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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19635
GENTA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF INCORPORATION)
DELAWARE 33-0326866
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
99 HAYDEN AVENUE, SUITE 200
LEXINGTON, MASSACHUSETTS 02421
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(781) 860-5150
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS,
$.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The approximate aggregate market value of the voting common equity held by
non-affiliates of the registrant was $270,069,748 as of March 10, 2000. For
purposes of determining this number, 7,874,769 shares of common stock held by
affiliates are excluded.
As of March 10, 2000, the registrant had 28,649,365 shares of Common Stock
outstanding. As of March 10, 2000, 555 persons held common stock of the
registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Certain provisions of the registrant's definitive proxy statement to be filed
not later than May 1, 2000 pursuant to Regulation 14A are incorporated by
reference in Items 10 through 13 of Part III of this Annual Report on Form 10-K.
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The statements contained in this Annual Report on Form 10-K that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. The
Company intends that all forward-looking statements be subject to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect the Company's views as of the date they are
made with respect to future events and financial performance, but are subject to
many risks and uncertainties, which could cause the actual results of the
Company to differ materially from any future results expressed or implied by
such forward-looking statements. Examples of such risks and uncertainties
include, but are not limited to: the obtaining of sufficient financing to
maintain the Company's planned operations; the timely development, receipt of
necessary regulatory approvals and acceptance of new products; the successful
application of the Company's technology to produce new products; the obtaining
of proprietary protection for any such technology and products; the impact of
competitive products and pricing and reimbursement policies; the changing of
market conditions and the other risks detailed in the Certain Trends and
Uncertainties section of Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") in this Annual Report on Form 10-K
and elsewhere herein. The Company does not undertake to update any
forward-looking statements.
See "MD&A -- Certain Trends and Uncertainties" for a discussion of certain
risks and uncertainties applicable to the Company and its stockholders,
including the Company's need for additional funds to sustain its operations.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Genta Incorporated ("Genta" or the "Company"), incorporated under the laws
of the State of Delaware on February 4, 1988, is an emerging biopharmaceutical
company. The Company's research efforts have been focused on the development of
proprietary oligonucleotide pharmaceuticals intended to block or regulate the
production of disease-related proteins at the genetic level. The Company's
oligonucleotide programs are focused in the area of cancer. In late 1995, a
Phase 1/2A clinical trial was initiated in the United Kingdom using Genta's
anti-bcl-2 Anticode(TM) oligonucleotide, G3139, in non-Hodgkin's lymphoma
patients for whom prior therapies have failed. This clinical trial, which was
conducted in collaboration with the Royal Marsden NHS Trust and the Institute
for Cancer Research, is now complete. In late 1996, an Investigational New Drug
("IND") application for the G3139 clinical program was filed in the United
States and allowed to proceed by the United States Food and Drug Administration
("FDA"). In late 1997, a Phase 1 trial was initiated in the United States at the
Memorial Sloan-Kettering Cancer Center ("MSKCC") in New York City using G3139 in
patients diagnosed with various types of cancer and was followed by a Phase 2A
trial in prostate cancer. In 1998, several additional trials were initiated in
North America and Europe. In each of these trials, G3139 is being investigated
for safety and preliminary evidence of effectiveness when administered with
standard chemotherapeutic agents in different cancers. In 1999, the Company
entered into a Cooperative Research and Development Agreement ("CRADA") with the
National Cancer Institute ("NCI"), acquired Androgenics Technologies, Inc., a
company with license rights to a series of compounds that inhibit the growth of
prostate cancer cells, granted fast-track designation by the FDA to its bcl-2
antisense compound, G3139, for use in combination with Dacarbazine (DTIC) for
treatment of advanced malignant melanoma and initiated three clinical trials
sponsored by the NCI.
The Company had manufactured and marketed specialty biochemicals and
intermediate products to the in vitro diagnostic and pharmaceutical industries
through its manufacturing subsidiary, JBL Scientific, Inc. ("JBL"), a California
corporation acquired by the Company in February 1991, which was sold in 1999.
The Company owns 50% of a drug delivery system joint venture, Genta Jago
Technologies B.V. ("Genta Jago"), with SkyePharma, PLC ("SkyePharma," formerly
with Jagotec AG ("Jagotec"), which was acquired by SkyePharma) established to
develop oral controlled-release drugs. To date, no products from this joint
venture have been commercialized although an abbreviated New Drug Application
("NDA") was submitted in 1998 by the joint venture's marketing partner for one
product. The joint venture's original plan was to use Jagotec's patented
GEOMATRIX(R) drug delivery technology ("GEOMATRIX") in a two-pronged
commercialization strategy: the development of generic versions of successful
brand-name controlled-release drugs; and the development of controlled-release
formulations of drugs currently marketed in only immediate-release form. The
only products in development to date are those intended to be comparable to the
commercially available, brand name, controlled-release drugs.
Since 1997, the Company has been reducing its human and other resources to
reduce expenses while focusing its research and development efforts on its
Anticode(TM) brand of antisense products. To this end the Company's primary
efforts are directed toward the clinical development of G3139.
Consistent with this strategic direction, on March 19, 1999, the Company
entered into an Asset Purchase Agreement with Promega Corporation whereby its
wholly owned subsidiary Promega Biosciences, Inc. ("Promega") acquired
substantially all of the assets and assumed certain liabilities of JBL. JBL has
been reported as a discontinued operation in the accompanying consolidated
financial statements. The closing of the sale of JBL was completed on May 10,
1999.
On March 4, 1999, Genta and SkyePharma (on behalf of itself and its
affiliates) entered into an interim agreement pursuant to which the parties to
the joint venture released each other from all liability relating to unpaid
development costs and funding obligations of Genta Jago. SkyePharma agreed to be
responsible for substantially all of the obligations of the joint venture to
third parties and for the further development of the joint venture's products,
with any net income resulting therefrom to be allocated in agreed-upon
percentages between Genta and SkyePharma
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as set forth in such interim agreement. In the first quarter 2000, the Company
received $689,500 from SkyePharma as a royalty payment based on SkyePharma's
agreement with Elan Pharmaceuticals for the sale of Naproxen.
In August 1999, Genta acquired Androgenics Technologies, Inc.,
("Androgenics") a company with license rights to a series of compounds invented
at the University of Maryland, Baltimore to treat prostate cancer. These
compounds have the potential to broaden Genta's product portfolio of drugs.
Effective December 1, 1999, Kenneth K. Kasses, Ph.D., resigned as
President, Chief Executive Officer and Chairman of the Board of Directors of
the Company. Also effective December 1, 1999, the Company appointed Raymond P.
Warrell Jr., M.D. to serve as President and Chief Executive Officer and elected
Mark C. Rogers, M.D. to serve as Chairman of the Board of Directors of the
Company.
In 1998, the Company completed the closure of its research and development
facilities in San Diego, California and in the second quarter of 1999 moved its
headquarters from San Diego, California, to Lexington, Massachusetts.
SUMMARY OF BUSINESS AND RESEARCH AND DEVELOPMENT PROGRAMS
The Company is currently focusing most of its research and product
development efforts on Genta's lead anti-bcl-2 molecule, G3139. The Androgenics
program is in early preclinical development. The Company is actively seeking
additional products, technologies and alliances to expand its development
programs.
ANTICODE(TM) BRAND OF ANTISENSE OLIGONUCLEOTIDE PROGRAMS
Oligonucleotides represent a new approach to drug development based upon
genetic control of disease. Many human diseases have genetic origins that
involve either the expression of a harmful foreign gene or the aberrant
expression of a normal or mutated human gene. The Company's Anticode(TM)
oligonucleotides are short strands of synthetic nucleic acids designed to bind
to ("hybridize" with) specific sequences of disease-related RNA, thereby
blocking or controlling production of disease-related proteins. Because of their
highly selective binding properties, the Company believes that Anticode(TM)
oligonucleotides should not interfere with the function of normal cells, and
therefore should elicit fewer side effects than traditional drugs.
Oligonucleotide drugs may attack a disease at one of two levels. Our approach is
to prevent the synthesis of essential disease-related proteins. In this
approach, certain oligonucleotides are used to interrupt the processing of, or
selectively to bind to and destroy, individual messenger RNA (mRNA) sequences,
which leads to the down-regulation (lowering of levels) of specific proteins and
thereby effectively eliminates the disease or the disease promoter. This is
referred to as the "antisense" mechanism of action.
Genta has focused its Anticode(TM) research on oligonucleotides with mixed
phosphorothioate and methylphosphonate backbones. The Company has licensed
patents covering phosphorothioate oligonucleotide constructions and has applied
for patents covering the mixed backbone constructions. Genta's scientists have
improved the backbone technologies by introducing mixed chirally-enriched or
chirally-pure oligonucleotides. In preclinical studies, these oligonucleotides
effectively interfere with the action of targeted mRNA sequences inside cells.
Intravenous administration of the improved technology oligonucleotides to
certain animals demonstrates that these compounds have greater stability in the
circulatory system and are eventually excreted intact in the urine. These
improved backbone technologies represent opportunities for advanced generation
Anticode(TM) antisense oligonucleotides, and one of these approaches is
currently in preclinical development. Management believes that the Company has
the ability to acquire quantities of oligonucleotides sufficient to support its
present needs for research and its projected needs for initial clinical
development programs, assuming adequate funding. However, in order to obtain
oligonucleotides sufficient to meet the volume and cost requirements needed for
certain commercial applications of Anticode(TM) oligonucleotide products, Genta
requires raw materials currently provided by a single supplier. There can be no
assurance that such supplier will continue satisfactorily to provide the
requisite raw materials. See "MD&A -- Certain Trends and Uncertainties -- The
Raw Materials for Our Products are Produced by a Limited Number of Suppliers."
The Company's oligonucleotide research and development efforts are currently
focused on its cancer program as described below. Extensive additional
development will be required, and there can be no assurance that any product
will be successfully developed or will receive the necessary regulatory
approvals. See "MD&A -- Certain Trends and Uncertainties -- We Cannot Market and
Sell Our Products in the United States or in Other Countries if We Fail to
Obtain the Necessary Regulatory Approvals" and "Clinical Trials are Costly and
Time Consuming and are Subject to Delays."
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Bcl-2 Gene Target
The bcl-2 gene is a proto-oncogene and a major inhibitor of the natural
process the body uses to eliminate genetically damaged cancerous cells, which is
called apoptosis (programmed cell death). The protein produced by this gene has
two known critical functions in the progression of cancer: it creates a survival
advantage of malignant over normal cells, and it confers resistance to radiation
and chemotherapy, rendering those treatments ineffective in the late stages of
many types of cancer. Genta's lead anti-bcl-2 molecule, G3139, is designed to
bind to and destroy the mRNA that produces the bcl-2 protein product, thereby
interfering with the cellular production of the protein. This targeted reduction
of the bcl-2 protein may facilitate the natural process of apoptosis to kill the
cancer cell. High levels of bcl-2 are associated with a poor clinical prognosis
in many solid tumors and hematological cancers such as lymphoma, leukemia,
melanoma, multiple myeloma, lung, colon, prostate and breast cancers. The
Company believes that its Anticode(TM) antisense strategy against the bcl-2 gene
has the potential to represent a significant therapeutic opportunity in many of
these cancers.
Preclinical studies showed that an anti-bcl-2 oligonucleotide cured a
lymphoma-like disease induced by the injection of human B-cell lymphoma cells in
immunodeficient mice. Anti-bcl-2 Anticode(TM) oligonucleotides have also been
found to inhibit the growth of human lymphoma, melanoma, colon, prostate and
breast cancer tumors in immunodeficient mice when administered alone or in
combination with chemotherapeutic agents. In the February 1998 issue of Nature
Medicine, G3139 administered with Dacarbazine was reported to produce
significantly greater tumor volume reduction than Dacarbazine alone or than
G3139 alone. In ten of thirteen animals there was no tumor after the combination
treatment.
In late 1995, a Phase 1/2A clinical trial was initiated in the United
Kingdom using Genta's anti-bcl-2 Anticode(TM) oligonucleotide, G3139, in human
non-Hodgkin's lymphoma patients for whom prior therapies had failed. Other than
mild irritation at the site of the subcutaneous infusion in most of the patients
and a low-grade reversible thrombocytopenia (decrease in number of blood
platelets), no serious drug-attributable or dose-limiting adverse effects were
seen until the maximum tolerated dose was reached. Four of nine patients
observed showed improvements in their disease and in one patient the tumor had
completely disappeared. Of the 21 patients treated to date, three suffered what
were considered to be serious drug-related adverse events at high levels of drug
presentation above the predicted efficacy range. These events included a skin
reaction due to the subcutaneous method of administration in the study,
hypotension, and thrombocytopenia. These patients were removed from the study
and recovered from the reaction. The patient who had experienced hypotension was
later re-challenged at a lower dose without any untoward event.
The Company filed an IND, with the FDA in December 1996. The Company
initiated several clinical trials in 1998 and 1999, and on-going trials are
summarized in the table below. Additional trials are also under review.
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STATUS OF G3139 CLINICAL TRIALS
TRIAL LOCATION/INVESTIGATOR STATUS INDICATION TREATMENT
--------------------------- ------ ---------- ---------
Royal Marsden Hospital Phase 2 Lymphoma G3139 with Rituxan
David Cunningham, MD in Progress
London, England
MSKCC Phase 1/2 G3139 with Taxotere(R)
Howard Scher, MD in Progress Prostate Cancer
New York, NY
University of Vienna Phase 2 G3139 with DTIC
Burkhard Jansen, MD in Progress Melanoma
Vienna, Austria
Lombardi Cancer Center Phase 1/2 Breast Cancer G3139 with Taxotere(R)
Marc Lippmann, MD
Washington, DC
Institute of Drug Development Phase 2 Prostate Cancer G3139 with Taxotere(R)
Anthony Tolcher, MD
San Antonio, TX
Institute of Drug Development Phase 2 Colo-rectal Cancer G3139 with Camptosar(R)
Anthony Tolcher, MD
San Antonio, TX
Case Western University
Timothy Spiro, MD
Cleveland, OH
University of Chicago Phase 2 Small Cell Lung Cancer G3139 with Taxotere(R)
Charles Rudin, MD
Chicago, IL
Ohio State University
Gregg Otterson, MD
Columbus, OH
Ohio State University Phase 1 Acute Leukemia G3139
Guido Marcucci, MD Fludara(R); Cytosine(R)
Columbus, OH
In May 1999, the Company signed a CRADA with the NCI regarding additional
Phase 2 clinical trials. The Company will collaborate with the NCI on the design
of such clinical studies and the selection of tumor targets. Under the
arrangement, NCI will cover the costs of running both pre-clinical and clinical
studies while Genta would be responsible for supplying NCI with necessary
quantities of G3139 to carry out this work. See "MD&A -- Certain Trends and
Uncertainties -- We Cannot Market and Sell our Products in the United States or
in Other Countries if we Fail to Obtain the Necessary Regulatory Approvals and
Clinical Trials are Costly and Time Consuming and are Subject to Delays."
On March 31, 1998, the United States Patent and Trademark Office ("USPTO")
issued a patent, to which the Company has an exclusive license, for claims
covering antisense oligonucleotide compounds targeted against bcl-2. These
claims cover the Company's proprietary Anticode(TM) oligonucleotide molecules
that target bcl-2, including its lead clinical candidate, G3139. Other related
patents and claims in the United States and corresponding foreign patent
applications are still pending.
In July 1999, USPTO issued a notice of allowance for claims covering the use
of antisense targeted to the bcl-2 gene, which included Genta's lead drug
candidate G3139, to sensitize or kill cancer cells with BCL-2 antisense,
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either alone or in combination with chemotherapy agents. See "MD&A -- Certain
Trends and Uncertainties -- We may be Unable to Obtain or Enforce Patents and
Proprietary Rights to Protect our Business."
Oligonucleotide Collaborative and Licensing Agreements
Gen-Probe (Chugai). In February 1989, Genta entered into a development,
license and supply agreement with Gen-Probe Incorporated ("Gen-Probe"). Chugai
Pharmaceutical Company, Ltd. ("Chugai"), a Japanese corporation, subsequently
acquired Gen-Probe. Gen-Probe had the option to acquire an exclusive worldwide
license to any product consisting of, including, derived from or based on
oligonucleotides for the treatment or prevention of Epstein-Barr virus,
cytomegalovirus, HIV, human T-cell leukemia virus-1 and all leukemias and
lymphomas. Genta was obligated to pursue the development of a therapeutic
compound for the treatment of one of these indications as its first therapeutic
development program, which it did. In February 1996, Gen-Probe elected not to
exercise such option with respect to Genta's anti-bcl-2 products, waiving any
rights it may have had to develop or commercialize such products. The Gen-Probe
agreement provides for perpetual worldwide licenses in applicable proprietary
rights; royalty payments shall not accrue beyond the later of fifteen years
after the first commercial sale of each product and the duration of patent in
the country of sale.
Ts'o/Miller/Hopkins. In February 1989, the Company entered into a license
agreement with Drs. Paul Ts'o and Paul Miller (the "Ts'o/Miller Agreement")
pursuant to which Drs. Ts'o and Miller (the "Ts'o/Miller Partnership") granted
an exclusive license to the Company to certain issued patents, patent
applications and related technology regarding the use of nucleic acids and
oligonucleotides including methylphosphonate as pharmaceutical agents. Dr. Ts'o
is a Professor of Biophysics, Department of Biochemistry, and Dr. Miller is a
Professor of Biochemistry, both at the School of Public Health and Hygiene,
Johns Hopkins University ("Johns Hopkins"). In May 1990, the Company entered
into a license agreement with Johns Hopkins (the "Johns Hopkins Agreement," and
collectively with the Ts'o/Miller Agreement, referred to herein as the
"Ts'o/Miller/Hopkins Agreements") pursuant to which Johns Hopkins granted Genta
an exclusive license to its rights in certain issued patents, patent
applications and related technology developed as a result of research conducted
at Johns Hopkins by Drs. Ts'o and Miller and related to the use of nucleic acids
and oligonucleotides as pharmaceutical agents. In addition, Johns Hopkins
granted Genta certain rights of first negotiation to inventions made by Drs.
Ts'o and Miller in their laboratories in the area of oligonucleotides and to
inventions made by investigators at Johns Hopkins in the course of research
funded by Genta, which inventions are not otherwise included in the
Ts'o/Miller/Hopkins Agreements. Genta had agreed to pay Dr. Ts'o, Dr. Miller and
Johns Hopkins royalties on net sales of products covered by the issued patents
and patent applications, but not the related technology, licensed to the Company
under the Ts'o/ Miller/Hopkins Agreements. The Company also agreed to pay
certain minimum royalties prior to commencement of commercial sales of such
products, which royalties may be credited under certain conditions against
royalties payable on subsequent sales.
On February 14, 1997, the Company received notice from Johns Hopkins that
the Company was in material breach of the Johns Hopkins Agreement. The Johns
Hopkins Agreement provides that, if a material payment default is not cured
within 90 days of receipt of notice of such breach, Johns Hopkins may terminate
the Johns Hopkins Agreement. In February 1997, the Company paid Johns Hopkins
$100,000 towards the post-doctoral support program. On May 15, 1997, Johns
Hopkins sent Genta a letter stating that the Johns Hopkins Agreement was
terminated. On November 26, 1997, the Ts'o/Miller Partnership sent Genta a
letter claiming that Genta was in material breach of the Ts'o/Miller Agreement
for failing to pay royalties from 1995 through 1997. By letter dated April 28,
1998, the Ts'o/Miller Partnership advised the Company that it was terminating
the license granted pursuant to the Ts'o/Miller Agreement. On June 4, 1998, the
Company's statutory process agent received a Summons and Complaint in a lawsuit
brought by Johns Hopkins against the Company in Maryland Circuit Court for
Baltimore City (Case No. 98120110). Johns Hopkins alleged in the Complaint that
the Company had breached the Johns Hopkins Agreement and owed it licensing
royalty fees and related expenses in the amount of $308,832; which amount
included, $287,671 representing claims made by the Ts'O/Miller Partnership
pursuant in a Summons and Complaint received by the Company's statutory process
agent on August 10, 1998. Johns Hopkins also alleged the existence of a separate
March 1993 letter agreement wherein the Company agreed to support a fellowship
program at the Johns Hopkins School of Hygiene and Public Health and the
Company's breach thereof, with damages of $326,829. Based on a review of the
research conducted with the technology provided by these licenses, the Company
concluded that it could not develop potential products using this technology.
Management's current strategy, therefore, is to employ alternative technologies
that are available to it through other licenses or its own intellectual
property.
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In August 1999, the Company settled lawsuits with Johns Hopkins and the
Ts'o/Miller Partnership for $380,000. As part of the settlement of claims, the
Company agreed to pay $180,000 in cash over a six-month period of which $52,500
remains outstanding as of December 31, 1999 and issued 69,734 shares of Common
Stock to Johns Hopkins, acting on its behalf and on behalf of Ts'o/Miller
Partnership, sufficient to provide a value of $200,000.
GENTA JAGO
As previously mentioned, on March 4, 1999, Genta and SkyePharma entered into
an interim agreement pursuant to which the parties to the joint venture released
each other from all liability relating to unpaid development costs and funding
obligations of Genta Jago. SkyePharma agreed to be responsible for substantially
all of the obligations of the joint venture to third parties and for the further
development of the joint venture's products, with any net income resulting
therefrom to be allocated in agreed-upon percentages between Genta and
SkyePharma as set forth in such interim agreement. In the first quarter 2000,
the Company received $689,500 from SkyePharma as a royalty payment based on
SkyePharma's agreement with Elan Pharmaceuticals, for the sale of Naproxen, of
which $187,500 was attributable to 1999. Historical information relative to
Genta Jago follows.
In 1992, Genta and Jagotec determined to enter into a joint venture (Genta
Jago). The Company's purpose in establishing Genta Jago was to develop products
using a limited-scope license to Jagotec's GEOMATRIX technology in the hopes of
producing shorter-term earnings than were expected from the Company's
Anticode(TM) antisense programs. Genta contributed $4 million in cash to Genta
Jago as well as the rights to apply its Anticode(TM) oligonucleotide technology
to six products. Genta issued 120,000 shares of Common Stock valued at $7.2
million to Jagotec and its affiliates in 1992 as consideration for its interest
in Genta Jago, to induce Jagotec to license to Genta Jago, for what the parties
believed was a substantial discount from the underlying value of such license,
Jagotec's GEOMATRIX technology with respect to approximately 25 products (the
"Initial License") and to license to Genta Jagotec's GEOMATRIX technology for
use in Genta's Anticode(TM) oligonucleotide development programs. The Common
Stock issued by Genta was unregistered and therefore was recorded at a discount
to the then-current trading value of registered shares. Jagotec's contribution
to the joint venture consisted of its issuance of the Initial License to Genta
Jago for $425,000, which the parties believed to be a substantial discount from
the underlying value of such license.
In 1994, separate from the original 1992 joint venture agreement, Genta and
Jagotec began negotiations to expand Genta Jago to include the GEOMATRIX
technology as applied to 35 additional products (the "Additional License"). In
1994, Jagotec granted Genta, for $1.85 million, an option (the "Expansion
Option"), exercisable solely at Genta's discretion through April 30, 1995, to
expand the joint venture by requiring Jagotec to contribute rights under the
Additional License at what the parties believed was a substantial discount to
its actual fair value. An additional $2.0 million (the "Deposit") was deposited
with Jagotec in 1994, but would only be retained by Jagotec, as partial payment
of the exercise price for the Expansion Option, if Genta actually exercised the
Expansion Option. If such Expansion Option was not exercised, the $2.0 million
Deposit would be transferred to Genta Jago in the form of working capital loans
payable by Genta Jago to Genta.
Pursuant to the terms of the Expansion Option, for Genta to exercise the
Expansion Option, Genta would have had to pay Jagotec an aggregate of $3.15
million in cash and 124,000 shares of Common Stock, valued at $1.6 million
(based on the trading price at such time). The parties agreed the $3.15 million
in cash would consist of (i) the $2.0 million Deposit made by Genta in 1994,
which would be applied to the Expansion Option's exercise price upon Genta's
election, in 1995, to exercise such Expansion Option; and (ii) an additional
cash payment of $1.15 million to exercise the Expansion Option to be paid by
Genta in 1995. Genta exercised the Expansion Option in 1995.
The Company has provided funding to Genta Jago pursuant to a working capital
loan agreement that expired in October 1998. The Company believes it has
fulfilled all obligations of the working capital agreement to the Joint Venture.
See "MD&A -- Liquidity and Capital Resources." From 1992 through 1997, Genta
advanced an aggregate of $15.8 million in such working capital loans. In 1995,
Genta Jago returned the Anticode(TM) technology to Genta in exchange for Genta's
forgiveness of $4.4 million of principal and $0.3 million of interest
outstanding under existing working capital loans to Genta Jago. This amount was
determined by an arm's-length negotiation between Genta, Jagotec, and Genta Jago
and was based on the amount actually expended by Genta Jago for research and
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development related to the Anticode(TM) technology from the time Genta Jago
originally acquired the relevant license in 1992 through the date of return in
1995.
Genta has the option (the "Purchase Option") to purchase Jagotec's interest
in Genta Jago during the period beginning on December 31, 1998 and continuing
through December 31, 2000 at a purchase price equal to the remainder of (a) the
sum of (i) the lesser of (x) 50% of the fair market value of Genta Jago,
excluding the fair market value of Genta Jago's rights to the Initial License
and the Additional License, or (y) $100 million, plus (ii) 50% of the fair
market value of Genta Jago's rights to the Initial License and the Additional
License, less (b) 1.714286 times the fair market value of the 70,000 shares of
Common Stock issued to Jagotec pursuant to a Common Stock Transfer Agreement
dated as of December 15, 1992, between Genta and Jagotec.
Oral Controlled-Release Drugs
Formulations of drugs using the GEOMATRIX technology are designed to swell
and gel when exposed to gastrointestinal fluids. This swelling and gelling is
designed to allow the active drug component to diffuse from the tablet into the
gastrointestinal fluids, gradually over a period of up to 24 hours. The Company
believes that the GEOMATRIX technology may have other benefits that,
collectively, may distinguish it from competing controlled-release technologies.
More specifically, the Company believes these formulations can control drug
release and potentially modulate pharmacokinetic profiles to produce a variety
of desired clinical effects. For example, the GEOMATRIX technology may be used
to formulate tablets with a rapid or a delayed therapeutic effect by varying the
release characteristics of the drug from the tablet. The GEOMATRIX technology
may also be used to formulate tablets that release two drugs at the same or
different rates, or tablets that release a drug in several pulses after
administration.
Genta Jago may use the GEOMATRIX drug delivery technology to develop oral
controlled-release formulations for a broad range of presently marketed drugs
which have lost, or will, in the near to mid-term, lose patent protection and/or
marketing exclusivity. Certain of these presently marketed drugs are already
available in a controlled-release format, while others are only available in an
immediate release format that requires dosing several times daily. In the case
of drugs already available in a controlled-release format, Genta Jago is seeking
to develop bioequivalent products which would be therapeutic substitutes for the
branded products. In the case of currently marketed products that are only
available in immediate release form requiring multiple daily dosing, Genta Jago
is seeking to develop once or twice-daily controlled-release formulations. The
potential benefits of Genta Jago's oral controlled-release formulations may
include improved compliance, greater efficacy and reduced side effects as a
result of a more constant drug plasma concentration than that associated with
immediate release drugs administered several times daily.
Brightstone Pharma, Inc., a subsidiary of SkyePharma and the marketing
partner of Genta Jago for naproxen sodium, submitted an abbreviated NDA in 1998.
(Recently, SkyePharma has announced that it no longer plans to market its
generic pharmaceutical candidates exclusively through its Brightstone subsidiary
and is seeking marketing partners for these products.) Nifedipine (Procardia
XL(R)) and ketoprofen (Oruvail(R)) are currently undergoing formulation
development by SkyePharma. In December 1997, a competitor of the Company, Elan
Pharmaceuticals, received approval of its ANDA for a generic formulation of
Oruvail(R) (ketoprofen), and another company, Mylan Laboratories, Inc., has
filed an ANDA for a generic formulation of Procardia XL(R) (nifedipine). See
"MD&A -- Certain Trends and Uncertainties -- Our Business will Suffer if We Fail
to Compete Effectively with our Competitors and to Keep Up with New
Technologies."
Oral Controlled-Release Collaborative and Licensing Agreements
Genta Jago's strategy is to commercialize its GEOMATRIX controlled-release
products worldwide by forming alliances with pharmaceutical companies. Genta
Jago has established three such collaborations.
Genta Jago/Gensia/Brightstone. In January 1993, Genta Jago entered into a
collaboration agreement with Gensia for the development and commercialization of
certain oral controlled-release pharmaceutical products for treatment of
cardiovascular disease. Under the agreement, Gensia provides funding for
formulation and preclinical development to be conducted by Genta Jago and is
responsible for clinical development, regulatory submissions and marketing.
Terms of the agreement provide Gensia exclusive rights to market and distribute
the products in North America, Europe and certain other countries. The agreement
has a term of the longer of twelve years and the patent
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term in the respective countries within the territory. Genta Jago received $1.0
million, $1.2 million and $2.2 million of funding in 1998, 1997, and 1996,
respectively, pursuant to the agreement. Collaborative revenues of $2.2 million,
$1.5 million and $2.8 million were recognized under the agreement during the
years ended December 31, 1998, 1997, and 1996, respectively. Effective October
1996, Gensia and SkyePharma reached an agreement whereby a SkyePharma
subsidiary, Brightstone Pharma, Inc. ("Brightstone"), was assigned Gensia's
rights (and those of Gensia's partner, Boehringer Mannheim) to develop and
co-promote the potentially bioequivalent nifedipine product under the
collaboration agreement with Genta Jago. The assignment was accepted by Genta
Jago and has no impact on the terms of the original agreement. Genta Jago is
still entitled to receive additional milestone payments from Brightstone
triggered upon regulatory submissions and approvals, as well as royalties or
profit sharing ranging from 10% to 21% of product sales, if any.
Genta Jago/Apothecon. In March 1996, Genta Jago entered into a collaborative
licensing and development agreement (the "Genta Jago/Apothecon Agreement") with
Apothecon, Inc. ("Apothecon"). In 1998, Apothecon advised Genta Jago that it was
terminating its license. Genta Jago is seeking an alternative partner for future
development and marketing of this product.
Genta Jago/Krypton. In October 1996, Genta Jago entered into five
collaborative licensing and development agreements (the "Genta Jago/Krypton
Agreements") with Krypton, Ltd. ("Krypton"), a subsidiary of SkyePharma, whereby
Genta Jago would sublicense to Krypton rights to develop and commercialize
potentially bioequivalent GEOMATRIX(R) versions of five currently marketed
products, as well as another agreement granting Krypton an option to sublicense
rights to develop and commercialize an improved version of a sixth product. The
Genta Jago/Krypton Agreements have terms of the shorter of fifteen years from
first commercial sale or the expiration of the patent term on a
territory-by-territory basis. During 1997, Genta Jago received funding of $1.9
million under the Genta Jago/Krypton Agreements and recognized $2.3 million of
collaborative revenue therefrom. There were no revenues under this agreement in
1998 and 1999.
RESEARCH AND DEVELOPMENT
In an effort to focus its research and development efforts on areas that
provide the most significant commercial opportunities, the Company continually
evaluates its ongoing programs in light of the latest market information and
conditions, availability of third-party funding, technological advances, and
other factors. As a result of such evaluation, the Company's product development
plans have changed from time to time, and the Company anticipates that it will
continue to do so in the future. The Company recorded research and development
expenses of $3.3 million, $2.1 million and $5.3 million during 1997, 1998 and
1999, respectively, of which approximately $50,000, $50,000 and zero,
respectively, were funded pursuant to collaborative research and development
agreements and of which approximately $0.3 million, $0.1 million and zero,
respectively, were funded pursuant to a related party contract revenue agreement
with Genta Jago. See "MD&A -- Results of Operations."
MANUFACTURING/JBL
On March 19, 1999, the Company signed an Asset Purchase Agreement with
Promega Corporation whereby a wholly owned subsidiary of Promega acquired
substantially all of the assets and assumed certain liabilities of JBL. The
closing of the sale of JBL was completed on May 10, 1999. The accompanying
financial information therefore reflects JBL as a discontinued operation for all
periods presented.
Genta acquired JBL in early 1991. JBL is a manufacturer of high-quality
specialty chemicals and intermediate products for the pharmaceutical and in
vitro diagnostic industries. The products JBL manufactures include: enzyme
substrates that are used as color-generating reagents in clinical diagnostic
tests, such as pregnancy tests, developed by JBL's customers; and fine chemical
raw materials used in pharmaceutical research and development and manufacturing,
such as those used to make biological polymers like peptides and
oligonucleotides. JBL manufactures approximately 110-125 products on a recurring
basis. A number of Fortune 500 companies use JBL products as raw material in the
production of a final product. JBL markets its products to over 100 purchasers
in the pharmaceutical and diagnostic industries. JBL holds a California site
license to manufacture drugs for use in clinical research, but the manufacturing
facilities at JBL have not been inspected by the FDA for compliance with
requirements for Good Manufacturing Practices ("GMP"). The Company is currently
having G3139 made on a contract-manufacturing basis by a third party supplier
and is evaluating the establishment of affiliate relationships
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with third parties for the long-term manufacture of oligonucleotides. See "MD&A
- -- Certain Trends and Uncertainties -- The Raw Materials of our Products are
Produced by a Limited Number of Suppliers."
GENTA EUROPE
During 1995, Genta Pharmaceuticals Europe S.A. ("Genta Europe"), a
wholly-owned subsidiary of the Company, received approximately 5.4 million
French Francs (as of December 31, 1999, approximately $826,600) of funding in
the form of a loan from the French government agency L'Agence Nationale de
Valorisation de la Recherche ("ANVAR") towards research and development
activities pursuant to an agreement (the "ANVAR Agreement") between ANVAR, Genta
Europe and Genta. In October 1996, as part of the Company's restructuring
program, Genta Europe terminated all scientific personnel. ANVAR asserted, in a
letter dated February 13, 1998, that Genta Europe was not in compliance with the
ANVAR Agreement, and that ANVAR might request the immediate repayment of such
loan. On July 1, 1998, ANVAR notified Genta Europe by letter of its claim that
the Company remains liable for FF4,187,423 (as of December 31, 1999,
approximately $641,000) and is required to pay this amount immediately. The
Company does not believe that under the terms of the ANVAR Agreement ANVAR is
entitled to request early repayment. ANVAR notified Genta Incorporated that it
was responsible as a guarantor of the note for the repayment. Genta's legal
counsel in Europe has again notified ANVAR that it does not agree that the note
is payable. The Company is working with ANVAR to achieve a mutually satisfactory
resolution. However, there can be no assurance that such a resolution will be
obtained.
On June 30, 1998, Marseille Amenagement, a company affiliated with the city
of Marseilles, France, filed suit in France to evict Genta Europe from its
facilities in Marseilles and to demand payment of alleged back rent due and of a
lease guarantee for nine years' rent. Following the filing of this claim and in
consideration of the request for repayment of the loan from ANVAR, Genta
Europe's Board of Directors directed the management to declare a "Cessation of
Payment." Under this procedure, Genta Europe ceased any operations and
terminated its only employee. A liquidator was appointed by the Court to take
control of any assets of Genta Europe and to make payment to creditors. In
December 1998, the Court in Marseilles dismissed the case against Genta Europe
and indicated that it had no jurisdiction against Genta Incorporated. In August
1999, Marseille Amenagement instituted legal proceedings against the Company at
the Commercial Court in France, claiming alleged back rent payment of FF663,413
(as of December 31, 1999, approximately $101,500) and early termination payment
of FF1,852,429 (as of December 31, 1999, approximately $283,600). A court
hearing has been scheduled for May 15, 2000. The Company is working with its
counsel in France to achieve a mutually satisfactory resolution. However, there
can be no assurance that such a resolution will be obtained. On December 31,
1999, the Company has $574,800 of net liabilities of liquidated subsidiary
recorded and, therefore, management believes no additional accrual is necessary.
There can be no assurance that the Company will not incur material costs in
relation to this claim.
SALES AND MARKETING
Genta Jago has secured collaborative agreements with three entities for the
development and commercialization of selected controlled-release
pharmaceuticals. See "Genta Jago -- Oral Controlled-Release Collaborative and
Licensing Agreements." Genta Jago's collaborative agreements generally provide
the collaborative partner exclusive rights to market and distribute the products
in exchange for royalty payments to Genta Jago on product sales. Genta Jago's
goal is to form additional collaborations to develop and market a number of its
GEOMATRIX controlled-release products. There can be no assurance that any such
potential product will be successfully developed or that any prospective
collaborations or licensing arrangements will be entered into.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's policy is to protect its technology by, among other things,
filing patent applications with respect to technology considered important to
the development of its business. The Company also relies upon trade secrets,
unpatented know-how, continuing technological innovation and the pursuit of
licensing opportunities to develop and maintain its competitive position.
Genta has a portfolio of intellectual property rights to aspects of
oligonucleotide technology, which includes novel compositions of matter, methods
of large-scale synthesis, methods of controlling gene expression and cationic
lipid delivery systems. In addition, foreign counterparts of certain
applications have been filed or will be filed at the appropriate time. Allowed
patents generally would not expire until 17 years after the date of allowance if
filed in the
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United States before June 8, 1995 or, in other cases, 20 years from the date of
application. Generally, it is the Company's strategy to apply for patent
protection in the United States, Canada, Western Europe, Japan, Australia and
New Zealand.
Since its incorporation, Genta has separately filed an aggregate of over 400
United States and foreign patent applications covering new compositions and
improved methods to use, synthesize and purify oligonucleotides, linker-arm
technology, and compositions for their delivery. Thirty-five patents have been
issued; 22 in the United States (13 in 1998 and five in 1999) and 13 have issued
overseas.
Under the agreement with Gen-Probe, Genta gained non-exclusive access to all
technology developed by Gen-Probe, as of February 1989, related to the use of
DNA probes for therapeutic applications. This technology is related to nucleic
acid probes for quantitation of organisms and viruses, methods for their
production, including non-nucleotide linking reagents, labeling, and
purification, and methods for their use including hybridization and enhanced
hybridization. This includes rights to 14 issued patents and several pending
United States patent applications and corresponding issued and pending
applications in foreign countries. See "Genta Jago -- Oligonucleotide
Collaborative and Licensing Agreements -- Gen-Probe (Chugai)."
Genta also gained access to certain rights from the National Institutes of
Health ("NIH") covering phosphorothioate oligonucleotides. This includes rights
to three United States issued patents, one issued European patent, one issued in
Japan and other corresponding foreign applications that are still pending. In
addition, under an agreement with the University of Pennsylvania, Genta has
acquired exclusive rights to antisense oligonucleotides directed against the
bcl-2 gene as well as methods of their use for the treatment of cancer. On March
31, 1998 and November 3, 1998, two United States patents were issued
encompassing the Company's licensed antisense oligonucleotide compounds targeted
against the bcl-2 gene and in vitro uses of the same. These claims cover the
Company's proprietary Anticode(TM) oligonucleotide molecules, which target the
bcl-2 gene including its lead clinical candidate, G3139. Other related United
States and corresponding foreign patent applications are still pending.
Jagotec's GEOMATRIX technology is the subject of issued patents and pending
applications. Jagotec currently holds four issued United States patents, five
granted foreign patents, and other corresponding foreign patent applications
still pending that cover the GEOMATRIX technology. Certain rights to GEOMATRIX
technology have been licensed to Genta Jago. See "Genta Jago."
The patent positions of biopharmaceutical and biotechnology firms, including
Genta, can be uncertain and involve complex legal and factual questions.
Consequently, even though Genta is currently prosecuting its patent applications
with the United States and foreign patent offices, the Company does not know
whether any of its applications will result in the issuance of any patents or if
any issued patents will provide significant proprietary protection or will be
circumvented or invalidated. Since patent applications in the United States are
maintained in secrecy until patents issue, and since publication of discoveries
in the scientific or patent literature tend to lag behind actual discoveries by
several months, Genta cannot be certain that others have not filed patent
applications directed to inventions covered by its pending patent applications
or that it was the first to file patent applications for such inventions.
Competitors or potential competitors may have filed applications for, or
have received patents and may obtain additional patents and proprietary rights
relating to, compounds or processes competitive with those of the Company. See
"Competition." Accordingly, there can be no assurance that the Company's patent
applications will result in issued patents or that, if issued, the patents will
afford protection against competitors with similar technology; nor can there be
any assurance that any patents issued to Genta will not be infringed or
circumvented by others; nor can there be any assurance that others will not
obtain patents that the Company would need to license or design around. There
can be no assurance that the Company will be able to obtain a license to
technology that it may require or that, if obtainable, such a license would be
available on reasonable terms.
There can be no assurance that the Company's patents, if issued, would be
held valid by a court of competent jurisdiction. Moreover, the Company may
become involved in interference proceedings declared by the United States Patent
and Trademark Office (or comparable foreign office or process) in connection
with one or more of its patents or patent applications to determine priority of
invention, which could result in substantial cost to the Company, as well as a
possible adverse decision as to priority of invention of the patent or patent
application involved.
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The Company also relies upon unpatented trade secrets and no assurance can
be given that third parties will not independently develop substantially
equivalent proprietary information and techniques or gain access to the
Company's trade secrets or disclose such technologies to the public, or that the
Company can meaningfully maintain and protect unpatented trade secrets.
Genta requires its employees, consultants, outside scientific collaborators
and sponsored researchers and other advisors to execute a confidentiality
agreement upon the commencement of an employment or consulting relationship with
the Company. The agreement generally provides that all confidential information
developed or made known to the individual during the course of the individual's
relationship with Genta shall be kept confidential and shall not be disclosed to
third parties except in specific circumstances. In the case of employees, the
agreement generally provides that all inventions conceived by the individual
shall be assigned to, and made the exclusive property of, the Company. There can
be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets or adequate remedies in the event of
unauthorized use or disclosure of such information, or in the event of an
employee's refusal to assign any patents to the Company in spite of such
contractual obligation. See "MD&A -- Certain Trends and Uncertainties -- We May
be Unable to Obtain or Enforce Patents and Other Proprietary Rights to Protect
our Business and We Could Become Involved in Time Consuming and Expensive Patent
Litigation and Adverse Decisions in Patent Litigation Could Cause us to Incur
Additional Costs and Experience Delays in Bringing New Drugs to Market."
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of the
Company's proposed products and in its ongoing research and product development
activities. All of the Company's therapeutic products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous preclinical and clinical
testing and pre-market approval procedures by the FDA and similar authorities in
foreign countries. Various federal, and in some cases state, statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such products. The lengthy process of
seeking these approvals, and the subsequent compliance with applicable federal,
and in some cases state, statutes and regulations, require the expenditure of
substantial resources. Any failure by the Company, its collaborators or its
licensees to obtain, or any delay in obtaining, regulatory approvals could
adversely affect the marketing of any products developed by the Company and its
ability to receive product or royalty revenue.
The activities required before a new pharmaceutical agent may be marketed in
the United States begin with preclinical testing. Preclinical tests include
laboratory evaluation of product chemistry and animal studies to assess the
potential safety and efficacy of the product and its formulations. The results
of these studies must be submitted to the FDA as part of an IND. An IND becomes
effective within 30 days of filing with the FDA unless the FDA imposes a
clinical hold on the IND. In addition, the FDA may, at any time, impose a
clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold,
clinical trials cannot commence or recommence, as the case may be, without prior
FDA authorization and then only under terms authorized by the FDA. Typically,
clinical testing involves a three-phase process. In Phase 1, clinical trials are
conducted with a small number of subjects to determine the early safety profile
and the pattern of drug distribution and metabolism. In Phase 2, clinical trials
are conducted with groups of patients afflicted with a specific disease in order
to determine preliminary efficacy, optimal dosages and expanded evidence of
safety. In Phase 3, large-scale, multi-center, comparative clinical trials are
conducted with patients afflicted with a target disease in order to provide
enough data for the statistical proof of efficacy and safety required by the FDA
and others. In the case of products for life-threatening diseases, the initial
human testing is generally done in patients rather than in healthy volunteers.
Since these patients are already afflicted with the target disease, it is
possible that such studies may provide results traditionally obtained in Phase 2
trials. These trials are frequently referred to as "Phase 1/2A" trials.
The results of the preclinical and clinical testing, together with
chemistry, manufacturing and control information, are then submitted to the FDA
for a pharmaceutical product in the form of a New Drug Application ("NDA"), for
a biological product in the form of a Product License Application ("PLA") or for
medical devices in the form of a Premarket Approval Application ("PMA") for
approval to commence commercial sales. In responding to an NDA, PLA or PMA, the
FDA may grant marketing approval, request additional information or deny the
application if it determines that the application does not satisfy its
regulatory approval criteria. There can be no
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assurance that approvals will be granted on a timely basis, if at all, or if
granted will cover all the clinical indications for which the Company is seeking
approval or will not contain significant limitations in the form of warnings,
precautions or contraindications with respect to conditions of use.
In circumstances where a company intends to develop and introduce a novel
formulation of an active drug ingredient already approved by the FDA, clinical
and preclinical testing requirements may not be as extensive. Limited additional
data about the safety and/or effectiveness of the proposed new drug formulation,
along with chemistry and manufacturing information and public information about
the active ingredient, may be satisfactory for product approval. Consequently,
the new product formulation may receive marketing approval more rapidly than a
traditional full NDA, although no assurance can be given that a product will be
granted such treatment by the FDA.
For clinical investigation and marketing outside the United States, the
Company is or may be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. The Company's approach is to design its European
clinical trial studies to meet FDA, European Economic Community ("EEC") and
other European countries' standards. At present, the marketing authorizations
are applied for at a national level, although certain EEC procedures are
available to companies wishing to market a product in more than one EEC member
state. If the competent authority is satisfied that adequate evidence of safety,
quality and efficacy has been presented, a market authorization will be granted.
The registration system proposed for medicines in the EEC after 1992 is a dual
one in which products, such as biotechnology and high technology products and
those containing new active substances, will have access to a central regulatory
system that provides registration throughout the entire EEC. Other products will
be registered by national authorities under the local laws of each EEC member
state. With regulatory harmonization finalized in the EEC, the Company's
clinical trials will be designed to develop a regulatory package sufficient for
multi-country approval in the Company's European target markets without the need
to duplicate studies for individual country approvals. This approach also takes
advantage of regulatory requirements in some countries, such as in the United
Kingdom, which allow Phase 1 studies to commence after appropriate toxicology
and preclinical pharmacology studies, prior to formal regulatory approval.
Prior to the enactment of the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Waxman/Hatch Act"), the FDA, by regulation,
permitted certain pre-1962 drugs to be approved under an abbreviated procedure
which waived submission of the extensive animal and human studies of safety and
effectiveness normally required to be in a NDA. Instead, the manufacturer only
needed to provide an Abbreviated New Drug Application ("ANDA") containing
labeling; information on chemistry and manufacturing procedures and data
establishing that the original "pioneer" product and the proposed "generic"
product are bioequivalent when administered to humans.
Originally, the FDA's regulations permitted this abbreviated procedure only
for copies of a drug that was approved by the FDA as safe before 1962 and which
was subsequently determined by the FDA to be effective for its intended use. In
1984, the Waxman/Hatch Act extended permission to use the abbreviated procedure
established by the FDA to copies of post-1962 drugs subject to the submission of
the required data and information, including data establishing bioequivalence.
However, effective approval of such ANDAs was dependent upon there being no
outstanding patent or non-patent exclusivity.
Additionally, the FDA allows, under section 505(b)(2) of the Food Drug and
Cosmetic Act, for the submission and approval of a hybrid application for
certain changes in drugs which, but for the changes, would be eligible for an
effective ANDA approval. Under these procedures the applicant is required to
submit the clinical efficacy and/or safety data necessary to support the changes
from the ANDA eligible drug (without submitting the basic underlying safety and
efficacy data for the chemical entity involved) plus manufacturing and chemistry
data and information. Effective approval of a 505(b)(2) application is dependent
upon the ANDA-eligible drug upon which the applicant relies for the basic safety
and efficacy data being subject to no outstanding patent or non-patent
exclusivity. As compared to a NDA, an ANDA or a 505(b)(2) application typically
involves reduced research and development costs. However, there can be no
assurance that any such applications will be approved. Furthermore, the supply
of raw materials must also be approved by the FDA.
The Company is also subject to various foreign, federal, state and local
laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use, manufacture, storage, handling and disposal of hazardous or potentially
hazardous substances, including
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radioactive compounds and infectious disease agents, used in connection with the
Company's research and development work and manufacturing processes. Although
the Company believes it is in compliance with these laws and regulations in all
material respects (except as disclosed under "MD&A -- Liquidity and Capital
Resources"), there can be no assurance that the Company will not be required to
incur significant costs to comply with such regulations in the future. See "MD&A
- -- Certain Trends and Uncertainties -- We Cannot market and Sell our Products in
the United States or in Other Countries if we Fail to Obtain the Necessary
Regulatory Approvals."
COMPETITION
For many of their applications, the Company's products under development
will be competing with existing therapies for market share. In addition, a
number of companies are pursuing the development of antisense technology and
controlled-release formulation technology and the development of pharmaceuticals
utilizing such technologies. The Company competes with fully integrated
pharmaceutical companies that have more substantial experience, financial and
other resources and superior expertise in research and development,
manufacturing, testing, obtaining regulatory approvals, marketing and
distribution. Smaller companies may also prove to be significant competitors,
particularly through their collaborative arrangements with large pharmaceutical
companies or academic institutions. Furthermore, academic institutions,
governmental agencies and other public and private research organizations have
conducted and will continue to conduct research, seek patent protection and
establish arrangements for commercializing products. Such products may compete
directly with any products that may be offered by the Company. In December 1997,
a competitor of the Company, Elan Corporation, received approval of their ANDA
for a generic formulation of Oruvail(R) (ketoprofen), and another company, Mylan
Laboratories, Inc., filed an ANDA for a generic formulation of procardia XL(R)
(nifedipine). See "MD&A -- Certain Trends and Uncertainties -- Our Business Will
Suffer if We Fail to Compete Effectively with Our Competitors and to Keep up
with New Technologies."
The Company's competition will be determined in part by the potential
indications for which the Company's products are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction of the Company's or competitors' products. See "MD&A -- Certain
Trends and Uncertainties. -- Our Business will Suffer if we Fail to Compete
Effectively with Our Competitors and to Keep up with New Technologies."
Accordingly, the relative speed with which Genta and Genta Jago can develop
products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market are expected to be important
competitive factors. The Company expects that competition among products
approved for sale will be based, among other things, on product efficacy,
safety, reliability, availability, price, patent position and sales, marketing
and distribution capabilities. The development by others of new treatment
methods could render the Company's and Genta Jago's products under development
non-competitive or obsolete.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales. See "MD&A -- Certain Trends and Uncertainties -- Need for and Dependence
on Qualified Personnel. We may be Unable to Obtain or Enforce Patents and Other
Proprietary Rights to Protect our Business and our Business will Suffer if we
Fail to Obtain Timely Funding."
JBL's products address several markets including clinical chemistry,
diagnostics, molecular biology and pharmaceutical development. While many
customers have specified JBL products in their manufacturing protocols,
competition from several international competitors, many of whom have more
substantial experience, financial and other resources and superior expertise in
research and development, manufacturing, testing, obtaining regulatory
approvals, marketing and distribution, could undermine JBL's competitive
position. Competition has come primarily on price for some key JBL products for
pharmaceutical development and from competing technologies in diagnostics and
molecular biology.
HUMAN RESOURCES
As of March 1, 2000, Genta had nine employees, three of whom held doctoral
degrees. Four employees were engaged in development activities and five were in
administration. Most of the management and professional employees of the Company
have had prior experience and positions with pharmaceutical and biotechnology
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companies. Genta believes it maintains satisfactory relations with its
employees. See "MD&A -- Certain Trends and Uncertainties -- Need for and
Dependence on Qualified Personnel."
ITEM 2. PROPERTIES
Effective March 1, 1998, the Company reduced its leased space in San Diego
to 4,732 square feet and closed its laboratory facilities at this site. The
Company further reduced its leased space in December 1, 1998 to 3,944 square
feet. In April 1999, the Company moved its headquarters to Lexington,
Massachusetts, and entered into a two-year sub-lease effective April 1, 1999 for
2,400 square feet. In February 2000, the Company received notice of lease
cancellation by the overtenant, effective August 31, 2000. The Company is
currently searching for new lease space.
Genta Europe leased approximately 10,000 square feet of office, laboratory
and manufacturing space in Marseilles, France. The lease was cancelable in 2003
and expired in 2005. In June 1998, Marseille Amenagement, a company affiliated
with the city of Marseilles, France, filed suit in France to evict Genta Europe
from its facilities in Marseille. Following the filing of this claim and in
consideration of the request for payment of the loan from the ANVAR, Genta
Europe's Board of Directors directed management to declare a "Cessation of
Payment". In December 1998, the Court in Marseilles dismissed the case against
Genta Europe and indicated that it had no jurisdiction against Genta. In August
1999, Marseille Amenagement instituted legal proceedings against the Company at
the Commercial Court in France, claiming alleged back rent payment of FF663,413
(as of December 31, 1999, approximately $101,500) and early termination payment
of FF1,852,429 (as of December 31, 1999, approximately $283,600). A court
hearing has been scheduled for May 15, 2000. The Company is working with its
counsel in France to achieve a mutually satisfactory resolution.
ITEM 3. LEGAL PROCEEDINGS
On June 4, 1998, the Company's statutory process agent received a Summons
and Complaint in a lawsuit brought by Johns Hopkins against the Company in
Maryland Circuit Court for Baltimore City (Case No. 98120110). Johns Hopkins
alleged in the Complaint that the Company had breached the Johns Hopkins
Agreement (see "Business -- Anticode(TM) Brand of Antisense Oligonucleotide
Programs -- Oligonucleotide Collaborative and Licensing Agreements --
Ts'o/Miller/Hopkins") and owed it licensing royalty fees and related expenses in
the amount of $308,832; of which amount included, $287,671 representing claims
made by the Ts'o/Miller Partnership pursuant in a Summons and Complaint received
by the Company's statutory process agent on August 10, 1998. Johns Hopkins also
alleged the existence of a separate March 1993 letter agreement wherein the
Company agreed to support a fellowship program at the Johns Hopkins School of
Hygiene and Public Health and the Company's breach thereof, with damages of
$326,829. As of December 31, 1998, the Company had accrued $635,000 relating to
the estimated cost to settle these claims.
In August 1999, the Company settled lawsuits with Johns Hopkins and the
Ts'o/Miller Partnership for $380,000. As part of the settlement of claims, the
Company agreed to pay $180,000 in cash over a six-month period of which $52,500
remains outstanding as of December 31, 1999 and issued 69,734 shares of Common
Stock to Johns Hopkins, acting on its behalf and on behalf of Ts'o/Miller
Partnership, sufficient to provide a value of $200,000. The stock was sold by a
broker under an agreement between the Company and Johns Hopkins, with the
proceeds from such sales delivered to Johns Hopkins. The excess of the
previously accrued settlement costs over the actual settlement cost has been
recorded as a reduction to general and administrative expenses in 1999.
During 1995, Genta Europe received approximately 5.4 million French Francs
(as of December 31, 1999, approximately $826,600) of funding in the form of a
loan from the French government agency L'Agence Nationale de Valorisation de la
Recherche ("ANVAR") towards research and development activities pursuant to an
agreement (the "ANVAR Agreement") between ANVAR, Genta Europe and the Company.
In October 1996, as part of the Company's restructuring program, Genta Europe
terminated all scientific personnel. ANVAR asserted, in a letter dated February
13, 1998, that Genta Europe was not in compliance with the ANVAR Agreement, and
that ANVAR might request the immediate repayment of such loan. On July 1, 1998,
ANVAR notified Genta Europe by letter of its claim that the Company remains
liable for FF4,187,423 (as of December 31, 1999, approximately $641,000) and is
required to pay this amount immediately. The Company does not believe that under
the terms of the ANVAR Agreement ANVAR is entitled to request early repayment.
ANVAR notified the Company that it was responsible as a guarantor of the note
for the repayment. The Company's legal counsel in Europe has again notified
ANVAR
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17
that the Company does not agree that the note is payable. The Company is working
with ANVAR to achieve a mutually satisfactory resolution. However, there can be
no assurance that such a resolution will be obtained. There can be no assurance
that the Company will not incur material costs in relation to these terminations
and/or assertions of default or liability.
On June 30, 1998, Marseille Amenagement, a company affiliated with the city
of Marseilles, France, filed suit in France to evict Genta Europe from its
facilities in Marseilles and to demand payment of alleged back rent due and of a
lease guarantee for nine years' rent. Following the filing of this claim and in
consideration of the request for repayment of the loan from ANVAR, Genta
Europe's Board of Directors directed management to declare a "Cessation of
Payment." Under this procedure, Genta Europe ceased any operations and
terminated its only employee. A liquidator was appointed by the Court to take
control of any assets of Genta Europe and to make payment to creditors. In
December 1998, the Court in Marseilles dismissed the case against Genta Europe
and indicated that it had no jurisdiction against Genta Incorporated. In August
1999, Marseille Amenagement instituted legal proceedings against the Company at
the Commercial Court in France, claiming alleged back rent payment of FF663,413
(as of December 31, 1999, approximately $101,500) and early termination payment
of FF1,852,429 (as of December 31, 1999, approximately $283,600). A court
hearing has been scheduled for May 15, 2000. The Company is working with its
counsel in France to achieve a mutually satisfactory resolution. However, there
can be no assurance that such a resolution will be obtained. On December 31,
1999, the Company has $574,800 of net liabilities of liquidated subsidiary
recorded and, therefore, management believes no additional accrual is necessary.
There can be no assurance that the Company will not incur material costs in
relation to this claim.
In October 1996, JBL retained a chemical consulting firm to advise it with
respect to an incident of soil and groundwater contamination (the "Spill").
Sampling conducted at the JBL facility revealed the presence of chloroform and
perchloroethylenes ("PCEs") in the soil and groundwater at this site. A
semi-annual groundwater-monitoring program is being conducted, under the
supervision of the California Regional Water Quality Control Board, for purposes
of determining whether the levels of chloroform and PCEs have decreased over
time. The results of the latest sampling conducted by JBL show that PCEs and
chloroform have decreased in all but one of the monitoring sites. Based on an
estimate provided to the Company by the consulting firm, the Company accrued
$65,000 in 1999 relating to remedial costs. Prior to 1999, such costs were not
estimable, and therefore, no loss provision had been recorded. The company has
agreed to indemnify Promega in respect of this matter. The Company believes that
any costs stemming from further investigating or remediating this contamination
will not have a material adverse effect on the business of the Company, although
there can be no assurance thereof.
JBL received notice on October 16, 1998 from Region IX of the Environmental
Protection Agency ("EPA") that it had been identified as a potentially
responsible party ("PRP") at the Casmalia Disposal Site, which is located in
Santa Barbara, California. JBL has been designated as a de minimis PRP by the
EPA. Based on volume amounts from the EPA, the Company concluded that it was
probable that a liability had been incurred and accrued $75,000 during 1998. In
1999, the EPA estimated that the Company would be required to pay approximately
$63,200 to settle their potential liability. The Company expects to receive a
revised settlement proposal from the EPA by the second quarter 2000. While the
terms of the settlement with the EPA have not been finalized, they should
contain standard contribution protection and release language. The Company
believes that any costs stemming from further investigating or remediating this
contamination will not have a material adverse effect on the business of the
Company, although there can be no assurance thereof. The Company has agreed to
indemnify Promega in respect of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter ended
December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Throughout 1996 and in the beginning of 1997, the Company's Common Stock was
traded on the Nasdaq National Market under the symbol "GNTA." Beginning February
7, 1997, the Company's Common Stock traded in the over-the-counter market on the
Nasdaq SmallCap Market, initially under the symbol "GNTAC." During the 20
trading days immediately following the Company's reverse stock split effected on
April 7, 1997, the Company's Common Stock traded under the symbol "GNTCD." Genta
resumed trading under the symbol "GNTA" on July 24, 1997. In February 2000, the
Company filed an application to Nasdaq to resume trading on the Nasdaq National
Market. The following table sets forth, for the periods indicated, the high and
low sales prices for the Common Stock as reported by Nasdaq (as adjusted for the
Reverse Stock Split).
HIGH LOW
---- ---
1998
First Quarter................................................... 1 5/32 3/4
Second Quarter.................................................. 1 1/2 23/32
Third Quarter................................................... 1 5/32 5/8
Fourth Quarter.................................................. 1 11/32 7/8
1999
First Quarter................................................... 3 1 5/32
Second Quarter.................................................. 4 1/16 1 15/16
Third Quarter................................................... 2 3/32 2
Fourth Quarter.................................................. 8 1/4 2 7/16
(b) Holders
There were 555 holders of record of the Company's common stock as of March
10, 2000.
(c) Dividends
The Company has never paid cash dividends on its common stock and does not
anticipate paying any such dividends in the foreseeable future. In addition, the
Company is restricted from paying cash dividends on its common stock until such
time as all cumulative dividends have been paid on outstanding shares of its
Series D convertible preferred stocks. The Company currently intends to retain
its earnings, if any, after payment of dividends on outstanding shares of Series
D convertible preferred stock, for the development of its business. See "MD&A --
Liquidity and Capital Resources."
(d) Recent Sales of Unregistered Securities
In February 1997, the Company raised gross proceeds of $3 million in a
private placement, to The Aries Fund, a Cayman Islands Trust, and the Aries
Domestic Fund, LP (collectively the "Aries Funds"), of Convertible Notes and
warrants to purchase common stock ("Bridge Warrants"). The Convertible Notes,
together with accrued interest thereon, were converted pursuant to their terms
into an aggregate of 65,415 shares of Series D Preferred Stock, which in turn
are convertible, at $ 0.8848 per share, into 7,393,203 shares of common stock.
The Bridge Warrants permit the purchase of up to an aggregate of 7,741,935
shares of Common Stock at an exercise price of $0.3875 per share (subject to
adjustment upon the occurrence of certain events). Pursuant to the Note and
Warrant Purchase Agreement dated as of January 28, 1997 between the Company and
the Aries Funds (the "Note and Warrant Purchase Agreement"), the Aries Funds
have the right to appoint a majority of the members of the Board of Directors of
the Company. See "MD&A -- Certain Trends and Uncertainties -- There Currently
Exists Certain Interlocking Relationships and Potential Conflicts of Interest."
On June 6, 1997, the Aries Funds entered into a Line of Credit Agreement
with the Company pursuant to which the Aries Funds provided the Company with a
line of credit of up to $500,000, which subsequently was repaid, in
consideration for warrants (the "Line of Credit Warrants") to purchase 62,035
shares of Common Stock exercisable at $ 2.015 per share, subject to adjustment
upon the occurrence of certain events.
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19
As of August 27, 1997, the Company entered into separate consulting
agreements with each of Dr. Paul O.P. Ts'o and Dr. Sharon B. Webster (both
former directors of the Company), pursuant to which, in addition to certain
other compensation for consulting services to be rendered thereunder, the
Company issued 15,400 shares of Common Stock to Dr. Ts'o and 15,500 shares of
Common Stock to Dr. Webster.
On June 30, 1997, a total of 161.58 Premium Preferred Units(TM) ("Units")
were sold to accredited investors in a private placement (the "Private
Placement"). Such sale was made in reliance on the exemption from registration
pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended
("The Securities Act"). Each unit sold in the Private Placement consists of
1,000 shares of Premium Preferred Stock(TM) (Series D Preferred Stock), par
value $0.001 per share, stated value $100.00 per share, and warrants to purchase
5,000 shares of the Company's common stock, par value $0.001 per share, at any
time prior to the fifth anniversary of the final closing date ("Class D
Warrants"). A total of $16,158,000 was raised. The net proceeds to the Company
were $13,957,262. The respective conversion and exercise price of the Series D
Preferred Stock and the Class D Warrants is $0.8848 and $0.8754 per share of
common stock, respectively, subject to adjustment upon the occurrence of certain
events. In connection with the Private Placement, the placement agent --
Paramount Capital, Inc. -- received cash commissions equal to 9% of the gross
sales price and a non-accountable expense allowance equal to 4% of the gross
sales price, and the placement agent received warrants to purchase up to 10% of
the Units sold in the Private Placement for 110% of the offering price per Unit.
Furthermore, the Company has entered into a financial advisory agreement with
the placement agent pursuant to which the financial advisor is entitled to
receive certain cash fees and has received warrants (the "Advisory Warrants") to
purchase up to 15% of the Units sold in the Private Placement for 110% of the
offering price per Unit.
The Company was contractually required to file, and had filed, a
Registration Statement on Form S-3 with the Securities and Exchange Commission
(the "SEC") under the Securities Act with respect to the common stock issuable
upon conversion and upon exercise of the securities issued in the private
placement consummated in February 1997 and the Private Placement. This
registration statement has not been declared effective. In November 1999, the
Company issued warrants to acquire 550,000 shares of Common Stock in full
satisfaction of its obligation to file and have declared effective a shelf
registration statement pursuant to the Note and Warrant Purchase Agreement.
On May 29, 1998, the Company requested, and subsequently received, consents
(the "Letter Agreements") from the holders of a majority of the Series D
Preferred Stock to waive the Company's obligation to use best efforts to obtain
the effectiveness of a registration statement with the SEC as to Common Stock
issuable upon conversion of Series D Preferred Stock and exercise of Class D
Warrants. In exchange, the Company agreed to waive the contractual "lock-up"
provisions to which such consenting holders were subject and which provisions
would have prevented the sale of up to 75% of their securities for a nine-month
period following the effectiveness of the registration statement; and to extend
to January 29, 1999 from June 29, 1998 the Reset Date referred to in the
Certificate of Designations of the Series D Preferred Stock. In addition,
through the Letter Agreements, the Company agreed to issue to such holders
warrants to purchase at $0.8754 per share, an aggregate of up to 807,900 shares
of Common Stock, subject to certain anti-dilution adjustments, exercisable until
June 29, 2002. The shares were valued at approximately $633,000 and recorded as
a dividend. The Company had conditioned the effectiveness of such consent on its
acceptance by a majority of the Series D Preferred Stockholders. The Series D
Preferred Stock began earning dividends, payable in shares of the Company's
Common Stock, at the rate of 10% per annum subsequent to the new Reset Date of
January 29, 1999.
In December 1999, the Company raised gross proceeds of approximately $11.4
million (approximately $10.4 million net of placement costs) through the private
placement of 114 units at $100,000 per unit or $3.00 per share. Each unit sold
in the private placement consisted of (i) 33,333 shares of Common Stock, par
value $.001 per share, and (ii) warrants to purchase 8,333 shares of the
Company's common stock at any time prior to the fifth anniversary of the final
closing (the "Warrants"). The Warrants are convertible at the option of the
holder into shares of Common Stock at an initial conversion rate equal to the
average closing bid price for 20 days preceding the closing date of the private
placement, or $4.83 per share (subject to antidilution adjustment). In
connection with the private placement, the placement agent -- Paramount Capital,
Inc. -- received cash commissions equal to 7.5% of the gross sales price,
reimbursable expenses up to $125,000 and warrants to purchase up to 10% of the
units sold in the private placement for 110% of the offering price per unit. See
"MD&A -- Certain Trends
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and Uncertainties -- If We Cease Doing Business and Liquidate our Assets, We are
Required to Distribute Proceeds to Holders of our Preferred Stock Before we
Distribute Proceeds to Holders of our Common Stock and Volatility of Stock
Price; Market Overhang From Convertible Securities and Warrants."
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Consolidated Statements of Operations Data:
Gain on sale of technology ..................................... $ - $ 373 $ - $ - $ -
Related party contract revenue ................................. -- 1,559 350 55 --
Collaborative research and development ......................... 1,125 -- 50 50 --
-------- -------- -------- -------- --------
1,125 1,932 400 105 --
-------- -------- -------- -------- --------
Costs and expenses
Research and development ....................................... 9,764 4,592 3,309 2,116 5,334
Charge for acquired in-process research and development ........ 4,762 -- -- -- --
General and administrative ..................................... 4,493 5,096 6,132 4,020 5,999
LBC Settlement ................................................. -- -- 600 547 --
-------- -------- -------- -------- --------
19,019 9,688 10,041 6,683 11,333
-------- -------- -------- -------- --------
Loss from operations .............................................. (17,894) (7,756) (9,641) (6,578) (11,333)
Equity in net income (loss) of joint venture ...................... (6,913) (2,712) (1,193) (132) 2,449
Net loss of liquidated foreign subsidiary ......................... -- -- -- (98) --
Other income (expense), net ....................................... 7 (745) (2,850) (38) 22
-------- -------- -------- -------- --------
Net loss from continuing operations ............................... $(24,800) $(11,213) $(13,684) $ (6,846) $ (8,862)
Loss from discontinued operations ................................. (566) (879) (1,741) (739) (189)
Gain on sale of discontinued operations ........................... -- -- -- -- 1,607
-------- -------- -------- -------- --------
Net loss .......................................................... (25,366) (12,092) (15,425) (7,586) (7,444)
Preferred Stock dividends ......................................... (3,551) (4,873) (17,853) (633) (10,085)
-------- -------- -------- -------- --------
Net loss applicable to common shares .............................. $(28,917) $(16,965) $(33,278) $ (8,219) $(17,529)
======== ======== ======== ======== ========
Continuing operations ............................................. $ (14.53) $ (5.39) $ (7.13) $ (1.06) $ (1.07)
Discontinued operations ........................................... (0.29) (0.30) (0.39) (0.11) 0.08
-------- -------- -------- -------- --------
Net loss per share (1) ............................................ $ (14.82) $ (5.69) $ (7.52) $ (1.17) $ (0.99)
======== ======== ======== ======== ========
Weighted average shares used in computing net loss per share ...... 1,952 2,983 4,422 7,000 17,784
Deficiency of earnings to meet combined fixed charges and preferred
stock dividends (2) ........................................ $(28,917) $(16,965) $(33,278) $ (8,219) $(17,529)
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments ............... $ 262 $ 532 $ 8,456 $ 2,458 $ 10,101
Working capital (deficit) ...................................... (2,981) (3,816) 5,807 3,629 9,434
Total assets .................................................... 11,351 8,806 15,079 7,551 12,228
Notes payable and capital lease obligations, less current portion 2,334 118 -- -- --
Total stockholders' equity ...................................... 4,258 4,074 9,425 2,959 10,206
(1) Computed on the basis of net loss per common share described in Note 1
of Notes to Consolidated Financial Statements.
(2) The Company has incurred losses and, thus, has had a deficiency in
fixed charges and preferred stock dividend coverage since inception.
The above selected financial data reflects discontinued operations and balance
sheet data of JBL as a result of the sale of JBL in May 1999. See Note 2 of the
Notes to Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since its inception in February 1988, Genta has devoted its principal
efforts toward drug discovery, research and development. Genta has been
unprofitable to date and, even if it obtains financing to continue its
operations, expects to incur substantial operating losses due to continued
requirements for ongoing research and development activities, preclinical and
clinical testing, manufacturing activities, regulatory activities, and
establishment of a sales and marketing organization. From the period since its
inception to December 31, 1999, the Company has incurred a cumulative net loss
of $139.5 million. The Company has experienced significant quarterly
fluctuations in operating results and it expects that these fluctuations in
revenues, expenses and losses will continue, although mitigated by recent
developments.
The Company has been reducing its human and other resources to reduce
expenses while focusing its research and development ("R&D") efforts. Genta's
strategy is to build a product and technology portfolio, primarily, but not
exclusively, focused on its Anticode(TM) (antisense) products. To this end, the
Company has significantly reduced its involvement with respect to its 50%
investment in an R&D joint venture, Genta Jago, through an interim agreement
reached in March 1999. The Company also entered into an Asset Purchase Agreement
on March 19, 1999 for the sale of substantially all of the assets and certain
liabilities of the Company's wholly owned specialty chemicals subsidiary JBL
Scientific, Inc. ("JBL") for cash, a promissory note and certain pharmaceutical
development services in support of Genta's G3139 development project. The
transaction was completed on May 10, 1999. Following the sale of JBL, the
Company is operating as one business segment. Accordingly, the following
information and accompanying financial statements reflect JBL as a discontinued
operation. The Company has closed its operation in France. The Company has also
closed its facilities in San Diego, California and has moved its headquarters to
Lexington, Massachusetts as of the second quarter of 1999.
In August 1999, the Company acquired Androgenics Technologies, Inc., a
wholly owned entity of the Company's majority stockholder. Androgenics is a
company with license rights to a series of compounds invented at the University
of Maryland, Baltimore to treat prostate cancer. As consideration for the
acquisition, the Company paid $132,000 in cash (including reimbursements of
pre-closing expenses and on-going research funding) and issued warrants (with
exercise prices ranging from $1.25 to $2.50 per share) to purchase an aggregate
of 1,000,000 shares of Common Stock, 90% of which will not become exercisable
until the successful conclusion of certain development milestones, ranging from
the initial clinical patient trial through the submission of an application for
marketing authorization.
The Company has recently completed a private placement for $11.4 million;
however, its ability to continue operations beyond the first quarter of 2001
depends upon the Company's success in obtaining additional funding. There can be
no assurance that the Company will be able to obtain additional funds on
satisfactory terms or at all. There are several factors that must be considered
risks in that regard and those that are known to management are discussed in
"MD&A -- Certain Trends and Uncertainties."
The statements contained in this Annual Report on Form 10-K that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. The
Company intends that all forward-looking statements be subject to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements reflect the Company's views as of the date they
are made with respect to future events and financial performance, but are
subject to many risks and uncertainties, which could cause the actual results of
the Company to differ materially from any future results expressed or implied by
such forward-looking statements. Examples of such risks and uncertainties
include, but are not limited to, obtaining sufficient financing to maintain the
Company's planned operations, the timely development, receipt of necessary
regulatory approvals and acceptance of new products, the successful application
of the Company's technology to produce new products, the obtaining of
proprietary protection for any such technology and products, the impact of
competitive products and pricing and reimbursement policies, changing market
conditions and the other risks detailed in the Certain Trends and Uncertainties
section of this Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this Annual Report on Form 10-K. The
Company does not undertake to update any forward-looking statements.
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RESULTS OF OPERATIONS
The following discussion of results of operations relates to the Company's
continuing business.
Operating revenues totaled $0.4 million in 1997 compared to $0.1 million in
1998 and zero in 1999. The changes in operating revenue have largely reflected
the Company's lessened involvement in Genta Jago development activities. Related
party contract revenues decreased from $350,000 in 1997, to $55,000 in 1998 and
zero in 1999. It is anticipated that, as the Company has reduced its resources
and focused them on its development of its lead Anticode(TM) oligonucleotide,
G3139, this trend will continue. It should be noted that at the same time, the
Company has reduced its commitment to provide funds to Genta Jago. On March 4,
1999, Genta and SkyePharma (on behalf of itself and its affiliates) entered into
an interim agreement pursuant to which the parties to the joint venture released
each other from all liability relating to unpaid development costs and funding
obligations of Genta Jago. SkyePharma agreed to be responsible for substantially
all the obligations of the joint venture to third parties and for the further
development of the joint venture's products, with any net income resulting
therefrom to be allocated in agreed-upon percentages between Genta and
SkyePharma as set forth in such interim agreement. The completion of the sale of
the assets of JBL resulted in a significant decrease in ongoing revenues, as all
of the Company's historical product sales have been attributable to JBL.
Collaborative research and development revenues were $50,000 annually in
1997 and 1998 and zero in 1999, recognized pursuant to the Company's
collaboration with Johnson & Johnson Consumer Products, Inc. See "Business --
Anticode(TM) Brand of Antisense Oligonucleotide Programs, -- Oligonucleotide
Collaborative and Licensing Agreements and -- Other Anticode Agreements." The
above agreement has expired.
Costs and expenses totaled $10.0 million in 1997 compared to $6.7 million in
1998 and $11.3 million in 1999. Primarily, the overall decrease between 1997 and
1998 reflects reduced research and development and general and administrative
charges offset by non-recurring charges related to restructuring. The decrease
in R&D expenses is the result of work force reductions and related closure of
research and development facilities in San Diego. The increase from 1998 to 1999
reflects increases in clinical trials and related drug supply, salaries and
non-cash stock compensation charges.
Services and capabilities that have not been retained within the Company are
out-sourced through short-term contracts or from consultants. All preclinical
biology and clinical trial work are now conducted through such collaborations
with external scientists and clinicians. The Company anticipates that, if
sufficient collaborative revenues and other funding are available, research and
development expenses may increase in future years due to requirements for
preclinical studies, clinical trials, the G3139 Anticode oligonucleotide program
and increased regulatory costs. The Company will be required to assess the
potential costs and benefits of developing its own Anticode(TM) oligonucleotide
manufacturing, marketing and sales activities if and as such products are
successfully developed and approved for marketing, as compared to establishing a
corporate partner relationship.
Research and development expenses totaled $3.3 million in 1997, $2.1 million
in 1998, and $5.3 million in 1999. The decrease in research and development
expenses between 1997 and 1998 is primarily attributable to the Company's
re-deployment of certain employees, and related workforce reductions implemented
in 1997 together with the discontinuation of several programs. Research and
development and certain other services the Company provided to Genta Jago under
the terms of the joint venture were significantly reduced over the period from
1997 through 1999. These amounts were $350,000 in 1997, $55,000 in 1998 and zero
in 1999. The increase between 1998 and 1999 is due primarily to expanded
clinical trials and non-cash stock compensation charges of $1,128,900.
It is anticipated that research and development expenses will continue to
increase in the future, assuming the Company obtains sufficient financing, as
the development program for G3139 expands and more patients are treated in
clinical trials at higher doses, through longer or more treatment cycles, or
both. Furthermore, the Company is pursuing other opportunities for new product
development candidates, which, if successful, will require additional research
and development expenses. There can be no assurance, however, that the trials
will proceed in this manner or that the Company will initiate new development
programs.
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24
In an effort to focus its research and development on areas that provide the
most significant commercial opportunities, the Company continually evaluates its
ongoing programs in light of the latest market information and conditions,
availability of third-party funding, technological advances, and other factors.
As a result of such evaluation, the Company's product development plans have
changed from time to time, and the Company anticipates that they will continue
to do so in the future.
General and administrative expenses were $6.1 million in 1997, $4.0 million
in 1998, and $6.0 million in 1999. The $2.1 million decrease from 1997 to 1998
reflects reductions in staff and in accounting and legal expenses. Legal
expenses were higher in 1997 due to several factors: successfully defending the
litigation brought by certain of the Company's preferred stockholders
challenging a $3.0 million investment made in February 1997, which litigation
was resolved in the Company's favor in April 1997; and the Company's successful
efforts to avoid a potential Nasdaq delisting associated with the equity
offerings consummated in 1997. The increase from 1998 to 1999 reflects primarily
non-cash stock compensation charges of $1,945,400 and accrual for severance due
to change in management. See "Legal Proceedings" and "Market for Registrant's
Common Equity and Related Stockholder Matters -- Recent Sales of Unregistered
Securities." As a continuation of its 1995 restructuring plan, in May 1997,
Genta again reassessed its personnel requirements and established another
termination plan involving the termination of 12 research and administrative
employees. The Company recorded general and administrative expenses of $868,000
in the second quarter of 1997 for accrued severance costs. In 1998, three
additional staff personnel left the Company, and two senior managers joined the
Company. Another senior manager joined the Company in 1999. Although the Company
has reduced its work force to a core group of corporate personnel, the remaining
team is able to maintain Genta's operations in the development of G3139.
The Company recorded charges to general and administrative expenses of
$600,000, $577,000 and $523,400 in 1997, 1998 and 1999, respectively, to account
for the carrying value of abandoned patents no longer related to the research
and development efforts of the Company. The Company's policy is to evaluate the
appropriateness of carrying values of the unamortized balances of intangible
assets on the basis of estimated future cash flows (undiscounted) and other
factors. If such evaluation were to identify a material impairment of these
intangible assets, such impairment would be recognized by a write-down of the
applicable assets. The Company continues to evaluate the continuing value of
patents and patent applications, particularly as expenses to prosecute or
maintain these patents come due. Through this evaluation, the Company may elect
to continue to maintain these patents, seek to out-license them, or abandon
them.
The Company's equity in net loss of its joint venture (Genta Jago) totaled
$1.2 million in 1997, compared to $0.1 million in 1998 and a net gain of $2.4
million in 1999. The decrease in the Company's equity in net loss of its joint
venture during 1998 relative to 1997 is largely attributable to the fact that
development efforts became focused exclusively on GEOMATRIX-based products and a
greater portion of development activities were funded pursuant to Genta Jago's
collaborative agreements with third parties. The operating results of Genta Jago
are based primarily on three factors. First, Genta Jago receives collaborative
research and development revenue from third parties. Secondly, Genta Jago is
billed by Jagotec and Genta for research and development costs associated with
Genta Jago projects. Thirdly, there are general and administrative costs
associated with the joint venture.
The increase in equity in net income of joint venture from 1998 to 1999 is
due to an agreement signed on March 4, 1999, between the Company and SkyePharma
(on behalf of itself and its affiliates) entered into an interim agreement (the
"Interim JV Agreement") pursuant to which the Company was released from all
liability relating to unpaid development costs and funding obligations of Genta
Jago, the joint venture between the Company and SkyePharma. SkyePharma agreed to
be responsible for substantially all the obligations of the joint venture to
third parties and for the further development of the joint venture's products,
with any net income resulting therefrom to be allocated in agreed-upon
percentages between the Company and SkyePharma. As a result of the Interim JV
Agreement, the Company wrote off its liability relative to the Company's
recorded deficit in the joint venture and, as such, recorded a gain of
approximately $2.3 million for the three months ended March 31, 1999. Also,
according to revised revenue sharing agreements, the Company reported
approximately $164,500 for its proportionate share of net income of Genta Jago
in relation to SkyePharma's royalty agreement, with Elan Pharmaceuticals, for
Genta Jago's product, Naproxen.
Interest income has fluctuated significantly each year and is anticipated to
continue to fluctuate primarily due to changes in the levels of cash,
investments and interest rates during each period.
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Interest expense was $3.3 million in 1997, $8,700 in 1998 and $ 200 in 1999.
In consideration of a beneficial conversion feature on a debt instrument, the
Company recorded $666,667 in imputed interest on $2.0 million in 4% Convertible
Debentures due August 1, 1997, that were originally issued in September 1996 and
were converted at a 25% discount to market. The discount represents an effective
interest rate of 38%. The Company recorded a $3.0 million charge to imputed
interest in 1997 related to value associated with 6.4 million Bridge Warrants
issued in connection with a $3.0 million debt issue in February 1997.
In consideration of a beneficial conversion feature on a convertible equity
security, the Company recorded $16,158,000 in imputed dividends for discounted
conversion terms and liquidation preference of the Series D Preferred Stock
issued in the Private Placement.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 16, 1998 the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
standard is effective for fiscal years beginning after June 15, 2000. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
instruments at fair value. The Company is currently evaluating the impact of
this pronouncement and does not believe adoption of SFAS No. 133 will have a
material impact on the Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from
private and public offerings of its equity securities. Cash provided from these
offerings totaled approximately $134.9 million through December 31, 1999,
including net proceeds of $10.4 million raised in 1999 and $17.0 million raised
during 1997. At December 31, 1999, the Company had cash, cash equivalents and
short-term investments totaling $10.1 million compared to $2.5 million at
December 31, 1998. Management believes that at the current rate of spending, the
Company will have sufficient cash funds to maintain its present operations
through December 31, 2000.
The Company will need substantial additional funds before it can expect to
realize significant product revenue. To the extent that the Company is
successful in accelerating its development of G3139 or in expanding its
development portfolio or acquiring or adding new development candidates, the
current cash resources would be consumed at a greater rate. Certain parties with
whom the Company has agreements have claimed default and, should the Company be
obligated to pay these claims or should the Company engage legal services to
defend or negotiate its positions or both, its ability to continue operations
could be significantly reduced or shortened. See "MD&A -- Certain Trends and
Uncertainties -- Claims of Genta's Default Under Various Agreements." The
Company anticipates that significant additional sources of financing, including
equity financing, will be required in order for the Company to continue its
planned operations. The Company also anticipates seeking additional product
development opportunities from external sources. Such acquisitions may consume
cash reserves or require additional cash or equity. The Company's working
capital and additional funding requirements will depend upon numerous factors,
including: (i) the progress of the Company's research and development programs;
(ii) the timing and results of preclinical testing and clinical trials; (iii)
the level of resources that the Company devotes to sales and marketing
capabilities; (iv) technological advances; (v) the activities of competitors;
and (vi) the ability of the Company to establish and maintain collaborative
arrangements with others to fund certain research and development efforts, to
conduct clinical trials, to obtain regulatory approvals and, if such approvals
are obtained, to manufacture and market products. See "MD&A -- Certain Trends
and Uncertainties -- Our Business Will Suffer if We Fail to Obtain Timely
Funding."
If the Company successfully secures sufficient levels of collaborative
revenues and other sources of financing, it expects to use such financing to
continue to expand its ongoing research and development activities, preclinical
testing and clinical trials, costs associated with the market introduction of
potential products, and expansion of its administrative activities. As
previously discussed in the MD&A Overview, the Company entered into an Asset
Purchase Agreement with Promega Corporation on March 19, 1999. Under the
agreement, a wholly owned subsidiary of Promega acquired substantially all of
the assets and assumed certain liabilities of JBL for $4.8 million in cash, a
$1.2 million promissory note, and pharmaceutical development services to be
provided to Genta.
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In connection with the Genta Jago joint venture formed in late 1992 and
expanded in May 1995, the Company provided funding to Genta Jago pursuant to a
working capital loan agreement that expired in October 1998. As of December 31,
1998, the Company had advanced working capital loans of approximately $15.8
million to Genta Jago, net of principal repayments and credits, which amount
fully satisfied what the Company believes is the loan commitment established by
the parties through December 31, 1998 and in relation to the interim agreement
signed on March 4, 1999. Such loans bore interest at rates per annum ranging
from 5.81% to 7.5%, and were payable in full on October 20, 1998. Genta Jago
repaid Genta $1 million in principal of its working capital loans, in November
1996, from license fee revenues. See "MD&A -- Certain Trends and Uncertainties
- -- Claims of Genta's Default Under Various Agreements."
On March 4, 1999, Genta and SkyePharma (on behalf of itself and its
affiliates) entered into the interim agreement pursuant to which the parties to
the joint venture released each other from all liability relating to unpaid
development costs and funding obligations of Genta Jago and SkyePharma agreed to
be responsible for the obligations of the joint venture to third parties and for
the further development of the joint venture's products, with any net income
resulting therefrom to be allocated in agreed-upon percentages between Genta and
SkyePharma as set forth in such interim agreement. Accordingly, the Company
reversed its $2.3 million deficit in joint venture and effectively forgiving
payment of working capital loans to Genta Jago.
In August 1999, the Company acquired Androgenics Technologies, Inc.
("Androgenics"), a wholly owned entity of the Company's majority stockholder. As
consideration for the acquisition, the Company paid $132,000 in cash (including
reimbursements of pre-closing expenses and on-going research funding) and issued
warrants (with exercise prices ranging from $1.25 to $2.50 per share) to
purchase an aggregate of 1,000,000 shares of Common Stock, 90% of which will not
become exercisable until the successful conclusion of certain development
milestones, ranging from the initial clinical patient trial through the
submission of an application for marketing authorization. The acquisition was
accounted for as a transfer between companies under common control. The cash and
warrants were issued in exchange for 100% of the shares of Androgenics and
licensed technology and the assumption of a research and development agreement
with the University of Maryland, Baltimore. The 1,000,000 warrants were
accounted for as a deemed distribution based on their fair value of $440,500.
The $132,000 in cash was also accounted for as a deemed distribution. The assets
and liabilities of Androgenics as of December 31, 1999 and the results of its
operations for the year ended are immaterial.
Through December 31, 1999, the Company had acquired $10.4 million in
property and equipment of which $5.5 million was financed through capital leases
and other equipment financing arrangements, $3.6 million was funded in cash and
the remainder was acquired through the Company's acquisition of JBL. The Company
has commitments associated with its operating leases as discussed further in
Note 7 to the Company's consolidated financial statements. In 1997, the Company
bought out its equipment