Back to GetFilings.com
================================================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2001 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ________ to _______
Commission File Number 0-27718
NEOSE TECHNOLOGIES, INC.
----------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3549286
----------------------------------------------- ----------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
102 Witmer Road
Horsham, Pennsylvania 19044
--------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 441-5890
--------------
Securities registered pursuant to Section 12(b) of the Act:
None None
------------------- -----------------------------------------
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights
-------------------------------
(Title of class)
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K.[ ]
As of March 25, 2002, the aggregate market value of the Common Stock
held by non-affiliates of the registrant was approximately $290,084,000 based on
the last sale price of the Common Stock as reported by the The Nasdaq Stock
Market. This calculation excludes 4,472,706 shares held by directors, executive
officers, and a holder of more than 10% of the registrant's Common Stock.
As of March 25, 2002, there were 14,145,407 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement to be filed in connection
with solicitation of proxies for its Annual Meeting of Stockholders to be held
on June 25, 2002, is incorporated by reference into Part III of this Annual
Report on Form 10-K.
================================================================================================================
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS...........................................................................................1
ITEM 2. PROPERTIES........................................................................................19
ITEM 3. LEGAL PROCEEDINGS.................................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................21
ITEM 6. SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA...................................................22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.........................................27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..............28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY...................................................29
ITEM 11. EXECUTIVE COMPENSATION............................................................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................................30
NEOSE, GlycoAdvance, GlycoTherapeutics, and GlycoActives are trademarks of Neose
Technologies, Inc. This Form 10-K also includes trademarks and trade names of
other companies.
PART I
ITEM 1. BUSINESS.
Forward-Looking Statements
Some of the statements in this Annual Report on Form 10-K and the
Exhibits contain forward-looking statements within Section 21E of the Securities
Exchange Act of 1934. When used in this Form 10-K and the Exhibits, the words
"anticipate," "believe," "estimate," "may," "expect," "intend," and similar
expressions are generally intended to identify forward-looking statements. These
forward-looking statements include, among others, the statements in Management's
Discussion and Analysis of Financial Condition and Results of Operations about
our:
o expectations for increases in operating expenses;
o expectations for increases in research and development, and
marketing, general and administrative expenses in order to
develop products, manufacture commercial quantities of
products and commercialize our technology;
o expectations for the development, manufacturing, and approval
of new products, including our own proprietary products;
o expectations for incurring additional capital expenditures to
expand our manufacturing capabilities;
o expectations for generating revenue or becoming profitable on
a sustained basis;
o ability to enter into additional collaboration agreements and
the ability of our existing collaboration partners to
commercialize products incorporating our technologies;
o estimate of the sufficiency of our existing cash and cash
equivalents and investments to finance our operating and
capital requirements;
o expected losses; and
o expectations for future capital requirements.
Our actual results could differ materially from those results expressed
in, or implied by, these forward-looking statements. Potential risks and
uncertainties that could affect our actual results include the following:
o our ability to commercialize any products or technologies;
o our ability to maintain our existing collaborative
arrangements and enter into new collaborative arrangements;
o our ability to develop commercial-scale manufacturing
facilities;
o our ability to protect our proprietary products, know-how, and
manufacturing processes;
o unanticipated cash requirements to support current operations
or research and development;
o the timing and extent of funding requirements for the
activities of our joint venture with McNeil Nutritionals;
o our ability to attract and retain key personnel; and
o general economic conditions.
These and other risks and uncertainties that could affect our actual
results are discussed in greater detail in this Annual Report on Form 10-K.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance, or achievements. We do not assume responsibility for the
accuracy and completeness of the forward-looking statements.
We do not undertake any duty to update after the date of this Annual
Report on Form 10-K any of the forward-looking statements in this report to
conform them to actual results.
1
RISK FACTORS
You should carefully consider the risks and uncertainties described
below. If any of the following occur, our business, financial condition, or
operating results could be materially harmed. This could cause the trading price
of our common stock to decline, and you may lose all or part of your investment.
Risks Related to Our Business
We have not yet commercialized any products or technologies, and we may never
become profitable.
We have not yet commercialized any products or technologies and we may
never be able to do so. Since we began operations in 1990, we have not generated
any revenues, except for interest income and revenues from collaborative
agreements and investments. Even if we or our collaborators commercialize one or
more of our technologies or any products that incorporate our technologies, we
may not become profitable. Our ability to achieve profitability is dependent on
a number of factors, including our ability to complete our development efforts
and enter into collaborative agreements with others to incorporate our
technologies into their products or develop and commercialize our own products.
Furthermore, our ability to achieve profitability is dependent upon the
willingness and ability of our collaborators to incorporate successfully our
technologies into, obtain regulatory approval for, and commercialize
successfully their product candidates or our ability to commercialize our own
product candidates.
We have a history of losses, and we may incur continued losses for some time.
We have incurred losses each year, including net losses of
approximately $13.3 million for the year ended December 31, 1999, approximately
$8.5 million for the year ended December 31, 2000, and approximately $13.3
million for the year ended December 31, 2001. Given our planned level of
operating expenses, we may continue to incur losses for some time. As of
December 31, 2001, we had an accumulated deficit of approximately $81.6 million.
To date, we have derived substantially all of our revenue from corporate
collaborations, license agreements, and investments. We expect that
substantially all of our revenue for the foreseeable future will result from
these sources and from the licensing of our technologies. We also expect to
spend significant amounts to expand research and development efforts, expand
manufacturing scale-up activities, begin sales and marketing activities, and to
fund research and development of drug candidates we develop internally. Because
our operating expenses will increase significantly in the near term, we will
need to generate significant additional revenue to achieve profitability. In
order to generate revenue, we must continue to develop technologies from which
we can derive revenue either ourselves or through existing and future
collaborations. We may continue to incur substantial losses even if our revenues
increase. As a result, we cannot predict the extent of future losses or the time
required for us to achieve profitability, if at all.
We have a joint venture with McNeil Nutritionals, a subsidiary of
Johnson & Johnson. The joint venture has incurred losses since its inception,
and we expect the joint venture to incur additional losses for some time as it
explores establishing a manufacturing arrangement with a third party.
If we fail to obtain necessary funds for our operations, we will be unable to
maintain and improve our technology position.
To date, we have funded our operations primarily through revenues from
corporate collaborations, public and private placements of equity securities,
capital equipment and leasehold financing, gains from the sale of investments,
and interest earned on investments. We believe that our existing cash and
short-term investments, expected revenue from collaborations and license
arrangements, anticipated financing of capital expenditures, and interest income
should be sufficient to meet our operating and capital requirements through at
least 2003. However, our present and future capital requirements depend on many
factors, including:
o the level of research and development investment required to
maintain and improve our technology position;
o our ability to enter into new agreements with collaborators or
to extend the terms of our existing collaborations, and the
terms of any agreement of this type;
2
o our success rate or that of our collaborators in discovery
efforts associated with milestones and royalties;
o the timing, willingness, and ability of our collaborators to
commercialize products incorporating our technologies, which
commercialization would result in milestone payments and in
royalties;
o costs of recruiting and retaining qualified personnel;
o costs of filing, prosecuting, defending, and enforcing patent
claims and other intellectual property rights;
o our need or decision to acquire or license complementary
technologies or new drug targets; and
o changes in product candidate development plans needed to
address any difficulties in clinical studies or in
commercialization.
If additional funds are required to operate our business, these funds
may not be available on terms that we find favorable, if at all. We may raise
these funds through public or private equity offerings, debt financings, credit
facilities, or through corporate collaborations and licensing arrangements.
If we raise additional capital by issuing equity securities, our
existing stockholders' percentage ownership will be reduced and they may
experience substantial dilution. Any equity securities issued may also provide
for rights, preferences, or privileges senior to holders of our common stock. If
we raise additional funds by issuing debt securities, these debt securities
would have rights, preferences, and privileges senior to holders of our common
stock, and the terms of the debt securities issued could impose significant
restrictions on our operations. If we enter into a credit facility, the
agreement may require us to maintain compliance with financial covenants and
restrict our ability to incur additional debt, pay dividends, make redemptions
or repurchases of capital stock, make loans, investments or capital
expenditures, or engage in other activities. If we raise additional funds
through collaborations and licensing arrangements, we may be required to
relinquish some rights to our technologies or drug candidates, or grant licenses
on terms that are not favorable to us. If adequate funds are not available or
are not available on acceptable terms, our ability to fund our operations, take
advantage of opportunities, develop products or technologies, or otherwise
respond to competitive pressures could be significantly delayed or limited, and
we may need to downsize or halt our operations.
Our technologies may prove to be ineffective, or it may be years, if ever,
before they lead to commercial products.
Our technologies involve new and unproven approaches. We are developing
manufacturing processes based on our enzymatic glycosylation technology
platform. We intend to use these processes to manufacture enzymes and sugar
nucleotides for use by our potential GlycoAdvance(TM) customers, as well as for
our own use in manufacturing complex carbohydrates for our GlycoAdvance,
GlycoTherapeutics(TM), and GlycoActives(TM) programs. Any evaluation of our
business and prospects must be made in light of the risks and unexpected
expenses and difficulties frequently encountered by companies in an early stage
of development in a new market. For us, these risks include:
o we have limited experience in manufacturing enzymes, sugar
nucleotides, and complex carbohydrates on a commercial scale;
o we may incur unexpected costs, and the costs associated with
manufacturing commercial quantities of these compounds may
make commercialization unprofitable;
o we may fail to overcome the difficulties posed in
manufacturing these compounds, or complete successfully all
the other activities required to commercialize any enzyme,
sugar nucleotide, or complex carbohydrate;
o we may encounter difficulties in locating sufficient sources
and supplies necessary for our business; and
o we may face obstacles and difficulties unknown to us today.
We may find that our technologies fail to remodel therapeutic
glycoproteins to include the proper human sugars. We may also find that our
technologies do not significantly enhance yield improvement, improve the
pharmacokinetic properties of glycoproteins, or are not scaleable in commercial
production processes. Any of these
3
would result in limiting our ability to enter into additional collaborative
agreements or obtain revenues under existing agreements.
We do not expect that we will make commercially available any product
candidates we develop internally or license from third parties for at least five
years, if at all. We may not succeed in our research and product development
efforts, and we may not be able to launch any successfully commercialized
products. Further, after commercial introduction of a new product, discovery of
problems through adverse event reporting could result in restrictions on the
product, including recall or withdrawal from the market and, in certain cases,
civil or criminal penalties resulting from actions by regulatory authorities or
damage from product liability judgments.
Many of these risks are described in more detail elsewhere in this
"Risk Factors" section. Our business could be seriously harmed by adverse
developments in any of these areas.
Our success depends on collaborative relationships, and our failure to enter
into new, or successfully manage our existing and future, collaborations and
license arrangements could prevent us from commercializing our technologies.
In the near term, we intend to rely substantially on collaborative
partners to commercialize our broad technology platform. This strategy entails
many risks, including:
o we may be unsuccessful in entering into collaborative
agreements for the development and commercialization of
products incorporating our technologies;
o we may not be successful in adapting our technologies to the
needs of our collaborative partners;
o our collaborators may not be successful in or remain committed
to developing or commercializing products incorporating our
technologies;
o our collaborators may decide to attempt to develop proprietary
alternatives to our technologies;
o we cannot be sure that our collaborators will share our
perspective on the relative value of our technologies;
o we cannot be sure that our collaborators will commit
sufficient resources to incorporating our technologies into
their products;
o the use of our technologies may not advance as rapidly as it
might if we retained complete control of all research,
development, regulatory, and commercialization decisions;
o none of these collaborators is contractually obligated to
introduce or promote products incorporating our technologies,
nor are any of them contractually required to achieve any
specific production schedule;
o our collaborative agreements are generally terminable by our
partners on short notice;
o continued consolidation in our target markets may also limit
our ability to enter into collaboration agreements, or may
result in terminations of existing collaborations.
Any of our present or future collaborators may breach or terminate
their agreements with us or otherwise fail to conduct their collaborative
activities successfully and in a timely manner. In addition, we may dispute the
application of payment provisions under any of our collaboration agreements. If
we fail to enter into or maintain collaborative agreements, or if any of these
events occurs, we may not be able to commercialize our technologies.
GlycoAdvance. In December 2001, we entered into a research,
development, and license agreement with Wyeth Pharmaceuticals, a division of
Wyeth, for the use of our GlycoAdvance technology to develop an improved
production system for Wyeth's biopharmaceutical compound, recombinant PSGL-Ig.
The compound is currently being evaluated in Phase II clinical trials in
patients being treated for heart attack. Wyeth is evaluating the use of
GlycoAdvance in the production of rPSGL-Ig for Phase III clinical trials and
commercial launch. Wyeth may not obtain regulatory approval for rPSGL-Ig, Wyeth
may choose not to commercialize rPSGL-Ig, Wyeth may choose not to use
GlycoAdvance services or products to commercialize rPSGL-Ig, or we may not
succeed in developing an improved production system for rPSGL-Ig.
4
Regardless of the success of our technologies, the success of
GlycoAdvance will be dependent on the priorities and actions of Wyeth and any
future collaborative partners, including their success in obtaining regulatory
approval for, and commercial acceptance of, any products incorporating our
technologies.
GlycoTherapeutics(TM). We have existing collaborative agreements for
GlycoTherapeutics with Progenics Pharmaceuticals, Inc. and Neuronyx, Inc.
Our agreement with Progenics involves the development of proprietary
technologies that enable the manufacture of two gangliosides for use as the
active pharmaceutical ingredients in two cancer vaccines being developed by
Progenics. On May 15, 2001, Progenics announced the initiation of a Phase III
clinical trial with the most advanced of these vaccines to prevent the relapse
of malignant melanoma. Under the terms of the agreement, Progenics has the right
to negotiate with us for the supply of the gangliosides. The agreement does not
provide for future payments unless we reach an agreement with Progenics. Even if
we reach an agreement with Progenics on terms for supplying the gangliosides,
and we successfully complete development of these processes and fulfill all of
our obligations under the agreement, Progenics may not obtain regulatory
approval to market either of these vaccines. Further, even if Progenics obtains
regulatory approval to market either of these vaccines, we cannot be sure that
Progenics will enter into a manufacturing contract with us, that the terms of a
future contract with Progenics will be favorable to us, or that either vaccine
will be commercially successful.
Under our agreement with Neuronyx, we are collaborating in the research
of compounds for the treatment of Parkinson's disease and other neurological
diseases. Even if the research identifies potential target compounds, both
parties must agree to pursue development of the target compounds. If development
proceeds, we would be responsible for the synthesis and manufacturing scale-up
of target compounds, using our proprietary technologies for carbohydrate
synthesis. We may be unable to complete this development successfully. Even if
we successfully complete development of these processes and fulfill all of our
obligations under the agreement, Neuronyx may not obtain regulatory approval to
market any products. Further, even if Neuronyx obtains regulatory approval to
market any of these products, we cannot be sure that any of the products will be
commercially successful.
GlycoActives(TM). We have collaborative agreements with McNeil
Nutritionals and Wyeth Nutrition, a business unit of Wyeth Pharmaceuticals.
The success of our joint venture with McNeil Nutritionals is dependent
upon the joint venture's ability to develop, manufacture, sell, and market
successfully complex carbohydrates, all of which are in early stages.
Under our agreement with Wyeth Nutrition, we are responsible for
developing a large-scale manufacturing process for a potential ingredient in
infant formula. We may be unable to complete this development successfully, or
be successful in commercial scale-up of these processes. Even if we successfully
develop a process and fulfill all of our obligations under the agreement, Wyeth
may fail to obtain regulatory approval to market the ingredient. Even if Wyeth
obtains regulatory approval for the ingredient, Wyeth may elect not to add the
ingredient to any of its products.
If our collaborators fail to develop and commercialize products incorporating
our technologies, we will fail to realize potential revenues.
Our future revenue will depend in part on the realization of milestone
payments and royalties, if any, triggered by our collaborators' successful
commercialization and development of products incorporating our technologies.
The agreements with our collaborators do not obligate them to develop or
commercialize lead compounds identified or manufactured through the use of our
technologies. Our future revenues will therefore depend not only on our and our
collaborators' achievement of development objectives, but also on each
collaborator's own financial, competitive, marketing and strategic
considerations, such as the relative advantages of other companies' products,
including relevant patent and proprietary positions. If a collaborator fails to
develop or commercialize a compound using our technologies, or if a compound
that a collaborator develops is determined to be unsafe or of no therapeutic
benefit, we will not receive any future milestone payments or royalties for that
compound.
5
We have limited commercial manufacturing capability and experience, and we may
be unable to manufacture the compounds required to commercialize our
technologies.
Commercialization of our technologies requires the manufacture of
enzymes, sugar nucleotides, and complex carbohydrates. We intend to manufacture
enzymes and sugar nucleotides for use by our potential GlycoAdvance customers,
as well as for our own use in manufacturing complex carbohydrates for our
GlycoAdvance, GlycoTherapeutics, and GlycoActives programs. Our success depends
on our ability to manufacture these compounds on a commercial scale and in
accordance with current Good Manufacturing Practices, or cGMP, prescribed by the
United States Food and Drug Administration, or FDA. Our existing facility is not
adequate for large-scale, commercial manufacturing. Therefore, we will need to
develop commercial-scale manufacturing facilities meeting cGMP, or depend on our
collaborators, licensees, or contract manufacturers.
We intend to expand our manufacturing capacity. This expansion will
require significant additional funds and personnel, and compliance with
applicable regulations. We intend to pursue this expansion without any assurance
that we will receive an adequate return on our investment. We may be unable to
design, build, or operate the required facilities. In addition to the normal
scale-up risks associated with any manufacturing process, we may face
unanticipated problems unique to manufacture of enzymes, sugar nucleotides, or
complex carbohydrates. If we are unable to develop commercial-scale
manufacturing capacity, we would seek collaborators, licensees, or contract
manufacturers to manufacture the compounds necessary to commercialize our
technologies. We may not be able to find parties willing to manufacture these
compounds at acceptable prices.
Any manufacturing facility must adhere to the FDA's regulations on
cGMP, which are enforced by the FDA through its facilities inspection program.
The manufacture of product at these facilities will be subject to strict quality
control, testing, and record keeping requirements, and continuing obligations
regarding the submission of safety reports and other post-market information.
Ultimately, we or our contract manufacturers may not meet these requirements.
If we encounter delays or difficulties in connection with
manufacturing, commercialization of our technologies could be delayed, or we
could breach our obligations under our collaborative agreements.
The failure to obtain or maintain adequate patents, and other intellectual
property protection, could impact our ability to compete effectively.
Our success will depend in part on our ability to obtain commercially
valuable patent claims and to protect our intellectual property. Our patent
position is generally uncertain and involves complex legal and factual
questions. Legal standards relating to the validity and scope of claims in our
technology field are still evolving. Therefore, the degree of future protection
for our proprietary rights is uncertain. The risks and uncertainties that we
face with respect to our patents and other proprietary rights include the
following:
o the pending patent applications we have filed or to which we
have exclusive rights may not result in issued patents or may
take longer than we expect to result in issued patents;
o the claims of any patents that are issued may not provide
meaningful protection;
o we may not be able to develop additional proprietary
technologies that are patentable;
o the patents licensed or issued to us or our customers may not
provide a competitive advantage;
o other companies may challenge patents licensed or issued to us
or our customers;
o other companies may independently develop similar or
alternative technologies, or duplicate our technologies; and
o other companies may design around technologies we have
licensed or developed.
We may incur substantial costs in asserting any patent rights and in
defending suits against us relating to intellectual property rights. Such
disputes could substantially delay our product development or commercialization
activities. The United States Patent and Trademark Office or a private party
could institute an interference proceeding relating to our patents or our patent
applications. An adverse decision in any such proceeding could result in the
loss of our intellectual property rights.
6
In addition to patents and patent applications, we depend upon trade
secrets and proprietary know-how to protect our proprietary technology. We
require all employees, consultants, advisors, and collaborators to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to any other parties. We require that our employees and consultants
disclose and assign to us their ideas, developments, discoveries, and
inventions. These agreements may not, however, provide adequate protection for
our trade secrets, know-how, or other proprietary information in the event of
any unauthorized use or disclosure.
International patent protection is uncertain.
Patent law outside the United States is uncertain, and is currently
undergoing review and revision in many countries. Further, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as U.S. laws. We may participate in opposition proceedings to determine
the validity of our or our competitors' foreign patents, which could result in
substantial costs and diversion of our efforts. Finally, some of our patent
protection in the United States is not available to us in foreign countries due
to the laws of those countries.
We may have to develop or license alternative technologies if we are unable to
maintain or obtain key technology from third parties.
We have licensed patents and patent applications from a number of
institutions. Some of our proprietary rights have been licensed to us under
agreements that have performance requirements or other contingencies. The
failure to comply with these provisions could lead to termination or
modifications of our rights to these licenses. Additionally, we may need to
obtain additional licenses to patents or other proprietary rights from other
parties to facilitate development of our proprietary technology base. If our
existing licenses are terminated or we are unable to obtain such licenses, or
obtain such licenses on what we consider to be acceptable terms, our ability to
perform our obligations under our collaborative agreement and research and
development efforts may be delayed while we seek to develop or license
alternative technologies.
We are exposed to intense competition from many sources.
Our potential competitors include both public and private
pharmaceutical, chemical, biotechnology, food, and consumer product companies.
Compared to us, many of these companies have more:
o financial, scientific, and technical resources;
o manufacturing and marketing capabilities;
o experience conducting preclinical studies and clinical trials
of new products; and
o experience in obtaining regulatory approvals for products.
Competitors may succeed in developing products and technology that are
more effective and less costly than we may develop, or that would render our
technology or products, or both, obsolete or noncompetitive. For example,
potential customers may develop other ways to achieve the benefits of our
technology. Competitors also may prove to be more successful in the
manufacturing and marketing of products. If we are successful in developing our
own drug candidates or versions of drugs that are no longer patented, we will
compete with other drug manufacturers for market share. If we are unable to
compete against our competitors, our commercial opportunities will be
diminished.
We operate in an environment of rapid technological change, and we may fall
behind our competitors.
Our business is characterized by extensive research efforts and rapid
technological progress. New developments in molecular biology, medicinal
chemistry, and other fields of biology and chemistry are expected to continue at
a rapid pace in both industry and academia. Research and discoveries by others
may render some or all of our programs noncompetitive or obsolete. For example,
some companies are producing by enzymatic and other means a limited variety of
complex carbohydrates. Although we do not believe any of these companies
currently has the ability to manufacture a wide variety of human carbohydrate
products in quantities sufficient for commercialization, any of these companies
may develop technologies superior to our technologies. In addition, some
companies are investigating novel methods of chemical synthesis, sometimes with
enzymatic steps, to produce commercial quantities
7
of complex carbohydrates. These and other efforts by potential competitors may
be successful, or other methods of carbohydrate synthesis that compete with our
technologies may be developed.
We may be unable to retain key employees or recruit additional qualified
personnel.
Because of the specialized scientific nature of our business, we are
highly dependent upon qualified scientific, technical, and managerial personnel.
There is intense competition for qualified personnel in our business. Therefore,
we may not be able to attract and retain the qualified personnel necessary for
the development of our business. The loss of the services of existing personnel,
as well as the failure to recruit additional key scientific, technical, and
managerial personnel in a timely manner, would harm our research and development
programs or our manufacturing capabilities.
We may be exposed to product liability and related risks.
The use in humans of compounds incorporating our technologies can
result in product liability claims. Product liability claims can be expensive to
defend, and may result in large settlements of claims or judgments against us.
Even if a product liability claim is not successful, the adverse publicity,
time, and expense involved in defending such a claim may interfere with our
business. We may not be able to obtain insurance coverage at a reasonable cost
or in sufficient amounts to protect us against losses.
Risks Related to Government Approvals
We are subject to extensive government regulation, and we or our collaborators
may not obtain necessary regulatory approvals.
The research, development, manufacture, marketing, and sale of product
candidates manufactured using our technologies are subject to significant, but
varying, degrees of regulation by a number of government authorities in the
United States and other countries.
Regulation of Pharmaceutical Products
Pharmaceutical product candidates manufactured using our technology
must undergo an extensive regulatory approval process before commercialization.
This process is regulated by the FDA and by comparable agencies in other
countries. Product candidates incorporating our technology are regulated in the
United States in accordance with the federal Food, Drug and Cosmetic Act, the
Public Health Service Act, and other laws. If a product candidate is regulated
as a biologic, the FDA Center for Biologics Evaluation and Research, or CBER,
will require the submission and approval of a Biologic License Application, or
BLA, before commercial marketing. The BLA process generally requires:
o expensive and time-consuming preclinical studies and clinical
trials to establish the safety, potency, purity, and
effectiveness of each compound to be submitted with the FDA;
o compliance with FDA good laboratory, clinical, and
manufacturing practices during testing and manufacturing; and
o continued FDA oversight of product and promotion after
marketing approval is obtained.
It may be many years, if ever, until regulatory approval is obtained,
and regulatory oversight continues after marketing approval for the product
candidate is received.
Each manufacturer of drugs or biologics must be registered with the FDA
and pass an inspection by the FDA prior to approval to manufacture products for
commercial distribution. Failure to pass the inspection results in not receiving
approval to market products. A collaborator's use of our technologies in the
manufacture of a product candidate will require submission of Drug Master Files
with CBER. If we or our collaborators fail to comply with all applicable
regulatory requirements, the following delays or regulatory action could result:
8
o warning letters;
o fines;
o product recalls or seizures;
o operating restrictions;
o refusal of the FDA to complete review of pending market
approval applications or supplements to approval applications;
o withdrawal of previously approved product approvals;
o civil penalties; and
o criminal prosecution.
We have not submitted, and we may never submit, any pharmaceutical
product candidates for marketing approval to the FDA, or any other regulatory
authority. In addition, no collaborator has submitted, and may never submit, any
product candidate incorporating our technologies for marketing approval to the
FDA, or any other regulatory authority.
If any product candidate manufactured using our technology is submitted
for regulatory approval, it may not receive either the approvals necessary for
commercialization, the desired labeling claims, or coverage or adequate levels
of reimbursement under federal, state, or private healthcare insurance
providers. Any delay in receiving, or failure to receive, these approvals would
adversely affect our ability to generate product revenues or royalties. Even if
all requisite approvals were granted, these approvals may entail commercially
unacceptable limitations on the labeling claims. In addition, once an approval
is granted, both a marketed drug or compound and the manufacturer are subject to
continual review and inspection. Later discovery of previously unknown problems
with a product or manufacturer may result in restrictions or regulatory action
against the product or manufacturer, including withdrawal of the product from
the market. Additional governmental regulations may delay or alter regulatory
approval of any product candidate manufactured using our technology. We cannot
predict the impact of adverse governmental action that might arise from future
legislative and administrative action.
Regulation of Foods and Food Ingredients
We expect that any products of our joint venture with McNeil
Nutritionals will be regulated as food ingredients. Foods and food ingredients
are subject to the provisions of the federal Food, Drug and Cosmetic Act. Food
ingredients are broadly defined as any substances that may become a component,
or otherwise affect the characteristics, of food. Food ingredients and
ingredients used in animal feed are regulated either as substances generally
recognized as safe, or GRAS, or as food additives.
Food ingredients that are GRAS are excluded from the definition of food
additives. The FDA has affirmed by regulation a number of substances as GRAS,
although it is not required that a substance be affirmed as GRAS by regulation
of the FDA in order to be GRAS. A manufacturer may self-affirm a substance as
GRAS by making an independent determination that qualified experts would
generally agree that the substance is GRAS for a particular use. If the FDA
disagrees with a determination, the manufacturer must complete the food additive
petition process for the substance to be approved by the FDA. Affirmation of
GRAS status either by the manufacturer or regulation of the FDA would allow the
manufacturer to market and sell the additive or the food containing the
additive. Furthermore, a manufacturer's decision to rely on an independent
determination may limit the marketability of that manufacturer's products to
food manufacturers, many of whom require confirmation of GRAS status from the
FDA before they will purchase substances for use in foods from third parties.
Food ingredients that are not GRAS are regulated as food additives. All
new food additives require FDA approval prior to commercialization. Information
supporting the safety of a food additive is submitted to the FDA in the form of
a food additive petition. The food additive petition process is generally
expensive and lengthy. Commercialization of the food additive, if permitted by
the FDA, often occurs several years after the petition is submitted to the FDA.
The petition must establish with reasonable certainty that the food additive is
safe for its intended use at the level specified in the petition. The petition
is required to contain reports of safety investigations of the food additive and
details regarding its physical, chemical, and biological properties. Product
safety studies submitted to the FDA are typically conducted in accordance with
FDA good laboratory practices requirements. If a
9
food additive petition is submitted, the FDA may choose to reject the petition
or deny any desired labeling claims. Furthermore, the FDA may require the
establishment of regulations that necessitate costly and time-consuming
compliance procedures.
Regulation of Infant Formula Additives
We are collaborating with Wyeth Nutrition to develop a bioactive
carbohydrate as a potential nutritional additive to infant formula. The
manufacture, composition, and labeling of infant formulas are subject to the
provisions of the United States Infant Formula Act. Prior to commercializing any
potential infant formula additive, an infant formula manufacturer must
demonstrate that its potential additive:
o is GRAS by previous regulation of the FDA, or is self-affirmed
as GRAS by the infant formula manufacturer; or
o is the subject of an approved food additive petition.
Under the United States Infant Formula Act, infant formula
manufacturers are required to notify the FDA of any intent to revise, add, or
substitute any protein, fat, or carbohydrate in infant formula ninety days prior
to the intended date of commercial distribution. During that ninety-day period,
the FDA may request additional information, or deny marketing rights for the new
formula. Wyeth is responsible for all regulatory activities relating to the
infant formula additive. They have not yet made, and may never make, any filings
with the FDA to propose inclusion of an infant formula additive manufactured
using our technology. Furthermore, Wyeth may fail to self-affirm GRAS status of
the potential infant formula additive, impairing their efforts to commercialize
the infant formula additive.
Wyeth may market infant formula containing the additive in foreign
countries. Infant formula regulatory requirements vary widely from country to
country, and may be more or less stringent than the FDA requirements. The time
required to obtain clearances, if required, in foreign countries may be longer
or shorter than that required in the United States.
The use of hazardous materials in our operations may subject us to an
environmental claim or liability.
Our research and development processes involve the controlled use of
hazardous materials, chemicals, and radioactive compounds. The risk of
accidental injury or contamination from these materials cannot be entirely
eliminated. We do not maintain a separate insurance policy for these types of
risks. In the event of an accident or environmental discharge, we may be held
liable for any resulting damages, and any liability could exceed our resources.
We are subject to federal, state, and local laws and regulations governing the
use, storage, handling, and disposal of these materials and specified waste
products. The cost of compliance with these laws and regulations could be
significant.
Third party reimbursement for our collaborators' or our future product
candidates may not be adequate.
Even if regulatory approval is obtained to sell any product candidates
incorporating our technologies, our future revenues, profitability, and access
to capital will be determined in part by the price at which we or our
collaborators can sell such products. There are continuing efforts by
governmental and private third-party payors to contain or reduce the costs of
health care through various means. We expect a number of federal, state, and
foreign proposals to control the cost of drugs through governmental regulation.
We are unsure of the form that any health care reform legislation may take or
what actions federal, state, foreign, and private payors may take in response to
the proposed reforms. Therefore, we cannot predict the effect of any implemented
reform on our business.
Our collaborators and our ability to commercialize our products
successfully will depend, in part, on the extent to which reimbursement for the
cost of such products and related treatments will be available from government
health administration authorities, such as Medicare and Medicaid in the United
States, private health insurers, and other organizations. Significant
uncertainty exists as to the reimbursement status of newly approved healthcare
products, particularly for indications for which there is no current effective
treatment or for which medical care typically is not sought. Adequate
third-party coverage may not be available to enable us to maintain price levels
10
sufficient to realize an appropriate return on investment in product research
and development. Inadequate coverage and reimbursement levels provided by
government and third-party payors for use of our or our collaborators' products
may cause these products to fail to achieve market acceptance and would cause us
to lose anticipated revenues and delay achievement of profitability.
BUSINESS
Overview
We develop proprietary technologies for the synthesis and manufacture
of complex carbohydrates. Our enzymatic technology platform makes feasible the
synthesis and modification of a wide range of complex carbohydrates, which are
chains of simple sugar molecules that can be joined together in many different
combinations. Our platform enables the production and manipulation of complex
carbohydrates either as stand-alone carbohydrate molecules or as carbohydrate
structures attached to recombinant therapeutic glycoproteins and glycolipids.
Our GlycoAdvance program uses our technology to complete the human
carbohydrate structures on therapeutic glycoproteins. We are also developing our
technology to create novel glycosylation patterns, and to link other molecules,
such as polyethylene glycol, to glycoproteins. The application of this
technology to proteins potentially results in improved clinical activity and
pharmacokinetic profile, enhanced drug development flexibility, stronger and
additional patent claims, and yield improvements.
Our GlycoTherapeutics program uses our technology to enable the
development of carbohydrate-based therapeutics. Our GlycoActives program uses
our technology to develop novel carbohydrate food and nutritional ingredients.
GlycoAdvance
Overview
Our GlycoAdvance products and services are used to complete, correct,
or improve the carbohydrate structures that are critical portions of therapeutic
glycoproteins. Many biotechnology drugs on the market or in development,
including monoclonal antibodies, are glycoproteins, and their associated
carbohydrates are often critical to the function of the protein. GlycoAdvance
can also be used to attach other molecules, such as polyethylene glycol, to
glycoproteins.
We are pursuing partnerships for GlycoAdvance with pharmaceutical and
biotechnology companies that are developing or marketing glycoprotein drugs. We
are also exploring the use of GlycoAdvance for the development of our own
glycoprotein drugs, as well as its use to enable alternative protein production
systems, such as transgenic animals, plants, insect cells, and fungi such as
yeast.
In 2000, worldwide sales of glycoprotein drugs were approximately $17.5
billion, and there were approximately 360 biotechnology drugs in development to
treat more than 200 diseases. Many of these drug candidates are glycoproteins,
and we expect that many of these compounds could benefit from GlycoAdvance.
Currently, glycoproteins are most often produced in mammalian cell
culture systems, primarily Chinese hamster ovary (CHO) cells. Production in
these systems often results in incomplete or incorrect glycosylation.
Glycosylation refers both to the carbohydrate structures on glycoproteins, and
to the process of creating or modifying these structures. The impact of
incomplete or incorrect glycosylation on a glycoprotein drug can include
suboptimal clinical activity, reduced half-life, greater or more frequent
dosing, and increased side effects. Incomplete glycosylation can also result in
development delays and production inefficiencies, including lower production
yields, higher manufacturing costs, and increased facilities and equipment
requirements. Conventional methods of solving the problems of incomplete or
incorrect glycosylation include choosing different cell types for use in cell
expression systems, re-engineering cells, optimizing cell culture media,
purifying for final product only the most completely
11
glycosylated compounds, and building additional production facilities. These
approaches can be expensive, time-consuming, and ineffective.
At the present time, GlycoAdvance is being used to remodel therapeutic
glycoproteins, after their production in cell culture, to achieve the desired
glycosylation. The use of GlycoAdvance in the production of therapeutic
glycoproteins may result in improved clinical activity and pharmacokinetic
profile, enhanced drug development flexibility, stronger and additional patent
claims, and yield improvements. GlycoAdvance may permit the development of new
therapeutic proteins with unique characteristics. GlycoAdvance may also permit
the continued development of some drugs by overcoming a variety of development
problems associated with poor glycosylation. Although alternatives to mammalian
cell culture systems, such as transgenic animals, plants, insect cells, and
fungi such as yeast, are in use or being developed, these systems are not now
capable of producing glycoproteins with a fully human glycosylation pattern. We
are considering the role of GlycoAdvance in the development of glycoproteins
produced in some of these alternative systems.
We continue to invest in GlycoAdvance research and development. We are
developing intellectual property and know-how in using glycosylation to improve
antibody function, impart new therapeutic properties to drugs, and extend
half-life, such as through the site-specific addition of polyethylene glycol. We
are also developing new GlycoAdvance enzymes and sugar nucleotides to broaden
the scope of our technology.
Agreement with Wyeth Pharmaceuticals
In December, 2001, we announced our first commercial agreement for
GlycoAdvance. This agreement is with Wyeth Pharmaceuticals, a division of Wyeth,
for use of GlycoAdvance services and products to develop an improved production
system for Wyeth's recombinant PSGL-Ig (P-selectin glycoprotein ligand).
rPSGL-Ig is being developed to treat inflammation and thrombosis associated with
acute coronary syndrome and reperfusion injury. The drug is currently in Phase
II clinical trials for heart attack.
Under the agreement, we will develop processes for the commercial-scale
manufacture of GlycoAdvance enzymes and sugar nucleotides to be used in the
production of rPSGL-Ig, and will license GlycoAdvance technology to Wyeth for
commercial production of the drug, if regulatory approval is obtained. During
commercial production of Wyeths' current rPSGL-Ig, we would receive ongoing
payments tied to yield improvements achieved using GlycoAdvance. In addition,
Wyeth has the option to use GlycoAdvance to develop a next generation rPSGL-Ig,
in which case we would receive development payments and royalties on product
sales.
We will receive license, research, and milestone payments that will
total up to $17 million if all milestones are met. In addition to ongoing
product payments, Neose and Wyeth would also enter into a supply agreement for
the long-term supply of GlycoAdvance process reagents for their commercial
production needs.
The scope of our license to Wyeth is limited to rPSGL-Ig and proteins
similar in amino acid sequence to rPSGL-Ig. This preserves our ability to work
with other companies developing drugs for the same indications.
Feasibility Studies
We have completed more than 20 feasibility studies for pharmaceutical
and biotechnology companies to demonstrate the utility of GlycoAdvance. In
general, these feasibility studies have been conducted with glycoproteins that
are being produced in CHO cell expression systems. In these studies, we have
shown that GlycoAdvance can be used to improve the pharmacokinetic properties of
these glycoproteins.
At the 2001 Biotechnology Industry Organization meeting, Eli Lilly &
Company and Biogen, Inc. presented results of GlycoAdvance feasibility studies
conducted with CHO cell produced glycoproteins. In animal studies, the half-life
of proteins treated with GlycoAdvance were up to three times greater than the
same protein not treated with GlycoAdvance.
12
Business Strategy
We are actively pursuing collaborations with companies that are
developing, manufacturing, or marketing glycoproteins to use GlycoAdvance
services and products in the research, development, and commercialization of
glycoproteins. We anticipate that these collaborations would provide for
up-front license fees, annual license fees, milestone payments, and royalties,
as well as revenues from the supply of enzymes and sugar nucleotides. These
collaborations could be product specific, as is the case with our Wyeth
Pharmaceuticals collaboration, or research and development pipeline
collaborations, where companies integrate GlycoAdvance into their protein
research, development, and manufacturing processes to enable the accelerated
development of better protein drugs.
We are considering opportunities for the use of GlycoAdvance in the
development by Neose of glycoprotein drugs. These include using GlycoAdvance to
develop improved versions of currently marketed glycoproteins as their patent
protection expires; using GlycoAdvance to revive drugs that have been dropped
from development because of glycosylation-related problems; and acquiring,
co-developing, or in-licensing promising drug candidates that will benefit from
GlycoAdvance.
Protein production systems other than mammalian cell culture expression
systems, such as transgenic animals, plants, insect cells, and fungi, offer the
promise of reduced production costs for glycoproteins. Glycosylation in these
systems is often incomplete or incompatible with therapeutic use, resulting in
therapeutic proteins that have poor pharmacokinetic activity or are immunogenic
in humans. We are considering the possibilities of using GlycoAdvance in
conjunction with some of these expression systems to solve their glycosylation
problems.
GlycoTherapeutics
In our GlycoTherapeutics program, we are using our core technologies to
enable the development and production of novel carbohydrate-based drugs. We are
supporting research and development projects on promising, carbohydrate-based
therapeutic approaches. We do not intend to proceed beyond early stage clinical
trials on any carbohydrate-based drug candidates without a suitable partner for
late stage development and commercialization. Our business strategy is to
collaborate with others, allowing us to leverage our proprietary technologies to
participate in the profits of successful drugs while assuming limited financial
and clinical development risk. If we successfully enter into collaborations with
other companies, we anticipate that we will receive up-front license fees,
annual license fees, milestone payments, royalties, and revenues from the supply
of compounds.
Neuronyx, Inc.
We have a research and development collaboration with Neuronyx for the
discovery and development of drugs for treating Parkinson's disease and other
neurological diseases. We also made an equity investment of approximately $1.3
million in Neuronyx. Currently, the collaboration is focusing on the
modification of certain compounds that have previously demonstrated clinical
promise in arresting the progression of Parkinson's disease symptoms. If the
collaboration identifies potential target compounds, development of these
compounds would require the agreement of both parties. If development proceeds,
we are responsible for the synthesis and manufacturing scale-up of target
compounds, using our proprietary technologies for carbohydrate synthesis, and
Neuronyx is responsible for preclinical and clinical development of the
compounds. Neose and Neuronyx each bear their own research and development costs
under the collaboration. If any drugs are commercialized under this
collaboration, Neose will be responsible for manufacturing the drug, and would
receive a transfer payment and royalties based on sales. Parkinson's disease is
a progressive disorder of the central nervous system. There is no known
prevention or cure for Parkinson's disease. Current treatments focus on
controlling symptoms of the disease, but do not slow the progression of the
disease.
Progenics Pharmaceuticals, Inc.
In May 2001, Bristol-Myers Squibb assigned to Progenics Pharmaceuticals
our agreement with Bristol-Myers to develop two synthetic gangliosides for use
in two cancer vaccines, GMK and MGV. Progenics is continuing with the
development of both vaccines and we are in discussions with them concerning
future supply of material for clinical and commercial use, but we will receive
no revenues from this agreement unless it is renegotiated.
13
Other Therapeutic Research Programs
We have early-stage research programs in the following areas:
o Glycolipids. Through our collaborations with Bristol-Myers and
Neuronyx, we have developed expertise in the synthesis of
glycolipids. We are continuing to develop this technology, and
are exploring applications in inflammatory diseases and
cancer.
o Heparins. We are exploring the use of our technology to
synthesize heparin-like molecules. Heparins may have
application in a variety of disesases.
o Immune system regulation. In conjunction with scientists at
Harvard University, we are investigating whether certain
carbohydrates may be useful as regulators of immune response.
We are exploring whether these carbohydrates may be used for
the treatment of various autoimmune conditions, including
inflammatory bowel disease, allergic asthma, and psoriasis.
GlycoActives
In our GlycoActives program, we are applying our technology platform to
the manufacture and development of novel carbohydrate-based food and nutritional
ingredients. Our business strategy is to enter into collaborations with others
for the use of our technologies for the development of these ingredients.
Joint Venture with McNeil Nutritionals
In 1999, we entered into a joint venture with McNeil Nutritionals, a
subsidiary of Johnson & Johnson, to explore the inexpensive, enzymatic
production of complex carbohydrates for use as bulking agents. The joint venture
developed a process for making fructooligosaccharides and constructed a pilot
facility in Athens, Georgia. In 2001, the joint venture closed the pilot
facility as it shifted focus to a second generation bulking agent. The joint
venture is exploring establishing a manufacturing arrangement with a third party
to produce these bulking agents.
Wyeth Nutrition-Infant Formula Additive
We entered into an agreement in 1999 with Wyeth Nutrition, a business
unit of Wyeth Pharmaceuticals, to develop a manufacturing process for a
bioactive carbohydrate to be used as an ingredient in Wyeth's infant and
pediatric nutritional formula products. We are responsible for developing a
large-scale manufacturing process for this ingredient. We are receiving contract
development payments, and will receive payments if we achieve the milestones
specified in the agreement. If Wyeth commercializes the ingredient under this
agreement, we will sell product to Wyeth at minimum specified transfer prices.
Wyeth is a leading global infant formula manufacturer with products distributed
in more than 90 countries.
Abbott Laboratories
Abbott Laboratories has a non-exclusive license to use our technology
to manufacture and commercialize, for nutritional purposes only, any complex
carbohydrate naturally found in human breast milk. If Abbott commercializes any
products manufactured using our technology, we will receive fees from Abbott
tied to commercial quantities.
Patents and Proprietary Rights
We solely own 23 issued U.S. patents, and have licensed 68 issued U.S.
patents from 14 institutions. In addition, we own or have licensed over 56
patent applications pending in the United States. There are a number of U.S. and
foreign patent applications related to our owned and licensed patents. We have
licensed, or have an option to
14
license, patents and patent applications from the following institutions:
University of California, The Scripps Research Institute, University of
Pennsylvania, Japan Tobacco, Inc., University of Michigan, Marukin Shoyu Co.,
Ltd., Celltech Therapeutics Limited, University of Arkansas, University of
British Columbia, Rockefeller University, University of Alberta, Genencor
International, GlycoZym Aps., National Research Council Canada, Harvard
University, University of Washington, Wayne State University, University of
Illinois, and University of Adelaide.
Government Regulation
Products manufactured using our technologies, and our manufacturing and
research activities, will typically be subject to significant, but varying,
degrees of regulation by a number of government authorities in the United States
and other countries. The development, manufacture, marketing, and sale of
products manufactured using our technology will be subject to one of the
following regulatory review processes before commercialization:
o pharmaceutical - new drug application or biologic license
application;
o infant formula additive - new infant formula submission; or
o foods and food ingredients - either self-affirmed to be, or
notified as, GRAS (generally recognized as safe) or food
additive petition process.
Our products, systems, and processes are subject to continuing review
subsequent to marketing, and affirmative reporting requirements to the FDA and
other federal, state, or international agencies may be imposed upon us as a
condition of continued marketing approval. Generally, pharmaceuticals are
regulated more rigorously than foods and food ingredients. Infant formula
additives are special types of food ingredients that are regulated more
rigorously than most other types of food ingredients.
Our operations are also subject to regulation under the Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act, and other similar
federal, state, and local laws, rules, and regulations governing laboratory
activities, waste disposal, handling dangerous materials, and other matters. We
voluntarily comply with the National Institutes of Health Guidelines for
Research Involving Recombinant DNA Technologies.
Regulation of Pharmaceutical Product Candidates
We intend to manufacture enzymes and sugar nucleotides for use by our
potential GlycoAdvance customers, as well as for our own use in manufacturing
complex carbohydrates for our GlycoTherapeutics and GlycoActives programs. Our
collaborators will be responsible for obtaining all required regulatory
approvals for pharmaceutical product candidates incorporating our technologies.
Neose will be responsible for filing Drug Master Files covering the
manufacturing of enzymes and sugar nucleotides for customers. The research and
development activities regarding, and the future manufacturing and marketing of,
all pharmaceutical product candidates incorporating our technologies are and
will be subject to significant regulation by numerous governmental authorities
in the United States and other countries. Pharmaceutical product candidates
intended for therapeutic use in humans are governed principally by the federal
Food, Drug and Cosmetic Act, Public Health Service Act, and FDA regulations in
the United States, and by comparable laws and regulations in foreign countries.
The federal Food, Drug and Cosmetic Act and other federal statutes and
regulations govern the testing, manufacture, safety, effectiveness, marketing,
labeling, storage, record keeping, approval, advertising, and promotion of
pharmaceutical products. The process of completing preclinical and clinical
testing and obtaining FDA approval for a new pharmaceutical product requires a
number of years and the expenditure of substantial resources.
Following drug discovery, the steps required before a new
pharmaceutical product candidate may be marketed in the United States include:
o preclinical laboratory and animal tests;
o the submission to the FDA of an Investigational New Drug
application;
o adequate and well-controlled clinical trials, typically
conducted in three phases, to establish the safety and
effectiveness of the product candidate;
15
o the submission of a New Drug Application or Biologic License
Application to the FDA; and
o FDA approval of the New Drug Application or Biologic License
Application prior to any promotion, commercial sale, or
shipment of the product.
Preclinical trials, in vitro or in animals, must be conducted to
evaluate the safety of a compound for testing in humans. Various regulations
govern such testing including Good Laboratory Practices or similar international
regulations. Clinical trials, conducted according to Good Clinical Practices or
similar international regulations and subject to review by independent oversight
bodies (e.g. Institutional Review Boards), are typically conducted in three
sequential phases. Phase I clinical trials are primarily designed to determine
the metabolic and pharmacologic effects of the product candidate in humans, and
the side effects associated with increasing doses. These studies generally
involve a small number of healthy volunteer subjects, but may be conducted on
people with the disease the product candidate is intended to treat. Phase II
studies are conducted to evaluate the effectiveness of the product candidate for
a particular indication, and involve patients with the disease under study.
These studies also provide evidence of the short-term side effects and risks
associated with the product candidate. Phase III studies are generally designed
to assess the overall benefit-risk relationship of the product candidate. Phase
III trials must demonstrate that substantial evidence of safety and
effectiveness of a product candidate exists in order to obtain FDA approval for
marketing the product candidate. Phase III trials often involve a substantial
number of patients in multiple study centers, and include longer-term
administration of the product candidate than in Phase II trials. A clinical
trial may combine the elements of more than one phase, and often at least two
Phase III studies demonstrating a product candidate's safety and efficacy are
required before marketing approval is received. Typical estimates of the total
time required for completing such clinical testing vary between four and ten
years. For marketing outside the United States, foreign regulatory requirements
govern human clinical trials and marketing approval for product candidates. The
requirements relating to the conduct of clinical trials, product licensing,
pricing, and reimbursement vary widely from country to country. Regulatory
oversight continues after marketing approval for the product candidate is
received. Regulatory bodies may require additional clinical trials be performed
as a condition of receiving marketing approval. Affirmative reporting
obligations are imposed as a condition of continued marketing approval.
Third Party Reimbursement
Our ability and each of our collaborator's ability to commercialize
successfully drug products may depend in part on the extent to which coverage
and reimbursement for the cost of such products will be available from
government health administration authorities, private health insurers, and other
organizations. Significant uncertainty exists as to the reimbursement status of
new therapeutic products and we cannot be sure that third-party reimbursement
would be available for therapeutic products we or our collaborators might
develop. Healthcare reform, especially as it relates to prescription drugs, is
an area of increasing national attention and a priority of many governmental
officials. Certain reform proposals, if adopted, could impose limitations on the
prices we will be able to charge in the United States for our products or the
amount of reimbursement available for our products or the amount of
reimbursement available for our products from governmental agencies or
third-party payors.
Regulation of Foods and Food Ingredients
We expect that any products of our joint venture with McNeil
Nutritionals will be regulated as food ingredients. Foods and food ingredients
are subject to the provisions of the federal Food, Drug and Cosmetic Act. Food
ingredients are broadly defined as any substances that may become a component,
or otherwise affect the characteristics, of food. Food ingredients and
ingredients used in animal feed are regulated either as substances generally
recognized as safe, or GRAS, or as food additives.
Food ingredients that are GRAS are excluded from the definition of food
additives. The FDA has affirmed by regulation a number of substances as GRAS,
although it is not required that a substance be affirmed as GRAS by regulation
of the FDA in order to be GRAS. Alternatively, under a new proposed regulatory
framework, a manufacturer may submit GRAS notification to the FDA claiming that
a food ingredient is GRAS. The FDA generally will respond to the notification
within approximately ninety days as to whether there is sufficient evidence to
support the notifier's conclusion that the substance is GRAS. A positive
response from the FDA indicates that it has no objection to the notifier's
conclusion that a substance is a GRAS. A manufacturer also may self-affirm a
16
substance as GRAS by making an independent determination that qualified experts
would generally agree that the substance is GRAS for a particular use. If the
FDA disagrees with the manufacturer's self-determination or GRAS notification,
the manufacturer generally must submit a food additive petition to obtain
approval to market the food ingredient. Affirmation of GRAS status either by the
manufacturer or regulation of the FDA would allow the manufacturer to market and
sell the additive or the food containing the additive. Furthermore, a
manufacturer's decision to rely on an independent determination may limit the
marketability of that manufacturer's products to food manufacturers, many of
whom require confirmation of GRAS status from the FDA before they will purchase
substances for use in foods from third parties.
Food ingredients that are not GRAS are regulated as food additives. All
new food additives require FDA approval prior to commercialization. Information
supporting the safety of a food additive is submitted to the FDA in the form of
a food additive petition. The food additive petition process is generally
expensive and lengthy. Commercialization of the food additive, if permitted by
the FDA, often occurs several years after the petition is submitted to the FDA.
The petition must establish with reasonable certainty that the food additive is
safe for its intended use at the level specified in the petition. The petition
is required to contain reports of safety investigations of the food additive and
details regarding its physical, chemical, and biological properties. Product
safety studies submitted to the FDA are typically conducted in accordance with
FDA good laboratory practices requirements. If a food additive petition is
submitted, the FDA may choose to reject the petition or deny any desired
labeling claims. Furthermore, the FDA may require the establishment of
regulations that necessitate costly and time-consuming compliance procedures.
Regulation of Infant Formula Additives
We are collaborating with Wyeth Nutrition to develop a bioactive
carbohydrate as a potential nutritional additive to infant formula. The
manufacture, composition, and labeling of infant formulas are subject to the
provisions of the United States Infant Formula Act. Prior to commercializing any
potential infant formula additive, an infant formula manufacturer must
demonstrate that its potential additive:
o is GRAS either by previous regulation of the FDA, or is
self-affirmed as GRAS by the infant formula manufacturer; or
o is the subject of an approved food additive petition.
Under the United States Infant Formula Act, infant formula
manufacturers are required to notify the FDA of any intent to revise, add, or
substitute any protein, fat, or carbohydrate in infant formula ninety days prior
to the intended date of commercial distribution. This new infant formula
submission must contain the quantitative formulation of the new infant formula,
a description of any reformulation or change in processing, and assurances that
the new infant formula will not be marketed without complying with the nutrient
and quality factor requirements and cGMP control requirements. Upon
notification, the FDA has a ninety-day period, in which to request additional
information, or deny marketing rights for the new formula. If no response is
received from the FDA within the ninety-day period, the manufacturer may proceed
with commercial sales of the newly formulated product. Under our agreement,
Wyeth is responsible for all regulatory activities relating to the infant
formula additive. Wyeth has not yet made, and may never make, any filings with
the FDA to propose inclusion of an infant formula additive manufactured using
our technology. Their efforts to commercialize any infant formula additive may
be materially and adversely affected if they do not self-affirm GRAS status of
this potential infant formula additive.
Wyeth may market infant formula containing this additive in foreign
countries. Infant formula regulatory requirements vary widely from country to
country, and may be more or less stringent than FDA requirements. The time
required to obtain clearances, if required, in foreign countries may be longer
or shorter than that required in the United States.
Competition
Some companies are producing complex carbohydrates by enzymatic and
other means. We do not believe any of these companies has the ability currently
to manufacture a wide variety of carbohydrates in quantities sufficient for
17
commercialization. Some companies are investigating novel methods of chemical
synthesis, sometimes with enzymatic steps, to produce commercial quantities of
complex carbohydrates. These and other efforts by potential competitors may be
successful or other methods of carbohydrate synthesis that compete with our
technologies may be developed.
Our GlycoAdvance services and products compete with internal efforts
within companies to improve protein glycosylation. This includes efforts to
develop better glycosylating cell lines, optimize cell culture conditions to
improve glycosylation, and construct additional manufacturing capacity.
Other companies are developing technologies that could compete with
GlycoAdvance. This includes the genetic engineering of expression systems to
produce glycoproteins in vivo with improved glycosylation, and developing human
cell lines for glycoprotein production. Other companies are seeking to extend
protein half-life by polyethelyne-glycol or polyglutamate modification, human
albumin fusion, or microsphere encapsulation, while still others are developing
technologies that focus on improving half-life or efficacy. Companies developing
competing technologies are pursuing business strategies that include
collaborations with pharmaceutical and biotechnology companies, as well as the
use of their technologies to develop proprietary products including improved
versions of currently marketed biological products.
Manufacturing
We intend to manufacture enzymes and sugar nucleotides for use by our
anticipated GlycoAdvance customers, and for our own use in proprietary drug
development, and for use in manufacturing complex carbohydrates for our current
and potential GlycoTherapeutics and GlycoActives customers. We will need to
develop commercial-scale manufacturing facilities meeting cGMP, or depend on
collaborators, licensees, or contract manufacturers for the commercial
manufacture of potential products.
During 2001, we committed to spend approximately $17 million to provide
additional cGMP manufacturing capacity in our Horsham, Pennsylvania facility to
support the initial requirements of our anticipated GlycoAdvance customers. In
addition, we entered into a lease during 2002 for a 40,000 square foot building
located in Horsham, Pennsylvania. We intend to convert the facility into
laboratory and office space at an expected cost of approximately $12 million. We
plan to relocate research laboratories and corporate offices from our current
facility in Horsham, Pennsylvania to the new facility, leaving our current
facility available for future expansion of our cGMP manufacturing capacity.
We believe we have the capacity to develop scalable manufacturing
processes required for our collaboration with Wyeth Nutrition in our existing
facilities, although we currently estimate that we will require additional
facilities to produce these ingredients at commercial scale.
Marketing, Distribution, and Sales
We intend to rely substantially on collaborative partners to
commercialize our broad technology platform. These partners would be responsible
for the development, regulatory, approval, sales, marketing, and distribution
activities, for products incorporating our technologies. If we commercialize any
products on our own, we will have to establish or contract for development,
regulatory, sales, marketing, and distribution capabilities. The marketing,
advertising, and promotion of any product manufactured using our technology
would likely be subject to regulation by the FDA or other governmental agencies.
Employees
As of December 31, 2001, we employed 111 individuals, consisting of 81
employees engaged in research and development activities and 30 employees
devoted to business development and administrative activities. Our staff
includes carbohydrate biochemists as well as scientists with expertise in
organic chemistry, analytic chemistry, molecular biology, microbiology, cell
biology, scale-up manufacture, and regulatory affairs. A significant number of
our employees have prior experience with pharmaceutical or biotechnology
18
companies, and in the food industry, and many have specialized training in
carbohydrate technology. None of our employees is covered by collective
bargaining agreements. We believe we have good relations with our employees.
Executive Officers of the Company
The name, age as of March 25, 2002, and position of each of our
executive officers are as follows:
Stephen A. Roth, Ph.D, 59, has served on our Board since 1989 and as
Chairman and Chief Executive Officer since August 1994. Dr. Roth co-founded
Neose, and from 1992 until August 1994, he served as Senior Vice President,
Research and Development and Chief Scientific Officer. Dr. Roth was on the
faculty of the University of Pennsylvania from 1980 to 1994, and was Chairman of
Biology from 1982 to 1987. Dr. Roth received his A.B. in biology from The Johns
Hopkins University, and his Ph.D. in developmental biology from the Case Western
Reserve University. He completed his post-doctorate training in carbohydrate
chemistry at The Johns Hopkins University.
David A. Zopf, M.D., 59, has served as our Executive Vice President
since January 2002. He served as our Vice President, Drug Development from 1992
to January 2002. From 1991 to 1992, we engaged Dr. Zopf as a consultant on the
biomedical applications of complex carbohydrates. From 1988 to 1991, Dr. Zopf
served as Vice President and Chief Operating Officer of BioCarb, Inc., a
biotechnology company and the U.S. subsidiary of BioCarb AB, where he managed
the research and development programs of novel carbohydrate-based diagnostics
and therapeutics. Dr. Zopf received his A.B. in zoology from Washington
University, and his M.D. from Washington University School of Medicine.
Edward J. McGuire, Ph.D., 64, has served as our Vice President,
Research and Development since 1990. Dr. McGuire was on the faculty of the
University of Pennsylvania from 1985 to 1990. From 1984 to 1985, Dr. McGuire
served as a Senior Researcher at Genetic Engineering, Inc., a biotechnology
company. Dr. McGuire received his B.A. in biology from Blackburn College, and
his Ph.D. in biochemistry/chemistry from the University of Illinois Medical
School.
George J. Vergis, Ph.D., 41, has served as our Vice President, Business
and Commercial Development since July 2001. From January 1996 to May 2001, Dr.
Vergis served as Vice President, New Product Development and Commercialization
at Knoll Pharmaceutical Company, a division of BASF Pharma, responsible for the
commercial planning, product development, and marketing for the cardiovascular,
immunology, and critical care franchises. Prior to his employment at BASF, Dr.
Vergis held a variety of clinical and medical marketing positions at Wyeth
Pharmaceuticals and Warner-Lambert Parke-Davis. Dr. Vergis received his BA in
Biology and History from Princeton University, his Ph.D. in Physiology from The
Pennsylvania State University, and his M.B.A. from Columbia University.
A. Brian Davis, 35, has served in a variety of positions since 1994,
most recently as acting Chief Financial Officer and Senior Director, Finance.
Mr. Davis is licensed as a Certified Public Accountant in New Jersey, and
received his B.S. in accounting from Trenton State College. From 1991 to 1994,
Mr. Davis was employed by MICRO HealthSystems, Inc., a provider of healthcare
information systems, where he served most recently as Corporate Controller.
Debra J. Poul, Esq., 49, has served as our General Counsel since
January 2000. From January 1995 to January 2000, Ms. Poul was of counsel at
Morgan Lewis. From September 1978 to December 1994, Ms. Poul was at Dechert,
serving as counsel from 1989 to 1994. Ms. Poul received her B.A. from the
University of Pennsylvania and her J.D. from Villanova University.
19
ITEM 2. PROPERTIES.
We own, subject to a mortgage, approximately 45,000 square feet of cGMP
manufacturing, laboratory, and corporate office space in Horsham, Pennsylvania.
Our lease of approximately 2,600 square feet of laboratory and office space in
San Diego, California expired in September 2001. In April 2001, we entered into
a new lease agreement for approximately 10,000 square feet of laboratory and
office space in San Diego, California. The initial term of the lease ends in
March 2006, at which time we have an option to extend the lease for an
additional five years. We anticipate our expanded operations in San Diego will
allow us to increase our research and development efforts for our GlycoAdvance
program.
In 2001, we committed to make approximately $17 million in capital
expenditures to provide additional cGMP manufacturing capacity in our Horsham,
Pennsylvania facility to support the initial requirements of our anticipated
GlycoAdvance customers. In February 2002, we entered into a lease agreement for
a 40,000 square foot building in Horsham, Pennsylvania. We intend to convert the
facility into laboratory and office space for an expected cost of approximately
$12 million. We plan to relocate research laboratories and corporate offices
from our current facility in Horsham, Pennsylvania to the new facility, leaving
our current facility available for future expansion of our cGMP manufacturing
capacity.
We intend to manufacture enzymes and sugar nucleotides for use by our
anticipated GlycoAdvance customers, and for our own use in proprietary drug
development, and for use in manufacturing complex carbohydrates for our current
and potential GlycoTherapeutics and GlycoActives customers. We will need to
develop commercial-scale manufacturing facilities meeting cGMP, or depend on
collaborators, licensees, or contract manufacturers for the commercial
manufacture of potential products. See "Item 1-Business-Manufacturing."
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of security holders during the
fourth quarter of 2001.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on The Nasdaq Stock Market under the symbol
NTEC. We commenced trading on The Nasdaq Stock Market on February 15, 1996. The
following table sets forth the high and low sale prices of our common stock for
the periods indicated.
Common Stock Price
------------------
High Low
---- ---
Year Ended December 31, 2000
First Quarter............................................... $60.13 $13.00
Second Quarter.............................................. 45.94 18.63
Third Quarter............................................... 51.82 33.00
Fourth Quarter.............................................. 52.00 25.75
Year Ended December 31, 2001
First Quarter............................................... 44.38 22.38
Second Quarter.............................................. 46.97 23.25
Third Quarter............................................... 47.42 30.15
Fourth Quarter.............................................. 41.81 27.31
Year Ended December 31, 2002
First Quarter (through March 25, 2002)...................... 38.35 27.31
As of March 25, 2002, there were approximately 200 record holders and 4,500
beneficial holders of our common stock. We have not paid any cash dividends on
our common stock and we do not anticipate paying any in the foreseeable future.
21
ITEM 6. SELECTED FINANCIAL DATA.
The following Statements of Operations Data for the years ended
December 31, 1997, 1998, 1999, 2000, and 2001, and for the period from inception
(January 17, 1989) through December 31, 2001, are derived from our consolidated
financial statements that have been audited by Arthur Andersen LLP, independent
public accountants. The financial data set forth below should be read in
conjunction with the sections of this Annual Report on Form 10-K entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the financial statements and notes included elsewhere in this
Form 10-K.
Period from
inception
(January 17, 1989)
Year ended December 31, to December 31,
-------------------------------------------------------------
1997 1998 1999 2000 2001 2001
--------------------------------------------------------------------------------
(in thousands, except per share data)
Statements of Operations Data:
Revenue from
collaborative agreements $ 725 $ 390 $ 422 $ 4,600 $ 1,266 $ 12,633
--------------------------------------------------------------------------------
Operating expenses:
Research and development 8,013 9,912 10,649 12,094 14,857 78,504
Marketing, general
and administrative 3,884 3,635 4,520 5,648 9,374 36,255
--------------------------------------------------------------------------------
Total operating expenses 11,897 13,547 15,169 17,742 24,231 114,759
--------------------------------------------------------------------------------
Gain on sale of marketable
security - - - - 6,120 6,120
Interest income, net 2,108 1,250 1,429 4,642 3,516 14,365
--------------------------------------------------------------------------------
Net loss $ (9,064) $ (11,907) $ (13,318) $ (8,500) $ (13,329) $ (81,641)
=================================================================================
Basic and diluted net loss per
share $ (0.96) $ (1.25) $ (1.25) $ (0.63) $ (0.95)
=============================================================
Basic and diluted weighted-average
shares outstanding 9,405 9,556 10,678 13,428 14,032
=============================================================
As of December 31,
-------------------------------------------------------------
1997 1998 1999 2000 2001
-------------------------------------------------------------
(in thousands)
Balance Sheet Data:
Cash and marketable securities $ 43,303 $ 32,023 $ 33,235 $ 94,762 $76,245
Total assets 58,886 46,265 52,239 114,768 105,786
Long-term debt 8,917 8,300 7,300 6,200 5,100
Deficit accumulated during
the development stage (34,587) (46,494) (59,812) (68,312) (81,641)
Total stockholders' equity 46,954 36,013 40,785 104,868 93,946
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with our
consolidated financial statements and related notes included in this Form 10-K.
Overview
Neose develops proprietary technologies for the synthesis and
manufacture of complex carbohydrates. Our enzymatic technology platform makes
feasible the synthesis and modification of a wide range of complex
carbohydrates, which are chains of simple sugar molecules that can be joined
together in many different combinations. Our platform enables the production and
manipulation of complex carbohydrates either as stand-alone carbohydrate
molecules or as carbohydrate structures attached to recombinant therapeutic
glycoproteins and glycolipids.
Our GlycoAdvance program uses our technology to complete the human
carbohydrate structures on therapeutic glycoproteins. We are also developing our
technology to create novel glycosylation patterns, and to link other molecules,
such as polyethylene glycol, to glycoproteins. The application of this
technology to proteins potentially results in improved clinical activity and
pharmacokinetic profile, enhanced drug development flexibility, stronger and
additional patent claims, and yield improvements.
Our GlycoTherapeutics program uses our technology to enable the
development of carbohydrate-based therapeutics. Our GlycoActives program uses
our technology to develop novel carbohydrate food and nutritional ingredients.
As of December 31, 2001, we had an accumulated deficit of approximately
$82 million. We expect additional losses for some time as we expand research and
development efforts, expand manufacturing scale-up activities, and begin sales
and marketing activities.
Critical Accounting Policies
Our significant accounting policies are described in Note 2 to the
consolidated financial statements included in Item 8 of this Form 10-K. We
believe our most critical accounting policies relate to recognition of revenue
and impairment of long-lived assets.
Revenue Recognition
Revenue from collaborative agreements consists of up-front fees,
research and development funding, and milestone payments. We recognize revenues
from these agreements consistent with Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements", issued by the Securities and
Exchange Commission in December 1999. Non-refundable up-front fees are deferred
and amortized to revenue over the related performance period. Periodic payments
for research and development activities are recognized over the period in which
we perform those activities under the terms of each agreement. Revenue resulting
from the achievement of milestone events stipulated in the agreements is
recognized when the milestone is achieved.
Impairment of Long-Lived Assets
As required by Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS 121), we assess the recoverability of any long-lived
assets for which an indicator of impairment exists. Specifically, we calculate,
and recognize, any impairment losses by comparing the carrying value of these
assets to our estimate of the undiscounted future operating cash flows. Although
our current and historical operating and cash flows are indicators of
23
impairment, we believe the future cash flows to be received from our long-lived
assets will exceed the assets' carrying value. Accordingly, we have not
recognized any impairment losses through December 31, 2001.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 replaces SFAS
121 for fiscal years beginning after December 15, 2001. We do not believe SFAS
144 will have a material impact on our consolidated financial position or
results of operations.
Results of Operations
Years Ended December 31, 2001 and 2000
Revenues from collaborative agreements decreased to approximately $1.3
million in 2001 from approximately $4.6 million in 2000. Substantially all of
our revenues during 2001 were payments received by us under our collaborative
agreement with Wyeth Nutrition.
Research and development expenses increased to approximately $14.9
million in 2001 from $12.1 million in 2000. The increase was primarily
attributable to the addition of new employees in 2001 and the expenses
associated with our San Diego facility, which we began leasing in April 2001. In
addition, our joint venture with McNeil Nutritionals reimbursed Neose
approximately $0.8 million, which was $0.8 million less than in 2000, for the
cost of research and development services and supplies provided to the joint
venture. The reimbursement amounts have been reflected as a reduction of
research and development expense in our consolidated statements of operations
for 2000 and 2001. We expect research and development expenses to increase
significantly during 2002.
Marketing, general and administrative expenses increased to
approximately $9.4 million in 2001 from $5.6 million in 2000. The increase was
primarily attributable to the hiring of additional business development
personnel, increased expenses for marketing GlycoAdvance, increased legal and
filing expenses associated with our growing patent portfolio, and non-cash
compensation expense associated with stock options. We expect marketing, general
and administrative expenses to increase significantly during 2002.
We realized a gain of approximately $6.1 million in 2001 from the sale
of shares of Genzyme General common stock, which we received as a result of
Genzyme's acquisition of Novazyme Pharmaceuticals, Inc. in September 2001.
Interest income decreased to approximately $3.7 million in 2001 from
approximately $5.1 million in 2000 due to lower average cash and marketable
securities balances and lower interest rates during 2001. Interest expense
decreased to approximately $0.2 million in 2001 from approximately $0.5 million
in 2000 due to lower average loan balances and lower interest rates during 2001.
Years Ended December 31, 2000 and 1999
Revenues from collaborative agreements increased to approximately $4.6
million in 2000 from approximately $0.4 million in 1999. Payments under our
agreement with Bristol-Myers accounted for approximately $3.3 million of our
collaborative revenues in 2000.
Research and development expenses increased to $12.1 million in 2000
from $10.6 million in 1999. The increase was primarily attributable to
additional services rendered under our current research and development
agreement with Bristol-Myers, and non-cash compensation expense associated with
stock options granted to non-employees. During the year ended December 31, 2000,
our joint venture with McNeil Nutritionals reimbursed Neose approximately $1.6
million for the cost of research and development services and supplies provided
to the joint venture. This amount has been reflected as a reduction of research
and development expense in our consolidated statements of operations.
Marketing, general and administrative expenses increased to $5.6
million in 2000 from $4.5 million in 1999. The increase was primarily
attributable to the hiring of additional business development and administrative
personnel, and the non-cash compensation expense associated with stock options
granted to non-employees.
24
Interest income increased to $5.1 million in 2000 from $1.9 million in
1999 due to higher average cash and marketable securities balances during 2000
resulting from our public offering of 2.3 million shares of common stock in
March 2000. Interest expense increased to $0.5 million in 2000 from $0.4 million
in 1999 due to higher average interest rates, and was partly offset by lower
average loan balances outstanding during 2000.
Liquidity and Capital Resources
We have incurred operating losses each year since our inception. As of
December 31, 2001, we had an accumulated deficit of approximately $82 million.
We have financed our operations through private and public offerings of our
securities, and revenues from our collaborative agreements. We had approximately
$76 million in cash and marketable securities as of December 31, 2001, compared
to approximately $95 million in cash and marketable securities as of December
31, 2000. The decrease for 2001was primarily attributable to the use of cash to
fund our operating loss and capital expenditures, and was partly offset by the
one-time sale of approximately $6.4 million of shares of common stock of Genzyme
General. As part of its acquisition of Novazyme Pharmaceuticals, Inc. in 2001,
Genzyme assumed Novazyme's obligation to pay us $1.6 million in November 2002.
During 1999, 2000, and 2001, we purchased approximately $1.2 million,
$1.7 million, and $10.9 million of property, equipment, and building
improvements. In 2001, we committed to make $17 million in capital expenditures
to provide additional cGMP manufacturing capacity in our Horsham, Pennsylvania
facility to support the initial requirements of our anticipated GlycoAdvance
customers. As of December 31, 2001, we had expended approximately $8.2 million
for this project.
In December 2001, we entered into a research, development and license
agreement with Wyeth Pharmaceuticals, a division of Wyeth, for the use of our
GlycoAdvance technology to develop an improved production system for Wyeths'
biopharmaceutical compound, recombinant PSGL-Ig (P-selectin glycoprotein
ligand). rPSGL-Ig is being developed to treat inflammation and thrombosis
associated with acute coronary syndrome and reperfusion injury. It is currently
being evaluated in Phase II clinical trials for heart attack.
Under the agreement, we will receive license, research, and milestone
payments that would total up to $17 million if all milestones are met. In
addition to ongoing product payments, Neose and Wyeth would also enter into a
supply agreement for the long-term supply of GlycoAdvance process reagents for
their commercial production needs. In December 2001, we received an upfront-fee
of $1 million, which is included in deferred revenue in our consolidated balance
sheet as of December 31, 2001. We will amortize the up-front fee to revenue over
the estimated four-year performance period.
In February 2002, we entered into a lease agreement for a 40,000 square
foot building in Horsham, Pennsylvania. We intend to convert the facility into
laboratory and office space for an expected cost of approximately $12 million.
We plan to relocate research laboratories and corporate offices from our current
facility in Horsham, Pennsylvania to the new facility, leaving our current
facility available for future expansion of our cGMP manufacturing capacity.
We may finance some or all of these capital expenditures through the
issuance of new debt. If we are able to issue new debt, we may be required to
maintain a minimum cash and investments balance, transfer cash into an escrow
account to collateralize some portion of the debt, or both.
In 2001, we announced a stock repurchase program authorizing the
repurchase of up to one million shares of common stock in the open market at
times and prices that we consider appropriate. During 2001, we purchased 6,000
shares of common stock in the open market for approximately $0.2 million.
In 1997, we issued, through the Montgomery County (Pennsylvania)
Industrial Development Authority, $9.4 million of taxable and tax-exempt bonds,
of which $6.2 million remains outstanding. The bonds were issued to finance the
purchase of our previously leased building and the construction of a pilot-scale
manufacturing facility within our building. The bonds are supported by an
AA-rated letter of credit, and a reimbursement agreement between our bank and
25
the letter of credit issuer. The interest rate on the bonds will vary weekly,
depending on market rates for AA-rated taxable and tax-exempt obligations,
respectively. During 2001, the weighted-average, effective interest rate was
5.3% per year, including letter-of-credit and other fees. The terms of the bond
issuance provide for monthly, interest-only payments and a single repayment of
principal at the end of the twenty-year life of the bonds. However, under our
agreement with our bank, we are making monthly payments to an escrow account to
provide for an annual prepayment of principal. As of December 31, 2001, we had
restricted funds relating to the bonds of approximately $0.9 million, which
consisted of our monthly payments to an escrow account plus interest revenue on
the balance of the escrow account.
To provide credit support for this arrangement, we have given a first
mortgage on the land, building, improvements, and certain machinery and
equipment to our bank. We have also agreed to a covenant to maintain a minimum
required cash and short-term investments balance of at least two times the
current loan balance. At December 31, 2001, we were required to maintain a cash
and short-term investments balance of $12.4 million. If we fail to comply with
this covenant, we are required to deposit with the lender cash collateral up to,
but not more than, the loan's unpaid balance.
We believe that our existing cash and short-term investments, expected
revenue from collaborations and license arrangements, anticipated financing of
capital expenditures, and interest income should be sufficient to meet our
operating and capital requirements through at least 2003, although changes in
our collaborative relationships or our business, whether or not initiated by us,
may cause us to deplete our cash and short-term investments sooner than the
above estimate. The timing and amount of our future capital requirements and the
adequacy of available funds will depend on many factors, including if or when
any products manufactured using our technology are commercialized.
The following table summarizes our obligations to make future payments
under current contracts:
Payments due by period
----------------------------------------------------------------------------------
Less than 1
Total Year 1 - 3 Years 4 - 5 Years After 5 Years
----------------------------------------------------------------------------------
Long-term debt.................... $ 6,200,000 $ 1,100,000 $2,500,000 $300,000 $2,300,000
Operating leases................... 11,371,000 517,000 2,299,000 965,000 7,590,000
Construction contract............. 8,800,000 8,800,000 -- -- --
----------------------------------------------------------------------------------
Total contractual obligations.... $ 26,371,000 $10,417,000 $4,799,000 $1,265,000 $9,890,000
==================================================================================
Joint Venture with McNeil Nutritionals
We have a joint venture with McNeil Nutritionals. We account for our
investment in the joint venture under the equity method, under which we
recognize our share of the income and losses of the joint venture. In 1999, we
reduced the carrying value of our initial investment in the joint venture of
approximately $0.4 million to zero to reflect our share of the joint venture's
losses. We recorded this amount as research and development expense in our
consolidated statements of operations. We will record our share of post-1999
losses of the joint venture, however, only to the extent of our actual or
committed investment in the joint venture.
The joint venture developed a process for making fructooligosaccharides
and constructed a pilot facility in Athens, Georgia. In 2001, the joint venture
closed the pilot facility as it shifted focus to a second generation bulking
agent. The joint venture is exploring establishing a manufacturing arrangement
with a third party to produce these bulking agents.
During the years ended December 31, 2000 and 2001, the joint venture
reimbursed Neose approximately $1.6 million and $0.8 million, respectively, for
the cost of research and development services and supplies provided to the joint
venture. There were no such reimbursements during the year ended December 31,
1999. This amount has been reflected as a reduction of research and development
26
expense in our consolidated statements of operations. As of December 31, 2001,
the joint venture owed Neose approximately $0.2 million. This amount is included
in prepaid expenses and other current assets in our consolidated balance sheet.
We expect to provide significantly fewer research and development services
during 2002, thereby significantly reducing our expected reimbursement from the
joint venture.
If the joint venture becomes profitable, we will recognize our share of
the joint venture's profits only after the amount of our capital contributions
to the joint venture is equivalent to our share of the joint venture's
accumulated losses. As of December 31, 2001, the joint venture had an
accumulated loss since inception of approximately $9.8 million, of which our
share, assuming a 50% ownership interest, is approximately $4.9 million. Until
the joint venture is profitable, McNeil Nutritionals is required to fund, as a
non-recourse, no-interest loan, all of the joint venture's aggregate capital
expenditures in excess of an agreed-upon amount, and all of the joint venture's
operating losses. The loan balance would be repayable by the joint venture to
McNeil Nutritionals over a seven-year period commencing on the earlier of
September 30, 2006 or the date on which Neose attains a 50% ownership interest
in the joint venture after having had a lesser ownership interest. In the event
of any dissolution of the joint venture, the loan balance would be payable to
McNeil Nutritionals before any distribution of assets to us. As of December 31,
2001, the joint venture owed McNeil Nutritionals approximately $8.1 million.
We may be required to make additional investments in the joint venture
to fund capital expenditures. If the joint venture builds additional production
facilities, and we wish to have a 50% ownership interest in the joint venture,
we are required to invest up to $8.9 million to fund half of such expenditures.
However, we may elect to fund as little as $1.9 million of the cost of the
facilities, so long as our aggregate investments in the joint venture are at
least 15% of the joint venture's aggregate capital expenditures. In this case,
McNeil Nutritionals will fund the remainder of our half of the joint venture's
capital expenditures, and our ownership percentage will be proportionately
reduced. We have an option, expiring in September 2006, to return to 50%
ownership of the joint venture by reimbursing McNeil Nutritionals for this
amount.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized
Statements of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
which are effective for fiscal years beginning after December 15, 2001. SFAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. SFAS 142 no longer requires the amortization of
goodwill; rather, goodwill will be subject to a periodic assessment for
impairment by applying a fair-value-based test. In addition, an acquired
intangible asset should be separately recognized if the benefit of the
inta