Back to GetFilings.com



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

 

(Mark One)

 

 

 

 

 

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended September 30, 2003

 

 

 

 

OR

 

 

 

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the transition period from          to         

 

 

 

 

Commission File Number: 000-30289

 

PRAECIS PHARMACEUTICALS INCORPORATED

(Exact name of registrant as specified in its charter)

 

Delaware

 

04-3200305

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

830 Winter Street, Waltham, MA 02451-1420

(Address of principal executive offices and zip code)

 

 

 

(781) 795-4100

(Registrant’s telephone number, including area code)

 

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 October 31, 2003, there were 51,900,923 shares of the registrant’s common stock, $.01 par value, outstanding.

 

 



 

PRAECIS PHARMACEUTICALS INCORPORATED

 

FORM 10-Q

 

FOR THE QUARTER ENDED SEPTEMBER 30, 2003

 

INDEX

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets –
December 31, 2002 and September 30, 2003

 

 

 

 

 

Condensed Consolidated Statements of Operations –
three and nine months ended September 30, 2002 and 2003

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows –
nine months ended September 30, 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

 

 

 

 

EXHIBIT INDEX

 

 

2



 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

PRAECIS PHARMACEUTICALS INCORPORATED

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

 

 

 

December 31,
2002

 

September 30,
2003

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

64,913

 

$

89,446

 

Marketable securities

 

130,122

 

67,240

 

Prepaid expenses and other assets

 

848

 

1,135

 

 

 

 

 

 

 

Total current assets

 

195,883

 

157,821

 

 

 

 

 

 

 

Property and equipment, net

 

71,252

 

68,250

 

Due from officer

 

933

 

858

 

Other assets

 

182

 

15

 

 

 

 

 

 

 

Total assets

 

$

268,250

 

$

226,944

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

3,285

 

$

1,124

 

Accrued expenses

 

7,075

 

7,560

 

Current portion of long-term debt

 

 

747

 

 

 

 

 

 

 

Total current liabilities

 

10,360

 

9,431

 

Long-term debt

 

33,000

 

32,067

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common Stock, $0.01 par value; 200,000,000 shares authorized; 51,801,423 shares in 2002 and 51,900,197 shares in 2003 issued and outstanding

 

518

 

519

 

Accumulated other comprehensive income

 

203

 

165

 

Additional paid-in capital

 

354,676

 

355,019

 

Accumulated deficit

 

(130,507

)

(170,257

)

 

 

 

 

 

 

Total stockholders’ equity

 

224,890

 

185,446

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

268,250

 

$

226,944

 

 

See accompanying notes.

 

3



 

PRAECIS PHARMACEUTICALS INCORPORATED

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2002

 

2003

 

2002

 

2003

 

 

 

 

 

 

 

 

 

 

 

Corporate collaboration revenue

 

$

 

$

 

$

1,029

 

$

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

19,986

 

9,918

 

44,840

 

30,887

 

Sales and marketing

 

325

 

732

 

1,039

 

2,794

 

General and administrative

 

2,274

 

2,443

 

7,131

 

7,171

 

Total costs and expenses

 

22,585

 

13,093

 

53,010

 

40,852

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(22,585

)

(13,093

)

(51,981

)

(40,852

)

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

997

 

308

 

3,492

 

1,102

 

Gain on termination of collaboration agreement

 

16,020

 

 

16,020

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(5,568

)

$

(12,785

)

$

(32,469

)

$

(39,750

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.11

)

$

(0.25

)

$

(0.63

)

$

(0.77

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of basic and diluted shares outstanding

 

51,782

 

51,883

 

51,643

 

51,838

 

 

See accompanying notes.

 

4



 

PRAECIS PHARMACEUTICALS INCORPORATED

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2002

 

2003

 

Operating activities:

 

 

 

 

 

Net loss

 

$

(32,469

)

$

(39,750

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,535

 

3,416

 

Stock compensation

 

(195

)

114

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

458

 

 

Prepaid expenses and other assets

 

(133

)

(120

)

Due from officer

 

(1,000

)

75

 

Accounts payable

 

(25,526

)

(2,161

)

Accrued expenses

 

(536

)

485

 

 

 

 

 

 

 

Net cash used in operating activities

 

(55,866

)

(37,941

)

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchase of available-for-sale securities

 

(87,267

)

(35,936

)

Sales or maturities of available-for-sale securities

 

100,281

 

98,780

 

Purchase of property and equipment

 

(1,625

)

(414

)

 

 

 

 

 

 

Net cash provided by investing activities

 

11,389

 

62,430

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Principal payments on debt

 

 

(186

)

Proceeds from exercises of stock options

 

930

 

230

 

 

 

 

 

 

 

Net cash provided by financing activities

 

930

 

44

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(43,547

)

24,533

 

Cash and cash equivalents, beginning of period

 

144,685

 

64,913

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

101,138

 

$

89,446

 

 

See accompanying notes.

 

5



 

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 subsidiaries, 830 Winter Street LLC and PRAECIS Europe Limited.  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 Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related interpretations, in accounting for its stock-based compensation plans. 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.  The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of Financial Accounting Standards Board (“FASB”) Statement No. 123 (“SFAS No. 148”).

 

6



 

Accordingly, had compensation expense for the Company’s stock option plans been determined based on the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS No. 148, the Company’s net loss and net loss per share would have approximated the pro forma amounts indicated below (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2002

 

2003

 

2002

 

2003

 

Net loss, as reported

 

$

(5,568

)

$

(12,785

)

$

(32,469

)

$

(39,750

)

Deduct/(add): Stock compensation cost as computed under APB No. 25

 

1

 

46

 

(195

)

114

 

Deduct: Stock based employee compensation cost, net of related tax effects, that would have been included in the determination of net loss as reported if the fair value method had been applied to all awards

 

(2,702

)

(2,963

)

(8,330

)

(8,531

)

Pro forma net loss

 

$

(8,269

)

$

(15,702

)

$

(40,994

)

$

(48,167

)

Diluted net loss per share, as reported

 

$

(0.11

)

$

(0.25

)

$

(0.63

)

$

(0.77

)

Diluted net loss per share, pro forma

 

$

(0.16

)

$

(0.30

)

$

(0.79

)

$

(0.93

)

 

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 and nine months ended September 30, 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 options would be antidilutive due to the Company’s net losses for all periods presented.  Diluted net loss per common share excluded 6,926,270 and 7,967,327 common stock options for the periods ended September 30, 2002 and 2003, respectively.

 

7



 

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 and nine months ended September 30, 2002 and 2003, respectively, comprehensive loss was as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2002

 

2003

 

2002

 

2003

 

Net loss

 

$

(5,568

)

$

(12,785

)

$

(32,469

)

$

(39,750

)

Changes in comprehensive loss:

 

 

 

 

 

 

 

 

 

Net unrealized holding losses on investments

 

(326

)

(131

)

(598

)

(38

)

Total comprehensive loss

 

$

(5,894

)

$

(12,916

)

$

(33,067

)

$

(39,788

)

 

Recent Accounting Pronouncements

 

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 our Annual Report on Form 10-K for the year ended December 31, 2003.  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.                                      Mortgage Financing

 

On July 30, 2003, the Company exercised the first of two one-year extension options on its acquisition and construction loan agreement, extending the maturity date until July 30, 2004.  On August 1, 2003, the Company began to pay approximately $62,000 per month in principal in addition to the existing interest payments on the loan.  In connection with this extension, the Company also entered into an interest rate cap agreement in order to reduce the potential impact of interest rate increases on future income.

 

4.                                      Gain on Termination of Collaboration Agreement

 

In August 2002, the Company paid Amgen Inc. (“Amgen”) $13.0 million in full and complete satisfaction of all amounts payable under the Company’s previously terminated collaboration agreement with Amgen and in consideration of the transfer from Amgen to the Company of title to, and possession of, any existing materials inventory. As a result of the Company’s payment of this amount, plus certain related legal fees in connection with the termination agreement, the Company eliminated the excess of its previously accrued $29.1 million liability related to this collaboration agreement and recognized a gain of $16.0 million during the third quarter of 2002.

 

8



 

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 prostate cancer and endometriosis.  We are seeking approval for Plenaxis in the United States for use in advanced symptomatic prostate cancer patients for whom the use of existing hormonal therapies may not be appropriate.  We resubmitted our new drug application, or NDA, to the FDA on February 27, 2003 seeking approval for this indication.  In July 2003, the FDA indicated that the original action date of August 27, 2003 would be extended by 90 days, and we now expect a response from the FDA by November 26, 2003.

 

In June 2003, we initiated the regulatory submission process in the Europe Union seeking approval to market Plenaxis for the treatment of a broad population of hormonally responsive prostate cancer patients.  We submitted a marketing authorization application, or MAA, in Germany and will seek broader European Union approvals under the Mutual Recognition Procedure, or MRP.  We believe that the German review process will be completed during 2004.  We are in discussions with potential partners for the commercialization of Plenaxis in Europe, as well as for the development and commercialization of Plenaxis in Japan.

 

We are conducting clinical trials of Apan, our proprietary drug candidate for the treatment of Alzheimer’s disease.  PPI-2458 is our proprietary compound in development for the potential treatment of a variety of inflammatory diseases, as well as a wide range of cancers.  We have filed an investigational new drug application, or IND, to study PPI-2458 in patients with non-Hodgkin’s lymphoma and expect to initiate a clinical trial in this indication during the fourth quarter of 2003.  In addition, we have other programs 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, all revenues and ongoing financial obligations under our former collaboration agreements have ended.  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 in the United States for the treatment of advanced symptomatic 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 nine months of 2003.  We expect to continue to have net operating losses at least through 2005.  Assuming receipt by the end of 2003 of FDA marketing approval for Plenaxis in the United States, partnering of clinical programs at opportune times and

 

9



 

continued prudent fiscal management, we believe that our existing cash and investments will be sufficient for us to execute our current operating plan and attain profitability by 2006 without the need to return to the capital markets.

 

The market for currently available hormonal therapies to treat prostate cancer is approximately $1.2 billion in the United States.  We believe that the revenue opportunity for Plenaxis, if approved for the treatment of advanced symptomatic prostate cancer patients for whom the use of existing hormonal therapies may not be appropriate, may represent 15% or more of this market.  However, our actual revenues will depend upon our approved labeling and risk management program, as well as the success of our commercialization efforts.

 

Our accumulated deficit as of September 30, 2003 was approximately $170.3 million.

 

At September 30, 2003, we had 139 full-time employees, 106 of whom were engaged in research and development activities, compared to 133 full-time employees at September 30, 2002, 103 of whom were engaged in research and development activities.

 

Results of Operations

 

Three Months Ended September 30, 2003 Compared To Three Months Ended September 30, 2002

 

We had no revenues for the three months ended September 30, 2003.  If the FDA grants marketing approval for Plenaxis in the United States by the end of 2003, we estimate that we will begin to ship product during the first quarter of 2004.  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 expected revenues.

 

Research and development expenses for the three months ended September 30, 2003 decreased 50% to approximately $9.9 million, from approximately $20.0 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 the Plenaxis NDA in February 2003, spending on the prostate cancer clinical development program was reduced significantly.  During the second quarter of 2003, we initiated a phase Ib clinical trial for Apan.  We plan to initiate a phase I clinical trial for PPI-2458 in patients with non-Hodgkin’s lymphoma during the fourth quarter of 2003.  Overall, we expect our research and development expenses for the remainder of 2003 to remain lower than 2002 spending and then increase thereafter.  While we are generally able to forecast our overall spending on research and development, we are unable to predict the precise level of spending on individual clinical programs due to the uncertain nature of clinical development and the potential for future development partnerships.

 

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 regarding 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 to the FDA on February 27, 2003 seeking approval for use in advanced symptomatic prostate cancer patients for whom the use of existing hormonal therapies may not be appropriate.  In July 2003, the FDA indicated that our original action date of August 27, 2003 would be extended by 90 days.  We now expect a response from the FDA regarding the approvability of Plenaxis by November 26, 2003.  During this extension, the FDA is

 

10



 

reviewing previously received data requested by, and submitted to, the agency, as well as working with us to arrive at the appropriate risk management program for Plenaxis.  Specifically, the FDA has indicated that our proposed risk management program must include some form of controlled or managed distribution.  We are working with the FDA to finalize the details of our risk management program, as well as other matters required for approval.

 

On June 23, 2003, we also submitted an MAA in Germany.  We will subsequently seek broader European Union approval for Plenaxis under the MRP to market Plenaxis for the treatment of a broad population of hormonally responsive prostate cancer patients.  We believe that the German regulatory authorities will complete their review of our MAA during 2004.  We are in discussions with potential partners for the commercialization of Plenaxis in Europe, as well as for the development and commercialization of Plenaxis in Japan.

 

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 population of prostate cancer patients 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 suggest 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 a pharmacokinetic study of Plenaxis for the treatment of endometriosis to examine the appropriate 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 partnership opportunities.

 

We began our clinical program for Apan in 2000.  We have completed a normal volunteer, phase Ia dose escalation study of Apan and have determined a maximum tolerated dose, or MTD, in healthy volunteers.  During the second quarter of 2003, we initiated a phase Ib trial of Apan in Alzheimer’s disease patients.  In this trial, we are evaluating 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 anticipate completing this study during the first half of 2004.  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 initiate our first clinical study for PPI-2458 during the fourth quarter of 2003.  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 benefiting from other therapies.  The study will utilize an accelerated dosing regimen in one-month treatment cycles, with the option for patients to continue on the study for multiple one-month cycles.  The primary goal of the study is to establish the MTD of orally administered PPI-2458 in this patient population.  The study will also utilize a proprietary pharmacodynamic assay to evaluate the inhibition of the target enzyme, MetAP2.  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 and psoriasis.

 

Sales and marketing expenses for the three months ended September 30, 2003 increased to approximately $0.7 million, from approximately $0.3 million for the corresponding period in 2002.  This increase was due to increased costs related to pre-commercialization efforts in connection with the possible launch of Plenaxis in the United States, in particular for market research, various national meetings, and pricing and reimbursement consulting activities.  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 the remainder of 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 educational, promotional and marketing programs.

 

General and administrative expenses for the three months ended September 30, 2003 increased 7% to approximately $2.4 million, from approximately $2.3 million for the corresponding period in 2002. We expect that general and administrative expenses will increase slightly during the

 

11



 

remainder of 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 September 30, 2003 decreased 69% to approximately $0.3 million, from approximately $1.0 million for the corresponding period in 2002. The decrease in net interest income was due primarily to lower average cash and investment balances and lower average interest rates.

 

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.

 

Nine Months Ended September 30, 2003 Compared To Nine Months Ended September 30, 2002

 

We had no revenues for the nine months ended September 30, 2003, compared to approximately $1.0 million for the corresponding period in 2002.  During the second quarter of 2002, we received a final reimbursement payment from a former corporate collaborator.  We do not expect to receive any additional revenues under this former collaboration agreement.

 

Research and development expenses for the nine months ended September 30, 2003 decreased 31% to approximately $30.9 million, from approximately $44.8 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 the Plenaxis NDA in February 2003, spending on the prostate cancer clinical development program was reduced significantly.  In addition, pending final analysis of the results of certain clinical studies, we also reduced spending on our endometriosis program during the first nine months of 2003.  During the second quarter of 2003, we initiated a phase Ib clinical trial for Apan and we plan to initiate a phase I clinical trial for PPI-2458 in patients with non-Hodgkin’s lymphoma during the fourth quarter of 2003 and, accordingly, will increase our spending in these areas.

 

Sales and marketing expenses for the nine months ended September 30, 2003 increased to approximately $2.8 million, from approximately $1.0 million for the corresponding period in 2002.  This increase was due to increased costs related to pre-commercialization efforts in connection with the possible launch of Plenaxis in the United States, in particular for market research, various physician and national meetings, pricing and reimbursement consulting and sales force sizing and deployment activities.

 

General and administrative expenses for the nine months ended September 30, 2003 increased 1% to approximately $7.2 million, from approximately $7.1 million for the corresponding period in 2002. We expect that general and administrative expenses will increase slightly during the remainder of 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 nine months ended September 30, 2003 decreased 68% to approximately $1.1 million, from approximately $3.5 million for the corresponding period in 2002. The decrease in net interest income was due primarily to lower average cash and investment balances and lower average interest rates.

 

Liquidity and Capital Resources

 

At September 30, 2003, we had cash, cash equivalents and marketable securities of approximately $156.7 million and working capital of approximately $148.4 million, compared to approximately $195.0 million and $185.5 million, respectively, at December 31, 2002.  During 2003, we expect to use an aggregate of approximately $55.0 million to $60.0 million of our cash and investments to fund operations.  This reflects a $5.0 million to $10.0 million reduction compared to our previous guidance of approximately $65.0 million.  Assuming receipt by the end of 2003 of regulatory approval to market Plenaxis in the United States for advanced symptomatic prostate cancer patients, partnering of clinical programs at opportune times and continued prudent fiscal management, we believe that our existing cash and investments will be sufficient for us to execute our current operating plan and attain profitability by 2006 without the need to return to the capital markets.

 

12



 

For the nine months ended September 30, 2003, net cash of approximately $37.9 million was used in operating activities, compared to approximately $55.9 million used in operating activities during the nine months ended September 30, 2002. During the nine months ended September 30, 2003, our use of cash in operations was due principally to our net loss of approximately $39.8 million and the reduction in accounts payable of approximately $2.2 million, partially offset by approximately $3.4 million of depreciation and amortization.  We expect our cash utilization to increase for the remainder of 2003 as a result of an overall increase in operating expenses as we prepare for the expected commercial launch of Plenaxis, continue with clinical trials for Apan, initiate a clinical study 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 $62.4 million for the nine months ended September 30, 2003 consisted primarily of net sales or maturities of marketable securities of approximately $62.8 million.  This compares to net cash provided by investing activities of approximately $11.4 million for the corresponding period in 2002.  Net cash provided by investing activities for the nine months ended September 30, 2002 was primarily related to net sales or maturities of marketable securities of approximately $13.0 million.

 

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 September 30, 2003, approximately $32.8 million was outstanding under the loan agreement. Advances bear interest at a rate equal to the 30-day LIBOR plus 2.0% (3.12% at September 30, 2003). Interest is payable monthly in arrears. In July, we exercised the first of two one-year extension options, extending the maturity date of the loan until July 30, 2004.  As a result of this extension, in August we started making monthly principal payments on the loan of approximately $62,000, in addition to interest payments.  In connection with this extension, we also entered into an interest rate cap agreement in order to reduce the potential impact of interest rate increases on future income.

 

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.  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  future operating losses, 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 January 2003, the Financial Accounting Standards Board, or 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 Annual Report on Form 10-K for the year ended December 31, 2003.  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.

 

13



 

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. We do not expect to have any revenues, other than interest income, until 2004 at the earliest.  In addition, we expect to continue to spend significant amounts to develop commercial sales and marketing capabilities, continue clinical studies and seek regulatory approval for our existing product candidates. 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 September 30, 2003, we had an accumulated deficit of approximately $170.3 million.  We expect that our operating expenses will increase significantly due primarily to increased expenses related to continued pre-commercialization activities for Plenaxis, as well as the initiation and continuation of studies as part of our other clinical programs, 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 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, Alzheimer’s disease and non-Hodgkin’s lymphoma 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

 

14



 

Plenaxis, our drug candidate for the treatment of hormonally responsive prostate cancer and endometriosis, or for any of our other product candidates.  Also, regulatory approval may be conditioned upon significant labeling requirements and, as described below, in the case of FDA approval of Plenaxis, will require that we agree with the FDA on and implement some form of controlled or managed distribution program.  Such labeling or distribution requirements could  materially 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 regarding 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 advanced symptomatic prostate cancer patients for whom the use of existing hormonal therapies may not be appropriate.  In February 2003, we resubmitted to the FDA our NDA seeking approval for this indication.  In July 2003, the FDA indicated that our original action date of August 27, 2003 would be extended by 90 days.  We now expect a response from the FDA regarding the approvability of Plenaxis by November 26, 2003.  During the extension, the FDA is reviewing data requested by, and submitted to, the agency, as well as working with us to arrive at the appropriate risk management program for Plenaxis.  Specifically, the FDA has indicated that our proposed risk management program must include some form of controlled or managed distribution.  We are working with the FDA to finalize our risk management program, as well as other matters required for approval.

 

In June 2003, we also submitted an MAA in Germany and will seek broader approvals under the MRP to market Plenaxis in the European Union for the treatment of a broad population of hormonally responsive prostate cancer patients.  We believe that the German regulatory authorities will complete their review of our MAA during 2004.

 

The FDA actions described above have delayed, and otherwise adversely affected, our obtaining regulatory approval to market Plenaxis in the United States for the treatment of advanced symptomatic prostate cancer.  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 FDA 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.

 

We may be unable to establish marketing and sales capabilities necessary to successfully commercialize Plenaxis or our other 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 product for use in advanced symptomatic 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. Our ability to successfully commercialize Plenaxis in the United States for the treatment of advanced symptomatic prostate cancer patients and to otherwise execute our current operating plan and attain profitability by 2006,

 

15



 

without the need to raise additional capital, is dependent on numerous factors, including, as described above, our receipt by the end of 2003 of regulatory approval to market Plenaxis in the United States for advanced symptomatic prostate cancer patients, partnering of clinical programs at opportune times and continued prudent fiscal management.  Accordingly, we cannot assure investors that we will have the funds to successfully commercialize Plenaxis or any other potential product in the United States or elsewhere.

 

We have also announced our intention to market and sell Plenaxis outside of the United States through one or more marketing partners.  We have not entered into any such arrangements and we cannot assure you that we will be able to enter into agreements with third parties on acceptable terms, if at all. In addition, co-promotion or other marketing arrangements with third parties to commercialize Plenaxis or any other potential products could significantly limit the revenues we derive from these products, and these third parties may fail to commercialize Plenaxis or our other 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 terms of any risk management and/or controlled or managed distribution program required by the FDA in connection with the approval of Plenaxis or any of our other product candidates;

 

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

 

                                          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 sale of Plenaxis or other potential products;

 

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

 

                                          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;

 

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

 

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

 

If Plenaxis is 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

 

16



 

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 accordingly, our ability to earn revenues from this commercialization.

 

Our ability to commercialize Plenaxis, or any other potential product, alone or with collaborators, may depend in part on the availability of reimbursement 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 such as Plenaxis.  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 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.

 

17



 

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 in the United States or abroad which could result in additional expenses and further delay the regulatory review and potential commercialization of Plenaxis.

 

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 single third-party manufacturer, and we currently have not contracted, and in the near term do not expect to contract, with a second supplier 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 are evaluating 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 treatment options exist and may be more readily available or acceptable, which may impair our ability to capture or maintain market share for our potential products.

 

Alternative products and medical treatments 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 respond to changes in hormone levels, and there are other treatment alternatives available, including radiation therapy and surgery.  Even if the FDA approves Plenaxis for commercialization for the treatment of advanced symptomatic prostate cancer patients, the approval will be limited to a particular subset of patients and distribution of Plenaxis will be controlled or managed in some manner, which prescribing physicians may view as burdensome.  Moreover, Plenaxis may not compete favorably with existing treatments that already have an established market share.  Accordingly, it may be difficult for doctors to obtain Plenaxis or they or their patients may choose to use alternative treatments that are more readily available or more acceptable to the doctor and/or the patient.  If Plenaxis does not achieve broad market acceptance as a drug for the treatment of advanced symptomatic 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

 

18



 

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, including Plenaxis, 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 24 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 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

 

19



 

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 to 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.

 

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.

 

20



 

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 attract and retain these people 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.

 

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 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 advanced symptomatic prostate cancer patients or any of our other product candidates, or of associated labeling or controlled or managed distribution requirements;

 

                                          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, Plenaxis or our other product candidates and the timing of commercialization;

 

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

 

21



 

                                          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;

 

                                          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.

 

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 clinical 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.

 

22



 

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 $0.4 million decrease in the fair value of our investments as of September 30, 2003.  The same hypothetical increase in interest rates as of December 31, 2002 would have resulted in an approximate $0.8 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 September 30, 2003, approximately 91% of our total investments will mature in one year or less, with the remainder maturing in less than two 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. In July 2003, we exercised the first of two one-year extension options extending the maturity date of the loan until July 30, 2004.  In connection with this extension, the subsidiary has entered into an interest rate cap agreement which limits exposure to interest rate increases above a certain threshold.  Due to the current interest rate environment and the relatively short duration of the loan agreement extension, 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.

 

ITEM 4.  CONTROLS AND PROCEDURES.

 

(a)          Disclosure Controls and Procedures.

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

 

(b)                               Internal Control Over Financial Reporting.

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

23



 

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)

 

 

 

31.1

 

Certification of Chief Executive Officer

 

 

 

31.2

 

Certification of Chief Financial Officer

 

 

 

32.1

 

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

 

 

 

32.2

 

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.

 

(b)                                 Reports Submitted on Form 8-K

 

On July 21, 2003, we furnished a Current Report on Form 8-K to furnish under Item 12 (Results of Operations and Financial Condition) a copy of our Press Release dated July 21, 2003.

 

On September 15, 2003, we furnished a Current Report on Form 8-K to furnish under Item 9 (Regulation FD Disclosure) a copy of our Press Release dated September 15, 2003.

 

24



 

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:  November 14, 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)

 

25



 

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)

 

 

 

31.1

 

Certification of Chief Executive Officer

 

 

 

31.2

 

Certification of Chief Financial Officer

 

 

 

32.1

 

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

 

 

 

32.2

 

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.

 

26