U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
July 31, 2004 0-11088
For the fiscal year ended Commission file number
ALFACELL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2369085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Belleville Avenue, Bloomfield, New Jersey 07003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 748-8082
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
The aggregate market value of the common stock, par value $.001 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on January 31, 2004 was approximately $128,365,000. As of October 8, 2004
there were 34,980,314 shares of common stock, par value $.001 per share,
outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of the Stockholders scheduled to be held on January 27, 2005, to be
filed with the Commission not later than 120 days after the close of the
registrant's fiscal year, have been incorporated by reference, in whole or in
part, into Part III Items 10, 11, 12, 13 and 14 of this Annual Report on Form
10-K.
Table of Contents
PART I Page
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Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 32
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 32
Item 9A. Controls and Procedures 32
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners
and Management 33
Item 13. Certain Relationships and Related Transactions 33
Item 14. Principal Accounting Fees and Services 33
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 33
The following trademarks appear in this Annual Report: ONCONASE(R) is the
registered trademark of Alfacell Corporation, exclusively for the anti-cancer
indications; Alimta(R) and Gemzar(R) are registered trademarks of Eli Lilly;
Navelbine(R) is a registered trademark of Glaxo Smith Kline.
All information on this Form 10-K is as of October 14, 2004 and we undertake no
obligation to update this information.
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We maintain a website at www.alfacell.com to provide information to the general
public and our stockholders on our products, resources and services along with
general information on Alfacell, its management, financial results and press
releases. Copies of our most recent Annual Report on Form 10-K, our Quarterly
Reports on Form 10-Q or our other reports filed with the Securities and Exchange
Commission, or SEC, can be obtained, free of charge as soon as reasonably
practicable after such material is electronically filed with, or furnished to
the SEC, from our Investor Relations Department by calling 973-748-8082, through
an e-mail request from our website at www.alfacell.com/info.htm, or through the
SEC's website by clicking the direct link from our website at
www.alfacell.com/investinfo.htm or directly from the SEC's website at
www.sec.gov. Our website and the information contained therein or connected
thereto are not intended to be incorporated into this Annual Report on Form
10-K.
Our Board of Directors has adopted a Code of Business Conduct that is applicable
to all of our directors, officers and employees. Any material changes made to
our Code of Business Conduct or any waivers granted to any of our directors and
executive officers will be publicly disclosed by filing a current report on Form
8-K within five business days of such material change or waiver. We intend to
make the Code of Business Conduct available on our website at www.alfacell.com.
Although our Board of Directors has not established a nominating committee, our
formal nominating procedures will be described in our definitive proxy statement
for the Annual Meeting of Stockholders to be held on January 27, 2005. In
addition, copies of such documents are available to our shareholders upon
request either by contacting our Investor Relations Department at 973-748-8082
or through an e-mail request from our website at www.alfacell.com/info.htm.
Information contained herein contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. All statements,
other than statements of historical fact, regarding our financial position,
potential, business strategy, plans and objectives for future operations are
"forward-looking statements." These statements are commonly identified by the
use of forward-looking terms and phrases such as "anticipates," "believes,"
"estimates," "expects," "intends," "may," "seeks," "should," or "will" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Actual future results may vary from expectations set
forth in these forward-looking statements. The matters set forth herein under
the caption "Risk Factors" constitute cautionary statements identifying
important factors with respect to these forward-looking statements, including
certain risks and uncertainties, that could cause actual results to vary
significantly from the future results indicated in these forward-looking
statements. Other factors could also cause actual results to differ
significantly from the future results indicated in these forward-looking
statements.
Part I
Item 1. BUSINESS.
Overview
Alfacell Corporation is a biopharmaceutical company primarily engaged in
the discovery and development of a new class of therapeutic drugs for the
treatment of cancer and other pathological conditions. Based on our proprietary
Ribonuclease, or RNase, which is a type of biological enzyme that splits RNA
molecules and is the basis of our technology platform, our drug discovery and
development program consists of novel therapeutics developed from amphibian
ribonucleases. These are very basic RNA enzymes which play important roles in
nature in the development of an organism's cells and in cell functions. RNA is
an essential bio-chemical cellular component necessary to support life. There
are various types of RNA, all of which have specific functions in a living cell.
They help control several essential biological activities, namely, regulation of
cell proliferation, maturation, differentiation and cell death. Therefore, they
are ideal candidates for the development of therapeutics for cancer and other
life-threatening diseases, including HIV and autoimmune diseases, that require
anti-proliferative and apoptotic, or programmed cell death, properties. We have
co-sponsored and been a key participant in the International Ribonuclease
Meetings which are held every three years.
ONCONASE(R), our trademark name for our lead product, is currently in an
international, centrally randomized Phase III trial. The first part of the trial
has been completed and the second confirmatory part of the trial is ongoing for
which patient enrollment is expected to be completed in the first quarter of
2005. The primary endpoint of the trial is survival, and as such, a sufficient
number of deaths must occur in order to perform the
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required statistical analyses to determine the efficacy of ONCONASE(R) in
patients with unresectable (inoperable) malignant mesothelioma. If the results
of the clinical trials are positive, we expect to file for marketing
registrations (NDA and MAA) for ONCONASE(R) within six months of completion of
the statistical analyses. However, at this time, we cannot predict with
certainty when a sufficient number of deaths will occur to achieve statistical
significance. Hence, the timing of when we will be able to file for marketing
registrations in the US and EU is data driven. Therefore, we cannot predict with
certainty what our total cost associated with obtaining marketing approvals will
be, or when and if such approvals will be granted, or when actual sales will
occur. We have also conducted other randomized and non-randomized trials with
patients with advanced stages of solid tumors in other types of cancers.
ONCONASE(R), unlike most cancer drugs that attack all cells regardless of
their phenotype, malignant versus normal, and produce a variety of severe
toxicities, is not an indiscriminate cytotoxic, or cell killing agent, but
rather, its activity is controlled through unique and specific molecular
mechanisms. ONCONASE(R) affects primarily exponentially growing malignant cells.
ONCONASE(R) is a novel amphibian ribonuclease, unique among the superfamily of
pancreatic ribonuclease that has been isolated from the eggs of the Rana pipiens
frog, commonly called the leopard frog. We have determined that, thus far,
ranpirnase, the generic name of ONCONASE(R), is the smallest known protein
belonging to the superfamily of pancreatic ribonuclease and has been shown, on a
molecular level, to re-regulate the unregulated growth and proliferation of
cancer cells.
In December 2002, we received Fast Track Designation from the FDA for
ONCONASE(R) for the treatment of malignant mesothelioma. Fast Track Designation
is an FDA program designed to expedite the review of new drugs that are intended
to treat serious or life threatening conditions and that demonstrate the
potential to address unmet medical needs. In February 2001, we received an
Orphan Medicinal Product Designation for ONCONASE(R) from the European Agency
for the Evaluation of Medicinal Products, or the EMEA. Orphan Medicinal Product
Designation is a program designed to provide marketing, protocol and other
incentives for pharmaceutical companies to develop and market products in the
European Community that address life threatening or very serious conditions that
affect not more than 5 in 10,000 persons in the European Community. Orphan
designation in Europe entitles the Company to 10 years of marketing exclusivity,
reduced filing fees and regulatory guidance from the EMEA.
These FDA and EMEA designations for ONCONASE(R) may serve to expedite its
regulatory review, assuming the clinical trials yield a positive result. Future
clinical trials, however, may not demonstrate that ONCONASE(R) is effective.
Thus, our applications for FDA or EMEA approval to market ONCONASE(R), which are
dependent upon the success of our clinical trials, may be affected. The efficacy
and safety of ONCONASE(R) for malignant mesothelioma will ultimately be
determined by the FDA. In the interim, our Fast Track Designation allows us to
continue to have meetings and discussions with the FDA to establish mutually
agreed upon parameters for the NDA to obtain marketing approval for ONCONASE(R),
based on the assumption that the clinical trials will continue to yield
favorable results.
Our drug discovery program forms the basis for the development of specific
recombinant RNases for chemically linking drugs and other compounds such as
monoclonal antibodies, growth factors, etc. and gene fusion products with the
goal of targeting various molecular functions. This program provides for joint
design and generation of new products with outside partners. We may own these
new products along with a partner(s), or we may grant an exclusive license to
the collaborating partner(s).
We have established a number of scientific collaborations with academic
and research institutions including the National Cancer Institute, or NCI that
are designed to develop new therapeutic applications for ONCONASE(R). One
collaboration has produced RN321, a conjugate of ranpirnase, with a monoclonal
antibody that demonstrated activity in treating non-Hodgkin's lymphoma in
preclinical studies. These results were presented by the NCI investigators at
the 2002 Ribonuclease Meeting in Bath, England. The NCI has undertaken the
manufacturing of RN321 (the conjugate) according to Good Manufacturing
Practices, or GMP regulations in preparation for commencing clinical trials for
the treatment of patients with non-Hodgkin's lymphoma with RN321. Currently, the
NIH has produced RN321 clinical grade like material. Clinical grade production
of RN321 and Investigational New Drug Application, or IND, directed toxicology
studies will require further approval from the Drug Development Group of the NIH
prior to commencing human clinical trials.
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We have also discovered another series of proteins, collectively named
amphinases that may have therapeutic uses. These proteins are bioactive in that
they have an effect on living cells and organisms and have both anti-cancer and
anti-viral activity. All of the proteins characterized to date are RNases. These
products are currently undergoing preclinical testing. We are currently in
discussions with potential pharmaceutical partners for the development of these
new compounds as conjugates and fusion proteins.
We have entered into a research and development collaboration with a major
US privately held stent and drug delivery company. ONCONASE(R) is being
evaluated in stents and other delivery platforms to treat cardiovascular disease
and cancer via direct site delivery. This collaboration may result in licensing
agreement between the companies, however; there is no assurance that such
agreement will be reached.
We have entered into a collaborative agreement (anti-viral screening,
non-SARS) with the National Institute of Allergy and Infectious Diseases, or
NIAID in which five potential drug candidates (natural and genetically
engineered) are under evaluation against various RNA viruses.
Our research and development collaboration with Wyeth Pharmaceuticals is
ongoing to develop a number of designer drugs such as conjugates and fusion
proteins for a variety of indications using our technology. This collaboration
may result in a licensing agreement between the companies, however; there is no
assurance that such an agreement will be reached.
We have signed confidentiality agreements and have entered into
discussions and due diligence with a number of companies for US or non-US
marketing rights for ONCONASE(R) and for out-licensing some of our early drug
candidates.
We are engaged in the research, development and clinical trials of our
products both independently and through research collaborations. We have
financed our operations since inception through the sale of our equity
securities and convertible debentures in registered offerings and private
placements. Additionally, we have raised capital through debt financings, the
sale of our tax benefits and research products, interest income and financing
received from our Chief Executive Officer. These funds provide us with the
resources to acquire staff, facilities, capital equipment, finance our
technology, product development, manufacturing and clinical trials. We have
incurred losses since inception and to date we have not consummated any
licensing, marketing or development arrangements. Presently, our cash balance is
sufficient to fund our expanded operations through October 31, 2005 based on our
expected level of expenditures in relation to activities in preparing
ONCONASE(R) for an NDA filing and other ongoing operations of the company.
However, we continue to seek additional capital financing through the sale of
equity in private placements, sale of our tax benefits and exercise of stock
options and warrants but cannot be sure that we will be able to raise capital on
favorable terms or at all.
Research and Development Programs
Research and development expenses for the fiscal years ended July 31,
2004, 2003, and 2002 were $3,353,000, $1,700,000, and $2,033,000, respectively.
Our research and development programs focus primarily on the development of
therapeutics from amphibian ribonucleases. Because ribonucleases have been shown
to be involved in the regulation of cell proliferation, maturation,
differentiation and programmed cell death, known as apoptosis, ribonucleases may
be ideal candidates for the development of therapeutics for the treatment of
cancer and other life-threatening diseases, including viral and autoimmune
diseases that require anti-proliferative and pro-apoptotic properties.
Technology Platform and Pipeline
Using ribonucleases as therapeutics is a relatively new approach to drug
development. The use of these proteins to re-regulate the unregulated growth and
proliferation of cancer cells is unlike most cancer drugs that attack all cells
regardless of their phenotype, malignant versus normal, and produce a variety of
severe toxicities.
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ONCONASE(R) and related drug candidates are not indiscriminate cytotoxic,
or cell killing, agents, but rather, their activity is controlled through unique
and specific molecular mechanisms. They affect primarily exponentially growing
malignant cells.
Cancer is associated with the over or under production of many types of
proteins in tumor cells. We believe that the ability to selectively halt the
production of certain proteins via ribonuclease activity in tumor cells without
damaging normal cells, may make treatment of cancer more effective. To make
cancer therapy more effective and less toxic, we are developing ONCONASE(R) and
a related family of regulatory proteins, collectively named amphinases. These
novel RNases are being developed as therapeutics as well as effector moieties
(payload), or killer molecules for targeted therapies. We believe that selective
degradation of intracellular proteins is central to the process of programmed
cell death.
We have devoted significant resources towards the development of
recombinant designer RNases for chemical conjugation and gene fusion products
with various targeting moieties such as monoclonal antibodies, growth factors,
cytokines, etc.
Apoptosis
Apoptosis, or programmed cell death, is essential for the proper
development of embryos and of many body systems, including the central nervous
system, immune regulation and others. Apoptosis is required to accommodate the
billions of new cells produced daily by our bodies and to eliminate aged or
damaged cells. Abnormal regulation of the apoptosis process can result in
disease. For example, cancer, autoimmune disorders and many viral infections are
associated with inhibited apoptosis or programmed death of cells occurring too
slowly. Conversely, HIV is associated with increased apoptosis or programmed
death of cells occurring too rapidly. The process of programmed cell death is
genetically regulated. We believe that we are the first company to discover and
develop a novel family of primordial "regulatory" proteins that have been shown
to play a fundamental role in this regulatory process.
ONCONASE(R) (ranpirnase) Pro-Apoptotic Mechanisms
The molecular mechanisms were identified which determine the apoptotic
cell death induced by ranpirnase. tRNA, rRNA and mRNA are all different types of
RNA with specific functions in a living cell. Ranpirnase preferentially degrades
tRNA, leaving rRNA and mRNA apparently undamaged. The RNA damage induced by
ranpirnase appears to represent a "death signal", or triggers a chain of
molecular events culminating in the activation of proteolytic enzyme cascades
which, in turn, induces disintegration of the cellular components and finally
leads to cell death. It has been shown that there is a protein synthesis
inhibition-independent component, which, together with the changes induced by
the protein synthesis inhibition, results in tumor cell death.
Many cancer cells become resistant to most types of cancer treatment,
including chemotherapy, radiation and monoclonal antibodies. Overcoming
resistance to chemotherapy remains a major challenge for cancer therapy.
ONCONASE(R) has been shown to overcome multiple drug resistance or prevent
resistance to cancer therapy, thereby dramatically increasing the sensitivity of
certain cancer cells to chemotherapy and radiation therapy.
It remains unknown whether or not ONCONASE(R) targets and binds
preferentially to tumor cells, rather than normal cells of the respective
tissues. It is possible that there is no differential targeting and/or binding,
but that tumor cells are more susceptible to the cytostatic (suppresses cancer
cells from further dividing) and cytotoxic (kills cancer cells) effects of
ONCONASE(R). The cytostatic effects are manifested by the inhibition of
progression in the cell cycle. These effects have been associated with induction
of parallel differentiation and apoptosis. The cytostatic and
differentiation-inducing effects are reflected in the stabilization of
previously progressive tumors observed in our clinical trials.
Clinical Studies and Preclinical Development of ONCONASE(R)
We have been very selective in our product development strategy, which is
focused on the use of ONCONASE(R) alone or in combination with drugs which have
shown evidence of preclinical and clinical efficacy on
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tumor types for which median survivals are typically less than a year and for
which there are few or no approved treatments.
ONCONASE(R) has been tested in Phase I, Phase II and Phase III clinical
trials in more than 40 cancer centers across the United States since 1991 and in
Europe since 2000, including major centers such as Columbia-Presbyterian,
University of Chicago, M.D. Anderson and Cedars-Sinai Cancer Centers.
ONCONASE(R) has been tested as a single agent in patients with a variety
of solid tumors. It has also been tested in combination with tamoxifen in
patients with prostate cancer, advanced pancreatic cancer and renal cell
carcinoma as well as with doxorubicin in patients with malignant mesothelioma.
We have collaborated with NIH, NCI and The University of Pennsylvania
Medical Center, Metabolic Magnetic Resonance Research and Computing Center, and
have developed a considerable body of knowledge in RNase technology and novel
RNase-based therapeutics. ONCONASE(R) has demonstrated a broad spectrum of
anti-tumor activity in vitro, or studies of tumor cell lines in laboratory
vessels, and was determined to kill cancer cells and therefore was judged to be
"active" in the NCI Cancer Screen.
In vitro and in vivo studies showed both cytostatic (suppresses cancer
cells from further dividing) and cytotoxic (kills cancer cells) antitumor
activity when used as a single agent and in combination with other agents.
In Vitro
ONCONASE(R), in combination with other drugs has been shown to be
synergistic, which means that the effect of ONCONASE(R) when given in
combination with other drugs is greater than if the drugs were given alone. The
combination of ONCONASE(R) and tamoxifen, an anti-cancer drug, resulted in a
significant cell kill in pancreatic, prostate, and ovarian tumor cell lines as
compared to each drug alone. Similar results were found with respect to the
following:
o ONCONASE(R) + phenothiazine for non-small cell lung cancer;
o ONCONASE(R) + lovastatin in pancreatic, ovarian, and two types of
non-small cell lung cancer;
o ONCONASE(R) + cisplatin in ovarian cancer;
o ONCONASE(R) + all-trans-retinoic acid in glioma (brain) cancer;
o ONCONASE(R) + vincristine in colorectal cancer and ;
o ONCONASE(R) + doxorubicin in breast cancer including resistant
variants, malignant mesothelioma.
In Vivo Anti-Cancer Activity
ONCONASE(R) as a Single Agent
ONCONASE(R), as a single agent has shown in vivo anti-tumor activity in
several mouse models of solid tumors. The following are all examples of the
effect of ONCONASE(R) on various types of human cancer cells in mouse models:
o In the human squamous A-253 carcinoma and the NIH-OVCAR-3 ovarian
adenocarcinoma models, ONCONASE(R) has produced prolonged survival
and delayed time to development of ascites (fluid in the abdomen),
respectively.
o In mice bearing M109 Madison lung carcinoma cells, time to
appearance of ascites and survival were significantly prolonged in
ONCONASE(R) treated animals as compared to controls. Several
histologically (microscopic study of cells) confirmed cures were
noted.
o In nude mice bearing human DU-145 prostate carcinoma and pancreatic
ASPC-1 carcinoma, ONCONASE(R) inhibited growth of the subcutaneously
transplanted tumor.
o In several mouse tumor models, ONCONASE(R) not only demonstrated
direct anti-tumor activity but also increased the potential for
other drugs to penetrate the tumor tissue as well as increased the
tumor sensitivity to radiation therapy.
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ONCONASE(R) in Combination With Other Agents
Based on in vivo results, ONCONASE(R) in combination with the following
known and approved anti-cancer agents has been evaluated by us, in collaboration
with the NCI:
o vincristine
o doxorubicin
o tamoxifen
When used in combination with vincristine, ONCONASE(R) prolonged the
survival of nude mice bearing vincristine-resistant, HT-29 human colorectal
carcinomas, a type of cancer cell, transfected with mdr-1 gene, a multiple drug
resistant gene. These NCI results demonstrated that ONCONASE(R) can restore the
sensitivity of resistant tumor cells to chemotherapy.
NCI experiments in nude mice transplanted intravenously with human breast
carcinoma cells treated with the combination of ONCONASE(R) and doxorubicin have
shown significantly prolonged survival. Tumor growth was significantly inhibited
as demonstrated by a decrease in the number of pulmonary metastases, or
disseminated lesions in the lung, present at the time of sacrifice.
NCI reported the ability of ONCONASE(R) to overcome multiple drug
resistance as well as other forms of drug resistance (referring to a drug that
no longer kills cancer cells) both in vitro and in vivo. We believe that these
in vivo results demonstrate the therapeutic utility of ONCONASE(R) in
chemotherapy-resistant tumors, and the findings suggest that ONCONASE(R) in
combination with other agents has broad clinical application in cancer
treatments.
Clinical Trials
Onconase(R) Phase III Randomized Clinical Trials
We are currently conducting a two-part Phase III clinical trial of
ONCONASE(R) as a treatment for malignant mesothelioma. The first part of the
Phase III trial compares ONCONASE(R) alone to doxorubicin. Doxorubicin has been
considered by opinion leaders to be the most effective drug for the treatment of
malignant mesothelioma. The second part of the trial compares the combination of
ONCONASE(R) and doxorubicin versus doxorubicin alone. The trial is an open
label, centrally randomized, controlled study. The patient enrollment for the
first part of the clinical trial has been completed and the trial is on-going.
The second part is currently in the enrollment stage and is being conducted in
the United States, Europe, Canada and Australia.
Since ONCONASE(R) has Fast Track Designation for the treatment of
malignant mesothelioma patients, we continue to have meetings and discussions
with the FDA to establish mutually agreed upon parameters for the New Drug
Application, or NDA, to obtain marketing approval for ONCONASE(R), assuming the
Phase III clinical trial yields favorable results.
Phase III Single Agent Results
An interim subset analysis of the results of this Phase III clinical trial
according to the Cancer Adult Leukemia Group B, or CALGB, prognostic groups
revealed a marked excess of poor prognosis patients (groups 5 and 6) in the
ONCONASE(R) arm of the trial (32 patients or 38.1% of the patients treated with
ONCONASE(R)) as compared to the doxorubicin arm of the trial (12 patients or 17%
of the patients treated with doxorubicin). By excluding these patients and the
10 patients whose central pathology review did not confirm a diagnosis of
malignant mesothelioma (N=5) from the 154 intent-to-treat patients, we defined a
target treatment group, or TTG, consisting of 104 patients who met the criteria
for CALGB prognostic groups 1-4. Of these patients, 47 were treated with
ONCONASE(R) and 57 were treated with doxorubicin. The single agent Phase III
results of the TTG showed a median survival benefit, or MST, of 2 months for
ONCONASE(R) treated patients, 11.6 months versus 9.6 months.
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This two month median survival difference favoring ONCONASE(R) represents
a 20% advantage over the active agent, doxorubicin. Moreover, the clinical
activity of ONCONASE(R) is also evident from the overall 1-year and 2-year
survival rates of ONCONASE(R) versus doxorubicin, 46.8% versus 38.6% and 20.2%
versus 12.3%, respectively. Doxorubicin treatment was associated with a 60%
higher risk of death compared to ONCONASE(R) treatment. Tumor assessment by an
independent radiologist for evaluable patients (had a baseline and follow-up
radiological assessment) revealed evidence of objective clinical activity in 17
patients in each treatment arm. Four partial responses and 13 stabilization of
previously progressive disease were reported in the ONCONASE(R) treated patients
and 7 partial responses and 10 stabilization of previously progressive disease
were reported in the doxorubicin treated patients. Despite the small number of
patients, the analysis revealed a statistically significant difference, log rank
test, p. = 0.037, in survival of the responders favoring ONCONASE(R) treated
patients with an MST 23.3 versus 14.4 months for doxorubicin treated patients as
well as the 2 year survival rates of 40% for ONCONASE(R) and 9% for doxorubicin.
Preliminary results were presented at the 2000 American Society of Clinical
Oncologists, or ASCO, meeting.
These survival advantages were recognized as clinically important in this
patient population by opinion leaders and the FDA. Therefore, the FDA has
requested confirmation of the survival results in the TTG population in the
second part of the ongoing trial.
In December 2002, we received Fast Track Designation from the FDA for
ONCONASE(R) and doxorubicin for the treatment of malignant mesothelioma. Fast
Track is a formal mechanism to interact with the FDA using approaches that are
available to all applicants for marketing claims for drugs that are being
developed for a serious or life-threatening disease for which there is an unmet
medical need. The benefits of Fast Track include scheduled meetings to seek FDA
input into development plans, the option of submitting an NDA in sections rather
than all components simultaneously, and the option of requesting evaluation of
studies using surrogate endpoints. We anticipate to use this designation to
reduce the marketing approval timeline for ONCONASE(R).
In February 2001, we received an Orphan Medicinal Product Designation for
ONCONASE(R) from the European Agency for the Evaluation of Medicinal Products,
or the EMEA. Orphan Medicinal Product Designation is a program designed to
provide marketing, protocol and other incentives for pharmaceutical companies to
develop and market products in the European Community that address life
threatening or very serious conditions that affect not more than 5 in 10,000
persons in the European Community. Orphan designation in Europe entitles the
Company to 10 years of marketing exclusivity, reduced filing fees and regulatory
guidance from the EMEA. We continue to fulfill the EMEA requirements regarding
the Marketing Authorization Application, or MAA registration requirements for
ONCONASE(R) for the treatment of malignant mesothelioma.
In part two of the ongoing Phase III trial, interim analyses based on the
occurrence of 105 deaths and at 210 deaths are planned. Based upon the results
of these analyses, we may be able to file an NDA and an MAA within six months
after the completion of the analyses. However, we cannot assure you that
marketing approval for ONCONASE(R) as a treatment for malignant mesothelioma
will be granted by the FDA or EMEA.
Based on Phase II trial results after meeting with the FDA, we had
initiated a Phase III trial in patients with advanced pancreatic cancer in 1995.
In the Phase II trial, the median survival time of 5.5 months for 47 patients
with stage 4 disease and liver involvement treated with the combination of
ONCONASE(R) weekly and tamoxifen daily was more than double the median survival
of such patients reported in previously published trials treated with a variety
of other systemic therapies (published median survival times ranged from 2.0 to
2.5 months). The Phase III trial was a multicenter randomized trial designed to
evaluate an ONCONASE(R) and tamoxifen regimen in untreated patients as well as
patients who had failed GEMZAR(R), an approved drug for pancreatic cancer. The
primary endpoint of both segments of this Phase III trial was survival, however,
early survival analyses of both segments did not reveal a significant survival
advantage of ONCONASE(R) over the controls. Thus, due to the negative results of
the Phase III trial, despite favorable results produced in Phase II, competitive
pressures and our inability to accrue qualified patients in the clinical trials,
we made a decision that further evaluation of this end-stage patient population
was not warranted at that time and our resources were refocused on the ongoing
malignant mesothelioma program.
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ONCONASE(R) Phase II Clinical Trials
ONCONASE(R) as a single agent, demonstrated objective clinical activity in
105 patients with uresectable, or inoperable, malignant mesothelioma that
included many heavily pretreated patients with refractory tumors, which are
tumors that did not readily yield to the treatment. Analysis of the TTG
population confirmed the importance of the CALGB prognostic groups and their
utility for evaluating systemic therapies in this patient population.
Of the 105 patients treated, 41 patients, or 39%, reported evidence of
clinical activity. Of the patients showing evidence of clinical activity, there
were four with partial responses, two with minor responses and 35 showed
evidence of stabilization of previously progressive disease. The MST of these
patients was 18.5 months and the overall 1-year and 2-year survival rates were
61% and 40.8%, respectively. The results of this trial demonstrated a survival
benefit for both newly diagnosed patients and patients who failed prior
therapies. The presentation of this data to the FDA resulted in the design of
our Phase III malignant mesothelioma trial.
A multicenter Phase II Broad Eligibility trial designed to evaluate
ONCONASE(R) as a single agent has been conducted and results of the findings for
patients with non-small cell lung cancer, or NSCLC, and advanced breast cancer
were published.
ONCONASE(R) as a single agent, demonstrated objective clinical activity in
patients with advanced NSCLC and breast cancer. The median survival time of 30
patients with advanced NSCLC was greater than that in 19 of 20 regimens when
supportive care, a placebo or another single agent was given. Furthermore it was
greater than 75% of the reported MSTs in combination chemotherapy trials. The
MST and 1 year survival rates of 7.7 months and 27%, respectively, for
ONCONASE(R) treated patients compared favorably to 7.2 months and 30% for
patients treated with Navelbine(R) (an approved drug for this indication) as a
single agent.
Thirty percent of 17 patients with advanced breast cancer demonstrated
objective clinical activity, which included, one partial response, two minor
responses, the significant reduction in bone pain in one patient, and the
control of uncontrollable malignant fluid in the lungs of another patient.
A series of pilot Phase II studies to evaluate ONCONASE(R) as a single
agent, and ONCONASE(R) and tamoxifen in previously treated patients with
unresectable, or inoperable, renal cell cancer were conducted. The results of
both the Phase II single agent and ONCONASE(R) and tamoxifen were published.
Although the single agent study did not demonstrate evidence of clinical
activity, the regimen of ONCONASE(R) and tamoxifen did demonstrate evidence of
clinical activity which indicated further evaluation in untreated patients was
warranted.
Research And Development Pipeline Of Targeted Therapies
Our drug discovery program forms the basis for the development of
recombinant designer RNases for chemical conjugation and gene fusion products
with various targeting moieties such as monoclonal antibodies, growth factors,
cytokines, etc. We believe these products can be produced in a cost effective
and controlled manufacturing environment.
This program also provides for joint design and generation of new products
with outside partners. We, along with any outside partners, may own these new
products jointly, or we may grant an exclusive license to the collaborating
partner(s).
Ranpirnase Conjugates and Fusion Proteins
The concept of targeting potent toxins as effector molecules to kill
cancer or other specifically targeted cells has been extensively evaluated over
the last two decades. An immunotoxin is an antibody linked to a toxic molecule
that is used to destroy specific cells. Several immunotoxins containing
bacterial and plant toxins or other biotoxins, have been evaluated in human
clinical trials. Efficacy has always been limited due to the high incidence of
immunogenicity, or an immune response, and other intolerable toxicities,
including death. Conjugation of ranpirnase to targeting ligands, or binding to
other molecules, appears to eliminate this safety problem in pre-clinical
studies.
10
We have established a number of scientific collaborations with academic
and research institutions including the NCI. The objective of our collaboration
with the NCI is to develop new therapeutic applications for ONCONASE(R). This
collaboration has produced RN321, a conjugate of ranpirnase, with a monoclonal
antibody that demonstrated activity in treating non-Hodgkin's lymphoma in
preclinical studies. The relative benefit in killing targeted tumor cells versus
non-targeted healthy cells, or the therapeutic index, is greater than
200,000-fold with this conjugate. These "proof-of-concept" results were
presented at the 2002 Ribonuclease Meeting in Bath, England. The NCI has
undertaken the manufacturing of RN321 (the conjugate) according to Good
Manufacturing Practices, or GMP regulations in preparation for commencing
clinical trials for the treatment of patients with non-Hodgkin's lymphoma with
RN321. Clinical grade production of RN321 and Investigational New Drug
Application, or IND, directed toxicology studies will require further approval
from the Drug Development Group of the NIH prior to commencing human clinical
trials.
Although ranpirnase is active against a variety of human cancers, its
activity is not uniform across different tumor types. However, whether the tumor
is more or less sensitive to ranpirnase as a single agent, its anti-tumor
activity can be greatly augmented by conjugation to different targeting
moieties, or groups. One of these moieties is the epidermal growth factor, or
EGF, which is a ligand for the EGF receptor often hyperexpressed on malignant
cells. The genetically engineered ranpirnase conjugates with EGF (rRNP-EGF)
exerted significant anti-tumor activity in human cell types of the head and neck
and pancreatic carcinomas, and human D54MG glioblastoma, a cancerous brain tumor
cell. Other constructs target tumor blood vessel formation, which could be
potentially used in a broad spectrum of solid tumors. They are in pre-clinical
evaluation by our European collaborator.
Novel Amphibian Ribonucleases
All of the proteins characterized to date are RNases. Preclinical testing
of the new candidates collectively called amphinases showed them to be similarly
active to ranpirnase. Their chemical structure makes them ideal candidates for
genetic engineering of designer products.
Research Collaborations
In addition to the above programs, we are pursuing some programs in
collaboration with the NIH, NCI and The University of Pennsylvania Medical
Center, Metabolic Magnetic Resonance Research and Computing Center.
We have established a number of scientific collaborations with the NIH and
NCI. The objective of our collaborations with the NIH and NCI is to develop new
therapeutic applications for ONCONASE(R) as well as other drug candidates.
The multiple effects of biological activity of ONCONASE(R) led to research
in other areas of cancer biology. Two important areas associated with
significant market opportunities are radiation therapy and control of tumor
angiogenesis, or new tumor blood vessel formation. Many types of cancers undergo
radiation therapy at early stages of the disease; however, success of such
treatment is often limited. We believe any agent capable of enhancing tumor
radiosensitivity has great market potential. Moreover, since the growth of
essentially all types of cancer is dependent on new blood vessel formation, any
agent that has anti-angiogenic activity, we believe, is most desirable.
Evaluation Of ONCONASE(R) As A Radiation Enhancer
The p53 gene is a tumor-suppressor gene meaning that if it malfunctions,
tumors will develop. Published studies have demonstrated that ONCONASE(R) causes
an increase in both tumor blood flow and in median tumor oxygen partial pressure
causing tumor cells to become less resistant to radiation therapy regardless of
the presence or absence of the functional p53 tumor-suppressor gene. We believe
these findings further expand the profile of ONCONASE(R) in vivo activities and
its potential clinical utility and market potential.
The University of Pennsylvania Medical Center, Metabolic Magnetic
Resonance Research and Computing Center will further evaluate ONCONASE(R) in
combination with radiation and cisplatin, an anti-cancer drug, in human lung
adenocarcinoma, a form of lung cancer, in a series of animal models as well as
look at the effects of
11
ONCONASE(R) in the inhibition of sub-lethal damage repair (SLDR) and potentially
lethal damage repair (PLDR) in human lung carcinoma cells.
ONCONASE(R) As a Resistance-Overcoming and Apoptosis-Enhancing Agent
The Fas (CD95) cell surface receptor (and its Fas ligand FasL) has been
recognized as an important "death" receptor involved in the induction of the
"extrinsic" pathway of apoptosis. The apoptotic pathways have been the preferred
target for new drug development in cancer, autoimmune, and other therapeutic
areas.
The Thoracic Surgery Branch of the NCI confirmed the synergy between
ranpirnase and soluble Fas ligand (sFasL) in inducing significant apoptosis in
sFasL-resistant Fas+tumor cells. These results provided rationale for using
ONCONASE(R) as a potential treatment of FasL-resistant tumors and possibly other
disorders such as the autoimmune lympho-proliferative syndrome (ALPS). Further
research in this area is ongoing.
Evaluation Of ONCONASE(R) As An Anti-Viral Agent
A collaborative agreement (anti-viral screening, non-SARS) with the
National Institute of Allergy and Infectious Diseases, or NIAID, has yielded
positive results, which have been confirmed with one of our amphinases. Further
evaluation of this potential therapeutic is ongoing.
The ribonucleolytic activity was the basis for testing ONCONASE(R) as a
potential anti-viral agent against HIV. The NIH has performed an independent in
vitro screen of ONCONASE(R) against the HIV virus type 1. The results showed
ONCONASE(R) to inhibit replication of HIV by up to 99.9% after a four-day
incubation period at concentrations not toxic to uninfected cells. In vitro
findings by the NIH revealed that ONCONASE(R) significantly inhibited production
of HIV in several persistently infected human cell lines, preferentially
breaking down viral RNA while not affecting normal cellular ribosomal RNA and
messenger RNAs, which are essential to cell function.
Moreover, the NIH, Division of AIDS also screened ONCONASE(R) for anti-HIV
activity. ONCONASE(R) demonstrated highly significant anti-HIV activity in the
monocyte/macrophage, or anti-viral, system. Ranpirnase may inhibit viral
replication at several points during the life cycle of HIV, including its early
phases. Ranpirnase may inhibit replication of all different HIV-1 subtypes.
These properties of ranpirnase are particularly relevant in view of the
extremely high and exponentially increasing rate of mutations of HIV that occur
during infection, and which are primarily responsible for the development of
resistance to several currently available anti-viral drugs. At present, over 50%
of clinical isolates of HIV are resistant to both reverse transcriptase,
mechanisms which combat viral replication, and protease inhibitors drugs, a
class of anti-viral drugs. An additional 25%, while being sensitive to protease
inhibitors, are resistant to RT inhibitor(s) drugs, reverse transcriptase drugs.
European collaborators continue to investigate the anti-viral properties of
ONCONASE(R). The ribonucleolytic activity of ONCONASE(R) suggested that it might
be active against a variety of RNA viruses, including HIV and hepatitis C.
Commercial Collaborations with Pharmaceutical/Drug Delivery Companies
A research and development collaboration with a major US privately held
stent and drug delivery company is ongoing. ONCONASE(R) is being evaluated in
stents and other delivery platforms to treat cardiovascular disease and cancer
via direct site delivery. This collaboration may result in licensing agreement
between the companies, however; there is no assurance that such agreement will
be reached.
Our research and development collaboration with Wyeth Pharmaceuticals is
ongoing to develop a number of designer drugs such as conjugates and fusion
proteins for a variety of indications using our proprietary technology. This
collaboration may result in a licensing agreement between the companies,
however; there is no assurance that such an agreement will be reached.
12
Raw Materials
The major active ingredient derived from leopard frog eggs is the protein
ranpirnase. We have sufficient egg inventory on hand to produce enough
ONCONASE(R) to complete the current Phase III clinical trial for malignant
mesothelioma and supply ONCONASE(R) for up to two years after commercialization.
In addition, we can successfully produce ranpirnase by using recombinant
technology; however, it may not be more cost effective.
Manufacturing
We have signed an agreement with Scientific Protein Laboratories, which
will perform the intermediary manufacturing process of purifying ranpirnase. We
contract with BenVenue Corporation for vial filling and with Cardinal Health for
the labeling, storage and shipping of ONCONASE(R) during the Phase III trial
period. Other than these arrangements, we do not have specific arrangements for
the manufacture of our product. Products manufactured for use in Phase III
clinical trials and for commercial sale must be manufactured in compliance with
Current Good Manufacturing Practices. Scientific Protein Laboratories, BenVenue
Corporation and Cardinal Health all manufacture in accordance with Current Good
Manufacturing Practices. For the foreseeable future, we intend to rely on these
manufacturers, or substitute manufacturers, if necessary, to manufacture our
product. We believe, however, that there are substantial alternative service
providers for the services for which we contract. Because we have not yet
received drug approval, we utilize the services of these third party
manufacturers solely on an as needed basis with prices and terms customary for
companies in businesses that are similarly situated. In order to replace an
existing manufacturer, we must amend our Investigational New Drug application to
notify the FDA of the new manufacturer. We are dependent upon our contract
manufacturers to comply with Current Good Manufacturing Practices and to meet
our production requirements. It is possible that our contract manufacturers may
not comply with Current Good Manufacturing Practices or deliver sufficient
quantities of our products on schedule.
Marketing
We do not plan to market our products at this time. We have entered into a
number of Confidential Disclosure Agreements and have been in discussions with
several United States and multinational biopharmaceutical companies for the
selection of suitable marketing partners for our lead product ONCONASE(R), our
proprietary RNA interference technology pipeline, as well as several patented
product candidates.
We intend to enter into development and marketing agreements with third
parties. We expect that under such arrangements we would grant exclusive
marketing rights to our corporate partners in return for assuming further
research and development cost, up-front fees, milestone payments and royalties
on sales. Under these agreements, our marketing partner may have the
responsibility for a significant portion of product development and regulatory
approval. In the event that our marketing partner fails to develop a marketable
product or fails to market a product successfully, our business may be adversely
affected.
Government Regulation
The manufacturing and marketing of pharmaceutical products in the United
States requires the approval of the FDA under the Federal Food, Drug and
Cosmetic Act. Similar approvals by comparable regulatory agencies are required
in most foreign countries. The FDA has established mandatory procedures and
safety standards that apply to the clinical testing, manufacturing and marketing
of pharmaceutical products in the United States. Obtaining FDA approval for a
new therapeutic may take many years and involve substantial expenditures. State,
local and other authorities also regulate pharmaceutical manufacturing
facilities.
As the initial step in the FDA regulatory approval process, preclinical
studies are conducted in laboratory dishes and animal models to assess the
drug's efficacy and to identify potential safety problems. Moreover
manufacturing processes and controls for the product are required. The
manufacturing information along with the results of these studies is submitted
to the FDA as a part of the IND, which is filed to obtain approval to begin
human clinical testing. The human clinical testing program typically involves up
to three phases. Data from human trials as well as other regulatory requirements
such as chemistry, manufacturing and controls, pharmacology and toxicology
13
sections, are submitted to the FDA in an NDA or Biologics License Application,
or BLA. Preparing an NDA or BLA involves considerable data collection,
verification and analysis. A similar process in accordance with EMEA regulations
is required to gain marketing approval in Europe. Moreover, a commercial entity
must be established and approved by the EMEA in a member state of the EU at
least three months prior to filing the Marketing Authorization Application, or
MAA.
We have not received United States or other marketing approval for any of
our product candidates and may not receive any approvals. We may encounter
difficulties or unanticipated costs in our effort to secure necessary
governmental approvals, which could delay or preclude us from marketing our
products.
With respect to patented products, delays imposed by the governmental
approval process may materially reduce the period during which we may have the
exclusive right to exploit them.
Patents and Proprietary Technology
We have protected our business by applying for, and obtaining, patents and
trademark registrations. We have also relied on trade secrets and know-how to
protect our proprietary technology. We continue to develop our portfolio of
patents, trade secrets, and know how. We have obtained, and continue to apply
for, patents concerning our RNase-based technology.
In addition, we have filed (and we intend to continue to file) foreign
counterparts of certain U.S. patent applications. Generally, we apply for patent
protection in the United States, selected European countries, and Japan.
We own the following U.S. patents:
- ----------------------------------------------------------------------------------------------------------------------------------
Patent No. Issue Date Expiration **
---------- ---------- -------------
- ----------------------------------------------------------------------------------------------------------------------------------
6,423,515 B1 July 2002 covers methodology for synthesizing gene sequences of Sept. 2019
ranpirnase and a genetically engineered variant of ranpirnase
- ----------------------------------------------------------------------------------------------------------------------------------
6,290,951 B1 Sept. 2001 covers alteration of the cell cycle in vivo, particularly for Aug. 2018
inducing apoptosis of tumor cells
- ----------------------------------------------------------------------------------------------------------------------------------
6,239,257 B1 May 2001 covers a family of variants of ONCONASE(R) Dec. 2018
- ----------------------------------------------------------------------------------------------------------------------------------
6,175,003 B1 Jan. 2001 covers the genes of ONCONASE(R) and a variant of ONCONASE(R) Sept. 2019
- ----------------------------------------------------------------------------------------------------------------------------------
5,728,805 Mar. 1998 covers a family of variants of ONCONASE(R) Mar. 2015
- ----------------------------------------------------------------------------------------------------------------------------------
5,595,734 Jan. 1997 covers combinations of ONCONASE(R) with certain other Jan. 2014
pharmaceuticals
- ----------------------------------------------------------------------------------------------------------------------------------
5,559,212 Sept. 1996 covers the amino acid sequence of ONCONASE(R) Sept. 2013
- ----------------------------------------------------------------------------------------------------------------------------------
5,540,925 July 1996 covers combinations of ONCONASE(R) with certain other July 2013
pharmaceuticals
- ----------------------------------------------------------------------------------------------------------------------------------
5,529,775 June 1996 covers combinations of ONCONASE(R) with certain other Jan. 2013
pharmaceuticals
- ----------------------------------------------------------------------------------------------------------------------------------
4,888,172 Dec. 1989 covers a pharmaceutical produced from fertilized frog eggs Dec. 2006
(Rana pipiens) and the methodology for producing it
- ----------------------------------------------------------------------------------------------------------------------------------
6,649,392 B1* Nov. 2003 covers a family of recombinant variants of ONCONASE(R) Apr. 2016
- ----------------------------------------------------------------------------------------------------------------------------------
6,649,393 B1* Nov. 2003 covers nucleic acids encoding recombinant variants of ONCONASE(R) Apr. 2016
and methodology for producing such variants
- ----------------------------------------------------------------------------------------------------------------------------------
*We own this patent jointly with the U.S. Government.
14
We own the following foreign patents in Europe and Japan (European patents
are validated in selected European nations):
- --------------------------------------------------------------------------------------------------------------------
Patent No. Expiration **
- ---------- -------------
- --------------------------------------------------------------------------------------------------------------------
EP 0 440 633 covers ONCONASE(R) and process technology for making it Mar. 2009
- --------------------------------------------------------------------------------------------------------------------
EP 0 500 589 cover combinations of ONCONASE(R) with certain other pharmaceuticals Oct. 2010
JP 2972334
- --------------------------------------------------------------------------------------------------------------------
EP 0 656 783 covers combinations of ONCONASE(R) with certain other pharmaceuticals July 2013
- --------------------------------------------------------------------------------------------------------------------
EP 0 837 878 covers a variant of ONCONASE(R) June 2016
- --------------------------------------------------------------------------------------------------------------------
**Assumes timely payment of all applicable maintenance fees and annuities;
excludes term extensions that do or may apply.
These patents cover ONCONASE(R), a variant of ONCONASE(R), process
technology for making ONCONASE(R), and combinations of ONCONASE(R) with certain
other chemotherapeutics. We also have patent applications pending in the United
States, Europe, and Japan.
The scope of protection afforded by patents for biotechnological
inventions can be uncertain, and such uncertainty may apply to our patents as
well. The patent applications we have filed, or that we may file in the future,
may not result in patents. Our patents may not give us competitive advantages,
may be wholly or partially invalidated or held unenforceable, or may be held
uninfringed by products that compete with our products. Patents owned by others
may adversely affect our ability to do business. Furthermore, others may
independently develop products that are similar to our products or that
duplicate our products, and may design around the claims of our patents.
Although we believe that our patents and patent applications are of substantial
value to us, we cannot assure you that such patents and patent applications will
be of commercial benefit to us, will adequately protect us from competing
products or will not be challenged, declared invalid, or uninfringed upon. We
also rely on proprietary know-how and on trade secrets to develop and maintain
our competitive position. Others may independently develop or obtain access to
such know-how or trade secrets. Although our employees and consultants having
access to proprietary information are required to sign agreements that require
them to keep such information confidential, our employees or consultants may
breach these agreements or these agreements may be held to be unenforceable.
Competition
In February 2004, the Food and Drug Administration granted Eli Lilly &
Company approval to sell its Alimta(R) medication as an orphan drug to treat
patients with pleural mesothelioma. Alimta(R) is a multi-targeted antifolate
that is based upon a different mechanism of action than ONCONASE(R). To our
knowledge, no other company is developing a product with the same mechanism of
action as ONCONASE(R).
There may be several companies, universities, research teams or
scientists, which are engaged in research similar, or potentially similar to
research performed by us. Some of these entities or persons may have far greater
financial resources, larger research staffs and more extensive physical
facilities. In addition, these entities or persons may develop products that are
more effective than ours and may be more successful than us at producing and
marketing their products.
We are not aware, however, of any product currently being marketed that
has the same mechanism of action as our proposed anti-tumor agent, ONCONASE(R).
Search of scientific literature reveals no published information that would
indicate that others are currently employing this method or producing such an
anti-tumor agent. However, we cannot assure you that others may not develop new
treatments that are more effective than ONCONASE(R).
Employees
15
As of September 30, 2004, we have 15 employees, of whom 8 were engaged in
research and development activities and 7 were engaged in administration and
management. We have 6 employees who hold Ph.D. degrees. All of our employees are
covered by confidentiality agreements. We consider relations with our employees
to be good. None of our employees are covered by a collective bargaining
agreement.
Environmental Matters
Our operations are subject to comprehensive regulation with respect to
environmental, safety and similar matters by the United States Environmental
Protection Agency and similar state and local agencies. Failure to comply with
applicable laws, regulations and permits can result in injunctive actions,
damages and civil and criminal penalties. If we expand or change our existing
operations or propose any new operations, we may need to obtain additional or
amend existing permits or authorizations. We spend time, effort and funds in
operating our facilities to ensure compliance with environmental and other
regulatory requirements.
Such efforts and expenditures are common throughout the biotechnology
industry and generally should have no material adverse effect on our financial
condition. The principal environmental regulatory requirements and matters known
to us requiring or potentially requiring capital expenditures by us do not
appear likely, individually or in the aggregate, to have a material adverse
effect on our financial condition. We believe that we are in compliance with all
current laws and regulations.
Item 2. PROPERTIES.
We lease a total of approximately 17,000 square feet in an industrial
office building located in Bloomfield, New Jersey on a month-to-month basis. The
monthly rental obligation is $11,333. We believe that the facility is sufficient
for our needs in the foreseeable future.
Item 3. LEGAL PROCEEDINGS.
We are presently not involved in any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the The Nasdaq SmallCap Market, or Nasdaq,
and has traded under the symbol "ACEL" since September 9, 2004. As of October 8,
2004, there were approximately 1,112 stockholders of record of our common stock.
The following table sets forth the range of high and low sale prices of
our common stock for the two fiscal years ended July 31, 2004 and 2003. The
prices were obtained from OTCBB and are believed to be representative of
inter-dealer quotations, without retail mark-up, mark-down or commission, and
may not necessarily represent actual transactions.
High Low
---- ---
Year Ended July 31, 2004:
First Quarter $4.51 $1.25
Second Quarter 5.14 2.65
16
High Low
---- ---
Third Quarter 9.97 3.70
Fourth Quarter 10.07 5.50
Year Ended July 31, 2003:
First Quarter 0.36 $ 0.18
Second Quarter 1.01 0.19
Third Quarter 0.85 0.39
Fourth Quarter 1.45 0.64
We have not paid dividends on our common stock since inception and we do
not plan to pay dividends in the foreseeable future. Any earnings we may realize
will be retained to finance our growth.
The following table provides additional information on the Company's
equity based compensation plans as of July 31, 2004:
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column a)
------------- ------------------- ------------------- ----------------------
(a) (b) (c)
Equity compensation plans approved by
security holders 2,957,445 $ 2.95 9,030,000
Equity compensation plans not approved
by security holders 55,556 (1) $ 1.50 -0-
(1) In August 2001, we converted $50,000 of our accounts payable into
55,556 shares of common stock. In addition, we issued 55,556
five-year warrants to purchase 55,556 shares of common stock at an
exercise price of $1.50 per share.
Recent Sales of Unregistered Securities
The following is a summary of transactions involving our securities from
May 1, 2004 to July 31, 2004. Each of the following was exempt from
registrations under Section 4(2) of the Securities Act of 1933, as amended,
based upon the fact that each issuance was to an accredited investor. The net
proceeds from these transactions were used for general corporate purposes,
including the funding of research and development.
In May 2004, we issued 1,210,654 shares of Common Stock to an existing
institutional investor, resulting in gross proceeds of $10,000,000 to us. In
addition, the institutional investor was granted five-year warrants to purchase
1,210,654 shares of Common Stock at an exercise price of $12.39 per share. We
paid a 5% finder's fee and granted a five-year warrant to purchase 60,533 shares
of Common Stock at an exercise price of $12.39 per share to a third party in
connection with the private placement.
In May and June 2004, we issued, an aggregate of 785,000 shares of
restricted common stock upon the exercise of warrants by unrelated parties, at
per share exercise prices ranging from $0.75 to $1.50. We realized aggregate
gross proceeds of $1,051,250 from these exercises.
In May 2004, we issued 25,000 shares of restricted common stock as payment
for services rendered in the amount of $198,500.
17
In June 2004, we issued 2,099 restricted shares of common stock as payment
of accounts payable in the amount of $9,447.
From June 2004 through July 15, 2004, we issued an aggregate of 1,574,424
shares of restricted common stock and 1,815,466 shares of common stock
underlying five-year warrants with exercise prices ranging from $1.00 to $1.10
per share upon the conversion of notes payable by unrelated parties in an
aggregate amount of $413,275.
Issuer Purchases of Equity Securities
We did not repurchase any shares of our common stock during the fourth
quarter of fiscal 2004.
Item 6. SELECTED FINANCIAL DATA.
Set forth below is the selected financial data for our company for the
five fiscal years ended July 31, 2004.
Year Ended July 31,
--------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Investment Income $ 42,113 $ 9,877 $ 4,838 $ 13,121 $ 51,144
Other Income -- 30,000 -- -- --
Net Loss (1) (5,070,307) (2,411,532) (2,591,162) (2,294,936) (1,722,298)
Net Loss Per Basic and
Diluted Share (.17) (.10) (.12) (.12) (.10)
Dividends None None None None None
Total Assets 10,421,063 495,322 228,871 201,609 488,099
Long-term Debt -- 242,516 315,929 23,663 30,251
Total Equity
(Deficiency) 8,881,647 (2,491,681) $(1,885,437) (740,378) (131,860)
(1) Included in the net loss of $5,070,307, $2,411,532 and $2,591,162
for fiscal years ended July 31, 2004, 2003 and 2002, respectively,
are tax benefits of $221,847, $231,357 and $353,732, respectively,
related to the sale of certain state tax operating loss
carryforwards.
18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Since our inception, we have devoted the vast majority of our resources to
the research and development of ONCONASE(R) and related drug candidates. We have
focused our resources towards the completion of the clinical program for
unresectable, or inoperable, malignant mesothelioma.
Since ONCONASE(R) has Fast Track Designation for the treatment of
malignant mesothelioma patients, we continue to have meetings and discussions
with the FDA to establish mutually agreed upon parameters for the New Drug
Application, or NDA to obtain marketing approval for ONCONASE(R), assuming the
Phase III clinical trial for the treatment of malignant mesothelioma yields
favorable results.
We received an Orphan Medicinal Product Designation for ONCONASE(R) from
the European Agency for the Evaluation of Medicinal Products, or the EMEA. We
continue to fulfill the EMEA requirements regarding the Marketing Authorization
Application, or MAA registration requirements for ONCONASE(R) for the treatment
of malignant mesothelioma.
Almost all of our research and development expenses since our inception of
$44,954,912 has gone toward the development of ONCONASE(R) and related drug
candidates. For the fiscal years 2004, 2003 and 2002 our research and
development expenses were $3,353,000, $1,700,000 and $2,033,000, respectively,
almost all of which was used for the development of ONCONASE(R) and related drug
candidates. ONCONASE(R) is currently in an international, centrally randomized
Phase III trial. The first part of the trial has been completed and the second
confirmatory part of the trial is ongoing for which patient enrollment is
expected to be completed in the first quarter of 2005. The primary endpoint of
the trial is survival, and as such, a sufficient number of deaths must occur in
order to perform the required statistical analyses to determine the efficacy of
ONCONASE(R) in patients with unresectable (inoperable) malignant mesothelioma.
If the results of the clinical trials are positive, we expect to file for
marketing registrations (NDA and MAA) for ONCONASE(R) within six months of
completion of the statistical analyses. However, at this time, we cannot predict
with certainty when a sufficient number of deaths will occur to achieve
statistical significance. Hence, the timing of when we will be able to file for
marketing registrations in the US and EU is data driven. Therefore, we cannot
predict with certainty what our total cost associated with obtaining marketing
approvals will be, or when and if such approvals will be granted, or when actual
sales will occur.
We fund the research and development of our products from cash receipts
resulting from the sale of our equity securities and convertible debentures in
registered offerings and private placements. Additionally, we have raised
capital through debt financings, the sale of our tax benefits and research
products, interest income and financing received from our Chief Executive
Officer. Presently, our cash balance is sufficient to fund our expanded
operations at least through October 31, 2005 based on our expected level of
expenditures in relation to activities in preparing ONCONASE(R) for marketing
registrations and other ongoing operations of the Company. However, we continue
to seek additional capital financing through the sale of equity in private
placements, sale of our tax benefits and exercise of stock options and warrants
but cannot be sure that we will be able to raise capital on favorable terms or
at all.
Results of Operations
Fiscal Years Ended July 31, 2004, 2003 and 2002
Revenues
We are a development stage company as defined in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 7. We are
devoting substantially all our present efforts to establishing a new business
and developing new drug products. Our planned principal operations of marketing
and/or licensing of new drugs have not commenced and, accordingly, we have not
derived any significant revenue from these operations. We focus most of our
productive and financial resources on the development of ONCONASE(R). We did not
have
19
any sales in fiscal 2004, 2003 and 2002. Investment income for fiscal 2004 was
$42,000 compared to $10,000 for fiscal 2003, an increase of $32,000. Investment
income for fiscal 2003 was $10,000 compared to $5,000 for fiscal 2002, an
increase of $5,000. These increases were due to higher balances of cash and cash
equivalents. Other income for fiscal 2003 was related to investigational
research we performed for a pharmaceutical company.
Research and Development
Research and development expense for fiscal 2004 was $3,353,000 compared
to $1,700,000 for fiscal 2003, an increase of $1,653,000, or 97%. This increase
was primarily due to increases in data management, consulting fees and clinical
expenses related to our pivotal Phase III clinical trial for malignant
mesothelioma of approximately $1,302,000, sponsored research and development
expenses of approximately $236,000, regulatory consulting costs of approximately
$142,000, non cash expense related to stock options issued for consulting
services of approximately $94,000, offset by a decrease in personnel and
insurance expenses of approximately $121,000.
Research and development expense for fiscal 2003 was $1,700,000 compared
to $2,033,000 for fiscal 2002, a decrease of $333,000, or 16.4%. This decrease
was primarily due to decreases in regulatory and clinical costs, personnel
costs, and a reduction of non-cash expenses relating to stock options issued for
consulting services of approximately $236,000, $114,000 and $23,000,
respectively. These decreases were partially offset by increases in costs
relating to patent and trademark applications for ONCONASE(R) of approximately
$40,000.
General and Administrative
General and administrative expense for fiscal 2004 was $1,578,000 compared
to $624,000 for fiscal 2003, an increase of $954,000, or 153%. The increase was
due primarily to an increase in non-cash expense related to stock and stock
options issued for consulting services associated with business development
activities of approximately $402,000, increases in legal, public relations,
personnel, insurance, and accounting expenses of approximately $230,000,
$109,000, $106,000, $77,000 and $30,000, respectively.
General and administrative expense for fiscal 2003 was $624,000 compared
to $798,000 for fiscal 2002, a decrease of $174,000, or 21.8%. This decrease was
primarily due to decreases in costs related to public relations activities,
insurance expenses, reduction in non-cash expense relating to stock options
issued for consulting services, legal, personnel costs and other miscellaneous
office expenses of approximately $71,000, $54,000, $34,000, $10,000 and $5,000,
respectively.
Interest
Interest expense for fiscal 2004 was $403,000 compared to $358,000 in
fiscal 2003, an increase of $45,000 or 12.6%. The increase was primarily due to
the interest expense on the beneficial conversion feature of the notes payable
and its related warrants issued to unrelated parties. The interest expense was
based on the value of the warrants using the Black-Scholes options-pricing
model, amortized on a straight-line basis over the term of the notes.
Interest expense for fiscal 2003 was $358,000 compared to $119,000 in
fiscal 2002, an increase of $239,000. The increase was primarily due to the
interest expense on the beneficial conversion feature of the notes payable
issued to unrelated parties, the related warrants and the increase in total
borrowing levels. The interest expense was based on the value of the warrants
using the Black-Scholes options-pricing model, amortized on a straight-line
basis over the term of the notes.
Income Taxes
New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carryforwards and state research and
development credits, or tax benefits. For the state fiscal year 2004 (July 1,
2003 to June 30, 2004), we had approximately $1,378,000 total available tax
benefits that were saleable; of which New Jersey permitted us to sell
approximately $261,000. We received approximately $222,000 from the sale of the
$261,000 of tax benefits, which we recognized as tax benefits for the fiscal
year ended July 31, 2004.
20
For the state fiscal year 2003 (July 1, 2002 to June 30, 2003), we had
approximately $1,373,000 in total available tax benefits that were saleable; of
which New Jersey permitted us to sell approximately $273,000. We received
approximately $231,000 from the sale of the $273,000 of tax benefits, which we
recognized as tax benefits for the fiscal year ended July 31, 2003.
For the state fiscal year 2002 (July 1, 2001 to June 30, 2002), we had
approximately $1,535,000 total available tax benefits that were saleable; of
which New Jersey permitted us to sell approximately $426,000. We received
approximately $354,000 from the sale of the $426,000 of tax benefits, which we
recognized as tax benefits for fiscal 2002.
If still available under New Jersey law, we will attempt to sell the
remaining $1,117,000 of our tax benefits, between July 1, 2004 and June 30,
2005. This amount, which is a carryover of our remaining tax benefits from state
fiscal year 2004, may increase if we incur additional tax benefits during state
fiscal year 2005. We can not estimate, however, what percentage of our saleable
tax benefits New Jersey will permit us to sell, how much money we will receive
in connection with the sale, if we will be able to find a buyer for our tax
benefits or if such funds will be available in a timely manner.
Net Loss
We have incurred net losses during each year since our inception. The net
loss for fiscal 2004 was $5,070,000 as compared to $2,411,000 in fiscal 2003 and
$2,591,000 in fiscal 2002. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 2004 amounted to $69,045,000. Such losses are
attributable to the fact that we are still in the development stage and,
accordingly, have not derived sufficient revenues from operations to offset the
development stage expenses.
Liquidity and Capital Resources
We have reported net losses of approximately $5,070,000, $2,411,000, and
$2,591,000 for the fiscal years ended July 31, 2004, 2003 and 2002,
respectively. The loss from date of inception, August 24, 1981, to July 31, 2004
amounts to $69,045,000.
We have financed our operations since inception through the sale of our
equity securities and convertible debentures in registered offerings and private
placements. Additionally, we have raised capital through debt financings, the
sale of our tax benefits and research products, and interest income and
financing received from our Chief Executive Officer. During the fiscal year
2004, we had a net increase in cash and cash equivalents of $9,818,000, which
resulted primarily from net cash provided by financing activities of
$14,886,000, which resulted from $10,736,000 in net proceeds from private
placements of common stock and warrants with several institutional investors,
$4,158,000 in net proceeds from warrants and stock options exercises and a
reduction in short term debt of $9,000, offset by net cash used in operating
activities of $5,015,000, principally for research and development activities,
and net cash used in investing activities of $54,000. Total cash resources as of
July 31, 2004 were $10,148,000 compared to $330,000 at July 31, 2003.
Our current liabilities as of July 31, 2004 were $1,539,000 compared to
$2,744,000 at July 31, 2003, a decrease of $1,205,000. The decrease was
primarily due to the payment of accrued payroll of $644,000 and payroll taxes of
$241,000, maturity of short-term notes payable of approximately $264,000 and
decreased accounts payable and other accrued expenses of approximately $56,000.
The following transactions occurred after July 31, 2004:
21
o In September 2004, we issued 320,157 shares of restricted common
stock and an aggregate of 420,157 shares of common stock underlying
five year warrants with an exercise price of $1.00 per share upon
the conversion of notes payable in the amount of $112,055.
o In September 2004, we issued an aggregate of 292,272 shares of
restricted common stock upon the exercise of warrants and stock
options by a board member and unrelated parties at exercise prices
ranging from $0.29 to $1.50 per share. We realized aggregate gross
proceeds of $224,054 from these exercises.
Our continued operations will depend on our ability to raise additional
funds through various potential sources such as equity and debt financing,
collaborative agreements, strategic alliances, sale of tax benefits, revenues
from the commercial sale of ONCONASE(R), licensing of our proprietary RNase
technology and our ability to realize revenues from our technology and our drug
candidates via out-licensing agreements with other companies. Such additional
funds may not become available as we need them or be available on acceptable
terms. Through October 14, 2004, a significant portion of our financing has been
through the sale of our equity securities and convertible debentures in
registered offerings and private placements and exercise of stock options and
warrants. Additionally, we have raised capital through debt financings, the sale
of our tax benefits and research products, interest income and financing
received from our Chief Executive Officer. Until and unless our operations
generate significant revenues, we expect to continue to fund operations from the
sources of capital previously described. There can be no assurance that we will
be able to raise the capital we need on terms which are acceptable, if at all.
Presently, our cash balance is sufficient to fund our expanded operations at
least through October 31, 2005, based on our expected level of expenditures in
relation to activities in preparing ONCONASE(R) for marketing registrations and
other ongoing operations of the Company. However, we continue to seek additional
capital financing through the sale of equity in private placements, sale of our
tax benefits and exercise of stock options and warrants but cannot be sure that
we will be able to raise capital on favorable terms or at all.
We will continue to incur costs in conjunction with our U.S. and foreign
registrations for marketing approval of ONCONASE(R). We are currently in
discussions with potential strategic alliance partners to further the
development and marketing of ONCONASE(R) and other related products in our
pipeline. However, we cannot be sure that any such alliances will materialize.
The market price of our Common Stock is volatile, and the price of the
stock could be dramatically affected one way or another depending on numerous
factors. The market price of our Common Stock could also be materially affected
by the marketing approval or lack of approval of ONCONASE(R).
Off-balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions
that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities or SPE, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of July 31, 2004, we are not involved in any
material unconsolidated SPE transactions.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. The
accounting policies set forth below have been considered critical because
changes to certain judgments, estimates and assumptions could significantly
affect our financial statements.
Use of Estimates
22
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures during the reporting
period. Since some of those estimates are subjective and complex, actual results
could differ from those estimates.
Research and Development
Research and development costs are expensed as incurred.
Accounting For Stock-Based Compensation
Statements of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), provides for the use of a fair value
based method of accounting for employee stock compensation. However, SFAS 123
also allows an entity to continue to measure compensation cost for stock options
granted to employees and directors using the intrinsic value method of
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), which only requires charges to
compensation expense for the excess, if any, of the fair value of the underlying
stock at the date a stock option is granted (or at an appropriate subsequent
measurement date) over the amount the employee must pay to acquire the stock, if
such amounts differ materially from the historical amounts. We have elected to
continue to account for employee stock options using the intrinsic value method
under Opinion 25.
Pursuant to SFAS 123, shares, warrants or options issued in connection
with debt financing agreements or to non-employees for services are accounted
for based on their fair market value determined using the Black-Scholes option
pricing model.
Accounting For Warrants Issued With Convertible Debt
We account for the intrinsic value of beneficial conversion rights arising
from the issuance of convertible debt instruments with nondetachable conversion
rights that are in-the-money at the commitment date pursuant to the consensuses
for EITF Issue No. 98-5 and EITF Issue No. 00-27. Such value is allocated to
additional paid-in capital and the resulting debt discount is charged to
interest expense over the terms of the notes payable. Such value is determined
after first allocating an appropriate portion of the proceeds received to
warrants or any other detachable instruments included in the exchange.
Income Taxes
We account for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect for all years in which
the temporary differences are expected to reverse. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Contractual Obligations and Commercial Commitments
Our major outstanding contractual obligations relate to our equipment
operating lease. Below is a table that presents our contractual obligations and
commercial commitments as of July 31, 2004:
23
Payments Due by Fiscal Year
---------------------------
2006 and
Total 2005 Thereafter
----- ---- ----------
Research and development $72,398 $72,398 $ -0-
Operating lease 13,100 13,100 -0-
------- ------- ---------
Total contractual cash obligations $85,498 $85,498 $ -0-
======= ======= =========
RISK FACTORS
An investment in our common stock is speculative and involves a high
degree of risk. You should carefully consider the risks and uncertainties
described below and the other information in this Form 10-K and our other SEC
filings before deciding whether to purchase shares of our common stock. If any
of the following risks actually occur, our business and operating results could
be harmed. This could cause the trading price of our common stock to decline,
and you may lose all or part of your investment.
We have incurred losses since inception and anticipate that we will incur
continued losses for the foreseeable future. We do not have a current source of
product revenue and may never be profitable.
We are a development stage company and since our inception our source of
working capital has been public and private sales of our stock. We incurred a
net loss of approximately $5,070,000 for the fiscal year ended July 31, 2004. We
have continued to incur losses since July 2004. We may never achieve revenue
sufficient for us to attain profitability.
We incurred net losses of approximately $5,070,000, $2,411,000 and
$2,591,000 for the fiscal years ended July 31, 2004, 2003 and 2002,
respectively.
Our profitability will depend on our ability to develop, obtain regulatory
approvals for, and effectively market ONCONASE(R) as well as entering into
strategic alliances for the development of new drug candidates from the
out-licensing of our proprietary RNase technology. The commercialization of our
pharmaceutical products involves a number of significant challenges. In
particular our ability to commercialize ONCONASE(R) depends on the success of
our clinical development programs, our efforts to obtain regulatory approval and
our sales and marketing efforts or those of our marketing partners, if any,
directed at physicians, patients and third-party payors. A number of factors
could affect these efforts including:
o Our ability to demonstrate clinically that our products have utility
and are safe;
o Delays or refusals by regulatory authorities in granting marketing
approvals;
o Our limited financial resources relative to our competitors;
o Our ability to obtain an appropriate marketing partner;
o The availability and level of reimbursement for our products by
third party payors;
o Incidents of adverse reactions to our products;
o Side effects or misuse of our products and unfavorable publicity
that could result; and
o The occurrence of manufacturing or distribution disruptions.
We will seek to generate revenue through licensing, marketing and
development arrangements prior to receiving revenue from the sale of our
products. To date we have not consummated any licensing or marketing
arrangements and we may not be able to successfully consummate any such
arrangements. We have entered into several development arrangements, which have
resulted in limited revenues for us. However, we cannot ensure that these
arrangements or future arrangements, if any, will result in significant amounts
of revenue for us. We, therefore, are unable to predict the extent of any future
losses or the time required to achieve profitability, if at all.
We need additional financing to continue operations, which may not be available
on acceptable terms, if it is available at all.
We need additional financing in order to continue operations, including
completion of our current clinical trials and filing marketing registrations for
ONCONASE(R) in the United States with the FDA and in Europe with the
24
EMEA. If the results from our current clinical trial do not demonstrate the
efficacy and safety of ONCONASE(R) for malignant mesothelioma, our ability to
raise additional capital will be adversely affected. Even if regulatory
applications for marketing approvals are filed, we will need additional
financing to continue operations. In connection with the recent private
placement from which we realized $10.0 million in gross proceeds from an
institutional investor, we plan to expand our operations in preparing
ONCONASE(R) for marketing registrations in the US and outside the US as well as
fund our ongoing operations. Presently, our cash balance is sufficient to fund
our expanded operations at least through October 31, 2005, based on our expected
level of expenditures. However, taking into consideration all of the
uncertainties related to drug development and our industry, we continue to seek
additional capital financing through the sale of equity in private placements,
sale of our tax benefits and exercise of stock options and warrants but cannot
be sure that we will be able to raise capital on favorable terms or at all.
We may be unable to sell certain state tax benefits in the future and if we are
unable to do so, it would eliminate a source of financing that we have relied on
in the past.
At July 31, 2004, we had federal net operating loss carryforwards of
approximately $47,326,000 that expire from 2005 to 2024. We also had research
and experimentation tax credit carryforwards of approximately $1,426,000 that
expire from 2005 to 2024. New Jersey has enacted legislation permitting certain
corporations located in New Jersey to sell state tax loss carryforwards and
state research and development credits or tax benefits. The aggregate amount of
tax benefits that New Jersey allows corporations to sell each state fiscal year
(July 1st through June 30th) is determined annually and if New Jersey reduces
such aggregate amount in any fiscal year we may be unable to sell some or all of
our available tax benefits as we have in the past. In addition, there is a
limited market for these types of sales and we may not be able to find someone
to purchase our tax benefits for a reasonable price. Our historical results of
operations have been improved by our sale of tax benefits and if we continue to
generate a limited amount of revenue and are unable in the future to sell our
tax benefits, our results of operations will be negatively impacted.
For the state fiscal year 2004 (July 1, 2003 to June 30, 2004), we had
approximately $1,378,000 total available tax benefits that were saleable; of
which New Jersey permitted us to sell approximately $261,000. We received
approximately $222,000 from the sale of the $261,000 of tax benefits, which we
recognized as tax benefits for the fiscal year ended July 31, 2004. For the
state fiscal year 2003 (July 1, 2002 to June 30, 2003), we had approximately
$1,373,000 in total available tax benefits that were saleable; of which New
Jersey permitted us to sell approximately $273,000. We received approximately
$231,000 from the sale of the $273,000 of tax benefits, which we recognized as
tax benefits for the fiscal year ended July 31, 2003.
If still available under New Jersey law, we will attempt to sell the
remaining $1,117,000 of our tax benefits, between July 1, 2004 and June 30,
2005. This amount, which is a carryover of our remaining tax benefits from state
fiscal year 2004, may increase if we incur additional tax benefits during state
fiscal year 2005. We can not estimate, however, what percentage of our sellable
tax benefits New Jersey will permit us to sell, how much money we will receive
in connection with the sale, if we will be able to find a buyer for our tax
benefits or if such funds will be available in a timely manner.
We cannot predict how long it will take us nor how much it will cost us to
complete our Phase III trial because it is a survival study and we are still in
patient enrollment in part two of this Phase III trial.
We currently have ongoing a two-part Phase III trial of ONCONASE(R) as a
treatment for malignant mesothelioma. The first part of the clinical trial has
been completed and the second, confirmatory part is still ongoing for which
patient enrollment is expected to be completed in the first quarter of 2005. The
primary endpoint of the Phase III clinical trial is survival, which tracks the
length of time patients enrolled in the study live. According to the protocol, a
sufficient number of patient deaths must occur in order to perform the required
statistical analyses to determine the efficacy of ONCONASE(R) in patients with
unresectable (inoperable) malignant mesothelioma. Since it is impossible to
predict with certainty when these terminal events in the Phase III trial will
occur, we do not have the capability of reasonably determining when a sufficient
number of deaths will occur, nor when we will be able to file for marketing
registrations with the FDA and EMEA.
25
In addition, clinical trials are very costly and time consuming. The
length of time required to complete a clinical trial depends on several factors
including the size of the patient population, the ability of patients to get to
the site of the clinical study, and the criteria for determining which patients
are eligible to join the study. Delays in patient enrollment, could delay
achieving a sufficient number of deaths required for statistical analyses, which
therefore may delay the marketing registrations. Although we believe we could
modify some of our expenditures to reduce our cash outlays in relation to our
clinical trials and other NDA related expenditures, we cannot quantify which or
the amount such expenditures might be modified. Hence, a delay in the commercial
sale of ONCONASE(R) would increase the time frame of our cash expenditure
outflows and may require us to seek additional financing. Such capital financing
may not be available on favorable terms or at all.
The FDA and comparable regulatory agencies in foreign countries impose
substantial pre-market approval requirements on the introduction of
pharmaceutical products. These requirements involve lengthy and detailed
pre-clinical and clinical testing and other costly and time consuming
procedures. Satisfaction of these requirements typically takes several years
depending on the type, complexity and novelty of the product. We cannot apply
for FDA or EMEA approval to market ONCONASE(R) until the clinical trials and all
other registration requirements have been met.
If we fail to obtain the necessary regulatory approvals, we will not be allowed
to commercialize our drugs and will not generate product revenue.
The FDA and comparable regulatory agencies in foreign countries impose
substantial pre-market approval requirements on the introduction of
pharmaceutical products. These requirements involve lengthy and detailed
pre-clinical and clinical testing and other costly and time consuming
procedures. Satisfaction of these requirements typically takes several years
depending on the level of complexity and novelty of the product. Drugs in late
stages of clinical development may fail to show the desired safety and efficacy
results despite having progressed through initial clinical testing. While
limited trials with our product have produced certain favorable results, we
cannot be certain that we will successfully complete Phase I, Phase II or Phase
III testing of any compound within any specific time period, if at all.
Furthermore, the FDA or the company may suspend clinical trials at any time on
various grounds, including a finding that the subjects or patients are being
exposed to an unacceptable health risk. In addition, we cannot apply for FDA or
EMEA approval to market ONCONASE(R) until pre-clinical and clinical trials have
been completed. Several factors could prevent the successful completion or cause
significant delays of these trials including an inability to enroll the required
number of patients or failure to demonstrate the product is safe and effective
in humans. Also if safety concerns develop, the FDA and EMEA could stop our
trials before completion.
In December 2002, we received Fast Track Designation from the Food and
Drug Administration, or the FDA for ONCONASE(R) for the treatment of malignant
mesothelioma. In February 2001, we received an Orphan Medicinal Product
Designation for ONCONASE(R) from the European Agency for the Evaluation of
Medicinal Products, or the EMEA.
All statutes and regulations governing the conduct of clinical trials are
subject to change by various regulatory agencies, including the FDA, in the
future, which could affect the cost and duration of our clinical trials. Any
unanticipated costs or delays in our clinical studies would delay our ability to
generate product revenues and to raise additional capital and could cause us to
be unable to fund the completion of the studies.
We may not market or sell any product for which we have not obtained
regulatory approval. We cannot assure that the FDA or other regulatory agencies
will ever approve the use of our products that are under development. Even if we
receive regulatory approval, such approval may involve limitations on the
indicated uses for which we may market our products. Further, even after
approval, discovery of previously unknown problems could result in additional
restrictions, including withdrawal of our products from the market.
If we fail to obtain the necessary regulatory approvals, we cannot market
or sell our products in the United States, or in other countries and our
long-term viability would be threatened. If we fail to achieve regulatory
approval or foreign marketing authorizations for ONCONASE(R) we will not have a
saleable product or product revenues for quite some time, if at all, and may not
be able to continue operations.
26
We are and will be dependent upon third parties for manufacturing our products.
If these third parties do not devote sufficient time and resources to our
products our revenues and profits may be adversely affected.
We do not have the required manufacturing facilities to manufacture our
products. We presently rely on third parties to perform certain of the
manufacturing processes for the production of ONCONASE(R) for use in clinical
trials. Currently, we contract with Scientific Protein Labs for the
manufacturing of ranpirnase (protein drug substance) from the oocytes, or the
unfertilized eggs, of the Rana pipiens frog, which is found in the Northwest
United States and is commonly called the leopard frog. We contract with Ben
Venue Corporation for the manufacturing of ONCONASE(R) and with Cardinal Health
for the labeling, storage and shipping of ONCONASE(R) for clinical trial use. We
utilize the services of these third party manufacturers solely on an as needed
basis with terms and prices customary for our industry.
Our use of manufacturers for ranpirnase and ONCONASE(R) have been approved
by the FDA. We have identified substantial alternative service providers for the
manufacturing services for which we contract. In order to replace an existing
service provider we must amend our IND to notify the FDA of the new
manufacturer. Although the FDA generally will not suspend or delay a clinical
trial as a result of replacing an existing manufacturer, the FDA has the
authority to suspend or delay a clinical trial if, among other grounds, human
subjects are or would be exposed to an unreasonable and significant risk of
illness or injury as a result of the replacement manufacturer.
We intend to rely on third parties to manufacture our products if they are
approved for sale by the appropriate regulatory agencies and are commercialized.
Third party manufacturers may not be able to meet our needs with respect to the
timing, quantity or quality of our products or to supply products on acceptable
terms.
Because we do not have marketing, sales or distribution capabilities, we expect
to contract with third parties for these functions and we will therefore be
dependent upon such third parties to market, sell and distribute our products in
order for us to generate revenues.
We currently have no sales, marketing or distribution capabilities. In
order to commercialize any product candidates for which we receive FDA approval,
we expect to rely on established third party strategic partners to perform these
functions. For example, if we are successful in our Phase III clinical trials
with ONCONASE(R), and are granted marketing approval for the commercialization
of ONCONASE(R), we will be unable to introduce the product to market without
establishing a marketing collaboration with a pharmaceutical company with those
resources. If we establish relationships with one or more biopharmaceutical or
other marketing companies with existing distribution systems and direct sales
forces to market any or all of our product candidates, we cannot assure you that
we will be able to enter into or maintain agreements with these companies on
acceptable terms, if at all. Further, it is likely that we will have limited or
no control over the manner in which product candidates are marketed or the
resources devoted to such markets.
In addition, we expect to begin to incur significant expenses in
determining our commercialization strategy with respect to one or more of our
product candidates. The determination of our commercialization strategy with
respect to a product candidate will depend on a number of factors, including:
o the extent to which we are successful in securing collaborative
partners to offset some or all of the funding obligations with
respect to product candidates;
o the extent to which our agreement with our collaborators permits us
to exercise marketing or promotion rights with respect to the
product candidate;
o how our product candidates compare to competitive products with
respect to labeling, pricing, therapeutic effect, and method of
delivery; and
o whether we are able to establish agreements with third party
collaborators, including large biopharmaceutical or other marketing
companies, with respect to any of our product candidates on terms
that are acceptable to us.
A number of these factors are outside of our control and will be difficult
to determine.
27
Our product candidates may not be accepted by the market.
Even if approved by the FDA and other regulatory authorities, our product
candidates may not achieve market acceptance, which means we would not receive
significant revenues from these products. Approval by the FDA does not
necessarily mean that the medical community will be convinced of the relative
safety, efficacy and cost-effectiveness of our products as compared to other
products. In addition, third party reimbursers such as insurance companies and
HMOs may be reluctant to reimburse expenses relating to our products.
We depend upon Kuslima Shogen and our other key personnel and may not be able to
retain these employees or recruit qualified replacement or additional personnel,
which would have a material adverse affect on our business.
We are highly dependent upon our founder, Chairman and Chief Executive
Officer, Kuslima Shogen. Kuslima Shogen's talents, efforts, personality, vision
and leadership have been, and continue to be, critical to our success. The
diminution or loss of the services of Kuslima Shogen, and any negative market or
industry perception arising from that diminution or loss, would have a material
adverse effect on our business. While our other employees have substantial
experience and have made significant contributions to our business, Kuslima
Shogen is our senior executive and also our primary supporter because she
represents the Company's primary means of accessing the capital markets.
Because of the specialized scientific nature of our business, our
continued success also is dependent upon our ability to attract and retain
qualified management and scientific personnel. There is intense competition for
qualified personnel in the pharmaceutical field. As our company grows our
inability to attract qualified management and scientific personnel could
materially adversely affect our research and development programs, the
commercialization of our products and the potential revenue from product sales.
We do not have employment contracts with Kuslima Shogen or any of our
other management and scientific personnel.
Our proprietary technology and patents may offer only limited protection against
infringement and the development by our competitors of competitive products.
We own two patents jointly with the United States government. These
patents expire in 2016. We also own ten United States patents with expiration
dates ranging from 2006 to 2019, four European patents with expiration dates
ranging from 2009 to 2016 and one Japanese patent that expires in 2010. We also
own patent applications that are pending in the United States, Europe and Japan.
The scope of protection afforded by patents for biotechnological inventions is
uncertain, and such uncertainty applies to our patents as well. Therefore, our
patents may not give us competitive advantages or afford us adequate protection
from competing products. Furthermore, others may independently develop products
that are similar to our products, and may design around the claims of our
patents. Patent litigation and intellectual property litigation are expensive
and our resources are limited. If we were to become involved in litigation, we
might not have the funds or other resources necessary to conduct the litigation
effectively. This might prevent us from protecting our patents, from defending
against claims of infringement, or both. To date, we have not received any
threats of litigation, legal actions or negotiations regarding patent issues.
Developments by competitors may render our products obsolete or non-competitive.
In February 2004, the Food and Drug Administration granted Eli Lilly &
Company approval to sell its Alimta(R) medication as an orphan drug to treat
patients with pleural mesothelioma. Alimta is a multi-targeted antifolate that
is based upon a different mechanism of action than ONCONASE(R). To our
knowledge, no other company is developing a product with the same mechanism of
action as ONCONASE(R). However, there may be other companies, universities,
research teams or scientists who are developing products to treat the same
medical conditions our products are intended to treat. Eli Lilly is, and some of
these other companies, universities, research teams or scientists may be more
experienced and have greater clinical, marketing and regulatory capabilities and
managerial and financial resources than we do. This may enable them to develop
products to treat the same medical
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conditions our products are intended to treat before we are able to complete the
development of our competing product.
Our business is very competitive and involves rapid changes in the
technologies involved in developing new drugs. If others experience rapid
technological development, our products may become obsolete before we are able
to recover expenses incurred in developing our products. We will probably face
new competitors as new technologies develop. Our success depends on our ability
to remain competitive in the development of new drugs or we may not be able to
compete successfully.
We may be sued for product liability.
Our business exposes us to potential product liability that may have a
negative effect on our financial performance and our business generally. The
administration of drugs to humans, whether in clinical trials or commercially,
exposes us to potential product and professional liability risks which are
inherent in the testing, production, marketing and sale of new drugs for humans.
Product liabi