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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-28006
ESSENTIAL THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3186021
(State or other (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)
1365 MAIN STREET, 02451
WALTHAM, MASSACHUSETTS
(Address of principal (Zip Code)
executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 647-5554
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
PREFERRED SHARE PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the 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. [_]
As of February 28, 2002, 16,763,578 shares of common stock of the registrant
were outstanding. As of that date, the aggregate market value of the common
stock of the registrant held by non-affiliates of the registrant was
approximately $50.0 million, based upon the closing price of the common stock
on that date.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference from the registrant's Proxy Statement for the 2002
Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after the close of the registrant's fiscal
year ended December 31, 2001.
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ESSENTIAL THERAPEUTICS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
INDEX
PART I
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 23
Item 3. Legal Proceedings............................................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders........................................... 24
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.......................... 25
Item 6. Selected Financial Data....................................................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................... 32
Item 8. Financial Statements and Supplemental Data.................................................... 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 33
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 34
Item 11. Executive Compensation........................................................................ 34
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 34
Item 13. Certain Relationships and Related Transactions................................................ 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 35
Signatures.................................................................................... 39
Index to Consolidated Financial Statements.................................................... F-1
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
The following discussion of our business contains forward-looking statements
that involve risks and uncertainties. You are directed to the section captioned
"Special Note Regarding Forward-Looking Statements" for a discussion of these
types of statements. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of a number of
factors, including the risks discussed below, and those risks discussed in the
section captioned "Risk Factors" and elsewhere in this report.
Essential Therapeutics, Inc., formerly known as Microcide Pharmaceuticals,
Inc., which was incorporated in 1992, is a biopharmaceutical company committed
to the discovery, development and commercialization of critical products for
life threatening diseases in hematology, oncology and infectious disease. The
present business of Essential results from the combination by merger in October
2001, of Microcide Pharmaceuticals, Inc. and The Althexis Company, Inc., and
embodies those companies' complementary strengths. Essential has broad-based
antibiotic and antifungal discovery and development programs with a significant
product pipeline. With its March 2002 acquisition of Maret Corporation, which
was doing business as Maret Pharmaceuticals, Essential now has pre-clinical and
clinical programs in hematology/oncology and infectious diseases. Essential's
lead product, ETRX 101, is a small molecule angiotensin derivative for
treatment and prophylaxis of the suppression of blood cells, known as
myelosuppression, and other serious clinical diseases. Our three research
platforms address the growing problems of antibiotic resistance and the need
for improved antifungal therapeutics. Our Novel Cephalosporin Platform, which
has been partnered with Johnson & Johnson, or J&J as they are known in the
industry, targets serious gram-positive multi-drug resistant infections. The
Efflux Pump Inhibitor Platform, which has been partnered with Daiichi,
Schering-Plough and is internally-funded, targets gram-negative infections as
well as serious fungal infections. Our Structure-Based Drug Design Platform,
partnered with PLIVA Pharmaceuticals, focuses on novel cell wall biosynthesis
inhibitors with intrinsic activity against a broad spectrum of resistant
organisms.
We believe that the antibiotics market provides an attractive opportunity
for our research and development activities, because:
(i) the antibiotics market is the third largest pharmaceutical market,
with worldwide sales of systemic antibiotics totaling $24.7 billion in
1999, including $8.45 billion in the United States;
(ii) there are significant unmet clinical needs, caused by growing
bacterial resistance problems, that require new antibacterial
therapies; and
(iii) the pre-clinical and clinical development process for antibiotics
generally follows an efficient and well-defined path to the market.
We also believe that the hematology/oncology market presents an attractive
opportunity for us to address a critical medical need in the treatment of
myelosuppression from chemotherapy, radiation and other serious blood
disorders. Worldwide sales of products for the treatment of anemia exceeded
$5.0 billion in 2000 and are expected to reach $9.0 billion by 2005. Worldwide
sales of growth factors affecting white blood cells was $1.3 billion in 2000
and is estimated to grow at 5% per year. At the present time there is no widely
used product available to stimulate the recovery of platelets or lymphocytes.
Nevertheless, these markets are generally thought to be significant unserved
target markets. We also believe that the pre-clinical and clinical development
process in this therapeutic area follows a well-defined pathway to the market.
Lastly, we believe that the systemic antifungals market, totaling
approximately $2.5 billion in 1999 worldwide sales, also represents an
attractive opportunity, because there are currently relatively few agents with
adequate efficacy and low toxicity to treat the often immunocompromised
patients with systemic fungal infections. And, despite recent progress in
introducing new antiviral agents, we feel that there is a clear clinical need
within the $4.6 billion worldwide antiviral market for improved treatments for
viral infections.
In addition to our target validation system known as ACTT, other areas of
research include our Microbial Genomics (VALID) Program, which seeks to
identify novel classes of antimicrobial agents that will act upon microbes that
are resistant to currently available therapeutic agents.
We have collaboration agreements with major pharmaceutical companies that
enhance our discovery and development programs. As of December 31, 2001, we had
received $64.5 million in license fees, milestone payments and research support
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payments, and $10.0 million in equity investments. Assuming each of the current
collaboration agreements continues until its scheduled expiration, we will
continue to receive additional research support payments. In addition, we may
receive up to $42.4 million in potential further milestone payments, as well as
royalties on worldwide sales of products that may result from these
collaborations. We have retained full rights to products that may result from
programs we have now as a result of our acquisition of Maret as well as our own
internal, self-funded programs in Bacterial In Vivo Essential Genes, Bacterial
and Fungal Efflux Pumps and Microbial Genomics (VALID). Our forward-integration
development strategy is to continue to utilize strategic collaborations
selectively to complement and balance our own, self-funded efforts.
J&J. We established a collaboration in October 1995 with Ortho-McNeil
Pharmaceuticals and the R.W. Johnson Pharmaceutical Research Institute,
affiliates of Johnson & Johnson Pharmaceutical Research & Development, L.L.C.,
which we collectively refer to as "J&J," to discover and develop novel
beta-lactam antibiotics, antibiotic potentiators and inhibitors of bacterial
signal transduction targeted at problematic gram-positive bacteria, including
staphylococci and enterococci. Together with J&J, we selected an initial
beta-lactam antibiotic candidate, a parenteral, or administered by injection,
cephalosporin, for pre-clinical development in October 1996, and in November
1999, J&J entered into Phase I clinical trials with this antibiotic candidate.
In November 2000, we announced that these Phase I trials would be extended,
based upon the observation of induration, or irritation, at the injection site
in some subjects. In May 2001, we announced that J&J had selected a prodrug of
the initial lead compound for toxicology studies. A prodrug is a modified form
of a drug that is readily converted to the active drug in the body. In animal
studies, administration of this prodrug form eliminated the irritation seen
when the compound itself was administered. We expect J&J to advance this
prodrug into the clinic when toxicology studies are completed. In January 1999,
in collaboration with J&J, we committed to the pre-clinical development of a
second cephalosporin compound. This second parenteral cephalosporin antibiotic
was selected for pre-clinical development as a back-up and potential "second
generation" compound, which may improve the likelihood of ultimately bringing
one or more products to the market. We extended this collaboration in December
2000 to develop a new class of cephalosporins, having similar spectrum and
potency to the first compounds, but which would be bioavailable following oral
administration. We have received two milestone payments under this
collaboration and research support was extended in December 2001. If specified
research and development milestones are achieved, we will be entitled to
receive an additional $13.5 million for either the initial or back-up
parenteral product developed within the collaboration and an additional $17.5
million for an orally-absorbed product, plus royalties based on worldwide sales
of products arising from the collaboration. In December 2000, we entered into
another collaboration with J&J with a focus on the discovery of products from
our natural product extracts. We have provided J&J with access to our natural
products library for the purpose of screening for activity in various
biological and therapeutic applications. Research work on this project is also
being continued in 2002. J&J will undertake a program for the development,
manufacture and sale of products developed from the collaborative research.
Under the terms of the agreement, we received an up-front license fee, a
technology-access fee for access to our natural products library and funding
for our research to identify the active components of natural product extracts.
For each product resulting from the collaboration, we will receive specified
milestone payments and royalties on worldwide sales.
Daiichi. We established a collaboration in November 1995 with Daiichi to
discover and develop bacterial efflux pump inhibitors to be used in combination
with Daiichi's quinolone antibiotics to target gram-negative bacteria,
including pseudomonas. The research phase of this collaboration was extended in
May 2000, and at the end of March 2001, the research funding portion of this
collaboration came to its natural conclusion. If specified research and
development milestones are achieved, we will be entitled to receive up to $6.5
million for each product developed within the collaboration, plus royalties
based on worldwide sales of products arising from the collaboration.
Pfizer. We established a collaboration in March 1996 with Pfizer to
implement our bacterial in vitro essential gene and multi-channel screening
system to discover novel classes of antibiotics over a five-year term. At the
conclusion of this agreement in February 2001, each party gained the right to
independently use the technology developed during the collaboration for its own
purposes.
In January 1999, we established a separate collaboration with Pfizer to
utilize bacterial genetic approaches with in vitro essential genes to discover
products for the treatment of bacterial infections in animals. The funded
research portion of this agreement ended in January 2002, and Pfizer Veterinary
Medicine is pursuing the product opportunities discovered during this
collaboration. If specified research and development milestones are achieved,
we would be entitled to receive specified milestone payments for each product
developed within the collaboration, plus royalties based on worldwide sales of
products.
PLIVA Pharmaceuticals. The Althexis Company, Inc., which we acquired on
October 24, 2001, entered into a collaboration agreement with PLIVA
Pharmaceuticals in December 1998 to combine PLIVA's scientific, drug
development and financial resources with Althexis' unique expertise and
experience in structure-based drug design, or SBDD, in order to discover,
select, develop and commercialize novel antibiotic drugs worldwide. Under the
terms of the collaboration, Althexis
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agreed to undertake specified research and license the resulting technology to
PLIVA. PLIVA agreed to license some of its technology to Althexis and received
the right to commercialize any resulting products. Under the collaboration
agreement, Althexis has received license fees, research support and milestone
payments over the three-year term of the agreement's research plan totaling
approximately $12.0 million. The research plan may be extended by mutual
consent of both parties. In December 2001, the funded research portion of this
agreement came to its natural conclusion. We are continuing to work with PLIVA
using SBDD to develop products based upon a novel cell wall biosynthesis target
selected during the term of the collaboration.
Schering-Plough Animal Health. In October 2000, we entered into a
collaboration with Schering-Plough Animal Health, or SPAH, to discover and
develop compounds to be used in the treatment of veterinary bacterial
infections based upon application of our efflux pump technology to existing
SPAH antibacterials. In July and December 2001, the agreement was amended, each
time increasing the level of research funded by SPAH. If specified research and
development milestones are achieved, we will be entitled to receive milestone
payments for each product developed within the collaboration, plus royalties
based on worldwide sales of products arising from the collaboration. These
milestone payments and royalties are lower in amount than those applicable to
human health applications. SPAH will have worldwide rights to products
resulting from the collaboration.
Iconix. In January 1998, we entered into a collaboration with Iconix, a
biotechnology company to which we licensed or assigned technology related to
Iconix's genetic technology. At February 28, 2002, we held approximately a 17%
ownership interest in Iconix, on a fully diluted basis. Iconix has applied the
genetics technology to a number of viral disease targets in a search for novel
antiviral agents in collaborative research funded by Essential. We are entitled
to worldwide development, manufacturing and marketing rights to antiviral
products that may emerge from the antiviral collaboration. If we were to
develop a product using technology developed under the collaboration, we would
be obligated to pay Iconix royalties on worldwide sales. The assay discovery
phase of this collaboration ended in January 2001, and we have assumed
responsibility for research efforts on the viral gene targets in our search for
novel antiviral agents using new cell-free technology developed within our
bacterial and fungal programs.
We do not expect that any drugs resulting from our collaborations, or our
research and development efforts, will be commercially available for a number
of years, if at all. Since inception, we have focused our activities on the
development of a gene function-based technology platform and other proprietary
information to identify and commercialize novel antimicrobials for the
treatment of serious infections. It is difficult to predict when, if ever, we
will be able to successfully discover additional novel lead compounds for
potential development as product candidates. All compounds discovered by us
will require extensive pre-clinical and clinical testing prior to submission of
any regulatory application for commercial use. Extensive pre-clinical and
clinical testing required to establish safety and efficacy will take a number
of years, and the time required to commercialize new drugs cannot be predicted
with accuracy. We cannot assure you that our approach to drug discovery, or the
efforts of our partners, will result in the successful development of any
drugs, or that any drugs, if successfully developed, will be proven to be safe
and effective in clinical trials, meet applicable regulatory standards, be
capable of being manufactured in commercial quantities at reasonable costs or
be successfully commercialized. Product development of new pharmaceuticals is
highly uncertain, and unanticipated developments, clinical or regulatory
delays, unexpected adverse effects or inadequate therapeutic efficacy would
slow or prevent our product development efforts or those of our partners and
would have a material adverse effect on our business and results of operations.
We will not receive revenues or royalties from sales of drugs for a significant
number of years, if at all. Any failure to receive significant revenues or
achieve profitable operations could impair our ability to sustain operations,
and we cannot assure you that we will ever receive significant revenues or
achieve profitable operations.
INFECTIOUS DISEASE ENVIRONMENT
BACTERIAL INFECTIONS AND ANTIBIOTICS OVERVIEW
Bacterial infections are a significant and growing medical problem. They
occur when the body's immune system cannot prevent invasion and colonization by
disease-causing bacteria. These infections may be confined to a single organ or
tissue, or disseminated throughout the body, and can cause many serious
clinical conditions, including pneumonias, endocarditis, osteomyelitis,
meningitis, deep-seated soft tissue infections, complicated urinary tract
infections, bacteremia and septicemia.
According to estimates by the United States Centers for Disease Control and
Prevention, or CDC, approximately 2.0 million hospital-acquired infections,
also referred to in our industry as nosocomial infections, occur annually in
the United States and contribute to more than 50,000 deaths. The additional
health care costs due to nosocomial infections now total more than $3.5 billion
per year. While overall per capita mortality rates declined in the United
States from 1980 to 1992, the per capita mortality rate due to infectious
diseases increased 58% over this period, continuing to make infectious diseases
a
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leading cause of death in the United States. We believe that bacterial
infections, especially infections caused by difficult-to-treat,
antibiotic-resistant bacteria, cause or contribute to a substantial majority of
these deaths.
Antibiotics are administered both to prevent bacterial infections and to
treat established bacterial diseases. When administered to prevent an
infection, antibiotics are given prophylactically, before definitive clinical
signs or symptoms of an infection are present. When administered to treat an
established infection, antibiotics are often chosen empirically, before
diagnostic testing has established the causative bacterium and its
susceptibility to specific antibiotics.
Antibiotics work by interfering with a vital bacterial cell function at a
specific cellular target, either killing the bacteria or inhibiting their
multiplication, thereby allowing the patient's immune system to clear the
bacteria from the body. Currently available antibiotics work on relatively few
targets, through mechanisms such as inhibiting protein or cell wall
biosynthesis. These targets tend to be present in all bacteria and are highly
similar in structure and function, so that these antibiotics kill or inhibit
growth of a broad range of bacterial species and are referred to as
broad-spectrum antibiotics.
Major structural classes of antibiotics include beta-lactams,
fluoroquinolones, macrolides, tetracyclines, aminoglycosides, glycopeptides and
trimethoprim combinations. Penicillin, a member of the beta-lactam class, which
also includes extended-spectrum penicillins, cephalosporins and carbapenems,
was first developed in the 1940s. Nalidixic acid, the earliest member of the
quinolone class, was discovered in the 1960s. The creation of broad-spectrum
antibiotics began in the 1970s and 1980s, with major advances seen in the 1970s
with the development of newer beta-lactams and aminoglycosides, and in the
1980s with the development of fluoroquinolones and carbapenems. These
antibiotics remain the mainstay of therapy today, since the only new class of
antibiotics that has been discovered and commercialized in the last 20 years is
the recently introduced oxazolidinones, exemplified by linezolid. Daptomycin, a
member of the new antibiotic class, lipopeptides, is undergoing clinical trials.
According to sales data compiled by IMS International, an independent
pharmaceutical industry research firm, the market for systemic antibiotics,
both orally or parenterally administered, constitutes the third largest
worldwide pharmaceutical market, generating $24.7 billion in worldwide sales in
1999, including $8.45 billion in the United States. The in-hospital antibiotic
market, where bacterial resistance poses the most serious threat, totaled $7.5
billion worldwide during this period.
FUNGAL INFECTIONS
Invasive infections due to fungi are a continuing problem, particularly
among patient populations with compromised host defenses due to
immunosuppressive drugs (e.g., in organ transplant patients or in patients
undergoing cancer chemotherapy) or serious underlying disease (e.g., AIDS).
Despite the limitations of existing therapeutics, systemic antifungal agents
generated worldwide sales of approximately $2.5 billion in 1999, according to
IMS International. The two major classes of clinically important systemic
antifungal agents, polyenes and azoles, utilize essentially only two targets:
ergosterol, or membrane, biosynthesis and membrane integrity. Amphotericin B,
while fungicidal, has toxicity limitations in many patients. In contrast, the
azole class of compounds is limited by suboptimal efficacy in the treatment of
deep-seated fungal infections in immunocompromised patients, due to its
fungistatic mode-of-action and emerging drug resistance. Caspofungin, a member
of a new class of cell wall biosynthesis inhibitors, echinocandins, has
recently been approved for limited indications and several other analogs are in
advanced stages of clinical testing. All members of this class discovered to
date are only available for parenteral use, a relatively small portion of the
systemic fungal infections market.
VIRAL INFECTIONS
Viral infections continue to be a major medical problem in both
immune-competent and immunosuppressed patients. Since its discovery, an
estimated 42 million people have been infected with the human immunodeficiency
virus, or HIV. Newer combination therapies with HIV-protease inhibitors or
newer reverse-transcriptase inhibitors have markedly improved survival and
reduced the occurrence of opportunistic infections. These agents, however, are
often poorly tolerated by patients due to drug-to-drug interactions and adverse
effects, require frequent administration of multiple pills that make adherence
to prescribed regimens difficult, and are subject to viral resistance,
resulting in a need for new therapeutic agents.
There is a vast, unmet clinical need for effective and well-tolerated
antiviral therapy in other viral infections with a high prevalence and
morbidity. Hepatitis B, or HBV, afflicts a major proportion of the global
population. In addition, the CDC estimates that approximately 3.0 million
people in the United States have hepatitis C, or HCV, infection. Both forms of
hepatitis can cause chronic infections that can lead to serious complications,
including the need for liver transplantation. Well-tolerated treatment regimens
that produce a durable antiviral response would represent a considerable
advance in the long- term management of chronically-infected patients. Also,
cytomegalovirus, or CMV, infection remains a complication in
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transplant patients as well as in some pediatric populations, and existing
antiviral therapies for CMV are often poorly tolerated.
ANIMAL HEALTH INFECTIONS
Bacterial infections represent a major problem for both livestock and
companion animals. In particular, livestock undergoes periods of stress-induced
suppression of immunity during which there is increased susceptibility to
bacterial infection. Important bacterial pathogens of livestock include species
responsible for bovine and porcine respiratory diseases, enteric diseases and
mastitis. We estimate that global sales of anti-infective products for
therapeutic use in animal health applications are in excess of $1.0 billion.
With the continued development of antibiotic-resistant bacteria in human
populations, there has been increasing pressure to limit the animal use of
antibiotics that are also used to treat infections in humans. Novel approaches
that do not utilize antibiotic classes used in humans may find an increasing
importance in veterinary infections.
RESISTANCE PROBLEMS
One of the key contributors to the increase in mortality and morbidity due
to bacterial infections is the increasing prevalence of drug-resistant
bacteria. Evidence of bacterial resistance to penicillin was first seen in the
1940s shortly after its introduction. Methicillin and subsequent
second-generation penicillins were developed to overcome these
penicillin-resistant organisms, but resistance to methicillin in turn began to
occur in the 1970s shortly after its release, and has continued to increase.
Similar resistance problems are now seen with a number of clinically important
bacteria targeted by our initial products, including staphylococci,
enterococci, pneumococci and pseudomonas. Strains of these bacteria have become
resistant to all but a few antibiotics. According to estimates based on CDC
data, these four groups of bacteria are responsible for 44% of all
hospital-acquired infections and for 63% of all hospital-acquired blood stream
infections in the United States.
A number of factors are believed to contribute to the increased rate of
bacterial drug resistance:
(i) physician reliance on broad-spectrum antibiotics for empiric treatment
of an infection prior to definitive diagnoses;
(ii) repeated exposure of bacteria to long-term antibiotic therapy,
providing a competitive advantage to bacteria that harbor drug
resistance;
(iii) antibiotic use in immunosuppressed patients, for example, from cancer
chemotherapy, AIDS and organ transplantation;
(iv) the growing number of institutionalized, often elderly, patients
receiving multiple courses of antibiotics;
(v) the increased frequency of invasive medical procedures; and
(vi) societal and technological changes, including air travel, that
accelerate the spread of drug-resistant bacteria.
One example of the seriousness of antibiotic resistance is
methicillin-resistant staphylococci, or MRS, which has become resistant to
virtually all currently used antibiotics, except vancomycin. The heavy use of
vancomycin to treat MRS infections may in turn have contributed to the
emergence of new strains of enterococci that are resistant to vancomycin.
Infections caused by these vancomycin-resistant enterococci, or VRE, frequently
do not respond to any current therapies, and in many cases prove fatal. The
transfer of vancomycin resistance from enterococci to staphylococci has been
demonstrated experimentally. If vancomycin resistance is transferred in the
clinical setting by VRE to staphylococci, the leading cause of
hospital-acquired bacterial infections, no effective antibiotic therapy will
remain to treat MRS infections. The first report of vancomycin
intermediate-susceptible staphylococcus aureus in a clinical setting occurred
in 1997 in Japan, followed by subsequent reports of strains with decreased
susceptibility to vancomycin in patients in various parts of the United States.
Although caused by a different mechanism-of-action than occurs in VRE, we
believe that these reports are suggestive of future resistance problems in
staphylococci.
HEMATOLOGY/ONCOLOGY ENVIRONMENT
HEMATOPOIESIS OVERVIEW
With our recent acquisition of Maret, we are developing a family of peptide
drugs which stimulate progenitor cell growth. We are focusing our initial
clinical development on stimulation of blood cell growth. Blood contains
various types of cells including red blood cells, which carry oxygen to the
body's tissues; several types of white blood cells, which are an important
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part of the immune system; and platelets, which are involved in blood clotting.
The body's process of producing blood cells is known as hematopoiesis, and
occurs predominantly in the bone marrow. The bone marrow contains progenitor
cells that can differentiate into the various types of blood cells. Progenitor
cells are few in number but can proliferate when stimulated by growth factor
proteins.
There are various conditions that can cause the specialized blood cells to
drop below normal levels including: inadequate blood cell production; excessive
blood cell destruction or loss; or an autoimmune response in which a person's
immune system attacks the blood producing cells in the bone marrow.
Deficiencies may also be caused by treatments such as chemotherapy or radiation
therapy. These agents damage the blood-producing cells in the bone marrow, a
condition known as bone marrow suppression or myelosuppression. Damage to the
bone marrow can lead to deficiencies of all types of blood cells. No single
drug is currently available that can stimulate all lineages of blood cells.
The largest and most developed market opportunity in hematopoiesis is
anemia, which occurs when there is a low number of functioning red blood cells.
Anemia occurs as a result of a disease or treatment of a disease, for example,
chemotherapy or radiation treatment of cancer. Total worldwide sales of
products to treat anemia exceeded $5 billion in 2000 and is expected to reach
$9 billion by 2005.
The next largest segment in the hematopoiesis market is
colony-stimulating-factors, or CSFs, which increase neutrophils, or white blood
cells. White blood cells are the mainstay of the body's defense against
bacteria and fungi. CSFs are also used to help move cells out of the bone
marrow and into the blood for use in peripheral blood stem cell collection,
known as PBSC, or bone marrow transplantation. Worldwide sales of products to
increase neutrophils exceeded $1.3 billion in 2000 with 5% annual growth
predicted over the next five years. The market opportunity for new white blood
cell growth factors is substantial. Infection remains a significant problem in
patients receiving chemotherapy and/or radiation treatment for cancer and in
dialysis patients with chronic renal insufficiency.
The least developed segment of the hematopoiesis market is platelet growth
factors. Currently, only one drug is approved in the United States to increase
platelets and it achieved approximately $35.0 million in sales in 2000, despite
its marginal efficacy and significant side effects. Nevertheless, we believe
that the market for a safe, efficacious product capable of increasing platelets
is significantly larger, as evidenced by the over one million platelet
transfusions that occur per year in the United States alone.
STRATEGY
We believe that the hematology/oncology and antibiotics markets provide an
attractive opportunity for our research and development activities because
there are significant unmet clinical needs and the pre-clinical and clinical
development process typically follows an efficient and well-defined path to the
market, with early testing generally being predictive of later stage results.
Further, we believe these factors will lead to shorter overall development
timelines and higher approval rates for our products than for products in most
other therapeutic categories.
To this end, we are executing our "forward integration" development
strategy, which is to continue to utilize strategic collaborations selectively
to complement and balance our internal, self-funded efforts. We plan to retain
some rights to products resulting from our unpartnered programs, including our
ETRX 101 compound for the treatment of myelosuppression, as well as our Fungal
Efflux Pump Inhibitor Platform and those aspects of our Bacterial Efflux Pump
Inhibitor Platform that lie outside of our collaborations with Daiichi and
Schering-Plough Animal Health. In general, we plan to take some discovery leads
forward into clinical development stages alone before entering into
collaborative relationships for final product development and
commercialization. Additionally, we intend to continue to pursue the
acquisition of clinical compounds as we focus our transition to a
product-focused company.
ESSENTIAL'S RESEARCH PLATFORMS
CEPHALOSPORIN PLATFORM
Our cephalosporin platform is focused on discovering and developing novel
antibiotics for the treatment of infections caused by drug-resistant,
gram-positive bacteria, including MRS, VRE and pneumococci. Gram-positive and
gram-negative bacteria have fundamentally different surface characteristics.
These surface properties greatly affect the ability of an antibiotic
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to penetrate the bacterium and reach its target site. As a result, antibiotics
that are effective against gram-positive bacteria are often less effective
against gram-negative bacteria, and vice versa. The problematic gram-positive
bacteria targeted by this program cause serious infections, including
endocarditis, osteomyelitis, meningitis, deep-seated soft tissue infections,
complicated urinary tract infections, pneumonias, bacteremia and septicemia.
The cephalosporin work is being conducted in collaboration with J&J and
consists of the discovery and development of beta-lactam antibiotics with
specific efficacy against resistant, gram-positive bacteria. Traditional
beta-lactam antibiotics work by inhibiting enzymes, or more specifically,
penicillin-binding proteins, or PBPs, that carry out crucial steps in the
biosynthesis of the bacterial cell wall. Resistance to beta-lactam antibiotics
in MRS is primarily caused by bacterial production of PBP2a, an enzyme capable
of conducting cell wall biosynthesis in the presence of these antibiotics, as
well as by the production of beta-lactamases, which render beta-lactams
ineffective.
Our gram-positive cephalosporin platform has identified novel beta-lactam
antibiotics that are beta-lactamase-stable and inhibit PBPs, including PBP2a,
thereby gaining efficacy against MRS. Compounds emerging from our cephalosporin
platform are active against staphylococci, including MRS, enterococci, VRE,
streptococci, penicillin-resistant strains of pneumococci and other
gram-positive bacteria. We have prepared hundreds of new synthetic analogs and
have made significant advances in drug design, resulting in several compounds
with desirable in vitro potency, in vivo efficacy, favorable pharmacokinetics
and solubility, and low toxicity. Pharmacokinetics is an analysis of
absorption, distribution, metabolism and excretion of the compound in the body.
The initial antibiotics developed within this platform are expected to be
parenterally administered in the institutional setting to prevent or treat
infections caused by gram-positive bacteria, including those resistant to other
antibiotics. These antibiotics could potentially be clinically adopted for use
as a single agent following treatment failure in patients with a documented
drug-resistant infection, or empirically as a single agent or in combination
with a broad-spectrum antibiotic to extend coverage to resistant bacterial
strains. We believe that the clinical adoption of these antibiotics could be
similar to that of vancomycin as a single agent, or ceftazidime or an
aminoglycoside in combination use for empiric therapy.
In collaboration with J&J, we selected an initial cephalosporin candidate
for pre-clinical development in October 1996. Pre-clinical studies including
product formulation and process scale-up for manufacture of large quantities of
drug substance were completed in early 1999. Sufficient drug substance was
produced in this effort to allow the anticipated pre-clinical animal safety and
tolerability studies as well as Phase I clinical trials. Safety and
tolerability are measures of the body's ability to assimilate a compound at
various dose levels without adverse reactions or side effects. Pre-clinical
animal safety and tolerability studies were successfully completed, and Phase I
clinical trials were initiated in November 1999. We announced in October 2000
that these Phase I clinical trials would be extended in order to evaluate
modifications that may reduce or eliminate the irritation at the injection site
seen in some subjects with the current formulation. In May 2001, we announced
that J&J had selected a prodrug of the initial lead compound for toxicology
studies. We expect J&J to advance this prodrug into the clinic when these
toxicology studies are completed. We have filed patent applications in the
United States and elsewhere on lead structures discovered in this program, and
thirteen patents have issued in the United States.
In January 1999, in collaboration with J&J, we committed to the pre-clinical
development of a second cephalosporin compound. This compound has undergone
extensive pre-clinical evaluation of its activity and pharmacokinetics, and is
undergoing pharmaceutical characterization, product formulation and process
scale-up for manufacturing of sufficient bulk drug substance to conduct
requisite pre-clinical animal safety and tolerability studies. We expect that
these activities will occur in parallel with the extended Phase I clinical
development of the initial cephalosporin candidate, and that either compound
could be advanced into Phase II clinical trials.
In December 2000, we entered into an extension of our collaboration with J&J
to include a new series of Essential-discovered, chemically-distinct
cephalosporins, with similar spectrum and potency but with significantly
different physico-chemical properties, offering the additional potential for
oral bioavailability. Orally absorbed cephalosporins may potentially compete in
a significantly enlarged market for community-acquired infections, and be
useful as follow-on therapy to parenteral cephalosporins. In December 2001,
this agreement was extended for an additional year.
EFFLUX PUMP INHIBITOR PLATFORM
Essential has a bacterial efflux pump inhibitor platform with two
collaborators, Daiichi and SPAH. In the collaboration with Daiichi, the program
focuses on the high intrinsic resistance of P. aeruginosa to many antibiotics,
including quinolones. This resistance has generally been attributed to the
impermeable outer membrane of this gram-negative bacterium. Recent information
indicates that this intrinsic resistance is due to the combined effects of low
membrane permeability and the
9
production of particular membrane proteins, efflux pumps, that bind to
antibiotics of many different classes as they enter the bacterial cell and
eject, or efflux, them from the bacterium, preventing their interaction with
specific intracellular targets.
We believe that the combination of bacterial efflux pump inhibitors with
existing antibiotics could restore the activity of antibiotics against bacteria
expressing efflux pump-mediated antibiotic resistance. In addition, many
bacterial species have active efflux pumps that contribute to the overall
intrinsic susceptibility of the species to some antibiotics. As a result, we
believe that the combination of bacterial efflux pump inhibitors with existing
antibiotics could increase the susceptibility of many gram-negative bacteria to
these antibiotics, and thereby either extend the clinical usefulness of the
antibiotic, or lower required therapeutic doses. We have established a genetics
and molecular biology program that focuses on microbial efflux systems, and
have developed novel screening and lead evaluation technologies to permit the
identification of lead compounds for subsequent lead optimization efforts.
Daiichi is designing compounds for activity against a multi-drug efflux pump
in pseudomonas, based on efflux pump inhibitor leads that we discovered with
Daiichi. We have worked with Daiichi to progress the lead compounds toward
pre-clinical development, with the primary objective of developing potentiators
that will be combined with Daiichi's oral and parenteral quinolone antibiotics
or with beta-lactamase stable beta-lactam antibiotics to overcome efflux
pump-mediated resistance in P. aeruginosa.
In addition, we have demonstrated that inhibitors can be beneficially
combined with other classes of antibiotics for which efflux pump-mediated
resistance limits clinical utility, such as macrolides or ketolides, and we are
actively screening for inhibitors in this area. We are also engaged in the
modification of existing antibiotics for which efflux is known to be a limiting
factor in their activity, and believe this approach may be especially useful
when multiple pumps of different structural families are involved. We have
filed patent applications in the United States and elsewhere on various lead
structures discovered under this program, and four patents have issued in the
United States.
In the bacterial efflux pump inhibition work with SPAH, we are conducting
joint research to discover and develop compounds to be used in the treatment of
veterinary bacterial infections, based upon application of our efflux pump
technology to existing SPAH antibacterials.
The azoles, which are inhibitors of the ergosterol biosynthesis pathway, are
currently the most widely used class of agents in the treatment of fungal
diseases. Among the azoles, fluconazole is the most extensively used, but there
are increasing reports of fluconazole therapy failures due to emergence of
resistance. Recently, multi-drug efflux pumps have been implicated in candida
resistance to fluconazole and other azoles. As with bacterial efflux, intrinsic
fungal resistance to fluconazole, such as found in C. glabrata, C. krusei and
in aspergillus, may arise from naturally-occurring, multi-drug efflux pumps.
Therefore, similar to our approach with regard to bacteria, we believe that by
inhibiting the activity of efflux pumps in fungal pathogens, it may be possible
to achieve a significant decrease of both intrinsic and acquired resistance,
thereby extending the useful life of existing agents, broadening the antifungal
spectra of existing agents, or allowing newer agents to be more clinically
efficacious.
We initiated screens for inhibitors of several efflux pumps in candida sp.
and aspergillus, which resulted in several natural product and synthetic
compound screening hits. After an extensive lead identification effort, we have
selected a novel chemical class of broad-spectrum inhibitors of azole efflux in
candida sp. for a lead optimization program. If successful, this program could
result in inhibitors that could be used to potentiate several different types
of azole/triazole antifungals:
(i) a generic narrow-spectrum azole, like fluconazole with good activity
against candida and good pharmacokinetic properties;
(ii) triazoles currently in clinical trials or the early stages of
toxicology, with a broad spectrum of activity including aspergillus,
but with less desirable pharmacokinetic properties than fluconazole;
and/or
(iii) a newer triazole with excellent aspergillus activity as well as
activity against candida and a pharmacokinetic profile like
fluconazole.
STRUCTURE-BASED DRUG DESIGN PLATFORM--NOVEL CELL WALL BIOSYNTHESIS INHIBITORS
In parallel with our oral cephalosporin work with J&J, this program is
focused on discovering and developing novel antibiotics for the treatment of
drug-resistant, gram-positive bacteria and some gram-negative bacteria that are
commonly associated with respiratory tract infections. The target of these
inhibitors is a different enzyme in the cell wall biosynthesis pathway than
that inhibited by beta-lactam antibiotics and these antibacterials could have a
broader spectrum of activity than the more targeted cephalosporins.
10
Althexis, which we acquired in October 2001, entered into a collaboration
agreement with PLIVA Pharmaceuticals in December 1998 and together chose the
target of this program. They conducted preliminary work to validate the target
as being suitable for structure-based drug design, or SBDD. Following
validation of the target, they collaborated in order to apply Althexis' unique
expertise and experience in SBDD to discover novel inhibitors of this target.
This program utilized PLIVA's expertise in chemistry, microbiology and
pharmacology, which have now been supplemented with those of Essential. In
December 2001, the funded research portion of this agreement came to its
natural conclusion. We are continuing to work with PLIVA using SBDD to develop
products based upon this novel cell wall biosynthesis target.
OTHER RESEARCH PROGRAMS:
MICROBIAL GENOMICS--VALID--VALIDATED ANTIMICROBIAL LEAD IDENTIFICATION AND
DEVELOPMENT
We believe that we have developed a unique approach to anti-infective
research using microbial genetics as a foundation for drug discovery. Further,
we believe that this approach has yielded a large number of relevant novel drug
targets that in turn are expected to lead to the development of new classes of
antimicrobials. Our strategy is to focus our gene discovery efforts on the
pharmaceutically-relevant portion of bacterial and fungal genomes, by
identifying genes that are essential to a pathogen's viability in vitro (our
Bacterial and Fungal In Vitro Essential Genes Program) or in vivo (our
Bacterial In Vivo Essential Genes Program). These target genes, once
identified, are incorporated into our high-throughput screening systems to
identify compounds for further development. We have applied our microbial
genomics approach to bacterial and fungal systems, and have also applied this
approach to viruses through our collaboration with Iconix. We believe that this
approach offers significant advantages over traditional pharmaceutical industry
biochemical assay approaches, while utilizing data from publicly-available,
genomic sequencing approaches.
BACTERIAL AND FUNGAL IN VITRO ESSENTIAL GENES PROGRAM
Our Bacterial and Fungal In Vitro Essential Genes Program utilizes a
targeted genomics approach to discover the pharmaceutically-relevant genes
present in bacterial fungal genomes, and focuses on several important and
diverse pathogenic organisms. We have created unique molecular tools and
approaches in bacterial and fungal molecular genetics, which allow us to create
and use gene mutants to quickly and directly clone essential bacterial and
fungal genes. These same mutants are then used to characterize and prioritize
drug targets. This targeted genomics approach accelerates the entire discovery
process by focusing only on the functionally important portions of the genome
and thereby bypassing the task of sequencing and characterizing irrelevant
portions of the genome.
BACTERIAL IN VIVO ESSENTIAL GENES PROGRAM
Bacteria possess a set of genes, encoding both metabolic functions and
non-redundant virulence factors and regulators, that are necessary for pathogen
growth in a mammalian environment, which is referred to as in vivo, but which
are not required for bacterial growth in enriched media in a petri dish, which
is referred to as in vitro. We refer to these genes as in vivo essential, or
ivs, genes. Our scientists have developed a proprietary method, referred to as
size-based marker identification technology, or SMIT, to identify the ivs
mutants from among more than 10,000 mutants that have been evaluated in
infection models. Many of these genes constitute targets not previously
directly utilized in drug discovery programs. We have created a library of over
65 ivs genes that have been characterized in vitro and in animal systems for
selection of priority targets for screening. We have produced proteins for
binding assays and biochemical assays for a number of these targets, i.e.
applied the VALID paradigm, and plan to expand this effort to additional high
priority targets in 2002. An extension of the SMIT technology is expected to be
useful as a novel method to enable high-throughput in vivo evaluation of lead
compounds. Products that may emerge from this program are expected to be
bactericidal antibiotics that may be applied in either the human or animal
health market.
We have retained all rights to this program and are self-funding it. We have
filed patent applications in the United States covering methods for discovery
and characterization of bacterial in vivo essential genes.
MANUFACTURING AND MARKETING
We do not have any expertise in the manufacture of commercial quantities of
drugs, and our current facilities and staff are inadequate for the commercial
production or distribution of drugs. We intend to rely on our major
pharmaceutical partners for
11
the manufacturing, marketing and sale of any products that result from our
collaborations. We will be required to contract with third parties for the
manufacture of other products or to acquire or build production facilities
before we can manufacture any products ourselves. We cannot assure you that we
will be able to enter into contractual manufacturing arrangements with third
parties on acceptable terms, if at all, or acquire or build production
facilities ourselves. To date we have had no experience with sales, marketing
or distribution. Consequently, in order to market any of our products, we will
be required to develop marketing and sales capabilities, either on our own or
in conjunction with others. We cannot assure you that we will be able to
develop any of these capabilities. In instances where we rely on partners for
the manufacturing, marketing and sales of any products that result from our
collaborations, we cannot assure you that these partners will satisfactorily
perform these functions.
We cannot assure you that any products successfully developed by us or our
collaborative partners, if approved for marketing, will achieve market
acceptance. The hematopoietic agents and antimicrobial products that we are
attempting to develop will compete with a number of well-established drugs
manufactured and marketed by major pharmaceutical companies. The degree of
market acceptance of any products developed by us will depend on a number of
factors, including the establishment and demonstration in the medical community
of the clinical efficacy and safety of our product candidates, their potential
advantage over existing treatment methods, and reimbursement policies of
government and third-party payors. We cannot assure you that physicians,
patients or the medical community in general will accept and utilize any
products that we may develop or that our collaborative partners may develop.
Our ability and that of our collaborative partners to receive revenues and
income with respect to drugs, if any, developed through the use of our
technology will depend, in part, upon the extent to which reimbursement for the
cost of these drugs will be available from third-party payors, such as
government health administration authorities, private health care insurers,
health maintenance organizations, pharmacy benefits management companies and
other organizations. Third-party payors are increasingly challenging the prices
charged for pharmaceutical products. We cannot assure you that third-party
reimbursement will be available or sufficient to allow profitable price levels
to be maintained for drugs developed by us or our collaborative partners. Any
inability to maintain profitable price levels for these drugs could adversely
affect our business and results of operations.
PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS
Protection of our proprietary compounds and technology is vital to our
business. Our policy is to seek, when appropriate, protection for our lead
compounds, gene discoveries, screening technologies and other proprietary
technology by filing patent applications in the United States and other
countries. We have filed more than 150 patent applications in the United
States, in addition to applications filed in other countries, covering our
inventions. As of March 15, 2002, we had been issued 38 patents in the United
States and various other patents relating to these inventions in foreign
countries.
Patent law as it relates to inventions in the biotechnology field is still
evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, the patent position of
biotechnology and pharmaceutical companies is highly uncertain and involves
many complex legal and technical issues. We cannot assure you that patents will
be granted with respect to any of our patent applications currently pending in
the United States or in other countries, or with respect to applications filed
by us in the future. The failure by us to obtain patents pursuant to our
applications and any future applications could have a material adverse effect
on our business. Furthermore, we cannot assure you that any patents that may be
issued to us will not be infringed, challenged, invalidated or circumvented by
others, or that the rights granted thereunder will provide competitive
advantages to us. In particular, it is difficult to enforce patents covering
methods of use of screening and other similar technologies. Litigation to
establish the validity of patents, to defend against patent infringement claims
and to assert infringement claims against others can be expensive and
time-consuming, even if the outcome is favorable to us. If the outcome of
patent prosecution or litigation is not favorable to us, our business could be
materially adversely affected. Moreover, because patent applications in the
United States are maintained in secrecy until patents issue, because patent
applications in other countries generally are not published until more than
eighteen months after they are filed, because publication of technological
developments in the scientific or patent literature often lags behind the date
of these developments, and because searches of prior art may not reveal all
relevant prior inventions, we cannot be sure that we were the first to invent
the subject matter covered by our patent applications or that we were the first
to file patent applications for particular inventions.
Our commercial success will depend in part on not infringing patents or
proprietary rights of others. We cannot assure you that we will be able to
obtain a license to any third-party technology we may require to conduct our
business or that if obtainable, this technology can be licensed at reasonable
cost. Failure by us to obtain a license to technology that we may
12
require to utilize our technologies or commercialize our products may have a
material adverse effect on our business. In some cases, litigation or other
proceedings may be necessary to defend against or assert claims of
infringement, to enforce patents issued to us, to protect trade secrets,
know-how or other intellectual property rights owned by us, or to determine the
scope and validity of the proprietary rights of third parties. Any potential
litigation could result in substantial costs to and diversion of resources by
us and could have a material adverse impact on our business. We cannot assure
you that any of our issued or licensed patents will ultimately be held valid or
that any efforts to defend any of our patents, trade secrets, know-how or other
intellectual property rights will be successful. An adverse outcome in any
litigation or proceeding could subject us to significant liabilities, require
us to cease using the subject technology or require us to license the subject
technology from the third party, all of which could have a material adverse
effect on our business.
In addition to patent protection, we rely upon trade secrets, proprietary
know-how and continuing technological advances to develop and maintain our
competitive position. To maintain the confidentiality of our trade secrets and
proprietary information, we require our employees, consultants and
collaborative partners to execute confidentiality agreements upon the
commencement of their relationships with us. In the case of employees, the
agreements also provide that all inventions resulting from work performed by
them while in our employ will be our exclusive property. We cannot assure you,
however, that these agreements will not be breached, that we would have
adequate remedies in the event of any breach or that our trade secrets or
proprietary information will not otherwise become known or developed
independently by others.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position, which we seek to protect, in part, by confidentiality
agreements with our commercial partners, collaborators, employees and
consultants. We also have invention or patent assignment agreements with our
employees and some, but not all, commercial partners and consultants. We cannot
assure you that relevant inventions will not be developed by a person not bound
by an invention assignment agreement. We cannot assure you that binding
agreements will not be breached, that we would have adequate remedies for any
breach, or that our trade secrets will not otherwise become known or be
independently discovered by competitors.
As is commonplace in the biotechnology industry, we employ individuals who
were previously employed at other biotechnology or pharmaceutical companies,
including competitors or potential competitors of ours. To the extent these
employees are involved in research areas that are similar to those areas in
which they were involved at their former employer, we may be subject to claims
that these employees and/or that we have inadvertently or otherwise used or
disclosed the alleged trade secrets or other proprietary information of the
former employers. Litigation may be necessary to defend against these types of
claims, which could result in substantial costs and be a distraction to
management, and which may have a material adverse effect on our business, even
if we were ultimately successful in defending against these claims.
COMPETITION
The biotechnology and pharmaceutical industries are intensely competitive.
Many companies, including large, multinational pharmaceutical and biotechnology
companies, are actively engaged in activities similar to ours. Many of these
companies may employ in these activities greater financial and other resources,
including larger research and development staffs and more extensive marketing
and manufacturing organizations, than us or our collaborative partners. There
are also academic institutions, governmental agencies and other research
organizations that are conducting research in areas in which we are working.
Competing technologies may be developed that would render our technologies
obsolete or non-competitive. We are aware of many pharmaceutical and
biotechnology companies that are engaged in efforts to treat myelosuppression
and each of the infectious diseases for which we are seeking to develop
therapeutic products.
We also expect to encounter significant competition with respect to the
drugs that we and our collaborative partners plan to develop. Companies that
complete clinical trials, obtain required regulatory agency approvals and
commence commercial sale of their drugs before their competitors may achieve a
significant competitive advantage. In order to compete successfully, our goal
is to obtain patent protection for our potential products and to make those
available selectively to pharmaceutical companies through collaborative and
licensing arrangements. We cannot assure you that our competitors will not
develop competing drugs that are more effective than those developed by us and
our collaborative partners or obtain regulatory approvals of their drugs more
rapidly than we and our collaborative partners do, thereby rendering our and
our collaborative partners' drugs obsolete or noncompetitive. Moreover, we
cannot assure you that our competitors will not obtain patent protection or
other intellectual property rights that would limit our or our collaborative
partners' ability to use our technology or commercialize our or their drugs.
13
GOVERNMENT REGULATION
The development, manufacture and marketing of drugs developed by us or our
collaborative partners are subject to regulation by numerous governmental
agencies in the United States and in other countries. The United States Food
and Drug Administration, or FDA, and comparable regulatory agencies in other
countries impose mandatory procedures and standards for the conduct of some
types of pre-clinical testing and clinical trials and the production and
marketing of drugs for human therapeutic use. Product development and approval
of a new drug are likely to take a number of years and involve the expenditure
of substantial resources.
Any compound developed by us or our collaborative partners must receive
regulatory agency approval before it may be marketed as a drug in a particular
country. The regulatory process, which includes pre-clinical testing and
clinical trials of each compound in order to establish its safety and efficacy,
can take many years and requires the expenditure of substantial resources. The
steps required by the FDA before new drugs may be marketed in the United States
include:
(i) pre-clinical studies;
(ii) the submission to the FDA of a request for authorization to conduct
clinical trials on an investigational new drug, or IND;
(iii) adequate and well-controlled clinical trials to establish the safety
and efficacy of the drug for its intended use;
(iv) submission to the FDA of a new drug application, or NDA; and
(v) review and approval of the NDA by the FDA before the drug may be
shipped or sold commercially.
In the United States, pre-clinical testing includes both in vitro and in
vivo laboratory evaluation and characterization of the safety and efficacy of a
drug and its formulation. Laboratories involved in pre-clinical testing must
comply with FDA regulations regarding good laboratory practices. Pre-clinical
testing results are submitted to the FDA as part of the IND and are reviewed by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to an IND, the IND becomes effective 30 days following its receipt by
the FDA. There can be no assurance that submission of an IND will result in the
commencement of human clinical trials.
Clinical trials, which involve the administration of the investigational
drug to healthy volunteers or to patients under the supervision of a qualified
principal investigator, are typically conducted in three sequential phases,
although the phases may overlap with one another. Clinical trials must be
conducted in accordance with the FDA's good clinical practices under protocols
that detail the objectives of the study, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an independent institutional review board, or
IRB, at the institution where the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution. Compounds must be formulated
according to the FDA's good manufacturing practices.
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more
rarely, to a group of selected patients with the targeted disease or disorder.
The goal of Phase I clinical trials is typically to test for safety/adverse
effects, dose tolerance, absorption, biodistribution, metabolism, excretion and
clinical pharmacology and, if possible, to gain early evidence regarding
efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range
and to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III
clinical trials are initiated to establish further clinical safety and efficacy
of the investigational drug in a broader sample of the general patient
population at geographically dispersed study sites in order to determine the
overall risk-benefit ratio of the drug and to provide an adequate basis for all
physician labeling. The results of the research and product development,
manufacturing, pre-clinical testing, clinical trials and related information
are submitted to the FDA in the form of an NDA for approval of the marketing
and shipment of the drug.
Data obtained from pre-clinical and clinical activities are susceptible to
varying interpretations, which could delay, limit or prevent regulatory agency
approval. In addition, delays or rejections may be encountered based upon
changes in regulatory agency policy during the period of drug development
and/or the period of review of any application for regulatory agency approval
for a compound. Delays in obtaining regulatory agency approvals could adversely
affect the marketing of any drugs developed by us or our collaborative
partners, impose costly procedures upon our and our collaborative partners'
activities, diminish any competitive advantages that we or our collaborative
partners may attain and adversely affect our ability to receive royalties. We
cannot assure you that, even after significant time and expenditures,
regulatory agency approvals will be obtained for any compounds developed by or
in collaboration with us. Moreover, if regulatory agency approval for a drug is
granted, this approval may entail limitations on the indicated uses for which
it may be marketed that could limit the potential
14
market for this drug. Furthermore, approved drugs and their manufacturers are
subject to continual review, and discovery of previously unknown problems with
a drug, or its manufacturer, may result in restrictions on the drug or
manufacturer, including withdrawal of the drug from the market. In addition,
regulatory agency approval of prices is required in many countries and may be
required for the marketing of any drug developed by us or our collaborative
partners in these countries.
Timetables for the various phases of clinical trials and NDA approval cannot
be predicted with any certainty. We, our collaborative partners or the FDA may
suspend clinical trials at any time if it is believed that individuals
participating in the trials are being exposed to unacceptable health risks.
Even assuming that clinical trials are completed and that an NDA is submitted
to the FDA, we cannot assure you that the NDA will be reviewed by the FDA in a
timely manner or that once reviewed, the NDA will be approved. The approval
process is affected by a number of factors, including the severity of the
targeted indications, the availability of alternative treatments and the risks
and benefits demonstrated in clinical trials. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, or may require additional
testing or information with respect to the investigational drug. Even if
initial FDA approval is obtained, further studies, including post-market
studies, may be required in order to provide additional data on safety and will
be required in order to gain approval for the use of a product as a treatment
for clinical indications other than those for which the product was initially
tested. The FDA will also require post-market reporting and may require
surveillance programs to monitor the side effects of the drug. Results of
post-marketing programs may limit or expand the further marketing of the drug.
Further, if there are any modifications to the drug, including changes in
indication, manufacturing process or labeling, an NDA supplement may be
required to be submitted to the FDA.
Each manufacturing establishment for new drugs is also required to receive
some form of approval by the FDA. Among the conditions for approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the FDA's good manufacturing practices,
which must be followed at all times. In complying with standards set forth in
these regulations, manufacturers must continue to expend time, monies and
effort in the area of production and quality control to ensure full technical
compliance. Manufacturing establishments, both foreign and domestic, are also
subject to inspections by or under the authority of the FDA and may be subject
to inspections by foreign and other federal, state or local agencies.
We cannot assure you that the regulatory framework described above will not
change or that additional regulations will not arise that may affect approval
of or delay an IND or an NDA. Moreover, because our present collaborative
partners are, and it is expected that our future collaborative partners may be,
primarily responsible for pre-clinical testing, clinical trials, regulatory
approvals, manufacturing and commercialization of drugs, the ability to obtain
and the timing of regulatory approvals are not within our control.
Prior to the commencement of marketing a product in other countries,
approval by the regulatory agencies in these countries is required, whether or
not FDA approval has been obtained for a particular product. The requirements
governing the conduct of clinical trials and product approvals vary widely from
country to country, and the time required for approval may be longer or shorter
than the time required for FDA approval. Although there are some procedures for
unified filings for some European countries, in general, each country has its
own procedures and requirements.
We are also subject to regulation under other federal laws and regulation
under state and local laws, including laws relating to occupational safety,
laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although
we believe that our safety procedures for handling and disposing of radioactive
compounds and other hazardous materials used in our research and development
activities comply with the standards prescribed by federal, state and local
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of an accident, we
could be held liable for any damages that result and any liability could exceed
our financial resources.
The drug development process and regulatory framework for animal drugs are
similar in many respects to that for human therapeutics. In the United States,
the Center for Veterinary Medicine of the FDA is charged with assuring that a
new animal drug will not be introduced into interstate commerce unless it is
the subject of an approved new animal drug application, or NADA. Like an NDA,
an NADA must be supported by proof that the drug is safe and effective. An NADA
application must include reports of adequate and well-controlled
investigations. Procedures for the initiation of studies on an investigational
new animal drug are similar to those for an IND. Compliance with good
laboratory practices and good clinical practices is required.
EMPLOYEES
As of December 31, 2001, we had 139 full-time, regular employees, 48 of whom
held Ph.D. degrees and 30 of whom held other advanced degrees. Approximately
118 of the 139 employees are engaged in scientific activities and 21 are
engaged in
15
general, managerial and administrative functions. None of our employees is
represented by a collective bargaining agreement, nor have we experienced work
stoppages. We consider our relations with our employees to be good.
SCIENTIFIC CONSULTANTS
We supplement our internal scientific staff with consulting arrangements
with a number of leading academic and industrial scientists and clinicians. Our
Scientific Advisory Board formally meets once or twice per year to review our
programs and provide general scientific guidance and direction. On a more
frequent basis, we use consultants either in small focused groups or as
individuals on an ad hoc basis to provide detailed scientific guidance in such
areas as genetics and molecular biology, chemistry, clinical
microbiology/pharmacology and molecular diversity/natural products. In 2001, we
paid these consultants approximately $403,000 in the aggregate, as compared to
approximately $321,000 in 2000. None of the consultants is an employee of ours.
Most of the consultants have other commitments to, or consulting or advisory
contracts with, their employers and other institutions.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. In some cases, these statements can be identified by the
use of forward-looking terminology such as "may," "will," "could," "should,"
"would," "expect," "anticipate," "continue" or other similar words. These
statements discuss future expectations, contain projections of results of
operations or of financial condition or state trends and known uncertainties or
other forward-looking information. Furthermore, these statements are based on
current expectations that involve a number of uncertainties including those set
forth in the risk factors below. When considering forward-looking statements,
you should keep in mind that the risk factors noted below and other factors
noted throughout this report or incorporated by reference could cause our
actual results to differ significantly from those contained in any
forward-looking statement.
Forward-looking statements include information concerning possible or
assumed future results of our operations, including statements regarding:
. our ability to use our discovery and technology platforms to identify
potential product candidates;
. our expectations regarding the anticipated date of selection of clinical
development candidates;
. our expectations regarding dates for commencement of clinical trials and
development time lines;
. the timing and likelihood of regulatory approvals;
. the continuation of our collaborations with our partners;
. our future capital requirements and the expected time period during which
our existing financial resources will meet these capital requirements; and
. our expectations regarding business conditions generally and growth in
the biopharmaceutical industry and overall economy.
Many factors could affect our actual financial results, and could cause
these actual results to differ materially from those in these forward-looking
statements. These factors include the following:
. costs or difficulties related to the integration of the businesses of
Althexis and Maret being greater than expected;
. demands placed on management by the increase in the size of Essential;
. unanticipated increases occurring in financing and other costs;
. general economic or business conditions being less favorable than
expected; and
. legislative or regulatory changes adversely affecting Essential or the
biopharmaceutical industry generally.
16
RISK FACTORS
IF OUR RESEARCH AND DEVELOPMENT EFFORTS DO NOT RESULT IN POTENTIAL DRUG
CANDIDATES AND/OR WE CANNOT ADVANCE POTENTIAL PRODUCTS THROUGH CLINICAL TRIALS,
WE MAY FAIL TO DEVELOP PHARMACEUTICAL PRODUCTS.
Our first potential pharmaceutical product, a compound in the cephalosporin
class of antibacterials, commenced Phase I clinical trials under the direction
of our partner, J&J, in November 1999. The cephalosporin class of antibacterial
drugs is the largest class of antibiotics in terms of global sales. The purpose
of these Phase I studies is to assess the compound's safety, tolerability and
pharmacokinetics. Based upon the observation of irritation at the injection
site in some subjects in these trials, we announced in May 2001 that J&J had
decided to focus current efforts on the advancement of RWJ-442831, an
Essential-developed prodrug form of the collaboration's lead parenteral
cephalosporin product, known as RWJ-54428, into pre-clinical toxicology studies
that, if successful, would allow the compound to advance into Phase I clinical
trials. Preliminary studies of RWJ-442831 that we conducted in animals,
demonstrated reduced venous irritation at the injection site compared to
RWJ-54428. The Phase I clinical trials for this cephalosporin compound may not
be completed. We have two other cephalosporin compounds in the J&J
collaboration: another parenteral compound that is in pre-clinical development
and a cephalosporin intended for oral administration, in the research stage.
ETRX 101, our small molecule angiotensin derivative, has completed Phase I
clinical testing. The Phase II clinical trials for this compound may not be
completed. Our other potential products are in the pre-clinical or research
stage. All of our potential products will require significant additional
research and development efforts before we can sell them. These efforts include
extensive pre-clinical and clinical testing prior to submission to the Food and
Drug Administration, or FDA, or other regulatory authority. Pre-clinical and
clinical testing will likely take several years. After submission, these
potential products will be subject to lengthy regulatory review. We cannot
predict with accuracy the time required to commercialize new pharmaceutical
products.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. We do not expect any of our potential
products to be commercially available for a number of years, if at all.
Pharmaceutical products that appear to be promising at early stages of
development may not reach the market for a number of reasons including the
following:
. we or our collaborative partners may not successfully complete research
and development efforts;
. any pharmaceutical products we or our collaborative partners develop may
be found to be ineffective or to cause harmful side effects during
pre-clinical testing or clinical trials;
. we may fail to obtain required regulatory approvals for any products that
we develop;
. we may be unable to manufacture enough of any potential products at an
acceptable cost and with appropriate quality;
. our products may not be competitive with other existing or future
products; and
. proprietary rights of third parties may prevent us from commercializing
our products.
IF WE ARE UNABLE TO MAINTAIN OUR CURRENT COLLABORATIONS WITH OUR PARTNERS,
ENTER INTO NEW COLLABORATIONS OR EXTEND CONCLUDED COLLABORATIONS, DEVELOPMENT
OF OUR POTENTIAL PRODUCTS COULD BE DELAYED.
Our strategy for enhancing our research and development capability and
funding, in part, our capital requirements involves entering into collaboration
agreements with major pharmaceutical companies, which we refer to as our
partners. We have entered into collaboration agreements with Johnson & Johnson,
Daiichi Pharmaceutical, Pfizer animal health group and Schering-Plough Animal
Health. Under these agreements, our collaborative partners are responsible for:
. selecting which compounds discovered in the collaboration will proceed
into subsequent development, if any;
. conducting pre-clinical testing, clinical trials and obtaining required
approvals for potential products; and
. manufacturing and commercializing any approved products.
We cannot control the timing of these actions or the amount of resources
devoted to these activities by our partners. In addition, these agreements are
subject to cancellation or the election not to extend by our partners. As a
result, our receipt of revenue, whether in the form of continued research
funding, product development milestone payments, or royalties on sales, depends
upon the decisions made and the actions taken by our partners. Our
collaborative partners may view compounds that
17
we may discover as competitive with their own products or potential products,
and, therefore, any partner may elect not to proceed with the development of
our potential products. Our partners are free to pursue their own existing or
alternative technologies to develop products in preference to our potential
products. We cannot be certain that our interests will continue to coincide
with those of our partners, or that disagreements concerning our rights,
technology, or other proprietary interests will not arise with our partners.
Substantially all of our revenues to date have resulted from our
collaborations. We intend to continue to rely on our collaborations to fund a
substantial portion of our research and development activities over the next
several years. If our existing partners do not extend our collaborations or if
we are unable to enter into new collaborations, the development and
commercialization of our potential products may be delayed. In addition, we may
be forced to seek alternative sources of financing for product development and
commercialization activities.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST, EXPECT TO CONTINUE TO INCUR
LOSSES FOR THE NEXT SEVERAL YEARS AND MAY NEVER ACHIEVE PROFITABILITY.
We have incurred substantial net losses in every year since our inception in
December 1992. We had net losses allocable to common stockholders of $10.7
million in 1999, $13.9 million in 2000 and $28.2 million in 2001. We had an
accumulated deficit of $81.1 million through December 31, 2001. We expect to
continue to incur operating losses over the next several years.
Substantially all of our revenues to date have resulted from license fees,
research support and milestone payments under our collaboration agreements. We
will not receive revenues or royalties from drug sales until we or our
collaborative partners successfully complete clinical trials with regard to a
drug candidate, obtain regulatory approval for this drug candidate, and
successfully commercialize the drug. We do not expect to receive revenues or
royalties from sales of drugs for a number of years, if at all. If we fail to
achieve sufficient revenues to become profitable or sustain profitability, we
may be unable to continue operations.
OUR APPROACH TO DRUG DISCOVERY IS UNPROVEN AND WE MAY NOT SUCCEED IN
IDENTIFYING ANY DRUG CANDIDATES WITH CLINICAL BENEFITS.
We are developing a gene-function-based technology platform and other
proprietary technology to attempt to identify and commercialize novel
antibiotics, antifungals and antiviral agents. To date these technologies have
identified a small number of compounds that have demonstrated potential
clinical benefits. We cannot be certain that these or any other technologies we
may develop will allow us to identify drug candidates that may have clinical
benefits. The failure to identify and develop new drug candidates will have a
material adverse effect on our business.
IF WE FAIL TO SATISFY SAFETY AND EFFICACY REQUIREMENTS OR MEET REGULATORY
REQUIREMENTS IN OUR CLINICAL TRIALS, WE WILL NOT BE ABLE TO COMMERCIALIZE OUR
DRUG CANDIDATES.
Either we or our collaborators must show through pre-clinical studies and
clinical trials that each of our pharmaceutical products is safe and effective
in humans for each indication before obtaining regulatory clearance from the
FDA for the commercial sale of that pharmaceutical product. If we fail to
adequately show the safety and effectiveness of a pharmaceutical product,
regulatory approval could be delayed or denied. The results from pre-clinical
studies and early clinical trials are often different than the results that are
obtained in large-scale testing. We cannot be certain that we will show
sufficient safety and effectiveness in our clinical trials that would allow us
to obtain the needed regulatory approval. A number of companies in the
pharmaceutical industry, including biotechnology companies, have suffered
significant setbacks in advanced clinical trials, even after promising results
in earlier trials.
Any drug is likely to produce some level of toxicity or undesirable side
effects in animals and in humans when administered at sufficiently high doses
and/or for a long period of time. Unacceptable toxicities or side effects may
occur in the course of toxicity studies or clinical trials. We have observed
local irritation at the injection site in some subjects receiving RWJ-54428,
one of our potential cephalosporin products, in Phase I clinical trials
conducted by our partner, J&J. In addressing this problem, we announced in May
2001 that J&J had decided to focus current efforts on the advancement of
RWJ-442831, an Essential-developed prodrug form of the cephalosporin compound
RWJ-54428, into pre-clinical toxicology studies which, if successful, would
allow the compound to advance into Phase I clinical trials. Preliminary studies
of RWJ-442831 in animals, conducted by us, demonstrated reduced venous
irritation at the injection site as compared to RWJ-54428. If we observe
further unacceptable toxicities or other side effects, we, our partner or
regulatory authorities may interrupt, limit, delay or halt the development of
the drug. In addition, unacceptable toxicities or side effects could prevent
approval by the FDA or foreign regulatory authorities for any or all
indications.
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We must obtain regulatory approval before marketing or selling our future
drug products. In the United States, we must obtain FDA approval for each drug
that we intend to commercialize. The FDA approval process is lengthy and
expensive, and approval is never certain. Products distributed abroad are also
subject to foreign government regulation. The process of obtaining FDA and
other required regulatory approvals can vary a great deal based upon the type,
complexity and novelty of the products involved. Delays or rejections may be
encountered based upon additional government regulation from future legislation
or administrative action or changes in FDA policy during the period of clinical
trials and FDA regulatory review. Similar delays also may be encountered in
foreign countries.
None of our drug candidates has received regulatory approval. If we fail to
obtain this approval, we will be unable to manufacture and sell our drug
products commercially. Even if we obtain regulatory approval, we may be
required to continue clinical studies even after we have started selling a
pharmaceutical product. In addition, identification of some side effects after
a drug is on the market or the occurrence of manufacturing problems could cause
subsequent withdrawal of approval, reformulation of the drug, additional
pre-clinical testing or clinical trials and changes in labeling of the product.
This could delay or prevent us from generating revenues from the sale of that
drug or cause our revenues to decline.
If we obtain regulatory approval, we will also be subject to ongoing
existing and future FDA regulations and guidelines and continued regulatory
review. In particular, we, our collaborators, or any third party that we use to
manufacture the drug, will be required to adhere to regulations setting forth
current good manufacturing practices. The regulations require that we
manufacture our products and maintain our records in a particular way with
respect to manufacturing, testing and quality control activities. Furthermore,
we, our collaborators, or our third-party manufacturers, must pass a
pre-approval inspection of manufacturing facilities by the FDA before obtaining
marketing approval.
Failure to comply with the FDA or other relevant regulatory requirements may
subject us to administrative or legally imposed restrictions. These
restrictions may include warning letters, civil penalties, injunctions, product
seizure or detention, product recalls, total or partial suspension of
production and FDA refusal to approve pending New Drug Applications, or NDAs,
or supplements to approved NDAs.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY LOSE THE
COMPETITIVE ADVANTAGE INHERENT IN OUR PROPRIETARY TECHNOLOGIES.
Our success depends in part on our ability to establish, protect and enforce
our proprietary rights relating to our lead compounds, gene discoveries,
screening technology and other proprietary technology. We have filed more than
150 patent applications in the United States, in addition to applications filed
in other countries, in order to protect lead compounds, gene discoveries and
screening technology, and 38 United States patents have been issued to date on
these applications. We cannot be certain that patents will be granted with
respect to any of our patent applications currently pending in the United
States or in other countries, or with respect to applications filed in the
future. For example, although in 2000 a patent was granted in the United States
covering our cephalosporin compounds now in development, prosecution has not
yet begun on more recently filed patent applications related to prodrugs of our
earlier inventions, as well as on our new compounds having potential for oral
administration. Our failure to obtain patents pursuant to our current or future
applications could have a material adverse effect on our business. Furthermore,
we cannot be certain that any patents issued to us will not be infringed,
challenged, invalidated or circumvented by others, or that the rights granted
thereunder will provide competitive advantages to us. In particular, it is
difficult to enforce patents covering methods of use of screening and other
similar technologies. Litigation to establish the validity of patents, to
defend against copatent infringement claims and to assert infringement claims
against others can be expensive and time-consuming, even if the outcome is
favorable to us. If the outcome of patent prosecution or litigation is not
favorable to us, our business could be materially adversely affected.
Our commercial success also depends on our ability to operate without
infringing patents and proprietary rights of third parties. We cannot assure
you that our products will not infringe on the patents or proprietary rights of
others. For example, many companies are active in the field of genomics, and
some have filed patents on essential genes in bacteria. While we are not
currently aware of any patents encumbering our ability to practice the
technologies we have discovered, it is possible that a patent of this nature
may issue in the future. We may be required to obtain licenses to patents or
other proprietary rights of others. Any licenses may not be available on terms
acceptable to us, if at all. The failure to obtain these licenses could delay
or prevent our collaborative partners' activities, including the development,
manufacture or sale of drugs requiring such licenses.
In addition to patent protection, we rely on trade secrets, proprietary
know-how and technological advances that we seek to protect, in part, by
confidentiality agreements with our collaborative partners, employees and
consultants. We cannot assure you that these agreements will not be breached,
that we would have adequate remedies for any breach that might occur, or that
our trade secrets, proprietary know-how and technological advances will not
otherwise become known or be independently discovered by others.
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IF OTHER COMPANIES DEVELOP BETTER PRODUCTS THAN OURS OR MARKET SIMILAR PRODUCTS
SOONER, OUR PRODUCTS MAY BE RENDERED OBSOLETE OR NONCOMPETITIVE.
We operate in a field in which new developments are occurring at an
increasing pace. Competition from biotechnology and pharmaceutical companies,
joint ventures, academic and other research institutions and others is intense
and is expected to increase. Many of our competitors have substantially greater
financial, technical and personnel resources than we have. Although we believe
that we have identified new and distinct approaches to drug discovery, there
are other companies with drug discovery programs, at least some of the
objectives of which are the same as or similar to ours. For example, there are
other companies that have recently described cephalosporins in early stages of
development that are designed for treatment of resistant gram-positive
infections in hospitals, the same objective as our lead cephalosporin compound.
Similarly, several other companies are seeking to capitalize on the expanding
body of knowledge of efflux pumps in microorganisms.
Competing technologies may be developed that would render our technologies
obsolete or non-competitive. We are aware of many pharmaceutical and
biotechnology companies that are engaged in efforts to treat myelosuppression
and each of the infectious diseases for which we are seeking to develop
therapeutic products. We cannot assure you that our competitors will not
develop competing drugs that are more effective than those developed by us and
our collaborative partners or obtain regulatory approvals of their drugs more
rapidly than we and our collaborative partners, thereby rendering our and our
collaborative partners' drugs obsolete or noncompetitive. Moreover, we cannot
assure you that our competitors will not obtain patent protection or other
intellectual property rights that would limit our and our collaborative
partners' ability to use our technology or commercialize our or their drugs.
OUR POTENTIAL PRODUCTS MAY NOT BE ACCEPTABLE IN THE MARKET OR ELIGIBLE FOR
THIRD PARTY REIMBURSEMENT, RESULTING IN A NEGATIVE IMPACT ON OUR FUTURE
FINANCIAL RESULTS.
Any products successfully developed by us or our collaborative partners may
not achieve market acceptance. The hematology/oncology and antibiotic products
that we are attempting to develop will compete with a number of
well-established traditional drugs manufactured and marketed by major
pharmaceutical companies. The degree of market acceptance of any of our
products will depend on a number of factors, including:
. the establishment and demonstration in the medical community of the
clinical efficacy and safety of our products;
. the potential advantage of our products over existing treatment methods;
and
. reimbursement policies of government and third-party payors.
Physicians, patients or the medical community in general may not accept or
use any products that may be developed by us or our collaborative partners. Our
ability to receive revenues and income with respect to drugs, if any, developed
through the use of our technology will depend, in part, upon the extent to
which reimbursement for the cost of these drugs will be available from
third-party payors, such as government health administration authorities,
private health care insurers, health maintenance organizations, pharmacy
benefits management companies and other organizations. Third-party payors are
increasingly challenging the prices charged for pharmaceutical products. If
third-party reimbursement is not available or sufficient to allow profitable
price levels to be maintained for drugs developed by us or our collaborative
partners, it could adversely affect our business.
WE HAVE NO MANUFACTURING, MARKETING OR SALES EXPERIENCE, AND IF WE ARE UNABLE
TO ENTER INTO MANUFACTURING AGREEMENTS OR MAINTAIN COLLABORATIONS WITH
MARKETING PARTNERS OR IF WE ARE UNABLE TO DEVELOP OUR OWN MANUFACTURING, SALES
AND MARKETING CAPABILITY, WE MAY NOT BE SUCCESSFUL IN COMMERCIALIZING OUR
PRODUCTS.
We do not have any experience in the manufacture of commercial quantities of
drugs, and our current facilities and staff are inadequate for the commercial
production or distribution of drugs. We intend to rely on our collaborative
partners for the manufacturing, marketing and sales of any products that result
from these collaborations. The current third-party manufacturer of our
potential cephalosporin product has in the past encountered difficulties with
the manufacture of related compounds in sufficient quantities for clinical
trial purposes. Manufacturers often encounter difficulties in scaling up to
manufacture commercial quantities of pharmaceutical products. We cannot be
certain that our current or any other manufacturer will not encounter similar
delays in the scale-up to manufacture this or any other compound in commercial
quantities in the future.
20
We will be required to contract with third parties for the manufacture of
our products or to acquire or build production facilities before we can
manufacture any of our products. We cannot assure you that we will be able to
enter into contractual manufacturing arrangements with third parties on
acceptable terms, if at all, or acquire or build production facilities
ourselves.
To date we have no experience with sales, marketing or distribution. In
order to market any of our products, we will be required to develop marketing
and sales capabilities, either on our own or in conjunction with others. We
cannot assure you that we will be able to develop any of these capabilities.
HEALTH CARE REFORM MEASURES OR COST CONTROL INITIATIVES MAY NEGATIVELY IMPACT
PHARMACEUTICAL PRICING, THEREBY HARMING OUR ABILITY TO COMMERCIALIZE OUR
POTENTIAL PRODUCTS.
The levels of revenue and profitability of pharmaceutical companies may be
affected by continuing governmental efforts to contain or reduce the costs of
health care through various means. For example, in some foreign markets pricing
or profitability of prescription pharmaceuticals is already subject to
governmental control. In the United States, there have been, and we expect that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. Cost control initiatives could decrease the price
that we or our collaborative partners receive for any products that we or they
may develop in the future which would adversely affect our business. Further,
to the extent that these types of proposals or initiatives have a material
adverse effect on our collaborative partners or potential collaborative
partners, our ability to commercialize our potential products may be materially
adversely affected.
IF OUR PRODUCTS HARM PEOPLE, WE MAY EXPERIENCE PRODUCT LIABILITY CLAIMS THAT
MAY NOT BE COVERED BY INSURANCE.
We face an inherent business risk of exposure to potential product liability
claims in the event that drugs, if any, developed through the use of our
technology are alleged to have caused adverse effects on patients. This risk
exists for products being tested in human clinical trials, as well as products
that receive regulatory approval for commercial sale. We will, if appropriate,
seek to obtain product liability insurance with respect to drugs developed by
us and our collaborative partners. We may not, however, be able to obtain
insurance. Even if insurance is obtainable, it may not be available at a
reasonable cost or in a sufficient amount to protect us against liability. Any
successful product liability claims may exceed our financial resources.
Further, costs of defending against product liability claims, even if we were
to prevail ultimately, may have a material adverse effect on our business and
results of operations.
IF WE CANNOT ATTRACT AND RETAIN MANAGEMENT AND SCIENTIFIC STAFF, WE MAY NOT BE
ABLE TO PROCEED WITH OUR DRUG DISCOVERY AND DEVELOPMENT PROGRAMS.
We are highly dependent on management and scientific staff, including Mark
Skaletsky, our Chairman and Chief Executive Officer, George H. Miller, Ph.D.,
our Executive Vice President--Research and Development, Paul Mellett, our
Senior Vice President and Chief Financial Officer and on our other officers.
Considering the time necessary to recruit replacements, if we lose the services
of any of the named individuals or other senior management and key scientific
staff, we may incur delays in our product development and commercialization
efforts or experience difficulties in raising additional funds. We may also
lose a significant amount of revenues without the senior staff necessary to
adequately maintain existing corporate collaborations or to enter into new
collaborations. We do not carry key-man life insurance on any of our
executives. We believe that our future success will depend, in part, on our
ability to attract and retain highly talented managerial and scientific
personnel and consultants. We face intense competition for talented personnel
from, among others, biotechnology and pharmaceutical companies, as well as
academic and other research institutions. We cannot assure you that we will be
able to attract and retain the personnel we require on acceptable terms, or at
all.
OUR OPERATIONS INVOLVE HAZARDOUS MATERIALS, WHICH COULD SUBJECT US TO
SIGNIFICANT LIABILITY.
As with many biotechnology and pharmaceutical companies, our activities
involve the use of radioactive compounds and hazardous materials. As a
consequence, we are subject to numerous environmental and safety laws and
regulations. We are subject to periodic inspections for possible violations of
any environmental or safety law or regulation. Any violation of, and the cost
of compliance with, these regulations could materially adversely affect our
operations.
21
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BY-LAWS AND DELAWARE LAW, TOGETHER
WITH OUR STOCKHOLDER RIGHTS PLAN, COULD MAKE THE ACQUISITION OF OUR COMPANY BY
ANOTHER COMPANY MORE DIFFICULT.
Some provisions of our certificate of incorporation and by-laws may have the
effect of making it more difficult for a third party to acquire, or
discouraging a third party from attempting to acquire, control of Essential.
These provisions could limit the price that investors might be willing to pay
in the future for shares of our common stock. These provisions allow us to
issue preferred stock without a vote or further action by our stockholders,
provide for staggered elections of our Board of Directors and specify
procedures for director nominations by stockholders and submission of other
proposals for consideration at stockholder meetings. None of these provisions
provides for cumulative voting in the election of directors. Some provisions of
Delaware law applicable to us could also delay or make more difficult a merger,
tender offer or proxy contest involving us, including Section 203 of the
Delaware General Corporation Law, which prohibits a Delaware corporation from
engaging in any business combination with any stockholder owning fifteen
percent or more of our outstanding voting stock for a period of three years
from the date the person became a 15% stockholder unless specified conditions
are met.
We adopted a stockholder rights plan, dated as of February 2, 1999, pursuant
to which our Board of Directors declared a dividend of one right for each share
of the common stock outstanding, which right entitles the holder to purchase
for $30.00 a fraction of a share of our Series A preferred stock with economic
terms similar to that of one share of the common stock. In the event that an
acquiror obtains 20% or more of our outstanding common stock, each right, other
than rights owned by the acquiror or its affiliates, will thereafter entitle
the holder thereof to purchase, for the exercise price, a number of shares of
the common stock having a then current market value equal to twice the exercise
price. If, after an acquiring person obtains 20% or more of our outstanding
common stock, we merge into another entity, an acquiring entity merges into our
company, or we sell more than 50% of our assets or earning power, then each
right, other than rights owned by the acquiring person or its affiliates, will
entitle the holder thereof to purchase for the exercise price, a number of
shares of common stock of the person engaging in the transaction having a then
current market value equal to twice the exercise price.
The possible issuance of Series A preferred stock, the procedures required
for director nominations and stockholder proposals and Delaware law could have
the effect of delaying, deferring or preventing a change in control of
Essential, including without limitation, discouraging a proxy contest or making
more difficult the acquisition of a substantial block of our common stock.
These provisions could also limit the price that investors might be willing to
pay in the future for shares of our common stock.
IF WE CANNOT OBTAIN ADDITIONAL FUNDING FOR FUTURE OPERATIONS, WE MAY NOT BE
ABLE TO PROCEED WITH OUR DRUG DISCOVERY AND DEVELOPMENT PROGRAMS.
The development of our potential pharmaceutical products will require
substantially more money than we currently have. We intend to seek to raise
such additional funding from sources including other collaborative partners and
through public or private financings involving the sale of equity or debt
securities. We cannot assure you that any financings will be available when
needed, or if available will be on acceptable terms. Funding from collaborative
partners could limit our ability to control the research, development and
commercialization of potential products, and could limit our revenues and
profits from such products, if any. Collaborative agreements may also require
us to give up rights to products or technologies that we would otherwise seek
to develop or commercialize ourselves. Any additional equity financing will
result in dilution to our current stockholders. If we fail to secure sufficient
additional funding we will have to delay or terminate some or all of our drug
discovery and development programs.
MARKET CONDITIONS AND CHANGES IN OPERATING RESULTS MAY CONTINUE TO CAUSE
VOLATILITY IN THE MARKET PRICE OF OUR STOCK, MAKING FUTURE EQUITY FINANCINGS
MORE DIFFICULT.
The market price of the common stock, like that of the securities of many
other biopharmaceutical companies, has been and is likely to continue to be
highly volatile. The stock market has experienced significant price and volume
fluctuations that are often unrelated to the operating performance of
particular companies. Factors contributing to volatility in the market price of
our common stock include:
. results of pre-clinical studies and clinical trials by us or our
competitors;
. announcements of new collaborations;
. announcements of our technological innovations or new therapeutic
products or that of our competitors;
. developments in our patent or other proprietary rights or that of our
competitors, including litigation;
22
. governmental regulation; and
. healthcare legislation.
Fluctuations in our operating results and market conditions for
biotechnology stocks in general could have a significant impact on the
volatility of the market price for our common stock and on the future price of
our common stock.
WE EXPECT TO RETAIN ALL FUTURE EARNINGS AND HAVE NO INTENTION TO PAY DIVIDENDS.
We have never paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in our business and do
not expect to pay any dividends in the foreseeable future.
WE MAY NOT REALIZE ANY OF THE ANTICIPATED BENEFITS FROM OUR ACQUISITIONS.
On October 24, 2001, we concluded our acquisition of Althexis and on March
11, 2002, we concluded our acquisition of Maret. We consummated these
transactions with the expectation that they will result in mutual benefits
including benefits relating to expanded and complementary product offerings,
increased market opportunity, new technology and the addition of research and
development personnel. Achieving the benefits of these acquisitions will depend
in part on the integration of our technology, operations and personnel in a
timely and efficient manner so as to minimize the risk that the acquisitions
will result in the loss of market opportunity or key employees or the diversion
of the attention of management. We cannot assure you that, following these
transactions, our businesses will achieve revenues, specific net income or loss
levels, efficiencies or synergies that justify the acquisitions or that the
acquisitions will result in increased earnings, or reduced losses, for the
combined company in any future period.
WE MAY NOT BE ABLE TO EFFECTIVELY AND EFFICIENTLY INTEGRATE THE OPERATIONS OF
ESSENTIAL THERAPEUTICS WITH ALTHEXIS AND MARET.
Integrating the operations and management of Essential with Althexis and
Maret will be a complex process, and we cannot assure you that this integration
will be completed rapidly or will achieve all of the anticipated synergies and
other benefits expected from the acquisitions. The integration of the three
companies will require significant management attention, which may temporarily
distract management from its usual focus on the daily operations of the
combined company. Moreover, as a result of the change of our corporate
headquarters from California to Massachusetts and the operation of offices on
both coasts, management will face new challenges not previously encountered.
Management's inability to integrate successfully the operations of Essential
with Althexis and Maret, or any significant delay in achieving this
integration, could cause our business to suffer.
ITEM 2. PROPERTIES
We have offices in Massachusetts and California. In conjunction with the
acquisition of Althexis, we relocated our headquarters to Waltham,
Massachusetts. In Waltham, we lease approximately 15,000 square feet under a
lease agreement expiring at the end of 2002. In January 2002, we entered into a
new lease agreement for a building in Waltham consisting of approximately
42,000 square feet. The building will be converted into a biotechnology
facility and will house our headquarters and some of our research laboratories.
The new Waltham lease commenced in February 2002 and expires in March 2009. The
terms provide for equal monthly payments and will be subject to increases.
Our Mountain View, California office consists of two buildings with
approximately 84,170 square feet of leased laboratory and office space under
lease agreements expiring in 2005. We have another building lease through 2005
in Mountain View, for approximately 18,040 square feet, which has been sublet
to another company through October 2003.
Following our recent acquisition of Maret, we plan to consolidate its
operations with those of our Waltham facilities. Maret currently leases 1,400
square feet in a facility located in Newport Beach, California. This lease
expires in April 2003. We believe that our facilities are sufficient to
accommodate our anticipated research and administrative needs through 2004.
Thereafter, we believe that we will be able to secure adequate additional
facilities for our continued operations.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders of Essential Therapeutics, Inc. was held
on October 24, 2001. The matters voted upon at the meeting and the voting
results were as follows:
(i) Approval of the issuance of shares of common stock in connection
with Essential's acquisition of Althexis and the appointment of Mark
Skaletsky as the President, Chief Executive Officer and Chairman of the
Board of Essential Therapeutics, Inc. upon completion of the merger
pursuant to the Agreement and Plan of Merger, dated as of July 27, 2001:
For Against Abstain Not Voted
--- ------- ------- ---------
5,962,033 958,808 13,806 4,584,666
(ii) Approval of the issuance of shares of Series B convertible
redeemable preferred stock and the appointment of three nominees of the
purchasers of this Series B stock to Essential Therapeutics, Inc.'s Board
of Directors pursuant to the Subscription Agreements, each dated as of
July 27, 2001:
For Against Abstain Not Voted
--- ------- ------- ---------
5,929,073 982,938 22,636 4,584,666
(iii) Approval of an amendment to the company's certificate of
incorporation to change the company's name from Microcide
Pharmaceuticals, Inc. to Essential Therapeutics, Inc.:
For Against Abstain Not Voted
--- ------- ------- ---------
9,157,899 1,195,599 56,227 1,109,588
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market System under the
symbol "ETRX". Our common stock was first publicly traded on May 15, 1996. The
following table sets forth for the periods indicated the high and low sales
prices