UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission file number 0-13634
MACROCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2744744
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Hartwell Avenue
Lexington, Massachusetts 02421-3134
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(Address of principal executive offices)
(781) 862-4003 (Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Series B Preferred Stock Purchase Rights, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
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THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NON-AFFILIATES, BASED UPON THE CLOSING PRICE FOR SUCH STOCK ON JUNE 28, 2002 WAS
APPROXIMATELY $48,669,000. AS OF MARCH 10, 2003, 28,193,054 SHARES OF COMMON
STOCK, $.01 PAR VALUE, WERE OUTSTANDING.
PART I
ITEM 1. BUSINESS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. MACROCHEM'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED
TO IN "RISK FACTORS". READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE
NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. ALL SUBSEQUENT WRITTEN
AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS
ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THESE
CAUTIONARY STATEMENTS. READERS ARE ALSO URGED TO CAREFULLY REVIEW AND CONSIDER
THE VARIOUS DISCLOSURES MADE BY THE COMPANY, IN THIS DOCUMENT, AS WELL AS THE
COMPANY'S PERIODIC REPORTS ON FORMS 10-K, 10-Q AND 8-K FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION ("SEC").
MacroChem develops pharmaceutical products for commercialization by
employing SEPA(R) (Soft Enhancer of Percutaneous Absorption), our patented
topical drug delivery technology. SEPA compounds, when properly combined with
drugs, provide pharmaceutical formulations, such as creams, gels, lacquers and
solutions, etc., that enhance the transdermal delivery of drugs into the skin or
into the bloodstream. We believe that SEPA compounds enhance the diffusion of
drugs into and through the skin by making the outer layer of the skin more
permeable to the drug molecule. Transdermal delivery provides an alternative to
other methods of drug administration, such as injection, oral dosage forms and
inhalation, and may allow selected drugs to be administered more effectively, at
lower doses, with fewer adverse events and with improved patient compliance for
both human and veterinary use.
On October 11, 2002, MacroChem Corporation announced that the Food and Drug
Administration (FDA) had advised the Company that further clinical trials of
MacroChem's drugs containing its absorption enhancer SEPA(R) had been placed on
clinical hold until issues regarding a transgenic mouse carcinogenicity study
have been resolved. During the clinical hold, the Company has been and will
continue to be unable to conduct human clinical trials on its SEPA-based
investigational drug products.
According to the FDA, the Executive Committee of its Carcinogenicity
Assessment Committee has determined that SEPA is responsible for carcinogenic
findings in a six-month transgenic Tg.AC mouse assay. That study, which was
conducted by MacroChem in 1999 and reported to the FDA in February 2000, yielded
no adverse effects at SEPA doses up to 50 mg/kg/day. At the two highest doses
used in the study, skin injury and inflammation preceded the development of
papillomas in the treated animals.
In addition to the transgenic mouse study, MacroChem has completed and
submitted to the FDA results from a range of genetic and dermal toxicity studies
of SEPA in animals, as well as a two-year rat carcinogenicity study. Results
from these studies showed that SEPA was not genotoxic and not carcinogenic.
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There can be no assurance that the Company will succeed in its attempts to
have the clinical hold lifted, nor can there be any assurance that the FDA will
ultimately approve any of MacroChem's investigational drugs. Certain risks and
uncertainties associated with the filing and the FDA review of any future NDA
and FDA regulation of the Company's proposed products are described or
referenced elsewhere in this Annual Report on Form 10-K.
We have been developing specific SEPA formulations for use with
non-proprietary and proprietary drugs manufactured by pharmaceutical companies,
and we plan to commercialize these products through the formation of
partnerships, strategic alliances and licensing arrangements with those
companies. Because of the substantial costs involved in bringing a new
pharmaceutical product, or a new formulation of an old drug, to market, we may
be required to rely on pharmaceutical companies or other strategic partners to
conduct all or part of the clinical trials necessary to gain regulatory approval
to manufacture and to market any resulting product.
We have also developed a series of new low molecular weight polymers,
termed MacroDerm(TM), for cosmetic use and the topical delivery of
pharmaceuticals. We have developed, tested and evaluated MacroDerm prototypes
and have been seeking strategic partners to manufacture and market products
based upon this technology.
We do not maintain general product liability insurance, since we do not
market drug products. In the past, we have obtained specific liability insurance
relating to all clinical studies we have conducted. As of December 31, 2002, no
liability claims had been asserted against us. However, in the future, incidents
could give rise to claims which could exceed our insurance coverage and
resources.
RESEARCH AND DEVELOPMENT
We conduct our research and development activities through our own staff
and facilities, and also through collaborative arrangements with universities,
contract research organizations and independent consultants. As of March 1,
2003, the Company had 13 full-time employees, 6 of whom are devoted to research
and development and regulatory affairs. Research and developmental expenditures
were approximately $3,998,400, $9,791,400 and $5,280,600 during the years ended
December 31, 2002, 2001 and 2000, respectively. We also rely upon third parties
to conduct clinical studies, obtain U.S. Food and Drug Administration ("FDA")
and other regulatory approvals and manufacture and market a finished product.
We conduct stability studies, test our unique formulations and design
manufacturing processes for our SEPA compounds and polymer technologies at our
facility and other facilities. We have cGMP (current Good Manufacturing
Practices) facilities for the manufacture of dosage forms for clinical
evaluations.
PRODUCTS AND TECHNOLOGIES
BACKGROUND
To be effective, drugs must reach an intended site in the body, at an
effective concentration, and for an appropriate length of time. Traditional
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methods of drug administration, such as oral ingestion, intramuscular and
intravenous injections and inhalation, are effective for a wide variety of
drugs. However, depending upon the given drug, each method may have
disadvantages. For example, following oral administration, a drug must pass
through the gastrointestinal system to be absorbed and may be metabolized or
broken down in the stomach, intestines or liver, resulting in a lower amount of
unchanged drug at the target site for its action. As a result, higher dosages of
the drug must be administered orally to produce the desired effect, which may
cause irritation of the gastrointestinal tract and systemic toxicity.
In addition, the rate at which an orally administered drug is absorbed may
vary depending on several factors, including the drug's chemical properties, the
length of time the drug remains in the gastrointestinal tract and the patient's
meal patterns. The pharmaceutical industry has investigated a variety of
alternative approaches for dealing with drug adverse events and loss of efficacy
following oral dosing, including enteric coating of tablets, formulating with
various waxes and cellulosic materials, microencapsulation and compressing
tablets in various layers. However, the desired effects of these approaches are
not always reproducible from patient to patient or effective in bypassing
metabolism.
TOPICAL DRUG DELIVERY
Topical drug delivery is the process of delivering drugs into the skin
(dermal delivery) so that they can be effective in the treatment of
dermatological or localized conditions and diseases, or through the skin
(transdermal delivery) and into the bloodstream for the treatment of systemic
diseases.
The skin is made up of three layers: the outer layer or stratum corneum;
the middle layer or viable epidermis; and the inner layer or dermis. The stratum
corneum, which serves as the skin's primary barrier to the external environment,
consists of closely packed dead cells and fatty (lipid) material. The epidermis
is composed of several layers of active cells and the dermis consists, in part,
of tissue containing hair follicles, nerve endings and blood capillaries. Within
the stratum corneum, lipid layers bind the dead cells together to form a
protective barrier. Research conducted by MacroChem shows that SEPA compounds
affect drug delivery by acting, in part, upon the stratum corneum to disrupt the
alignment of the lipid molecules within the lipid layers. This disruption
increases the porosity of the lipid-cell layers, allowing drugs to diffuse
through the stratum corneum and through the more porous epidermis to the dermis,
where they enter the blood stream through the capillaries. The rate and amount
of drug absorbed can be controlled by varying the formulation used.
MACROCHEM'S DRUG DELIVERY SYSTEMS AND OTHER PROPOSED PRODUCTS
SEPA(R) COMPOUNDS
The delivery of a drug through the skin depends on the drug's physical and
chemical characteristics (molecular size and shape, the drug's solubility in
lipids and water, its melting point and whether it is lipophilic or
hydrophilic).
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Since some drugs move through the skin too rapidly, the transdermal system
must retard the rate of drug absorption to ensure optimal efficacy with minimum
toxicity. Since other drugs move through the skin with difficulty, the
transdermal system must be formulated to increase a drug's rate of absorption
through the skin. Common methods of transdermal delivery use common chemicals
such as ethanol or fatty compounds to enhance penetration.
Although certain delivery methods using chemicals have proven to be
somewhat effective with specific drugs, such as drugs used for the treatment of
motion sickness or hormone deficiencies, they have caused adverse events, such
as skin irritation and sensitivity at the site of application. Some drugs,
because of their physical characteristics or the amount of drug necessary to
achieve the desired therapeutic effect, have not been successfully delivered
transdermally to date.
MacroChem has developed SEPA compounds that are designed to enhance the
transport, penetration and controlled delivery of drugs through the skin. SEPA
compounds are generally colorless, clear liquids that are intended to promote
drug delivery by aiding drug molecules to penetrate the skin, diffuse into or
through the skin layers and become absorbed into the bloodstream.
We have our own facility for the in vitro testing of drug formulations
containing SEPA, and therefore are less dependent on outside laboratories for
this type of testing. We have been conducting in vitro studies to evaluate the
transdermal enhancing effect of SEPA in combination with a variety of drugs with
differing physical and chemical characteristics, representing a broad spectrum
of potential drug products. Although our research and development efforts with
SEPA are at an advanced stage, we must still conduct substantial additional
studies to demonstrate the efficacy and safety of any SEPA-drug formulation. We
have found that specific drugs administered transdermally with SEPA demonstrate
increased transdermal absorption. Some of the drug formulations tested by us
with SEPA contain compounds generally recognized as unlikely or difficult
candidates for transdermal delivery because of their physical and chemical
properties and molecular size. As these drug formulations are further developed,
we plan to conduct additional studies to investigate the efficacy and safety of
some of these formulations.
We have conducted early clinical studies with several drug formulations
containing SEPA where SEPA has been demonstrated to enhance transdermal
penetration of the specific drug within in vitro testing. Clinical studies have
included Phase I trials in which safety and tolerance of a topical application
of the drug formulation were assessed and Phase II trials in which efficacy of
the specific drug was evaluated in an appropriate clinical condition.
We have designed and sponsored clinical trials of Topiglan(R), our topical
formulation of alprostadil and SEPA for use in the treatment of erectile
dysfunction. A Phase III trial of a first generation Topiglan formulation
demonstrated improvement in total erectile function score and improvement of the
International Index of Erectile Function domain score among protocol-conforming
patients treated with Topiglan versus a control vehicle. The Company
subsequently completed preclinical and Phase I studies of a new Topiglan
formulation.
The Company has also designed and sponsored in vitro and clinical studies
of its topical formulation of SEPA and testosterone for use in treating male
hypogonadism. These studies demonstrated that SEPA enhanced penetration of
testosterone through the skin.
5
The Company has also conducted pre-clinical laboratory studies with SEPA
formulations of non-steroidal anti-inflammatory drugs for topical application in
pain management.
In addition to the clinical development programs cited above, MacroChem has
conducted a pre-clinical study of EcoNail(TM), its formulation of SEPA in
combination with active antifungal agents to treat fungal infections of the
nail. The study demonstrated substantially increased nail penetration by an
antifungal drug when combined with SEPA.
We believe that SEPA compounds can be used with a broad variety of new and
existing drugs to enhance their commercial value. The therapeutic effectiveness
and improved convenience of a transdermal SEPA product may substantially expand
the existing market for a drug. In addition, a formulation containing a SEPA
compound may prove to be a superior alternative to the existing methods of
administering certain drugs.
MACRODERM(TM) DRUG DELIVERY SYSTEM
We have developed a series of new low molecular weight polymers, termed
MacroDerm, for use in cosmetics and in the superficial dermal delivery of
pharmaceuticals. Potential applications include their use with sunscreens,
moisturizers, and insect repellents. We have synthesized, tested and evaluated
MacroDerm prototypes and have been seeking strategic partners to manufacture and
market specific MacroDerm products.
COMPETITION
We compete with numerous firms, many of which are large, multi-national
organizations with worldwide distribution. We believe that our major competitors
in the drug delivery sector of the health care industry include NexMed, Inc.,
Bentley Pharmaceuticals, Inc., ALZA Corporation, Elan Corporation, plc.,
Novartis and Pfizer. Compared with MacroChem, most of these firms have
substantially greater capital resources, research and development and technical
staffs, facilities and experience in obtaining regulatory approvals, as well as
in manufacturing, marketing and distribution of products. Recent trends in this
area are toward further market consolidation of large drug companies into a
smaller number of very large entities, further concentrating financial,
technical and market strength and increasing competitive pressure in the
industry. Academic institutions, hospitals, governmental agencies and other
public and private research organizations are also conducting research and
seeking patent protection and may develop competing products or technologies of
their own through joint ventures or other arrangements. In addition, recently
developed technologies, or technologies that may be developed in the future, may
or could be the basis for competitive products. We cannot guarantee that our
competitors will not succeed in developing technologies and products that are
more effective or less costly to use than any that we are currently developing.
Alprostadil, a synthetic prostaglandin E1 (PGE1), and Viagra(R) are the
only drugs approved for marketing in the United States for erectile dysfunction.
PGE1 is available in two dosage forms. Caverject(R), marketed by Pharmacia &
Upjohn, is administered by needle injection directly into the penis. The second
product, developed by Vivus, is a pellet form of the drug administered through a
tube inserted into the urethra. In contrast to the invasive forms now available,
MacroChem believes that a topical formulation applied to the penis will be the
6
preferred dosage form for treatment of this disorder. Viagra(R), an oral product
of Pfizer, was approved by the FDA in 1998. Many large drug companies have
internal programs to develop orally administered alternatives to Pfizer's Viagra
for treating male erectile dysfunction. In addition, NexMed, Inc. has announced
completion of U.S. Phase III clinical trials of its cream formulation of
alprostadil for treating the disease.
With respect to EcoNailTM, Johnson & Johnson and Novartis each offer an
orally administered antifungal therapy and Dermik Laboratories offers a topical
nail lacquer therapy for treating fungal infections of the nail. A number of
smaller firms are also developing topical and oral therapies for these
infections.
We expect any products approved for sale to compete primarily on the basis
of efficacy, safety, patient compliance, reliability, price and patent position.
Generally, the first pharmaceutical product to reach the market in a therapeutic
or preventive area often has a significant advantage compared with later
entrants to the market. Our competitive position will also depend on our ability
to attract and retain qualified scientific and other personnel, develop
effective proprietary products, implement production and marketing plans, obtain
patent protection and secure adequate capital resources.
EMPLOYEES
As of March 1, 2003, the Company had 13 full time employees, 6 of whom are
devoted to research and development and regulatory affairs. None of our
employees are covered by a collective bargaining agreement, and we consider
relations with our employees to be good.
GOVERNMENT REGULATION
The production and marketing of our drug delivery systems and
pharmaceutical products are subject to regulation for safety, efficacy and
quality by numerous federal, state and local agencies and comparable agencies in
foreign countries. In the United States, the Federal Food, Drug and Cosmetics
Act, the Public Health Service Act, the Controlled Substances Act and other
federal statutes and regulations govern or influence the testing, manufacture,
safety, labeling, storage, record keeping, approval, advertising and promotion
of our proposed products and technologies.
Non-compliance with applicable requirements can result in fines and other
judicially imposed sanctions including recalls and criminal prosecutions based
on violation of statutory requirements by products, promotional practices, or
manufacturing practices. In addition, administrative remedies can involve
voluntary recalls or cessation of sale of products, administrative detention,
public notice, voluntary changes in labeling, manufacturing or promotional
practices, as well as refusal of the government to approve New Drug Applications
(NDAs). The FDA also has the authority to withdraw approval of drugs in
accordance with statutory procedures.
The FDA approval procedure involves completion of certain pre-clinical and
manufacturing/stability studies and the submission of the results of these
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studies to the FDA in an Investigational New Drug (IND) application in support
of performing clinical trials. IND allowance is then followed by performance of
human clinical trials, and additional pre-clinical and manufacturing quality
control studies, supporting safety, efficacy and manufacturing quality control.
The safety, chemistry, manufacturing and stability and clinical studies
developed under the IND are compiled into an NDA or Abbreviated New Drug
Application (ANDA) and submitted to the FDA for approval to market.
Preclinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
product. Human clinical trials are typically conducted in three sequential
phases, but the phases may overlap. Phase I trials consist of testing of the
product in a small number of normal volunteers primarily for safety. In Phase
II, in addition to safety, the efficacy of the product is evaluated in a small
patient population. Phase III trials typically involve multicenter testing for
safety and clinical efficacy in an expanded population of patients at
geographically dispersed test sites. A clinical plan, or "protocol," accompanied
by the identification of the institutions participating in the trials, must be
submitted to the FDA prior to commencement of each clinical trial. The FDA may
order the temporary or permanent discontinuation of a clinical trial at any time
if adverse events that endanger patients in the trials are observed. As noted
elsewhere in this Annual Report on Form 10-K, the FDA has advised the Company
that further clinical trials of MacroChem's drugs containing its absorption
enhancer SEPA(R) have been placed on clinical hold. In addition, the FDA may
request Phase IV clinical trials, to be performed after marketing approval, to
resolve any lingering questions.
A 30-day waiting period after the filing of each IND application is
required by the FDA prior to the commencement of clinical testing in human
subjects. If the FDA does not comment on or question the IND application within
30 days, initial clinical studies may begin. However, any FDA comments or
questions must be answered to the satisfaction of the FDA before initial
clinical testing can begin. In some instances, this process could result in
substantial delay and expense.
The results of the preclinical and clinical studies on new drugs are
submitted to the FDA in the form of NDAs for approval to commence commercial
sales. Following extensive review, the FDA may grant marketing approval, require
additional testing or information, or deny the application. All products must
continue to comply with all FDA requirements and the conditions in an approved
application, including product specifications, manufacturing process and
labeling requirements. Failure to comply, or the occurrence of unanticipated
adverse events during commercial marketing, could lead to the need for labeling
changes, product recall, seizure, injunctions against distribution or other
FDA-initiated action, which could delay further marketing until the products are
brought into compliance.
In certain cases, an ANDA may be filed in lieu of filing an NDA. An ANDA
relies on bioequivalency tests that compare the applicant's drug with an already
approved reference drug, rather than on clinical trials. An ANDA may be
available to us for a new formulation of a drug which has already been approved
by the FDA in other topical dosage forms.
The NDA itself is a complicated and detailed document and must include the
results of extensive animal, clinical and other testing, the cost of which is
substantial. Although the FDA is required to review applications within 180 days
of filing, in the process of reviewing applications the FDA frequently requests
8
that additional information be submitted and restarts the 180-day regulatory
review period when the requested additional information is submitted. The effect
of such requests and subsequent submissions can significantly extend the time
for the NDA review process. Until an NDA is actually approved, no assurance can
be given that the information requested and submitted will be considered
adequate by the FDA to justify approval.
In addition, packaging and labeling of most of our proposed products are
subject to FDA regulation. We must get FDA approval for all labeling and
packaging prior to marketing of a regulated product.
Whether or not FDA approval has been obtained, approval of a product by a
comparable regulatory authority must be obtained in most foreign countries
before marketing of the product in that country. The approval procedure varies
from country to country and may involve additional testing, and the time
required may differ from that required for FDA approval. Although some
procedures for unified filings exist for certain European countries, in general
each country has its own procedure and requirements, many of which are time
consuming and expensive. Thus, substantial delays in obtaining required
approvals from foreign regulatory authorities can result after the relevant
applications are filed. After such approvals are obtained, further delays may be
encountered before the products become commercially available.
We cannot guarantee that any required FDA or other governmental approval
will be granted or, if granted, will not be withdrawn. Governmental regulation
may prevent or substantially delay the marketing of our proposed products, cause
us to undertake costly procedures and furnish a competitive advantage to the
more substantially capitalized companies with which we plan to compete. In
addition, we cannot predict the extent of potentially adverse government
regulations that may arise from future administrative action or legislation.
PATENTS, TRADEMARKS AND LICENSE RIGHTS
During 2002, one new U.S. patent was issued to the Company and two foreign
applications were allowed.
U.S. Patent No. 6,459,124 titled, "Antifungal nail lacquer and method using
same," issued during 2002. This patent extends to other enhancer compounds the
protection afforded to the Company by its previously issued U.S. Patent No.
6,224,887 (2001) for a SEPA containing antifungal nail lacquer.
Canadian Patent Application No. 2,296,373, directed to the Company's
Topiglan(R) formulations, was allowed and is expected to be granted during 2003.
European Patent Application No. 99905838.1, directed to the Company's EcoNailTM
formulations, was allowed and the grant fee was paid in 2002.
During 2002, the Company filed two new U.S. patent applications and one new
International PCT application.
Of the two new U.S. patent applications, one relates to the use of SEPA(R)
enhancers in formulations for delivery of non-steroidal anti-inflammatory drugs
(NSAID) by topical application to the skin and seeks to expand the scope of
protection afforded by the Company's previously issued U.S. Patent No.
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5,976,566, issued in 1999. The other new U.S. patent application relates to an
antifungal nail lacquer and seeks to broaden the coverage of the new patent that
issued this year.
The new International PCT application seeks to obtain worldwide patent
protection for a new technology developed by the Company relating to emulsifier
compounds. It is expected that this application will be published during April
2003.
In addition to the patent activity, the Company filed one new trademark
application for the mark OPTERONE for a topical hormone replacement product. The
application has been allowed and published.
We believe that patent protection of our technologies, processes and
products is important to our future operations. The success of our proposed
products may depend, in part, upon our ability to obtain patent protection.
Although we intend to file additional patent applications, as management
believes appropriate for any new products or technological developments, we
cannot guarantee that any additional patents will be issued or, if issued, will
be of commercial benefit to us. In addition, to anticipate the breadth or degree
of protection that any such patents may afford is impossible. To the extent that
we rely on unpatented proprietary technology, we cannot guarantee that others
will not independently develop or obtain substantially equivalent or superior
technology or otherwise gain access to our trade secrets, that any obligation of
confidentiality will be honored or that we will be able to effectively protect
our rights to proprietary technology. Further, we cannot guarantee that any
products developed by us will not infringe patents held by third parties or
that, in such case, licenses from such third parties will be available on
commercially acceptable terms, if at all.
In connection with our prior research and development efforts, we own
several patents and possess certain license rights in connection with other
technologies, which we are not currently pursuing. We intend to enforce our
patent position and intellectual property rights vigorously. The cost of
enforcing our patent rights in lawsuits, if necessary, may be significant and
could interfere with our operations.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING US AND OUR BUSINESS. THIS
REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN FORWARD-LOOKING STATEMENTS MADE
FROM TIME TO TIME BY THE US ON THE BASIS OF MANAGEMENT'S THEN-CURRENT
EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED OR REFERRED TO BELOW.
WE HAVE A HISTORY OF OPERATING LOSSES AND WILL CONTINUE TO NEED WORKING CAPITAL.
Since 1981, we have been engaged primarily in research and development and
have derived limited revenues from feasibility studies, the commercial sale of
10
our products and the licensing of certain technology. We have not generated any
revenues from the sale of any products currently under development. We have
incurred net losses every year since we began doing business and we anticipate
that losses will continue for the foreseeable future. As of December 31, 2002,
we had an accumulated deficit of approximately $62,888,000. Our ability to
continue operations after our current capital resources are exhausted depends on
our ability to secure additional financing and to become profitable, which we
cannot guarantee.
We have been pursuing the commercialization of our SEPA technology through
discussions with potential licensees, but there can be no guarantee that we will
enter into any licenses or that we will receive any license fees. Until
marketing approvals are obtained and/or license agreements are entered into, if
ever, we expect to generate only limited licensing revenue and no royalties from
sales of products using SEPA. In addition, we intend to continue to make the
substantial expenditures required to support our research and development
programs. As a result, we expect to incur operating losses for the foreseeable
future.
THE FDA HAS PLACED FURTHER TRIALS OF DRUGS CONTAINING OUR ABSORPTION ENHANCER
SEPA(R) ON CLINICAL HOLD.
On October 11, 2002, MacroChem Corporation announced that the Food and Drug
Administration (FDA) had advised the Company that further clinical trials of
MacroChem's drugs containing its absorption enhancer SEPA(R) had been placed on
clinical hold until issues regarding a transgenic mouse carcinogenicity study
have been resolved. During the clinical hold, the Company has been and will
continue to be unable to conduct human clinical trials on its SEPA-based
investigational drug products.
According to the FDA, the Executive Committee of its Carcinogenicity
Assessment Committee has determined that SEPA is responsible for carcinogenic
findings in a six-month transgenic Tg.AC mouse assay. That study, which was
conducted by MacroChem in 1999 and reported to the FDA in February 2000, yielded
no adverse effects at SEPA doses up to 50 mg/kg/day. At the two highest doses
used in the study, skin injury and inflammation preceded the development of
papillomas in the treated animals.
There can be no assurance that the Company will succeed in its attempts to
have the clinical hold lifted, nor can there be any assurance that the FDA will
ultimately approve any of MacroChem's investigational drugs. Certain risks and
uncertainties associated with the filing and the FDA review of any future NDA
and FDA regulation of the Company's proposed products are described or
referenced elsewhere in this Annual Report on Form 10-K.
IF WE CANNOT REGAIN COMPLIANCE WITH THE MINIMUM BID PRICE REQUIREMENT FOR
CONTINUED LISTING ON THE NASDAQ NATIONAL MARKET, OUR COMMON STOCK COULD BE
DELISTED.
On November 11, 2002, the Company received a notification from NASDAQ
indicating that, for the previous thirty consecutive trading days, the Company's
common stock had not satisfied the minimum bid price requirement of $1.00 per
share required for continued inclusion on the NASDAQ National Market. The
Company was informed that it had until February 10, 2003 to regain compliance
and that the Company could regain compliance if the closing bid price of its
common stock was $1.00 per share or more for ten consecutive trading days before
February 10, 2003.
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On March 18, 2003, the Company received a further notification from NASDAQ
indicating that the Securities and Exchange Commission had declared effective a
rule change extending to 180 days the period given to issuers listed on the
NASDAQ National Market to regain compliance with the minimum bid price
requirement. Accordingly, the Company was informed that it has until May 12,
2003 to regain compliance and that the Company could regain compliance if the
closing bid price of its common stock is $1.00 per share or more for ten
consecutive trading days before May 12, 2003. Currently, the Company has not met
the conditions required to regain compliance.
In addition, NASDAQ requires a company to maintain stockholders' equity of
at least $10 million to be listed on the NASDAQ National Market. As of December
31, 2002, the Company's stockholders' equity was less than $10 million. There
can be no assurance that the Company will be able to regain compliance with this
requirement in the future.
If the Company is unable to regain compliance with any NASDAQ listing
requirement, the Company will consider other potential actions, including
applying to transfer its common stock to The NASDAQ SmallCap Market. However, a
delisting of the Company's common stock from the NASDAQ National Market could
reduce the liquidity of an investment in the Company's common stock and affect
the Company's ability to raise additional funds in the future.
OUR PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND REMAIN SUBJECT TO
TECHNOLOGY UNCERTAINTY.
Various pharmaceutical companies have developed systems to enhance the
transdermal delivery of specific drugs, but relatively limited research has been
conducted about using transdermal delivery systems for a wider range of
pharmaceutical products. Although we have demonstrated in preclinical and
clinical studies that SEPA transdermal compounds may have applicability when
paired with a broad range of drugs, transdermal delivery systems are currently
marketed for only a limited number of products. In addition, some transdermal
delivery systems used to date have demonstrated adverse side effects for users,
including skin irritation and delivery difficulties.
Most of our proposed products are in the early development stage and will
require significant further research, development, testing and regulatory
clearances. Our proposed products are subject to the risks of failure inherent
in the development of products based on innovative technologies. These risks
include the possibilities that any or all of the proposed products may be found
to be ineffective or toxic, or otherwise may fail to receive necessary
regulatory clearances. In addition, even if our proposed products are effective,
they may be uneconomical to market or third parties may market superior or
equivalent products. Due to the extended testing and regulatory review process
required before we obtain marketing clearance for any of our proposed products,
we do not expect to realize royalty revenues from the sale of any drugs in the
foreseeable future.
12
WE WILL NEED TO MAKE SIGNIFICANT PRODUCT DEVELOPMENT EFFORTS AND RECEIVE
ADDITIONAL FINANCING TO MARKET OR LICENSE ANY PRODUCTS.
Before we or any of our potential licensees may market any products based
upon our technology, significant additional development efforts and substantial
testing will be necessary. In most cases, we will require substantial additional
financing to fund clinical studies on our proposed products. We cannot guarantee
that we will be able to secure such financing on favorable terms, if at all.
OUR PRODUCTS MAY NOT SUCCESSFULLY COMPLETE THE EXTENSIVE REGULATORY APPROVAL
PROCESS REQUIRED PRIOR TO ANY PHARMACEUTICAL PRODUCT BEING MARKETED.
Before obtaining regulatory approval for the commercial sale of any of the
pharmaceutical products we have under development, we must demonstrate that the
product is safe and efficacious for use in each proposed indication. The results
of preclinical studies and early clinical trials may not accurately predict
results that will be obtained in large-scale testing, and we cannot guarantee
that clinical trials will prove that our products are safe and efficacious or
that any of our products will ultimately be marketable. A number of other
companies in the pharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after they achieved promising results in earlier
trials. If we are unable to demonstrate the safety and efficacy of our products,
we may be adversely affected.
WE DEPEND ON THIRD PARTIES ENTERING INTO LICENSE ARRANGEMENTS WITH US AND
HELPING US DEVELOP OUR PRODUCTS.
To the extent we rely on licensees and joint venture arrangements to fund
most of the costs relating to product development and clinical trials, licensees
may have the legal right to terminate funding for a product at any time for any
reason without significant penalty. We cannot control the resources and
attention that a licensee may devote to a product and this can result in delays
in clinical testing, regulatory filings and commercialization efforts. We also
cannot guarantee that we will be able to enter into collaborative arrangements
or that any collaborative arrangements will succeed.
OUR PRIOR DEVELOPMENT EFFORTS HAVE NOT GENERATED SUSTAINED REVENUES OR ANY
PROFITS.
Since 1981, we have engaged in research and development activities with
respect to a variety of technologies and products, including polymers for
medical and industrial use, dental adhesives, osteoporotic drugs and transdermal
drug delivery products. None of our products or technologies has ever generated
sustained revenues and we have never been profitable. We have expended
substantial resources in researching and developing technology relating to our
products as well as in connection with the research and development of
transdermal delivery systems. We cannot guarantee that our development
activities with respect to transdermal delivery systems will be successful or
that these efforts will not eventually be abandoned.
13
WE LACK MARKETING EXPERIENCE AND AS A RESULT WE DEPEND ON THIRD PARTIES TO
MARKET AND DISTRIBUTE OUR PRODUCTS.
We intend to market and distribute our proposed products through other
companies. We cannot guarantee that we will be able to enter into agreements
with other companies on acceptable terms, if at all. We may have to cede control
over some or all aspects of the marketing and sales of our products as a
condition to entering into such arrangements. We currently have no sales force
or marketing organization. If we decide to directly market and sell any of our
products, we will, among other things, have to develop such capabilities,
including the ability to attract and retain qualified and experienced marketing
and sales personnel. We cannot guarantee that we will be able to attract and
retain qualified and experienced marketing and sales personnel or that any
efforts undertaken by such personnel will be successful.
WE DEPEND ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS.
We do not have facilities capable of manufacturing any of our proposed
products in commercial quantities and we do not have plans to obtain such
facilities. Accordingly, we will depend to a significant extent on licensees or
corporate partners for such manufacturing and for compliance with regulatory
requirements for good manufacturing practices. There can be no guarantee that
such partners or licensees will perform their obligations in a timely fashion.
Our dependence on third parties for manufacturing may adversely affect our
ability to develop and deliver products on a timely and competitive basis. If we
decide to establish a commercial manufacturing facility, we will require
substantial additional funds. We will be required to hire and retain significant
additional personnel and we will have to comply with extensive government
regulations. We cannot guarantee that we will be able to obtain the additional
capital required to conduct manufacturing activities directly on acceptable
terms, if at all.
OUR BUSINESS WILL SUFFER IF WE LOSE KEY PERSONNEL.
The success of our business depends on our ability to attract, retain and
motivate qualified senior management personnel who are in high demand.
OUR BUSINESS WILL SUFFER IF WE FAIL TO ATTRACT AND RETAIN EXPERIENCED SCIENTIFIC
PERSONNEL.
Our business also depends on our ability to attract and retain scientific
personnel. The competition for such experienced personnel is intense and can be
expected to increase. We cannot guarantee that we will be able to retain our
existing personnel or attract additional qualified employees.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE
SIGNIFICANTLY MORE RESOURCES THAN WE HAVE.
We compete with numerous firms, many of which are large, multi-national
organizations with worldwide distribution. We believe that our major competitors
in the drug delivery sector of the health care industry include NexMed, Inc.,
Bentley Pharmaceuticals, Inc., ALZA Corporation, Elan Corporation, plc.,
Novartis and Pfizer. Compared with MacroChem, most of these firms have
substantially greater capital resources, research and development and technical
staffs, facilities and experience in obtaining regulatory approvals, as well as
in manufacturing, marketing and distribution of products. Recent trends in this
14
area are toward further market consolidation of large drug companies into a
smaller number of very large entities, further concentrating financial,
technical and market strength and increasing competitive pressure in the
industry. Academic institutions, hospitals, governmental agencies and other
public and private research organizations are also conducting research and
seeking patent protection and may develop competing products or technologies of
their own through joint ventures or other arrangements. In addition, recently
developed technologies, or technologies that may be developed in the future, may
or could be the basis for competitive products. We cannot guarantee that our
competitors will not succeed in developing technologies and products that are
more effective or less costly to use than any that we are currently developing.
We expect any products approved for sale to compete primarily on the basis
of efficacy, safety, patient compliance, reliability, price and patent position.
Generally, the first pharmaceutical product to reach the market in a therapeutic
or preventive area often has a significant advantage compared with later
entrants to the market. Our competitive position will also depend on our ability
to attract and retain qualified scientific and other personnel, develop
effective proprietary products, implement production and marketing plans, obtain
patent protection and secure adequate capital resources.
OUR PRODUCTS ARE SUBJECT TO RIGOROUS GOVERNMENTAL REVIEW AND SIGNIFICANT
REGULATION.
Our technologies must undergo a rigorous regulatory approval process, which
includes extensive preclinical and clinical testing, to demonstrate safety and
efficacy before any resulting product can be marketed. To date, neither the FDA
nor any of its international equivalents has approved any of our technologies
for marketing. The clinical trial and regulatory approval process can require
many years and substantial cost, and there can be no guarantee that our efforts
will result in an approved product.
Our activities are regulated by a number of government authorities in the
United States and other countries, including the FDA. The FDA regulates
pharmaceutical products, including their manufacture and labeling. Data obtained
from testing is subject to varying interpretations which can delay, limit or
prevent FDA approval. Risks associated with the regulatory approval process
include:
o Changes in existing regulatory requirements could prevent or affect our
regulatory compliance. Federal and state laws, regulations and policies may
be changed with possible retroactive effect, and how these rules actually
operate can depend heavily on administrative policies and interpretations
over which we have no control or inadequate experience to assess their full
impact upon our business.
o Obtaining FDA clearances is time-consuming and expensive and we cannot
guarantee that such clearances will be granted or, if granted, will not be
withdrawn.
15
o The FDA review process may prevent the marketing of our products or may
involve delays that significantly and negatively affect our products. We
may encounter similar delays in foreign countries.
o Regulatory clearances may place significant limitations on the uses for
which any approved products may be marketed.
o Any marketed product and its manufacturer are subject to periodic review.
Any discovery of previously unrecognized problems with a product or
manufacturer could result in suspension or limitation of approvals.
WE DEPEND ON PATENTS TO PROTECT OUR TECHNOLOGIES AND THE SCOPE OF SUCH
PROTECTION IS INHERENTLY UNCERTAIN.
We believe that patent protection of our technologies, processes and
products is important to our future operations. The success of our proposed
products may depend, in part, upon our ability to obtain patent protection.
Although we intend to file additional patent applications, we cannot
guarantee that any additional patents will be issued or, if issued, will be of
commercial benefit to us. In addition, it is impossible to anticipate the
breadth or degree of protection that any such patents may afford. There can be
no guarantee that other parties will not commence litigation challenging our
existing or future patents or that we will be successful in defending against
any such challenge. To the extent that we rely on unpatented proprietary
technology, we cannot guarantee that others will not independently develop or
obtain substantially equivalent or superior technology or otherwise gain access
to our trade secrets, that any obligation of confidentiality will be honored or
that we will be able to effectively protect our rights to proprietary
technology. Further, products we develop could infringe patents held by third
parties. In such cases, licenses from the third parties may not be available on
commercially acceptable terms, if at all.
We intend to enforce our patent position and intellectual property rights
vigorously. The cost of enforcing our patent rights in lawsuits, if necessary,
may be significant and could interfere with our operations.
WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS AND WE MAY NOT HAVE SUFFICIENT
PRODUCT LIABILITY INSURANCE TO COVER SUCH CLAIMS. IT MAY BE EXPENSIVE AND
DIFFICULT TO OBTAIN ADEQUATE INSURANCE COVERAGE.
The design, development, manufacture and sale of our products involve risk
of liability claims and associated adverse publicity. We currently have
liability insurance to cover claims related to our products that may arise from
previously conducted clinical trials, but we do not maintain product liability
insurance and we may need to acquire such insurance coverage prior to the
commercial introduction of our products. Such insurance is expensive, may be
difficult to obtain and may not be available on acceptable terms, if at all. If
we obtain such coverage, we have no guarantee that the coverage limits of such
insurance policies will be adequate. A successful claim against us if we are
uninsured, or which is in excess of our insurance coverage, if any, could have a
material adverse effect upon us and our financial condition.
16
GOVERNMENT OR PRIVATE INITIATIVES TO REDUCE HEALTH CARE COSTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON PHARMACEUTICAL PRICING AND ON US.
The future revenues and profitability of, and availability of capital for,
biomedical and pharmaceutical companies such as us may be affected by the
continuing efforts of governmental and third-party payers to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets pricing or profitability of prescription pharmaceuticals is subject to
government control and to reform in the health care system. In the United
States, there have been, and we expect there will continue to be, a number of
federal and state proposals to impose similar government control. While we
cannot predict whether any such legislative or regulatory proposals will be
adopted, the announcement or adoption of such proposals could have a material
adverse effect on our prospects. If we or one of our partners succeeds in
bringing to market one or more of our products, there can be no assurance that
these products will be cost effective and that reimbursement to the consumer
will be available or will be sufficient to allow us or our partners to sell such
products on a profitable basis.
ITEM 2. PROPERTIES.
We occupy 17,277 square feet of office and laboratory space under a lease
expiring February 28, 2005. This space is located on one floor of a three story
building in Lexington, Massachusetts. We believe that this facility is adequate
to meet our current and foreseeable future requirements.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during the three
months ended December 31, 2002, through the solicitation of proxies or
otherwise.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET PRICE OF SECURITIES AND RELATED MATTERS
Our Common Stock is traded on the NASDAQ National Market under the symbol
"MCHM." The following chart shows the high and low closing prices for the Common
Stock for the periods indicated as obtained from NASDAQ:
COMMON STOCK
MCHM
YEAR ENDED HIGH LOW
DECEMBER 31, 2002
First Quarter $ 4.32 $ 3.02
Second Quarter 3.15 1.60
Third Quarter 1.70 0.91
Fourth Quarter 0.94 0.26
DECEMBER 31, 2001
First Quarter $ 4.25 $ 2.34
Second Quarter 10.53 4.02
Third Quarter 7.31 2.02
Fourth Quarter 3.88 2.13
These prices are between dealers and do not reflect retail markups,
markdowns or commissions and may not necessarily represent actual transactions.
As of March 10, 2003, there were 11,919 holders of record of our Common Stock.
We have never paid dividends on our Common Stock and our Board of Directors
does not contemplate declaring any dividends in the foreseeable future. We
intend to retain any earnings to finance research, development, and expansion of
our business.
18
ITEM 6. SELECTED FINANCIAL DATA.
Years Ended December 31,
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
STATEMENTS OF OPERATIONS DATA:
Revenues $ 42,925 $ 829,385 $ 629,647 $ 464,332 $ 274,749
Research and development
expenses 3,998,388 9,791,438 5,280,641 5,423,138 4,318,758
Net loss (7,514,514) (12,333,243) (9,745,357) (6,787,069) (4,842,871)
Basic and diluted net
loss per share $ (0.27) $ (0.46) $ (0.43) $ (0.30) $ (0.22)
Shares used to compute
basic and diluted net
loss per share 27,928,562 26,607,363 22,854,646 22,311,890 22,204,105
BALANCE SHEET DATA:
Working capital $ 8,704,944 $ 15,739,712 $ 15,969,137 $ 14,776,372 $ 19,891,936
Current assets 9,119,723 17,099,675 17,063,070 15,437,685 20,756,671
Total assets 10,132,007 18,257,543 17,981,957 16,313,732 21,509,724
Current liabilities 414,779 1,359,963 1,093,933 661,313 864,735
Total liabilities 462,488 1,408,838 1,131,197 1,161,313 1,364,735
Stockholders' equity $ 9,669,519 $ 16,848,705 $ 16,850,760 $ 15,152,419 $ 20,144,989
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations for the Company should be read in conjunction with the accompanying
financial statements and related footnotes.
GENERAL
MacroChem's primary business is the development of pharmaceutical products
for commercialization by employing SEPA(R) (Soft Enhancer of Percutaneous
Absorption), its patented drug delivery technology. SEPA compounds, when
properly combined with drugs, provide pharmaceutical formulations (creams, gels,
lacquers, solutions, etc.) that enhance the transdermal delivery of drugs into
the skin or into the bloodstream. The Company currently derives no significant
revenue from product sales, royalties or license fees. The Company plans to
develop specific SEPA formulations for use with proprietary and non-proprietary
drugs manufactured by pharmaceutical companies, and to commercialize these
products through the formation of partnerships, strategic alliances and
licensing arrangements with those companies.
On October 11, 2002, MacroChem Corporation announced that the Food and Drug
Administration (FDA) had advised the Company that further clinical trials of
MacroChem's drugs containing its absorption enhancer SEPA(R) had been placed on
clinical hold until issues regarding a transgenic mouse carcinogenicity study
have been resolved. During the clinical hold, the Company has been and will
continue to be unable to conduct human clinical trials on its SEPA-based
investigational drug products.
19
According to the FDA, the Executive Committee of its Carcinogenicity
Assessment Committee has determined that SEPA is responsible for carcinogenic
findings in a six-month transgenic Tg.AC mouse assay. That study, which was
conducted by MacroChem in 1999 and reported to the FDA in February 2000, yielded
no adverse effects at SEPA doses up to 50 mg/kg/day. At the two highest doses
used in the study, skin injury and inflammation preceded the development of
papillomas in the treated animals.
In addition to the transgenic mouse study, MacroChem has completed and
submitted to the FDA results from a range of genetic and dermal toxicity studies
of SEPA in animals, as well as a two-year rat carcinogenicity study. Results
from these studies showed that SEPA was not genotoxic and not carcinogenic.
There can be no assurance that the Company will succeed in its attempts to
have the clinical hold lifted, nor can there be any assurance that the FDA will
ultimately approve any of MacroChem's investigational drugs. Certain risks and
uncertainties associated with the filing and the FDA review of any future NDA
and FDA regulation of the Company's proposed products are described or
referenced elsewhere in this Annual Report on Form 10-K.
The Company's results of operations can vary significantly from year to
year and quarter to quarter, and depend, among other factors, on the signing of
new licenses and product development agreements, the timing of revenues
recognized pursuant to license agreements, the achievement of milestones by
licensees, the progress of clinical trials conducted by licensees and the
Company, and the degree of research, marketing and administrative effort. The
timing of the Company's revenues may not match the timing of the Company's
associated product development expenses. To date, research and development
expenses have generally exceeded revenues in any particular period and/or fiscal
year.
CRITICAL ACCOUNTING POLICIES
Note 1 of the consolidated financial statements, included elsewhere in this
Form 10-K, includes a summary of the significant accounting policies and methods
used in the preparation of our consolidated financial statements. The following
is a brief discussion of the more significant accounting policies and methods
used by us.
The Company's discussion and analysis of its financial condition and
results of operations are based upon our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
financial statements. As more fully described in the notes to the financial
statements, we derive revenue from research and development programs. Research
and development funding is generally recognized as revenue at the time the
20
research and development activities are performed under the terms of the related
agreements, when the counter-party is obligated to pay, and when no future
performance obligation exists. Research and development revenue is billed on a
cost reimbursement basis, which includes direct costs incurred in connection
with research activities and an allocation of certain other costs incurred by
the Company.
Costs and expenses incurred in connection with pending patent applications
are deferred. Costs related to successful patent applications are amortized over
the estimated useful lives of the patents using the straight-line method.
Accumulated patent costs and deferred patent application costs related to
patents that are considered to have limited future value are charged to
operations. The impact of the FDA's clinical hold decision may have an impact on
the carrying value of certain of the Company's patent assets, amounting to
$606,982 at December 31, 2002. The impact, if any, cannot be currently
determined. Accordingly, the Company has not recorded a reduction in value to
its patent assets.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
For 2002 and 2001, the Company recognized revenues of approximately $43,000
and $829,400, respectively. The decrease in revenues is attributed to the
completion of a large research contract in 2001 and a smaller research contract
being completed in 2002.
Research and development costs decreased by approximately $5,793,000 from
approximately $9,791,000 in 2001 to approximately $3,998,000 in 2002, a 59%
decrease. This change for the period is primarily attributable to a reduction in
the number and size of clinical trials conducted in 2002, partially resulting
from the clinical hold imposed by the FDA and referenced elsewhere in this
Annual Report on Form 10-K. Of total research and development expenses,
approximately $185,500 in 2002 and $363,500 in 2001 were paid to independent
third party contractors. The Company expects that research and development
expenses will decrease by approximately 30% for 2003 as compared to 2002. This
anticipated decrease reflects an expected reduction in the number and size of
clinical trials in 2003 as compared to 2002.
Marketing, general and administrative expenses for 2002 aggregated
approximately $3,703,000, a decrease of approximately $297,000 or 7%, from
2001's total of approximately $4,000,000. This decrease is primarily the result
of a $193,000 reduction in consulting fees and a $104,000 reduction in costs for
preparation of investor relations materials and securities filings offset by an
increase in insurance of $115,200, an increase in rent of $22,100 and an
increase in other related expenses in 2002. The Company expects that marketing,
general and administrative expenses will decrease by approximately 35% for 2003
as compared to 2002. This anticipated decrease primarily will be the result of
the staff reduction undertaken by the Company in November 2002.
Total other income decreased by approximately $497,500 or 72%, from
$691,000 in 2001 to $193,500 in 2002. The decrease is attributable primarily to
lower interest income as a result of lower interest rates and a decrease in our
average invested balance.
21
For the year ended December 31, 2002, our net loss was approximately
$7,514,500 as compared to a loss of approximately $12,333,000 for the previous
year, a 39% decrease.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
For 2001 and 2000, the Company recognized revenues of approximately
$829,400 and $629,600, respectively. Also during 2001, we obtained a small
business grant of $158,500 funded by the Department of Health and Human
Services. The year 2000 revenue includes $500,000 in deferred revenue which was
recognized from the termination of a collaboration agreement.
Research and development costs increased by approximately $4,510,000 from
approximately $5,281,000 in 2000 to approximately $9,791,000 in 2001, an 85%
increase. This change for the period was primarily attributable to an increase
in clinical trial expenses due to a Topiglan Phase III study and an increase in
R&D salaries. Of total R&D expenses, approximately $363,500 in 2001 and $253,600
in 2000 were paid to independent third party contractors.
Marketing, general and administrative expenses for 2001 aggregated
approximately $4,000,000, a decrease of approximately $1,794,000 or 31%, from
2000's total of approximately $5,794,000. This decrease was primarily the result
of a $2,809,000 stock-based compensation charge related to the extension of
certain stock options to key employees in the second quarter of 2000, offset by
an increase in general and administrative salaries, travel and other related
expenses in 2001.
Total other income decreased by approximately $61,000 or 8%, from $752,000
in 2000 to $691,000 in 2001. The decrease was attributable primarily to lower
interest income as a result of lower interest rates.
For the year ended December 31, 2001, our net loss was approximately
$12,333,000 as compared to a loss of approximately $9,745,000 for the previous
year, a 27% increase.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the primary source of funding for the Company's operations
has been the private and public sale of its securities, and, to a lesser extent,
the licensing of its proprietary technology and products, research
collaborations, feasibility studies, government grants and the limited sales of
products and test materials. During 2002, the Company did not receive any net
proceeds from the exercise of stock options and warrants and sale of common
stock, compared to approximately $11,785,000 in 2001. At December 31, 2002,
working capital was approximately $8.7 million, compared to $15.7 million at
December 31, 2001. The decrease in the Company's working capital was due to the
use of funds in operations. Until such time as the Company obtains agreements
with third-party licensees or partners to provide funding for the Company's
anticipated business activities, the Company's working capital will be utilized
to fund its operating activities.
22
Pursuant to a plan approved by the Company's Board of Directors, the
Company is authorized to repurchase 1,000,000 shares of its common stock to be
held as treasury shares for future use. During 2002, the Company did not
repurchase any shares of Common Stock. At December 31, 2002, 185,264 repurchased
shares remain available for future use and 679,587 shares remain available for
repurchase under the plan.
Capital expenditures and additional patent development costs for the year
ended December 31, 2002 were approximately $71,400. The Company anticipates that
it will not make any significant capital expenditures during the fiscal year
ending December 31, 2003.
On November 8, 2002, in light of the clinical hold imposed by FDA described
elsewhere in this Annual Report on Form 10-K, the Company reduced its staff by
14 employees, representing approximately one-half of its work force. This action
was taken to reduce cash expenditures in the short term and concentrate the
Company's resources on addressing the FDA clinical hold, while attempting to
minimize the impact on the future development of the Company's products. The
Company took a one-time charge during the quarter ending December 31, 2002 of
approximately $269,000 relating to the November 8, 2002 staff reduction. Dr.
Dennis Fowler, the Company's Vice President, Clinical Affairs and Drug
Development, was dismissed as a part of this workforce reduction. As of December
31, 2002, $152,600 of the $269,000 has been paid and the remaining $116,400 has
been accrued.
In addition to approving the staff reduction described above, in order to
enhance retention of the remaining employees of the Company, the Compensation
Committee of the Board of Directors has approved retention payments to be paid
in June 2003 for most remaining employees other than executive officers and
severance augmentations for certain key employees including certain executive
officers. The Company anticipates the aggregate expense of this retention and
severance program will be approximately $290,000. Approximately $181,000 of the
aggregate expense represents severance augmentation to be paid to certain
executive officers if terminated as reflected in severance agreements recently
entered into with certain executive officers.
On November 11, 2002, the Company received a notification from NASDAQ
indicating that, for the previous thirty consecutive trading days, the Company's
common stock had not satisfied the minimum bid price requirement of $1.00 per
share required for continued inclusion on the NASDAQ National Market. The
Company was informed that it had until February 10, 2003 to regain compliance
and that the Company could regain compliance if the closing bid price of its
common stock was $1.00 per share or more for ten consecutive trading days before
February 10, 2003.
On March 18, 2003, the Company received a further notification from NASDAQ
indicating that the Securities and Exchange Commission had declared effective a
rule change extending to 180 days the period given to issuers listed on the
NASDAQ National Market to regain compliance with the minimum bid price
requirement. Accordingly, the Company was informed that it has until May 12,
2003 to regain compliance and that the Company could regain compliance if the
closing bid price of its common stock is $1.00 per share or more for ten
consecutive trading days before May 12, 2003. Currently, the Company has not met
the conditions required to regain compliance.
23
In addition, NASDAQ requires a company to maintain stockholders' equity of
at least $10 million to be listed on the NASDAQ National Market. As of December
31, 2002, the Company's stockholders' equity was less than $10 million. There
can be no assurance that the Company will be able to regain compliance with this
requirement in the future.
If the Company is unable to regain compliance with any NASDAQ listing
requirement, the Company will consider other potential actions, including
applying to transfer its common stock to The NASDAQ SmallCap Market. However, a
delisting of the Company's common stock from the NASDAQ National Market could
reduce the liquidity of an investment in the Company's common stock and affect
the Company's ability to raise additional funds in the future.
The Company believes that its existing cash and cash equivalents will be
sufficient to meet its operating expenses and capital expenditure requirements
for at least the next twelve months. The Company's cash requirements may vary
materially from those now planned because of changes in focus and direction of
the Company's research and development programs, competitive and technical
advances, patent developments or other developments. The Company will require
additional financing to continue its long term plans for clinical trials and new
product development. It is not believed that inflation will have any significant
effect on the results of the Company's operations.
The following summarizes MacroChem's contractual obligations at December
31, 2002, and the effect that such obligations are expected to have on future
cash flows and liquidity:
Due In
-----------------------------
Obligations: Total Amount 1 Year or Less 2-3 Years
Lease Commitment (through February 2005) $ 995,500 $ 451,800 $ 543,700
Employment Agreements (per year) 945,000 945,000 ---
----------- ----------- -----------
Total Contractual Cash Obligations $ 1,940,500 $ 1,396,800 $ 543,700
=========== =========== ===========
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"). SFAS No. 142 was effective for fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized in an entity's statement of financial position at that date,
regardless of when those assets were initially recognized. SFAS No. 142 requires
that upon adoption, amortization of goodwill and other intangible assets with
indefinite useful lives will cease and instead, the carrying value of these
assets will be evaluated for impairment on an annual basis. On January 1, 2002,
the Company adopted this statement which had no effect on the Company's
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
24
assets. This Statement supercedes SFAS No. 121, and the accounting and reporting
provisions of APB 30, for the disposal of a segment of a business. The
provisions of SFAS No. 144 were required to be adopted by the Company effective
January 1, 2002. On January 1, 2002, the Company adopted this statement, which
had no effect on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for costs associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. If we engage in any exit
or disposal activities in the future, the adoption of SFAS No. 146 might have a
material effect on future financial statements.
In November 2002, the EITF issued EITF Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"), which provides guidance
on the timing and method of revenue recognition for sales arrangements that
include the delivery of more than one product or service. EITF 00-21 is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company does not expect that the adoption of
EITF 00-21 will have a significant impact on its financial statements.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
---------------------------------------------------------
2002 Quarters
Revenues $ 43,000 $ 0 $ 0 $ 0
Net Loss $(2,204,000) $(2,148,000) $(1,528,000) $(1,633,000)
Net Loss per share $ (0.08) $ (0.08) $ (0.05) $ (0.06)
(basic and diluted)
2001 Quarters
Revenues $ 0 $ 0 $ 189,000 $ 640,000
Net Loss $(3,181,000) $(3,450,000) $(3,039,000) $(2,633,000)
Net Loss per share $ (0.13) $ (0.13) $ (0.11) $ (0.10)
(basic and diluted)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As of December 31, 2002, the Company is exposed to market risks, which
relate primarily to changes in U.S. interest rates. The Company's cash
equivalents and short-term investments are subject to interest rate risk and
will decline in value if interest rates increase. Due to the short duration of
these financial instruments, generally one year or less, changes to interest
rates would not have a material effect upon the Company's financial position. A
hypothetical 10% change in interest rates would not have a material effect on
our Statement of Operations or Cash Flows for the twelve months ending December
31, 2003 based on December 31, 2002 balances.
25
THE FOREGOING STATEMENTS IN THIS REPORT INCLUDE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED OR REFERRED TO IN ITEM 1, BUSINESS - "RISK FACTORS".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required under this Item 8 is set forth on pages 27 through
44 of this report.
26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MacroChem Corporation:
We have audited the accompanying balance sheets of MacroChem Corporation as of
December 31, 2002 and 2001, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of MacroChem Corporation at December 31, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, on October 11, 2002, the
Company announced that the United States Food and Drug Administration had
advised the Company that further clinical trials of the Company's drugs
containing its absorption enhancer SEPA(R) had been placed on clinical hold.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 7, 2003
(except as to Note 8, which is dated March 18, 2003)
27
MACROCHEM CORPORATION
BALANCE SHEETS
December 31, December 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 771,046 $ 697,178
Short-term investments 8,118,355 15,832,828
Accounts receivable 40,081 375,000
Receivable due from related party 25,057 24,164
Prepaid expenses and other current assets 165,184 170,505
----------- -----------
Total current assets 9,119,723 17,099,675
Property and equipment, net 376,109 530,028
Other assets:
Patents, net 606,982 598,647
Deposits 29,193 29,193
----------- -----------
Total other assets 636,175 627,840
----------- -----------
Total assets $10,132,007 $18,257,543
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable $ 18,619 $ 4,971
Accrued expenses and other liabilities 396,160 1,354,992
----------- -----------
Total current liabilities 414,779 1,359,963
Deferred rent 47,709 48,875
----------- -----------
Total liabilities 462,488 1,408,838
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY
Preferred stock, authorized and unissued, 6,000,000 shares --- ---
Common stock, $.01 par value, 60,000,000 shares
authorized; 28,163,054 and 28,158,054 shares issued
at December 31, 2002 and 2001, respectively 281,630 281,580
Additional paid-in capital 72,949,352 73,019,790
Unearned compensation (382) (71,156)
Accumulated deficit (62,888,302) (55,373,788)
Less treasury stock, at cost, 185,264 and 253,346 shares at
December 31, 2002 and 2001, respectively (672,779) (1,007,721)
----------- -----------
Total stockholders' equity 9,669,519 16,848,705
----------- -----------
Total liabilities and stockholders' equity $10,132,007 $18,257,543
=========== ===========
See notes to financial statements.
28
MACROCHEM CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
REVENUES
Research contracts $ 42,925 $ 829,385 $ 629,647
------------ ------------ ------------
OPERATING EXPENSES
Research and development 3,998,388 9,791,438 5,280,641
Marketing, general and administrative 3,702,593 4,000,330 5,794,023
Consulting fees with related parties 50,000 61,750 52,000
------------ ------------ ------------
TOTAL OPERATING EXPENSES 7,750,981 13,853,518 11,126,664
------------ ------------ ------------
LOSS FROM OPERATIONS (7,708,056) (13,024,133) (10,497,017)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 193,542 690,890 752,547
Interest expense --- --- (887)
------------ ------------ ------------
TOTAL OTHER INCOME 193,542 690,890 751,660
------------ ------------ ------------
NET LOSS $ (7,514,514) $(12,333,243) $ (9,745,357)
============ ============ ============
BASIC AND DILUTED NET LOSS
PER SHARE $ (0.27) $ (0.46) $ (0.43)
============ ============ ============
SHARES USED TO COMPUTE BASIC
AND DILUTED NET LOSS PER
SHARE 27,928,562 26,607,363 22,854,646
============ ============ ============
STOCK BASED COMPENSATION INCLUDED IN:
2002 2001 2000
---- ---- ----
Research and development $ 23,429 $ 216,226 $ (255,236)
Marketing, general and administrative 224,436 265,257 3,078,827
------------ ------------ ------------
$ 247,865 $ 481,483 $ 2,823,591
============ ============ ============
See notes to financial statements.
29
MACROCHEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Shares Additional Cost of Total
-------------------- Common Paid-In Unearned Accumulated Treasury Stockholders'
Issued Treasury Stock Capital Compensation Deficit Subtotal Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE,
JANUARY 1, 2000 22,597,564 (160,165) $225,976 $49,387,454 $(382,473) $(33,295,188) $15,935,769 $ (783,350) $15,152,419
Issuances of common
stock-net 1,921,235 --- 19,212 8,776,225 --- --- 8,795,437 --- 8,795,437
Exercise of common
stock options 210,166 (12,563) 2,102 166,741 --- --- 168,843 (78,531) 90,312
Purchase of treasury
stock --- (120,500) --- --- --- --- --- (334,698) (334,698)
Stock based
compensation (1) 1,818 --- 18 2,465,819 357,754 --- 2,823,591 --- 2,823,591
Stock issued to
401(k) trust --- 17,054 --- (9,095) --- --- (9,095) 78,151 69,056
Net loss --- --- --- --- --- (9,745,357) (9,745,357) --- (9,745,357)
---------- -------- -------- ----------- --------- ------------- ------------ ---------- ------------
BALANCE,
DECEMBER 31, 2000 24,730,783 (276,174) 247,308 60,787,144 (24,719) (43,040,545) 17,969,188 (1,118,428) 16,850,760
Issuances of common
stock-net 1,566,047 --- 15,660 9,390,631 --- --- 9,406,291 --- 9,406,291
Exercise of common
stock options 922,580 --- 9,226 1,970,590 --- --- 1,979,816 --- 1,979,816
Exercise of stock
warrants 932,644 (2,330) 9,326 371,000 --- --- 380,326 (8,826) 371,500
Stock based
compensation (1) 6,000 --- 60 527,860 (46,437) --- 481,483 --- 481,483
Stock issued to
401(k) trust --- 25,158 --- (27,435) --- --- (27,435) 119,533 92,098
Net loss --- --- --- --- --- (12,333,243) (12,333,243) --- (12,333,243)
---------- -------- -------- ---------- --------- ------------- ------------ ---------- ------------
BALANCE,
DECEMBER 31, 2001 8,158,054 (253,346) 281,580 73,019,790 (71,156) (55,373,788) 17,856,426 (1,007,721) 16,848,705
Stock based
compensation (1) 5,000 --- 50 177,041 70,774 --- 247,865 --- 247,865
Stock issued to
401(k) trust --- 68,082 --- (247,479) --- --- (247,479) 334,942 87,463
Net loss --- --- --- --- --- (7,514,514) (7,514,514) --- (7,514,514)
---------- -------- -------- ---------- --------- ------------- ------------ ---------- ------------
BALANCE,
DECEMBER 31, 2002 28,163,054 (185,264) $281,630 $72,949,352 $ (382) $(62,888,302) $10,342,298 $ (672,779) $ 9,669,519
========== ========= ======== =========== ========== ============= =========== =========== ===========
(1) See following page for details.
See notes to financial statements. (continued)
30
MACROCHEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(1) Stock Based Compensation
Additional
Common Stock Paid-In Unearned
Shares Amount Capital Compensation Total
----------------------------------------------------------------------
2000
Issuance of common stock in exchange for services 1,818 $ 18 $ 9,372 $ (9,390) $ ---
Issuance of common stock options to non-employees --- --- 183,346 (183,346) ---
Amortization and other changes in unearned compensation --- --- (536,431) 550,490 14,059
Stock based compensation to employees --- --- 2,809,532 --- 2,809,532
------ ------ --------- ----------- ----------
1,818 $ 18 $2,465,819 $ 357,754 $2,823,591
====== ====== ========== =========== ==========
2001
Issuance of common stock options to non-employees --- $ --- $ 82,458 $ (68,299) $ 14,159
Amortization and other changes in unearned compensation --- --- 129,200 21,862 151,062
Stock based compensation to employees and directors 6,000 60 316,202 --- 316,262
------ ------ ---------- ----------- ----------
6,000 $ 60 $ 527,860 $ (46,437) $ 481,483
====== ====== ========== =========== ==========
2002
Issuance of common stock options to non-employees $ --- $ --- $ --- $ ---
Amortization and other changes in unearned compensation --- (28,697) 70,774 42,077
Stock based compensation to employees and directors 5,000 50 205,738 --- 205,788
------ ------ ---------- ----------- ----------
5,000 $ 50 $ 177,041 $ 70,774 $ 247,865
====== ====== ========== =========== ==========
See notes to financial statements. (concluded)
31
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------------
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,514,514) $(12,333,243) $(9,745,357)
------------ ------------- ------------
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 216,921 181,696 174,091
Stock-based compensation 247,865 481,483 2,823,591
401(k) contributions in company common stock 87,463 92,098 69,056
Deferred rent (1,166) 11,611 37,264
Deferred revenue --- --- (500,000)
Change in assets and liabilities:
Accounts receivable 334,919 (344,331) 36,285
Receivable due from related party (893) (1,600) (1,604)
Prepaid expenses and other current assets 5,321 70,799 (74,822)
Accounts payable and accrued expenses (945,184) 266,030 528,853
Deferred compensation and related accrued
interest --- --- (96,233)
----------- ------------ ------------
Net cash used by operating activities (7,569,268) (11,575,457) (6,748,876)
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales/(purchases) of short-term investments-net 7,714,473 345,932 (1,313,781)
Deposits --- --- ---
Expenditures for property and equipment (31,991) (307,212) (154,080)
Additions to patents (39,346) (113,465) (62,851)
------------ ------------- ------------
Net cash provided/(used) by investing activities 7,643,136 (74,745) (1,530,712)
----------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of common stock options --- 1,979,816 90,312
Net proceeds from issuance of common stock --- 9,406,291 8,795,437
Proceeds from exercise of warrants --- 371,500 ---
Net purchase of treasury stock --- --- (334,698)
----------- ------------ ------------
Net cash provided by financing activities $ --- $ 11,757,607 $ 8,551,051
----------- ------------ -----------
See notes to financial statements. (Continued)
32
MACROCHEM CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31,
----------------------------------------
2002 2001 2000
---- ---- ----
NET CHANGE IN CASH
AND CASH EQUIVALENTS $ 73,868 $ 107,405 $ 271,463
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 697,178 589,773 318,310
---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 771,046 $ 697,178 $ 589,773
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:
During 2001, the Company received 2,330 shares of Company stock relating to the
exercise of 882,644 warrants on a "cashless" basis.
During 2000, the Company received 12,563 shares of Company stock valued at
$78,531 as payment of option exercises.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest aggregated $0, $0 and $886, respectively, for the years
ended December 31, 2002, 2001 and 2000.
The Company did not pay any income taxes during those periods.
See notes to financial statements. (Concluded)
33
MACROCHEM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MacroChem Corporation (the "Company") develops and licenses transdermal drug
delivery compounds and systems intended to promote the delivery of drugs from
the surface of the skin into the skin or the bloodstream.
The Company has been engaged primarily in research and development since its
inception in 1981 and has derived limited revenues from the commercial sale of
its products, licensing of certain technology and feasibility studies. The
Company has had no revenues relating to the sale of any products currently under
development. The Company has incurred net losses every year since its inception
and the Company anticipates that losses may continue for the foreseeable future.
At December 31, 2002, the Company's accumulated deficit was approximately $62.9
million. The Company's ability to continue operations after its current capital
resources are exhausted depends on its ability to obtain additional financing
and achieve profitable operations, as to which no assurances can be given.
However, the Company believes that its financial resources are sufficient to
meet planned operating activities for at least twelve months.
On October 11, 2002, MacroChem Corporation announced that the Food and Drug
Administration (FDA) had advised the Company that further clinical trials of
MacroChem's drugs containing its absorption enhancer SEPA(R) had been placed on
clinical hold until issues regarding a transgenic mouse carcinogenicity study
have been resolved. During the clinical hold, the Company has been and will
continue to be unable to conduct human clinical trials on its SEPA-based
investigational drug products.
According to the FDA, the Executive Committee of its Carcinogenicity Assessment
Committee has determined that SEPA is responsible for carcinogenic findings in a
six-month transgenic Tg.AC mouse assay. That study, which was conducted by
MacroChem in 1999 and reported to the FDA in February 2000, yielded no adverse
effects at SEPA doses up to 50 mg/kg/day. At the two highest doses used in the
study, skin injury and inflammation preceded the development of papillomas in
the treated animals.
In addition to the transgenic mouse study, MacroChem has completed and submitted
to the FDA results from a range of genetic and dermal toxicity studies of SEPA
in animals, as well as a two-year rat carcinogenicity study. Results from these
studies showed that SEPA was not genotoxic and not carcinogenic.
There can be no assurance that the Company will succeed in its attempts to have
the clinical hold lifted, nor can there be any assurance that the FDA will
ultimately approve any of MacroChem's investigational drugs. Certain risks and
uncertainties associated with the filing and the FDA review of any future NDA
and FDA regulation of the Company's proposed products are described or
referenced elsewhere in this Annual Report on Form 10-K.
The Company organizes itself as one segment reporting to the chief executive
officer. Products and services consist primarily of research and development
activities in the pharmaceutical industry.
34
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The primary estimates
underlying the Company's financial statements include the carrying value and
useful lives of the Company's patents and property and equipment, the valuation
allowance established for the Company's deferred tax assets, and the underlying
assumptions to apply the pricing model to value stock options under SFAS No.
123. Management bases its estimates on certain assumptions, which it believes
are reasonable in the circumstances, and while actual results could differ from
those estimates, management does not believe that any change in those
assumptions in the near term would have a significant effect on the financial
position or the results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash equivalents,
marketable securities, accounts receivable, accounts payable and accrued
expenses approximate their fair value because of their short-term nature.
Short-term investments are carried at aggregate fair value.
CONCENTRATION OF RISK - Cash and cash equivalents and short-term investments at
December 31, 2002 and 2001 are primarily comprised of government agency
securities and certificates of deposit. Accounts receivable at December 31, 2002
are due from 4 contract research organizations. All revenues for the years ended
December 31, 2002 and 2001 were derived from research and development contracts.
CASH AND CASH EQUIVALENTS - Cash equivalents consist of short-term, highly
liquid investments with a maturity of three months or less when purchased.
SHORT-TERM INVESTMENTS - The Company has classified its short-term investments
as "available-for-sale" and, accordingly, carries such securities at aggregate
fair value. Fair value has been determined based on quoted market prices. The
cost of such securities approximates fair market value. Short-term investments
are comprised of bank certificates of deposit, with maturities of 4 to 23
months, amounting to $0 and $294,730 at December 31, 2002 and 2001,
respectively, and a liquid money market mutual fund with a carrying value of
$8,118,355 and $15,538,098 at December 31, 2002 and 2001, respectively.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
and amortization are provided on the straight-line method over the estimated
useful lives of the related assets which range from five to ten years.
PATENTS - The Company has filed applications for United States and foreign
patents covering aspects of its technology. Costs and expenses incurred in
connection with pending patent applications are deferred. Costs related to
successful patent applications are amortized over the estimated useful lives of
the patents, not exceeding 20 years, using the straight-line method. Accumulated
patent costs and deferred patent application costs related to patents that are
considered to have limited future value are charged to expense. Accumulated
35
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
amortization aggregated approximately $203,600 and $172,600, respectively, at
December 31, 2002 and 2001. On an on-going basis, the Company evaluates the
recoverability of the net carrying value of various patents by reference to the
patent's expected use in drug and other research activities as measured by
outside interest in the Company's patented technologies and management's
determination of potential future uses of such technologies.
LONG-LIVED ASSETS - In August 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets", which supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of", and the accounting and reporting
provisions of Accounting Principles Board Opinion ("APB") No. 30, "Reporting the
Results of Operations - Report the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". SFAS No. 144 requires that companies (1) recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable based
on its undiscounted future cash flows and (2) measure an impairment loss as the
difference between the carrying amount and fair value of the asset. In addition,
SFAS No. 144 provides guidance on accounting and disclosure issues surrounding
long-lived assets to be disposed of by sale. The adoption of this statement in
2002 did not have a material impact on the Company's financial position or
results of operations.
REVENUE RECOGNITION - Revenues are earned and recognized based upon the sale or
licensing of product rights, completion of contractually identified development
milestones, upon shipment of product, upon completion of a contract or upon the
attainment of specific milestones or benchmarks specified in license or
development agreements. Amounts received in advance are recorded as deferred
revenue and are amortized over the life of the agreement or achievement of
milestones. Research revenue associated with the research contracts is billed on
a cost reimbursement basis, which includes direct costs incurred in connection
with research activities and an allocation of certain other costs incurred by
the Company.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations as incurred. Such costs include proprietary research and development
activities and expenses associated with research and development contracts,
whether performed by the Company or contracted with independent third parties.
STOCK BASED COMPENSATION - The Company applies the intrinsic value method of
accounting for stock options and awards granted to employees. The Company
accounts for stock options and awards to non-employees using the fair value
method.
Under the intrinsic value method, compensation associated with stock awards to
employees is determined as the difference, if any, between the current fair
value of the underlying common stock on the date compensation is measured and
the price an employee must pay to exercise the award. The measurement date for
employee awards is generally the date of grant. Under the fair value method,
compensation associated with stock awards to non-employees is determined based
on the estimated fair value of the award itself, measured using either current
market data or an established option pricing model. The measurement date for
non-employee awards is generally the date performance of services is complete.
36
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Stock or other equity-based compensation for non-employees must be accounted for
under the fair value based method as required by SFAS No. 123 and Emerging
Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services". Under this method, the equity-based instrument is valued at either
the fair value of the consideration received or of the equity instrument issued
on the date of grant. The resulting compensation cost is recognized and charged
to operations over the service period or the vesting period, whichever is
shorter.
The Company intends to continue to use the intrinsic value method to account for
stock-based compensation to employees and directors. The following table
illustrates the effect on net loss and net loss per share if the Company had
applied the fair value method to stock-based employee and director compensation:
2002 2001 2000
---- ---- ----
Net loss as reported $ (7,514,514) $(12,333,243) $ (9,745,358)
Additional stock compensation
measured using the fair value
method (3,358,424) (2,196,840) (3,846,761)
------------- ------------- -------------
Proforma net loss $(10,872,938) $(14,530,083) $(13,592,119)
============= ============= =============
Basic and diluted net loss per share -
as reported $ (0.27) $ (0.46) $ (0.43)
============= ============= =============
Basic and diluted net loss per share -
proforma $ (0.39) $ (0.55) $ (0.59)
============= ============= =============
The fair value of options on their grant date was measured using the
Black/Scholes option pricing model. Key assumptions used to apply this pricing
model are as follows:
2002 2001 2000
---- ---- ----
Risk-free interest rate 4.08%-4.53% 4.38%-5.27% 5.67%-6.57%
Expected life of option grants 6 years 6 years 6 years
Expected volatility of underlying stock 154% 128% 72%-82.18%
Expected dividend payment rate, as a
percentage of the stock price on the
date of grant --- --- ---
The weighted average fair values of options granted during 2002, 2001 and 2000
were $1.20, $3.42 and $4.30, respectively.
37
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The option pricing model used was designed to value readily tradable stock
options with relatively short lives. The options granted to employees are not
tradable and have contractual lives of up to ten years.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", which requires the use of the liability method. The objective of
this method is to establish deferred tax assets and liabilities for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities using tax rates in effect in the year(s) in
which the differences are expected to reverse.
NET INCOME (LOSS) PER SHARE - Basic earnings per share is computed using the
weighted average number of common shares outstanding during each year. Diluted
earnings per common share reflect the effect of the Company's outstanding
options and warrants, except where such items would be anti-dilutive. Due to the
net losses reported in 2002, 2001 and 2000, basic and diluted per share amounts
are the same. For the years ended December 31, 2002, 2001 and 2000 potential
common shares are not included in the per share calculations for diluted EPS,
because the effect of their inclusion would be anti-dilutive. Anti-dilutive
potential shares not included in per share calculations for 2002, 2001 and 2000
were approximately 5,059,000, 4,791,000 and 4,761,000 shares, respectively.
NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards SFAS No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 142 was
effective for fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized in an entity's statement of financial
position at that date,