be used for this indication.
Many companies are working to develop and market products intended for the
additional disease areas being targeted by us, including cancer and asthma. A
number of major pharmaceutical companies have significant franchises in these
disease areas, and can be expected to invest heavily to protect their
interests. In the cancer field, anti-angiogenic agents are under development at
a number of companies. In the respiratory field, other biopharmaceutical
companies have also reported the discovery of genes relating to asthma and
other respiratory diseases. We are aware that research on compounds derived
from animal host-defense systems is being conducted by others. Many companies
are also currently involved in research and development activities focused on
the pathogenesis of disease, and the competition among companies attempting to
find genes responsible for disease is intense.
Executive Officers
Our executive officers as of December 31, 2000 are as follows:
Name Age Position
---- --- --------
Roy C. Levitt, M.D. ................ 47 President and Chief Executive Officer
Executive Vice President and Chief
Kenneth J. Holroyd, M.D. ........... 42 Business Officer
Vice President and Chief Financial
Christopher P. Schnittker........... 32 Officer
Sean M. Johnston, Ph.D. ............ 42 Vice President, Manufacturing
Dr. Levitt has served as our President and Chief Executive Officer since
November 2000. Dr. Levitt served as our Executive Vice President and Chief
Operating Officer since August 1998. Dr. Levitt was appointed our head of
Research and Development, and a Director in August 1997. Dr. Levitt had served
as Executive Vice President since joining us on a full-time basis in January
1996 until November 2000. Prior to joining, Dr. Levitt served as a consultant
to Genaera beginning in 1995. Dr. Levitt served as a faculty member at Johns
Hopkins University in the Department of Anesthesiology and Critical Care
Medicine, from 1986 to 1995, in Neurological Surgery from 1995 to 1996 and in
the Department of Environmental Health Sciences in the Johns Hopkins School of
Public Health and Hygiene from 1988 to 1996.
Dr. Holroyd has served as our Executive Vice President and Chief Business
Officer since November 2000. Prior to that, Dr. Holroyd served as Senior Vice
President, Clinical Research and Regulatory Affairs since June 1998. Dr.
Holroyd has held various positions, including Vice President of Respiratory
Discovery Research, Product Development and Business Development, since joining
us in February 1997. Prior to joining us, Dr. Holroyd was a faculty member and
head of respiratory care services at Johns Hopkins University School of
Medicine and Hospital in the Department of Anesthesiology and Critical Care
Medicine. Dr. Holroyd earned his M.D. and M.B.A. from Johns Hopkins in 1984 and
2000, respectively, and completed his residency training at Johns Hopkins
serving as chief resident of the Osler Medical Service and at the National
Heart, Lung and Blood Institute.
13
Mr. Schnittker has served as our Vice President and Chief Financial Officer
since June 2000. Prior to joining us, Mr. Schnittker served as Director of
Finance from August 1999 to May 2000 and Controller from December 1997 to
August 1999 at Global Sports, Inc. From June 1995 to December 1997, Mr.
Schnittker held the positions of Manager, Finance Policies and Procedures and
Senior Accountant at Rhone-Poulenc Rorer, Inc. Mr. Schnittker is a certified
public accountant.
Dr. Johnston has served as our Vice President, Manufacturing since January
1999. Prior to joining us, Dr. Johnston served as Production Manager at Lonza,
Inc. from May 1993 to December 1998. Dr. Johnston also served as Chemical
Development Manager from October 1989 to May 1993 at Greenwich Pharmaceutical,
Inc. From October 1982 to May 1989, Dr. Johnston served in various process
chemistry positions at E.R. Squibb (now Bristol-Myers Squibb) including Process
Manager, Process Chemist and Chemical Process Investigator.
Officers are elected or appointed by the Board of Directors to serve until
the appointment or election and qualification of their successors or their
earlier termination or resignation.
Employees
As of December 31, 2000, we had 46 full-time employees. No employees are
covered by collective bargaining agreements, and we consider relations with our
employees to be good.
Risk Factors Related to Our Business
Any investment in shares of our common stock involves a high degree of risk.
You should carefully consider the following risk factors, together with the
other information presented in this Annual Report.
If We Do Not Raise Additional Capital, We May Not Be Able to Continue Our
Research and Development Programs and May Never Commercialize Any Products.
We maintained cash and investments of $19,033,000 at December 31, 2000. At
December 31, 2000, we had current liabilities of $5,985,000 and long-term
liabilities of $2,010,000. In the absence of raising additional funds or
significantly reducing expenses, we do not have sufficient resources to sustain
operations beyond 2001. We will need to raise substantial additional funds in
the future to continue our research and development programs and to
commercialize our potential products. If we are unable to raise such funds, we
may be unable to complete our development activities for any of our proposed
products.
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings and collaborative arrangements with third parties. We currently do
not have any commitments to obtain additional funds, and may be unable to
obtain sufficient funding in the future on acceptable terms. If we cannot
obtain funding, we will need to delay, scale back or eliminate research and
development programs or enter into collaborations with third parties to
commercialize potential products or technologies that we might otherwise seek
to develop or commercialize ourselves, or seek other arrangements. If we engage
in collaborations, we will receive lower consideration upon commercialization
of such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.
We expect to evaluate all available strategic alternatives to finance our
programs and technology, including broad-based alliances or mergers intended to
create better-financed entities.
We Expect to Continue to Incur Substantial Losses.
To date, we have engaged primarily in the research and development of drug
candidates. We have not generated any revenues from product sales and have
incurred losses in each year since our inception. As of December 31, 2000, we
had an accumulated deficit of approximately $157,568,000.
14
Our proposed products are in a relatively early developmental stage and will
require significant research, development and testing. We must obtain
regulatory approvals for all of our proposed products prior to
commercialization of the product. Our operations are also subject to various
competitive and regulatory risks. As a result, we are unable to predict when or
if we will achieve any product revenues. We expect to experience substantial
losses in the foreseeable future as we continue our research, development and
testing efforts, which will cause us to have continued negative results of
operations.
If We Do Not Obtain Required Regulatory Approvals, We Will Not Be Able to
Commercialize Any of Our Product Candidates.
Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, such as that which has
occurred for LOCILEX(TM) Cream, will materially affect our business.
If we receive approval of a product candidate, it may be conditioned upon
certain limitations and restrictions as to the drugs used and may be subject to
continuous review. If we fail to comply with any applicable regulatory
requirements, we could be subject to penalties, including:
. warning letters;
. fines;
. withdrawal of regulatory approval;
. product recalls;
. operating restrictions;
. injunctions; and
. criminal prosecution.
We Will Rely on Marketing and Development Partners and if They Do Not Perform
as Expected, We May Not Successfully Commercialize Our Products.
We do not have our own sales and marketing staff. In order to successfully
develop and market our products, we must enter into marketing and distribution
arrangements with third parties. We also expect to delegate the responsibility
for all, or a significant portion, of the development and regulatory approval
for certain products to partners. If our partners do not develop an approvable
or marketable product or do not market a product successfully, we may not
achieve necessary product revenues. Additionally, we may be unable to enter
into other successful arrangements.
We do not have control over the amount and timing of resources to be devoted
to our products by our collaborative partners. In the future, the interests of
our collaborators may not be consistent with our interests. Collaborators may
develop products independently or through third parties that could compete with
our proposed products. For example, GlaxoSmithKline maintains a significant
presence in the antibiotic area and currently sells a topical antibiotic
product indicated for the treatment of certain skin infections and Genentech
has recently launched an antibody-based asthma product. In addition, a partner
may decide to end a relationship with us. For example, in December 2000,
Genentech elected to terminate the collaboration agreement covering the IL9
antibody development program and related respiratory technology.
15
We may also decide to establish our own sales force to market and sell
certain products. Although certain members of our management have limited
experience in the marketing of pharmaceutical products, we have no experience
with respect to marketing our products. If we choose to pursue this
alternative, we will need to spend significant additional funds and devote
significant management resources and time to establish a successful sales
force. Given our inexperience in establishing and managing a salesforce, this
effort may not be successful. Given our financial resources, efforts in this
area would likely be modest compared to our competitors.
If We Are Not Able to Innovate and Develop Products as Rapidly as Our
Competitors, Our Products May Not Achieve Market Acceptance.
The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
Many companies are currently involved in research and development activities
focused on the pathogenesis of disease, and the competition among companies
attempting to find genes responsible for disease is intense. In addition, we
are aware that research on compounds derived from animal host-defense systems
is being conducted by others. Most of these entities have substantially greater
financial, technical, manufacturing, marketing, distribution and other
resources. We may also face competition from companies using different or
advanced techniques that could render our products obsolete.
Many companies are working to develop and market products intended for the
additional disease areas being targeted, including cancer and asthma. A number
of major pharmaceutical companies have significant franchises in these disease
areas, and can be expected to invest heavily to protect their interests. In the
cancer field, anti-angiogenic agents are under development at a number of
companies. In the asthma field, other biopharmaceutical companies have also
reported the discovery of genes relating to asthma.
We expect technological developments in the biopharmaceutical field to occur
at a rapid rate and expect competition to intensify as advances in this field
are made. Accordingly, we must continue to devote substantial resources and
efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that
have significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining
regulatory approvals of such products. Some of these companies may be in
advanced phases of clinical testing of various drugs that may be competitive
with our proposed products.
Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology that they
have developed, some of which may be directly competitive with our technology.
In addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting
highly qualified scientific personnel.
If We Do Not Develop and Maintain Relationships With Contract Manufacturers, We
May Not Successfully Commercialize Our Products.
We currently do not have the resources, facilities, or technical
capabilities to manufacture any of our proposed products in the quantities and
quality required for commercial sale. We have no plans to establish a
manufacturing facility. We depend upon contract manufacturers for commercial
scale manufacturing of our proposed products in accordance with regulatory
standards. This dependence may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis. Additionally, the
number of companies capable of producing our proposed products is limited. We
may be unable to maintain arrangements with qualified outside contractors to
manufacture materials at costs which are affordable to us, if at all.
16
Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a
manufacturing process. In order to engage another manufacturer, we may need to
obtain a license or other technology transfer from the original contract
manufacturer. Even if a license is available from the original contract
manufacturer on acceptable terms, we may be unable to successfully effect the
transfer of the technology to the new contract manufacturer. Any such
technology transfer may also require the transfer of requisite data for
regulatory purposes, including information contained in a proprietary drug
master file held by a contract manufacturer. If we rely on a contract
manufacturer that owns the drug master file, our ability to change contract
manufacturers may be more limited.
We are currently working with outside contractors for the chemical
production of squalamine. Production of squalamine and other proposed products
will require significant expenditure.
We Depend on Our Intellectual Property and, If We Are Unable to Protect Our
Intellectual Property, We May Not Realize Optimal Value from Our Technology.
Patents
Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies, both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. Our ability to
recoup these expenditures and realize profits upon commercialization could be
diminished.
We cannot be certain that:
. patents will issue from any of our patent applications;
. our patent rights will be sufficient to protect our technology;
. our patents will not be successfully challenged or circumvented by our
competitors; or
. our patent rights will provide us with any commercial advantages.
The process of obtaining patents can be time consuming and expensive. Even
after significant expenditure, a patent may not issue. We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because U.S. patent
applications are maintained in secrecy until a patent issues and publications
in the scientific or patent literature lag behind actual discoveries.
Even after we are issued patent rights, we cannot be certain that:
. others will not develop similar technologies or duplicate the technology;
. others will not design around the patented aspects of the technology;
. we will not be obliged to defend ourselves in court against allegations
of infringement of third-party patents;
. our issued patents will be held valid in court; or
. an adverse outcome in a suit would not subject us to significant
liabilities to third parties, require rights to be licensed from third
parties, or require us to cease using such technology.
The cost of litigation related to patents can be substantial, regardless of
the outcome.
17
Potential Ownership Disputes
There may be disputes arising as to the ownership of our technology. Most of
our research and development personnel previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when technology was developed, and
assert rights to the technology. These kinds of disputes have occurred in the
past. We may not prevail in any such disputes.
Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There may be disputes as to the capacity in which consultants
are operating when they make certain discoveries. We may not prevail in any
such disputes.
Other Intellectual Property
In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators, and other advisors.
We may find that these agreements will be breached, or that our trade secrets
have otherwise become known or independently developed or discovered by our
competitors.
Certain of our exclusive rights to patents and patent applications are
governed by contract. Generally, such contracts require that we pay royalties
on sales of any products which are covered by patent claims. If we are unable
to pay the royalties, we may lose our patent rights. Additionally, some of
these agreements also require that we develop the licensed technology under
certain timelines. If we do not adhere to an acceptable schedule of
commercialization, we may lose our rights.
If We Cannot Recruit and Retain Qualified Management, We May Not Be Able to
Successfully Develop and Commercialize Our Products.
We depend to a considerable degree on a limited number of key personnel.
Most significant responsibilities have been assigned to a relatively small
number of individuals. We do not maintain "key man" insurance on any of our
employees. The loss of certain management and technical personnel could
adversely affect our ability to develop and commercialize products.
We are Subject to Potential Product Liability Claims That Could Result in
Significant Expense if a Claim Arose.
We are subject to significant potential product liability risks inherent in
the testing, manufacturing and marketing of human therapeutic products,
including the risk that:
. our proposed products cause some undesirable side effects or injury
during clinical trials;
. our products cause undesirable side effects or injury in the market; or
. third parties that we have agreed to indemnify incur liability.
While we carry insurance, this coverage is expensive and we may be unable to
maintain adequate coverage on acceptable terms.
If We Do Not Receive Adequate Third-Party Reimbursement for Any of Our Drug
Candidates, Some Patients May Be Unable to Afford Our Products and Sales Could
Suffer.
In both the United States and elsewhere, the availability of reimbursement
from third-party payers, such as government health administration authorities,
private health insurers and other organizations, can impact
18
prescription pharmaceutical sales. These organizations are increasingly
challenging the prices charged for medical products and services, particularly
where they believe that there is only an incremental therapeutic benefit which
does not justify the additional cost. Coverage and reimbursement may not be
available for our proposed products, or, if available, may not be adequate.
Without insurance coverage, many patients may be unable to afford our products,
and we may not reach optimal sales levels.
There has also been a trend toward government reforms intended to contain or
reduce the cost of health care. In certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been a number of federal and state proposals
to implement similar government control.
We expect this trend to continue, but we cannot predict the nature or extent
of any reform that results. It is possible that reform could impact
pharmaceutical marketing and pricing. Not only would this affect possible
future profit margins, it could adversely affect our ability to obtain
financing for the continued development of our proposed products. Furthermore,
reforms could have a broader impact by limiting overall growth of health care
spending, such as Medicare and Medicaid spending, which could also adversely
affect our business.
The FDA Has Deemed Our NDA for LOCILEX(TM) Cream to Be Not Approvable, Which
Will Prevent Near Term Commercialization of the Product.
We announced on July 26, 1999 that we received notification from the FDA
that our NDA for LOCILEX(TM) Cream had been deemed not approvable.
LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of infection
in diabetic foot ulcers, was our lead product development candidate. With the
FDA's decision, near-term commercialization of LOCILEX(TM) Cream will not
occur, and we will generate no revenues from LOCILEX(TM) Cream in the near
future.
In order to again seek approval of LOCILEX(TM) Cream, the FDA has indicated
that we must conduct further development activities, including clinical and
manufacturing activities. The specific nature of the clinical activities will
be determined after consultations with the FDA. As a result of its review of
manufacturing of the cream product, the FDA issued certain observations of
deficiencies in compliance with their GMP regulations. In any additional
clinical studies to be conducted, new batches of the cream product will need to
be manufactured from the bulk drug substance, in compliance with FDA-determined
good manufacturing procedures, and meeting strict product specifications. The
time required to conduct such further clinical and manufacturing development
efforts may be lengthy and costly, and the results may ultimately prove
unsuccessful.
Our Stock Price Is Extremely Volatile Due to a Number of Factors.
The market prices and trading volumes for securities of biopharmaceutical
and biotechnology companies, including ours, have historically been, and will
likely continue to be, highly volatile. Future events affecting our business,
or that of our competitors, may significantly impact our stock price,
including:
. product testing results;
. technological innovations;
. new commercial products;
. government regulations;
. proprietary rights;
19
. regulatory actions; and
. litigation.
We May Be Unable to Maintain the Standards for Listing on the Nasdaq National
Market, Which Could Impact the Liquidity of Our Common Stock and Could Subject
Our Common Stock to the "Penny Stock" Rules.
Our common stock is listed on the Nasdaq National Market. Nasdaq requires
listed companies to maintain standards for continued listing, including a
minimum bid price for shares of a company's stock and a minimum tangible net
worth. If we are unable to maintain these standards, our common stock could be
delisted. Trading in our stock would then be conducted on the Nasdaq Small Cap
Market unless we are unable to meet the requirements for inclusion therein. If
we were unable to meet the requirements for inclusion in the Small Cap Market,
our common stock would be traded on an electronic bulletin board established
for securities that do not meet the Nasdaq listing requirements or in
quotations published by the National Quotation Bureau, Inc. that are commonly
referred to as the "pink sheets." As a result, it could be more difficult to
sell or obtain an accurate quotation as to the price of our common stock.
In addition, if our common stock were delisted, it would be subject to the
so-called "penny stock" rules. The U.S. Securities and Exchange Commission has
adopted regulations that define a "penny stock" to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions,
such as any securities listed on a national securities exchange or quoted on
Nasdaq. For any transaction involving a "penny stock," unless exempt, the rules
impose additional sales practice requirements on broker-dealers, subject to
certain exceptions.
For transactions covered by the "penny stock" rules, a broker-dealer must
make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to the sale.
The "penny stock" rules also require broker-dealers to deliver monthly
statements to "penny stock" investors disclosing recent price information for
the "penny stock" held in the account, and information on the limited market in
"penny stocks." Prior to the transaction, a broker-dealer must provide a
disclosure schedule relating to the "penny stock" market. In addition, the
broker-dealer must disclose the following:
. commissions payable to the broker-dealer and the registered
representative; and
. current quotations for the security as mandated by the applicable
regulations.
If our common stock were delisted and determined to be a "penny stock," a
broker-dealer may find it to be more difficult to trade our common stock and an
investor may find it more difficult to acquire or dispose of our common stock
in the secondary market.
The Exercise of Options and Warrants and Other Issuances of Shares Could Have a
Dilutive Effect on Our Stock Price.
As of December 31, 2000, there were outstanding options to purchase an
aggregate of approximately 3,680,000 shares of our common stock at prices
ranging from $1.03 per share to $16.75 per share, of which approximately
2,109,000 were exercisable as of such date. Also outstanding at December 31,
2000 were warrants to purchase 229,739 shares of our common stock, currently
exercisable at $8.00 per share, and warrants to purchase an aggregate of
1,242,153 shares of our common stock, currently exercisable from $5.06 to $6.79
per share, and subject to adjustment with future offerings. In addition, in
connection with our private placement in August 2000, we issued warrants to
purchase an aggregate of 167,166 shares of our common stock, currently
exercisable at $3.50 per share, and subject to adjustment under certain
circumstances. Exercise of options and warrants at prices below the market
price of our common stock could adversely affect the price of our common stock.
Additional dilution may result from the issuance of shares in connection with
collaborations or manufacturing arrangements, or in connection with other
financing efforts.
20
Our Certificate of Incorporation and Delaware Law Contain Provisions that Could
Discourage a Takeover.
Our certificate of incorporation provides our board of directors the power
to issue shares of preferred stock without stockholder approval. This preferred
stock could have voting rights, including voting rights that could be superior
to that of our common stock, and the board of directors has the power to
determine these voting rights. In addition, Section 203 of the Delaware General
Corporation Law contains provisions which impose restrictions on stockholder
action to acquire control of Genaera. The effect of these provisions of our
certificate of incorporation and Delaware law provisions would likely
discourage third parties from seeking to obtain control.
ITEM 2. Properties
We lease an aggregate of approximately 26,000 square feet of office and
laboratory space at two locations in Plymouth Meeting, Pennsylvania. Our
primary lease of 21,000 square feet of office and laboratory space expires in
November 2002. The secondary lease, and corresponding sublease, of
approximately 5,000 square feet of office space expires in January 2001. In the
aggregate, these leases provide for minimum annual payments of approximately
$327,000 in 2001 and are subject to certain annual increases thereafter. We
expect offsetting minimum annual sublease payments of $10,000 in 2001.
ITEM 3. Legal Proceedings
We are not a party to any material litigation.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders during the last
quarter of the year ended December 31, 2000.
21
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
From December 12, 1991, the date of our initial public offering, until March
9, 2001 our common stock was included for quotation on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") National Market
under the symbol "MAGN". On March 9, 2001, we changed our name to Genaera
Corporation and, on March 12, 2001, our common stock began inclusion for
quotation on the NASDAQ National Market under the symbol "GENR". The quarterly
ranges of high and low closing bid prices per share of our common stock are
shown below.
Year Ended December 31, 2000 High Low
---------------------------- ------ -----
1st Quarter.................................................. $10.50 $1.78
2nd Quarter.................................................. $ 5.00 $2.50
3rd Quarter.................................................. $ 5.38 $3.06
4th Quarter.................................................. $ 4.06 $2.09
Year Ended December 31, 1999 High Low
---------------------------- ------ -----
1st Quarter.................................................. $ 4.44 $1.44
2nd Quarter.................................................. $ 2.56 $1.50
3rd Quarter.................................................. $ 3.69 $1.00
4th Quarter.................................................. $ 2.25 $0.94
Dividends
We have not paid any cash dividends since our inception, and we do not
anticipate paying any cash dividends in the foreseeable future. It is the
present policy of the Board of Directors to retain all earnings, if any, to
finance the development of our business.
Number of Holders of Common Stock
At March 7, 2001, there were approximately 358 stockholders of record and
approximately 10,944 beneficial owners of our common stock.
Recent Sales of Unregistered Securities
In May 2000, pursuant to a collaboration agreement, we issued and sold to
Genentech, Inc. 500 shares of our Series A redeemable convertible preferred
stock at an aggregate purchase price of $500,000 and 1,085,973 shares of our
common stock at an aggregate purchase price of approximately $5,000,000. In
December 2000, we issued and sold to Genentech an additional 688 shares of
preferred stock for an aggregate purchase price of $688,000 and on the same
terms and conditions as the May 2000 sale. There were no underwriters or
underwriting discounts or commissions in connection with these transactions.
The preferred stock and common stock sold to Genentech in May 2000 and the
preferred stock sold in December 2000 were issued and sold in transactions that
we believe were exempt from the registration requirements of the Securities Act
of 1933, as amended, by reason of Section 4(2) thereof.
22
The preferred stock is convertible, in whole or in part, at our (subject to
defined limitations) or the holder's option, into shares of our common stock at
a conversion rate determined by dividing the original issue price of $1,000 per
share by the 5-day average closing price of the common stock as of the
conversion date. Shares of the preferred stock issued before May 10, 2005 are
convertible at any one date during the six-month period beginning on May 10,
2005. Shares of the preferred stock issued on or after May 10, 2005 are
convertible at any one date during the six-month period beginning on December
31, 2008. In addition, the preferred stock shall also be convertible at the
holder's option after November 10, 2000 (1) in the event of a merger,
consolidation or sale of substantially all of our assets or (2) at any time
following the first date when the total number of common shares outstanding, on
a fully-diluted and as-converted basis, multiplied by the preceding 10-day
average closing price of such date is less than 500% of the aggregate original
issue price plus accrued and unpaid cumulative dividends on the preferred
stock. In any event, the aggregate number of common shares issued upon
conversion of the shares of preferred stock shall not exceed 5,388,595 shares
nor shall such aggregate conversions result in Genentech beneficially owning
more than 10% of our common stock. In the event of a conversion that would
exceed these limits, we would be required to redeem such shares at a cash
redemption price of $1,000 per share plus accrued and unpaid cumulative
dividends to the date of conversion. The preferred stock may also be redeemed,
in whole or in part, at any time at our option at a cash redemption price of
$1,000 per share plus accrued and unpaid cumulative dividends to the date of
redemption.
The preferred stock ranks senior to our common stock as to liquidation and
dividend rights. In the event of our liquidation, dissolution or winding up,
the preferred stock has a liquidation preference of $1,000 per share plus
accumulated and unpaid cumulative dividends to the date of liquidation.
Cumulative preferred dividends under the preferred stock are payable in arrears
on a quarterly basis at an annual rate of the prime rate plus 2%.
In August 2000, we issued and sold 4,153,196 shares of our common stock to
several accredited investors in several transactions for an aggregate purchase
price of approximately $12,460,000, of which $702,000 constituted the fee paid
to Paramount Capital, Inc., who acted as our financial advisor in certain of
the transactions. We also issued warrants to purchase 167,166 shares of our
common stock exercisable at $3.50 per share to several affiliates of Paramount
Capital. These transactions were not public offerings. We believe, based on
information available to us as of the date of such transactions, including
representations and warranties of Paramount Capital and the accredited
investors, these transactions were exempt from the registration requirements of
the Securities Act of 1933, as amended, by reason of Section 4(2) thereof. On
August 23, 2000, we filed a registration statement on Form S-3 to register the
4,153,196 shares of our common stock and the 167,166 shares of our common stock
issuable upon exercise of the warrants. The effective date of such registration
statement was October 12, 2000.
23
ITEM 6. Selected Financial Data
The following table summarizes certain selected financial data. The selected
financial data is derived from, and is qualified by reference to, our financial
statements included herein.
Year Ended December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- --------
(In thousands, except per share amounts)
Statement of Operations
Data:
Contract revenues........ $ -- $ -- $ -- $ 10,088 $ 150
--------- --------- --------- --------- --------
Costs and expenses:
Research and
development........... 10,074 9,876 21,456 22,875 22,326
General and
administrative........ 2,583 2,870 3,292 3,246 3,488
Charge for stock
issuance relating to
royalty buyout........ -- -- -- -- 7,080
--------- --------- --------- --------- --------
12,657 12,746 24,748 26,121 32,894
--------- --------- --------- --------- --------
Loss from operations..... (12,657) (12,746) (24,748) (16,033) (32,744)
Interest income.......... 883 755 1,640 1,770 2,172
Interest expense......... (605) (225) (196) (118) (48)
--------- --------- --------- --------- --------
Net loss................. (12,379) (12,216) (23,304) (14,381) (30,620)
Dividends on preferred
stock................... 45 -- -- -- --
--------- --------- --------- --------- --------
Net loss applicable to
common stockholders..... $ (12,424) $ (12,216) $ (23,204) $ (14,381) $(30,620)
========= ========= ========= ========= ========
Net loss applicable to
common stockholders per
share--basic and
diluted................. $ (0.42) $ (0.52) $ (1.05) $ (0.73) $ (1.71)
========= ========= ========= ========= ========
Weighted average shares
outstanding--basic and
diluted................. 29,375 23,706 22,235 19,679 17,938
========= ========= ========= ========= ========
Balance Sheet Data:
Cash and investments..... $ 19,033 $ 10,644 $ 22,871 $ 39,061 $ 33,340
Working capital.......... 13,393 7,608 11,897 33,073 28,276
Total assets............. 20,701 12,731 25,891 42,444 36,376
Long-term liabilities.... 2,010 3,015 58 1,096 915
Redeemable convertible
preferred stock......... 1,233 -- -- -- --
Accumulated deficit...... (157,568) (145,144) (132,928) (109,624) (95,243)
Stockholders' equity..... 11,473 6,552 14,680 34,870 29,943
24
ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Our disclosure and analysis in this Annual Report contains some forward-
looking statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe," "hope," and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance. In
particular, these include statements relating to present or anticipated
scientific progress, development of potential pharmaceutical products, future
revenues, capital expenditures, research and development expenditures, future
financing and collaborations, personnel, manufacturing requirements and
capabilities, and other statements regarding matters that are not historical
facts or statements of current condition.
Any or all of our forward-looking statements in this Annual Report may turn
out to be wrong. They can be affected by inaccurate assumptions we might make
or by known or unknown risks and uncertainties. Many factors mentioned in the
discussion below will be important in determining future results. Consequently,
no forward-looking statement can be guaranteed. Actual future results may vary
materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our filings with the U.S. Securities and Exchange Commission. This
discussion is provided as permitted by the Private Securities Litigation Reform
Act of 1995.
Overview
Genaera Corporation, formerly known as Magainin Pharmaceuticals Inc., is a
biopharmaceutical company committed to developing medicines for serious
diseases from genomics and natural products. Our research and development
efforts are focused on anti-angiogenesis, obesity, infectious diseases and
respiratory diseases. We changed our name from Magainin Pharmaceuticals Inc. to
Genaera Corporation on March 9, 2001.
Since commencing operations in 1988, we have not generated any revenue from
product sales, and we have funded operations primarily from the proceeds of
public and private placements of securities. We have incurred a loss in each
year since our inception, and we expect to incur substantial additional losses
for at least the next several years. We expect that losses may fluctuate, and
that such fluctuations may be substantial. At December 31, 2000, our
accumulated deficit was approximately $157,568,000. We will need to raise
additional funds in the future to continue our operations.
Results of Operations
Revenues
We have received no revenues from product sales. Revenues recorded to date
have consisted principally of revenues recognized under collaborations with
corporate partners. We recorded revenue of $10,000,000 in 1997 reflecting the
receipt of payments under the GlaxoSmithKline agreement entered into in
February 1997 for LOCILEX(TM) Cream. We had hoped to commercialize LOCILEX(TM)
Cream in the near-term. However, with the FDA's decision not to approve
LOCILEX(TM) Cream, near-term commercialization will not occur, and we will
generate no revenues from LOCILEX(TM) Cream in the near future. GlaxoSmithKline
remains our exclusive sales, marketing and distribution partner for the North
American territory for LOCILEX(TM) Cream. We have no currently existing
collaborations that will result in the realization of research and development
revenues.
Research and Development Expenses
Research and development expenses increased in the year ended December 31,
2000 as compared to the same period a year ago, due to increases in squalamine
development, clinical and manufacturing activity as
25
well as preclinical and development activity in our mucoregulator, IL9 antibody
and produlestan programs. Research and development expenses decreased in the
year ended December 31, 1999 as compared to those in the year ended December
31, 1998, due to reductions in manufacturing development, clinical and
regulatory costs, and personnel expenses, principally due to decreased
development activity relating to LOCILEX(TM) Cream. The level of research and
development expenses in future periods will depend principally upon the
progress of our research and development programs and our capital resources.
General and Administrative Expenses
General and administrative expenses consist principally of personnel costs
and professional fees and have decreased in 2000 as compared to the prior year
due principally to the decrease in those costs. General and administrative
expenses in the year ended December 31, 1999 decreased compared to those in the
year ended December 31, 1998, due to a reduction in personnel expenses.
Other Income and Expense
Interest income increased during the year ended December 31, 2000 as
compared to the prior year, due to higher investment balances. Interest income
decreased during the year ended December 31, 1999 as compared to the prior
year, due to lower investment balances. The increase in interest expense for
the years ended December 31, 2000 and 1999, as compared to the prior years, is
due principally to the recognition of interest expense associated with the
long-term obligation to Abbott Laboratories.
Net Loss
Our goal is to conduct significant research, pre-clinical development,
clinical testing and manufacturing activities over the next several years. We
expect that these activities, together with projected general and
administrative expenses, will result in continued and significant losses.
Financial Condition, Liquidity, and Capital Resources
Cash and investments were $19,033,000 at December 31, 2000 as compared to
$10,644,000 at December 31, 1999. The primary use of cash was to finance our
operations.
Since inception, we have funded our operations primarily from the proceeds
of public and private placements of securities, including:
. $17,080,000 raised from our initial public offering in December 1991;
. $21,469,000 raised from a public offering completed in February 1993;
. $18,023,000 raised from a private placement completed in October 1993;
. $32,627,000 raised from a public offering completed in August 1995;
. $11,932,000 raised from a private placement completed in August 1996;
. $19,172,000 raised from a public offering completed in December 1997;
. $2,000,000 raised from a private placement completed in December 1998;
. $3,915,000 raised from a public offering completed in October 1999;
. $5,447,000 raised from a private placement completed in May 2000;
. $11,678,000 raised from a private placement completed in August 2000; and
. $688,000 raised from a private placement in December 2000.
26
In addition to the above, we have funded our operations from contract and
grant revenues, interest income and lease and debt financing.
Current liabilities increased by $2,821,000 to $5,985,000 at December 31,
2000, due principally to increased research contract accruals related to
squalamine development as well as the transfer of $1,392,000 owed to Abbott to
current liabilities as a result of our financing activities. We had an
agreement with Abbott providing for the purchase of approximately $10,000,000
of bulk drug substance for LOCILEX(TM) Cream. As FDA approval of LOCILEX(TM)
Cream did not occur, we renegotiated this agreement with Abbott in 1999, paying
Abbott $4,200,000 and receiving partial delivery of material. An additional
$3,400,000 is due to Abbott and payable if we receive in excess of $10,000,000
of additional funds in any year beginning in 2000, in which case 15% of such
excess over $10,000,000 shall be payable to Abbott. We have no further purchase
commitments to Abbott, and Abbott has no further supply requirements to us.
Long-term accrued development expense decreased by $995,000 to $1,967,000 at
December 31, 2000 due to the transfer of a portion of the amount owed Abbott to
current liabilities.
Under the terms of our $2,500,000 note payable, we make monthly interest-
only payments at an annual rate of 9.125%, with principal due in June 2001. We
maintain cash and investments of $2,862,000 as collateral for the note payable.
In May 2000, we entered into a research, development and commercialization
collaboration agreement with Genentech, Inc. Under this agreement, we would
have co-developed with Genentech an antibody to IL9 for asthma, with options
for other products in respiratory disease. We simultaneously executed a stock
purchase agreement with Genentech pursuant to which we received from Genentech
approximately $5,000,000 in exchange for the issuance of 1,085,973 shares of
our common stock and $500,000 representing the issuance of 500 shares of our
Series A convertible preferred stock, redeemable under certain circumstances.
We would have conducted development activities through Phase II clinical
testing for pharmaceutical products covered by the collaboration agreement and
Genentech would have conducted Phase III clinical testing, manufacturing and
marketing for such products. We may have elected to co-fund Genentech's Phase
III clinical and regulatory costs in return for a share of profits and losses
resulting from the sales of covered product in the U.S. We would have received
a royalty on sales overseas and in the U.S. if we elected not to fund the Phase
III and regulatory costs. Future development funding would have been provided
to us by Genentech through the issuance of additional shares of the Series A
preferred stock to Genentech. Cumulative preferred dividends under the Series A
preferred stock are payable in arrears on a quarterly basis at an annual rate
of the prime rate plus 2%.
In August 2000, we sold approximately 4,153,000 shares of our common stock,
through a private placement, at a price of $3.00 per share. Net proceeds to
Genaera from the offering were approximately $11,678,000 after offering costs.
In November 2000, we issued 688 of our Series A Preferred Stock to Genentech
for $688,000 which represented further IL9 antibody development funding.
In December 2000, Genentech elected to terminate the collaboration agreement
covering the IL9 antibody development program and related respiratory
technology. As a result, all licensed technology under this agreement,
exclusive of Genentech-improved technology, will be returned to us. We expect
to repartner this antibody development program during 2001.
We will need to raise substantial additional funds in the future to continue
our research and development programs and to commercialize our potential
products. If we are unable to raise such funds, we may be unable to complete
our development activities for any of our proposed products.
27
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings and collaborative arrangements with third parties. We currently do
not have any commitments to obtain additional funds, and may be unable to
obtain sufficient funding in the future on acceptable terms. If we cannot
obtain funding, we will need to delay, scale back or eliminate research and
development programs or enter into collaborations with third parties to
commercialize potential products or technologies that we might otherwise seek
to develop or commercialize ourselves, or seek other arrangements. If we engage
in collaborations, we will receive lower consideration upon commercialization
of such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.
Our capital expenditure requirements will depend upon numerous factors,
including the progress of our research and development programs, the time and
cost required to obtain regulatory approvals, our ability to enter into
additional collaborative arrangements, the demand for products based on our
technology, if and when such products are approved, and possible acquisitions
of products, technologies and companies. We had no significant capital
commitments as of December 31, 2000.
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to risks associated with interest rate changes. Our exposure
to market risk for changes in interest rates relates primarily to our
investment portfolio. We invest in only U.S. government debt instruments that
meet high quality credit standards, as specified in our investment policy. The
policy also limits the amount of credit exposure we may have to any one issue,
issuer or type of investment.
As of December 31, 2000, our portfolio investments consisted of $0.6 million
in cash and $18.4 million in U.S government debt instruments having a maturity
of less than one year. Due to the nature of our investment portfolio,
management believes that a sudden change in interest rates would not have a
material effect on the value of the portfolio. Management estimates that if the
average annualized yield of our investments had decreased by 100 basis points,
our interest income for the year ended December 31, 2000 would have decreased
by approximately $73,000. This estimate assumes that the decrease occurred on
the first day of 2000 and reduced the annualized yield of each investment
instrument by 100 basis points. The impact on our future interest income will
depend largely on the gross amount of our investment portfolio.
We do not currently have any significant direct foreign currency exchange
rate risk.
ITEM 8. Financial Statements and Supplementary Data
The information required by this item, including our financial statements,
supplementary data and related documents, are listed in Item 14(a) of Part IV
of this Annual Report.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
28
PART III
This Part incorporates certain information from our Proxy Statement for the
2001 Annual Meeting of Stockholders filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K. Notwithstanding such incorporation, the
sections of our 2001 Proxy Statement entitled "Report of the Compensation
Committee" and "Performance Graph" shall not be deemed to be "filed" as part of
this Annual Report.
ITEM 10. Directors and Executive Officers of the Registrant
Information required by this item concerning our directors is incorporated
herein by reference to our Proxy Statement for the 2001 Annual Meeting of
Stockholders. Information required by this item concerning executive officers
is included in Part I of this Annual Report.
ITEM 11. Executive Compensation
Information required by this item is incorporated herein by reference from
our Proxy Statement for the 2001 Annual Meeting of Stockholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated herein by reference from
our Proxy Statement for the 2001 Annual Meeting of Stockholders.
ITEM 13. Certain Relationships and Related Transactions
None.
29
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this Annual Report:
1. Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report....................................... F-2
Consolidated Balance Sheets........................................ F-3
Consolidated Statements of Operations.............................. F-4
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss................................................ F-5
Consolidated Statements of Cash Flows.............................. F-6
Notes to Consolidated Financial Statements......................... F-7
2. Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required or the information is shown in the Financial Statements or Notes
thereto.
3. Exhibits
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically,
together with a reference to the filing indicated by footnote.
Exhibit No.
-----------
3.1 Restated Certificate of Incorporation of the Registrant (Exhibit
3.1)(1)
3.2 Certificate of Amendment of Restated Certificate of Incorporation
of the Registrant (Exhibit 3.2)(11)
3.3 By-laws of the Registrant (Exhibit 3.2)(2)
3.4 Amended and Restated By-laws of the Registrant (Exhibit 3.4)(17)
4.1 Specimen copy of stock certificate for shares of Common Stock of
the Registrant (Exhibit 4.1)(3)
10.1# 1990 Stock Option Plan of the Registrant (Exhibit 10.1)(2)
10.2# 1992 Stock Option Plan of the Registrant, as amended(4)
10.3# 1998 Equity Compensation Plan(13)
10.4# Stock Option Agreement with Jay Moorin (Exhibit 10.24)(3)
10.5# Amendment to Stock Option Agreement with Jay Moorin (Exhibit
10.4)(1)
10.6# Form of Stock Option Agreement under Stock Option Plans (Exhibit
4.6)(2)
10.7# Employment Agreement with Michael A. Zasloff, M.D., Ph.D. (Exhibit
10.23)(3)
10.8# Amendment of Employment Agreement with Michael A. Zasloff, M.D.,
Ph.D. (Exhibit 10.9)(3)
10.9#* Consulting Agreement with Michael A. Zasloff, M.D., Ph.D.
10.10# Employment Agreement with Michael R. Dougherty (Exhibit 10.26)(7)
30
Exhibit No.
-----------
10.11# Employment Agreement with Roy C. Levitt, M.D. (Exhibit
10.24)(5)(8)
10.12# Employment Agreement with Kenneth J. Holroyd, M.D. (Exhibit
10.12)(14)
10.13#* Employment Agreement with Christopher P. Schnittker
10.14#* Employment Agreement with Sean M. Johnston, Ph.D.
10.15# Form and Schedule of Stock Awards to Executive Officers (Exhibit
10.36)(14)
10.16 Lease with respect to Plymouth Meeting, Pennsylvania offices and
laboratories (Exhibit 10.16)(2)
10.17 Lease with respect to Plymouth Meeting, Pennsylvania office
(Exhibit 10.13)(12)
10.18 Amendment to lease with respect to Plymouth Meeting, Pennsylvania
offices and laboratories (Exhibit 10.16)(14)
10.19 Patent License Agreement and Sponsored Research Agreement with The
Children's Hospital of Philadelphia (Exhibit 10.15)(2)
10.20 License Agreement with Multiple Peptide Systems, Inc. (Exhibit
10.12)(2)
10.21 Second Amendment to License Agreement with Multiple Peptide
Systems, Inc. (Exhibit 10.30)(10)
10.22 Form of Credit Agreement, including form of Promissory Note and
Warrant (Exhibit 10.22)(2)
10.23 Form of Amendment to Credit Agreement Warrant (Exhibit 10.18)(6)
10.24 Assignment Agreement between Genaera Corporation, Roy C. Levitt,
M.D. and GeneQuest, Inc. (Exhibit 10.25)(5)(8)
10.25 Form of Purchase Agreement relating to the issuance by Genaera
Corporation of units consisting of shares of Genaera Corporation
Common Stock and warrants to purchase shares of Common Stock
(Exhibit 10.1)(9)
10.26 Form of Warrant to purchase shares of Genaera Corporation Common
Stock (Exhibit 10.2)(8)
10.27 Development, Supply and Distribution Agreement, effective as of
February 12, 1997 with SmithKline Beecham Corporation (Exhibit
10.29)(5)(11)
10.28 Collaborative Research and Option Agreement with Genentech, Inc.,
effective as of December 30, 1998 (Exhibit 10.32)(15)
10.29 Stock Purchase Agreement between Genaera Corporation and
Genentech, Inc., dated December 30, 1998 (Exhibit 10.33)(15)
10.30+ License and Collaboration Agreement between Genaera Corporation
and Genentech, Inc. dated April 28, 2000 (Exhibit 10.1)(18)
10.31+ Certificate of Designations, Preferences and Rights of Series A
Preferred Stock of Genaera Corporation dated May 8, 2000 (Exhibit
10.2)(18)
10.32+ Stock Purchase Agreement between Genaera Corporation and
Genentech, Inc. dated April 28, 2000 (Exhibit 10.3)(18)
10.33+ Registration Rights Agreement between Genaera Corporation and
Genentech, Inc. dated April 28, 2000 (Exhibit 10.4)(18)
23.1* Consent of KPMG LLP
24.1* Power of Attorney (included on signature page of this Annual
Report on Form 10-K)
- --------
Explanation of Footnotes to Listing of Exhibits:
31
* Filed herewith.
# Compensation plans and arrangements for executives and others.
+ Confidential treatment has been requested as to certain portions of
this exhibit. The omitted portions have been separately filed with the
Securities and Exchange Commission.
(1) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended June 30, 1992 filed with the Securities and Exchange Commission
on September 24, 1992.
(2) Filed as an Exhibit to Registration Statement (No. 33-43579) on Form S-
1 filed with the Securities and Exchange Commission on October 24,
1991.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
Statement (No. 33-43579) on Form S-1 filed with the Securities and
Exchange Commission on November 27, 1991.
(4) Filed as Exhibit A to the Proxy Statement for the 1996 Annual Meeting
of Stockholders.
(5) Portions of this Exhibit were omitted and filed separately with the
Securities and Exchange Commission pursuant to an order granting
confidential treatment.
(6) Filed as an Exhibit to the Transition Report on Form 10-K for the year
ended December 31, 1993 filed with the Securities and Exchange
Commission on March 9, 1994.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1994 filed with the Securities and Exchange
Commission on March 31, 1995.
(8) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1995 filed with the Securities and Exchange
Commission on March 29, 1996.
(9) Filed as an Exhibit to Registration Statement (No. 333-09927) on Form
S-3 filed with the Securities and Exchange Commission on August 9,
1996.
(10) Filed as an Exhibit to the Form 10-Q for the quarter ended September
30, 1996 filed with the Securities and Exchange Commission on November
14, 1996.
(11) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1996 filed with the Securities and Exchange
Commission on March 31, 1997.
(12) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1997, filed with the Securities and Exchange
Commission on March 13, 1998.
(13) Filed as Exhibit A to the Proxy Statement for the 1998 Annual Meeting
of Stockholders.
(14) Filed as an Exhibit to the Annual Report on Form 10-K/A for the year
ended December 31, 1998, filed with the Securities and Exchange
Commission on March 19, 1999
(15) Filed as an Exhibit to the Annual Report on Form 10-K/A for the year
ended December 31, 1998, filed with the Securities and Exchange
Commission on August 6, 1999
(16) Filed as an Exhibit to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 8, 1999.
(17) Filed as an Exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1999, filed with the Securities and Exchange
Commission on March 15, 2000.
(18) Filed as an Exhibit to Amendment No. 1 to the Quarterly Report on Form
10-Q for the quarter ended June 30, 2000 filed with the Securities and
Exchange Commission on October 11, 2000.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K on November 16, 2000 regarding
positive squalamine clinical trial data results.
We filed a Current Report on Form 8-K on November 21, 2000 regarding the
appointment of Roy C. Levitt as President and Chief Executive Officer.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Genaera Corporation
/s/ Roy C. Levitt
Date: March 16, 2001 By: _________________________________
Roy C. Levitt, M.D.
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Each person whose signature appears below in so signing also makes,
constitutes and appoints Roy C. Levitt, President and Chief Executive Officer,
his true and lawful attorney-in-fact, in his name, place and stead to execute
and cause to be filed with the Securities and Exchange Commission any or all
amendments to this report.
Signature Title Date
--------- ----- ----
/s/ Michael R. Dougherty Chairman and Director March 16, 2001
______________________________________
Michael R. Dougherty
/s/ Bernard Canavan Director March 16, 2001
______________________________________
Bernard Canavan, M.D.
/s/ Zola P. Horovitz Director March 16, 2001
______________________________________
Zola P. Horovitz, Ph.D.
/s/ Roy C. Levitt President, Chief Executive March 16, 2001
______________________________________ Officer and Director
Roy C. Levitt, M.D. (Principal Executive
Officer)
/s/ Charles A. Sanders Director March 16, 2001
______________________________________
Charles A. Sanders, M.D.
/s/ Christopher P. Schnittker Vice President and Chief March 16, 2001
______________________________________ Financial Officer
Christopher P. Schnittker (Principal Financial and
Accounting Officer)
/s/ Robert F. Shapiro Director March 16, 2001
______________________________________
Robert F. Shapiro
/s/ James B. Wyngaarden Director March 16, 2001
______________________________________
James B. Wyngaarden, M.D.
/s/ Michael A. Zasloff Director March 16, 2001
______________________________________
Michael A. Zasloff, M.D., Ph.D.
33
GENAERA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Loss...................................................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Genaera Corporation:
We have audited the accompanying consolidated balance sheets of Genaera
Corporation (formerly Magainin Pharmaceuticals Inc.) and subsidiary as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, changes in stockholders' equity and comprehensive loss and cash
flows for each of the years in the three-year period ended December 31, 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Genaera
Corporation and subsidiary as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Princeton, New Jersey
February 14, 2001, except as to the first paragraph of Note 1 which is as of
March 9, 2001
F-2
GENAERA CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31,
------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 599 $ 2,435
Short-term investments (NOTE 6).......................... 18,434 8,209
Prepaid expenses and other............................... 345 128
-------- --------
Total current assets................................... 19,378 10,772
Fixed assets, net.......................................... 1,144 1,793
Other assets............................................... 179 166
-------- --------
Total assets......................................... $ 20,701 $ 12,731
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (NOTE 5)........... $ 2,093 $ 664
Notes payable (NOTE 6)................................... 2,500 2,500
Accrued development expense--short-term (NOTE 15)........ 1,392 --
-------- --------
Total current liabilities.............................. 5,985 3,164
Accrued development expense--long-term (NOTE 15)........... 1,967 2,962
Deferred rent.............................................. 43 53
Redeemable convertible preferred stock (liquidation value
of $1,233) (NOTE 7)....................................... 1,233 --
Commitments, contingencies and other matters...............
Stockholders' equity:
Preferred stock--$.001 par value; shares authorized--
9,211; 1.2 shares issued as redeemable convertible
preferred stock in 2000; no shares issued in 1999....... -- --
Common stock--$.002 par value; shares authorized--45,000;
shares issued and outstanding--32,393 and 26,943,
respectively (NOTE 8)................................... 65 54
Additional paid-in capital............................... 168,967 151,655
Accumulated other comprehensive income--unrealized gain
(loss) on investments................................... 9 (13)
Accumulated deficit...................................... (157,568) (145,144)
-------- --------
Total stockholders' equity............................. 11,473 6,552
-------- --------
Total liabilities and stockholders' equity........... $ 20,701 $ 12,731
======== ========
See accompanying notes to financial statements.
F-3
GENAERA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Revenues........................................ $ -- $ -- $ --
Costs and expenses:
Research and development...................... 10,074 9,876 21,456
General and administrative.................... 2,583 2,870 3,292
-------- -------- --------
12,657 12,746 24,748
Loss from operations............................ (12,657) (12,746) (24,748)
Interest income................................. 883 755 1,640
Interest expense................................ (605) (225) (196)
-------- -------- --------
Net loss........................................ (12,379) (12,216) (23,304)
Dividends on preferred stock.................... 45 -- --
-------- -------- --------
Net loss applicable to common stockholders...... $(12,424) $(12,216) $(23,304)
======== ======== ========
Net loss applicable to common stockholders per
share--basic and diluted....................... $ (0.42) $ (0.52) $ (1.05)
======== ======== ========
Weighted average shares outstanding--basic and
diluted........................................ 29,375 23,706 22,235
======== ======== ========
Pro forma amounts assuming the new revenue
recognition principle is applied retroactively:
Net loss...................................... $(12,379) $(11,058) $(21,263)
======== ======== ========
Net loss applicable to common stockholders.... $(12,424) $(11,058) $(21,263)
======== ======== ========
Net loss applicable to common stockholders per
share--basic and diluted..................... $ (0.42) $ (0.47) $ (0.96)
======== ======== ========
See accompanying notes to financial statements.
F-4
GENAERA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(In thousands)
Common Stock
-------------
Accumulated
Number Additional Other Total
of Paid-in Comprehensive Accumulated Stockholders
Shares Amount Capital Income (Loss) Deficit Equity
------ ------ ---------- ------------- ----------- ------------
Balance at December 31,
1997................... 21,980 $ 44 $144,444 $ 6 $(109,624) $ 34,870
Common stock issued
pursuant to research
and option
agreement............. 620 1 1,999 -- -- 2,000
Fair value of shares
issued to contract
manufacturer.......... 125 -- 859 -- -- 859
Exercise of stock
options and
compensation expense
under warrant and
option grants and
stock awards.......... 185 1 251 -- -- 252
Comprehensive loss:
Net loss............. -- -- -- -- (23,304) (23,304)
Carrying value
adjustment.......... -- -- -- 3 -- 3
------ ----- -------- ----- --------- --------
Total comprehensive
loss.................. -- -- -- -- -- (23,301)
------ ----- -------- ----- --------- --------
Balance at December 31,
1998................... 22,910 46 147,553 9 (132,928) 14,680
Exercise of stock
options, issuance of
stock and
compensation expense
under option grants
and stock awards...... 33 -- 195 -- -- 195
Common stock issued
pursuant to public
offering.............. 4,000 8 3,907 -- -- 3,915
Comprehensive loss:
Net loss............. -- -- -- -- (12,216) (12,216)
Carrying value
adjustment.......... -- -- -- (22) -- (22)
------ ----- -------- ----- --------- --------
Total comprehensive
loss.................. -- -- -- -- -- (12,238)
------ ----- -------- ----- --------- --------
Balance at December 31,
1999................... 26,943 54 151,655 (13) (145,144) 6,552
Exercise of stock
options and
compensation expense
under option grants
and stock awards...... 211 1 697 -- -- 698
Common stock issued
pursuant to
collaboration
agreement............. 1,086 2 4,945 -- -- 4,947
Common stock issued
pursuant to private
placement............. 4,153 8 11,670 -- -- 11,678
Dividends on preferred
stock................. -- -- -- (45) (45)
Comprehensive loss: --
Net loss............. -- -- -- -- (12,379) (12,379)
Carrying value
adjustment.......... -- -- -- 22 -- 22
------ ----- -------- ----- --------- --------
Total comprehensive
loss.................. -- -- -- -- -- (12,357)
------ ----- -------- ----- --------- --------
Balance at December 31,
2000................... 32,393 $ 65 $168,967 $ 9 $(157,568) $ 11,473
====== ===== ======== ===== ========= ========
See accompanying notes to financial statements.
F-5
GENAERA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-----------------------------
2000 1999 1998
-------- -------- ---------
Cash Flows From Operating Activities:
Net loss...................................... $(12,379) $(12,216) $(23,304)
Adjustments to reconcile net loss to net cash
used in operating activities:
Fair value of stock, options and warrants
issued...................................... -- -- 859
Depreciation and amortization................ 920 1,004 1,140
Amortization of investment
discounts/premiums.......................... (654) (493) (782)
Compensation expense on option grants and
equity awards............................... 248 195 114
Changes in operating assets and liabilities:
Prepaid expenses and other................... (230) (39) 298
Accounts payable and accrued expenses........ 1,429 (7,989) 2,709
Accrued development expenses................. 397 2,962 --
Deferred rent................................ (10) (5) (38)
-------- -------- ---------
Net cash used in operating activities........... (10,279) (16,581) (19,004)
-------- -------- ---------
Cash Flows From Investing Activities:
Purchase of investments....................... (30,574) (31,780) (45,317)
Proceeds from maturities of investments....... 21,025 41,418 66,300
Proceeds from sale of investments............. -- 1,000 --
Capital expenditures.......................... (271) (32) (1,081)
-------- -------- ---------
Net cash provided by (used in) investing
activities..................................... (9,820) 10,606 19,902
-------- -------- ---------
Cash Flows From Financing Activities:
Payments of notes payable..................... -- (2,500) --
Proceeds from notes payable................... -- 2,500 1,000
Payments on capitalized equipment leases...... -- -- (28)
Proceeds from issuance of redeemable
convertible preferred stock.................. 1,188 -- --
Net proceeds from issuance of common stock.... 16,625 3,915 2,000
Proceeds from exercise of options............. 450 -- 138
-------- -------- ---------
Net cash provided by financing activities....... 18,263 3,915 3,110
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... (1,836) (2,060) 4,008
Cash and cash equivalents at beginning of
period......................................... 2,435 4,495 487
-------- -------- ---------
Cash and cash equivalents at end of period...... $ 599 $ 2,435 $ 4,495
======== ======== =========
Supplemental Cash Flow Information:
Cash paid during the period for interest...... $ 205 $ 223 $ 185
======== ======== =========
See accompanying notes to financial statements.
F-6
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. The Company
Genaera Corporation ("Genaera" or the "Company"--formerly Magainin
Pharmaceuticals Inc.), a Delaware corporation, was incorporated on June 29,
1987. Genaera is a biopharmaceutical company committed to developing medicines
for serious diseases from genomics and natural products. The Company's research
and development efforts are focused on anti-angiogenesis, obesity, infectious
diseases and respiratory diseases. On March 9, 2001, the Company changed its
name from Magainin Pharmaceuticals Inc. to Genaera Corporation.
The Company is managed and operated as one business. A single management
team that reports to the Chief Executive Officer comprehensively manages the
entire business. Accordingly, the Company does not prepare discrete financial
information with respect to separate product areas or by location, and does not
have separately reportable segments as defined by Statement of Financial
Accounting Standards ("SFAS") No. 131.
NOTE 2. Summary of Significant Accounting Policies
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and related notes. Actual results could differ from those estimates.
Cash and Cash Equivalents--The Company considers all highly liquid
investment instruments purchased with a maturity of three months or less to be
cash equivalents.
Investments--Investments purchased with a maturity of more than three
months, and which mature less than twelve months from the balance sheet date,
are classified as short-term investments. Long-term investments are those with
maturities greater than twelve months from the balance sheet date. The Company
generally holds investments to maturity, however, since the Company may, from
time to time, sell securities to meet cash requirements, the Company classifies
its investments as available-for-sale as defined by SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Available-for-sale
securities are carried at market value with unrealized gains and losses
reported as a separate component of stockholders' equity. Gross realized gains
and losses on the sales of investment securities are determined on the specific
identification method and are included in interest income.
Fixed Assets and Depreciation--Fixed assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets including: three (3) years for computers/software, five (5) years
for laboratory and office equipment and seven (7) years for furniture and
fixtures. Equipment under capital leases and leasehold improvements are
amortized using the straight-line method over the term of the respective lease,
or their estimated useful lives, whichever is shorter. Expenditures for
maintenance and repairs are charged to expense as incurred.
Revenue Recognition--In December 1999, the staff of the U.S. Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain of
the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements, including the recognition of non-
refundable fees received upon entering into arrangements ("up-front fees"). In
previous years, prior to SAB 101, the Company recognized up-front fees in the
period in which they were received. Post implementation of SAB101, any revenues
from research and development arrangements are recognized in accordance with
the terms of the related agreements, either as services are performed or as
milestones are achieved. Revenues related to up-front fees are now deferred and
recognized over specified future performance periods.
F-7
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company implemented SAB101, as amended, effective January 1, 2000. The
adoption of this new accounting principle did not have an impact on the
Company's results of operations for the year ended December 31, 2000. For the
year ended December 31, 1997, the Company recognized revenues of $5,000,000
related to a non-refundable, up-front license fee received in connection with a
collaboration agreement with GlaxoSmithKline for LOCILEX(TM) Cream. On a pro
forma basis under SAB101, this fee would have been deferred and amortized over
an estimated development period of approximately 29 months. In 1999, as a
result of the Food and Drug Administration's ("FDA") decision not to approve
LOCILEX(TM) Cream, the Company was no longer required to perform development
activities pursuant to this agreement. The pro forma effects of retroactive
application of this new revenue recognition principle on net loss and net loss
applicable to common stockholders, and related per share amounts, for the years
ended December 31, 1999 and 1998 are presented in the accompanying consolidated
statements of operations.
Research and Development--Research and development costs are expensed as
incurred.
Patent Costs--Patent-related costs are expensed as incurred.
Lease Expense--Expense related to the facility lease is recorded on a
straight-line basis over the lease term. The difference between rent expense
incurred and the amount paid is recorded as deferred rent and is amortized over
the lease term.
Stock Based Compensation--The Company accounts for stock-based employee
compensation under Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Effective January 1, 1996, the Company adopted the disclosure-only provisions
of SFAS No. 123, Accounting for Stock-Based Compensation.
Income Taxes--The Company accounts for income taxes using the asset and
liability method as prescribed by SFAS No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits which are
not expected to be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period in which tax rate changes
are enacted.
Loss Per Share--The Company calculates loss per share under the provisions
of SFAS No. 128, Earnings Per Share. SFAS No. 128 requires a dual presentation
of "basic" and "diluted" loss per share on the face of the income statement.
Basic loss per share is computed by dividing the net loss by the weighted
average number of shares of common stock outstanding during each period.
Diluted loss per share includes the dilutive effect, if any, from the potential
exercise or conversion of securities, such as stock options and warrants, which
would result in the issuance of shares of common stock. Basic and diluted loss
per share amounts are the same because the Company reported a loss for all
periods presented.
Comprehensive Income--SFAS No. 130, Reporting Comprehensive Income,
establishes standards for the reporting of comprehensive income and its
components. Comprehensive income consists of reported net income or loss and
"other comprehensive income" (i.e. other gains and losses affecting
stockholders' equity that, under generally accepted accounting principals, are
excluded from net income or loss as reported on the statement of operations).
With regard to the Company, other comprehensive income consists of unrealized
gains and losses on marketable securities. The adoption of SFAS No. 130 affects
only the presentation of the Company's balance sheet and statements of changes
in stockholders' equity and does not affect the Company's reported results of
operations or cash flows.
F-8
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3. Investments
The Company invests in securities of the U.S. Treasury and U.S. government
agencies. Excess cash is invested on a short-term basis in U.S. government-
based money market funds. The Company had an unrealized gain of $9,000 and an
unrealized loss of $13,000 at December 31, 2000 and 1999, respectively. The
Company has not realized any losses on its investments during the years ended
December 31, 2000, 1999 or 1998.
NOTE 4. Fixed Assets
Fixed assets are stated at cost and are summarized as follows (in
thousands):
December 31, December 31,
2000 1999
------------ ------------
Laboratory and office equipment................... $ 3,536 $ 3,298
Leasehold improvements............................ 1,149 2,908
------- -------
4,685 6,206
Less accumulated depreciation and amortization.... (3,541) (4,413)
------- -------
$ 1,144 $ 1,793
======= =======
NOTE 5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in
thousands):
December 31, December 31,
2000 1999
------------ ------------
Accounts payable................................... $ 190 $164
Manufacturing development costs.................... 710 40
Clinical and regulatory costs...................... 444 161
Professional fees.................................. 428 226
Preclinical costs.................................. 222 17
Other.............................................. 99 56
------ ----
$2,093 $664
====== ====
NOTE 6. Note Payable
The Company refinanced its $2,500,000 note payable with the same bank in the
second quarter of 2000. Under the terms of this arrangement, the Company makes
monthly interest-only payments at an annual rate of 9.125%, with principal due
in June 2001. The Company maintains cash and investments of approximately
$2,862,000 as collateral for the note payable. The Company's current intention
is to refinance this loan prior to its maturity. Interest expense related to
this note payable for the years ended December 31, 2000, 1999 and 1998 was
approximately $208,000, $190,000 and $183,000, respectively.
NOTE 7. Preferred Stock
The Company's certificate of incorporation provides the board of directors
the power to issue shares of preferred stock without stockholder approval. This
preferred stock could have voting rights, including voting rights that could be
superior to that of the Company's common stock, and the board of directors has
the power to determine these voting rights.
F-9
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 2000, the Company designated 80,000 shares of its previously
authorized 9,211,031 shares of preferred stock, par value of $.001 per share,
as Series A non-voting preferred stock (the "Series A Preferred Stock"). The
Series A Preferred Stock is convertible, in whole or in part, at the Company's
(subject to defined limitations) or holder's option, into shares of the
Company's common stock at a conversion rate determined by dividing the original
issue price of $1,000 per share ("Original Issue Price") by the 5-day average
closing price of the common stock as of the conversion date. Shares of the
Series A Preferred Stock issued before May 10, 2005 are convertible at any one
date during the six-month period beginning on May 10, 2005. Shares of the
Series A Preferred Stock issued on or after May 10, 2005 are convertible at any
one date during the six-month period beginning on December 31, 2008. In
addition, the Series A Preferred Stock shall also be convertible at the
holder's option after November 10, 2000 (1) in the event of a merger,
consolidation or sale of substantially all of the assets of the Company or (2)
at any time following the first date when the total number of common shares
outstanding, on a fully-diluted and as-converted basis, multiplied by the
preceding 10-day average closing price of such date is less than 500% of the
aggregate Original Issue Price plus accrued and unpaid cumulative dividends on
the Series A Preferred Stock. In any event, the aggregate number of common
shares issued upon conversion of the shares of Series A Preferred Stock shall
not exceed 5,388,595 shares nor shall such aggregate conversions result in
Genentech beneficially owning more than 10% of the Company's common stock. In
the event of a conversion which would exceed these limits, the Company would be
required to redeem such shares at a cash redemption price of $1,000 per share
plus accrued and unpaid cumulative dividends to the date of conversion. The
Series A Preferred Stock may also be redeemed, in whole or in part, at any time
at the Company's option at a cash redemption price of $1,000 per share plus
accrued and unpaid cumulative dividends to the date of redemption. The Series A
Preferred Stock ranks senior to the Company's common stock as to liquidation
and dividend rights. In the event of any liquidation, dissolution or winding up
of the Company, the Series A Preferred Stock has a liquidation preference of
$1,000 per share plus accumulated and unpaid cumulative dividends to the date
of liquidation. Cumulative preferred dividends under the Series A Preferred
Stock are payable in arrears on a quarterly basis at an annual rate of the
prime rate plus 2%.
In connection with an agreement with Genentech, Inc. ("Genentech") (see NOTE
12), 500 shares of Series A Preferred Stock were issued in May 2000. In
November 2000, the Company issued 688 of its Series A Preferred Stock to
Genentech for $688,000 which represented further development funding. Preferred
dividends of $45,000 have been accrued as of December 31, 2000 on the Series A
Preferred Stock.
NOTE 8. Common Stock
In January 1998, pursuant to an arrangement with a contract manufacturer,
the Company issued to such manufacturer 125,000 shares of common stock with a
fair value of $6.125 per share. In connection therewith, the Company recorded a
non-cash charge to earnings of $859,000.
In December 1998, pursuant to a collaboration, the Company sold 620,540
shares of common stock to Genentech, with proceeds to the Company of
approximately $2,000,000.
In October 1999, the Company completed a public offering of 4,000,000 shares
of its common stock with proceeds to the Company (after offering expenses) of
approximately $3,915,000.
In May 2000, the Company issued 1,085,973 shares of its common stock to
Genentech for approximately $5,000,000 (see NOTE 12).
In August 2000, the Company sold 4,153,196 shares of its common stock,
through a private placement, at a price of $3.00 per share. Net proceeds to the
Company from the offering totaled approximately $11,678,000, after offering
costs, which included a cash fee paid and warrants (see NOTE 9).
F-10
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9. Warrants
In connection with a 1991 credit agreement with certain stockholders, the
Company granted warrants to the lenders to purchase an aggregate of 250,000
shares of common stock at $8 per share. These warrants expire in 2001. At
December 31, 2000, 229,739 of these warrants are outstanding.
In connection with its August 1996 private placement, the Company issued
common stock, together with warrants to purchase 1,011,896 shares of the
Company's common stock. The warrants contain provisions to decrease the
exercise price and increase shares under certain circumstances. Such
circumstances include the issuance of shares of common stock by the Company for
a consideration per share less than the exercise price of the warrants, and the
issuance by the Company of securities convertible into shares of common stock
for which the exercise or conversion price is less than the exercise price of
the warrants. Warrants to purchase 1,242,153 shares of common stock at prices
ranging from $5.06 to $6.79 per share are currently exercisable.
In connection with its August 2000 private placement, the Company granted to
the placement agent warrants to purchase 167,166 shares of the Company's common
stock at an exercise price of $3.50 per share. These warrants expire on August
17, 2007 and are subject to adjustment under certain circumstances. Such
circumstances include the issuance of shares of common stock by the Company for
a consideration per share less than the exercise price of the warrants, and the
issuance by the Company of securities convertible into shares of common stock
for which the exercise or conversion price is less than the exercise price of
the warrants. All such warrants are currently exercisable.
NOTE 10. Common Stock Options and Restricted Common Stock Awards
In May 1991, the stockholders approved the 1990 Stock Option Plan (the "1990
Plan") which provides for the granting of options for the purchase of up to
160,000 shares of common stock. In May 1996, the stockholders approved the
amended 1992 Stock Option Plan (the "1992 Plan") which provides for the
granting of options for the purchase of up to 2,500,000 shares of common stock.
In May 1998, the stockholders approved the 1998 Equity Compensation Plan (the
"1998 Plan") which provides for the granting of options and stock awards of up
to 1,500,000 shares of common stock.
The plans provide for the granting of incentive stock options and
nonqualified stock options and are administered by a committee of the Company's
board of directors. The committee has the authority to determine the term
during which an option may be exercised (provided that no option may have a
term of more than 10 years), the exercise price of an option, and the rate at
which options may be exercised. Incentive stock options may be granted only to
employees of the Company. Nonqualified stock options may be granted to
employees, directors or consultants of the Company. For nonqualified stock
options under the 1992 and 1998 Plans and incentive stock options, the exercise
price cannot be less than the fair market value of the underlying common stock
on the date of the grant.
In addition to the shares of common stock issuable upon exercise of options
granted under the Company's stock option plans, 485,612 shares of common stock
are issuable upon exercise of outstanding options granted pursuant to written
agreements. The exercise price for these options was set by the Board of
Directors, or a committee designated by the Board, based upon an evaluation of
the fair market value of the Company's common stock on the date of grant.
F-11
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's stock options as of December 31,
2000, 1999 and 1998, and changes during the years ended on those dates, is
presented below (in thousands, except per share data):
2000 1999 1998
------------------------ ------------------------ ------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ---------------- ------ ----------------
Outstanding at beginning
of year................ 3,662 $4.70 3,588 $5.94 2,974 $6.33
Granted................. 760 $3.89 833 $1.96 976 $4.29
Exercised............... (171) $2.63 (1) $0.07 (176) $0.78
Forfeited............... (571) $5.67 (758) $7.46 (186) $8.40
----- ----- -----
Outstanding at end of
year................... 3,680 $4.51 3,662 $4.70 3,588 $5.94
===== ===== =====
Exercisable at end of
year................... 2,109 $5.28 2,141 $4.71 2,022 $5.76
===== ===== =====
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 2000 (in thousands, except per share data):
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted Average
Shares Remaining Weighted Average Shares Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------ ----------- ---------------- ---------------- ----------- ----------------
$1.03-$ 2.00............ 845 3.7 Years $ 1.63 580 $ 1.86
$2.72-$ 3.25............ 894 8.6 Years $ 3.01 261 $ 3.10
$3.47-$ 4.63............ 862 7.3 Years $ 4.14 345 $ 3.93
$5.00-$ 9.13............ 758 5.5 Years $ 7.19 618 $ 7.36
$9.88-$16.75............ 321 5.4 Years $10.93 305 $10.95
----- -----
$1.03-$16.75............ 3,680 6.3 Years $ 4.51 2,109 $ 5.28
===== =====
The Company applies APB Opinion 25 and related Interpretations in accounting
for options. Accordingly, no compensation cost has been recognized for employee
stock option grants. Had compensation cost for employee stock option grants
been determined based on the fair value at the grant dates for awards
consistent with the method of SFAS No. 123, the Company's net loss and net loss
per share would have been increased to the pro forma amounts indicated below
(in thousands, except per share data):
2000 1999 1998
-------- -------- --------
Net loss applicable to common stockholders:
As reported.............................. $(12,424) $(12,216) $(23,304)
Pro forma................................ $(14,991) $(14,966) $(26,208)
Net loss applicable to common stockholders
per share--basic and diluted:
As reported.............................. $ (0.42) $ (0.52) $ (1.05)
Pro forma................................ $ (0.51) $ (0.63) $ (1.18)
F-12
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The resulting effect on pro forma net loss and pro forma net loss per share
disclosed above may not be representative of the effects on a pro forma basis
in future years. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions:
2000 1999 1998
--------- --------- ---------
Range of risk free interest rates............ 5.4%-6.7% 5.0%-6.4% 4.4%-5.7%
Dividend yield............................... --% --% --%
Volatility factor............................ 100% 86% 78%
Weighted average expected life of options (in
years)...................................... 7.3 6.0 6.0
Weighted average fair value of options
granted
during the year............................. $3.32 $1.54 $3.04
The 1998 Plan also provides for the issuance of common stock awards, up to a
maximum of 375,000 shares. Such awards shall be made subject to such
performance requirements, vesting provisions, transfer restrictions or other
restrictions and conditions as a committee of the Company's Board of Directors
may determine. As of December 31, 2000, a total of 206,000 shares have been
awarded under the 1998 Plan, vesting over a four year period from the award
date. The cost of these awards will be recognized as expense over the vesting
period. As of December 31, 2000, 71,125 shares have been issued pursuant to the
vesting of these awards. Compensation expense related to these stock awards for
the years ended December 31, 2000, 1999 and 1998 was approximately $194,000,
$158,000 and $76,000, respectively.
The Company granted options to purchase 25,000, 15,000 and 10,000 shares of
the Company's common stock to consultants in the years ended December 31, 2000,
1999 and 1998, respectively. Compensation expense related to these options for
the years ended December 31, 2000, 1999 and 1998 was approximately $11,000,
$37,000 and $31,000, respectively. The compensation expense for options granted
to consultants is recognized over the respective service periods ranging up to
one year or in accordance with vesting provisions. The amount of compensation
expense recognized in future years is subject to adjustment based upon changes
in the price of the Company's common stock and other measures of fair value.
The Company recorded compensation expense of approximately $18,000 for the
year ended December 31, 2000 related to a former officer who entered into a
consulting contract with the Company subsequent to their employment and
retained unvested options to purchase 97,500 shares of the Company's common
stock after their transition to non-employee status. The amount of compensation
expense recognized in future years on these unvested options is subject to
adjustment based upon changes in the price of the Company's common stock and
other measures of fair value.
NOTE 11. Income Taxes
As of December 31, 2000 the Company had approximately $88,470,000 of net
operating loss ("NOL") carry-forwards for federal income tax purposes (expiring
in years 2003 through 2020). In addition, the Company had NOL carryforwards for
state income tax purposes of approximately $51,915,000 (expiring in years 2005
through 2010). Pennsylvania has a $2,000,000 annual limitation on the
utilization of NOL carryforwards, thus the Company is not likely to utilize
most of its state NOL carryforwards. The Company also had approximately
$6,238,000 of research and development tax credits carryforwards available to
offset future federal income tax liability (expiring in years 2005 through
2020). The NOL carryforward differs from the accumulated deficit principally
due to differences in the recognition of certain expenses between financial and
federal tax reporting.
F-13
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the Tax Reform Act of 1986, the utilization of a corporation's NOL
carryforward and research and development tax credits are limited following a
change in ownership of greater than 50% within a three year period. Due to the
Company's prior equity transactions, the Company's net operating loss and tax
credit carryforwards may be subject to an annual limitation generally
determined by multiplying the market value of the Company on the date of the
ownership change by the federal long-term tax exempt rate. Any amount exceeding
the annual limitation may be carried forward to future years for the balance of
the NOL and tax credit carryforward period.
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due
to the uncertainty of the Company's ability to realize the benefit of the
deferred tax asset, the deferred tax assets are fully offset by a valuation
allowance at December 31, 2000 and 1999. The net change in the valuation
allowance for deferred tax assets at December 31, 2000 and 1999 was an increase
of $6,177,000 and $8,417,000, respectively.
Significant components of the net deferred tax assets as of December 31,
2000 and 1999 consists of the following (in thousands):
2000 1999
-------- --------
Deferred tax assets:
Net operating losses................................... $ 36,150 $ 30,371
Research credits....................................... 6,238 6,132
Capitalized research and development................... 30,915 30,413
Accrued expenses, reserves and other................... 1,272 1,453
Depreciation........................................... 315 344
-------- --------
74,890 68,713
Valuation allowance...................................... (74,890) (68,713)
-------- --------
Deferred tax assets, net............................... $ -- $ --
======== ========
NOTE 12. Collaborative Agreements
In February 1997, the Company entered into a development, supply and
distribution agreement (the "GlaxoSmithKline Agreement") in North America with
GlaxoSmithKline for LOCILEX(TM) Cream. GlaxoSmithKline has paid the Company
$10,000,000 under this agreement. The Company had hoped to commercialize
LOCILEX(TM) Cream in the near-term. However, with the FDA's decision not to
approve LOCILEX(TM) Cream, near-term commercialization will not occur, and the
Company will generate no revenues from LOCILEX(TM) Cream in the near future.
The GlaxoSmithKline Agreement also gives GlaxoSmithKline rights to terminate
the arrangement, and, under certain conditions, the right to negotiate for
rights to another Genaera product development candidate. GlaxoSmithKline
remains our exclusive sales, marketing and distribution partner for the North
American territory for LOCILEX(TM) Cream.
In December 1998, the Company entered into a collaborative research and
option agreement with Genentech relating to a protein therapeutic in asthma.
Under this agreement, the Company and Genentech conducted a collaborative
program to evaluate the utility of a blocking antibody to IL9 in suppressing
the asthmatic response. Genentech made an initial equity investment in the
Company of $2,000,000 in 1998, and had an option to enter into a development
and commercialization agreement with the Company.
F-14
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 2000, the Company entered into a research, development and
commercialization collaboration agreement (the "Collaboration Agreement") with
Genentech, which replaced the December 1998 collaboration agreement. The
Company and Genentech simultaneously executed a Stock Purchase Agreement (the
"Stock Purchase Agreement") pursuant to which the Company received from
Genentech approximately $5,000,000 in exchange for the issuance of 1,085,973
shares of its common stock and $500,000 representing the issuance of 500 shares
of its Series A Preferred Stock (see NOTE 7).
In December 2000, Genentech elected to terminate the License and
Collaboration Agreement covering the IL9 antibody development program and
related respiratory technology. As a result, all licensed technology under this
agreement, exclusive of Genentech-improved technology, will be returned to the
Company.
The Company has rights to certain patents and patent applications under
license agreements pursuant to which the Company expects to owe royalties on
sales of products that incorporate any issued patent claims. Additionally,
certain of these agreements also provide that if the Company elects not to
pursue the commercial development of any licensed technology, or does not
adhere to an acceptable schedule of commercialization, then the Company's
exclusive rights to such technology would terminate. The Company also funds
research at certain institutions, and these relationships may provide the
Company with an option to license any results of the research.
NOTE 13. 401(k) Plan
The Company maintains a 401(k) retirement plan available to all full-time,
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company, at its discretion, may make certain contributions to
the plan. No such contributions have been made during the years ended December
31, 2000, 1999 or 1998.
NOTE 14. Fair Value of Financial Instruments
The following disclosures of estimated fair value were determined by
management, using available market information and valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair market value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize on
disposition of the financial instruments. The use of different market
assumptions or estimation methodologies may have an effect on the estimated
fair value amounts.
Cash equivalents, accounts payable, accrued expenses and investments are
carried at amounts which reasonably approximate their fair values due to the
short term nature of these instruments. The estimated fair value of the
Company's note payable is estimated to be approximately equal to its carrying
value of $2,500,000 at December 31, 2000.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 2000. Although
management is not aware of any factors that would significantly affect the
reasonable fair value amounts, such amounts have not been comprehensively
revalued for the purposes of these financial statements since December 31,
2000, and current estimates of fair value may differ from the amounts presented
herein.
F-15
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15. Commitments, Contingencies and Other Matters
Rent
The Company has entered into two operating leases for its laboratory and
corporate office facilities. One facility is subleased to a third party, which
expires in January 2001. Minimum annual rent payments through 2002 are as
follows (in thousands):
Year Ended
December 31,
------------
2001................................................................. $327
2002................................................................. 299
----
$626
====
The leases provide for escalations relating to increases in real estate
taxes and certain operating expenses. Under the Company's sub-lease, which
expires in January 2001, minimum annual lease payments are expected to be
$10,000 for the year ended December 31, 2001.
Rent expense was approximately $357,000, $440,000 and $394,000, for the
years ended December 31, 2000, 1999 and 1998, respectively.
Manufacturing
In January 1999 and prior, the Company entered into several agreements with
Abbott Laboratories providing for the purchase of approximately $10,000,000 of
bulk drug substance to be used in the manufacturing process for LOCILEX(TM)
Cream. As FDA approval of LOCILEX(TM) Cream did not occur, the Company
renegotiated this agreement with Abbott in September 1999, paying Abbott
$4,200,000 at that time and receiving partial delivery of material. An
additional $3,400,000 is due to Abbott and payable if the Company receives in
excess of $10,000,000 of additional funds (as defined in the agreement) in any
year beginning in 2000, in which case the Company must pay 15% of such excess
over $10,000,000 to Abbott. The Company recorded this conditional obligation as
a liability in 1999 at its then present value. As a result of the Company's
financing activities for the year ended December 31, 2000 (see NOTES 7 and 8)
and other cash inflows, $1,392,000 of this liability becomes payable to Abbott
on March 1, 2001 and thus has been included in current liabilities at December
31, 2000. The remaining amount is included in long-term liabilities as of
December 31, 2000.
Legal Proceedings
The Company is involved in various routine litigation incidental to its
business. The Company believes that the disposition of such routine litigation
will not have a material adverse effect on the financial position or results of
operations of the Company.
Liquidity
The Company has not generated any revenues from product sales, and has
funded operations primarily from the proceeds of public and private placements
of securities. Substantial additional financing will be required by the Company
to fund its continuing research and development activities. No assurance can be
given that any such financing will be available when needed or that the
Company's research and development efforts will be successful.
In the absence of raising additional funds or significantly reducing
expenses, the Company does not have sufficient resources to sustain operations
beyond 2001. The Company regularly explores alternative means of
F-16
GENAERA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
financing its operations and seeks funding through various sources, including
public and private securities offerings and collaborative arrangements with
third parties. The Company currently does not have any commitments to obtain
additional funds, and may be unable to obtain sufficient funding in the future
on acceptable terms. If the Company cannot obtain funding, it will need to
delay, scale back or eliminate research and development programs or enter into
collaborations with third parties to commercialize potential products or
technologies that it might otherwise seek to develop or commercialize
independently, or seek other arrangements. If the Company engages in
collaborations, it will receive lower consideration upon commercialization of
such products than if it had not entered into such arrangements, or if it
entered into such arrangements at later stages in the product development
process.
NOTE 16. Quarterly Results (Unaudited)
The following tables contain selected unaudited Statement of Operations
information for each quarter of the fiscal years ended December 31, 2000 and
1999 (in thousands, except per share amounts). The Company believes that the
following information reflects all normal recurring adjustments necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any
future period.
Year Ended December 31, 2000
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues.................................. $ -- $ -- $ -- $ --
======= ======= ======= =======
Gross profit.............................. -- -- -- --
======= ======= ======= =======
Net loss.................................. $(2,424) $(3,056) $(3,309) $(3,590)
======= ======= ======= =======
Net loss applicable to common
stockholders............................. $(2,424) $(3,063) $(3,325) $(3,612)
======= ======= ======= =======
Net loss applicable to common stockholders
per share--basic and diluted............. $ (.09) $ (.11) $ (.11) $ (.11)
======= ======= ======= =======
Weighted average shares outstanding--basic
and diluted.............................. 26,996 27,743 30,328 32,390
======= ======= ======= =======
Year Ended December 31, 1999
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues.................................. $ -- $ -- $ -- $ --
======= ======= ======= =======
Gross profit.............................. -- -- -- --
======= ======= ======= =======
Net loss.................................. $(3,149) $(3,864) $(2,743) $(2,460)
======= ======= ======= =======
Net loss per share--basic and diluted..... $ (.14) $ (.17) $ (.12) $ (.09)
======= ======= ======= =======
Weighted average shares outstanding--basic
and diluted.............................. 22,912 22,912 22,912 26,064
======= ======= ======= =======
F-17