UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

Commission File Number: 000-30289

 

PRAECIS PHARMACEUTICALS INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

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 ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).      Yes ý  No o

 

As of April 30, 2003, there were 51,832,850 shares of the registrant’s common stock, $.01 par value, outstanding.

 

 

PRAECIS PHARMACEUTICALS INCORPORATED
FORM 10-Q

 

FOR THE QUARTER ENDED MARCH 31, 2003

 

INDEX

 

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets - December 31,2002 and March 31, 2003
	Condensed Consolidated Statements of Operations - three months ended March 31, 2002 and 2003
	Condensed Consolidated Statements of Cash Flows - three months ended March 31, 2002 and 2003
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION OF CHIEF FINANCIAL OFFICER
EXHIBIT INDEX

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

PRAECIS PHARMACEUTICALS INCORPORATED
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)

 

		December 31, 2002			March 31, 2003
Assets
Current assets:
Cash and cash equivalents		$	64,913		$	90,441
Marketable securities		130,122			90,828
Prepaid expenses and other assets		848			603
Total current assets		195,883			181,872
Property and equipment, net		71,252			70,199
Due from officer		933			908
Other assets		182			115
Total assets		$	268,250		$	253,094
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	3,285		$	1,269
Accrued expenses		7,075			5,153
Total current liabilities		10,360			6,422
Long-term debt		33,000			33,000
Commitments and contingencies
Stockholders’ equity:
Common Stock, $0.01 par value; 200,000,000 shares authorized; 51,801,423 shares in 2002 and 51,832,475 shares in 2003 issued and outstanding		518			518
Accumulated other comprehensive income		203			364
Additional paid-in capital		354,676			354,712
Accumulated deficit		(130,507		)	(141,922		)
Total stockholders’ equity		224,890			213,672
Total liabilities and stockholders’ equity		$	268,250		$	253,094

 

See accompanying notes.

 

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PRAECIS PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

 

		Three Months Ended March 31,
		2002			2003
Revenue		$	—		$	—
Costs and expenses:
Research and development		11,336			8,679
Sales and marketing		440			1,028
General and administrative		2,114			2,124
Total costs and expenses		13,890			11,831
Operating loss		(13,890		)	(11,831		)
Interest income, net		1,204			416
Net loss		$	(12,686	)	$	(11,415	)
Basic and diluted net loss per share		$	(0.25	)	$	(0.22	)
Weighted average number of basic and diluted shares outstanding		51,415			51,820

 

See accompanying notes.

 

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PRAECIS PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 

		Three Months Ended March 31,
		2002			2003
Operating activities:
Net loss		$	(12,686	)	$	(11,415	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		1,173			1,140
Stock compensation		(193		)	30
Changes in operating assets and liabilities:
Accounts receivable		458			—
Prepaid expenses and other assets		(5		)	337
Accounts payable		2,761			(2,016		)
Accrued expenses		(7		)	(1,922		)
Net cash used in operating activities		(8,499		)	(13,846		)
Investing activities:
Purchase of available-for-sale securities		(28,622		)	(17,529		)
Sales or maturities of available-for-sale securities		25,747			56,984
Purchase of property and equipment		(985		)	(87		)
Net cash (used in) provided by investing activities		(3,860		)	39,368
Financing activities:
Proceeds from exercises of stock options		784			6
Net cash provided by financing activities		784			6
Net (decrease) increase in cash and cash equivalents		(11,575		)	25,528
Cash and cash equivalents, beginning of period		144,685			64,913
Cash and cash equivalents, end of period		$	133,110		$	90,441

 

See accompanying notes.

 

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PRAECIS PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 

1.                                      Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared by PRAECIS PHARMACEUTICALS INCORPORATED (the “Company”) in accordance with generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  It is suggested that the financial statements be read in conjunction with the audited financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

The information furnished reflects all adjustments which, in the opinion of management, are considered necessary for a fair presentation of results for the interim periods.  Such adjustments consist only of normal recurring items.  It should also be noted that results for the interim periods are not necessarily indicative of the results expected for the full year or any future period.

 

The preparation of these 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 disclosures 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.

 

2.                                      Summary of Significant Accounting Principles

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the Company’s accounts and the accounts of its wholly owned real estate subsidiary.  All significant intercompany account balances and transactions between the companies have been eliminated.

 

Stock-Based Compensation

 

The Company has elected to follow Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), in accounting for its stock-based employee compensation plans using the intrinsic value method, rather than the alternative fair value accounting method provided for under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), as SFAS No. 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, when the exercise price of options granted to employees under these plans equals the market price of the underlying stock on the date of grant, no compensation expense is required.

 

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The reconciliation of net loss and net loss per share, as reported, to pro forma net loss and net loss per share giving effect to employee stock-based compensation accounted for using the fair value accounting method, is as follows (in thousands, except per share data):

 

 

The fair value of the stock options at the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

		2002		2003
Risk-free interest rate		4.0	%	4.0	%
Expected life (years)		6		6
Volatility		103	%	103	%

 

The Company has never declared or paid any cash dividends on any of its capital stock and does not expect to do so in the foreseeable future.

 

Net Loss Per Share

 

Basic net loss per share is based on the weighted average number of common shares outstanding.  For the three months ended March 31, 2002 and 2003, diluted net loss per common share is the same as basic net loss per common share as the inclusion of common stock equivalents, including the effect of stock options and warrants, would be antidilutive due to the Company’s net losses for all periods presented.

 

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Comprehensive Income

 

SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income (loss) and its components in the consolidated financial statements.  The Company’s accumulated other comprehensive income is comprised primarily of net unrealized gains or losses on available-for-sale securities.  For the three months ended March 31, 2002 and 2003, respectively, comprehensive loss was as follows (in thousands):

 

 

Recent Accounting Pronouncements

 

On December 31, 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS No. 148”).  SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation.  SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting to include increased pro-forma disclosure of the effects of stock-based employee compensation on the results of operations.  SFAS No. 148 became effective for fiscal years ending after December 15, 2002.  The Company has elected to continue to account for employee stock-based compensation using the intrinsic value method as described in APB No. 25 and, therefore, the adoption of SFAS No. 148 did not have a material impact on the Company’s consolidated results of operations for the three months ended March 31, 2003.

 

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN No. 46”).  FIN No. 46 sets forth the criteria used in determining whether an investment in a variable interest entity (“VIE”) should be consolidated and is based on the general premise that companies that control another entity through interests other than voting interests should consolidate the controlled entity.  FIN No. 46 would require the consolidation of specified VIE’s created before February 1, 2003 in the Company’s September 30, 2003 Quarterly Report on Form 10-Q.  For specified VIE’s created after January 31, 2003, FIN No. 46 would require consolidation in this Quarterly Report on Form 10-Q.  The Company does not have any VIE’s.  Accordingly, the implementation of FIN No. 46 will not have any impact on its consolidated financial statements.

 

3.                                     Due from Officer

 

In May 2002, the Company extended a $1.0 million loan to an officer in connection with the officer’s acceptance of employment with the Company. The loan is full recourse, uncollateralized, bears no interest and becomes due and payable in May of 2012. Under the terms of the promissory note (the “Note”) executed in connection with the loan, 10% of the original loan principal will be forgiven annually on each anniversary date of the Note, provided that the officer remains an employee of the Company. The Company is not responsible for the personal income tax implications related to the forgiveness of this Note. Upon the officer’s voluntary termination of employment with the Company, other than for Good Reason (as defined), and upon termination by the Company of the officer’s employment for Cause (as defined), the Note becomes immediately due and payable.

 

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4.                                     Guarantees

 

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN No. 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.  FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of certain guarantees. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.

 

Under its Amended and Restated Certificate of Incorporation (the “Charter”) and Third Amended and Restated By-Laws (the “By-Laws”), the Company has agreed to indemnify any person who is made a party to any action or threatened with any action as a result of such person’s serving or having served as an officer or director of the Company or having served, at the Company’s request, as an officer or director of another company. The indemnification does not apply if the person is adjudicated not to have acted in good faith in the reasonable belief that his or her actions were in the best interests of the Company. The indemnification obligation survives termination of the indemnified party’s involvement with the Company but only as to those claims arising from such person’s role as an officer or director.  The maximum potential amount of future payments that the Company could be required to make under the Charter and By-Law provisions is unlimited; however, the Company has director and officer insurance policies that may limit its exposure and enable it to recover a portion of any future amounts paid. The estimated fair value of these indemnification provisions is minimal.  Most of these indemnification provisions were grandfathered under the provisions of FIN No. 45 as they were in effect prior to December 31, 2002. Accordingly, the Company has no liabilities recorded for these provisions as of March 31, 2003.

 

The Company enters into indemnification provisions under its agreements with other companies in its ordinary course of business, typically with corporate collaborators, contractors and clinical investigators.  Under these provisions, the Company generally agrees to indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements is minimal.  Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2003.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion of our financial condition and results of operations should be read together with the condensed consolidated financial statements and accompanying notes to those statements included elsewhere in this Form 10-Q.  This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties.  All statements other than statements of historical information set forth herein are forward-looking and may contain information about financial results, economic conditions, trends and known uncertainties.  Our actual results could differ materially from those discussed in these forward-looking statements as a result of a number of factors, which include those discussed in this section and elsewhere in this report, and the risks discussed in our other filings with the Securities and Exchange Commission.  Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof.  PRAECIS undertakes no obligation to publicly reissue or modify these forward-looking statements to reflect events or circumstances that arise after the date hereof.

 

Overview

 

Since our inception, we have been engaged in developing drugs for the treatment of a variety of human diseases.  Our lead program is the development of Plenaxis™ (abarelix for injectable suspension), a drug for the treatment of diseases that respond to the lowering of certain hormone levels. We are developing Plenaxis for the treatment of hormonally responsive advanced prostate cancer and endometriosis.  We are seeking approval for Plenaxis in the United States for use in a defined sub-population of advanced pros tate cancer patients for whom the use of existing hormonal therapies may not be appropriate.  The specific sub-population of patients will be determined through discussions with the FDA. We resubmitted our new drug application, or NDA, to the FDA on February 27, 2003 seeking approval for this indication and expect a response from the FDA by the end of August 2003.  We also intend to file, during the second quarter of 2003, a registration dossier in Europe seeking approval to market Plenaxis for the treatment of a broad population of hormonally responsive advanced prostate cancer patients.

 

We are conducting clinical trials of Apan, our proprietary drug candidate for the treatment of Alzheimer’s disease.  We have filed an investigational new drug applic ation, or IND, for our proprietary compound, PPI-2458, in development for the treatment of non-Hodgkin’s lymphoma.  In addition, we have a number of other product candidates in the research or preclinical development stage.

 

Since our inception, we have had no revenues from product sales.  In the past, a significant portion of our revenues was received under collaboration agreements through which we converted the potential value underlying our Plenaxis program into a stream of upfront, milestone and expense reimbursement payments from corporate collaborators.  In 2001, we regained full ownership of our Plenaxis program and, as a result, revenues from collaborations have ended and we do not anticipate receiving any additional revenues under any former collaboration agreements.  Substantially all of our expenditures to date have been for drug development and commercialization activities and for general and administrative expenses.

 

Due to the costs associated with the continued development and potential commercialization of Plenaxis for the treatment of a defined sub-population of advanced prostate cancer patients, as well as other research and development and general and administrative expenses, and our lack of revenues, we had a net operating loss for the first quarter of 2003.  We expect to continue to have net operating losses at least through 2005.  We do not expect to generate operating income unless we receive FDA approval to market Plenaxis in the United States for the treatment of a defined sub-population of advanced prostate cancer patients.  Assuming receipt by the end of 2003 of such FDA approval, partnering of clinical programs at opportune times and continued conservative fiscal management, we believe that we should have sufficient financial resources to execute our operating plan and attain profitability by 2006 without returning to the capital markets.

 

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Our accumulated deficit as of March 31, 2003 was approximately $141.9 million.

 

At March 31, 2003, we had 147 full-time employees, 116 of whom were engaged in research and development activities, compared to 131 full-time employees at March 31, 2002, 102 of whom were engaged in research and development activities.

 

Results of Operations

 

Three Months Ended March 31, 2003 Compared To Three Months Ended March 31, 2002

 

Revenues for the three months ended March 31, 2003 and 2002 were zero due to the termination of our Plenaxis collaboration agreements during the fourth quarter of 2001.  If the FDA grants marketing approval for Plenaxis in the United States by the end of August 2003, we estimate that we will begin to ship product in the fourth quarter of 2003.  If the FDA does not grant marketing approval for Plenaxis in the United States, or if approval is delayed, such denial or delay is likely to have a materially adverse impact on our future planned revenues.

 

Research and development expenses for the three months ended March 31, 2003 decreased 23% to approximately $8.7 million, from approximately $11.3 million for the corresponding period in 2002.  The decrease in expenses reflects reduced spending in our clinical and preclinical programs.  As a result of the resubmission of our NDA in February 2003, spending on the clinical development of Plenaxis for the treatment of hormonally responsive advanced prostate cancer during the first quarter of 2003 was reduced significantly.  We also reduced spending on our endometriosis program during the first quarter 2003 pending final analysis of study results and decisions regarding the next steps for development.  We plan to initiate during 2003 a phase Ib clinical trial for Apan and initiate a phase I clinical trial for PPI-2458 and, accordingly, will increase our spending in these areas.  Overall, we expect our research and development expenses for the remainder of 2003 to remain lower than 2002 spending and then increase thereafter.  We are unable to predict the precise level of spending on individual clinical programs due to the uncertain nature of clinical development.

 

We currently have several other ongoing research and development programs. Using industry estimates, typical drug development programs may last for ten or more years and may cost hundreds of millions of dollars to complete. As our programs progress, we will assess the possibility of entering into corporate collaborations to offset a portion of development costs. The ultimate success of our research and development programs and the impact of these programs on our operations and financial results cannot be accurately predicted and will depend, in large part, upon the outcome and timing of many variables outside of our control.

 

We began our clinical program to develop Plenaxis for the treatment of prostate cancer in 1996. In December 2000, we submitted an NDA to the FDA for Plenaxis for the treatment of hormonally responsive prostate cancer. However, the FDA raised concerns over the occurrence of immediate-onset, systemic allergic reactions in a small subset of clinical trial patients. In addition, the FDA expressed concern that, in a subset of patients treated beyond the three-month pivotal study time frame, fluctuations in testosterone levels were observed more frequently in patients treated with Plenaxis than in patients treated with either Lupron Depot or Lupron Depot plus Casodex.  We have proposed various alternatives to the FDA to address these issues and improve the risk/benefit profile of Plenaxis.  As mentioned above, we resubmitted our NDA on February 27, 2003 and expect a response from the FDA within six months of that date. However, we cannot assure investors that we will be successful in obtaining approval in the United States or abroad for Plenaxis for the treatment of any portion of the hormonally responsive advanced prostate cancer patient population or for any other indication.

 

In 1998, we began our clinical program to develop Plenaxis for the treatment of endometriosis. We completed a phase II study of Plenaxis for the treatment of pain associated with endometriosis in March 2002. Results from this study have suggested that we may be able to utilize a lower dose and/or a more prolonged dosing interval in future studies to reduce drug exposure and attendant bone mineral density loss, a known consequence of hormonal therapies that lower estrogen levels.  Accordingly, during 2002, we initiated and completed both the dosing and observation phases of a pharmacokinetic study of Plenaxis for the treatment of endometriosis to examine the appropriate

 

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dose and dosing schedule.  Upon completion of our review of the results of this study, we will determine the next steps for development, which will include evaluating potential partnership opportunities.

 

We began our clinical program for Apan in 2000.  We are currently conducting a normal volunteer, phase Ia dose escalation study of Apan and believe that we have determined a maximum tolerated dose, or MTD, in healthy volunteers.  The FDA has indicated that we may proceed with our proposed phase Ib trial in Alzheimer’s disease patients.  The phase Ib study will evaluate a single administration of Apan in a series of patient cohorts, escalating the dose in successive cohorts, with the goal of establishing the MTD in patients. We expect to initiate the phase Ib trial during the second quarter of 2003.  Upon completion of the phase Ib study and, assuming favorable FDA review of the study’s results, we intend to initiate a phase Ic trial examining multiple administrations of a selected Apan dose in Alzheimer’s disease patients.

 

We plan to begin our clinical program for PPI-2458 in the second half of 2003.  We recently announced the submission to the FDA of an IND to initiate a phase I clinical study of PPI-2458 in non-Hodgkin’s lymphoma patients.  PPI-2458 is a novel, proprietary molecule based on the fumagillin class of compounds that have been shown to prevent both abnormal cell growth and the formation of new blood vessels, which contribute to aberrant tissue growth.  In the proposed study, we will evaluate an oral formulation of PPI-2458 in non-Hodgkin’s lymphoma patients who are no longer deriving benefits from other therapies.   In addition to non-Hodgkin’s lymphoma, we also intend to continue evaluating the potential utility of PPI-2458 for treating certain other cancers, as well as rheumatoid arthritis.

 

Sales and marketing expenses for the three months ended March 31, 2003 increased 134% to approximately $1.0 million, from approximately $0.4 million for the corresponding period in 2002.  The increase in sales and marketing expenses was due to increased costs related to pre-commercialization efforts, in particular for market research, various physician meetings, and sales force sizing and deployment activities, in connection with the possible launch of Plenaxis in the United States.  We intend, upon FDA approval of our NDA, to market and sell Plenaxis in the United States through our own marketing and sales team.  Accordingly, assuming FDA approval of Plenaxis, we expect our sales and marketing expenses to continue to increase during 2003 and thereafter, and to include, but not be limited to, expenses relating to the building of a commercial infrastructure, the cost of our sales force, and promotional and marketing programs.

 

General and administrative expenses for the three months ended March 31, 2003 were approximately $2.1 million, which is consistent with general and administrative expenses for the corresponding period in 2002.  We expect that general and administrative expenses will increase slightly during 2003 and thereafter based on normal hiring of additional administrative personnel to support  the continued growth of our research, development and commercialization initiatives.

 

Net interest income for the three months ended March 31, 2003 decreased 65% to approximately $0.4 million, from approximately $1.2 million for the corresponding period in 2002. The decrease in net interest income was due primarily to reduced average interest rates and lower average cash balances.

 

At December 31, 2002, we had federal net operating loss carryforwards of $129.0 million that will expire in varying amounts through 2022, if not utilized. Utilization of net operating loss and tax credit carryforwards will be subject to substantial annual limitations under the Internal Revenue Code of 1986, as amended. The annual limitations may result in the expiration of the net operating loss and tax credit carryforwards before full utilization.

 

Liquidity and Capital Resources

 

To date, our operations and capital requirements have been financed primarily with the proceeds of public and private sales of common stock and preferred stock, research and development partnerships, collaborative agreements and investment income.

 

At March 31, 2003, we had cash, cash equivalents and marketable securities of approximately $181.3 million and working capital of approximately $175.5 million, compared to approximately $195.0 million and $185.5 million, respectively, at December 31, 2002.  During 2003, we expect to use approximately $75.0 million of our current cash and investments in our business.  We believe that our existing cash and investments will be sufficient to meet the working capital and capital expenditure needs under our current operating plan through approximately the end of 2005.  Assuming receipt by the end of 2003 of regulatory

 

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approval to market Plenaxis in the United States for a defined sub-population of advanced prostate cancer patients, partnering of clinical programs at opportune times and continued conservative fiscal management, we believe that we should have sufficient financial resources to execute our operating plan and attain profitability by 2006 without returning to the capital markets.

 

For the three months ended March 31, 2003, net cash of approximately $13.8 million was used in operating activities, compared to approximately $8.5 million used in operating activities during the three months ended March 31, 2002. During the three months ended March 31, 2003, our use of cash in operations was due principally to our net loss of approximately $11.4 million and the reduction in accounts payable and accrued expenses of $3.9 million, partially offset by depreciation and amortization.  We expect our cash utilization to increase during 2003 as a result of an overall increase in operating expenses as we prepare for the possible commercial launch of Plenaxis in the United States, continue with clinical trials for Apan, initiate a new clinical program for PPI-2458 and expand our research and development initiatives.  The actual amount of these expenditures will depend on numerous factors, including the timing of expenses and the timing and progress of our research, development, marketing and sales efforts.

 

Net cash provided by investing activities of approximately $39.4 million for the three months ended March 31, 2003 consisted primarily of net sales or maturities of marketable securities of approximately $57.0 million.  This compares to net cash used in investing activities of approximately $3.9 million for the corresponding period in 2002.  Net cash used in investing activities for the three months ended March 31, 2002 was primarily related to purchases of marketable securities.

 

In July 2000, in connection with the purchase, through our wholly owned real estate subsidiary, of our corporate headquarters and research facility in Waltham, Massachusetts, the subsidiary entered into an acquisition and construction loan agreement providing for up to $33.0 million in financing for the acquisition of, and improvements to, the facility. As of March 31, 2003, $33.0 million was outstanding under the loan agreement. Advances bear interest at a rate equal to the 30-day LIBOR plus 2.0% (3.30% at March 31, 2003). Interest is payable monthly in arrears. Principal is due and payable in full on July 30, 2003, subject to two one-year extension options.  We have provided the lender with notice of our intention to exercise the first one-year extension option to extend the maturity date until July 30, 2004 and we believe that we will be able to satisfy the conditions for this extension set forth in the loan agreement.  The loan is secured by the facility, together with all fixtures, equipment, improvements and other related items, and by all rents, income or profits received by our real estate subsidiary, and is unconditionally guaranteed by us. In addition to this financing, we have spent approximately $38.0 million of our own funds in connection with the build-out and occupancy of this facility. We have occupied this facility since May 2001 and, as planned, are actively seeking to sublease a portion of the facility.

 

At December 31, 2002, we had provided a valuation allowance of $64.1 million for our deferred tax assets. The valuation allowance represents the value of the deferred tax assets.  Due to anticipated operating losses in the future, we believe that it is more likely than not that we will not realize the net deferred tax assets in the future and we have provided an appropriate valuation allowance.

 

Recent Accounting Pronouncements

 

In November 2002, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34, or FIN No. 45.  FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of certain guarantees. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The implementation of FIN No. 45 did not have a material impact on our consolidated financial statements for the three months ended March 31, 2003.

 

On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, or SFAS No. 148.  SFAS No. 148 amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation.  SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Principles Board Opinion No. 28, Interim Financial

 

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Reporting, to include increased pro-forma disclosure of the effects of stock-based employee compensation on the results of operations.  SFAS No. 148 became effective for fiscal years ending after December 15, 2002.  We have elected to continue to account for employee stock-based compensation using the intrinsic value method as described in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and therefore, the adoption of SFAS No. 148 did not have a material impact on our consolidated results of operations for the three months ended March 31, 2003.

 

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, or FIN No. 46.  FIN No. 46 sets forth the criteria used in determining whether an investment in a variable interest entity, or VIE, should be consolidated and is based on the general premise that companies that control another entity through interests other than voting interests should consolidate the controlled entity.  FIN No. 46 would require the consolidation of specified VIE’s created before February 1, 2003 in our September 30, 2003 Quarterly Report on Form 10-Q.  For specified VIE’s created after January 31, 2003, FIN No. 46 would require consolidation in this Quarterly Report on Form 10-Q.  We do not have any VIE's.  Accordingly, the implementation of FIN No. 46 will not have any impact on our consolidated financial statements.

 

Risk Factors That May Affect Future Results

 

The risks and uncertainties described below are not the only ones we face.  Additional risks and uncertainties not presently known to us or that are currently deemed immaterial may also impair our business, financial condition and results of operations.  If any of these risks actually occur, our business, financial condition and results of operations could be materially adversely affected.

 

Because we have not yet marketed or sold any products and anticipate significant increases in our operating expenses over the next several years, we may not be profitable in the future.

 

We cannot assure you that we will be profitable in the future or, if we attain profitability, that it will be sustainable. All of our potential products are in the research or development stage. We have not yet marketed or sold any products, and we may not succeed in developing and marketing any product in the future. To date, we have derived substantially all of our revenues from payments under corporate collaboration and license agreements. Due to the termination of the Amgen and Sanofi-Synthélabo agreements and the uncertainty regarding regulatory approval for our lead product candidate, Plenaxis, for the foreseeable future, we do not expect to have any revenues, other than interest income. In addition, we expect to continue to spend significant amounts to develop commercial sales and marketing capabilities, continue clinical studies, seek regulatory approval for our existing product candidates and continue further build-out of our facility. We also intend to spend substantial amounts to fund additional research and development for other potential products, enhance our core technologies, and for general and administrative purposes. As of March 31, 2003, we had an accumulated deficit of approximately $141.9 million. We expect that our operating expenses will increase significantly in the near term due primarily to increased expenses related to the continued development and pre-commercialization activities for Plenaxis, resulting in significant operating losses at least through 2005 and possibly thereafter.

 

If our clinical trials are not successful, or if we are otherwise unable to obtain and maintain the regulatory approval required to market and sell our potential products, we would incur additional operating losses.

 

The development and sale of our product candidates are subject to extensive regulation by governmental authorities. Obtaining and maintaining regulatory approval typically is costly and takes many years. Regulatory authorities, most importantly, the FDA, have substantial discretion to terminate clinical trials, delay or withhold registration and marketing approval in the United States, and mandate product recalls. Failure to comply with regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other actions as to our potential products or against us. Outside the United States, we can market a product only if we receive marketing authorization from the appropriate regulatory authorities. This foreign regulatory approval process includes all of the risks associated with the FDA approval process, and may include additional risks.

 

To gain regulatory approval from the FDA and foreign regulatory authorities for the commercial sale of any product, we must demonstrate in clinical trials, and satisfy the FDA and foreign regulatory authorities as to, the safety and efficacy of the product.  If we develop a product to treat a

 

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long-lasting disease, such as cancer or Alzheimer’s disease, we must gather data over an extended period of time. There are many risks associated with our clinical trials. For example, we may be unable to achieve the same level of success in later trials as we did in earlier ones. Additionally, data we obtain from preclinical and clinical activities are susceptible to varying interpretations that could impede regulatory approval. Further, some patients in our prostate cancer and Alzheimer’s disease programs have a high risk of death, age-related disease or other adverse medical events that may not be related to our products. These events may affect the statistical analysis of the safety and efficacy of our products. If we obtain regulatory approval for a product, the approval will be limited to those diseases for which our clinical trials demonstrate the product is safe and effective.

 

In addition, many factors could delay or result in termination of our ongoing or future clinical trials. For example, a clinical trial may experience slow patient enrollment or lack of sufficient drug supplies. Patients may experience adverse medical events or side effects, and there may be a real or perceived lack of effectiveness of, or of safety issues associated with, the drug we are testing. Future governmental action or existing or changes in FDA policies or precedents, may also result in delays or rejection of an application for marketing approval.  The FDA has considerable discretion in determining whether to grant marketing approval for a drug, and may delay or deny approval even in circumstances where the applicant’s clinical trials have proceeded in compliance with FDA procedures and regulations and have met the established end-points of the trials. Challenges to FDA determinations are generally time-consuming and costly. We can give no assurance that we will obtain marketing approval for Plenaxis, our drug candidate for the treatment of hormonally responsive advanced prostate cancer and endometriosis, or for any of our other product candidates, or regulatory approval may be conditioned upon significant labeling requirements which could adversely affect the marketability or value of the product.

 

To date, none of our product candidates has received regulatory approval for commercial sale. In June 2001, we received a letter from the FDA with respect to our NDA for Plenaxis for the treatment of hormonally responsive advanced prostate cancer, in which the FDA indicated that the information presented in the NDA was inadequate for approval. The FDA raised concerns over the occurrence of immediate-onset, systemic allergic reactions in a small subset of clinical trial patients. In addition, the FDA expressed concern that, in a subset of patients treated beyond the three-month pivotal study time frame, fluctuations in testosterone levels were observed more frequently in patients treated with Plenaxis than in patients treated with either Lupron Depot or Lupron Depot plus Casodex.  We have proposed various alternatives to the FDA to address these issues and improve the risk/benefit profile of Plenaxis. Based upon our discussions with the FDA, we are now seeking approval for Plenaxis for use in a defined sub-population of advanced prostate cancer patients for whom the use of existing hormonal therapies may not be appropriate. The specific sub-population of patients will be determined through additional discussions with the FDA. In February 2003, we resubmitted to the FDA our NDA seeking approval for this indication.   We expect to receive a response from the FDA within six months.

 

The FDA actions described above have delayed, and otherwise adversely affected, our obtaining regulatory approval to market Plenaxis for the treatment of hormonally responsive advanced prostate cancer. Moreover, there could be further delays due to FDA review or action, and the FDA could deny approval altogether. If we are further delayed in obtaining or are unable to obtain this regulatory approval, any foreign regulatory approval or regulatory approval to market our other potential products, we may exhaust our available resources significantly sooner than we had planned, particularly given the termination of the Amgen and Sanofi-Synthélabo agreements. If this were to happen, we would need to either raise additional funds or seek alternative partners to complete development and commercialization of Plenaxis and continue our currently planned research and development programs. We cannot assure you that we would be able to raise the necessary funds or negotiate additional corporate collaborations on acceptable terms, if at all.

 

The termination by our corporate collaborators of their agreements with us could adversely affect the development and commercialization of Plenaxis.

 

We depended upon our former corporate collaborators, Amgen and Sanofi-Synthélabo, to provide substantial financial support for the development and commercialization of Plenaxis.  We also relied on them to some extent in seeking regulatory approval in the United States and abroad for Plenaxis for the treatment of hormonally responsive advanced prostate cancer.  In addition, under our agreement with Amgen, they had assumed principal responsibility for the manufacture of Plenaxis, and under our agreements with Amgen and Sanofi-Synthélabo, those parties were responsible for the marketing, distribution and sale of Plenaxis in their respective licensed territories.  Accordingly, we

 

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have had, and will continue for the foreseeable future, to devote funds and other resources to Plenaxis development and commercialization that we had planned would be available from our collaborators. In addition, we have had, and in the future may have, to enter into new arrangements with third parties to support the Plenaxis program.  If we encounter unanticipated expenses or delays in the development and commercialization of Plenaxis for the treatment of advanced prostate cancer patients in the United States or abroad, we may be required to curtail or terminate one or more of our other drug development programs and/or seek additional funding.  We cannot assure investors that we would be able to raise such additional funds.

 

We may be unable to establish marketing and sales capabilities necessary to successfully commercialize Plenaxis or our other our potential products.

 

We have no experience in marketing or selling pharmaceutical products and have very limited marketing and sales resources. To achieve commercial success for any approved product, we must either develop a marketing and sales force, as well as the infrastructure to support it, or enter into arrangements with others to market and sell our products. We may be unable to establish marketing, sales and distribution capabilities necessary to commercialize and gain market acceptance for our potential products. We have announced our intention to independently market and sell Plenaxis in the United States if we receive FDA approval of this compound for use in a defined sub-population of advanced prostate cancer patients. Accordingly, we will need to hire a sales force with expertise in pharmaceutical sales. Recruiting and retaining qualified sales personnel will be critical to our success. Competition for skilled personnel is intense, and we cannot assure you that we will be able to attract and retain a sufficient number of qualified individuals to successfully launch Plenaxis or any other potential product. In addition, establishing the expertise necessary to successfully market and sell Plenaxis, or any other product, will require a substantial capital investment. We cannot assure you that we will have the funds necessary to successfully commercialize Plenaxis for the treatment of a defined sub-population of advanced prostate cancer patients or any other potential product.

 

In the event that we decide to contract with third parties to provide sales force capabilities to meet our needs for Plenaxis or any other product candidates, we cannot assure you that we will be able to enter into such agreements on acceptable terms, if at all. In addition, co-promotion or other marketing arrangements with third parties to commercialize potential products could significantly limit the revenues we derive from these potential products, and these third parties may fail to commercialize our potential products successfully. To the extent we enter into any such agreements, the parties to those agreements may also market products that compete with our products, further limiting our potential revenue from product sales.

 

Even if we receive approval for the marketing and sale of Plenaxis or any of our other product candidates, they may fail to achieve market acceptance and, accordingly, may never be commercially successful.

 

Many factors may affect the market acceptance and commercial success of Plenaxis or any of our other potential products, including:

 

•                                          the scope of the patient population and the indications for which Plenaxis or our other product candidates are approved;

 

•                                          the effectiveness of Plenaxis or any of our other product candidates, including any potential side effects, as compared to alternative treatment methods;

 

•                                          the extent and success of our marketing and sales efforts relating to the marketing and sales of Plenaxis or other potential products;

 

•                                          the product labeling or product insert required by the FDA for Plenaxis and each of our other product candidates;

 

•                                          the rate at which Plenaxis or our other product candidates are reimbursed by third-party payors, in particular Medicare;

 

•                                          the timing of market entry as compared to competitive products;

 

•                                          the rate of adoption of Plenaxis or our other product candidates by doctors and nurses and acceptance by the target patient population;

 

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•                                          the competitive features of our products as compared to other products, including the frequency of administration of Plenaxis as compared to other products, and doctor and patient acceptance of these features;

 

•                                          the cost-effectiveness of Plenaxis or our other product candidates and the availability of insurance or other third-party reimbursement, in particular Medicare, for patients using our products; and

 

•                                          unfavorable publicity concerning Plenaxis or any of our other product candidates or any similar products.

 

If our products are not commercially successful, we may never become profitable.

 

Our potential revenues will diminish if we fail to obtain acceptable prices or adequate reimbursement for Plenaxis or our other product candidates from third-party payors.

 

The continuing efforts of government and third-party payors to contain or reduce the costs of health care may limit our commercial opportunity. If government and other third-party payors do not provide adequate coverage and reimbursement for Plenaxis or our other product candidates, physicians may not prescribe them. If we are unable to offer physicians comparable or superior financial motivation to use Plenaxis or our other product candidates, we may not be able to generate significant revenues. In some foreign markets, pricing and profitability of prescription pharmaceuticals are subject to government control. In the United States, we expect that there will continue to be federal and state proposals for similar controls. In addition, managed care initiatives in the United States will continue to put pressure on the pricing of pharmaceutical products. Cost control initiatives could decrease the price that we receive for any of our products in the future. Further, cost control initiatives could impair or diminish our ability or incentive, or the ability or incentive of potential partners, to commercialize Plenaxis or any of our other products, and our ability to earn revenues from this commercialization.

 

Our ability to commercialize pharmaceutical products, alone or with collaborators, may depend in part on the availability of reimbursement for our products from:

 

•                                          government and health administration authorities;

 

•                                          private health insurers; and

 

•                                          other third-party payors, including Medicare and Medicaid.

 

We cannot predict the availability of reimbursement for newly approved drugs. Third-party payors, including Medicare, are increasingly challenging the prices charged for medical products and services. Government and other third-party payors increasingly are limiting both coverage and the level of reimbursement for new drugs and, in some cases, refusing to provide coverage for a patient’s use of an approved drug for purposes not approved by the FDA. Third-party insurance coverage may not be available to patients for Plenaxis or any of our other products.

 

If we fail to develop and maintain our relationships with third-party manufacturers, or if these manufacturers fail to perform adequately, we may be unable to commercialize Plenaxis or any of our product candidates.

 

Our ability to conduct, or continue to conduct, clinical trials and commercialize our product candidates, including Plenaxis, will depend in part on our ability to manufacture, or arrange for third-party manufacture of, our products on a large scale, at a competitive cost and in accordance with regulatory requirements. We must establish and maintain a commercial scale formulation and manufacturing process for each of our potential products for which we seek marketing approval. We or third-party manufacturers may encounter difficulties with these processes at any time that could result in delays in clinical trials, regulatory submissions or in the commercialization of potential products.

 

We have no experience in large-scale product manufacturing, nor do we have the resources or facilities to manufacture products on a commercial scale. We will continue to rely upon contract manufacturers to produce Plenaxis and other compounds for later-stage preclinical, clinical and commercial purposes for a significant period of time. Third-party manufacturers may not be able to meet our needs as to timing, quantity or quality of materials. If we are unable to contract for a sufficient supply of needed materials on acceptable terms, or if we encounter delays or difficulties in our relationships with manufacturers, our clinical trials may be delayed, thereby preventing or delaying the submission of product candidates for, or the granting of, regulatory approval and the commercialization

 

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of our potential products. Any such delays may lower our revenues and delay or prevent our attaining or maintaining profitability.

 

If the third-party manufacturers upon which we rely fail to meet our needs for clinical or commercial supply, we may be required to supplement our manufacturing capacity by building our own manufacturing facilities. This would require substantial expenditures.  Also, we would need to hire and train significant numbers of employees to staff a new facility. If we are required to build our own facility, we may not be able to develop sufficient manufacturing capacity to produce drug materials for clinical trials or commercial use.

 

In addition, we and the third-party manufacturers that we use must continually adhere to current good manufacturing practice regulations enforced by the FDA through its facilities inspection program. If our facilities or the facilities of third-party manufacturers cannot pass a pre-approval plant inspection, the FDA pre-market approval of our product candidates will not be granted. In complying with these regulations and foreign regulatory requirements, we and any of our third-party manufacturers will be obligated to expend time, money and effort in production, record-keeping and quality control to assure that our potential products meet applicable specifications and other requirements. If we or any of our third-party manufacturers fail to comply with these requirements, we may be subject to regulatory sanctions.

 

Any of these factors could prevent, or cause delays in, obtaining regulatory approvals for, and the manufacturing, marketing or selling of, our potential products, including Plenaxis, and could also result in significantly higher operating expenses.

 

Under our collaboration agreement with Amgen, Amgen had control over certain phases of the manufacturing process for Plenaxis and was itself performing certain manufacturing processes.  Due to the termination of our collaboration agreement with Amgen, to assure an adequate supply of drug product for continued clinical studies and, if Plenaxis is approved for marketing, for commercial sale, we were required to enter into a new agreement with a third party manufacturer to provide for the manufacturing functions that Amgen had been performing.  Due to the use of a different manufacturer, we may be required to undergo additional regulatory review and compliance procedures which could result in additional expenses and further delay the regulatory review and potential commercialization of Plenaxis for the treatment of a defined sub-population of advanced prostate cancer patients.

 

The loss or failure of any of our third-party manufacturers could substantially delay or impair our development, or our sale or continued sale, of Plenaxis products.

 

For each stage of Plenaxis production we have relied, and expect in the near term to continue to rely, on a separate third-party manufacturer, and we currently have not contracted, and in the near term do not expect to contract, with second-source suppliers for any of these production stages. Accordingly, the loss of one or more of these suppliers for any reason, including as a result of fire, terrorism, acts of God or insolvency or bankruptcy, could result in substantial delays in, or substantially impair our ability to complete, clinical trials and regulatory submissions or reviews, and could delay or impair substantially our sale or continued sale of Plenaxis products. Such delays or impairment, and the associated costs and expenses, may lower our potential revenues and delay or prevent our attaining profitability. While we intend to evaluate the possibility of a second source of supply at each stage of Plenaxis production, the number of qualified alternative suppliers is limited, and we cannot assure investors that we will be able to locate alternative suppliers or negotiate second supply agreements on reasonable terms. Furthermore, the process of engineering a new supplier’s facility for the production of Plenaxis and obtaining the necessary FDA approval of the facility would require substantial lead-time and could be extremely costly. We cannot assure investors that we will not lose one or more of our suppliers, or that in such event we would be readily able to continue the development and commercialization and sale of Plenaxis products without substantial and costly delays.

 

Alternative treatments are available which may impair our ability to capture market share for our potential products.

 

Alternative products exist or are under development to treat the diseases for which we are developing drugs. For example, the FDA has approved several drugs for the treatment of prostate cancer that responds to changes in hormone levels. Even if the FDA approves Plenaxis for commercialization for the treatment of a defined sub-population of advanced prostate cancer patients, the approval is expected to be limited to a particular group of patients or to administration over a limited period of time, and Plenaxis may not compete favorably with existing treatments that already have an established market share. If Plenaxis does not achieve broad market acceptance as a drug for

 

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the treatment of a defined sub-population of advanced prostate cancer patients, we may not become profitable.

 

Because we depend on third parties to conduct laboratory testing and human clinical studies and assist us with regulatory compliance, we may encounter delays in product development and commercialization.

 

We have contracts with a limited number of research organizations to design and conduct our laboratory testing and human clinical studies. If we cannot contract for testing activities on acceptable terms, or at all, we may not complete our product development efforts in a timely manner. To the extent we rely on third parties for laboratory testing and human clinical studies, we may lose some control over these activities. For example, third parties may not complete testing activities on schedule or when we request them to do so. In addition, these third parties may conduct our clinical trials in a manner inconsistent with regulatory requirements or otherwise in a manner that yields misleading or unreliable data. This, or other failures of these third parties to carry out their duties, could result in significant additional costs and expenses and could delay or prevent the development and commercialization of our product candidates.

 

Many of our competitors have substantially greater resources than we do and may be able to develop and commercialize products that make our potential products and technologies obsolete or non-competitive.

 

A biotechnology company such as ours must keep pace with rapid technological change and faces intense competition. We compete with biotechnology and pharmaceutical companies for funding, access to new technology, research personnel and in product research and development. Many of these companies have greater financial resources and more experience than we do in developing drugs, obtaining regulatory approvals, manufacturing and marketing. We also face competition from academic and research institutions and government agencies pursuing alternatives to our products and technologies. We expect that all of our products under development will face intense competition from existing or future drugs. In addition, for each of our product candidates, we may face increasing competition from generic formulations or existing drugs whose active components are no longer covered by patents.

 

Our competitors may:

 

•                                          successfully identify drug candidates or develop products earlier than we do;

 

•                                          obtain approvals from the FDA or foreign regulatory bodies more rapidly than we do;

 

•                                          develop products that are more effective, have fewer side effects or cost less than our products; or

 

•                                          successfully market and sell products that compete with our products.

 

The success of our competitors in any of these efforts would adversely affect our ability to develop, commercialize and market our product candidates and to attain and maintain profitability.

 

If we are unable to obtain and enforce valid patents, we could lose any competitive advantage we may have.

 

Our success will depend in part on our ability to obtain patents and maintain adequate protection of our technologies and potential products. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode any competitive advantage we may have. For example, if we lose our patent protection for Plenaxis, another party could produce and market the compound in direct competition with us. Some foreign countries lack rules and methods for defending intellectual property rights and do not protect proprietary rights to the same extent as the United States. Many companies have had difficulty protecting their proprietary rights in foreign countries.

 

Patent positions are sometimes uncertain and usually involve complex legal and factual questions. We can protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We currently own or have exclusively licensed 23 issued United States patents. We have applied, and will continue to apply, for patents covering both our technologies and products as we deem appropriate. Others may challenge our patent applications or our patent applications may not result in issued patents. Moreover, any issued patents on our own inventions, or

 

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those licensed from third parties, may not provide us with adequate protection, or others may challenge the validity of, or seek to narrow or circumvent, these patents. Third-party patents may impair or block our ability to conduct our business. Additionally, third parties may independently develop products similar to our products, duplicate our unpatented products, or design around any patented products we develop.

 

If we are unable to protect our trade secrets and proprietary information, we could lose any competitive advantage we may have.

 

In addition to patents, we rely on a combination of trade secrets, confidentiality, nondisclosure and other contractual provisions, and security measures to protect our confidential and proprietary information. These measures may not adequately protect our trade secrets or other proprietary information. If these measures do not adequately protect our rights, third parties could use our technology, and we could lose any competitive advantage we may have. In addition, others may independently develop similar proprietary information or techniques, which could impair any competitive advantage we may have.

 

If our technologies, processes or potential products conflict with the patents or other intellectual property rights of competitors, universities or others, we could have to engage in costly litigation and be unable to commercialize those products.

 

Our technologies, processes or potential products may give rise to claims that they infringe patents or other intellectual property rights of third parties.  A third party could force us to pay damages, stop our use of these technologies or processes, or stop our manufacturing or marketing of the affected products by bringing a legal action against us for infringement. In addition, we could be required to obtain a license to continue to use the technologies or processes or manufacture or market the affected products, and we may not be able to do so on acceptable terms or at all. We believe that significant litigation will continue in our industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our resources. Even if legal actions were meritless, defending a lawsuit could take significant time, be expensive and divert management’s attention from other business concerns.

 

If third parties terminate our licenses, we could experience delays or be unable to complete the development and commercialization of our potential products.

 

We license some of our technology from third parties. Termination of our licenses could force us to delay or discontinue some of our development and commercialization programs. For example, if Advanced Research and Technology Institute, Inc., the assignee of Indiana University Foundation, terminated our license with them, we could have to discontinue development and commercialization of our Plenaxis products. We cannot assure you that we would be able to license substitute technology in the future. Our inability to do so could impair our ability to conduct our business because we may lack the technology, or the necessary rights to technology, required to develop and commercialize our potential products.

 

We may have substantial exposure to product liability claims and may not have adequate insurance to cover those claims.

 

We may be held liable if any product we develop, or any product made by others using our technologies, causes injury. We have only limited product liability insurance coverage for our potential products in clinical trials. We intend to expand our product liability insurance coverage for any of our products for which we obtain marketing approval. However, this insurance may be prohibitively expensive or may not fully cover our potential liabilities. Our inability to obtain adequate insurance coverage at an acceptable cost could prevent or inhibit the commercialization of our products. Our collaboration agreements with Amgen and Sanofi-Synthélabo included, and the agreements with them regarding the termination of those collaborations also include, an indemnification of them for liabilities associated with the development and commercialization of Plenaxis. If a third party, including a former collaborator, sues us for any injury, or for indemnification for losses, arising out of products made by us or using our technologies, our liability could exceed our total assets.

 

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We may be unable to find suitable tenants for a portion of our facility.

 

In May 2001, we moved to a new 175,000 square foot facility in Waltham, Massachusetts. We are currently seeking to sublease a portion of this facility. To date, we have not been able to find suitable sub-tenants to occupy this space. If we are unable to find suitable sub-tenants, we will not be able to offset with rental income any of the substantial mortgage payments and other operating expenses associated with our facility.

 

If we lose our key personnel or are unable to attract and retain additional skilled personnel, we may be unable to pursue our product development and commercialization efforts.

 

We depend substantially on the principal members of our management and scientific staff, including Malcolm L. Gefter, Ph.D., our Chief Executive Officer and Chairman of the Board, and William K. Heiden, our President and Chief Operating Officer. We do not have employment agreements with any of our executive officers. Any officer or employee can terminate his or her relationship with us at any time and work for one of our competitors. The loss of these key individuals could result in competitive harm because we could experience delays in our product research, development and commercialization efforts without their expertise.

 

Recruiting and retaining qualified scientific personnel to perform future research and development work also will be critical to our success. Competition for skilled personnel is intense and the turnover rate can be high. We compete with numerous companies and academic and other research institutions for experienced scientists. This competition may limit our ability to recruit and retain qualified personnel on acceptable terms. Failure to attract and retain qualified personnel would prevent us from continuing to develop our potential products, enhancing our technologies and launching our products commercially. Our planned activities will require the addition of new personnel, including management and marketing and sales personnel, and the development of additional expertise by existing management personnel, in particular in the area of product marketing and sales. The inability to retain these personnel or to develop this expertise could prevent, or result in delays in, the research, development and commercialization of Plenaxis or our other potential products.

 

We use hazardous chemicals and radioactive and biological materials in our business and any claims relating to the handling, storage or disposal of these materials could be time consuming and costly.

 

Our research and development processes involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials, which may pose health risks. For example, the health risks associated with accidental exposure to Plenaxis include temporary impotence or infertility and harmful effects on pregnant women. Our operations also produce hazardous waste products. We cannot completely eliminate the risk of accidental contamination or discharge from hazardous materials and any resultant injury. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. Compliance with health and safety and environmental laws and regulations is necessary and expensive. Current or future health and safety and environmental regulations may impair our research, development or production efforts. We may be required to pay fines, penalties or damages in the event of noncompliance or the exposure of individuals to hazardous materials.

 

From time to time, third-parties have also worked with hazardous materials in connection with our agreements with them. We have agreed to indemnify our present and former collaborators in some circumstances against damages and other liabilities arising out of development activities or products produced in connection with these collaborations.

 

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If we engage in an acquisition, we will incur a variety of costs and may never realize the anticipated benefits of the acquisition.

 

If appropriate opportunities become available, we may attempt to acquire businesses, or acquire or in-license products or technologies, that we believe are a strategic fit with our business. We currently have no commitments or agreements for any acquisitions.  If we do undertake any transaction of this sort, the process of integrating an acquired business, or an acquired or in-licensed product or technology, may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for the ongoing development of our business. Moreover, we may fail to realize the anticipated benefits of any transaction of this sort. To the extent we issue stock in a transaction, the ownership interest of our stockholders will be diluted. Transactions of this kind could also cause us to incur debt, expose us to future liabilities and result in amortization expenses related to goodwill and other intangible assets.

 

The market price of our common stock may experience extreme price and volume fluctuations.

 

The market price of our common stock may fluctuate substantially due to a variety of factors, including, but not limited to:

 

•                                          announcement of FDA approval or disapproval of Plenaxis for the treatment of a defined sub-population of advanced prostate cancer patients or any of our other product candidates;

 

•                                          failure or delay by third-party manufacturers in performing their supply obligations or disputes or litigation regarding those obligations;

 

•                                          our ability to commercialize, directly or with collaborators, our product candidates and the timing of commercialization;

 

•                                          the success rate of our discovery efforts and clinical trials;

 

•                                          announcements of technological innovations or new products by us or our competitors;

 

•                                          developments or disputes concerning patents or proprietary rights, including claims of infringement, interference or litigation against us or our licensors;

 

•                                          announcements concerning our competitors, or the biotechnology or pharmaceutical industry in general;

 

•                                          public concerns as to the safety of our products or our competitors’ products;

 

•                                          changes in government regulation of the pharmaceutical or medical industry;

 

•                                          changes in the reimbursement policies of third-party insurance companies or government agencies;

 

•                                          actual or anticipated fluctuations in our operating results;

 

•                                          changes in financial estimates or recommendations by securities analysts;

 

•                                          sales of large blocks of our common stock;

 

•                                          changes in accounting principles; and

 

•                                          the loss of any of our key scientific or management personnel.

 

In addition, the stock market has experienced extreme price and volume fluctuations. The market prices of the securities of biotechnology companies, particularly companies like ours without current product revenues and earnings, have been highly volatile, and may continue to be highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. In the past, securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Whether or not meritorious, litigation brought against us could result in substantial costs and a diversion of management’s attention and resources.

 

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We expect that our quarterly results of operations will fluctuate, and this fluctuation could cause our stock price to decline.

 

Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to decline. Some of the factors that could cause our operating results to fluctuate include:

 

•                                          the timing and level of expenses related to the development and commercialization of our Plenaxis products leading to revenues from product sales;

 

•                                          the timing and level of expenses related to our other research and development programs; and

 

•                                          the timing of our commercialization of other products resulting in revenues.

 

Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance.

 

Anti-takeover provisions in our charter and by-laws, our rights agreement and certain provisions of Delaware law may make an acquisition of us more difficult, even if an acquisition would be beneficial to our stockholders.

 

Provisions in our certificate of incorporation and by-laws may delay or prevent an acquisition of us or a change in our management. Also, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit or delay large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. In addition, the rights issued under our rights agreement may be a substantial deterrent to a person acquiring 10% or more of our common stock without the approval of our board of directors. These provisions in our charter and by-laws, rights agreement and under Delaware law could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk.  We have not entered into any instruments for trading purposes.  Some of the securities that we invest in may have market risk. This means that an increase in prevailing interest rates may cause the principal amount of the investment to decrease. To minimize this risk in the future, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds and government and non-government debt securities. An immediate hypothetical 100 basis point increase in interest rates would have resulted in an approximate $0.6 million decrease in the fair value of our investments as of March 31, 2003.  The same hypothetical increase in interest rates as of March 31, 2002 would have resulted in an approximate $0.6 million decrease in the fair value of our investments.  Due to the conservative nature and relatively short duration of our investments, interest rate risk is mitigated. As of March 31, 2003, approximately 85% of our total investments will mature in one year or less, with the remainder maturing in less than three years.

 

In connection with the purchase of our new facility in July 2000, our wholly owned real estate subsidiary executed an acquisition and construction loan agreement that provides for up to $33.0 million in borrowings at a floating interest rate indexed to 30-day LIBOR. Concurrent with that transaction, the subsidiary also entered into an interest rate cap agreement which limits exposure to interest rate increases above a certain threshold. Due to the decrease in interest rates since we entered into this interest rate cap, we currently do not believe that there is material interest rate risk exposure with respect to the loan agreement. In addition, we believe that we have mitigated our risk relating to significant adverse fluctuations in interest rates with respect to borrowings under the loan agreement, and we do not believe that a 10% change in interest rates would have a material impact on our results of operations or cash flows.

 

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ITEM 4.       CONTROLS AND PROCEDURES.

 

(a)                               Evaluation of Disclosure Controls and Procedures.

 

Our chief executive officer and chief financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days prior to the filing date of this quarterly report, referred to as the evaluation date.  Based on this evaluation, these officers have concluded that, as of the evaluation date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company required to be included in the Company’s reports filed or submitted under the Exchange Act.

 

(b)                               Changes in Internal Controls.

 

Since the evaluation date, there have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect these controls. There were no significant deficiencies or material weaknesses, and therefore, there were no corrective actions required or undertaken.

 

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PART II.  OTHER INFORMATION

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

 

(a)                                  Exhibits

 

Exhibit Number		Exhibit
3.1		Amended and Restated Certificate of Incorporation (2)
3.2		Third Amended and Restated By-Laws (5)
4.1		Specimen certificate representing shares of common stock (1)
4.2		Specimen certificate representing shares of common stock (including Rights Agreement Legend) (3)
4.3		Rights Agreement between the Registrant and American Stock Transfer & Trust Company, as Rights Agent (4)
4.4		Form of Certificate of Designations of Series A Junior Participating Preferred Stock (attached as Exhibit A to the Rights Agreement filed as Exhibit 4.3 hereto) (4)
4.5		Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit 4.3 hereto) (4)
99.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(1)                                  Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-96351) initially filed with the Securities and Exchange Commission on February 8, 2000 and declared effective on April 26, 2000.

 

(2)                                  Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 filed with the Securities and Exchange Commission on June 7, 2000.

 

(3)                                  Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-54342) initially filed with the Securities and Exchange Commission on January 26, 2001 and declared effective on February 14, 2001.

 

(4)                                  Incorporated by reference to Registration Statement on Form 8-A filed with the Securities and Exchange Commission on January 26, 2001.

 

(5)                                  Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 19, 2003.

 

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(b)                                 Reports Submitted on Form 8-K

 

On January 31, 2003, we filed a Current Report on Form 8-K to file under Item 5 (Other Events) a copy of our Press Release dated January 31, 2003.

 

On February 6, 2003, we filed a Current Report on Form 8-K to file under Item 5 (Other Events) a copy of our Press Release dated February 6, 2003.

 

On February 26, 2003, we filed a Current Report on Form 8-K to file under Item 5 (Other Events) a copy of our Press Release dated February 26, 2003.

 

On March 12, 2003, we filed a Current Report on Form 8-K to file under Item 5 (Other Events) a copy of our Press Release dated March 12, 2003.

 

On March 26, 2003, we filed a Current Report on Form 8-K to file under Item 5 (Other Events) a copy of our Press Release dated March 26, 2003.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

	PRAECIS PHARMACEUTICALS INCORPORATED
Date:  May 9, 2003	By	/s/ Kevin F. McLaughlin
		Kevin F. McLaughlin
		Chief Financial Officer, Senior Vice President, Treasurer and Secretary (Duly Authorized Officer and Principal Financial and Accounting Officer)

 

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CERTIFICATIONS

 

I, Malcolm L. Gefter, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of PRAECIS PHARMACEUTICALS INCORPORATED;

 

2.                                       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.                                       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.                                       The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date: May 9, 2003
/s/ Malcolm L. Gefter
Malcolm L. Gefter
Chief Executive Officer

 

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I, Kevin F. McLaughlin, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of PRAECIS PHARMACEUTICALS INCORPORATED;

 

2.                                       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.                                       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.                                       The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date: May 9, 2003
/s/ Kevin F. McLaughlin
Kevin F. McLaughlin
Chief Financial Officer

 

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---

 

EXHIBIT INDEX

 

Exhibit Number		Exhibit
3.1		Amended and Restated Certificate of Incorporation (2)
3.2		Third Amended and Restated By-Laws (5)
4.1		Specimen certificate representing shares of common stock (1)
4.2		Specimen certificate representing shares of common stock (including Rights Agreement Legend) (3)
4.3		Rights Agreement between the Registrant and American Stock Transfer & Trust Company, as Rights Agent (4)
4.4		Form of Certificate of Designations of Series A Junior Participating Preferred Stock (attached as Exhibit A to the Rights Agreement filed as Exhibit 4.3 hereto) (4)
4.5		Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit 4.3 hereto) (4)
99.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(1)                                  Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-96351) initially filed with the Securities and Exchange Commission on February 8, 2000 and declared effective on April 26, 2000.

 

(2)                                  Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 filed with the Securities and Exchange Commission on June 7, 2000.

 

(3)                                  Incorporated by reference to Registration Statement on Form S-1 (Registration No. 333-54342) initially filed with the Securities and Exchange Commission on January 26, 2001 and declared effective on February 14, 2001.

 

(4)                                  Incorporated by reference to Registration Statement on Form 8-A filed with the Securities and Exchange Commission on January 26, 2001.

 

(5)                                  Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 19, 2003.

 

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