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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITIONAL 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
Commission File Number 0-19635
GENTA INCORPORATED
(Exact name of Registrant as specified in its certificate of incorporation)
Delaware 33-0326866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3550 General Atomics Court
San Diego, California 92121
(Address of principal executive offices) (Zip Code)
(619) 455-2700
(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, $.001 par value
Preferred Stock Purchase Rights,
Par Value $.001
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 the voting stock held by
non-affiliates of the registrant was $16.7 million as of March 1, 1997. For
purposes of determining this number, 1.8 million shares of common stock held by
affiliates are excluded.
As of March 1, 1997, the registrant had 39,991,626 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Designated portions of Registrant's Definitive Proxy Statement to be furnished
for the Annual Meeting of the Stockholders to be held on April 4, 1997 are
incorporated by reference in Part III of this Form 10-K.
Part I
Item 1. Business
Overview
Genta Incorporated ("Genta" or the "Company"), incorporated under the
laws of the State of Delaware on February 4, 1988, is an emerging
biopharmaceutical company engaged in the development of a pipeline of
pharmaceutical products. Genta's multi-faceted approach incorporates a product
development portfolio with balanced technical risk, a novel drug delivery
technology and a United States/European business base. The near to mid-term
segment of the product pipeline consists of oral controlled-release drugs being
developed by the Company's 50%-owned drug delivery joint venture with Jagotec AG
("Jagotec"), Genta Jago Technologies B.V. ("Genta Jago"). Using Jagotec's
patented GEOMATRIX(R) drug delivery technology ("GEOMATRIX"), Genta Jago is
employing a two-pronged commercialization strategy: the development of generic
versions of successful brand-name controlled-release drugs and the development
of controlled-release formulations of drugs currently marketed in only immediate
release form. The Company's longer-term research efforts are focused on the
development of proprietary Anticode(TM) oligonucleotide ("Anticode")
pharmaceuticals intended to block or regulate the production of disease-related
proteins at the genetic level. The Company's Anticode programs are focused
primarily in the area of cancer. In late 1995, a phase I/IIa clinical trial was
initiated in the United Kingdom using Genta's Anticode drug ("G3139") in
non-Hodgkin's lymphoma patients for whom prior therapies have failed. The
clinical trial is being conducted in collaboration with the Royal Marsden NHS
Trust and the Institute for Cancer Research. In late 1996, an Investigational
New Drug application ("IND") for the G3139 clinical program was filed in the
United States and allowed to proceed by the United States Food and Drug
Administration ("FDA"). The Company also manufactures and markets specialty
biochemicals and intermediate products to the in vitro diagnostic and
pharmaceutical industries through its manufacturing subsidiary, JBL Scientific,
Inc. ("JBL"), a California corporation acquired by the Company in February,
1991.
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. The
Company intends that all forward-looking statements be subject to the safeharbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect the Company's views as of the date they are
made with respect to future events and financial performance, but are subject to
many risks and uncertainties, which could cause the actual results of the
Company to differ materially from any future results expressed or implied by
such forward-looking statements. Examples of such risks and uncertainties
include, but are not limited to: the obtaining of sufficient financing to
maintain the Company's planned operations; the timely development, receipt of
necessary regulatory approvals and acceptance of new products; the successful
application of the Company's technology to produce new products; the obtaining
of proprietary protection for any such technology and products; the impact of
competitive products and pricing and reimbursement policies; the changing of
market conditions and the other risks detailed in the Risk Factors section of
this Annual Report on Form 10-K and elsewhere herein. The Company does not
undertake to update any forward-looking statements.
See "Risk Factors" for a discussion of certain risks and uncertainties
applicable to the Company and its stockholders, including the Company's need for
additional funds to sustain its operations in 1997 and thereafter, as well as
the threat of a delisting of the Company's common stock from the Nasdaq SmallCap
Market.
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Oral Controlled-Release Drugs
Formulations of drugs using the GEOMATRIX technology are designed to
swell and gel when exposed to gastrointestinal fluids. This swelling and gelling
is designed to allow the active drug component to diffuse from the tablet into
the gastrointestinal fluids, gradually over a period of up to 24 hours. The
Company believes that the GEOMATRIX technology may have other benefits which,
collectively, may distinguish it from competing controlled-release technologies.
The Company believes GEOMATRIX formulations can control drug release and
potentially modulate pharmacokinetic profiles to produce a variety of desired
clinical effects. For example, the GEOMATRIX technology may be used to formulate
tablets with a rapid or a delayed therapeutic effect by varying the release
characteristics of the drug from the tablet. The GEOMATRIX technology may also
be used to formulate tablets that release two drugs at the same or different
rates, or tablets that release a drug in several pulses after administration.
Genta Jago is using the GEOMATRIX drug delivery technology to develop
oral controlled-release formulations for a broad range of presently marketed
drugs which have lost, or will in the near to mid-term lose, patent protection
and/or marketing exclusivity. Certain of these presently marketed drugs are
already available in a controlled-release format, while others are only
available in an immediate release format that requires dosing several times
daily. In the case of drugs already available in a controlled-release format,
Genta Jago is seeking to develop bioequivalent products which would be
therapeutic substitutes for the branded products. In the case of currently
marketed products that are only available in immediate release form requiring
multiple daily dosing, Genta Jago is seeking to develop once or twice-daily
controlled-release formulations. The potential benefits of Genta Jago's oral
controlled-release formulations may include improved compliance, greater
efficacy and reduced side effects as a result of a more constant drug plasma
concentration than that associated with immediate release drugs administered
several times daily.
Genta Jago's strategy is to commercialize its GEOMATRIX
controlled-release products worldwide primarily by forming alliances with major
pharmaceutical companies. Genta Jago has established three such collaborations.
See "Business -- Collaborative and Licensing Agreements" below.
Genta Jago currently has eight products in various stages of
development that are intended to be bioequivalent generic versions of
brand-name, controlled-release drugs currently marketed by others. Four of these
products, nifedipine (Procardia XL(R)), ketoprofen (Oruvail(R)),
carbidopa/levodopa (Sinemet(R)CR), and naproxen (Naprelan(R)) are currently
undergoing manufacturing scale-up after completion of formulations development
and pilot human pharmacokinetic studies. During the manufacturing scale-up phase
of development, Genta Jago and its collaborators are seeking to proceed from the
production of small-scale research quantities to the production of larger-scale
quantities necessary for commercial scale manufacturing. The scale-up has not
yet been successfully completed for these products. Assuming successful
completion of manufacturing scale-up, pivotal bioequivalency studies are
scheduled to begin for these products in 1997. Genta Jago believes that if such
bioequivalency studies are successfully completed, Abbreviated New Drug
Applications (each an "ANDA") may be filed with the FDA for two of its products
in 1997. In addition, potentially bioequivalent versions of two other
products--Voltaren-XR(R) (diclofenac) and Covera-HS(R) (verapamil)--have
completed formulations development and pilot pharmacokinetic studies. Genta Jago
intends to proceed with manufacturing scale-up on these two products during
1997.
Genta Jago has also completed initial formulations development and
pilot human pharmacokinetic studies for GEOMATRIX controlled-release
formulations of cefaclor (Ceclor CD(R)) and metoprolol tartrate and formulations
development is ongoing for additional products including acyclovir (Zovirax(R)).
Genta Jago continues to seek collaborative agreements for these products in
order to finance the manufacturing scale-up and required bioequivalency or
clinical studies. In addition to these products currently in development, Genta
Jago maintains the rights to apply the GEOMATRIX technology to the development
of up to approximately 50 additional drugs. There can be no assurance that any
product will be successfully developed or receive the necessary regulatory
approvals.
3
Anticode Programs
Anticode oligonucleotides represent a modern approach to drug
development based upon genetic control of disease. Many human diseases have a
genetic origins that involve either the expression of a harmful foreign gene or
the aberrant expression of a normal or mutated human gene. Anticode
oligonucleotides are short strands of synthetic nucleic acids designed to bind
to ("hybridize" with) specific sequences of disease-related RNA or DNA, thereby
blocking or controlling production of disease-related proteins. The Company
believes that, because of their selective binding properties, Anticode
oligonucleotides will not interfere with the function of normal cells, and
therefore, will elicit significantly fewer side effects than traditional drugs.
Anticode drugs may attack a disease at one of two levels. One approach is to
prevent the synthesis of essential disease-related proteins. In this approach,
certain oligonucleotides are used to interrupt the processing of, or selectively
to destroy, individual messenger RNA (mRNA) sequences, which leads to the
down-regulation (lowering of levels) of specific proteins and thereby
effectively eliminates the disease. This is referred to as the "antisense"
mechanism of action. A second therapeutic opportunity is to prevent
transcription of disease-causing DNA into the mRNA copy of the gene. This is
referred to as the "triple-strand to DNA" mechanism of activity.
Genta has focused its Anticode research on oligonucleotides with
methylphosphonate and phosphorothioate backbones. The Company has exclusively
licensed patents from Dr. Paul O. P. Ts'o, Dr. Paul Miller and Johns Hopkins
University ("Johns Hopkins") covering methylphosphonate technology. Genta also
has obtained certain rights to phosphorothioate oligonucleotide constructions.
Genta's scientists have improved these technologies by introducing
chirally-enriched or chirally-pure oligonucleotides. In preclinical studies,
these improved oligonucleotides effectively turn off the action of targeted mRNA
sequences inside cells. Intravenous administration of these oligonucleotides to
certain animals demonstrates that these compounds remain stable in the
circulatory system and are eventually excreted intact in the urine. New
proprietary delivery systems have also been developed to increase intracellular
concentration of oligonucleotides and to lower the drug dosage for potential
therapeutics. Management believes that the Company has the ability to acquire or
produce quantities of oligonucleotides sufficient to support its present needs
for research and its projected needs for initial clinical development programs.
The Company's Anticode research and development efforts are currently
focused primarily on its cancer, program as described below. Extensive
additional development will be required, and there can be no assurance that any
product will be successfully developed or will receive the necessary regulatory
approvals.
BCL2 Gene Target
The BCL2 gene is a proto-oncogene and a major inhibitor of apoptosis
(programmed cell death) of cancerous cells. The protein produced by this gene
has two known critical functions in the progression of cancer: it makes cancer
cells immortal, creating a survival advantage of malignant over normal cells;
and confers resistance to radiation and chemotherapy, rendering those treatments
ineffective in the late stages of many types of cancer. Genta's lead anti-BCL2
molecule, G3139, is designed to inactivate the RNA that produces the BCL2
protein product, thereby preventing cellular production of the protein. High
levels of BCL2 are associated with a poor clinical prognosis in many solid tumor
and hematological malignancies such as lymphoma, leukemia, melanoma, multiple
myeloma and prostate and breast cancers. The Company believes that its Anticode
strategy against the BCL2 gene has the potential to represent a significant
therapeutic opportunity in many of these cancers.
In preclinical studies conducted by Dr. Finbarr Cotter, at the
Institute for Child Health in London, an anti- BCL2 oligonucleotide was shown to
cure lymphoma-like disease induced by the injection of human B-cell lymphoma
cells in immunodeficient mice. In addition, in a variety of other animal
studies, anti-BCL2 Anticode oligonucleotides were found to inhibit the growth of
human melanoma, colon and human breast cancer tumors in immunodeficient mice.
G3139 has demonstrated efficacy when administered as a single agent.
In July 1996, the National Cancer Institute ("NCI") agreed to fund and
conduct preclinical studies of G3139. Pending the outcome of these ongoing
preclinical studies, NCI intends to sponsor Phase I human trials evaluating
G3139 against a number of solid tumor malignancies. The Company will collaborate
with NCI on the design of such clinical studies and the selection of tumor
targets. The primary goal of the trials will be to determine
4
the maximum tolerated dose of G3139, although any preliminary antitumor activity
will also be assessed. Tumors under consideration for clinical study include
malignant melanoma, breast, prostate and colorectal cancers. NCI would cover the
costs of running both preclinical and clinical studies. Genta would be
responsible for supplying NCI with necessary quantities of G3139 to carry out
this work.
In late 1995, a Phase I/IIa clinical trial was initiated in the United
Kingdom using Genta's anti-BCL2 Anticode oligonucleotides, G3139, in
non-Hodgkin's lymphoma patients for whom prior therapies have failed. The
clinical trial is being conducted in collaboration with the Royal Marsden NHS
Trust and the Institute for Cancer Research under the direction of Dr. David
Cunningham. The principal aim of this Phase I/IIa study is to define the maximum
tolerated dose of G3139. Secondary objectives include measurement of clinical
and biochemical disease parameters. To date, G3139 has been administered to 14
patients with relapsed and poor prognosis disease. Other than usually mild
topical skin irritation in most of the patients, no serious, clearly
drug-attributable or dose-limiting adverse effects have been seen, so far. The
doses have been escalated six times, and escalations continue. Some of the
patients have demonstrated encouraging signs of potential drug activity. The
responses included one patient in whom cancer mass was reduced and one who
developed a complete radiological tumor response for over 38 weeks in duration.
These results have been considered very encouraging by several prominent
oncologists and accepted for journal publications and presentation at peer
meetings, including that of the American Society of Clinical Oncologists.
Late in 1996, Genta's IND was filed in the United States and the FDA
has allowed the program to proceed. Genta is working with several prominent
United States and European clinical experts to devise the appropriate clinical
strategy for subsequent trials. Planning includes continuation of Phase I/IIa
clinical trials in non-Hodgkin's lymphoma, initiation of studies in different
BCL2 positive solid tumors, including those in the prostate, reported to express
BCL2 in the vast majority of patients. These studies will also examine both
subcutaneous and intravenous administration. Extensive additional clinical
studies are required, and there can be no assurance that the Company will secure
the funding necessary to conduct this development or that any product will be
successfully developed or receive the necessary regulatory approvals.
In September 1996, the Company received a notice of an allowance from
the United States Patent and Trademark Office for patent claims covering
antisense compounds targeted against BCL2. Those claims covering compositions of
matter give Genta exclusive rights to target sequences of the BCL2 gene. The
patent claims cover the Company's proprietary Anticode molecules which target
BCL2, including its lead clinical candidate, G3139. Other related patents and
claims in the United States and Europe are still pending.
Focal Adhesion Kinase (FAK) Gene Target
FAK protein is involved in the regulation of adhesion-dependent growth
and motility of cells. In a variety of cancers - human epithelial and
mesenchymal tumors, such as those implicated in melanoma, lymphoma and multiple
myeloma - the manufacture of FAK protein ("FAK expression") is highly active.
Moreover, increased FAK expression correlates with increased invasiveness and
increased ability of cancer to metastasize (spread of cancer through body). In
collaborative preclinical experiments with Dr. William G. Cance, at the
University of North Carolina, Genta's Anticode oligonucleotides against FAK were
shown to inhibit the growth of a primary (the site at which the cancer is
believed to have begun) tumor and to virtually eliminate metastases in human
melanoma/immunocompromised mice xenograft models. Combined with the observation
that anti-FAK oligonucleotides appear to show few adverse effects against normal
tissues, such results indicate that the FAK target may represent a promising
therapeutic opportunity for both the treatment of primary disease and the
prevention of metastatic disease.
In an effort to focus its research and development efforts on areas
which provide the most significant commercial opportunities, the Company
continually evaluates its ongoing programs in light of the latest market
information and conditions, availability of third party funding, technological
advances, and other factors. As a result of such evaluation, the Company's
product development plans have changed from time to time, and the Company
anticipates that they will continue to do so in the future. The Company recorded
research and development expenses of $5.8 million, $11.3 million and $13.5
million during 1996, 1995, and 1994, respectively, of which zero,
5
approximately $1.1 million and $3.1 million, respectively, were funded pursuant
to collaborative research and development agreements.
In 1996, the Company terminated those employees conducting
pre-clinical research on the Company's antisense projects.
Topical Dermatology Products
During 1996, the Company sold its rights relating to research and
development activities regarding two licensed topical dermatology products for
approximately $373,000. The Company does not presently intend to conduct further
activities in this area.
Manufacturing
In 1996, Genta continued to advance its technology for large-scale
production of its Anticode oligonucleotides and has also developed a high degree
of self-sufficiency for large-scale production of synthon raw materials for its
Anticode oligonucleotides. The Company also filed a series of key patent
applications in 1996 covering the improved synthesis of dimers essential to the
manufacture of its Anticode molecules.
Genta obtained its manufacturing capabilities in early 1991 through the
acquisition of JBL. JBL is a manufacturer of high-quality specialty biochemicals
and intermediate products for the pharmaceutical and in vitro diagnostic
industries. A number of Fortune 500 companies utilize JBL products as raw
material in the production of a final product. The manufacturing facilities at
JBL have not been formally inspected by the FDA for compliance with requirements
for Good Manufacturing Practices ("GMP"). The Company is continuing to develop
procedures, documentation and facilities for the production of Anticode
oligonucleotides which it believes will adequately comply with the necessary GMP
requirements. Failure to establish compliance with GMP to the satisfaction of
the FDA can result in delays in, or prohibition from, initiating clinical trials
or commercial marketing of a product.
The manufacture of all of the Company's and Genta Jago's products will
be subject to GMP requirements prescribed by the FDA or other standards
prescribed by the appropriate regulatory agency in the country of use. There can
be no assurance that the Company or Genta Jago will be able to manufacture
products or have products manufactured for either of them in a timely fashion at
acceptable quality and prices, that they or third party manufacturers can comply
with GMP, or that they or third party manufacturers will be able to manufacture
an adequate supply of product.
Genta Europe
Genta Europe has received $1.1 million of funding from a French
governmental agency, L'Agence National de Valorisation de la Recherche
("ANVAR"), towards research and development activities. Genta Europe is
currently in default under the agreement with ANVAR, and ANVAR has the right to
demand repayment of such funds. However, management believes that this matter
will be resolved in a mutually satisfactory manner.
Sales and Marketing
Genta Jago has secured collaborative agreements with three entities for
the development and commercialization of selected controlled-release
pharmaceuticals. Genta Jago's collaborative agreements generally provide the
collaborative partner exclusive rights to market and distribute the products in
exchange for royalty payments to Genta Jago on product sales. Genta Jago's goal
is to form additional collaborations to develop and market a number of its
GEOMATRIX controlled-release products, while potentially selecting certain
products to develop and commercialize on its own. Genta Jago would consider
several options for commercializing these potential products in the United
States including building a small sales force or contracting for the services of
an existing sales force. To market these potential products outside of the
United States, Genta Jago believes it would best utilize its resources through
licensing arrangements. There can be no assurance that any such potential
product will be successfully developed or that any prospective collaborations or
licensing arrangements will be entered into.
6
JBL manufactures and markets specialty biochemicals and intermediate
products to over 100 purchasers in the pharmaceutical and diagnostic industries,
with the top 10 customers representing more than 80% of JBL's total sales.
Collaborative and Licensing Agreements
Genta Jago
In December 1992, the Company and Jagotec formed Genta Jago, a
Netherlands corporation, to develop and commercialize therapeutic products on a
worldwide basis. The Company and Jagotec each own 50% of Genta Jago. Under the
arrangement, Jagotec granted Genta Jago an exclusive license to its GEOMATRIX
oral controlledrelease technology for the development and commercialization of
approximately 25 specified products (the "Initial Products"). In May 1995, the
parties entered into an agreement to expand Genta Jago by adding the rights to
develop and commercialize an additional 35 products (the "Additional Products").
With these Additional Products, Genta Jago now maintains the rights to develop
controlled-release formulations of approximately 60 products using Jagotec's
GEOMATRIX technology. Under the agreement, Genta Jago also acquired certain
manufacturing rights with respect to such products. In connection with the
expansion of Genta Jago, the parties elected to focus Genta Jago's activities
exclusively on GEOMATRIX oral-controlled release products. As a result, Genta
Jago returned to Genta, in May 1995, the right to develop six Anticode products
licensed from Genta in connection with the formation of Genta Jago in 1992.
In connection with the formation of Genta Jago, the Company made an
initial capital contribution of $4 million to Genta Jago and issued an aggregate
of 1.2 million unregistered shares of Genta's common stock to Jagotec and an
affiliate. To obtain the rights to the Additional Products and the manufacturing
rights in May 1995, Genta applied $5 million in option and related fees paid to
Jagotec and its affiliates, of which $3.85 million was paid during 1994
(including $1.85 million of non-refundable fees charged to expense during 1994)
and $1.15 million was paid in the first quarter of 1995. The Company also issued
an additional 1.24 million unregistered shares of Genta's common stock to an
affiliate of Jagotec in May 1995. Genta Jago is required to pay certain
additional fees to Jagotec upon Genta Jago's receipt of revenues from third
parties, and to pay manufacturing royalties to Jagotec.
The Company is also required to provide loans to Genta Jago pursuant to
a working capital agreement which expires in October 1998. The loans are
advanced up to a mutually agreed upon maximum commitment amount which is
established by the parties on a periodic basis. The Company anticipates
contributing working capital loans of up to approximately $300,000 to Genta Jago
during 1997. In connection with Genta Jago's return of the Anticode license
rights to Genta in May 1995, the working capital loan payable by Genta Jago to
Genta was credited with a principal reduction of approximately $4.4 million. As
of December 31, 1996, the Company had advanced working capital loans of
approximately $15.3 million to Genta Jago, net of principal repayments and the
aforementioned credit, which amount fully satisfied the loan commitment
established by the parties through December 31, 1996. Such loans bear interest
and are payable in full in October 1998, or earlier in the event certain
revenues are received by Genta Jago from third parties. There can be no
assurance, however, that Genta Jago will obtain sufficient financial resources
to repay such loans to Genta. Genta Jago repaid Genta $1 million of its working
capital loans, in November 1996, from license fee revenues.
Genta has the option to purchase Jagotec's interest in Genta Jago
during the period beginning in December 1998 through the year 2000. The exercise
price with respect to the Initial Products is the lesser of the fair market
value at the time of exercise of the 50% interest in the Initial Products owned
by Jagotec, or $100 million, in each case reduced by the market value at the
time of exercise of the purchase option of the 1.2 million shares of Genta
common stock issued to Jagotec and an affiliate in 1992. The exercise price with
respect to the Additional Products is the fair market value at the time of
exercise of the 50% interest in the Additional Products owned by Jagotec. The
Company also has an exclusive worldwide license to use Jagotec's GEOMATRIX
technology in Genta's Anticode development programs. Genta Jago has contracted
with Genta and Jagotec to conduct research and development and provide certain
other services.
7
Genta Jago/Gensia/Brightstone
In January 1993, Genta Jago entered into a collaboration agreement with
Gensia, Inc. ("Gensia") for the development and commercialization of a
potentially bioequivalent nifedipine product, an oral controlled-release
pharmaceutical product for treatment of cardiovascular disease. Under the
agreement, Gensia was to provide funding for formulation and preclinical
development to be conducted by Genta Jago and to be responsible for clinical
development, regulatory submissions and marketing. Terms of the agreement
provided Gensia exclusive rights to market and distribute the products in North
America, Europe and certain other countries. Genta Jago received $2.2 million,
$1.9 million and $4.9 million of research and development funding in 1996, 1995
and 1994, respectively, pursuant to the agreement. Collaborative revenues of
$2.8 million, $3 million and $4.2 million were recognized under the agreement
during the years ended December 31, 1996, 1995 and 1994, respectively.
Effective October 1996, Gensia and SkyePharma PLC ("SkyePharma")
reached an agreement whereby a SkyePharma subsidiary, Brightstone Pharma, Inc.
("Brightstone"), was assigned Gensia's rights to develop and copromote the
potentially bioequivalent nifedipine product under the collaboration agreement
with Genta Jago. The assignment was accepted by Genta Jago and has no impact on
the terms of the original agreement. Genta Jago is still entitled to receive
additional milestone payments from Brightstone triggered upon regulatory
submissions and approvals, as well as royalties or profit sharing ranging from
10% to 21% of product sales, if any.
Genta's Chairman and Chief Executive Officer is a member of Gensia's
Scientific Advisory Board.
Genta Jago/Apothecon
In March 1996, Genta Jago entered into a collaborative licensing and
development agreement with Apothecon, Inc. ("Apothecon"), the multisource
subsidiary of Bristol-Myers Squibb Co. Under the terms of the agreement,
Apothecon provides funding to Genta Jago up to a specified maximum amount for
the formulation, development and clinical testing of a GEOMATRIX formulation of
OD-CR ketoprofen, subject to certain early termination rights. The agreement
also provides for Genta Jago to receive potential milestone payments and
royalties on product sales, if any. Terms of the agreement provide Apothecon
exclusive rights to market and distribute the products on a worldwide basis.
During 1996, Genta Jago received $1.1 million in funding under the arrangement
and recognized $1.3 million of collaborative revenue from the arrangement.
Genta Jago/Krypton
In October 1996, Genta Jago entered into five collaborative licensing
and development agreements with Krypton, Ltd. ("Krypton"), a subsidiary of
SkyePharma. Under the terms of the agreements, Genta Jago is to sublicense to
Krypton rights to develop and commercialize potentially bioequivalent GEOMATRIX
versions of five currently marketed products. Genta Jago also granted Krypton an
option to sublicense rights to develop and commercialize an improved version of
a sixth product. During 1996, Genta Jago received funding of $1 million under
the collaborative agreements and recognized $1 million of collaborative revenue
from the agreements.
8
Chugai/Gen-Probe
In February 1989, the Company entered into a development, license and
supply agreement with Gen-Probe Incorporated ("Gen-Probe"). Gen-Probe was
subsequently acquired by Chugai Pharmaceutical Company, Ltd. ("Chugai"), a
Japanese corporation. Chugai has the option to acquire an exclusive worldwide
license to any product consisting of, including, derived from or based on
oligonucleotides for the treatment or prevention of Epstein-Barr virus,
cytomegalovirus, HIV, human T-cell leukemia virus-1 and all leukemias and
lymphomas. Genta is obligated to pursue the development of a therapeutic
compound for the treatment of one of these indications as its first therapeutic
development program. If Chugai exercises its option to acquire rights to a
product in any such indication, the Company will grant Chugai certain rights to
sell such product and Chugai must fund Genta's development of any such product,
subject to certain limitations and early termination rights. If Chugai fully
funds the development of such product, profits on sales of such product will be
shared between the parties. Through the agreement, the Company also has obtained
certain rights to phosphorothioate oligonucleotide constructions and other
technology. In return, the Company has agreed to pay Chugai a royalty on sales
of products derived from such technology. Gen-Probe is a stockholder in the
Company.
Ts'o/Miller/Hopkins
In February 1989, the Company entered into a license agreement with
Drs. Paul Ts'o and Paul Miller (the "Ts'o/Miller Agreement") pursuant to which
Drs. Ts'o and Miller granted an exclusive license to the Company to certain
issued patents, patent applications and related technology regarding the use of
nucleic acids and oligonucleotides, including methylphosphonates, as
pharmaceutical agents. Dr. Ts'o is a Professor of Biophysics, Department of
Biochemistry, and Dr. Miller a Professor of Biochemistry, both at the School of
Public Health and Hygiene, Johns Hopkins University. In May 1990, the Company
entered into a license agreement with Johns Hopkins (the "Johns Hopkins
Agreement," and collectively with the Ts'o/Miller Agreement, referred to herein
as the "Ts'o/Miller/Hopkins Agreements") pursuant to which Johns Hopkins granted
Genta an exclusive license to its rights in certain issued patents, patent
applications and related technology developed as a result of research conducted
at Johns Hopkins by Drs. Ts'o and Miller and related to the use of nucleic acids
and oligonucleotides as pharmaceutical agents. In addition, Johns Hopkins has
granted Genta certain rights of first negotiation to inventions made by Drs.
Ts'o and Miller in their laboratories in the area of oligonucleotides and to
inventions made by investigators at Johns Hopkins in the course of research
funded by Genta, which inventions are not otherwise included in the
Ts'o/Miller/Hopkins Agreements. Genta has agreed to pay Dr. Ts'o, Dr. Miller and
Johns Hopkins royalties on net sales of products covered by the issued patents
and patent applications, but not the related technology, licensed to the Company
under the Ts'o/Miller/Hopkins Agreements. The Company has also agreed to pay
certain minimum royalties prior to commencement of commercial sales of such
products, which royalties may be credited under certain conditions against
royalties payable on subsequent sales. Subject to certain rights of early
termination, the Ts'o/Miller/Hopkins Agreements remain in effect for the life of
the last-to-expire patent licensed under the respective agreements or until
abandonment of the last-pending patent application licensed under the respective
agreements.
As of December 31, 1996, the Company owed Johns Hopkins $627,271, of
which $200,000 consists of royalty payments for 1995 and 1996 and the balance
consisted of the Company's obligations to provide funds to support a
post-doctoral research program of Johns Hopkins. In February 1997, the Company
paid Johns Hopkins $100,000 toward the post-doctoral support program. The
Company is in negotiations with Johns Hopkins as to payment of the remaining
balance in cash and securities. On February 14, 1997, the Company received
notice from Johns Hopkins that the Company was in material breach of the Johns
Hopkins Agreement. The Johns Hopkins Agreement provides that, if a material
payment default is not cured within 90 days of receipt of notice of such breach,
Johns Hopkins may terminate the Johns Hopkins Agreement. A termination of the
Johns Hopkins agreement could have a material adverse effect on the Company.
9
Other Anticode Agreements
The Company entered into agreements with Baxter Healthcare Corporation
and Johnson & Johnson Consumer Products, Inc. in late 1995, which provide
limited funding for preliminary feasibility studies using Genta's Anticode
compounds. Under the terms of these agreements, if the collaborative partner
elects to pursue the commercial development of an Anticode compound upon
completion of the feasibility studies, the parties would enter into mutually
acceptable development, license and supply agreements.
Patents and Proprietary Technology
The Company's policy is to protect its technology by, among other
things, filing patent applications with respect to technology considered
important to the development of its business. The Company also relies upon trade
secrets, unpatented know-how, continuing technological innovation and the
pursuit of licensing opportunities to develop and maintain its competitive
position.
Genta has a portfolio of intellectual property rights to aspects of
Anticode technology which includes rights in novel compositions of matter,
methods of large-scale synthesis and methods of controlling gene expression.
This portfolio includes issued United States and Canadian patents and patent
applications, which were licensed by Genta under the Ts'o/Miller/Hopkins
Agreements as described above, and patent applications filed by the Company. In
addition, foreign counterparts of certain applications have been filed or will
be filed at the appropriate time. These issued patents will expire, absent
regulatory extension, in the years 2001 through 2005. Additional allowed patents
under this agreement generally would not expire until 17 years after the date of
allowance or, in other cases, 20 years from the date of application. Generally,
it is the Company's strategy to apply for patent protection in the United
States, Canada, Western Europe, Israel, Taiwan, Japan, Australia and New
Zealand. The Company seeks to coordinate its patent protection policy with those
of its licensors; however, of the six issued patents licensed by Genta under the
Ts'o/Miller/Hopkins Agreements, five were filed only in the United States and
one was filed in both the United States and Canada. Genta also has rights of
first refusal for future antisense work performed by Drs. Ts'o and Miller. See
"Collaborative and Licensing Agreements -- Ts'o/Miller/Hopkins."
Since its incorporation, Genta has separately filed an aggregate of
over 100 United States and foreign patent applications covering new compositions
and improved methods to use, synthesize and purify Anticode oligonucleotides and
linker-arm technology.
Under the agreement with Gen-Probe, Genta gained non-exclusive access
to all technology developed by Gen-Probe related to the use of DNA probes for
therapeutic applications as of February 1989. This technology is related to
nucleic acid probes for quantitation of organisms and viruses, methods for their
production, including nonnucleotide linking reagents, labeling, and
purification, and methods for their use including hybridization and enhanced
hybridization. This includes rights to 14 issued patents and several pending
United States patent applications and corresponding issued and pending
applications in foreign countries. See "Collaborative and Licensing Agreements
- -- Chugai/Gen-Probe".
Genta also gained access to certain rights from the National Institutes
of Health ("NIH") covering phosphorothioate oligonucleotides. This includes
rights to three United States issued patents, one granted European patent and
other corresponding foreign applications which are still pending. In addition,
under an agreement with the University of Pennsylvania, Genta has acquired
exclusive rights for the use of BCL2 as a target for antisense and gene
therapy-based treatments for cancer.
In September 1996, the Company received a notice of an allowance from
the United States Patent and Trademark Office for patent claims covering
antisense compounds targeted against BCL2 based on the technology acquired from
the University of Pennsylvania. Those claims covering compositions of matter
give Genta exclusive rights to target sequences of the BCL2 gene. The patent
claims cover the Company's proprietary Anticode molecules which target BCL2,
including its lead clinical candidate, G3139. Other related patents and claims
in the United States and Europe are still pending.
10
Jagotec's GEOMATRIX technology is the subject of issued patents and
pending applications. Jagotec currently holds four issued United States patents,
five granted foreign patents, and other corresponding foreign patent
applications still pending that cover the GEOMATRIX technology. Certain rights
to GEOMATRIX technology have been licensed to Genta Jago. See "Collaborative and
Licensing Agreements -- Genta Jago".
The patent positions of biopharmaceutical and biotechnology firms,
including Genta, can be uncertain and involve complex legal and factual
questions. Consequently, even though Genta is currently prosecuting its patent
applications with the United States and foreign patent offices, the Company does
not know whether any of its applications will result in the issuance of any
patents or, if any issued patents will provide significant proprietary
protection or will be circumvented or invalidated. Since patent applications in
the United States are maintained in secrecy until patents issue, and since
publication of discoveries in the scientific or patent literature tend to lag
behind actual discoveries by several months, Genta cannot be certain that others
have not filed patent applications directed to inventions covered by its pending
patent applications or that it was the first to file patent applications for
such inventions.
Competitors or potential competitors may have filed applications for,
or have received patents and may obtain additional patents and proprietary
rights relating to, compounds or processes competitive with those of the
Company. See "Competition." Accordingly, there can be no assurance that the
Company's patent applications will result in issued patents or that, if issued,
the patents will afford protection against competitors with similar technology;
nor can there be any assurance that any patents issued to Genta will not be
infringed or circumvented by others; nor can there be any assurance that others
will not obtain patents that the Company would need to license or design around.
There can be no assurance that the Company will be able successfully to obtain a
license to technology that it may require or that, if obtainable, such a license
would be available on reasonable terms.
There can be no assurance that the Company's patents, if issued, would
be held valid by a court of competent jurisdiction. Moreover, the Company may
become involved in interference proceedings declared by the United States Patent
and Trademark Office in connection with one or more of its patents or patent
applications to determine priority of invention, which could result in
substantial cost to the Company, as well as a possible adverse decision as to
priority of invention of the patent or patent application involved.
The Company also relies upon unpatented trade secrets and no assurance
can be given that third parties will not independently develop substantially
equivalent proprietary information and techniques or gain access to the
Company's trade secrets or disclose such technology to the public, or that the
Company can meaningfully maintain and protect unpatented trade secrets.
Genta requires its employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors to execute a
confidentiality agreement upon the commencement of employment or consulting
relationship with the Company. The agreement generally provides that all
confidential information developed or made known to the individual during the
course of the individual's relationship with Genta shall be kept confidential
and shall not be disclosed to third parties except in specific circumstances. In
the case of employees, the agreement generally provides that all inventions
conceived by the individual shall be assigned to, and made the exclusive
property of, the Company. There can be no assurance, however, that these
agreements will provide meaningful protection for the Company's trade secrets or
adequate remedies in the event of unauthorized use or disclosure of such
information, or in the event of an employee's refusal to assign any patents to
the Company in spite of such contractual obligation.
11
Government Regulation
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of the
Company's proposed products and in its ongoing research and product development
activities. All of the Company's therapeutic products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous preclinical and clinical
testing and premarket approval procedures by the FDA and similar authorities in
foreign countries. Various federal, and in some cases state, statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such products. The lengthy process of
seeking these approvals, and the subsequent compliance with applicable federal
and in some cases state, statutes and regulations, require the expenditure of
substantial resources. Any failure by the Company, its collaborators or its
licensees to obtain, or any delay in obtaining, regulatory approvals could
adversely affect the marketing of any products developed by the Company and its
ability to receive product or royalty revenue.
The activities required before a new pharmaceutical agent may be
marketed in the United States begin with preclinical testing. Preclinical tests
include laboratory evaluation of product chemistry and animal studies to assess
the potential safety and efficacy of the product and its formulations. The
results of these studies must be submitted to the FDA as part of an IND, which
must be reviewed and approved by the FDA before proposed clinical testing can
begin. An IND becomes effective within 30 days of filing with the FDA unless the
FDA imposes a clinical hold on the IND. In addition, the FDA may, at any time,
impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical
hold, clinical trials cannot commence or recommence, as the case may be, without
prior FDA authorization and then only under terms authorized by the FDA.
Typically, clinical testing involves a three-phase process. In Phase I, clinical
trials are conducted with a small number of subjects to determine the early
safety profile and the pattern of drug distribution and metabolism. In Phase II,
clinical trials are conducted with groups of patients afflicted with a specific
disease in order to determine preliminary efficacy, optimal dosages and expanded
evidence of safety. In Phase III, large-scale, multi-center, comparative
clinical trials are conducted with patients afflicted with a target disease in
order to provide enough data for the statistical proof of efficacy and safety
required by the FDA and others. In the case of products for life-threatening
diseases, the initial human testing is generally done in patients rather than in
healthy volunteers. Since these patients are already afflicted with the target
disease, it is possible that such studies may provide results traditionally
obtained in Phase II trials. These trials are frequently referred to as "Phase
I/II" trials.
The results of the preclinical and clinical testing, together with
chemistry, manufacturing and control information, are then submitted to the FDA
for a pharmaceutical product in the form of a New Drug Application ("NDA"), for
a biological product in the form of a Product License Application ("PLA") or for
medical devices in the form of a Premarket Approval Application ("PMA") for
approval to commence commercial sales. In responding to an NDA, PLA or PMA, the
FDA may grant marketing approval, request additional information or deny the
application if it determines that the application does not satisfy its
regulatory approval criteria. There can be no assurance that approvals will be
granted on a timely basis, if at all, or if granted will cover all the clinical
indications for which the Company is seeking approval or will not contain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use.
In circumstances where a company intends to develop and introduce a
novel formulation of an active drug ingredient already approved by the FDA,
clinical and preclinical testing requirements may not be as extensive. Limited
additional data about the safety and/or effectiveness of the proposed new drug
formulation, along with chemistry and manufacturing information and public
information about the active ingredient, may be satisfactory for product
approval. Consequently, the new product formulation may receive marketing
approval more rapidly than a traditional full NDA, although no assurance can be
given that a product will be granted such treatment by the FDA.
For clinical investigation and marketing outside the United States, the
Company is or may be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. The Company's approach is to design its European
clinical trials studies to meet FDA, European Economic Community ("EEC") and
other European countries' standards. At present, the marketing authorizations
12
are applied for at a national level, although certain EEC procedures are
available to companies wishing to market a product in more than one EEC member
state. If the competent authority is satisfied that adequate evidence of safety,
quality and efficacy has been presented, a market authorization will be granted.
The registration system proposed for medicines in the EEC after 1992 is a dual
one in which products, such as biotechnology and high technology products and
those containing new active substances, will have access to a central regulatory
system that provides registration throughout the entire EEC. Other products will
be registered by national authorities under the local laws of each EEC member
state. Provided regulatory harmonization is finalized in the EEC, the Company's
clinical trials will be designed to develop a regulatory package sufficient for
multi-country approval in the Company's European target markets without the need
to duplicate studies for individual country approvals. This approach also takes
advantage of regulatory requirements in some countries, such as in the United
Kingdom, which allow Phase I studies to commence after appropriate toxicology
and preclinical pharmacology studies, prior to formal regulatory approval.
Prior to the enactment of the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Waxman/Hatch Act"), the FDA, by regulation,
permitted certain pre-1962 drugs to be approved under an abbreviated procedure
which waived submission of the extensive animal and human studies of safety and
effectiveness normally required to be in a NDA. Instead, the manufacturer only
needed to provide an ANDA containing labeling, information on chemistry and
manufacturing procedures and data establishing that the original "pioneer"
product and the proposed "generic" product are bioequivalent when administered
to humans.
Originally, the FDA's regulations permitted this abbreviated procedure
only for copies of a drug that was approved by the FDA as safe before 1962 and
which was subsequently determined by the FDA to be effective for its intended
use. In 1984, the Waxman/Hatch Act extended permission to use the abbreviated
procedure established by the FDA to copies of post-1962 drugs subject to the
submission of the required data and information, including data establishing
bioequivalence. However, effective approval of such ANDAs were dependent upon
there being no outstanding patent or non-patent exclusivities.
Additionally, the FDA allows, under section 505(b)(2) of the Food Drug
and Cosmetic Act, for the submission and approval of a hybrid application for
certain changes in drugs which, but for the changes, would be eligible for an
effective ANDA approval. Under these procedures the applicant is required to
submit the clinical efficacy and/or safety data necessary to support the changes
from the ANDA eligible drug (without submitting the basic underlying safety and
efficacy data for the chemical entity involved) plus manufacturing and chemistry
data and information. Effective approval of a 505(b)(2) application is dependent
upon the ANDA eligible drug upon which the applicant relies for the basic safety
and efficacy data being subject to no outstanding patent or non-patent
exclusivities. As compared to a NDA, an ANDA or a 505(b)(2) application
typically involves reduced research and development costs. However, there can be
no assurance that any such applications will be approved. Furthermore, the
supply of raw materials must also be approved by the FDA.
The Company is also subject to various foreign, federal, state and
local laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use, manufacture, storage, handling and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research and development work and
manufacturing processes. Although the Company believes it is in compliance with
these laws and regulations in all material respects (except as disclosed under
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources"), there can be no assurance that
the Company will not be required to incur significant costs to comply with such
regulations in the future.
13
Competition
For many of their applications, the Company's, and Genta Jago's,
products under development will be competing with existing therapies for market
share. In addition, a number of companies are pursuing the development of
antisense and triple-strand technology and controlled-release formulation
technology and the development of pharmaceuticals utilizing antisense and
triple-strand technology and controlled-release formulation technology. The
Company competes with fully integrated pharmaceutical companies, many of which
have more substantial experience, financial and other resources and superior
expertise in research and development, manufacturing, testing, obtaining
regulatory approvals, marketing and distribution. Smaller companies may also
prove to be significant competitors, particularly through their collaborative
arrangements with large pharmaceutical companies or academic institutions.
Furthermore, academic institutions, governmental agencies and other public and
private research organizations have conducted and will continue to conduct
research, seek patent protection and establish arrangements for commercializing
products. Such products may compete directly with any products which may be
offered by the Company.
The Company's products under development are expected to address an
array of markets. The Company's competition will be determined in part by the
potential indications for which the Company's products are developed and
ultimately approved by regulatory authorities. For certain of the Company's
potential products, an important factor in competition may be the timing of
market introduction of the Company's or competitor's products. Accordingly, the
relative speed with which Genta and Genta Jago can develop products, complete
the clinical trials and approval processes and supply commercial quantities of
the products to the market are expected to be important competitive factors. The
Company expects that competition among products approved for sale will be based,
among other things, on product efficacy, safety, reliability, availability,
price, patent position and sales, marketing and distribution capabilities. The
development by others of new treatment methods could render the Company's and
Genta Jago's products under development non-competitive or obsolete. The
Company's competitive position also depends upon its ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
JBL's products address several markets, including clinical chemistry,
diagnostics, molecular biology and pharmaceutical development. While many
customers have specified JBL products in their manufacturing protocols,
competition from several international competitors could undermine JBL's
competitive position, many of whom have more substantial experience, financial
and other resources and superior expertise in research and development,
manufacturing, testing, obtaining regulatory approvals, marketing and
distribution. Competition has come primarily on price for some key JBL products
for pharmaceutical development, and from competing technologies in diagnostics
and molecular biology.
Human Resources
As of December 31, 1996, Genta, JBL and Genta Europe had 22, 41 and 2
employees, respectively, 13 of whom held doctoral degrees. Twenty employees were
engaged in research and development activities, 21 were engaged in manufacturing
and 24 were in administration, sales and marketing positions. A significant
number of the Company's management and professional employees have had prior
experience and positions with pharmaceutical and biotechnology companies. Genta
believes it maintains satisfactory relations with its employees.
In October 1996, the Company terminated its nine employees conducting
pre-clinical research on the Company's "antisense" projects and Genta Europe
terminated seven employees. The Company's overall staff was reduced by an
additional net reduction of ten employees in 1996, due to attrition.
Risk Factors
In addition to the other information contained in this Annual Report on
Form 10-K, the following factors should be considered carefully.
14
Need for Additional Funds; Risk of Insolvency. Genta's operations to
date have consumed substantial amounts of cash. The Company anticipates that its
existing cash funds, including $3 million in additional financing obtained in
February 1997, will enable the Company to maintain its presently planned
operations until July, 1997. The Company's auditors have included an emphasis
paragraph in their opinion with respect to the Company's ability to continue as
a going concern. Management believes that a minimum of approximately $6.4
million of additional financing will be necessary to sustain operations through
the end of 1997 and to satisfy the Company's obligations under its Senior
Secured Convertible Bridge Notes (the "Convertible Notes") and 4% Convertible
Debentures (the "Convertible Debentures"). Substantial additional sources of
financing will be required in order for the Company to continue its planned
operations thereafter, as well. Furthermore, The Nasdaq Stock Market, Inc.
("Nasdaq") has informed the Company that its common stock will be delisted from
the Nasdaq SmallCap Market unless the Company makes a public filing with the
Securities and Exchange Commission and Nasdaq by April 7, 1997 evidencing
minimum capital and surplus of at least $6 million. See "Risk Factors -- Threat
of Nasdaq Delisting" below. The Company is negotiating with pharmaceutical
companies regarding collaborative agreements and other financing arrangements
and is actively seeking additional equity or debt financing. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." However, there can be no assurance that any
such collaborative agreements or other sources of funding will be available on
favorable terms, if at all. If such funding is unavailable, the Company will be
required to license or sell certain of its assets and technology, further scale
back or eliminate some or all of its development programs, further reduce its
work force and spending, and take other measures in order to continue its
operations. If such measures are not successfully completed, the Company may be
required to discontinue its operations. The Company will need to raise
substantial additional funds to conduct the costly and time-consuming research,
pre-clinical development and clinical trials necessary to bring its and Genta
Jago's products to market and to establish production and marketing
capabilities. The Company will also need substantial additional funds to provide
working capital loans to Genta Jago. The Company intends to seek additional
funding through public or private financings, including equity financings, and
through collaborative arrangements. Adequate funds for these purposes, whether
obtained through financial markets or collaborative or other arrangements with
corporate partners or from other sources, may not be available when needed or on
terms acceptable to the Company. Insufficient funds may require the Company to
delay, scale back or eliminate some or all of its research and product
development programs or to license third parties to commercialize products or
technologies that the Company would otherwise seek to develop itself. The
Company's future cash requirements will be affected by results of research and
development, results of preclinical studies and bioequivalence and clinical
trials, relationships with corporate collaborators, changes in the focus and
direction of the Company's research and development programs, competitive and
technological advances, resources devoted to Genta Jago, the FDA and foreign
regulatory process, potential litigation by companies seeking to prevent or
delay marketing approval of Genta Jago's products and other factors.
Threat of Nasdaq Delisting. Since October 22, 1996 the Company's common
stock has been trading at less than $1.00 per share. Effective February 7, 1997
the Company's common stock was removed from the Nasdaq National Market and began
trading on the Nasdaq SmallCap Market under a conditional exception from the bid
price and capital surplus requirements of the Nasdaq SmallCap Market. Nasdaq has
indicated that, unless the Company's common stock achieves a minimum bid price
of at least $1.50 per share by April 7, 1997, and maintains a minimum bid price
of at least $1.50 per share for a period of ten consecutive days thereafter, the
Company's common stock will be delisted from the Nasdaq SmallCap Market. The
Board of Directors of the Company has approved an amendment to the Company's
Restated Certificate of Incorporation effecting a one-for-ten reverse stock
split of the Company's common stock (the "Reverse Split Amendment") and has
recommended that stockholders approve the Reverse Split Amendment at the Annual
Meeting of Stockholders to be held on April 4, 1997. The Company believes that,
if the Reverse Split Amendment is approved, it can meet Nasdaq's terms; however,
there can be no assurance that, even with the reverse stock split, the Company
will be able to maintain its listing on the Nasdaq SmallCap Market. To maintain
such listing, the Company will also be required to make a public filing with the
SEC and Nasdaq evidencing minimum capital and surplus of $6 million on or before
April 7, 1997. While the Company believes that it can meet this capital and
surplus level by such date, there can be no assurance that the Company will
succeed in timely achieving this requirement or that, even if successful, the
Company's common stock would not be delisted from the Nasdaq SmallCap Market.
There can be no assurances that approval of the Reverse Split Amendment will
succeed in raising the bid price of the Company's common stock above $1.50 per
share, that such minimum price if achieved would be maintained for the requisite
period, or that even if Nasdaq's minimum bid price requirement were satisfied,
the Company's common stock would not be delisted from the Nasdaq
15
SmallCap Market for other reasons. A delisting of the Company's common stock
could adversely affect the ability of the Company to attract new investors.
Subordination of Common Stock to Series A and Series C Preferred Stocks
and Redemption of Series A Preferred Stock; Risk of Dilution. The common stock
is expressly subordinate to the approximately $30 million preference of the
528,100 outstanding shares of Series A Preferred Stock and the approximately
$1.5 million preference of the 1,424 shares of Series C Preferred Stock in the
event of the liquidation, dissolution or winding up of the Company. Further, no
dividends may be paid on the common stock unless full cumulative dividends on
the Series A and Series C Preferred Stocks have been paid or funds set aside for
such preferred dividends by the Company. In addition, the conversion ratio of
the Series A Preferred Stock and the exercise price of warrants issued in
connection with the Series A Preferred Stock (the "Series A Warrants") is
subject to adjustment, among other things, upon certain issuances of common
stock or securities convertible into common stock at $6.75 per share or less.
Each share of Series A preferred stock is presently convertible into 21.31
shares of common stock and the exercise price of the Series A Warrants is $2.60
per share.
The Series A Preferred Stock was subject to a mandatory redemption
(the "Mandatory Redemption") by the Company on September 23, 1996 (the
"Redemption Date"). Under the terms of the Mandatory Redemption, as set forth in
the Company's Restated Certificate of Incorporation, the Redemption Price of $50
per share plus accrued dividends was to be paid, subject to certain conditions,
in common stock valued at an average trading price for ten trading days before
August 20, 1996. The Company elected to effect the Mandatory Redemption through
the use of common stock, and then was required to use its best efforts to
arrange with an investment bank acceptable to the holders of Series A preferred
stock for a firm commitment underwriting relating to such shares. The Company
was unable to arrange for such a firm commitment offering and is now required to
use its reasonable efforts to arrange for a firm commitment underwriting as
promptly as practicable and to redeem any remaining outstanding shares of Series
A preferred stock upon arranging for such firm commitment underwriting. Even if
the Company is successful in satisfying its Mandatory Redemption obligations
with its shares of common stock, holders of common stock will experience
substantial dilution at the time of such redemption. Terms of the Company's
Series A preferred stock provide for the payment of dividends annually in
amounts ranging from $3.00 per share per annum for the first year to $5.00 per
share per annum in the third and fourth years. Dividends may be paid in cash or
common stock or a combination thereof, at the Company's option. Dividends on the
preferred stock accrue on a daily basis (whether or not declared) and shall
accumulate to the extent not paid on the annual dividend payment date following
the dividend period for which they accrue. Each share of Series C Preferred
Stock is convertible, subject to certain conditions, at the option of the
holder, into that number of shares of common stock determined by dividing the
sum of $1,000, plus all accrued dividends on each share of Series C Preferred
Stock (approximately $40 per share), by the conversion price of the Series C
Preferred Stock. The conversion price of the Series C Preferred Stock is equal
to 75% of the average of the closing bid prices of the Company's common stock on
the Nasdaq Stock Market for a specified period. Terms of the Company's Series C
convertible preferred stock also provide for dividends payable in shares of the
Company's common stock. The Company has paid and, to the extent permitted by
law, intends to continue paying the dividends in shares of the Company's common
stock.
Subordination of Common Stock to Senior Secured Convertible Bridge
Notes and 4% Convertible Debentures; Risk of Dilution. In the event of a
liquidation, dissolution or winding up of the Company, the common stock is also
expressly subordinate to $3 million principal amount of Convertible Notes and to
$350,000 principal amount of Convertible Debentures; both issues are payable in
August, 1997. Further, no dividends may be paid on the common stock unless
cumulative dividends on such convertible notes and debentures have been paid or
funds have been set aside for such payment. The Convertible Notes are initially
convertible into 600,000 shares of Series D preferred stock, which are in turn
convertible into 20 million shares of common stock, subject to antidilution
adjustments. The Convertible Debentures are convertible into a maximum of
122,101 shares of common stock.
Early Stage of Development; Technological Uncertainty. Genta is at an
early stage of development. All of the Company's potential therapeutic products
are in research or development, and no revenues have been generated from
therapeutic product sales. The Company is pursuing research and development,
through Genta Jago, of a range of oral controlled-release formulations of
currently available pharmaceuticals. Many of the products to be developed
through Genta Jago have not yet been successfully formulated using GEOMATRIX
technology. In
16
addition, none of the products being developed through Genta Jago has had its
manufacturing process successfully scaled-up for commercial production or has
started pivotal bioequivalence trials. To date, a major portion of the Company's
resources have been dedicated to applying molecular biology and medicinal
chemistry to the research and development of potential pharmaceutical products
based upon Anticode technology. While the Company has demonstrated the activity
of Anticode technology in model systems in vitro and the activity of antisense
technology in animals and has identified a number of compounds which the Company
believes are worthy of additional testing, only one of these potential Anticode
products has begun to be tested in humans, with such testing in its early
stages. There can be no assurance that the novel approach of Anticode technology
to develop therapeutic products will result in products which receive necessary
regulatory approvals or that will be successful commercially. Further, results
obtained in preclinical studies or pilot bioequivalence trials are not
necessarily indicative of results that will be obtained in human clinical
testing or pivotal bioequivalence trials, respectively. The Company is also
developing products for certain diseases where no animal models exist. There can
be no assurance that any of the Company's or Genta Jago's potential products can
be successfully developed. Furthermore, the Company's products in research or
development may prove to have undesirable and unintended side effects or other
characteristics that may prevent or limit their commercial use. There can be no
assurance that the Company will be permitted to undertake human clinical testing
of its potential Anticode products or any other of the Company's products
currently in preclinical development, or, if permitted, that such products will
be demonstrated to be safe and efficacious. In addition, there can be no
assurance that any of the Company's or Genta Jago's products will obtain FDA or
foreign regulatory approval for any indication or that an approved compound
would be capable of being produced in commercial quantities at reasonable costs
and successfully marketed. Products, if any, resulting from Genta's or Genta
Jago's research and development programs are not expected to be commercially
available for a number of years.
Loss History; Uncertainty of Future Profitability. Genta has been
unprofitable to date, incurring substantial operating losses associated with
ongoing research and development activities, preclinical testing, clinical
trials, manufacturing activities and development activities undertaken by Genta
Jago. From the period since its inception to December 31, 1996, the Company has
incurred a cumulative net loss of $108.4 million. The Company has experienced
significant quarterly fluctuations in operating results and expects that these
fluctuations in revenues, expenses and losses will continue. The Company has
historically experienced significant quarterly fluctuations in its level of
product sales, generally reflecting the timing and degree of customer demand for
various products.
Dividends. The Company has never paid cash dividends on its common
stock and does not anticipate paying any such dividends in the foreseeable
future. In addition, the Company is restricted from paying cash dividends on its
common stock until such time as all cumulative dividends have been paid on
outstanding shares of its Series A and Series C convertible preferred stock. The
Company currently intends to retain its earnings, if any, after payment of
dividends on outstanding shares of Series A and Series C convertible preferred
stock, for the development of its business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Operations After Restructuring. As a result of the Company's
restructuring to reduce operating expenses, the Company has focused its research
and development programs on its near-term drug delivery (GEOMATRIX) technology
and its Anticode cancer program. The Company's Anticode programs directed at
other areas have largely been curtailed and any future progress with these
programs is dependent upon the Company obtaining a collaborative partner to fund
further research. There can be no assurance that the Company will be successful
in obtaining additional funding for these programs. The Company no longer
anticipates devoting any of its resources to further development of its topical
dermatology product candidates. The Company's agreement with its collaborative
partner, the Procter & Gamble Company ("Procter & Gamble"), for its Anticode
program in infectious diseases, ended in September 1995. The Company will have
to obtain additional corporate partners in order to continue its Anticode
programs. There can be no assurance that the Company will be able to negotiate
such collaborative arrangements on favorable terms, if at all.
Genta Jago's strategy is to form alliances with major pharmaceutical
companies to commercialize its GEOMATRIX oral controlled-release products
worldwide. Genta Jago has established collaborations with Gensia (and, through
Gensia, with Boehringer Mannheim), Apothecon and Krypton. Gensia has since
entered into an Assignment and Release Agreement with SkyePharma for its United
States subsidiary, Brightstone, to assume
17
Gensia's position in the collaboration with Genta Jago with no modification to
the terms of the original agreement between Genta Jago and Gensia. Brightstone
also replaces Gensia in its relationship with Boehringer Mannheim.
No Assurance of Regulatory Approval; Government Regulation. The FDA and
comparable agencies in foreign countries impose substantial premarket approval
requirements upon the introduction of pharmaceutical products through lengthy
and detailed preclinical and clinical testing procedures and other costly and
time-consuming procedures. Satisfaction of these requirements, which includes
demonstrating to the satisfaction of the FDA and foreign regulatory agencies
that the product is both safe and effective, typically takes several years or
more depending upon the type, complexity and novelty of the product. There can
be no assurance that such testing will show any product to be safe or
efficacious or, in the case of certain of Genta Jago's products, to be
bioequivalent to a currently marketed pharmaceutical. Government regulation also
affects the manufacture and marketing of pharmaceutical products. The effect of
government regulation may be to delay marketing of any new products for a
considerable or indefinite period of time, to impose costly procedures upon the
Company's or Genta Jago's activities and to diminish any competitive advantage
that the Company or Genta Jago may attain. It may take years before marketing
approvals are obtained for the Company's or Genta Jago's products, if at all.
There can be no assurance that FDA or other regulatory approval for any products
developed by the Company or Genta Jago will be granted on a timely basis, if at
all, or, if granted, that such approval will cover all the clinical indications
for which the Company or Genta Jago is seeking approval or will not sustain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use. Further, with respect to
the reformulated versions of currently available pharmaceuticals being developed
through Genta Jago, there is a substantial risk that the manufacturers or
marketers of such currently available pharmaceuticals will seek to delay or
block regulatory approval of any reformulated versions of such pharmaceuticals
through litigation or other means. Any significant delay in obtaining, or
failure to obtain, such approvals would materially adversely affect the Company
and Genta Jago's revenue. Moreover, additional government regulation from future
legislation or administrative action may be established which could prevent or
delay regulatory approval of the Company's or Genta Jago's products or further
regulate the prices at which the Company's or Genta Jago's proposed products may
be sold.
The Company is also subject to various foreign, federal, state and
local laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use, manufacture, storage, handling and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research and development work and
manufacturing processes. Although the Company believes it is in compliance with
these laws and regulations in all material respects (except as disclosed under
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources"), there can be no assurance that
the Company will not be required to incur significant costs to comply with such
regulations in the future.
Uncertainty Regarding Patents and Proprietary Technology. The Company's
and Genta Jago's success will depend, in part, on their respective abilities to
obtain patents, maintain trade secrets and operate without infringing the
proprietary rights of others. No assurance can be given that patents issued to
or licensed by the Company or Genta Jago will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company or Genta Jago. There can be no assurance that the
Company's or Genta Jago's patent applications will be approved, that the Company
or Genta Jago will develop additional products that are patentable, that any
issued patent will provide the Company or Genta Jago with any competitive
advantage or adequate protection for its inventions or will not be challenged by
others, or that the patents of others will not have an adverse effect on the
ability of the Company or Genta Jago to do business. Competitors may have filed
applications, may have been issued patents or may obtain additional patents and
proprietary rights relating to products or processes competitive with those of
the Company or Genta Jago. Furthermore, there can be no assurance that others
will not independently develop similar products, duplicate any of the Company's
or Genta Jago's products or design around any patented products developed by the
Company or Genta Jago. The Company and Genta Jago rely on secrecy to protect
technology in addition to patent protection, especially where patent protection
is not believed to be appropriate or obtainable. No assurance can be given that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to
18
the Company's or Genta Jago's trade secrets, or that the Company or Genta Jago
can effectively protect is rights to its unpatented trade secrets.
Genta and Genta Jago have obtained licenses or other rights to patents
and other proprietary rights of third parties, and may be required to obtain
licenses to additional patents or other proprietary rights of third parties. No
assurance can be given that any existing licenses and other rights will remain
in effect or that any licenses required under any such additional patents or
proprietary rights would be made available on terms acceptable to the Company or
Genta Jago, if at all. If Genta's or Genta Jago's licenses and other rights are
terminated or if Genta or Genta Jago cannot obtain such additional licenses,
Genta or Genta Jago could encounter delays in product market introductions while
it attempts to design around such patents or could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed. In
addition, the Company or Genta Jago could incur substantial costs, including
costs caused by delays in obtaining regulatory approval and bringing products to
market, in defending itself in any suits brought against the Company or Genta
Jago claiming infringement of the patent rights of third parties or in asserting
the Company's or Genta Jago's patent rights, including those granted by third
parties, in a suit against another party. The Company or Genta Jago may also
become involved in interference proceedings declared by the United States Patent
Office in connection with one or more of its patents or patent applications,
which could result in substantial cost to the Company or Genta Jago, as well as
an adverse decision as to priority of invention of the patent or patent
application involved. There can be no assurance that the Company or Genta Jago
will have sufficient funds to obtain, maintain or enforce patents on their
respective products or technology, to obtain or maintain licenses that may be
required in order to develop and commercialize their respective products, to
contest patents obtained by third parties, or to defend against suits brought by
third parties.
Dependence on Others. The Company's strategy for the research,
development and commercialization of certain of its or Genta Jago's products
requires negotiating, entering into and maintaining various arrangements with
corporate collaborators, licensors, licensees and others, and is dependent upon
the subsequent success of these outside parties in performing their
responsibilities. The Company's agreement with Procter & Gamble represented the
Company's primary source of collaborative revenues during 1995 and such
agreement ended in September 1995. Genta Jago is seeking additional
collaborative arrangements to develop and commercialize certain of their
respective products. However, there can be no assurance that Genta Jago will be
able to negotiate collaborative arrangements on acceptable terms, if at all.
Technology Licensed From Third Parties. The Company has entered into
certain agreements with, and licensed certain technology and compounds from,
third parties. The Company has relied on scientific, technical, clinical,
commercial and other data supplied and disclosed by others in entering into
these agreements, including the Genta Jago agreements, and will rely on such
data in support of development of certain products. Although the Company has no
reason to believe that this information contains errors of omission or fact,
there can be no assurance that there are no errors of omission or fact that
would materially affect the future approvability or commercial viability of
these products.
Competition. The Company and Genta Jago have numerous competitors in
the United States and other countries for their respective technologies and
products under development, including among others, major pharmaceutical and
chemical companies, specialized biotechnology firms, universities and other
research institutions. There can be no assurance that the Company's or Genta
Jago's competitors will not succeed in developing products or other novel
technologies that are more effective than any which have been or are being
developed by the Company or Genta Jago or which would render the Company's or
Genta Jago's technology and products non-competitive. Many of the Company's and
Genta Jago's competitors have substantially greater financial, technical,
marketing and human resources than the Company or Genta Jago. In addition, many
of those competitors have significantly greater experience than the Company or
Genta Jago in undertaking preclinical testing and human clinical trials of new
pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in healthcare. Accordingly, the Company's or Genta Jago's
competitors may succeed in obtaining regulatory approval for products more
rapidly than the Company or Genta Jago and such competitors may succeed in
delaying or blocking regulatory approvals of the Company's or Genta Jago's
products. Furthermore, if the Company or Genta Jago is permitted to commence
commercial sales of products, it will also be competing with respect to
marketing capabilities, an area in which it has limited or no experience, and
manufacturing efficiency. There are many public and private companies that are
conducting research and development activities based on drug delivery
19
and antisense technologies. The Company believes that the industry-wide interest
in such technologies will accelerate and competition will intensify as the
techniques which permit drug design and development based on such technologies
are more widely understood.
Difficult Manufacturing Requirements. The manufacture of Anticode
oligonucleotides is a time-consuming and complex process. Management believes
that the Company has the ability to acquire or produce quantities of
oligonucleotides sufficient to support its present needs for research and its
projected needs for its initial clinical development programs. However, Genta
believes that improvements in its manufacturing technology will be required to
enable the Company to meet the volume and cost requirements needed for certain
commercial applications of Anticode products. Products based on chemically
modified oligonucleotides have never been manufactured on a commercial scale.
The manufacture of all of the Company's and Genta Jago's products will be
subject to current GMP requirements prescribed by the FDA or other standards
prescribed by the appropriate regulatory agency in the country of use. There can
be no assurance that the Company or Genta Jago will be able to manufacture
products, or have products manufactured for it, in a timely fashion at
acceptable quality and prices, that they or third party manufacturers can comply
with GMP or that they or third party manufacturers will be able to manufacture
an adequate supply of product.
Limited Sales, Marketing and Distribution Experience. The Company and
Genta Jago have very limited experience in pharmaceutical sales, marketing and
distribution. In order to market and sell certain products directly, The Company
or Genta Jago would have to develop or subcontract a sales force and a marketing
group with technical expertise. There can be no assurance that any direct sales
or marketing efforts would be successful.
Uncertainty of Product Pricing, Reimbursement and Related Matters. The
Company's and Genta Jago's business may be materially adversely affected by the
continuing efforts of governmental and third party payers to contain or reduce
the costs of healthcare through various means. For example, in certain foreign
markets the pricing or profitability of healthcare products is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar governmental control. While the Company cannot predict
whether any such legislative or regulatory proposals or reforms will be adopted,
the adoption of any such proposal or reform could adversely affect the
commercial viability of the Company's and Genta Jago's potential products. In
addition, in both the United States and elsewhere, sales of healthcare products
are dependent in part on the availability of reimbursement to the consumer from
third party payers, such as government and private insurance plans. Third party
payers are increasingly challenging the prices charged for medical products and
services and therefore, significant uncertainty exists as to the reimbursement
of existing and newly approved healthcare products. If the Company or Genta Jago
succeeds in bringing one or more products to the market, there can be no
assurance that these products will be considered cost effective and that
reimbursement to the consumer will be available or will be sufficient to allow
the Company or Genta Jago to sell its products on a competitive basis.
Dependence on Qualified Personnel. The Company's success is highly
dependent on the retention of principal members of its management and scientific
staff and the recruitment of additional key personnel. As the Company has
already fallen below critical mass, the loss of additional key personnel or the
failure to recruit necessary additional personnel does and will further impede
the achievement of development objectives. There is intense competition for
qualified personnel in the areas of the Company's activities, and there can be
no assurance that Genta will be able to continue to attract and retain the
qualified personnel necessary for the development of its business.
Product Liability Exposure; Limited Insurance Coverage. The Company's,
JBL's and Genta Jago's businesses expose them to potential product liability
risks which are inherent in the testing, manufacturing, marketing and sale of
human therapeutic products. If available, product liability insurance for the
pharmaceutical industry generally is expensive. The Company has obtained a level
of liability insurance coverage which it deems appropriate for its current stage
of development. However, there can be no assurance that the Company's present
insurance coverage is adequate. Such existing coverage may not be adequate as
the Company further develops products, and no assurance can be given that in the
future adequate insurance coverage will be available in sufficient
20
amounts or at a reasonable cost, or that a product liability claim would not
have a material adverse effect on the business or financial condition of the
Company.
Hazardous Materials; Environmental Matters. The Company's research and
development and manufacturing processes involve the controlled storage, use and
disposal of hazardous materials, biological hazardous materials and radioactive
compounds. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company may be held liable for any damages
that result, and any such liability could exceed the resources of the Company.
There can be no assurance that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future, nor that the operations, business or assets of the Company will not be
materially adversely affected by current or future environmental laws of
regulations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Liquidity and Capital Resources."
Volatility of Stock Price. The market price of the Company's common
stock, like that of the common stock of many other biopharmaceutical companies,
has been highly volatile. Factors such as the results of preclinical studies and
clinical trials by Genta, Genta Jago or their competitors, other evidence of the
safety or efficacy of products of Genta, Genta Jago or their competitors,
announcements of technological innovations or new therapeutic products by the
Company, Genta Jago or their competitors, governmental regulation, developments
in patent or other proprietary rights of the Company or its competitors,
including litigation, fluctuations in the Company's operating results, and
market conditions for biopharmaceutical stocks in general could have a
significant impact on the future price of the common stock. On March 2, 1997,
the Company had 39,991,626 shares of common stock outstanding. Future sales of
shares of common stock by existing stockholders and option holders also could
adversely affect the market price of the common stock.
Concentration of Ownership. The Company's directors, executive officers
and principal stockholders and certain of their affiliates have the ability to
influence the election of the Company's directors and most other stockholder
actions.
Possible Nonpayment of Dividends on Series A and Series C Preferred
Stock; Deficiency in Fixed Charges and Preferred Stock Dividend Coverage.
Dividends will be payable on the Series A and Series C Preferred Stock only
when, as and if declared by the Company's Board of Directors, out of funds
legally available therefor. The Company has incurred losses and, thus, has had a
deficiency in fixed charges and preferred stock dividend coverage since
inception. For the fiscal years ended December 31, 1991, 1992, 1993, 1994, 1995
and 1996 the coverage deficiency was approximately $9,486,000, $16,703,000,
$16,189,000, $25,998,000, $27,917,000 and $13,950,000 respectively. While the
Company intends to pay dividends on the Series A and Series C Preferred Stock,
it is anticipated that the Company will continue to incur losses and thus will
continue to have a deficiency in fixed charges and preferred stock dividend
coverage. Dividends on the Series A and Series C Preferred Stock may be paid
only out of capital surplus (within the meaning of the Delaware General
Corporation Law) or net profits of the Company for the fiscal year in which the
dividend is declared and the preceding fiscal year.
Effect of Certain Anti-Takeover Provisions. The Company's Restated
Certificate of Incorporation and Bylaws include provisions that could discourage
potential takeover attempts and make attempts by stockholders to change
management more difficult. The approval of 66-2/3% of the Company's voting stock
is required to approve certain transactions and to take certain stockholder
actions, including the calling of a special meeting of stockholders and the
amendment of any of the anti-takeover provisions contained in the Company's
Restated Certificate of Incorporation. Further, pursuant to the terms of its
stockholder rights plan adopted in December 1993, the Company has distributed a
dividend of one right for each outstanding share of common stock. These rights
will cause a substantial dilution to a person or group that attempts to acquire
the Company on terms not approved by the Board of Directors and may have the
effect of deterring hostile takeover attempts. The stockholder rights plan was
amended to permit the consummation of the transactions with the Aries Funds
described under Item 5(d) of this Annual Report on Form 10-K.
21
Item 2. Properties
Genta's principal administrative offices and research laboratories are
located in San Diego, California where the Company occupies approximately 15,000
square feet. The Company's lease for these premises expired in November, 1996,
and the Company is currently renting on a month-to-month basis at the same rate
of $30,076 per month. The Company believes this space will be adequate for its
activities through 1997.
JBL, the Company's manufacturing subsidiary, leases and occupies
approximately 30,000 square feet of office, laboratory and manufacturing space
in San Luis Obispo, California. This lease expires in 2000. The lease calls for
rent of approximately $306,000 in 1997, with amounts generally increasing
annually thereafter to reflect cost of living related increases. The Company
currently uses substantially all of the manufacturing capacity of this facility.
The Company believes that such space will be adequate for its planned operations
through 1997. The Company also has an option to purchase property adjacent to
this facility, for expansion, if necessary. A director and officer and another
officer of the Company, Drs. Klem and Brown, respectively, are affiliated with
the owners of the leased and adjacent properties.
Genta Pharmaceuticals Europe, S.A., the Company's European subsidiary,
leases approximately 10,000 square feet of office, laboratory and manufacturing
space in Marseilles, France. The lease is cancelable in 2003 and expires in
2005. The lease calls for rent of approximately $99,000 in 1997, with amounts
generally increasing annually thereafter to reflect cost of living related
increases.
Item 3. Legal Proceedings
(a) On February 5, 1997, Equity-Linked Investors, L.P. and
Equity-Linked Investors-II (collectively, the "Plaintiffs") who, as a
group, may be deemd to beneficially own more than five percent of the
outstanding shares of the Common Stock of the Company as Series A
preferred stockholders, filed suit (the "Suit") in the Delaware Court
of Chancery (the "Court") against the Company, each of the Company's
directors and the Aries Funds (as hereinafter defined in Item 5).
Through the Suit, the Plaintiffs are seeking to enjoin the transactions
contemplated by The Note and Warrant Purchase Agreement (the
"Transactions"), rescission of the Transactions, damages, attorney
fees, and such other and further relief as the Court may deem just and
proper. The Suit alleges that the Board of Directors of the Company
breached fiduciary duties by failing to consider financing alternatives
to the Transactions and further alleges that the Transactions were not
in the best interests of the stockholders. Additionally, the Suit
alleges that the Aries Funds aided and abetted such breach of fiduciary
duty through their participation in the Transactions. On March 4 and 5,
1997, a trial was held before the Court. The Court has established a
briefing schedule and set a hearing for post-trial arguments on April
1, 1997. The Company believes that the lawsuit is without merit.
(b) No material legal proceedings were terminated in the quarter ending
December 31, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders in the quarter
ended December 31, 1996.
22
Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name Age Position
Thomas H. Adams, Ph.D........................... 54 Chairman of the Board, Chief Executive Officer
and Director
Lauren R. Brown, Ph.D........................... 54 Vice President, President of JBL
Zofia E. Dziewanowska, Ph.D., M.D............... 57 Senior Vice President, Global Clinical Affairs
Robert E. Klem, Ph.D............................ 52 Vice President, Director, and Chairman of the
Board of JBL
Guy Van de Winckel.............................. 55 Vice President, European Operations
Robert Wang, Ph.D............................... 49 Vice President, Pharmaceutical Operations
Dr. Adams was the founder of Genta and has been Chairman of the Board
and Chief Executive Officer of Genta since February 1989. He previously served
as Chairman of the Board and Chief Executive Officer of GenProbe, which he
co-founded in 1984. Prior to joining Gen-Probe, he held the positions of Senior
Vice President of Research & Development and Chief Technical Officer at
Hybritech Incorporated ("Hybritech"), a leading monoclonal antibody products
company which was acquired by Eli Lilly and Company in 1986. He had previously
held senior scientific management positions with Technicon Instruments Corp.,
the Hyland Laboratories Division of Baxter Travenol, and DuPont. Dr. Adams is a
director of Life Technologies, Inc., and three private biotechnology firms. He
received his Ph.D. in Biochemistry from the University of California at
Riverside.
Dr. Brown has been Vice President of the Company since October 1991. He
co-founded JBL in 1973 and, since then, has been President of JBL the subsidiary
that Genta acquired in February 1991. He has had significant experience in the
scale-up of a wide variety of processes, including many custom syntheses for
outside companies under GMP standards. In the past, he has also shared
responsibilities for the research program at JBL, and he developed the syntheses
for many of JBL's products. Dr. Brown received his Ph.D. in Organic Chemistry
from the University of California at Riverside.
Dr. Dziewanowska joined the Company as Senior Vice President, Global
Clinical Affairs in May 1994. Prior to joining Genta, Dr. Dziewanowska spent 17
years at Hoffmann-La Roche Inc. in various research and development positions
including, most recently, Vice President and Director of International
Therapeutic Research and Medical Affairs Advisor. Dr. Dziewanowska is currently
holding a faculty appointment at the Cornell University Medical School. She also
has held various positions in the Pharmaceutical Research and Manufacturers
Association of America, the most recent being a Vice-Chairman of the Medical
Section Steering Committee, American Association of Pharmaceutical Physicians
and the International Federation of Pharmaceutical Medicine. Before joining
Hoffmann-La Roche, Dr. Dziewanowska worked four years as associate director of
international clinical pharmacology at Merck, Sharp & Dohme Laboratories and as
a visiting associate physician in the Department of Pharmacology at Rockefeller
University in New York. She received an M.D. degree from the University of
Warsaw Medical School and a Ph.D. in physiology from the Institute of Immunology
and Experimental Therapeutics, Polish Academy of Science. Her medical degree was
recertified in England and the United States She has been invited to speak on a
variety of United States and International Conferences pertaining to clinical
drug research and development, and she is listed in "Who's Who."
Dr. Klem has been a director of the Company since February 1991 and a
Vice President of the Company since October 1991. Dr. Klem co-founded JBL in
1973 and, since then, has been Chairman of the Board and Chief
23
Technical Officer of JBL with responsibility for research, development and
marketing activities. Previously, Dr. Klem was the Plant Manager for E.I. DuPont
in Victoria, Texas from 1970 to 1974. Dr. Klem received his Ph.D. in Organic
Chemistry from the University of California at Riverside.
Mr. Van de Winckel has been President of Genta Pharmaceuticals Europe,
S.A. since its incorporation in November 1993 and has been Vice President,
European Operations of the Company since December 1992. From 1987 until December
1992, Mr. Van de Winckel was an independent consultant for healthcare companies
in Europe and the United States, specializing in marketing and financial
strategies. From 1981 until 1986, Mr. Van de Winckel was Vice President
International and Co-President of Hybritech Europe. He previously held various
management positions with Baxter Travenol, including Vice President of Marketing
with the Hyland Laboratories Division and Director of Marketing International.
Mr. Van de Winckel received a degree in international business from the
University of Louvain, Belgium.
Dr. Wang has been Vice President, Pharmaceutical Operations of the
Company since July 1995. From September 1993 through June 1995, Dr. Wang was
Vice President, Corporate Operations of the Company. From the time Dr. Wang
joined Genta in February 1989 to September 1993, Dr. Wang was Vice President,
Process Development of the Company. From 1986 to 1988, Dr. Wang was Vice
President of Development at Gen-Probe where he had technical responsibility for
developing and implementing a novel nonisotopic DNA probe assay system. Prior to
joining Gen-Probe, Dr. Wang was Senior Director of Process Development and
Manufacturing at Hybritech, where he had overall responsibility for
manufacturing, process development and clinical support for all manufacturing.
Dr. Wang also held senior scientific positions at Calbiochem-Behring Diagnostics
and International Diagnostic Technology. He received his Ph.D. in Biochemistry
from the University of California at Riverside and was a post-doctoral fellow at
Scripps Clinic and Research Foundation.
24
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
Throughout 1995 and 1996, the Company's common stock was traded on the
Nasdaq National Market under the symbol "GNTA". However, as of February
7, 1997 the Company's common stock trades in the over-the-counter
market on the Nasdaq SmallCap Market under the symbol "GNTAC" (see
"Risk Factors - Threat of Nasdaq Delisting"). The following table sets
forth, for the periods indicated, the high and low sales prices for the
common stock as reported by Nasdaq.
High Low
1995
First Quarter................................ $ 6 1/2 3 3/4
Second Quarter............................... 3 1/2 1 3/4
Third Quarter................................ 3 1/2 1 3/8
Fourth Quarter............................... 2 7/8 1 1/2
1996
First Quarter................................ 2 15/16 1 7/8
Second Quarter............................... 2 7/8 1 7/16
Third Quarter................................ 2 7/16
Fourth Quarter............................... 1 1/2 9/32
(b) Holders
There were 424 holders of record of the Company's common stock as of
March 1, 1997.
(c) Dividends
The Company has never paid cash dividends on its common stock and does
not anticipate paying any such dividends in the foreseeable future. In
addition, the Company is restricted from paying cash dividends on its
common stock until such time as all cumulative dividends have been paid
on outstanding shares of its Series A and Series C convertible
preferred stocks. The Company currently intends to retain its earnings,
if any, after payment of dividends on outstanding shares of Series A
and Series C convertible preferred stock, for the development of its
business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources".
(d) Recent Sale of Unregistered Securities
In February, 1997, the Company raised gross proceeds of $3 million in a
private placement, to the Aries Fund and the Aries Domestic Fund, L.P.
(collectively the "Aries Funds"), of Convertible Notes and warrants to
purchase 20 million shares of common stock ("Bridge Warrants"). The
Convertible Notes are initially convertible into 600,000 shares of
Series D preferred stock, which in turn are convertible into 20 million
shares of common stock. Bridge Warrants on 7.8 million shares of common
stock have an exercise price of $.001 per share. Bridge Warrants on
12.2 million shares of common stock have an exercise price of $.55 per
share. Further, upon the occurrence of certain events of default, if
elected by the holders, up to $300,000 principal amount of the
Convertible Notes is convertible into common stock at a conversion
price of $.001 per share. Each Bridge Warrant is convertible, at the
option of the holder, into a new
25
Warrant entitling such holder to purchase one share of common stock at
an exercise price of $0.15 per share or, under certain circumstances,
if lower than $0.15 per share, 50% of the market price of the common
stock. Pursuant to the Note and Warrant Purchase Agreement dated as of
January 28, 1997 between the Company and the Aries Funds (the "Note and
Warrant Purchase Agreement"), the Aries Funds have the right to appoint
a majority of the members of the Board of Directors of the Company;
provided, however, that in the event the Company does not obtain Future
Financings (as defined in the Note and Warrant Purchase Agreement) in
excess of $3.5 million on or before the date which is six months after
the Bridge Closing Date referred to in such agreement, then the Aries
Funds shall have the contractual right to appoint only two directors or
observers and, if at such time, more than two directors have been
appointed by the Aries Funds, the additional directors shall be
required to resign. As of March 14, 1997, the Aries Funds had not
exercised their right to appoint any directors or observers.
26
Item 6. Selected Consolidated Financial Data
The following table sets forth certain consolidated financial data with
respect to the Company. The selected consolidated financial data should be read
in conjunction with the consolidated financial statements and related
notes thereto.
YEARS ENDED DECEMBER 31,
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