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Table of Contents
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
For the quarterly period ended October 31, 2002
 
OR
 
¨
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
For the transition period from                     to                    
 
Commission file number: 0-27756
 
Alexion Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
  
13-3648318
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
352 Knotter Drive, Cheshire, Connecticut 06410
(Address of principal executive offices) (Zip Code)
 
203-272-2596
(Registrant’s telephone number, including area code)
 
N/A
(Former address of principal executive offices) (Zip Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x     No ¨
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
 
Yes x     No ¨
 
Common Stock, $0.0001 par value
  
18,205,296 shares
Class
  
Outstanding at December 1, 2002

Table of Contents
 
ALEXION PHARMACEUTICALS, INC.
 
INDEX
 
    
Page
PART I.    FINANCIAL INFORMATION
     
Item 1.    Consolidated Financial Statements (Unaudited)
     
  
3
  
4
  
5
  
6
  
10
  
15
  
15
PART II.    OTHER INFORMATION
   
16
    
  
17
  
18

Page 2 of 19

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ALEXION PHARMACEUTICALS, INC.
 
Consolidated Balance Sheets
(UNAUDITED)
(amounts in thousands)
 
    
October 31, 2002
     
July 31, 2002
  
ASSETS
                  
Current Assets:
                  
Cash and cash equivalents
   
$
20,204
 
   
$
47,574
 
Marketable securities
   
 
263,254
 
   
 
261,010
 
Reimbursable contract costs
   
 
297
 
   
 
863
 
Prepaid expenses and other current assets
   
 
2,326
 
   
 
1,337
 
    
  
Total current assets
   
 
286,081
 
   
 
310,784
 
Property, plant, and equipment, net
   
 
15,110
 
   
 
14,874
 
Goodwill
   
 
19,954
 
   
 
19,954
 
Deferred financing costs, net
   
 
2,549
 
   
 
2,692
 
Other assets
   
 
6,009
 
   
 
5,765
 
    
  
TOTAL ASSETS
   
$
329,703
 
   
$
354,069
 
    
  
                   
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Current Liabilities:
                  
Accounts payable
   
 
8,262
 
   
 
9,843
 
Accrued expenses
   
 
4,826
 
   
 
4,303
 
Accrued interest
   
 
921
 
   
 
2,627
 
Deferred revenue
   
 
546
 
   
 
546
 
    
  
Total current liabilities
   
 
14,555
 
   
 
17,319
 
    
  
Deferred revenue, less current portion included above
   
 
7,205
 
   
 
7,352
 
    
  
Note payable
   
 
3,920
 
   
 
3,920
 
    
  
Convertible subordinated notes
   
 
120,000
 
   
 
120,000
 
    
  
Stockholders’ Equity:
                  
Preferred stock $.0001 par value; 5,000 shares authorized; no shares issued or outstanding
   
 
—  
 
   
 
—  
 
Common stock $.0001 par value; 145,000 shares authorized; 18,242 and 18,241 shares issued
at October 31, 2002 and July 31, 2002, respectively
   
 
2
 
   
 
2
 
Additional paid-in capital
   
 
385,222
 
   
 
385,197
 
Accumulated deficit
   
 
(202,439
)
   
 
(180,799
)
Other comprehensive income
   
 
1,838
 
   
 
1,678
 
Treasury stock, at cost; 37 shares
   
 
(600
)
   
 
(600
)
    
  
Total stockholders’ equity
   
 
184,023
 
   
 
205,478
 
    
  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   
$
329,703
 
   
$
354,069
 
    
  
 
The accompanying notes are an integral part of these consolidated financial statements.

Page 3 of 19

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ALEXION PHARMACEUTICALS, INC.
 
Consolidated Statement of Operations
(UNAUDITED)
(amounts in thousands, except per share amounts)
 
    
Three months ended October 31,
  
    
2002
     
2001
  
CONTRACT RESEARCH REVENUES
   
$
323
 
   
$
1,860
 
    
  
OPERATING EXPENSES:
                  
Research and development
   
 
19,677
 
   
 
9,671
 
General and administrative
   
 
2,192
 
   
 
1,599
 
    
  
Total operating expenses
   
 
21,869
 
   
 
11,270
 
    
  
Operating loss
   
 
(21,546
)
   
 
(9,410
)
OTHER INCOME AND EXPENSE
                  
Investment income
   
 
1,882
 
   
 
3,538
 
Interest expense
   
 
(1,927
)
   
 
(1,917
)
    
  
Net loss before provision for state income tax
   
 
(21,591
)
   
 
(7,789
)
PROVISION FOR STATE INCOME TAX
   
 
49
 
   
 
—  
 
    
  
Net loss
   
$
(21,640
)
   
$
(7,789
)
    
  
BASIC AND DILUTED NET LOSS PER SHARE
   
$
(1.19
)
   
$
(0.43
)
    
  
SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE
   
 
18,204
 
   
 
18,110
 
    
  
                   
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.

Page 4 of 19

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ALEXION PHARMACEUTICALS, INC.
 
Consolidated Statements of Cash Flows
(UNAUDITED)
(amounts in thousands)
 
    
Three months ended October 31,
  
    
2002
     
2001
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                  
Net loss
   
$
(21,640
)
   
$
(7,789
)
Adjustments to reconcile net loss to net cash
                  
used in operating activities:
                  
Depreciation and amortization
   
 
879
 
   
 
925
 
Compensation expense related to grant of stock options
   
 
16
 
   
 
54
 
Change in assets and liabilities:
                  
Reimbursable contract costs
   
 
566
 
   
 
(187
)
Prepaid expenses
   
 
(989
)
   
 
171
 
Other assets
   
 
(244
)
   
 
—  
 
Accounts payable
   
 
(1,581
)
   
 
(509
)
Accrued expenses
   
 
523
 
   
 
1,105
 
Accrued interest
   
 
(1,706
)
   
 
(1,725
)
Deferred revenue
   
 
(147
)
   
 
(72
)
    
  
Net cash used in operating activities
   
 
(24,323
)
   
 
(8,027
)
    
  
CASH FLOWS FROM INVESTING ACTIVITIES:
                  
Purchases of marketable securities
   
 
(38,992
)
   
 
(214,206
)
Proceeds from marketable securities
   
 
36,908
 
   
 
207,618
 
Purchases of property, plant and equipment
   
 
(972
)
   
 
(443
)
Net cash paid in acquisition of Prolifaron
   
 
—  
 
   
 
(24
)
    
  
Net cash used in investing activities
   
 
(3,056
)
   
 
(7,055
)
    
  
CASH FLOWS FROM FINANCING ACTIVITIES:
                  
Net proceeds from issuance of common stock
   
 
9
 
   
 
50
 
Other
   
 
—  
 
   
 
2
 
    
  
Net cash provided by financing activities
   
 
9
 
   
 
52
 
    
  
NET DECREASE IN CASH AND CASH EQUIVALENTS
   
 
(27,370
)
   
 
(15,030
)
CASH AND CASH EQUIVALENTS, beginning of period
   
 
47,574
 
   
 
135,188
 
    
  
CASH AND CASH EQUIVALENTS, end of period
   
$
20,204
 
   
$
120,158
 
    
  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
                  
Cash paid for interest expense
   
$
3,509
 
   
$
3,509
 
    
  
 
The accompanying notes are an integral part of these consolidated financial statements.

Page 5 of 19

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ALEXION PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
1.
 
Organization and Operations -
 
Alexion Pharmaceuticals, Inc. (“Alexion” or the “Company”) was organized in 1992 and is engaged in the development of therapeutic products for the treatment of a wide array of severe diseases, including cardiovascular, autoimmune, and hematologic disorders, inflammation, and cancer.
 
The accompanying consolidated financial statements include Alexion Pharmaceuticals, Inc. and its wholly owned subsidiaries, Alexion Antibody Technologies (“AAT”) and Columbus Farming Corporation (“Columbus”). All significant inter-company balances and transactions have been eliminated in consolidation. Columbus was formed on February 9, 1999 to acquire certain manufacturing assets from United States Surgical Corporation (“US Surgical”).
 
The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include, in the opinion of management, all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of interim period results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The results for the interim periods presented are not necessarily indicative of results to be expected for any future period. These consolidated condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K Annual Report for the fiscal year ended July 31, 2002. The year end balance sheet data presented does not include all disclosures required by accounting principles generally accepted in the United States of America.
 
2.
 
Procter & Gamble Pharmaceuticals Collaboration -
 
The Company and Procter & Gamble Pharmaceuticals (“P&G”) entered into an exclusive collaboration in January 1999 to develop and commercialize pexelizumab. The Company granted P&G an exclusive license to the Company’s intellectual property related to pexelizumab, with the right to sublicense. P&G originally agreed to fund generally all clinical development and manufacturing costs relating to pexelizumab for the treatment of inflammation caused by cardiopulmonary bypass surgery, heart attack, and angioplasty (see below). Additionally, P&G agreed to pay the Company up to $95 million in payments, which included a non-refundable up-front $10 million license fee, milestone payments (including up to $33 million in milestone payments for achievement of certain sales thresholds), and research and development support payments. The Company was also to receive royalties on worldwide sales of pexelizumab, if any, for all indications. The Company was to retain a preferred position relative to third-party manufacturers to manufacture pexelizumab worldwide. The Company was to share co-promotion rights with P&G to sell, market and distribute pexelizumab in the United States (“U.S.”), and granted P&G the exclusive rights to sell, market and distribute pexelizumab outside of the U.S.
 
In December 2001, the Company and P&G entered into a binding memorandum of understanding (“MOU”) pursuant to which they revised their January 1999 collaboration. Under the revised structure per the MOU, the Company and P&G will share decision-making and responsibility for all future U.S. development and commercialization costs for pexelizumab, including clinical, manufacturing, marketing, and sales efforts. Prior to December 2001, P&G was generally funding all clinical development and manufacturing costs for pexelizumab. The revised collaboration per the MOU provides that the Company and P&G each incur approximately 50% of all Phase III clinical trial, product development and manufacturing, and commercialization costs necessary for the potential approval and marketing of pexelizumab in the U.S. and that the Company will receive approximately 50% of the gross margin on U.S. sales, if any. The Company has agreed to bear the first 50% of projected costs associated with the U.S. coronary artery bypass graft surgery (“CABG”) – Phase III clinical trial costs and P&G will bear the second 50%, with a final adjustment to make even the 50% sharing costs. The Company and P&G have agreed that each will share concurrently 50% of the ongoing U.S. pre-production and development manufacturing costs for pexelizumab. P&G

Page 6 of 19

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ALEXION PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
agreed to retain responsibility for future development and commercialization costs outside the U.S., with the Company receiving a royalty on sales to the rest of the world, if any. The Company is responsible for royalties on certain third party intellectual property worldwide, if such intellectual property is necessary. Additionally, as part of the MOU, the Company will receive milestone payments for achieving specified development steps, regulatory filings and approvals, but will not receive previously agreed sales milestones and will generally forego further research and development support payments from P&G.
 
P&G has the right to terminate the collaboration at any time. If P&G terminates prior to incurring its 50% of the CABG-Phase III clinical trial costs, then P&G will not be required to contribute towards its approximately equal share of the U.S. CABG-Phase III clinical trial costs and P&G will be released from its future funding obligations. In such circumstance, all rights and the exclusive license to the Company’s intellectual property related to pexelizumab will revert back to the Company and the Company will be entitled to all future pexelizumab revenues, if any, without any sharing of revenues, if any, with P&G.
 
As part of the revised collaboration per the MOU, P&G agreed to continue to fund 100% of the costs to complete the two acute myocardial infarction (“AMI”) Phase II clinical trials in myocardial infarction (“heart attack”) patients that completed enrollment. The Company and P&G have agreed that each will share concurrently 50% of any future AMI-Phase III clinical trial costs.
 
3.
 
Net Loss Per Common Share -
 
The Company computes and presents net loss per common share in accordance with SFAS No. 128, “Earnings Per Share.” Basic net loss per common share is based on the weighted average shares of common stock outstanding during the period. Diluted net loss per common share assumes in addition to the above, the dilutive effect of common share equivalents outstanding during the period. Common share equivalents represent dilutive stock options and convertible subordinated debt. These outstanding stock options and convertible subordinated debt entitled holders to acquire 4,745,841 and 4,688,175 shares of common stock at October 31, 2002 and 2001, respectfully. There is no difference in basic and diluted net loss per common share for the three months ended October 31, 2002 and 2001 as the effect of common share equivalents is anti-dilutive.
 
4.
 
Revenues -
 
Contract research revenues recorded by the Company consist of research and development support payments and license fees under collaborations with third parties and amounts received under various government grants.
 
Up-front, non-refundable license fees received in connection with a collaboration are deferred and amortized into revenue based upon the terms of each collaborative arrangement.
 
Revenues derived from the achievement of milestones are recognized when the milestone is achieved, provided that the milestone is substantive and a culmination of the earnings process has occurred. Research and development support revenues are recognized as the related work is performed and expenses are incurred under the terms of the contracts for development activities.
 
Reimbursable contract costs as shown on the accompanying consolidated balance sheets represent reimbursable costs incurred in connection with research contracts. The Company bills these costs and recognizes the costs and related revenues in accordance with the terms of the contracts.
 
Deferred revenue results from cash received or amounts receivable in advance of revenue recognition under research and development contracts.

Page 7 of 19

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ALEXION PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Through October 31, 2002, the Company had received proceeds of approximately $50.8 million from P&G. These proceeds included the non-refundable up-front license fee of $10 million in fiscal 1999 and $40.8 million for research and development support expenses, including a milestone payment of $2 million for initiation of the CABG-Phase III trial.
 
The Company has been awarded various grants by agencies of the U.S. government to fund specific research projects. These projects were substantially complete as of October 31, 2002, and the Company has no significant additional funding available under these grants.
 
A summary of revenues generated from contract research collaboration, milestone payment, and grant awards is as follows for the three months ended October 31 (dollars in thousands):
 
      
Three months ended October 31,
      
2002