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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the fiscal year ended December 31, 1997
OR
| | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _________ to ________.
Commission File Number 000-23186
BIOCRYST PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1413174
(State of other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
2190 Parkway Lake Drive; Birmingham, Alabama 35244
(Address and zip code of principal executive offices)
(205) 444-4600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.01 Par Value
Indicate by a 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 | |.
While it is difficult to determine the number of shares owned by non-affiliates,
the Registrant estimates that the aggregate market value of the Common Stock on
March 22, 1998 (based upon the closing price shown on the Nasdaq National Market
on March 20, 1998) held by non-affiliates was approximately $77,526,188. For
this computation, the Registrant has excluded the market value of all shares of
its Common Stock reported as beneficially owned by officers, directors and
certain significant stockholders of the Registrant. Such exclusion shall not be
deemed to constitute an admission that any such stockholder is an affiliate of
the Registrant.
The number of shares of Common Stock, par value $.01, of the Registrant
outstanding as of March 22, 1998 was 13,940,210 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. BUSINESS
General
BioCryst Pharmaceuticals, Inc. ("BioCryst" or the "Company") is an emerging
pharmaceutical company using structure-based drug design to discover and design
novel, small-molecule pharmaceutical products for the treatment of immunological
and infectious diseases and disorders. The Company believes that structure-based
drug design, by precisely designing compounds to fit the active site of target
proteins, offers the potential for developing drugs for many indications that
have improved efficacy and fewer side effects than currently marketed drugs for
the same indications. The Company is conducting four clinical trials with its
lead drug, BCX-34, including a Phase I/II trial with an oral formulation for
cutaneous T-cell lymphoma ("CTCL"), a Phase I/II trial with an oral formulation
for psoriasis, a Phase I/II trial with an oral formulation for HIV and a Phase
I/II trial with an ointment formulation for psoriasis. BioCryst has additional
drug discovery projects underway using its structure-based drug design
technologies to develop inhibitors of influenza neuraminidase and enzymes and
proteins involved in the complement cascade, which is implicated in several
major inflammatory conditions. The Company has selected a lead compound,
BCX-1470, for its serine protease inhibitor in its complement cascade project
and is testing several neuraminidase inhibitors to further assess the compounds'
oral activity against influenza A and influenza B. One of the elements of the
Company's strategic plan is to leverage its clinical progress by entering into
pharmaceutical collaborations with drug companies in major world markets.
BioCryst entered into an exclusive license agreement with Torii Pharmaceutical
Co., Ltd. ("Torii"), a Japanese pharmaceutical company, for the development and
commercialization in Japan of BCX-34 and certain other purine nucleoside
phosphorylase ("PNP") inhibitor compounds. PNP is an enzyme believed to be
involved in T-cell proliferation.
BioCryst's lead immunological drug program targets T-cell proliferative
disorders, which arise when T-cells, immune system cells that normally fight
infection, attack normal body cells or multiply uncontrollably. These disorders
are varied and include CTCL (a severe form of cancer), psoriasis, transplant
rejection and certain autoimmune diseases. BioCryst has designed and synthesized
several chemically distinct classes of compounds which inhibit PNP.
The Company has completed seven Phase I clinical trials, four Phase I/II
clinical trials, six Phase II clinical trials and two Phase III clinical trials
with topical BCX-34 and has completed three Phase I trials with oral and
intravenous formulations of the drug and one Phase I/II clinical trial with an
oral formulation of the drug and is conducting three Phase I/II clinical trials
with an oral formulation of BCX-34. BCX-34 has been tested in over 670 subjects,
and no significant drug-related side effects have been observed. While the Phase
III clinical trials with topical BCX-34 for the treatment of CTCL and psoriasis
did not demonstrate statistical efficacy and resulted in cessation of further
development of a topical cream formulation. The Company is continuing its PNP
inhibitor program for the oral and ointment formulations of BCX-34. In addition,
the Company has initiated preclinical studies using an ophthalmic formulation of
BCX-34 for potential use in treating uveitis, Sjogren's syndrome and corneal
transplant rejection.
BioCryst's scientists include recognized world leaders in the fields of X-ray
crystallography and medicinal chemistry, two core disciplines associated with
structure-based drug design. The Company has certain collaborative arrangements
with The University of Alabama at Birmingham ("UAB"), which has one of the
leading X-ray crystallography centers in the world and has been successful in
characterizing a significant number of medically relevant protein targets. The
Company believes, based upon its scientific staff and management, the number of
compounds it has designed and its clinical development program, that it is a
leader in the practical application of structure-based drug design.
In May 1996, the Company entered into an agreement pursuant to which it granted
Torii an exclusive license, with the right to sublicense, to develop,
manufacture and commercialize BCX-34 and certain other PNP inhibitor compounds
in Japan for the treatment of rheumatoid arthritis, T-cell cancers (including
CTCL) and atopic dermatitis. Upon entering into the agreement, Torii paid the
Company $1.5 million in license fees and made a $1.5 million equity investment
in the Company, purchasing 76,608 shares of Common Stock at a purchase price of
$19.58 per share. A milestone payment of $1 million was paid the Company by
Torii in 1997. In order for Torii to maintain its licensing rights, it is
obligated to make payments to the Company of up to $18 million upon the
achievement of specified development milestones. Torii is responsible for all
development, regulatory and commercialization expenses in Japan and is
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obligated to pay royalties to the Company on sales of licensed products in
Japan. The agreement will remain in effect, unless earlier terminated, until the
last to expire of any patent rights licensed under the agreement, or in the
event no patents issue, for twenty years from May 31, 1996. The agreement is
subject to termination by Torii at any time and by the Company in certain
circumstances, including any material breaches of the agreement by Torii.
Pursuant to the agreement, Torii may negotiate a license with the Company to
develop BCX-34 and certain other PNP inhibitor compounds for additional
indications.
Products in Development
The following table summarizes BioCryst's development projects as of February
28, 1997:
PROGRAM/ INDICATION/ DELIVERY STAGE OF
COMPOUND APPLICATION FORM DEVELOPMENT
-------- ----------- ---- -----------
PNP Inhibitors (BCX-34) CTCL Oral Phase I/II
Psoriasis Oral Phase I/II
Ointment Phase I/II
HIV Oral Phase I/II
Rheumatoid arthritis Oral Preclinical
Transplant rejection Oral Preclinical
Ophthalmic diseases and
disorders Ophthalmic Preclinical
Influenza Neuraminidase Inhibitors Influenza Oral Preclinical
Complement Inhibitors (BCX-1470) Cardiopulmonary bypass surgery Intravenous/Oral Phase I
- ----------
See "-Government Regulation" for a description of drug development phases and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Factors That May Affect Future Results, Financial
Condition and the Market Price of Securities" for a discussion of certain
factors that can adversely affect the Company's drug development programs.
PNP Inhibitors (BCX-34)
The human immune system employs specialized cells and proteins, including cells
known as T-cells and B-cells, to control infection and recognize and attack
foreign disease-causing viruses, bacteria and parasites. The immune system can
also cause diseases or disorders when it inappropriately identifies the body's
own tissue as foreign and, among other things, produces T-cells that attack
normal body cells. Such diseases are referred to as autoimmune diseases and
include psoriasis, in which the immune system attacks skin tissue, and
rheumatoid arthritis, in which the immune system attacks joint tissue. This
immune system response also causes transplant rejection in which the T-cells of
the immune system attack the transplanted organ or tissue. The immune system may
also produce T-cells that multiply uncontrollably. T-cell proliferation in such
cases is associated with cancers such as cutaneous T-cell lymphoma. Within the
past decade, drugs have been developed that treat autoimmune and related
diseases by selectively suppressing the immune system. However, most current
immunosuppressive drugs have dose-limiting side effects, including severe
toxicity.
The link between T-cell proliferative disorders and the PNP enzyme was first
discovered approximately 20 years ago when a patient, who was genetically
deficient in PNP, exhibited limited T-cell activity, but reasonably normal
activity of other immune functions. Since then, additional patients with
inherited PNP deficiency have been reported. In most patients, the T-cell
population was less than 20% of normal levels, often as low as 1-3% of normal
levels. However, B-cell function was normal in approximately two-thirds of these
patients. These findings suggested that inhibition of PNP might produce
selective suppression of T-cell function without significantly impairing B-cell
function.
BioCryst has designed and synthesized several chemically distinct classes of
small molecule compounds (seven of which have been patented in the United
States) which inhibit the PNP enzyme. In in vitro preclinical studies, the
Company's PNP inhibitor compounds selectively and potently suppressed human
T-cells associated with certain T-cell proliferative disorders. One member of a
patented class of PNP inhibitor compounds, BCX-34, which was designed and
2
developed by BioCryst, to date has undergone clinical trials as a potential
treatment for a number of T-cell proliferative diseases and related disorders.
The Company is in the clinical stage of development of an oral formulation of
BCX-34 and is in the preclinical stage of development of an ophthalmic
formulation. Additionally, the Company has an intravenous formulation for future
development. An orally deliverable product may allow systemic application of the
drug in diseases that either cannot be treated topically or can be treated more
successfully with an oral formulation. An ophthalmic formulation in the form of
eye droplets may be most suitable for treating certain ophthalmic indications as
a result of being able to directly administer the drug to the eye. An
intravenous formulation may allow more precise dosage control and direct
systemic application into the bloodstream and may permit usage of BCX-34 where
other methods of delivery may not be suitable.
Cutaneous T-Cell Lymphoma. CTCL is a severe form of cancer which is
characterized by the development of scaly patches on the skin, progressing to
ulcers and tumors of the skin, lymph nodes and internal organs. CTCL is a
chronic disease involving the proliferation of certain types of T-cells.
According to a medical journal, approximately 1,000 new cases of CTCL are
diagnosed annually in the United States. There is no known cure and the median
survival time is approximately four years after systemic progression of the
disease. Existing therapies for CTCL are generally considered inadequate. In
October 1993, the Company obtained from the United States Food and Drug
Administration (the "FDA") orphan drug designation for BCX-34 to treat CTCL and
may qualify for accelerated review as a new drug to treat serious and
life-threatening illnesses.
The Company completed a Phase I oral and intravenous trial of BCX-34 in May
1995. In this trial, three CTCL patients received a single intravenous dose,
followed a week later by a single oral dose, followed three weeks later by
five-day consecutive oral dosing. This pharmacology study suggested that BCX-34
is well tolerated systemically and that the drug is highly bioavailable in
humans. In late 1995, the Company initiated a Phase I/II dose escalation oral
trial in CTCL and other T-cell cancer patients. This is an open label trial
designed to provide safety and pharmacokinetic data on BCX-34 as well as provide
potential efficacy data. As of December 31, 1997, 30 patients have been enrolled
and dosed in this study, and preliminary data indicate biological activity.
Psoriasis. Psoriasis is a common chronic and recurrent disease involving T-cells
characterized by red, thick scaling of the skin, which can develop at any time
in life. According to the National Psoriasis Foundation, it is estimated that
approximately five million people suffer from some form of psoriasis in the
United States and 150,000 to 260,000 new cases are diagnosed annually. About 10%
of these cases are classified as "severe" and are most likely to require
physician's care and drug intervention. In some cases, the condition may be
accompanied by a form of arthritis which can be debilitating. Current therapies
for psoriasis either are of limited benefit or have severe side effects.
The Company has initiated Phase I/II clinical trials with an ointment and an
oral formulation BCX-34 for the treatment of psoriasis.
HIV. Due to the increasing number of HIV-infected people, HIV infection is a
major health concern. Despite extensive research and development, the treatment
of HIV infection remains unsatisfactory due to the toxicity or limited
therapeutic benefit of currently approved therapies. The Centers for Disease
Control and Prevention ("CDC") estimates that there are approximately one
million people in the United States infected with HIV. HIV drug research has
focused primarily on developing inhibitors of the enzymes reverse transcriptase
("RT") and HIV protease. Initially, scientists thought blocking the HIV
essential RT enzyme would shut down replication of HIV and curb the progression
of HIV infection to AIDS. Several RT inhibitors are now approved, but the
clinical usefulness of these drugs has been limited by their toxicity and by the
ability of HIV to mutate into forms that are resistant to them. A second
approach of HIV drug research and treatment has targeted the HIV protease
enzyme. HIV protease is an enzyme that performs an essential role in the
infectious cycle of HIV. It is believed that blocking HIV protease renders HIV
unable to form a new infectious virus. Although numerous companies are
developing protease inhibitors, the long-term therapeutic potential of these
drugs is uncertain.
A new approach to HIV drug research focuses on the T-cell host rather than the
virus. It is believed that while resting, nondividing CD4 T-cells can be
infected by the virus, the virus does not multiply. Since T-cell activation and
growth appear to be essential for virus replication, a treatment which inhibits
T-cell growth might decrease the overall viral burden. The Company believes,
based in part upon preliminary preclinical in vitro tests, that BCX-34 could
potentially be useful in treating HIV-infected patients by reversibly inhibiting
the growth of infected T-cells. The Company, in collaboratation with researchers
at the UAB Center for AIDS Research on the design, has initiated a Phase I/II
clinical
3
trial with an oral formulation of BCX-34 for the treatment of HIV.
Rheumatoid Arthritis. Rheumatoid arthritis is an autoimmune disease that
involves inflammation of the membranes lining joints, causing joint pain,
swelling, and deformities. According to a scientific journal, it is estimated
that approximately 1% to 2% of the U.S. adult population is afflicted with
rheumatoid arthritis. There are many drugs used to treat the disease, but such
drug treatments only alleviate the symptoms of rheumatoid arthritis. The Company
believes T-cell controlling agents, such as PNP inhibitors and specifically an
oral formulation of BCX-34, offer promise as a potential drug treatment for
rheumatoid arthritis. Among other potential competitors, Novartis
Pharmaceuticals Corporation, formerly Ciba-Geigy Corporation, ("Novartis") has
rights to develop a group of PNP inhibitors, excluding BCX-34, licensed from
BioCryst, with potential application in the treatment of rheumatoid arthritis.
Transplant Rejection. Risk of rejection is one of the most frequent
complications following transplant surgery. Rejection is caused by the body's
immune response in which T-cells are generated to attack the transplanted organ
or tissue. In general, for organ and bone marrow transplants, rejection is an
acute risk during the initial hospital stay for the transplant surgery and
thereafter a chronic risk of varying degrees of severity. The Company believes
selective suppression of the immune response may reduce the risk of rejection.
The immunosuppressant drugs which are currently used to control or prevent
rejection often cause significant detrimental side effects. A number of new
drugs are in various stages of development by other researchers and companies
for the control and prevention of transplant rejection. The Company is at the
preclinical stage of development of an oral formulation of BCX-34 for treatment
of transplant rejection.
Ophthalmic Diseases and Disorders. There are a number of inflammatory diseases
of the eye that involve T-cells. A leading ophthalmic inflammatory disease is
uveitis, which is characterized by eye swelling, ocular accumulation of fatty
deposits and impaired vision. The most severe cases of uveitis, such as Behcet's
syndrome and Vogt-Koyanagi-Harada syndrome, may result in blindness. Clinical
studies conducted by third parties with currently approved immunosuppressants
support the idea that T-cells participate in the pathogenesis of these diseases
and that oral and ophthalmic formulations of BCX-34 may potentially be
efficacious in treating these diseases. The Company is in the preclinical stage
of development of an ophthalmic formulation of BCX-34 for direct delivery of the
drug to the eye in treating uveitis, Sjogren's syndrome and corneal transplant
rejection.
Influenza Neuraminidase Inhibitors
Influenza is a viral disease which is particularly dangerous to the very young,
the elderly and debilitated patients and those who have suppressed immune
systems. The CDC estimates that approximately 10% to 20% of the U.S. population
is infected with influenza during most influenza seasons. The current standard
for preventing flu is by vaccination, which is of limited benefit as vaccines
are designed to resist a specific flu strain. No satisfactory treatment
currently exists. Since the early 1980's, UAB scientists have been investigating
the active site and function of the enzyme influenza neuraminidase. Influenza
neuraminidase is an enzyme on the surface of the influenza virus which is
associated with the spread of influenza and is believed to permit the influenza
virus to invade human cells. Scientists at UAB and the Company have
characterized the molecular structure of influenza neuraminidase and have
initiated the design and synthesis of specific inhibitors. Research at UAB and
the Company to date indicates that the active site for influenza neuraminidase
remains substantially unchanged for the major strains of influenza. The Company
believes that a neuraminidase inhibitor may be useful as a treatment for
influenza and is in the preclinical stage of development of inhibitors of
influenza neuraminidase. Funded in part by a National Institutes of Health
("NIH") Phase I Small Business Innovation Research ("SBIR") grant and a State of
Alabama grant, the Company has developed lead compounds which in in vitro
studies have indicated inhibition of influenza neuraminidase. The Company is
currently assessing several influenza inhibitor compounds for oral activity
against influenza A and influenza B. At least two major pharmaceutical companies
are engaged in clinical studies of influenza neuraminidase inhibitor compounds
intended to treat influenza, and the Company believes that several other
pharmaceutical companies are engaged in research to design or discover
inhibitors of influenza neuraminidase.
Complement Inhibitors
The human body is equipped with immunological defense mechanisms to respond
aggressively to infection or injury. One of these mechanisms, called complement,
is a system of functionally linked proteins that interact with one another in a
highly regulated manner. The complement system functions as a "cascade." Once an
activator of the system
4
converts an inactive enzyme to an active enzyme, the activated enzyme activates
more proteins at the next stage, which in turn activates other proteins. This
mechanism, if inappropriately activated, can cause acute medical reactions,
including inflammatory reactions that accompany hemodialysis, myocardial
infarction, bypass surgery and post heart attack reperfusion injury. There are
two pathways of complement activation, the classical pathway and the alternative
pathway. The classical pathway is usually initiated by antigen-antibody
complexes, while the alternative pathway is activated by bacterial, viral and
parasite cell surfaces.
Due to the biochemical mechanism of the complement cascade, BioCryst believes
complement inhibitors may have therapeutic applications in several acute and
chronic immunological disorders. BioCryst is focusing its research efforts on
designing enzyme inhibitors to limit the rapid and aggressive damage caused by
the complement cascade. The Company is initially focusing on designing
inhibitors for Factor D and Factor B, enzymes playing a role in the alternative
pathway, and the enzyme C1s, which plays a role in the classical pathway.
Working with UAB scientists and funded in part by SBIR grants from the NIH,
BioCryst has characterized the three-dimensional structure of Factor D and has
developed various assay systems for screening complement inhibitors. The Company
is performing preclinical studies with certain inhibitors it has designed and
synthesized. A serine protease inhibitor, BCX-1470, has been selected by the
Company for evaluation in patients receiving heparin during cardiopulmonary
bypass surgery. Preclinical results have shown that BCX-1470 and related
compounds can block key blood enzymes, known as serine proteases, responsible
for excessive bleeding and inflammatory damage related to cardiopulmonary bypass
surgery. The Company filed an Investigational New Drug ("IND") in January 1998
with respect to the use of an intravenous formulation of BCX-1470 in connection
with cardiopulmonary bypass surgery and started a Phase I clinical trial in
February 1998. The Company continues to design additional inhibitors. The
Company has a collaboration agreement to use combinatorial chemistry to help
identify certain inhibitors. See "Research and Development - 3-Dimensional
Pharmaceuticals."
Drug Discovery Methods
Drugs are chemical compounds that interact with target molecules, typically
proteins, within the human body to affect a molecule's normal function. Ideally,
drugs accomplish their intended therapeutic functions while creating as few side
effects as possible. The interaction can be illustrated as follows: the drug
molecule inserts itself in the target protein like a key inserted in a lock, and
either stimulates, or more commonly suppresses, a protein's normal function. The
results vary depending upon the role of the target protein. A drug that is
selective or specific, i.e., that binds to or blocks the target protein without
affecting other proteins or receptors, is generally more effective, less likely
to cause side effects and can be administered in smaller doses.
Traditional Drug Discovery
Historically, most pharmaceutical companies have relied on costly and
time-consuming screening to discover new chemical entities for development.
While screening has been the basis for the discovery of virtually all drugs
currently in use, the cost has been substantial. On average, it has generally
been necessary to assess hundreds or thousands of chemical compounds to find a
lead compound which successfully completes the development process. If screening
produces a lead compound, it is likely that the compound's mode of action will
be unknown and the risk of side effects caused by a lack of target specificity
will be high. Newer techniques, such as combinatorial chemistry and high
throughput screening, have enhanced the range of compounds that can be examined
quickly. However, screening-based research has, to date, failed to yield
acceptably safe and effective drugs for many important therapeutic needs.
Most pharmaceutical companies presently use some form of pharmacology-based
rational drug design which primarily utilizes certain receptors or purified
enzyme preparations in assays to identify lead compounds and to design molecules
to perform specific therapeutic tasks. Development of lead compounds is
conducted by systematic empirical methods and computer modeling. While this
approach is more refined than random screening, it is still a costly and
time-consuming effort which is limited by the amount and quality of information
available about the target protein.
Structure-Based Drug Design
Structure-based drug design is a drug discovery approach by which synthetic
compounds are designed from detailed structural knowledge of the active sites of
protein targets associated with particular diseases. The Company's
structure-based drug design involves the integrated application of traditional
biology and medicinal chemistry along with an
5
array of advanced technologies, including X-ray crystallography, combinatorial
chemistry, computer modeling of molecular structures and protein biophysical
chemistry, to focus on the three-dimensional molecular structure and active site
characterization of the proteins that control cellular biology. BioCryst
believes that structure-based drug design is an improvement over traditional
drug screening techniques. By identifying the target protein in advance and by
discovering the chemical and molecular structure of the protein, scientists
believe it is possible to design a more optimal drug to interact with the
protein.
The initial targets for structure-based drug design are selected based on their
involvement in the biological pathways integral to the course of a disease. Once
a target is selected, its structure is determined by X-ray crystallography, a
method used in determining the precise three-dimensional molecular structure of
the proteins. This structure is then used as a blueprint for the drug design of
a lead compound. The compounds are modeled for their fit in the active site of
the target, considering both steric aspects (i.e., geometric shape) and
functional group interactions, such as hydrogen bonding and hydrophobic
interactions.
The initial design phase is followed by the synthesis of the lead compound,
quantitative measurements of its ability to interact with the target protein,
and X-ray crystallographic analysis of the compound-target complex. This
analysis reveals important, empirical information on how the compound actually
binds to the target and the nature and extent of changes induced in the target
by the binding. These data, in turn, suggest ways to refine the lead compound to
improve its binding to the target protein. The refined lead compound is then
synthesized and complexed with the target, and further refined in a reiterative
process. If lead compounds are available from other studies, such as screening
of combinatorial libraries, these compounds may serve as starting points for
this optimization cycle using structure-based drug design.
Once a sufficiently potent compound has been designed and optimized, its
activity is evaluated in a biological system to establish the compound's ability
to function in a physiological environment. If the compound fails at any stage
of the biological evaluation, the design team reviews the structural model and
uses crystallography to adjust structural features of the compound to overcome
the difficulty. This process continues until a designed compound exhibits the
desired properties.
The compound is then evaluated in an experimental disease model. If the compound
fails, the reasons for failure (e.g., adverse metabolism, plasma binding,
distribution, etc.) are determined and, again, new modified compounds are
designed to overcome the deficiencies without interfering with their ability to
interact with the active site of the target protein. The experimental drug is
then ready for conventional drug development (e.g., studies in safety
assessment, formulation, clinical trials, etc.).
This reiterative analysis and compound modification are possible because of the
structural data obtained by X-ray crystallographic analysis at each stage. This
capability renders structure-based drug design a powerful tool for rapid and
efficient development of drugs that are highly specific for particular protein
target sites.
Research and Development
General
BioCryst initiated its research and development program in 1986, with drug
synthesis beginning in 1987. The Company has assembled a scientific research
staff with expertise in a broad base of advanced research technologies including
protein biochemistry, X-ray crystallography, chemistry and pharmacology. Of the
Company's 55 employees at March 15, 1998, 41 were employed in its research and
development, preclinical studies and clinical trials programs. The Company's
staff includes 19 persons with Ph.D. or M.D. degrees.
The Company's research facilities include protein biochemistry and organic
synthesis laboratories, in vitro and in vivo testing facilities, X-ray
crystallography, computer and graphics equipment and formulation facilities.
In addition to its research programs pursued in-house, BioCryst collaborates
with academic institutions to support research in areas of the Company's product
development interests and to conduct its clinical trials. Usually, research
assistance provided by outside academic institutions is performed in conjunction
with additional in-house research. The faculty member supervising the outside
research effort may also participate as a consultant to the Company's in-house
6
effort. The Company's primary academic collaboration is with UAB and is
described under "Business - Research and Development - UAB Collaborative
Arrangements."
During the years ended December 31, 1995, 1996 and 1997, the Company spent an
aggregate of $25,270,777 on research and development. Of that amount, $7,107,249
was spent in 1995, $7,586,159 was spent in 1996 and $10,577,369 was sent in
1997. Approximately $13,682,948 of that amount was spent on in-house research
and development and $11,587,829 was spent on contract research and development.
Torii
In May 1996, the Company entered into an agreement pursuant to which it granted
Torii an exclusive license, with the right to sublicense, to develop,
manufacture and commercialize BCX-34 and certain other PNP inhibitor compounds
in Japan for the treatment of rheumatoid arthritis, T-cell cancers (including
CTCL) and atopic dermatitis. Upon entering into the agreement, Torii paid the
Company $1.5 million in license fees and made a $1.5 million equity investment
in the Company, purchasing 76,608 shares of Common Stock at a purchase price of
$19.58 per share. A milestone payment of $1 million was made in 1997. In order
for Torii to maintain its licensing rights, it is obligated to make payments to
the Company of up to $18 million upon the achievement of specified development
milestones. Torii is responsible for all development, regulatory and
commercialization expenses in Japan and is obligated to pay royalties to the
Company on sales of licensed products in Japan. The agreement will remain in
effect, unless earlier terminated, until the last to expire of any patent rights
licensed under the agreement, or in the event no patents issue, for twenty years
from May 31, 1996. The agreement is subject to termination by Torii at any time
and by the Company in certain circumstances, including any material breaches of
the agreement by Torii. Pursuant to the agreement, Torii may negotiate a license
with the Company to develop BCX-34 and certain other PNP inhibitor compounds for
additional indications.
3-Dimensional Pharmaceuticals
In October 1996, the Company signed an agreement with 3-Dimensional
Pharmaceuticals, Inc. ("3DP") of Exton, Pennsylvania, under which the companies
will share resources and technology to expedite the identification of inhibitors
of key serine protease enzymes which represent promising targets for inhibition
of complement activation. The agreement combines BioCryst's capabilities in
structure-based drug design with the selection power of 3DP's
DirectedDiversity(R), a proprietary method of directing combinatorial chemistry
and high throughput screening toward specific molecular targets, used to rapidly
discover and optimize new drugs. Under the terms of this agreement, the
companies will be responsible for their own research costs. If compounds are
discovered as a result of the collaboration, the companies will then negotiate
clinical development and commercialization rights to those compounds.
UAB Collaborative Arrangements
UAB has one of the leading X-ray crystallography centers in the world with
approximately 140 full-time staff members and approximately $17.7 million in
research grants and contract funding in 1997. In 1986, the Company entered into
an agreement with UAB which granted the Company exclusive rights to any
discoveries resulting from research relating to PNP.
Since 1990, the Company has entered into several other research agreements with
UAB to perform research for the Company. The agreements provide that UAB perform
specific research for the Company in return for research payments and license
fees. In November 1994, the Company entered into an agreement with UAB for the
joint research and development relating to development of an influenza
neuraminidase inhibitor. UAB has granted the Company certain rights to any
discoveries in this area resulting from research previously developed by UAB or
jointly developed with BioCryst. The Company has agreed to fund certain UAB
research laboratories, to expend at least $6 million for the project over a
period coinciding with the period the Company funds UAB's research laboratories,
to pay certain royalties on sales of any resulting product and to share in
future payments received from other third-party collaborators. In July 1995, the
Company entered into an agreement with UAB for the joint research and
development relating to Factor D inhibitors. UAB has also granted the Company
certain rights to any discoveries in this area resulting from research
previously developed by UAB or jointly developed with BioCryst. The Company has
agreed to fund certain UAB research laboratories, to expend at least $1 million
for the project over a three-year period, to pay certain royalties on sales of
any resulting product and to share in future payments received from other
third-party collaborators. These
7
two agreements have initial 25-year terms (automatically renewable for five-year
terms throughout the life of the last patent or extension thereof incorporating
the license rights) and are terminable by the Company upon three months' notice
and by UAB under certain circumstances.
BioCryst believes that due to the expertise of the faculty at UAB in the various
disciplines employed by BioCryst in its structure-based drug design programs,
including X-ray crystallography, and UAB's past performance in identifying and
characterizing medically relevant protein targets, BioCryst's relationship with
UAB is important to the success of BioCryst. No assurance can be given, however,
that UAB's research will be beneficial to BioCryst or that BioCryst will be able
to maintain its relationship with UAB. See Note 9 to Notes to Financial
Statements.
Grants and Technology Agreements
In 1987, the Company entered into a research agreement under which BioCryst
received approximately $960,000 over four years from Novartis to fund its
research of PNP inhibitors and Novartis was granted certain rights to enter into
various option and license agreements for PNP inhibitors. In 1990, Novartis
exercised its right pursuant to which the Company granted Novartis an exclusive
option to enter into a worldwide exclusive license for several of the Company's
PNP inhibitor compounds. The license does not include BCX-34. Novartis signed
that license agreement and paid the Company a $500,000 fee (up to $300,000 of
which is refundable in certain circumstances) following patent issuance in 1993.
The terms of the license also call for Novartis to make milestone payments based
upon the estimated annual United States sales of the licensed products plus
royalties. No assurance can be given that any additional revenues will be
realized by the Company pursuant to the license. Novartis' other rights to enter
into various option and license agreements for PNP inhibitors have expired. See
Note 9 to Notes to Financial Statements.
In 1991 and 1992, BioCryst was awarded three $50,000 Phase I SBIR grants by the
NIH. They were used to support the design and synthesis of inhibitors to
influenza neuraminidase, Factor D and aldose reductase. In 1992, the Company was
also awarded $47,500 by the Alabama Department of Economic and Community Affairs
which was used in the design and synthesis of inhibitors of influenza
neuraminidase. In February 1994, BioCryst was awarded a two-year $500,000 Phase
II SBIR grant by the NIH. The grant was used to support the design of inhibitors
of Factor D. There is no assurance that BioCryst will be awarded any future
grants.
Patents and Proprietary Information
The Company owns or has rights to certain proprietary information, issued and
allowed patents and patent applications which relate to compounds it is
developing. The Company actively seeks, when appropriate, protection for its
products and proprietary information by means of United States and foreign
patents, trademarks and contractual arrangements. In addition, the Company plans
to rely upon trade secrets and contractual arrangements to protect certain of
its proprietary information and products. The Company has been issued seven
United States patents which expire between 2009 to 2013 and relate to its PNP
inhibitor compounds. The Company's current lead compound, BCX-34, is covered by
one of the patents. This group also includes BCX-5, which may require a license
from Warner-Lambert Company ("Warner-Lambert") to market a product containing
this compound. The Company has the right of first refusal to negotiate a license
from Warner-Lambert for that compound: however, there can be no assurance that
such a license would be available or obtainable on terms acceptable to the
Company. The Company has also been issued a patent by the U.S. Patent and
Trademark Office ("PTO") covering the manufacturing process of its PNP
inhibitors which expires in 2015 and an additional patent application has been
filed for another new process to prepare BCX-34 and other PNP inhibitors. In
addition, one patent has issued by the PTO which expires in 2015 and two patent
applications have been filed with the PTO relating to inhibitors of influenza
neuraminidase. Also, two provisional United States patent applications have been
filed with the PTO on complement inhibitors. There can be no assurance that any
patents will provide the Company with sufficient protection against competitive
products or otherwise be commercially valuable.
The Company's success will depend in part on its ability to obtain and enforce
patent protection for products developed by it, preserve its trade secrets, and
operate without infringing on the proprietary rights of third parties, both in
the United States and other countries. In the absence of patent protection, the
Company's business may be adversely affected by competitors who develop
substantially equivalent technology. Because of the substantial length of time
and expense associated with bringing new products through development and
regulatory approval to the marketplace, the pharmaceutical and biotechnology
industries place considerable importance on obtaining and maintaining patent and
trade secret protection for new technologies, products and processes. There can
be no assurance that patents will be
8
issued from such applications, that the Company will develop additional products
that are patentable, or that present or future patents will provide sufficient
protection to the Company's present or future technologies, products and
processes. In addition, there can be no assurance that others will not
independently develop substantially equivalent proprietary information, design
around the Company's patents or obtain access to the Company's know-how, or that
others will not successfully challenge the validity of the Company's patents or
be issued patents which may prevent the sale of one or more of the Company's
product candidates, or require licensing and the payment of significant fees or
royalties by the Company to third parties in order to enable the Company to
conduct its business. Legal standards relating to the scope of claims and the
validity of patents in the fields in which the Company is pursuing research and
development are still evolving, are highly uncertain and involve complex legal
and factual issues. No assurance can be given as to the degree of protection or
competitive advantage any patents issued to the Company will afford, the
validity of any such patents or the Company's ability to avoid violating or
infringing any patents issued to others. Further, there can be no guarantee that
any patents issued to or licensed by the Company will not be infringed by the
products of others. Litigation and other proceedings involving the defense and
prosecution of patent claims can be expensive and time consuming, even in those
instances in which the outcome is favorable to the Company, and can result in
the diversion of resources from the Company's other activities. An adverse
outcome could subject the Company to significant liabilities to third parties,
require the Company to obtain licenses from third parties or require the Company
to cease any related research and development activities or sales.
The Company depends upon the knowledge, experience and skills (which are not
patentable) of its key scientific and technical personnel. To protect its rights
to its proprietary information, the Company requires all employees, consultants,
advisors and collaborators to enter into confidentiality agreements which
prohibit the disclosure of confidential information to anyone outside the
Company and require disclosure and assignment to the Company of their ideas,
developments, discoveries and inventions. There can be no assurance that these
agreements will effectively prevent the unauthorized use or disclosure of the
Company's confidential information.
The Company's research has been funded in part by SBIR or NIH grants. As a
result of such funding, the United States Government has certain rights in the
inventions developed with the funding. These rights include a non-exclusive,
paid-up, worldwide license under such inventions for any governmental purpose.
In addition, the government has the right to require the Company to grant an
exclusive license under any of such inventions to a third party if the
government determines that (i) adequate steps have not been taken to
commercialize such inventions, (ii) such action is necessary to meet public
health or safety needs or (iii) such action is necessary to meet requirements
for public use under federal regulation. Federal law requires that any exclusive
licensor of an invention that was partially funded by federal grants (which is
the case with the subject matter of certain patents issued in the Company's
name) agree that it will not grant exclusive rights to use or sell the invention
in the United States unless the grantee agrees that any products embodying the
invention will be manufactured substantially in the United States, although such
requirement is subject to a discretionary waiver by the government. It is not
expected that the government will exercise any such rights.
Marketing, Distribution and Sales
The Company lacks experience in marketing, distributing or selling
pharmaceutical products and will have to develop a pharmaceutical sales force
and/or rely on collaborators, licensees or on arrangements with others to
provide for the marketing, distribution and sales of any products it may
develop. There can be no assurance that the Company will be able to establish
marketing, distribution and sales capabilities or make arrangements with
collaborators, licensees or others to perform such activities.
Competition
The pharmaceutical industry is intensely competitive. Many companies, including
biotechnology, chemical and pharmaceutical companies, are actively engaged in
activities similar to those of the Company, including research and development
of drugs for the treatment of immunological and infectious diseases and
disorders. Many of these companies have substantially greater financial and
other resources, larger research and development staffs, and more extensive
marketing and manufacturing organizations than the Company. In addition, some of
them have considerable experience in preclinical testing, clinical trials and
other regulatory approval procedures. There are also academic institutions,
governmental agencies and other research organizations which are conducting
research in areas in which the Company is working; they may also market
commercial products, either on their own or through collaborative
9
efforts.
BioCryst expects to encounter significant competition for any of the
pharmaceutical products it plans to develop. Companies that complete clinical
trials, obtain required regulatory approvals and commence commercial sales of
their products before their competitors may achieve a significant competitive
advantage. In addition, certain pharmaceutical and biotechnology firms,
including major pharmaceutical companies and specialized structure-based drug
design companies have announced efforts in the field of structure-based drug
design and in the field of PNP inhibitors, and the Company is aware that other
companies or institutions are pursuing development of new drugs and technologies
directly targeted at applications for which the Company is developing its drug
compounds. The Company expects that the technology for structure-based drug
design will attract significant additional competitors over time. In order to
compete successfully, the Company's goal is to develop proprietary positions in
patented drugs for therapeutic markets which have not been satisfactorily
addressed by conventional research strategies and, in the process, extend its
expertise in structure-based drug design.
Government Regulation
BioCryst's research and development activities are, and its future business will
be, subject to significant regulation by numerous governmental authorities in
the United States, primarily, but not exclusively, by the FDA, and other
countries. Pharmaceutical products intended for therapeutic or diagnostic use in
humans are governed principally by the Federal Food, Drug and Cosmetic Act and
by FDA regulations in the United States and by comparable laws and regulations
in foreign countries. The process of completing clinical testing and obtaining
FDA approval for a new drug product requires a number of years and the
expenditure of substantial resources.
Following drug discovery, the steps required before a new pharmaceutical product
may be marketed in the United States include (1) preclinical laboratory and
animal tests, (2) the submission to the FDA of an application for an IND, (3)
clinical and other studies to assess safety and parameters of use, (4) adequate
and well-controlled clinical trials to establish the safety and effectiveness of
the drug, (5) the submission of a New Drug Application ("NDA") to the FDA, and
(6) FDA approval of the NDA prior to any commercial sale or shipment of the
drug.
Typically, preclinical studies are conducted in the laboratory and in animal
model systems to gain preliminary information on the drug's pharmacology and
toxicology and to identify any potential safety problems that would preclude
testing in humans. The results of these studies are submitted to the FDA as part
of the IND application. Testing in humans may commence 30 days after submission
of the IND to the FDA unless the FDA objects, although companies typically wait
for approval from the FDA before commencing clinical trials. A three phase
clinical trial program is usually required for FDA approval of a pharmaceutical
product. Phase I clinical trials are designed to determine the metabolism and
pharmacologic effects of the drug in humans, the side effects associated with
increasing doses, and, possibly, to obtain early indications of efficacy. These
studies generally involve a small number of healthy volunteer subjects, but may
be conducted in people with the disease the drug is intended to treat. Phase II
studies are conducted in an expanded population to evaluate the effectiveness of
the drug for a particular indication and thus involve patients with the disease
under study. These studies are also intended to elicit additional safety data on
the drug, including evidence of the short-term side effects and other risks
associated with the drug. Phase III studies are generally designed to provide
the substantial evidence of safety and effectiveness of a drug required to
obtain FDA approval. They often involve a substantial number of patients in
multiple study centers and may include chronic administration of the drug in
order to assess the overall benefit-risk relationship of the drug. A clinical
trial may combine the elements of more than one phase, and typically two or more
Phase III studies are required. Upon completion of clinical testing which
demonstrates that the product is safe and effective for a specific indication,
an NDA may be submitted to the FDA. This application includes details of the
manufacturing and testing processes, preclinical studies and clinical trials.
The designation of a clinical trial as being of a particular phase is not
necessarily indicative that such a trial will be sufficient to satisfy the
requirements of a particular phase. For example, no assurance can be given that
a Phase III clinical trial will be sufficient to support an NDA without further
clinical trials. The FDA monitors the progress of each of the three phases of
clinical testing and may alter, suspend or terminate the trials based on the
data that have been accumulated to that point and its assessment of the
risk/benefit ratio to the patient. Typical estimates of the total time required
for completing such clinical testing vary between four and ten years. FDA
approval of the NDA is required before the applicant may market the new product
in the United States. The clinical testing and FDA review process for new drugs
are likely to require substantial time, effort and expense. There can be no
assurance that any approval will be granted to the Company on a timely basis, if
at all. The FDA may refuse to approve an NDA if applicable statutory
10
and/or regulatory criteria are not satisfied, or may require additional testing
or information. There can be no assurance that such additional testing or the
provision of such information, if required, will not have a material adverse
effect on the Company. The regulatory process can be modified by Congress or the
FDA in specific situations.
In 1988, the FDA issued regulations intended to expedite the development,
evaluation, and marketing of new therapeutic products to treat life-threatening
and severely debilitating illnesses for which no satisfactory alternative
therapies exist. These regulations provide for early consultation between the
sponsor and the FDA in the design of both preclinical studies and clinical
trials. Phase I clinical trials may sometimes be carried out in people with the
disease that the drug is intended to treat rather than in healthy volunteers, as
is customary, followed by studies to establish effectiveness in Phase II. If the
results of Phase I and Phase II trials support the safety and effectiveness of
the therapeutic agent, and their design and execution are deemed satisfactory
upon review by the FDA, marketing approval can be sought at the end of Phase II
trials. NDA approval granted under these regulations may be restricted by the
FDA as necessary to ensure safe use of the drug. In addition, post-marketing
clinical studies may be required. If after approval a post-marketing clinical
study establishes that the drug does not perform as expected, or if
post-marketing restrictions are not adhered to or are not adequate to ensure
safe use of the drug, FDA approval may be withdrawn. The expedited approval may
shorten the traditional drug development process by an estimated two to three
years. There can be no assurance, however, that any compound the Company may
develop will be eligible for evaluation by the FDA under the 1988 regulations
or, if eligible, will be approved for marketing at all or, if approved for
marketing, will be approved for marketing sooner than would be traditionally
expected.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition," which generally is a disease or
condition that affects populations of fewer than 200,000 individuals in the
United States. Orphan drug designation must be requested before submitting an
NDA. After the FDA grants orphan drug designation, the generic identity of the
therapeutic agent and its potential orphan use are publicized by the FDA. Under
current law, orphan drug designation grants certain U.S. marketing exclusivity
to the first company to receive FDA approval to market such designated drug,
subject to certain limitations. A product that is considered by the FDA to be
different from a particular orphan drug or is approved for different indications
is not barred from sale in the United States during the seven year exclusivity
period. Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory approval process. In October 1993, the Company
obtained from the FDA an orphan drug designation for BCX-34 to treat CTCL, and
may request orphan drug designation for more of its products and/or additional
indications as part of its overall regulatory strategy in the future. There is
no assurance, however, that any of its products will receive an orphan drug
designation or be the first to be approved by the FDA for the designated
indication and, hence, obtain orphan drug marketing exclusivity. Although
obtaining FDA approval to market a product with an orphan drug designation can
be advantageous, there can be no assurance that the scope of protection or the
level of marketing exclusivity that is currently afforded by orphan drug
designation and marketing approval will remain in effect in the future. There
can be no assurance that the Company will receive FDA approval to market BCX-34
to treat CTCL. In addition, it is possible that other competitors of the Company
could obtain orphan drug designation for product candidates that are not the
same as BCX-34 though they are intended for use to treat CTCL.
Even after initial FDA approval has been obtained, further studies may be
required to provide additional data on safety or to gain approval for the use of
a product as a treatment in clinical indications other than those for which the
product was initially tested. The FDA may also require post-marketing testing
and surveillance programs to monitor the drug's effects. Side effects resulting
from the use of pharmaceutical products may prevent or limit the further
marketing of products.
Once the sale of a product is approved, the FDA regulates production, marketing,
and other activities under the Federal Food, Drug, and Cosmetic Act and the
FDA's implementing regulations. A post-marketing testing, surveillance and
reporting program may be required to continuously monitor the product's usage
and effects. Product approvals may be withdrawn, or other actions may be
ordered, or sanctions imposed if compliance with regulatory requirements is not
maintained. Other countries in which any products developed by the Company or
its licensees may be marketed impose a similar regulatory process.
In June 1995, the Company notified the FDA that it had submitted incorrect
efficacy data to the FDA pertaining to its Phase II dose-ranging studies of
BCX-34 for CTCL and psoriasis. Upon learning of the error, the Company initiated
internal and external audits and submitted corrected analyses to the FDA. In
addition, the Company hired a new Vice President of Clinical Development and
outside expert personnel to manage clinical development and monitor studies,
11
developed additional standard operating procedures, and contracted with a
contract research organization to assist the Company in monitoring its trial for
BCX-34 for CTCL.
In November 1995, the FDA inspected the Company in relation to a February 1995
48-hour skin stripping study involving application of BCX-34. At the conclusion
of the inspection, the FDA issued to the Company a List of Inspectional
Observations ("Form FDA 483") including the observation that there was no
documentation of any monitoring of the study or of several other studies. The
Company responded to this and the other observation in the Form FDA 483.
Although the FDA has not raised any additional questions in the matter, the
Company does not know whether its responses were satisfactory to the FDA.
In June 1996, the FDA inspected the Company and one of its clinical sites in
relation to Phase II dose-ranging studies of BCX-34 for CTCL and psoriasis, each
of which was concluded in early 1995. At the conclusion of the inspection, the
FDA issued to the Company a Form FDA 483 citing deficiencies relating to the
monitoring of the studies and the Company's procedures for generating,
archiving, and safeguarding the randomization tables used in the studies. The
deficient procedures failed to prevent the use of an incorrect randomization
table which ultimately resulted in the initial submission to the FDA of data
which reported false statistical significance. The FDA issued a Form FDA 483 to
the principal investigator at one of the Company's clinical sites, citing
numerous significant deficiencies in the conduct of the Phase II dose-ranging
study of BCX-34 for CTCL and psoriasis. These deficiencies included improper
delegations of authority by the principal investigator, failures to follow the
protocols, institutional review board deviations, and discrepancies or
deficiencies in documentation and reporting. As a result of the FDA inspections,
the Company has been notified that the FDA will not accept data from these
studies at that clinical site. As a consequence of the FDA inspections and such
resulting Form FDA 483s, the Company's ongoing clinical studies are likely to
receive increased scrutiny from the FDA.
The Company believes that its procedures and monitoring practices are now in
compliance with the FDA's requirements governing Good Clinical Practice ("GCP").
There can be no assurance, however, that the FDA will agree or that, even if it
does agree, it will not seek to impose administrative, civil, or other sanctions
in connection with the earlier studies and submission.
In addition to regulations enforced by the FDA, the Company also is subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other similar Federal, state and local regulations governing
permissible laboratory activities, waste disposal handling of toxic, dangerous
or radioactive materials and other matters. The Company believes that it is in
compliance with such regulations.
For marketing outside the United States, the Company will be subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs and devices. The requirements relating to the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country.
Human Resources
As of March 15, 1998, the Company had 55 employees, of whom 41 were engaged in
research and development and 14 were in general and administrative functions.
The Company's scientific staff (19 of whom hold Ph.D. or M.D. degrees) has
diversified experience in biochemistry, pharmacology, X-ray crystallography,
synthetic organic chemistry, computational chemistry, medicinal chemistry and
pharmacology. The Company considers its relations with its employees to be
satisfactory.
Scientific Advisory Board and Consultants
BioCryst has assembled a Scientific Advisory Board comprised of six members (the
"Scientific Advisors") who are leaders in certain of the Company's core
disciplines or who otherwise have specific expertise in its therapeutic focus
areas. The Scientific Advisory Board meets as a group at scheduled meetings and
the Scientific Advisors meet more frequently, on an individual basis, with the
Company's scientific personnel and management to discuss the Company's ongoing
research and drug discovery and development projects. The Company also has
consulting agreements with a number of other scientists (the "Consultants") with
expertise in the Company's core disciplines or in its therapeutic focus areas
who are consulted from time to time by the Company.
12
The Scientific Advisors and the Consultants are reimbursed for their expenses
and receive nominal cash compensation in connection with their service and have
been issued options and/or shares of Common Stock. The Scientific Advisors have
been issued a total of 4,975 shares of Common Stock for nominal consideration
and granted stock options to purchase a total of 75,000 shares of Common Stock
at a weighted average exercise price of $7.37 per share. Consultants have also
been granted stock options to purchase a total of 30,000 shares at a weighted
average exercise price of $7.52 per share. The Scientific Advisors and the
Consultants are all employed by or have consulting agreements with entities
other than the Company, some of which may compete with the Company in the
future. The Scientific Advisors and the Consultants are expected to devote only
a small portion of their time to the business of the Company, although no
specific time commitment has been established. They are not expected to
participate actively in the Company's affairs or in the development of the
Company's technology. Certain of the institutions with which the Scientific
Advisors and the Consultants are affiliated may adopt new regulations or
policies that limit the ability of the Scientific Advisors and the Consultants
to consult with the Company. The loss of the services of certain of the
Scientific Advisors and the Consultants could adversely affect the Company to
the extent that the Company is pursuing research or development in areas of such
Scientific Advisors' and Consultants' expertise. To the extent members of the
Company's Scientific Advisory Board or the Consultants have consulting
arrangements with or become employed by any competitor of the Company, the
Company could be materially adversely affected. One member of the Scientific
Advisory Board, Dr. Gordon N. Gill, is a member of the Board of Directors of the
Agouron Institute. The Agouron Institute is a shareholder in, and has had
contractual relationships with, Agouron Pharmaceuticals, Inc., a company
utilizing core technology which is similar to the core technology employed by
BioCryst.
The Scientific Advisory Board consists of the following individuals:
Name Position
- ---- --------
Albert F. LoBuglio, M.D. (Chairman).. Professor of Medicine and the Director
of the Comprehensive Cancer Center of
UAB
Gordon N. Gill, M.D.................. Professor of Medicine and Chair of the
Faculty of Basic Biomedical Sciences at
the University of California, San Diego
School of Medicine
Robert E. Handschumacher, Ph.D....... Retired Professor and former Chairman of
the Department of Pharmacology at Yale
University School of Medicine
Herbert A. Hauptman, Ph.D............ Research Professor in Biophysical
Science at the State University of New
York (Buffalo), the President of the
Hauptman-Woodward Medical Research
Institute, Inc. (formerly the Medical
Foundation (Buffalo), Inc.), and
Research Professor in Biophysical
Sciences at the State University of New
York (Buffalo), recipient of the Nobel
Prize in Chemistry (1985)
Yuichi Iwaki, M.D., Ph.D............. Professor of Urology and Pathology,
University of Southern California School
of Medicine
Hamilton O. Smith, M.D............... Professor, Molecular Biology and
Genetics Department at The Johns Hopkins
University School of Medicine, recipient
of the Nobel Prize in Medicine (1978)
Any inventions or processes independently discovered by the Scientific Advisors
or the Consultants may not become the property of the Company and will probably
remain the property of such persons or of such persons' employers. In addition,
the institutions with which the Scientific Advisors and the Consultants are
affiliated may make available the research services of their personnel,
including the Scientific Advisors and the Consultants, to competitors of the
Company pursuant to sponsored research agreements. The Company requires the
Scientific Advisors and the Consultants to enter into confidentiality agreements
which prohibit the disclosure of confidential information to anyone outside the
Company and require disclosure and assignment to the Company of their ideas,
developments, discoveries or inventions. However, no assurance can be given that
competitors of the Company will not gain access to trade secrets and other
proprietary information developed by the Company and disclosed to the Scientific
Advisors and the Consultants.
13
ITEM 2. PROPERTIES
The Company's administrative offices and principal research facility are located
in 28,440 square feet of leased office space in Riverchase Industrial/Research
Park in Birmingham, Alabama. The lease runs through July 31, 2000 with an option
to lease for an additional three years at current market rates. The Company
believes that its facilities are adequate for its current operations. Additional
facilities will be necessary to manufacture sufficient quantities under good
manufacturing practices to conduct extensive clinical trials or if the Company
undertakes commercial manufacturing. See Note 5 to the Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock MarketSM under the symbol BCRX. Public trading commenced on March
4, 1994. Prior to that date, there was no public market for the Company's stock.
The following table sets forth the low and high prices as reported by Nasdaq for
each quarter in 1997 and 1996:
1997 1996
---- ----
Low High Low High
---- ----- ---- ----
First quarter $11.50 $17.00 $ 8.63 $10.25
Second quarter 10.06 14.75 9.13 20.75
Third quarter 4.25 13.75 10.63 17.13
Fourth quarter 6.25 8.38 10.50 17.13
The last sale price of the common stock on February 27, 1998 as reported by
Nasdaq was $7.69 per share.
As of February 27, 1998, there were approximately 566 holders of record of the
common stock.
The Company has never paid cash dividends and does not anticipate paying cash
dividends.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
(In thousands, except per share)
--------------------------------
Statement of Operations Data: 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Total revenues $ 2,693 $ 2,652 $ 885 $ 734 $ 363
Research and development expenses $ 10,577 $ 7,586 $ 7,107 $ 5,552 $ 4,196
Net loss $(10,619) $ (7,698) $ (8,576) $ (6,938) $ (5,196)
Net loss per share $ (.77) $ (.69) $ (.96) $ (1.02) $ (1.55)
Weighted average shares outstanding 13,780 11,171 8,905 6,787 3,352
December 31,
(In thousands)
--------------
Balance Sheet Data: 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Cash, cash equivalents and securities $ 24,643 $ 35,785 $ 11,414 $ 10,873 $ 2,873
Total assets 26,485 37,149 13,056 12,803 5,203
Long-term debt and obligations under
capital leases, excluding current portion 34 58 300 573 855
Accumulated deficit (48,384) (37,766) (30,067) (21,491) (14,553)
Total stockholders' equity 25,285 35,403 11,326 11,176 2,877
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Such statements are only predictions and the actual events or results may differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include those discussed below
as well as those discussed in other filings made by the Company with the
Securities and Exchange Commission.
Overview
Since its inception in 1986, the Company has been engaged in research and
development activities (including drug discovery, manufacturing compounds,
conducting preclinical studies and clinical trials) and organizational efforts
(including recruiting its scientific and management personnel), establishing
laboratory facilities, engaging its Scientific Advisory Board and raising
capital. The Company has not received any revenue from the sale of
pharmaceutical products and does not expect to receive such revenues to a
significant extent for at least several years, if at all. The Company has
incurred operating losses since its inception. The Company expects to incur
significant additional operating losses over the next several years and expects
such losses to increase as the Company's research and development and clinical
trial efforts expand.
Year Ended December 31, 1997 Compared with the Year Ended December 31, 1996
Collaborative and other research and development revenue decreased 35.8% to
$1,000,000 in 1997 from $1,558,543 in 1996, primarily due to a $1 million
milestone payment received from Torii in 1997 compared to the $1.5 million
license fee received from Torii and a Factor D grant in 1996. Interest and other
income increased 54.8% to $1,692,521 in 1997 from $1,093,617 in 1996, primarily
due to interest earned on funds invested from the Company's public offering in
September 1996.
Research and development expenses increased 39.4% to $10,577,369 in 1997 from
$7,586,159 in 1996. The increase was primarily attributable to costs associated
with manufacturing compounds, clinical trials and preclinical studies and
expenses associated with increased personnel. These costs tend to fluctuate from
period to period depending upon the stage of development and the conduct of
clinical trials.
General and administrative expenses increased .7% to $2,682,137 in 1997 from
$2,664,197 in 1996. The increase was in several categories, primarily increased
personnel costs and the fact that 1996 expenses were reduced by the reversal of
a liability recorded in 1995 for use taxes assessed that the Company
successfully contested in 1996, and was partially offset by decreased fees and
taxes on the Torii milestone in 1997 versus the fees and taxes on the Torii
license in 1996 and decreased legal expenses in 1997.
Interest expense decreased 48.1% to $51,880 in 1997 from $100,031 in 1996. The
decrease was primarily due to a decline in capitalized lease obligations, along
with long-term debt, resulting in lesser interest expense. The Company obtained
most of its leases in connection with the move to its current facilities in
April 1992.
Year Ended December 31, 1996 Compared with the Year Ended December 31, 1995
Collaborative and other research and development revenue increased 601.0% to
$1,558,543 in 1996 from $222,329 in 1995, primarily due to the $1.5 million
license fee received from Torii. This was offset by the decrease in the Factor D
grant from 1995 due to its completion in early 1996. Interest and other income
increased 65.1% to $1,093,617 in 1996 from $662,259 in 1995, primarily due to
interest earned on funds from the Company's public offering in September 1996
and private placements in March 1996 and May 1995.
Research and development expenses increased 6.7% to $7,586,159 in 1996 from
$7,107,249 in 1995. The increase was primarily attributable to expenses
associated with increased personnel. The costs associated with manufacturing
compounds, clinical trials and preclinical studies were approximately the same
in both 1996 and 1995. These costs tend
16
to fluctuate from period to period depending upon the stage of development and
the conduct of clinical trials.
General and administrative expenses increased 20.6% to $2,664,197 in 1996 from
$2,209,488 in 1995. The increase was primarily the result of approximately
$574,000 in consulting fees and withholding taxes incurred in connection with
the license agreement with Torii which was offset by reversal of a liability
recorded in 1995 for use taxes assessed that the Company successfully contested
in 1996.
Interest expense decreased 30.6% to $100,031 in 1996 from $144,115 in 1995. The
decrease was primarily due to a decline in capitalized lease obligations, along
with long-term debt, resulting in lesser interest expense. The Company obtained
most of its leases in connection with the move to its current facilities in
April 1992.
Liquidity and Capital Resources
Cash expenditures have exceeded revenues since the Company's inception.
Operations have principally been funded through public offerings and private
placements of equity and debt securities, equipment lease financing, facility
leases, collaborative and other research and development agreements (including a
license and options for licenses), research grants and interest income. In
addition, the Company has attempted to contain costs and reduce cash flow
requirements by renting scientific equipment or facilities, contracting with
third parties to conduct certain research and development and using consultants.
The Company expects to incur additional expenses, resulting in significant
losses, as it continues and expands its research and development activities and
undertakes additional preclinical studies and clinical trials of compounds which
have been or may be discovered. The Company also expects to incur substantial
administrative, manufacturing and commercialization expenditures in the future
as it seeks FDA approval for its compounds and establishes its manufacturing
capability under Good Manufacturing Practices, and substantial expenses related
to the filing, prosecution, maintenance, defense and enforcement of patent and
other intellectual property claims.
At December 31, 1997, the Company's cash, cash equivalents and securities
held-to-maturity were $24,643,486, a decrease of $11,141,182 from December 31,
1996 principally due to net cash used in the Company's operating activities
($10.3 million) and purchases of furniture and equipment ($1.1 million),
partially offset by a number of other items.
The Company has financed its equipment purchases primarily with lease lines of
credit. The Company currently has a $500,000 line of credit with its bank to
finance capital equipment. In January 1992, the Company entered into an
operating lease for its current facilities which, based on an extension signed
in March 1997, expires on July 31, 2000, with an option to lease for an
additional three years at current market rates. The March 1997 extension also
added 5,640 square feet of finished office space. The operating lease requires
the Company to pay monthly rent (ranging from $14,562 and escalating annually to
a minimum of $15,912 per month in the final year), and a pro rata share of
operating expenses and real estate taxes in excess of base year amounts.
At December 31, 1997, the Company had long-term capital lease and operating
lease obligations which provide for aggregate minimum payments of $251,401 in
1998, $201,653 in 1999 and $127,610 in 2000. The Company is required to expend
$6 million over a period coinciding with funding by the Company to UAB on its
influenza neuraminidase project of which approximately $5.2 million was expended
through December 31, 1997. In 1997, the Company upgraded all its personal
computers and established a network using software packages that are generally
year 2000 compliant. Consequently, the Company does not anticipate incurring
additional significant costs to ensure that its operations will not be adversely
impacted by the year 2000 software problem. In addition, the Company has
committed to conducting certain clinical trials and animal studies in 1997 for
an aggregate amount of approximately $.9 million at December 31, 1997.
As described in Note 9, the Company entered into a license agreement with Torii
under which Torii paid the Company $1.5 million in license fees and made a $1.5
million equity investment in the Company in 1996 and $1 million in a milestone
payment in 1997. While the license agreement provides for additional potential
milestone payments of up to $18 million and royalties on future sales of
licensed products in Japan, there can be no assurance that Torii will continue
to develop the product in Japan or that if it does so that it will result in
meeting the milestones or achieving future sales of licensed products in Japan.
17
The Company plans to finance its needs principally from its existing capital
resources and interest thereon, from payments under collaborative and licensing
agreements with corporate partners, through research grants, and to the extent
available, through lease or loan financing and future public or private
financings. The Company believes that its available funds will be sufficient to
fund the Company's operations at least through the end of 1998. However, this is
a forward-looking statement, and no assurance can be given that there will be no
change that would consume available resources significantly before such time.
The Company's long-term capital requirements and the adequacy of its available
funds will depend upon many factors, including continued scientific progress in
its research, drug discovery and development programs, the magnitude of these
programs, progress with preclinical studies and clinical trials, prosecuting and
enforcing patent claims, competing technological and market developments,
changes in existing collaborative research or development relationships, the
ability of the Company to establish additional collaborative relationships, and
the cost of manufacturing scale-up and effective marketing activities and
arrangements. Additional funding, whether through additional sales of securities
or collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms acceptable to the Company.
Insufficient funds may require the Company to delay, scale-back or eliminate
certain of its research and development programs or to license third parties to
commercialize products or technologies that the Company would otherwise
undertake itself.
Certain Factors That May Affect Future Results, Financial Condition and the
Market Price of Securities
Early Stage of Development; Uncertainty of Product Development; Technological
Uncertainty
BioCryst is at an early stage of development. All of the Company's compounds are
in research and development, and no revenues have been generated from sales of
its compounds. It will be a number of years, if ever, before the Company will
recognize significant revenues from product sales or royalties. To date, most of
the Company's resources have been dedicated to the research and development of
pharmaceutical compounds based upon its PNP program for the treatment of T-cell
proliferative diseases and disorders and for the development of inhibitors of
influenza neuraminidase and enzymes and proteins involved in the complement
cascade. The Company is conducting preclinical and clinical studies with its
lead drugs, BCX-34 and BCX-1470, and results from these studies may not support
future human clinical testing or further development of the compound. Recently
completed Phase III trials with a cream formulation of BCX-34 for treatment of
CTCL and psoriasis did not show statistical efficacy. Accordingly, the Company
has discontinued further development of the cream formulation of BCX-34, but is
continuing its oral trials for BCX-34 and a Phase I trial for a topical ointment
treatment for psoriasis. T-cell proliferative diseases, as well as the other
disease indications the Company is studying, are highly complex and their causes
are not fully known. The Company's compounds under development will require
significant additional, time-consuming and costly research and development,
preclinical testing and extensive clinical testing prior to submission of any
regulatory application for commercial use. Product development of new
pharmaceuticals is highly uncertain, and unanticipated developments, clinical or
regulatory delays, unexpected adverse side effects or inadequate therapeutic
efficacy could slow or prevent product development efforts and have a material
adverse effect on the Company. BioCryst's lead drug, BCX-34, reversibly inhibits
T-cell activity, an essential component of the human immune system. In addition
to any direct toxicities or side effects the drug may cause, BCX-34, while
inhibiting T-cells, may compromise the immune system's ability to fight
infection. Although the Company will monitor immunosuppression during drug
dosing, there can be no assurance that the drug will not cause irreversible
immunosuppression. There can be no assurance that the Company's research or
product development efforts as to any particular compound will be successfully
completed, that the compounds currently under development will be safe or
efficacious, that required regulatory approvals can be obtained, that products
can be manufactured at acceptable cost and with appropriate quality or that any
approved products can be successfully marketed or will be accepted by patients,
health care providers and third-party payors. Few drugs discovered by use of
structure-based drug design have been successfully developed, approved by the
FDA or marketed. Within the pharmaceutical industry, treatment of the disease
indications being pursued by the Company, especially T-cell proliferative
diseases such as CTCL and psoriasis, have proven difficult. There can be no
assurance that drugs resulting from the approach of structure-based drug design
employed by the Company will overcome the difficulties of drug discovery and
development or result in commercially successful products.
Uncertainty Associated with Preclinical and Clinical Testing
Before obtaining regulatory approvals for the commercial sale of any of its
products, BioCryst must undertake
18
extensive preclinical and clinical testing to demonstrate their safety and
efficacy in humans. The Company has limited experience in conducting clinical
trials. To date, the Company has conducted initial preclinical testing of
certain of its compounds and is testing oral and topical ointment formulations
of BCX-34 in various clinical trials. The results of initial preclinical and
clinical testing of compounds under development by the Company are neither
necessarily predictive of results that will be obtained from subsequent or more
extensive preclinical and clinical testing nor necessarily acceptable to the FDA
to support applications for marketing permits. However, the Company recently
completed two Phase III trials of a topical cream formulation of BCX-34 which
did not show statistical efficacy. Even if the results of subsequent clinical
tests are positive, products, if any, resulting from the Company's research and
development programs are not likely to be commercially available for several
years. Additionally, the Company has made and may in the future make changes to
the formulation of its drugs and/or to the processes for manufacturing its
drugs. Any such future changes in formulation or manufacturing processes could
result in delays in conducting further preclinical and clinical testing, in
unexpected adverse events in further preclinical and clinical testing, and/or in
additional development expenses. Furthermore, there can be no assurance that
clinical studies of products under development will be acceptable to the FDA or
demonstrate the safety and efficacy of such products at all or to the extent
necessary to obtain regulatory approvals of such products. Companies in the
industry have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. The failure to comply with data
integrity GCP requirements or to adequately demonstrate the safety and efficacy
of a therapeutic product under development could delay or prevent regulatory
approval of the product, and would have a material adverse effect on the
Company.
The rate of completion of clinical trials is dependent upon, among other
factors, the rate of enrollment of patients. Patient accrual is a function of
many factors, including the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the study and the
existence of competitive clinical trials. Delays in planned patient enrollment
in the Company's current trials or future clinical trials may result in
increased costs and/or program delays which could have a material adverse effect
on the Company.
Government Regulation; No Assurance of Product Approval
The research, testing, manufacture, labeling, distribution, advertising,
marketing and sale of drug products are subject to extensive regulation by
governmental authorities in the United States and other countries. Prior to
marketing, compounds developed by the Company must undergo an extensive
regulatory approval process required by the FDA and by comparable agencies in
other countries. This process, which includes preclinical studies and clinical
trials of each compound to establish its safety and effectiveness and
confirmation by the FDA that good laboratory, clinical and manufacturing
practices were maintained during testing and manufacturing, can take many years,
requires the expenditure of substantial resources and gives larger companies
with greater financial resources a competitive advantage over the Company. To
date, no compound or drug candidate being evaluated by the Company has been
submitted for approval to the FDA or any other regulatory authority for
marketing, and there can be no assurance that any such product or compound will
ever be approved for marketing or that the Company will be able to obtain the
labeling claims desired for its products or compounds. The Company is and will
continue to be dependent upon the laboratories and medical institutions
conducting its preclinical studies and clinical trials to maintain both good
laboratory and good clinical practices and, except for the formulating and
packaging of small quantities of its drug formulations which the Company is
currently undertaking, upon the manufacturers of its compounds to maintain
compliance with current good manufacturing practices ("GMP") requirements. Data
obtained from preclinical studies and clinical trials are subject to varying
interpretations which could delay, limit or prevent FDA regulatory approval.
Delays or rejections may be encountered based upon changes in FDA policy for
drug approval during the period of development and FDA regulatory review.
Similar delays also may be encountered in foreign countries. Moreover, even if
approval is granted, such approval may entail commercially unacceptable
limitations on the labeling claims for which a compound may be marketed. Even if
such regulatory approval is obtained, a marketed drug or compound and its
manufacturer are subject to continual review and inspection, and later discovery
of previously unknown problems with the product or manufacturer may result in
restrictions or sanctions on such product or manufacturer, including withdrawal
of the product from the market, and other enforcement actions.
In June 1995 the Company notified the FDA that it had submitted incorrect
efficacy data to the FDA pertaining to its Phase II dose-ranging studies of
BCX-34 for CTCL and psoriasis. The FDA inspected the Company in November 1995
19
in relation to a study involving the topical application of BCX-34 concluded in
early 1995, and in June 1996 the FDA inspected the Company and one of its
clinical sites in relation to a Phase II dose-ranging study of BCX-34 for CTCL
and a Phase II dose ranging study for psoriasis, both of which were concluded in
early 1995. After each inspection, the FDA issued to the Company a Form FDA 483
setting forth certain deficient GCP procedures followed by the Company, some of
which resulted in submission to the FDA of efficacy data which reported false
statistical significance. The FDA also issued a Form FDA 483 to the principal
investigator at one of the Company's clinical sites citing numerous significant
deficiencies in the conduct of the Phase II dose-ranging studies of BCX-34 for
CTCL and psoriasis. These deficiencies included improper delegations of
authority by the principal investigator, failures to follow the protocols,
institutional review board deviations, and discrepancies or deficiencies in
documentation and reporting. As a consequence of the FDA inspections and such
resulting Form FDA 483s, the Company's ongoing clinical studies are likely to
receive increased scrutiny since the same clinical site which received the Form
FDA 483 is involved in the Company's oral trials; this may delay the regulatory
review process or require the Company to increase the number of patients at
other sites to obtain approval (which can not be assured on a timely basis or at
all). The Company has adjusted certain of its procedures, but there can be no
assurance that the FDA will find such adjustments to be in compliance with FDA
requirements or that, even if it does find such adjustments to be in compliance,
it will not seek to impose administrative, civil or other sanctions in
connection with the earlier studies. Administrative sanctions could include
refusing to accept earlier studies and requiring the Company to repeat one or
more clinical studies, which would be the only studies the FDA would accept for
purposes of substantive scientific review of any NDA by the agency.
Such sanctions or other government regulation may delay or prevent the marketing
of products being developed by the Company, impose costly procedures upon the
Company's activities and confer a competitive advantage to larger companies or
companies that are more experienced in regulatory affairs and that compete with
the Company. There can be no assurance that FDA or other regulatory approval for
any products developed by the Company will be granted on a timely basis, or at
all. Delay in obtaining or failure to obtain such regulatory approvals will
materially adversely affect the marketing of any products which may be developed
by the Company, as well as the Company's results of operations.
History of Operating Losses; Accumulated Deficit; Uncertainty of Future
Profitability
BioCryst, to date, has generated no revenue from product sales and has incurred
losses since its inception. As of December 31, 1997, the Company's accumulated
deficit was approximately $48.4 million. Losses have resulted principally from
costs incurred in research activities aimed at discovering, designing and
developing the Company's pharmaceutical product candidates and from general and
administrative costs. These costs have exceeded the Company's revenues, which to
date have been generated primarily from collaborative arrangements, licenses,
research grants and from interest income. The Company expects to incur
significant additional operating losses over the next several years and expects
such losses to increase as the Company's research and development and clinical
trial efforts expand. The Company's ability to achieve profitability depends
upon its ability to develop drugs and to obtain regulatory approval for its
products that may be developed, to enter into agreements for product
development, manufacturing and commercialization, and to develop the capacity to
manufacture, market and sell its products. There can be no assurance that the
Company will ever achieve significant revenues or profitable operations.
Additional Financing Requirements; Uncertainty of Additional Funding
The Company has incurred negative cash flows from operations in each year since
its inception. The Company expects that the funding requirements for its
operating activities will increase substantially in the future due to expanded
research and development activities (including preclinical studies and clinical
trials), the development of manufacturing capabilities and the development of
marketing and distribution capabilities. The Company anticipates that its
capital resources are adequate to satisfy its capital requirements at least
through 1998. However, this is a forward-looking statement, and no assurance can
be given that there will be no change that would consume available resources
significantly before such time. The Company's future capital requirements will
depend on many factors, including continued scientific progress in its research,
drug discovery and development programs, the magnitude of these programs,
progress with preclinical studies and clinical trials, prosecuting and enforcing
patent claims, competing technological and market developments, changes in
existing collaborative research or development relationships, the ability of the
Company to establish additional collaborative relationships, and the cost of
manufacturing scale-up and
20
effective marketing activities and arrangements. The Company anticipates, based
on its current business plan, that it will be necessary to raise additional
funds in 1999 or earlier. Additional funds, if any, may possibly be raised
through financing arrangements or collaborative relationships and/or the
issuance of preferred or common stock or convertible securities, on terms and
prices significantly more favorable than those of the currently outstanding
Common Stock, which could have the effect of diluting or adversely affecting the
holdings or rights of existing stockholders of the Company. In addition,
collaborative arrangements may require the Company to transfer certain material
rights to such corporate partners. If adequate funds are not available, the
Company will be required to delay, scale back or eliminate one or more of its
research, drug discovery or development programs or attempt to obtain funds
through arrangements with collaborative partners or others that may require the
Company to relinquish some or all of its rights to certain of its intellectual
property, product candidates or products. No assurance can be given that
additional financing will be available to the Company on acceptable terms, if at
all.
Competition
The Company is engaged in the pharmaceutical industry, which is characterized by
extensive research efforts, rapid technological progress and intense
competition. There are many public and private companies, including well-known
pharmaceutical companies, chemical companies, specialized biotechnology
companies and academic institutions, engaged in developing synthetic
pharmaceuticals and biotechnological products for human therapeutic applications
that represent significant competition to the Company. Existing products and
therapies and improvements thereto will compete directly with products the
Company is seeking to develop and market, and the Company is aware that other
companies or institutions are pursuing development of new drugs and technologies
directly targeted at applications for which the Company is developing its drug
compounds. Many of the Company's competitors have substantially greater
financial and technical resources and production and marketing capabilities and
experience than does the Company. The Company has granted Novartis, a worldwide
exclusive license to several compounds in the Company's sixth group of PNP
inhibitors. Such arrangement with Novartis does not include BCX-34 or most of
the Company's other compounds. No assurance can be given that Novartis will or
will not develop compounds under such arrangements, will be able to obtain FDA
approval for any licensed compounds, that any such licensed compounds if so
approved will be able to be commercialized successfully, or that the Company
will realize any revenues pursuant to such arrangements. If commercialized,
these compounds could compete directly against other compounds, including
BCX-34, being developed by the Company.
Many of the Company's competitors have significantly greater experience in
conducting preclinical studies and clinical trials of new pharmaceutical
products and in obtaining FDA and other regulatory approvals for health care
products. Accordingly, BioCryst's competitors may succeed in obtaining approvals
for their products more rapidly than the Company and in developing products that
are safer or more effective or less costly than any that may be developed by the
Company and may also be more successful than the Company in the production and
marketing of such products. Many of the Company's competitors also have current
GMP facilities and significantly greater experience in implementing GMP or in
obtaining and maintaining the requisite regulatory standards for manufacturing.
Moreover, other technologies are, or may in the future become, the basis for
competitive products. Competition may increase further as a result of the
potential advances from structure-based drug design and greater availability of
capital for investment in this field. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective than any being developed by the Company or that would
render the Company's technology and product candidates obsolete or
noncompetitive.
Dependence on Collaborative Partners; Relationship with The University of
Alabama at Birmingham
The Company's strategy for research, development and commercialization of
certain of its products is to rely in part upon various arrangements with
corporate partners, licensees and others. As a result, the Company's products
are dependent in large part upon the subsequent success of such third parties in
performing preclinical studies and clinical trials, obtaining regulatory
approvals, manufacturing and marketing. The Company entered into an exclusive
license agreement with Torii in May 1996 to develop, manufacture and
commercialize in Japan BCX-34 and certain other PNP inhibitor compounds for
three indications. The Company has also entered into collaborative arrangements
with Novartis and intends to pursue additional collaborations in the future.
There can be no assurance that the Company will be able to negotiate additional
acceptable collaborative arrangements or that such arrangements will be
successful. No
21
assurance can be given that the Company's collaborative partners will be able to
obtain FDA approval for any licensed compounds, that any such licensed
compounds, if so approved, will be able to be commercialized successfully, or
that the Company will realize any revenues pursuant to such arrangements.
Although the Company believes that parties to collaborative arrangements
generally have an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources which they devote to these
activities are not within the control of the Company. There can be no assurance
that such parties will perform their obligations as expected or that current or
potential collaborators will not pursue treatments for other diseases or seek
alternative means of developing treatments for the diseases targeted by
collaborative programs with the Company or that any additional revenues will be
derived from such arrangements. If any of the Company's collaborators breaches
or terminates its agreement with the Company or otherwise fails to conduct its
collaborative activities in a timely manner, the development or
commercialization of the product candidate or research program under such
collaboration agreement may be delayed, the Company may be required to undertake
unforeseen additional responsibilities or to devote unforeseen additional
resources to such development or commercialization, or such development or
commercialization could be terminated. The termination or cancellation of
collaborative arrangements could also adversely affect the Company's financial
condition, intellectual property position and operations. In addition,
disagreements between collaborators and the Company have in the past and could
in the future lead to delays in the collaborative research, development or
commercialization of certain product candidates, or could require or result in
legal process or arbitration for resolution. These consequences could be
time-consuming, expensive and could have material adverse effects on the
Company.
The successful commercialization of the Company's compounds and product
candidates is also dependent upon the Company's ability to develop collaborative
arrangements with academic institutions and consultants to support research and
development efforts and to conduct clinical trials. The Company's primary
academic collaboration is with UAB. The Company is highly dependent upon its
collaborative arrangements with UAB to support its ongoing research and
development programs and the termination or cessation of such relationship could
have a material adverse effect upon the Company. There can be no assurance that
the Company's current arrangements with UAB will continue or that the Company
will be able to develop successful collaborative arrangements with academic
institutions and consultants in the future.
Uncertainty of Protection of Patents and Proprietary Rights
The Company's success will depend in part on its ability to obtain and enforce
patent protection for its products, preserve its trade secrets, and operate
without infringing on the proprietary rights of third parties, both in the
United States and in other countries. In the absence of patent protection, the
Company's business may be adversely affected by competitors who develop
substantially equivalent technology. Because of the substantial length of time
and expense associated with bringing new products through development and
regulatory approval to the marketplace, the pharmaceutical and biotechnology
industries place considerable importance on obtaining and maintaining patent and
trade secret protection for new technologies, products and processes. To date,
the Company has been issued seven United States patents related to its PNP
inhibitor compounds. One of these compounds is under a patent issued to
Warner-Lambert and the Company may require a license from Warner-Lambert to
market a product containing one or both of these compounds. The Company has the
right of first refusal to negotiate a license from Warner-Lambert for that
compound, however, there can be no assurance that such a license would be
available or obtainable on terms acceptable to the Company. A patent has also
been issued by the PTO on a new process to prepare BCX-34 and other PNP
inhibitors and an additional patent application has been filed for another new
process to prepare BCX-34 and other PNP inhibitors. In addition, one patent has
been issued by the PTO and two patent applications have been filed with the PTO
relating to inhibitors of influenza neuraminidase. Also, two provisional United
States patent applications have been filed with the PTO on complement
inhibitors. The Company has filed certain corresponding foreign patent
applications and intends to file additional foreign patent applications and
additional United States patent applications, as appropriate. There can be no
assurance that patents will be issued from such applications, that the Company
will develop additional products that are patentable or that present or future
patents will provide sufficient protection to the Company's present or future
technologies, products and processes. In addition, there can be no assurance
that others will not independently develop substantially equivalent proprietary
information, design around the Company's patents or obtain access to the
Company's know-how or that others will not successfully challenge the validity
of the Company's patents or be issued patents which may prevent the sale of one
or more of the Company's product candidates, or require licensing and the
payment of significant fees or royalties by the Company to third parties in
order
22
to enable the Company to conduct its business. Legal standards relating to the
scope of claims and the validity of patents in the fields in which the Company
is pursuing research and development are still evolving, are highly uncertain
and involve complex legal and factual issues. No assurance can be given as to
the degree of protection or competitive advantage any patents issued to the
Company will afford, the validity of any such patents or the Company's ability
to avoid infringing any patents issued to others. Further, there can be no
guarantee that any patents issued to or licensed by the Company will not be
infringed by the products of others. Litigation and other proceedings involving
the defense and prosecution of patent claims can be expensive and time
consuming, even in those instances in which the outcome is favorable to the
Company, and can result in the diversion of resources from the Company's other
activities. An adverse outcome could subject the Company to significant
liabilities to third parties, require the Company to obtain licenses from third
parties or require the Company to cease any related research and development
activities or sales.
The Company's success is also dependent upon the skills, knowledge and
experience (none of which is patentable) of its scientific and technical
personnel. To help protect its rights, the Company requires all employees,
consultants, advisors and collaborators to enter into confidentiality agreements
which prohibit the disclosure of confidential information to anyone outside the
Company and requires disclosure and assignment to the Company of their ideas,
developments, discoveries and inventions. There can be no assurance, however,
that these agreements will provide adequate protection for the Company's trade
secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure or the lawful development by others of such
information.
The Company's management and scientific personnel have been recruited primarily
from other pharmaceutical companies and academic institutions. In many cases,
these individuals are continuing research in the same areas with which they were
involved prior to joining BioCryst and may be restricted by agreement from
disclosing to the Company trade secrets they learned elsewhere. As a result, the
Company could be subject to allegations of violation of such agreements and
similar claims and litigation regarding such claims could ensue.
Dependence on Key Management and Qualified Personnel
The Company is highly dependent upon the efforts of its senior management and
scientific team. The loss of the services of one or more members of the senior
management and scientific team could significantly impede the achievement of
development objectives. Although the Company maintains, and is the beneficiary
of, a $2 million key-man insurance policy on the life of Charles E. Bugg, Ph.D.,
Chairman of the Board of Directors and Chief Executive Officer, the Company does
not believe the proceeds would be adequate to compensate for his loss. Due to
the specialized scientific nature of the Company's business, the Company is also
highly dependent upon its ability to attract and retain qualified scientific,
technical and key management personnel. There is intense competition for
qualified personnel in the areas of the Company's activities, and there can be
no assurance that the Company will be able to continue to attract and retain
qualified personnel necessary for the development of its existing business and
its expansion into areas and activities requiring additional expertise, such as
production and marketing. The loss of, or failure to recruit, scientific,
technical and managerial personnel could have a material adverse effect on the
Company. In addition, the Company relies on members of its Scientific Advisory
Board and consultants to assist the Company in formulating its research and
development strategy. All of the members of the Scientific Advisory Board and
all of the Company's consultants are employed by other employers, and each such
member or consultant may have commitments to, or consulting or advisory
contracts with, other entities that may limit their availability to the Company.
Lack of Manufacturing, Marketing or Sales Capability
The Company has not yet manufactured or marketed any products and currently does
not have the facilities to manufacture its product candidates in commercial
quantities under GMP as prescribed and required by the FDA. To be successful,
the Company's products must be manufactured in commercial quantities under GMP
and at acceptable costs. Although the Company is formulating and packaging under
GMP conditions small amounts of certain drug formulations which are the subject
of preclinical studies and clinical trials, the current facilities of the
Company are not adequate for commercial scale production. Therefore, the Company
will need to develop its own GMP manufacturing facility and/or depend on its
collaborators, licensees or contract manufacturers for the commercial
manufacture of its products. The Company has no experience in such commercial
manufacturing and no assurance can be given that the Company will be able to
make the transition to commercial production successfully or at an acceptable
cost. In
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addition, no assurance can be given that the Company will be able to make
arrangements with third parties to manufacture its products on acceptable terms,
if at all. The inability of the Company to manufacture or provide for the
manufacture of any products it may develop on a cost-effective basis would have
a material adverse effect on the Company.
The Company has no experience in marketing, distributing or selling
pharmaceutical products and will have to develop a pharmaceutical sales force
and/or rely on its collaborators, licensees or arrangements with others to
provide for the marketing, distribution and sales of any products it may
develop. There can be no assurance that the Company will be able to establish
marketing, distribution and sales capabilities or make arrangements with
collaborators, licensees or others to perform such activities.
Uncertainty of Third-Party Reimbursement and Product Pricing
Successful commercialization of any pharmaceutical products the Company may
develop will depend in part upon the availability of reimbursement or funding
from third-party health care payors such as government and private insurance
plans. There can be no assurance that third-party reimbursement or funding will
be available for newly approved pharmaceutical products or will permit price
levels sufficient to realize an appropriate return on the Company's investment
in its pharmaceutical product development. The U.S. Congress is considering a
number of legislative and regulatory reforms that may affect companies engaged
in the health care industry in the United States. Although the Company cannot
predict whether these proposals will be adopted or the effects such proposals
may have on its business, the existence and pendency of such proposals could
have a material adverse effect on the Company in general. In addition, the
Company's ability to commercialize potential pharmaceutical products may be
adversely affected to the extent that such proposals have a material adverse
effect on other companies that are prospective collaborators with respect to any
of the Company's pharmaceutical product candidates.
Third-party payors are continuing their efforts to contain or reduce the cost of
health care through various means. For example, third-party payors are
increasingly challenging the prices charged for medical products and services.
Also, the trend toward managed health care in the United States and the
concurrent growth of organizations, such as health maintenance organizations,
which can control or significan