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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-19635
GENTA INCORPORATED
(Exact name of Registrant as specified in its certificate of incorporation)
Delaware 33-0326866
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
Two Connell Drive
Berkeley Heights, New Jersey 07922
(Address of principal executive offices) (Zip Code)
(908) 286-9800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.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 information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_|
The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant was $385,800,211 as of June 28,
2002 (the last business day of the registrant's most recently completed second
fiscal quarter). For purposes of determining this number, 28,856,050 shares of
common stock held by affiliates are excluded. For purposes of making this
calculation, the registrant has defined affiliates as including all directors,
executive officers and beneficial owners of more than ten percent of the common
stock of the Company.
As of March 21, 2003, the registrant had 73,810,345 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Certain provisions of the registrant's definitive proxy statement to be
filed not later than April 30, 2003 pursuant to Regulation 14A are incorporated
by reference in Items 10 through 13 of Part III of this Annual Report on Form
10-K.
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1
Genta Incorporated
Table of Contents
Part I
Item 1. Business .......................................................................................... 4
Item 2. Properties ........................................................................................ 20
Item 3. Legal Proceedings ................................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders ............................................... 21
Part II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters ............................. 22
Item 6. Selected Consolidated Financial Data .............................................................. 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 24
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ........................................ 27
Item 8. Financial Statements and Supplemental Data ........................................................ 28
Part III
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............. 55
Item 10. Directors and Executive Officers of the Registrant (1) ........................................... 55
Item 11. Executive Compensation (1) ....................................................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(1) ............................................................................................... 55
Item 13. Certain Relationships and Related Transactions (1) ............................................... 55
Item 14. Controls and Procedures .......................................................................... 55
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K .................................. 55
Signatures ................................................................................................... 63
Certifications ............................................................................................... 64
(1) The information required in these items is incorporated by reference from
the Company's definitive proxy statement to be filed not later than April
30, 2003 pursuant to Regulation 14A of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended.
2
The statements contained in this Annual Report on Form 10-K that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs, intentions or strategies regarding the future. The
Company intends that all forward-looking statements be subject to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect the Company's views as of the date they are
made with respect to future events and financial performance, but are subject to
many risks and uncertainties, which could cause actual results to differ
materially from any future results expressed or implied by such forward-looking
statements. Forward-looking statements include, without limitation, statements
about:
o the Company's ability to develop, manufacture and sell its products;
o the potential efficacy of the Company's products;
o the commencement and completion of pre-clinical and clinical trials;
o the Company's ability to obtain necessary regulatory approvals;
o the Company's contractual collaborative arrangements;
o the adequacy of the Company's capital resources;
o the ability to obtain sufficient financing to maintain the Company's
planned operations;
o the possibility and effect of patent infringement claims;
o the impact of competitive products and market conditions;
o the other risks detailed in the Certain Trends and Uncertainties
section of Management's Discussion and Analysis of Financial
Condition and Results of Operations in this Annual Report on Form
10-K; and
o the other risks described under Certain Risks and Uncertainties
Related to the Company's Business.
The Company does not undertake to update any forward-looking statements.
3
PART I
Item 1. Business
A. Overview
Genta Incorporated ("Genta" or the "Company") was incorporated in Delaware
on February 4, 1988. Genta is a biopharmaceutical company that is dedicated to
the identification, development, and commercialization of novel drugs for cancer
and related diseases. The Company's research portfolio is comprised of two
components: Oligonucleotide Medicines, which are drugs based on chemical
modifications of either deoxyribonucleic acid (DNA) or ribonucleic acid (RNA)
and Small Molecules. At present, the Oligonucleotide Medicines portfolio
includes technologies based on antisense and decoy aptamers, whereas the Small
Molecule portfolio includes gallium-based products and Androgenics compounds.
We make available free of charge on our internet website
(http://www.genta.com) our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission. The
content on the Company's website is available for informational purposes only.
It should not be relied upon for investment purposes, nor is it incorporated by
reference into this Form 10-K.
The Company's lead investigational antisense drug is called Genasense(TM)
(oblimersen sodium), a molecule that is designed to block the production of a
protein known as Bcl-2. Current science suggests that Bcl-2 is a fundamental
(although not sole) cause of the inherent resistance of cancer cells to current
anticancer treatments, such as chemotherapy, radiation, or monoclonal
antibodies. While Genasense(TM) has displayed some anticancer activity when used
by itself, the Company is developing the drug solely as a means of amplifying
the effects of other anticancer therapy by pre-treating patients with
Genasense(TM).
The U.S. Food and Drug Administration ("FDA") has granted several
designations to Genasense(TM) that may, in the future, serve to expedite its
regulatory review, assuming the clinical trials have yielded a positive result.
These designations include "Fast Track" status for melanoma and multiple
myeloma, and "Orphan Drug" designation for myeloma, melanoma, and chronic
lymphocytic leukemia. The Company has applied for similar designation from
regulatory agencies in Europe. Genasense(TM) is undergoing the last stage of
clinical testing prior to application to the FDA, which is called "Phase 3".
Randomized Phase 3 trials are currently being conducted on a multinational basis
that include patients with malignant melanoma, multiple myeloma, and chronic
lymphocytic leukemia. The Company has other randomized and non-randomized
clinical trials involving patients with other types of cancer.
In addition to the antisense program, the Company's other platform
technology from the Oligonucleotide Medicines group involves decoy aptamers.
Decoys are designed to bind proteins (known as "transcription factors") that can
selectively turn genes on or off. This type of control could potentially be used
to regulate genes that are critically involved in cancer progression. A lead
target, known as the cyclic adenosine monophosphate response element-binding
protein (CRE-BP), has been identified and a decoy has been created. Preclinical
studies with this compound have shown broad anticancer activity, with very low
toxicity to normal cells. The CRE-BP decoy is currently undergoing optimization
and additional preclinical testing by the Company.
From its Small Molecule franchise, the Company is developing two drugs
based on elemental gallium, an intravenous drug known as Ganite(TM) (gallium
nitrate injection), and a novel oral formulation of a gallium-containing
compound. Ganite(TM) has previously been approved for marketing in the U.S. and
Canada by the FDA for the treatment of cancer-related hypercalcemia. In April
2000, Genta assumed ownership of the New Drug Application ("NDA") from an asset
purchase agreement (Note 9), and the Company is seeking to launch the drug for
its approved indication, cancer-related hypercalcemia. Hypercalcemia is a
life-threatening condition caused by excessive buildup of calcium in the
bloodstream. Based on previously published data, the Company believes that
Ganite(TM) may also be an active treatment for patients with certain types of
cancer, particularly non-Hodgkin's lymphoma. The Company has filed an
Investigational New Drug ("IND") exemption with the Division of Oncology
Products at the FDA, and has initiated a new clinical trial of Ganite(TM) for
treatment of patients with relapsed non-
4
Hodgkin's lymphoma. The Company has also filed an Orphan Drug Application for
this use and plans to seek expanded marketing approval for this indication.
The Company is concurrently seeking to develop an oral formulation of a
gallium-containing compound that is intended to permit the use of lower doses to
be administered over extended periods. The Company believes this type of drug
may be useful for patients who have accelerated loss of bone, such as persons
with bone metastases (i.e., cancer that has spread into bone) and Paget's
disease.
The Company is also developing Androgenics compounds, which are intended
to be used in the early, "hormone-sensitive" stage of prostate cancer. These
compounds are currently undergoing additional preclinical testing.
B. Summary of Business and Research and Development Programs
Antisense Technology
Antisense involves the use of compounds comprised of DNA that target
production of a specific protein. Most of a cell's functions, including whether
the cell lives or dies, are carried out by proteins. DNA is made up of bases
(nucleotides) that are arranged in a specific sequence. The specificity of the
sequence accounts for the production of a specific protein. In order for DNA to
produce a protein, an intermediate step is required. In this step, DNA is
transcribed into RNA (i.e., "messenger RNA", or mRNA). The sequence of mRNA that
encodes a protein is oriented in only one direction, which is known as the
"sense" orientation.
Antisense drugs are short sequences of chemically modified DNA bases that
are called "oligonucleotides" (oligos). The oligos are engineered in a sequence
that is exactly opposite (hence "anti") to the "sense" coding orientation of
mRNA. Because antisense drugs bind only short regions of the mRNA (rather than
the whole message itself), they contain far fewer nucleotides than the whole
gene. Moreover, since they are engineered to bind only to the matching sequence
on a specific mRNA, antisense drugs have both high selectivity and specificity,
which can be used to attack production of a single, disease-causing protein.
The Company has devoted significant resources towards the development of
antisense oligos that contain a phosphorothioate "backbone." However, the
Company also has patents covering later "third generation" technologies that
involve mixed phosphorothioate and methylphosphonate backbones that may further
enhance the molecule's ability to bind to the intended target. In preclinical
studies, these "mixed backbone" oligos have effectively down-regulated targeted
mRNA sequences inside cells. When injected intravenously into certain animals,
these third generation oligos have also demonstrated greater stability in the
circulatory system and urinary excretion relative to earlier compounds. This
higher degree of stability suggests that third-generation oligos may ultimately
be more effective than the Company's second-generation oligos.
Apoptosis
Cancer is commonly associated with the over or under-production of many
types of proteins. The Company believes that the ability to selectively halt the
production of certain proteins may make the treatment of certain diseases more
effective. In an effort to make existing cancer therapy more effective, Genta is
developing Genasense(TM) to target the production of Bcl-2, a protein that is
central to the process of programmed cell death (known as "apoptosis").
The programmed death of cells is necessary to accommodate the billions of
new cells produced daily, and also to eliminate aged or damaged cells. However,
abnormal regulation of the apoptotic process can result in disease. For
instance, cancer, autoimmune disorders, and many viral infections are associated
with decreased apoptosis (i.e., the programmed death of cells is occurring too
slowly). Conversely, AIDS and certain neurodegenerative diseases are associated
with increased apoptosis (i.e., cell death occurs too rapidly). The process of
programmed cell death is regulated by a large number of proteins, particularly
members of the Bcl-2 protein family.
Bcl-2 as an Inhibitor of Apoptosis
5
Normally, when a cancer cell is exposed to treatment (i.e. with
chemotherapy, radiation or immunotherapy) a "death signal" is sent to an
organelle within the cell called the mitochondrion. The mitochondrion then
releases a factor (known as cytochrome C) that activates a series of enzymes
called caspases. These enzymes cause widespread fragmentation of the cellular
proteins and DNA, which ultimately causes cell death.
Bcl-2 is normally found in the mitochondrial membrane where it regulates
the release of cytochrome C. High levels of Bcl-2 are associated with most types
of human cancer, including the major hematologic cancers (e.g., lymphomas,
myeloma, and leukemia) and solid tumors (e.g., cancers of the lung, colon,
breast, and prostate). In these diseases, Bcl-2 acts as a blocking factor that
inhibits the release of cytochrome C triggered by cancer therapy. Thus, Bcl-2
appears to be a major contributor to both inherent and acquired resistance to
anticancer treatments.
In cancer cells, the Bcl-2 protein inhibits the process of apoptosis,
thereby allowing cells to survive for much longer than normal cells. Many cancer
cells have an excess of Bcl-2, which contributes to making them resistant to
current types of anticancer treatment (including chemotherapy, radiation, and
monoclonal antibodies). Overcoming resistance to chemotherapy poses a major
challenge for cancer treatment. The Company's lead antisense compound,
Genasense(TM), has been developed to block production of Bcl-2, thereby
dramatically increasing the sensitivity of cancer cells to standard forms of
anticancer treatment.
Scientific support for these conclusions include:
o Cancerous cells that are known to be sensitive to chemotherapy
and radiotherapy can be made resistant to these treatments by
inserting the Bcl-2 protein into those cells.
o Higher levels of Bcl-2 are known to correlate with an inferior
prognosis and/or poor response to therapy in many diseases.
o Higher levels of Bcl-2 coincide with the shift from
androgen-dependent to androgen-independent tumor growth in
prostate cancer.
o The ability of cells to develop into tumors can be
substantially increased by inserting the Bcl-2 protein into
those cells.
Genasense(TM) (oblimersen sodium; G3139; Bcl-2 antisense)
Genasense(TM) blocks production of Bcl-2, thereby potentially restoring
the integrity of the apoptotic process and enabling the cancer cell to be killed
with current anticancer therapy. Genasense(TM) is comprised of a
phosphorothioate (i.e., second generation) backbone linking 18 modified DNA
bases (i.e., an "18-mer"). This oligo targets the first six codons of Bcl-2 mRNA
to form a DNA/RNA duplex. An enzyme recognizes this DNA/RNA duplex as foreign
and then cleaves the Bcl-2 mRNA strand, thereby destroying the ability of the
message to be translated into the Bcl-2 protein. Halting protein production
eventually reduces its intracellular levels, thus preventing the protein from
functioning normally. The fragments of Bcl-2 mRNA are themselves degraded by
other enzymes.
Overview of Preclinical and Clinical studies of Genasense(TM)
Genasense(TM) Preclinical Studies
In order to affect Bcl-2 function, Genasense(TM) must be incorporated into
the cell. After intravenous or subcutaneous injection, Genasense(TM) distributes
rapidly to highly perfused organs, especially lung and bone marrow.
Oligonucleotides, like Genasense(TM), are generally excreted from the body
unchanged, predominantly by the kidney. Biodistribution studies of Genasense in
vivo have demonstrated high tissue to plasma ratios, particularly in kidney and
liver, but also demonstrate significant distribution to the bone marrow and
spleen. In vitro and in vivo studies also show both biologic and antitumor
activity with sub-micromolar concentrations (e.g., approximately 170 nanomolar).
A number of in vitro and in vivo studies have shown synergistic
enhancement of tumor cell killing when Bcl-2 antisense was used in combination
with standard anticancer therapies, including anti-metabolites, alkylating
agents, corticosteroids, other cytotoxic chemotherapy, radiation, and monoclonal
antibodies. Several studies have
6
demonstrated enhanced antitumor activity and durable tumor regression in animals
engrafted with human cancers that were treated with Bcl-2 antisense followed by
antitumor agents that induce apoptosis. These studies include human lymphoma,
melanoma, breast cancer, and prostate cancers, which were treated with
Genasense(TM) in combination with cyclophosphamide, dacarbazine, docetaxel and
paclitaxel, respectively.
Genasense(TM) Clinical Studies
Genasense(TM) has been in clinical trials since 1995 in both the United
States and Europe. These studies have been conducted in patients with a wide
variety of tumor types, including non-Hodgkin's lymphoma, malignant melanoma,
several types of leukemia, and cancers of the prostate, colon, lung, and breast.
In 1999, the Company executed a Cooperative Research and Development Agreement
(CRADA) with the U.S. National Cancer Institute (NCI). Since 2001, Genta and NCI
have jointly approved the initiation of approximately 20 new clinical trials. In
addition to enabling more physicians and patients access to the drug, these
trials allow the Company to evaluate Genasense(TM) in certain diseases (and in
combination with other chemotherapy drugs) that would otherwise be outside the
Company's initial priorities for clinical development. To date, more than 900
patients have been treated with Genasense(TM). In aggregate, results of clinical
trials performed to date suggest that Genasense(TM) can be administered to
cancer patients with an acceptable degree of side-effects, and that such
treatment may reduce the level of Bcl-2 protein in cancer cells.
Genasense(TM) Phase 3 Randomized Clinical Trials
In 2001 and 2000, the Company initiated a series of randomized clinical
trials that employed Genasense(TM) in combination with cytotoxic chemotherapy.
These trials are all similarly designed, and each employs Genasense(TM) in an
effort to improve the outcome achieved above that which would be achieved by
using chemotherapy by itself. The studies comprise the following:
o a trial in patients with advanced malignant melanoma evaluating
dacarbazine alone versus dacarbazine plus Genasense(TM);
o a trial in patients with multiple myeloma evaluating high-dose
dexamethasone alone versus high-dose dexamethasone plus
Genasense(TM);
o a trial in patients with chronic lymphocytic leukemia (CLL)
evaluating fludarabine and cyclophosphamide alone versus fludarabine
and cyclophosphamide plus Genasense(TM); and
o a trial in patients with advanced non-small cell lung cancer (NSCLC)
evaluating docetaxel alone versus docetaxel (Taxotere(R), Aventis)
plus Genasense(TM).
The melanoma trial is directed to patients who have not been previously
treated with chemotherapy. The primary end-point of the trial is to increase
overall survival of patients treated with Genasense(TM) plus dacarbazine
compared with patients treated with dacarbazine alone. The myeloma and CLL
studies are similarly designed. Each of these trials are directed towards
patients who have previously been treated with chemotherapy and have developed
progressive disease. The primary endpoint of the myeloma trial is to increase
the duration of response (or time to relapse) treated with Genasense(TM) plus
high-dose dexamethasone compared to dexamethasone alone. The primary endpoint of
the CLL trial is to increase the proportion of patients who achieve a complete
response treated with Genasense(TM) and fludarabine and cyclophosphamide
compared to fludarabine and cyclophosphamide alone. The primary endpoint of the
NSCLC trial is to increase survival of patients treated with Genasense(TM) and
docetaxel over docetaxel alone.
Non-Randomized Trials of Genasense(TM)
Non-Hodgkin's Lymphoma and Chronic Lymphocytic Leukemia: A Phase 1
study of 21 patients with B-cell non-Hodgkin's lymphoma (NHL) was conducted in
the U.K. using Genasense(TM) administered by continuous subcutaneous infusion.
This study demonstrated that Genasense(TM) down-regulated Bcl-2 protein. In the
study, thrombocytopenia, infusion site reactions, and fatigue were felt to be
dose limiting in 2 patients treated at a level of 5.3 mg/kg/day. However, the
tolerance to treatment in this study may have been closely linked to the
prolonged (2-week) infusion schedule given by the subcutaneous route. (Other
studies have safely escalated the Genasense(TM) doses up to 12 mg/kg/day when
given intravenously in combination with cytotoxic chemotherapy.) Although the
administered drug dose was quite low in most patients (i.e., substantially below
doses that are now known to be both safe and
7
optimally effective with respect to Bcl-2 down-regulation), several major
responses were observed. One patient with low-grade lymphoma who had progressive
disease in nodes and bone marrow after two prior regimens attained a complete
response using Genasense(TM) alone, which has been maintained for longer than
four years. These results were initially published in The Lancet in 1997 and
updated in 2000 in The Journal of Clinical Oncology.
More recently, the Company conducted a Phase 1-2 trial of Genasense(TM) in
patients with chronic lymphocytic leukemia (CLL). Similar to the previous NHL
study, this trial showed that CLL patients (like NHL patients) exhibited
disease-specific side effects to Genasense(TM), including exaggerated fever,
hypotension, and back pain. Together, these studies have indicated that the
appropriate initial dose for extended Phase 2 and Phase 3 testing in these two
diseases is 3 mg/kg/day. Preliminary results from the first 23 patients showed
that 2 patients (9%) achieved partial responses, despite having failed 4 or more
prior treatment regimens; 11 patients (48%) achieved stabilization of their
disease, 5 of whom had failed 4 or more prior treatments. Circulating CLL cells
were reduced by more than 50% in 9 patients (39%). Eight of 19 patients (42%)
achieved greater than 50% decrease in the size of enlarged lymph nodes, and 8 of
16 patients (50%) achieved greater than 50% decrease in the size of enlarged
liver or spleen. To date, the major side effects of Genasense(TM) have been
fatigue and fever.
Acute Leukemia: A Phase 1 study at Ohio State University evaluated a
continuous intravenous (IV) infusion dose of Genasense(TM) with escalating doses
of fludarabine, cytosine arabinoside, and filgrastim (FLAG) in patients with
acute leukemia. Results showed that Genasense(TM) could be safely combined with
these agents in patients with relapsed leukemia and that several refractory
patients were able to achieve complete remissions. A second study has been
initiated that tests Genasense(TM) in combination with daunorubicin and cytosine
arabinoside (Ara-C). To date, the combined Genasense(TM) /chemotherapy program
has not caused more side effects than expected from using chemotherapy alone.
Overall, 5 of the first 11 evaluable patients have achieved complete remission
(CR).
Malignant Melanoma: A Phase 1 clinical study of Genasense(TM)
combined with dacarbazine (DTIC) was conducted at the University of Vienna.
Daily IV infusions (or twice daily subcutaneous injections) of Genasense(TM)
were given at doses ranging from 1.7 to 12 mg/kg/day. Serial biopsies of
cutaneous melanoma metastases showed reduced Bcl-2 protein content (assayed by
Western analysis) in tumor cells by day five of treatment. Durable responses and
prolonged (greater than 1 year) progression-free survival were also observed in
this study, even though most patients had failed both immunotherapy and
chemotherapy. Six of the first 14 patients treated showed objective responses.
The Genasense(TM) /DTIC regimen was well tolerated up to the dose level of 7
mg/kg/day. Details of this study were reported in The Lancet in 2000.
Other Phase 1 Studies: Thirty-five patients (mostly with
genitourinary cancer) were entered into a dose-escalation trial using both a
14-day and 21-day intravenous infusion schedule of Genasense(TM), either alone
or in combination with paclitaxel. This study showed that fatigue and fever were
observed after 2 weeks of continuous treatment at doses ranging from 4.1 to 7
mg/kg/day for 14 days. Similar reactions were observed on the 21-day schedule.
Transient elevation of liver enzymes (i.e., serum transaminase) was also
observed at the 7 mg/kg-dose level. These data have been published in Clinical
Cancer Research. Other dose-ranging combination studies of Genasense(TM) have
been conducted in patients receiving mitoxantrone or docetaxel for advanced
prostate cancer, docetaxel for breast cancer, multi-drug chemotherapy for
non-Hodgkin's lymphoma, and irinotecan for colorectal cancer. Results from most
of these clinical trials have been presented at national scientific meetings and
published in the proceedings of these conferences.
Summary of Phase 1-2 Studies: In general, Genasense(TM) appears to
be generally well tolerated when combined with full doses of standard cytotoxic
chemotherapy using a daily Genasense(TM) dose of 7 mg/kg/day for 5 to 7 days.
Exceptions to these dosing regimens have been noted in patients with NHL and
CLL, who appear more sensitive to the drug, and for whom doses are currently
employed. Significant thrombocytopenia, liver function abnormalities, or fatigue
have not been dose-limiting in most Phase 1-2 studies. Current data suggest that
reduction of Bcl-2 protein may be observed within the first 3 to 5 days. Thus,
current studies are generally using a 5 to 7 day schedule in combination with
chemotherapy, using Genasense(TM) administered at least 3 days prior to the
initiation of other therapy. As previously noted, the Company, either alone or
in conjunction with NCI, has initiated a number of additional non-randomized
Phase 2 trials of Genasense(TM) in combination with chemotherapy in patients
with a variety of cancer types.
8
Gallium Products
Gallium nitrate (Ganite(TM); gallium nitrate injection) was originally
studied by NCI as a new type of cancer chemotherapy. In the course of these
studies, gallium nitrate was shown to strongly inhibit bone resorption. Gallium
nitrate underwent additional clinical testing and was approved by the FDA in
1991 as a treatment for patients with a condition known as "cancer-related
hypercalcemia". Hypercalcemia occurs due to rapid loss of bone that releases
large amounts of calcium into the bloodstream of patients, which can be lethal.
Lower doses of Ganite(TM) were also tested in patients with less extreme
bone-losing conditions, including bone metastases (i.e. cancer that has spread
to bone), Paget's disease (an affliction of older patients that causes pain and
disability), and osteoporosis.
In April 2000, Genta acquired assets, rights, licenses to patents, and
technology relating to gallium-containing compounds for treatment of bone-losing
conditions, and to Ganite(TM) (gallium nitrate injection), the liquid injectable
product. The acquired assets included the ownership of an approved NDA. Since
this acquisition, the Company has worked with the FDA to address certain
regulatory issues and to update certain aspects of drug manufacturing. In
December 2002, the Company made its first submission to this NDA, which was sent
to the Metabolism and Endocrine Division of FDA. The Company has announced that
it intends to complete its NDA filings for Ganite(TM) in the first quarter of
2003. The Division has advised Genta that these supplements will be subject to a
four-month review period from the last filing date. Assuming there are no
serious delays in the review of its submissions, or of any information related
to submissions or activities conducted by the prior Sponsor, Genta anticipates
that it will market Ganite(TM) under its own auspices in the United States in
the second half of 2003.
Given the extensive published anticancer activity for gallium nitrate, the
Company filed a new Investigational New Drug (IND) exemption request for
Ganite(TM) with the Oncology Drug Products Division at FDA for the treatment of
patients with relapsed non-Hodgkin's lymphoma (NHL). Under that IND, the Company
initiated a new clinical trial of Ganite(TM) in NHL patients in 2002. Genta has
also submitted an application to the FDA in order to designate gallium nitrate
as an "Orphan Drug" in NHL. Since previous clinical trials of Ganite(TM) showed
that it does not cause significant myelosuppression, the Company believes that
this drug may address a significant unmet medical need. The Company intends to
pursue additional clinical trials of Ganite(TM) in NHL, and possibly other
neoplastic diseases.
The Company also seeks to develop new formulations of gallium-containing
compounds that can be taken by mouth. The Company believes that such
formulations will be useful for the treatment of patients who have chronic
bone-losing diseases, such as bone metastases, Paget's disease, and
osteoporosis. Such patients are commonly afflicted by bone pain and
susceptibility to fractures.
Decoy Aptamers
As described above, decoy aptamers - like antisense drugs - are also based
on oligonucleotide chemistry. However, while antisense technology uses
oligonucleotides to bind to and destroy mRNA, decoy aptamers employ
oligonucleotides to bind to proteins that are known as "transcription factors."
Normally, transcription factors bind to specific portions of DNA known as
response elements, thereby regulating the functions of genes in a positive or
negative fashion (i.e., they can turn genes "on" or "off"). When a cell is
flooded with an excess of aptamers, transcription factors are fooled into
binding to the decoys rather than the normal response elements found in genes.
By selectively inactivating the transcription factor, the function of the gene
can be regulated in a positive or negative manner. In December 2000, Genta
licensed patents and technology relating to decoy aptamers from the U.S.
National Institute of Health. The Company's current program is targeting a
transcription factor known as the cyclic adenosine monophosphate response
element binding protein (CRE-BP). Inactivation of this protein in pre-clinical
studies indicates selectivity for cancer cells relative to normal cells.
Androgenics Technologies
Genta is developing Androgenics compounds to treat patients with prostate
cancer. These compounds have two principal actions: first, they block the
synthesis of androgen hormones, such as testosterone, that simulate the growth
of prostate cancer cells; second, they inactivate androgen receptors, proteins
that bind androgen hormones and thereby mediate their effects. These types of
activities suggest that these drugs could be useful therapy for patients with
early stage "hormone-sensitive" prostate cancer. In connection with the
acquisition of Androgenics Technologies, Inc. in 1999, the Company acquired
licensing rights to a series of Androgenics compounds. The Company has engaged
in a
9
pre-clinical program of drug synthesis, formulation and anti-tumor testing with
these compounds.
Patents and Proprietary Technology
The Company's policy is to protect its technology by filing patent
applications with respect to technology considered important to the development
of its business. The Company also relies upon trade secrets, unpatented
know-how, continuing technological innovation, the pursuit of licensing
opportunities to develop and maintain its competitive position, and certain
other regulatory or legal means (such as "Orphan Drug" designations).
Genta has a portfolio of intellectual property rights and applications to
numerous aspects of oligonucleotide technology, which include novel compositions
of matter, methods of large-scale synthesis, methods of controlling gene
expression, and delivery systems. In addition, foreign counterparts of many
applications have been filed and will continue to be filed as deemed desirable.
In the United States, allowed patents generally would not expire until 17 years
after the date of allowance if filed before June 8, 1995, or in later cases, 20
years from the date of application. Generally, it is the Company's strategy to
apply for patent protection in the United States, Canada, Western Europe, Japan,
Australia and New Zealand.
Since its incorporation, Genta has filed numerous patent applications in
the United States and overseas covering new compositions and improved methods to
use, synthesize and purify oligonucleotides, linker-arm technology, and
compositions for their delivery. There are more than 70 United States and
foreign patent applications currently pending.
To further protect its interests, Genta seeks to license patents or
intellectual property rights from other entities. The Company has licensed
certain rights from the National Institutes of Health covering phosphorothioate
oligonucleotides. Genta also acquired exclusive rights to antisense
oligonucleotides directed against the Bcl-2 mRNA, as well as methods of their
use for the treatment of cancer, from the University of Pennsylvania. In 1998,
two United States patents were issued encompassing the Company's licensed
antisense oligonucleotide compounds targeted against the Bcl-2 mRNA and in vitro
uses of those compounds. These claims cover the Company's proprietary antisense
oligonucleotide molecules, which target the Bcl-2 mRNA including its lead
clinical candidate, Genasense(TM). Other related United States and corresponding
foreign patent applications are still pending.
In May 2000, the Company entered into a licensing arrangement with
Molecular Biosystems, Inc. ("MBI") for a broad portfolio of patents and
technology that relate to antisense for therapeutic and diagnostic applications.
The arrangement included a grant of both exclusive and non-exclusive rights from
MBI to Genta on a royalty-free basis in return for cash and shares of common
stock.
The patent positions of biopharmaceutical and biotechnology firms,
including Genta, can be uncertain and can involve complex legal and factual
questions. Consequently, even though Genta is currently prosecuting its patent
applications with the United States and foreign patent offices, the Company does
not know whether any of its applications will result in the issuance of any
patents, or if any issued patents will provide significant proprietary
protection, or even if successful that these patents will not be circumvented or
invalidated. Since applications in the United States are maintained in secrecy
until an actual patent issues, and since publication of discoveries in the
scientific or patent literature tend to lag behind actual discoveries by several
months, Genta cannot be certain that others have not filed patent applications
directed to inventions covered by its pending patent applications, or that it
was the first to file patent applications for such inventions.
Competitors or potential competitors may have filed applications for, or
have received patents and may obtain additional patents and proprietary rights
relating to, compounds or processes competitive with those of the Company.
Accordingly, there can be no assurance that the Company's patent applications
will result in issued patents or that, if issued, the patents will afford
protection against competitors with similar technology. The Company cannot
provide assurance that any patents issued to Genta will not be infringed or
circumvented by others, nor can there be any assurance that others will not
obtain patents that the Company would need to license or design around. There
can be no assurance that the Company will be able to obtain a license to
technology that it may require or that, even if obtainable, such a license would
be available on reasonable terms.
10
Even if issued, patents can be challenged in the courts. Moreover, the
Company may become involved in interference proceedings declared by the United
States Patent and Trademark Office (or comparable foreign office or process) in
connection with one or more of its patents or patent applications to determine
priority of invention, which could result in substantial cost to the Company, as
well as a possible adverse decision as to priority of invention of the patent or
patent application involved.
The Company also relies upon unpatented trade secrets. No assurance can be
given that third parties will not independently develop substantially equivalent
proprietary information and techniques, or gain access to the Company's trade
secrets, or disclose such technologies to the public, or that the Company can
meaningfully maintain and protect unpatented trade secrets.
Genta requires its employees, consultants, outside scientific
collaborators, sponsored researchers, and other advisors to execute
confidentiality agreements upon the commencement of an employment or consulting
relationship with the Company. These agreements generally provide that all
confidential information developed or made known to an individual during the
course of the individual's relationship with Genta shall be kept confidential
and shall not be disclosed to third parties except in specific circumstances. In
the case of employees, the agreement generally provides that all inventions
conceived by the individual shall be assigned to, and made the exclusive
property of, the Company. There can be no assurance, however, that these
agreements will provide meaningful protection for the Company's trade secrets or
adequate remedies in the event of unauthorized use or disclosure of such
information, or in the event of an employee's refusal to assign any patents to
the Company in spite of such contractual obligation.
Research and Development
In addition to the Company's current focus in the four areas already
described and in an effort to focus its research and development efforts on
areas that provide the most significant commercial opportunities, the Company
continually evaluates its ongoing programs in light of the latest market
information and conditions, availability of third-party funding, technological
advances, and other factors. As a result of such evaluation, the Company's
product development plans have changed from time to time, and the Company
anticipates that it will continue to do so in the future. The Company recorded
net research and development expenses of $58.9 million, $39.4 million and $6.8
million during 2002, 2001 and 2000, respectively.
Collaborative Agreement
In April 2002, the Company entered into a development and
commercialization agreement ("Collaborative Agreement") with Aventis
Pharmaceuticals Inc. ("Aventis"). Under the terms of the Collaborative
Agreement, the Company and Aventis will jointly develop and commercialize
Genasense(TM) in the U.S. ("the Alliance"), and Aventis will have exclusive
development and marketing rights to the compound in all countries outside of the
U.S.
Sales and Marketing
Either alone or in partnership with other companies, the Company intends
to be a direct marketer or co-marketer of its pharmaceutical products by
building a sales and marketing infrastructure in the United States to launch and
fully realize the commercial potential of our products. For international
product sales, the Company intends to distribute its products through
collaborations with third parties.
Manufacturing
The Company's ability to conduct clinical trials on a timely basis, to
obtain regulatory approvals and to commercialize its products will depend in
part upon its ability to manufacture its products, either directly or through
third parties, at a competitive cost and in accordance with applicable FDA and
other regulatory requirements, including current Good Manufacturing Practice
(cGMP) regulations.
We currently rely on third parties to manufacture our products. In
December 2002, the Company signed a five-year Manufacturing and Supply Agreement
("Supply Agreement") with Avecia Ltd., a leading multinational manufacturer of
pharmaceutical products, to supply quantities of our lead antisense compound,
Genasense(TM). This agreement is also renewable beyond the initial five-year
period.
11
Subsidiaries and Affiliates
Androgenics Technologies, Inc.
Androgenics Technologies, Inc. ("Androgenics"), acquired in 1999, is a
wholly-owned subsidiary of Genta with license rights to a series of compounds
invented by The University of Maryland at Baltimore to treat prostate cancer.
These compounds are currently undergoing additional preclinical testing.
JBL Scientific, Inc.
Prior to 1999, the Company had manufactured and marketed specialty
biochemicals and intermediate products to the in vitro diagnostic and
pharmaceutical industries through its manufacturing subsidiary, JBL Scientific,
Inc. ("JBL"), a California corporation that was acquired in February 1991. On
March 19, 1999, the Company entered into an Asset Purchase Agreement with
Promega Corporation whereby its wholly owned subsidiary, Promega Biosciences,
Inc. ("Promega"), acquired substantially all of the assets and assumed certain
liabilities of JBL. JBL has been reported as a discontinued operation in the
accompanying consolidated financial statements for the year ended December 31,
1999 (Note 20).
Genta Europe
Genta Pharmaceuticals Europe S.A. ("Genta Europe"), was a wholly owned
subsidiary of Genta in France. Genta Europe was established in 1993 to deal with
research relating to dermatology, geomatrix and antisense. Genta reduced Genta
Europe's staff in 1996 and 1997, and in 1998 closed the entire operation in
France. For a description of certain legal proceedings affecting our subsidiary,
Genta Europe, see (Note 19).
Genta Jago
Genta Jago Technologies B.V. ("Genta Jago") is a joint venture formed by
SkyePharma PLC and Genta. On March 4, 1999, SkyePharma PLC (on behalf of itself
and its affiliates) entered into an interim agreement with Genta (the "Interim
JV Agreement") pursuant to which the parties to the joint venture released each
other from all liability relating to unpaid development costs and funding
obligations of Genta Jago. Under the terms of the Interim JV Agreement,
SkyePharma PLC assumed responsibility for substantially all the obligations of
the joint venture to third parties as well as further development of the product
line. In addition, earnings of the joint venture are to be allocated equally
between the two parties. Accordingly, Genta recognized $0.502 million as its
equity in net income of the joint venture during the first quarter of 2000.
Since the first quarter of 2000, there have been only $0.033 million in net
earnings of the joint venture allocated to Genta and we are currently seeking to
terminate our involvement with the joint venture.
Human Resources
As of February 2003, Genta had 96 employees, 19 of whom hold doctoral
degrees. There are 65 employees engaged in development activities and 31 are in
administration. Most of the management and professional employees of the Company
have had prior experience and positions with pharmaceutical and biotechnology
companies. Genta believes it maintains satisfactory relations with its
employees.
C. Government Regulation
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the Company's ongoing research and product
development activities and in the manufacture and marketing of the Company's
proposed products. All of the Company's therapeutic products will require
regulatory approval by governmental agencies prior to commercialization. In
particular, human therapeutic products are subject to rigorous preclinical and
clinical testing and pre-market approval procedures by the FDA and similar
authorities in foreign countries. Various federal, and in some cases state,
statutes and regulations also govern or influence the development,
12
testing, manufacturing, safety, labeling, storage, record keeping and marketing
of such products. The lengthy process of seeking these approvals, and the
subsequent compliance with applicable federal and, in some cases, state statutes
and regulations, require the expenditure of substantial resources. Any failure
by the Company, its collaborators or its licensees to obtain, or any delay in
obtaining, regulatory approvals could adversely affect the marketing of any
products developed by the Company and its ability to receive product or royalty
revenue.
The activities required before a new pharmaceutical agent may be marketed
in the United States begin with preclinical testing. Preclinical tests include
laboratory evaluation of product chemistry and animal studies to assess the
potential safety and efficacy of the product and its formulations. The results
of these studies must be submitted to the FDA as part of an IND. An IND becomes
effective within 30 days of filing with the FDA unless the FDA imposes a
clinical hold on the IND. In addition, the FDA may, at any time, impose a
clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold,
clinical trials cannot commence or recommence, as the case may be, without prior
FDA authorization and then only under terms authorized by the FDA. Typically,
clinical testing involves a three-phase process. In Phase 1, clinical trials are
conducted with a small number of subjects to determine the early safety profile
and the pattern of drug distribution and metabolism. In Phase 2, clinical trials
are conducted with groups of patients afflicted with a specific disease in order
to determine preliminary efficacy, optimal dosages and expanded evidence of
safety. In Phase 3, large-scale, multi-center, comparative clinical trials are
conducted with patients afflicted with a target disease in order to provide
enough data for the statistical proof of efficacy and safety required by the FDA
and others. In the case of products for life-threatening diseases, the initial
human testing is generally done in patients rather than in healthy volunteers.
Since these patients are already afflicted with the target disease, it is
possible that such studies may provide results traditionally obtained in Phase 2
trials. These trials are frequently referred to as "Phase 1/2A" trials.
The results of the preclinical and clinical testing, together with
chemistry, manufacturing and control information, are then submitted to the FDA
for a pharmaceutical product in the form of a NDA, for a biological product in
the form of a Biologics License Application ("BLA"), for a particular medical
device in the form of a Premarket Approval Application ("PMA") for approval to
commence commercial sales. In responding to an NDA, BLA or PMA, the FDA may
grant marketing approval, request additional information or deny the application
if it determines that the application does not satisfy its regulatory approval
criteria. There can be no assurance that the approvals that are being sought or
may be sought by the Company in the future will be granted on a timely basis, if
at all, or if granted will cover all the clinical indications for which the
Company is seeking approval or will not contain significant limitations in the
form of warnings, precautions or contraindications with respect to conditions of
use.
In circumstances where a company intends to develop and introduce a novel
formulation of an active drug ingredient already approved by the FDA, clinical
and preclinical testing requirements may not be as extensive. Limited additional
data about the safety and/or effectiveness of the proposed new drug formulation,
along with chemistry and manufacturing information and public information about
the active ingredient, may be satisfactory for product approval. Consequently,
the new product formulation may receive marketing approval more rapidly than a
traditional full NDA, although no assurance can be given that a product will be
granted such treatment by the FDA.
For clinical investigation and marketing outside the United States, the
Company is or may be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. The Company's approach is to design its European
clinical trial studies to meet FDA, European Economic Community ("EEC") and
other European countries' standards. At present, the marketing authorizations
are applied for at a national level, although certain EEC procedures are
available to companies wishing to market a product in more than one EEC member
state. If the competent authority is satisfied that adequate evidence of safety,
quality and efficacy has been presented, a market authorization will be granted.
The registration system proposed for medicines in the EEC after 1992 is a dual
one in which products, such as biotechnology and high technology products and
those containing new active substances, will have access to a central regulatory
system that provides registration throughout the entire EEC. Other products will
be registered by national authorities under the local laws of each EEC member
state. With regulatory harmonization finalized in the EEC, the Company's
clinical trials will be designed to develop a regulatory package sufficient for
multi-country approval in the Company's European target markets without the need
to duplicate studies for individual country approvals. This approach also takes
advantage of regulatory requirements in some countries, such as in the United
Kingdom, which allow Phase 1 studies to commence after appropriate toxicology
and preclinical pharmacology studies, prior to formal regulatory approval.
13
Prior to the enactment of the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Waxman/Hatch Act"), the FDA, by regulation,
permitted certain pre-1962 drugs to be approved under an abbreviated procedure
which waived submission of the extensive animal and human studies of safety and
effectiveness normally required to be in an NDA. Instead, the manufacturer only
needed to provide an Abbreviated New Drug Application ("ANDA") containing
labeling; information on chemistry and manufacturing procedures and data
establishing that the original "pioneer" product and the proposed "generic"
product are bioequivalent when administered to humans.
Originally, the FDA's regulations permitted this abbreviated procedure
only for copies of a drug that was approved by the FDA as safe before 1962 and
which was subsequently determined by the FDA to be effective for its intended
use. In 1984, the Waxman/Hatch Act extended permission to use the abbreviated
procedure established by the FDA to copies of post-1962 drugs subject to the
submission of the required data and information, including data establishing
bioequivalence. However, effective approval of such ANDAs was dependent upon
there being no outstanding patent or non-patent exclusivity.
Additionally, the FDA allows, under section 505(b)(2) of the Food Drug and
Cosmetic Act, for the submission and approval of a hybrid application for
certain changes in drugs which, but for the changes, would be eligible for an
effective ANDA approval. Under these procedures the applicant is required to
submit the clinical efficacy and/or safety data necessary to support the changes
from the ANDA eligible drug (without submitting the basic underlying safety and
efficacy data for the chemical entity involved) plus manufacturing and chemistry
data and information. Effective approval of a 505(b)(2) application is dependent
upon the ANDA-eligible drug upon which the applicant relies for the basic safety
and efficacy data being subject to no outstanding patent or non-patent
exclusivity. As compared to an NDA, an ANDA or a 505(b)(2) application typically
involves reduced research and development costs. However, there can be no
assurance that any such applications will be approved. Furthermore, the supply
of raw materials must also be approved by the FDA.
The Company is also subject to various foreign, federal, state and local
laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use, manufacture, storage, handling and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research and development work and
manufacturing processes. Although the Company believes it is in compliance with
these laws and regulations in all material respects, there can be no assurance
that the Company will not be required to incur significant costs to comply with
such regulations in the future.
D. Competition
In many cases, the Company's products under development will be competing
with existing therapies for market share. In addition, a number of companies are
pursuing the development of antisense technology and controlled-release
formulation technology and the development of pharmaceuticals utilizing such
technologies. The Company competes with fully integrated pharmaceutical
companies that have more substantial experience, financial and other resources
and superior expertise in research and development, manufacturing, testing,
obtaining regulatory approvals, marketing and distribution. Smaller companies
may also prove to be significant competitors, particularly through their
collaborative arrangements with large pharmaceutical companies or academic
institutions. Furthermore, academic institutions, governmental agencies and
other public and private research organizations have conducted and will continue
to conduct research, seek patent protection and establish arrangements for
commercializing products. Such products may compete directly with any products
that may be offered by the Company.
The Company's competition will be determined in part by the potential
indications for which the Company's products are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction of the Company's or competitors' products. Accordingly, the
relative speed with which Genta can develop products, complete the clinical
trials and approval processes and supply commercial quantities of the products
to the market are expected to be important competitive factors. The Company
expects that competition among products approved for sale will be based, among
other things, on product efficacy, safety, reliability, availability, price,
patent position and sales, marketing and distribution capabilities. The
development by others of new treatment methods could render the Company's
products under development non-competitive or obsolete.
14
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the often substantial period between technological conception and
commercial sales.
E. Certain Risks and Uncertanties Related to the Company's Business
In addition to the other information contained in this Annual Report on
Form 10-K, the following factors should be considered carefully.
We may be unsuccessful in our efforts to commercialize our pharmaceutical
products, such as Ganite(TM) and Genasense(TM).
The commercialization of our pharmaceutical products involves a number of
significant challenges. In particular, our ability to commercialize products,
such as Ganite(TM) and Genasense(TM), depends, in large part, on the success of
our clinical development programs, our efforts to obtain regulatory approval and
our sales and marketing efforts 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 and sales and marketing experience
relative to our competitors;
o actual and perceived differences between our products and those of
our competitors;
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 the unfavorable publicity
that could result; and
o the occurrence of manufacturing, supply or distribution disruptions.
Ultimately, our efforts may not prove to be as effective as the efforts of
our competitors. In the United States and elsewhere, our products will face
significant competition. The principal conditions on which our product
development efforts are focused and some of the other disorders for which we are
conducting additional studies, are currently treated with several drugs, many of
which have been available for a number of years or are available in inexpensive
generic forms. Thus, even if we obtain regulatory approvals, we will need to
demonstrate to physicians, patients and third-party payors that the cost of our
products is reasonable and appropriate in light of their safety and efficacy,
the price of competing products and the relative health care benefits to the
patient. If we are unable to demonstrate that the costs of our products are
reasonable and appropriate in light of these factors, we will likely not be
successful in commercializing our products, in which case our financial
performance will suffer and our long-term viability will be threatened.
We intend to be a direct marketer of products in the United States. Our
inability to build a sales force capable of marketing our pharmaceutical
products will adversely affect our sales and limit the commercial success of our
products.
We anticipate that we will incur additional losses and we may never be
profitable.
We have not been profitable. We have incurred substantial operating losses
associated with ongoing research and development activities, pre-clinical
testing, clinical trials, regulatory submissions and manufacturing activities.
From the period since our inception to December 31, 2002, we have incurred a
cumulative net loss of $273.2 million. We may never achieve revenue sufficient
for us to attain profitability, until Genasense(TM) becomes an approved drug and
we receive a full year of royalties from Aventis on worldwide sales.
Our business will suffer if we fail to obtain timely funding.
Our operations to date have required significant cash expenditures. Based
on our current operating plan, we believe that our available resources will be
adequate to satisfy our capital needs to the end of 2004. Additional Aventis
milestone payments and other funding available to the Company upon the
anticipated NDA approval of Genasense(TM) should provide sufficient capital
resources for beyond 2004. Our future capital requirements will depend on the
results of our research and
15
development activities, pre-clinical studies and clinical trials, competitive
and technological advances, and regulatory activities of the U.S. Food and Drug
Administration ("FDA") and other regulatory authorities. In order to
commercialize our products, we will need to raise additional financing and we
intend to seek additional financing. We may obtain that financing through public
and private offerings of our securities, including debt or equity financing, or
through collaborative or other arrangements with research institutions and
corporate partners. We may not be able to obtain adequate funds for our
operations from these sources when needed or on acceptable terms. A
collaboration or similar arrangement may require us to license valuable
intellectual property to, or share substantial economic benefits with, our
collaborators. If we raise additional capital by issuing equity, or securities
convertible into equity, our stockholders may experience dilution and share
prices may decline. Any debt financing may result in restrictions on our
spending or payment of dividends.
If we are unable to raise additional financing, we will need to do one or
more of the following:
o delay, scale back or eliminate some or all of our research and
product development programs;
o license third parties to develop and commercialize products or
technologies that we would otherwise seek to develop ourselves;
o attempt to sell our company;
o cease operations; or
o declare bankruptcy.
Many of our products are in an early stage of development, and we may
never receive regulatory approval for those products.
Most of our resources have been dedicated to the research and development
of potential antisense pharmaceutical products such as Genasense(TM), based upon
oligonucleotide technology. While we have demonstrated the activity of antisense
oligonucleotide technology in model systems in vitro and in animals, among our
products, only Genasense(TM) has been tested in humans. Several of our other
technologies that serve as a possible basis for pharmaceutical products are only
in pre-clinical testing. Results obtained in pre-clinical studies or early
clinical investigations are not necessarily indicative of results that will be
obtained in extended human clinical trials. Our products may prove to have
undesirable and unintended side effects or other characteristics that may
prevent our obtaining FDA or foreign regulatory approval for any indication. In
addition, it is possible that research and discoveries by others will render our
oligonucleotide technology obsolete or noncompetitive.
Clinical trials are costly and time consuming and are subject to delays;
our business would suffer if the development process relating to our products
were subject to meaningful delays.
Clinical trials are very costly and time-consuming. The length of time
required to complete a clinical study depends upon 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 completion
of a clinical study and increase its costs, which could also delay the
commercial sale of the drug that is the subject of the clinical trial.
Our commencement and rate of completion of clinical trials also may be
delayed by many other factors, including the following:
o inability to obtain sufficient quantities of materials for use in
clinical trials;
o inability to adequately monitor patient progress after treatment;
o unforeseen safety issues;
16
o the failure of the products to perform well during clinical trials;
and
o government or regulatory delays.
If we fail to obtain the necessary regulatory approvals, we cannot market
and sell our products in the United States or in other countries and our
long-term viability would be threatened.
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 or
more depending upon the type, complexity and novelty of the product. While
limited trials of some of our products have produced favorable results, we
cannot apply for FDA approval to market any of our products under development
until pre-clinical and clinical trials on the product are successfully
completed. Several factors could prevent successful completion or cause
significant delays of these trials, including an inability to enroll the
required number of patients or failure to demonstrate adequately that the
product is safe and effective for use in humans. If safety concerns develop, the
FDA could stop our trials before completion. 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. If the patient populations for which our
products are approved are not sufficiently broad, or if approval is accompanied
by unanticipated labeling restrictions, the commercial success of our products
could be limited, at best, which would adversely affect our long-term viability.
We may be unable to obtain or enforce patents and other proprietary rights
to protect our business; we could become involved in patent litigation that
could cause us to incur additional costs and delay or prevent our introduction
of new drugs to market.
Our success will depend to a large extent on our ability to:
o obtain U.S. and foreign patent or other proprietary protection for
our technologies, products and processes;
o preserve trade secrets; and
o operate without infringing the patent and other proprietary rights
of third parties.
Legal standards relating to the validity of patents covering
pharmaceutical and biotechnological inventions and the scope of claims made
under these types of patents are still developing and involve complex legal and
factual questions. As a result, our ability to obtain and enforce patents that
protect our drugs is highly uncertain.
We hold numerous U.S. and international patents covering aspects of our
technology, which include novel compositions of matter, use, methods of
large-scale synthesis and methods of controlling gene expression. Nevertheless,
we may not receive any issued patents based on pending or future applications.
Moreover, our issued patents may not contain claims sufficiently broad to
protect us against competitors with similar technology. Additionally, our
patents, the patents of our business partners and patents for which we have
license rights may be challenged, narrowed, invalidated or circumvented.
Furthermore, rights granted under our patents may not cover commercially
valuable drugs or processes and may not provide us with any competitive
advantage.
The pharmaceutical and biotechnology industries have been characterized by
time-consuming and expensive litigation regarding patents and other intellectual
property rights. We may be required to commence, or may be made a party to,
litigation relating to the scope and validity of our intellectual property
rights or the intellectual property rights of others. Such litigation could
result in adverse decisions regarding the patentability of our inventions and
products, the enforceability, validity or scope of protection offered by our
patents or our infringement of patents held by others. Such decisions could make
us liable for substantial money damages, or could bar us from the manufacture,
sale, or use of certain products. Moreover, an adverse decision may also compel
us to seek a license from a third party. The costs of any license may be
expensive, and we may not be able to enter into any required licensing
arrangement on terms acceptable to us.
17
The cost to us of any litigation or proceeding relating to patent rights,
even if resolved in our favor, could be substantial. Some of our competitors may
be able to sustain the costs of complex patent litigation more effectively than
we can because of their substantially greater resources. Uncertainties resulting
from the initiation and continuation of any patent or related litigation could
have a material adverse effect on our ability to compete in the marketplace.
We also may be required to participate in interference proceedings
declared by the U.S. Patent and Trademark Office and in International Trade
Commission proceedings aimed at preventing the importing of drugs that would
compete unfairly with our drugs. These types of proceedings could cause us to
incur considerable costs.
We rely on our contractual collaborative arrangements with research
institutions and corporate partners for development and commercialization of our
products, and our business could suffer if we are not able to enter into
suitable arrangements or if our collaborative arrangements are not successful in
developing and commercializing products.
We have entered into collaborative relationships relating to specific
disease targets and other research activities in order to augment our internal
research capabilities and to obtain access to specialized knowledge and
expertise. The loss of any of these collaborative relationships could have a
material adverse effect on our business. In addition, our business strategy
depends in part on our continued ability to develop and maintain relationships
with leading academic and research institutions and independent researchers. The
competition for these relationships is intense, and we can give no assurances
that we will be able to develop and maintain these relationships on acceptable
terms.
We also seek strategic alliances with corporate partners, primarily
pharmaceutical and biotechnology companies, which are intended to help us
develop and commercialize drugs. Various problems can arise in strategic
alliances. A partner responsible for conducting clinical trials and obtaining
regulatory approval may fail to develop a marketable drug. A partner may decide
to pursue an alternative strategy or focus its efforts on alliances or other
arrangements with third parties. A partner that has been granted marketing
rights for a certain drug within a geographic area may fail to market the drug
successfully. Consequently, strategic alliances that we may enter into may not
be scientifically or commercially successful. In this regard, Genta Jago
Technologies B.V., a joint venture we entered into to develop oral
controlled-release drugs, has not resulted in any commercial products, and we
intend to seek to terminate our involvement in this joint venture. Moreover, we
may be unable to negotiate advantageous strategic alliances in the future. Our
failure to enter into strategic alliances, or the failure of a strategic
alliance to achieve its goals, could harm our efforts to develop and
commercialize our drugs.
The raw materials for our products are produced by a limited number of
suppliers, and our business could suffer if we cannot obtain needed quantities
at acceptable price and quality.
The raw materials that we require to manufacture our drugs, particularly
oligonucleotides, are available from only a few suppliers. If these suppliers
cease to provide us with the necessary raw materials or fail to provide us with
adequate supply of materials at an acceptable price and quality, we could be
materially adversely affected.
If third-party payors do not provide coverage and reimbursement for use of
our products, we may not be able to successfully commercialize our products.
Our ability to commercialize drugs successfully will depend in part on the
extent to which various third-party payors are willing to reimburse patients for
the costs of our drugs and related treatments. These third-party payors include
government authorities, private health insurers, and other organizations, such
as health maintenance organizations. Third-party payors often challenge the
prices charged for medical products and services. Accordingly, if less costly
drugs are available, third-party payors may not authorize or may limit
reimbursement for our drugs, even if they are safer or more effective than the
alternatives. In addition, the federal government and private insurers have
changed and continue to consider ways to change, the manner in which health care
services are provided and paid for in the United States. In particular, these
third-party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new therapeutic
products. In the future, it is possible that the government may institute price
controls and further limits on Medicare and Medicaid spending. These controls
and limits could affect the payments we collect from sales of our products.
Internationally, medical reimbursement systems vary significantly, with some
countries requiring application for, and approval of, government or third-party
18
reimbursement. In addition, some medical centers in foreign countries have fixed
budgets, regardless of levels of patient care. Even if we succeed in bringing
therapeutic products to market, uncertainties regarding future health care
policy, legislation and regulation, as well as private market practices, could
affect our ability to sell our products in quantities, or at prices that will
enable us to achieve profitability.
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 human
therapeutic products. Product liability claims can be expensive to defend and
may result in large judgments or settlements against us, which could have a
negative effect on our financial performance and materially adversely affect our
business. We maintain product liability insurance (subject to various
deductibles), but our insurance coverage may not be sufficient to cover claims.
Furthermore, we cannot be certain that we will always be able to maintain or
increase our insurance coverage at an affordable price. Even if a product
liability claim is not successful, the adverse publicity and time and expense of
defending such a claim may interfere with our business.
If we cease doing business and liquidate our assets, we are required to
distribute proceeds to holders of our preferred stock before we distribute
proceeds to holders of our common stock.
In the event of our dissolution or liquidation, holders of our common
stock will not receive any proceeds until holders of the outstanding shares of
our Series A Preferred Stock receive a liquidation preference in the amount of
$13.025 million.
The nature of the business activities or positions of our principal
stockholders and present and future officers and directors may involve conflicts
of interest.
One of our principal stockholders is Paramount Capital Asset Management,
Inc. ("PCAM"). The sole stockholder and chairman of PCAM is also the chairman of
Paramount Capital Inc. ("PCI") and of Paramount Capital Investment LLC
("Paramount LLC", and together with PCAM, PCI and their affiliates, the
"Paramount Companies"). Together, the Paramount Companies beneficially own
approximately 36% of our common stock when calculated on a fully diluted basis.
In addition, PCAM is the investment manager for the Aries Funds (comprised of
Aries Select I, LLC, Aries Select II, LLC, and Aries Select, Ltd.). The Aries
Funds have the right to convert Series A Preferred Stock and exercise warrants
that they own into a significant portion of the outstanding common stock. In the
regular course of business, the Paramount Companies evaluate and pursue
investment opportunities in biomedical and pharmaceutical products, technologies
and companies. Due to the ownership and control of the Paramount Companies and
the Aries Funds and their involvement with other companies in the life sciences
area, some of our current or future officers and directors may from time to time
serve as officers or directors of other biopharmaceutical or biotechnology
companies. We cannot assure you that these other companies will not have
interests in conflict with ours.
Concentration of ownership of our stock could delay or prevent a change of
control.
Our directors, executive officers and principal stockholders (the
Paramount Companies and the Aries Funds) beneficially own approximately 38% of
our outstanding common stock and preferred stock. They also have, through the
exercise of options and warrants, the right to acquire additional common stock
and Series A Preferred Stock. As a result, these stockholders, if acting
together, have the ability to significantly influence the outcome of corporate
actions requiring stockholder approval. This concentration of ownership may have
the effect of delaying or preventing a change in control of Genta.
Provisions in our certificate of incorporation and Delaware law may
discourage a takeover and prevent our stockholders from receiving a premium for
their shares.
Our certificate of incorporation gives our board of directors the power to
issue shares of preferred stock without approval of the holders of common stock.
This preferred stock could have voting rights, including voting rights that
could be superior to that of our common stock. The approval of 66-2/3% of our
voting stock is required to approve certain transactions and to take certain
stockholder actions, including the amendment of our certificate of
19
incorporation. In addition, we are subject to Section 203 of the Delaware
General Incorporation Law, which contains restrictions on stockholder action to
acquire control of Genta. These provisions could discourage third parties from
seeking to obtain control of us and, therefore, could prevent our stockholders
from receiving a premium for their shares.
We have not paid, and do not expect to pay in the future, dividends on our
common stock.
We have never paid cash dividends on our common stock and do not
anticipate paying any such dividends in the foreseeable future. We currently
intend to retain our earnings, if any, for the development of our business.
We are dependent on our key executives and scientists, and the loss of
this personnel or the failure to attract additional qualified personnel could
harm our business.
Our business is highly dependent on our key executives and scientific
staff. The loss of key personnel or the failure to recruit necessary additional
or replacement personnel will likely impede the achievement of our development
objectives. There is intense competition for qualified personnel in the
pharmaceutical and biotechnology industries, and there can be no assurance that
we will be able to attract and retain the qualified personnel necessary for the
development of our business.
Our stock price is volatile.
The market price of our common stock, like that of the common stock of
many other biopharmaceutical companies, has been and likely will continue to be
highly volatile. Factors that could have a significant impact on the future
price of our common stock include:
o the results of pre-clinical studies and clinical trials by us or our
competitors;
o announcements of technological innovations or new therapeutic
products by us or our competitors;
o government regulation;
o developments in patent or other proprietary rights by us or our
respective competitors, including litigation; and
o fluctuations in our operating results, and market conditions for
biopharmaceutical stocks in general.
As of March 21, 2003, the Company had 73,810,345 shares of common stock
outstanding. Future sales of shares of common stock by existing stockholders,
holders of preferred stock who might convert such preferred stock into common
stock, and option and warrant holders who may exercise their options and
warrants to purchase common stock also could adversely affect the market price
of the common stock. Moreover, the perception that sales of substantial amounts
of our common stock might occur could adversely affect prevailing market prices.
Item 2. Properties
In November 2000, the Company relocated its headquarters from Lexington,
MA to Berkeley Heights, NJ and as of March 2002, leased approximately 24,000
square feet of space. Such leases expire in February 2004 and June 2005. In June
2002, the Company signed a new seven-year lease agreement for an additional
69,000 square feet of office space, at a rental cost of $1.764 million per year.
The Company has retained significant existing improvements to that space,
including furniture and other furnishings. A security deposit for $1.029 million
was paid in January 2003, and rent payments for portions of this new space began
as the Company occupied each portion of the space. The Company began paying for
the additional space in its entirety on March 1, 2003. This required security
deposit amount may change to (i) $0.588 million in the event the Company
receives approval from the FDA for Genasense(TM), (ii) $0.294 million in the
event the Company receives approval from the FDA for Genasense(TM) and the
Company's EBITDA for the immediately preceding four calendar quarters is equal
to or greater than $10.0 million, or (iii) an additional security deposit of
approximately $0.294 will be due if the Company's net worth falls below $40.0
million or the Company's cash and cash equivalents balance falls below $50.0
million. All of the Company's other leases for office space have been amended so
that the expiration dates coincide with the new lease. At the end of the initial
lease term, the Company has the option to renew these leases for five more years
at the then prevailing market rental rate.
20
Item 3. Legal Proceedings
Prior to 1999, the Company manufactured specialty biochemical products
through its manufacturing subsidiary, JBL Scientific, Inc. ("JBL). Effective May
10, 1999, substantially all of the assets and certain liabilities of JBL were
sold to Promega Biosciences, Inc. ("Promega"). Prior to the sale, in October
1996, JBL retained a chemical consulting firm to advise it with respect to an
incident of soil and groundwater contamination (the "Spill"). Sampling conducted
at the JBL facility revealed the presence of chloroform and perchloroethylenes
("PCEs") in the soil and groundwater at this site. A semi-annual
groundwater-monitoring program is being conducted, under the supervision of the
California Regional Water Quality Control Board, for purposes of determining
whether the levels of chloroform and PCEs have decreased over time. The results
of the latest sampling conducted by JBL show that PCEs and chloroform have
decreased in all but one of the monitoring sites. Based on an estimate provided
to the Company by the consulting firm, the Company accrued $0.065 million in
1999 relating to remedial costs. Although the Company has agreed to indemnify
Promega in respect of this matter, in November 2001, the Company received from
the California Regional Water Quality Control Board notification on the
completion of site investigation and remedial action for these sites. The
notification stated that no further action related to this case was required.
In October 1998, JBL received notice from Region IX of the Environmental
Protection Agency ("EPA") that JBL had been identified as a potentially
responsible party ("PRP") at the Casmalia Disposal Site, which is located in
Santa Barbara, California. JBL has been designated as a de minimis PRP by the
EPA. Based on volume amounts from the EPA, the Company concluded that it was
probable that a liability had been incurred and accrued $0.075 million during
1998. In 1999, the EPA estimated that the Company would be required to pay
approximately $0.063 million to settle their potential liability. In December
2001, the Company received a revised settlement proposal from the EPA in the
amount of $0.033 million, the terms of the settlement with the EPA contained
standard contribution protection and release language. This settlement amount of
$0.033 million was fully paid in January 2002. There can be no assurance,
however, that the EPA will not reject our settlement offer if there is not a
sufficient number of PRP's settling with the EPA.
During May 2000, Promega notified Genta of two claims against Genta and
Genta's subsidiary, Genko Scientific, Inc. (f/k/a JBL Scientific, Inc.)
("Genko"), for indemnifiable damages in the aggregate amount of $2.82 million
under the purchase agreement pursuant to which Promega aqcuired the assets of
JBL. Promega's letter stated that it intended to reduce to zero the principal
amount of the $1.2 million promissory note it issued as partial payment for the
assets of Genko and that therefore Genta owed Promega approximately $1.6
million. On October 16, 2000 Genta filed suit in the US District Court of
California against Promega for the non payment of the $1.2 million note plus
interest. On November 6, 2000, Promega filed a countersuit alleging
indemnifiable damages in the aggregate amount of $2.82 million. During the first
quarter of 2001, the Company agreed to resolve the matter with Promega, and, in
connection therewith, agreed to restructure its $1.2 million promissory note
receivable to provide for a $0.2 million non-interest bearing note due to be
repaid by Promega upon final resolution of certain environmental issues related
to JBL and forgave all accrued interest. As of March 21, 2003, the Company is
awaiting final acceptance by the EPA of the Company's settlement offer, as noted
above, before the remaining note receiveable will be repaid by JBL.
In October 2002, a licensing officer from the University of Pennsylvania
("UPenn") asserted a claim to a portion of the initial $40.0 million development
funding (Note 19) the Company received from Aventis pursuant to the
Collaborative Agreement. The Company has disputed this claim and has filed a
petition for binding arbitration for this matter, as provided in the original
licensing agreement between the Company and UPenn. At the current time the
Company cannot reasonably estimate the outcome of this claim; however, the
Company does not believe that this claim will have a material adverse impact on
the Company's financial results and liquidity. As such, the Company has not
reserved any amount for royalty payments that could be due to UPenn as a result
binding arbitration.
For a description of certain legal proceedings affecting our subsidiary,
Genta Europe, see (Note 19).
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders in the quarter
ended December 31, 2002.
21
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
The Company's common stock is traded on the Nasdaq National Market under
the symbol "GNTA." The following table sets forth, for the periods indicated,
the high and low sales prices for the common stock as reported by Nasdaq.
High Low
---- ---
2002
First Quarter ........................................ $ 18.250 $10.880
Second Quarter ....................................... 17.740 6.291
Third Quarter ........................................ 8.699 6.150
Fourth Quarter ....................................... 11.500 6.140
2001
First Quarter ........................................ $ 8.844 $ 5.063
Second Quarter ....................................... 10.120 5.070
Third Quarter ........................................ 12.770 7.900
Fourth Quarter ....................................... 17.700 9.900
On March 21, 2003, the closing price of our common stock was $7.590.
(b) Holders
There were 571 holders of record of the Company's common stock as of March
21, 2003.
(c) Dividends
The Company has never paid cash dividends on its common stock and does not
anticipate paying any such dividends in the foreseeable future. The Company
currently intends to retain its earnings, if any, for the development of its
business.
22
Item 6. Selected Consolidated Financial Data
Years Ended December 31,
-------------------------------------------------------------
(In thousands, except share data) 2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Consolidated Statements of Operations Data (2):
Revenues:
License revenue .............................................. $ 3,498 $ 97 $ 17 $ -- $ --
Royalties .................................................... 61 49 5 -- --
Related party contract revenue ............................... -- -- -- -- 55
Collaborative research and development ....................... -- -- -- -- 50
--------- --------- --------- --------- ---------
3,559 146 22 -- 105
--------- --------- --------- --------- ---------
Costs and expenses:
Research and development ..................................... 58,899 39,355 6,830 4,205 2,114
General and administrative ................................... 19,347 8,215 3,323 4,054 3,868
Equity related compensation .................................. 1,016 1,074 8,605 3,074 154
Promega Settlement ........................................... -- 1,000 -- -- --
LBC Settlement ............................................... -- -- -- -- 547
--------- --------- --------- --------- ---------
79,262 49,644 18,758 11,333 6,683
--------- --------- --------- --------- ---------
Loss from operations ............................................ (75,703) (49,498) (18,736) (11,333) (6,578)
Equity in net income (loss) of joint venture .................... 33 -- 502 2,448 (132)
Net loss of liquidated foreign subsidiary ....................... -- -- -- -- (98)
Other income (loss) ............................................. 1,326 2,785 5,783 23 (38)
Income taxes .................................................... (184) -- -- -- --
--------- --------- --------- --------- ---------
Loss from continuing operations ................................. (74,528) (46,713) (12,451) (8,862) (6,846)
Loss from discontinued operations ............................... -- -- -- (189) (739)
Gain on sale of discontinued operations ......................... -- -- -- 1,607 --
--------- --------- --------- --------- ---------
Net loss ........................................................ (74,528) (46,713) (12,451) (7,444) (7,585)
Preferred stock dividends ....................................... -- -- (3,443) (10,085) (633)
--------- --------- --------- --------- ---------
Net loss applicable to common shares ............................ $ (74,528) $ (46,713) $ (15,894) $ (17,529) $ (8,218)
========= ========= ========= ========= =========
Continuing operations ........................................... $ (1.05) $ (0.84) $ (0.41) $ (1.07) $ (1.06)
Discontinued operations ......................................... -- -- -- 0.08 (0.11)
--------- --------- --------- --------- ---------
Net loss per share (1) .......................................... $ (1.05) $ (0.84) $ (0.41) $ (0.99) $ (1.17)
========= ========= ========= ========= =========
Weighted average shares used in computing net loss per share .... 70,656 55,829 38,659 17,784 7,000
========= ========= ========= ========= =========
Years Ended December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Consolidated Balance Sheet Data (2):
Cash, cash equivalents and short-term investments ............... $ 113,716 $ 54,086 $ 50,199 $ 10,101 $ 2,458
Working capital ................................................. 91,586 42,709 48,321 9,434 3,629
Total assets .................................................... 136,419 60,630 57,208 12,228 7,551
Notes payable and capital lease obligations, less current portion -- -- -- -- --
Total stockholders' equity ...................................... 46,703 48,310 53,567 10,206 2,959
(1) Computed on the basis of net loss per common share described in Note 2 of
Notes to Consolidated Financial Statements.
(2) The above selected financial data reflects discontinued operations and
balance sheet data of JBL as of May 10, 1999. See Note 20 to consolidated
financial statements.
23
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since its inception in February 1988, Genta has devoted its principal
efforts toward drug discovery and research and development. Genta has been
unprofitable to date and expects to incur substantial operating losses due to
continued requirements for ongoing and planned research and development
activities, pre-clinical and clinical testing, manufacturing activities,
regulatory activities, and establishment of a sales and marketing organization.
From its inception to December 31, 2002, the Company has incurred a cumulative
net loss of $273.2 million. The Company has experienced significant quarterly
fluctuations in operating results and it expects that these fluctuations in
revenues, expenses and losses will continue.
Genta's strategy is to build a product and technology portfolio primarily
focused on its oncology products. In this regard, effective March 1999, the
Company significantly reduced its involvement with respect to Genta Jago, its
50% owned R&D joint venture. The Company also sold substantially all of the
assets and certain liabilities of the Company's wholly owned specialty chemicals
subsidiary JBL Scientific, Inc. ("JBL") for cash, a promissory note and certain
pharmaceutical development services in support of Genta's Genasense(TM)
development project in May 1999. In October 2000, the Company relocated its
entire operation to Berkeley Heights, New Jersey.
Results of Operations
Genta has focused its resources on the development of its lead antisense
oligonucleotide, Genasense(TM). The following discussion of results of
operations relates to the Company's continuing operations:
Summary Operating Results
For the years ended December 31,
--------------------------------------------------------------------
($ thousands) Increase Increase
2002 (Decrease) 2001 (Decrease) 2000
-------- ---------- -------- ---------- --------
Revenues:
License fees .................... $ 3,498 $ 3,401 $ 97 $ 80 $ 17
Royalties ....................... 61 12 49 44 5
-------- -------- -------- -------- --------
3,559 3,413 146 124 22
Costs and expenses:
Research and development ........ 58,899 19,544 39,355 32,525 6,830
General and administrative ...... 19,347 11,132 8,215 4,892 3,323
Promega settlement .............. -- (1,000) 1,000 1,000 --
Equity related compensation ..... 1,016 (58) 1,074 (7,531) 8,605
-------- -------- -------- -------- --------
79,262 29,618 49,644 30,886 18,758
-------- -------- -------- -------- --------
Loss from operations ................ (75,703) 26,205 (49,498) 30,762 (18,736)
Equity in net income of joint venture 33 33 -- (502) 502
Other income ........................ 1,326 (1,459) 2,785 (2,998) 5,783
Income taxes ........................ (184) (184) -- -- --
-------- -------- -------- -------- --------
Net loss ............................ $(74,528) $ 27,815 $(46,713) $ 34,262 $(12,451)
======== ======== ======== ======== ========
Operating revenues consisting of license fees and royalties were $3.559
million in 2002 compared to $0.146 million in 2001 and $0.022 million in 2000.
These revenues were derived mainly from the initial $10.0 million licensing fee
and $40.0 million development funding received from Aventis under the
Collaborative Agreement (Note 12), along with non-exclusive sub-license
agreements involving antisense technology. These initial payments received from
Aventis will be recognized over the estimated useful life of the related
first-to-expire patent of 115 months. The non-exclusive sub-license agreements
were initiated with Atugen AG and EpiGenesis Pharmaceuticals, Inc. in 2001, and
Sequitur Incorporated and Oasis Biopharmaceuticals, Inc. in 2000.
Costs and expenses totaled $79.3 million in 2002, net of Aventis
reimbursement of $28.451 million, compared to $49.6 million in 2001 and $18.8
million in 2000. These increases reflect additional clinical trial activity and
related drug supply and salaries. Services and capabilities that have not been
retained within the Company are out-sourced through short-term contracts or from
consultants. Substantially, all pre-clinical biology and clinical trial work are
now conducted through such collaborations with external scientists and
clinicians. The Company anticipates that, if sufficient collaborative revenues
and other funding are available, research and development expenses may increase
in
24
future years due to requirements for pre-clinical studies, clinical trials and
increased regulatory costs. The Company will continue to assess the potential
cost benefit ratio of developing its own antisense oligonucleotide
manufacturing, and marketing and sales activities if and as such products are
successfully developed and approved for marketing.
Research and development expenses totaled $58.9 million in 2002, net of
Aventis reimbursement of $27.746 million, compared to $39.4 million in 2001 and
$6.8 million in 2000. The increase from 2000 through 2002 is due primarily to
drug supply costs and investigator and monitor fees related to expanded clinical
trials. It is anticipated that research and development expenses will continue
to increase in the future, as Genta expands its other product development
programs. Furthermore, the Company is also pursuing other opportunities for new
product development candidates, which, if successful, will require additional
research and development expenses.
In an effort to focus its research and development on areas that provide
the most significant commercial opportunities, the Company continually evaluates
its ongoing programs in light of the latest market information and conditions,
availability of third party funding, technological advances, and other factors.
As a result of such evaluation, the Company's product development plans have
changed from time to time, and the Company anticipates that they will continue
to do so in the future.
General and administrative expenses were $19.4 million in 2002, net of
Aventis reimbursement of $0.705 million, compared to $8.2 million in 2001 and
$3.3 million in 2000. The increase is primarily related to financial advisory
services, royalty payments and legal fees relating to the Collaborative
Agreement (Note 12), personnel costs and increased marketing-related spending.
The Company records charges to general and administrative expense for the
carrying value of abandoned patents no longer related to the research and
development efforts of the Company. There were no abandoned patent charges in
2002 and the amounts recorded in 2001 and 2000 were immaterial.
The Company recorded charges to non-cash equity related compensation of
$1.0 million in 2002 compared to $1.1 million in 2001 and $8.6 million in 2000.
This decrease in 2001 was primarily due to the acceleration of outstanding stock
options for the four members of the Company's Board of Directors who resigned in
March 2000 (Note 18).
Equity in earnings of joint venture (Genta Jago) was $0.033 million in
2002 compared to none in 2001 and $0.502 in 2000. Since the first quarter of
2000, there have been only $0.033 million in net earnings of the joint venture
allocated to Genta and we are currently seeking to terminate our involvement
with the joint venture.
Net other income, principally interest income decreased over the
comparable periods in 2001 and 2000, as a result of significantly lower
investment balances and decreased yields on investments. The proceeds received
from Aventis were not placed into any investment instruments until October 2002.
Interest expense is attributable to interest being accrued on the $10.0 million
convertible promissory note issued to Aventis (Note 14). Interest income has
fluctuated significantly each year and is anticipated to continue to fluctuate
primarily due to changes in the levels of cash, investments and interest rates
during each period.
The Company recorded no gain on the sale of marketable securities in 2002
compared to approximately $0.061 million in 2001 and to $4.9 million in 2000,
which reflects a non-recurring gain on the disposition of securities in
September 2000. Genta exercised 66,221 warrants to purchase shares of common
stock of CV Therapeutics, Inc. ("CV"). These warrants, which were restricted and
not publicly traded, were issued to Genta by CV in connection with a licensing
arrangement entered into in 1993. The Company received approximately $4.9
million in cash upon the sale of such common shares.
Recent Accounting Pronouncements
The Company has adopted all required Statements of Financial Accounting
Standards issued subsequent to December 31, 2001, as more fully discussed in
Note 2 to the consolidated financial statements. Adoption of these standards did
not or is not expected to have a material effect on the Company's financial
position or results of operations.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 2 to
the consolidated financial statements. In preparing our financial statements in
accordance with accounting principles generally accepted in the United States of
25
America, management is required to make estimates and assumptions that, among
other things, affect the reported amounts of assets and liabilities and reported
amounts of revenues and expenses. These estimates are most significant in
connection with our critical accounting policies, namely those of our accounting
policies that are most important to the portrayal of our financial condition and
results and require management's most difficult, subjective or complex
judgments. These judgments often result from the need to make estimates about
the effects of matters that are inherently uncertain. Actual results may differ
from those estimates under different assumptions or conditions. We believe that
our most critical accounting policies relate to:
o Revenue recognition. The Company's policy is to recognize revenues
under license arrangements when delivery has occurred or services
have been rendered, persuasive evidence of an arrangement exists,
the fee is fixed and determinable, and collectibility is reasonably
assured. Royalties are recognized when earned. Consistent with Staff
Accounting Bulletin No. 101 "Revenue Recognition" ("SAB 101"),
initial funding of ongoing development received from Aventis after
the achievement of certain research and development milestones (Note
12) will be recognized on a straight-line basis over the estimated
useful life of the related first-to-expire patent of 115 months. Any
subsequent milestone payments that may be received from Aventis will
also be recognized over the then, remaining estimated useful life of
the related first-to-expire patent.
o Research and development costs. All such costs are expensed as
incurred, including raw material costs required to manufacture drugs
for clinical trials. Once Genta has submitted an NDA, which includes
the results of the preclinical and clinical testing, chemistry,
manufacturing and control information, to the FDA for approval to
commence commercial sales, Genta will then include the sales launch
product, consisting of raw materials and all subsequent processing
costs required to produce finished goods, as inventory on Genta's
balance sheet in anticipation of approval by the FDA. Reimbursements
for applicable Genasense(TM)related costs, under the Collaborative
Agreement (Note 12), will continue to be recorded as a reduction to
expense.
o Intangible assets. The Company's intangible assets consist primarily
of licensed technology and capitalized patent costs, and are
amortized using the straight-line method over their estimated useful
lives. The Company's policy is to evaluate the appropriateness of
the carrying values of the unamortized balances of intangible assets
on the basis of estimated future cash flows (undiscounted) and other
factors. If such evaluation were to indicate an impairment of these
intangible assets, such impairment would be recognized by a
write-down of the applicable assets. The Company evaluates the
continuing value of patents and patent applications each financial
reporting period. As a result of this evaluation, the Company may
elect to continue to maintain, seek to out-license, or abandon these
patents
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily from
private placements and public offerings of its equity securities. Cash provided
from these offerings totaled approximately $278.8 million through December 31,
2002, including net proceeds of $71.0 million received in 2002, $32.2 million
received in 2001 and $40.1 million received in 2000. The Company used $19.7
million in operating activities during 2002, resulting from a net loss of $74.5
million, offset by deferred revenues received from Aventis, non-cash charges and
improved working capital aggregating $54.8 million. At December 31, 2002, the
Company had cash, cash equivalents and short-term investments totaling $113.7
million compared to $54.1 million at December 31, 2001. In March 2003, the
Company and Aventis negotiated a line of credit for an amount up to $40.0
million. Management believes that at the current rate of spending, primarily in
support of on-going and anticipated clinical trials, coupled with the amounts to
be reimbursed by Aventis and the available line of credit, the Company should
have sufficient cash funds to maintain its present operations to the end of
2004. Additional Aventis milestone payments and other funding available to the
Company upon the anticipated NDA approval of Genasense(TM) should provide
sufficient capital resources for beyond 2004.
If the Company successfully secures sufficient levels of collaborative
revenues and other sources of financing, it expects to use such financing to
continue to expand its ongoing research and development activities, preclinical
testing and clinical trials, costs associated with the market introduction of
potential products, and expansion of its administrative activities.
The Company anticipates that significant additional sources of financing,
primarily expense reimbursement from Aventis, will be required in order for the
Company to continue its planned operations. The Company also anticipates seeking
additional product development opportunities from external sources. Such
acquisitions may consume cash reserves or require additional cash or equity. The
Company's working capital and additional funding requirements will
26
depend upon numerous factors, including: (i) the progress of the Company's
research and development programs; (ii) the timing and results of pre-clinical
testing and clinical trials; (iii) the level of resources that the Company
devotes to sales and marketing capabilities; (iv) technological advances; (v)
the activities of competitors; and (vi) the ability of the Company to establish
and maintain collaborative arrangements with others to fund certain research and
development efforts, to conduct clinical trials, to obtain regulatory approvals
and, if such approvals are obtained, to manufacture and market products.
Future minimum obligations at December 31, 2002 are as follows ($