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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND SPECIAL REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 0-25544
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MIRAVANT MEDICAL TECHNOLOGIES
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0222872
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7408 HOLLISTER AVENUE, SANTA BARBARA, CALIFORNIA 93117
(Address of principal executive offices, including zip code)
(805) 685-9880
(Registrant's telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The approximate aggregate market value of voting stock held by
non-affiliates as of March 17, 1998, based upon the last sale price of the
Common Stock reported on the Nasdaq National Market was approximately
$250,138,350. For purposes of this calculation only, the registrant has
assumed that its directors and executive officers, and any person who has
filed a Schedule 13D or 13G, is an affiliate.
The number of shares of Common Stock outstanding as of March 17, 1998 was
14,229,302.
ITEM 1. BUSINESS
GENERAL
Miravant Medical Technologies (formerly PDT, Inc.) (the "Company") is
engaged in the integrated development of drugs and medical device products
for use in PhotoPoint-TM-, the Company's proprietary technologies for
photodynamic therapy. PhotoPoint is a medical procedure which integrates the
use of proprietary light-activated (photoselective) drugs, proprietary light
producing devices and light delivery devices to achieve selective
photochemical destruction of diseased cells. The Company believes that
PhotoPoint has the potential to be a safe, cost-effective, minimally invasive
primary or adjunctive treatment for indications in a broad number of disease
areas, including oncology, ophthalmology, urology, dermatology, gynecology
and cardiology. The Company is currently conducting clinical trials in
oncology, dermatology and ophthalmology. All of the Company's clinical trials
are testing its leading drug candidate, Purlytin-TM- (SnET2, tin ethyl
etiopurpurin) ("Purlytin"). The Company is developing products in
collaboration with its corporate partners, Boston Scientific Corporation
("Boston Scientific"), Cordis Corporation, a Johnson & Johnson company
("Cordis"), Chiron Diagnostics ("Chiron"), Iridex Corporation ("Iridex"),
Medicis Pharmaceutical Corporation ("Medicis"), Pharmacia & Upjohn, Inc.
("Pharmacia & Upjohn"), and Ramus Medical Technologies ("Ramus").
In September and October 1997, the Company completed three private
equity placements totaling $70.8 million, which provided net proceeds to the
Company of $68.2 million. The transactions included the issuance of
1,416,000 shares of the Company's Common Stock as well as one detachable
Common Stock warrant for each share of Common Stock purchased. In April
1996, the Company completed a secondary public offering of 1,500,000 shares
of Common Stock which provided net proceeds to the Company of approximately
$65.3 million.
In December 1997, the Company's Board of Directors authorized the
repurchase of up to 750,000 shares of Common Stock. This 750,000 repurchase
authorization was in addition to and superseded the repurchase program
authorized in July 1996, which allowed for the repurchase of up to 600,000
shares of Common Stock. Under these repurchase programs, the Company purchased
301,000 shares in 1997 and 138,500 shares in 1996 at a cost of $10.0 million and
$3.9 million, respectively. As of December 31, 1997, all shares repurchased
were retired.
Effective September 15, 1997, the Company changed its name from PDT, Inc.
to Miravant Medical Technologies.
BACKGROUND
Photodynamic therapy is a minimally invasive medical technology that uses
photoselective drugs to treat or diagnose disease. The technology involves three
components: photoselective drugs, light producing devices and light delivery
devices.
Photoselective drugs transform light energy into chemical energy in a
manner similar to the action of chlorophyll in green plants. Certain
photoselective drugs accumulate and are retained to a greater degree in
fast-growing (hyperproliferating) cells. Hyperproliferation is a characteristic
of cells associated with a variety of diseases such as cancer, certain
cardiovascular disorders and skin diseases such as psoriasis.
A photoselective drug is typically administered by intravenous injection
and distributes throughout the body. After several hours, the drug starts to
clear from normal tissues but is selectively retained in hyperproliferating
tissues for up to several days. The drug is inactive until exposed to light of a
specific wavelength, which can vary depending on the drug's molecular structure.
Exposing the target cells to the appropriate light wavelength permits selective
activation of the retained drug and initiates a chemical reaction that generates
a highly reactive form of oxygen. High
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concentrations of this form of oxygen lead to destruction of the cellular
membrane and, ultimately, cell death. The response of the target cells
depends on, among other factors, the drug dose, the amount of light energy
delivered, the physiology of the cell and the vasculature in the diseased
areas. Neither the drug nor the light on its own can cause the desired
effect. The drug is a catalyst which transfers energy. The chemical reaction
stops when the light is turned off. The result of this process is that
diseased cells are destroyed with minimal damage to surrounding normal
tissues, offering the potential for a more selective method of treating
disease than chemotherapy, radiation therapy or surgery, which can damage
both normal and abnormal tissues.
Low-power, non-thermal light can be used to activate photoselective drugs.
As a result, there is little or no risk of thermal damage to surrounding tissue,
as would be the case if thermal lasers were used. The light is typically
generated electronically or by lasers which have been specifically modified for
use in photodynamic therapy. The light is often delivered from the light source
to the patient via specially modified fiber optics. These fiber optic light
delivery devices produce patterns of light for different disease applications
and can be channeled into the body for internal applications.
Photodynamic therapy may be applied in two ways: (i) DRUG SELECTIVITY
- -hyperproliferating cells such as in a cancer tumor can be selectively
destroyed by allowing the photoselective drug to clear from non-target cells
before delivering light to the general area; and (ii) LIGHT SELECTIVITY -in
conditions such as certain eye disorders, tissues can be selectively
destroyed by precisely delivering the light to discrete areas while the drug
is in circulation. This flexibility gives photodynamic therapy its potential
in many different medical applications.
While light of a specific wavelength is used to cause a photoselective
drug to produce chemical reactions leading to cell death, light of a
different wavelength can be used to cause the same drug to fluoresce (glow).
The fluorescent property of photodynamic drugs offers the potential for their
use in diagnostic applications.
INDUSTRY
As early as 1900, scientists observed that certain compounds will
sensitize tissues to light. Since the mid-1970s, various aspects of
photodynamic therapy have been studied and established in humans.
Photodynamic therapy is currently being studied by a variety of companies,
physicians and researchers around the world for the treatment of a broad
range of cancers and non-cancer applications.
Photodynamic therapy has potential advantages over traditional treatment
methods such as chemotherapy, radiation therapy and surgery. Photodynamic
therapy offers the potential for a more selective treatment of disease with
fewer side effects. The fact that photoselective drugs are retained in
hyperproliferating tissues and are non-toxic until activated by light allows
for selective and controlled treatment. Additionally, since the activating
light offers a less invasive and less debilitating alternative to surgery,
the Company believes that photodynamic therapy may result in less trauma to
the patient. Further, the Company believes that photodynamic therapy for many
applications may be performed on an outpatient basis or in an office setting,
reducing if not eliminating the need for hospitalization. These potential
advantages may make photodynamic therapy a less costly alternative to
traditional treatment methods.
The Company believes that, despite the potential benefits of
photodynamic therapy, industry development has been hindered by various
drawbacks. First, certain formulations of photoselective drugs are complex
mixtures derived from blood or plant sources which, in contrast to synthetic
drugs, vary in both content and concentration and may yield inconsistent
results. Second, photodynamic therapy with some drugs produces a temporary,
severe photosensitivity (sensitivity to light) requiring patients to restrict
exposure to sunlight for up to several weeks following treatment. Third,
light wavelengths used to activate certain other photodynamic drugs require
large, expensive, difficult-to-maintain research or surgical lasers that have
been adapted to produce the low-power activating light.
The Company believes that the lack of an integrated approach to
photodynamic therapy has slowed the development of the technology in clinical
settings. The development of photodynamic therapy has historically been
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pursued by companies with either drug or device technology, but not both.
Light systems and light delivery devices were supplied by outside sources;
therefore, developers were often unable to fully coordinate the three
components of drug, light producing devices and light delivery devices.
BUSINESS STRATEGY
The Company's objective is to apply PhotoPoint, its photodynamic therapy
systems--combining drug, light producing devices and light delivery devices--
as a primary therapy in targeted disease areas and as an adjunct to surgery
or other therapies. The Company believes that its systems have the potential
to offer a safe, cost-effective and minimally-invasive alternative therapy
for numerous diseases for which current treatments are either unsatisfactory
or do not exist. Key elements of the Company's strategy to achieve
commercialization include:
INTEGRATION OF PHOTOSELECTIVE DRUGS, LIGHT PRODUCING DEVICES AND LIGHT
DELIVERY DEVICES. The Company's strategy is to integrate each component of
photodynamic therapy into systems that offer predictable and consistent
results. The Company believes that by being expert in both photodynamic drugs
and devices and by integrating the development of these technologies, the
Company may create competitive advantages over companies that are developing
certain components of photodynamic therapy while outsourcing others. For
example, integration affords the Company the opportunity to pursue regulatory
approval for its drug products together with its devices through unified
clinical trials.
FOCUS ON DISEASE APPLICATIONS WITH UNMET MEDICAL NEEDS. Although the
potential applications for the Company's PhotoPoint systems are numerous, the
Company is initially targeting high-incidence diseases or diseases that are
serious or life-threatening or for which there is no satisfactory alternative
treatment. By doing so, the Company believes it may be able to accelerate
regulatory processes where appropriate and facilitate commercial success.
EXCLUSIVE COLLABORATIONS WITH INDUSTRY-LEADING PHARMACEUTICAL AND
MEDICAL DEVICE COMPANIES. To facilitate development, regulatory approval,
manufacturing, marketing and distribution of its products, the Company seeks
to form strategic collaborations with partners who are leaders in the
Company's targeted disease areas. To date, the Company has established
collaborative arrangements with Pharmacia & Upjohn related to Purlytin, with
Boston Scientific and Cordis related to the development of medical catheters
for the delivery of light, with Iridex related to the development of diode
light devices in the field of ophthalmology, with Medicis to facilitate the
clinical development of PhotoPoint in dermatology, with Chiron related to the
early detection and treatment of lung cancer and with Ramus related to the
development of the Company's and Ramus' technology for use in photodynamic
therapy in the field of cardiovascular disease. The Company seeks to obtain
from its collaborative partners exclusivity in the field of photodynamic
therapy and to retain certain manufacturing and co-development rights. See
"--Strategic Collaborations."
There can be no assurance that the Company will be successful in
pursuing its strategy or that its goals will be achieved. See "--Risk
Factors" generally for a discussion of certain risks, including those
relating to operating losses, the early stage of the development of the
Company and its products, strategic collaborations and forward-looking
statements.
TECHNOLOGY AND PRODUCTS
The Company is developing synthetic photoselective drugs together with
software-controlled desktop light producing devices and fiber optic light
delivery and measurement devices for the application of PhotoPoint to a broad
range of disease indications. The Company believes that by being expert in
both PhotoPoint drugs and devices, and by integrating the development of
these technologies, it can produce easy-to-use PhotoPoint systems which
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offer the potential for predictable and consistent results. All drug and
device products currently under development by the Company will require
extensive preclinical and clinical testing prior to regulatory approval for
commercial use. See "--Targeted Diseases and Clinical Trials" and "--Risk
Factors--Early Stage of the Company and its Products" and "Unproven Safety
and Efficacy; Clinical Trials." See "--Risk Factors" generally for a
discussion of certain other risks, including those relating to
forward-looking statements.
DRUG TECHNOLOGY. The Company holds exclusive license rights under
certain U.S. and foreign patents to several classes of synthetic,
photoselective compounds, subject to certain governmental rights. See
"--Patents and Proprietary Technology." From its classes of compounds, the
Company has selected Purlytin as its leading drug candidate and has used
Purlytin in each of its clinical trials to date. The Company has granted to
Pharmacia & Upjohn an exclusive, worldwide license to use Purlytin in the
field of photodynamic therapy. See "--Strategic Collaborations" and "--Risk
Factors--Reliance on Collaborative Partners" and "--Uncertainty Regarding
Patents and Proprietary Technology." The Company is developing other
potential photoselective drugs for additional disease applications and future
partnering opportunities.
The Company believes that its synthetic photoselective drugs may provide
the following benefits:
- PREDICTABLE. The synthetic nature of the Company's photoselective
compounds permits the Company to design drugs with a single molecular
structure. The Company believes that this characteristic may facilitate
consistency in clinical treatment settings, as well as predictability in
manufacturing and quality control.
- MINIMAL SIDE EFFECTS. Treatments to date have been well-tolerated,
with the primary side effect being a mild, transient skin
photosensitivity in some patients.
- VERSATILE. The Company can design drugs with specific characteristics,
such as activation by a particular wavelength of light. This versatility
provides the Company with the potential to customize its drugs for
particular uses and to take advantage of semiconductor light technology.
See "--Risk Factors" for a discussion of certain risks, including those
relating to forward-looking statements.
LIGHT PRODUCING DEVICES. Because the Company's photoselective drugs
are synthetic, the Company has been able to design its drugs to be activated
by light produced by readily available, reliable and relatively inexpensive
light sources. The Company's light technologies include software-controlled
microchip diodes, light emitting diode ("LED") arrays and non-thermal lasers.
The Company's desktop diode light was introduced into the Company's clinical
trials in 1995. The Company has also developed LED arrays for use in
dermatological and other applications of PhotoPoint. The Company and Iridex
are collaborating on the development of light-producing devices for
PhotoPoint in the field of ophthalmology and have introduced a portable,
solid state diode light device which is currently being used in clinical
trials. See "--Strategic Collaborations."
The Company believes that its diode and LED array devices offer
advantages over laser technology historically used in photodynamic therapy.
For example, the Company's software-controlled designs offer reliability and
built-in control and measuring features. In addition, the Company's diode
systems, which are roughly the size of a desktop computer, are smaller and
more portable than traditional laser systems. The Company believes that it
has the potential to offer light producing devices that will be more
affordable than surgical laser systems used in photodynamic therapy. See
"--Risk Factors" for a discussion of certain risks, including those relating
to forward-looking statements.
LIGHT DELIVERY AND MEASUREMENT DEVICES. The Company is developing and
manufacturing light delivery and measurement devices including a wide variety
of fiber optic light delivery devices with specialized tips for use in
PhotoPoint. These devices must be highly flexible and appropriate for
endoscopic use, and must be able to deliver unique patterns of uniform,
diffuse light for different disease applications. The Company's products
include
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microlenses that produce a tiny flashlight beam for discrete surface lesions,
the Flex-Registered Trademark- cylinder diffuser which delivers light in a
radial pattern along a flexible tip for sites such as the esophagus, and
spherical diffusers which emit a diffuse ball of light for sites such as the
bladder or nasopharynx. Certain of the Company's light delivery devices were
introduced into the Company's clinical trials in 1992. The Company has also
developed light measurement devices for PhotoPoint including devices that
detect wavelength and fluorescence to facilitate the measurement of light or
drug dose.
Through collaborative arrangements with Boston Scientific in the fields
of urology, pulmonology and gastroenterology and Cordis in the field of
cardiology, the Company is co-developing medical catheters for use in
PhotoPoint. The Company has secured or applied for patent protection relating
to its light delivery and measurement devices. Certain of these patents or
patent applications are subject to certain governmental rights. See
"--Patents and Proprietary Technology" and "--Risk Factors" generally for a
discussion of certain risks, including those relating to forward-looking
statements.
TARGETED DISEASES AND CLINICAL TRIALS
The Company believes that PhotoPoint has potential in a wide range of
applications. The Company has selected, based upon regulatory, clinical and
market considerations, a number of disease applications, discussed below, on
which to focus initially. In all of its clinical trials, the Company is using
Purlytin together with light producing devices and light delivery devices
either developed on its own or in collaboration with its partners.
All drug and device products currently under development by the Company
will require extensive preclinical and clinical testing prior to regulatory
approval for commercial use. None of the Company's products have completed
such testing for efficacy and safety in humans. There can be no assurance
that such testing for any of the Company's products under development now or
in the future, will be commenced or successfully completed within any period
of time, if at all, or that such testing, if completed, will demonstrate that
Purlytin or any other of the Company's products is safe or efficacious.
Specifically with respect to the indications discussed below, it is
uncertain that the application of the Company's products in any of such
indications will progress beyond its current state of development, receive
regulatory approval, be successfully marketed and distributed, or that the
Company will have the financial resources to pursue any such application or
indication. Any clinical data reported by the Company from time to time may
change as a result of the continuing evaluation of patients. Moreover, as a
result of changing economic considerations, market, clinical or regulatory
conditions, or clinical trial results, the Company's focus may shift to other
indications, or it may be determined not to further pursue one or more of the
indications discussed below. See "--Risk Factors--Early Stage of the Company
and its Products" and "--Unproven Safety and Efficacy; Clinical Trials". See
"--Risk Factors" generally for a discussion of certain other risks, including
those relating to forward-looking statements.
ONCOLOGY
Cancer is a large group of diseases characterized by uncontrolled growth
and spread of hyperproliferating cells. The Company targeted this area for
its initial products both because of the large potential market size as well
as the potential for expedited review by governmental regulatory bodies. The
Company is collaborating with Pharmacia & Upjohn on the co-development of
Purlytin in the field of oncology.
CUTANEOUS METASTATIC BREAST CANCER (CMBC). The Company has completed
treating patients in its Phase II/III clinical trials using Purlytin for the
local treatment of breast cancer (adenocarcinoma) which has spread to the
chest wall. The Company began Phase II/III clinical trials in the United
States in March 1996 and Pharmacia & Upjohn began Phase II clinical trials in
Europe in January 1997 and the patient accrual has since concluded. The
Company plans to file a New Drug Application ("NDA") in 1998 for this
indication as a palliative treatment of metastatic lesions which have failed
to respond to radiation therapy. There can be no assurance that the NDA will
be filed or that the U.S.
6
Food and Drug Administration ("FDA") will approve the NDA once it is filed.
The Company is continuing to treat CMBC patients under a new Phase III trial
in the United States during the NDA filing and review process.
AIDS-RELATED KAPOSI'S SARCOMA. Kaposi's sarcoma ("KS") is a form of
skin cancer, usually involving multiple tumors. The most aggressive and
prevalent type of KS is the variety usually associated with AIDS. The Company
is conducting clinical trials using Purlytin for the local treatment of
AIDS-related KS. The Company began Phase II/III clinical trials for
AIDS-related KS in March 1996 and continues to treat patients.
OTHER CANCERS. The Company is conducting preclinical studies for the
treatment of a variety of other cancers including prostate cancer, lung
cancer, brain tumors and head and neck cancers. The Company has an existing
oncology Investigational New Drug application ("IND") which it may utilize
for those protocols, if any, it determines to advance to a Phase I/II
clinical trial. The timing of any such advancement will depend on the
progress of preclinical studies. The decision to proceed to clinical trials
depends upon a number of factors including preclinical results, FDA
communications, approval, competitive factors, economic considerations and
the Company's overall business strategy.
OPHTHALMOLOGY
The Company believes that PhotoPoint has the potential to treat a
variety of ophthalmic disorders, including conditions caused by
neovascularization, such as age-related macular degeneration ("AMD") and
corneal neovascularization, as well as other ophthalmic conditions, including
glaucoma. Neovascularization is a condition in which new blood vessels grow
abnormally under the surface of the retina or other parts of the eye. These
fragile vessels can hemorrhage, causing scarring and damage to the nerve
tissue and lead to loss of vision. The Company is collaborating with
Pharmacia & Upjohn on the co-development of Purlytin in the field of
ophthalmology and is collaborating with Iridex, through its subsidiary
company, Iris Medical Instruments, Inc., on the co-development of light
devices in this field. The Company is conducting clinical trials for the
treatment of choroidal neovascularization including AMD. The Company began
Phase I/II clinical trials for AMD in the United States in May 1996 and has
conducted preclinical studies for the treatment of corneal neovascularization
and glaucoma.
UROLOGY
Benign prostate hyperplasia ("BPH") is a urological disorder
characterized by a gradual enlargement of the prostate, a gland in men which
surrounds the urethra. As men age, the prostate gland increases in size and
pinches the urethra, leading to complications in urination and other
debilitating symptoms. The Company is collaborating with Pharmacia & Upjohn
on the co-development of Purlytin in the field of urology. Additionally, the
Company is conducting preclinical studies using Purlytin for the treatment of
BPH and is collaborating with Boston Scientific on the joint development of
medical catheter devices for this use. Based on economic considerations, the
Company is developing local drug delivery methods to optimize this treatment
and may submit an amended IND to the FDA.
DERMATOLOGY
BASAL CELL CARCINOMA. The Company is conducting clinical trials using
Purlytin for the local treatment of certain nonmelanoma cutaneous (skin)
cancers. The skin cancer trials include basal cell carcinomas (skin cancers
caused primarily by sun exposure) and basal cell nevus syndrome (a genetic
disease which causes multiple, recurrent basal cell carcinomas). In 1996, the
Company began Phase II/III clinical trials for basal cell carcinoma in the
United States and Pharmacia & Upjohn began Phase II/III trials in Australia.
Subsequently, the responsibility for the Phase II/III basal cell carcinoma
studies was transferred from the FDA Division of Oncology to the FDA Division
of Dermatology. Because dermatological diseases are generally non
life-threatening, certain study criteria in the FDA Division of Dermatology
differ from the oncology criteria. Therefore the Company is performing
additional preclinical studies prior to the completion of the Phase II/III
clinical studies. The Company may or may not elect to further develop
PhotoPoint procedures for skin disorders based on the criteria of the FDA
Division of Dermatology and other factors, including cost and reimbursement.
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OTHER DERMATOLOGICAL DISORDERS. A number of other non-cancerous
dermatological disorders have shown potential for being treated with
PhotoPoint. Among these are psoriasis, a chronic and potentially debilitating
skin disorder, and actinic keratosis, a pre-cancerous condition of the upper
layer of the skin. The Company is collaborating with Medicis on the
co-development of PhotoPoint in the field of dermatology and, under the
provisions of the letter of intent with Medicis, the Company is responsible
for the funding and development of the dermatological clinical trials. The
Company is continuing to evaluate psoriasis as the next possible dermatology
indication and may advance to a clinical trial based on the progress of the
preclinical studies and other factors. Preparations include development of
LED or other light sources and light delivery systems for use in dermatology
applications and protocol development for anticipated clinical trials.
CARDIOLOGY
The Company is developing PhotoPoint in the field of cardiology. Early
preclinical studies with PhotoPoint indicate that certain photoselective
drugs may be preferentially retained in the hyperproliferating and lipid-rich
components of arterial plaques, as they are in cancer cells. The Company is
conducting preclinical studies for the prevention of restenosis, the
renarrowing of arterial vessels following angioplasty, and believes that
PhotoPoint may provide a means of preventing restenosis, or even treating
diffuse atherosclerosis. The Company is collaborating with Cordis on the
joint development of medical catheter devices for such cardiovascular
applications. In addition, the Company believes that PhotoPoint may provide a
means of reducing intimal hyperplasia (excessive cell growth at the
anastomosis (stitch) sites) associated with bypass grafts and is
collaborating with Ramus on the application of PhotoPoint in the area of
bypass grafts.
GYNECOLOGY
The Company believes that PhotoPoint has potential in various
gynecological applications, including dysfunctional uterine bleeding which
accounts for a significant percent of all hysterectomies. The risks
associated with a hysterectomy have prompted the development of alternatives
which allow destruction of the endometrial lining of the uterus rather than
surgical removal of the uterus. However, current techniques for such
endometrial ablation, such as the use of high-power laser or electrocautery,
are not entirely effective. The Company is therefore conducting preclinical
studies using PhotoPoint as a method of endometrial ablation and believes
PhotoPoint may be a non-surgical alternative to existing techniques or
hysterectomies. Other possible indications include the treatment of
endometriosis and cervical dysplasia.
STRATEGIC COLLABORATIONS
The Company pursues a strategy of establishing license agreements and
collaborative arrangements for the purpose of securing exclusive access to
drug and device technologies and providing market access for products. The
Company intends to continue to pursue this strategy where appropriate in
order to enhance in-house research programs, facilitate clinical testing and
gain access to distribution channels and additional technology. Strategic
collaborations are not, however, without risks. See "--Manufacturing and
Marketing Capabilities and Experience." To date, the Company has entered
into the following collaborative arrangements:
PHARMACIA & UPJOHN
The Company has entered into a series of agreements with certain
subsidiaries of Pharmacia & Upjohn (collectively "Pharmacia & Upjohn") relating
to the development and commercialization of Purlytin.
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LICENSE AGREEMENT. Under a July 1995 development and license agreement
(the "License Agreement"), the Company granted to Pharmacia & Upjohn an
exclusive, worldwide license to use, distribute and sell Purlytin in the area
of photodynamic therapy. The License Agreement provides for the
co-development of Purlytin for use in PhotoPoint in the fields of oncology,
urology and dermatology. In August 1996, the Company signed an agreement with
Pharmacia & Upjohn for the co-development of Purlytin in the field of
ophthalmology with similar terms and conditions as the License Agreement.
Under the License Agreement, Pharmacia & Upjohn is responsible for
conducting certain aspects of clinical trials involving Purlytin and to fund
other current and future preclinical and clinical trials conducted by the
Company involving Purlytin. The Company is entitled to receive royalties on
the sale of Purlytin, payments for certain contemplated indications upon the
achievement of certain milestones and reimbursement for certain expenses.
Pharmacia & Upjohn has also agreed to promote, market and sell Purlytin and
to refrain from developing or selling other photodynamic therapy drugs in the
fields contained in the License Agreement during the agreement term.
Pharmacia & Upjohn also has a right of first negotiation with respect to the
marketing rights to any new photodynamic therapy drug developed by the
Company in the fields contained in the License Agreement. The License
Agreement remains in force for the duration of the patents related to
Purlytin or for a period of ten years from the first commercial sale of
Purlytin on a country-by-country basis, whichever is longer. After those
periods have expired, Pharmacia & Upjohn will have an irrevocable,
royalty-free, non-exclusive license to Purlytin. See "--Risk Factors,
Uncertainty Regarding Patents and Proprietary Technology" and Note 7 of Notes
to Consolidated Financial Statements.
STOCK PURCHASE AGREEMENT. Concurrent with the License Agreement,
Pharmacia & Upjohn entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement"), pursuant to which Pharmacia & Upjohn purchased 600,000
shares of Common Stock from the Company for $12 million, and agreed to
certain restrictions with respect to the acquisition and sale of shares of
the Common Stock, subject to certain exceptions.
DRUG SUPPLY AGREEMENT. The Company and Pharmacia & Upjohn have also
entered into a Drug Supply Agreement pursuant to which the Company agreed to
manufacture (or have manufactured) and supply to Pharmacia & Upjohn, upon
specified payment terms, Pharmacia & Upjohn's requirements of Purlytin in
finished pharmaceutical form for clinical and commercial purposes in the area
of photodynamic therapy. The Drug Supply Agreement was amended in 1996 to
include similar terms and conditions for the field of ophthalmology. The Drug
Supply Agreement remains in force for the term of the License Agreement,
subject to termination under certain limited circumstances. Upon termination,
the Company has agreed to continue to provide Purlytin to Pharmacia & Upjohn
on terms to be negotiated by the parties. See Note 7 of Notes to Consolidated
Financial Statements.
DEVICE SUPPLY AGREEMENT. The Company and Pharmacia & Upjohn also entered
into a Device Supply Agreement pursuant to which the Company appointed
Pharmacia & Upjohn as a non-exclusive worldwide distributor of certain
instruments developed, manufactured or licensed by the Company that produce,
deliver or measure light ("light devices") for use with Purlytin in
photodynamic therapy in the fields of oncology and urology. The Device Supply
Agreement provides for the sale by the Company to Pharmacia & Upjohn of such
light devices at specified rates and the Company is responsible for the
development and regulatory approval of the light devices. During the term of
the Device Supply Agreement, Pharmacia & Upjohn is prohibited from
developing, manufacturing or purchasing from third parties such light
devices or distributing or selling them for use with any photodynamic drug
other than Purlytin. If, however, the Company determines not to or is unable
to manufacture or supply a particular light device, Pharmacia & Upjohn is
entitled to manufacture such device. The Device Supply Agreement was amended
in 1996 to include similar terms and conditions for the field of
ophthalmology. The Device Supply Agreement remains in force during the term
of the License Agreement, subject to earlier termination under certain
limited circumstances. See Note 7 of Notes to Consolidated Financial
Statements.
FORMULATION AGREEMENT. In August 1994, the Company entered into a supply
contract with Pharmacia & Upjohn to develop an emulsion formulation suitable for
intravenous administration of Purlytin. Pursuant to this agreement, Pharmacia &
Upjohn agreed to (i) be the Company's exclusive supplier of such emulsion
products, (ii)
9
manufacture and supply all of the Company's worldwide requirements of certain
emulsion formulations containing Purlytin, and (iii) not develop or supply
formulations or services for use in any photodynamic therapy applications for
any other company. This agreement continues indefinitely except that it may
be terminated ten years after the first commercial sale of Purlytin. See
"--Manufacturing" and Note 7 of Notes to Consolidated Financial Statements.
BOSTON SCIENTIFIC CORPORATION
In December 1993, the Company executed a strategic development letter
agreement with Boston Scientific, a leading developer, manufacturer and
marketer of catheter-based medical technology, for the joint development of
catheter-based light delivery devices for photodynamic therapy in the fields
of urology, pulmonology and gastroenterology. The letter agreement pursuant
to which the parties are collaborating is intended to provide the framework
for a more definitive agreement, relating to, among other things, the
distribution, manufacturing and licensing of developed products, and
continues until the parties enter into such an agreement. At this time,
however, the Company and Boston Scientific have not entered into any such
agreement. See "--Manufacturing" and "--Marketing, Sales and Distribution"
and "--Risk Factors--Limited Manufacturing and Marketing Capability and
Experience" and Note 7 of Notes to Consolidated Financial Statements.
CORDIS CORPORATION
In December 1993, the Company executed a strategic development letter
agreement with Cordis, a Johnson & Johnson company and a leader in coronary
catheter devices, for the joint development of catheter-based light delivery
devices for photodynamic therapy in the cardiovascular field. The letter
agreement pursuant to which the parties are collaborating is intended to
provide the framework for a more definitive agreement, relating to, among
other things, the distribution, manufacturing and licensing of developed
products, and continues until the parties enter into a definitive agreement.
At this time, the Company and Cordis have not entered into any such
agreement. See "--Manufacturing" and "--Marketing, Sales and Distribution" and
"--Risk Factors--Limited Manufacturing and Marketing Capability and
Experience" and Note 7 of Notes to Consolidated Financial Statements.
IRIDEX CORPORATION
In May 1996, the Company entered into a co-development and distribution
agreement with Iridex, a leading provider of semiconductor-based laser
systems to treat eye diseases. The agreement generally provides (i) the
Company with the exclusive right to co-develop with Iridex light-producing
devices for use in photodynamic therapy in the field of ophthalmology, (ii)
that the Company will conduct clinical trials and make regulatory
submissions with respect to all co-developed devices and Iridex will
manufacture all devices for such trials, with costs shared as set forth in
the agreement, and (iii) that Iridex will have an exclusive, worldwide
license to make, distribute and sell all co-developed devices, on which it
will pay royalties to the Company. The agreement remains in effect, subject
to earlier termination in certain circumstances, until ten years after the
date of the first FDA approval of any co-developed device for commercial
sale, subject to certain renewal rights. See "--Manufacturing" and
"--Marketing, Sales and Distribution" and "--Risk Factors--Limited
Manufacturing and Marketing Capability and Experience."
RAMUS MEDICAL TECHNOLOGIES
In December 1996, the Company's wholly owned subsidiary, Miravant
Cardiovascular, Inc. ("MRVTC"), entered into a co-development agreement with
Ramus, an innovator in the development of autologous tissue stent-grafts for
vascular bypass surgeries. Generally the agreement provides MRVTC with the
exclusive rights to co-develop its photodynamic therapy technology with
Ramus' proprietary technology in the development of autologous vascular
grafts for coronary arteries and other vessels. Ramus shall provide, at no
cost to MRVTC, products for use in preclinical and clinical testing with all
other preclinical and clinical costs to be paid by MRVTC. The agreement
remains in effect until the later of (i) ten years after the date of the
first FDA approval of any co-developed device for commercial sale, or (ii)
the life of any patent issued thereon, subject to certain renewal rights.
In conjunction with the co-development agreement, MRVTC purchased, for
$2 million, shares of Ramus' Series A Preferred Stock and obtained an option
to acquire the remaining shares of Ramus at some time in the future
10
under specified terms and conditions. Further, MRVTC is provided first
refusal rights and pre-emptive rights for any issuance of new securities,
whether debt or equity, made by Ramus and requires that Ramus maintain
certain financial and other covenants.
MEDICIS PHARMACEUTICAL CORPORATION
In October 1997, the Company executed a letter of intent with Medicis
Pharmaceutical Corporation, the leading independent dermatology company in
the United States, to develop and commercialize certain PhotoPoint procedures
for dermatology applications. The letter agreement pursuant to which the
parties are collaborating is intended to facilitate the clinical development
of PhotoPoint in dermatology and provide the framework for a more definitive
agreement which would grant Medicis an exclusive license to distribute and
sell certain PhotoPoint products in the United States. At this time, the
Company and Medicis have not entered into any such agreement.
CHIRON DIAGNOSTICS
In November 1997, the Company executed a letter of intent with Chiron
Diagnostics, a division of Chiron Corporation and an international leader in
IN VITRO diagnostics, to collaborate on studies directed towards the early
detection and treatment of lung cancer. The alliance is designed to give the
Company a potentially more sensitive, less invasive and less costly way to
identify patients in early stages of cancer who are eligible for
participation in PhotoPoint clinical trials. In addition to assisting the
Company in these clinical trials, Chiron has agreed to work exclusively with
the Company in the field of PhotoPoint for certain oncology indications.
THE UNIVERSITY OF TOLEDO, THE MEDICAL COLLEGE OF OHIO
AND ST. VINCENT MEDICAL CENTER
In July 1989, the Company entered into a License Agreement with the
University of Toledo, the Medical College of Ohio and St. Vincent Medical
Center, of Toledo, Ohio (collectively, "Toledo"). This agreement provides the
Company with, among other items, exclusive, worldwide rights, subject to certain
governmental rights as described below: (i) to make, use, sell, license or
sublicense certain photoselective compounds (including Purlytin) covered by
certain Toledo patents and patent applications, or not covered by such patents
or patent applications but owned or licensed to Toledo (and which Toledo has the
right to sublicense); (ii) to make, use, sell, license or sublicense certain of
such compounds for which the Company has provided Toledo with financial support;
and (iii) to make, use or sell any invention claimed in certain Toledo patents
or applications and any composition, method or device related to compounds
conceived or developed by Toledo under research funded by the Company. The
agreement further provides that the Company pay Toledo royalties on the sales of
such compounds. As of December 31, 1997, no royalties had been paid or accrued
since no drug or related product had been sold. Under the agreement, the Company
is required to satisfy certain development and commercialization objectives.
This agreement terminates upon the expiration or non-renewal of the last patent
which may issue under this agreement, currently 2013. By its terms, however, the
license extends upon issuance of any new Toledo patents. The Company does not
have contractual indemnification rights against Toledo under the agreement.
Certain research relating to the compounds covered by the License Agreement,
including Purlytin, has been or is being funded in part by certain governmental
grants under which the United States Government has or will have certain rights
in the technology developed, including the right under certain circumstances to
a non-exclusive license or to require the Company to grant an exclusive license
to a third party. See "--Patents and Proprietary Technology" and "--Risk
Factors--Uncertainty Regarding Patents and Proprietary Technology."
LASERSCOPE
In April 1992, the Company entered into a seven-year License and
Distribution Agreement with Laserscope of San Jose, California, a leader in the
surgical laser industry. Pursuant to this agreement, as amended, among other
terms: (i) the Company granted to Laserscope rights to manufacture and sell a
dye laser module developed by the Company;
11
(ii) the Company retains the right to manufacture and sell this system for
use with the Company's own photoselective drugs; and (iii) Laserscope agreed
to pay to the Company a license fee and royalties on Laserscope's sales. This
dye laser module had been developed by the Company prior to the development
of the Company's diode light systems. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RESEARCH AND DEVELOPMENT PROGRAMS
The Company's research and development programs are devoted to the
discovery and development of drugs and devices for PhotoPoint. These research
activities are conducted in-house in the Company's pharmaceutical and
engineering laboratories or elsewhere in collaboration with medical or other
research institutions or with other companies. The Company has expended, and
expects to continue to spend, substantial funds on its research and development
programs. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company's pharmaceutical research program is focused on the ongoing
evaluation of its proprietary compounds for different disease applications.
Among its outside or extramural research, the Company is conducting preclinical
studies at various academic and medical research institutions in the United
States, Europe and Australia. The Company is also active in the research and
development of devices for PhotoPoint. These programs include development of
fiber optic light delivery devices and measurement devices for accuracy in
dosimetry and fluorescence detection systems for diagnostic application of
PhotoPoint. Device research and development is presently conducted either
in-house or in collaboration with partners.
The Company has pursued and been awarded various government grants and
contracts, such as grants sponsored by the National Institutes of Health and
the Small Business Innovative Research Administration, which complement the
Company's research efforts and facilitate new development. See "--Patents
and Proprietary Technology" and Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of Operations" and
Note 7 of Notes to Consolidated Financial Statements.
MANUFACTURING
The Company's strategy is generally to retain manufacturing rights and,
where appropriate, to partner with leading pharmaceutical and medical device
companies for certain elements of its manufacturing processes. The Company is
licensed by the State of California to manufacture bulk drug substance at its
Santa Barbara, California facility for clinical trial use and currently
manufactures the active Purlytin drug substance, light producing devices and
light delivery devices, and conducts other production and testing activities,
at this location. However, the Company has limited capabilities and
experience in the manufacture of drug, light producing and light delivery
products and utilizes outside suppliers, contracted or otherwise, for certain
materials and services related to its manufacturing activities. Although most
of the Company's materials and components are available from various sources,
it is dependent on certain suppliers for key materials or services used in
the Company's drug and light producing and light delivery device development
and production operations. One such supplier is Pharmacia & Upjohn, which
processes Purlytin into a sterile injectable formulation and packages it in
vials for distribution by the Company. The Company expects to continue to
develop new formulations which may or may not have similar dependencies on
suppliers.
Although the Company believes it can continue to produce its drug and
device products in quantities sufficient to support its clinical trial
requirements for the foreseeable future, the Company has limited capabilities
and experience in large-scale drug and device manufacturing. The Company has
and may elect in the future to utilize contract suppliers and manufacturers
for the production of certain drug and device components or product lines.
Moreover, if definitive collaborative arrangements with Boston Scientific and
Cordis are consummated, it is anticipated that such companies will
manufacture the medical catheters and the Company will manufacture the fiber
optic sub-assemblies. Under the terms of the co-development agreement with
Iridex, all manufacturing for light producing devices for use in
12
photodynamic therapy in the field of ophthalmology is the responsibility of
Iridex. There can be no assurance that such collaborative arrangements will
be available to the Company on acceptable terms, if at all. Additionally,
there can be no assurance that the Company's current suppliers will continue
to be available to the Company on acceptable terms, if at all, or that the
Company will be able to produce materials or components in-house in a timely
manner or in sufficient quantities to meet its needs. See "--Strategic
Collaborations" and "--Risk Factors--Reliance on Collaborative Partners" and
"--Limited Manufacturing and Marketing Capability and Experience" and
"--Dependence on Suppliers."
In February 1997, the Company received registration to ISO 9001 and EN
46001 signifying compliance to the International Standards Organization quality
systems requirements for design, manufacture and distribution of medical
devices. This registration should enable the Company to more easily attain
international device marketing approvals.
MARKETING, SALES AND DISTRIBUTION
The Company's strategy is to partner with leading pharmaceutical and
medical device companies for the marketing, sales and distribution of its
products. The Company has granted to Pharmacia & Upjohn the exclusive,
worldwide license to market and sell the Company's leading drug candidate
Purlytin in certain disease fields. Under the terms of the Company's
co-development arrangements with Boston Scientific and Cordis, these
companies have the option of negotiating to enter into long-term
relationships with the Company, under which they will have a license to
market and sell the co-developed medical catheters -- Boston Scientific in
the fields of urology, pulmonology and gastroenterology and Cordis in the
field of cardiology on a worldwide basis. At this time, the Company and
Boston Scientific and Cordis have not entered into any such agreements. Also,
the Company has granted to Iridex the worldwide license to market and sell
all co-developed light producing devices for use in PhotoPoint in the field
of ophthalmology. See "--Strategic Collaborations" and "--Risk
Factors--Reliance on Collaborative Partners."
Where appropriate, the Company intends to seek additional arrangements with
collaborative partners, selected for experience in disease applications or
markets, to act as the marketing and sales arm for the Company and to establish
distribution channels for the Company's drugs and devices. However, there can be
no assurance that such collaborative arrangements can be negotiated or will be
successful. See "--Risk Factors--Reliance on Collaborative Partners."
The Company may also distribute its products directly or through
independent distributors. The Company currently has limited capabilities and
experience in marketing, sales and distribution of its products. See "--Risk
Factors--Limited Manufacturing and Marketing Capability and Experience" and
Note 7 of Notes to Consolidated Financial Statements.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company pursues a policy of seeking patent protection for its
technology both in the United States and in selected countries abroad. The
Company plans to prosecute, assert and defend its patent rights when
appropriate. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position.
The Company is currently the record owner of 23 United States patents
duly issued by the U.S. Patent and Trademark Office which expire during the
time frame 2010 through 2016, a substantial number of which relate to certain
light delivery and measurement devices and methods. The Company is also the
record owner of four foreign patents expiring during the time frame from 2012
to 2014. Also in its name, the Company owns a number of United States (and
related foreign) patent applications filed and pending. In addition, the
Company has exclusive license rights under fifteen issued United States
patents, which expire during the time frame from 2006 through 2013, and two
issued foreign patents expiring in 2006, and under several pending United
States patent applications (and related foreign patent applications),
relating to certain photoselective compounds, as well as exclusive rights to
two method-of-use patents.
13
The Company obtained its photoselective compound patent rights, including
rights to Purlytin, through an exclusive License Agreement with Toledo. This
agreement is the basis for the Company's core drug technology. See
"--Strategic Collaborations" for a description of the Toledo agreement.
Certain of the foregoing patents and patent applications are subject to
certain governmental rights described below.
The patent position of pharmaceutical and medical device firms generally is
highly uncertain and involves complex legal and factual questions. There can be
no assurance that patent applications owned by or licensed to the Company will
result in issued patents, that any issued patents will provide the Company with
significant proprietary protection or competitive advantages or will not be
infringed upon or designed around by others, will not be challenged by others
and held to be invalid or unenforceable or that the patents of others will not
have a material adverse effect on the Company. See "--Risk Factors--Uncertainty
Regarding Patents and Proprietary Technology."
The Company is aware that its competitors and other companies,
institutions and individuals have been issued patents relating to
photodynamic therapy. In addition, the Company's competitors and other
companies, institutions and individuals may have filed patent applications or
been issued patents relating to other potentially competitive products of
which the Company is not aware. Further, the Company's competitors and other
companies, institutions and individuals may in the future file applications
for, or be granted licenses or otherwise obtain proprietary rights to,
patents relating to other potentially competitive products. There can be no
assurance that these existing or future patents or patent applications will
not conflict with the Company's or its licensors' patents or patent
applications. Such conflicts could result in a rejection of the Company's or
its licensors' patent applications or the invalidation of their patents,
which could have a material adverse effect on the Company's competitive
position. In the event of such conflicts, or in the event the Company
believes that such competitive products may infringe the patents owned by or
licensed to the Company, the Company may pursue patent infringement
litigation or interference proceedings against, or may be required to defend
against litigation involving, holders of such conflicting patents or
competing products. Such proceedings may materially adversely affect the
Company's competitive position, and there can be no assurance that the
Company will be successful in any such proceeding. Litigation and other
proceedings relating to patent matters, whether initiated by the Company or a
third party, can be expensive and time consuming, regardless of whether the
outcome is favorable to the Company, and can result in the diversion of
substantial financial, managerial and other resources from the Company's
other activities. An adverse outcome could subject the Company to significant
liabilities to third parties or require the Company to cease any related
research and development activities or product sales. The Company does not
have contractual indemnification rights against the licensors of the various
drug patents including, but not limited to, patents on photoselective
compounds. In addition, if patents that contain dominating or conflicting
claims have been or are subsequently issued to others and such claims are
ultimately determined to be valid, the Company may be required to obtain
licenses under patents or other proprietary rights of others. No assurance
can be given that any licenses required under any such patents or proprietary
rights would be made available on terms acceptable to the Company, if at all.
If the Company does not obtain such licenses, it could encounter delays or
could find that the development, manufacture or sale of products requiring
such licenses is foreclosed.
The Company also relies upon unpatented trade secrets, and no assurance can
be given that others will not independently develop substantially equivalent
proprietary information and techniques, or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its rights to its unpatented trade secrets and know-how.
It is the Company's policy to require its employees, consultants,
outside scientific collaborators and sponsored researchers and other advisors
to execute confidentiality agreements upon the commencement of employment or
consulting relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific limited
circumstances. The Company also requires signed confidentiality or material
transfer agreements from any company that is to receive confidential data or
proprietary compounds. In the case of employees and consultants, the
agreements generally provide that all inventions conceived by the individual
while rendering services to the Company, which relate to the Company's
business or
14
anticipated business, shall be assigned to the Company as the exclusive
property of the Company. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for the
Company's trade secrets or other proprietary information in the event of
unauthorized use or disclosure of such information.
Certain of the Company's research, including research relating to certain
pharmaceutical compounds covered by the License Agreement with Toledo, including
Purlytin, has been or is being funded in part by Small Business Innovation
Research Administration or National Institutes of Health grants. See
"--Research and Development Programs." As a result of such funding, the
United States Government has or will have certain rights in the inventions
developed with the funding. These rights include a non-exclusive, paid-up,
worldwide license under such inventions for any governmental purpose. In
addition, the government has the right to require the Company to grant an
exclusive license under any of such inventions to a third party if the
government determines that (i) adequate steps have not been taken to
commercialize such inventions, (ii) such action is necessary to meet public
health or safety needs or (iii) such action is necessary to meet requirements
for public use under federal regulations. Federal law requires that any
exclusive licensor of an invention that was partially funded by federal
grants (which is the case with the subject matter of certain patents issued
in the Company's name or licensed from Toledo) agree that it will not grant
exclusive rights to use or sell the invention in the United States unless the
grantee agrees that any products embodying the invention will be manufactured
substantially in the United States, although such requirement is subject to a
discretionary waiver by the government. It is not expected that the
government will exercise any such rights or that such exercise would have a
material impact on the Company.
GOVERNMENT REGULATION
The research, development, manufacture, marketing and distribution of the
Company's products are subject to regulation for safety and efficacy by numerous
governmental authorities in the United States and other countries. In the United
States, pharmaceutical products and medical devices are regulated by the FDA
through the Food, Drug and Cosmetic Act ("FDC Act"). The FDC Act and various
other federal and state statutes control and otherwise affect the development,
approval, manufacture, testing, storage, records and distribution of drugs and
medical devices. The Company is subject to regulatory requirements governing
both drugs and devices.
DRUG PRODUCTS. The FDA generally requires the following steps before a new
drug product may be marketed in the United States: (i) preclinical studies
(laboratory and animal tests); (ii) the submission to the FDA of an application
for an IND exemption, which must become effective before human clinical trials
may commence; (iii) adequate and well-conducted clinical trials to establish
safety and efficacy of the drug for its intended use; (iv) the submission to the
FDA of an NDA; and (v) review and approval of the NDA by the FDA before any
commercial sale or shipment of the drug. In addition to obtaining FDA approval
for each new drug product, each drug manufacturing establishment must be
registered with the FDA. Manufacturing establishments, both domestic and
foreign, are subject to inspections by or under the authority of the FDA and by
other federal, state or local agencies and must comply with the FDA's current
Good Manufacturing Practices ("GMP") regulations. The FDA will not approve an
NDA until a preapproval inspection of the manufacturing facilities confirms that
the drug is produced in accordance with current drug GMPs. In addition, drug
manufacturing establishments in California must also be licensed by the State of
California and must comply with manufacturing, environmental and other
regulations promulgated and enforced by the California Department of Health
Services.
Preclinical studies include laboratory evaluation of product chemistry,
conducted under Good Laboratory Practice ("GLP") regulations, and animal studies
to assess the potential safety and efficacy of the drug and its formulation. The
results of the preclinical tests are submitted to the FDA as part of the IND.
Unless the FDA objects to the IND, the IND becomes effective 30 days following
its receipt by the FDA.
Clinical trials involve the administration of the investigational drug
to human subjects under FDA regulations and other guidance commonly known as
good clinical practice ("GCP") requirements and the supervision of a
qualified physician. Clinical trials are conducted in accordance with
protocols that detail the objectives of the study, the
15
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol is submitted to the FDA as a part of the IND. Each
clinical study must be conducted under the auspices of an independent
Institutional Review Board ("IRB"). The IRB considers, among other things,
ethical factors, the safety of human subjects and the possible liability of
the testing institution.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. Phase I represents the initial introduction
of the drug to a small group of humans to test for safety (adverse effects),
dosage tolerance, absorption, distribution, metabolism, excretion and
clinical pharmacology and, if possible, to gain early evidence of
effectiveness. Phase II involves studies in a limited sample of the intended
patient population to assess the efficacy of the drug for a specific
indication, to determine dose tolerance and optimal dose range and to
identify possible adverse effects and safety risks. Once a compound is found
to have some efficacy and to have an acceptable safety profile in Phase II
evaluations, Phase III clinical trials are initiated for definitive clinical
safety and efficacy studies in a broader sample of the patient population at
multiple study sites. The results of the preclinical and clinical testing are
submitted to the FDA in the form of an NDA for marketing approval.
Completing clinical trials and obtaining FDA approval for a new drug
product is likely to take several years and require expenditure of substantial
resources. If an NDA application is submitted, there can be no assurance that
the FDA will approve the NDA in a timely manner, if at all. Even if initial FDA
approval is obtained, further studies will be required to gain approval for the
use of a product as a treatment for clinical indications other than those for
which the product was initially approved. Also, the FDA requires post-market
surveillance programs to monitor and report the drug's side effects. For certain
drugs, the FDA may also, concurrent with marketing approval, seek agreement from
the sponsor to conduct post-marketing ("Phase IV") studies to obtain further
information about the drug's risks, benefits, and optimal use. Results of such
monitoring and of Phase IV post-marketing studies may affect the further
marketing of the product.
Where appropriate, the Company may seek to obtain accelerated review and/or
approval of products and to use expanded access programs that may provide
broader accessibility and, if approved by the FDA, payment for an
investigational drug product. These activities may include, but may not be
limited to, pursuing programs such as treatment IND or parallel track IND
classifications which allow expanded availability of an investigational
treatment to patients not in the ongoing clinical trials, and seeking physician
or cross-referenced INDs which allow individual physicians to use an
investigational drug before marketing approval and for an indication not covered
by the ongoing clinical trials. However, there can be no assurance that the
Company will seek such avenues in all possible cases or in any individual case.
Further, there can be no assurance that the Company will be able to obtain
access to such avenues in a timely manner, if at all. If the Company is able to
obtain access to any such avenue, there can be no assurance that an avenue will
be successful or result in accelerated review or approval, or broader
accessibility to, any of the Company's products.
MEDICAL DEVICE PRODUCTS. The Company's medical device products are subject
to government regulation in the United States and foreign countries. In the
United States, the Company is subject to the rules and regulations established
by the FDA requiring that the Company's medical device products are safe and
efficacious and are designed, tested, developed, manufactured and distributed in
accordance with FDA regulations.
Under the FDC Act, medical devices are classified into one of three classes
(i.e., class I, II, or III) on the basis of the controls necessary to reasonably
ensure their safety and effectiveness. Safety and effectiveness can reasonably
be assured for class I devices through general controls (e.g., labeling,
premarket notification and adherence to GMPs) and for class II devices through
the use of general and special controls (e.g., performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, class III
devices are those which must receive premarket approval by the FDA to ensure
their safety and effectiveness (e.g., life-sustaining, life-supporting and
implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed devices).
16
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a premarket approval application ("PMA"). A PMA requires the
completion of extensive clinical trials comparable to those required of new
drugs and typically requires several years before FDA approval, if any, is
obtained. A 510(k) clearance will be granted if the submitted data establish
that the proposed device is "substantially equivalent" to a legally marketed
class I or class II medical device, or to a class III medical device for which
the FDA has not called for PMAs. Currently, devices indicated for use in
photodynamic therapy, such as the Company's devices, regardless of
classification, must be evaluated in conjunction with an IND as a combination
drug-device product.
COMBINATION DRUG-DEVICE PRODUCTS. Medical products containing a
combination of drugs, devices or biological products may be regulated as
"combination products." A combination product is generally defined as a product
comprised of components from two or more regulatory categories (drug/device,
device/biologic, drug/biologic, etc.) and in which the various components are
required to achieve the intended effect and are labeled accordingly. Each
component of a combination product is subject to the rules and regulations
established by the FDA for that component category, whether drug, biologic or
device. Primary responsibility for the regulation of a combination product
depends on the FDA's determination of the "primary mode of action" of the
combination product, whether drug, biologic or device.
In order to facilitate premarket review of combination products, the FDA
designates one of its centers to have primary jurisdiction for the premarket
review and regulation of both components, in most cases eliminating the need to
receive approvals from more than one center. The determination whether a product
is a combination product or two separate products is made by the FDA on a
case-by-case basis. Market approval authority for combination photodynamic
therapy drug/device products is vested in the FDA Center for Drug Evaluation and
Research (the "CDER") which is required to consult with the FDA Center for
Devices and Radiological Health. As the lead agency, the CDER administers and
enforces the premarket requirements for both the drug and device components of
the combination product. The FDA has reserved the decision on whether to require
separate submissions for each component until the product is ready for premarket
approval. Although, to date, photodynamic therapy products have been categorized
by the FDA as combination drug-device products, there can be no assurance that
the Company's products currently under investigation or any future drug/device
products will continue to be categorized for regulatory purposes as combination
products, that they will not require separate drug and device submissions, or
that they will not require separate approval by both centers.
In the event that separate applications for approval are required in the
future for PhotoPoint devices, it may be necessary for the Company to
submit a PMA or a 510(k) to the FDA for its PhotoPoint devices. Submission of
a PMA would include the same clinical studies submitted under the IND to show
the safety and efficacy of the device for its intended use in the combination
product. A 510(k) notification would include information and data to show that
the Company's device is substantially equivalent to previously marketed devices.
There can be no assurance as to the exact form of the premarket approval
submission required by the FDA or post-marketing controls for the Company's
PhotoPoint devices.
POST-APPROVAL COMPLIANCE. Once a product is approved for marketing, the
Company must continue to comply with various FDA, and in some cases Federal
Trade Commission, requirements for design, safety, advertising, labeling, record
keeping and reporting of adverse experiences associated with the use of a
product. The FDA actively enforces regulations prohibiting marketing of products
for non-approved uses. Failure to comply with applicable regulatory requirements
can result in, among other things, fines, injunctions, civil penalties, failure
of the government to grant premarket clearance, premarket approval or export
certificates for devices or drugs, delays or suspensions or withdrawals of
approvals, seizures or recalls of products, operating restrictions and criminal
prosecutions. Changes in existing requirements or adoption of new requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations.
17
INTERNATIONAL. With regard to the marketing of PhotoPoint drugs
and devices outside the United States, the Company is subject to foreign
regulatory requirements governing testing, development, marketing, licensing,
pricing and/or distribution of drugs and devices in other countries. These
regulations vary from country to country. Beginning in 1995, a new regulatory
system to approve drug market registration applications was implemented in the
European Union ("EU"). The system provides for new centralized, decentralized
and national (member state by member state) registration procedures through
which a company may obtain drug marketing registrations. The centralized
procedure allows for expedited review and approval of biotechnology and high
technology/innovative product marketing applications by a central Committee for
Proprietary Medicinal Products that is binding on all member states in the EU.
The decentralized procedure allows a company to petition individual EU member
states to review and recognize a market application previously approved in one
member state by the national route. There can be no assurance that the Company's
drug products will qualify for the centralized review procedure or that the
Company will be able to obtain a national market application that will be
accepted by other EU member states. The Company's devices must also meet the new
Medical Device Directive effective in Europe in 1998. The Directive requires
that the Company's manufacturing quality assurance systems and compliance with
technical essential requirements be certified with a CE Mark authorized by a
registered notified body of an EU member state prior to free sale in the EU.
Registration and approval of a photodynamic therapy product in other countries,
such as Japan, may include additional procedures and requirements, nonclinical
and clinical studies, and may require the assistance of native corporate
partners.
The time and expense required to gain approval for a product in another
country may be more or less than that required for U.S. approval. There can be
no assurance as to degree or extent of approval requirements or regulation of
the Company's products in any country, or the effect of such requirements or
regulations on the Company's ability to sell its products outside of the United
States.
OTHER LAWS; FUTURE LEGISLATION OR REGULATIONS. In addition to the
regulations for drug or device approvals, the Company is subject to regulation
under state, federal or other law, including regulations for worker occupational
safety, laboratory practices, environmental protection and hazardous substance
control. The Company continues to make capital and operational expenditures for
protection of the environment in amounts which are not material. However, there
can be no assurance that future expenditures will not have a material adverse
effect on the Company. The Company may also be subject to other present and
possible future local, state, federal and foreign regulation. There can be no
assurance that any such regulations will not adversely affect the Company's
business.
Heightened public awareness and concerns regarding the growth in overall
health care expenditures in the United States, combined with the continuing
efforts of governmental authorities to contain or reduce costs of health care,
may result in the enactment of national health care reform or other legislation
or regulations that impose limits on the number and type of medical procedures
which may be performed or which have the effect of restricting a physician's
ability to select specific products for use in certain procedures. Such new
legislation or regulations may materially adversely affect the demand for the
Company's products. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state
legislative proposals and regulations to implement greater governmental control
in the health care industry. For example, the Clinton Administration and certain
members of Congress have proposed health care reform legislation that may impose
pricing or profitability limitations or other restrictions on companies in the
health care industry. The announcement of such proposals may materially
adversely affect the Company's ability to raise capital or to form
collaborations, and the enactment of any such reforms could have a material
adverse effect on the Company. In certain foreign markets, the pricing and
profitability of health care products are subject to governmental influence or
control. In addition, legislation or regulations that impose restrictions on the
price that may be charged for health care products or medical devices may
adversely affect the Company's results of operations. From time to time,
legislation or regulatory proposals are considered that could alter the review
and approval process relating to pharmaceutical or medical device products. The
Company is unable to predict the likelihood of adverse effects which might arise
from future legislative or administrative action, either in the United States or
abroad.
18
COMPETITION
The pharmaceutical and medical device industries are characterized by
extensive worldwide research and development efforts and rapid technological
change. Competition from other domestic and foreign pharmaceutical or medical
device companies and research and academic institutions in the areas of product
development, product and technology acquisition, manufacturing and marketing is
intense and is expected to increase. These competitors may succeed in obtaining
approval from the FDA or other regulatory agencies for their products more
rapidly than the Company. Competitors have also developed or are in the process
of developing technologies that are, or in the future may be, the basis for
competitive products.
The Company believes that a primary competitive issue will be the
performance characteristics of photoselective drugs, including product efficacy
and safety, as well as availability, price and patent position, among other
issues. As the photodynamic therapy industry evolves, the Company believes that
new and more sophisticated devices will be required and that the ability of any
group to develop advanced devices will be of primary importance to market
position. The Company believes that, after approval, competition will be based
on product reliability, clinical utility, availability, price and patent
position.
The Company is aware of various competitors involved in the photodynamic
therapy drug arena. The Company understands that these companies are conducting
preclinical and/or clinical testing in various countries and for a variety of
disease indications. One such company is QLT PhotoTherapeutics ("QLT"). The
Company understands that QLT's drug Photofrin-Registered Trademark- has received
marketing approval in the United States and certain other countries for various
specific disease indications. In addition, the Company is aware of competitors
active in the commercialization of photodynamic therapy devices. Many of the
Company's competitors have substantially greater financial, technical and human
resources than the Company and substantially greater experience in developing
products, conducting preclinical or clinical testing, obtaining regulatory
approvals and manufacturing and marketing. Further, the Company's competitive
position could be materially adversely affected by the establishment of patent
protection by its competitors. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective or affordable than those being developed by the Company or that
would render the Company's technology and products less competitive or obsolete.
See "--Risk Factors--Competition and Technological Uncertainty."
LIABILITY OR RECALL
The use of the Company's products in clinical trials and the sale of such
products may expose the Company to liability claims. These claims could be made
directly by patients or consumers, or by companies, institutions or others using
or selling such products. In addition, the Company is subject to the inherent
risk that a governmental authority or third party may require the recall of one
or more of the Company's products. The Company has not obtained liability
insurance that would cover a claim relating to the use or recall of its
products. In the absence of such insurance, claims made against the Company or a
product recall could have a material adverse effect on the Company. In addition,
there can be no assurance that, if the Company seeks insurance coverage in the
future, such coverage will be available at a reasonable cost and in amounts
sufficient to protect the Company against claims that could have a material
adverse effect on the financial condition and prospects of the Company. Further,
liability claims relating to the use of the Company's products or a product
recall could negatively effect the Company's ability to obtain or maintain
regulatory approval for its products. The Company has agreed to indemnify
certain of its collaborative partners against certain potential liabilities
relating to the manufacture and sale of Purlytin and PhotoPoint light devices.
See "--Strategic Collaborations."
EMPLOYEES
As of March 17, 1998, the Company employed 177 individuals,
approximately 79 of which were engaged in research and development, 51 were
engaged in manufacturing and clinical activities and 47 in general and
19
administrative activities. The Company believes that its relationship with
its employees is good and none of the employees are represented by a labor
union.
RISK FACTORS
The Company does not provide forecasts of potential future operational or
financial performance. While management of the Company is optimistic about the
Company's long-term prospects, the following issues and uncertainties, among
others, should be considered in evaluating its outlook. This Annual Report on
Form 10-K contains forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, which involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievement of the Company, or industry results, to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Actual results could differ materially from those
contemplated by such statements. The factors listed below represent certain
important factors the Company believes could cause such results to differ. These
factors are not intended to represent a complete list of the general or specific
risks that may affect the Company. It should be recognized that other risks may
be significant, presently or in the future, and the risks set forth below may
affect the Company to a greater extent than indicated.
EARLY STAGE OF THE COMPANY AND ITS PRODUCTS
The Company and its products are in an early stage of development. No
revenues have been generated from sales of the Company's drugs and only
limited revenues have been generated from sales of the Company's devices. The
Company does not expect to achieve significant levels of revenues for at
least several years. The Company's revenues to date have consisted, and for
the foreseeable future are expected to consist, principally of grants awarded
and payments for its devices which are purchased by others engaged in
preclinical and clinical testing and research of photodynamic therapy drugs
or by companies that distribute the devices and payments under research and
development agreements, license fees, royalties, clinical reimbursements,
milestone payments and interest income. To achieve profitable operations on a
continuing basis, the Company, alone or with collaborative partners, must
successfully research, develop, test, obtain regulatory approval,
manufacture, introduce, market and distribute its products. The time frame
necessary to achieve these goals for any individual product is long and
uncertain. Most of the products currently under development by the Company
will require significant additional research and development, preclinical and
clinical testing and regulatory approval prior to commercialization. There
can be no assurance that the Company's research or product development
efforts or those of its collaborative partners will be successfully
completed, that the drugs or devices currently under development will be
successfully transformed into marketable products, that required regulatory
approvals can be obtained, that products can be manufactured at an acceptable
cost and with appropriate quality, that any approved products can be
successfully marketed, or that any products that may be marketed will be
favorably accepted. The likelihood of the Company's success must be
considered in light of these and other problems, expenses, difficulties,
complications and delays frequently encountered in connection with the
formation of a new business and the development and commercialization of new
products, particularly pharmaceutical and medical device products. See
"--Strategic Collaborations" and "--Government Regulation" and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has generated little revenue to date, has experienced operating
losses since its inception in 1989 and has not yet achieved profitability. As of
December 31, 1997, the Company had an accumulated deficit of approximately $80.9
million. These losses have resulted primarily from the Company's research and
development programs, the funding of preclinical and clinical testing and
regulatory activities and the general and administrative expenses associated
with these activities. The Company anticipates incurring substantial and
increasing losses over at least the next several years. The extent of losses and
the time required to reach profitability are highly uncertain. To achieve
sustained profitable operations, the Company, alone or with collaborative
partners, must successfully research, develop, test, obtain regulatory approval,
manufacture, introduce, market and distribute its products. There can be no
20
assurance that the Company will be able to achieve profitability or that
profitability, if achieved, can be sustained on an ongoing basis. Moreover,
if profitability is achieved, the level of that profitability cannot be
accurately predicted. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNPROVEN SAFETY AND EFFICACY; CLINICAL TRIALS
All drug and device products currently under development by the Company
will require extensive preclinical and clinical testing prior to regulatory
approval for commercial use. None of the Company's products have completed
testing for efficacy or safety in humans. There can be no assurance that such
testing will demonstrate that Purlytin or any other of the Company's products
is safe or efficacious or that testing for any of the Company's compounds
currently under development will be commenced or completed successfully
within any specified time period, if at all. Further, there can be no
assurance that clinical data reported by the Company will not change as a
result of the continuing evaluation of patients. Data obtained from
preclinical and clinical trials are subject to varying interpretations which
can delay, limit or prevent approval by the FDA or other regulatory
authorities. There can be no assurance that the Company will not encounter
problems in research and development, preclinical testing or clinical trials
that will cause the Company to delay, suspend or cancel clinical trials. Many
potential pharmaceutical and medical device products that achieve promising
results in preclinical tests and clinical trials fail to demonstrate
sufficient safety or efficacy to warrant approval by the FDA or other
regulatory authorities, and there can be no assurance that any of the
Company's potential products will obtain the required approvals or, if
approved, will obtain sufficient market acceptance to become commercially
successful. Moreover, as a result of changing economic considerations,
market, clinical or regulatory conditions, or clinical trial results, the
Company's focus may shift to other indications, or it may be determined not
to further pursue one or more of the indications currently being pursued. See
"--Targeted Diseases and Clinical Trials" and "--Government Regulation."
To date, the Company has very limited experience in conducting clinical
trials. The Company will either need to rely on third parties, including its
collaborative partners, to design and conduct any required clinical trials or
expend resources to hire additional personnel to administer such clinical
trials. There can be no assurance that the Company will be able to find
appropriate third parties to design and conduct clinical trials or that it
will have the resources to hire personnel to administer clinical trials
in-house. See "--Strategic Collaborations."
RELIANCE ON COLLABORATIVE PARTNERS
The Company has entered into collaborative relationships with certain
corporations and academic institutions in connection with the research and
development, preclinical and clinical testing, licensing, manufacturing and
distribution of its products. In July 1995, the Company entered into a
collaborative agreement with Pharmacia & Upjohn pursuant to which the Company
granted to Pharmacia & Upjohn an exclusive worldwide license to use,
distribute and sell Purlytin for therapeutic or diagnostic applications in
the area of photodynamic therapy. The amount of royalty revenues and other
payments, if any, ultimately received by the Company with respect to sales of
Purlytin is dependent, in part, on the amount and timing of resources
Pharmacia & Upjohn commits to research and development, clinical testing and
regulatory and marketing activities, which are entirely within the control of
Pharmacia & Upjohn. The resources committed by Pharmacia & Upjohn in these
areas will depend on Pharmacia & Upjohn's own competitive, marketing and
strategic considerations, including the relative advantages of alternative
products or therapies developed and marketed by Pharmacia & Upjohn or
competitors. There can be no assurance that Pharmacia & Upjohn will pursue
the development and commercialization of Purlytin or that Pharmacia & Upjohn
will perform its obligations as expected. See "--Strategic Collaborations."
In addition, the Company is also collaborating with Boston Scientific
and Cordis with respect to the co-development of catheters for use in
photodynamic therapy. Also, the Company is collaborating with Medicis to
facilitate the clinical development of PhotoPoint in dermatology and with
Chiron for the early detection and treatment of lung cancer. The Company has
not entered into any definitive collaborative agreement with any of these
companies. No assurance can be given that these additional collaborations
will culminate in definitive collaborative agreements or
21
marketable products or will otherwise be successful. Also, there can be no
assurance that Iridex and Ramus will continue to pursue the development of
devices for use in photodynamic therapy in the fields of ophthalmology and
cardiology, respectively or that such development will result in marketable
products. See "--Strategic Collaborations."
In addition, the Company is currently at various stages of discussions
with other companies regarding the establishment of various collaborations.
The Company's current and future collaborations are important to the Company
because they allow the Company greater access to funds, to research,
development or testing resources and to manufacturing, sales or distribution
resources than it would otherwise have, and the Company intends to continue
to rely on such collaborative arrangements. However, there can be no
assurance that the Company will be able to negotiate acceptable collaborative
arrangements in the future or that such future or existing collaborative
arrangements will be successful or result in products that are marketed or
sold. In addition, there can be no assurance that such collaborative
relationships will not limit or restrict the Company in any way. Further,
there can be no assurance that the Company's collaborative partners will not
develop or pursue alternative technologies either on their own or in
collaboration with others, including the Company's competitors, as a means of
developing or marketing products for the diseases targeted by the
collaborative programs and the Company's products. If the Company's partners
elect to terminate the development and other activities contemplated by the
collaborative relationships described above, the Company will be required to
seek other partners, or expend substantial additional resources to pursue
such activities independently. There can be no assurance that such efforts
would be successful. See "--Strategic Collaborations" and "--Limited
Manufacturing and Marketing Capabilities and Experience."
ADDITIONAL FINANCING REQUIREMENTS AND UNCERTAINTY OF CAPITAL FUNDING
The Company has incurred negative cash flows from operations since its
inception and has expended substantial funds in connection with its research
and development programs and preclinical and clinical testing. The Company
may require substantial funding to continue or undertake its research and
development activities, preclinical and clinical testing and manufacturing,
marketing, sales, distribution and administrative activities. There can be no
assurance that the Company's existing capital resources, together with the
proceeds from future offerings and future cash flows, will be sufficient to
fund the Company's future operations. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
PRICE PROTECTION PROVISIONS OF SECURITIES PURCHASE AGREEMENTS
Included in the provisions of the Securities Purchase Agreements related
to the Company's private equity placements in September and October 1997 are
price protections provisions that provide that, if on the first anniversary
of the closing of such purchases, the 30 day average closing bid price of the
Common Stock for the period ending on the trading day prior to the
anniversary date is less than the closing price paid by the purchasers, then
the Company shall pay each purchaser additional cash or stock, or a
combination of both, as determined by the Company at its sole option. In the
event that the price of the Common Stock is significantly below the closing
price at the anniversary date, such payment, if made in cash, would have a
material adverse impact on the liquidity and financial condition of the
Company, or would, if made in shares of Common Stock, result in dilution to
existing shareholders.
COMPETITION AND TECHNOLOGICAL UNCERTAINTY
Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company and substantially greater
experience in developing products, conducting preclinical or clinical
testing, obtaining regulatory approvals and manufacturing and marketing.
Further, the Company's competitive position could be materially adversely
affected by the establishment of patent protection by its competitors. There
can be no assurance that the Company's existing competitors or other
companies will not succeed in developing technologies and products that are
more effective or affordable than those being developed by the Company or
that would render the Company's
22
technology and products less competitive or obsolete. See "--Patents and
Proprietary Technology" and "--Competition."
The Company's products are subject to the risks of failure inherent in
the development and testing of products based on innovative technologies.
These risks include the possibilities that this technology or any or all of
the Company's products may be found to be ineffective or to have
unanticipated limitations or otherwise fail.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its ongoing
research and development, preclinical testing and clinical trial activities
are subject to extensive regulation and review by numerous governmental
authorities in the United States, including the FDA, and in other countries.
All drugs and most medical devices developed by the Company must undergo
rigorous preclinical and clinical testing and an extensive regulatory
approval process administered by the FDA under the FDC Act, and comparable
foreign authorities before they can be marketed. These processes involve
substantial cost and can take many years. The Company has limited experience
in, and limited resources available to commit to, regulatory activities.
Failure to comply with the applicable regulatory requirements can, among
other things, result in non-approval, suspensions of regulatory approvals,
fines, product seizures and recalls, operating restrictions, injunctions and
criminal prosecution.
The time required for completing such testing and obtaining such
approvals is uncertain and approval itself may not be obtained. In addition,
delays or rejections may be encountered due to, among other reasons,
regulatory review of each submitted new drug, device or combination
drug/device application or product license application, as well as changes in
regulatory policy during the period of product development. Similar delays
may also be encountered in foreign countries. To date, no pharmaceutical
product candidate being developed by the Company has been submitted for
approval or has been approved by the FDA or any other regulatory authority
for marketing, and there can be no assurance that, even after investing
substantial time and expense, regulatory approval will be obtained for any
products developed by the Company. Moreover, if regulatory approval of a
product is granted, such approval may entail limitations on the indicated
uses for which the product may be marketed. Further, even if such regulatory
approval is obtained, a marketed product, its manufacturer and the facilities
in which the product is manufactured are subject to continual review and
periodic inspections. Later discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on such product
or manufacturer, including withdrawal of the product from the market and
litigation. Although, to date, photodynamic therapy products have been
categorized by the FDA as combination drug-device products, there can be no
assurance that the Company's products currently under investigation or any
future drug/device products will continue to be categorized for regulatory
purposes as combination products, that they will not require separate drug
and device submissions, or that they will not require separate approval by
regulatory authorities. See "--Government Regulation."
REIMBURSEMENT
The Company's ability to commercialize its products successfully may
depend in part on the extent to which reimbursement for such products and
related treatment will be available from collaborative partners, government
health administration authorities, private health insurers, managed care
entities and other organizations. Such payors are increasingly challenging
the price of medical products and services and establishing protocols and
formularies which effectively limit physicians' ability to select products
and procedures. Uncertainty exists as to the reimbursement status of health
care products (especially innovative technologies), and there can be no
assurance that adequate reimbursement coverage will be available to enable
the Company to achieve market acceptance of its products or to maintain price
levels sufficient for realization of an appropriate return on its products.
LIMITED MANUFACTURING AND MARKETING CAPABILITY AND EXPERIENCE
23
To be successful, the Company's products must be manufactured in
commercial quantities under current GMP prescribed by the FDA and at
acceptable costs. Although the Company intends to manufacture drugs and
devices, the Company has not yet manufactured any products in commercial
quantities under GMP and has no experience in such commercial manufacturing.
The Company will need to expand its manufacturing capabilities and/or depend
on its collaborators, licensees or contract manufacturers for the commercial
manufacture of its products. In the event the Company determines to expand
its manufacturing capabilities, it will require the expenditure of
substantial funds, the hiring and retention of significant additional
personnel and compliance with extensive regulations applicable to such
expansion. There can be no assurance that the Company will be able to expand
such capabilities successfully or that it will be able to manufacture
products in commercial quantities for sale at competitive prices. Further,
there can be no assurance that the Company will be able to enter into
manufacturing arrangements with collaborators, licensees, or contract
manufacturers on acceptable terms or at all. If the Company is not able to
expand its manufacturing capabilities or enter into additional commercial
manufacturing agreements, it could be materially and adversely affected. See
"--Strategic Collaborations" and "--Manufacturing" and "--Dependence upon
Suppliers."
The Company has limited experience in marketing, distributing and
selling pharmaceutical products, and will need to develop a sales force or
rely on its collaborators or licensees or make arrangements with others to
provide for the marketing, distribution and sale of its products. There can
be no assurance that the Company's marketing, distribution and sales
capabilities or current or future arrangements with third parties to perform
such activities will be adequate for the successful commercialization of its
products. See "--Strategic Collaborations" and "--Marketing, Sales and
Distribution."
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend, in part, on its and its licensors'
ability to obtain, assert and defend its patents, protect trade secrets and
operate without infringing the proprietary rights of others. The Company has
filed applications for or has been issued U.S. and foreign patents, a majority
of which relate to its light delivery and measurement devices, and the
Company has an exclusive license under patent applications or patents of
others relating to certain photoselective compounds. Such issued U.S.
patents expire from 2006 through 2016. Certain of the foregoing patents and
patent applications are subject to certain governmental rights. The exclusive
license to the Company under various drug patents, including patents relating
to its leading drug candidate Purlytin, provides that the licensors may elect
that the license become non-exclusive if the Company fails to satisfy certain
development and commercialization objectives. The termination or restriction
of the Company's rights under one or more of the licenses for any reason,
including without limitation its failure to satisfy commercialization
objectives or any other obligation thereunder, would likely have a material
adverse impact on the business and financial condition of the Company.
Moreover, although the Company believes it should be able to achieve such
objectives, there can be no assurance that the Company will be successful.
The patent position of pharmaceutical and medical device firms generally is
highly uncertain and involves complex legal and factual questions. There can
be no assurance that the patent applications owned by or licensed to the
Company will result in issued patents, that any issued patents will provide
the Company with proprietary protection or competitive advantages, will not
be infringed upon or designed around by others, will not be challenged by
others and held to be invalid or unenforceable or that the patents of others
will not have a material adverse effect on the Company. See "--Strategic
Collaborations."
The Company is aware that its competitors and other companies,
institutions and individuals have been issued patents relating to
photodynamic therapy. In addition, the Company's competitors and other
companies, institutions and individuals may have filed patent applications or
been issued patents relating to other potentially competitive products of
which the Company is not aware. Further, the Company's competitors and other
companies, institutions and individuals may in the future file applications
for, or be granted or license or otherwise obtain proprietary rights to,
patents relating to other potentially competitive products. There can be no
assurance that these existing or future patents or patent applications will
not conflict with the Company's or its licensors' patents or patent
applications. Such conflicts could result in a rejection of the Company's or
its licensors' patent applications or the invalidation of their patents,
which could have a material adverse effect on the Company's competitive
position. In the event of such
24
conflicts, or in the event the Company believes that such competitive
products may infringe the patents owned by or licensed to the Company, the
Company may pursue patent infringement litigation or interference proceedings
against, or may be required to defend against litigation involving, holders
of such conflicting patents or competing products. Such proceedings may
materially adversely affect the Company's competitive position, and there can
be no assurance that the Company will be successful in any such proceeding.
Litigation and other proceedings relating to patent matters, whether
initiated by the Company or a third party, can be expensive and time
consuming, regardless of whether the outcome is favorable to the Company, and
can result in the diversion of substantial financial, managerial and other
resources from the Company's other activities. An adverse outcome could
subject the Company to significant liabilities to third parties or require
the Company to cease any related research and development activities or
product sales. The Company does not have contractual indemnification rights
against the licensors of the various drug patents. In addition, if patents
that contain dominating or conflicting claims have been or are subsequently
issued to others and such claims are ultimately determined to be valid, the
Company may be required to obtain licenses under patents or other proprietary
rights of others. No assurance can be given that any licenses required under
any such patents or proprietary rights would be made available on terms
acceptable to the Company, if at all. If the Company does not obtain such
licenses, it could encounter delays or could find that the development,
manufacture or sale of products requiring such licenses is foreclosed.
The Company also seeks to protect its proprietary technology and
processes in part by confidentiality agreements with its collaborative
partners, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently discovered by competitors. Certain of the research
activities relating to the development of certain of the patents owned by or
licensed to the Company were funded, in part, by agencies of the United
States Government. When the United States Government participates in research
activities, it retains certain rights that include the right to use the
resulting patents for government purposes under a royalty-free license. See
"--Research and Development Programs" and "--Patents and Proprietary
Technology."
DEPENDENCE UPON KEY PERSONNEL AND CONSULTANTS
The Company's ability to successfully develop its products, manage
growth and maintain a competitive position will depend in large part on its
ability to attract and retain highly qualified scientific, management and
other personnel and to develop and maintain relationships with leading
research institutions and consultants. The Company is highly dependent upon
principal members of its management, key employees, scientific staff and
consultants which the Company may retain from time to time. Competition for
such personnel and relationships is intense, and there can be no assurance
that the Company will be able to continue to attract and retain such
personnel. The Company's consultants may be affiliated or employed by others,
and some have consulting or other advisory arrangements with other entities
that may conflict or compete with their obligations to the Company.
Inventions or processes discovered by such persons will not necessarily
become the property of the Company and may remain the property of such
persons or others. See Item 10, "Directors and Executive Officers."
DEPENDENCE UPON SUPPLIERS
The Company currently depends upon outside suppliers, contracted or
otherwise, for certain raw materials and components for its products. There
can be no assurance that such raw materials or components will continue to be
available to the Company's standards or on acceptable terms, if at all, or
that alternative suppliers will be available to the Company on acceptable
terms, if at all. Further, there can be no assurance that the Company will be
able to produce needed materials or components in-house in a timely manner or
in sufficient quantities to meet the needs of the Company, if at all.
Although most of the Company's raw materials and components are available
from various sources, the Company is currently dependent on single,
contracted sources for certain key materials or services used by the Company
in its drug development, light producing and light delivery device
development and production operations. Although the Company has entered into
agreements with these suppliers, there can be no assurance that these
25
arrangements will be successful or that the Company will not encounter delays
or other problems which may materially adversely affect its business. See
"--Strategic Collaborations" and "--Manufacturing."
ENVIRONMENTAL MATTERS
The Company is subject to federal, state, county and local laws and
regulations relating to the protection of the environment. In the course of
its business, the Company is involved in the handling, storage and disposal
of materials that are classified as hazardous. The Company's safety
procedures for handling, storage and disposal of such materials are designed
to comply with the standards prescribed by applicable laws and regulations.
However, there can be no assurance that the Company will not be involved in
contamination or injury from these materials. In the event of such an
occurrence, the Company could be held liable for any damages that result, and
any such liability could materially and adversely affect the Company.
Further, there can be no assurance that the cost of complying with these laws
and regulations will not increase materially in the future. See "--Government
Regulation."
YEAR 2000
The Company is in the process of assessing the impact of year 2000 on
its operations and systems, including those of its suppliers and
collaborators and other third parties. Management is in the process of
formalizing its assessment procedures and developing a plan to address
identified issues, if any. To date, the Company has performed a preliminary
evaluation of its operating systems and concluded that currently it is not
aware of any possible material impact of the year 2000. The Company is
continuing to evaluate the impact, if any, of year 2000 on its systems and
equipment and those of third parties with which the Company does business.
There can be no assurance that third parties, such as suppliers, clinical
research organizations and collaborative parties, are using systems that are
year 2000 compliant or will address any year 2000 issues in a timely fashion,
or at all. Any year 2000 compliance problems of either the Company, its
suppliers, its clinical research organizations, or its collaborative partners
could have a material adverse effect on the Company's business, operating
results and financial conditions.
The total cost of the year 2000 systems assessments and conversions is
funded through operating cash flows and the Company is expensing these costs.
The financial impact of making the required systems changes can not be known
precisely at this time, but is not expected to be material to the Company's
financial position, results of operations or cash flows.
POTENTIAL VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The market prices for the Company's Common Stock and the securities of
emerging pharmaceutical and medical device companies generally have
historically been highly volatile. Future announcements concerning the
Company or its collaborators, competitors or industry, including but not
limited to the results of testing, technological innovations or new
commercial products, the achievement of or failure to achieve certain
milestones, governmental regulations, rules and orders or developments
concerning safety of the Company's products, may have a material adverse
effect on the market price of the Common Stock. In addition, the stock
market has experienced extreme price and volume fluctuations. This
volatility has significantly affected the market prices of securities of many
emerging pharmaceutical and medical device companies for reasons frequently
unrelated or disproportionate to the performance of the specific companies.
These broad market fluctuations may materially adversely affect the market
price of the Common Stock. Except for the three for two split of the Common
Stock declared for stockholders of record at July 24, 1995, the Company has
never paid dividends, cash or otherwise, on its capital stock and does not
anticipate paying any such dividends in the foreseeable future. The
Company's bank line of credit prohibits the payment of dividends on its
Common Stock.
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CONTROL BY OFFICERS AND DIRECTORS
As of March 17, 1998, the Company's officers and directors beneficially
own approximately 25.6% of the outstanding Common Stock (approximately 29.3%
is beneficially owned if all options granted to such officers and directors
become vested and are exercised). These shareholders will be able to elect a
substantial number of the Company's directors and will have the ability to
influence significantly