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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, 1998
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 15, 1999 (based upon the closing price shown on the Nasdaq National Market
on March 15, 1999) held by non-affiliates was approximately $90,258,291. 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 15, 1999 was 14,987,032 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 major
immunological, viral and cardiovascular 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 a clinical trial with its lead immunological compound, BCX-34, with
an oral formulation for HIV, and will be conducting another clinical trial in
1999 with an oral formulation of BCX-34 for cutaneous T-cell lymphoma ("CTCL").
BioCryst has also discovered drug candidates using its structure-based drug
design technologies to inhibit influenza neuraminidase and serine proteases
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.
BioCryst's lead viral drug program, which has been licensed for clinical
development, targets the inhibition of the influenza neuraminidase enzyme.
Inhibiting the influenza neuraminidase enzyme appears to be a promising method
to treat and prevent influenza infections. Four neuraminidase inhibitors were
tested to 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 worldwide
license agreement in September 1998 with the R.W. Johnson Research Institute
("PRI") and Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil"), both Johnson &
Johnson companies, to develop and market products to treat and prevent viral
influenza. BioCryst entered into an exclusive license agreement in May 1996 with
Torii Pharmaceutical Co., Ltd. ("Torii"), a Japanese pharmaceutical company
majority owned by Japan Tobacco Inc., 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), 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 six Phase I trials with oral and
intravenous formulations of BCX-34 and two Phase I/II clinical trials with an
oral formulation of BCX-34 and is conducting a Phase I/II clinical trials with
an oral formulation of BCX-34. BCX-34 has been tested in approximately 680
subjects, and no significant drug-related side effects have been observed. 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 topical cream and ointment formulations. The Company is
continuing its PNP inhibitor program for the oral and intravenous formulations
of BCX-34.
The Company has completed two Phase I clinical trials with an intravenous
formulation of BCX-1470 in 40 healthy subjects with no significant systemic
drug-related side effects and minor local irritation at the infusion site. The
Company is currently conducting an additional series of preclinical studies to
determine if BCX-1470 will be advanced into a Phase I/II clinical trial in the
treatment of cardiopulmonary bypass surgery.
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
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clinical development program, that it is a leader in the practical application
of structure-based drug design.
In September 1998, the Company entered into a worldwide license agreement with
PRI and Ortho-McNeil to develop and market products to treat and prevent viral
influenza. Under the terms of the agreement, the Company received an initial
$6.0 million. The agreement provides for additional potential milestone payments
and royalties based on future sales of licensed products. PRI and Ortho-McNeil
are responsible for all development, regulatory and commercialization expenses.
The agreement is subject to termination by PRI and Ortho-McNeil at any time upon
notice and by the Company in certain circumstances. In addition, Johnson &
Johnson Development Corporation ("JJDC"), another Johnson & Johnson company,
made a $6.0 million equity investment in the Company in connection with signing
the license agreement.
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 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, 1999:
PROGRAM/ INDICATION/ DELIVERY STAGE OF
COMPOUND APPLICATION FORM DEVELOPMENT
-------- ----------- ---- -----------
PNP Inhibitors (BCX-34) CTCL Oral/Intravenous Phase I/II
Psoriasis Oral Phase I/II
HIV Oral Phase I
Rheumatoid arthritis Oral Preclinical
Crohn's disease Oral Preclinical
Multiple sclerosis Oral Preclinical
Influenza Neuraminidase Inhibitors Influenza Oral Licensed to Johnson &
Johnson companies for
clinical development
Complement Inhibitors Cardiopulmonary bypass surgery Intravenous Phase I
Angioplasty Intravenous/Oral Research
Post myocardial Infarction Intravenous/Oral Research
Tissue Factor/VIIa Anticoagulation of blood Intravenous/Oral Research
Parainfluenza Parainfluenza virus Oral Research
- ----------
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.
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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
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 oral and intravenous
formulations of BCX-34. 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 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.
In 1998, the Company completed a Phase I/II dose escalation oral trial in CTCL
and other T-cell cancer patients. This was an open label trial designed to
provide safety and pharmacokinetic data on BCX-34 as well as provide potential
efficacy data. A total of 45 patients were enrolled and dosed in this study.
Dose-limiting toxicity was not encountered and some objective responses were
observed. A second Phase I/II oral trial in CTCL is planned in the second
quarter of 1999 for up to 55 patients at up to 23 sites. The frequency and
completeness of response to 12 weeks of treatment will be assessed.
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 completed a Phase I/II clinical trial with an oral formulation
of BCX-34 for the treatment of psoriasis. Further development will be dependent
upon the results of the Phase I/II clinical trial with an oral formulation
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of BCX-34 for CTCL and the Phase I clinical trial with an oral formulation of
BCX-34 for HIV.
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 collaboration with researchers
at the UAB Center for AIDS Research on the design, has initiated a Phase I
clinical 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.
Crohn's Disease. Crohn's disease is an inflammatory disease that affects the
intestines and other parts of the digestive tract. A patient with Crohn's
disease suffers chronic, sometimes severe, episodes of diarrhea, abdominal pain,
rectal bleeding and fever. Approximately 500,000 people worldwide suffer from
Crohn's disease. The Company believes that T-cell controlling agents such as PNP
inhibitors may offer promise as a potential drug treatment for Crohn's disease.
The Company is at the preclinical stage of development of an oral formulation of
BCX-34 for treatment of Crohn's disease.
Multiple Sclerosis. Multiple sclerosis ("MS") is an autoimmune disease in which
T-cells attack and progressively destroy the myelin sheath that envelops certain
nerve cells in the brain and spinal cord. The disease is characterized by
unpredictable attacks of neurological dysfunction that may include partial
paralysis or tremors, lack of motor coordination, vision problems and memory
loss. MS afflicts between 250,000 and 300,000 people in the United States,
approximately two-thirds of which are women. The Company believes that T-cell
controlling agents such as PNP inhibitors offer promise as a potential drug
treatment for MS. BioCryst believes that an oral formulation of BCX-34 may be
useful for the treatment of MS. The first FDA approved treatment for any form of
MS, a beta interferon, became available in 1993. Beta interferon is a large
molecule protein which requires delivery by injection. The Company is at the
preclinical stage of development of an oral formulation of BCX-34 for treatment
of MS.
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 although Glaxo Wellcome and Hoffmann-La Roche have similar flu
drug candidates in advanced stages
4
of clinical trials. 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. The Company believes that a
neuraminidase inhibitor may be useful as a treatment for influenza and has
developed certain inhibitors of influenza neuraminidase. As described above in
General, these inhibitors have been licensed to two Johnson & Johnson companies
for clinical development. The Company also 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 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 Small Business Innovation
Research ("SBIR") grants from the National Institutes of Health ("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. 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 completed two Phase I clinical trials, one of which is
still under evaluation, for an intravenous formulation of BCX-1470 in 1998. The
Company continues to design additional complement inhibitors. The Company has a
collaboration agreement to use combinatorial chemistry to help identify certain
inhibitors. See "Research and Development - 3-Dimensional Pharmaceuticals."
Tissue Factor/VIIa
Blood coagulation proceeds by a cascade of reactions leading to the formation of
a blood clot. The cascade is initiated by exposure, due to injury, of cell
surface tissue factor to blood and the subsequent formation of the Tissue
Factor/VIIa complex ("TF/VIIa"). TF/VIIa then activates other factors leading to
a blood clot. It has been extensively shown in animal models that blood clot
formation can be treated by inhibiting either TF/VIIa or TF. TF/VIIa inhibitors
may potentially be useful in coronary thrombosis, disseminated intravascular
coagulation, stroke, ischemia-reperfusion injury, sepsis, ARDS and cancer. The
Company is at the research stage of development of intravenous and oral
formulations for inhibition of Tissue Factor/VIIa.
Parainfluenza
Human parainfluenza virus ("PIV") is an important lower respiratory tract
pathogen in infants and young children. Acute infection with PIV accounts for a
significant portion of croup, bronchialitis and pneumonia in children. In the
United States, about five million infants and children per year are infected
with PIV. While the molecular structure of PIV neuraminidase has not been
determined, observations have led to predictions that the active site of PIV
neuraminidase may share common features with the active site of influenza
neuraminidase. The Company is reviewing the preliminary research it has done on
influenza neuraminidase as a basis for starting research for a PIV neuraminidase
inhibitor. The Company is at the research stage of development of an oral
formulation for treatment of parainfluenza.
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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 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
6
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 56 employees at March 15, 1999, 42 were employed in its research and
development, preclinical studies and clinical trials programs. The Company's
staff includes 18 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
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, 1996, 1997 and 1998, the Company spent an
aggregate of $27,454,674 on research and development. Of that amount, $7,586,159
was spent in 1996, $10,577,369 was spent in 1997 and $9,291,146 was spent in
1998. Approximately $15,189,828 of that amount was spent on in-house research
and development and $12,264,846 was spent on contract research and development.
PRI and Ortho-McNeil
In September 1998, the Company entered into a worldwide license agreement PRI
and Ortho-McNeil, both Johnson & Johnson companies, to develop and market
products to treat and prevent viral influenza. Under the terms of the agreement,
the Company received an initial $6.0 million. The agreement provides for
additional potential milestone payments and royalties based on future sales of
licensed products. PRI and Ortho-McNeil are responsible for all development,
regulatory and commercialization expenses. The agreement is subject to
termination by PRI and Ortho-McNeil at any time upon notice and by the Company
in certain circumstances, including any material breaches of the agreement by
PRI or Ortho-McNeil. In addition, JJDC, another Johnson & Johnson company, made
a $6.0 million equity investment in the Company in connection with signing the
license agreement.
Torii
In May 1996, the Company entered into an exclusive license agreement with Torii
to develop, manufacture and commercialize BCX-34 and certain other PNP inhibitor
compounds in Japan for the treatment of rheumatoid arthritis,
7
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 $1.0
million was made in 1997. The agreement further provides for additional
potential milestone payments of up to $18.0 million and royalties on future
sales of licensed products in Japan. Torii is responsible for all development,
regulatory and commercialization expenses 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?, 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 largest X-ray crystallography centers in the world with
approximately 112 full-time staff members and approximately $19.5 million in
research grants and contract funding in 1998. 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 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. This agreement was expanded in October 1996 to include other enzyme
targets of the complement system. 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
pay certain royalties on sales of any resulting product and to share in future
payments received from other third-party collaborators. These 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.
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
8
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 immunological 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 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. 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 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'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 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
9
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 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
10
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 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
11
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,
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.
12
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, 1999, the Company had 56 employees, of whom 42 were engaged in
research and development and 14 were in general and administrative functions.
The Company's scientific staff (18 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 five 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.
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 77,000 shares of Common Stock
at a weighted average exercise price of $7.08 per share. Consultants have also
been granted stock options to purchase a total of 65,000 shares at a weighted
average exercise price of $6.98 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.
13
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
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, retired, Director of
DNA Resources at Celera Genomics
Corporation, Investigator at The Institute
for Genomic Research, 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.
ITEM 2. PROPERTIES
The Company's administrative offices and principal research facility are located
in 41,250 square feet of leased office space in Riverchase Industrial/Research
Park in Birmingham, Alabama. The lease runs through June 30, 2003 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. The following table sets forth the
low and high prices as reported by Nasdaq for each quarter in 1998 and 1997:
1998 1997
---- ----
Low High Low High
--- ---- --- ----
First quarter $6.88 $9.50 $11.50 $17.00
Second quarter 6.00 9.13 10.06 14.75
Third quarter 6.00 8.00 4.25 13.75
Fourth quarter 4.38 8.44 6.25 8.38
The last sale price of the common stock on February 26, 1999 as reported by
Nasdaq was $9.00 per share.
As of February 26, 1999, there were approximately 520 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: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total revenues $ 7,626 $ 2,693 $ 2,652 $ 885 $ 734
Research and development expenses $ 9,291 $ 10,577 $ 7,586 $ 7,107 $ 5,552
Net loss $ (4,785) $(10,619) $ (7,698) $ (8,576) $ (6,938)
Net loss per share $ (.34) $ (.77) $ (.69) $ (.96) $ (1.02)
Weighted average shares outstanding 14,120 13,780 11,171 8,905 6,787
December 31,
(In thousands)
--------------
Balance Sheet Data: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Cash, cash equivalents and securities $ 27,012 $ 24,643 $ 35,785 $ 11,414 $ 10,873
Total assets 29,100 26,485 37,149 13,056 12,803
Long-term debt and obligations under
capital leases, excluding current portion 22 34 58 300 573
Accumulated deficit (53,170) (48,384) (37,766) (30,067) (21,491)
Total stockholders' equity 27,682 25,285 35,403 11,326 11,176
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, development and clinical
trial efforts expand.
Year Ended December 31, 1998 Compared with the Year Ended December 31, 1997
Collaborative and other research and development revenue increased 537.1% to
$6,371,095 in 1998 from $1,000,000 in 1997, primarily due to the $6.0 million in
up front fees received from PRI and Ortho-McNeil in 1998 for a license agreement
for the Company's influenza neuraminidase inhibitors compared to the $1.0
million milestone payment received from Torii in 1997. Interest and other income
decreased 25.9% to $1,254,881 in 1998 from $1,692,521 in 1997, primarily due to
a decline in the weighted average investment for 1998.
Research and development expenses decreased 12.2% to $9,291,146 in 1998 from
$10,577,369 in 1997. Such expenses vary from period to period based on the
status of the Company's projects. The Company completed two Phase III clinical
trials in 1997. In 1998, the Company commenced two Phase I clinical trials for
its serine protease inhibitor, continued its two Phase I/II clinical trials for
an oral formulation of its PNP inhibitor and initiated preclinical studies for
its influenza neuraminidase and serine protease inhibitors. Overall, the decline
in costs associated with the Company's PNP inhibitor project were partially
offset by the increases in the Company's serine protease and influenza
neuraminidase projects. As a result, there was a slight decrease in 1998 in the
outside research and development efforts associated with the Company's three
primary research and development projects. The Company reduced some of its other
discretionary costs, which was offset by one-time costs associated with signing
a license agreement for the Company's influenza neuraminidase inhibitors and
certain related agreements in September 1998.
General and administrative expenses increased 15.8% to $3,104,925 in 1998 from
$2,682,137 in 1997. The increase was primarily due to the fees and expenses
incurred in connection with the license agreement (and related agreements) for
the Company's influenza neuraminidase inhibitors signed in September 1998.
Interest expense decreased 71.1% to $14,986 in 1998 from $51,880 in 1997. The
decrease was primarily due to a decline in capitalized lease obligations
resulting in lesser interest expense. The Company obtained most of its leases in
connection with the move to its facilities in April 1992.
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 $1.0 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.
16
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 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
licenses 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 Food and Drug Administration (the "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, 1998, the Company's cash, cash equivalents and securities
held-to-maturity were $27,012,093, an increase of $2,368,607 from December 31,
1997 principally due to the $6.0 million equity investment in the Company in
connection with the influenza neuraminidase license offsetting the cash used in
operations.
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 June 1998, expires on June 30, 2003, with an option to lease for an
additional three years at current market rates. The operating lease requires the
Company to pay monthly rent (ranging from $21,405 and escalating annually to a
minimum of $24,814 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, 1998, the Company had long-term capital lease and operating
lease obligations which provide for aggregate minimum payments of $280,254 in
1999, $288,128 in 2000 and $285,816 in 2001.
Pursuant to the license agreement for the Company's influenza neuraminidase
inhibitors, Ortho-McNeil and PRI paid the Company an initial $6.0 million for
reimbursement of research and development expenses and in license fees and JJDC,
pursuant to the Stock Purchase Agreement, made a $6.0 million equity investment
in the Company. While the License Agreement provides for potential milestone
payments of up to an additional $43.0 million and royalties on future sales of
licensed products, there can be no assurance that PRI will continue to develop
the product or, that if it does so, that it will result in meeting the
milestones or achieving future sales of licensed products. The Company also
entered into an exclusive license agreement with Torii under which Torii paid
the Company $1.5 million in initial license fees and made a $1.5 million equity
investment in the Company in 1996. The first milestone payment of $1.0 million
was received in 1997. While the Torii license agreement provides for potential
milestone payments of up to an
17
additional $18.0 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.
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 2000. 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 results of research and
development, results of preclinical studies and clinical trials, relationships
with strategic partners, changes in the focus and direction of the Company's
research and development programs, competitive and technological advances,
changes in existing collaborative, licensing, research or development
relationships, the ability of the Company to establish additional collaborative
relationships and the FDA regulatory process. 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. 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, 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. 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.
Risks Associated with the Year 2000
The year 2000 issue ("Year 2000 Issue") is the result of computer programs being
written using two digits rather than four digits to represent the year and
affects both information technology (IT) and non-IT systems. Thus, computer
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including among others, a temporary inability to
process certain data or engage in similar normal business activities.
Plan and Status. The Company's plan to resolve the Year 2000 Issue involves four
phases: assessment, remediation, testing and implementation. The Company has
completed its assessment of its IT systems. In 1997, the Company installed a
computer network, upgraded its MacIntosh computers to IBM compatible personal
computers and upgraded its IT software to a common standard. As a consequence,
most of its IT systems are identified by the manufacturer as Year 2000
compliant. The Company is completing its assessment of non-IT systems, most of
which is equipment used in the laboratories. Major vendors and suppliers are
also being contacted with regard to their Year 2000 compliance and the Company
will continue to monitor their compliance. The Company anticipates completing
its assessment by the end of the first quarter of 1999. Systems identified as
not being Year 2000 compliant will be brought into compliance by upgrading
either the software or hardware. The Company expects to begin remediation and
testing by the second quarter of 1999 and to be fully implemented by the end of
the third quarter of 1999.
While the Company has queried its significant suppliers, vendors and other
outside parties and will continue to monitor their Year 2000 compliance status,
the Company has no means of ensuring that suppliers, vendors and other outside
parties will be Year 2000 ready. The inability of suppliers, vendors and other
outside parties (including the government) to complete their Year 2000
resolution process in a timely fashion could materially impact the Company. The
effect of non-compliance by suppliers, vendors and outside parties is not
determinable.
Costs. The costs incurred to date for Year 2000 compliance have not been
material (less than $50,000) and are not expected to be material when completed
(less than $100,000). The Company anticipates that it will be able to fund its
costs from current funds available for operations. If, however, the costs are
higher than anticipated, this could have a material adverse effect on the
Company's business, results of operations and financial condition.
Risks. While management of the Company believes it has an effective program in
place to resolve the Year 2000 Issue
18
in a timely manner, as noted above, the Company has not completed all necessary
phases of the Year 2000 program for compliance. In the event that the Company or
third parties do not complete any additional phases, the Company may not be able
to complete the testing of its compounds and advancing its projects into human
clinical trials in support of an NDA filing. In addition, disruptions in the
economy generally resulting from Year 2000 Issues could also materially
adversely effect the Company. The Company is unable to estimate if it has any
potential liability or potential lost revenue at this time. There can be no
assurance that the Company will not discover Year 2000 compliance issues that
will have a material adverse effect on the Company's business, results of
operations and financial condition.
Contingency. The Company has contingency plans for certain critical applications
and is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds, increasing inventories and adjusting staffing
strategies. There can be no assurance that these contingency plans will be
adequate.
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 purine nucleoside phosphorylase ("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 and PRI have conducted
preclinical studies with its influenza neuraminidase inhibitor and the Company
is conducting 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 compounds. Phase III trials completed in 1997 with a
cream formulation of BCX-34 for treatment of cutaneous T-cell lymphoma ("CTCL")
and psoriasis and a Phase I/II trial completed in 1998 for a topical ointment
treatment for psoriasis did not show statistical efficacy. Accordingly, the
Company has discontinued further development of these topical formulations of
BCX-34, but is continuing its oral trials for BCX-34. 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. One of BioCryst's
lead drugs, 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 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
19
compounds and is testing an oral formulation of BCX-34 and an intravenous
formulation of BCX-1470 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 completed in 1997 two Phase III trials of a topical cream
formulation and in 1998 a Phase I/II trial of a topical ointment 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 good
clinical practices requirements for data integrity 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.
Dependence on Collaborative Partners; Relationship with The University of
Alabama at Birmingham ("UAB")
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 Ortho-McNeil and PRI in September 1998 to develop,
manufacture and commercialize its influenza neuraminidase inhibitor compounds
for the flu. The Company also 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 3-Dimensional Pharmaceuticals,
Inc. to share resources and technology to expedite the identification of
inhibitors of key serine protease enzymes and with Novartis to pursue
development of certain types of PNP inhibitors. The Company 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 assurance can be
given that the Company's collaborative partners, particularly Ortho-McNeil and
PRI, 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, including any milestone or royalty payments under the License
Agreement. 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, particularly by Ortho-McNeil and
PRI, could also adversely affect the Company's financial condition, intellectual
property position and operations. In addition, disagreements between
20
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 has been with UAB to support its ongoing research and
development programs. In 1998, the Company completed its funding obligations
with UAB for the development of inhibitors for influenza neuraminidase and
Factor D. UAB, however, will continue to share in any revenues derived from
those two projects and the Company intends to continue using certain UAB faculty
members as consultants to 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.
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 compound or drug
candidate will ever be approved for marketing or that the Company will be able
to obtain the labeling claims desired for its compounds or drug candidates. 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 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 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 List of
Inspectional Observations ("Form FDA 483") setting forth certain deficient Good
Clinical Practices 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. The Company received notice from the FDA in November 1997 that work
in support of products under FDA jurisdiction performed by this investigator
would not be accepted by the FDA
21
without validating information. Currently, the Company does not intend to pursue
a topical treatment for BCX-34, which is the clinical study this investigator
pursued for the Company. As a consequence of the FDA inspections and such
resulting Form FDA 483s, the Company's ongoing and future clinical studies may
receive increased scrutiny; 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.
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, 1998, the Company's accumulated
deficit was approximately $53.2 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 continue. The Company's ability to achieve profitability depends
in part upon its ability to develop drugs and to obtain regulatory approval for
its products that may be developed, to enter into agreements with collaborative
partners 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 continued
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 for
approximately the next 24 months at the current level of operations. 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 effective marketing activities and arrangements. The
Company anticipates, based on its current business plan, that it will be
necessary to raise additional funds in 2000 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
22
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 Corporation,
formerly Ciba-Geigy Corporation, ("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
compounds and in obtaining FDA and other regulatory approvals for health care
products. Accordingly, BioCryst's competitors may succeed in obtaining approvals
for their drug candidates 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.
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 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. A patent has also been issued to BioCryst by
the U.S. Patent and Trademark Office ("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, two
patent applications and two provisional patents 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
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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 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 Compa