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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND SPECIAL REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 0-25544
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PDT, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0222872
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
7408 HOLLISTER AVENUE, SANTA BARBARA, CALIFORNIA 93117
(Address of principal executive offices, including zip code)
(805) 685-9880
(Registrant's telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of voting stock held by
non-affiliates as of March 14, 1997, based upon the last sale price of the
Common Stock reported on the Nasdaq National Market was approximately
$228,223,000. For purposes of this calculation only, the registrant has
assumed that its directors and executive officers, and any person who has
filed a Schedule 13D or 13G is an affiliate.
The number of shares of Common Stock outstanding as of March 14, 1997
was 12,382,656.
ITEM 1. BUSINESS
GENERAL
PDT, Inc. (the "Company") is engaged in the development of
pharmaceutical and medical device products for use in photodynamic therapy.
Photodynamic therapy is a medical procedure which uses light-activated
(photoreactive) drugs to achieve selective photochemical destruction of
diseased cells. The Company believes that photodynamic therapy has the
potential to be a safe, cost-effective, minimally invasive primary or
adjunctive treatment for indications in a broad number of disease areas
including oncology, ophthalmology, urology, dermatology, gynecology and
cardiology. The Company is conducting Phase II/III clinical trials for three
indications in the oncology area; has initiated a Phase I/II clinical trial
in ophthalmology, is preparing to initiate additional Phase I/II clinical
trials in the urology, oncology and dermatology areas; and is conducting
preclinical studies in oncology, ophthalmology, urology, dermatology,
gynecology and cardiology. All of the Company's clinical trials are testing
its leading drug candidate: tin ethyl etiopurpurin ("SnET2"). The Company is
developing products in collaboration with its corporate partners, Pharmacia &
Upjohn, Inc. ("Pharmacia & Upjohn"), Boston Scientific Corporation ("Boston
Scientific"), Cordis Corporation, a Johnson & Johnson company ("Cordis"),
Iridex Corporation ("Iridex") and Ramus Medical Technologies ("Ramus").
In April 1996, the Company completed a secondary public offering of
1,500,000 shares of Common Stock which provided net proceeds to the Company
of approximately $65.3 million.
In July 1996, the Company's Board of Directors authorized the purchase
of up to 600,000 shares of the Company's Common Stock. During 1996, the
Company repurchased 138,500 shares at a cost of $3,948,000 under this
repurchase program. As of December 31, 1996, all shares repurchased were
retired.
BACKGROUND
Photodynamic therapy is a minimally invasive medical technology that
uses photoreactive drugs to treat or diagnose disease. The technology
involves three components: photoreactive drugs, light producing devices and
light delivery devices.
Photoreactive drugs transform light energy into chemical energy in a
manner similar to the action of chlorophyll in green plants. Certain
photoreactive drugs accumulate and are retained to a greater degree in
fast-growing (hyperproliferating) cells. Hyperproliferation is a
characteristic of cells associated with a variety of diseases such as cancer,
certain cardiovascular disorders and skin diseases such as psoriasis.
A photoreactive drug is typically administered by intravenous injection
and distributes throughout the body. After several hours, the drug starts to
clear from normal tissues but is selectively retained in hyperproliferating
tissues for up to several days. The drug is inactive until exposed to light
of a specific wavelength, which can vary depending on the drug's molecular
structure. Exposing the target cells to the appropriate light wavelength
permits selective activation of the retained drug and initiates a chemical
reaction that generates a highly reactive form of oxygen. High concentrations
of this form of oxygen lead to destruction of the cellular membrane and,
ultimately, cell death. The response of the target cells depends on, among
other factors, the drug dose, the amount of light energy delivered, the
physiology of the cell and the vasculature in the diseased areas. Neither the
drug nor the light on its own can cause the desired effect. The drug is a
catalyst which transfers energy and is not consumed in the process, thereby
reducing potential side effects. The chemical reaction stops when the light
is turned off. The result of this process is that diseased cells are
destroyed with minimal damage to surrounding normal tissues, offering the
potential for a more selective method of treating disease than chemotherapy,
radiation therapy or surgery, which can damage both normal and abnormal
tissues.
Low-power, non-thermal light can be used to activate photoreactive
drugs. As a result, there is little or no risk of thermal damage to
surrounding tissue, as would be the case if thermal lasers were used. The
light is
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typically generated electronically or by lasers which have been specifically
modified for use in photodynamic therapy. The light is often delivered from
the light source to the patient via specially modified fiber optics. These
fiber optic light delivery devices produce patterns of light for different
disease applications and can be channeled into the body for internal
applications.
Photodynamic therapy may be applied in two ways: (i) DRUG SELECTIVITY -
hyperproliferating cells such as in a cancer tumor can be selectively
destroyed by allowing the photoreactive drug to clear from non-target cells
before delivering light to the general area; and (ii) LIGHT SELECTIVITY - in
conditions such as certain eye disorders, tissues can be selectively
destroyed by precisely delivering the light to discrete areas before the drug
has cleared. This flexibility gives photodynamic therapy its potential in
many different medical applications.
While light of a specific wavelength is used to cause a photoreactive
drug to produce chemical reactions leading to cell death, light of a
different wavelength can be used to cause the same drug to fluoresce (glow).
The fluorescent property of photodynamic drugs offers the potential for their
use in diagnostic applications.
INDUSTRY
As early as 1900, scientists observed that certain compounds will
sensitize tissues to light. Since the mid-1970s, various aspects of
photodynamic therapy have been studied and established in humans.
Photodynamic therapy is currently being studied by a variety of companies,
physicians and researchers around the world for the treatment of a broad
range of cancers and non-cancer applications.
Photodynamic therapy has potential advantages over traditional treatment
methods such as chemotherapy, radiation therapy and surgery. Photodynamic
therapy offers the potential for more selective treatment of disease with
fewer side effects. The fact that photoreactive drugs are retained in
hyperproliferating tissues and are non-toxic until activated by light allows
for selective and controlled treatment. Additionally, since the activating
light offers a less invasive and less debilitating alternative to surgery,
the Company believes that photodynamic therapy may result in less trauma to
the patient. Further, the Company believes that photodynamic therapy for many
applications may be performed on an outpatient basis or in an office setting,
reducing if not eliminating the need for hospitalization. These potential
advantages may make photodynamic therapy a less costly alternative to
traditional treatment methods.
The Company believes that, despite the potential benefits of
photodynamic therapy, industry development has been hindered by various
drawbacks. First, certain formulations of photoreactive drugs are complex
mixtures derived from blood or plant sources which, in contrast to synthetic
drugs, vary in both content and concentration and may yield inconsistent
results. Second, photodynamic therapy with some drugs produces a temporary
photosensitivity (sensitivity to light) requiring patients to restrict
exposure to sunlight for up to several weeks following treatment. Third,
light wavelengths used to activate certain other photodynamic drugs require
large, expensive, difficult-to-maintain research or surgical lasers that have
been adapted to produce the low-power activating light.
The Company believes that the lack of an integrated approach to
photodynamic therapy has slowed the development of the technology in clinical
settings. The development of photodynamic therapy has historically been
pursued by companies with either drug or device technology, but not both.
Light systems and light delivery devices were supplied by outside sources;
therefore, developers were often unable to fully coordinate the three
components of drug, light producing devices and light delivery devices.
BUSINESS STRATEGY
The Company's objective is to apply its photodynamic therapy
systems--combining drug, light producing devices and light delivery devices--
as a primary therapy in targeted disease areas and as an adjunct to surgery
or other therapies. The Company believes that its systems have the potential
to offer a safe, cost-effective and
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minimally-invasive alternative therapy for numerous diseases for which
current treatments are either unsatisfactory or do not exist. Key elements of
the Company's strategy to achieve commercialization include:
INTEGRATION OF PHOTOREACTIVE DRUGS, LIGHT PRODUCING DEVICES AND LIGHT
DELIVERY DEVICES. The Company's strategy is to integrate each component of
photodynamic therapy into systems that offer predictable and consistent
results. The Company believes that by being expert in both photodynamic drugs
and devices and by integrating the development of these technologies, the
Company may create competitive advantages over companies that are developing
certain components of photodynamic therapy while outsourcing others. For
example, integration affords the Company the opportunity to pursue regulatory
approval for its drug products together with its devices through unified
clinical trials.
FOCUS ON DISEASE APPLICATIONS WITH UNMET MEDICAL NEEDS. Although the
potential applications for the Company's photodynamic therapy systems are
numerous, the Company is initially targeting high-incidence diseases or
diseases that are serious or life-threatening and for which there is no
satisfactory alternative treatment. By doing so, the Company believes it may
be able to accelerate regulatory processes where appropriate and facilitate
commercial success.
EXCLUSIVE COLLABORATIONS WITH INDUSTRY-LEADING PHARMACEUTICAL AND
MEDICAL DEVICE COMPANIES. To facilitate development, regulatory approval,
manufacturing, marketing and distribution of its products, the Company seeks
to form strategic collaborations with partners who are leaders in the
Company's targeted disease areas. To date, the Company has established
collaborative arrangements with Pharmacia & Upjohn related to SnET2, with
Boston Scientific and Cordis related to the development of medical catheters
for the delivery of light, with Iridex related to the development of diode
light devices in the field of ophthalmology and with Ramus related to the
development of the Company's and Ramus' technology for use in photodynamic
therapy in the field of cardiovascular disease. The Company seeks to obtain
from its collaborative partners exclusivity in the field of photodynamic
therapy and to retain certain manufacturing and co-development rights. See
"--Strategic Collaborations."
There can be no assurance that the Company will be successful in
pursuing its strategy or that its goals will be achieved. See "--Risk
Factors" generally for a discussion of certain risks, including those
relating to forward-looking statements.
TECHNOLOGY AND PRODUCTS
The Company is developing synthetic photoreactive drugs together with
software-controlled desktop light producing devices and fiber optic light
delivery and measurement devices for the application of photodynamic therapy
to a broad range of disease indications. The Company believes that by being
expert in both photodynamic drugs and devices, and by integrating the
development of these technologies, it can produce easy-to-use photodynamic
therapy systems which offer the potential for predictable and consistent
results.
DRUG TECHNOLOGY. The Company holds exclusive license rights under
certain U.S. patents and three foreign patents to several classes of
synthetic, photoreactive compounds, subject to certain governmental rights.
See "--Patents and Proprietary Technology." From its classes of compounds,
the Company has selected SnET2 as its leading drug candidate and has used
SnET2 in each of its clinical trials to date. The Company has granted to
Pharmacia & Upjohn an exclusive, worldwide license to use SnET2 in the field
of photodynamic therapy. See "--Strategic Collaborations" and "--Risk
Factors, Uncertainty Regarding Patents and Proprietary Technology." The
Company is developing other potential photoreactive drugs for additional
disease applications and future partnering opportunities.
The Company believes that its synthetic photoreactive drugs may provide
the following benefits:
- PREDICTABLE. The synthetic nature of the Company's photoreactive
compounds permits the Company to design drugs with a single molecular
structure. The Company believes that this characteristic may
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facilitate consistency in clinical treatment settings, as well as
predictability in manufacturing and quality control.
- MINIMAL SIDE EFFECTS. Phase I/II clinical trials with SnET2 have
demonstrated therapeutic response with minimal side effects. Treatments to
date have been well-tolerated, with SnET2 producing only a mild, transient
skin photosensitivity in some patients as compared to the relatively severe
and long-lasting photosensitivity produced by certain other photoreactive
drugs.
- VERSATILE. The Company can design drugs with specific
characteristics, such as activation by a particular wavelength of light. This
versatility provides the Company with the potential to customize its drugs
for particular uses and to take advantage of semiconductor light technology.
See "--Risk Factors" for a discussion of certain risks, including those
relating to forward-looking statements.
LIGHT PRODUCING DEVICES. Because the Company's photoreactive drugs are
synthetic, the Company has been able to design its drugs to be activated by
light produced by readily available, reliable and relatively inexpensive
light sources. The Company's light technologies include software-controlled
microchip diodes, LED arrays and non-thermal lasers. The Company's desktop
diode light was introduced into the Company's clinical trials in 1995. The
Company has also developed LED arrays for use in dermatological and other
applications of photodynamic therapy. The Company and Iridex are
collaborating on the development of light-producing devices for photodynamic
therapy in the field of ophthalmology and have introduced a portable, solid
state diode light device which is currently being used in clinical trials.
See "--Strategic Collaborations."
The Company believes that its diode and LED array devices offer
advantages over laser technology historically used in photodynamic therapy.
For example, the Company's software-controlled designs offer reliability and
built-in control and measuring features. In addition, the Company's diode
systems, which are roughly the size of a desktop computer, are smaller and
more portable than traditional laser systems. The Company believes that it
has the potential to offer light producing devices that will be more
affordable than surgical laser systems used in photodynamic therapy. See
"--Risk Factors" for a discussion of certain risks, including those relating
to forward-looking statements.
LIGHT DELIVERY AND MEASUREMENT DEVICES. The Company is developing and
manufacturing photodynamic light delivery and measurement devices including a
wide variety of fiber optic light delivery devices with specialized tips for
use in photodynamic therapy. These devices must be highly flexible and
appropriate for endoscopic use, and must be able to deliver unique patterns
of uniform, diffuse light for different disease applications. The Company's
products include microlenses that produce a tiny flashlight beam for discrete
surface lesions, the Flex-Registered Trademark- cylinder diffuser which
delivers light in a radial pattern along a flexible tip for sites such as the
esophagus and spherical diffusers which emit a diffuse ball of light for
sites such as the bladder or nasopharynx. The Company has also developed
light measurement devices for photodynamic therapy including devices that
detect wavelength and fluorescence to facilitate the measurement of light or
drug dose.
Through collaborative arrangements with Boston Scientific and Cordis,
the Company is co-developing medical catheters for use in photodynamic
therapy. The Company and Boston Scientific are collaborating in the fields of
urology, pulmonology and gastroenterology. The Company plans to introduce
certain of these catheters into its clinical studies of benign prostatic
hyperplasia ("BPH") subject to U.S. Food and Drug Administration ("FDA")
concurrence. The Company and Cordis are co-developing, and currently testing
in preclinical studies, catheters for use in photodynamic therapy of
cardiovascular conditions such as the prevention of restenosis. The Company
has secured or applied for patent protection relating to its light delivery
and measurement devices. Certain of these patents or patent applications are
subject to certain governmental rights. See "--Patents and Proprietary
Technology" and "--Risk Factors" generally for a discussion of certain risks,
including those relating to forward-looking statements.
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TARGETED DISEASES AND CLINICAL TRIALS
The Company believes that photodynamic therapy has potential in a wide
range of applications. The Company has selected, based upon regulatory,
clinical and market considerations, a number of disease applications,
discussed below, on which to focus initially. In all of its clinical trials,
the Company is using SnET2 together with light producing devices and light
delivery devices either developed on its own or in collaboration with its
partners.
All drug and device products currently under development by the Company
will require extensive preclinical and clinical testing prior to regulatory
approval for commercial use. None of the Company's products have completed
such testing for efficacy and safety in humans. There can be no assurance
that such testing for any of the Company's products under development now or
in the future, will be commenced or successfully completed within any period
of time, if at all, or that such testing, if completed, will demonstrate that
SnET2 or any other of the Company's products is safe or efficacious.
Specifically with respect to the indications discussed below, it is
uncertain that the application of the Company's products in any of such
indications will progress beyond its current state of development, receive
regulatory approval, be successfully marketed and distributed, or that the
Company will have the financial resources to pursue any such application or
indication. Any clinical data reported by the Company from time to time may
change as a result of the continuing evaluation of patients. Moreover, as a
result of changing market, clinical or regulatory conditions, or clinical
trial results, the Company's focus may shift to other indications, or it may
be determined not to further pursue one or more of the indications discussed
below. See "--Risk Factors--Unproven Safety and Efficacy; Clinical Trials";
and "--Early Stage of the Company and its Products." See "--Risk Factors"
generally for a discussion of certain other risks, including those relating
to forward-looking statements.
ONCOLOGY
Cancer is a large group of diseases characterized by uncontrolled growth
and spread of hyperproliferating cells. The Company targeted this area for
its initial products both because of the large potential market size as well
as the potential for expedited review by governmental regulatory bodies. The
Company is collaborating with Pharmacia & Upjohn on the co-development of
SnET2 in the field of oncology.
BASAL CELL CARCINOMA AND METASTATIC BREAST CANCER. The Company is
conducting clinical trials using SnET2 for the local treatment of certain
nonmelanoma cutaneous (skin) carcinomas. The skin cancer trial includes basal
cell carcinomas (skin cancers caused primarily by sun exposure), basal cell
nevus syndrome (a genetic disease which causes multiple, recurrent basal cell
carcinomas), and metastatic adenocarcinomas (cancers which originate in
glands, such as breast cancer, and in this trial have metastasized or spread
to the skin). The Company began Phase II/III clinical trials for metastatic
breast cancer involving the skin in the United States in March 1996 and
Pharmacia & Upjohn began Phase II clinical trials in Europe in January
1997. The Company also began Phase II/III clinical trials for basal cell
carcinoma in the United States and Pharmacia & Upjohn began Phase II/III
clinical trials in Australia in 1996. There can be no assurance that
successful completion of Phase II/III clinical trials will occur within any
specified period of time, if at all.
AIDS-RELATED KAPOSI'S SARCOMA. Kaposi's sarcoma ("KS") is a form of
skin cancer, usually involving multiple tumors. The most aggressive and
prevalent type of KS is the variety usually associated with AIDS. The Company
is conducting clinical trials using SnET2 for the local treatment of
AIDS-related KS. The Company began Phase II/III clinical trials for
AIDS-related KS in March 1996.
OTHER CANCERS. The Company is conducting preclinical studies for the
treatment of a variety of other cancers including prostate cancer, lung
cancer, brain tumors and head and neck cancers. The Company has an existing
oncology IND which it may utilize for those protocols, if any, it determines
to advance to a Phase I/II clinical trial. The timing of any such
advancement will depend on the progress of preclinical studies.
OPHTHALMOLOGY. The Company believes that photodynamic therapy has the
potential to treat a variety of ophthalmic disorders, including conditions
caused by neovascularization, such as age-related macular degeneration ("AMD")
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and diabetic retinopathy, as well as other ophthalmic conditions, including
glaucoma. Neovascularization is a condition in which new blood vessels grow
abnormally on the surface of the retina or other parts of the eye. These
fragile vessels can hemorrhage, causing scarring and damage to the nerve
tissue and lead to loss of vision. The Company is collaborating with
Pharmacia & Upjohn on the co-development of SnET2 in the field of
ophthalmology and is collaborating with Iridex on the co-development of light
devices in this field. The Company is conducting clinical trials for the
treatment of choroidal neovascularization including AMD. The Company began
Phase I/II clinical trials for AMD in the United States in May 1996 and is
conducting preclinical studies for the treatment of diabetic retinopathy and
glaucoma.
UROLOGY
BPH is a urological disorder characterized by a gradual enlargement of
the prostate, a gland in men which surrounds the urethra. As men age, the
prostate gland increases in size and pinches the urethra, leading to
complications in urination and other debilitating symptoms. The Company is
collaborating with Pharmacia & Upjohn on the co-development of SnET2 in the
field of urology. Additionally, the Company is conducting preclinical studies
using SnET2 for the treatment of BPH and is collaborating with Boston
Scientific on the joint development of medical catheter devices for this use.
Based on the results from these studies, the Company submitted an
Investigational New Drug application ("IND") to enter into Phase I/II
clinical trials.
DERMATOLOGY
A number of dermatologic disorders have shown potential for being
treated with photodynamic therapy. Among these are psoriasis, a chronic and
potentially debilitating skin disorder, and actinic keratosis, a precancerous
condition of the upper layer of the skin. The Company is collaborating with
Pharmacia & Upjohn on the co-development of SnET2 in the field of
dermatology. The first dermatology application targeted by the Company and
Pharmacia & Upjohn is psoriasis. The Company is continuing preclinical
studies in psoriasis and may advance to a Phase I/II clinical trial based on
the progress of the preclinical studies. Preparations include development of
LED light systems and light delivery systems for use in dermatology
applications and protocol development for anticipated clinical trials.
CARDIOLOGY
The Company is developing photodynamic therapy in the field of
cardiology. Early studies with photodynamic therapy indicate that certain
photoreactive drugs may be preferentially retained in the hyperproliferating
and lipid-rich components of arterial plaques, as they are in cancer cells.
The Company is conducting preclinical studies for the prevention of
restenosis (re-blocking of arterial vessels), and believes that photodynamic
therapy may provide a means of preventing restenosis, or even treating
diffuse atherosclerosis, without injury to the vessel. The Company is
collaborating with Cordis on the joint development of medical catheter
devices for such cardiovascular applications. In addition, the Company
believes that photodynamic therapy may provide a means of reducing intimal
hyperplasia (excessive cell growth at the anastamosis (stitch) sites)
associated with bypass grafts and is collaborating with Ramus on the
application of photodynamic therapy in the area of bypass grafts.
GYNECOLOGY
The Company believes that photodynamic therapy has potential in various
gynecological applications, including dysfunctional uterine bleeding which
accounts for a significant percent of all hysterectomies. The risks
associated with hysterectomy have prompted the development of alternatives
which allow destruction of the endometrial lining of the uterus rather than
surgical removal of the uterus. However, current techniques for such
endometrial ablation, such as the use of high-power laser or electrocautery,
are not entirely effective. The Company is therefore conducting preclinical
studies using photodynamic therapy as a method of endometrial ablation and
believes photodynamic therapy may be a non-surgical alternative to existing
techniques or hysterectomies.
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STRATEGIC COLLABORATIONS
The Company pursues a strategy of establishing license agreements and
collaborative arrangements for the purpose of securing exclusive access to
drug and device technologies and providing market access for products. The
Company intends to continue to pursue this strategy where appropriate in
order to enhance in-house research programs, facilitate clinical testing and
gain access to distribution channels and additional technology. Strategic
collaborations are not, however, without risks. See "--Risk
Factors--Reliance on Collaborative Partners" and "--Limited Manufacturing and
Marketing Capabilities and Experience." To date, the Company has entered
into the following collaborative arrangements:
PHARMACIA & UPJOHN
The Company has entered into a series of agreements with certain
subsidiaries of Pharmacia & Upjohn (collectively "Pharmacia & Upjohn")
relating to the development and commercialization of SnET2.
SNET2 LICENSE AGREEMENT. Under a July 1995 development and license
agreement (the "License Agreement"), the Company granted to Pharmacia &
Upjohn an exclusive, worldwide license to use, distribute and sell SnET2 in
the area of photodynamic therapy. The License Agreement provides for the
co-development of SnET2 for use in photodynamic therapy in the fields of
oncology, urology and dermatology. In August 1996, the Company signed an
agreement with Pharmacia & Upjohn for the co-development of SnET2 in the
field of ophthalmology with similar terms and conditions as the License
Agreement.
Under the License Agreement, Pharmacia & Upjohn is responsible for
conducting certain aspects of clinical trials involving SnET2 and to fund
other current and future preclinical and clinical trials conducted by the
Company involving SnET2. The Company is entitled to receive royalties on the
sale of SnET2, payments for certain contemplated indications upon the
achievement of certain milestones and reimbursement for certain expenses.
Pharmacia & Upjohn has also agreed to promote, market and sell SnET2 and to
refrain from developing or selling other photodynamic therapy drugs in the
fields of oncology, urology, dermatology and ophthalmology during the
agreement term. Pharmacia & Upjohn also has a right of first negotiation with
respect to the marketing rights to any new photodynamic therapy drug
developed in the fields of oncology, urology, dermatology and ophthalmology
by the Company. The License Agreement remains in force for the duration of
the patents related to SnET2 or for a period of ten years from the first
commercial sale of SnET2 on a country-by-country basis, whichever is longer.
After those periods have expired, Pharmacia & Upjohn will have an
irrevocable, royalty-free, nonexclusive license to SnET2. See "--Risk
Factors, Uncertainty Regarding Patents and Proprietary Technology" and
Note 7 of Notes to Consolidated Financial Statements.
STOCK PURCHASE AGREEMENT. Concurrent with the License Agreement,
Pharmacia & Upjohn entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement"), pursuant to which Pharmacia & Upjohn purchased 600,000
shares of Common Stock from the Company for $12 million, and agreed to
certain restrictions with respect to the acquisition and sale of shares of
the Common Stock, subject to certain exceptions.
DRUG SUPPLY AGREEMENT. The Company and Pharmacia & Upjohn have also
entered into a Drug Supply Agreement pursuant to which the Company agreed to
manufacture (or have manufactured) and supply to Pharmacia & Upjohn upon
specified payment terms Pharmacia & Upjohn's requirements of SnET2 in
finished pharmaceutical form for clinical and commercial purposes in the area
of photodynamic therapy. The Drug Supply Agreement was amended in 1996 to
include similar terms and conditions for the field of ophthalmology. The Drug
Supply Agreement remains in force for the term of the License Agreement,
subject to termination under certain limited circumstances. Upon termination,
the Company has agreed to continue to provide SnET2 to Pharmacia & Upjohn on
terms to be negotiated by the parties. See Note 7 of Notes to Consolidated
Financial Statements.
DEVICE SUPPLY AGREEMENT. The Company and Pharmacia & Upjohn also entered
into a Device Supply Agreement pursuant to which the Company appointed
Pharmacia & Upjohn as a non-exclusive worldwide distributor of certain
instruments developed, manufactured or licensed by the Company that produce,
deliver or
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measure light ("light devices") for use with SnET2 in photodynamic therapy in
the fields of oncology, urology and dermatology. The Device Supply Agreement
provides for the sale by the Company to Pharmacia & Upjohn of such light
devices at specified rates and the Company is responsible for the development
and regulatory approval of the light devices. During the term of the Device
Supply Agreement, Pharmacia & Upjohn is prohibited from developing ,
manufacturing or purchasing from third parties such light devices or
distributing or selling them for use with any photodynamic drug other than
SnET2. If, however, the Company determines not to or is unable to
manufacture or supply a particular light device, Pharmacia & Upjohn is
entitled to manufacture such device. The Device Supply Agreement was amended
in 1996 to include similar terms and conditions for the field of
ophthalmology. The Device Supply Agreement remains in force during the term
of the License Agreement, subject to earlier termination under certain
limited circumstances. See Note 7 of Notes to Consolidated Financial
Statements.
FORMULATION AGREEMENT. In August 1994, the Company entered into a
supply contract with Pharmacia & Upjohn to develop an emulsion formulation
suitable for intravenous administration of SnET2. Pursuant to this agreement,
Pharmacia & Upjohn agreed to (i) be the Company's exclusive supplier of such
emulsion products, (ii) manufacture and supply all of the Company's worldwide
requirements of certain emulsion formulations containing SnET2, and (iii)
not develop or supply formulations or services for use in any photodynamic
applications for any other company. This agreement continues indefinitely
except that it may be terminated ten years after the first commercial sale of
SnET2. See "--Manufacturing" and Note 7 of Notes to Consolidated Financial
Statements.
BOSTON SCIENTIFIC CORPORATION
In December 1993, the Company executed a strategic development letter
agreement with Boston Scientific, a leading developer, manufacturer and
marketer of catheter-based medical technology, for the joint development of
catheter-based light delivery devices for photodynamic therapy in the fields
of urology, pulmonology and gastroenterology. The letter agreement pursuant
to which the parties are collaborating is intended to provide the framework
for a more definitive agreement, relating to, among other things, the
distribution, manufacturing and licensing of developed products, and
continues until the parties enter into such an agreement. At this time,
however, the Company and Boston Scientific have not entered into any such
agreement. See "--Manufacturing" and Note 7 of Notes to Consolidated
Financial Statements.
CORDIS CORPORATION
In December 1993, the Company executed a strategic development letter
agreement with Cordis, a Johnson & Johnson company and a leader in coronary
catheter devices, for the joint development of catheter-based light delivery
devices for photodynamic therapy in the cardiovascular field.
The letter agreement pursuant to which the parties are collaborating is
intended to provide the framework for a more definitive agreement, relating
to, among other things, the distribution, manufacturing and licensing of
developed products, and continues until the parties enter into a definitive
agreement. At this time, the Company and Cordis have not entered into any
such agreement. See "--Manufacturing" and Note 7 of Notes to Consolidated
Financial Statements.
IRIDEX CORPORATION
In May 1996, the Company entered into a co-development and distribution
agreement with Iridex, a leading provider of semiconductor-based laser
systems to treat eye diseases. The agreement generally provides (i) the
Company with the exclusive right to co-develop with Iridex light-producing
devices for use in photodynamic therapy in the field of ophthalmology, (ii)
that the Company will conduct clinical trials and make regulatory
submissions with respect to all co-developed devices and Iridex will
manufacture all devices for such trials, with costs shared as set forth in
the agreement, and (iii) that Iridex will have an exclusive, worldwide
license to make, distribute and sell all co-developed devices, on which it
will pay royalties to the Company. The agreement
9
remains in effect, subject to earlier termination in certain circumstances,
until ten years after the date of the first FDA approval of any co-developed
device for commercial sale, subject to certain renewal rights. See
"--Manufacturing."
RAMUS MEDICAL TECHNOLOGIES
In December 1996,the Company's wholly owned subsidiary, PDT
Cardiovascular, Inc. ("PDTC"), entered into a co-development agreement with
Ramus, an innovator in the development of autologous tissue stent-grafts for
coronary bypass surgeries. Generally the agreement provides PDTC with the
exclusive rights to co-develop its photodynamic therapy technology with
Ramus' proprietary technology in the development of autologous vascular
grafts for coronary arteries and other vessels. Ramus shall provide, at no
cost to PDTC, products for use in preclinical and clinical testing with all
other preclinical and clinical costs to be paid by PDTC. The agreement
remains in effect until the later of (i) ten years after the date of the
first FDA approval of any co-developed device for commercial sale, or (ii)
the life of any patent issued thereon, subject to certain renewal rights.
In conjunction with the co-development agreement, PDTC purchased, for $2
million, shares of Ramus' Series A Preferred Stock and obtained an option to
acquire the remaining shares of Ramus at some time in the future under
specified terms and conditions. Further, PDTC is provided first refusal
rights and pre-emptive rights for any issuance of new securities, whether
debt or equity, made by Ramus and requires that Ramus maintain certain
financial and other covenants.
THE UNIVERSITY OF TOLEDO, THE MEDICAL COLLEGE OF OHIO AND ST. VINCENT MEDICAL
CENTER
In July 1989, the Company entered into a License Agreement with the
University of Toledo, the Medical College of Ohio and St. Vincent Medical
Center, of Toledo, Ohio (collectively, "Toledo"). This agreement provides the
Company with, among other items, exclusive, worldwide rights, subject to
certain governmental rights as described below: (i) to make, use, sell,
license or sublicense certain photoreactive compounds (including SnET2)
covered by certain Toledo patents and patent applications, or not covered by
such patents or patent applications but owned or licensed to Toledo (and
which Toledo has the right to sublicense); (ii) to make, use, sell, license
or sublicense certain of such compounds for which the Company has provided
Toledo with financial support; and (ii) to make, use or sell any invention
claimed in certain Toledo patents or applications and any composition,
method or device related to compounds conceived or developed by Toledo under
research funded by the Company. The agreement further provides that the
Company pay Toledo royalties on the sales of such compounds. As of December
31, 1996, no royalties had been paid or accrued since no drug or related
product had been sold. Under the agreement, the Company is required to
satisfy certain development and commercialization objectives. This agreement
terminates upon the expiration or non-renewal of the last patent which may
issue under this agreement, currently 2016. By its terms, however, the
license extends upon issuance of any new Toledo patents. The Company does not
have contractual indemnification rights against Toledo under the agreement.
Certain research relating to the compounds covered by the License Agreement,
including SnET2, has been or is being funded in part by certain governmental
grants under which the United States Government has or will have certain
rights in the technology developed, including the right under certain
circumstances to a non-exclusive license or to require the Company to grant
an exclusive license to a third party. See "--Patents and Proprietary
Technology" and "--Risk Factors--Uncertainty Regarding Patents and Proprietary
Technology."
LASERSCOPE
In April 1992, the Company entered into a seven-year License and
Distribution Agreement with Laserscope of San Jose, California, a leader in
the surgical laser industry. Pursuant to this agreement, as amended, among
other terms: (i) the Company granted to Laserscope rights to manufacture and
sell a dye laser module developed by the Company; (ii) the Company retains
the right to manufacture and sell this system for use with the Company's own
photoreactive drugs; and (iii) Laserscope agreed to pay to the Company a
license fee and royalties on Laserscope's sales. This dye laser module had
been developed by the Company prior to the development of the Company's diode
light systems. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
10
RESEARCH AND DEVELOPMENT PROGRAMS
The Company's research and development programs are devoted to the
discovery and development of drugs and devices for photodynamic therapy.
These research activities are conducted in-house in the Company's
pharmaceutical and engineering laboratories or elsewhere in collaboration
with medical or other research institutions or with other companies. The
Company has expended, and expects to continue to spend, substantial funds on
its research and development programs. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company's pharmaceutical research program is focused on the ongoing
evaluation of its proprietary compounds for different disease applications.
Among its outside or extramural research, the Company is conducting
preclinical animal studies at various academic and medical research
institutions in the United States, Europe and Australia. The Company is also
active in the research and development of devices for photodynamic therapy.
These programs include development of fiber optic light delivery devices and
measurement devices for accuracy in dosimetry and fluorescence detection
systems for diagnostic application of photodynamic therapy. Device research
and development is presently conducted either in-house or in collaboration
with partners.
The Company has pursued and been awarded various government grants and
contracts, such as grants sponsored by the National Institutes of Health and
the Small Business Innovative Research Administration, which complement the
Company's research efforts and facilitate new development. See "--Patents
and Proprietary Technology." See Note 7 of Notes to Consolidated Financial
Statements.
The Company's expenditures for research and development (which include
clinical trial expenses) totaled approximately $15.7 million, $8.8 million
and $7.0 million in 1996, 1995 and 1994 , respectively.
MANUFACTURING
The Company's strategy is generally to retain manufacturing rights and,
where appropriate, to partner with leading pharmaceutical and medical device
companies for certain elements of its manufacturing processes. The Company is
licensed by the State of California to manufacture bulk drug substance at its
Santa Barbara, California facility for clinical trial use and currently
manufactures the active SnET2 drug substance, light producing devices and
light delivery devices, and conducts other production and testing activities,
at this location. However, the Company has limited capabilities and
experience in the manufacture of drug, light producing and light delivery
products and utilizes outside suppliers, contracted or otherwise, for certain
materials and services related to its manufacturing activities. Although most
of the Company's materials and components are available from various sources
it is dependent on certain suppliers for key materials or services used in
the Company's drug and light producing and light delivery device development
and production operations. One such supplier is Pharmacia & Upjohn, which
processes SnET2 into a sterile injectable formulation and packages it in
vials for distribution by the Company. The Company and Pharmacia & Upjohn
expect to continue to develop new formulations which may or may not have
similar dependencies on suppliers.
Although the Company believes it can continue to produce its drug and
device products in quantities sufficient to support its clinical trial
requirements for the foreseeable future, the Company has limited capabilities
and experience in large-scale drug and device manufacturing. The Company has
and may elect in the future to utilize contract suppliers and manufacturers
for the production of certain drug and device components or product lines.
Moreover, if definitive collaborative arrangements with Boston Scientific and
Cordis are consummated, it is anticipated that such companies will
manufacture the medical catheters and the Company will manufacture the fiber
optic sub-assemblies. Under the terms of the co-development agreement with
Iridex, all manufacturing for light producing devices for use in photodynamic
therapy in the field of ophthalmology is the responsibility of Iridex. There
can be no assurance that such collaborative arrangements will be available to
the Company on acceptable terms, if at all. Additionally, although the
Company anticipates continuous and good relationships with its current
suppliers, there can be no assurance that such suppliers will continue to be
available to the Company on acceptable terms, if at all, or that the Company
will be able to produce materials or components in-house in a
11
timely manner or in sufficient quantities to meet its needs. See "--Risk
Factors--Limited Manufacturing and Marketing Capability and Experience" and
"--Strategic Collaboration."
In February 1997, the Company received registration to ISO 9001 and EN
46001 signifying compliance to the International Standards Organization
quality systems requirements for design, manufacture and distribution of
medical devices. This registration should enable the Company to more easily
attain international device marketing approvals.
MARKETING, SALES AND DISTRIBUTION
The Company's strategy is to partner with leading pharmaceutical and
medical device companies for the marketing, sales and distribution of its
products. The Company has granted to Pharmacia & Upjohn the exclusive,
worldwide license to market and sell the Company's leading drug candidate
SnET2. Under the terms of the Company's co-development arrangements with
Boston Scientific and Cordis, these companies have the option of negotiating
to enter into long-term relationships with the Company, under which they will
do have a license to market and sell the co-developed medical catheters --
Boston Scientific in the fields of urology, pulmonology and gastroenterology
and Cordis in the field of cardiology on a worldwide basis. At this time, the
Company and Boston Scientific and Cordis have not entered into any such
agreements. Also, the Company has granted to Iridex, the worldwide license to
market and sell all co-developed light producing devices for use in
photodynamic therapy in the field of ophthalmology. See "--Strategic
Collaborations."
Where appropriate, the Company intends to seek additional arrangements
with collaborative partners, selected for experience in disease applications
or markets, to act as the marketing and sales arm for the Company and to
establish distribution channels for the Company's drugs and devices. However,
there can be no assurance that such collaborative arrangements can be
negotiated or will be successful. See "--Risk Factors--Reliance on
Collaborative Partners."
The Company may also distribute its products directly or through
independent distributors. The Company currently has limited capabilities and
experience in marketing, sales and distribution of its products. See "--Risk
Factors--Limited Manufacturing and Marketing Capability and Experience" and
Note 1 of Notes to Consolidated Financial Statements.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company pursues a policy of seeking patent protection for its
technology both in the United States and in selected countries abroad. The
Company plans to prosecute, assert and defend its patent rights when
appropriate. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position.
The Company is currently the record owner of eighteen United States
patents duly issued by the U.S. Patent and Trademark Office which expire 2010
through 2014, a majority of which relate to certain light delivery and
measurement devices. Also in its name, the Company has a number of United
States (and related foreign) patent applications filed and pending relating
to certain light delivery and measurement devices. In addition, the Company
has exclusive rights under fourteen issued United States patents, which
expire from 2006 through 2016, and three issued foreign patent expiring in
2006, and under several pending United States patent applications (and
related foreign patent applications), relating to certain photoreactive
compounds. Additionally, issued in its name the Company has one foreign
method patent which expires in 2013. Certain of the foregoing patents and
patent applications are subject to certain governmental rights described
below.
The Company currently does not have any drug patents issued in its own
name. The Company obtained its photoreactive compound patent rights,
including rights to SnET2, through an exclusive License Agreement with
Toledo. This agreement is the basis for the Company's core drug technology.
See "--Strategic Collaborations" for a description of the Toledo agreement.
12
The patent position of pharmaceutical and medical device firms generally
is highly uncertain and involves complex legal and factual questions. There
can be no assurance that patent applications owned by or licensed to the
Company will result in issued patents, that any issued patents will provide
the Company with significant proprietary protection or competitive advantages
or will not be infringed upon or designed around by others, will not be
challenged by others and held to be invalid or unenforceable or that the
patents of others will not have a material adverse effect on the Company.
See "--Risk Factors--Uncertainty Regarding Patents and Proprietary
Technology."
The Company is aware that its competitors and other companies,
institutions and individuals have been issued patents relating to
photodynamic therapy. In addition, the Company's competitors and other
companies, institutions and individuals may have filed patent applications or
been issued patents relating to other potentially competitive products of
which the Company is not aware. Further, the Company's competitors and other
companies, institutions and individuals may in the future file applications
for, or be granted licenses or otherwise obtain proprietary rights to,
patents relating to other potentially competitive products. There can be no
assurance that these existing or future patents or patent applications will
not conflict with the Company's or its licensors' patents or patent
applications. Such conflicts could result in a rejection of the Company's or
its licensors' patent applications or the invalidation of their patents,
which could have a material adverse effect on the Company's competitive
position. In the event of such conflicts, or in the event the Company
believes that such competitive products may infringe the patents owned by or
licensed to the Company, the Company may pursue patent infringement
litigation or interference proceedings against, or may be required to defend
against litigation involving, holders of such conflicting patents or
competing products. Such proceedings may materially adversely affect the
Company's competitive position, and there can be no assurance that the
Company will be successful in any such proceeding. Litigation and other
proceedings relating to patent matters, whether initiated by the Company or a
third party, can be expensive and time consuming, regardless of whether the
outcome is favorable to the Company, and can result in the diversion of
substantial financial, managerial and other resources from the Company's
other activities. An adverse outcome could subject the Company to significant
liabilities to third parties or require the Company to cease any related
research and development activities or product sales. The Company does not
have contractual indemnification rights against the licensors of the various
drug patents. In addition, if patents that contain dominating or conflicting
claims have been or are subsequently issued to others and such claims are
ultimately determined to be valid, the Company may be required to obtain
licenses under patents or other proprietary rights of others. No assurance
can be given that any licenses required under any such patents or proprietary
rights would be made available on terms acceptable to the Company, if at all.
If the Company does not obtain such licenses, it could encounter delays or
could find that the development, manufacture or sale of products requiring
such licenses is foreclosed.
The Company also relies upon unpatented trade secrets, and no assurance
can be given that others will not independently develop substantially
equivalent proprietary information and techniques, or otherwise gain access
to the Company's trade secrets or disclose such technology, or that the
Company can meaningfully protect its rights to its unpatented trade secrets
and know-how.
It is the Company's policy to require its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to
execute confidentiality agreements upon the commencement of employment or
consulting relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific limited
circumstances. The Company also requires signed confidentiality or material
transfer agreements from any company that is to receive confidential data or
proprietary compounds. In the case of employees and consultants, the
agreements generally provide that all inventions conceived by the individual
while rendering services to the Company shall be assigned to the Company as
the exclusive property of the Company. There can be no assurance, however,
that these agreements will provide meaningful protection or adequate remedies
for the Company's trade secrets or other proprietary information in the event
of unauthorized use or disclosure of such information.
13
Certain of the Company's research, including research relating to certain
drug compounds covered by the License Agreement with Toledo, including SnET2,
has been or is being funded in part by Small Business Innovation Research or
National Institutes of Health grants. See "--Research and Development
Programs." As a result of such funding, the United States Government has or
will have certain rights in the inventions developed with the funding. These
rights include a non-exclusive, paid-up, worldwide license under such
inventions for any governmental purpose. In addition, the government has the
right to require the Company to grant an exclusive license under any of such
inventions to a third party if the government determines that (i) adequate
steps have not been taken to commercialize such inventions, (ii) such action
is necessary to meet public health or safety needs or (iii) such action is
necessary to meet requirements for public use under federal regulations.
Federal law requires that any exclusive licensor of an invention that was
partially funded by federal grants (which is the case with the subject matter
of certain patents issued in the Company's name or licensed from Toledo)
agree that it will not grant exclusive rights to use or sell the invention in
the United States unless the grantee agrees that any products embodying the
invention will be manufactured substantially in the United States, although
such requirement is subject to a discretionary waiver by the government. It
is not expected that the government will exercise any such rights or that
such exercise would have material impact on the Company.
GOVERNMENT REGULATION
The research, development, manufacture, marketing and distribution of the
Company's products are subject to regulation for safety and efficacy by
numerous governmental authorities in the United States and other countries.
In the United States, pharmaceutical products and medical devices are
regulated by the FDA through the Food, Drug and Cosmetic Act ("FDC Act").
The FDC Act and various other federal and state statutes control and
otherwise affect the development, approval, manufacture, testing, storage,
records and distribution of drugs and medical devices. The Company is subject
to regulatory requirements governing both drugs and devices.
DRUG PRODUCTS. The FDA generally requires the following steps before a
new drug product may be marketed in the United States: (i) preclinical
studies (laboratory and animal tests); (ii) the submission to the FDA of an
application for an IND exemption, which must become effective before human
clinical trials may commence; (iii) adequate and well-conducted clinical
trials to establish safety and efficacy of the drug for its intended use;
(iv) the submission to the FDA of a New Drug Application ("NDA"); and (v)
review and approval of the NDA by the FDA before any commercial sale or
shipment of the drug. In addition to obtaining FDA approval for each new drug
product, each drug manufacturing establishment must be registered with the
FDA. Manufacturing establishments, both domestic and foreign, are subject to
inspections by or under the authority of the FDA and by other federal, state
or local agencies and must comply with the FDA's current Good Manufacturing
Practices ("GMP") regulations. The FDA will not approve an NDA until a
preapproval inspection of the manufacturing facilities confirms that the drug
is produced in accordance with current drug GMPs. In addition, drug
manufacturing establishments in California must also be licensed by the State
of California and must comply with manufacturing, environmental and other
regulations promulgated and enforced by the California Department of Health
Services.
Preclinical studies include laboratory evaluation of product chemistry,
conducted under Good Laboratory Practice ("GLP") regulations, and animal
studies to assess the potential safety and efficacy of the drug and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of the IND. Unless the FDA objects to the IND, the IND becomes effective
30 days following its receipt by the FDA.
Clinical trials involve the administration of the investigational drug to
human subjects under FDA regulations and other guidance commonly known as
good clinical practice ("GCP") requirements and the supervision of a
qualified physician. Clinical trials are conducted in accordance with
protocols that detail the objectives of the study, the parameters to be used
to monitor safety and the efficacy criteria to be evaluated. Each protocol is
submitted to the FDA as a part of the IND. Each clinical study must be
conducted under the auspices of an independent Institutional Review Board
("IRB"). The IRB considers, among other things, ethical factors, the safety
of human subjects and the possible liability of the testing institution.
14
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. Phase I represents the initial introduction
of the drug to a small group of humans to test for safety (adverse effects),
dosage tolerance, absorption, distribution, metabolism, excretion and
clinical pharmacology and, if possible, to gain early evidence of
effectiveness. Phase II involves studies in a limited sample of the intended
patient population to assess the efficacy of the drug for a specific
indication, to determine dose tolerance and optimal dose range and to
identify possible adverse effects and safety risks. Once a compound is found
to have some efficacy and to have an acceptable safety profile in Phase II
evaluations, Phase III clinical trials are initiated for definitive clinical
safety and efficacy studies in a broader sample of the patient population at
multiple study sites. The results of the preclinical and clinical testing are
submitted to the FDA in the form of an NDA for marketing approval.
Completing clinical trials and obtaining FDA approval for a new drug
product is likely to take several years and require expenditure of
substantial resources. If an NDA application is submitted, there can be no
assurance that the FDA will approve the NDA in a timely manner, if at all.
Even if initial FDA approval is obtained, further studies will be required to
gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially approved.
Also, the FDA requires post-market surveillance programs to monitor and
report the drug's side effects. For certain drugs, the FDA may also,
concurrent with marketing approval, seek agreement from the sponsor to
conduct post-marketing ("Phase IV") studies to obtain further information
about the drug's risks, benefits, and optimal use. Results of such monitoring
and of Phase IV post-marketing studies may affect the further marketing of
the product.
Where appropriate, the Company may seek to obtain accelerated review
and/or approval of products and to use expanded access programs that may
provide broader accessibility and, if approved by the FDA, payment for an
investigational drug product. These activities may include, but may not be
limited to, pursuing programs such as treatment IND or parallel track IND
classifications which allow expanded availability of an investigational
treatment to patients not in the ongoing clinical trials, and seeking
physician or cross-referenced INDs which allow individual physicians to use
an investigational drug before marketing approval and for an indication not
covered by the ongoing clinical trials. However, there can be no assurance
that the Company will seek such avenues in all possible cases or in any
individual case. Further, there can be no assurance that the Company will be
able to obtain access to such avenues in a timely manner, if at all. If the
Company is able to obtain access to any such avenue, there can be no
assurance that an avenue will be successful or result in accelerated review
or approval, or broader accessibility to, any of the Company's products.
MEDICAL DEVICE PRODUCTS. The Company's medical device products are
subject to government regulation in the United States and foreign countries.
In the United States, the Company is subject to the rules and regulations
established by the FDA requiring that the Company's medical device products
are safe and efficacious and are designed, tested, developed, manufactured
and distributed in accordance with FDA regulations.
Under the FDC Act, medical devices are classified into one of three
classes (i.e., class I, II, or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Safety and effectiveness
can reasonably be assured for class I devices through general controls (e.g.,
labeling, premarket notification and adherence to GMPs) and for class II
devices through the use of general and special controls (e.g., performance
standards, postmarket surveillance, patient registries, and FDA guidelines).
Generally, class III devices are those which must receive premarket approval
by the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to legally marketed devices).
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a premarket approval application ("PMA"). A PMA requires the
completion of extensive clinical trials comparable to those required of new
drugs and typically requires several years before FDA approval, if any, is
obtained. A 510(k) clearance will be granted if the submitted data establish
that the proposed device is "substantially equivalent" to a legally marketed
class I or class II medical device, or to a class III medical device for
which the FDA has not called for PMAs. Currently, devices indicated
15
for use in photodynamic therapy, such as the Company's devices, regardless of
classification, must be evaluated in conjunction with an IND as a combination
drug-device product.
COMBINATION DRUG-DEVICE PRODUCTS. Medical products containing a
combination of drugs, devices or biological products may be regulated as
"combination products." A combination product is generally defined as a
product comprised of components from two or more regulatory categories
(drug/device, device/biologic, drug/biologic, etc.) and in which the various
components are required to achieve the intended effect and are labeled
accordingly. Each component of a combination product is subject to the rules
and regulations established by the FDA for that component category, whether
drug, biologic or device. Primary responsibility for the regulation of a
combination product depends on the FDA's determination of the "primary mode
of action" of the combination product, whether drug, biologic or device.
In order to facilitate premarket review of combination products, the FDA
designates one of its centers to have primary jurisdiction for the premarket
review and regulation of both components, in most cases eliminating the need
to receive approvals from more than one center. The determination whether a
product is a combination product or two separate products is made by the FDA
on a case-by-case basis. Market approval authority for combination
photodynamic therapy drug/device products is vested in the FDA Center for
Drug Evaluation and Research (the "CDER") which is required to consult with
the FDA Center for Devices and Radiological Health. As the lead agency, the
CDER administers and enforces the premarket requirements for both the drug
and device components of the combination product. The FDA has reserved the
decision on whether to require separate submissions for each component until
the product is ready for premarket approval. Although to date photodynamic
therapy products have been categorized by the FDA as combination drug-device
products, there can be no assurance that the Company's products currently
under investigation or any future drug/device products will continue to be
categorized for regulatory purposes as combination products, that they will
not require separate drug and device submissions, or that they will not
require separate approval by both centers.
In the event that separate applications for approval are required in the
future for photodynamic therapy devices, it may be necessary for the Company
to submit a PMA or a 510(k) to the FDA for its photodynamic devices.
Submission of a PMA would include the same clinical studies submitted under
the IND to show the safety and efficacy of the device for its intended use in
the combination product. A 510(k) notification would include information and
data to show that the Company's device is substantially equivalent to
previously marketed devices. There can be no assurance as to the exact form
of the premarket approval submission required by the FDA or post-marketing
controls for the Company's photodynamic therapy devices.
POST-APPROVAL COMPLIANCE. Once a product is approved for marketing, the
Company must continue to comply with various FDA, and in some cases Federal
Trade Commission, requirements for design, safety, advertising, labeling,
record keeping and reporting of adverse experiences associated with the use
of a product. The FDA actively enforces regulations prohibiting marketing of
products for non-approved uses. Failure to comply with applicable regulatory
requirements can result in, among other things, fines, injunctions, civil
penalties, failure of the government to grant premarket clearance, premarket
approval or export certificates for devices or drugs, delays or suspensions
or withdrawals of approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions. Changes in existing requirements or
adoption of new requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTERNATIONAL. With regard to the marketing of photodynamic therapy
drugs and devices outside the United States, the Company is subject to
foreign regulatory requirements governing testing, development, marketing,
licensing, pricing and/or distribution of drugs and devices in other
countries. These regulations vary from country to country. Beginning in 1995,
a new regulatory system to approve drug market registration applications was
implemented in the European Union ("EU"). The system provides for new
centralized, decentralized and national (member state by member state)
registration procedures through which a company may obtain drug marketing
registrations. The centralized procedure allows for expedited review and
approval of biotechnology and high technology/innovative product marketing
applications by a central Committee for Proprietary Medicinal Products that
is binding on all member states in the EU. The decentralized procedure allows
16
a company to petition individual EU member states to review and recognize a
market application previously approved in one member state by the national
route. There can be no assurance that the Company's drug products will
qualify for the centralized review procedure or that the Company will be able
to obtain a national market application that will be accepted by other EU
member states. The Company's devices must also meet the new Medical Device
Directive effective in Europe in 1998. The Directive requires that the
Company's manufacturing quality assurance systems and compliance with
technical essential requirements be certified with a CE Mark authorized by a
registered notified body of an EU member state prior to free sale in the EU.
Registration and approval of a photodynamic therapy product in other
countries, such as Japan, may include additional procedures and requirements,
nonclinical and clinical studies, and may require the assistance of native
corporate partners.
The time and expense required to gain approval for a product in another
country may be more or less than that required for U.S. approval. There can
be no assurance as to degree or extent of approval requirements or regulation
of the Company's products in any country, or the effect of such requirements
or regulations on the Company's ability to sell its products outside of the
United States.
OTHER LAWS; FUTURE LEGISLATION OR REGULATIONS. In addition to the
regulations for drug or device approvals, the Company is subject to
regulation under state, federal or other law, including regulations for
worker occupational safety, laboratory practices, environmental protection
and hazardous substance control. The Company continues to make capital and
operational expenditures for protection of the environment in amounts which
are not material. However, there can be no assurance that future expenditures
will not have a material adverse effect on the Company. The Company may also
be subject to other present and possible future local, state, federal and
foreign regulation. There can be no assurance that any such regulations will
not adversely affect the Company's business.
Heightened public awareness and concerns regarding the growth in overall
health care expenditures in the United States, combined with the continuing
efforts of governmental authorities to contain or reduce costs of health
care, may result in the enactment of national health care reform or other
legislation or regulations that impose limits on the number and type of
medical procedures which may be performed or which have the effect of
restricting a physician's ability to select specific products for use in
certain procedures. Such new legislation or regulations may materially
adversely affect the demand for the Company's products. In the United States,
there have been, and the Company expects that there will continue to be, a
number of federal and state legislative proposals and regulations to
implement greater governmental control in the health care industry. For
example, the Clinton Administration and certain members of Congress have
proposed health care reform legislation that may impose pricing or
profitability limitations or other restrictions on companies in the health
care industry. The announcement of such proposals may materially adversely
affect the Company's ability to raise capital or to form collaborations, and
the enactment of any such reforms could have a material adverse effect on the
Company. In certain foreign markets, the pricing and profitability of health
care products are subject to governmental influence or control. In addition,
legislation or regulations that impose restrictions on the price that may be
charged for health care products or medical devices may adversely affect the
Company's results of operations. From time to time, legislation or regulatory
proposals are considered that could alter the review and approval process
relating to pharmaceutical or medical device products. The Company is unable
to predict the likelihood of adverse effects which might arise from future
legislative or administrative action, either in the United States or abroad.
COMPETITION
The pharmaceutical and medical device industries are characterized by
extensive worldwide research and development efforts and rapid technological
change. Competition from other domestic and foreign pharmaceutical or medical
device companies and research and academic institutions in the areas of
product development, product and technology acquisition, manufacturing and
marketing is intense and is expected to increase. These competitors may
succeed in obtaining approval from the FDA or other regulatory agencies for
their products more rapidly than the Company. Competitors have also developed
or are in the process of developing technologies that are, or in the future
may be, the basis for competitive products.
17
The Company believes that a primary competitive issue will be the
performance characteristics of photoreactive drugs, including product
efficacy and safety, as well as availability, price and patent position,
among other issues. As the photodynamic therapy industry evolves, the Company
believes that new and more sophisticated devices will be required and that
the ability of any group to develop advanced devices will be of primary
importance to market position. The Company believes that, after approval,
competition will be based on product reliability, clinical utility,
availability, price and patent position.
The Company is aware of various competitors involved in the photodynamic
therapy drug arena. The Company understands that these companies are
conducting preclinical and/or clinical testing in various countries and for a
variety of disease indications. One such company is QLT PhotoTherapeutics
("QLT"). The Company understands that QLT's drug Photofrin-Registered
Trademark- has received marketing approval in certain countries for various
specific disease indications. In addition, the Company is aware of
competitors active in the commercialization of photodynamic therapy devices.
Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company and substantially greater
experience in developing products, conducting preclinical or clinical
testing, obtaining regulatory approvals and manufacturing and marketing.
Further, the Company's competitive position could be materially adversely
affected by the establishment of patent protection by its competitors. There
can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective or affordable
than those being developed by the Company or that would render the Company's
technology and products less competitive or obsolete. See "--Risk
Factors--Competition and Technological Uncertainty."
LIABILITY OR RECALL
The use of the Company's products in clinical trials and the sale of such
products may expose the Company to liability claims. These claims could be
made directly by patients or consumers, or by companies, institutions or
others using or selling such products. In addition, the Company is subject to
the inherent risk that a governmental authority or third party may require
the recall of one or more of the Company's products. The Company has not
obtained liability insurance that would cover a claim relating to the use or
recall of its products. In the absence of such insurance, claims made against
the Company or a product recall could have a material adverse effect on the
Company. In addition, there can be no assurance that, if the Company seeks
insurance coverage in the future, such coverage will be available at a
reasonable cost and in amounts sufficient to protect the Company against
claims that could have a material adverse effect on the financial condition
and prospects of the Company. Further, liability claims relating to the use
of the Company's products or a product recall could negatively effect the
Company's ability to obtain or maintain regulatory approval for its products.
The Company has agreed to indemnify certain of its collaborative partners
against certain potential liabilities relating to the manufacture and sale of
SnET2 and photodynamic therapy light devices. See "--Strategic
Collaborations."
EMPLOYEES
As of March 14, 1997, the Company employed 134 individuals, approximately
58 of which were engaged in research and development, 39 were engaged in
manufacturing and clinical activities and 37 in general and administrative
activities. The Company believes that its relationship with its employees is
good and none of the employees are represented by a labor union.
RISK FACTORS
The Company does not provide forecasts of potential future operational or
financial performance. While management of the Company is optimistic about
the Company's long-term prospects, the following issues and uncertainties,
among others, should be considered in evaluating its outlook. This Annual
Report on Form 10-K contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, which involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievement of the Company, or industry results, to
differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Actual results
could
18
differ materially from those contemplated by such statements. The factors
listed below represent certain important factors the Company believes could
cause such results to differ. These factors are not intended to represent a
complete list of the general or specific risks that may affect the Company.
It should be recognized that other risks may be significant, presently or in
the future, and the risks set forth below may affect the Company to a greater
extent than indicated.
EARLY STAGE OF THE COMPANY AND ITS PRODUCTS
The Company and its products are in an early stage of development. No
revenues have been generated from sales of the Company's drugs and only
limited revenues have been generated from sales of the Company's devices. The
Company does not expect to achieve significant levels of revenues for at
least several years. The Company's revenues to date have consisted, and for
the foreseeable future are expected to consist, principally of grants awarded
and payments for its devices which are purchased by others engaged in
preclinical and clinical testing and research of photodynamic therapy drugs
or by companies that distribute the devices and payments under research and
development agreements, license fees, royalties, clinical reimbursements,
milestone payments and interest income. To achieve profitable operations on a
continuing basis, the Company, alone or with collaborative partners, must
successfully research, develop, test, obtain regulatory approval,
manufacture, introduce, market and distribute its products. The time frame
necessary to achieve these goals for any individual product is long and
uncertain. Most of the products currently under development by the Company
will require significant additional research and development, preclinical and
clinical testing and regulatory approval prior to commercialization. There
can be no assurance that the Company's research or product development
efforts or those of its collaborative partners will be successfully
completed, that the drugs or devices currently under development will be
successfully transformed into marketable products, that required regulatory
approvals can be obtained, that products can be manufactured at an acceptable
cost and with appropriate quality, that any approved products can be
successfully marketed, or that any products that may be marketed will be
favorably accepted. The likelihood of the Company's success must be
considered in light of these and other problems, expenses, difficulties,
complications and delays frequently encountered in connection with the
formation of a new business and the development and commercialization of new
products, particularly pharmaceutical and medical device products. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "--Government Regulation."
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has generated little revenue to date, has experienced
operating losses since its inception in 1989 and has not yet achieved
profitability. As of December 31, 1996, the Company had an accumulated
deficit of approximately $50.6 million. These losses have resulted primarily
from the Company's research and development programs, the funding of
preclinical and clinical testing and regulatory activities and the general
and administrative expenses associated with these activities. The Company
anticipates incurring substantial and increasing losses over at least the
next several years. The extent of losses and the time required to reach
profitability are highly uncertain. To achieve sustained profitable
operations, the Company, alone or with collaborative partners, must
successfully research, develop, test, obtain regulatory approval,
manufacture, introduce, market and distribute its products. There can be no
assurance that the Company will be able to achieve profitability or that
profitability, if achieved, can be sustained on an ongoing basis. Moreover,
if profitability is achieved, the level of that profitability cannot be
accurately predicted. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNPROVEN SAFETY AND EFFICACY; CLINICAL TRIALS
All drug and device products currently under development by the Company
will require extensive preclinical and clinical testing prior to regulatory
approval for commercial use. None of the Company's products have completed
testing for efficacy or safety in humans. There can be no assurance that such
testing will demonstrate that SnET2 or any other of the Company's products is
safe or efficacious or that testing for any of the Company's compounds
currently under development will be commenced or completed successfully
within any
19
specified time period, if at all. Further, there can be no assurance that
clinical data reported by the Company will not change as a result of the
continuing evaluation of patients. Data obtained from preclinical and
clinical trials are subject to varying interpretations which can delay, limit
or prevent approval by the FDA or other regulatory authorities. There can be
no assurance that the Company will not encounter problems in research and
development, preclinical testing or clinical trials that will cause the
Company to delay, suspend or cancel clinical trials. Many potential
pharmaceutical and medical device products that achieve promising results in
preclinical tests and clinical trials fail to demonstrate sufficient safety
or efficacy to warrant approval by the FDA or other regulatory authorities,
and there can be no assurance that any of the Company's potential products
will obtain the required approvals or, if approved, will obtain sufficient
market acceptance to become commercially successful. Moreover, as a result of
changing market, clinical or regulatory conditions, or clinical trial
results, the Company's focus may shift to other indications, or it may be
determined not to further pursue one or more of the indications currently
being pursued. See "--Government Regulation."
To date, the Company has very limited experience in conducting clinical
trials. The Company will either need to rely on third parties, including its
collaborative partners, to design and conduct any required clinical trials or
expend resources to hire additional personnel to administer such clinical
trials. There can be no assurance that the Company will be able to find
appropriate third parties to design and conduct clinical trials or that it
will have the resources to hire personnel to administer clinical trials
in-house.
RELIANCE ON COLLABORATIVE PARTNERS
The Company has entered into collaborative relationships with certain
corporations and academic institutions in connection with the research and
development, preclinical and clinical testing, licensing, manufacturing and
distribution of its products. In July 1995, the Company entered into a
collaborative agreement with Pharmacia & Upjohn, Inc. pursuant to which the
Company granted to Pharmacia & Upjohn an exclusive worldwide license to use,
distribute and sell SnET2 for therapeutic or diagnostic applications in the
area of photodynamic therapy. See "--Strategic Collaborations." The amount
of royalty revenues and other payments, if any, ultimately received by the
Company with respect to sales of SnET2 is dependent, in part, on the amount
and timing of resources Pharmacia & Upjohn commits to research and
development, clinical testing and regulatory and marketing activities, which
are entirely within the control of Pharmacia & Upjohn. The resources
committed by Pharmacia & Upjohn in these areas will depend on Pharmacia &
Upjohn's own competitive, marketing and strategic considerations, including
the relative advantages of alternative products or therapies developed and
marketed by Pharmacia & Upjohn or competitors. There can be no assurance that
Pharmacia & Upjohn will pursue the development and commercialization of SnET2
or that Pharmacia & Upjohn will perform its obligations as expected. In
addition, the Company is collaborating with Boston Scientific and Cordis with
respect to the development of catheters for use in photodynamic therapy. The
Company has not entered into any definitive collaborative agreement with
either of these companies. No assurance can be given that these additional
collaborations will culminate in definitive collaborative agreements or
marketable products or will otherwise be successful. Also, there can be no
assurance that Iridex and Ramus will continue to pursue the development of
devices for use in photodynamic therapy in the fields of ophthalmology and
cardiology, respectively or that such development will result in marketable
products .
In addition, the Company is currently at various stages of discussions
with other companies regarding the establishment of various collaborations.
The Company's current and future collaborations are important to the Company
because they allow the Company greater access to funds, to research,
development or testing resources and to manufacturing, sales or distribution
resources than it would otherwise have, and the Company intends to continue
to rely on such collaborative arrangements. However, there can be no
assurance that the Company will be able to negotiate acceptable collaborative
arrangements in the future or that such future or existing collaborative
arrangements will be successful or result in products that are marketed or
sold. In addition, there can be no assurance that such collaborative
relationships will not limit or restrict the Company in any way. Further,
there can be no assurance that the Company's collaborative partners will not
develop or pursue alternative technologies either on their own or in
collaboration with others, including the Company's competitors, as a means of
20
developing or marketing products for the diseases targeted by the
collaborative programs and the Company's products. See "--Strategic
Collaborations."
ADDITIONAL FINANCING REQUIREMENTS AND UNCERTAINTY OF CAPITAL FUNDING
The Company has incurred negative cash flows from operations since its
inception and has expended substantial funds in connection with its research
and development programs and preclinical and clinical testing. The Company
may require substantial funding to continue or undertake its research and
development activities, preclinical and clinical testing and manufacturing,
marketing, sales, distribution and administrative activities. There can be no
assurance that the Company's existing capital resources, together with the
proceeds from future offerings and future cash flows, will be sufficient to
fund the Company's future operations. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
COMPETITION AND TECHNOLOGICAL UNCERTAINTY
Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company and substantially greater
experience in developing products, conducting preclinical or clinical
testing, obtaining regulatory approvals and manufacturing and marketing.
Further, the Company's competitive position could be materially adversely
affected by the establishment of patent protection by its competitors. There
can be no assurance that the Company's existing competitors or other
companies will not succeed in developing technologies and products that are
more effective or affordable than those being developed by the Company or
that would render the Company's technology and products less competitive or
obsolete. See "--Patents and Proprietary Technology" and "--Competition."
The Company's products are subject to the risks of failure inherent in
the development and testing of products based on innovative technologies.
These risks include the possibilities that this technology or any or all of
the Company's products may be found to be ineffective or to have
unanticipated limitations or otherwise fail.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its ongoing
research and development, preclinical testing and clinical trial activities
are subject to extensive regulation and review by numerous governmental
authorities in the United States, including the FDA, and in other countries.
All drugs and most medical devices developed by the Company must undergo
rigorous preclinical and clinical testing and an extensive regulatory
approval process administered by the FDA under the FDC Act, and comparable
foreign authorities before they can be marketed. These processes involve
substantial cost and can take many years. The Company has limited experience
in, and limited resources available to commit to, regulatory activities.
Failure to comply with the applicable regulatory requirements can, among
other things, result in non-approval, suspensions of regulatory approvals,
fines, product seizures and recalls, operating restrictions, injunctions and
criminal prosecution.
The time required for completing such testing and obtaining such
approvals is uncertain and approval itself may not be obtained. In addition,
delays or rejections may be encountered due to, among other reasons,
regulatory review of each submitted new drug, device or combination
drug/device application or product license application, as well as changes in
regulatory policy during the period of product development. Similar delays
may also be encountered in foreign countries. To date, no pharmaceutical
product candidate being developed by the Company has been submitted for
approval or has been approved by the FDA or any other regulatory authority
for marketing, and there can be no assurance that, even after investing
substantial time and expense, regulatory approval will be obtained for any
products developed by the Company. Moreover, if regulatory approval of a
product is granted, such approval may entail limitations on the indicated
uses for which the product may be marketed. Further, even if such regulatory
approval is obtained, a marketed product, its manufacturer and the facilities
in which the product is manufactured are subject to continual review and
periodic inspections. Later
21
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer,
including withdrawal of the product from the market and litigation. Although
to date photodynamic therapy products have been categorized by the FDA as
combination drug-device products, there can be no assurance that the
Company's products currently under investigation or any future drug/device
products will continue to be categorized for regulatory purposes as
combination products, that they will not require separate drug and device
submissions, or that they will not require separate approval by regulatory
authorities. See "--Government Regulation."
REIMBURSEMENT
The Company's ability to commercialize its products successfully may
depend in part on the extent to which reimbursement for such products and
related treatment will be available from corporate partners, government
health administration authorities, private health insurers, managed care
entities and other organizations. Such payors are increasingly challenging
the price of medical products and services and establishing protocols and
formularies which effectively limit physicians' ability to select products
and procedures. Uncertainty exists as to the reimbursement status of health
care products (especially innovative technologies), and there can be no
assurance that adequate reimbursement coverage will be available to enable
the Company to achieve market acceptance of its products or to maintain price
levels sufficient for realization of an appropriate return on its products.
LIMITED MANUFACTURING AND MARKETING CAPABILITY AND EXPERIENCE
To be successful, the Company's products must be manufactured in
commercial quantities under current GMP prescribed by the FDA and at
acceptable costs. Although the Company intends to manufacture drugs and
devices, the Company has not yet manufactured any products in commercial
quantities under GMP and has no experience in such commercial manufacturing.
The Company will need to expand its manufacturing capabilities and/or depend
on its collaborators, licensees or contract manufacturers for the commercial
manufacture of its products. In the event the Company determines to expand
its manufacturing capabilities, it will require the expenditure of
substantial funds, the hiring and retention of significant additional
personnel and compliance with extensive regulations applicable to such
expansion. There can be no assurance that the Company will be able to expand
such capabilities successfully or that it will be able to manufacture
products in commercial quantities for sale at competitive prices. Further,
there can be no assurance that the Company will be able to enter into
manufacturing arrangements with collaborators, licensees, or contract
manufacturers on acceptable terms or at all. If the Company is not able to
expand its manufacturing capabilities or enter into additional commercial
manufacturing agreements, it could be materially and adversely affected. See
"--Strategic Collaborations" and "--Manufacturing."
The Company has limited experience in marketing, distributing and
selling pharmaceutical products, and will need to develop a sales force or
rely on its collaborators or licensees or make arrangements with others to
provide for the marketing, distribution and sale of its products. There can
be no assurance that the Company's marketing, distribution and sales
capabilities or current or future arrangements with third parties to perform
such activities will be adequate for the successful commercialization of its
products. See "--Strategic Collaborations" and "--Marketing, Sales and
Distribution."
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend, in part, on its and its licensors'
ability to obtain, assert and defend its patents, protect trade secrets and
operate without infringing the proprietary rights of others. The Company has
filed applications for or has been issued U.S. and foreign patents a majority
of which relate to its light delivery and measurement devices, and the
Company has an exclusive license under patent applications or patents of
others relating to certain photoreactive compounds. Such issued U.S. patents
expire from 2006 through 2014. Certain of the foregoing patents and patent
applications are subject to certain governmental rights. The exclusive
license to the Company under various drug patents, including patents relating
to its leading drug candidate SnET2, provides
22
that the licensors may elect that the license become non-exclusive if the
Company fails to satisfy certain development and commercialization
objectives. Although the Company believes it should be able to achieve such
objectives, there can be no assurance that the Company will be successful.
The patent position of pharmaceutical and medical device firms generally is
highly uncertain and involves complex legal and factual questions. There can
be no assurance that the patent applications owned by or licensed to the
Company will result in issued patents, that any issued patents will provide
the Company with proprietary protection or competitive advantages, will not
be infringed upon or designed around by others, will not be challenged by
others and held to be invalid or unenforceable or that the patents of others
will not have a material adverse effect on the Company. See "--Strategic
Collaborations."
The Company is aware that its competitors and other companies,
institutions and individuals have been issued patents relating to
photodynamic therapy. In addition, the Company's competitors and other
companies, institutions and individuals may have filed patent applications or
been issued patents relating to other potentially competitive products of
which the Company is not aware. Further, the Company's competitors and other
companies, institutions and individuals may in the future file applications
for, or be granted or license or otherwise obtain proprietary rights to,
patents relating to other potentially competitive products. There can be no
assurance that these existing or future patents or patent applications will
not conflict with the Company's or its licensors' patents or patent
applications. Such conflicts could result in a rejection of the Company's or
its licensors' patent applications or the invalidation of their patents,
which could have a material adverse effect on the Company's competitive
position. In the event of such conflicts, or in the event the Company
believes that such competitive products may infringe the patents owned by or
licensed to the Company, the Company may pursue patent infringement
litigation or interference proceedings against, or may be required to defend
against litigation involving, holders of such conflicting patents or
competing products. Such proceedings may materially adversely affect the
Company's competitive position, and there can be no assurance that the
Company will be successful in any such proceeding. Litigation and other
proceedings relating to patent matters, whether initiated by the Company or a
third party, can be expensive and time consuming, regardless of whether the
outcome is favorable to the Company, and can result in the diversion of
substantial financial, managerial and other resources from the Company's
other activities. An adverse outcome could subject the Company to significant
liabilities to third parties or require the Company to cease any related
research and development activities or product sales. The Company does not
have contractual indemnification rights against the licensors of the various
drug patents. In addition, if patents that contain dominating or conflicting
claims have been or are subsequently issued to others and such claims are
ultimately determined to be valid, the Company may be required to obtain
licenses under patents or other proprietary rights of others. No assurance
can be given that any licenses required under any such patents or proprietary
rights would be made available on terms acceptable to the Company, if at all.
If the Company does not obtain such licenses, it could encounter delays or
could find that the development, manufacture or sale of products requiring
such licenses is foreclosed.
The Company also seeks to protect its proprietary technology and
processes in part by confidentiality agreements with its collaborative
partners, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently discovered by competitors. Certain of the research
activities relating to the development of certain of the patents owned by or
licensed to the Company were funded, in part, by agencies of the United
States government. When the United States government participates in research
activities, it retains certain rights that include the right to use the
resulting patents for government purposes under a royalty-free license. See
"--Research and Development Programs" and "--Patents and Proprietary
Technology."
DEPENDENCE UPON KEY PERSONNEL AND CONSULTANTS
The Company's ability to successfully develop its products, manage
growth and maintain a competitive position will depend in large part on its
ability to attract and retain highly qualified scientific, management and
other personnel and to develop and maintain relationships with leading
research institutions and consultants. The Company is highly dependent upon
principal members of its management, key employees, scientific staff and
23
consultants which the Company may retain from time to time. Competition for
such personnel and relationships is intense, and there can be no assurance
that the Company will be able to continue to attract and retain such
personnel. The Company's consultants may be affiliated or employed by others,
and some have consulting or other advisory arrangements with other entities
that may conflict or compete with their obligations to the Company.
Inventions or processes discovered by such persons will not necessarily
become the property of the Company and may remain the property of such
persons or others. See Item 10, "Directors and Executive Officers."
DEPENDENCE UPON SUPPLIERS
The Company currently depends upon outside suppliers, contracted or
otherwise, for certain raw materials and components for its products. There
can be no assurance that such raw materials or components will continue to be
available to the Company's standards or on acceptable terms, if at all, or
that alternative suppliers will be available to the Company on acceptable
terms, if at all. Further, there can be no assurance that the Company will be
able to produce needed materials or components in-house in a timely manner or
in sufficient quantities to meet the needs of the Company, if at all.
Although most of the Company's raw materials and components are available
from various sources, the Company is currently dependent on single,
contracted sources for certain key materials or services used by the Company
in its drug development, light producing and light delivery device
development and production operations. Although the Company has entered into
agreements with these suppliers, there can be no assurance that these
arrangements will be successful or that the Company will not encounter delays
or other problems which may materially adversely affect its business. See
"--Strategic Collaborations" and "--Manufacturing."
ENVIRONMENTAL MATTERS
The Company is subject to federal, state, county and local laws and
regulations relating to the protection of the environment. In the course of
its business, the Company is involved in the handling, storage and disposal
of materials that are classified as hazardous. The Company's safety
procedures for handling, storage and disposal of such materials are designed
to comply with the standards prescribed by applicable laws and regulations.
However, there can be no assurance that the Company will not be involved in
contamination or injury from these materials. In the event of such an
occurrence, the Company could be held liable for any damages that result, and
any such liability could materially and adversely affect the Company.
Further, there can be no assurance that the cost of complying with these laws
and regulations will not increase materially in the future. See "--Government
Regulation."
CONTROL BY OFFICERS AND DIRECTORS
As of March 14, 1997, the Company's officers and directors beneficially
own approximately 32.8% of the outstanding Common Stock (approximately 44.7%
is beneficially owned if all options granted to such officers and directors
become vested and are exercised). These shareholders will be able to elect a
substantial number of the Company's directors and will have the ability to
influence significantly the Company and the direction of its business and
affairs. Such concentration of ownership may have the effect of delaying or
preventing a change in control of the Company, which could adversely affect
the market price for the Common Stock. See Item 12, "Security Ownership of
Certain Beneficial Owners and Management."
OUTSTANDING OPTIONS AND WARRANTS
As of March 14, 1997, there were outstanding options to purchase
2,421,088 shares of Common Stock at a weighted average exercise price of
$14.16 per share, and warrants to purchase 1,634,471 shares of Common Stock
at a weighted average exercise price of $10.53 per share. The exercise of
these options and warrants would result in significant book value and
earnings dilution to existing shareholders. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General" and Notes 3 and 4 of Notes to Consolidated Financial
Statements.
24
ITEM 2. PROPERTIES
The Company has entered into three leases for approximately 65,500
square feet of office and laboratory space in Santa Barbara, California. The
first lease for approximately 18,300 square feet of space was entered into in
1992 at a base rent of approximately $16,000 per month. The rent is adjusted
annually based on increases in the consumer price index, and the rent is
$18,100 per month in 1997. This lease expires in October 1997, subject to the
Company's option to extend the lease for a three year term upon six months
notice to lessor. The facility is equipped and licensed to allow certain
laboratory testing and manufacturing. The Company manufactures and
distributes its active SnET2 drug substance from this facility.
In the second half of 1996, the Company entered into two additional
leases for approximately 47,200 square feet of office, laboratory and
manufacturing space. The current base rent for these two leases totals
approximately $45,700 per month. Each lease provides for rent to be adjusted
annually based on increases in the consumer price index. These leases expire
in August 1999, subject to the Company's option to extend them for a three
year term upon six months notice to lessor. Each leased property is located
in a business park and is subject to a master lease. The Company
manufactures its light producing and light delivery devices and performs
research and development of drugs, light delivery and light producing devices
from this facility. The Company will continue to incur additional costs for
the construction of the laboratories and office space associated with these
new facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently party to any material litigation or
proceeding and is not aware of any material litigation or proceeding
threatened against it.
During 1996, the Company and two of its executive officers responded to
subpoenas from the Securities and Exchange Commission (the "SEC") to provide
certain information and documents and to testify in the matter of "TRADING IN
THE SECURITIES OF THE UPJOHN COMPANY" (HO 3129). Although the breadth and
nature of this investigation is not known, neither the SEC nor its staff has
given any indication that it intends to make any allegations or bring any
claims against the Company or any of its directors or officers, and, after
completion of its own internal inquiries, the Company continues to believe
that neither it nor any of its officers or directors has engaged in any
inappropriate activity. The Company and management are cooperating fully
with the investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The Company's Common Stock is traded on The Nasdaq National Market under
the symbol PDTI. From April 11, 1995 through August 29, 1995, the Common
Stock was traded on The Nasdaq SmallCap Market. At the close of business on
August 29, 1995, the Common Stock ceased trading on The Nasdaq SmallCap
Market and on August 30, 1995 commenced trading on The Nasdaq National
Market. The following table sets forth high and low sales prices per share
of Common Stock as reported on The Nasdaq National Market based on published
financial sources, for the period commencing on August 30, 1995, and the high
and low bid prices of the Common Stock on The Nasdaq SmallCap Market for the
period from April 11, 1995 to August 29, 1995. The Nasdaq SmallCap Market
prices reflect inter-dealer prices, without mark-up, mark-down or commission
and may not reflect actual transactions.
HIGH LOW
-------- --------
1996
First quarter . . . . . . . . . . . . . . . . . . $ 62.00 $ 47.00
Second quarter. . . . . . . . . . . . . . . . . . 60.75 33.00
Third quarter . . . . . . . . . . . . . . . . . . 39.00 26.75
Fourth quarter. . . . . . . . . . . . . . . . . . 33.50 22.38
1995
Second quarter (from April 11). . . . . . . . . . $ 25.33 $ 10.67
Third quarter (through August 29) . . . . . . . . 38.67 21.17
Third quarter (from August 30). . . . . . . . . . 43.00 33.00
Fourth quarter. . . . . . . . . . . . . . . . . . 74.25 32.50
As of March 14, 1997, there were approximately 232 stockholders of
record of the Common Stock. The Company has never paid dividends, cash or
otherwise, on its capital stock and does not anticipate paying any such
dividends in the foreseeable future. The Company currently intends to retain
future earnings, if any, to finance the growth and development of its
business. Any future determination to pay dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant. The Company's bank
credit line prohibits the payment of dividends on the Common Stock.
26
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statement of operations data set forth below
for each of the three years in the period ended December 31, 1996 and the
consolidated balance sheet data set forth below at December 31, 1995 and 1996
are derived from the consolidated financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors, and which are
included elsewhere herein. The consolidated statement of operations data for
the years ended December 31, 1992 and 1993 and the consolidated balance sheet
data at December 31, 1992, 1993 and 1994 are derived from audited
consolidated financial statements not included herei n. The data set forth
below should be read in conjunction with Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and related notes listed under Item 14,
"Exhibits, Financial Statement Schedules, and Reports on Form 8-K."
Year Ended December 31,
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(in thousands, except share and per share data)
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues ........................ $ 3,598 $ 521 $ 130 $ 503 $ 2,444
Costs and expenses............... 22,113 12,416 9,350 7,636 4,780
----------- ----------- ----------- ----------- -----------
Loss from operations............. (18,515) (11,895) (9,220) (7,133) (2,336)
Interest income (expense)........ 2,373 185 (259) (134) 5
----------- ----------- ----------- ----------- -----------
Net loss......................... $ (16,142) $ (11,710) $ (9,479) $ (7,267) $ (2,331)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net loss per share (1) .......... $ (1.37) $ (1.19) $ (1.04) $ (0.85) $ (0.29)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Shares used in computing net
loss per share (1) .............. 11,786,429 9,861,212 9,115,926 8,508,882 8,117,216
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