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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[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 NO. 0-19591
EPIMMUNE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0245076
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5820 NANCY RIDGE DRIVE, SAN DIEGO, CALIFORNIA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 860-2500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to 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. Yes [ ] No [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of March 15, 2001 was approximately $15.9
million, based on the closing price on that date of Common Stock on the Nasdaq
National Stock Market.*
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 8,912,715 as of March 15, 2001.
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* Excludes 3,614,681 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds 10% of the Common Stock
outstanding on March 15, 2001. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Registrant, or that such person is controlled by or under common control
with the Registrant.
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include,
without limitation, those discussed in the description of our business below and
the sections entitled "Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," as well as those discussed in
any documents incorporated herein by reference.
Unless otherwise indicated, all references to "Cytel" are to Cytel
Corporation. Epimmune Inc. was a majority-owned subsidiary of Cytel until July
1, 1999, at which time Cytel and Epimmune Inc. merged. All references to "we,"
"us" or "our company" are to the combined entity of Cytel and Epimmune Inc.
Epimmune(TM), EIS(TM), EpiGene(TM) and PADRE(TM) are trademarks and
ImmunoSense is a service mark of the company.
OVERVIEW
We are developing novel vaccines for infectious diseases and cancer,
building on our expertise and intellectual property in the field of T-cell
recognition and activation. We are in preclinical development with therapeutic
vaccines for breast, colon, lung and prostate cancers, hepatitis C, hepatitis B
and HIV, and prophylactic vaccines for hepatitis C, HIV and malaria. We expect
that a therapeutic vaccine targeting HIV will be the first of our candidate
vaccines to enter human clinical trials. We expect initial clinical studies for
this vaccine candidate to be initiated by late 2001 or early 2002.
Eliciting a strong cellular, or T cell, immune response is crucial for
treating and preventing certain infectious diseases and tumors. Clinicians have
shown that the cellular immune response is associated with viral clearance and
tumor regression in the subset of patients who spontaneously clear chronic viral
infection and in cancer patients who respond to immunotherapy. This successful
cellular immune response includes activity of cytotoxic T cells, or CTLs, and
helper T cells, or HTLs, which are directed toward specific antigen fragments,
known as epitopes.
Our vaccines are based on proprietary technology, known as Epitope
Identification System or EIS, which enables the rapid identification of novel
epitopes that can stimulate specific CTL and HTL immune responses. These
epitopes can be identified from any protein or gene sequence and, to date, we
have identified, evaluated and included in our patent applications more than
50,000 epitopes, and a small subset of these epitopes are used in our candidate
vaccines. Furthermore, EIS enables rapid immunological evaluation of the vast
quantities of genomic data now available, making it feasible to develop new
vaccine candidates for complex diseases such as tuberculosis, malaria, herpes
simplex virus and chlamydia.
Our approach of using epitopes in vaccine development offers several
distinct advantages over traditional vaccine approaches.
- First, we select epitopes from conserved regions of viral or
tumor-associated antigens, reducing the likelihood that the virus or
tumor will be able to change or mutate in a way that makes the vaccine
less effective. By comparison, there is evidence that the immune response
elicited by vaccines that use whole antigens is directed largely toward
variable regions of the antigen, allowing mutations that reduce the
efficacy of these vaccines.
- Second, our approach allows us to combine selected epitopes (CTL and HTL)
and to alter their composition to enhance immunogenicity allowing for
manipulation of the immune response, as appropriate, for the target
disease. Similar engineering of the response is not possible with
traditional approaches that use whole antigens.
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- Third, a major benefit of epitope-based, immune-stimulating vaccines is
their safety. The possible pathological side effects caused by infectious
agents or whole protein antigens, which might have their own intrinsic
biological activity, is eliminated.
- Finally, our approach allows us to develop vaccines that target multiple
antigens by combining multiple epitopes into a single vaccine. This
approach offers a simple alternative to traditional complex vaccines and
enables the design of a well-characterized product, which contains
minimal extraneous biological material.
Based on our scientists' discoveries in the field, we believe we have
established a broad intellectual property position directed toward the methods
of epitope identification, epitope compositions and epitope uses in vaccines and
diagnostics products. Our core business is the development of vaccines to treat
and prevent infectious diseases and cancer. All non-vaccine operations of Cytel
have been sold or discontinued.
THE IMMUNE RESPONSE
The immune system is the body's natural defense mechanism to prevent and
combat disease. The immune system differentiates between normal tissue, or self,
and diseased tissue, or non-self. When a competent immune system recognizes
diseased cells, a series of steps ensues resulting in the elimination of these
cells. There are two types of immune response: antibody-based and cellular or T
cell-based.
The antibody immune response is primarily involved in the prevention of
diseases. Antibodies are proteins produced by the body in response to disease
causing agents known as pathogens. Antibodies bind to pathogens, including
viruses and bacteria, and block their ability to infect cells. Preventive
vaccines that trigger an antibody-based immune response have been very
successful in reducing the incidence of several deadly diseases, including
smallpox, polio and measles. These vaccines consist of weakened or attenuated
pathogens that stimulate the production of antibodies. However, these types of
vaccines have not been effective in the prevention or treatment of many serious
diseases, including cancers and infectious diseases.
The cellular, or T cell-based, immune response is primarily involved in
combating cancers and infectious diseases. T cells are specialized white blood
cells that are normally produced by the body to kill cancer cells and infected
cells. The cellular immune response begins when specialized immune cells, called
antigen-presenting cells, capture antigens, which are identifying structural
components of cancers and pathogens. Once inside antigen-presenting cells,
antigens are broken down into small fragments, called epitopes, that are
subsequently displayed on the surface of the antigen-presenting cell. T cells
continually scan the surface of antigen-presenting cells for epitopes bound to a
cell surface receptor referred to as the major histocompatibility complex, or
MHC. If T cells recognize displayed epitopes as foreign or non-self, the T cells
replicate rapidly and then search for and kill other diseased cells displaying
those same epitopes.
Significant scientific evidence suggests that cancers and infections
trigger a T cell-based immune response during the initial course of disease
progression. This immune response alone, however, is often not sufficient to
eradicate the disease. Studies have analyzed the effective cellular response in
individuals who spontaneously clear chronic viral infection, and in cancer
patients who respond to immunotherapy. This effective cellular response is
comprised of CTL and HTL directed toward multiple discrete and specific
antigen-specific epitopes. Vaccines attempt to recreate this successful
multi-specific CTL and HTL response.
To date, efforts to develop vaccines that sufficiently stimulate these
multi-specific T cells responses to selectively and accurately target and kill
diseased cells have failed due to one or both of the following:
- the inability of drug developers to identify the appropriate antigens
that can induce the appropriate immune response; and
- the inability to present these relevant antigens to activate T cell
responses that are sufficiently potent and broad to selectively destroy
diseased cells.
We believe our technology and vaccine candidates specifically address these
issues.
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OUR TECHNOLOGY AND VACCINE DEVELOPMENT PLATFORMS
T Cell Vaccines
Our approach to T cell vaccine development is to rationally create a
multi-specific cellular response, causing the immune system to be stimulated
specifically against multiple, select epitopes, which meet stringent criteria.
We have developed EIS to rapidly identify these antigen-specific epitopes from
the genetic information of tumor-associated antigens or infectious agents (such
as viruses, bacteria and parasites).
Epitope Identification System (EIS(TM)). We developed and optimized EIS
based on extensive work over the past ten years in the field of T cell
recognition and stimulation. We have issued patents and patent applications that
cover the methods employed by EIS, as well as the epitopes we identify using
EIS. With the genetic sequence of a tumor-associated antigen, virus, bacteria or
parasite as input, we use EIS to rapidly identify antigen-specific epitopes
which meet pre-determined criteria for conservancy, binding, population coverage
and immunogenicity.
- We use computer algorithms to analyze the sequence of all known antigens
associated with the target disease for the presence of peptides which
contain specified types of epitopes from conserved regions of the
antigens.
- We synthesize peptides that meet these requirements and perform in vitro
assays to assess binding to human MHC molecules referred to as human
leukocyte antigens, or HLA.
- We evaluate peptides for superfamily binding, an assessment of their
ability to bind broadly within a family of HLA molecules, to assess
binding to human MHC molecules referred to as human leukocyte antigens,
or HLA. We identify epitopes from these peptides, which bind broadly
within three superfamilies, enabling broad population coverage for the
vaccine being developed.
- We then test peptides for immunogenicity, both in vivo in transgenic mice
which express HLA and in vitro against infected or transfected cells.
Using EIS, we have already identified T-cell epitopes for a number of
diseases, including breast, colon, lung and prostate cancers, as well as
hepatitis C virus or HCV, hepatitis B virus or HBV, human papilloma virus or
HPV, HIV and malaria.
EpiGene(TM) Vaccines. Our candidate vaccines for each cancer and infectious
disease indication are comprised of the particular epitopes that can stimulate
the specific T cells needed to combat the relevant indication. We select
epitopes for a target indication using EIS and then combine them to form an
EpiGene, a string of DNA for select epitopes from several antigens. In animal
models, EpiGene vaccines have elicited strong multi-specific T cell responses
that are both stronger and broader than the responses generated by a traditional
whole antigen DNA vaccine.
We are advancing EpiGene candidate vaccines for HIV and HCV in preclinical
development. To be effective in treating or preventing HIV and HCV, vaccines
should target multiple strains of the virus and induce T cells directed at
conserved regions of the virus. Our candidate vaccines incorporate epitopes
which are selected from multiple viral proteins and from highly conserved
regions of the virus.
We expect the first of our candidate vaccines to enter human clinical
trials will be a therapeutic vaccine targeting HIV. The vaccine incorporates
multiple CTL epitopes from six HIV associated antigens and our immune
stimulation technology called PADRE. We expect initial clinical studies for this
vaccine candidate to be initiated by late 2001 or early 2002.
Antibody Based Vaccines
We are evaluating several antibody vaccine opportunities internally and in
collaboration with others. The vaccines being considered target cancers,
neurological diseases, bacteria and atherosclerosis. All of these vaccine
opportunities incorporate our PADRE technology with one or more target antigens.
The PADRE technology consists of a family of small (13 amino acid), synthetic
proprietary molecules that are potent immunostimulants, meaning that they
stimulate the immune response. When combined with disease-specific
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antigens, PADRE induces important signals that enhance the antigen-specific
immune response, enabling the production of more effective antibody responses.
We believe that PADRE offers several advantages over proteins traditionally used
to enhance antibody vaccines:
- PADRE can be easily synthesized and readily characterized when linked to
the antigen, whereas traditionally used proteins can complicate
manufacturing;
- the antibody responses generated by PADRE are primarily antibodies
specific to the disease-specific antigen, rather than antibodies to
PADRE, whereas traditionally used proteins generate high anti-protein
responses which can render the vaccine ineffective; and
- PADRE could aid in the development of combination vaccines, unlike
traditionally used proteins which can be difficult to effectively combine
with a number of different, much larger protein-antigen conjugates.
Genomic and Proteomic Screening Technology
We have developed several programs employing our ImmunoSense technology for
the discovery and validation of antigenic proteins utilizing proteomics or
genomics data derived from tumor-associated proteins, protein targets of
autoimmune diseases, and infectious pathogens. Using ImmunoSense, we can rapidly
analyze gene sequence data for antigens recognized by the immune system to
identify new vaccine and drug targets for diseases caused or controlled by the
immune system. We also use our ImmunoSense technology to reduce the undesired
immunogenicity of therapeutic proteins used to treat a variety of diseases.
VACCINE PRODUCT CANDIDATES
We believe we have a number of vaccine product opportunities as described
in the following table:
INDICATION PRODUCT DEVELOPMENT STAGE COMMERCIALIZATION RIGHTS
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Cancer
Therapeutic Vaccines
Breast Preclinical Epimmune
Colon Preclinical Epimmune
Lung Preclinical Epimmune
Prostate Epitope/Antigen Identification Epimmune
Ex Vivo Preclinical Takara/Epimmune
Infectious Diseases
Therapeutic Vaccines
Hepatitis B Preclinical Epimmune
Hepatitis C Preclinical Epimmune
HIV Preclinical Epimmune
Papilloma virus Epitope/Antigen Identification Epimmune
Prophylactic
Vaccines
Hepatitis C Preclinical Epimmune
HIV Preclinical Epimmune
Malaria Preclinical Epimmune
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(1) By using the term Epitope/Antigen Identification, we mean we are
discovering, evaluating and selecting epitopes for inclusion in candidate
vaccines that would be advanced to preclinical development. By using the
term Preclinical, we mean that we have identified and selected specific
epitope compositions for inclusion in a vaccine and are conducting
preclinical testing aimed at optimizing the construction, formulation and
manufacture of the vaccine and toxicology studies with the objective of
filing an Investigational New Drug application with regulatory authorities.
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CORPORATE COLLABORATIONS
We expect to enter into research and development collaborations with
multiple pharmaceutical and biotechnology companies to commercialize therapeutic
and prophylactic vaccines in select infectious disease fields. Our unique
capabilities include expertise in identifying those epitopes from viral and
tumor-associated antigens which elicit the desired immune response and in
creating and evaluating product candidates which elicit a potent immune
response.
In 1994, we established a collaboration with Takara Shuzo Co., Ltd., which
focused on ex vivo cellular therapy for treatment of cancer. Takara, who is
collaborating with Japanese investigators on the evaluation and optimization of
ex vivo cellular therapies, has rights to our technology for ex vivo treatment
of cancer in Japan. Under the terms of the collaboration, we have a license to
any patents or know-how developed by Takara in the field. Takara will make
payments to us upon achievement of certain clinical milestones and pay us
royalties on sales of any products resulting from the collaboration.
In February 1998, we entered into a collaboration with G.D. Searle & Co.
for the treatment of cancer worldwide, excluding ex vivo cellular therapy in
Japan. In connection with the collaboration, Searle made a $15 million
investment in Epimmune. In November 2000, we were notified that following the
merger between Pharmacia Corporation and Monsanto, the parent of Searle,
Pharmacia would not continue funding its cancer vaccine program. We are working
with Pharmacia to implement an orderly conclusion to the collaboration and
transfer of applicable materials and documentation to us so that we may proceed
with the cancer program, either alone or with another partner. As of December
31, 2000, Pharmacia owned 4.0% of our outstanding common stock and all of our
outstanding preferred stock.
In December 2000, we licensed gene delivery technology from Valentis, Inc.
for preventive and therapeutic DNA vaccines against HIV and HCV. In connection
with the license, we will make payments to Valentis upon achievement of certain
clinical milestones and pay royalties on sales of any products incorporating
Valentis technology.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
Our success will depend in part on our ability to obtain patent protection
for our products, both in the United States and other countries. The patent
position of biotechnology and pharmaceutical companies is highly uncertain and
involves complex legal and factual questions. We file patent applications as
appropriate covering our proprietary technology.
We have developed our vaccine patent estate over approximately the past ten
years. With 13 issued United States patents, 20 issued foreign patents,
approximately 150 pending applications worldwide, and licenses to other
intellectual property relevant to epitope discovery and gene delivery, we have
established a broad intellectual property position directed toward processes of
epitope identification, epitope compositions and uses. Our intellectual property
covers thousands of CTL and HTL epitopes relevant to stimulating a cellular
immune response to breast, lung, prostate, cervical and colorectal cancers and
melanoma, as well as HBV, HCV, HIV, malaria, HPV and tuberculosis. The claims
cover peptide and nucleic acid compositions and related methods of use. Our
intellectual property also covers numerous processes of epitope identification,
including methods for identifying epitopes based on their preferred amino acid
sequence for binding to HLA molecules, methods for modifying epitopes to
increase population coverage and enhance immunogenicity, in vitro MHC binding
assays, methods of inducing CTL ex vivo and methods for using transgenic animals
and computer programs to identify epitopes and generate analogs of motif-bearing
molecules. Many of these methods, developed by our scientists, have become
standard practice in the field. We also have issued patents and pending
applications covering the PADRE technology.
These patent applications and patents are either owned by or are under
license to us. We cannot be certain that patents will issue from any of the
applications we have filed or licensed, or that if patents do issue, that claims
allowed will be sufficiently broad to protect our procedures and processes. In
addition, we cannot be certain that third parties will not challenge, invalidate
or circumvent any patents issued to us, or that the rights granted thereunder
will provide proprietary protection to us.
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As is typical in the biotechnology industry, our commercial success will
depend in part on our ability to avoid infringing patents issued to competitors
or breaching the technology licenses upon which we might base our products. If
we fail to obtain a license to any technology that we require to commercialize
our products, or to develop an alternative compound and obtain regulatory
approval within an acceptable period of time if required to do so, our business
would be harmed. Litigation, which could result in substantial costs to us, may
also be necessary to enforce any patents issued to us or to determine the scope
and validity of others' proprietary rights. In addition, we may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office which could result in substantial costs to determine the
priority of inventions.
We also protect our proprietary technology and processes in part by
confidentiality agreements with our collaborative partners, employees and
consultants. There can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any breach, or that our trade
secrets will not otherwise become known or be independently discovered by
competitors.
MANUFACTURING
To be successful, our products and the products of our partners must be
manufactured in commercial quantities in compliance with regulatory requirements
and at an acceptable cost. We have not commercialized any products, nor have we
demonstrated that we can manufacture commercial quantities of our product
candidates or our partners' product candidates in accordance with regulatory
requirements. If we cannot manufacture products in suitable quantities in
accordance with regulatory standards, either on our own our through contracts
with third parties, it may delay clinical trials, regulatory approvals and
marketing efforts for such products. Such delays could adversely affect our
competitive position and our chances of achieving profitability. We cannot be
sure that we can manufacture, either on our own our through contracts with third
parties, such products at a cost or in quantities which are commercially viable.
GOVERNMENT REGULATION
Our research and development activities and any future manufacturing and
marketing of our products are subject to regulation for safety and efficacy by
numerous governmental authorities in the United States and other countries. In
the United States, drugs are subject to rigorous regulation by the U.S. Food and
Drug Administration or FDA. The Federal Food, Drug and Cosmetic Act and the
Public Health Service Act govern the testing, manufacture, safety, efficacy,
labeling, storage, record-keeping, approval, advertising and promotion of our
products. In addition to FDA regulations, we are also subject to other federal
and state regulations such as the Occupational Safety and Health Act and the
Environmental Protection Act. Product development and approval within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources. In addition, there can be no assurance that this
regulatory framework will not change or that additional regulation will not
arise at any stage of our product development which may affect approval or delay
an application or require additional expenditures.
The steps required before a pharmaceutical agent may be marketed in the
United States include:
- preclinical laboratory and animal tests,
- the submission to the FDA of an application for an IND, which must become
effective before human clinical trials may commence in the United States,
- adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug,
- the submission of a New Drug Application, or NDA, or Product License
Application, or PLA, to the FDA, and
- the FDA approval of the NDA or PLA prior to any commercial sale or
shipment of the drug.
In addition to obtaining FDA approval for each product, each domestic drug
manufacturing establishment must be registered with, and approved by, the FDA.
Drug product manufacturing establishments located
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in California also must be licensed by the State of California in compliance
with separate regulatory requirements.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the safety and efficacy of the product and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of an IND and subsequently when additional non-clinical work is completed
and, unless the FDA objects, the IND will become effective 30 days following its
receipt by the FDA.
Clinical trials involve the administration of the drug under the
supervision of a qualified principal investigator to healthy volunteers or to
patients identified as ones with the condition for which the drug is being
tested. Clinical trials are conducted in accordance with protocols that detail
the objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part
of the IND. Each clinical study is conducted under the auspices of an
independent Institutional Review Board, or IRB, at the institution at which the
study will be conducted. Prior to its approval for the study to be conducted,
the IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution.
Clinical trials are typically conducted in three sequential phases prior to
product approval, but the phases may overlap. Phase I involves the initial
introduction of the drug into healthy human subjects and often into patients as
well. In Phase I, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase
II involves studies in a limited patient population to:
- determine the efficacy of the drug for specific targeted indications,
- determine dosage tolerance and optimal dosage and regimen, and
- identify possible adverse side-effects and safety risks.
When a compound is found to be effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to evaluate
clinical efficacy further and to test further for safety within an expanded
patient population at multiple clinical study sites. Even after the NDA
approval, the FDA may require additional Phase IV clinical trials. The FDA
reviews both the clinical plans and the results of the trials and may
discontinue the trials at any time if there are significant safety issues.
The results of the preclinical tests and clinical trials are submitted to
the FDA in the form of an NDA or PLA for marketing approval. The testing and
approval process is likely to require substantial time and effort and we cannot
be certain that any approval will be granted on a timely basis, if at all. The
approval process is affected by a number of factors, including the severity of
the disease, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials. Additional animal studies or clinical
trials may be requested during the FDA review period and may delay marketing
approval. After FDA approval for the initial indications, further clinical
trials may be necessary to gain approval for the use of the product for
additional indications. The FDA mandates that adverse effects be reported to the
FDA and may also require post-marketing testing to monitor for adverse effects,
which can involve significant expense.
Among the conditions for NDA or PLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to good manufacturing practices prescribed by the FDA. Domestic manufacturing
facilities are subject to FDA inspections twice yearly and foreign manufacturing
facilities are subject to periodic FDA inspections or inspections by the foreign
regulatory authorities with reciprocal inspection agreements with the FDA.
The Prescription Drug Act of 1992 requires companies engaged in
pharmaceutical development, such as our company, to pay user fees in the amount
of at least $100,000 upon submission of an NDA. We do not believe that this
requirement will harm our business.
For marketing outside the United States, we are also subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country.
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The time required for completing such testing and obtaining such approvals
is uncertain and approval itself may not be obtained. In addition, delays or
rejections may be encountered based upon changes in FDA policy during the period
of product development and FDA regulatory review of each submitted NDA or PLA.
Similar delays may also be encountered in foreign countries. There can be no
assurance that even after such time and expenditures regulatory approval will be
obtained for any drugs that we develop. Moreover, if regulatory approval of a
drug is granted, such approval may entail limitations on the indicated uses for
which the drug may be marketed. Further, even if such regulatory approval is
obtained, a marketed drug, its manufacturer and the facilities in which the drug
is manufactured are subject to continual review and periodic inspections. Later
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer, including
withdrawal of the product from the market.
COMPETITION
The biotechnology industry continues to undergo rapid change and
competition is intense and is expected to increase. Our competitors may succeed
in developing technologies and products that are more effective or affordable
than any of the products we are developing or which would render our technology
and products obsolete and noncompetitive. We compete with many public and
private companies, including pharmaceutical companies, chemical companies,
specialized biotechnology companies and academic institutions. Many of our
competitors have substantially greater experience, financial and technical
resources and production, marketing and development capabilities than us. In
addition, many of our competitors have significantly greater experience
conducting preclinical studies and clinical trials of new products, and in
obtaining regulatory approvals for such products. Accordingly, some of our
competitors may succeed in obtaining, developing and commercializing products
more rapidly or effectively than us, or in developing technology and products
that would render our technology and products obsolete or noncompetitive. We are
aware of companies that are pursuing the development of novel pharmaceuticals
which target the same diseases that we are targeting. These and other efforts by
potential competitors may be successful, and other technologies may be developed
to compete with our technologies. If we cannot successfully respond to
technological change in a timely manner, our commercialization efforts may be
harmed.
Our products under development address a range of markets. Our competition
will be determined in part by the potential indications for which our compounds
are developed and ultimately approved by regulatory authorities. For certain of
our potential products, an important factor in competition may be the timing of
market introduction of our products and competitive products. Accordingly, the
relative speed with which we can develop products, complete the clinical trials
and approval processes and supply commercial quantities of the products to the
market are expected to be important competitive factors. We expect that
competition among products approved for sale will be based, among other things,
on product effectiveness, safety, reliability, availability, price and patent
position.
Our competitive position also depends upon our ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
EMPLOYEES
As of March 15, 2001, we employed 37 individuals full-time, of whom 28 were
engaged in research and development, 11 of whom hold Ph.D. or M.D. degrees. A
significant number of our management and professional employees have had prior
experience with pharmaceutical, biotechnology or medical product companies. None
of our employees are covered by collective bargaining agreements, and management
considers relations with our employees to be good.
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EXECUTIVE OFFICERS
Our executive officers and their ages as of March 15, 2001 are as follows:
NAME AGE POSITION
---- --- --------
Robert W. Chesnut, Ph.D................ 57 Executive Vice President, R&D,
Secretary, and Acting President and
Chief Executive Officer
Alessandro D. Sette, Ph.D.............. 40 Vice President and Chief Scientific
Officer
Robert J. De Vaere..................... 43 Vice President, Finance and Chief
Financial Officer
Mark J. Newman, Ph.D................... 46 Vice President, Infectious Disease
Program
Dr. Chesnut has served as our Vice President of Research and Development
and Secretary since July 1999. From October 1997 to July 1999, he served as Vice
President of Research and Development of Epimmune. Prior to joining Epimmune,
Dr. Chesnut was with Cytel from 1988 to October 1997. From 1977 to 1988, Dr.
Chesnut was a Member of the Department of Medicine, National Jewish Medical and
Research Center in Denver, Colorado. He also serves as an Associate Member of
the Department of Immunology, Scripps Clinic and Research Foundation.
Dr. Sette has served as our Vice President and Chief Scientific Officer
since July 1999. From October 1997 to July 1999, he served as Vice President and
Chief Scientific Officer of Epimmune. Dr. Sette was with Cytel from 1988 to
October 1997 where he was most recently Director of Immunology. Before joining
Cytel, Dr. Sette completed a post-doctoral fellowship with Dr. Howard Grey at
the National Jewish Medical and Research Center in Denver, Colorado.
Mr. De Vaere has served as our Vice President, Finance and Chief Financial
Officer since May 2000. Prior to joining Epimmune in May 2000, Mr. De Vaere was
with Vista Medical Technologies, Inc., a medical device company, since January
1996 and served as Vice President of Finance and Administration and Chief
Financial Officer. Prior to his employment with Vista, he was Director of
Finance and Business Management for Kaiser Electro-Optics from April 1993 to
January 1996 and Controller for Kaiser Rollmet, an aerospace company, from
January 1991 to April 1993.
Dr. Newman has served as our Vice President, Infectious Disease Program
since July 1999. From March 1999 to July 1999, he served as Vice President,
Infectious Disease Program of Epimmune. Prior to joining Epimmune, Dr. Newman
served as Vice President of Research and Development of Vaxcel, Inc., a vaccine
company, from January 1995 to March 1999. Prior to joining Vaxcel, he was
Associate Vice President, Research and Development for Apollon, Inc., a vaccine
company. He also previously held the position of Senior Director, Clinical
Research, at Cambridge Biotech Corporation.
On January 16, 2001, the Company entered into an employment agreement with
Dr. Emile Loria for the position of President and Chief Executive Officer
contingent upon his obtaining satisfactory approval to work in the United
States. Dr. Loria was elected to the Company's Board of Directors.
All officers are elected annually by the Board of Directors. Each officer
serves at the discretion of the Board of Directors. There are no family
relationships among any of our directors, officers or key employees.
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RISK FACTORS
We wish to caution readers that the following important factors, among
others, in some cases have affected our results and in the future could cause
our actual results and needs to vary materially from forward-looking statements
made from time to time by us on the basis of management's then-current
expectations. The business in which we are engaged is in rapidly changing and
competitive markets and involves a high degree of risk, and accuracy with
respect to forward-looking projections is difficult.
WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND WE MAY EXPERIENCE DELAYS AND OTHER
PROBLEMS IN DEVELOPING PRODUCTS.
We are a research and development focused company. There are many factors
outside of our control that may affect the timing of commencement and completion
of clinical trials of any of our drug candidates, and we cannot assure you that
clinical trials will commence or be completed within any anticipated timeframe.
For example, although we previously indicated that Pharmacia was expected to
initiate Phase I/II human clinical trials of a drug candidate in our cancer
program by late 2000 or early 2001, Pharmacia recently terminated our
collaboration in the cancer field. We expect to work with Pharmacia to implement
an orderly conclusion to the collaboration and transfer of applicable materials
and documentation to us so that we may proceed with the cancer program, either
alone or with another partner. As a result, the clinical trials for our cancer
program will not begin within the previously indicated timeframe. Although we
expect to initiate clinical trials for a therapeutic vaccine targeting HIV by
late 2001 or early 2002, we may experience unexpected delays in our research and
development efforts that would require us to delay these trials.
We cannot guarantee that our research and development programs will be
successful or that we can show that our products are safe and effective in
humans. For example, in March 1999, Cytel completed its Phase II/III clinical
trial of Cylexin, its lead cell adhesion inhibitor compound. Based on
disappointing results from this Phase II/III clinical trial, Cytel decided to
terminate the clinical trials of Cylexin and discontinue its therapeutic
anti-inflammatory business. Unacceptable toxicities or side effects may occur at
any time in the course of human clinical trials or during commercial use. Delays
in planned patient enrollment in our clinical trials may result in increased
costs, program delays or both. The appearance of any unacceptable toxicities or
side effects could interrupt, limit, delay or abort the development of any of
our products or, if previously approved, necessitate their withdrawal from the
market.
We may never obtain FDA or other necessary regulatory approvals to
successfully commercialize any of our products under development. Further, we
may not be able to manufacture any products in commercial quantities in
compliance with regulatory requirements at an acceptable cost. Even if we
successfully develop and obtain approval for our products, we may fail to
achieve the necessary market acceptance of these products. Our failure to
address problems and delays relating to research and development, regulatory
approval, manufacturing and marketing would harm our business.
IF WE DO NOT SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR PRODUCTS, WE MAY NEVER
GENERATE SIGNIFICANT REVENUES.
We have not completed the development of any product and, accordingly, have
not begun to market or generate revenues from the commercialization of any
product. We do not expect to market any of our therapeutic or prophylactic
products for a number of years. If we do not successfully develop and
commercialize products, we may never generate significant revenues. Our
potential therapies under development will require time consuming and costly
research and development efforts, preclinical studies, clinical testing,
regulatory approvals and additional investment prior to their commercialization,
which may never occur.
PHARMACIA'S DECISION TO END OUR COLLABORATION MAY DELAY OR LIMIT OUR ABILITY TO
DEVELOP OUR CANCER EPITOPE PRODUCTS.
Pharmacia recently terminated our research and development collaboration
with respect to the production, use and sale of pharmaceutical products derived
from our cancer epitopes and the use of these epitopes in therapeutic vaccines.
This collaboration was our only significant collaboration, and we have been
substantially
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dependent upon it. Although a significant portion of our revenues for 1999
resulted from payments from Pharmacia, we do not expect to receive further
revenues from Pharmacia.
In light of the termination of our collaboration with Pharmacia, our
preclinical or clinical development of drug candidates in our cancer program is
delayed and could be terminated, which could harm our business.
IF WE CANNOT OBTAIN AND MAINTAIN COLLABORATION OR LICENSE AGREEMENTS ON
ACCEPTABLE TERMS IN THE FUTURE, WE MAY NOT SUCCESSFULLY DEVELOP SOME OF OUR
PRODUCTS.
We expect to rely on collaborative arrangements both to develop and
commercialize pharmaceutical products. We cannot be certain that we will be able
to enter into collaborative arrangements in the future, that any such
arrangements will remain in place or be successful or that we will receive
royalty revenues, license fees or milestone payments from any such collaborative
arrangements. For example, our cancer vaccine collaboration with Pharmacia was
recently terminated. Our collaborative partners may pursue alternative
technologies or develop alternative compounds either on their own or in
collaboration with others as a means of developing treatments for the disease
targeted by any collaborative program with us. In addition, we may be required
to enter into licenses or other collaborative agreements with third parties in
order to access technologies that are necessary to successfully develop certain
of our products. We cannot be certain that we will be able to successfully
negotiate acceptable licenses or other collaborative arrangements that will
allow us to access such technologies. In addition, we cannot be certain that any
technologies accessed through such licenses or other collaborations will
successfully meet our requirements.
OUR ADDITIONAL FINANCING REQUIREMENTS AND LIMITED ACCESS TO FINANCING MAY
ADVERSELY AFFECT OUR ABILITY TO DEVELOP PRODUCTS.
As of December 31, 2000, we had $10.1 million in cash, cash equivalents,
restricted cash and short-term investments. Our future capital requirements will
depend on many factors, including: continued scientific progress in our drug
discovery programs; the magnitude of our drug discovery programs; our ability to
establish and maintain collaborative arrangements; progress with preclinical
testing and clinical trials; the time and costs involved in obtaining regulatory
approvals; the costs involved in filing, prosecuting and enforcing patent
claims; competing technological and market developments; our ability to
establish and maintain collaborative arrangements; the cost of manufacturing
scale-up; and effective commercialization activities and arrangements.
We intend to seek additional funding through collaborative arrangements or
equity or debt financings. If additional financing is not available, we
anticipate that our existing resources will enable us to maintain our current
and planned operations through the end of 2001. We may not be able to obtain
financing on favorable terms, if at all, or enter into additional collaborations
to reduce our funding requirements. If we acquire funds by issuing securities,
further dilution to existing stockholders may result. If we acquire funds
through additional collaborations, we will likely have to relinquish some or all
of the rights to products or technologies that we may have otherwise developed
ourselves.
OUR HISTORY OF OPERATING LOSSES AND OUR EXPECTATIONS OF CONTINUING LOSSES MAY
HURT OUR ABILITY TO CONTINUE OPERATIONS.
We have experienced significant operating losses since our inception in
1987. As of December 31, 2000, we had an accumulated deficit of $141.7 million.
We have not generated revenues from the commercialization of any product. All of
our revenues to date have consisted of contract research and development
revenues, license and milestone payments, research grants, certain asset
divestitures and interest income. We expect that substantially all of our
revenues for the foreseeable future will result from research grants and, if we
are able to establish new collaborations, payments under those future
collaborations, including royalties on product sales and interest income. We
expect to continue to incur substantial net operating losses which may imperil
our ability to continue operations. To achieve profitable operations, we, alone
or with partners, must successfully identify, develop, register and market
proprietary products. We may not be able to generate sufficient product revenue
to become profitable on a sustained basis or at all.
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IF WE CANNOT COST-EFFECTIVELY MANUFACTURE OUR PRODUCTS AND THE PRODUCTS OF OUR
PARTNERS IN COMMERCIAL QUANTITIES AND IN COMPLIANCE WITH REGULATORY
REQUIREMENTS, WE MAY NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.
To be successful, our products and the products of our partners must be
manufactured in commercial quantities in compliance with regulatory requirements
and at an acceptable cost. We have not commercialized any products, nor have we
demonstrated that we can manufacture commercial quantities of our product
candidates or our partners' product candidates in accordance with regulatory
requirements. We intend to rely on third party contract manufacturers to produce
materials needed for clinical trials and product commercialization. Third party
manufacturers may not be able to meet our needs with respect to timing, quantity
or quality. If we are unable to contract for a sufficient supply of needed
materials on acceptable terms, or if we should encounter delays or difficulties
in our relationships with manufacturers, it may delay clinical trials,
regulatory approvals and marketing efforts for our products. Such delays could
adversely affect our competitive position and our chances of achieving
profitability. We cannot be sure that we can manufacture, either on our own our
through contracts with third parties, such products at a cost or in quantities
which are commercially viable.
THE LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS MAY DELAY OR PREVENT US FROM COMMERCIALIZING PRODUCTS.
We cannot commercialize our products if we do not receive FDA or foreign
approval for our products. Clinical testing, manufacture, promotion and sale of
our products are subject to extensive regulation by numerous governmental
authorities in the United States, principally the FDA, and corresponding state
and foreign regulatory agencies. These regulations may delay or prevent us from
commercializing products. Noncompliance with applicable requirements can result
in, among other things, fines, injunctions, seizure of products, total or
partial suspension of product marketing, failure of the government to grant
pre-market approval, withdrawal of marketing approvals and criminal prosecution.
The regulatory process for new therapeutic drug products, including the
required preclinical studies and clinical testing, is lengthy and expensive. We
may not receive necessary FDA or foreign clearances for any of our potential
products in a timely manner, or at all. The length of the clinical trial process
and the number of patients the FDA will require to be enrolled in the clinical
trials in order to establish the safety and efficacy of our products is
uncertain. The FDA or we and our collaborators may decide to discontinue or
suspend clinical trials at any time if the subjects or patients who are
participating in such trials are being exposed to unacceptable health risks or
if the results show no or limited benefit in patients treated with the drug
compared to patients in the control group.
We may encounter significant delays or excessive costs in our efforts to
secure necessary approvals. Regulatory requirements are evolving and uncertain.
Future United States or foreign legislative or administrative acts could also
prevent or delay regulatory approval of our products. We may not receive the
necessary approvals for clinical trials, manufacturing or marketing of any of
our products under development. Even if we obtain commercial regulatory
approvals, the approvals may significantly limit the indicated uses for which we
may market our products. In addition, the FDA may continually review a product
after its initial approval and commercialization. Later discovery of previously
unknown problems or failure to comply with the applicable regulatory
requirements may result in restrictions on the marketing of a product or
withdrawal of the product from the market, as well as possible civil or criminal
sanctions.
To market any drug products outside of the United States, we are also
subject to numerous and varying foreign regulatory requirements, implemented by
foreign health authorities, governing the design and conduct of human clinical
trials and marketing approval. The approval procedure varies among countries and
can involve additional testing, and the time required to obtain approval may
differ from that required to obtain FDA approval. The foreign regulatory
approval process includes all of the risks associated with obtaining FDA
approval set forth above, and approval by the FDA does not ensure approval by
the health authorities of any other country, nor does the approval by foreign
health authorities ensure approval by the FDA.
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Among the other requirements for regulatory approval is the requirement
that prospective manufacturers conform to the FDA's Good Manufacturing
Practices, or GMP, requirements specifically for biological drugs, as well as
for other drugs. In complying with the FDA's GMP requirements, manufacturers
must continue to expend time, money and effort in production, record keeping and
quality control to assure that the product meets applicable specifications and
other requirements. Failure to comply with the FDA's GMP requirements subjects
the manufacturer to possible FDA regulatory action. If we or our contract
manufacturers, if any, fail to maintain compliance with the FDA's GMP
requirements on a continuing basis, it could materially adversely affect our
operations, commercialization efforts and profitability.
TECHNOLOGICAL CHANGE AND COMPETITION MAY RENDER OUR POTENTIAL PRODUCTS OBSOLETE.
The biotechnology industry continues to undergo rapid change and
competition is intense and is expected to increase. Our competitors may succeed
in developing technologies and products that are more effective or affordable
than any of the products we are developing or which would render our technology
and products obsolete and noncompetitive. We compete with many public and
private companies, including pharmaceutical companies, chemical companies,
specialized biotechnology companies and academic institutions. Many of our
competitors have substantially greater experience, financial and technical
resources and production, marketing and development capabilities than us. In
addition, many of our competitors have significantly greater experience
conducting preclinical studies and clinical trials of new products, and in
obtaining regulatory approvals for such products. Accordingly, some of our
competitors may succeed in obtaining developing and commercializing products
more rapidly or effectively than us, or in developing technology and products
that would render our technology and products obsolete or noncompetitive. We are
aware of companies that are pursuing the development of novel pharmaceuticals
which target the same diseases that we are targeting. These and other efforts by
potential competitors may be successful, and other technologies may be developed
to compete with our technologies. If we cannot successfully respond to
technological change in a timely manner, our commercialization efforts may be
harmed.
Our products under development address a range of markets. Our competition
will be determined in part by the potential indications for which our compounds
are developed and ultimately approved by regulatory authorities. For certain of
our potential products, an important factor in competition may be the timing of
market introduction of our products and competitive products. Accordingly, the
relative speed with which we can develop products, complete the clinical trials
and approval processes and supply commercial quantities of the products to the
market are expected to be important competitive factors. We expect that
competition among products approved for sale will be based, among other things,
on product effectiveness, safety, reliability, availability, price and patent
position.
OUR FAILURE TO OBTAIN ISSUED PATENTS AND, CONSEQUENTLY, TO PROTECT OUR
PROPRIETARY TECHNOLOGY, COULD IMPAIR OUR COMPETITIVE POSITION.
Our success will depend in part on our ability to obtain patent protection
for our products and processes, both in the United States and other countries.
The patent position of biotechnology and pharmaceutical companies is highly
uncertain and involves complex legal and factual questions. There is no
consistent policy regarding the breadth of claims allowed in biotechnology
patents. We intend to file applications and pursue patent prosecution as
appropriate for patents covering both our products and processes. We cannot be
sure that patents will issue from any of the patent applications that we own or
license or that, if patents do issue, that claims allowed will be sufficiently
broad to protect our products and processes. In addition, we cannot be certain
that third parties will not challenge, invalidate or circumvent any patents
issued to us, or that the rights granted under the patents will provide
proprietary protection to us.
We also protect our proprietary technology and processes in part by
confidentiality agreements with our collaborative partners, employees and
consultants. We cannot be certain that our collaborative partners, employees and
consultants will not breach these agreements, that we will have adequate
remedies for any breach, or that our trade secrets will not otherwise become
known or be independently discovered by competitors.
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WE MAY NOT BE ABLE TO COMMERCIALIZE OUR OTHER PRODUCTS UNDER DEVELOPMENT IF THEY
INFRINGE EXISTING PATENTS OR PATENTS THAT HAVE NOT YET ISSUED, WHICH WOULD
MATERIALLY HARM OUR BUSINESS.
As is typical in the biotechnology industry, our commercial success will
depend in part on our ability to avoid infringing patents issued to competitors
or breaching the technology licenses upon which we might base our products. If
we fail to obtain a license to any technology that we require to commercialize
our products, or to develop an alternative compound and obtain FDA approval
within an acceptable period of time if required to do so, our business would be
harmed. Litigation, which could result in substantial costs to us, may also be
necessary to enforce any patents issued to us or to determine the scope and
validity of others' proprietary rights. In addition, we may have to participate
in interference proceedings declared by the United States Patent and Trademark
Office which could result in substantial costs to determine the priority of
inventions.
OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY
SCIENTIFIC AND MANAGEMENT PERSONNEL AND OUR ABILITY TO IDENTIFY, HIRE AND RETAIN
ADDITIONAL PERSONNEL.
We are highly dependent on the principal members of our scientific and
management staff. We do not maintain key person life insurance on the life of
any employee. Our future success also will depend in part on the continued
service of our key scientific and management personnel and our ability to
identify, hire and retain additional qualified personnel.
There is intense competition for qualified personnel in the areas of our
activities, and we cannot be sure that we will be able to continue to attract
and retain such personnel necessary for the development of our business. Because
of the intense competition, we cannot be sure that we will be successful in
adding technical personnel as needed to meet the staffing requirements of
additional collaborative relationships. Our failure to attract and retain key
personnel could be significantly detrimental to our product development programs
and could harm our business.
IF WE DO NOT DEVELOP A SUFFICIENT SALES AND MARKETING FORCE, WE MAY NOT BE ABLE
TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.
We have no experience in sales, marketing or distribution. Before we can
market any of our products directly, we must develop a substantial marketing and
sales force with technical expertise and supporting distribution capability.
Alternatively, we may obtain the assistance of one or more pharmaceutical
companies with a large distribution system and a large direct sales force. Other
than our agreement with Takara, we do not have any existing distribution
arrangements with any pharmaceutical company for our products under development.
We cannot be sure that we can establish sales and distribution capabilities or
successfully gain market acceptance for our products. If we cannot develop sales
and distribution capabilities, we may not be able to successfully commercialize
our products.
ADVERSE DETERMINATIONS CONCERNING PRODUCT PRICING, REIMBURSEMENT AND RELATED
MATTERS COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS.
Our ability to successfully commercialize our products may depend in part
on the extent to which reimbursement for the cost of such products and related
treatment will be available from government health administration authorities,
private health insurers and other organizations. Third-party payors are
increasingly challenging the price of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and we cannot be certain that adequate third-party coverage will be
available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product development. If we cannot obtain
adequate third-party coverage for our products, it could harm our business.
PRODUCT LIABILITY RISKS MAY EXPOSE US TO SIGNIFICANT LIABILITY.
Our business exposes us to potential product liability risks which are
inherent in the testing, manufacturing and marketing of human therapeutic
products. While we currently have product liability insurance, we
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cannot be sure that we can maintain such insurance on acceptable terms or that
our insurance will provide adequate coverage against potential liabilities.
OUR USE OF HAZARDOUS MATERIALS COULD EXPOSE US TO SIGNIFICANT COSTS.
Our research and development processes involve the controlled storage, use
and disposal of hazardous materials, chemicals and radioactive compounds. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of these materials and some waste
products. Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards prescribed by these laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of an accident, we could
be held liable for any damages that result, and any liability could exceed our
resources.
Although we believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material capital expenditures for environmental control facilities in the
near term, we cannot be sure that compliance with environmental laws and
regulations in the future will not entail significant costs, or that our
business will not be harmed by current or future environmental laws or
regulations.
THE VOLATILITY OF THE PRICE OF OUR COMMON STOCK AND OUR DIVIDEND POLICY MAY HURT
OUR STOCKHOLDERS.
The market prices for securities of biotechnology companies, including our
common stock, have historically been highly volatile and currently are of new
record levels, and the market from time to time has experienced significant
price and volume fluctuations that are unrelated to the operating performance of
such companies. The following factors may have a significant effect on the
market price of our common stock:
- announcements of technological innovations or new commercial therapeutic
products by us or others;
- governmental regulation that affects the biotechnology and pharmaceutical
industries;
- developments in patent or other proprietary rights;
- developments in our relationships with our collaborative partners,
including the end of our collaboration with Pharmacia;
- public concern as to the clinical results and/or, the safety of drugs
developed by us or others; and
- general market conditions.
Fluctuations in financial performance from period to period also may have a
significant impact on the market price of our common stock.
THE SUBORDINATION OF OUR COMMON STOCK TO OUR PREFERRED STOCK COULD HURT COMMON
STOCKHOLDERS.
Our common stock is expressly subordinate to our Series S and Series S-1
Preferred Stock in the event of our liquidation, dissolution or winding up. If
we were to cease operations and liquidate our assets, there may not be any
remaining value available for distribution to the holders of common stock after
providing for the Series S and Series S-1 Preferred Stock liquidation
preference.
THE EFFECT OF ANTI-TAKEOVER PROVISIONS COULD ADVERSELY AFFECT OUR COMMON
STOCKHOLDERS.
Our certificate of incorporation includes a provision that requires the
approval of holders of at least 66 2/3% of our voting stock as a condition to a
merger or certain other business transactions with, or proposed by, a holder of
15% or more of our voting stock. This approval is not required in cases where
certain of our directors approve the transaction or where certain minimum price
criteria and other procedural requirements are met. Our certificate of
incorporation also requires the approvals of holders of at least 66 2/3% of our
voting stock to amend or change the provisions mentioned relating to the
transaction approval. Finally, our certificate of incorporation provides that
any action required or permitted to be taken by our stockholders must be
effected at a duly called annual or special meeting rather than by any consent
in writing.
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Further, pursuant to the terms of our stockholder rights plan, we have
distributed a dividend of one right for each outstanding share of common stock.
These rights will cause substantial dilution to the ownership of a person or
group that attempts to acquire us on terms not approved by the Board of
Directors and may have the effect of deterring hostile takeover attempts.
Concentration of ownership among our existing officers, directors and
principal stockholders may prevent other stockholders from influencing
significant corporate decisions and depress our stock price.
Our officers, directors and stockholders with at least 10% of our stock
together control approximately 49% of our outstanding common stock and preferred
stock, on a combined, as-converted basis. If these officers, directors and
principal stockholders act together, they will be able to exert a significant
degree of influence over our management and affairs and over matters requiring
stockholder approval, including the election of directors and approval of
mergers or other business combination transactions. The interests of this
concentration of ownership may not always coincide with our interests or the
interests of other stockholders. For instance, officers, directors and principal
stockholders, acting together, could cause us to enter into transactions or
agreements that we would not otherwise consider. Similarly, this concentration
of ownership may have the effect of delaying or preventing a change in control
of our company otherwise favored by our other stockholders. This concentration
of ownership could depress our stock price.
WE HAVE NEVER PAID DIVIDENDS.
We have never paid any cash dividends and do not anticipate paying cash
dividends in the foreseeable future.
ITEM 2. PROPERTIES
We lease a 24,000 square foot administrative and research laboratory
facility in San Diego. The future minimum rental commitment for this lease will
range from approximately $535,000 to $658,000 per year over eight years, based
upon pre-established annual rent increases. We believe our existing facilities
will be adequate to meet our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock (NASDAQ symbol "EPMN") is traded publicly through the
National Market System. The following table presents quarterly information on
the price range of our common stock. This information indicates the high and low
sale prices reported by the National Market System. These prices do not include
retail markups, markdowns or commissions. All information set forth below has
been adjusted to reflect a one-for-seven reverse stock split of common stock
effected on November 13, 1998.
HIGH LOW
------ -----
2001
1st Quarter (through March 15).............................. $ 7.00 $1.88
2000
1st Quarter................................................. $21.38 $2.00
2nd Quarter................................................. $ 9.56 $3.25
3rd Quarter................................................. $ 6.41 $3.78
4th Quarter................................................. $ 5.00 $1.59
1999
1st Quarter................................................. $ 7.38 $2.00
2nd Quarter................................................. $ 3.38 $1.75
3rd Quarter................................................. $ 4.69 $2.88
4th Quarter................................................. $ 3.63 $2.22
As of March 15, 2001, there were approximately 255 stockholders of record
of our common stock. We have never declared or paid dividends on our common
stock and do not anticipate the payment of dividends in the foreseeable future.
During the period covered by this Annual Report on Form 10-K, we sold and
issued the following securities which were not registered under the Securities
Act of 1933, as amended:
(1) In May 2000, we issued warrants to purchase an aggregate of 4,960
shares of Common Stock with an exercise price of $1.875 to Virgil Thompson,
former President and Chief Executive Officer of Cytel, and Robert L. Roe,
former Chief Operating Officer of Cytel. The warrants were issued in
connection with severance agreements with such former officers.
(2) In October 2000, pursuant to the terms of a stock purchase
agreement, we issued 500,000 shares of common stock to an individual
accredited investor at a purchase price of $4.00 per share. Gross proceeds
to us for the transaction totaled $2.0 million.
The sale and issuance of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) and/or Regulation D promulgated thereunder.
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ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
(in millions except for net loss per share)
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------- ------- -------
Operating revenues......................... $ 1.6 $ 4.2 $ 3.7 $ 5.1 $ 10.9
Net loss................................... (4.7) (8.3) (21.5) (14.4) (12.5)
Net loss per share -- basic and diluted.... (0.68) (1.57) (4.48) (3.92) (3.50)
BALANCE SHEET DATA:
(in millions)
AS OF DECEMBER 31,
-----------------------------------------
2000 1999 1998 1997 1996
----- ----- ----- ----- -----
Working capital.................................... $ 8.2 $ 6.9 $ 9.8 $17.8 $21.6
Total assets....................................... 14.5 12.7 21.0 28.1 34.3
Long-term obligations.............................. 0.4 0.4 1.6 0.7 1.1
Stockholders' equity............................... 12.1 10.4 14.0 24.4 27.5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include,
without limitation, those discussed below and in the section entitled "Risk
Factors."
Unless otherwise indicated, all references to "Cytel" are to Cytel
Corporation, all references to "Epimmune" are to Epimmune Inc., a majority-owned
subsidiary of Cytel, until July 1, 1999, at which time Cytel and Epimmune
merged, and all references to the "we," "us" or "our company" are to the
combined entity of Cytel and Epimmune.
On July 1, 1999, we completed a series of transactions (the "Exchange
Transactions") in which we: (i) transferred all of the outstanding shares of
Epimmune's Series B-1 Preferred Stock then held by Cytel to G.D. Searle & Co.
("Searle") in exchange for all of the outstanding shares of Cytel's Series B
Preferred Stock, (ii) issued 859,666 shares of Cytel's Series S Preferred Stock
and 549,622 shares of Cytel's Series S-1 Preferred Stock to Searle in exchange
for all outstanding shares of Epimmune's Series B Preferred Stock and Series B-1
Preferred Stock and (iii) issued a total of 1,027,782 shares of Cytel's Common
Stock to the holders of Common Stock of Epimmune in exchange for all outstanding
shares of Epimmune's Common Stock. The acquisition of the minority interest in
Epimmune, through the exchange transaction, was accounted for as a purchase. We
recorded the acquisition of the minority interest at the fair market value of
the preferred and common stock issued, and determined that the excess of the
purchase price over the identifiable net assets of $3.2 million was in-process
technology based on a discounted cash flow analysis of that technology. The
analysis, with a discount rate of 50%, was based on estimated research and
development costs for nine years and product revenues beginning in year six,
after the assumed completion of clinical trials and product approval by the FDA.
The analysis also considered milestone payments based on scientific
accomplishments, and new collaborative revenues based on projected future
collaboration agreements.
The value of the technology was charged to acquired in-process technology
because technological feasibility had not been achieved nor had alternative
future uses for the technology been identified. Following the Exchange
Transactions, Cytel merged with Epimmune and changed its name to Epimmune Inc.
As of December 31, 2000, Searle owned 4.0% of our outstanding common stock and
all of our outstanding preferred stock.
We have devoted substantially all of our resources to the discovery and
development of potential therapeutic and prophylactic products. To date, we have
not received any revenues from the sale of products. We have funded our research
and development primarily from equity-derived working capital and through
strategic alliances with other companies. We have been unprofitable since our
inception and expect to incur
18
20
substantial operating losses for the next several years. As of December 31,
2000, our accumulated deficit was approximately $141.7 million.
In the first quarter of 1999, Cytel completed the sale of its Glytec
carbohydrate synthesis and manufacturing business resulting in net proceeds of
approximately $6.2 million (see Note 2 in the Consolidated Financial
Statements). In addition, Cytel announced the results from its Cylexin Phase
II/III clinical trial which indicated that Cylexin, Cytel's lead therapeutic
compound, showed no benefit over the placebo. Accordingly, Cytel terminated its
therapeutic anti-inflammatory business and, as a result, Cytel recorded a
restructuring charge of $3.7 million in the first quarter 1999, which was
subsequently reduced to $2.7 million in the fourth quarter 1999 (see Note 2 in
the Consolidated Financial Statements). We are now focused exclusively on the
development of therapeutic and prophylactic vaccines for cancer and infectious
diseases.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion reflects historical financial information for both
Cytel and Epimmune on a combined basis.
We have financed operations since inception primarily through private
placements of equity securities, two public common stock offerings, revenues
under collaborative research and development agreements, grant revenues, certain
asset divestitures and interest income. Through December 2000, we had raised
approximately $151.4 million from the sale of equity securities.
We have financed our laboratory equipment and research and office
facilities primarily through operating lease arrangements and a note payable.
As of December 31, 2000, our cash, cash equivalents, restricted cash and
short-term investments increased to $10.1 million as compared to $8.7 million at
December 31, 1999. The increase was primarily due to private placement proceeds
of $6.3 million and the release of $1.1 million from escrow under the Cytel
agreement with Neose, partially offset by cash used for our operations. We
expect to continue to use our cash, cash equivalents and short-term investments
to fund our ongoing vaccine research programs. We had net working capital of
$8.2 million as of December 31, 2000 compared to $6.9 million as of December 31,
1999.
For the year ended December 31, 2000, our capital expenditures totaled $0.4
million as compared to $0.7 million for the year ended December 31, 1999.
Capital expenditures for 2000 were primarily for laboratory equipment. Capital
expenditures made in 1999 were primarily for equipment, furniture and leasehold
improvements for our new laboratory and office facility, which was completed in
April 1999. Future capital expenditures will be in support of our vaccine
business.
We have financed our laboratory equipment and research and office
facilities primarily through operating lease arrangements and a note payable.
During 2000 we made payments under the notes payable of $0.2 million, primarily
for laboratory equipment compared to payments of $1.0 million during 1999,
primarily related to research and office facilities.
Payments related to capitalized patent expenses for 2000 were $0.6 million
compared to $0.9 million during 1999. The decrease is primarily attributable to
the timing and nature of the filings made.
We expect to incur substantial additional research and development
expenditures in connection with our ongoing vaccine research programs, including
costs related to preclinical testing, clinical trials and manufacturing, as well
as marketing and distribution expenses. It is our intention to seek
collaborative research and development relationships with suitable corporate
partners. There can be no assurance that any agreements that may result from
these discussions will successfully reduce our funding requirements or will not
be terminated. For example, Pharmacia has decided to end our collaboration in
the cancer field. We will require additional equity or debt financing in order
to pursue our research and development programs, and there can be no assurance
that these funds will be available on favorable terms, if at all. If adequate
funds are not available we may be required to delay, scale back or eliminate one
or more of our drug discovery or development programs or obtain funds through
arrangements with collaborative partners or others that may
19
21
require us to relinquish rights to certain of our technologies, product
candidates or products that we would not otherwise relinquish.
We anticipate that our existing resources will enable us to maintain our
current and planned operations through the end of 2001. The estimate for the
period for which we anticipate our existing resources to enable us to maintain
our current and planned operations is a forward-looking statement that involves
risks and uncertainties as set forth herein.
Our future capital requirements will depend on many factors, including:
- our ability to establish and maintain collaborative arrangements;
- progress with preclinical testing and clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the costs involved in filing, prosecuting and enforcing patent claims;
- competing technological and market developments;
- changes in our existing research relationships;
- continued scientific progress in our drug discovery programs;
- the magnitude of our drug discovery programs;
- the cost of manufacturing scale-up; and
- effective commercialization activities and arrangements.
As is typical in the biotechnology industry, our commercial success will
depend in part on neither infringing patents issued to competitors nor breaching
the technology licenses upon which our products might be based. Our business is
also subject to other significant risks, including the uncertainties associated
with our ability to enter new collaborations, and the lengthy regulatory
approval process and with potential competition from other products. Even if our
products appear promising at an early stage of development, they may not reach
the market for a number of reasons. Such reasons include, but are not limited to
our inability to fund clinical development of such products, or the
possibilities that the potential products will be found ineffective during
clinical trials, fail to receive necessary regulatory approvals, be difficult to
manufacture on a large scale or be uneconomical to market.
RESULTS OF OPERATIONS
We had total revenues of $1.6 million for the year ended December 31, 2000,
compared to $4.2 million in 1999 and $3.7 million in 1998. Total revenues
decreased 62% in 2000 from 1999, due primarily to lack of research revenues and
milestone payments received from our collaborative agreement with Pharmacia in
2000 compared to 1999. Total revenues increased 13% in 1999 from 1998, due to
research revenues and milestone payments received from Pharmacia. Included in
total revenues were research grant revenues of $1.6 million in 2000, $1.7
million in 1999, and $1.7 million in 1998. As a result of the termination of our
collaborative agreement with Pharmacia, we do not expect to receive further
revenues from Pharmacia.
Research and development expenses decreased to $6.3 million in 2000 from
$8.7 million in 1999, primarily as a result of the discontinuation of Cytel
operations during the first quarter of 1999. Research and development expenses
decreased 53% to $8.7 million in 1999 from $18.4 million in 1998, due primarily
to the discontinuation of research efforts on Cylexin and other Cytel
technologies.
General and administrative expenses were $2.3 million in 2000, a $0.2
million decrease from the $2.5 million in general and administrative expenses in
1999. The decrease relates to the discontinuation of Cytel's operations during
1999 partially offset by increased staffing and associated expenses for business
development, financial and administrative activities during after
discontinuation of Cytel's operations. General and administrative expenses
decreased 45% to $2.5 million in 1999 from $4.6 million in 1998 due primarily to
termination of Cytel operations.
20
22
We had a reduction in restructuring charges of $0.1 million in 2000
compared to $2.7 million in restructuring charges in 1999 related to the
termination of non-Epimmune operations.
We had no charges to write-off of in-process technology in 2000. In 1999,
we charged $3.2 million to operations for the write-off of in-process technology
related to the acquisition of the minority interest in Epimmune. The charge was
based on a discounted cash flow analysis prepared to determine the fair value of
the excess of purchase price over the identifiable assets recorded as a result
of the merger of Cytel and Epimmune.
We had no minority interest in our company during the 2000 period and had a
minority interest in the net loss of a consolidated subsidiary of $0.5 million
during the 1999 period.
Other income was $1.6 million in 2000 compared to $0.5 million in 1999. The
2000 amount represents a payment from Elan of $0.5 million related to the
assignment of a license and the release of $1.1 million from escrow under the
Neose agreement. The 1999 amount relates primarily to $0.5 million from Elan
International Services in consideration for the buyout of certain future
milestone obligations by Elan.
There was no material gain on the disposal of assets during the 2000 period
compared to a $3.3 million gain on disposal of assets in 1999 related to the
sale of Cytel's Glytec carbohydrate synthesis and manufacturing business, offset
by the write-off of leasehold improvements of $0.1 million.
Net interest income was $0.6 million in 2000 compared to $0.4 million in
1999 and $0.9 million in 1998. The increase in 2000 from 1999 was due to higher
average cash balances during the 2000 period. The decrease in 1999 from 1998 was
due to lower average cash balances during the 1999 period.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
At December 31, 2000, our investment portfolio included fixed-income
securities of $9.6 million. These securities are subject to interest rate risk
and will decline in value if interest rates increase. Due to the short duration
of our investment portfolio, an immediate 10 percent increase in interest rates
would have no material impact on our financial condition or results of
operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
The Report of Ernst & Young LLP, Independent Auditors, the Consolidated
Financial Statements and Notes to Consolidated Financial Statements are included
in the report on pages F-1 through F-19.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Election of Directors,"
contained in our definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the end of our fiscal year ended December 31, 2000 (the "Proxy
Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this item is incorporated by reference to the
information set forth in the section entitled "Executive Officers of the
Company" in Part I, Item 1 of this Annual Report on Form 10-K.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The information required by this item is incorporated by reference to the
information set forth in the section entitled "Compliance with the Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" contained
in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Executive Compensation"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Certain Transactions" contained
in the Proxy Statement.
22
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
The consolidated financial statements required by this item are
submitted in a separate section beginning on page F-1 of this Report.
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2000............... F-4
Consolidated Statement of Stockholders' Equity for each of
the three years in the period ended December 31, 2000..... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2000............... F-6
Notes to Consolidated Financial Statements.................. F-7 - F-19
(2) Index to Financial Statement Schedules
The consolidated financial statement schedules required by this item
are omitted because they are not applicable or the required information is
shown in the Financial Statements or the notes thereto.
(3) Listing of Exhibits
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
3.1 Amended and Restated Certificate of Incorporation.(A)
3.2 Bylaws of the Registrant.(A)
3.3 Preferred Share Purchase Rights Plan.(B)
3.4 Form of Certificate of Amendment to the Company's Amended
and Restated Certificate of Incorporation.(E)
3.5 Certificate of Designation of the Series B Convertible
Preferred Stock.(J)
3.6 Certificate of Amendment of Amended and Restated Certificate
of Incorporation.(L)
3.7 Certificate of Increase of Series A Junior Participating
Preferred Stock.(L)
3.8 Certificate of Amendment of Amended and Restated Certificate
of Incorporation.(M)
3.9 Certificate of Designations of the Series S and Series S-1
Preferred Stock filed with the Secretary of State of the
State of Delaware on June 29, 1999.(P)
3.10 Certificate of Amendment of Amended and Restated Certificate
of Incorporation.(R)
3.11 Certificate of Decrease of Series A Junior Participating
Preferred Stock.(R)
4.1 Reference is made to Exhibits 3.1 through 3.11.
4.2 Specimen certificate of the Common stock.(A)
10.1 Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.(A)
10.5 Registrant's 1989 Stock Plan, as amended through June 12,
1998 (the "1989 Plan").(L)
10.6 Forms of Incentive Stock Option Agreement under the 1989
Plan.(A)
10.7 Form of Nonstatutory Stock Option Agreement under the 1989
Plan.(A)
10.19 Research Agreement, between the Registrant and The Scripps
Research Institute, formerly Scripps Clinic and Research
Foundation ("Scripps"), dated as of September 1, 1990, as
amended August 5, 1991 (with certain confidential portions
deleted).(A)(1)
10.24 License Agreement, between the Registrant and Scripps, dated
as of September 23, 1991 (with certain confidential portions
deleted).(A)(1)
10.25 Research and Option Agreement, between the Registrant and
Scripps, dated October 1, 1991 (with certain confidential
portions deleted).(A)(1)
23
25
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.35 Amendment to License Agreement between the Registrant and
Scripps dated as of June 17, 1992 (with certain confidential
portions deleted).(C)(2)
10.37 Registrant's Non-Employee Directors' Stock Option Plan, as
amended through June 12, 1998.(L)
10.48 Second Amendment to License Agreement between the Registrant
and Scripps dated as of June 17, 1992 (with certain
confidential portions deleted).(G)(2)
10.49 Letter Agreement, between the Registrant and Virgil D.
Thompson, dated December 19, 1995.(G)
10.50 Letter Agreement, between the Registrant and Robert L. Roe,
M.D., F.A.C.P., dated January 18, 1996.(G)
10.51 Directors' Deferred Compensation Plan, effective as of March
17, 1995, as amended September 20, 1996.(H)
10.54 Employment Agreement between Registrant, Epimmune Inc.
("Epimmune") and Deborah A. Schueren dated October 1,
1997.(J)
10.55 Form of Severance Benefit Agreement between Registrant and
the following executive officers: Virgil D. Thompson; Robert
L. Roe, M.D.; James C. Paulson, Ph.D; Edward C. Hall;
Jennifer Lorenzen.(K)
10.56 License and Collaboration Agreement between Epimmune and
Searle, dated February 27, 1998 (with certain confidential
portions deleted).(K)(4)
10.61 Amended and Restated Sublicense and Option Agreement,
between the Registrant and Elan International Services Ltd.
("Elan"), dated November 10, 1998 (the "Sublicense
Agreement"), and side letter entered between the Registrant
and Elan, dated November 10, 1998 (with certain confidential
portions of the Sublicense Agreement deleted).(M)(5)
10.63 Lease Agreement between Epimmune, Inc. and Nexus Equity LLC
VIII, dated as of November 1, 1998, as amended February 1,
1999.(N)
10.64 Asset Purchase Agreement between the Company and Neose
Technologies, Inc., dated March 26, 1999.(O)
10.65 Escrow Agreement between the Company and Neose Technologies,
Inc. dated March 26, 1999.(O)
10.66 Form of Common Stock Exchange Agreement.(P)
10.67 Preferred Stock Exchange Agreement, dated July 1, 1999, by
and between the Company and G.D. Searle & Co.(P)
10.68 Investor Rights Agreement, dated as of July 1, 1999 by and
between the Company and G.D. Searle & Co.(P)
10.69 Letter agreement between Epimmune and Dr. Robert W. Chesnut
regarding severance benefits dated February 5, 1998.(Q)
10.70 Letter agreement between Epimmune and Dr. Alessandro Sette
regarding severance benefits dated February 5, 1998.(Q)
10.71 Letter agreement between Epimmune and Dr. Robert L. Roe
regarding severance benefits dated June 2, 1999.(Q)
10.72 Letter agreement between Epimmune and Virgil Thompson
regarding severance benefits dated June 2, 1999.(Q)
10.73 Letter agreement between the registrant and Stephen F. Keane
dated October 1999.(S)
10.74 Form of Common Stock Purchase agreement dated February 15,
2000.(S)
10.75 Letter Agreement between Epimmune and Robert De Vaere dated
May 4, 2000.(T)
10.76 Letter Agreement between Epimmune and Mark Newman dated May
4, 2000.(T)
10.77 Form of Common Stock Purchase Agreement dated October 16,
2000.
10.78 Non-Exclusive License Agreement between Epimmune and
Valentis, Inc., dated November 27, 2000 (with certain
confidential portions deleted).(6)
21.1 Subsidiaries of the Registrant.(J)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24
26
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
25.1 Power of Attorney. Reference is made to the signature page
of this report on Form 10-K.
(4) Executive Compensation Plans and Arrangements
10.1 Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.(A)
10.5 Registrant's 1989 Stock Plan, as amended through June 12,
1998 (the "1989 Plan").(L)
10.6 Forms of Incentive Stock Option Agreement under the 1989
Plan.(A)
10.7 Form of Nonstatutory Stock Option Agreement under the 1989
Plan.(A)
10.37 Registrant's Non-Employee Directors' Stock Option Plan, as
amended through June 12, 1998.(L)
10.49 Letter Agreement, between the Registrant and Virgil D.
Thompson, dated December 19, 1995.(G)
10.50 Letter Agreement, between the Registrant and Robert L. Roe,
M.D., F.A.C.P., dated January 18, 1996.(G)
10.51 Directors' Deferred Compensation Plan, effective as of March
17, 1995 as amended September 20, 1996.(H)
10.54 Employment agreement between Registrant, Epimmune and
Deborah A. Schueren dated October 1, 1997.(J)
10.55 Form of Severance Benefit Agreement between Registrant and
the following executive officers: Virgil D. Thompson; Robert
L. Roe, M.D.; James C. Paulson, Ph.D; Edward C. Hall;
Jennifer Lorenzen.(K)
10.69 Letter Agreement between Epimmune and Dr. Robert W. Chesnut
regarding severance benefits dated February 5, 1998.(Q)
10.70 Letter Agreement between Epimmune and Dr. Alessandro Sette
regarding severance benefits dated February 5, 1998.(Q)
10.71 Letter Agreement between Epimmune and Dr. Robert L. Roe
regarding severance benefits dated June 2, 1999.(Q)
10.72 Letter Agreement between Epimmune and Virgil Thompson
regarding severance benefits dated June 2, 1999.(Q)
10.73 Letter Agreement between the registrant and Stephen F. Keane
dated October 1999.(S)
10.74 Form of Common Stock Purchase agreement dated February 15,
2000.(S)
10.75 Letter Agreement between Epimmune and Robert De Vaere dated
May 4, 2000.(T)
10.76 Letter Agreement between Epimmune and Mark Newman dated May
4, 2000.(T)
- ---------------
(A) Incorporated by reference to the Company's Form S-1 Registration Statement
and Amendments thereto (File No. 33-43356)
(B) Incorporated by reference to the Company's Form 8-K, dated March 19, 1993.
(C) Incorporated by reference to the Company's Annual Report on Form10-K, for
the fiscal year ended December 31, 1992, filed on March 26, 1993.
(D) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1993, filed on March 29, 1994.
(E) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1994, filed on March 31, 1995.
(F) Incorporated by reference to the Company's Quarterly Report on Form 10-Q/A,
Amendment No. 1, for the quarterly period ended March 31, 1995, filed on
August 17, 1995.
(G) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1995, filed on March 22, 1996.
(H) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1996, filed on March 31, 1997.
25
27
(I) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended September 30, 1997, filed on November 14,
1997.
(J) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1997, filed on March 31, 1998.
(K) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended March 31, 1998, filed on May 15, 1998.
(L) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended June 30, 1998, filed on August 14, 1998.
(M) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended September 30, 1998, filed on November 16,
1998.
(N) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1998, filed on April 15, 1999.
(O) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended March 31, 1999, filed on May 17, 1999.
(P) Incorporated by reference to the Company's Form 8-K, filed on July 16,
1999.
(Q) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended June 30, 1999, filed on August 16, 1999.
(R) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended September 30, 1999, filed on November 15,
1999.
(S) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1999, filed on March 17, 2000.
(T) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended June 30, 2000, filed on August 14, 2000.
(1) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Act of 1933 and Rule 406 Thereunder
Respecting Confidential Treatment dated November 21, 1991.
(2) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated May 15, 1996.
(4) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated July 15, 1998.
(5) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated December 17, 1998.
(6) Confidential Treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(b) Reports on Form 8-K
None.
(c) Exhibits
The response to this portion of Item 14 is submitted as Item 14 (a) (3).
(d) Financial Statement Schedules
The consolidated financial statement schedules required by this Item are
listed under Item 14(a)(2).
26
28
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, on this 29th day of
March, 2001.
EPIMMUNE INCORPORATED
By /s/ ROBERT W. CHESNUT
------------------------------------
Robert W. Chesnut, Ph.D.
Executive Vice President, R&D,
Secretary,
Acting President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Deborah A. Schueren and Howard E. Greene, Jr.,
and each of them, his attorney-in-fact, with the full power of substitution, for
him in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT W. CHESNUT Executive Vice President, R&D, March 29, 2001
- ----------------------------------------------------- Secretary, Acting President and
Robert W. Chesnut, Ph.D. Chief Executive Officer
(Principal Executive Officer)
/s/ ROBERT J. DE VAERE Vice President, Finance and March 29, 2001
- ----------------------------------------------------- Chief Financial Officer,
Robert J. De Vaere Assistant Secretary (Principal
Financial and Accounting
Officer)
/s/ HOWARD E. GREENE, JR. Chairman of the Board and March 29, 2001
- ----------------------------------------------------- Director
Howard E. Greene, Jr.
/s/ WILLIAM T. COMER Director March 29, 2001
- -----------------------------------------------------
William T. Comer, Ph.D.
/s/ MICHAEL G. GREY Director March 29, 2001
- -----------------------------------------------------
Michael G. Grey
/s/ JOHN P. MCKEARN Director March 29, 2001
- -----------------------------------------------------
John P. McKearn, Ph.D.
/s/ EMILE LORIA Director March 29, 2001
- -----------------------------------------------------
Emile Loria, M.D.
27
29
EPIMMUNE INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 1999, 1998 and 1997........ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
30
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Epimmune Inc.
We have audited the accompanying consolidated balance sheets of Epimmune
Inc. as of December 31, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Epimmune Inc.
at December 31, 2000 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
San Diego, California
February 2, 2001
F-2
31
EPIMMUNE INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------------
2000 1999
------------- -------------
Current assets:
Cash and cash equivalents................................. $ 4,181,000 $ 1,843,000
Short-term investments.................................... 5,412,000 6,412,000
Prepaids and other current assets......................... 507,000 460,000
------------- -------------
Total current assets........................................ 10,100,000 8,715,000
Restricted cash............................................. 472,000 472,000
Property and equipment, net................................. 966,000 817,000
Patents, net................................................ 2,948,000 2,700,000
Deposits and other assets................................... -- 1,000
------------- -------------
$ 14,486,000 $ 12,705,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 1,004,000 $ 970,000
Deferred contract revenues................................ 229,000 38,000
Accrued restructuring cost................................ -- 342,000
Accrued payroll and related expenses...................... 241,000 212,000
Current portion of notes payable.......................... 413,000 230,000
------------- -------------
Total current liabilities................................... 1,887,000 1,792,000
Deferred rent............................................... 119,000 55,000
Notes payable, less current portion......................... 389,000 436,000
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, 1,409,288 shares issued and outstanding at
December 31, 2000 and 1999............................. 14,000 14,000
Common stock, $.01 par value, 25,000,000 shares authorized
at December 31, 2000 and 1999; 7,847,343 and 6,048,945
shares issued and outstanding at December 31, 2000 and
1999, respectively..................................... 78,000 60,000
Additional paid-in capital................................ 153,720,000 147,393,000
Accumulated deficit....................................... (141,725,000) (136,988,000)
Unrealized gain (loss) on available-for-sale securities... 4,000 (57,000)
------------- -------------
Total stockholders' equity.................................. 12,091,000 10,422,000
------------- -------------
$ 14,486,000 $ 12,705,000
============= =============
See accompanying notes.
F-3
32
EPIMMUNE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
----------- ------------ ------------
REVENUES:
Research and development........................ $ -- $ 2,500,000 $ 2,005,000
Research grants and other income................ 1,603,000 1,668,000 1,692,000
----------- ------------ ------------
Total revenues.................................. 1,603,000 4,168,000 3,697,000
COSTS AND EXPENSES:
Research and development........................ 6,285,000 8,716,000 18,352,000
General and administrative...................... 2,305,000 2,508,000 4,587,000
Restructuring costs............................. (100,000) 2,707,000 --
Write-off of in-process technology.............. -- 3,154,000 --
Loss on permanent impairment of intangible
assets....................................... -- -- 3,400,000
----------- ------------ ------------
Total costs and expenses........................ 8,490,000 17,085,000 26,339,000
----------- ------------ ------------
Loss from operations............................ (6,887,000) (12,917,000) (22,642,000)
Minority interest in net loss of consolidated
subsidiary................................... -- 523,000 441,000
Interest income, net............................ 564,000 367,000 860,000
Other income, net............................... 1,581,000 544,000 --
Gain (loss) on sales and disposal of assets..... 5,000 3,218,000 (194,000)
----------- ------------ ------------
Net loss........................................ $(4,737,000) $ (8,265,000) $(21,535,000)
=========== ============ ============
Net loss per share-basic and diluted............ $ (.68) $ (1.57) $ (4.48)
=========== ============ ============
Shares used in computing net loss per
share-basic and diluted...................... 6,971,186 5,257,635 4,801,872
=========== ============ ============
See accompanying notes.
F-4
33
EPIMMUNE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNREALIZED
PREFERRED STOCK COMMON STOCK ADDITIONAL GAINS (LOSSES)
------------------- ------------------- PAID-IN ACCUMULATED ON AVAILABLE-FOR-
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SALE SECURITIES
--------- ------- --------- ------- ------------ ------------- -----------------
Balance at December 31, 1997...... -- $ -- 4,603,214 $46,000 $131,564,000 $(107,188,000) $(30,000)
Issuance of common stock for
cash.......................... -- -- 299,764 3,000 2,692,000 -- --
Issuance of common stock for
technology.................... -- -- 84,475 1,000 899,000 -- --
Issuance of Cytel Series B
preferred stock, net of
issuance costs................ 659,898 7,000 -- -- 3,593,000 -- --
Investment by Searle in
Epimmune...................... -- -- -- -- 3,894,000 -- --
Unrealized gains on
available-for-sale
securities.................... -- -- -- -- -- -- 30,000
Net loss........................ -- -- -- -- -- (21,535,000)
--------- ------- --------- ------- ------------ ------------- --------
Balance at December 31, 1998...... 659,898 7,000 4,987,453 50,000 142,642,000 (128,723,000) --
Issuance of common stock for
cash.......................... -- -- 33,910 1,000 202,000 -- --
Issuance of common stock in
exchange for Epimmune common
stock......................... -- -- 1,027,582 9,000 1,792,000 -- --
Issuance of Cytel Series S and
S-1 preferred stock net of
retirement of Series B........ 749,390 7,000 -- -- 2,499,000 -- --
Issuance of warrants to former
employees as part of
separation agreements......... -- -- -- -- 258,000 -- --
Unrealized losses on
available-for-sale
securities.................... -- -- -- -- -- -- (57,000)
Net loss........................ -- -- -- -- -- (8,265,000) --
--------- ------- --------- ------- ------------ ------------- --------
Balance at December 31, 1999...... 1,409,288 14,000 6,048,945 60,000 147,393,000 (136,988,000) (57,000)
Issuance of common stock for
cash.......................... -- -- 98,398 1,000 29,000 -- --
Issuance of common stock in
conjunction with private
placement, net of issuance
costs......................... -- -- 1,700,000 17,000 6,252,000 -- --
Deferred compensation related to
consultant stock options...... -- -- -- -- 17,000 -- --
Issuance of warrants to former
employees as part of
separation agreement.......... -- -- -- -- 29,000 -- --
Unrealized gains on
available-for-sale
securities.................... -- -- -- -- -- -- 61,000
Net loss........................ -- -- -- -- -- (4,737,000) --
--------- ------- --------- ------- ------------ ------------- --------
Balance at December 31, 2000...... 1,409,288 $14,000 7,847,343 $78,000 $153,720,000 $(141,725,000) $ 4,000
========= ======= ========= ======= ============ ============= ========
TOTAL
STOCKHOLDERS' COMPREHENSIVE
EQUITY LOSS
------------- -------------
Balance at December 31, 1997...... $ 24,392,000 $(14,362,000)
============
Issuance of common stock for
cash.......................... 2,695,000
Issuance of common stock for
technology.................... 900,000
Issuance of Cytel Series B
preferred stock, net of
issuance costs................ 3,600,000
Investment by Searle in
Epimmune...................... 3,894,000
Unrealized gains on
available-for-sale
securities.................... 30,000 30,000
Net loss........................ (21,535,000) (21,535,000)
------------ ------------
Balance at December 31, 1998...... 13,976,000 $(21,505,000)
============
Issuance of common stock for
cash.......................... 203,000
Issuance of common stock in
exchange for Epimmune common
stock......................... 1,801,000
Issuance of Cytel Series S and
S-1 preferred stock net of
retirement of Series B........ 2,506,000
Issuance of warrants to former
employees as part of
separation agreements......... 258,000
Unrealized losses on
available-for-sale
securities.................... (57,000) (57,000)
Net loss........................ (8,265,000) (8,265,000)
------------ ------------
Balance at December 31, 1999...... 10,422,000 $ (8,322,000)
============
Issuance of common stock for
cash.......................... 30,000
Issuance of common stock in
conjunction with private
placement, net of issuance
costs......................... 6,269,000
Deferred compensation related to
consultant stock options...... 17,000
Issuance of warrants to former
employees as part of
separation agreement.......... 29,000
Unrealized gains on
available-for-sale
securities.................... 61,000 61,000
Net loss........................ (4,737,000) (4,737,000)
------------ ------------
Balance at December 31, 2000...... $ 12,091,000 $ (4,676,000)
============ ============
See accompanying notes.
F-5
34
EPIMMUNE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
----------- ----------- ------------
OPERATING ACTIVITIES
Net loss.................................................... $(4,737,000) $(8,265,000) $(21,535,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 537,000 577,000 811,000
Amortization of deferred compensation..................... 17,000 -- --
Deferred rent............................................. 64,000 56,000 (225,000)
Deferred revenue.......................................... 191,000 (477,000) 437,000
Loss on permanent impairment of intangible assets......... -- -- 3,400,000
Minority interest in consolidated subsidiary.............. -- (523,000) (441,000)
Stock warrants relating to severance agreement............ 29,000 -- --
(Gain) loss on disposal of assets......................... (5,000) (3,218,000) 194,000
Accrued restructuring..................................... -- 2,707,000 --
Restructuring operating expenses.......................... (342,000) (1,792,000) --
Write-off of in-process technology........................ -- 3,154,000 --
Changes in operating assets and liabilities:
Other current assets.................................... (46,000) 697,000 (493,000)
Accounts payable and accrued liabilities................ 34,000 (1,451,000) 1,534,000
Accrued payroll and related expense..................... 29,000 (205,000) (47,000)
----------- ----------- ------------
Net cash used in operating activities....................... (4,229,000) (8,740,000) (16,365,000)
INVESTING ACTIVITIES
Purchases of available-for-sale securities.................. (3,742,000) (2,470,000) (18,909,000)
Maturities of available-for-sale securities................. 4,803,000 1,085,000 14,145,000
Sales of available-for-sale securities...................... -- 4,133,000 7,193,000
Proceeds from the sale of equipment......................... 5,000 3,687,000 109,000
Proceeds from the sale of patents (net of fees)............. -- 3,035,000 --
Principal payments on note receivable....................... -- -- 100,000
Purchases of property and equipment......................... (356,000) (739,000) (2,274,000)
Expenditures related to early lease termination............. -- -- (226,000)
Patents..................................................... (578,000) (878,000) (1,320,000)
Deposits and other assets................................... -- 23,000 574,000
Repayment of note........................................... -- 519,000 --
----------- ----------- ------------
Net cash provided by (used in) investing activities......... 132,000 8,395,000 (608,000)
FINANCING ACTIVITIES
Principal payments under equipment notes payable and note
payable to bank........................................... (230,000) (1,001,000) (1,207,000)
Restricted cash released as note payable collateral......... -- -- 1,031,000
Restricted cash for building lease agreement................ -- -- (472,000)
Proceeds from the issuance of equipment notes payable....... 366,000 510,000 1,515,000
Net proceeds from issuance of Cytel Series B preferred
stock..................................................... -- -- 3,600,000
Net proceeds from Searle investment in Epimmune............. -- -- 6,100,000
Net proceeds from issuance of common stock.................. 6,299,000 203,000 2,695,000
----------- ----------- ------------
Net cash provided by (used in) financing activities......... 6,435,000 (288,000) 13,262,000
----------- ----------- ------------
Increase (decrease) in cash and cash equivalents............ 2,338,000 (633,000) (3,711,000)
Cash and cash equivalents at beginning of year.............. 1,843,000 2,476,000 6,187,000
----------- ----------- ------------
Cash and cash equivalents at end of year.................... $ 4,181,000 $ 1,843,000 $ 2,476,000
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................... $ 69,000 $ 111,000 $ 122,000
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Early lease termination -- net debt extinguishment and asset
abandonment............................................... $ -- $ -- $ 153,000
=========== =========== ============
Asset write down in accrued restructuring................... $ -- $ 593,000 $ --
=========== =========== ============
Assumption of debt by Nextran............................... $ -- $ 838,000 $ --
=========== =========== ============
Issuance of common stock for patent rights.................. $ -- $ -- $ 900,000
=========== =========== ============
Exchange of common and preferred stock, for minority
interest in Epimmune...................................... $ -- $ 4,307,000 $ --
=========== =========== ============
See accompanying notes.
F-6
35
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Cytel Corporation was incorporated in Delaware on July 10, 1987. On July 1,
1999, Cytel merged with its majority-owned subsidiary, Epimmune Inc., and
changed its name from Cytel Corporation to Epimmune Inc. The Company's mission
is to develop novel vaccines for the treatment and prevention of infectious
diseases and cancer. Unless otherwise indicated, all references to "Cytel" are
to predecessor Cytel Corporation, all references to "Epimmune" are to Epimmune
Inc., a majority-owned subsidiary of Cytel until July 1, 1999. All references to
the "Company" are to the combined entity of Cytel and Epimmune.
PRINCIPLES OF CONSOLIDATION
On July 1, 1999, the Company completed a series of transactions (the
"Exchange Transactions") in which it: (i) transferred all of the outstanding
shares of Epimmune's Series B-1 Preferred Stock then held by Cytel to G.D.
Searle & Co. ("Searle") in exchange for all of the outstanding shares of Cytel's
Series B Preferred Stock, (ii) issued 859,666 shares of Cytel's Series S
Preferred Stock and 549,622 shares of Cytel's Series S-1 Preferred Stock to
Searle in exchange for all outstanding shares of Epimmune's Series B Preferred
Stock and Series B-1 Preferred Stock and (iii) issued a total of 1,027,782
shares of Cytel's Common Stock to the holders of Common Stock of Epimmune in
exchange for all outstanding shares of Epimmune's Common Stock. The acquisition
of the minority interest in Epimmune, through the exchange transaction, was
accounted for as a purchase. The Company recorded the acquisition of the
minority interest at the fair market value of the preferred and common stock
issued, and determined that the excess of the purchase price over the
identifiable net assets of $3.2 million was in-process technology based on a
discounted cash flow analysis of that technology. The analysis, with a discount
rate of 50%, was based on estimated research and development costs for nine
years and product revenues beginning in year six, after the assumed completion
of clinical trials and product approval by the FDA. The analysis also considered
milestone payments based on scientific accomplishments and new collaborative
revenues based on projected future collaboration agreements. The value of the
technology was charged to acquired in-process technology because technological
feasibility had not been achieved nor had alternative future uses for the
technology been identified. Following the Exchange Transactions, Cytel merged
with Epimmune and changed its name to Epimmune Inc. As of December 31, 2000,
Pharmacia, the parent of Searle owned 4.0% of the Company's outstanding common
stock and all of the Company's outstanding preferred stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of cash, certificates of
deposit, treasury securities and repurchase agreements with original maturities
at the date of acquisition of less than three months.
SHORT-TERM INVESTMENTS
The Company has classified its investments as available-for-sale and
accordingly carries them at fair value. Unrealized holding gains or losses on
these securities are included in comprehensive income. The
F-7
36
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses are also included in
interest income. The cost of securities sold is based on the specific
identification method.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in U.S. government securities and debt
instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
Management attempts to schedule the maturities of the Company's investments to
coincide with the Company's expected cash requirements.
PROPERTY AND EQUIPMENT
Furniture and equipment is stated at cost and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized using the straight-line method over the
shorter of the estimated useful life of the assets or the lease term.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," if indicators of impairment exist, the
Company assesses the recoverability of the affected long-lived assets by
determining whether the carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is indicated, the
Company values the asset at fair value. As described fully under Note 2 --
Discontinuance of Cytel operations, management determined that the cell adhesion
patent assets were impaired, and recorded a $3.4 million loss on permanent
impairment of these assets in 1998.
PATENT COSTS
Patent costs are amortized on a straight-line basis over ten years. The
patent costs are shown net of accumulated amortization of $577,000 and $246,000
at December 31, 2000 and 1999, respectively.
DEFERRED RENT
Rent expense is recognized on a straight-line basis over the term of the
lease. Accordingly, rent expense incurred in excess of rent paid is reflected as
deferred rent until April 2004.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation'
("SFAS 123") requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Deferred compensation for options granted to non-employees has been
determined in accordance with SFAS 123 and Emerging Issues Task Force No. 96-18
as the fair value of the consideration received or the
F-8
37
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fair value of the equity instruments issued, whichever is more reliably
measured. Deferred charges for options granted to non-employees are periodically
re-measured as the underlying options vest.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," an interpretation of APB 25 ("FIN 44" or the "Interpretation").
The Interpretation, which has been adopted prospectively as of July 1, 2000,
requires that stock options that have been modified to reduce the exercise price
be accounted for as variable. Management believes the Company's accounting for
its stock options is in compliance with the guidelines provided in FIN 44, and
therefore, the adoption of FIN 44 did not affect the Company's results of
operations.
RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES
Collaboration revenues are earned and recognized as research costs are
incurred in accordance with the provisions of each agreement. Fees paid to
initiate research projects are deferred and recognized over the project period.
Milestone payments are recognized as revenue upon the completion of the
milestone. Revenue from grants is recognized on a percentage of completion basis
as related costs are incurred. The Company recognizes revenue only on payments
that are non-refundable, and defers revenue recognition until performance
obligations have been completed. Research and development costs are expensed as
incurred. Expenses under research grants and contracts, which are included in
research and development, were approximately $4.5 million, $4.9 million and $4.5
million for 2000, 1999 and 1998, respectively.
RESEARCH GRANTS
Research grants represent research and development revenues primarily from
the National Institutes of Health.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period excluding unvested shares
pertaining to early exercises. All potential common shares have been excluded
from the diluted net loss per share calculations as they are antidilutive to net
loss.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted the SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income (loss) and its components; the Company has
disclosed its comprehensive income (loss) in the statement of stockholders'
equity.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
F-9
38
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. DISCONTINUANCE OF CYTEL OPERATIONS AND SALE OF CERTAIN RELATED ASSETS
DISCONTINUANCE OF CYTEL OPERATIONS
On March 29, 1999, Cytel announced the results from Phase II/III clinical
trials of its lead therapeutic compound, Cylexin, showing no benefit over
placebo. Accordingly, Cytel terminated its therapeutic anti-inflammatory
business and recorded a charge of $3.4 million as of December 31, 1998,
representing the book value of its cell adhesion patent portfolio. This charge
was recorded in accordance with SFAS 121 after Cytel determined that its
intangible assets were permanently impaired.
Based on the determination to terminate Cytel's businesses and focus future
operations on Epimmune, Cytel recorded a restructuring charge of $3.7 million in
the first quarter 1999. This restructuring charge was reduced to $2.7 million in
the fourth quarter 1999, primarily due to early terminations and subsequent
subleasing of facility leases and auction proceeds received for sale of assets.
During 2000, the Company made payments totaling $242,000 related to final
shut-down costs for Cytel and made a further $100,000 reduction in accrued
restructuring due to a favorable IRS ruling relating to potential tax liability
regarding Cytel's employee stock purchase plan.
SALE OF THE GLYTEC CARBOHYDRATE SYNTHESIS AND MANUFACTURING BUSINESS
On February 28, 1999, Cytel licensed its proprietary carbohydrate synthesis
and manufacturing intellectual property assets to Baxter Healthcare
Corporation's Nextran unit ("Nextran") for exclusive use in xenotransplantation.
Cytel received total consideration of $4.0 million, of which $3.2 million was
cash and $0.8 million was assignment of certain liabilities to Nextran.
Additionally, Nextran assumed the facility lease and certain personnel and fixed
assets related to this manufacturing operation. On March 26, 1999, Cytel sold
the remainder of its Glytec carbohydrate synthesis and manufacturing
intellectual property assets to Neose Technologies, Inc. ("Neose"). Neose paid
Cytel $3.5 million cash and paid an additional $1.5 million into escrow, the
release of which was conditioned on the Company's satisfaction of certain
matters relating to the patents and licenses acquired by Neose. As a result of
the transactions with Nextran and Neose, the Company recorded a gain on sale and
disposal of assets of approximately $3.2 million in 1999.
During 2000, the Company was paid $1.1 million in satisfaction of certain
matters under the escrow agreement with Neose which has been recorded in other
income. Neose may pay the Company up to an additional $1.6 million contingent on
potential payments and revenues realized by Neose in connection with certain
future corporate collaborations.
F-10
39
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SHORT-TERM INVESTMENTS
The following tables summarize available-for-sale securities:
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
---------- ---------------- ---------------- --------------------
DECEMBER 31, 2000
U.S. Government
Securities.......... $ -- $ -- $ -- $ --
Corporate
Obligations......... 5,408,000 4,000 -- 5,412,000
---------- ------ -------- ----------
$5,408,000 $4,000 $ -- $5,412,000
========== ====== ======== ==========
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
---------- ---------------- ---------------- --------------------
DECEMBER 31, 1999
U.S. Government
Securities.......... $ 500,000 $ -- $ (5,000) $ 495,000
Corporate
Obligations......... 5,969,000 -- (52,000) 5,917,000
---------- ------ -------- ----------
$6,469,000 $ -- $(57,000) $6,412,000
========== ====== ======== ==========
The above tables exclude an aggregate of $888,000 and $599,000 in corporate
obligations that are classified as cash equivalents in the accompanying balance
sheets at December 31, 2000 and 1999, respectively, due to the contractual
maturity of these assets.
The amortized cost and estimated fair value of debt securities at December
31, 2000, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because the issuers of the securities may
have the right to prepay obligations without prepayment penalties.
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------------ ------------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
Due in one year or less........... $1,600,000 $1,602,000 $3,642,000 $3,618,000
Due after one to four years....... 3,808,000 3,810,000 2,827,000 2,794,000
---------- ---------- ---------- ----------
$5,408,000 $5,412,000 $6,469,000 $6,412,000
========== ========== ========== ==========
4. BALANCE SHEET INFORMATION
Other current assets consist of the following:
DECEMBER 31,
--------------------
2000 1999
-------- --------
Investment income and grant revenue receivable.............. $323,000 $368,000
Contract revenue receivable................................. 125,000 --
Prepaid expenses............................................ 59,000 56,000
Reimbursement for incurred license costs.................... -- 36,000
-------- --------
$507,000 $460,000
======== ========
F-11
40
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BALANCE SHEET INFORMATION (CONTINUED)
Property and equipment consist of the following:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
Furniture and equipment..................................... $1,178,000 $ 826,000
Leasehold improvements...................................... 219,000 215,000
---------- ----------
1,397,000 1,041,000
Less accumulated depreciation and amortization.............. (431,000) (224,000)
---------- ----------
$ 966,000 $ 817,000
========== ==========
Accounts payable and accrued liabilities consist of the following:
DECEMBER 31,
----------------------
2000 1999
---------- --------
Trade accounts payable...................................... $ 935,000 $821,000
Directors deferred compensation............................. 60,000 64,000
Miscellaneous accrued liabilities........................... 9,000 85,000
---------- --------
$1,004,000 $970,000
========== ========
5. ADDITIONAL STATEMENT OF OPERATIONS INFORMATION
As a result of the events described in Note 1, the Company is presenting
additional information related to the operations of Cytel and Epimmune. As of
July 1, 1999, Cytel and Epimmune merged.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
CYTEL CONSOLIDATING
CORPORATION EPIMMUNE INC. ENTRIES TOTAL
----------- ------------- ------------- ------------
REVENUES:
Research and development................. $ 500,000 $ 2,000,000 $ -- $ 2,500,000
Research grants and other income......... 25,000 1,643,000 -- 1,668,000
----------- ----------- -------- ------------
Total revenues........................... 525,000 3,643,000 -- 4,168,000
COSTS AND EXPENSES:
Research and development................. 3,042,000 5,674,000 -- 8,716,000
General and administrative............... 870,000 1,638,000 -- 2,508,000
Restructuring costs...................... 2,707,000 -- -- 2,707,000
Write-off of in-process technology....... -- 3,154,000 -- 3,154,000
----------- ----------- -------- ------------
Total costs and expenses................. 6,619,000 10,466,000 -- 17,085,000
----------- ----------- -------- ------------
Loss from operations..................... (6,094,000) (6,823,000) -- (12,917,000)
Minority interest in net loss of
consolidated subsidiary.................. -- -- 523,000 523,000
Interest income (expense).................. (44,000) 411,000 -- 367,000
Other income (expense), net................ 550,000 (6,000) -- 544,000
Gain (loss) on sales and disposal of
assets................................... 3,296,000 (78,000) -- 3,218,000
----------- ----------- -------- ------------
Net loss................................... $(2,292,000) $(6,496,000) $523,000 $ (8,265,000)
=========== =========== ======== ============
F-12
41
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY
STOCK WARRANTS
In June 1999, September 1999, and May 2000, the Company issued warrants to
purchase 235,200, 5,804 and 4,960 shares respectively, of Common Stock with an
exercise price of $1.875 to former officers of Cytel. The warrants were issued
in connection with severance agreements and were recorded at their fair value on
the date of grant. The expense associated with the issuance of the warrants was
included as part of the restructuring charge. The warrants issued in June and
September 1999 will expire June 2003; warrants issued in May 2000 will expire
May 2004.
EMPLOYEE STOCK PURCHASE PLAN
In October 1991, Cytel adopted an Employee Stock Purchase Plan ("ESPP")
whereby employees, at their option, could purchase shares of Cytel common stock
through payroll deductions at the lower of 85% of the fair market value on the
plan offering date or 85% of the fair market value of the common stock at the
purchase date. The ESPP was terminated in July 1999. As of the termination date
of the ESPP, 85,558 shares of common stock had been issued under the Stock Plan.
STOCK PLANS
1989 Stock Plan
In November 1989, Cytel adopted a Stock Plan (the "Plan"), under which
options may be granted to employees, directors, consultants or advisors of
Cytel. The Plan provides for the grant of both incentive stock options and
nonstatutory stock options. The exercise price of an incentive stock option is
not less than the fair market value of the common stock on the date of grant.
The exercise price of nonstatutory options is not less than 85% of the fair
market value of the common stock on the date of grant. No options granted under
the Plan have a term in excess of ten years from the date of grant. Shares and
options issued under the Plan vest over varying periods of one to six years.
Effective June 9, 2000 with the approval of the Company's 2000 Plan, the Plan
was discontinued resulting in cancellation of remaining available shares and any
shares granted under the Plan that in the future are cancelled or expire will
not be available for re-grant. As of December 31, 2000, 716,385 options to
purchase common stock were outstanding under the 1989 Plan.
1997 Stock Plan
In December 1997, Epimmune Inc. adopted a Stock Plan ("Epimmune Stock
Plan"), under which options were granted to employees, directors, and
consultants of Epimmune Inc. The Epimmune Stock Plan provides for the grant of
both incentive stock options and nonstatutory stock options. The exercise price
of an incentive stock option was not less than the fair market value of the
common stock on the date of grant. The exercise price of nonstatutory options
was not less than 85% of the fair market value of the common stock on the date
of grant. No options granted under the Plan have a term in excess of ten years
from the date of grant. Options issued under the Plan vest over varying periods
of one to four years. Effective with the Exchange Transaction, the Company
assumed 423,283 options granted under the Epimmune Stock Plan. Options that
terminate will not be available for future grant. As of December 31, 2000,
262,647 options to purchase common stock were outstanding under the Epimmune
Stock Plan.
2000 Stock Plan
In June 2000, Epimmune Inc. adopted a Stock Plan ("2000 Stock Plan"), under
which options may be granted to employees, directors, consultants or advisors of
Epimmune. The 2000 Stock Plan provides for the grant of both incentive stock
options and nonstatutory stock options. The exercise price of an incentive stock
option is not less than the fair market value of the common stock on the date of
the grant. The exercise price
F-13
42
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
of nonstatutory options is not less than 85% of the fair market value of the
common stock on the date of grant. No options granted under the 2000 Stock Plan
have a term in excess of ten years from the date of grant. Options issued under
the 2000 Stock Plan may vest over varying periods of up to four years. As of
December 31, 2000, 36,000 options to purchase common stock were outstanding and
664,000 options were available for future grant under the 2000 Stock Plan.
STOCK OPTION REPRICING
In June 1998, the stockholders approved an Option Exchange Program for
certain options under the 1989 Plan. These options vest over a six year period
in accordance with a schedule developed by management, in conjunction with the
State of Wisconsin Investment Board, a major stockholder of the Company. On the
date of approval, all current employees were eligible to participate; however,
options granted to outside directors and consultants to the Company were
excluded from the exchange. There were 546,962 options eligible for
participation, of which 303,145 options were repriced. The effective exchange
price was $10.7188. Eligible employees who elected to participate forfeited a
total of 42,879 shares. These shares were permanently canceled and not returned
to the 1989 Plan for future grant. The Option Exchange Program imposes
restrictive vesting provisions. If the holder exercises vested options before
the sixth year, then the remaining unvested options do not vest until the end of
the sixth year, at which time all remaining shares will be fully vested.
The following table summarizes stock option activity under all stock option
plans for the three years ended December 31, 2000:
WEIGHTED
SHARES AVERAGE PRICE
--------- -------------
Balance at December 31, 1997........................ 540,593 30.94
Granted........................................... 437,671 10.82
Exercised......................................... (1,997) 1.50
Cancelled......................................... (418,009) 32.84
--------- ------
Balance at December 31, 1998........................ 558,258 13.88
Granted........................................... 453,754 3.38
Assumed from Epimmune............................. 423,283 0.27
Exercised......................................... (25,023) 0.40
Cancelled......................................... (355,910) 12.36
--------- ------
Balance at December 31, 1999........................ 1,054,362 $ 4.76
Granted........................................... 120,500 6.24
Exercised......................................... (98,398) 0.31
Cancelled......................................... (61,432) 9.23
========= ======
Balance at December 31, 2000........................ 1,015,032 $ 5.10
========= ======
F-14
43
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 2000, 664,000 shares are available for future issuance
under the 2000 Stock Option Plan. The following is a summary of the options
outstanding as of December 31, 2000:
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED EXERCISE
AVERAGE AVERAGE PRICE OF
RANGE OF EXERCISE OPTIONS REMAINING LIFE EXERCISE OPTIONS OPTIONS
PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE EXERCISABLE
- ----------------- ----------- -------------- ----------- ----------- -----------
$00.16 - $02.25... 265,074 7.46 $ 0.38 264,360 $ 0.37
$03.18 - $03.18... 355,678 8.93 3.19 94,323 3.19
$03.75 - $10.72... 322,684 7.23 7.47 158,086 9.43
$11.16 - $42.88... 71,596 3.69 21.31 63,389 22.11
--------- -------
Total 1,015,032 580,158
========= =======
Weighted averages 7.64 $ 5.10 $ 5.67
Adjusted pro forma information regarding net income or loss is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the
"Black-Scholes" method for option pricing with the following weighted average
assumptions for 2000, 1999, and 1998: risk-free interest rates of 6%; dividend
yield of 0; and a weighted average expected life for all options of six years.
The volatility factor assumptions of the expected market price the Company's
common stock were 142%, 135%, and 105% for 2000, 1999, and 1998, respectively.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the option is amortized to expense over the option's vesting period. The
Company's adjusted pro forma information is as follows:
2000 1999 1998
----------- ------------ ------------
Pro forma net loss................ $(5,227,000) $(11,225,000) $(23,895,000)
Pro forma net loss per share...... $ (0.75) $ (2.13) $ (4.98)
The weighted average fair value of options granted during 2000, 1999, and
1998 was $5.86, $3.02, and $8.11, respectively.
In March 1993, the Company adopted a Stockholder Rights Plan. The Plan
provides for the distribution of a preferred stock purchase right ("Rights") as
a dividend for each share of the Company's common stock held as of the record
date at the close of business on April 8, 1993. Under certain conditions
involving an acquisition by any person or group of 15% or more of the common
stock, the Rights permit the holders (other than the 15% holder) to purchase one
one-hundredth of a share of Series A Preferred Stock at a price of $80 per one
one-hundredth of a preferred share per Right. Each one one-hundredth of a share
of preferred stock has rights, privileges and preferences which make its value
approximately equal to the value of a common share. In addition, in the event of
certain business combinations, the Rights permit the purchase of the common
stock of an acquirer at a 50% discount. Under certain conditions, the Rights may
be redeemed by the Board of Directors at a price of $.01 per Right. The Rights
have no voting privileges and are attached to and automatically trade with the
Company's common stock. The Rights will expire on March 19, 2003.
F-15
44
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EQUIPMENT LOANS AND NOTES PAYABLE
In August 1998, Epimmune entered into a $750,000 loan and security
agreement for capital equipment purchases and certain tenant improvements. In
April 2000, Epimmune signed a modification to the existing loan agreement
increasing the available credit limit by $400,000. These funds were used
primarily for enhancement and upgrades of our scientific information management
systems databases. Total advances under the credit line total $366,000 and
$750,000 at December 31, 2000 and 1999, respectively. The capital equipment
financed secures all borrowings. The terms of the credit line contain a
financial covenant requiring the Company to maintain minimum liquidity equal to
nine months cash burn, which the Company was in compliance with at December 31,
2000.
Equipment loans and notes payable consist of the following:
DECEMBER 31,
--------------------
2000 1999
-------- --------
Equipment loan payable in monthly installments of principal
and interest of $23,600, at 9.25% interest, due August
2002...................................................... $436,000 $666,000
Equipment loan payable in monthly installments of principal
and interest of $14,600, at 9.44% interest, due March
2003...................................................... 366,000 --
-------- --------
$802,000 $666,000
======== ========
Future annual principal payments on equipment loans and notes payable are
as follows at December 31, 2000:
2001...................................................... $413,000
2002...................................................... 346,000
2003...................................................... 43,000
--------
$802,000
========
8. COMMITMENTS
The Company leases its office and research facility under an operating
lease that expires in March 2009. Under this operating lease, the Company pays
taxes, insurance and maintenance expenses related to the premises. Epimmune's
facility lease requires a letter of credit of $472,000 to secure the performance
of the Company's lease obligation and is reflected as restricted cash.
Rent expense for 2000, 1999, and 1998 was $582,000, $1.7 million and $1.8
million, respectively.
Future minimum lease payments under operating leases at December 31, 2000
are as follows:
OPERATING
YEAR LEASES
---- ----------
2001..................................................... $ 546,000
2002..................................................... 558,000
2003..................................................... 567,000
2004..................................................... 585,000
2005..................................................... 602,000
Thereafter............................................... 2,083,000
----------
Total minimum lease payments................... $4,941,000
==========
F-16
45
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REVENUES UNDER COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
G.D. SEARLE & CO.
In September 1997, Searle purchased 317,460 shares of Cytel common stock
for $5.0 million. Cytel transferred $6.5 million in cash and $1.5 million in
other assets to capitalize Epimmune.
In February 1998, Epimmune entered into a collaborative research and
development agreement with Searle to develop immune-stimulating products for the
treatment of cancer. Under the terms of the agreement, Epimmune has granted
Searle exclusive worldwide rights to its epitope and PADRE technologies in the
cancer field, excluding rights previously granted to Takara Shuzo Co., Ltd.
Biomedical Group (Takara) for the ex vivo treatment of cancer in Japan. As part
of the February 1998 agreement, Searle purchased 1,032,149 shares of Epimmune's
Series B convertible preferred stock for $6.1 million and 659,898 shares of
Cytel's Series B convertible preferred stock for $3.9 million. Cytel
simultaneously purchased 659,898 shares of Epimmune's Series B-1 convertible
preferred stock for $3.9 million.
In July 1999, as a result of the Exchange Transaction, the Company
transferred all of the outstanding shares of Epimmune's Series B-1 Preferred
Stock then held by Cytel to Searle in exchange for all of the outstanding shares
of Cytel's Series B Preferred Stock, and issued 859,666 shares of Cytel's Series
S Preferred Stock and 549,622 shares of Cytel's Series S-1 Preferred Stock to
Searle in exchange for all outstanding shares of Epimmune's Series B Preferred
Stock and Series B-1 Preferred Stock.
In August 1999, the Company received a $2.0 million milestone payment as a
result of Searle's acceptance of a lead product candidate for breast, lung and
colon cancers.
In November 2000, the Company was notified by Pharmacia, that following the
merger between Pharmacia and Monsanto, the parent of Searle, they would not
continue funding their cancer vaccine program.
TAKARA SHUZO CO., LTD
Under two agreements with Takara, which were assigned to Epimmune in
October 1997, Epimmune's technology is being applied to fungal disease targets
and ex-vivo cellular therapy for the treatment of cancer. Under the anti-fungal
collaboration initiated in June 1994, Takara obtained rights to any anti-fungal
products resulting from the collaboration for commercialization in Japan.
Epimmune has the right to develop products in North America, and the companies
share rights in the rest of the world. Research in the anti-fungal field, using
Epimmune technology is now being conducted independently by Takara in Japan.
Under the ex-vivo cellular therapy collaboration initiated in October 1994,
Takara obtained rights to Epimmune's technology relevant to the development of
ex vivo cellular therapies for the treatment of cancer in Japan. Takara will
make payments upon achievement of certain clinical milestones and pay royalties
to Epimmune on sales from products resulting from the collaboration under both
agreements.
ELAN CORPORATION, PLC
In July 1998, Cytel entered into an exclusive sublicense and option
agreement with Elan International Services Ltd. (Elan), a subsidiary of Elan
Corporation, plc., granting Elan rights to patents involving use of antibodies
that bind VLA-4 integrin for the treatment of inflammatory conditions. In
connection with this agreement, which included the grant of an exclusive
sublicense, Elan made a $4.0 million equity investment in Cytel, based on the
fair value of the stock, of which $2.6 million was allocated to the purchase
price of 285,714 shares of the Company's common stock and $1.4 million was
allocated to the rights granted under the exclusive sublicense and option
agreement. In addition, Elan has an option to enter into a nonexclusive
sublicense for patent rights to other VLA-4 blocking compounds.
F-17
46
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REVENUES UNDER COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
In June 1999, Cytel entered a further agreement eliminating milestone
obligations under the July 1998 agreement. Under the terms of the agreement,
Cytel received $0.5 million, which was recorded as other income.
10. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 2000 and 1999 are shown below. A valuation allowance of $59,895,000 at
December 31, 2000 and $61,374,000 at December 31, 1999 has been recognized to
offset the deferred tax assets as realization of such assets is uncertain.
2000 1999
------------ ------------
Deferred tax liabilities:
Patents expensed for tax...................... $ (832,000) $ (900,000)
------------ ------------
Total deferred tax liabilities.................. (832,000) (900,000)
Deferred tax assets:
Capitalized research expenses................. 833,000 3,691,000
Net operating loss carry forwards............. 50,797,000 49,179,000
Research and development credits.............. 8,949,000 8,692,000
Other, net.................................... 148,000 712,000
------------ ------------
Total deferred tax assets....................... 60,727,000 62,274,000
Valuation allowance for deferred tax assets..... (59,895,000) (61,374,000)
------------ ------------
Net deferred tax assets......................... $ -- $ --
============ ============
At December 31, 2000, the Company has federal and California net operating
loss carry forwards of approximately $130,106,000 and $91,475,000, respectively.
The difference between the federal and California tax loss carry forwards is
primarily attributable to the capitalization of research and development
expenses for California tax purposes and expiration of the California tax loss
carry forwards. The federal tax loss carry forwards will begin expiring in 2003,
unless previously utilized. The California tax loss carry forwards will continue
to expire in 2001. The Company also has federal and California research and
development tax credit carry forwards of $6,782,000 and $3,333,000,
respectively. The federal research and development tax credit carry forwards
will begin expiring in 2002 unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, the annual use of
the Company's net operating loss and credit carry forwards will be limited
because of greater than 50% cumulative changes in ownership which occurred
during 1989 and 1994. However, the Company believes that these limitations will
not have a material impact on the financial statements.
F-18
47
EPIMMUNE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following tables present unaudited quarterly financial information, for
the eight quarters ended December 31, 2000. We believe this information reflects
all adjustments (consisting only of normal recurring adjustments) that we
consider necessary for a fair presentation of such information in accordance
with generally accepted accounting principles. The results for any quarter are
not necessarily indicative of results for any future period. (in millions,
except per share data):
YEAR ENDED DECEMBER 31, 2000 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
---------------------------- ----------- ----------- ----------- -----------
Revenues............................. $ 0.3 $ 0.4 $ 0.5 $ 0.4
Income (loss) from operations........ (1.8) (1.6) (1.6) (1.9)
Net income (loss).................... (0.7) (1.5) (1.5) (1.0)
Basic net income (loss) per share.... (0.11) (0.21) (0.21) (0.14)
Diluted net income (loss) per
share.............................. (0.11) (0.21) (0.21) (0.14)
YEAR ENDED DECEMBER 31, 1999 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
---------------------------- ----------- ----------- ----------- -----------
Revenues............................. $ 0.9 $ 0.5 $ 2.5 $ 0.3
Income (loss) from operations........ (8.3) (1.9) (2.8) 0.1
Net income (loss).................... (4.7) (0.9) (2.8) 0.1
Basic net income (loss) per share.... (0.95) (0.17) (0.51) 0.03
Diluted net income (loss) per
share.............................. (0.95) (0.17) (0.51) 0.02
12. SUBSEQUENT EVENTS
On January 16, 2001, the Company entered into an employment agreement with
Dr. Emile Loria for the position of President and Chief Executive Officer
contingent upon his obtaining satisfactory approval to work in the United
States. Dr. Loria was elected to the Company's Board of Directors.
Also on January 16, 2001, Epimmune entered into a Restricted Stock Purchase
agreement with Dr. Loria for the purchase of 1,056,301 common shares at $2.50
per share. A promissory note was issued, secured by the shares issued to Dr.
Loria, where principal and interest will be due and payable in four years from
the date of the note.
F-19