FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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 No. 0-27072
HEMISPHERX BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-0845822 _
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1617 JFK Boulevard Phila., Pennsylvania 19103 _
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-0080
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par value
Securities registered pursuant to Section 12(g) of the Act:
(Title of Each Class)
NONE
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities and 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. Yes ( ) No (X)
The aggregate market value of Common Stock held by non-affiliates at June
30, 2002 was $80,226,755. For purposes of this calculation, it was assumed that
all Common Stock is valued at the closing price of the stock as of June 30,
2002.
The number of shares of the registrant's Common Stock outstanding as of
March 31, 2003 was 32,941,445.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 31
Item 3. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 32
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 32
Item 6. Selected Financial Data 36
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations _36
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk ___ 46
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 47
PART III
Item 10. Directors and Executive Officers of the Registrant _ 47
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 58
Item 13. Certain Relationships and Related Transactions 60
Item 14. Controls and Procedures 61
PART IV
Item 15. Principal Accountant Fees and Services 61
Item 16. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 61
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this "Form 10-K"),
including statements under "Item 1. Business," "Item 3 Legal Proceedings" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Result
of Operations," constitute "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, and the Private Securities
Litigation Reform Act of 1995 (collectively, the "Reform Act"). Certain, but not
necessarily all, of such forward-looking statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. All statements other than statements of historical fact included
in this Form 10-K regarding our financial position, business strategy and plans
or objectives for future operations are forward-looking statements. Without
limiting the broader description of forward-looking statements above, we
specifically note that statements regarding potential drugs, their potential
therapeutic effect, the possibility of obtaining regulatory approval, our
ability to manufacture and sell any products, market acceptance or our ability
to earn a profit from sales or licenses of any drugs or our ability to discover
new drugs in the future are all forward-looking in nature.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Hemispherx Biopharma, Inc. and its subsidiaries
(collectively, the "Company", "we or "us") to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements and other factors referenced in this Form 10-K. We do
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not undertake and specifically declines any obligation to publicly release the
results of any revisions which may be made to any forward-looking statement to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
PART I
ITEM 1. Business.
GENERAL
We were founded in the early 1970s as a contract researcher for the
National Institutes of Health (NIH). Dr. William A. Carter, M.D., joined the
Company in 1976 and ultimately become its CEO in 1988. He has focused the
Company on exploring, understanding and mastering the mechanism of nucleic acid
technology to produce a promising new class of drugs for treating chronic viral
diseases and disorders of the immune system. In the course of almost three
decades, we have established a strong foundation of laboratory, pre-clinical and
clinical data with respect to the development of nucleic acids to enhance the
natural antiviral defense system of the human body and the development of
therapeutic products for the treatment of chronic diseases. Our strategy is to
use our proprietary drug, Ampligen(R), to treat diseases for which adequate
treatment is not available. We seek the required regulatory approvals which will
allow the progressive introduction of Ampligen(R) for Myalgic
Encephalomyelitis/Chronic Fatigue Syndrome ("ME/CFS"), HIV, Hepatitis C ("HCV")
and Hepatitis B ("HBV") in the U.S., Canada, Europe and Japan. Ampligen(R) is
currently in phase III clinical trials in the U.S. for use in treatment of
ME/CFS and is in Phase IIb clinical trials in the U.S. for the treatment of
newly emerged multi-drug resistant HIV, and for the induction of cell mediated
immunity in HIV patients that are under control using potentially toxic drug
cocktails.
In March, 2003, the Company acquired from Interferon Sciences Inc. ("ISI"),
all of ISI's raw materials, work-in-progress and finished product of Alferon N
Injection(R), together with a limited license for the production, manufacture,
use, marketing and sale of the product. Alferon N Injection(R) [interferon alfa-
n3 (human derived)] is a natural alpha interferon that has been approved by the
U.S. Food and Drug Administration ("FDA") for commercial sale for the treatment
of certain types of genital warts. We intend to market this product in the
United State through sales facilitated via third party marketing agreements.
Additionally, we intend to implement studies, beyond those conducted by ISI, for
testing the potential treatment of HIV, Hepatitis C and other indications,
including multiple sclerosis. This acquisition not withstanding, our primary
focus remains the development to Ampligen(R) for treating ME/CFS and HIV
diseases.
In March, 2003, we entered into an agreement with ISI subject to certain
events that would grant us global rights to sell Alferon N Injection(R) as well
as acquire certain other assets of ISI which include but are not limited to real
estate and property, plant and equipment.
We outsource certain components of our research and development,
manufacturing, marketing and distribution while maintaining control over the
entire process through our quality assurance group and our clinical monitoring
group.
AMPLIGEN(R)
Our proprietary drug technology Ampligen(R) utilizes specially configured
ribonucleic acid ("RNA") and is protected by more than 350 patents worldwide
with over 80 additional patent applications pending to provide further
proprietary protection in various international markets. Certain patents apply
to the use of Ampligen(R) alone and certain patents apply to the use of
Ampligen(R) in combination with certain other drugs. Some composition of matter
patents pertain to other new medications which have a similar mechanism of
action. The main U.S. ME/CFS treatment patent (#6130206) expires January 23,
2015. Our main patents covering HIV treatment (#4795744,#4820696, #5063209, and
#5091374) expire on August 26, 2006, September 30, 2008, August 10, 2010,
respectively; Hepatitis treatment coverage is conveyed by U.S. patent #5593973
which expires on October 15, 2014. The U.S. Ampligen(R) Trademark (#1,515,099)
expires on December 6, 2008 and can be renewed thereafter for an additional 10
years. The U.S. FDA has granted us "orphan drug status" for our nucleic
acid-derived therapeutics for ME/CFS, HIV, and renal cell carcinoma and
malignant melanoma. Orphan drug status grants the Company protection against
competition for a period of seven years following FDA approval, as well as
certain federal tax incentives, and other regulatory benefits.
Nucleic acid compounds represent a potential new class of pharmaceutical
products that are designed to act at the molecular level for treatment of human
diseases. There are two forms of nucleic acids, DNA and RNA. DNA is a group of
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naturally occurring molecules found in chromosomes, the cell's genetic
machinery. RNA is a group of naturally occurring informational molecules which
orchestrate a cell's behavior and which regulate the action of groups of cells,
including the cells which comprise the body's immune system. RNA directs the
production of proteins and regulates certain cell activities including the
activation of an otherwise dormant cellular defense against virus and tumors.
The Company's drug technology utilizes specially configured RNA. Our
double-stranded RNA drug product, trademarked Ampligen(R), which is administered
intravenously, is (or has been) in human clinical development for various
disease indications, including treatment for ME/CFS, HIV, renal cell carcinoma
and malignant melanoma. Further studies are planned in cancer but initiation
dates have not been set.
Based on the result of published, peer reviewed pre-clinical studies and
clinical trials, we believe that Ampligen(R) may have broad-spectrum anti-viral
and anti-cancer properties. Over 500 patients have received Ampligen(R) in
clinical trials authorized by the FDA at over twenty clinical trial sites across
the U.S., representing the administration of more than 45,000 doses of this
drug.
Myalgic Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS)
ME/CFS is a debilitating disease that is difficult to diagnose and for
which, at present, there is no cure. People suffering from this illness
experience, among other symptoms, a constant tiredness, recurring dull
headaches, joint and muscle aches, a feeling of feverishness and chills low
grade fever, depression, difficulty in concentrating on tasks, and tender lymph
glands. With progression of the disease they can become bed-ridden, lose their
jobs and become dependent upon the state for support and medical care.
ME/CFS has been given official recognition by the U.S. Social Security
Administration, and some European nations, rendering ME/CFS patients eligible
for disability benefits and heightening awareness of this debilitating disease
in the medical community. Further scientific publication by independent
academicians on the accurate laboratory diagnosis of ME/CFS appeared in a
peer-reviewed journal (American Journal of Medicine) in February 2000. The U.S.
Centers of Disease Control ("CDC") reconfirmed its research commitment to ME/CFS
following an audit by the U.S. Government Accounting Office ("GAO") which was
announced July 28, 1999.
Estimates of ME/CFS patient numbers in the Unites States range from a low
of 500,000 (1995-Centers for Disease Control, Atlanta, GA) to a high of
1,000,000 (1999-DePaul University study). Estimates of patient numbers in Europe
range from 600,000 to 2,200,000 as reported in the British Medical Journal in
January 2000. It is believed worldwide patient totals may be as high as ten
million.
In 1989, we received FDA authorization to conduct a Phase II study of
Ampligen(R) for ME/CFS. In 1991, we completed a 24-week, 92 patient, randomized,
placebo-controlled, double-blinded, multi-center trial of Ampligen(R) for
treating patients with ME/CFS. The results, published in a peer review journal
in 1994, suggested enhanced physical performance, greater cognitive functions
and improved ability to perform daily living activities. Patients required
reduced hospitalization and medical care, while suffering little or no
significant adverse side effects. The FDA raised certain issues with respect to
this clinical trial which required further study. These issues were reviewed and
satisfactorily resolved.
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In February 1993, Hemispherx presented results of its Phase II study of
Ampligen(R) for ME/CFS to a FDA Advisory Committee and these results were
published in early 1994 in Clinical Infectious Diseases, a peer reviewed medical
journal, which emphasizes the understanding and potential treatment of
infectious diseases. The results suggested that patients on Ampligen(R), in
contrast to those receiving a placebo, showed significant improvement in
physical capacity as determined by performance on treadmill testing. The
Ampligen(R) treated patient group also required less pain medication than did
the placebo group.
In late 1998, we were authorized by the FDA to initiate a Phase III
multicenter, placebo-controlled, randomized, double blind clinical trial to
treat 230 patients with ME/CFS in the U.S. The objective of this Phase III,
clinical study, deemed as Amp 516, is to evaluate the safety and efficacy of
Ampligen(R) as a treatment for ME/CFS. As of April 1, 2003 we have engaged the
services of eleven (11) clinical investigators at Medical Centers in California,
New Jersey, Florida, North Carolina, Wisconsin, Nevada, Illinois and
Connecticut. These clinical investigators are medical doctors with special
knowledge of ME/CFS who have recruited, prescreened and enrolled ME/CFS patients
for inclusion in the Phase III Amp 516 ME/CFS clinical trial. This clinical
trial now has over 230 ME/CFS patients participating. The patients complete a
stage I, forty week, double-blind, randomized, placebo-controlled portion of the
clinical trial and then move into the stage II or the open label treatment
portion of the clinical trial. To date there have been no serious adverse events
reported related to the study medication. Additional ME/CFS patients have been
recruited by the clinical investigators to, in effect, over enroll the program.
We expect to have in excess of the full enrollment in order to compensate for
potential patient "drop outs", i.e.; patients that discontinue the program
prematurely for various reasons. The next stage in our program is final data
collection, quality assurance of data to insure its accuracy and analysis of the
data according to regulatory guidelines to facilitate filing for commercial
approval to sell.
Human Immunodeficiency Virus (HIV)
About fifteen antiviral drugs are currently approved by the FDA for the
treatment of HIV infection. All target the specific HIV enzymes, reverse
transcriptase ("RT") and protease. The use of various combinations of three or
more of these drugs is often referred to as Highly Active Anti-Retroviral
Therapy ("HAART"). HAART involves the utilization of several antiretrovirals
with different mechanisms of action to decrease viral loads in HIV-infected
patients. The goal of these combination treatments is to reduce the amount of
HIV in the body ("viral load") to as low as possible. Treatments include
different classes of drugs, but they all work by stopping parts of the virus so
the virus cannot reproduce. Experience has shown that using combinations of
drugs from different classes is a more effective strategy than using only one or
two drugs. HAART has provided dramatic decreases in morbidity and mortality of
HIV infection. Reduction of the viral load to undetectable levels in patients
with wild type virus (i.e., non-drug-resistant virus)is routinely possible with
the appropriate application of HAART. HIV mainly infects important immune system
cells called CD4 cells. After HIV has infected a CD4 cell, the CD4 cell becomes
damaged and is eventually destroyed. Fewer CD4 cells means more damage to the
immune system and, ultimately, results in AIDS. Originally, reduction of HIV
loads was seen as possibly allowing the reconstitution of the immune system and
led to early speculation that HIV might be eliminated by HAART.
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Subsequent experience has provided a more realistic view of HAART and the
realization that chronic HIV suppression using HAART, as currently practiced,
would require treatment for life with resulting significant cumulative
toxicities. The various reverse transcriptase and protease inhibitor drugs that
go into HAART have significantly reduced the morbidity and mortality connected
with HIV; however there has been a significant cost due to drug toxicity. It is
estimated that 50% of HIV deaths are from the toxicity of the drugs in HAART.
Current estimates suggest that it would require as many as 60 years of HAART for
elimination of HIV in the infected patient. Thus the toxicity of HAART drugs and
the enormous cost of treatment makes this goal impractical.
Although more potent second generation drugs are under development that
target the reverse transcriptase and protease genes as well as new HIV targets,
the problem of drug toxicities, the complex interactions between these drug
classes, and the likelihood of life-long therapy will remain a serious drawback
to their usage.
Failure of antiretroviral therapies over time and the demonstration of
resistance have stimulated intensive searches for appropriate combinations of
agents, or sequential use of different agents, that act upon the same or
different viral targets. This situation has created interest in our drug
technology which operates by a different mechanism.
We believe that the concept of Strategic Therapeutic Interruption ("STI")
of HAART provides a unique opportunity to minimize the current deficiencies of
HAART while retaining the HIV suppression capacities of HAART. STI is the
cessation of HAART until HIV again becomes detectable (i.e., rebounds) followed
by resumption of HAART with subsequent suppression of HIV. By re-institution of
HAART, HIV is suppressed before it can inflict damage to the immune system of
the patient. Based on recent publications (AIDS 2001,15: E19-27 and AIDS 2001,
15:1359-1368) in peer reviewed medical literature, it is expected that in just
30 days after stopping HAART approximately 80% to 90%, of the patients will
suffer a relapse evidencing detectable levels of HIV. The Company believes that
Ampligen(R) combined with the STI (strategic treatment interruption) approach
may offer a unique opportunity to retain HAART's superb ability to suppress HIV
while potentially minimizing its deficiencies. All present approved drugs block
certain steps in the life cycles of HIV. None of these drugs address the immune
system, as Ampligen(R) potentially does, although HIV is an immune-based
disease.
By using Ampligen(R) in combination with STI of HAART, we will undertake to
boost the patients' own immune system's response to help them control their HIV
when they are off of HAART. The Company's minimum expectation is that
Ampligen(R) has potential to lengthen the HAART-free time interval with a
resultant decrease in HAART-induced toxicities. The ultimate potential, which of
course requires full clinical testing to accept or reject the hypothesis, is
that Ampligen(R) may potentiate STI of HAART to the point that the cell mediated
immune system will be sufficient to eliminate requirement for HAART. We plan to
present the follow on clinical results of using our technology at several
International AIDS Scientific Forums in 2003, including the VI International
Viroteg Conference an Antiviral research in Savannah, Georgia in April 2003.
Our AMP 720 HIV Clinical Trial is being conducted with individuals infected
with HIV who are responding well to HAART at the moment. Patients in this study
are required to meet minimum immune system requirements of CD4 cell levels
greater than 400, maximum HIV infection levels of less that 50 copies/ml, and a
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HAART regimen containing at least one anti-viral drug showing therapeutic
synergy with Ampligen(R) based on recently reported ex vivo studies in
peer-reviewed scientific journals. All patients are chronically HIV infected and
will have been receiving the indicated HAART regimen prior to starting the STI.
The trial applies strategic treatment interruption of HAART based on the
hypothesis that careful management of HIV rebound following STI may have
potential to result in the development of protective immune responses to HIV in
order to achieve control of HIV replication. The Company believes that the
addition of Ampligen(R), with its potential immunomodulatory properties, may
reasonably achieve this outcome. Half of the participants in the trial are given
400 mg of Ampligen(R) twice a week and once they start the STI will remain off
of HAART until such time as their HIV rebounds. The other half of the
participants (the control group) are on STI, but they are given no Ampligen(R)
during the "control" portion of the clinical test.
The targeted enrollment in the AMP 720 Clinical Trial is 120 HIV-infected
persons who meet the criteria. We expect to have 60 people on STI with
Ampligen(R) and 60 people on STI without Ampligen(R). Presently, this study is
approximately 35% enrolled at ten medical centers around the U.S. The Company
expects enrollment in this clinical trial to accelerate as we recruit more
investigators and based on the analysis and presentation of results in Prague,
Czech Republic, Barcelona, Spain and Naples, FL (December, 2002). The length of
this stage of the trial will be determined by an analysis of the interim
results.
Hepatitis C Virus (HCV) We currently have an informal arrangement with the
California Institute of Molecular Medicine ("CIMM") to collaborate and assist
their efforts to replicate human Kupffer's cells obtained from HCV infected
patients. This proprietary CIMM approach involves the in vitro growth of hepatic
macrophages (called Kupffer's cells) from the failing liver of a patient and
reinfusion of the in vitro grown Kupffer's liver cells into the same patient.
The ability to grow HCV in long term culture that would allow the testing of,
potential anti-HCV drugs in vitro would permit us to conduct and obtain valuable
research data in using Ampligen(R) to treat HCV prior to engaging and clinical
trial. This would not raise the question of immunological incompatibility.
Testing by CIMM indicates that their process of Kupffers's cell application in
vitro is reproducible (>95% efficacy) from individual patients. CIMM is also
developing a process for maintaining and propagating Kuffer's cells reproducibly
in defined cell cultures from fine needle liver aspirates from living human
volunteers with potential as patients with failing liver due to a variety of
etiologies.
In January 2001 CIMM filed a notice of Invention with the U.S. patent
office. As a result, a patent titled "Replication of Human Kupffer's cell
obtained from HCV infected patients by Fine Needle Biopsy Technique" was issued.
This method can potentially salvage critically needed liver function without
major surgery or aggressive medical intervention.
The immediate and potential market for the Kupffer's maintenance and
propagation techniques will be more than 14,000 people in the U.S. actively
seeking a liver transplant. Additional thousands are progressing towards a
failing liver and will soon need transplantation or a successful alternative
method to restore function. Several hundred thousand who have alcoholic
cirrhosis may also benefit from the proprietary process. Medical costs of a
liver transplant are approximately $300,000 and are far beyond the financial
reserves of most families. Reimbursement of these costs by Health Insurance
carriers is problematic at best. We have a 30% equity position in CIMM, which is
located in California and recently opened a new state-of-the-art research
laboratory in Ventura, California.
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We are also evaluating potential novel clinical programs which would
involve using Ampligen(R) to treat both HCV and HIV when they coexist on the
same patient. We expect to commence these studies in collaboration with one or
more prospective corporate partners. A collaborative Clinical study in Europe,
in conjunction with Laboratorios Del Dr. Esteve S.A., is expected to commence
during the first half of 2003.
We have acquired a series of patents on Oragen(TM), potentially an oral
broad spectrum antiviral, Immunological enhancers through a licensing agreement
with Temple University. We were granted an exclusive worldwide license from
Temple for the Oragen(TM) products. Pursuant to the arrangement, we are
obligated to pay royalties of 2% on sales of Oragen(TM), depending on how much
technological assistance is required of Temple. We currently pay minimum
royalties of $30,000 per year to Temple. These compounds have been evaluated in
various academic and government laboratories for application to Chronic viral
and immunological disorders. Research and development of Oragen(TM) is on hold
at this time.
Other Diseases
An FDA authorized Phase I/II study of Ampligen(R) in cancer including
patients with renal cell carcinoma was completed in 1994. The results of this
study indicated that patients receiving high doses (200-500mg) twice weekly
experienced an increase in medium survival compared to the low dose group and as
compared to an historical control group. We received authorization from the FDA
to initiate a phase II study using Ampligen(R) to treat patients with metastatic
renal cell carcinoma. Patients with Metastatic Melanoma were included in the
Phase I/II study of Ampligen(R) in cancer. The FDA has authorized us to conduct
a Phase II clinical trial using Ampligen(R) in melanoma. We do not expect to
devote any significant resources to funding these studies in the near future.
Other Antiviral/ Immunologic Treatments
After the terrorist acts of September 11, 2001 and the resultant
International concern for bio-terrorism (including Smallpox), we filed a
regulatory application with the FDA for permission to conduct a clinical trial,
in the event of Smallpox dissemination, using Ampligen(R) therapy as a
treatment. This proposed study was based on an earlier peer reviewed laboratory
study from Yale University in Partnership with the U.S. Military Command at Fort
Detrick, the U.S. Biological defense Specialty Research Center. The result of
this study indicated Ampligen(R) to be promising in a laboratory model of
smallpox.
Based on these and other recent positive results (see below), we have
retained FDA regulatory counsel in Wash., D.C. , to advise us on a
commercialization path and to arrange relevant meetings with the FDA.
During the thirty day review period of our Clinical application by the FDA,
we became aware of a new ongoing laboratory study of Ampligen(R) in smallpox at
the Riga Medical Institute in Belgium. Our Medical Director had authorized the
Institute to use samples of Ampligen(R) for Research purposes only. The result
of this study became available in the early 2003. In the interim, we withdrew
our FDA application to review the result of the Belgium study and incorporate
such data into our Clinical study design and protocol before resubmission.
Positive new results on Ampligen(R) were thereafter reported by branches of the
U.S. government using animal models of smallpox and new guidelines on
bio-terrorism approvals were established which mandated only animal studies for
full commercialization.
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ALFERON N INJECTION(R)
Interferon is a group of proteins produced and secreted by cells to combat
diseases. Researchers have identified four major classes of human interferon:
alpha, beta, gamma and omega. The ALFERON N Injection product contains a
multi-species form of alpha interferon. The worldwide market for injectable
alpha interferon-based products has experienced rapid growth and various alpha
interferon injectable products are approved for many major medical uses
worldwide.
Alpha interferons are manufactured commercially in three ways: by genetic
engineering, by cell culture, and from human white blood cells. In the United
States, all three of these types of alpha interferon are approved for commercial
sale. Our Natural Alpha Interferon is produced from human white blood cells.
The potential advantages of Natural Alpha Interferon over recombinant
interferon may be based upon their respective molecular compositions. Natural
Interferon is composed of a family of proteins containing many molecular species
of interferon. In contrast, recombinant alpha interferon each contain only a
single species. Researchers have reported that the various species of interferon
may have differing antiviral activity depending upon the type of virus. Natural
Alpha Interferon presents a broad complement of species which the Company
believes may account for its higher efficacy in laboratory studies. Natural
Alpha Interferon is also glycosylated (partially covered with sugar molecules).
Such glycosylation is not present on the currently marketed recombinant alpha
interferons. The Company believes that the absence of glycosylation may be, in
part, responsible for the production of interferon-neutralizing antibodies seen
in patients treated with recombinant alpha interferon. Although cell
culture-derived interferon is also composed of multiple glycosylated alpha
interferon species, the types and relative quantity of these species are
different from the Company's Natural Alpha Interferon.
On October 10, 1989, the FDA approved ALFERON N Injection for the
intralesional (within lesions) treatment of refractory (resistant to other
treatment) or recurring external genital warts in patients 18 years of age or
older. Certain types of human papillomaviruses ("HPV") cause genital warts, a
sexually transmitted disease ("STD"). A published report estimates that
approximately eight million new and recurrent causes of genital warts occur
annually in the United States alone.
Basically, our interest in acquiring Alferon N was driven by two factors;
1) our belief that its use in combination with Ampligen(R) has the
potential to increase the positive therapeutic responses in chronic life
threatening viral diseases. Combinational therapy is evolving to the standard of
acceptable medical care based on a detailed examination of the Biochemistry of
the body's natural antiviral immune response; and
2) new knowledge about the competitive products in the Interferon arena
that we believe imply a large untapped market and potential new therapeutic
indication for Alferon N which could accelerate its revenues in the near term.
Specifically, the recombinative DNA derived alpha interferon are now reported to
have dramatically decreased effectiveness after one year, probably due to
antibody formation and other severe toxicities. These detrimental effects have
not been reported with Alferon N which could allow this product to assume a much
8
larger market share. These revenues would provide operational capital to
complete the Phase III Clinical trials of our experimental drug, Ampligen(R) in
a more cost effective, non-dilutive manner on a shareholder's equity.
Alferon N Injection(R) [Interferon alfa-n3 (human leukocyte derived)] is a
highly purified, natural-source, glycosylated, multispecies alpha interferon
product. There are essentially no antibodies observed against natural interferon
to date and the product has a relatively low side-effect profile. Alferon is the
only natural-source, multispecies alpha interferon currently sold in the U.S.
and is also approved for sale in Mexico, Germany, Singapore and Hong-Kong.
The Alferon targeted market consists of urologists, proctologists,
dermatologists, and Obstetricians/Gynecologists. These physicians normally see
patients with papilloma concondylomas (genital warts) in their practice. This
will be done in existing partnership with our strategic partners including
Gentiva Health Services, Biovail Corporation and Esteve Laboratories, all have
proven marketing expertise.
According to the NIH, there are one million new cases of venereal warts
every year.
Pipeline products (alpha interferon)
The following products, together with other assets are to be acquired upon
the closing of the second ISI agreement which is anticipated to occur in May
2003.
ALFERON N Injection(R) -Other applications
ALFERON N Injection(R) [Interferon alfa-n3 (human leukocyte derived)] has
been approved by the U.S. FDA for the treatment of certain types of genital
warts and has been studied for the potential treatment of HIV, Hepatitis C and
other indications. ISI, the Company from which we obtained our rights to ALFERON
N Injection(R) had conducted clinical trials with regard to the use of ALFERON N
Injection(R) in the treatment of HIV and Hepatitis C. While ISI found the
results to be encouraging, in both instances, the FDA determined that additional
trials were necessary.
ALFERON N Gel(R)
ALFERON N GEL(R) is the Company's registered trademark for its topical
(dermatological) Natural Alpha Interferon preparation in a hydrophilic gel base.
This product is still in research and development.
ALFERON LDO(R)
ALFERON LDO(R) is the registered trademark for the low-dose, oral liquid
formulation of Natural Alpha Interferon. Two Phase 2 clinical trials using
ALFERON LDO for the treatment of HIV-infected patients have been completed.
There can be no assurance that any of these proposed products will be
cost-effective, safe, and effective or that the Company will be able to obtain
FDA approval for such use. Furthermore, even if such approval is obtained, there
can be no assurance that such products will be commercially successful or will
produce significant revenues or profits for the Company.
9
EUROPEAN OPERATIONS
Our European operations were setup to prepare for the introduction of
Hemispherx products and to accelerate market penetration into the European
market once full approval is obtained from the European Medicine Evaluation
Agency ("EMEA"). The EMEA is the equivalent of the United States FDA. From a
regulatory point of view the member countries of the European Economic Union
("EEU") represent a common market under the jurisdiction of the EMEA. However,
from a practical point of view, every country is different regarding developing
relations with the medical community, patient associations and obtaining
reimbursement for treatment from the equivalent of Social Security Agencies and
insurance carriers. This program will be integrated into our new commercial
asset, ALFERON N Injection, as well.
Our European operations have assisted the growth of a number of
patient/physician educational associations. The French Chronic Fatigue Syndrome
Association has grown from 10 members in the year 2000 to 800 currently. Every
major country now has an active educational association with substantial numbers
of members who regularly meet and "network". These programs have been modeled on
the successful experience in the U.S. of conducting twice a year meetings on
ME/CFS with Health and Human Services, FDA, NIH and Centers for Disease Control.
We maintain contact with the EMEA, keeping the agency aware of our
activities, as well as the health ministries in numerous countries in the
European Union. In early 2001,our application for "orphan" drug status for the
use of Ampligen(R) in ME/CFS was rejected because the Board found that the
prevalence of ME/CFS was significantly above the 5 person per 10,000 limit
required to grant orphan drug status in the European Union. In addition, we are
exploring various ways to accelerate the commercial availability of our products
in the various nations of the EEU, including potential appreciation of the
"foreign import" rule for accepting products already approved in the U.S.
Limited number ME/CFS patients were treated during 2002 with Ampligen(R) in
the United Kingdom, Austria and Belgium under existing regulatory procedures in
these countries which allow the therapeutic use of an experimental drug under
certain conditions. These procedures allowed us to recover the cost of
Ampligen(R) used as well as to collect additional clinical data. Corresponding
procedures are being considered in several other countries at the request of
locally based physicians.
Our European operations are considering implementing clinical trials in
Europe for the use of Ampligen(R) in the treatment of HIV/AIDS on the basis of
the new U.S. Protocols involving the use of the drug either in combination with
"cocktail" therapies or as part of a strategic interruption of the "cocktail"
therapies. We plan to present these programs at European scientific conferences
in 2003.
The Efforts of our European Operation has started to produce results. In
March 2002, our European Subsidiary Hemispherx Biopharma Europe, S.A.
("Hemispherx, S.A.") entered into a Sales and Distribution agreement with
Laboratorios Del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra ("Territory") for the treatment of ME/CFS. In
addition to other terms and other projected payments, Esteve paid an initial and
non-refundable fee of 625,000 Euros (approximately $563,000) to Hemispherx S.A.
on April 24, 2002
Esteve is to pay a fee of 1,000,000 Euros after U.S. Food and Drug
Administration approval of Ampligen(R) for the treatment of ME/CFS and a fee of
10
1,000,000 Euros upon Spain's approval of the final marketing authorization for
using Ampligen(R) for the treatment of ME/CFS.
The agreement runs for the longer of 10 years from the date of first
arms-length sale in the Territory, the expiration of the last Hemispherx patent
exploited by Esteve or the period of regulatory data protection for Ampligen(R)
in the applicable territory. Pursuant to the terms of the agreement Esteve is to
conduct clinical trials using Ampligen(R) to treat patients with both HCV and
HIV and is required to purchase certain minimum annual amounts of Ampligen(R).
The agreement is terminable by either party if Ampligen(R) is withdrawn form the
territory for a specified period due to serious adverse health or safety
reasons; bankruptcy, insolvency or related issues of one of the parties; or
material breach of the agreement. Hemispherx may transform the agreement into a
non-exclusive agreement or terminate the agreement in the event that Esteve does
not meet specified percentages of its annual minimum purchase requirements under
the agreement. Esteve may terminate the agreement in the event that Hemispherx
fails to supply Ampligen(R) to the territory for a specified period of time or
certain clinical trials being conducted by Hemispherx are not successful.
MANUFACTURING
We outsource the manufacturing of Ampligen(R) to certain contractor
facilities in the United States and South Africa while maintaining full quality
control and supervision of the process. Nucleic Acid polymers constitute the raw
material used in the production of Ampligen(R). We acquire our raw materials
from Ribotech, Ltd. ("Ribotech') located in South Africa. Ribotech, is jointly
owned by us (24.9%) and Bioclones, proprietary, Ltd (75.1%). Bioclones manages
and operates Ribotech. Two manufacturers in the United States are available to
provide the polymers if Ribotech is unable to supply our needs. Sourcing our
needs from other suppliers could result in a cost increase for our raw
materials.
Until 1999, we distributed Ampligen(R) in the form of a freeze-dried powder
to be formulated by pharmacists at the site of use. We perfected a production
process to produce ready to use liquid Ampligen(R) in a dosage form which will
mainly be used upon commercial approval of Ampligen(R). At the present time, we
have engaged the services of Schering-Plough Products to mass produce
ready-to-use Ampligen(R) doses. There are other pharmaceutical processing
companies that can supply our production needs.
Bioclones (PTY) Ltd. has also successfully completed a series of production
runs for liquid Ampligen(R) doses. This was done at Ribotech's facility in South
Africa that has inspection approval by both the US FDA and the Medicine Control
Authority of the United Kingdom. Bioclones (PTY) Ltd. Is headquartered in South
Africa and is the majority owner in Ribotech, Ltd. (the Company owns 24.9%)
which produces most of the polymers used in manufacturing Ampligen(R). The
licensing agreement with Bioclones presently includes South Africa, South
America, Ireland, New Zealand and the United Kingdom.
We currently occupy and use the New Brunswick, New Jersey laboratory and
production facility owned by ISI. We are in the process of acquiring title to
these facilities pursuant to our second asset acquisition agreement with ISI
(see RECENT FINANCING AND ASSET ACQUISITIONS below for more details). This
facility is approved by the FDA for the manufacture of Alferon N.
11
All production facilities employ Good Manufacturing Practices.(EGMP)
Good Manufacturing Practices (GMP) require that a product be consistently
manufactured to an identical potency (strength) and purity with each lot, and
that the manufacturing facility itself and all the equipment therein, be
certified to operate within a strict set performance standards.
MARKETING/DISTRIBUTIONS
Our marketing strategy for Ampligen(R) reflects the differing health care
systems around the world, and the different marketing and distribution system
that are used to supply pharmaceutical products to those systems. In the United
States, we expect that, subject to receipt of regulatory approval, Ampligen(R)
will be utilized in three medical arenas: physicians' offices, clinics,
hospitals and the home treatment setting. We currently plan to use a service
provide in the home infusion (non-hospital) segment of the U.S. market to
execute direct marketing activities, conduct physical distribution of product
and handle billing and collections. Accordingly, we are developing marketing
plans to facilitate the product distribution and medical support for indication,
if and when they are approved, in each arena. We believe that this approach will
facilitate the generation of revenue without incurring the substantial costs
associated with a sales forces. Furthermore, management believes that the
approach will enable us to retain many options for future marketing strategies.
In February 1998, the Company and Gentiva Health Services (formerly Olstein
Heatlh services) entered into a distribution/specialty agreement for the
distribution of Ampligen(R) for the treatment of ME/CFS patients under the U.S.
treatment protocols.
In Europe, we plan to adopt a country-by-country and, in certain cases, an
indication-by-indication marketing strategy due to the heterogeneity regulation
and alternative distribution systems in these area. We also plan to adopt and
indication-by-indication strategy in Japan. Subject to receipt of regulatory
approval, we plan to seek strategic partnering arrangement with pharmaceutical
companies to facilitate introductions in these areas. The relative prevalence of
people from target indications for Ampligen(R) varies significantly by
geographic region, and we intend to adjust our clinical and marketing planning
to reflect the special of each area. In countries in South America, the United
Kingdom, Ireland, Africa, Australia, Tasmania, New Zealand, and certain other
countries and territories, we contemplate marketing our product through our
relationship with Bioclones pursuant to the Bioclones Agreement.
Our marketing and distribution plan for Alferon N is focused on increasing
the sales of Alferon N Injection for the intralesional treatment of refractory
and recurring external genital warts in adults. We will reach out to a targeted
audience of physicians consisting of Ob/GYNSs, Urologists, Proctologists and
Dermatologists and simultaneously create product awareness in the patient
population through several media and health organizations. Different regional
meetings and seminars are scheduled during which guest speakers will explain the
therapeutic benefits and safety profile of Alferon. Additional exposure will be
created by exhibiting at several STD related conferences, expanded web presence,
mailings and publications. We also plan to engage a contact sales organization
in order to build up a nationwide network of dedicated representatives in the
U.S. and Europe. This will be done while working with our strategic partners
including Gentiva Health Services, Biovail Corporation an Esteve Laboratories.
For more information about our arrangements with Gentiva Health Services,
Bioclones, Esteve and Biovail see below."RESEARCH AND DEVELOPMENT/COLLABORATIVE
AGREEMENTS"
12
COMPETITION
Our potential competitors are among the largest pharmaceutical companies in
the world, are well known to the public and the medical community, and have
substantially greater financial resources, product development, and
manufacturing and marketing capabilities than we have.
These companies and their competing products may be more effective and less
costly than our products. In addition, conventional drug therapy, surgery and
other more familiar treatments will offer competition to our products.
Furthermore, our competitors have significantly greater experience than we in
preclinical testing and human clinical trials of pharmaceutical products and in
obtaining FDA, EMEA Health Protection Branch ("HPB") and other regulatory
approvals of products. Accordingly, our competitors may succeed in obtaining FDA
EMEA and HPB product approvals more rapidly than us. If any of our products
receive regulatory approvals and we commence commercial sales of our products,
we will also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which we have no experience. Our competitors may possess
or obtain patent protection or other intellectual property rights that prevent,
limit or otherwise adversely affect our ability to develop or exploit our
products.
The major competitors with drugs to treat HIV diseases include "Gilead
Pharmaceutical, Pfizer, Bristol-Myers, Abbott Labs and Schering-Plough Corp.
("Schering"). ALFERON N Injection currently competes with a product produced by
Schering for treating genital warts. 3m Pharmaceutical also has received FDA
approval for its immune response modifier product for the treatment of genital
and perianal warts.
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and foreign countries is
and will be a significant factor in the manufacture and marketing of ALFERON N
products and our ongoing research and product development activities.
Ampligen(R) and the products developed from the ongoing research and product
development activities will require regulatory clearances prior to
commercialization. In particular, human new drug products for human are subject
to rigorous preclinical and clinical testing as a condition for clearances by
the FDA and by similar authorities in foreign countries. The lengthy process of
seeking these approvals, and the ongoing process of compliance with applicable
statutes and regulations, has required and will continue to require the
expenditure of substantial resources. Any failure by us or our collaborators or
licensees to obtain, or any delay in obtaining, regulatory approvals could
materially adversely affect the marketing of any products developed by the
Company and its ability to receive product or royalty revenue. We have received
orphan drug designation for certain therapeutic indications which might, under
certain conditions, accelerate the process of drug commercialization. ALFERON N
is only approved for use in treating genital warts. Use of Alferon N for other
applications requires regulatory approval.
A "Fast-Track" designation by the FDA, while not affecting any clinical
development time per se, has the potential effect of reducing the regulatory
13
review time by 50 percent (50%)from the time that a commercial drug application
is actually submitted for final regulatory review. Regulatory agencies may apply
a "Fast Track" designation to a potential new drug to accelerate the approval
and commercialization process. Criteria for "Fast Track" include: a) a
devastating disease without adequate therapy and b) laboratory or clinical
evidence that the candidate drug may address the unmet medical need. As of March
31, 2003, we have not received a Fast-Track designation for any of our potential
therapeutic indications although we have received "Orphan Drug Designation" for
both ME/CFS and HIV/AIDS in the United States. We will continue to present data
from time to time in support of obtaining accelerated review. We have not yet
submitted any New Drug Application (NDA) for Ampligen(R) or any other drug to a
North American regulatory authority. There are no assurances that such
designation will be granted, or if granted, there are no assurances that Fast
Track designation will materially increase the prospect of a successful
commercial application. In 2000 we submitted an emergency treatment protocol for
clinically-resistant HIV patients which was withdrawn by us during the statutory
30 day regulatory review period in favor of a set of individual
physician-generated applications. There are no assurances that authorizations to
commence such treatments will be granted by any regulatory authority or that the
resultant treatments, if any, will support drug efficacy and safety. In 2001, we
did receive FDA authorization for two separate Phase IIb HIV treatment protocols
in which the Company's drug is combined with certain presently available
antiretroviral agents. Interim results were presented in 2002 at various
international scientific meetings.
We are subject to various federal, state and local laws, regulations and
recommendations relating to such matters as safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the use of and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with our research
work. We believe that our Rockville, Maryland manufacturing and quality
assurance/control facility is in substantial compliance with all material
regulations applicable to these activities as advanced by European Union
Inspections team which conducted detailed audits in year 2000. However, we
cannot give assurances that facilities owned and operated by third parties, that
are utilized in the manufacture of our products, are in substantial compliance,
or if presently in substantial compliance, will remain so. These third party
facilities include manufacturing operations in San Juan, Puerto Rico; Capetown,
South Africa; Columbia, Maryland; Melbourne, Australia; and potential expansion
within the United States to new and larger facilities in 2003.
RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS In 1994, we entered into
a licensing agreement with Bioclones (Property) limited ("Bioclones") for
manufacturing and international market development in Africa, Australia, New
Zealand, Tasmania, the United Kingdom, Ireland and certain countries in South
Africa, of Ampligen(R) and Oragen(TM). Bioclones is to pursue regulatory
approval in the areas of its franchise and is required to conduct Hepatitis
clinical trials, based on international GMP and GLP standards. Thus far, these
Hepatitis studies have not yet commenced to a meaningful level. Bioclones has
been given the first right of refusal, subject to pricing, to manufacture that
amount of polamers utilized in the production of Ampligen(R) sufficient to
satisfy at least one-third of the worldwide sales requirement of Ampligen(R) and
other nucleic acid-derived drugs. Pursuant to this arrangement, we received
1)access to worldwide markets 2)commercial-scale manufacturing resources, 3)a $3
million cash payment in 1995 from Bioclones,4) a 24.9% ownership in Ribotech,
14
Ltd. a company set up by Bioclones to develop and manufacture RNA drug
compounds, and 5) royalties of 8% on Bioclones nucleic acid-derived drug sales
in the licensed territories. The agreement with Bioclones terminates three years
after the expiration of the last of the patents supporting the license granted
to Bioclones, subject to earlier termination by the parties for uncured defaults
under the agreement, or bankruptcy or insolvency of either party.
In August, 1998, we entered into a strategic alliance with Gentiva Health
Services (formerly known as Olsten Health Care Services) to develop certain
marketing and distribution capacity for Ampligen(R) in the United States.
Gentiva is one of the nation's largest home health care companies with over 400
offices and sixty thousand caregivers nationwide. Pursuant to the agreement,
Gentiva assumed certain responsibilities for distribution of Ampligen(R) for
which they receive a fee. Through this arrangement, Hemispherx may mitigate the
necessity of incurring certain up-front costs. Gentiva also works with us in
connection with the Amp 511 ME/CFS cost recovery treatment program, Amp 516
ME/CFS PHASE III clinical trial and the Amp 719(combining Ampligen with other
antiviral drugs in HIV-salvage therapy and Amp 720 HIV Phase IIb clinical trials
now under way. There can be no assurances that this alliance will develop a
significant commercial position in any of its targeted chronic disease markets.
The agreement had an initial one year term from February 9, 1998 with successive
additional one (1) year terms unless either party notifies the other not less
than one hundred eighty (180) days prior to the anniversary date of its intent
to terminate the agreement. Also, the agreement may be terminated for the
uncured defaults, or bankruptcy or insolvency of either party and will
automatically terminate upon our receiving New Drug Approval for Ampligen(R)
from the FDA, at which time, a new agreement will need to be negotiated with
Gentiva or another major drug distributor.
We have acquired a series of patents on Oragen(TM), potentially an oral
broad spectrum antiviral, Immunological enhancers through a licensing agreement
with Temple University. We were granted an exclusive worldwide license from
Temple for the Oragen(TM) products. Pursuant to the arrangement, we are
obligated to pay royalties of 2% to 4% on sales of Oragen(TM), depending on how
much technological assistance is required of Temple. We currently pay minimum
royalties of $30,000 per year to Temple. These compounds have been evaluated in
various academic and government laboratories for application to Chronic viral
and immunological disorders. This agreement is to remain in effect until the
date that the last licensed patent expires unless terminated sooner by mutual
consent or default due to royalties not being paid.
In December, 1999, we entered into an agreement with Biovail Corporation
International ("Biovail"). Biovail is an international full service
pharmaceutical company engaged in the formulation, clinical testing,
registration and manufacture of drug products utilizing advanced drug delivery
systems. Biovail is headquartered in Toronto, Canada. The agreement grants
Biovail the exclusive distributorship of our product in the Canadian territories
subject to certain terms and conditions. In return, Biovail agrees to conduct
certain pre-marketing clinical studies and market development programs,
including without limitation, expansion of the Emergency Drug Release Program in
Canada with respect to our products. In addition, Biovail agrees to work with us
in preparing and filing a New Drug Submission with Canadian Regulatory
Authorities. Biovail invested several million dollars in Hemispherx equity at
prices above the then current market price and agreed to make further payments
based on reaching certain regulatory milestones. The Agreement requires Biovail
to buy exclusively from us and penetrate certain market segments at specific
15
rates in order to maintain market exclusivity. The agreement terminates on
December 15, 2009, subject to successive two (2) year extensions by the parties
and subject to earlier termination by the parties for uncured defaults under the
agreement, bankruptcy or insolvency of either party, or withdrawal of our
product from Canada for a period of more than ninety (90) days for serious
adverse health or safety reasons.
In 1998, the Company invested $1,074,000 for a 3.3% equity interest in
R.E.D. Laboratory ("R.E.D."). R.E.D. is a privately held biotechnology company
for the development of diagnostic markers for Chronic Fatigue Syndrome and other
chronic immune diseases. Primarily, R.E.D.'s research and development is based
on certain technology owned by Temple University and licensed to R.E.D. We have
a research collaboration agreement with R.E.D. to assist in this development.
R.E.D. is headquartered in Belgium. The investment was recorded at cost in 1998.
During three months ended June 2002 and December 2002 respectively, we recorded
a non-cash charge of $678,000 and $396,000 respectively, to operations with
respect to our investment in R.E.D. These charges were the result of our
determination that R.E.D.'s business and financial position had deteriorated to
the point that our investment had been permanently impaired.
In May 2000, we acquired an interest in Chronix Biomedical Corp.
("CHRONIX"). Chronix focuses upon the development of diagnostics for chronic
diseases. We issued 100,000 shares of common stock to Chronix toward a total
equity investment of $700,000. Pursuant to a strategic alliance agreement, we
provided Chronix with $250,000 to conduct research in an effort to develop
intellectual property on potential new products for diagnosing and treating
various chronic illnesses such as ME/CFS. The strategic alliance agreement
provides us certain royalty rights with respect to certain diagnostic technology
developed from this research and a right of first refusal to license certain
therapeutic technology developed from this research. The strategic alliance
agreement provides us with a royalty payment of ten per cent (10%) of all net
sales of diagnostic technology developed by Chronix for diagnosing Chronic
Fatigue Syndrome, Gulf War Syndrome and Human Herpes Virus-6 associated
diseases. The royalty continues for the longer of twelve years from September
15, 2000 or the life of any patent(s) issued with regard to the diagnostic
technology. The strategic alliance agreement also provides us with the right of
first refusal to acquire an exclusive worldwide license for any and all
therapeutic technology developed by Chronix on or before September 14, 2012 for
treating Chronic Fatigue Syndrome, Gulf War Syndrome and Human Herpes Virus-6
associated. During the quarter ended December 31, 2002, we recorded a noncash
charge of $292,000 with respect to our investment in Chronix. This impairment
reduces our carrying value to reflect a permanent decline in Chronix's market
value based on their current proposed equity offerings.
In April, 1999 we acquired a 30% equity position in the California
Institute of Molecular Medicine ("CIMM") for $750,000. CIMM'S research is
focused on developing therapies for use in treating patients affected by
Hepatitis C ("HCV"). We use the equity method of accounting with respect to this
investment. During the fourth quarter of 2001 we recorded a non-cash charge of
$485,000 with respect to our investment in CIMM. This was a result of our
determination that CIMM's operations have not yet evolved to the point where the
full carrying value of our investment could be supported based on that company's
financial position and operating results. The amount represented the unamortized
balance of goodwill included as part of our investment. During 2002, we wrote
down to zero our remaining investment based on that company's continuing
operating losses. These charges are reflected in the Consolidated Statements of
16
Operations under the caption "Equity loss in unconsolidated affiliate".We still
believe CIMM will succeed in their efforts to advance therapeutic treatment of
HCV. We believe that CIMM's Hepatitis C diagnostic technology has great promise
and will fill a long-standing global void in the collective abilities to
diagnose and treat Hepatitis C infection at an early stage of the disorder.
In March 2002, our European subsidiary Hemispherx S.A. entered into a Sales
and Distribution agreement with Esteve. Pursuant to the terms of the agreement,
Esteve was granted the exclusive right to market Ampligen(R) in Spain, Portugal
and Andorra for the treatment of ME/CFS. In addition to other terms and other
projected payments, Esteve agreed to conduct certain clinical trials using
Ampligen(R) in the patient population coinfected with hepatitis C and HIV
viruses. The agreement runs for the longer of 10 years from the date of first
arms-length sale in the Territory, the expiration of the last Hemispherx patent
exploited by Esteve or the period of regulatory data protection for Ampligen(R)
in the applicable territory. Pursuant to the terms of the agreement Esteve is to
conduct clinical trials using Ampligen(R) to treat patients with both HCV and
HIV and is required to purchase certain minimum annual amounts of Ampligen(R).
The agreement is terminable by either party if Ampligen(R) is withdrawn form the
territory for a specified period due to serious adverse health or safety
reasons; bankruptcy, insolvency or related issues of one of the parties; or
material breach of the agreement. Hemispherx may transform the agreement into a
non-exclusive agreement or terminate the agreement in the event that Esteve does
not meet specified percentages of its annual minimum purchase requirements under
the agreement. Esteve may terminate the agreement in the event that Hemispherx
fails to supply Ampligen(R) to the territory for a specified period of time or
certain clinical trials being conducted by Hemispherx are not successful.
The development of our Nucleic Acid Based products requires the commitment
of substantial resources to conduct the time-consuming research, preclinical
development, and clinical trials that are necessary to bring pharmaceutical
products to market and to establish commercial-scale production and marketing
capabilities. During our last three fiscal years, we have directly spent
approximately $16,862,000 in research and development, of which approximately
$4,946,000 was expended in the year ended December 31, 2002. These direct costs
do not include the overhead and administrative costs necessary to support the
research and development effort. Our European subsidiary has an exclusive
license on all the technology and support from us concerning Ampligen(R) for the
use of ME/CFS and other applications for all countries of the European Union
(excluding the UK where Bioclones has a marketing license) and Norway,
Switzerland, Hungary, Poland, the Balkans, Russia, Ukraine, Romania, Bulgaria,
Slovakia, Turkey, Iceland and Liechtenstein. As mentioned above, Hemispherx S.A.
entered into a Sales and distribution Agreement with Esteve. Pursuant to the
terms of this agreement, Esteve has been granted the exclusive right in Spain,
Portugal and Andorra to market Ampligen(R) for the treatment of ME/CFS. See
"EUROPEAN OPERATIONS" above for more detailed information.
HUMAN RESOURCES
As of March 31, 2003 we had 40 personnel working on the development of
Ampligen(R) consisting of 19 full time, 3 part-time employees and 18
regulatory/research medical personnel on a part-time basis. Part time parties
are paid on a per diem or monthly basis. 30 personnel are engaged in our
research, development, clinical, manufacturing effort. Ten of our personnel
perform regulatory, general administration, data processing, including
bio-statistics, financial and investor relations functions.
17
In addition to the foregoing personnel, on March 11, 2003, pursuant to our
agreement with ISI, we added personnel from ISI to our payroll consisting of 12
part-time and 17 full-time employees.
We believe that the combination of Hemispherx and ISI Scientific employees
has 1) significantly strengthened our overall organization, 2) added expertise
to monitor and complete our ongoing clinical trials and 3) improved our data
management and system administration.
While we have been successful in attracting skilled and experienced
scientific personnel, there can be no assurance that the Company will be able to
attract or retain the necessary qualified employees and/or consultants in the
future.
RECENT FINANCING AND ASSET ACQUISITIONS
On March 12, 2003, We issued an aggregate of $5,426,000 in principal amount
of 6% Senior Convertible Debentures due January 31, 2005 and an aggregate of
743,288 Warrants to two investors in a private placement for aggregate
anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
Debentures, $1,550,000 of the proceeds from the sale of the Debentures have been
held back and will be released to us if, and only if, we acquire ISI's facility
with in a set timeframe (see the discussion below). The Debentures mature on
January 31, 2005 and bear interest at 6% per annum, payable quarterly in cash
or, subject to satisfaction of certain conditions, common stock. Any shares of
common stock issued to the investors as payment of interest shall be valued at
95% of the average closing price of the common stock during the five consecutive
business days ending on the third business day immediately preceding the
applicable interest payment date. Pursuant to the terms and conditions of the
Senior Convertible Debentures, we have pledged all of our assets other than
intellectual property, as collateral and are subject to comply with certain
financial and negative covenants, which include but are not limited to the
repayment of principal balances upon achieving certain revenue milestone.
The Debentures are convertible at the option of the investors at any time
through January 31, 2005 into shares of our common stock. The conversion price
under the Debentures is fixed at $1.46 per share, subject to adjustment for
anti-dilution protection for issuance of common stock or securities convertible
or exchangeable into common stock at a price less than the conversion price then
in effect.
The investors also received Warrants to acquire at any time through March
12, 2008 an aggregate of 743,288 shares of common stock at a price of $1.68 per
share. On March 12, 2004, the exercise price of the Warrants will reset to the
lesser of the exercise price then in effect or a price equal to the average of
the daily price of the common stock between March 13, 2003 and March 11, 2004
(but in no event less than $1.176 per share). The exercise price (and the reset
price) under the Warrants also is subject to similar adjustments for
anti-dilution protection.
We entered into a registration rights agreement with the investors in
connection with the issuance of the Debentures and the Warrants. The
registration rights agreement requires that we register the shares of common
stock issuable upon conversion of the Debentures, as interest shares under the
Debenture and upon exercise of the Warrants. In accordance with this agreement,
we filed a registration statement on form S-3 with the Securities and Exchange
18
Commission. If the registration statement is not declared effective within the
time period required by the agreement or, after it is declared effective and
subject to certain exceptions, sales of all shares required to be registered
thereon cannot be made pursuant thereto, then we will be required to pay to the
investors their pro rata share of $3,635 for each day any of the above
conditions exist with respect to this registration statement.
On March 11, 2003, we executed two agreements with ISI to purchase certain
assets of ISI.
In the first agreement with ISI, the Company acquired ISI's inventory of
ALFERON N Injection(R), and a limited license for the production, manufacture,
use, marketing and sale of this product. For these assets, the Company:
(i) issued 487,028 shares of its common stock; and
(ii) agreed to pay ISI 6 % of the net sales of the Product.
The Company also is required to pay ISI a service fee and pay certain of
ISI's obligations related to the product.
In the second agreement with ISI, ISI has agreed to sell to the Company all
of ISI's rights to the product and other assets related to the product
including, but not limited to, real estate and machinery. For these assets, the
Company will:
(i) issue an additional 487,028 shares of its common stock; and
(ii) continue to pay ISI 6 % of the net sales of the product.
In addition, the Company will be required to satisfy three obligations of
ISI. The Company will satisfy two of these obligations, pursuant to forbearance
agreements with The American National Red Cross and GP Strategies Corporation,
two of ISI's creditors, by issuing an aggregate of 581,761 shares of common
stock to these creditors. The third obligation is approximately $521,000 and is
secured by a lien on the property.
Pursuant to the agreements with ISI and its creditors, the Company is in
the process of registering the foregoing shares issued and to be issued to ISI
and its creditors for public sale in the registration statement on form S-3
mentioned above. Except for 125,000 of the shares issued and to be issued to
ISI, the Company has guaranteed the market value of the shares retained by ISI
and the two creditors through March 11, 2005 to be $1.59 per share. ISI and the
creditors are permitted to periodically sell certain amounts of their shares.
We will account for these transactions as a Business Combination under
Statement of Financial Accounting Standards ("SFAS") No. 141 Accounting for
Business Combinations.
During March 2002, Hemispherx Biopharma Europe, S.A., our Luxembourg
subsidiary, was authorized to issue up to 22,000,000 Euros of seven percent (7%)
convertible preferred securities. Such securities will be guaranteed by the
Company and will be converted into a specified number of shares pursuant to the
securities agreement. Conversion is to occur on the earlier of an initial public
offering of Hemispherx S.A. on a European stock exchange or September 30, 2003.
On March 13, 2003, we issued 347,445 shares of our common stock to Provesan
19
SA, an affiliate of Esteve, in exchange for 1,000,000 Euros of convertible
preferred equity certificates of Hemispherx Biopharma Europe, S.A., owned by
Esteve, and all dividends earned and to be earned through September 30, 2003. We
agreed to register the shares issued to Provesan SA, and we are in the process
of registering these shares for public sale in the registration statement of
form S-3 mentioned above.
On March 31, 2003 we settled our outstanding claim with an insurance
company relating to reimbursement of expenses in connection with our Asensio law
suits. See Legal Proceedings for more detailed information. We have applied the
net proceeds of approximately $1,050,000 as a reduction in general and
administrative expenses in our statement of operations for the year ended
December 31, 2002.
As of December 31, 2002, we had approximately $2,811,000 in cash and short
term investments. We believe that these funds plus 1) the anticipated infusion
of approximately $4.4 million in net proceeds from the Debenture placement, 2)
projected net cash flow from the acquisition of ALFERON N and 3) the funds
received from the insurance settlement should be sufficient to meet our
operating requirements for the next 12 months.
In addition, we may raise additional funds through additional equity or
debt financing, collaborative arrangements with corporate partners, lease
financing or from other sources in order to complete the necessary clinical
trials and the regulatory approval processes and begin commercializing our
products. If adequate funds are not available from operations and if we are not
able to secure additional sources of financing on acceptable terms, we would be
materially adversely affected in our commercialization process.
RISK FACTORS
The following cautionary statements identify important factors that could
cause our actual result to differ materially from those projected in the
forward-looking statements made in this Form 10-K. Among the key factors that
have a direct bearing on our results of operations are:
No assurance of successful product development
Ampligen(R) and related products. The development of Ampligen(R) and our
other related products is subject to a number of significant risks. Ampligen(R)
may be found to be ineffective or to have adverse side effects, fail to receive
necessary regulatory clearances, be difficult to manufacture on a commercial
scale, be uneconomical to market or be precluded from commercialization by
proprietary right of third parties. Our related products are in various stages
of clinical and pre-clinical development and, require further clinical studies
and appropriate regulatory approval processes before any such products can be
marketed. We do not know when, or if ever, Ampligen(R) or our other related
products will be generally available for commercial sale for any indication.
Generally, only a small percentage of potential therapeutic products are
eventually approved by the U.S. Food and Drug Administration ("FDA") for
commercial sale.
ALFERON N Injection(R). Although ALFERON N Injection is approved for
marketing for the treatment of genital warts, to date it has not been approved
for other applications. We face many of the risks discussed above, with regard
to developing this product for use to treat other ailments such as multiple
sclerosis and cancer.
20
Our drug and related technologies are investigational and subject to
regulatory approval. If we are unable to obtain regulatory approval, our
operations will be significantly affected.
All of our drugs and associated technologies other than ALFERON N Injection
are investigational and must receive prior regulatory approval by appropriate
regulatory authorities for general use and are currently legally available only
through clinical trials with specified disorders. At present, ALFERON N
Injection is only approved for the treatment of genital warts. Use of ALFERON N
Injection for other applications will require regulatory approval. In this
regard, Interferon Sciences, Inc., the Company from which we obtained our rights
to ALFERON N Injection, conducted clinical trials related to use of ALFERON N
Injection for treatment of HIV and Hepatitis C. In both instances, the FDA
determined that additional studies were necessary. Our principal development
efforts are currently focused on Ampligen(R), which has not been approved for
commercial use. Our products, including Ampligen(R), are subject to extensive
regulation by numerous governmental authorities in the U.S. and other countries,
including, but not limited to, the FDA in the U.S., the Health Protection
Branch("HPB") of Canada, and the European Medical Evaluation Agency ("EMEA") in
Europe. Obtaining regulatory approvals is a rigorous and lengthy process and
requires the expenditure of substantial resources. In order to obtain final
regulatory approval of a new drug, we must demonstrate to the satisfaction of
the regulatory agency that the product is safe and effective for its intended
uses and that we are capable of manufacturing the product to the applicable
regulatory standards. We require regulatory approval in order to market
Ampligen(R) or any other proposed product and receive product revenues or
royalties. We cannot assure you that Ampligen(R) will ultimately be demonstrated
to be safe or efficacious. In addition, while Ampligen(R) is authorized for use
in clinical trials in the United States and other countries, we cannot assure
you that additional clinical trial approvals will be authorized in the United
States or in other countries, in a timely fashion or at all, or that we will
complete these clinical trials. If Ampligen(R) or one of our other products does
not receive regulatory approval in the U.S. or elsewhere, our operations will be
materially adversely effected.
We may continue to incur substantial losses and our future profitability is
uncertain.
We began operations in 1966 and last reported net profit from 1985 through
1987. Since 1987, we have incurred substantial operating losses, as we pursued
our clinical trial effort and expanded our efforts in Europe. As of December 31,
2002 our accumulated deficit was approximately $99,000,000. We have not yet
generated significant revenues from our products and may incur substantial and
increased losses in the future. We cannot assure that we will ever achieve
significant revenues from product sales or become profitable. We require, and
will continue to require, the commitment of substantial resources to develop our
products. We cannot assure that our product development efforts will be
successfully completed or that required regulatory approvals will be obtained or
that any products will be manufactured and marketed successfully, or
profitability.
We may require additional financing which may not be available.
The development of our products will require the commitment of substantial
resources to conduct the time-consuming research, preclinical development, and
clinical trials that are necessary to bring pharmaceutical products to market.
21
In March 2003, we received $2,873,000 in initial net proceeds from the sale of
the Debentures and Warrants and, pursuant to the terms of these Debentures when
we close on the second Interferon Sciences asset acquisition, we will receive
additional net proceeds of $1,550,000. We anticipate receipt of revenues and
proceeds from the sales of Ampligen(R) under the Cost Recovery Clinical Programs
and, possibly, from the exercise of outstanding non-public warrants. We also
anticipate significant revenues from our recently acquired commercial product,
Alferon N. As of December 31, 2002, we had approximately $2,811,000 in cash and
short term investments. We believe that these funds plus 1) the anticipated
infusion of approximately $4.4 million in net proceeds from the Debenture
placement, 2) projected net cash flow from the acquisition of ALFERON N Business
and 3) the funds received from the Insurance settlement should be sufficient to
meet our operating requirement for the next 12 months. Anticipated sales from
the newly acquired Alferon N could significantly extend our present cash
reserves. We may need to raise additional funds through additional equity or
debt financing or from other sources in order to complete the necessary clinical
trials and the regulatory approval processes and begin commercializing our
products. There can be no assurances that we will raise adequate funds from
these or other sources, which may have a material effect on our ability to
develop our products.
If we do not complete the second Interferon Sciences asset acquisition, our
ability to generate revenues from the sale of ALFERON N Injection and our
financial condition will be adversely affected.
Although we acquired Interferon Sciences' inventory of ALFERON N Injection
and a limited license for the production, manufacture, use, marketing and sale
of this product, our ability to develop additional applications for the product
and generate sustained revenues from sales of this product is dependent, among
other things, on our completing the acquisition from Interferon Sciences of the
balance of its rights to this product and other assets related to the product
including, but not limited to, Interferon Science's facility for purifying the
drug concentrate utilized in the formulation of ALFERON N Injection. In
addition, pursuant to the terms of the Debentures, $1,550,000 of the proceeds
from the sale of the Debentures have been held back and, if we do not acquire
Interferon Sciences' facility, we will not receive these funds. Accordingly, if
we do not complete the second Interferon Sciences asset acquisition, our
financial condition will be adversely affected.
The limited number of unissued and unreserved authorized shares of Common
Stock severely restricts our ability to raise funds through the sale of our
securities.
We have a limited number of shares of Common Stock authorized but not
issued or reserved for issuance upon conversion or exercise of outstanding
convertible and exercisable securities such as debentures, options and warrants.
As of March 31, 2003, only approximately 749,770 shares of our authorized shares
of Common Stock will not be issued or reserved for issuance. Unless and until we
are able to increase the number of authorized shares of Common Stock, our
ability to raise funds through the sale of Common Stock or instruments that are
convertible into or exercisable for Common Stock will be severely restricted.
Although we intend to ask our stockholders at our next annual meeting to approve
an amendment to our Certificate of Incorporation to increase the shares of
Common Stock we are authorized to issue, we cannot assure you that we will be
able to obtain this approval.
We may not be profitable unless we can protect our patents and/or receive
approval for additional pending patents.
22
We need to preserve and acquire enforceable patents covering the use of
Ampligen(R) for a particular disease in order to obtain exclusive rights for the
commercial sale of Ampligen(R) for such disease. If and when we obtain all
rights to ALFERON N Injection, we will need to preserve and acquire enforceable
patents covering its use for a particular disease too. Our success depends, in
large part, on our ability to preserve and obtain patent protection for our
products and to obtain and preserve our trade secrets and expertise. Certain of
our know-how and technology is not patentable, particularly the procedures for
the manufacture of our drug product which are carried out according to standard
operating procedure manuals. We have been issued certain patents including those
on the use of Ampligen(R) and Ampligen(R) in combination with certain other
drugs for the treatment of HIV. We also have been issued patents on the use of
Ampligen(R) in combination with certain other drugs for the treatment of chronic
hepatitis B virus, chronic hepatitis C virus, and a patent which affords
protection on the use of Ampligen(R) in patients with chronic fatigue syndrome.
We have not yet been issued any patents in the United States for the use of
Ampligen(R) as a sole treatment for any of the cancers which we have sought to
target. With regard to ALFERON N Injection, Interferon Sciences, Inc. has a
patent for Natural Alpha Interferon produced from human peripheral blood
leukocytes and its production process and has additional patent applications
pending. We will acquire this patent and related patent applications if and when
we close on the second Interferon Sciences asset acquisition We cannot assure
you that any of these applications will be approved or that our competitors will
not seek and obtain patents regarding the use of our products in combination
with various other agents, for a particular target indication prior to us. If we
cannot protect our patents covering the use of our products for a particular
disease, or obtain additional pending patents, we may not be able to
successfully market our products.
The patent position of biotechnology and pharmaceutical firms is highly
uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of
protection afforded by pharmaceutical and biotechnology patents. There can be no
assurance that new patent applications relating to our products or technology
will result in patents being issued or that, if issued, such patents will afford
meaningful protection against competitors with similar technology. It is
generally anticipated that there may be significant litigation in the industry
regarding patent and intellectual property rights. Such litigation could require
substantial resources from us and we may not have the financial resources
necessary to enforce the patent rights that we hold. No assurance can be made
that our patents will provide competitive advantages for our products or will
not be successfully challenged by competitors. No assurance can be given that
patents do not exist or could not be filed which would have a materially adverse
effect on our ability to develop or market our products or to obtain or maintain
any competitive position the we may achieve with respect to our products. Our
patents also may not prevent others from developing competitive products using
related technology.
There can be no assurance that we will be able to obtain necessary licenses
if we cannot enforce patent rights we may hold. In addition, the failure of
third parties from whom we currently license certain proprietary information or
may be required to obtain such licenses in the future, to adequately enforce
their rights to such proprietary information, could adversely affect the value
of such licenses to us.
If we cannot enforce the patent rights we currently hold we may be required
to obtain licenses from others to develop, manufacture or market our products.
23
There can be no assurance that we would be able to obtain any such licenses on
commercially reasonable terms, if at all. We currently license certain
proprietary information from third parties, some of which may have been
developed with government grants under circumstances where the government
maintained certain rights with respect to the proprietary information developed.
No assurances can be given that such third parties will adequately enforce any
rights they may have or that the rights, if any, retained by the government will
not adversely affect the value of our license.
There is no guarantee that our trade secrets will not be disclosed or known
by our competitors.
To protect our rights, we require certain employees and consultants to
enter into confidentiality agreements with us. There can be no assurance that
these agreements will not be breached, that we would have adequate and
enforceable remedies for any breach, or that any trade secrets of ours will not
otherwise become known or be independently developed by competitors.
If our distributors do not market our product successfully, we may not generate
significant revenues or become profitable.
We have limited marketing and sales capability. We need to enter into
marketing agreements and third party distribution agreements for our products in
order to generate significant revenues and become profitable. To the extent that
we enter into co-marketing or other licensing arrangements, any revenues
received by us will be dependent on the efforts of third parties, and there is
no assurance that these efforts will be successful. Our agreement with Gentiva
Health Services offers the potential to provide significant marketing and
distribution capacity in the United States while licensing and marketing
agreements with certain foreign firms should provide an adequate sales force in
South America, Africa, United Kingdom, Australia and New Zealand, Canada,
Austria, Spain and Portugal.
We cannot assure that our domestic or our foreign marketing partners will
be able to successfully distribute our products, or that we will be able to
establish future marketing or third party distribution agreements on terms
acceptable to us, or that the cost of establishing these arrangements will not
exceed any product revenues. The failure to continue these arrangements or to
achieve other such arrangements on satisfactory terms could have a materially
adverse effect on us.
No Guaranteed Source Of Required Materials.
A number of essential materials are used in the production of ALFERON N
Injection, including human white blood cells, and we have a limited number of
sources from which to obtain such materials. We do not have long-term agreements
for the supply of any of such materials. There can be no assurance we can enter
into long-term supply agreements covering essential materials on commercially
reasonable terms, if at all. If we are unable to obtain the required raw
materials, we may be required to scale back our operations or stop manufacturing
ALFERON N Injection. The costs and availability of products and materials we
need for the commercial production of ALFERON N Injection and other products
which we may commercially produce are subject to fluctuation depending on a
variety of factors beyond our control, including competitive factors, changes in
technology, and FDA and other governmental regulations and there can be no
assurance that we will be able to obtain such products and materials on terms
acceptable to us or at all.
24
There is no assurance that successful manufacture of a drug on a limited
scale basis for investigational use will lead to a successful transition to
commercial, large-scale production.
Small changes in methods of manufacturing may affect the chemical structure
of Ampligen(R) and other RNA drugs, as well as their safety and efficacy.
Changes in methods of manufacture, including commercial scale-up may affect the
chemical structure of Ampligen(R) and, can, among other things, require new
clinical studies and affect orphan drug status, particularly, market exclusivity
rights , if any, under the Orphan Drug Act. The transition from limited
production of pre-clinical and clinical research quantities to production of
commercial quantities of our products will involve distinct management and
technical challenges and will require additional management and technical
personnel and capital to the extent such manufacturing is not handled by third
parties. There can be no assurance that our manufacturing will be successful or
that any given product will be determined to be safe and effective, capable of
being manufactured economically in commercial quantities or successfully
marketed.
We have limited manufacturing experience and capacity.
Ampligen(R) is currently produced only in limited quantities for use in our
clinical trials and we are dependent upon certain third party suppliers for key
components of our products and for substantially all of the production process.
The failure to continue these arrangements or to achieve other such arrangements
on satisfactory terms could have a material adverse affect on us. Also, to be
successful, our products must be manufactured in commercial quantities in
compliance with regulatory requirements and at acceptable costs. To the extent
we are involved in the production process, our current facilities are not
adequate for the production of our proposed products for large-scale
commercialization, and we currently do not have adequate personnel to conduct
commercial-scale manufacturing. We intend to utilize third-party facilities if
and when the need arises or, if we are unable to do so, to build or acquire
commercial-scale manufacturing facilities. We will need to comply with
regulatory requirements for such facilities, including those of the FDA and HPB
pertaining to current Good Manufacturing Practices ("cGMP") regulations. There
can be no assurance that such facilities can be used, built, or acquired on
commercially acceptable terms, or that such facilities, if used, built, or
acquired, will be adequate for our long-term needs.
The purified drug concentrate utilized in the formulation of ALFERON N
Injection is manufactured in Interferon Science's facility and ALFERON N
Injection is formulated and packaged at a production facility operated by
Abbott. if and when we close on the second Interferon Sciences asset
acquisition, we will acquire this facility. We still will be dependent upon
Abbott Laboratories and/or another third party for product formulation and
packaging.
We may not be profitable unless we can produce Ampligen(R) or other
products in commercial quantities at costs acceptable to us.
We have never produced Ampligen(R) or any other products in large
commercial quantities. Ampligen(R) is currently produced for use in clinical
trials. We must manufacture our products in compliance with regulatory
requirements in large commercial quantities and at acceptable costs in order for
us to be profitable. We intend to utilize third-party manufacturers and/or
facilities if and when the need arises or, if we are unable to do so, to build
or acquire commercial-scale manufacturing facilities. If we cannot manufacture
commercial quantities of Ampligen(R) or enter into third party agreements for
its manufacture at costs acceptable to us, our operations will be significantly
affected.
25
Rapid technological change may render our products obsolete or non-competitive.
The pharmaceutical and biotechnology industries are subject to rapid and
substantial technological change. Technological competition from pharmaceutical
and biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase. Most of
these entities have significantly greater research and development capabilities
than us, as well as substantial marketing, financial and managerial resources,
and represent significant competition for us. There can be no assurance that
developments by others will not render our products or technologies obsolete or
noncompetitive or that we will be able to keep pace with technological
developments.
Our products may be subject to substantial competition.
Ampligen(R) . Competitors may be developing technologies that are, or in
the future may be, the basis for competitive products. Some of these potential
products may have an entirely different approach or means of accomplishing
similar therapeutic effects to products being developed by us. These competing
products may be more effective and less costly than our products. In addition,
conventional drug therapy, surgery and other more familiar treatments may offer
competition to our products. Furthermore, many of our competitors have
significantly greater experience than us in pre-clinical testing and human
clinical trials of pharmaceutical products and in obtaining FDA, HPB and other
regulatory approvals of products. Accordingly, our competitors may succeed in
obtaining FDA, HPB or other regulatory product approvals more rapidly than us.
There are no drugs approved for commercial sale with respect to treating ME/CFS
and we have no knowledge of any ME/CFS drugs being developed by others. The
dominant competitors with drugs to treat HIV diseases include Gilead
Pharmaceutical, Pfizer, Bristol-Myers, Abbott Labs and Schering-Plough Corp.
("Shering"). These potential competitors are among the largest pharmaceutical
companies in the world, are well known to the public and the medical community,
and have substantially greater financial resources, product development, and
manufacturing and marketing capabilities than we have. Although we believe our
principal advantage is the unique mechanism action of Ampligen(R) on the immune
system, we cannot assure that we will be able to compete.
ALFERON N Injection(R). Many potential competitors are among the largest
pharmaceutical companies in the world, are well known to the public and the
medical community, and have substantially greater financial resources, product
development, and manufacturing and marketing capabilities than we have. ALFERON
N Injection currently competes with Schering's injectable recombinant alpha
interferon product (INTRON(R) A) for the treatment of genital warts. 3M
Pharmaceuticals also received FDA approval for its immune-response modifier,
Aldara(R), a self-administered topical cream, for the treatment of external
genital and perianal warts. ALFERON N Injection also competes with surgical,
chemical, and other methods of treating genital warts. We cannot assess the
impact products developed by our competitors, or advances in other methods of
the treatment of genital warts, will have on the commercial viability of ALFERON
N Injection. If and when we obtain additional approvals of uses of this product,
we expect to compete primarily on the basis of product performance. Our
potential competitors have developed or may develop products (containing either
alpha or beta interferon or other therapeutic compounds) or other treatment
modalities for those uses. In the United States, two recombinant forms of beta
interferon have been approved for the treatment of relapsing-remitting multiple
sclerosis. There can be no assurance that, if we are able to obtain regulatory
approval of ALFERON N Injection for the treatment of new indications, we will be
26
able to achieve any significant penetration into those markets. In addition,
because certain competitive products are not dependent on a source of human
blood cells, such products may be able to be produced in greater volume and at a
lower cost than ALFERON N Injection. Currently, Interferon Sciences' wholesale
price on a per unit basis of ALFERON N Injection is substantially higher than
that of the competitive recombinant alpha and beta interferon products.
General. Other companies may succeed in developing products earlier than we
do, obtaining approvals for such products from the FDA more rapidly than we do,
or developing products that are more effective than those we may develop. While
we will attempt to expand our technological capabilities in order to remain
competitive, there can be no assurance that research and development by others
or other medical advances will not render our technology or products obsolete or
non-competitive or result in treatments or cures superior to any therapy we
develop.
Possible side effects from the use of Ampligen(R) or ALFERON N Injection
could adversely effect potential revenues and physician/patient acceptability of
our product.
Ampligen(R). We believe that Ampligen(R) has been generally well tolerated
with a low incidence of clinical toxicity, particularly given the severely
debilitating or life threatening diseases that have been treated. A mild
flushing reaction has been observed in approximately 15% of patients treated in
our various studies. This reaction is occasionally accompanied by a rapid heart
beat, a tightness of the chest, urticaria (swelling of the skin), anxiety,
shortness of breath, subjective reports of "feeling hot," sweating and nausea.
The reaction is usually infusion-rate related and can generally be controlled by
slowing the infusion rate. Other adverse side effects include liver enzyme level
elevations, diarrhea, itching, asthma, low blood pressure, photophobia, rash,
transient visual disturbances, irregular heart rate, decreased visual activity
in platelets and white blood cell counts, anemia, dizziness, confusion,
elevation of kidney function tests, occasional temporary hair loss and various
flu-like symptoms, including fever, chills, fatigue, muscular aches, joint
pains, headaches, nausea and vomiting. These flu-like side effects typically
subside within several months. One or more of the potential side effects might
deter usage of Ampligen(R) in certain clinical situations and therefore, could
adversely effect potential revenues and physician/patient acceptability of our
product.
ALFERON N Injection(R). At present, ALFERON N Injection is only sold for
the intralesional (with in the lesion) treatment of refractory or recurring
external genital warts in adults. In clinical trials conducted for the treatment
of genital warts with ALFERON N Injection, patients did not experience serious
side effects; however, there can be no assurance that unexpected or unacceptable
side effects will not be found in the future for this use or other potential
uses of ALFERON N Injection which could threaten or limit such product's
usefulness.
We may be subject to product liability claims from the use of Ampligen(R) or
other of our products which could negatively affect our future operations.
We face an inherent business risk of exposure to product liability claims
in the event that the use of Ampligen(R) or other of our products results in
adverse effects. This liability might result from claims made directly by
patients, hospitals, clinics or other consumers, or by pharmaceutical companies
or others manufacturing these products on our behalf. Our future operations may
be negatively effected from the litigation costs, settlement expenses and lost
27
product sales inherent to these claims. While we will continue to attempt to
take appropriate precautions, we cannot assure that we will avoid significant
product liability exposure. Although we currently maintain product liability
insurance coverage, there can be no assurance that this insurance will provide
adequate coverage against product liability claims. A successful product
liability claim against us in excess of our $1,000,000 in insurance coverage or
for which coverage is not provided could have a negative effect on our business
and financial condition.
The loss of Dr. Carter's services could hurt our chances for success.
Our success is dependent on the continued efforts of Dr. William A. Carter
because of his position as a pioneer in the field of nucleic acid drugs, his
being the co-inventor of Ampligen(R), and his knowledge of our overall
activities, including patents, clinical trials. The loss of Dr. Carter's
services could have a material adverse effect on our operations and chances for
success. While we have an employment agreement with Dr. Carter, and have secured
key man life insurance in the amount of $2 million on the life of Dr. Carter,
the loss of Dr. Carter or other personnel, or the failure to recruit additional
personnel as needed could have a materially adverse effect on our ability to
achieve our objectives.
Uncertainty of health care reimbursement for our products.
Our ability to successfully commercialize our products will depend, in
part, on the extent to which reimbursement for the cost of such products and
related treatment will be available from government health administration
authorities, private health coverage insurers and other organizations.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and from time to time legislation is proposed, which, if
adopted, could further restrict the prices charged by and/or amounts
reimbursable to manufacturers of pharmaceutical products. We cannot predict
what, if any, legislation will ultimately be adopted or the impact of such
legislation on us. There can be no assurance that third party insurance
companies will allow us to charge and receive payments for products sufficient
to realize an appropriate return on our investment in product development.
There are risks of liabilities associated with handling and disposing of
Hazardous materials.
Our business involves the controlled use of hazardous materials,
carcinogenic chemicals and various radioactive compounds. Although we believe
that our safety procedures for handling and disposing of such materials comply
in all material respects with the standards prescribed by applicable
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident or the failure
to comply with applicable regulations, we could be held liable for any damages
that result, and any such liability could be significant. We do not maintain
insurance coverage against such liabilities.
The market price of our stock may be adversely affected by market volatility.
The market price of our common stock has been and is likely to be volatile.
In addition to general economic, political and market conditions, the price and
trading volume of our stock could fluctuate widely in response to many factors,
including:
28
* announcements of the results of clinical trials by us or our competitors;
* adverse reactions to products;
* governmental approvals, delays in expected governmental approvals or
withdrawals of any prior governmental approvals or public or regulatory agency
concerns regarding the safety or effectiveness of our products;
* changes in U.S. or foreign regulatory policy during the period of product
development;
* developments in patent or other proprietary rights, including any third
party challenges of our intellectual property rights;
* announcements of technological innovations by us or our competitors;
* announcements of new products or new contracts by us or our competitors;
* actual or anticipated variations in our operating results due to the
level of development expenses and other factors;
* changes in financial estimates by securities analysts and whether our
earnings meet or exceed the estimates;
* conditions and trends in the pharmaceutical and other industries;
* new accounting standards; and
* the occurrence of any of the risks described in these "Risk Factors."
Our common stock is listed for quotation on the American Stock Exchange.
For the 12-month period ended December 31, 2002, the price of our common stock
has ranged from $0.74 to $4.95. We expect the price of our common stock to
remain volatile. The average daily trading volume in our common stock varies
significantly. Our relatively low average volume and low average number of
transactions per day may affect the ability of our stockholders to sell their
shares in the public market at prevailing prices and a more active market may
never develop.
In the past, following periods of volatility in the market price of the
securities of companies in our industry, securities class action litigation has
often been instituted against companies in our industry. If we face securities
litigation in the future, even if without merit or unsuccessful, it would result
in substantial costs and a diversion of management attention and resources,
which would negatively impact our business.
Our stock price may be adversely affected if a significant amount of shares
are sold in the public market.
As of April 1, 2003, approximately 834,473 shares of our common stock,
constituted "restricted securities" as defined in Rule 144 under the Securities
Act of 1933. In addition, we have registered 5,967,820 shares issuable upon the
conversion of 135% of the Debentures and as payment of interest thereon. All of
these shares are being registered in the form S-3 registration statement
discussed above pursuant to agreements between us and the purchasers in our
recent private placements, requiring us to register their shares for resale
under the Securities Act. This permits the sale of registered shares of common
stock in the open market or in privately negotiated transactions without
compliance with the requirements of Rule 144. In addition, as of March 31, 2003,
we had options and warrants outstanding for the purchase of an aggregate of
approximately 9,265,914 shares of our common stock, which includes 135% of the
shares issuable upon exercise of the Warrants. To the extent the exercise price
of the options and warrants is less than the market price of the common stock,
the holders of the options and warrants are likely to exercise them and sell the
underlying shares of common stock and to the extent that the conversion price
and exercise price of these securities are adjusted pursuant to anti-dilution
protection, the securities could be exercisable or convertible for even more
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shares of common stock. Moreover, we anticipate that we will be issuing and
registering for public resale 1,068,789 shares if and when we acquire additional
assets from Interferon Sciences, Inc. and, possibly, additional shares to raise
funding or compensate employees, consultants and/or directors We are unable to
estimate the amount, timing or nature of future sales of outstanding common
stock. Sales of substantial amounts of our common stock in the public market
could cause the market price for our common stock to decrease. Furthermore, a
decline in the price of our common stock would likely impede our ability to
raise capital through the issuance of additional shares of common stock or other
equity securities.
Provisions of our Certificate of Incorporation and Delaware law could defer a
change of our management which could discourage or delay offers to acquire us.
Provisions of our Certificate of Incorporation and Delaware law may make it
more difficult for someone to acquire control of us or for our stockholders to
remove existing management, and might discourage a third party from offering to
acquire us, even if a change in control or in management would be beneficial to
our stockholders. For example, our Certificate of Incorporation allows us to
issue shares of preferred stock without any vote or further action by our
stockholders. Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our Board of Directors also
has the authority to issue preferred stock without further stockholder approval.
As a result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of common stock and the right to the redemption of
the shares, together with a premium, prior to the redemption of our common
stock. In this regard, in November, 2002 we adopted a shareholder rights plan
and, under the Plan, our Board of Directors declared a dividend distribution of
one Right for each outstanding share of Common Stock to stockholders of record
at the close of business on November 29, 2002. Each Right initially entitles
holders to buy one unit of preferred stock for $30.00. The Rights generally are
not transferable apart from the common stock and will not be exercisable unless
and until a person or group acquires or commences a tender or exchange offer to
acquire, beneficial ownership of 15% or more of our common stock. However, for
William A. Carter, M.D., our chief executive officer, who already beneficial
owns 11.4% of the our common stock, the Plan's threshold will be 20%, instead of
15%. The Rights will expire on November 19, 2012, and may be redeemed prior
thereto at $.01 per Right under certain circumstances.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the
imp