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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JULY 1, 1996 TO DECEMBER 31, 1996.
COMMISSION FILE NUMBER 1-11352
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DYNAGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 04-3029787
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
99 ERIE STREET, CAMBRIDGE, MASSACHUSETTS 02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(617) 491-2527
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE BOSTON STOCK EXCHANGE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS BOSTON STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
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COMMON STOCK, $.01 PAR VALUE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO
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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, 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. [ ]
As of April 24, 1997, 30,114,206 shares of the registrant's Common Stock,
$.01 par value, were issued and outstanding. The aggregate market value of the
registrant's voting stock held by non-affiliates of the registrant as of April
24, 1997, based upon the closing price of such stock on the Nasdaq Stock
Market's SmallCap Market ("Nasdaq") on that date ($1.22) was $33,589,902.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
DynaGen, Inc. ("DynaGen" or the "Company") develops and markets proprietary
and generic therapeutic and diagnostic products for the human healthcare market.
During 1996, DynaGen began expanding its business focus from being a development
and licensing company to building a diversified healthcare company focused on
the manufacture and distribution of generic drug products and specialty
pharmaceuticals, as well as the continued development of therapeutic and
diagnostic products. The Company intends to implement this strategy through the
acquisition of businesses, technologies and products that the Company believes
are undervalued, as well as through continued internal product development. In
August 1996, the Company acquired the tablet business of Able Laboratories, Inc.
("Able"), a generic pharmaceutical product subsidiary of Alpharma, Inc.
Prior to the Able acquisition, DynaGen's business consisted of developing
proprietary diagnostic products and proprietary therapeutic and diagnostic
product candidates. The Company's lead therapeutic product candidate,
NicErase(r)-SL, is intended as an aid in smoking cessation and to provide relief
from nicotine withdrawal symptoms. The Company is currently conducting a
multi-center pivotal Phase 3 clinical trial of NicErase-SL. Results from this
trial are anticipated to be available in the second quarter of 1997. There can
be no assurance that the results of the Company's ongoing Phase 3 clinical trial
of NicErase-SL will be favorable for the Company. In addition, the Company is
also considering alternative delivery formats for its lobeline-based NicErase
technology and intends to seek strategic partners to further develop and market
these delivery formats. In December 1996, the Company licensed worldwide,
exclusive rights to develop a lobeline sulfate nasal delivery formulation,
NicErase-NS, to Nastech Pharmaceutical Company, Inc. ("Nastech").
DynaGen is also developing OrthoDyn(r), a bioresorbable bone cement system
for bone and joint repair which is currently in the preclinical development
stage. In April 1997, the Company entered into an agreement with Smith & Nephew,
plc ("Smith & Nephew") providing Smith & Nephew an exclusive period of 12 months
to evaluate the OrthoDyn product's human orthopaedic applications. Additionally,
the Company expanded its resorbable polymer technology patent base by obtaining
a patent for its Sleeper(tm) vaccine technology which enables vaccines to be
delivered in a single administration rather than in multiple vaccinations over a
period of time.
In December 1996, the Company obtained United States Food and Drug
Administration (the "FDA") clearance to market its proprietary NicCheck(r) I
product for detection of nicotine and/or its metabolites in urine as an aid in
indicating smoking status of individuals. The Company has recently commenced
marketing NicCheck to physicians, smoking cessation programs, HMOs, and
insurance companies.
In December 1996, the Company licensed technology from BioLoc, Inc.
("BioLoc") that is intended to improve the accuracy and efficiency, and reduce
the overall cost of, breast surgical biopsy procedures. The Company is also
conducting early stage research on a proprietary bacterial extract for the
treatment of infectious diseases.
The Company changed its year end from June 30 to December 31. Accordingly,
the Company began a new 12 month fiscal year on January 1, 1997. The six month
period resulting from this change, July 1, 1996 through December 31, 1996, is
referred to as the "Transition Period."
MULTISOURCE BUSINESS
The U.S. multisource or generic pharmaceutical market approximates $8
billion in annual sales. This sector has grown due to a number of factors
including the large number of drugs coming off patent, the growing importance
and impact of managed care organizations which prefer lower cost generics to
brand products, and the increasing physician, pharmacist and consumer acceptance
of generic drugs. Generic drugs are the chemical and therapeutic equivalents of
brand-name drugs. They are required to meet the same governmental standards as
the brand-name drugs and must receive FDA approval prior to manufacture and
sale. Generic drugs may be manufactured and marketed only if relevant patents
(and any additional government-mandated market exclusivity periods) have
expired. These drugs are typically sold under their generic chemical names at
prices significantly below those of their brand-name equivalents.
1
To successfully participate in the multisource business, DynaGen intends to
compete with other generic companies through vertical integration of key
elements of the multisource business including manufacturing, packaging and
distribution. In August 1996, the Company acquired Able, a 46,000 square foot
tablet and suppository manufacturing facility. As part of this acquisition, the
Company obtained rights to eleven approved Abbreviated New Drug Applications
("ANDAs") as well as other generic formulations. Since the acquisition, DynaGen
has updated and expanded the manufacturing capability, validated several of the
acquired products, retrained employees in quality assurance procedures, and has
successfully met FDA requirements and guidelines to manufacture these products.
The Company is increasing sales of its current generic products through the
expansion of its distribution networks and by providing contract manufacturing
services to various pharmaceutical companies. The following is a list of generic
products that the Company obtained in the Able acquisition:
GENERIC PRODUCT THERAPEUTIC CATEGORY BRAND NAME(1)
--------------- -------------------- -------------
ANDA PRODUCTS:
Clorazepate tablets (three dosages) Anxiolytic Tranxene
Clorazepate capsules (three dosages)(2) Anxiolytic Tranxene
Loperamide tablets(2) Antidiarrheal Imodium
Acetaminophen suppositories (three dosages)(2) Analgesic Tylenol suppositories
Hydrocortisone acetate cream (1%)(2) Anti-inflammatory Anusol-HC cream
OTHER GENERIC FORMULATIONS:
Bisacodyl tablets Laxative Dulcolax
Choline magnesium trisalicylate tablets (three dosages) Anti-inflammatory Trilisate
Methenamine Mandelate tablets (two dosages) Urinary Antibacterial Mandelamine
Phenazopyridine HCL tablets (two dosages) Urinary Tract Analgesic Pyridium
Salsalate tablets (two dosages) Anti-inflammatory Disalcid
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(1) All brand names are registered trademarks of their respective
manufacturers.
(2) These products are not presently being marketed by the Company.
In April 1997, the Company signed an agreement with Kali Laboratories Inc.
("Kali"), a privately-held company specializing in the development of generic
drugs. The agreement provides for Kali to assist DynaGen in developing seven
specific generic drugs and obtaining FDA approval for these drugs. The patents
on these targeted drugs have expired or will expire over the next five years and
provide an opportunity for DynaGen to introduce generic equivalents. Kali's
management and its scientific staff have significant experience in developing
and obtaining approvals on generic drugs. DynaGen believes that by outsourcing
the development and approval activities it will benefit from the experience of a
highly seasoned team of scientists while reducing the requirement of major
investment in personnel and laboratory equipment.
To complement the acquisition of Able and pursue vertical integration, the
Company recently entered into an agreement to acquire all of the outstanding
shares of Superior Pharmaceutical Company ("Superior"), a privately-held
distributor of generic pharmaceutical products. Superior has its primary
operations in Cincinnati, Ohio, where it employs approximately 65 people, and
has 40,000 square feet of office, warehouse and distribution space. Superior
reported 1996 sales of approximately $32 million with pre-tax income of over $3
million. Under the terms of the agreement, DynaGen will pay Superior's
shareholders a total of $16.5 million, consisting of cash, three-year notes and
shares of DynaGen Common Stock. The shareholders may also receive certain cash
incentive payments based on Superior's performance during the three years
following the close of the transaction. The aquisition of Superior is subject to
customary closing conditions and the Company intends to close this acquisition
during the second quarter of 1997. There can be no assurance that the Superior
aquisition will close in the second quarter of 1997, or at all.
2
The Company plans to raise capital in order to finance the proposed
acquisition of Superior through the sale of its securities. There can be no
assurance that the Company will be able to secure this financing or that such
financing will be available on favorable terms. If the Company is unable to
obtain such financing, it will be unable to close the Superior acquisition.
Concurrently with the completion of the proposed Superior acquisition, Superior
and the Company intend to enter into a line of credit to provide financing for
Superior. The Company and Superior are currently engaged in discussions with a
commercial bank regarding such line of credit. There can be no assurance that
the Company will be able to secure the line of credit or that the line of credit
will be available on favorable terms. If the Company is unable to obtain a line
of credit for Superior, it will be unable to close the Superior acquisition. The
Company intends to fund Superior's operations with the line of credit and
Superior's cash generated from operations.
SPECIALTY PHARMACEUTICAL BUSINESS
DynaGen's specialty or emerging pharmaceutical business strategy is to
create a business based on branded generic products and multi-drug combinations
in convenient packaging for specific indications and treatments. Physicians
routinely prescribe two or more separate drugs for the treatment of several
common medical problems. These drugs are separately prescribed and dispensed but
are taken at various times during the course of the day as directed by the
physician. A major problem in such multi-drug therapies is lack of compliance by
the patient and therefore less than desirable therapeutic efficacy. For this
reason, the Company initially intends to focus its efforts in this area on
compliance enhancement packaging. DynaGen has identified near-term opportunities
in compliance enhancement packaging in the areas of women's healthcare and
respiratory infection. The Company is developing convenience packaging which it
believes will provide ease of prescription, dispensing, storage and
self-administration. Convenience packaging also provides cost advantages to the
consumer since there is only a single "co-pay" instead of multiple co-payments.
The Company's proposed specialty pharmaceutical products are in an early
stage of development and therefore are subject to the risks of unsuccessful
development, marketing and commercialization. These proposed products will
require substantial further development which may include clinical testing,
bio-equivalency studies and regulatory approval, all at a substantial cost to
the Company. The use of specialty pharmaceuticals will require the acceptance of
a new way of prescribing medication and there can be no assurance a market will
develop for such products. Additional investment by the Company in
manufacturing, marketing and sales infrastructures will also be required prior
to commercialization. No assurance can be given that these development efforts
will be successfully completed or that the products, if introduced, will be
successfully marketed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results."
THERAPEUTIC PRODUCTS
OVERVIEW OF SMOKING CESSATION THERAPY
The rationale behind currently marketed nicotine based smoking cessation
products is that by gradually decreasing the concentration and daily dosage of
nicotine, one can overcome nicotine dependency without experiencing withdrawal
problems. Nicorette(r), a nicotine-containing gum currently marketed by
SmithKline Beecham Consumer Health Care, was the first prescription product
approved by the FDA as an aid to smoking cessation. Nicotine-containing
transdermal patches and nasal sprays have also been developed and initially
approved by the FDA for prescription use and marketed as such by pharmaceutical
companies. Beginning in 1996, the FDA granted approval for several nicotine
patch and gum products, including some of the products mentioned above, to be
sold over-the-counter ("OTC"), without prescription. The FDA approval of OTC
products has caused a shift in the smoking cessation marketplace from
prescription to OTC use.
Until December 1993, there was a variety of non-FDA approved
over-the-counter smoking cessation products. Several of these products contained
lobeline as their active ingredient because it was believed that lobeline could
temporarily replace nicotine and help to overcome nicotine dependency and
withdrawal problems. The majority of the lobeline products were taken orally
assuming that a sufficient quantity of lobeline would be absorbed from the
gastrointestinal ("GI") tract into the bloodstream. These formulations have not
been proven to be effective and they have not received FDA approval.
3
DynaGen's research is consistent with the hypothesis that lobeline relieves
nicotine withdrawal symptoms by binding to nicotine receptors in the brain
without activating the addiction mechanisms. Based on the belief that a lobeline
formulation which does not depend on absorption from the GI tract might be an
effective tobacco substitute, DynaGen has developed alternative delivery
formulations, focusing primarily on the sublingual tablet, NicErase-SL.
NICERASE-SL. DynaGen is developing NicErase-SL, a sublingual tablet that is
held under the tongue where it dissolves in one to three minutes and releases
lobeline, the active ingredient of the tablet. As the tablet dissolves, the
lobeline enters the bloodstream directly through blood vessels under the tongue
and in the mouth. NicErase-SL is designed for use by individuals who want to
stop smoking. It is expected that NicErase-SL will be used in a six-week program
that includes smoking cessation counseling, as is the case for other FDA
approved prescription smoking cessation products.
DynaGen has shown in clinical studies that NicErase-SL reduces symptoms of
tobacco withdrawal and is now evaluating its effectiveness as an aid in smoking
cessation in a 750 subject multi-center pivotal Phase 3 clinical trial. Results
from this first trial are anticipated to be available in the second quarter of
1997. At a minimum, a second similar trial would also be necessary before the
Company could file with the FDA a New Drug Application to market NicErase-SL as
a prescription product. The FDA currently requires that smoking cessation
products be initially marketed for prescription use with a possible switch to
OTC only after a positive history of prescription use has been established and
demonstrated to the FDA's satisfaction.
In light of the shift in the smoking cessation market from prescription to
OTC products and of the expanding availability of different dosage formats of
nicotine-based smoking cessation products such as the nicotine nasal spray, the
Company is refocusing its traditional development strategy by concentrating on
outlicensing its technology to one or more strategic partners. The Company
intends to minimize research and development expenditures on products which have
a long development and approval process. Since alternative drug delivery formats
have proven successful in the nicotine replacement therapy market, the Company
is considering the development of additional delivery formats for NicErase, such
as a transdermal patch and adhesive buccal wafer. The Company believes that a
product available in multiple delivery dosage formats may create more diverse
marketing opportunities.
In December 1996, DynaGen licensed its technology for the development of a
lobeline-containing nasal spray to Nastech. Under the terms of this agreement,
Nastech will be responsible for all remaining preclinical and clinical
development of the product. DynaGen and Nastech will divide equally all future
license and sales royalty revenues.
To date, the Company has not entered into any collaborative arrangements
with any third party with respect to the development and commercialization of
NicErase, except for the agreement with Nastech. The Company's future NicErase
development and commercialization activities will depend on a number of factors
including the results of the Company's current pivotal Phase 3 clinical trial
for NicErase-SL, the changing demands of the smoking cessation market and the
Company's ability to secure a suitable marketing and development partner. There
can be no assurance that the results of the current pivotal Phase 3 clinical
trial will be sufficient to support further clinical development of NicErase-SL
or a second pivotal Phase 3 clinical trial. Even if such results are promising,
there can be no assurance that such results will be repeated in future clinical
trials, or that the Company will receive the necessary regulatory approvals to
commercialize NicErase-SL or any other NicErase format. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors That May Affect Future Results."
ORTHODYN BIORESORBABLE BONE CEMENT
The global orthopaedics market continues to expand, and the Company believes
that resorbable materials are one of the most rapidly growing sectors. With
significant growth projected in the elderly population comes an increased demand
for orthopaedic materials. Advances continue to be made in the design of total
joint prostheses and other fixation devices. The area of bioresorbable bone
substitutes is of prime interest to the major orthopaedics manufacturers, with
most having the goal of adding such materials to their product line.
4
OrthoDyn is based on a family of bioresorbable, biocompatible polyesters
derived from compounds naturally occurring in the body. It is a composite
polymer/filler system and has strength and stiffness more similar to human bone
than fully ceramic systems. It is initially moldable, forming a very cohesive
dough, cures fast (10 to 30 minutes) with little or no heat evolution, and has
strength, stiffness and toughness similar to human bone. Preclinical studies
have demonstrated acceptable specifications with regard to degradation time,
biocompatibility and strength. These studies also have provided early
indications that new bone effectively grows into and replaces the cement. The
polymer component also has potential use for formation of preformed
bioresorbable pins, plates and screws.
In line with DynaGen's goal to minimize development expenditures on products
which have long-term development and clinical approval programs, the Company and
Smith & Nephew have recently entered into an agreement providing Smith & Nephew
with an exclusive period of 12 months to evaluate the OrthoDyn product's human
orthopaedic applications. There can be no assurance that the Company will enter
into a definitive agreement with Smith & Nephew or that such an agreement will
prove successful for DynaGen. Furthermore, no assurance can be given that
continued preclinical development of OrthoDyn will be successful, that the
necessary regulatory approvals will be obtained or that the OrthoDyn products
will be successfully marketed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors That May Affect
Future Results."
ADDITIONAL BIORESORBABLE POLYMER TECHNOLOGIES
Vaccine delivery represents a potential area for the application of the
Company's controlled release delivery systems. DynaGen's patent application
covering its Sleeper(tm) technology has recently been granted notice of
allowance from the U.S. Patent and Trademark Office. This technology involves a
unique combination of a bioresorbable polymer and a vaccine such that, upon
injection, the Sleeper delivery system immediately releases the initial amount
of vaccine corresponding to the first shot and then, after a predetermined
period of time, will release in a "burst" the second load of vaccine
representing the "booster" shot.
DynaGen also has developed a polymer system that can be applied to the
controlled, sustained release of a wide variety of drugs. The Company is
pursuing both corporate alliances and outlicensing approaches for further
development of these resorbable polymer technologies. There can be no assurance
that the Company will be able to find a suitable development partner for these
bioresorbable polymer technologies, that development efforts for these
technologies will be successfully completed or that the products, if introduced,
will be successfully marketed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors That May Affect
Future Results."
OTHER THERAPEUTIC PRODUCTS
The Company is also conducting early stage research on a proprietary
bacterial extract for the treatment of infectious diseases and is currently
engaged in the characterization and partial purification of the extract prior to
filing an investigational new drug application. Management is also evaluating
potential clinical applications for this technology. These types of therapeutics
have been studied in the past and have had mixed results. There can be no
assurance that the Company can successfully develop, test and market products
based on this technology. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results."
DIAGNOSTIC PRODUCTS
The health care industry has shifted to a managed care approach which
integrates prevention, diagnostic, therapeutic and compliance technologies into
a panel of products for specific disease management. In light of this structural
shift, the Company is developing diagnostic products which may help in the
prevention and diagnosis of disease and in the determination of compliance with
smoking cessation programs.
5
BREAST BIOPSY TECHNOLOGY
DynaGen recently licensed technology that is intended to improve the
accuracy and efficiency, and reduce the overall cost, of breast surgical biopsy
procedures from BioLoc, a privately held Boston-based company. The acquisition
of the BioLoc technology fits DynaGen's strategy of developing distinctive
healthcare products based on technologies acquired by the Company from outside
sources.
Core needle biopsy, the most commonly used non-surgical procedure for
diagnosis of suspicious lesions in breasts, is limited in its ability due to the
difficulty in capturing the targeted tissue and the need for multiple attempts
to obtain accurate and sufficient samples, resulting in unnecessary pain,
scarring and anxiety. The BioLoc technology is intended to overcome the
shortcomings of the core needle biopsy procedure by accurately guiding the
surgical biopsy instruments directly to the suspected tissue lesion identified
during mammography examination. Imaging and location tracking technologies are
combined to provide a three-dimensional view of the breast tissue which the
Company believes will allow the accurate depiction of the biopsy target and
guidance for its surgical removal. The Company is now completing its patent
application covering this technology and developing a prototype system.
The BioLoc technology is in an early stage of development and therefore is
subject to the risks of unsuccessful development, marketing and
commercialization. This proposed product will require substantial further
development and preclinical and clinical testing and regulatory approval, at a
substantial cost to the Company. Additional investment by the Company in
manufacturing, marketing and sales infrastructures will also be required prior
to commercialization. No assurance can be given that these development efforts
will be successfully completed or that the products, if introduced, will be
successfully marketed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors That May Affect Future
Results."
SMOKING CESSATION AND RELATED DIAGNOSTIC PRODUCTS
NICCHECK I. NicCheck I is a simple colorometric test for the detection of
nicotine and/or its metabolites in urine. The test distinguishes between smokers
and nonsmokers with 97% accuracy and is also able to distinguish between high
and low consumers of nicotine. NicCheck I can be used both as a companion
product for NicErase-SL or independently for clinical evaluation. The NicCheck I
result may be used to determine the appropriate level of nicotine replacement
therapy during smoking cessation efforts. Smokers who are trying to quit may
become more motivated by observing a decrease in color intensity of the NicCheck
I results as they reduce nicotine consumption. NicCheck I may also prove to be a
cost-effective means for insurance companies to employ risk assessment/risk
management strategies. The FDA recently granted the Company clearance to market
NicCheck I in the United States and the Company is now attempting to establish
multilevel sales and marketing approaches.
NICCHECK II. The Company is initiating preclinical studies for detecting
exposure to secondhand smoke. Secondhand smoke causes and exacerbates a number
of respiratory problems in nonsmokers. The Company believes that physicians
could use NicCheck II to promote early intervention.
TUBERCULOSIS DIAGNOSTIC PRODUCTS
DynaGen has also developed proprietary diagnostic tests for certain
infectious diseases including tuberculosis ("TB"). The Company is currently
selling MycoDot(r), a product to detect antibodies against mycobacteria in blood
or serum, through distributors primarily in Southeast Asia, Pacific Rim
countries, China, India, and Japan. DynaGen has received clearance under three
premarket notification 510(k)s from the FDA to market its MycoAKT(r) diagnostic
tests that identify three mycobacterial species in culture. The Company has
granted exclusive U.S. manufacturing and distribution rights and semi-exclusive
worldwide rights for MycoAKT to a third party. The Company continues to pursue
licensing arrangements for the promotion and distribution of these products, but
does not expect to generate material amounts of revenue from sales of these
products.
6
SALES AND MARKETING
The Company's generic therapeutic products are sold through private label
arrangements primarily through direct sales efforts to drug wholesalers,
distributors and retail drug chains and other pharmaceutical companies. In the
near future, the Company also intends to market its generic therapeutic products
under its own "Able Laboratories" name. The Company markets its diagnostic
products under its own name primarily through distributors.
The Company has relatively limited experience in sales, marketing and
distribution. There can be no assurance that the Company can successfully
implement its sales and marketing strategy or that it can successfully market or
sell any of its products or proposed products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Future Results."
MAJOR CUSTOMERS
During the Transition Period, approximately 85% of total revenues were
derived from three major customers: Schein Pharmaceutical ("Schein") (53%),
Genelabs Diagnostic Pte LTD ("Genelabs") (18%) and Alpharma, Inc. (14%). For the
fiscal year ended June 30, 1996, approximately 79% of total revenues were
derived from three major customers: Bristol-Myers Products ("BMP") (45%), Hainan
OSROC Bio-Tech Co. Ltd. ("OSROC") (23%) and Remel LP ("Remel") (11%). For the
fiscal year ended June 30, 1995, approximately 77% of total revenues were
derived from two major customers: BMP (50%) and Genelabs (27%). There is no
assurance that the revenues from Schein and Genelabs will recur. The revenue
from BMP represents the recognition over two years of a one-time payment of
$500,000 and will not recur. In addition, the revenue from Alpharma, Inc. was
derived from a temporary supply agreement which ended in February 1997 and is
not expected to recur. The loss of any key customer and the inability of the
Company to replace revenues provided by a key customer could have a material
adverse effect on the Company's business, financial condition and results of
operations.
INDUSTRY SEGMENTS AND SALES BY GEOGRAPHIC AREA
Financial information with respect to the Company's business segments and
product sales by geographic area is presented in Note 11 of "Notes to
Consolidated Financial Statements."
BACKLOG
The dollar amount of backlog orders for the Company's products as of
December 31, 1996 was approximately $300,000. Although orders are subject to
cancellation without penalty, management expects to fill substantially all of
them in the near future.
MANUFACTURING AND SUPPLIERS
DynaGen's generic products are manufactured at its Able Laboratories
facility in South Plainfield, New Jersey. The principal components used in the
Company's generic products are active and inactive pharmaceutical ingredients
and certain packaging materials. Sources for certain materials for the Company's
products must be approved by the FDA, and in many instances only one source has
been approved. Active raw material ingredients are purchased primarily from
United States distributors of bulk pharmaceutical materials manufactured by
foreign companies. To date, the Company has experienced no significant
difficulty in obtaining raw materials. However, if raw materials from a
specified supplier were to become unavailable, the Company would be required to
file a supplement to its ANDA and revalidate the manufacturing process using the
new supplier's materials. If unexpected delays in obtaining new materials do
occur, it could result in the loss of revenues and have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors That May Affect Future Results."
The Company's strategy is to license its diagnostic products for manufacture
and distribution by third parties. The Company has entered into license
agreements for the manufacture and distribution of its MycoAKT and MycoDot
products. MycoDot is produced by a single licensed manufacturer in India.
Nicheck I is produced by a contract manufacturer in the United States. The
Company's dependence upon third parties for the manufacture and distribution of
its diagnostic products could have a material adverse effect on its ability to
deliver its products on a timely basis.
7
Clinical supplies of the Company's proprietary NicErase-SL product candidate
are manufactured by a third-party contract manufacturer.
The Company's Cambridge, Massachusetts and South Plainfield, New Jersey
facilities are registered with the FDA and subject to current Good Manufacturing
Practices ("cGMP") as prescribed by the FDA.
COMPETITION
The Company competes with other generic manufacturers, specialized
biotechnology companies and major pharmaceutical companies. Many of these
competitors possess substantially greater financial and other resources, such as
expertise in clinical trials, FDA submissions and marketing, that are needed to
commercialize a pharmaceutical product.
In the generic pharmaceutical market, the Company competes with off-patent
drug manufacturers, brand-name pharmaceutical companies that manufacture
off-patent drugs, the original manufacturers of brand-name drugs and
manufacturers of new drugs that may be used for the same indications as the
Company's products. Revenues and gross profit derived from generic
pharmaceutical products tend to follow a pattern based on regulatory and
competitive factors unique to the generic pharmaceutical industry. As patents
for brand name products and related exclusivity periods mandated by regulatory
authorities expire, the first generic manufacturer to receive regulatory
approval for generic equivalents of such products is usually able to achieve
relatively high revenues and gross profit. As other generic manufacturers
receive regulatory approvals on competing products, prices and revenues
typically decline. Accordingly, the level of revenues and gross profit
attributable to generic products developed and manufactured by the Company is
dependent, in part, on its ability to develop and introduce new generic
products, the timing of regulatory approval of such products, and the number and
timing of regulatory approvals of competing products. In addition, competition
in the United States generic pharmaceutical market continues to intensify as the
pharmaceutical market continues to intensify as the pharmaceutical industry
adjusts to increased pressures to contain health care costs. Brand name
companies are increasingly selling their products into the generic market
directly by acquiring or forming strategic alliances with generic pharmaceutical
companies. No regulatory approvals are required for a brand name manufacturer to
sell directly or through a third party to the generic market, nor do such
manufacturers face any other significant barriers to entry into such market.
These competitive factors may have a material adverse effect on the Company's
ability to sell its generic products.
In the field of nicotine addiction, the NicErase-SL product candidate will
compete with both prescription and OTC products. In particular, management
believes that the principal drug competition for its proposed NicErase product
is nicotine chewing gum, nicotine nasal spray and the nicotine patch which
several pharmaceutical companies, such as SmithKline Beecham, Hoechst Marion
Roussel, McNeil Consumer Products Co. and Ciba Self-Medication have developed
and are marketing in the United States and elsewhere. Competition has been
increasing due to the FDA approval of several nicotine patch and gum products to
be sold OTC, without prescription (see "Overview of Smoking Cessation Therapy").
These FDA approvals have caused a shift in the smoking cessation marketplace
from prescription to OTC use. Other programs that emphasize behavioral
modification approaches, such as hypnosis, will create additional competition in
the smoking cessation market. There can be no assurance that the results of
pivotal Phase 3 clinical trials will prove successful for the Company's
NicErase-SL product candidate or that it will receive the necessary regulatory
approvals and even if such approvals are obtained, that such product will be
commercially successful.
OrthoDyn, the Company's orthopedic product candidate, will compete with
products from a number of much larger companies in the bone repair market,
including, but not limited to, Johnson & Johnson Co., Pfizer (Howmedica) and
Bristol-Myers Squibb Co. (Zimmer). There can be no assurance that the Company's
OrthoDyn product candidate will receive the necessary regulatory approvals and
even if such approvals are obtained that such product will be commercially
successful.
Management believes that the Company's current and proposed diagnostic
products will compete on the basis of price, performance and technological
features such as speed of detection, absence of radioactive substance, accuracy
and reliability. Management believes that Gen-Probe, Inc. and Becton-Dickinson,
among others, are its immediate competitors and that other companies may
introduce competing products. There can be no assurance that the Company will be
able to successfully market any of its diagnostic products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors That May Affect Future Results."
8
GOVERNMENT REGULATION
The Company's therapeutic and diagnostic products will be subject to
significant government regulation in the United States principally by the FDA,
and to a lesser extent, by the Drug Enforcement Administration, state
governments and other countries. Federal and state regulations and statutes
impose certain requirements on the testing, manufacture, labeling, storage,
recordkeeping, approval, advertising and promotion of the Company's products.
Noncompliance with applicable requirements can result in judicially and
administratively imposed sanctions including seizures of adulterated or
misbranded products, injunction actions, fines and criminal prosecutions.
Administrative enforcement measures can also involve product recalls and the
refusal of the government to approve new drug applications ("NDAs") or ANDAs. In
order to conduct clinical tests and produce and market products for human
diagnostic and therapeutic use, the Company must comply with mandatory
procedures and safety standards established by the FDA and comparable state and
foreign regulatory agencies. Typically, such standards require that products be
approved by the FDA as safe and effective for their intended use prior to being
marketed for human applications.
To obtain FDA approval for a new drug or generic equivalent, a prospective
manufacturer must, among other things, comply with the FDA's cGMP regulations.
The FDA may inspect the manufacturer's facilities to assure such compliance
prior to approval or at any other reasonable time, and the Company must follow
cGMP regulations at all times during the manufacture and other processing of
drugs. To comply with the requirements set forth in these regulations, the
Company must continue to expend significant time to provide adequate resources
in the areas of development, production, quality control and quality assurance.
FDA approval is required before the Company can market any new drug,
including a generic equivalent of a previously approved drug or a new indication
or delivery method for a previously approved drug. There are three principal
ways to obtain FDA approval of a new drug:
1) New Drug Application (NDA) -- A prospective manufacturer must submit
to the FDA full reports of well-controlled clinical studies and other data
to prove that a drug is safe and effective and meets other requirements for
approval.
2) "Paper" NDAs -- Under certain circumstances, the FDA will permit
safety and efficacy to be demonstrated by submission of published literature
and journal articles.
3) Abbreviated New Drug Applications (ANDA) -- The Waxman-Hatch Act of
1984 established a statutory procedure for the submission and FDA review and
approval of ANDAs for generic versions of drugs previously approved by the
FDA. Under the ANDA procedure, the FDA waives the requirement of conducting
complete clinical studies of safety and efficacy, and instead typically
requires the applicant to submit data illustrating that the generic drug
formulation is bioequivalent to a previously approved drug. "Bioequivalence"
means that the rate of absorption and the levels of concentration of a
generic drug in the body needed to produce a therapeutic effect are
substantially equivalent to those of the previously approved drug. For some
drugs, the FDA may require other means of demonstrating that the generic
drug is bioequivalent to the original drug. The NDA and ANDA approval
process generally takes a number of years and involves the expenditure of
substantial resources.
FDA approval of an NDA dealing with a new pharmaceutical or biological
product for human use is a multistep process. Generally, preclinical animal
testing first must be conducted to establish the safety and potential efficacy
of the experimental product for treatment of a given disease or condition. Once
the product has been found to be reasonably safe in animals, suggesting that
human testing would be appropriate, an investigational new drug ("IND")
application is submitted to the FDA. FDA acceptance of the IND allows a company
to initiate clinical testing on human subjects. The initial phase of clinical
testing (Phase 1) is conducted to evaluate the safety and, if possible, to gain
early evidence of effectiveness of the experimental product in humans. If
acceptable product safety is demonstrated, then Phase 2 trials are initiated.
The Phase 2 trials involve studies in a small sample of the actual intended
patient population to assess the efficacy of the drug for a specific
application, to determine dose tolerance and the optimal dose range and to
gather additional information relating to safety and potential adverse side
effects. Phase 2 studies are also utilized to evaluate combinations of products
for therapeutic activity. Once an investigational drug is found to have some
efficacy and an acceptable safety profile in the targeted patient population,
Phase 3 trials may be initiated. Phase 3 trials are
9
expanded controlled trials that are intended to gather additional information
about safety and effectiveness in order to evaluate the overall risk-benefit
relationship of the experimental product and to provide an adequate basis for
product labeling. These trials also may compare the safety and activity of the
experimental product with currently available products. It is not possible to
estimate the time in which Phase 1, 2 and 3 studies will be completed with
respect to a given product, although the time period can be as long as several
years.
Upon completion of clinical testing, which demonstrates that the product is
safe and effective for a specific indication, an NDA or a Product License
Application ("PLA") for a biological product may be submitted to the FDA. This
application includes details of the manufacturing procedures, testing processes,
preclinical studies and clinical trials. FDA first determines whether to accept
the application for filing. If it does, FDA's review commences; if it does not,
the Company may need to obtain additional data before resubmitting the
application. FDA approval of the application is required before the applicant
may market the new product. In addition, the FDA may impose conditions on the
approval, such as post-marketing testing and surveillance programs to monitor a
product's safety and effectiveness.
The Waxman-Hatch Act establishes certain statutory protections for
FDA-approved drugs, which protections could preclude submission or delay the
approval of a competing ANDA. One such provision allows a five-year market
exclusivity period for NDAs involving new chemical compounds and a three-year
market exclusivity period for NDAs (including different dosage forms) containing
data from new clinical investigations essential to the approval of the
application. Both patented and non-patented drug products are subject to these
market exclusivity provisions. Another provision of the act extends patents for
up to five years as compensation for reduction of the effective market life of
the patent resulting from the time involved in the federal regulatory review
process.
The Orphan Drug Act also has market exclusivity provisions of seven years
for the first approved drug for a rare disease or condition. A grant of
exclusivity under this act can preclude the approval of both NDAs and ANDAs for
the orphan indication.
The Prescription Drug User Fee Act of 1992, enacted to expedite drug
approval by providing the FDA with resources to hire additional medical
reviewers, imposes three types of user fees on manufacturers of NDA-approved
prescription drugs. Applicants submitting only ANDAs and most other off-patent
drug manufacturers, including the Company, are not currently subject to any of
the three user fees. If the Company submits NDAs for non-ANDA products, the
Company will be subject to user fees.
Penalties for wrongdoing in connection with the development or submission of
an ANDA were established by the Generic Drug Enforcement Act of 1992,
authorizing the FDA to permanently or temporarily bar companies or individuals
from submitting or assisting in the submission of an ANDA. They may also
temporarily deny approval and suspend applications to market generic drugs. The
FDA may also suspend the distribution of all drugs approved or developed in
connection with certain wrongful conduct and also has authority to withdraw
approval of an ANDA under certain circumstances and to seek civil penalties. The
Company does not expect the law to have a material impact on the review or
approval of the Company's ANDAs.
Reimbursement legislation such as Medicaid, Medicare, Veterans
Administration and other programs govern reimbursement levels. All
pharmaceutical manufacturers rebate to individual states a percentage of their
revenues arising from Medicaid-reimbursed drug sales. Generic drug manufacturers
currently rebate 11% of average net sales price for products marketed under
ANDAs. NDA manufacturers are required to rebate the greater of 15.2% of average
net sales price or the difference between average net sales price and the lowest
net sales price during a specified period. The Company believes that the federal
and/or state governments may continue to enact measures in the future aimed at
reducing the cost of drugs and devices to the public. The Company cannot predict
the nature of such measures or their impact on the Company's profitability.
The Company's manufacturing subsidiary, Able, currently manufactures several
products which are regulated as "old drugs" and subject to the requirements of
the Over-the-Counter Drug Review regulations promulgated by the FDA. This class
of drugs requires no prior approval from FDA before marketing, but such products
must comply with applicable FDA monographs which specify,
10
among other things, required ingredients, dosage levels, label contents and
permitted uses. These monographs may be changed from time to time, in which case
the Company may be required to change the formulation, packaging or labeling of
any affected product. Changes to monographs normally have a delayed effective
date, so while the Company may have to incur costs to comply with any such
changes, disruption of distribution is not likely.
There are two principal methods by which FDA authorization may be obtained
to market medical device products, such as the Company's diagnostic test kits.
One method is to seek FDA clearance through a premarket notification filing
under Section 510(k) of the Federal Food, Drug, and Cosmetic Act. Applicants
under the 510(k) procedure must prove that the device for which marketing
clearance is sought is substantially equivalent to a device on the market prior
to the Medical Device Amendments of 1976 or a device marketed thereafter
pursuant to the 510(k) procedure. The review period for a 510(k) submission is
generally shorter than that of a premarket approval ("PMA") procedure, however,
it cannot be estimated with any degree of certainty.
If the 510(k) procedure is not applicable, a PMA must be obtained from the
FDA. Under the PMA procedure, the applicant must conduct substantial clinical
testing that is required to determine the safety, effectiveness and potential
hazards of the product. Clinical testing requires prior review of the study
protocol by an institutional review board ("IRB") and patients informed consent,
and may require submission of an investigational device exemption application to
the FDA (for significant risk devices). Prior to human testing, animal testing
may be required to determine the safety of the product. The review period under
a PMA application is generally longer than review of a 510(k) and it may include
review of the application by an outside advisory committee of experts in the
field. In addition, the preparation of a PMA application is significantly more
complex, expensive and time consuming than the 510(k) procedure and no assurance
can be given that the FDA will grant approval for the sale of the Company's
products for routine clinical applications or that the length of time the
approval process will require will not be extensive.
The FDA can also significantly delay the approval of a pending NDA, ANDA,
510(k) or PMA under its "Fraud, Untrue Statements of Material Facts, Bribery,
and Illegal Gratuities Policy." Manufacturers of drugs and devices must also
comply with the FDA's cGMP standards or risk sanctions such as the suspension of
manufacturing or the seizure of drug products and the FDA's refusal to approve
additional applications.
In addition, if the Company elects to manufacture its drugs, devices or
biological products itself, it will be necessary to meet mandated FDA
manufacturing requirements by applying for appropriate FDA establishment
registration such as an Establishment License Application for biological
products, Drug Establishment Registration for its drug products and a Device
Establishment Registration for devices.
There can be no assurance that the appropriate approvals from the FDA will
be granted as to any of the Company's proposed products or processes, that the
process to obtain such approvals will not be excessively expensive or lengthy,
or that the Company will have sufficient funds to pursue such approvals. The
failure to receive the requisite approvals for the Company's products or
processes, when and if developed, or significant delays in obtaining such
approvals, would prevent the Company from commercializing its products as
anticipated and would have a materially adverse effect on the business,
financial condition and results of operations of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors That May Affect Future Results."
Able is subject to a consent decree entered by the court on April 9, 1992 in
United States v. Able Laboratories, Inc., Civ. No. 91-4916 (D.N.J.) for failure
to comply with FDA cGMP and has been operating under this consent decree since
April 1992. The principals involved in the issuance of that order are no longer
employed by Able, DynaGen or any of its affiliates. Since the acquisition by
DynaGen, Able has made substantial commitments (both directed and financial) to
improve the plant, personnel, and equipment in order to effect an improvement in
its operations. Key management changes have been made with individuals who have
knowledge and commitment for cGMP in order to ensure continued cGMP compliance.
Ongoing cGMP training on a regularly scheduled basis will also be provided to
Able's employees.
11
Additionally, the latest Establishment Inspection, conducted on November 12,
13, 18, and 19, 1996 under the authority of an Order of Permanent Injunction did
not result in the issuance of an FDA Form 483, and the Establishment Inspection
Report (EIR) classified the inspection as "NN" -- no official action indicated.
The Company is in the process of initiating changes and plans to request the FDA
to join Able in a petition for relief from the consent decree.
PRODUCT LIABILITY AND INSURANCE COVERAGE
The Company presently maintains product liability insurance in the amount of
$3,000,000 for its products presently being marketed. The Company does not
presently maintain product liability insurance on any of its proposed products.
Although, the Company intends to obtain product liability insurance prior to the
commercialization of certain products which are not presently insured, there can
be no assurance that the Company will obtain such insurance at favorable rates
or, even if obtained, that any insurance will be adequate to cover potential
liabilities.
In the event of a successful suit against the Company, insufficiency of
insurance coverage could have a materially adverse impact on the Company's
operations and financial condition. Furthermore, the costs of defending or
settling a product liability claim and any attendant negative publicity may have
a materially adverse impact on the Company, even if the Company ultimately
prevails. Furthermore, certain food and drug retailers require minimum product
liability insurance coverage as a precondition to purchasing or accepting
products for commercial distribution. Failure to satisfy these insurance
requirements could impede the Company's ability to achieve broad commercial
distribution of its proposed products, which could have a materially adverse
effect upon the business and financial condition of the Company.
RESEARCH AND DEVELOPMENT
For the Transition Period, the Company expended $1,092,253 on research and
development activities. For the fiscal years ended June 30, 1996, 1995 and 1994,
the Company expended $3,118,145, $1,718,006 and $2,183,849, respectively, on
research and development activities.
PATENTS AND PROPRIETARY TECHNOLOGY
As part of its initial organization, the Company acquired several patents
related to the polymer technologies. In addition, the Company has filed several
U.S. and foreign patent applications for processes and products relating to its
controlled release delivery systems, smoking cessation technology, nicotine
detection product, bioresorbable bone cement product, immunological tests for
the diagnosis of mycobacterial disease, and other technologies. No assurance can
be given that existing patent applications will be granted or that any patents,
if issued, will provide the Company with adequate protection relating to the
covered products, technology or processes.
To date, the Company has received two U.S. patents related to its NicErase
smoking cessation technology covering: (i) the transdermal delivery system for
the administration of lobeline as an aid to smoking cessation and (ii)
sublingual tablet formulations. The Company has received a U.S. patent related
to a controlled release delivery system for drug dependency. In April 1997, the
Company received a notice of allowance from the U.S. patent office for the
Company's pulsed release vaccine delivery technology. Competitors may have filed
applications for, or may have been issued patents or may obtain additional
patents and proprietary rights relating to, products or processes competitive
with those of the Company. Accordingly, there can be no assurance that the
Company's patent applications will result in patents being issued or that, if
issued, the patents will afford protection against competitors with similar
technology; nor can there be any assurance that any patents issued to the
Company will not be infringed or circumvented by others or that others will not
obtain patents that the Company would need to license or circumvent. There can
be no assurance that licenses that might be required for the Company's processes
or products would be available on reasonable terms, if at all. In addition,
there can be no assurance that the Company's patents, if issued, would be held
valid by a court.
The Company's generic and specialty pharmaceutical businesses rely upon
unpatented trade secrets and proprietary technologies and processes. No
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise
12
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its right to unpatented trade secrets. The
Company requires its employees, consultants and other advisors to execute
confidentiality agreements. However, there is no assurance that these agreements
will provide meaningful protection or adequate remedies for the Company's trade
secrets in the event of unauthorized use or disclosure of such information.
The manufacture and sale of certain products developed by the Company will
involve the use of processes, products or information, the rights to certain of
which are owned by others. Although the Company has obtained licenses with
regard to the use of certain of such processes, products and information, there
can be no assurance that such licenses will not be terminated or expire during
critical periods, that the Company will be able to obtain licenses for other
rights which may be important to it, or, if obtained, that such licenses will be
obtained on commercially reasonable terms. If the Company is unable to obtain
such licenses, the Company may have to develop alternatives to avoid infringing
patents of others, potentially causing increased costs and delays in product
development and introduction, or precluding the Company from developing,
manufacturing or selling its proposed products. Additionally, there can be no
assurance that the patents underlying any licenses will be valid and
enforceable. To the extent any products developed by the Company are based on
licensed technology, royalty payments on the licenses will reduce the Company's
gross profit from such product sales and may render the sales of such products
uneconomical.
MycoDot(R), NicErase(R), MycoAKT(R), NicCheck(R) and OrthoDyn(R) are
registered trademarks of the Company. Sleeper(tm) is a trademark of the Company.
EMPLOYEES
As of April 24, 1997, the Company and its subsidiary had 67 full-time
employees, of whom 16 were employed in selling, general and administrative
activities and 51 were employed in research and development and manufacturing of
its products. Six of the Company's employees hold doctoral degrees including one
who holds a Doctorate in Medicine (M.D.). None of the Company's employees are
represented by a union. The Company believes its relationship with its employees
is good.
ITEM 2. PROPERTIES
The Company maintains its principal executive offices and laboratory
facilities at 99 Erie Street in Cambridge, Massachusetts. The premises, which
consist of approximately 27,000 square feet of space, are leased from an
unaffiliated party, for a term expiring on September 30, 1997.
The Able Laboratories subsidiary is located at a 46,000 square foot leased
manufacturing facility in South Plainfield, New Jersey. The premises are leased
from an unaffiliated party for a term expiring on March 31, 2000.
The Company believes that its present facilities are adequate to meet its
current needs. If new or additional space is required, the Company believes that
adequate facilities are available at competitive prices in the Boston,
Massachusetts and South Plainfield, New Jersey metropolitan
areas.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings incidental to its
normal business activities. While the outcome of any such proceedings cannot be
accurately predicted, the Company does not believe the ultimate resolution of
any existing matters should have a material adverse effect on its financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, whether through the
solicitation of proxies or otherwise, during the Transition Period.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock and Redeemable Common Stock Purchase Warrants
("Public Warrants") are traded principally on the Nasdaq SmallCap Market
("Nasdaq") under the symbols "DYGN" and "DYGNW," respectively, and on the Boston
Stock Exchange under the symbols "DYG" and "DYGW," respectively. The Company's
Class A Redeemable Common Stock Purchase Warrants ("Class A Public Warrants")
traded principally on Nasdaq under the symbol "DYGNZ" and on the Boston Stock
Exchange under the symbol "DYGZ" until they were redeemed on December 14, 1995.
The following table sets forth, for the periods indicated, the range of
quarterly high and low sale prices as reported on Nasdaq for the Company's
Common Stock, Public Warrants and Class A Public Warrants.
CLASS A
COMMON STOCK PUBLIC WARRANTS PUBLIC WARRANTS(1)
------------ --------------- ------------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
FISCAL 1995
July 1 to September 30, 1994 $1.44 $ .53 $ .44 $ .13 $ .56 $ .13
October 1 to December 31, 1994 2.75 1.19 .75 .34 1.69 .47
January 1 to March 31, 1995 3.13 1.63 1.38 .38 2.25 .88
April 1 to June 30, 1995 4.63 2.13 2.63 .75 3.81 1.25
FISCAL 1996
- -----------
July 1 to September 30, 1995 6.55 1.63 5.00 .50 5.19 1.00
October 1 to December 31, 1995 3.88 1.88 2.81 1.00 2.81 .56
January 1 to March 31, 1996 3.66 2.19 2.44 1.13 -- --
April 1 to June 30, 1996 3.19 2.13 2.50 1.13 -- --
TRANSITION PERIOD
- -----------------
July 1 to September 30, 1996 2.56 1.50 1.63 .88 -- --
October 1 to December 31, 1996 1.88 1.03 1.00 .16 -- --
- --------
(1) Redeemed on December 14, 1995.
On April 24, 1997, the last reported sale prices of the Company's Common
Stock and Public Warrants as reported on Nasdaq were $1.22 and $.50,
respectively.
As of April 24, 1997, based upon information from the Company's transfer
agent, there were approximately 753 holders of record of the Company's Common
Stock. As of such date, the Company estimates that there are approximately
12,000 beneficial holders of the Company's Common Stock.
The Company has not declared or paid any cash dividends since its inception
and does not anticipate paying any cash dividends to its stockholders in the
foreseeable future. The Company currently intends to retain earnings, if any, to
fund the development and future growth of its business.
14
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
audited financial statements of the Company. This information should be read in
conjunction with the financial statements and notes thereto set forth elsewhere
herein.
YEARS ENDED JUNE 30,
--------------------
TRANSITION
PERIOD ENDED
DECEMBER 31,
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues $ 359,908 $ 555,745 $ 497,553 $ 437,005 $ 883,910 $ 192,332
Costs and Expenses 4,687,745 5,899,650 3,836,295 4,264,141 4,388,575 2,837,862
Loss From Continuing
Operations (4,306,140) (5,097,419) (3,042,383) (3,645,804) (3,405,387) (2,660,040)
Loss From Discontinued
Operations -- -- -- (14,945) (48,095) (40,984)
Net Loss (4,306,140) (5,097,419) (3,042,383) (3,660,749) (3,453,482) (2,701,024)
Loss Per Share:
From Continuing
Operations (.15) (.21) (.14) (.22) (.26) (.23)
From discontinued
Operations -- -- -- -- -- (.01)
Net Loss (.15) (.21) (.14) (.22) (.26) (.24)
Weighted Average Number of
Shares Outstanding 28,794,118 24,433,949 21,179,703 16,517,117 13,070,565 11,471,849
AT JUNE 30,
-----------
AT
DECEMBER 31,
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Total Assets $7,463,149 $11,576,666 $5,114,021 $7,834,706 $5,602,289 $ 1,942,367
Convertible Note Payable 1,600,000 2,000,000 -- -- -- --
Total Liabilities 2,409,133 2,733,032 587,207 420,964 441,171 604,238
Working Capital 5,502,295 10,203,693 4,102,747 6,967,894 4,584,747 739,465
Stockholders' Equity 5,054,016 8,843,634 4,526,814 7,413,742 5,161,118 1,338,129
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops and markets proprietary and generic therapeutic and
diagnostic products for the human healthcare market. The Company has begun
expanding its business focus from being a development and licensing company to
building a diversified healthcare company focused on the manufacture and
distribution of generic drug products and specialty pharmaceuticals as well as
the continued development of therapeutic and diagnostic products. The Company
intends to implement this strategy through the acquisition of businesses,
technologies and products that the Company believes are undervalued as well as
through internal product development. In August 1996, the Company acquired the
tablet business of Able Laboratories, Inc. ("Able"), a generic pharmaceutical
product subsidiary of Alpharma, Inc. In addition, the Company has signed an
agreement to purchase all of the outstanding shares Superior Pharmaceutical
Company ("Superior"), a distributor of generic pharmaceuticals.
The Company has financed its operations primarily through the proceeds from
its public and private stock offerings, a convertible note and limited revenues
from product sales and technology license fees and royalties. Management
anticipates that revenues from product sales will not be sufficient to fund its
current operations or produce an operating profit until such
15
time as the Company is able to establish acceptance of its products in their
respective markets and expand its distribution channels. The Company has
incurred losses since inception and expects to incur additional losses until
such time as it is able to successfully develop, manufacture, and sell or
license its existing and proposed products and technologies.
RESULTS OF OPERATIONS
TRANSITION PERIOD ENDED DECEMBER 31, 1996 COMPARED WITH THE SIX MONTH
PERIOD ENDED DECEMBER 31, 1995
REVENUES
Revenues for the six month period ended December 31, 1996 (the "Transition
Period") were $360,000 versus $333,000 for the six months ended December 31,
1995. This increase of $27,000 is a result of an increase in Able product sales
partially offset by a decrease in fee revenue which was due to one-time fees
from Bristol-Meyers Products recognized during the six months ended December 31,
1995. The increase in product sales resulted from the Company realizing sales
from its Able subsidiary since its acquisition on August 19, 1996. The Company's
product sales also increased due to improved diagnostic products sales.
COST OF SALES
Cost of sales was 99% of product sales for the Transition Period compared
with 50% for the six months ended December 31, 1995. Tablet and suppository
production at Able during the Transition Period did not support the minimum
level of fixed manufacturing costs required at the facility. Management expects
that the cost of product sales, as a percentage of sales, will decrease as sales
orders and production volumes increase.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the Transition Period were $1,092,000
versus $1,037,000 for the six months ended December 31, 1995, an increase of
$55,000. This increase is primarily attributable to costs associated with the
ongoing NicErase-SL Phase 3 clinical trial and the Company's efforts in filing a
510(k) application with the U.S. Food and Drug Administration for its
NicCheck(R) product. The Company is also conducting early stage research on a
bacterial extract for the treatment of infectious diseases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the Transition Period were
$3,239,000 versus $1,189,000 for the six months ended December 31, 1995, an
increase of $2,050,000. The increase in selling, general and administrative
expenses is primarily due to additional payroll and plant operating costs of
approximately $793,000 resulting from the acquisition of Able. In addition, the
Company incurred additional costs of approximately $865,000 for the use of
business consultants to develop, seek and obtain alliances for certain Company
products, potential products and financial development. The Company incurred
additional costs of approximately $80,000 towards patent applications for
several of its products. Legal expenses increased by approximately $106,000
primarily related to assistance with technology licensing, pending acquisitions
and corporate regulatory filings. The remainder is due to a net increase in
other operating expenses.
OTHER INCOME (EXPENSE)
Investment income increased by $46,000 from $112,000 to $158,000 for the
Transition Period as compared to same period ended December 31, 1995. The
Company had greater funds available for investment during the Transition Period
compared to the six months ended December 31, 1995.
The Company incurred interest expense of $74,000 and amortized debt
financing costs of $62,000 during the Transition Period, both associated with
the $2,000,000 convertible note issued in 1996.
16
INCOME TAXES
There were no provisions for income taxes for the Transition Period and the
six months ended December 31, 1995 due to operating losses incurred by the
Company and valuation reserves applied against deferred tax assets. As of
December 31, 1996 and December 31, 1995, for Federal and state income tax
reporting purposes, the Company had net operating loss carryforwards of
approximately $23,460,000 and $19,270,000 respectively. In addition, the Company
had Federal and state research tax credit carryforwards of approximately
$583,000 and $120,000, respectively, available to reduce future tax liabilities.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
REVENUES
Revenues for the year ended June 30, 1996 ("Fiscal 1996") were $556,000
versus $498,000 for the year ended June 30, 1995 ("Fiscal 1995"). This increase
of $58,000 is a result of an increase in license fees of $85,000 offset by a
$27,000 decrease in product sales. The increase in license fee revenue is
attributable to one-time license fees received under distribution arrangements
for the Company's MycoAKT and MycoDot products. MycoDot and MycoDyn Uritec
product sales remained consistent between Fiscal 1996 and Fiscal 1995. The
decrease in total product sales resulted from lower shipments of other products
in Fiscal 1996.
COST OF SALES
Cost of product sales was 44% of net product sales in Fiscal 1996 compared
to 54% in Fiscal 1995. This decrease in the cost of sales percentage is
primarily attributable to a reallocation of certain manufacturing staff to
product marketing and support roles.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $3,118,000 for Fiscal 1996 versus
$1,718,000 for Fiscal 1995, an increase of $1,400,000. This increase is
primarily due to approximately $1,200,000 in additional therapeutic product
development costs and $285,000 in compensation expense resulting from stock
grants. The increase in therapeutic development is mainly attributable to the
initiation of the first of two planned pivotal Phase 3 clinical trials for the
Company's NicErase-SL smoking cessation product.
The increase in research and development expenses was partially offset by a
decrease in diagnostic product development costs of $74,000. The Company has
limited diagnostic product development primarily to NicCheck, a test to detect
the presence of nicotine.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for Fiscal 1996 were $2,685,000
versus $1,984,000 for Fiscal 1995, an increase of $701,000. Selling, general and
administrative expenses increased in the following areas: staffing - $355,000,
investor relations - $165,000, consulting - $111,000 and legal - $62,000. The
increase in investor relations expenses is attributable to a new program
designed to inform investors on corporate developments and strategy. Legal
expenses increased primarily for assistance with certain licensing arrangements,
regulatory issues, stock grants and options. The increase in staffing expenses
is primarily due to the award of stock grants and options. Consulting expenses
relate to assistance provided towards developing a strategy for business
alliances for certain Company products.
OTHER INCOME (EXPENSE)
The increase in investment income is primarily due to greater funds
available for investment during Fiscal 1996. The increases in interest expense
and debt financing cost amortization are attributable to the $2,000,000
convertible note issued in 1996.
INCOME TAXES
There were no provisions for income taxes for Fiscal 1996 and Fiscal 1995
due to operating losses incurred by the Company and valuation reserves applied
against deferred tax assets.
17
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
REVENUES
Revenues for Fiscal 1995 were $498,000 versus $437,000 for the year ended
June 30, 1994 ("Fiscal 1994"). This increase of $61,000, or 14%, is a result of
an increase in diagnostic product sales of $248,000 offset by a decrease in
contract service revenue of $138,000 and a decrease in license fees and
royalties of $49,000. Product sales were realized primarily from sales of
MycoDot, a tuberculosis antibody detection product, to a distributor in Asia.
The Company also recognized fee revenue of $250,000 from Bristol-Myers Products
("BMP"). The Company granted BMP the right to evaluate its smoking cessation
technology for which the Company received a $500,000 payment, of which $250,000
was deferred as revenue until Fiscal 1996. In July 1995, BMP informed the
Company that it decided not to exercise its option to license the technology as
BMP's strategic interest was in developing an over-the-counter smoking cessation
product. The Company's NicErase-SL smoking cessation product is being developed
for prescription use. In Fiscal 1994, royalties were attributable to a one-time
payment under an agreement to license certain tuberculosis diagnostic
technology. Contract service revenues for Fiscal 1994 related to the Company's
development of a vaccine delivery system under a U.S. Army contract completed in
Fiscal 1994. The Company is no longer performing any contract development work.
COST OF SALES
Cost of product sales for Fiscal 1995 was 54% of net product sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $1,718,000 for Fiscal 1995 versus
$2,184,000 for Fiscal 1994, a decrease of $466,000 or 21%. In Fiscal 1995, the
Company expended $1,476,000 on therapeutic product development and $242,000
towards diagnostic product development, compared to $1,500,000 and $684,000,
respectively, in Fiscal 1994. This is reflective of the Company's strategy
whereby resources were directed towards NicErase-SL development with limited
expenditures towards other therapeutic and diagnostic product development.
During Fiscal 1995, therapeutic product development focused primarily on
NicErase-SL, as the Company completed a multi-center pilot Phase 3 clinical
trial.
Diagnostic product development included limited development efforts for the
Company's NicCheck and MycoAKT products. In March 1995, the Company received
clearance from the FDA to market the MycoAKT products and is currently seeking
and evaluating strategic alliances with third parties. MycoAKT diagnostic test
kits are used to identify three mycobacterial species. The Company continued its
manufacturing development scale-up and regulatory approval efforts with respect
to NicCheck, a nicotine detection product.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for Fiscal 1995 were $1,984,000
versus $1,997,000 for Fiscal 1994, a decrease of $13,000. Comparing Fiscal 1995
to Fiscal 1994, savings realized from decreases in salaries and related
benefits, public relations expenditures, use of outside business consultants and
travel expenses were offset by increases in product marketing and support costs
and business insurance. Product marketing and support efforts focused primarily
on the implementation of distribution arrangements (including sales and
marketing support in connection with such distribution arrangements) for the
Company's tuberculosis related diagnostic products and business development
efforts for NicCheck.
OTHER INCOME (EXPENSE)
Investment income increased by $113,000 from $183,000 to $296,000 when
comparing Fiscal 1994 to Fiscal 1995. The Company had greater funds available
for investment during Fiscal 1995 as a result of the Company's March 1994 public
offering.
INCOME TAXES
There were no provisions for income taxes for Fiscal 1995 and 1994 due to
operating losses incurred by the Company.
18
DISCONTINUED OPERATIONS
In May 1994, the Company sold certain assets of its contract research and
development business that related to the Company's fluid systems consulting
services ("FSD"). The Company sold accounts receivable, work in process and
certain furniture and equipment for $165,000, and assigned to the buyer all of
the outstanding consulting projects. In addition, the Company entered into a
sub-lease agreement whereby the buyer occupies the space used by the FSD
business. This transaction resulted in a loss on disposal of $13,000. In
management's opinion, these services did not fit the strategic direction of the
Company's core therapeutic and diagnostic business. Moreover, these services
were not expected to be a significant source of revenues, profit or cash flow to
the Company in the future.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had working capital of $5,502,000
versus working capital of $10,204,000 at June 30, 1996. Cash and investment
securities were $5,117,000 at December 31, 1996 as compared to $10,464,000 at
June 30, 1996. Working capital was used primarily for research and development
and to fund the purchase of Able and its operations during the Transition
Period.
As discussed in Note 2 to the financial statements, in August 1996, the
Company acquired certain assets of Able, a generic pharmaceutical products
subsidiary of Alpharma Inc., for $550,000 in cash and acquisition costs of
$150,000. Able manufactures and markets prescription and over-the-counter
pharmaceuticals from a 46,000 square foot leased manufacturing facility in South
Plainfield, New Jersey. DynaGen obtained the rights to several approved ANDA
products through this purchase. DynaGen plans to increase sales of its generic
product portfolio by expanding Able's distribution network, by reintroducing
discontinued products and by developing new ANDA products. The acquisition has
increased revenues, costs and expenses, capital expenditures and net cash used
for operating activities. DynaGen intends to fund Able's operations until it
becomes self-supporting. There can be no assurance that the Company will be
successful in assimilating this or any future acquisition or that Able will
generate sufficient revenues to become self-supporting.
Management anticipates that the available working capital will be sufficient
to fund the current level of operations, including the Able business, through
June 1997, but that the available working capital will not be sufficient to fund
the acquisition of Superior. The Company has realized limited revenues from
license fees and the sale of its diagnostic products. Its future prospects and
revenue potential from product sales cannot be determined with any certainty at
this time.
The Company plans to raise capital in order to finance the proposed
acquisition of Superior through the sale of its securities. There can be no
assurance that the Company will be able to secure this financing or that such
financing will be available on favorable terms. If the Company is unable to
obtain such financing, it will be unable to close the Superior acquisition.
Concurrently with the completion of the proposed Superior acquisition, Superior
and the Company intend to enter into a line of credit to provide financing for
Superior. The Company and Superior are currently in discussions with a
commercial bank regarding such line of credit. There can be no assurance that
the Company will be able to secure the line of credit or that the line of credit
will be available on favorable terms. If the Company is unable to obtain a line
of credit for Superior, it will be unable to close the Superior acquisition. The
Company intends to fund Superior's operations with the line of credit and
Superior's cash generated from operations.
The Company also continues to pursue additional sources of capital in order
to fund the growth of the Able generic drug business and its product development
efforts. The Able financing may take the form of a line of credit or equipment
notes or leases. There can be no assurance that the Company will be able to
secure additional financing for the Able business or its continued product
development efforts or that financing will be available on favorable terms. If
the Company is unable to obtain such additional financing, the Company's ability
to maintain its current level of operations would be materially and adversely
affected and the Company will be required to reduce or eliminate certain
expenditures, including its research and development activity with respect to
certain proposed products.
ENVIRONMENTAL LIABILITY
The Company has no known material environmental violations or assessments.
19
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and SFAS No. 123, "Accounting for Stock-Based
Compensation" in the Transition Period. As discussed in Note 1 to the financial
statements, the adoption of SFAS No. 121 and No. 123 did not have a material
effect on the Company's financial position, results of operations and cash
flows.
The Financial Accounting Standards Board issued SFAS No. 128, "Earnings per
Share," in February 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share, and is effective for financial statements issued
for periods ending after December 15, 1997. Earlier application is not
permitted. SFAS No. 128 requires the restatement of all prior-period earnings
per share data presented.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of its future financial performance.
However, from time to time, information provided by the Company or statements
made by its employees may contain "forward looking" information that involves
risks and uncertainties. In particular, statements contained in this Form 10-K
that are not historical facts (including, but not limited to, statements
contained in "Item 1. Business" relating to the Company's strategy with respect
to the development and marketing of the Company's products and to statements
contained in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to liquidity and capital
resources) constitute forward looking statements and are made under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results of operations and financial condition have varied and
may in the future vary significantly from those stated in any forward looking
statements. Factors that may cause such differences include, without limitation,
the risks, uncertainties and other information discussed within this Form 10-K,
as well as the accuracy of the Company's internal estimates of revenue and
operating expense levels.
The following discussion of the Company's risk factors should be read in
conjunction with the financial statements and related notes thereto. The
following factors, among others, could cause actual results to differ materially
from those contained in forward looking statements contained or incorporated by
reference in this report and presented by management from time to time. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
History of Losses; Anticipation of Future Losses. The Company has incurred
operating losses since its inception and has an accumulated deficit of
$24,315,191 as of December 31, 1996. The Company incurred a net loss of
$4,306,140 for the Transition Period ended December 31, 1996, as compared with a
net loss of $1,809,816 for the same period ended December 31, 1995. The Company
incurred a net loss of $5,097,419 for the fiscal year ended June 30, 1996,
compared with a net loss of $3,042,383 for the fiscal year ended June 30, 1995.
Such losses have resulted principally from expenses incurred in research and
development and from general and administrative costs associated with the
Company's development efforts. The continued development of the Company's
products will require the commitment of substantial resources to conduct further
development and preclinical and clinical trials, and to establish manufacturing,
sales, marketing, regulatory and administrative capabilities. In addition, the
Company's recently acquired subsidiary, Able, has incurred net operating losses
in the past. The Company expects to provide its Able subsidiary with working
capital during the foreseeable future until Able can become self-supporting. The
Company expects to incur substantial operating losses over the next several
years as its product programs expand, various clinical trials commence and
marketing efforts are launched. The amount of net losses and the time required
by the Company to reach sustained profitability are highly uncertain and to
achieve profitability, the Company must, among other things, successfully
complete development of its products, obtain regulatory approvals, and establish
manufacturing and marketing capabilities by itself or with third parties. There
is no assurance that the Company will ever generate substantial revenues or
achieve profitability.
20
Future Capital Needs; Uncertainty of Additional Funding. It is anticipated
that the Company will continue to expend significant amounts of capital to fund
its research and development, clinical trials and generic pharmaceutical
business and the proposed acquisition of Superior. The Company's available
working capital is inadequate for completion of the Company's development
programs, and additional financing will be necessary for the continued support
of the Company's proposed products and operations, including the establishment
of manufacturing, marketing and distribution capabilities for its proposed
products and the continued operations of Able. There can be no assurance that
the Company will be able to secure additional financing or that such financing
will be available on favorable terms. If the Company is unable to obtain such
additional financing, the Company's ability to maintain its current level of
operations would be materially and adversely affected and the Company will be
required to reduce its overall expenditures including its research and
development activity with respect to certain proposed products.
In addition, the Company will require additional financing to fund the
proposed Superior acquisition and a line of credit to fund Superior's
operations. There can be no assurance that the Company will be able to secure
such financing or line of credit or that such financing or line of credit will
be available on favorable terms. If the Company is unable to obtain such
financing or line of credit, it will be unable to close the Superior
acquisition.
Uncertainties Related to NicErase-SL. Under applicable law, the Company will
not be permitted to sell NicErase-SL, and thus generate any revenue from its
development of NicErase-SL, unless it obtains the necessary regulatory approvals
from the FDA for the commercial sale of that product. To obtain such regulatory
approvals, the Company must demonstrate to the satisfaction of the FDA, through
preclinical studies and clinical trials, that NicErase-SL is safe and effective.
Although the results of the Company's pilot Phase 3 clinical trials were
encouraging, they do not necessarily indicate, and they do not guarantee, that
the results of the ongoing multi-center Phase 3 clinical trial will be favorable
to the Company. Nor do the results obtained in the small-scale pilot tests
completed by the Company to date necessarily indicate that the Company will
ultimately succeed in obtaining FDA approval for the commercial sale of
NicErase-SL. The results from preclinical studies and early clinical trials may
not be predictive of results that will be obtained in large-scale testing, and
there can be no assurance that the Company's clinical trials will demonstrate
sufficient safety and efficacy to obtain the requisite regulatory approvals or
will result in marketable products. A number of companies in the pharmaceutical
industry have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. If NicErase-SL is not shown to be
safe and effective in either current ongoing, or any future clinical trials, and
if the Company is thus unable to commercialize NicErase-SL it would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Integration of Able and Superior Acquisitions. In August 1996, the Company
acquired certain assets of Able, and in March 1997, the Company signed an
agreement to purchase all of the outstanding shares of Superior. There can be no
assurance that the anticipated benefits from the Able acquisition or the
proposed Superior acquisition will be realized. Additionally, there can be no
assurance that the Company will be able to effectively market the existing Able
products, that it will obtain FDA approval to market additional generic drugs or
that it will be successful in managing the combined operations. The integration
of Able and Superior requires substantial attention from management, many of
whom have limited experience in integrating acquisitions. The diversion of
management's attention, the process of integrating the businesses and any
difficulties encountered in the transition process could cause an interruption
of business, and could have a material adverse effect on the Company's
operations and financial performance.
Risks Associated with Managing a Changing Business. The Company has begun to
expand its business focus from being a development and licensing company to
building a diversified healthcare company focused on the manufacture and
distribution of generic drug products as well as the continued development of
therapeutic and diagnostic products. In order to achieve this expansion, the
Company must undergo substantial changes in its operations, which may
significantly strain the Company's limited administrative, operational and
financial resources. The ability of the Company to achieve its business
objectives will depend in large part on its ability to build and expand its
manufacturing operations and sales and marketing capabilities, to generally
expand its operational capabilities and its
21
financial and management information systems, to develop the management skills
of its managers and supervisors and to train, motivate and manage both its
existing employees and the additional employees that will be required if the
Company is to expand its business. There can be no assurance that the Company
will succeed in developing all or any of these capabilities, and any failure to
do so would have a material adverse effect on the Company's business, financial
condition and results of operations.
Future Acquisitions. Management may from time to time consider other
acquisitions of assets, businesses or technologies that will enable the Company
to acquire complementary skills and capabilities, offer new products, expand its
customer base or obtain other competitive advantages. There can be no assurance
that the Company will be able to successfully identify suitable acquisition
candidates, obtain financing on satisfactory terms, complete acquisitions,
integrate acquired operations into its existing operations or expand into new
markets. Acquisitions may result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, and amortization
expense related to intangible assets acquired, any of which could materially
adversely affect the Company's business and results of operations. Acquisitions,
including the Company's recent acquisition of Able and the proposed purchase of
Superior, involve a number of potential risks, including difficulties in the
assimilation of the acquired company's operations and products, diversion of
management's resources, uncertainties associated with operating in new markets
and working with new employees and customers, and the potential loss of the
acquired company's key employees. There can also be no assurance that the Able
acquisition, the proposed Superior acquisition and future acquisitions, if any,
will not have a material adverse effect upon the Company's business and results
of operations. Once integrated, acquired operations may not achieve levels of
revenues, profitability or productivity comparable to those achieved by the
Company's existing operations, or otherwise perform as expected.
Limited Manufacturing Capability and Experience. The Company's NicCheck,
MycoDot and MycoAKT products are currently made by licensed manufacturers. The
Company intends to enter into licenses, joint venture and similar collaborative
arrangements with third parties for the manufacture of other proprietary
products and proposed products. There are no other such agreements and there can
be no assurance that the Company will be successful in securing manufacturing
agreements for its products or that such agreements will prove to be on terms
favorable to the Company. In addition, the Company's dependence upon third
parties for the manufacture of its products and proposed products could have an
adverse effect on the Company's profitability and its ability to deliver its
proposed products on a timely and competitive basis. To the extent that the
Company attempts to manufacture any of its products, there can be no assurance
that the Company will be able to attract and retain qualified manufacturing
personnel, or build or rent manufacturing facilities.
The Company's generic therapeutic products are manufactured at its Able
Laboratories facility in South Plainfield, New Jersey. In order to maintain
compliance with FDA GMP standards, the Company will have to make significant
investments in its infrastructure and plant facility. The Company will need to
raise capital to finance these investments and there can be no assurance that
the Company will be able to obtain such financing or that such financing will be
available on favorable terms. There can be no assurance that such capital
expenditures and overhead costs will not have a material effect upon the
Company's ability to achieve profitability. There can be no assurance that the
Company will retain the key employees it acquired in the Able acquisition.
Limited Commercialization of Proprietary Products. The Company has
commercially introduced and is currently marketing through distributors only two
of its proprietary products, yielding limited revenues from the sale of these
products. Historically, substantially all of the Company's revenues had been
generated from research and development contracts and license fees. The
Company's ability to achieve profitability will depend on its ability to develop
and introduce commercially viable products, obtain regulatory approvals for
these products and either successfully manufacture, market and distribute such
products on its own or enter into collaborative agreements for product
manufacturing, marketing and distribution. Many of the Company's proposed
therapeutic and diagnostic products will require substantial further
development, preclinical and clinical testing, and investment by the Company or
third party licensees in manufacturing, marketing and sales infrastructures
prior to their commercialization. No assurance can be given that the Company's
development efforts will be successfully completed, that regulatory approvals
will be obtained, or that these products, once introduced, will be successfully
marketed.
22
Early Stage of Product Development. Several of the Company's proposed
products, including its specialty pharmeceuticals, OrthoDyn, the breast biopsy
technology being licensed from BioLoc and the bacterial extract for treatment of
infectious diseases, are at an early stage of development. The Company does not
expect that its early stage products will be available for a significant number
of years, if at all. The early stage products will require significant research
and development, and potential products that appear to be promising at early
stages of development may not reach the market for a number of reasons.
Potential products may be found ineffective or cause harmful side effects during
preclinical testing or clinical trials, fail to receive necessary regulatory
approvals, be difficult to manufacture on a large scale, be uneconomical to
produce, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. There can be no
assurance that the Company's or its collaborative partners' product development
efforts will be successfully completed, that required regulatory approvals will
be obtained or that any products, if introduced, will be successfully marketed
or achieve customer acceptance.
Lack of Marketing Experience. The Company currently does not plan to market
its proprietary products directly and does not have adequate resources or
expertise to develop a substantial marketing organization and internal sales
force for these products. Since the Company does not have the financial or other
resources to undertake extensive direct marketing activities, the Company
intends to enter into marketing arrangements with third parties, including
possible joint venture, license or distribution arrangements. While the Company
intends to license its products for manufacture and sale to established health
care or pharmaceutical companies, it has had very limited success in its efforts
to enter into such agreements to date. There can be no assurance that the
Company will be able to locate collaborative partners or that these strategic
alliances, if consummated, will prove successful.
With respect to the Company's generic therapeutic products, there can be no
assurance that present and potential customers of Able will continue their
recent buying patterns without regard to the Able acquisition, and any
significant delay or reduction in orders could have a material adverse effect on
the Company's near-term business and results of operations.
Regulation by Government Agencies. The Company's research, preclinical
development, clinical trials, manufacturing and marketing of its proposed
products are subject to extensive regulation by numerous governmental
authorities in the United States (including the FDA), and other equivalent
foreign regulatory authorities. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive. There can be no assurance that
the Company will be able to obtain the necessary approvals for clinical testing
or for the manufacturing or marketing of its proposed products. Further,
additional governmental regulation may be established which could prevent or
delay regulatory approval of the Company's products. The regulatory process may
delay for long periods, and ultimately prevent, marketing of new products or
impose costly procedures that would have a material adverse effect on the
Company's business. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
The Company's success in the generic drug market depends, in part, on its
ability to obtain FDA approval of ANDAs for its new products, as well as its
ability to procure a continuous supply of raw materials and to validate the
manufacturing processes used to produce consistent test batches for FDA
approval. Sources for certain materials for the Company's products must be
approved by the FDA, and in many instances only one source has been approved. If
raw materials from a specified supplier were to become unavailable, the Company
would be required to file a supplement to its ANDA and revalidate the
manufacturing process using a new supplier's materials. This could cause a delay
of several months in the manufacture of the drug involved and the consequent
loss of potential revenue and market share. Additionally, there is often a time
lag, sometimes significant, between the receipt of ANDA approval and the actual
marketing of the approved product due to this validation process.
The Able Laboratories facility is subject to plant inspections by the FDA to
determine compliance with GMP standards. The Company could be subject to fines
and sanctions such as the suspension of manufacturing or the seizure of drug
products if it were found to be in non-compliance with GMP standards.
23
Rapid Technological Advances and Competition. The therapeutic and diagnostic
markets in which the Company competes have undergone and can be expected to
continue to undergo rapid and significant technological advances. There can be
no assurance that the technological developments of others will not render the
Company's technology or products incorporating such technology either
uneconomical or obsolete. The Company competes with a number of specialized
biotechnology companies and major pharmaceutical companies. Most of these
companies have substantially greater financial, technical and human resources
and research and development staffs and facilities, as well as substantially
greater experience in conducting clinical trials, obtaining regulatory
approvals, and manufacturing and marketing products than does the Company. There
can be no assurance that the Company's products or proposed products will be
able to compete successfully.
In addition, with its newly acquired generic product line, the Company is
now competing in a new market with off-patent drug manufacturers, brand-name
pharmaceutical companies that manufacture off-patent drugs, the original
manufacturers of brand-name drugs and manufacturers of new drugs that may be
used for the same indications as the Company's products. There is no assurance
that the Company will compete successfully in this market. Revenues and gross
profit derived from generic pharmaceutical products tend to follow a pattern
based on regulatory and competitive factors unique to the generic pharmaceutical
industry. As patents for brand name products and related exclusivity periods
mandated by regulatory authorities expire, the first generic manufacturer to
receive regulatory approval for generic equivalents of such products is usually
able to achieve relatively high revenues and gross profit. As other generic
manufacturers receive regulatory approvals on competing products, prices and
revenues typically decline. Accordingly, the level of revenues and gross profit
attributable to generic products developed and manufactured by the Company is
dependent, in part, on its ability to develop and introduce new generic
products, the timing of regulatory approval of such products, and the number and
timing of regulatory approvals of competing products. In addition, competition
in the United States generic pharmaceutical market continues to intensify as the
pharmaceutical industry adjusts to increased pressures to contain health care
costs. Brand name companies are increasingly selling their products into the
generic market directly by acquiring or forming strategic alliances with generic
pharmaceutical companies. No regulatory approvals are required for a brand name
manufacturer to sell directly or through a third party to the generic market,
nor do such manufacturers face any other significant barriers to entry into such
market. These competitive factors may have a material adverse effect on the
Company's ability to sell its generic products.
Dependence on Patents and Proprietary Technology. The Company owns certain
patents and has applied for other patents relating to its technology and
proposed products. No assurance can be given, however, whether pending patent
applications will be granted or whether any patents granted will be enforceable
or provide the Company with meaningful protection from competitors. Even if a
competitor were to infringe the Company's patents, the costs of enforcing its
patent rights may be substantial or even prohibitive. In addition, there can be
no assurance that the Company's proposed products will not infringe the patent
rights of others. The Company may be forced to expend substantial resources if
the Company is required to defend against any such infringement claims. The
Company also may desire or be required to obtain licenses from others in order
to further develop, produce and market commercially viable products effectively.
There can be no assurance that such licenses will be obtainable on commercially
reasonable terms, if at all, that the patents underlying such licenses will be
valid and enforceable or that the proprietary nature of the unpatented
technology underlying such licenses will remain proprietary. The Company also
relies on unpatented proprietary know-how and trade secrets, and employs various
methods including confidentiality agreements with employees, consultants,
manufacturing and marketing partners to protect its trade secrets and know-how.
However, such methods may not afford complete protection and there can be no
assurance that others will not independently develop such trade secrets and
know-how or obtain access thereto.
The manufacture and sale of certain products developed by the Company will
involve the use of processes, products or information, the rights to certain of
which are owned by others. Although the Company has obtained licenses with
regard to the use of certain such processes, products and information, there can
be no assurance that such licenses will not be terminated or expire during
critical periods, that the Company will be able to obtain licenses for other
rights which may be important to it, or, if obtained, that such licenses will be
obtained on commercially reasonable terms. If the Company is unable to obtain
such licenses, the Company may have to develop
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alternatives to avoid infringing patents of others, potentially causing
increased costs and delays in product development and introduction, or
precluding the Company from developing, manufacturing or selling its proposed
products. Additionally, there can be no assurance that the patents underlying
any licenses will be valid and enforceable. To the extent any products developed
by the Company are based on licensed technology, royalty payments on the
licenses will reduce the Company's gross profit from such product sales and may
render the sales of such products uneconomical.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and related Independent
Auditors' Report are presented in the following pages. The financial statements
filed in this Item 8 are as follows:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets -- December 31, 1996 and June 30, 1996 and
1995
Consolidated Statements of Loss -- Six Months Ended December 31, 1996 and
1995 and Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity -- Six Months
Ended December 31, 1996 and Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -- Six Months Ended December 31,
1996 and 1995 and Years Ended June 30, 1996, 1995 and 1994