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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 2002 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ______ to _______
Commission File Number 0-27718
NEOSE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3549286
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
19044
102 Witmer Road --------
Horsham, Pennsylvania (Zip Code)
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(Address of principal executive offices)
Registrant's telephone number, including area code: (215) 315-9000
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Securities registered pursuant to Section 12(b) of the Act:
None None
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(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights
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(Title of class)
Common Stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [_]
As of June 28, 2002, the aggregate market value of the Common Stock
held by non-affiliates of the registrant was approximately $120,010,330 based on
the last sale price of the Common Stock as reported by the The Nasdaq Stock
Market. This calculation excludes 3,286,707 shares held by directors, executive
officers, and one holder of more than 10% of the registrant's Common Stock.
As of March 14, 2003, there were 17,207,766 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
PART I
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ITEM 1. BUSINESS. ........................................................................ 1
EXECUTIVE OFFICERS OF THE COMPANY. .............................................................. 9
ITEM 2. PROPERTIES. ...................................................................... 11
ITEM 3. LEGAL PROCEEDINGS. ............................................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ............................. 11
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS .......................................................................... 11
ITEM 6. SELECTED FINANCIAL DATA. ......................................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. ........................................................... 14
FACTORS AFFECTING THE COMPANY'S PROSPECTS. ...................................................... 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. ....................... 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ..................................... 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. ............................................................ 31
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. ................................. 33
ITEM 11. EXECUTIVE COMPENSATION. .......................................................... 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. .................. 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. .................................. 42
ITEM 14. CONTROLS AND PROCEDURES .......................................................... 42
PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. ................ 44
CERTIFICATIONS. ................................................................................. 48
NEOSE, GlycoAdvance, GlycoPEGylation and GlycoConjugation are trademarks of
Neose Technologies, Inc. This Annual Report on Form 10-K also includes
trademarks and trade names of other companies.
This report includes "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to, statements about our plans,
objectives, representations and contentions and are not historical facts, which
typically may be identified by use of terms such as "anticipate," "believe,"
"estimate," "plan," "may," "expect," "intend," "could," "potential," and similar
expressions, although some forward-looking statements are expressed differently.
You should be aware that the forward-looking statements included in this report
represent management's current judgment and expectations, but our actual
results, events and performance could differ materially from those in the
forward-looking statements. The forward looking statements are subject to a
number of risks and uncertainties which are discussed in the section of Part II
entitled "Factors Affecting the Company's Prospects." We do not intend to update
any of these factors or to publicly announce the results of any revisions to
these forward-looking statements.
PART I
ITEM 1. BUSINESS.
Overview
We are a biopharmaceutical company focused on improving glycoprotein
therapeutics using our proprietary technologies. We are using our
GlycoAdvance(TM), GlycoPEGylation(TM) and GlycoConjugation(TM) technologies to
develop improved versions of currently marketed drugs with proven efficacy and
to improve therapeutic profiles of glycoproteins in development for our
partners. We expect these next generation proteins to offer significant
advantages over drugs that are now on the market, potentially including less
frequent dosing and improved safety and efficacy. In addition to developing our
own products or co-developing products with others, we expect to enter into
strategic partnerships for including our technologies into the product design
and manufacturing processes of other biotechnology and pharmaceutical companies.
While our primary goal is protein drug development, our technologies offer
multiple opportunities to participate in the evolving therapeutic protein market
by addressing other challenges, such as manufacturing efficiency, manufacturing
consistency, and the use of non-mammalian cell expression systems.
Glycoprotein Market
Proteins are molecules that are comprised of chains of amino acids,
also called a polypeptides. Most commercially available protein therapeutics are
glycoproteins, which have carbohydrate structures, or sugar chains, linked to
the polypeptide backbone. Worldwide sales of glycoprotein drugs (which include
monoclonal antibodies) were over $20 billion in 2001, and by some estimates are
expected to grow to $80 billion by 2010. Many of the glycoproteins now on the
market will lose the protection of certain patent claims over the next 15 years.
We believe our GlycoAdvance, GlycoPEGylation and, potentially, GlycoConjugation
technologies could be applied to many of these marketed drugs to create next
generation products.
A growing number of glycoproteins are facing increased competition from
other marketed drugs in their approved disease indications. This increased
competition should generate demand for technologies that can improve and
differentiate a therapeutic protein. We believe our GlycoAdvance,
GlycoPEGylation and, possibly, GlycoConjugation technologies could be applied to
drugs facing increased competition, thereby creating next generation products
with improved clinical profiles. The same opportunity for the use of our
technologies may also be found in their application to products in development
that are going to enter a highly competitive market environment.
Core Technology
Our GlycoAdvance, GlycoPEGylation and emerging GlycoConjugation
technologies evolve from the same core - the use of enzymes to complete and
modify carbohydrate structures on glycoproteins. We have developed a special
expertise and strong intellectual property position in this area. Our
technologies may permit the development of new therapeutic proteins with
improved clinical profiles. In many cases, these new therapeutic proteins will
also give rise to new intellectual property. We continue to make significant
investments in research and development and legal services to protect and expand
our intellectual property position. We believe our core technology has broad
application to protein drug development and can be extended to provide an
opportunity for sustainable growth.
1
GlycoAdvance
Our GlycoAdvance technology uses enzymes to remodel or complete the
sugar chains on glycoprotein drugs that lack complete carbohydrate structures,
which is also called incomplete or incorrect glycosylation. Currently,
recombinant glycoprotein drugs are most often produced in mammalian cell culture
expression systems, primarily Chinese hamster ovary (CHO) cells. Carbohydrate
chains, known as glycans, are added to proteins by the internal CHO cell
glycosylation machinery. Proteins expressed in CHO cells, and many other
expression systems used for commercial manufacturing, tend to produce
carbohydrates on proteins that are described as incomplete because they lack one
or more of the sugars typically found in glycoproteins of human tissues.
Incompletely glycosylated proteins may be cleared more rapidly from the body,
break down more rapidly, or stimulate unwanted antibody responses. Conventional
approaches to improving glycosylation, such as changing expression cell types,
re-engineering the protein, and modifying cell culture conditions or media, are
time consuming and frequently provide only partial solutions. Purification of
incompletely glycosylated drug molecules from a drug product results in lower
manufacturing yields.
GlycoAdvance technology employs recombinant glycosyltransferase enzymes
to remodel or complete the glycan chains on glycoprotein drugs after they have
been secreted by a cell expression system. Remodeling or completing sugar chains
in this way has been shown to prolong half-life or enhance drug potency for
several drug candidates in development. We are using GlycoAdvance to develop
proprietary protein therapeutics and expect to partner with biotechnology and
pharmaceutical companies that are developing or marketing glycoprotein drugs. We
are also exploring the use of GlycoAdvance to enable alternative protein
production systems, such as plants, insect cells, and yeast, that naturally
produce only partial versions of glycan chains found in human glycoproteins.
GlycoPEGylation
Many glycoprotein drugs are smaller than the most abundant plasma
proteins and are cleared much more rapidly from the circulation. Others tend to
be subject to common protein drug delivery problems, such as poor solubility and
stability, proteolytic degradation, short pharmacokinetic half-life and unwanted
immunogenicity. For some proteins, covalent attachment of the large,
water-soluble polymer, polyethylene glycol (PEG), to one or more amino acids has
been shown to increase the effective size of the drug and improve solubility,
stability, and half-life, while reducing the immunogenicity of the native
protein. For many other protein drugs, however, it has been difficult to achieve
these benefits by conventional PEGylation, because the amino acids that may
serve as sites for attachment of PEG occur at positions in the polypeptide
backbone where the bulky PEG blocks access to the protein's active site or
alters the conformation of the protein, drastically diminishing drug activity.
GlycoPEGylation technology enables us to employ the selectivity of
glycosyltransferase enzymes to link a simple sugar unit carrying preattached PEG
to the ends of glycan chains on glycoprotein drugs. By specifically linking PEG
to sugar chains that are remote from the protein's active site, GlycoPEGylation
can preserve the bioactivity of the drug and extend its half-life. Starting with
PEG-sugar nucleotide donors that bear PEGs of preselected sizes, we are able to
enzymatically PEGylate a new or existing glycoprotein drug to create a family of
molecular sizes that may be screened for optimal receptor binding and
pharmacokinetic properties. We expect that significant clinical benefits may be
achieved through the application of our GlycoPEGylation technology to proteins
that have not been improved by traditional chemical PEGylation.
GlycoConjugation
Our emerging GlycoConjugation technology is a broader application of the
enzymatic approach we use for GlycoPEGylation. However, instead of adding PEG to
the glycoprotein to change its properties, we would add a different compound to
achieve different therapeutic objectives. For example, some developers of
monoclonal antibodies (MAbs) seek to achieve targeted therapeutic benefit by
linking small molecules to their antibodies. Current methods for linking small
molecule drugs to proteins, such as MAbs, generally employ chemistries that
modify the protein backbone. These random chemical coupling processes frequently
render some fraction of the protein molecules non-functional and result in a
final product whose composition is highly variable and difficult to control.
2
GlycoConjugation should build upon our experience coupling PEG to sugar
chains. Because of the well defined number of sites at which sugars can be added
enzymatically to any glycoprotein, GlycoConjugation may allow us to produce
uniform drug conjugates with reproducible pharmaceutical properties. For MAbs
that target cancer cells, GlycoConjugation can be designed to enable coupling of
a defined number of toxin molecules or radionuclides per antibody molecule
without interfering with antigen targeting activity. Experiments to explore
these and other applications of this technology are ongoing.
Strategy
Primary Business Strategy
During 2002, we focused our business on the development of
next-generation proprietary protein therapeutics, which we plan to pursue
independently and in collaboration with selected partners. We generated internal
data on potential proprietary drug candidates, and we continued to conduct
research studies for biotechnology and pharmaceutical companies.
In January 2003, we announced the selection of an improved
erythropoietin (EPO) as the target for our first proprietary drug development
program. EPO is prescribed to stimulate production of red blood cells, and is
approved for sale in major markets around the world for the treatment of anemia
associated with oncology chemotherapy, end stage renal disease, and chronic
renal insufficiency. EPO accounts for more sales worldwide than any other
glycoprotein drug. Worldwide sales of EPO in 2001 were over $6 billion. Of this
amount, approximately $4.5 billion in sales were in the U.S., $1.1 billion in
sales were in Europe, and $0.6 billion in sales were in other markets, primarily
in Asia. Based on preliminary laboratory data and animal studies, we believe it
is feasible to develop a longer-acting EPO through GlycoPEGylation.
Our proof-of-concept studies conducted during 2002 suggest that the
pharmacokinetic profile of EPO can be adjusted by manipulating the number of
GlycoPEGylation sites and the molecular weight of the PEG that we attach to the
compound. In these early studies, the biological activity of constructs of
GlycoPEGylated EPO was comparable to the activity of unmodified EPO, or its
longer acting analog. Based on our preliminary market research, we believe that
clinicians, particulary oncologists, would favor a longer-acting erythropoietic
protein over currently available formulations. This is supported by quantitative
data for Amgen's longer acting darbapoietin (ARANESP(TM)) indicating first full
year sales of greater than $400 million.
We believe that the expiration of key patents covering EPO will provide
commercial opportunities in a time frame consistent with the development
timeline of a new product. We expect to seek regulatory approval for EPO both in
and outside the U.S In Europe, the key patents will expire in mid-decade. In the
U.S., the patent situation surrounding EPO is more complex and the subject of
ongoing litigation, making the time frame less predictable. We are planning to
conduct various preclinical activities during 2003 and the first half of 2004,
with the goal of initiating clinical trials in the second half of 2004. We plan
to submit data from these trials to the appropriate government agencies for
regulatory and marketing approval.
The process we have begun with erythropoietin will be expanded to other
currently marketed proteins. We are generating internal data on other potential
proprietary drug candidates, and we expect to select our second proprietary
candidate in the second half of 2003.
We believe GlycoPEGylation has applicability to other proteins that are
in early stage development or for which the threshold of patent expiration is
too remote to consider the protein as a proprietary drug candidate. In these
cases, we will pursue collaborations with the originating company to incorporate
our technology in their protein development programs.
3
Business Development Initiatives
Our business development initiatives vary depending on the segment of
our business model they support. In the case of proprietary proteins, our first
objective is to assemble a portfolio of potential products and to partner them
at various stages of development, with the goal of obtaining milestone payments
and royalties from earlier products to fund the development of later products.
In some cases, in order to retain more upside from the evolution of a product,
we may co-develop the product, retaining commercial rights in some territories,
thereby sharing the risks and rewards of product development with a partner.
In those cases where we are working on another company's protein, our
business development approach involves a two-step process. In the first
instance, we seek to enter into a funded research and development collaboration,
in which our costs are funded and we have the opportunity to earn additional
fees for technical success. Once the potential benefit of our technology to
another company's protein is established in the initial step, we would begin the
second phase of negotiations, with the goal of entering into a collaboration and
license arrangement that recognizes the improvement in the product profile that
we have demonstrated in the first step of the process. The initial step of this
approach was incorporated into our negotiations with Novo Nordisk and Monsanto,
which resulted in three research and development collaborations during 2002. We
believe that this process will enable us and our partners to reflect the
appropriate value of our technology in our license agreements, following the
funded research and development collaborations.
Other Programs
During 2002, Wyeth decided to discontinue the clinical development of
its recombinant PSGL-Ig (P-selectin glycoprotein ligand) after examination of
Phase II results obtained with this protein, which did not yet incorporate our
technology. As a result, Wyeth terminated our agreement to provide GlycoAdvance
services and products in connection with Wyeth's recombinant PSGL-Ig. Wyeth's
decision was unrelated to the performance of our GlycoAdvance technology, which
had been intended to be used to subsequently produce recombinant PSGL-Ig for
Phase III studies and commercial use.
Since we are now focused on developing next generation proprietary
protein therapeutics, we are exploring the most effective means of continuing
some of our other programs. These include our collaboration with Neuronyx, Inc.
for the discovery and development of drugs for treating Parkinson's disease and
other neurological diseases, our joint venture with McNeil Nutritionals (a
subsidiary of Johnson & Johnson) to explore inexpensive, enzymatic production of
complex carbohydrates for use as bulking agents, and our work with Wyeth
Nutrition to develop a manufacturing process for a bioactive carbohydrate to be
used as an ingredient in Wyeth's infant and pediatric nutritional products.
Intellectual Property
Strategy
Our success depends on our ability to protect and use our intellectual
property rights in the continued development and application of our
technologies, to operate without infringing the proprietary rights of others,
and to prevent others from infringing on our proprietary rights. As we pursue
our strategy of developing next generation products, we have increased our focus
on investigating the patent protection for currently marketed proteins. We
devote significant resources to obtaining, enforcing and maintaining patents,
although we recognize that the scope and validity of patents is never certain.
Our patent strategy is to increase our proprietary portfolio by
continuing to seek patents for our technologies, including our proprietary
reagents and enzymes, our proprietary methods, and products made using our
technologies. We have filed applications for patents, have been granted patents,
and have licensed rights relating to our technologies. We have continued to file
patent applications covering new developments in our existing technologies and
our new technologies, including GlycoPEGylation and GlycoConjugation, and the
remodeling of a multitude of proteins.
4
In addition to developing our own intellectual property, we seek to
obtain rights to complementary intellectual property from others. We have
entered into license agreements with various institutions and individuals for
certain patent rights, as well as sponsored research and option agreements for
the creation and possible license to us of additional intellectual property
rights. We are obligated to pay royalties at varying rates based upon, among
other things, levels of revenues from the sale of licensed products under our
existing license agreements, and we expect to pay royalties under new license
agreements for intellectual property. Generally, these agreements continue for a
specified number of years or as long as any licensed patents remain in force,
unless the agreements are terminated earlier.
We also have certain proprietary trade secrets and know-how that are
not patentable or which we have chosen to maintain as secret rather than filing
for patent protection. We rely on certain security measures to protect our trade
secrets, proprietary know-how, technologies and confidential information, and we
continue to explore further methods of protection. We enter into confidentiality
agreements with employees, consultants, licensees, and potential collaboration
partners. These agreements generally require that all confidential information
developed or made known by us to the other party during the relationship must be
kept confidential and may not be disclosed to third parties, except in specific
circumstances. Our agreements with employees and consultants also provide that
inventions conceived by the individual in the course of rendering services to us
will be our exclusive property.
Patents and Proprietary Rights
We own 26 issued U.S. patents, and have licensed 63 issued U.S. patents
from 15 institutions. In addition, we own or have licensed over 81 patent
applications pending in the U.S. There are also 393 foreign patent applications
pending or granted related to our owned and licensed patents. In addition, we
had three issued U.S. patents, one pending U.S. patent application and 34
granted or pending foreign counterparts, all of which have been assigned to
Magnolia Nutritionals, our joint venture with McNeil Nutritionals (a subsidiary
of Johnson & Johnson).
We have licensed, or have an option to license, patents and patent
applications from the following institutions: University of California, The
Scripps Research Institute, University of Pennsylvania, University of Michigan,
Marukin Shoyu Co., Ltd., University of Arkansas, University of British Columbia,
Rockefeller University, University of Alberta, Genencor International, GlycoZym
Aps., Ghent University, National Research Council of Canada and University of
Washington.
Government Regulation
Our research and development activities, the future manufacture of
reagents and products incorporating our technologies, and the marketing of these
products are subject to regulation for safety and efficacy by numerous
governmental authorities in the U.S. and other countries.
Regulation of Pharmaceutical Product Candidates
The research and development, clinical testing, manufacture and
marketing of products using our technologies are subject to regulation by the
U.S. Food and Drug Administration (FDA) and by comparable regulatory agencies in
other countries. These national agencies and other federal, state and local
entities regulate, among other things, research and development activities, and
the manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, advertising and promotion of therapeutic products. Product development
and approval within this regulatory framework take a number of years and involve
the expenditure of substantial resources. We anticipate that the development of
our next generation proprietary proteins will involve a traditional development
program, including clinical trials.
In the U.S., after laboratory analysis and preclinical testing in
animals, an investigational new drug application is required to be filed with
the FDA before human testing may begin. Typically, a three-phase human clinical
testing program is then undertaken. In Phase I, small clinical trials are
conducted to determine the safety of the product. In Phase II, clinical trials
are conducted to assess safety, establish an acceptable dose, and gain
preliminary evidence of the efficacy of the product. In Phase III, clinical
trials are conducted to obtain sufficient data to establish statistically
significant proof of safety and efficacy. The time and expense required to
perform this clinical testing vary
5
and can be substantial. No action may be taken to market any new drug or
biologic product in the U.S. until an appropriate marketing application has been
approved by the FDA. Even after initial FDA approval is obtained, further
clinical trials may be required to provide additional data on safety and
effectiveness, and will be required to gain clearance for the use of a product
as a treatment for indications other than those initially approved. Side effects
or adverse events that are reported during clinical trials may delay, impede, or
prevent marketing approval. Similarly, adverse events that are reported after
obtaining marketing approval may result in additional limitations being placed
on the use of a product and, potentially, withdrawal of the product from the
market.
The regulatory requirements and approval processes of countries in the
European Union (EU) are similar to those in the U.S. In the EU, depending on the
type of drug for which approval is sought, there are currently two potential
tracks for marketing approval in member countries: mutual recognition and the
centralized procedure. Typically, recombinant products are reviewed through the
centralized procedure. The EU review mechanisms may ultimately lead to approval
in all EU countries, but each method grants all participating countries some
decision-making authority in product approval.
Sales of pharmaceutical and biopharmaceutical products in other areas
of the world vary from country to country. Whether or not FDA licensure has been
obtained, licensure of a product by comparable regulatory authorities in other
countries must be obtained prior to marketing the product in those countries.
The time required to obtain such licensure may be longer or shorter than that
required for FDA approval, and we cannot assure that we or our collaborators
will be able to obtain foreign approvals for any of our product candidates or
products manufactured using our technologies.
In addition to regulating and auditing human clinical trials, the FDA
regulates and inspects equipment, facilities, and processes used in the
manufacture of products prior to providing approval to market a product. Among
other conditions for marketing approval in the U.S., the prospective
manufacturer's quality control and manufacturing procedures must conform on an
ongoing basis with current Good Manufacturing Practices (cGMP). Before granting
marketing approval, the FDA will perform a prelicensing inspection of the
facility to determine its compliance with cGMP and other rules and regulations.
In complying with cGMP, manufacturers must continue to expend time, money and
effort in the area of production, training and quality control to ensure full
compliance. After the establishment is licensed for the manufacture of any
product, manufacturers are subject to periodic inspections by the FDA. If, as a
result of FDA inspections relating to our products or reagents, the FDA
determines that our equipment, facilities, or processes do not comply with
applicable FDA regulations or conditions of product approval, the FDA may seek
civil, criminal, or administrative sanctions and remedies against us, including
the suspension of our manufacturing operations.
We expect to manufacture enzymes and sugar nucleotides for use by our
potential GlycoAdvance and GlycoPEGylation customers, as well as for our own
manufacturing use in the development of next generation proprietary protein
therapeutics. Our partners may be responsible for clinical and regulatory
approval procedures, but we would expect to participate in this process by
submitting to the FDA a drug master file developed and maintained by us that
contains data concerning the manufacturing processes for our enzymes and sugar
nucleotides. Our ability to manufacture and sell enzymes and sugar nucleotides
developed under contract depends upon completion of satisfactory clinical trials
and success in obtaining marketing approvals.
Regulation of Other Products Manufactured Using Our Technologies
The development, manufacture, marketing, and sale of other products
using our technologies also will be subject to regulatory review in the U.S. and
other countries before commercialization. Generally foods and food ingredients
are regulated less rigorously than pharmaceuticals. Infant formula ingredients
are regulated as special types of food ingredients that are regulated more
rigorously than most other types of food ingredients.
6
Other Regulations Affecting Our Business
We are subject to regulation by the Occupational Safety and Health
Administration (OSHA), the Environmental Protection Agency (EPA), and the
Nuclear Regulatory Commission (NRC), and to regulation under the Toxic
Substances Control Act, the Resources Conservation and Recovery Act, and other
regulatory statutes. Our research and development activities involve the
controlled use of hazardous materials, chemicals, biological materials, and
various radioactive compounds. We believe that our procedures comply with the
standards prescribed by state and federal regulations, but we recognize that the
risk of injury or accidental contamination cannot be completely eliminated. We
voluntarily comply with the National Institutes of Health Guidelines for
Research Involving Recombinant DNA Technologies.
We are also subject to the U.S. Foreign Corrupt Practices Act, which
prohibits corporations and individuals from engaging in certain activities to
obtain or retain business or to influence a person working in an official
capacity. Our present and future business continues and will continue to be
subject to various other U.S. and foreign laws and regulations. In addition, new
laws or regulations may be applicable to our research and development programs,
and we cannot predict whether they would have a material adverse effect on our
operations.
Third Party Reimbursement
Our ability and each of our collaborator's ability to successfully
commercialize drug products may depend in part on the extent to which coverage
and reimbursement for the cost of such products will be available from
government health administration authorities, private health insurers, and other
organizations. Uncertainty continues within the pharmaceutical and biotechnology
industries as to the reimbursement status of new therapeutic products, and we
cannot be sure that third-party reimbursement would be available for any
therapeutic products that we or our collaborators might develop. Healthcare
reform, especially as it relates to prescription drugs, is an area of increasing
national attention and a priority of many governmental officials. Certain
reforms, if adopted, could impose limitations on the prices we would be able to
charge for our products, or the amount of reimbursement available for our
products from governmental agencies or third-party payors.
Competition
The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. Our competitors include
pharmaceutical and biotechnology companies. In addition, many specialized
biotechnology companies have formed collaborations with large, established
companies to support research, development and commercialization of products
that may be competitive with our current and future product candidates and
technologies. Academic institutions, governmental agencies and other public and
private research organizations are also conducting research activities and
seeking patent protection and may commercialize products or technologies on
their own or through joint ventures.
We are aware that other companies are working on the development of
next generation protein therapeutics in anticipation of the expiration of
certain patent claims covering marketed proteins. Specific companies such as
Maxygen and Applied Molecular Evolution are using directed evolution techniques
to manipulate protein structure and increase efficacy. Nektar and Enzon continue
to utilize their traditional chemical pegylation technologies to increase the
circulating half-life of certain proteins. Human Genome Sciences and BioRexis
are now applying in-vivo fusion technologies using albumin and other carrier
proteins to increase circulating half-life on specific proteins. In addition,
drug delivery companies like Alkermes continue to exploit formulation
technologies to improve administration and dosing of therapeutic proteins. Some
of these companies have greater financial, technical, manufacturing, marketing
and other resources than ours, and may be better equipped than we are to
develop, market and manufacture these proteins. We cannot assure that any of our
product candidates will be able to compete successfully against the products
already established in the marketplace, or against new therapies that either may
be developed by our competitors or may result from advances in biotechnology or
other fields. In addition, our products may become subject to generic
competition in the future.
Although a clear development and regulatory landscape does not
currently exist for generic biologics in the U.S. and Europe, we are aware that
companies are considering the opportunity to develop and commercialize
7
multisource versions of currently marketed products, including EPO. We continue
to expect that first generation, multisource biologic products will involve
traditional process development, manufacturing and clinical development.
Therefore, we expect that the cost of entry will be more significant than for
classic small molecule generic products and will result in fewer multisource
companies participating in the field, with less price erosion than one typically
sees for small molecule generic equivalents.
There are a number of companies that have active programs focused on
developing next generation or improved versions of EPO. Among them, companies
such as Roche, Amgen, and Johnson & Johnson are actively engaged in EPO product
improvement initiatives. Furthermore, non-originator companies are applying
their technologies to develop improved EPO compounds. These include Gryphon,
with their precision length polymer and chemical ligation technology,
Transkaryotic Therapeutics, utilizing their gene activation technology, Human
Genome Sciences, with their albumin fusion technology, and ARIAD, with their
gene therapy and small molecule promoter technology. Other companies are active
in this area, and we expect that competition will increase.
Although we are focused on the development of next generation protein
therapeutics, we also use our GlycoAdvance and GlycoPEGylation technologies to
provide collaborative research services and product improvement opportunities to
other pharmaceutical and biotechnology companies. These services compete with
internal efforts within these companies to improve therapeutic protein profiles
and expression, and services provided by other companies to improve proteins,
such as traditional PEGylation technology.
There are several companies that are engaged in glycobiology research.
Their work includes efforts to develop better-glycosylating cell lines and
optimizing cell culture conditions to improve glycosylation. Companies working
in this area include Crucell, Glycart, and GlycoFi. Crucell has developed human
cell lines for glycoprotein production. Glycart is pursuing the utilization of
in vivo glycosylation of antibodies, and GlycoFi is focused on expressing
glycoproteins in yeast systems.
Manufacturing
We have invested in the construction and validation of a manufacturing
pilot plant in Horsham to support our business objectives. We have facilities to
produce enzyme and sugar nucleotide reagents at scale to support our
GlycoAdvance, GlycoPEGylation and GlycoConjugation technologies, and to assist
in the production of our proprietary glycoprotein drugs and the glycoprotein
drugs of collaborators. We continue to discover and develop improved reagents
and technologies, and we will use our pilot plant to scale-up production of
these reagents. Our facility is also expected to support the manufacture of
modified forms of glycoprotein drugs as active pharmaceutical ingredients for
use in clinical trials utilizing GlycoAdvance, GlycoPEGylation and
GlycoConjugation technologies.
We intend to develop scalable processes to use our proprietary
GlycoAdvance and GlycoPEGylation reagents to produce glycoproteins with improved
properties. The reagents include donor sugars (sugar nucleotides) and enzymes
(glycosyltransferases) that transfer the sugars onto the carbohydrate structures
of glycoproteins. In our pilot plant, these reagents will be used in multiple
combinations to selectively modify a glycoprotein under cGMP conditions, with
the goal of producing a final active pharmaceutical ingredient. Depending on
future supply requirements, we may employ one or more contract manufacturing
organizations to manufacture our modified proteins or active pharmaceutical
ingredients.
In 2002, we expanded our capabilities with the construction of a pilot
manufacturing facility at our headquarters location for the production of
enzymes and sugar nucleotides at commercial-scale in accordance with U.S. Food
and Drug Administration's Good Manufacturing Practices regulations. The facility
consists of approximately 20,000 square feet of processing areas supported by
3,500 square feet of utility space. Separate areas are dedicated to sugar
nucleotide processing, enzymes expressed in bacterial organisms, and enzymes
expressed in fungal organisms.
The sugar nucleotide synthesis area has multiple process bays with
reaction vessels up to 1,200 liter scale and is designed to handle the synthesis
of carbohydrates using enzymes. Downstream processing can handle volumes up to
4,000 liters and consists of multiple suites with capability for filtration and
chromatography. The bacterial fermentation area is designed to progressively
scale an enzyme expression system from a 1 milliliter vial to a 1,500
8
liter batch. The area includes separate harvest and purification suites. The
equipment is highly automated and controlled through a dedicated server. The
fungal fermentation area has a similar layout and capacity to the bacterial area
but is separated physically. It too has fermentation capacity up to 1,500 liters
to produce enzymes expressed in fungal organisms. These suites are designed to
allow flexibility in process scale and downstream processing needs.
Marketing, Distribution, and Sales of Proprietary Protein Products
We intend to capitalize on the significant experience and resources of
our collaborative partners to commercialize proprietary products made using our
technologies. These partners generally would be responsible for much of the
development, regulatory approval, sales, marketing, and distribution activities
for products incorporating our technologies. However, Neose intends to retain
commercial rights to some proteins in select territories. If we commercialize
any products on our own, we will have to establish or contract for regulatory,
sales, marketing, and distribution capabilities, and we may have to supplement
our development capabilities. The marketing, advertising, and promotion of any
product manufactured using our technology would be subject to regulation by the
FDA or other governmental agencies.
Employees
As of December 31, 2002, we employed 124 individuals, consisting of 79
employees engaged in research, development and manufacturing activities, 8
employees devoted to business development and licensing activities, and 37
employees devoted to corporate and administrative activities. Our scientific
staff includes carbohydrate biochemists as well as scientists with expertise in
organic chemistry, analytic chemistry, molecular biology, microbiology, cell
biology, scale-up manufacture, and regulatory affairs. A significant number of
our employees have prior experience with pharmaceutical or biotechnology
companies, and many have specialized training in carbohydrate technology. None
of our employees is covered by collective bargaining agreements. We believe we
have good relations with our employees.
Internet Address and Securities Exchange Act Filings
Our internet address is www.neose.com. We make available through our
website our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We
make these reports and amendments available on our website as soon as
practicable after filing them electronically with, or furnishing them to, the
Securities and Exchange Commission.
EXECUTIVE OFFICERS OF THE COMPANY
The name, age as of March 14, 2003, and position of each of our
executive officers are as follows:
C. Boyd Clarke, 54, has served on our Board and as our President and
Chief Executive Officer since April 2002. From December 1999 to March 2002, Mr.
Clarke was President and Chief Executive Officer of Aviron, a biotechnology
company developing vaccines, which was acquired by MedImmune, and was also
Chairman of Aviron from January 2001 to March 2002. From 1998 to 1999, Mr.
Clarke was President and Chief Executive Officer of U.S. Bioscience, Inc., a
biotechnology company focused on products to treat cancer, which also was
acquired by MedImmune. Mr. Clarke served as President and Chief Operating
Officer of U.S. Bioscience, Inc. from 1996 to 1998. From 1977 to 1996, Mr.
Clarke held a number of positions at Merck & Co., Inc., including being the
first President of Pasteur-Merieux MSD, and most recently as Vice President of
Merck Vaccines. Mr. Clarke has a B.S. in biochemistry and an M.A. in history
from the University of Calgary. Mr. Clarke also serves on the Board of Trustees
of the Textile Museum in Washington, D.C.
David A. Zopf, M.D., 60, has served as our Executive Vice President
since January 2002. He served as our Vice President, Drug Development from 1992
to January 2002. From 1991 to 1992, we engaged Dr. Zopf as a consultant on the
biomedical applications of complex carbohydrates. From 1988 to 1991, Dr. Zopf
served as Vice President and Chief Operating Officer of BioCarb, Inc., a
biotechnology company and the U.S. subsidiary of BioCarb AB, where he managed
the research and development programs of novel carbohydrate-based diagnostics
and
9
therapeutics. Dr. Zopf received his A.B. in zoology from Washington University,
and his M.D. from Washington University School of Medicine.
Robert I. Kriebel, 60, has served as our Senior Vice President and
Chief Financial Officer since August 2002. From 1991 through 1999, he held
various positions at U.S. Bioscience, Inc., most recently as Executive Vice
President, Chief Financial Officer and Director. Prior to U.S. Bioscience, Mr.
Kriebel held various positions with Rhone-Poulenc Rorer Inc. (formerly Rorer
Group Inc.) from 1974 until November 1990. From 1987 to November 1990 he was
Vice President and Controller of Armour Pharmaceutical Company, a subsidiary of
Rorer Group Inc. In 1986, Mr. Kriebel was Vice President-Investor Relations of
Rorer Group Inc. and from 1979 to 1985, he was Treasurer of Rorer Group Inc. Mr.
Kriebel has a B.S. in economics from Roanoke College.
Debra J. Poul, Esq., 50, has served as our Senior Vice President and
General Counsel since December 2002. From May 2002 to December 2002, she served
as our Vice President and General Counsel, and from January 2000 until May 2002,
she served as our General Counsel. From January 1995 to January 2000, Ms. Poul
was Of Counsel at Morgan Lewis. From September 1978 to December 1994, Ms. Poul
was at Dechert, serving as Counsel from 1989 to 1994. Ms. Poul received her B.A.
from the University of Pennsylvania and her J.D. from Villanova University.
George J. Vergis, Ph.D., 42, has served as our Senior Vice President,
Business and Commercial Development since December 2002. From July 2001 to
December 2002, he served as our Vice President, Business and Commercial
Development. From January 1996 to May 2001, Dr. Vergis served as Vice President,
New Product Development and Commercialization at Knoll Pharmaceutical Company, a
division of BASF Pharma, responsible for the commercial planning, product
development, and marketing for the immunology franchise. Prior to this position,
Dr. Vergis was responsible for managing the endocrine business for BASF Pharma's
Knoll Pharmaceutical Division. Dr. Vergis has held a variety of clinical and
medical marketing positions at Wyeth Pharmaceuticals and Warner-Lambert
Parke-Davis. Dr. Vergis received his BA in biology and history from Princeton
University, his Ph.D. in physiology from The Pennsylvania State University, and
his M.B.A. from Columbia University.
Joseph J. Villafranca, Ph.D., 58, has served as our Senior Vice
President, Pharmaceutical Development and Operations since October 2002. From
1992 to 2002, he held various positions at Bristol-Myers Squibb, serving most
recently as Vice President of Biologics Strategy and Biopharmaceuticals
Operations. Prior to Bristol-Myers, Dr. Villafranca spent 20 years at The
Pennsylvania State University, including eight years as the Evan Pugh Professor
of Chemistry. Dr. Villafranca earned a B.S. in chemistry from the State
University of New York and a Ph.D. in biochemistry/chemistry from Purdue
University. He completed his post-doctoral training in biophysics at the
Institute for Cancer Research in Philadelphia.
A. Brian Davis, 36, has served as our Vice President, Finance since
August 2002. From 1994 until August 2002, Mr. Davis served in a variety of
positions, most recently as Acting Chief Financial Officer and Senior Director,
Finance. Mr. Davis is licensed as a Certified Public Accountant in New Jersey,
and received his B.S. in accounting from Trenton State College. From 1991 to
1994, Mr. Davis was employed by MICRO HealthSystems, Inc., a provider of
healthcare information systems, where he served most recently as Corporate
Controller.
Marjorie A. Hurley, Pharm.D., 43, has served as Vice President,
Regulatory Affairs and Project Management, since May 2002. She served as our
Senior Director of Regulatory Affairs from January 2001 to May 2002, and as our
Director of Regulatory Affairs from 1993-2000. From 1987 to 1993, Dr. Hurley
served in various positions, including Assistant Director of Regulatory ffairs,
at Cytogen Corporation, a biotechnology company. From 1984 to 1987, she held
several positions, including Project Coordinator, at the Wyeth-Ayerst
Laboratories division of American Home Products Corp. (now Wyeth). Dr. Hurley
received her B.S. in pharmacy and her Pharm.D. from the University of Michigan.
10
ITEM 2. PROPERTIES.
We own, subject to a mortgage, approximately 50,000 square feet of cGMP
manufacturing, laboratory, and corporate office space in Horsham, Pennsylvania,
and we lease approximately 5,000 square feet of additional office and warehouse
space in a building nearby. We lease approximately 10,000 square feet of
laboratory and office space in San Diego, California. The initial term of the
lease ends in March 2006, at which time we have an option to extend the lease
for an additional five years.
In 2001 and 2002, we made capital expenditures of $17.4 million to
provide additional cGMP manufacturing capacity in our Horsham, Pennsylvania
facility. In 2002, we entered into a lease agreement for a 40,000 square foot
building in Horsham, Pennsylvania, which we may convert into laboratory and
office space. During 2002, we suspended plans to complete this conversion, and
we have not yet made a final decision as to when or if we will resume this
project. Approximately $4 million was expended as part of a $12 million
renovation.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of security holders during the
fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on The Nasdaq Stock Market under the symbol
NTEC. We commenced trading on The Nasdaq Stock Market on February 15, 1996. The
following table sets forth the high and low sale prices of our common stock for
the periods indicated.
Common Stock Price
------------------
High Low
---- ---
Year Ended December 31, 2001
First Quarter ........................................ $44.38 $22.38
Second Quarter ....................................... 46.97 23.25
Third Quarter ........................................ 47.42 30.15
Fourth Quarter ....................................... 41.81 27.31
Year Ended December 31, 2002
First Quarter ........................................ 37.30 29.80
Second Quarter ....................................... 32.58 9.07
Third Quarter ........................................ 11.06 6.41
Fourth Quarter ....................................... 14.00 5.90
Year Ended December 31, 2003
First Quarter (through March 14, 2003) ............... 9.31 6.03
As of March 14, 2003, there were approximately 200 record holders and
3,500 beneficial holders of our common stock. We have not paid any cash
dividends on our common stock and we do not anticipate paying any in the
foreseeable future.
11
Equity Compensation Plan Information
The following table gives information about our common stock that may
be issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of March 14, 2003.
Number of Securities
remaining available for
Number of Securities Weighted-average future issuance under
to be issued upon exercise price of equity compensation
exercise of outstanding outstanding options, plans (excluding securities
Plan Category options, warrants and rights warrants and rights reflected in second column)
------------- ---------------------------- ------------------- ---------------------------
Equity
compensation
plans approved by
securityholders 4,171,865(1) $17.14(1) 152,360(1)
Equity
compensation
plans not approved
by securityholders 499,186(2) $31.62 --
--------- -------
Total 4,671,051 $18.65 152,360
========= =======
(1) Does not include rights granted under the Employee Stock Purchase Plan. The
next scheduled purchase date under the Employee Stock Purchase Plan is July
31, 2003, for which rights were granted in connection with the 24-month
offering period that commenced in February 2002.
(2) Includes option grant to C. Boyd Clarke and option grants to two
consultants, each as described in the text below.
Option Grants Under Plans Not Approved by Stockholders
On March 29, 2002, the Company's board of directors approved a grant to
C. Boyd Clarke in connection with his appointment as President and Chief
Executive officer of a non-qualified stock option to purchase 487,520 shares of
common stock. The option grant to Mr. Clarke is not pursuant to the stock option
plan and has not been submitted to, and is not required to be submitted to, the
stockholders for approval. The option is exercisable for a period of ten years
at a price of $32.05 per share, which was the fair market value of the
underlying stock on the date of grant. The option is subject to a vesting
schedule pursuant to which the options will vest and become exercisable with
respect to 121,880 shares on March 29, 2003, and on a monthly basis thereafter
such that the option will vest and become exercisable with respect to an
aggregate of 93,750, 121,880, 121,880 and 28,130 shares in each of the remainder
of 2003, 2004, 2005 and the first three months of 2006, respectively.
On December 6, 1995, the Company granted options to two consultants in
connection with services provided to the Company. These options are now fully
vested and exercisable at a price of $13.80 per share with respect to 8,333
shares for one consultant and 3,333 shares for the other. These options expire
on December 6, 2005
12
ITEM 6. SELECTED FINANCIAL DATA.
The following Statements of Operations and Balance Sheet Data for the
years ended December 31, 1998, 1999, 2000, 2001, and 2002, and for the period
from inception (January 17, 1989) through December 31, 2002, are derived from
our audited financial statements. The financial data set forth below should be
read in conjunction with the sections of this Annual Report on Form 10-K
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the financial statements and notes included
elsewhere in this Form 10-K.
Period from
inception
(January 17, 1989)
Year ended December 31, to December 31,
-------------------------------------------------------------
1998 1999 2000 2001 2002 2002
--------------------------------------------------------------------------------
(in thousands, except per share data)
Statements of Operations Data:
Revenue from
collaborative agreements $ 390 $ 422 $ 4,600 $ 1,266 $ 4,813 $ 17,446
---------------------------------------------------------------------------------
Operating expenses:
Research and development 9,912 10,649 12,094 14,727 18,879 97,253
Marketing, general and
administrative 3,635 4,520 5,648 8,631 12,390 47,902
Severance - - - 873 2,722 3,595
---------------------------------------------------------------------------------
Total operating expenses 13,547 15,169 17,742 24,231 33,991 148,750
Other income - - - 6,120 1,653 7,773
Interest income, net 1,250 1,429 4,642 3,516 1,108 15,473
---------------------------------------------------------------------------------
Net loss $(11,907) $(13,318) $(8,500) $(13,329) $(26,417) $(108,058)
=================================================================================
Basic and diluted net loss per
share $ (1.25) $ (1.25) $ (0.63) $ (0.95) $ (1.85)
=============================================================
Weighted-average shares
outstanding used in computing
basic and diluted loss per share 9,556 10,678 13,428 14,032 14,259
=============================================================
As of December 31,
-------------------------------------------------------------
1998 1999 2000 2001 2002
-------------------------------------------------------------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and
marketable securities $ 32,023 $ 33,235 $ 94,762 $ 76,245 $ 41,040
Total assets 46,265 52,239 114,768 105,786 83,092
Long-term debt 8,300 7,300 6,200 5,100 5,560
Deficit accumulated during the
development stage (46,494) (59,812) (68,312) (81,641) (108,058)
Total stockholders' equity 36,013 40,785 104,868 93,946 70,685
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with our
financial statements and related notes included in this Form 10-K.
Overview
We are a biopharmaceutical company focused on improving glycoprotein
therapeutics using our proprietary technologies. We are using our
GlycoAdvance(TM), GlycoPEGylation(TM) and GlycoConjugation(TM) technologies to
develop improved versions of currently marketed drugs with proven efficacy and
to improve therapeutic profiles of glycoproteins in development for our
partners. We expect these next generation proteins to offer significant
advantages over drugs that are now on the market, potentially including less
frequent dosing and improved safety and efficacy. In addition to developing our
own products or co-developing products with others, we expect to enter into
strategic partnerships for including our technologies into the product design
and manufacturing processes of other biotechnology and pharmaceutical companies.
While our primary goal is protein drug development, our technologies offer
multiple opportunities to participate in the evolving therapeutic protein market
by addressing other challenges, such as manufacturing efficiency, manufacturing
consistency, and the use of non-mammalian cell expression systems.
As of December 31, 2002, we had an accumulated deficit of approximately
$108 million. We expect additional losses in 2003 and over the next several
years as we expand product research and development efforts, increase
manufacturing scale-up activities and, potentially, begin sales and marketing
activities.
Application of Critical Accounting Policies
Our Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") focuses on our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
U.S. The preparation of financial statements requires management to make
estimates and assumptions that affect the carrying amounts of assets and
liabilities, and the reported amounts of revenues and expenses during the
reporting period. These estimates and assumptions are developed and adjusted
periodically by management based on historical experience and on various other
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates.
Our summary of significant accounting policies is described in Note 2
to our financial statements included in Item 8 of this Form 10-K. Management
considers the following policies to be the most critical in understanding the
more complex judgments that are involved in preparing our financial statements
and the uncertainties that could impact our results of operations, financial
position, and cash flows.
Valuation of Long-Lived Assets
We evaluate our long-lived assets for impairment whenever indicators of
impairment exist. Our history of negative operating cash flows is an indicator
of impairment. Accounting standards require that if the sum of the future cash
flows expected to result from a company's long-lived asset, undiscounted and
without interest charges, is less than the reported value of the asset, an asset
impairment must be recognized in the financial statements. The amount of the
recognized impairment would be calculated by subtracting the fair value of the
asset from the reported value of the asset.
Valuation of Acquired Intellectual Property
The carrying value of acquired intellectual property ("Acquired IP") on
our balance sheet as of December 31, 2002 was $2.5 million. As of December 31,
2001 and 2002, our market capitalization exceeded the book value of our net
assets by approximately $422 million and $53 million, respectively. Because most
of our intellectual property portfolio is not reflected on our balance sheet, we
believe the premium to book value reflected in our market
14
capitalization is largely due to the market's valuation of our intellectual
property portfolio. As a result of the decline during 2002 in the premium to
book value reflected in our market capitalization, we believed it was
appropriate to review our acquired intellectual property ("Acquired IP") for
impairment as of December 31, 2002. Since the undiscounted sum of the estimated
future cash flows from the Acquired IP exceeded the carrying value, we have not
recognized an impairment.
We believe that the accounting estimate related to asset impairment of
our Acquired IP is a "critical accounting estimate" because:
. the accounting estimate is highly susceptible to change from
period to period because it requires company management to
estimate future cash flows over the life of our Acquired IP by
making assumptions about the timing and probability of our
success in:
. entering into new collaborations; and
. developing and commercializing products that
incorporate our technologies, either directly or with
collaborators; and
. the recognition of an impairment would have a material impact on
the assets reported on our balance sheet as well as our net loss.
Management's assumptions underlying the estimate of cash flows require
significant judgment because we have limited experience in entering into
collaborations with others to develop products incorporating our technologies.
In addition, we have limited experience in developing products incorporating our
technologies and we have no experience in commercializing any products.
Management has discussed the development and selection of this critical
accouting estimate with the audit committee of our board of directors, and the
audit committee has reviewed the company's disclosure relating to it in this
MD&A.
In estimating the impact of future collaborations, we have made
assumptions about the timing of entering into collaborations for potential
products, most of which we are not yet developing. We have used data from public
and private sources to estimate the types of cash flows that would occur at
various stages of development for each product.
As of December 31, 2002, we estimate that our future cash flows, on an
undiscounted basis, related to Acquired IP are greater than the current carrying
value of the asset. Any decreases in estimated future cash flows could have an
impact on the carrying value of the Acquired IP. If we had determined the
Acquired IP to be fully impaired as of December 31, 2002, total assets would
have been reduced by 3% and net loss would have been increased by 9%.
Valuation of Property and Equipment
Our property and equipment, which have a carrying value of $36.5
million as of December 31, 2002, have been recorded at cost and are being
amortized on a straight-line basis over the estimated useful lives of those
assets. Approximately $21.4 million of the carrying value represents the cost
and, we believe, the fair value of construction-in-progress. We believe the
remaining property and equipment carrying value of $15.1 million does not exceed
its fair value.
Of the $21.4 million of carrying value of construction-in-progress,
approximately $4.0 million, was expended as part of a planned $12.0 million
renovation to a leased facility. We have suspended plans to complete these
renovations and we have not yet made a final decision as to when or if we will
resume this project. To the extent that we determine that the partially
completed renovations are of no future use to us, we would be required to
recognize an impairment loss in our statement of operations. If we had
determined this asset to be fully impaired as of December 31, 2002, total assets
would have been reduced by 5% and net loss would have been increased by 15%. If
we decide to resume the project, we anticipate expending an additional $8.0
million to restart the project and complete the renovations.
Valuation of Investment in Convertible Preferred Stock
In 2000, we made an investment of approximately $1.3 million in
convertible preferred stock of Neuronyx, Inc. Our equity investment, which
represents an ownership interest of less than 1%, was made on the same terms as
15
other unaffiliated investors. Accordingly, we recorded and carry our investment
at cost. We will continue to evaluate the realizability of this investment and
record, if necessary, appropriate impairments in value. No such impairments have
occurred as of December 31, 2002. Future events could cause us to conclude that
impairment indicators exist and the carrying value of our investment is
impaired. If we had determined this investment to be fully impaired as of
December 31, 2002, total assets would have been reduced by 2% and net loss would
have been increased by 5%.
Revenue Recognition
Our revenue from collaborative agreements consists of up-front fees,
research and development funding, and milestone payments. We recognize revenues
from these agreements consistent with Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), issued by the
Securities and Exchange Commission. Non-refundable up-front fees are deferred
and amortized to revenue over the related performance period. We estimate our
performance period based on the specific terms of each collaborative agreement,
but the actual performance period may vary. We adjust the performance periods
based on available facts and circumstances. Periodic payments for research and
development activities are recognized over the period that we perform those
activities under the terms of each agreement. Revenue resulting from the
achievement of milestone events stipulated in the agreements is recognized when
the milestone is achieved. Milestones are based on the occurrence of a
substantive element specified in the contract or as a measure of substantive
progress towards completion under the contract.
Stock-based Employee Compensation
We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25), and related interpretations in accounting for all stock-based employee
compensation. We record deferred compensation for option grants to employees for
the amount, if any, by which the market price per share exceeds the exercise
price per share. We amortize deferred compensation over the vesting periods of
each option.
We have elected to adopt only the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), as amended by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." The following table illustrates the effect on our net loss and
basic and diluted net loss per share if we had recorded compensation expense for
the estimated fair value of our stock-based employee compensation, consistent
with SFAS 123 (in thousands, except per share data):
Year Ended December 31, 2000 2001 2002
- ----------------------------------------------------------------------------------------------------------
Net loss - as reported $ (8,500) $ (13,329) $ (26,417)
Add: Stock-based employee compensation expense
included in reported net loss 70 125 171
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards (3,752) (8,179) (15,588)
----------------------------------------------------
Net loss - pro forma $ (12,182) $ (21,383) $ (41,834)
====================================================
Basic and diluted net loss per share - as reported $ (0.63) $ (0.95) $ (1.85)
Basic and diluted net loss per share - pro forma $ (0.91) $ (1.52) $ (2.94)
Liquidity and Capital Resources
Overview
We have incurred operating losses each year since our inception. As of
December 31, 2002, we had an accumulated deficit of approximately $108 million.
We have financed our operations through private and public
16
offerings of our securities, and revenues from our collaborative agreements. We
had approximately $41 million in cash, cash equivalents and marketable
securities as of December 31, 2002, compared to approximately $76 million in
cash and cash equivalents as of December 31, 2001. The decrease for 2002 was
primarily attributable to the use of cash to fund our operating loss and capital
expenditures.
In February 2003, we sold approximately 2.9 million shares of common
stock in a private placement to a group of institutional and individual
investors, generating net proceeds of approximately $16.3 million. We believe
that our existing cash and marketable securities, expected revenue from
collaborations and license arrangements, and interest income should be
sufficient to meet our operating and capital requirements at least through the
middle of 2004, although changes in our collaborative relationships or our
business, whether or not initiated by us, may cause us to deplete our cash and
marketable securities sooner than the above estimate. The timing and amount of
our future capital requirements and the adequacy of available funds will depend
on many factors, including if and when any products manufactured using our
technology are commercialized.
During 2002, we focused our business on the development of
next generation proprietary protein therapeutics, which we plan to pursue both
independently and in collaboration with selected partners. This development and
commercialization will require substantial investments by us and our
collaborators. Most of our 2002 revenues were derived from agreements that have
been terminated or will conclude early in 2003. As a result, our 2003 revenues
are difficult to project and will be largely dependent on entering into new
collaborations and on the financial terms of any new collaborations. Other than
revenues from any future collaborations, we expect to generate no significant
revenues until such time as products incorporating our technologies are
commercialized, which is not expected during the next several years. We expect
an additional several years to elapse before we can expect to generate
sufficient cash flow from operations to fund our operating and investing
requirements. Accordingly, we will need to raise substantial additional funds to
continue our business activities and fund our operations beyond the middle of
2004.
Capital Expenditures
During 2000, 2001, and 2002, we purchased approximately $1.5 million,
$9.4 million, and $17.8 million, respectively, of property, equipment, and
building improvements. The improvements during 2001 and 2002 consisted largely
of the two following facility improvement projects:
. We completed construction in 2002 of a pilot manufacturing
facility at our headquarters location for the production of
enzymes and sugar nucleotides at commercial-scale in accordance
with U.S. Food and Drug Administration's Good Manufacturing
Practices regulations. The facility comprises approximately
20,000 square feet of processing areas and 3,500 square feet of
utility space. It has bacterial and fungal fermentation
capabilities and houses two 1,500 liter fermenters. We expended
approximately $17.4 million for this project, of which
approximately $8.2 million and $9.2 million were expended in
2001 and 2002, respectively.
. We entered into a lease agreement in 2002 for a 40,000 square
foot building, which we intended to convert into laboratory and
office space for an expected cost of approximately $12.0
million. Later in 2002, we suspended plans to complete these
renovations and we have not yet made a final decision as to
when or if we will resume this project. Our property and
equipment at December 31, 2002 includes approximately $4.0
million in renovations to this facility. To the extent that we
determine the partially completed renovations are of no future
use to us, we would be required to recognize an impairment loss
in our statement of operations. If we decide to resume the
project, we anticipate expending an additional $8.0 million to
restart the project and complete the renovations.
In 2003, we expect our investment in capital expenditures to be
approximately $3.0 million to $5.0 million, which excludes the impact of
resuming the facility renovations described above. We may finance some or all of
these capital expenditures through the issuance of new debt or equity. If we
issue new debt, we may be required to maintain a minimum cash and investments
balance, or to transfer cash into an escrow account to collateralize some
portion of the debt, or both.
17
Long-term Debt
Montgomery County (Pennsylvania) IDA Bonds
In 1997, we issued, through the Montgomery County (Pennsylvania)
Industrial Development Authority, $9.4 million of taxable and tax-exempt bonds,
of which $5.1 million remains outstanding as of December 31, 2002. The bonds
were issued to finance the purchase of our headquarters building and the
construction of a pilot-scale manufacturing facility within our building. The
bonds are supported by an AA-rated letter of credit, and a reimbursement
agreement between our bank and the letter of credit issuer. The interest rate on
the bonds will vary weekly, depending on market rates for AA-rated taxable and
tax-exempt obligations, respectively. During 2002, the weighted-average,
effective interest rate was 3.3% per year, including letter-of-credit and other
fees. The terms of the bond issuance provide for monthly, interest-only payments
and a single repayment of principal at the end of the twenty-year life of the
bonds. However, under our agreement with our bank, we are making monthly
payments to an escrow account to provide for an annual prepayment of principal.
As of December 31, 2002, we had restricted funds relating to the bonds of
approximately $1.0 million, which consisted of our monthly payments to an escrow
account plus interest revenue on the balance of the escrow account. During 2003,
we will be required to make payments of $1.2 million into the escrow account.
To provide credit support for this arrangement, we have given a first
mortgage on the land, building, improvements, and certain machinery and
equipment to our bank. We have also agreed to maintain a minimum required cash
and short-term investments balance of at least two times the outstanding loan
balance. If we fail to comply with this requirement, we are required to deposit
with the lender cash collateral up to, but not more than, the loan's unpaid
balance. At December 31, 2002, we were required to maintain $10.2 million of
cash and short-term investments.
Equipment Loan
In December 2002, we borrowed approximately $2.3 million to finance the
purchase of equipment, which is collateralizing the amount borrowed. The terms
of the financing require us to pay monthly principal and interest payments over
36 months at an interest rate of 8%. During 2003, we will be required to make
payments totalling approximately $0.8 million under this agreement.
Capital Lease Obligation
In November 2002, we entered into a capital lease to lease $50,000 of
equipment. The terms of the lease require us to make monthly payments of $1,561
over 36 months. During 2003, we will be required to make payments totalling
$19,000 under this agreement.
Summary of Contractual Obligations
In addition to entering into the equipment lease financing described
above, we entered into an operating lease agreement during 2002 for a 40,000
square foot building in Horsham, Pennsylvania. Our aggregate rental obligation
over the 20-year lease term is approximately $9.9 million. The following table
summarizes our obligations to make future payments under current contracts:
18
Payments due by period
-------------------------------------------------------------------------------------
Less than 1
Total Year 1 - 3 Years 4 - 5 Years After 5 Years
-------------------------------------------------------------------------------------
Long-term debt/1/ ....................... $ 7,361,000 $1,835,000 $2,856,000 $ 370,000 $2,300,000
Capital lease obligation/2/ ............. 50,000 16,000 34,000 -- --
Operating leases/3/ ..................... 10,865,000 761,000 1,538,000 964,000 7,602,000
Purchase obligations/4/ ................. 832,000 634,000 194,000 4,000 --
Other long-term liabilities
reflected on our balance sheet
under GAAP/5/ ........................... 451,000 185,000 170,000 96,000 --
-------------------------------------------------------------------------------------
Total contractual obligations ........... $ 19,559,000 $3,431,000 $4,792,000 $ 1,434,000 $9,902,000
=====================================================================================
1. See "Long-term debt" in this Liquidity and Capital Resources section
for a description of the material features of our long-term debt.
2. See "Capital Lease Obligation" in this Liquidity and Capital Resources
section for a description of the material features of our capital
lease obligation.
3. See Note 13 of the Notes to Financial Statements included in this Form
10-K for a description of our significant operating leases. The
obligations presented in this table include $64,000 of deferred rent,
which is included in the Other Liabilities section of our Balance
Sheet.
4. Includes our commitments as of December 31, 2002 to purchase goods and
services.
5. Represents the present value as of December 31, 2002 of the remaining
payments under agreements with two former employees. The agreement
relating to one of the employees will terminate in March 2003. Prior
to the termination, the employee may agree to extend his
non-competition and non-solicitation commitments for two additional
years by entering into a separate non-competition agreement. If he
does so, we will continue his medical benefits for an additional six
months, extend his monthly payment of $39,622 for 24 additional
months, and continue his stock option vesting and exercisability
during the additional two-year period. This contingent commitment is
not reflected in the above table or on our balance sheet as of
December 31, 2002. These agreements are described in Note 11 of the
Notes to Financial Statements included in this Form 10-K.
Other Factors Affecting Liquidity
Wyeth Pharmaceuticals
In December 2001, we entered into a research, development and license
agreement with Wyeth Pharmaceuticals, a division of Wyeth, for the use of our
GlycoAdvance technology to develop an improved production process for Wyeth's
biopharmaceutical compound, recombinant PSGL-Ig (P-selectin glycoprotein
ligand), which was in Phase II clinical trials. In May 2002, we learned of
Wyeth's decision to discontinue the development of rPSGL-Ig for the treatment of
myocardial infarction based on Phase II results. Their decision was unrelated to
the performance of our GlycoAdvance technology, which was to have been
incorporated for Phase III and commercial production. Wyeth subsequently
notified us of the termination of the agreement, effective September 2002.
During 2002, we recognized approximately $3.8 million of revenue from this
agreement. We expect to receive no further revenues from this collaboration.
Joint Venture with McNeil Nutritionals
We have a joint venture with McNeil Nutritionals to develop bulking
agents for use in the food industry. We account for our investment in the joint
venture under the equity method, under which we recognize our share of the
income and losses of the joint venture. In 1999, we reduced the carrying value
of our initial investment in the joint venture of approximately $345,000 to zero
to reflect our share of the joint venture's losses. We recorded this amount
19
as research and development expense in our statements of operations. We will
record our share of post-1999 losses of the joint venture, however, only to the
extent of our actual or committed investment in the joint venture.
The joint venture developed a process for making fructooligosaccharides
and constructed a pilot facility in Athens, Georgia. In 2001, the joint venture
closed the pilot facility and is exploring establishing a manufacturing
arrangement with a third party to produce this or other bulking agents. As a
result, we do not intend to commit the joint venture to make any further
investments in facilities.
During the years ended December 31, 2000, 2001, and 2002, we supplied
to the joint venture research and development services and supplies, which cost
approximately $1.6 million, $0.8 million, and $252,000, respectively, which were
reimbursed to us by the joint venture. These amounts have been reflected as a
reduction of research and development expense in our statements of operations.
As of December 31, 2002, the joint venture owed us $16,000. We expect to provide
fewer research and development services during 2003 compared to 2002, thereby
reducing our expected reimbursement from the joint venture.
If the joint venture becomes profitable, we will recognize our share of
the joint venture's profits only after the amount of our capital contributions
to the joint venture is equivalent to our share of the joint venture's
accumulated losses. As of December 31, 2002, the joint venture had an
accumulated loss since inception of approximately $10.2 million. Until the joint
venture is profitable, McNeil Nutritionals is required to fund, as a
non-recourse, no-interest loan to the joint venture, all of the joint venture's
capital expenditures in excess of an agreed-upon amount, and all of the joint
venture's operating losses. The loan balance would be repayable by the joint
venture to McNeil Nutritionals over a seven-year period commencing on the
earlier of September 30, 2006 or the date on which Neose attains a 50% ownership
interest in the joint venture after having had a lesser ownership interest. In
the event of any dissolution of the joint venture, the loan balance would be
payable to McNeil Nutritionals by the joint venture before any distribution of
assets to us. As of December 31, 2002, the joint venture owed McNeil
Nutritionals approximately $8.5 million.
Off-Balance Sheet Arrangements
We are not involved in any off-balance sheet arrangements that have or
are reasonably likely to have a material future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources.
Results of Operations
Years Ended December 31, 2002 and 2001 and Outlook for 2003
Our net loss for the year ended December 31, 2002 was approximately
$26.4 million compared to approximately $13.3 million for the corresponding
period in 2001. The following section explains the trends within each component
of net loss for 2002 compared to 2001 and provides our estimate of trends for
2003 for each component.
Revenue from Collaborative Agreements. Revenues from collaborative
agreements increased to approximately $4.8 million in 2002 from approximately
$1.3 million in 2001. The increase in revenues during 2002 was primarily a
result of our Wyeth Pharmaceuticals collaboration, which was terminated in the
third quarter of 2002. Of the increase, $1.0 million was non-cash, and
represented the remaining amortization of the up-front fee that Wyeth paid in
December 2001. As required under SAB 101, we deferred the up-front fee and began
to amortize this amount as revenue over the expected performance period of the
Wyeth agreement. Upon termination of the Wyeth agreement, the unamortized
portion of the up-front fee was recognized as revenue.
Most of our 2002 revenues were derived from agreements that have been
terminated or will conclude early in 2003. As a result, our 2003 revenues are
difficult to project and are largely dependent on entering into new
collaborations and on the financial terms of any new collaborations.
Research and Development Expense. Research and development expenses for
the year ended December 31, 2002 were approximately $18.9 million, compared to
approximately $14.7 million for the year ended December 31,
20
2001. The increase was primarily attributable to increases in the number of
employees as well as increased laboratory supplies and service expenses.
In January 2003, we announced the selection of an improved
erythropoietin as our first proprietary candidate for development. We are
planning to conduct various preclinical activities during 2003 and the first
half of 2004, with the goal of beginning clinical trials in the second half of
2004. In addition, we intend to generate internal data on other potential
proprietary drug candidates, and we expect to announce our second proprietary
candidate for development in the second half of 2003. As a result of these
activities, we expect our 2003 research and development expenses to be
significantly greater than they were in 2002.
Marketing, General and Administrative Expense. Marketing, general and
administrative expenses for the year ended December 31, 2002 were approximately
$12.4 million, compared to approximately $8.6 million for the corresponding
period in 2001. The 2002 period contained higher personnel costs (including
payroll, recruiting, and relocation), legal, and consulting expenses than the
comparable 2001 period, which increases resulted primarily from recruiting of
senior executives and focusing our business on the development of next
generation proprietary protein therapeutics. During 2003, we expect our
marketing, general and administrative expenses to increase by less than 10% over
2002.
Severance Expense. During the year ended December 31, 2002, we incurred
severance expense of approximately $2.7 million compared to approximately $0.9
million for the year ended December 31, 2001. Of the $2.7 million incurred in
2002, approximately $1.6 million is a non-cash charge related to stock option
modifications for an agreement entered into with one of our officers in
connection with his retirement. We have no current plans to incur severance
expenses during 2003.
Other Income and Expense. During the year ended December 31, 2002, we
recognized approximately $1.7 million of other income upon receipt from Genzyme
General of a contract payment, which was due as a result of the restructuring of
our agreement with Novazyme Pharmaceuticals, Inc. in March 2001. In September
2001, Genzyme acquired Novazyme, and assumed Novazyme's contractual obligation
to us. We do not expect to recognize any additional other income during 2003.
Interest income for the year ended December 31, 2002 was approximately
$1.1 million, compared to approximately $3.7 million for the corresponding
period in 2001. The decrease was due to lower average cash and cash equivalents
and marketable securities balances, as well as lower interest rates, during
2002. Our interest income during 2003 is difficult to project, and will depend
largely on prevailing interest rates and whether we complete any collaborative
agreements and any additional equity or debt financings during the year.
Interest expense for the year ended December 31, 2002 was zero,
compared to $188,000 for the corresponding period in 2001. The decrease was due
to the fact that in 2002 we capitalized $150,000 of interest expense on our two
capital construction projects, as discussed in the Liquidity and Capital
Resources section of this MD&A. In accordance with GAAP, we recognized
capitalized interest for these projects only to the extent of our actual
interest expense, resulting in no reported interest expense for 2002. Our
interest expense during 2003 is difficult to project, and will depend largely on
prevailing interest rates and whether we complete any additional debt
financings, and whether we decide to resume and complete the facility
renovations described in the Liquidity and Capital Resources section of this
MD&A.
Years Ended December 31, 2001 and 2000
Our net loss for the year ended December 31, 2001 was approximately
$13.3 million compared to approximately $8.5 million for the corresponding
period in 2000. The following section explains the trends within each component
of net loss for 2001 compared to 2000.
Revenue from Collaborative Agreements. Revenues from collaborative
agreements decreased to approximately $1.3 million in 2001 from approximately
$4.6 million in 2000. Substantially all of our revenues during 2001 were
payments received by us under our collaborative agreement with Wyeth Nutrition.
Research and Development Expense. Research and development expenses
increased to approximately $14.7 million in 2001 from approximately $12.1
million in 2000. The increase was primarily attributable to the addition of
21
new employees in 2001 and the expenses associated with our San Diego facility,
which we began leasing in April 2001. In addition, our joint venture with McNeil
Nutritionals reimbursed Neose approximately $0.8 million in 2001, which was
approximately $0.8 million less than in 2000, for the cost of research and
development services and supplies provided to the joint venture. The
reimbursement amounts have been reflected as a reduction of research and
development expense in our statements of operations for 2000 and 2001.
Marketing, General and Administrative Expense. Marketing, general and
administrative expenses increased to approximately $8.6 million in 2001 from
$5.6 million in 2000. The increase was primarily attributable to the hiring of
additional business development personnel, increased expenses for marketing
GlycoAdvance, and increased legal and filing expenses associated with our
growing patent portfolio.
Severance Expense. During the year ended December 31, 2001, we incurred
severance expense of approximately $0.9 million, which included non-cash charges
of approximately $0.8 million related to stock option modifications in
connection with the separation of employees from Neose.
Other Income and Expense. We realized a gain of approximately $6.1
million in 2001 from the sale of shares of Genzyme General common stock, which
we received as a result of Genzyme's acquisition of Novazyme Pharmaceuticals,
Inc. in September 2001. Interest income decreased to approximately $3.7 million
in 2001 from approximately $5.1 million in 2000 due to lower average cash and
marketable securities balances and lower interest rates during 2001. Interest
expense decreased to $188,000 in 2001 from approximately $0.5 million in 2000
due to lower average loan balances and lower interest rates during 2001.
Recent Accounting Pronouncements
Statement of Financial Accounting Standard No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143), which was released in August 2001,
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and their associated asset retirement
costs. SFAS 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of intangible long-lived assets that
result from the acquisition, construction, development, or normal use of the
asset. The enterprise is also required to record a corresponding increase to the
carrying amount of the related long-lived asset (i.e. the associated asset
retirement cost) and to depreciate that cost over the life of the asset. The
liability is changed at the end of each period to reflect the passage of time
(i.e. accretion expense) and changes in the estimated future cash flows
underlying the initial fair value measurement. Because of the extensive use of
estimates, most enterprises will record a gain or loss when they settle the
obligation. We are required to adopt SFAS 143 for our fiscal year beginning
January 1, 2003; we do not expect the adoption of SFAS 143 to have a material
impact on our financial position or results of operations.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS 145 amends existing guidance
on reporting gains and losses on the extinguishment of debt to prohibit the
classification of the gain or loss as extraordinary, as the use of such
extinguishments have become part of the risk management strategy of many
companies. SFAS 145 also amends SFAS 13 to require sale-leaseback accounting for
certain lease modifications that have economic effects similar to sale-leaseback
transactions. The provisions of the Statement related to the rescission of
Statement No. 4 are applied in fiscal years beginning after May 15, 2002.
Earlier application of these provisions is encouraged. The provisions of the
Statement related to Statement No. 13 were effective for transactions occurring
after May 15, 2002, with early application encouraged. The adoption of SFAS 145
is not expected to have a material effect on our financial statements.
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 146, "Accounting for Exit or Disposal
Activities" (SFAS 146). SFAS 146 addresses significant issues regarding the
recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS 146 also addresses
recognition of certain costs related to terminating a contract that is not a
capital lease, costs to consolidate facilities or relocate employees and
termination of benefits provided to employees that are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS 146 is
effective for exit or disposal activities that are initiated
22
after December 31, 2002. Adoption of SFAS 146 is not expected to have a material
impact on our financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002, and are not expected to have a material effect on our financial
statements. The disclosure requirements are effective for financial statements
of interim and annual periods ending after December 31, 2002.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." This Statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002, and are included in the notes to
the financial statements included in this Form 10-K.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. Because we have no involvement with any
variable interest entities, the application of this Interpretation is not
expected to have a material effect on our financial statements.
23
FACTORS AFFECTING THE COMPANY'S PROSPECTS
Risks Related to Development Stage Company
If we fail to obtain necessary funds for our operations, we will be unable
to maintain and improve our technology position and we will be unable to develop
and commercialize our therapeutic proteins.
To date, we have funded our operations primarily through proceeds from
the public and private placements of debt and equity securities, revenues from
corporate collaborations, capital equipment and leasehold financing proceeds,
gains from the sale of investments, and interest earned on investments. We
believe that our existing cash and short-term investments, expected revenue from
collaborations and license arrangements, anticipated financing of capital
expenditures, and interest income should be sufficient to meet our operating and
capital requirements at least through the middle of 2004. Our present and future
capital requirements depend on many factors, including:
. the level of research and development investment required to
develop our therapeutic proteins and improve our technology
position;
. the progress of preclinical and clinical testing;
. the time and cost involved in obtaining regulatory approvals;
. our ability to enter into new agreements with collaborators and
to extend our existing collaborations, and the terms of these
agreements;
. our success rate or that of our collaborators in discovery
efforts associated with milestones and royalties;
. the timing, willingness, and ability of our collaborators to
commercialize products incorporating our technologies;
. costs of recruiting and retaining qualified personnel;
. costs of filing, prosecuting, defending, and enforcing patent
claims and other intellectual property rights;
. our need or decision to acquire or license complementary
technologies or new drug targets; and
. changes in product candidate development plans needed to
address any difficulties in clinical studies or in
commercialization.
We will require significant amounts of additional capital in the
future, and we do not have any assurance that funding will be available when we
need it on terms that we find favorable, if at all. We may seek to raise these
funds through public or private equity offerings, debt financings, credit
facilities, or through corporate collaborations and licensing arrangements.
If we raise additional capital by issuing equity securities, our
existing stockholders' percentage ownership would be reduced and they may
experience substantial dilution. We may also issue equity securities that
provide for rights, preferences, or privileges senior to those of our common
stock. If we raise additional funds by issuing debt securities, these debt
securities would have rights, preferences, and privileges senior to those of our
common stock, and the terms of the debt securities issued could impose
significant restrictions on our operations. If we enter into a credit facility,
the agreement may require us to maintain compliance with financial covenants and
restrict our ability to incur additional debt, pay dividends, make redemptions
or repurchases of capital stock, make loans, investments or capital
expenditures, or engage in other activities. If we raise additional funds
through collaborations and licensing arrangements, we may be required to
relinquish some rights to our technologies or drug candidates, or to grant
licenses on terms that are not favorable to us. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
operations, take advantage of opportunities, develop products or technologies,
or otherwise respond to competitive pressures could be significantly delayed or
limited, and we may need to downsize or halt our operations.
We have a history of losses, and we may incur continued losses for some
time.
We have incurred losses each year, including net losses of $8.5 million
for the year ended December 31, 2000, $13.3 million for the year ended December
31, 2001, and $26.4
24
million for the year ended December 31, 2002. Given our planned level of
operating expenses, we expect to continue incurring losses for some time. As of
December 31, 2002, we had an accumulated deficit of $108 million. To date, we
have derived substantially all of our revenue from corporate collaborations,
license agreements, and investments. We expect that substantially all of our
revenue for the foreseeable future will result from these sources and from the
licensing of our technologies. We also expect to spend significant amounts to
expand our research and development on our proprietary drug candidates and
technologies, maintain and expand our intellectual property position, expand our
manufacturing scale-up activities, and expand our business development and
commercialization efforts. We may continue to incur substantial losses even if
our revenues increase.
We have a joint venture with McNeil Nutritionals, a subsidiary of
Johnson & Johnson. The joint venture has incurred losses since its inception,
and we expect that the joint venture will incur additional losses for some time
while it explores opportunities to continue the development of this technology.
We have not yet commercialized any products or technologies, and we may
never become profitable.
We have not yet developed any products or commercialized any products
or technologies, and we may never be able to do so. Since we began operations in
1990, we have not generated any revenues, except for interest income and
revenues from collaborative agreements and investments. We do not know when or
if we will complete any of our product development efforts, receive regulatory
approval of any of our product candidates, or successfully commercialize any
approved products. Even if we should be successful in developing products that
are approved for marketing, we will not be successful unless our products, and
products incorporating our technologies, gain market acceptance. The degree of
market acceptance of these products will depend on a number of factors,
including:
. the receipt of regulatory approvals for the uses we seek;
. the establishment and demonstration in the medical community of
the safety and clinical efficacy of our products and their
potential advantages over existing therapeutic products; and
. pricing and reimbursement policies of government and
third-party payors, such as insurance companies, health
maintenance organizations and other plan administrators.
Physicians, patients, payors or the medical community in general may be
unwilling to accept, utilize or recommend any of our products or products
incorporating our technologies. As a result, we are unable to predict the extent
of future losses or the time required to achieve profitability, if at all. Even
if we or our collaborators successfully develop one or more products that
incorporate our technologies, we may not become profitable.
Risks Related to Development of Products and Technologies
We have limited product development and commercial manufacturing capability
and experience, and we may be unable to develop therapeutic proteins and
commercialize our technologies.
Until recently, we have not focused on the development of our own
proprietary products. We are now seeking to use our GlycoAdvance,
GlycoPEGylation and GlycoConjugation technologies to develop proprietary next
generation proteins, generally in collaboration with a partner. Our technologies
may not result in the successful remodeling, optimization or development of
proteins that are safe or efficacious. Because the development of new
pharmaceutical products is highly uncertain, our technologies may not produce
any commercially successful proteins. If we fail to validate our technologies
through the successful remodeling of the proteins we select for development, we
will not be able to license our next generation drug candidates, and our
customers will not be able to develop drug candidates incorporatiing our
technologies.
To date, we have manufactured only smaller, noncommercial quantities of
our enzymes, sugar nucleotides, and complex carbohydrates. We intend to
manufacture enzymes and sugar nucleotides for use in our proprietary product
development programs and for use by our customers. Our success depends on our
ability to manufacture these compounds on a commercial scale and in accordance
with current Good Manufacturing Practices, or cGMP, prescribed by the U.S. Food
and Drug Administration, or FDA. We may not be able to manufacture sufficient
25
quantities of the products we develop, even to meet our needs for pre-clinical
or clinical development, and we may have problems complying, or maintaining
compliance, with cGMP.
In addition to the normal scale-up risks associated with any
manufacturing process, we may face unanticipated problems unique to the
manufacture of enzymes, sugar nucleotides, or complex carbohydrates. If we are
unable to develop commercial-scale manufacturing capacity, we would seek
collaborators, licensees, or contract manufacturers to manufacture the compounds
necessary to commercialize our technologies. We may not be able to find parties
willing to manufacture these compounds at acceptable prices.
Any manufacturing facility must adhere to the FDA's evolving
regulations on cGMP, which are enforced by the FDA through its facilities
inspection program. The manufacture of products at any facility will be subject
to strict quality control, testing, and record keeping requirements, and
continuing obligations regarding the submission of safety reports and other
post-market information. Ultimately, we or our contract manufacturers may not
meet these requirements.
If we encounter delays or difficulties in connection with
manufacturing, commercialization of our products and technologies could be
delayed, or we could breach our obligations under our collaborative agreements.
Our success depends on collaborative relationships, and our failure to
enter into new collaborations, or to successfully manage our existing and future
collaborations and license arrangements, could prevent us from commercializing
our product candidates and technologies.
We rely to a large extent on collaborative partners to co-develop our
products and to commercialize products made using our technologies. This
strategy entails many risks, including:
. we may be unsuccessful in entering into collaborative agreements
for the co-development of our products or the commercialization
of products incorporating our technologies;
. we may not be successful in adapting our technologies to the
needs of our collaborative partners;
. our collaborators may not be successful in, or may not remain
committed to, co-developing our products or commercializing
products incorporating our technologies;
. our collaborators may not commit sufficient resources to
incorporating our technologies into their products;
. our collaborators may seek to develop proprietary alternatives to
our products or technologies;
. none of our collaborators is contractually obligated to market or
commercialize our products or products incorporating our
technologies, nor is any of them contractually required to
achieve any specific production schedule;
. our collaborative agreements are generally terminable by our
partners on short notice; and
. continued consolidation in our target markets may also limit our
ability to enter into collaboration agreements, or may result in
terminations of existing collaborations.
Any of our present or future collaborators may breach or terminate
their agreements with us or otherwise fail to conduct their collaborative
activities successfully and in a timely manner. In addition, we may dispute the
app