UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________TO__________
Commission file number 001-16043
ALTEON INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 13-3304550
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6 CAMPUS DRIVE, PARSIPPANY, NEW JERSEY 07054
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(Address of principal executive offices)
(Zip Code)
(201)934-5000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock, Par Value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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, as
amended, 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. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, based on the American Stock Exchange closing
price of the common stock ($1.18 per share), as of June 30, 2004, was
$47,636,963.
At March 1, 2005, 57,996,711 shares of the Registrant's common stock, par value
$.01 per share, were outstanding.
Documents Incorporated By Reference
The following documents (or parts thereof) are incorporated by reference into
the following parts of this form 10-K: certain information required in Part III
of this Annual Report on Form 10-K is incorporated from the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on June 29, 2005.
PART I
ITEM 1. BUSINESS.
OVERVIEW
We are a product-based biopharmaceutical company engaged in the discovery
and development of small molecule drugs to reverse or slow down diseases of
aging and complications of diabetes. We have identified several promising
product candidates that represent novel approaches to some of the largest
pharmaceutical markets. Our lead compound, alagebrium chloride (formerly
ALT-711), is in Phase 2 clinical development for systolic hypertension,
diastolic dysfunction in heart failure, or DHF, and erectile dysfunction, or ED.
As we announced in February 2005, and as discussed further below, we have
voluntarily and temporarily suspended enrollment of patients into our ongoing
clinical studies of alagebrium, pending receipt of additional pre-clinical data,
which are expected by mid-year 2005. Prior to resuming enrollment in any of our
clinical studies of alagebrium, we intend to review all relevant findings with
appropriate oversight entities, including our Data Monitoring Committee, or DMC,
Investigational Review Boards, or IRBs, and the U.S. Food and Drug
Administration, or the FDA.
Our pharmaceutical candidates were developed as a result of our research
on the Advanced Glycation End-Product, or A.G.E., pathway, a fundamental
pathological process and inevitable consequence of aging that causes or
contributes to many medical disorders. A.G.E.s are glucose/protein complexes
that form as a result of circulating blood glucose molecules reacting with
proteins throughout the body, and subsequently interacting and bonding
(crosslinking) with other proteins. These pathological complexes affect the
structural chemistry of blood vessels, tissues and organs throughout the body,
resulting in increased stiffness and fibrosis, as well as impaired flexibility
and compromised function. In addition, A.G.E.s have been shown to contribute to
disease by adversely altering multiple inflammatory and metabolic pathways.
A.G.E. accumulation and protein crosslinking occur slowly as the body ages and
at an accelerated rate in diabetic patients because of high glucose levels.
Cardiovascular diseases, such as systolic hypertension and DHF, as well as
diabetic complications, such as nephropathy and ED, are among the many
conditions that are pathological consequences of A.G.E. formation and
crosslinking. There are no known positive attributes of A.G.E.s.
Our research and drug development activities targeting the A.G.E. pathway
have taken three directions: the breaking of A.G.E. crosslinks between proteins
in order to reverse damage, or A.G.E. Crosslink Breakers; the prevention or
inhibition of A.G.E. formation, or A.G.E.-Formation Inhibitors; and the
reduction of the A.G.E. burden through a novel class of anti-hyperglycemic
agents, Glucose Lowering Agents, or GLA. We believe that we were the first
company to focus on the development of compounds to treat diseases caused by
A.G.E. formation and crosslinking. Since our inception, we have created an
extensive library of novel compounds targeting the A.G.E. pathway and have
actively pursued patent protection for these discoveries.
The primary focus of our current research and development activities is
alagebrium, which is our lead product candidate, and we believe it to be the
only A.G.E. Crosslink Breaker in advanced human clinical testing. Alagebrium is
the first rapidly-acting oral agent designed to "break" A.G.E. crosslinks, the
benefit of which may be to restore structure and function to blood vessels,
tissues and organs, thereby reversing the damage caused by aging and diabetes.
In December 2004, we announced that findings of a two-year toxicity study
indicated that male Sprague Dawley rats exposed to high doses of alagebrium over
their natural lifetime developed dose-related increases in liver cell
alterations and tumors, and that the liver tumor rate was slightly over the
expected background rate in this gender and species of rat. The relevance of
these findings to humans is unknown. Our DMC has reviewed the cumulative human
safety data and previous pre-clinical experience of alagebrium and found that
the data did not demonstrate an association with the lifetime carcinogenicity
study in rats. We have previously completed four genotoxicity studies of
alagebrium to help determine potential toxicities in humans, and these studies
have not indicated any potential human risk. Earlier pre-clinical toxicity
studies found no mutagenic or carcinogenic activity in either rats or mice. We
also announced in December 2004 our intent to conduct a series of pre-clinical
experiments to explore the mechanism by which the liver tumors developed and the
relevance of such tumors to human exposure. In February 2005, based on initial
findings from one of these subsequent studies that provided direction for
further analysis, we voluntarily and temporarily suspended enrollment of new
patients into our ongoing clinical studies pending receipt of additional
pre-clinical data, which are expected by mid-year 2005. We expect that decisions
regarding resumption of enrollment will be made at that time. Prior to resuming
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enrollment in any of our clinical studies of alagebrium, we intend to review all
relevant findings with appropriate oversight entities, including our DMC, IRBs
and the FDA.
Four clinical studies of alagebrium are ongoing. Of the approximately
1,300 patients who have participated in the Phase 1 and Phase 2 clinical studies
of alagebrium to date, approximately 1,000 patients have received alagebrium and
approximately 300 patients have received placebo. The compound has demonstrated
an excellent safety profile in all human clinical testing to date.
We are actively developing alagebrium for the treatment of systolic
hypertension, DHF and ED. In March 2004, we initiated a double-blind,
placebo-controlled Phase 2b clinical trial of alagebrium in systolic
hypertension, SPECTRA (Systolic Pressure EfficaCy and Safety TRial of
Alagebrium). SPECTRA is designed to lower systolic blood pressure in patients
with a systolic blood pressure reading of greater than or equal to 145 mm Hg by
ambulatory blood pressure measurements, or ABPM, building upon positive data
from previous Phase 2 studies, including a Phase 2a study in cardiovascular
compliance and the Phase 2b SAPPHIRE/SILVER (Systolic And Pulse Pressure
Hemodynamic Improvement by Restoring Elasticity/Systolic Hypertension
Interaction with Left VEntricular Remodeling) trial. SAPPHIRE/SILVER
demonstrated the ability of alagebrium to significantly lower systolic blood
pressure (when measured by ABPM) in patients with baseline systolic pressures of
140 mm Hg whose condition was uncontrolled despite treatment with one or more
currently available blood pressure medications. As discussed above, in February
2005, we voluntarily and temporarily suspended enrollment of new patients into
SPECTRA pending receipt of additional pre-clinical data. We expect that
decisions regarding resumption of enrollment will be made upon receipt of
additional pre-clinical data. Prior to resuming enrollment in SPECTRA, we intend
to review all relevant findings with appropriate oversight entities, including
our DMC, IRBs and the FDA. We cannot predict at this time when enrollment in our
clinical studies will resume, if ever. If we are unable to resume enrollment in
our clinical studies in a timely manner, or at all, our business will be
materially adversely affected.
In April 2004, we initiated PEDESTAL (Patients with Impaired Ejection
Fraction and Diastolic Dysfunction: Efficacy and Safety Trial of ALagebrium), an
open-label, Phase 2a study designed to continue the evaluation of alagebrium on
diastolic dysfunction and left ventricular mass in patients with diastolic and
systolic heart failure. In the previously-conducted Phase 2a DIAMOND
(Distensibility Improvement And ReMOdeliNg in Diastolic Heart Failure) study,
treatment with alagebrium over 16 weeks demonstrated a statistically significant
reduction in left ventricular mass and a marked improvement in the initial phase
of left ventricular diastolic filling. The study also showed statistically
significant improvements in multiple quality of life measurements. In December
2004, we disclosed that preliminary data from PEDESTAL indicate trends
consistent with positive data from DIAMOND. As with SPECTRA, in February 2005,
we voluntarily and temporarily suspended enrollment of new patients into
PEDESTAL pending receipt of additional pre-clinical data. We expect that
decisions regarding resumption of enrollment will be made upon receipt of
additional pre-clinical data. Prior to resuming enrollment in PEDESTAL, we
intend to review all relevant findings with appropriate oversight entities,
including our DMC, IRBs and the FDA. We cannot predict at this time when
enrollment in our clinical studies will resume, if ever. If we are unable to
resume enrollment in our clinical studies in a timely manner, or at all, our
business will be materially adversely affected.
In January 2004, we initiated a Phase 2a academic study of alagebrium in
endothelial function. That study is being conducted at Johns Hopkins University
School of Medicine, or JHU, under grants from the National Heart, Lung and Blood
Institute and the Society of Geriatric Cardiology. In December 2004, we
disclosed that these data are showing strong trends in key measures relating to
improvements in carotid and brachial artery stiffness based on a series of
advanced non-invasive measurements. An initial group of patients has completed
the study, and data are expected to be presented in the first half of 2005. In
February 2005, we voluntarily and temporarily suspended enrollment of new
patients into the JHU study pending receipt of additional pre-clinical data. We
expect that decisions regarding resumption of enrollment will be made upon
receipt of additional pre-clinical data. Prior to resuming enrollment in any of
our clinical studies of alagebrium, we intend to review all relevant findings
with appropriate oversight entities, including our DMC, IRBs and the FDA. We
cannot predict at this time when enrollment in our clinical studies will resume,
if ever. If we are unable to resume enrollment in our clinical studies in a
timely manner, or at all, our business will be materially adversely affected.
In January 2005, we announced the initiation of a Phase 2a study of
alagebrium in ED. EMERALD (Efficacy and Safety of Alagebrium in Erectile
Dysfunction in Male Diabetics) will assess the ability of alagebrium
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to restore erectile function in diabetic patients with moderate to severe ED
who are insufficiently responsive to current treatment with Phosphodiesterase
Type 5, or PDE5 inhibitors, the first class of orally-active compounds marketed
for ED. In a pre-clinical rat model of diabetes, alagebrium has demonstrated the
ability to restore erectile function through a unique mechanism of action. We
have voluntarily and temporarily suspended enrollment of new patients into
EMERALD pending receipt of additional pre-clinical data. We expect that
decisions regarding resumption of enrollment will be made upon receipt of
additional pre-clinical data. Prior to resuming enrollment in EMERALD, we intend
to review all relevant findings with appropriate oversight entities, including
our DMC, IRBs and the FDA. We cannot predict at this time when enrollment in our
clinical studies will resume, if ever. If we are unable to resume enrollment in
our clinical studies in a timely manner, or at all, our business will be
materially adversely affected.
For a detailed description of Current Clinical Studies, see page 7 and for
Completed Clinical Studies, see page 9.
We continue to evaluate potential pre-clinical and clinical studies in
other therapeutic indications in which A.G.E. Crosslink Breaker compounds may
address significant unmet needs. In addition to our ongoing clinical studies in
systolic hypertension, heart failure and ED, we have early research studies
focused on atherosclerosis; Alzheimer's disease; photoaging of the skin; eye
diseases, including Age-related Macular Degeneration, or AMD, and glaucoma; and
diabetic complications, including renal diseases.
We were incorporated in Delaware in October 1986. In January 2004, we
moved our headquarters to 6 Campus Drive, Parsippany, New Jersey 07054. Our web
address is www.alteon.com and our telephone number is (201) 934-5000. We make
available free of charge, through the "Investor Relations" section of our
website, our annual reports on Form 10-K, our quarterly reports on Form 10-Q,
our current reports on Form 8-K and all amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, or the Exchange Act, as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the Securities and
Exchange Commission, or the SEC.
In addition, the public may read and copy materials we file with the SEC
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an
Internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC. The SEC
Internet address is www.sec.gov.
See our financial statements for financial information required under this
Item.
OUR BUSINESS STRATEGY
Our strategy is to develop drug candidates from our proprietary portfolio
of new chemical entities. These compounds address large medical needs that are
unmet by existing therapies. We will seek, as appropriate, to selectively
out-license or co-develop our drug candidates with corporate partners. As we
continue the clinical development of alagebrium, we may elect to retain
development and marketing rights for one or several indications in North
America, while at the same time continuing to evaluate potential corporate
partnerships for the further development and ultimate marketing of the compound.
In addition to alagebrium, we have identified compounds in multiple chemical
classes of A.G.E. Crosslink Breakers and A.G.E.-Formation Inhibitors that may
warrant further evaluation and potential development.
MARKETS OF OPPORTUNITY
Our research and development efforts have led us to an initial focus on
cardiovascular and other vascular diseases, including hypertension, heart
failure and ED, as well as other complications of diabetes. Therapeutic
targeting of the A.G.E. pathway may reverse the progressive fibrosis and
stiffening of blood vessels, tissues and organs, as well as diminish deleterious
inflammatory and metabolic responses caused by A.G.E.s, thus potentially
broadening our markets of opportunity to include additional medical disorders
related to aging and diabetes. Importantly, there are no currently marketed
drugs of which we are aware that are known to work directly on A.G.E.s and the
structural stiffening of blood vessels and organs that lead to diseases such as
systolic hypertension, heart failure and ED.
4
Cardiovascular Diseases
According to the American Heart Association, more than 64 million
Americans have one or more types of heart or blood vessel disease, with 50
million Americans estimated to have high blood pressure. The latest World Health
Organization - International Society of Hypertension guidelines for the
management of hypertension emphasize the importance of pulse pressure (the
difference between systolic and diastolic pressures) and arterial stiffness as
predictors of overall cardiovascular risk. Currently available anti-hypertensive
agents, which address a multi-billion dollar market, commonly reduce pressure on
the vessel wall in such a manner as to lower both systolic and diastolic blood
pressures and may not significantly affect pulse pressure. Published studies
have shown that a 10 mm Hg reduction in pulse pressure correlates with
approximately a 35% reduction in cardiovascular mortality.
Systolic Hypertension
Systolic hypertension, defined as elevated systolic blood pressure greater
than 140 mm Hg, is the most common form of hypertension in those over the age of
50, with an estimated prevalence of nearly 25 million Americans. It is
associated with a significantly increased risk of overall mortality,
cardiovascular mortality and congestive heart failure. According to the American
Heart Association, it is the type of hypertension least likely to be well
treated. The potential ability of alagebrium to decrease pulse pressure and
increase large artery compliance offers an opportunity to provide a treatment
option specifically for systolic hypertension. See "--A.G.E. Crosslink Breakers
- Alagebrium." Although currently marketed anti-hypertensive agents are being
used to treat the disease, it is not adequately treated by these therapies. We
believe that alagebrium may provide additional benefit because it exerts its
activity by directly targeting the stiff vessels that are associated with
systolic hypertension, a mechanism of action different from currently marketed
anti-hypertension drugs. In addition, based on clinical trial results to date,
it appears to be well tolerated in patients with hypertension.
Diastolic Dysfunction in Heart Failure/Left Ventricular Hypertrophy
Diastolic dysfunction is the impaired ability of the heart to relax and
fill properly after a contraction, in part due to the stiffening of the heart
tissue. It is characterized by higher than normal pressures during the relaxing
phase of the heart cycle (diastole). If the heart tissue (interstitium) has
become stiffened, the filling of the heart will be impaired. When the ventricles
(the heart's lower pumping chambers) do not relax and fill normally, increased
pressure and fluid in the blood vessels of the lungs may be a result (pulmonary
congestion), resulting in shortness of breath. Diastolic dysfunction can also
cause increased pressure and fluid in the blood vessels returning to the heart
(systemic congestion). Diastolic dysfunction is common to both systolic and
diastolic heart failure in a group that collectively numbers about five million
in the United States alone. DHF, which is estimated to account for 30% to 50% of
all heart failure cases, is an especially poorly treated medical condition. We
believe that alagebrium may offer promise as a novel therapy for cardiovascular
diseases related to diastolic dysfunction because currently available therapies
do not specifically target the stiffening of the heart and vessel walls.
Left ventricular hypertrophy, or LVH, refers to the thickening of the left
ventricle that can occur progressively with hypertension. It can lead to
decreased cardiac output, the inability to meet the circulatory needs of the
body and to heart failure itself. It is a condition associated with many
cardiovascular diseases, including systolic hypertension and DHF. In the DIAMOND
study, patients who were treated with alagebrium experienced a rapid remodeling
of the heart, resulting in a statistically significant reduction of left
ventricular mass, as well as a marked improvement in the initial phase of left
ventricular diastolic filling. Additionally, in several pre-clinical studies,
alagebrium has been shown to reduce the thickening of the left ventricle and
induce a reverse remodeling of the heart.
Erectile Dysfunction
ED is defined as the persistent inability to attain and maintain an
erection sufficient to permit satisfactory sexual intercourse. ED has been
reported to affect as many as 20 to 30 million men in the United States and 152
million men worldwide, according to the National Institutes of Health. The risk
for ED increases progressively with advancing age, with an estimated 54% of men
ages 65 to 70 reporting some degree of impotence. It is believed that 85% to 90%
of ED cases are related to a physical or medical condition, while 10% to 15% are
due to psychological causes.
Many studies have identified ED as an early indicator of cardiovascular
diseases, including hypertension, heart attack and stroke, and point to the
underlying dysfunction of the arteries and vascular system as a principal
5
cause. ED is commonly associated with a number of other conditions frequently
occurring in aging men, including enlarged prostate, hardening of the arteries,
high cholesterol and diabetes.
An estimated 30% to 40% of diabetic and aged patients with ED do not
receive benefit from currently available drugs, such as the PDE5 inhibitors, and
patients with diabetes or severe vascular disease are among the most refractory
to such treatments. This occurs, in part, because the corpus cavernosum, the
structure in the penis that acts as an expandable reservoir for blood, is unable
to properly dilate due to the accumulation and crosslinking of A.G.E.s. A.G.E.s
have been demonstrated to impair erectile function in diabetes by affecting the
functional capabilities of the corpus cavernosum and by interfering with the
production of nitric oxide needed to maintain an erection. In October 2004, we
announced the presentation of a pre-clinical study that demonstrated the ability
of alagebrium to significantly improve erectile function, as well as decrease
A.G.E. levels. In addition, alagebrium normalized other diabetes-induced
pathologies associated with ED, an effect not seen with PDE5 inhibitors.
According to the investigative team, these data are unlike results for currently
marketed ED drugs in similar experiments.
Analysts estimate that the current ED market of around $1.8 billion a year
could rise to total impotence drug sales of around $6 billion over the next
eight years, split between currently-marketed ED drugs and other
second-generation treatments.
Complications of Diabetes
A significant portion of diabetic individuals develops cardiovascular
diseases and other complications due to the high levels of blood glucose and
A.G.E.s within the body. According to the American Diabetes Association, heart
disease is the leading cause of diabetes-related deaths. Heart disease death
rates are two to four times higher in adults with diabetes than adults without
diabetes. The risk of stroke is also two to four times higher in those with
diabetes.
The Diabetes Control and Complications Trial, a multi-center clinical
trial conducted by the National Institutes of Health, demonstrated that elevated
blood glucose levels significantly increase the rate of progression of blood
vessel, kidney, eye and nerve complications from diabetes. More than 50% of
people with diabetes in the United States develop diabetic complications that
range from mild to severe.
Kidney Disease
Kidney disease is a significant cause of morbidity and mortality in
patients with Type 1 and Type 2 diabetes. It is a chronic and progressive
disease that affects approximately one-third of patients with Type 1 diabetes.
Approximately 10% to 15% of patients with Type 2 diabetes develop kidney
disease. One of the early signs of kidney damage is microalbuminuria
(characterized by leakage of small amounts of protein into the urine), which
progresses to overt nephropathy (characterized by leakage of large amounts of
protein into the urine) and ultimately to end-stage renal disease. Diabetes is
the leading cause of kidney failure in the United States.
Other Markets of Opportunity
A.G.E.s have been shown to cause or contribute to many medical disorders.
In addition to our ongoing clinical studies in systolic hypertension, heart
failure and ED, we have early research studies focused on atherosclerosis;
Alzheimer's disease; photoaging of the skin; eye diseases, including AMD and
glaucoma; and diabetic complications, including renal diseases. We continue to
evaluate potential indications for our compounds.
OUR TECHNOLOGY: THE A.G.E. PATHWAY IN AGING AND DIABETES
The harmful consequences of A.G.E. formation in man was proposed in the
1980's by our scientific founders as an outgrowth of a research effort focused
on diabetes. The foundation for our technology is the experimental evidence that
intervention along the A.G.E. pathway provides significant benefit in slowing or
reversing the development of serious diseases in the diabetic and aging
populations. We are the pioneers in A.G.E. technology, and we have built an
extensive patent estate covering our discoveries and compounds.
A.G.E.s are permanent structures that form when simple sugars, such as
glucose, bind to the surface of proteins. As the body ages, A.G.E. complexes
form on proteins continuously and naturally, though slowly
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throughout life, at a rate dependent upon glucose levels and on the body's
natural ability to clear these pathological structures. A.G.E. complexes
subsequently crosslink to other proteins. The A.G.E. crosslink has been found to
be unique in biology and is prevalent in animal models of aging and diabetes.
Scientific literature suggests that the formation and subsequent crosslinking of
A.G.E.s is an inevitable part of the aging process and diabetes that leads to
the progressive loss of flexibility and function in various tissues, blood
vessels and organs.
The formation and crosslinking of A.G.E.s is a well-known process in food
chemistry called the Maillard Reaction. The browning and toughening of food
during the cooking process occurs, in part, as a result of the formation of
A.G.E. complexes between sugars and the amino acids of proteins.
The A.G.E. pathway may provide the scientific explanation for how and why
many of the medical complications of the aging process occur with higher
frequency and earlier in life in diabetic patients. Diabetic individuals form
excessive amounts of A.G.E.s earlier in life than do non-diabetic individuals,
due primarily to higher levels of blood sugar. For this reason, diabetes may be
viewed as an accelerated form of aging.
A.G.E.s and A.G.E. crosslinks are considered to be likely causative
factors in the development of many age-related and diabetic disorders. For
example, proteins in the body, such as collagen and elastin, which play an
important role in maintaining the elasticity of the cardiovascular system, are
prime targets for A.G.E. crosslinking. This stiffening process can impair the
normal function of contractile organs, such as blood vessels, which depend on
flexibility for normal function. A loss of flexibility of the vasculature is
associated with a number of cardiovascular disorders, including systolic
hypertension, diastolic dysfunction, LVH and heart failure itself, as well as ED
and other diabetic complications.
In addition to the fibrosis and stiffening of tissues and organs
throughout the body, A.G.E.s have been shown to contribute to disease by
adversely altering multiple inflammatory and metabolic pathways. A.G.E.s can
lead to pathologic alterations commonly associated with diabetic nephropathy,
retinopathy and alterations in molecules that accelerate atherosclerosis.
We incurred research and development expenditures of $10,147,000,
$9,930,000 and $14,992,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.
A.G.E. Crosslink Breakers
A.G.E. Crosslink Breakers have the potential to treat a number of medical
disorders where loss of flexibility or elasticity leads to a loss in function.
Our lead clinical candidate, alagebrium, has demonstrated the ability to reverse
tissue damage and restore function to the cardiovascular system in Phase 2
clinical studies in cardiovascular compliance, systolic hypertension and DHF. In
a pre-clinical rat model of diabetes, alagebrium has demonstrated the ability to
restore erectile function. Additionally, we are evaluating the development of
several compounds in the breaker class for other indications where A.G.E.
crosslinking leads to abnormal function.
We have identified 17 potential chemical classes of A.G.E. Crosslink
Breakers, and have a library of more than 650 compounds.
Alagebrium
Alagebrium is a small, easily synthesized compound with a rapid mode of
action. It is well absorbed from an oral tablet formulation. The compound is
under Phase 2 clinical evaluation in systolic hypertension, heart failure and
ED. It is being evaluated in various pre-clinical models to assess its safety
and potential in a number of other disease states.
CURRENT CLINICAL STUDIES
As announced in February 2005, based on initial findings from a
pre-clinical toxicity study that provided direction for further analysis, we
have voluntarily and temporarily suspended enrollment into each of the clinical
studies described in this section, pending receipt of additional pre-clinical
data. All trials are ongoing, and currently enrolled patients are permitted to
continue treatment with alagebrium. Prior to resuming enrollment of any new
patients into any of our clinical studies, we intend to review all relevant
findings with appropriate oversight entities, including our DMC, IRBs and the
FDA. We cannot predict at this time when enrollment in our clinical studies will
resume, if ever.
7
SPECTRA
In March 2004, we initiated SPECTRA, a double-blind, placebo-controlled
Phase 2b clinical trial in patients with systolic hypertension. SPECTRA is
designed to evaluate alagebrium's ability to lower systolic blood pressure in
patients with a systolic blood pressure reading of greater or equal to 145 mm
Hg, building upon positive data from previous Phase 2 trials. Alagebrium's
activity in prior clinical trials demonstrated the drug's safety and ability to
lower systolic blood pressure and pulse pressure in aging and diabetic patients,
especially in the difficult-to-treat hypertensive patient population with blood
pressure measured by ABPM monitoring.
In SPECTRA, approximately 400 patients are expected to be enrolled at over
70 clinical sites throughout the United States. The trial includes male and
female patients who are at least 45 years of age. Recruited patients undergo a
run-in phase during which they are stabilized on hydrochlorothiazide, a
commonly-used diuretic. They then receive alagebrium tablets or placebo once a
day for 12 weeks.
SPECTRA is designed to further extend the range of effective dosing
defined in previous Phase 2 testing. The trial consists of four treatment arms,
comprising three different dose levels of alagebrium (10, 50 or 150 mg) or
placebo. Patients enrolled in the trial must have systolic blood pressure of
greater than or equal to 145 mm Hg as measured by ABPM, as well as additional
qualifications. Automated office blood pressures as well as ABPM pressures are
taken at scheduled time points. The primary measure of efficacy will be the
change from baseline in mean 24-hour systolic ABPM pressure after 12 weeks of
dosing (as compared to placebo). Secondary endpoints will include changes in
diastolic, pulse and arterial pressures.
While SPECTRA is ongoing, we have voluntarily and temporarily suspended
the enrollment of new patients into the trial. We expect that decisions
regarding resumption of enrollment will be made upon receipt of additional
pre-clinical data. Prior to resuming enrollment of new patients into any of our
clinical studies of alagebrium, we intend to review all relevant findings with
appropriate oversight entities, including our DMC, IRBs and the FDA.
PEDESTAL
In April 2004, we initiated PEDESTAL, a Phase 2a study being conducted at
Baylor Heart Clinic in Houston. PEDESTAL is designed to continue evaluating the
potential effects of alagebrium on diastolic dysfunction and left ventricular
mass in patients with significant heart failure. In the previously completed
Phase 2a DIAMOND study, treatment with alagebrium resulted in an unprecedented
reduction in left ventricular mass within a 16-week treatment period, as well as
a marked improvement in the initial phase of left ventricular diastolic filling
and improvement in quality of life.
PEDESTAL is an open-label exploratory study to determine the effects of
alagebrium at two oral dosages (35 mg once a day or 210 mg twice daily) for 6,
12, 16 and 24 weeks on diastolic function and left ventricular mass in 20
patients diagnosed with systolic heart failure and diastolic dysfunction. Safety
and quality of life are also being evaluated. The study includes men and women
at least 30 years of age with or without diabetes, who are classified as having
grade II to IV heart failure under the New York Heart Association guidelines.
The primary endpoints, which include quantification of left ventricular mass and
complete Doppler evaluation of changes in diastolic function, are again designed
to look at the therapeutic remodeling capability of alagebrium. Secondary
endpoints include a quality of life assessment as measured by the Minnesota
Living With Heart Failure Questionnaire.
In December 2004, we announced that preliminary data from the initial 14
(of planned 20) patients indicate trends consistent with positive data from the
DIAMOND study. While patients in PEDESTAL cannot be compared directly with those
from DIAMOND (patients in PEDESTAL have impaired ejection fraction, larger
hearts and are sicker overall), treatment with alagebrium appears to have
important and consistent effects in both patient groups. While PEDESTAL is
ongoing, we have voluntarily and temporarily suspended the enrollment of new
patients into the study. We expect that decisions regarding resumption of
enrollment will be made upon receipt of additional pre-clinical data. Prior to
resuming enrollment of new patients into any of our clinical studies of
alagebrium, we intend to review all relevant findings with appropriate oversight
entities, including our DMC, IRBs and the FDA.
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JHU Study in Endothelial Dysfunction
In February 2004, we initiated a Phase 2a clinical study to evaluate the
potential effects of alagebrium on endothelial dysfunction at JHU under grants
from the National Heart, Lung and Blood Institute and the Society of Geriatric
Cardiology. This academic study is an additional component to our ongoing Phase
2 studies in systolic hypertension and heart failure, and will help further
elucidate alagebrium's mechanism of action in these indications.
The endothelium, a single-cell lining of the arteries that acts as an
interface between the blood and arterial wall, is impaired in many
cardiovascular conditions. Endothelial damage, and the resulting inability of
smaller vessels to react to changes in blood pressure and flow, can be a
predictor of present and future cardiovascular disease. Recent evidence suggests
that when arteries become stiffer, endothelial function is worsened even when
the endothelial cells themselves are normal. The loss of vascular tone due to
the interaction between arterial stiffening and endothelial function may be
important in explaining why stiff arteries are a major risk factor for
cardiovascular disease.
The JHU endothelial study is designed to enroll approximately 25 patients,
male or female who are 50 years of age or greater, with systolic hypertension
(systolic blood pressure of greater than 140 mm Hg and a diastolic blood
pressure of less than 95 mm Hg). Patients are receiving 210 mg of alagebrium
twice daily for eight weeks, preceded by three weeks of twice daily placebo
run-in dosing. The primary purpose of the study is to determine whether
increasing arterial elasticity by breaking A.G.E. crosslinks improves
endothelial function as assessed by evaluating vessel relaxation and biomarkers
of endothelial function.
In December 2004, we announced positive findings from an interim analysis
of this study. These data are showing strong trends in key measures relating to
improvements in carotid and brachial artery stiffness based on a series of
advanced non-invasive measurements. An initial group of patients has completed
the study, and data are expected to be presented in the first half of 2005.
While the JHU study is ongoing, we have voluntarily and temporarily suspended
the enrollment of new patients into the study. We expect that decisions
regarding resumption of enrollment will be made upon receipt of additional
pre-clinical data. Prior to resuming enrollment in any of our clinical studies
of alagebrium, we intend to review all relevant findings with appropriate
oversight entities, including our DMC, IRBs and the FDA.
EMERALD
In January 2005, we initiated a Phase 2a study to evaluate the potential
effects of alagebrium in ED. EMERALD will assess the ability of alagebrium to
restore erectile function in diabetic patients with moderate to severe ED who
achieve limited benefit from current treatment with PDE5 inhibitors, the first
class of orally-active compounds approved for the treatment of ED. In a
pre-clinical rat model of diabetes, alagebrium has demonstrated an ability to
restore erectile function through what appears to be a unique mechanism of
action and thus may offer significant potential as an adjunctive treatment for
diabetic ED.
EMERALD is a randomized, double-blind, placebo-controlled Phase 2a pilot
study being conducted under the direction of Wayne J.G. Hellstrom, M.D.,
Professor of Urology at Tulane University School of Medicine and an author of
many of the seminal studies in ED. Approximately 40 male diabetic patients age
18 to 70 will be enrolled and randomized to receive oral doses of either
alagebrium (200 mg once daily) or placebo tablets for a 16-week period in
conjunction with their PDE5 inhibitor therapy. The primary endpoint of the study
will be based on the International Index of Erectile Function questionnaire.
Secondary endpoints of efficacy will be self-reported improvement in erections
(according to a Global Assessment Question) and measurements of change from
baseline in penile blood flow. While EMERALD is ongoing, we have voluntarily and
temporarily suspended the enrollment of new patients into the study. We expect
that decisions regarding resumption of enrollment will be made upon receipt of
additional pre-clinical data. Prior to resuming enrollment of new patients into
any of our clinical studies of alagebrium, we intend to review all relevant
findings with appropriate oversight entities, including our DMC, IRBs and the
FDA.
COMPLETED CLINICAL STUDIES
SAPPHIRE/SILVER
The Phase 2b SAPPHIRE/SILVER trial evaluated the effectiveness of
alagebrium in approximately 770 patients having elevated systolic blood pressure
with or without LVH. The trial was dose-ranging, double-blind,
placebo-controlled and conducted at over 60 sites in the United States. In May
2004, the detailed findings from a
9
post hoc analysis of the SAPPHIRE/SILVER trial were presented at the American
Society of Hypertension or ASH Nineteenth Annual Scientific Meeting. These data,
which were subsequently published in a supplement to the December 15, 2004 issue
of the American Journal of Hypertension, demonstrated that treatment with
alagebrium, as recorded by ABPM, resulted in a significant reduction in systolic
blood pressure in patients that are traditionally difficult to treat.
Highlights of the SAPPHIRE/SILVER data presented include:
- Alagebrium treatment resulted in highly significant reduction of
systolic blood pressure in patients with a baseline 24-hour
ambulatory systolic blood pressure of 140 mm Hg or greater. These
patients had uncontrolled blood pressure despite the continuation of
their existing anti-hypertensive medications.
- In this patient population, significant efficacy at the best dose
(35 mg once a day) was persistent and resulted in an average drop in
systolic blood pressure of approximately 6 mm Hg vs. placebo
(p<0.01).
- In patients with a baseline 24-hour ambulatory systolic blood
pressure of 140 mm Hg or greater and on two or more background
anti-hypertensive medications, there was an average drop in systolic
blood pressure of 12.5 mm Hg vs. placebo (p<0.01).
- In a further defined subset of patients with a baseline 24-hour
ambulatory systolic blood pressure of 150 mm Hg or greater and on
two or more background medications, patients had an average drop in
systolic blood pressure of 18.0 mm Hg vs. placebo (p<0.01).
These findings support the hypothesis that alagebrium works best in
patients with more serious baseline hypertension via a mechanism of action
unlike any currently marketed high blood pressure drug.
We announced the initial results of the SAPPHIRE/SILVER trial in July
2003. The pre-specified primary endpoint of reduction of systolic blood pressure
by office cuff pressure measurement at the highest of the four active dose
levels, 210 mg per day, did not demonstrate statistical significance as compared
to placebo. The data analysis was confounded by a 6 to 10 mm Hg drop in systolic
blood pressures in all arms of the SAPPHIRE /SILVER trial, including placebo,
during the first two weeks after patient randomization. However, patients in the
SAPPHIRE "intent-to-treat" population demonstrated efficacy net of placebo, in
the 2 to 3 mm Hg range by cuff pressure, at the lower end of the alagebrium
dosing range. As reported at that time, a pre-specified secondary analysis of
ABPM measurements in patients who completed the study demonstrated a blood
pressure lowering effect at lower doses of about 4 mm Hg net of placebo.
Importantly, there was no significant placebo effect noted in the ABPM
measurements, and that data were presented at the ASH meeting in May 2004
(abstract highlighted above).
DIAMOND
In January 2003, we announced positive results from an analysis of the
first 17 patients in the Phase 2a DIAMOND clinical study evaluating the
potential effects of alagebrium in patients with diastolic dysfunction in
diastolic heart failure. The study was conducted at Wake Forest University
Baptist Medical Center and the Medical University of South Carolina in patients
at least 60 years of age with isolated DHF. In the DIAMOND study, 23 patients
received 210 mg of alagebrium twice daily on an open-label outpatient basis for
16 weeks in addition to their current medications. Primary endpoints included
changes in exercise tolerance and aortic stiffness. Effects on LVH, diastolic
filling and quality of life were also assessed. Patients who received alagebrium
for 16 weeks experienced a rapid remodeling of the heart, resulting in a
statistically significant reduction in left ventricular mass as well as a marked
improvement in the initial phase of left ventricular diastolic filling.
Additionally, the drug was well tolerated and had a positive effect on patients'
quality of life. Measurements of exercise tolerance and aortic distensibility
proved to be more variable than anticipated for a study of this size and were
not reportable.
Phase 2a Cardiovascular Compliance Study
In January 2001, we announced successful results from a Phase 2a clinical
study of alagebrium evaluating the effects of the compound on cardiovascular
elasticity and function. This study, conducted at nine United States clinical
sites, was a double-blind, placebo-controlled study evaluating the safety,
efficacy and pharmacology of alagebrium. The study enrolled 93 patients over the
age of 50 with measurably stiffened large vessels, including systolic blood
pressure of at least 140 mm Hg and pulse pressure of at least 60 mm Hg. Patients
were randomized to
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receive oral doses of either 210 mg of alagebrium or placebo once daily for
eight weeks. Patients were evaluated for cardiovascular elasticity and function
as measured by pulse pressure, cardiovascular compliance and pulse wave
velocity. Under this protocol, alagebrium treatment was in addition to the best
available therapeutic regimen chosen by the treating physicians. Study results
showed that patients who received alagebrium experienced a statistically
significant (p<0.02) and clinically meaningful reduction in the arterial pulse
pressure, defined as the difference between systolic and diastolic blood
pressure. Results also showed a statistically significant increase in large
artery compliance (p<0.03), an indicator of greater vascular flexibility and
volume capacity, using a traditional measurement of the ratio of stroke volume
to pulse pressure. Additionally, the drug was well tolerated. These Phase 2a
data were presented at the Special Sessions Presentation of "Late Breaking
Clinical Trials" at the American College of Cardiology Annual Scientific Session
in March 2001, and published as "breakthrough information" in the September 26,
2001 issue of the peer-reviewed journal, Circulation: Journal of the American
Heart Association.
In addition to several Phase 2 human studies, a series of Phase 1 safety
and dose escalation studies were conducted. These studies have shown the drug to
be safe and well tolerated in humans.
PRE-CLINICAL STUDIES
Alagebrium efficacy data are consistent across species. Studies in animal
models in several laboratories around the world have demonstrated rapid reversal
of impaired cardiovascular functions with alagebrium. In these pre-clinical
models, alagebrium reverses the stiffening of arteries, as well as the
stiffening of the heart, that are consequences of aging and diabetes.
Pre-clinical studies of alagebrium conducted by researchers from the National
Institute on Aging and Johns Hopkins Geriatric Center demonstrated the ability
of the compound to significantly and rapidly reduce arterial stiffness in
elderly Rhesus monkeys. In a pre-clinical study of alagebrium in aged dogs,
administration of alagebrium for one month resulted in an approximate 40%
decrease in age-related ventricular stiffness, or hardening of the heart, with
an overall improvement in cardiac function. Additionally, in several
pre-clinical studies, alagebrium has been shown to normalize the thickening of
the left ventricle and to have a beneficial, therapeutic effect on reversing the
pathologic remodeling of the heart. Recent pre-clinical studies have
demonstrated the beneficial effects of alagebrium on atherosclerosis, kidney
disease and ED.
In December 2004, we announced that findings of a two-year toxicity study
indicated that male Sprague Dawley rats exposed to high doses of alagebrium over
their natural lifetime developed dose-related increases in liver cell
alterations and tumors, and that the liver tumor rate was slightly over the
expected background rate in this gender and species of rat. The relevance of
these findings to humans is unknown. Our DMC has reviewed the cumulative human
safety data and previous pre-clinical experience of alagebrium and found that
the data did not demonstrate an association with the lifetime carcinogenicity
study in rats. We have previously completed four genotoxicity studies of
alagebrium to help determine potential toxicities in humans, and these studies
have not indicated any potential human risk. Earlier pre-clinical toxicity
studies found no mutagenic or carcinogenic activity in either rats or mice. We
also announced in December 2004 our intent to conduct a series of pre-clinical
experiments to explore the mechanism by which the liver tumors developed and the
relevance of such tumors to human exposure. In February 2005, based on initial
findings from one of these subsequent studies that provided further direction
for further analysis, we voluntarily and temporarily suspended enrollment of new
patients into our ongoing clinical studies pending receipt of additional
pre-clinical data, which are expected by mid-year 2005. Prior to resuming
enrollment in any of our clinical studies of alagebrium, we intend to review all
relevant findings with appropriate oversight entities, including our DMC, IRBs
and the FDA.
A.G.E.-Formation Inhibitors
A.G.E.-Formation Inhibitors are designed to prevent glucose/protein
formation and crosslinking. This class of compounds may have broad applications
in slowing down the key complications of diabetes.
We have identified nine distinct chemical classes of A.G.E.-Formation
Inhibitors, encompassing a library in excess of 850 compounds.
Pimagedine
Pimagedine was our lead compound in the A.G.E.-Formation Inhibitor class,
but is not in active clinical development.
In November 1998, we announced results of an analysis of data from the
ACTION 1 trial of pimagedine in diabetic patients with overt nephropathy.
Although the results showed that pimagedine reduced the risk of doubling
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of serum creatinine, the study's primary endpoint, the data did not reach
statistical significance. However, pimagedine therapy did result in a
statistically significant and clinically meaningful reduction of urinary protein
excretion. Pimagedine also reduced, to a statistically significant extent,
cholesterol and triglycerides, as well as the progression of retinopathy.
Additional data suggested a trend toward improvements in other measures of
kidney function, including estimated creatinine clearance and glomerular
filtration rate. The drug was generally well tolerated. Although pimagedine is
no longer in active clinical development because of resource allocation
priorities, the ACTION trial served as a proof-of-concept study demonstrating
the potential of compounds that target the A.G.E. pathway in the treatment of
diabetic kidney disease and a broad range of diabetic complications. The study
also suggests that other pharmacologic compounds that target the A.G.E. pathway
could have an impact on diabetic conditions. A.G.E. Crosslink Breakers have the
potential to reverse damage caused by A.G.E.s and potentially are much faster
acting than pimagedine and other A.G.E. Formation Inhibitors.
Glucose Lowering Agents, or GLA
High glucose levels (hyperglycemia of diabetes) accelerate the rate of
A.G.E. formation and crosslinking. Controlling glucose levels has been shown to
slow the rate of progression of diabetic complications. The GLA program arose
from a search of plant-derived natural products that would exhibit a beneficial
profile of glucose and lipid lowering of Type 2 diabetes. Several pre-clinical
candidates that display these beneficial properties have been evaluated. They
have demonstrated the ability to lower glucose and lipids, restore insulin
sensitivity and stimulate increased insulin production.
We have identified one chemical class of GLA, which includes more than 50
compounds.
MANUFACTURING
We have no manufacturing facilities for either production of bulk
chemicals or the manufacturing of pharmaceutical dosage forms. We rely on
third-party contract manufacturers to produce the raw materials and chemicals
used as the active drug ingredients in our products used in clinical studies,
and we expect to rely on third parties to perform the tasks necessary to
process, package and distribute these products in finished form.
We will inspect third-party contract manufacturers and their consultants
to confirm compliance with current Good Manufacturing Practice, or cGMP,
required for pharmaceutical products. We believe we will obtain sufficient
quantities of bulk chemicals at reasonable prices to satisfy anticipated needs.
There can be no assurance, however, that we can continue to meet our needs for
supply of bulk chemicals or that manufacturing limitations will not delay
clinical studies or possible commercialization.
MARKETING AND SALES
We retain worldwide marketing rights to our A.G.E. Crosslink Breaker
compounds. We believe that alagebrium may address the cardiovascular, diabetes,
urology and primary care physician markets. We plan to market and sell our
products, if successfully developed and approved, directly or through
co-promotion or other licensing arrangements with third parties. Such
arrangements may be exclusive or nonexclusive and may provide for marketing
rights worldwide or in a specific market.
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for our product candidates, processes and know-how
is important to our business. We aggressively file and prosecute patents
covering our proprietary technology, and, if warranted, will defend our patents
and proprietary technology. As appropriate, we seek patent protection for our
proprietary technology and products in the United States and Canada and in key
commercial European and Asia/Pacific countries. We also rely upon trade secrets,
know-how, continuing technological innovation and licensing opportunities to
develop and maintain our competitive position. In addition to our own patent
filings, we have licensed or obtained technology and patent portfolios from
others relating to the A.G.E.-formation and crosslinking technology currently
under development by us.
As of the date of this report, our patent estate of owned and/or licensed
patent rights consisted of 98 issued United States patents, one of which expires
in 2005, and 23 pending patent applications in the United States, the majority
of which are A.G.E.-related. We also own or have exclusive rights to over 45
issued patents in Europe,
12
Japan, Australia and Canada. These patents and additional patent applications
cover compounds, compositions and methods of treatment for several chemical
classes of crosslink breaker compounds, including alagebrium.
Effective as of August 5, 2002, we entered into a letter agreement with
Yamanouchi Pharmaceutical Co, Ltd., or Yamanouchi, who terminated its License
Agreement dated as of June 16, 1989. Pursuant to the letter agreement, for a
period of fifteen years, we will pay Yamanouchi royalties on any sales of
pimagedine or pimagedine products in Japan, South Korea, Taiwan and The People's
Republic of China covered by the License Agreement. We have entered into an
exclusive licensing arrangement with Roche Diagnostics GmbH for our technology
for diagnostic applications, and we have also entered into clinical testing and
distribution agreements with Gamida for Life, or Gamida, which grant Gamida the
exclusive right to distribute pimagedine, if successfully developed and approved
for marketing, in Israel, Bulgaria, Cyprus, Jordan and South Africa. We are not
currently developing pimagedine.
In 1987, we acquired an exclusive, royalty-free, worldwide license
(including the right to sub-license to others) to Rockefeller University's
issued patents, patent applications and trade secrets relating to
A.G.E.-formation technology. In addition, we previously exclusively licensed
from The Picower Institute for Medical Research, or The Picower, certain
patentable inventions and discoveries relating to A.G.E. technology. The Picower
license agreement was terminated as of April 15, 2002, when we entered into a
Termination Agreement, pursuant to which The Picower assigned to us all of its
patents, patent applications and other technology related to A.G.E.s. We agreed
to prosecute and maintain the patents and patent applications and will pay to
the trustee for The Picower royalties on any sales of products falling within
the claims of these patents and patent applications until they expire or are
allowed to lapse.
We believe that our licensed and owned patents provide a substantial
proprietary base that will allow us and our collaborative partners to
commercialize products in this field. We believe our research and development
plans will expand and broaden our rights within our technological and patent
base. We are also prepared to in-license additional technology that may be
useful in building our proprietary position. There can be no assurance, however,
that pending or future applications will issue, that the claims of any patents
which do issue will provide any significant protection of our technology or that
our directed discovery research will yield compounds and products of therapeutic
and commercial value.
Where appropriate, we utilize trade secrets and unpatentable improvements
to enhance our technology base and improve our competitive position. We require
all employees, scientific consultants and contractors to execute confidentiality
agreements as a condition of engagement. There can be no assurance, however,
that we can limit unauthorized or wrongful disclosures of unpatented trade
secret information.
We believe that our estate of licensed and owned issued patents, if
upheld, and pending applications, if granted and upheld, will be a substantial
factor in our success. The patent positions of pharmaceutical firms, including
ours, are generally uncertain and involve complex legal and factual questions.
Consequently, even though we are currently prosecuting such patent applications
in the United States and foreign patent offices, we do not know whether any of
such applications will result in the issuance of any additional patents or, if
any additional patents are issued, whether the claims thereof will provide
significant proprietary protection or will be circumvented or invalidated.
Competitors or potential competitors have filed for or have received
United States and foreign patents and may obtain additional patents and
proprietary rights relating to compounds or processes competitive with those of
ours. Accordingly, there can be no assurance that our patent applications will
result in patents being issued or that, if issued, the claims of the patents
will afford protection against competitors with similar technology; nor can
there be any assurance that others will not obtain patents that we would need to
license or circumvent. See "--Competition."
Our success will depend, in part, on our ability to obtain patent
protection for our products, preserve our trade secrets and operate without
infringing on the proprietary rights of third parties. There can be no assurance
that our current patent estate will enable us to prevent infringement by third
parties or that competitors will not develop competitive products outside the
protection that may be afforded by the claims of such patents. To the extent we
rely on trade secrets and unpatented know-how to maintain our competitive
technological position, there can be no assurance that others may not develop
independently the same or similar technologies. Failure to maintain our current
patent estate or to obtain requisite patent and trade secret protection, which
may become material or necessary for product development, could delay or
preclude us or our licensees or marketing partners from
13
marketing their products and could thereby have a material adverse effect on our
business, financial condition and results of operations.
GOVERNMENT REGULATION
We and our products are subject to comprehensive regulations by the FDA
and by comparable authorities in other countries. These national agencies and
other federal, state and local entities regulate, among other things, the
pre-clinical and clinical testing, safety, effectiveness, approval,
manufacturing, labeling, marketing, export, storage, record keeping, advertising
and promotion of our products.
The process required by the FDA before our products may be approved for
marketing in the United States generally involves (1) pre-clinical new drug
laboratory and animal tests, (2) submission to the FDA of an investigational new
drug application, or IND, which must become effective before clinical trials may
begin, (3) adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug for its intended indication, (4) submission to
the FDA of a new drug application, or NDA, and (5) FDA review of the NDA in
order to determine, among other things, whether the drug is safe and effective
for its intended uses. There is no assurance that the FDA review process will
result in product approval on a timely basis, if at all.
Pre-clinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Certain pre-clinical tests are subject to FDA
regulations regarding current Good Laboratory Practices. The results of the
pre-clinical tests are submitted to the FDA as part of an IND and are reviewed
by the FDA prior to the commencement of clinical trials or during the conduct of
the clinical trials, as appropriate.
Clinical trials are conducted under protocols that detail such matters as
the objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the IND. Further, each protocol must be reviewed and approved by an IRB.
Clinical trials are typically conducted in three sequential phases, which
may overlap. During Phase 1, when the drug is initially given to human subjects,
the product is tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion. Phase 2 involves studies in a limited patient
population to (1) evaluate preliminarily the efficacy of the product for
specific targeted indications, (2) determine dosage tolerance and optimal
dosage, and (3) identify possible adverse effects and safety risks. Phase 3
trials are undertaken in order to further evaluate clinical efficacy and to
further test for safety within an expanded patient population. The FDA may
suspend clinical trials at any point in this process if it concludes that
clinical subjects are being exposed to an unacceptable health risk.
We will need FDA approval of our products, including a review of the
manufacturing processes and facilities used to produce such products, before
such products may be marketed in the United States. The process of obtaining
approvals from the FDA can be costly, time-consuming and subject to
unanticipated delays. For example, in February 2005, based on initial findings
from a pre-clinical toxicity study that provided direction for further analysis,
we voluntarily and temporarily suspended enrollment of patients into our ongoing
clinical studies of alagebrium, pending receipt of additional pre-clinical data
and discussions with the FDA. We cannot assure at this time when enrollment in
our clinical studies will resume, if ever. We are conducting additional studies
to explore the mechanism by which the liver tumors developed and the relevance
of tumors to human exposure, the results of which are expected by mid-year 2005.
We expect that decisions regarding resumption of enrollment will be made at that
time. However, there can be no assurance that enrollment of new patients into
our clinical studies will resume at that time, or at all. There can no assurance
that the FDA will grant approvals of our proposed products, processes or
facilities on a timely basis, if at all. Any delay or failure to obtain such
approvals would have a material adverse effect on our business, financial
condition and results of operations. Moreover, even if regulatory approval is
granted, such approval may include significant limitations on indicated uses for
which a product could be marketed.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's operating procedures conform to cGMP requirements,
which must be followed at all times. In complying with these requirements,
manufacturers (including a drug sponsor's third-party contract manufacturers)
must continue to expend time, money and effort in the area of production and
quality control to ensure compliance. Domestic manufacturing establishments are
subject to periodic inspections by the FDA in order to assess, among other
things, cGMP compliance. To supply a product for use in the United States,
foreign manufacturing establishments must
14
comply with cGMP and are subject to periodic inspection by the FDA or by
regulatory authorities from other countries, as applicable.
Both before and after approval is obtained, a product, its manufacturer
and the holder of the NDA for the product are subject to comprehensive
regulatory oversight. Violations of regulatory requirements at any stage,
including the pre-clinical and clinical testing process, the approval process,
or thereafter (including after approval) may result in various adverse
consequences, including the FDA's delay in approving or refusal to approve a
product, withdrawal of an approved product from the market and/or the imposition
of criminal penalties against the manufacturer and/or NDA holder. In addition,
later discovery of previously unknown problems may result in restrictions on
such product, manufacturer or NDA holder, including withdrawal of the product
from the market. Also, new government requirements may be established that could
delay or prevent regulatory approval of our products under development.
For marketing outside of the United States, we will have to satisfy
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and diagnostic products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. We do not currently have any facilities or
personnel outside of the United States.
COMPETITION
A.G.E.s have been shown to contribute to many of the disorders of aging
and diabetes. Cardiovascular diseases and diabetic complications are among the
diseases that may be a consequence of A.G.E. accumulation in the body. We are
aware of many companies pursuing research and development of compounds for these
indications. In addition, we are aware of companies, such as Novartis AG, that
have research and development activities in the A.G.E. field itself and may have
identified candidates for clinical development.
Our competition will be determined, in part, by the potential indications
for which our compounds are developed and ultimately approved by regulatory
authorities. For certain of our potential products, an important factor in
competition may be the timing of market introduction of our or our competitors'
products. Accordingly, the relative speed with which we can develop products,
complete the clinical trials and approval processes and supply commercial
quantities of the products to the market are important competitive factors. We
expect that competition among products approved for sale will be based on, among
other things, product efficacy, safety, reliability, availability, price and
patent position. Our competitive position also depends upon our ability to
attract and retain qualified personnel, obtain protection or otherwise develop
proprietary products or processes and secure sufficient capital resources.
We are competing in an industry in which technologies can become obsolete
over time, thereby reducing or eliminating the market for any pharmaceutical
product. For example, competitive drugs based on other therapeutic mechanisms
are currently marketed and are being developed to treat cardiovascular disease
and diabetic complications. The development by others of non-A.G.E.-related
treatment modalities could render our products non-competitive. Therapeutic
approaches being pursued by others include treating cardiovascular disease and
diabetic complications via gene therapy and cell transplantation, as well as
pharmaceutical intervention with agents such as aldose reductase inhibitors.
There are many drugs currently marketed for hypertension including ACE
inhibitors, angiotensin receptor blockers, calcium channel blockers, adrenergic
alpha 1 receptor antagonists, aldosterone inhibitors, beta-blockers and
diuretics. In the absence of any marketed products that are designed to
specifically target the underlying pathology of vascular stiffness of systolic
hypertension, treatments approved for hypertension are currently being
prescribed to treat systolic hypertension. In addition, PDE5 inhibitors and
other therapies are currently marketed for ED.
MEDICAL AND CLINICAL ADVISORS
Our Medical and Clinical Advisors are individuals with recognized
expertise in medical and pharmaceutical sciences and related fields who advise
us about present and long-term scientific planning, research and development.
These advisors consult and meet with our management informally on a frequent
basis. All advisors are employed by employers other than us, who may also be
competitors of ours, and may have commitments to, or consulting or advisory
agreements with, other entities that may limit their availability to us. The
15
advisors have agreed, however, not to provide any services to any other entities
that might conflict with the activities that they provide us. Each member also
has executed a confidentiality agreement for our benefit.
The following persons are our Medical and Clinical Advisors:
George L. Bakris, M.D., F.A.C.P., F.A.S.N., Professor and Vice Chairman,
Department of Preventive Medicine and Director, Hypertension/Clinical
Research Center, Rush University Medical Center; immediate Past-President,
American College of Clinical Pharmacology.
Leslie Z. Benet, Ph.D., Professor, School of Pharmacy, Department of
Biopharmaceutical Sciences, the University of California San Francisco;
Chairman of the Board, AvMax, Inc.; Past-Chairman, Department of
Biopharmaceutical Sciences, the University of California San Francisco.
Edward D. Frohlich, M.D., Alton Ochsner Distinguished Scientist of the
Ochsner Clinic Foundation; Professor of Medicine and Physiology, Louisiana
State University; Clinical Professor of Medicine and Adjunct Professor of
Pharmacology, Tulane University; Past-President, Society of Geriatric
Cardiology; Past-President, American Society for Clinical Pharmacology and
Therapeutics; Past-Chairman, Council for High Blood Pressure Research
(American Heart Association); immediate Past-Editor-in-Chief of
Hypertension journal.
Norman K. Hollenberg, M.D., Ph.D., Professor of Medicine, Harvard Medical
School; Director of Physiologic Research, Brigham and Women's Hospital,
Boston; served as an Editor of the New England Journal of Medicine.
Peter R. Kowey, M.D., Full Professor, Medicine and Clinical Pharmacology,
Jefferson Medical College; President and Chief of the Division of
Cardiovascular Diseases, Main Line Health Heart Center, Lankenau Hospital;
Fellow of the American Heart Association, the American College of
Cardiology, the American College of Physicians, the College of Physicians
of Philadelphia, the American College of Chest Physicians and the American
College of Clinical Pharmacology.
Craig M. Pratt, M.D., Professor of Medicine, Baylor College of Medicine;
Director of Research, Methodist DeBakey Heart Center; Director, Coronary
Intensive Care Unit, The Methodist Hospital; Member, Continuing Medical
Education Advisory Board, Discovery International; Fellow, American
College of Cardiology.
As of March 3, 2005, we employed 37 persons; 25 were engaged in research
and development, and 12 were engaged in administration and management. Three of
those employed held a Ph.D., M.D. or other advanced degree. We believe that we
have been successful in attracting skilled and experienced personnel. Our
employees are not covered by collective bargaining agreements, but all employees
are covered by confidentiality agreements. We believe that our relationship with
our employees is good.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS
Statements in this Form 10-K that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Exchange Act and the Private Securities Litigation Reform Act of 1995, and are
subject to numerous risks and uncertainties. These forward-looking statements
and other forward-looking statements made by us or our representatives are based
on a number of assumptions. The words "believe," "expect," "anticipate,"
"intend," "estimate" or other expressions, which are predictions of or indicate
future events and trends and which do not relate to historical matters, identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, as they involve risks and uncertainties, and
actual results could differ materially from those currently anticipated due to a
number of factors, including those set forth in this section and elsewhere in
this Form 10-K. These factors include, but are not limited to, the risks set
forth below.
The forward-looking statements represent our judgment and expectations as
of the date of this Report. We assume no obligation to update any such
forward-looking statements.
16
IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR NEEDS, WE MAY HAVE
TO CURTAIL OR DISCONTINUE THE RESEARCH, PRODUCT DEVELOPMENT, PRE-CLINICAL
TESTING AND CLINICAL STUDIES OF SOME OR ALL OF OUR PRODUCT CANDIDATES.
As of December 31, 2004, we had working capital of $8,740,000, including
$11,176,000 of cash and cash equivalents. Our cash used in operating activities
for the year ended December 31, 2004 was $13,110,000.
Alagebrium is our lead product candidate and we believe it to be the only
A.G.E. Crosslink Breaker in advanced human clinical testing. We initiated
several Phase 2 studies of alagebrium during 2004: the SPECTRA trial in systolic
hypertension, the PEDESTAL study in heart failure and a study in endothelial
dysfunction. A Phase 2a study in ED, EMERALD, was initiated in January 2005.
Several Phase 2 clinical studies have been completed: the DIAMOND study in DHF,
the SAPPHIRE/SILVER trial in systolic hypertension and a study in cardiovascular
compliance. In February 2005, based on initial findings from a pre-clinical
toxicity study that provided direction for further analysis, we voluntarily and
temporarily suspended enrollment of new patients into our ongoing clinical
studies pending receipt of additional pre-clinical data, which are expected by
mid-year 2005. We expect that decisions regarding resumption of enrollment will
be made at that time. Prior to resuming enrollment in any of our clinical
studies of alagebrium, we intend to review all relevant findings with
appropriate oversight entities, including our DMC, IRBs and the FDA. We cannot
predict at this time when enrollment in our clinical studies will resume, if
ever. If we are unable to resume enrollment in our clinical studies in a timely
manner, or at all, our business will be materially adversely affected.
We expect to utilize cash and cash equivalents to fund our operating
activities, including the ongoing Phase 2 studies. In January 2005, we completed
a sale of common stock that provided net proceeds of approximately $9.5 million.
We will actively continue to pursue fund-raising possibilities through the sale
of our equity securities. If we are unsuccessful in our efforts to raise
additional funds through the sale of additional equity securities or if our
level of cash and cash equivalents falls below anticipated levels, we will be
required to significantly reduce or curtail our research and product development
activities, including the number of patients enrolled in our studies and other
operations. We have the ability to quickly and significantly reduce the cash
burn rate, if necessary, as we have limited fixed commitments. We expect to have
sufficient cash and cash equivalents to satisfy our working capital requirements
at least into the first quarter of 2006, either by future fund-raising or, if
needed, curtailment actions.
The amount and timing of our future capital requirements will depend on
numerous factors, including the progress of our research and development
programs, the number and characteristics of product candidates that we pursue,
the conduct of pre-clinical tests and clinical studies, the status and timelines
of regulatory submissions, the costs associated with protecting patents and
other proprietary rights, the development of marketing and sales capabilities,
our ability to complete strategic collaborations and the availability of
third-party funding.
We will require, over the long term, substantial new funding to pursue
development and commercialization of alagebrium and our other product candidates
and to continue our operations. We believe that satisfying these capital
requirements over the long term will require successful commercialization of our
product candidates, particularly alagebrium. However, it is uncertain whether
any products will be approved or will be commercially successful.
Selling securities to satisfy our short-term and long-term capital
requirements may have the effect of materially diluting the current holders of
our outstanding stock. We may also seek additional funding through corporate
collaborations and other financing vehicles. There can be no assurance that such
funding will be available at all or on terms acceptable to us. If adequate funds
are not available, we may be required to curtail significantly one or more of
our research and development programs. If we obtain funds through arrangements
with collaborative partners or others, we may be required to relinquish rights
to certain of our technologies or product candidates. If we are unable to obtain
the necessary funding, we may need to cease operations.
CLINICAL STUDIES REQUIRED FOR OUR PRODUCT CANDIDATES ARE TIME-CONSUMING, AND
THEIR OUTCOME IS UNCERTAIN.
Before obtaining regulatory approvals for the commercial sale of any of
our products under development, we must demonstrate through pre-clinical and
clinical studies that the product is safe and effective for use in each target
indication. Success in pre-clinical studies of a product candidate may not be
predictive of similar results in humans during clinical trials. None of our
products has been approved for commercialization in the United States or
elsewhere.
17
As we announced in December 2004, findings of a two-year toxicity study
indicated that male Sprague Dawley rats exposed to high doses of alagebrium over
their natural lifetime developed dose-related increases in liver cell
alterations and tumors, and that the liver tumor rate was slightly over the
expected background rate in this gender and species of rat. The relevance of
these findings to humans is unknown. As we further announced in February 2005,
we have voluntarily and temporarily suspended enrollment of patients into our
active clinical studies of alagebrium, pending receipt of additional
pre-clinical data. Prior to resuming enrollment in any of our clinical studies
of alagebrium, we intend to review all relevant findings with appropriate
oversight entities, including the DMC, IRBs and the FDA. We cannot predict at
this time that enrollment in our clinical studies will resume. If we are unable
to resume enrollment in our clinical studies in a timely manner, or at all, our
business will be materially adversely affected.
Before a clinical trial may commence in the United States, we must submit
an IND, containing pre-clinical studies, chemistry, manufacturing, control and
other information and a study protocol to the FDA. If the FDA does not object
within 30 days after submission of the IND, then the trial may commence. If
commenced, the FDA may delay, limit, suspend or terminate clinical trials, or
may delay, condition or reject approval of any of our product candidates, for
many reasons. For example:
- ongoing pre-clinical or clinical study results may indicate that the
product candidate is not safe or effective;
- the FDA may interpret our pre-clinical or clinical study results to
indicate that the product candidate is not safe or effective, even
if we interpret the results differently; or
- the FDA may deem the processes and facilities that our collaborative
partners, our third-party manufacturers or we propose to use in
connection with the manufacture of the product candidate to be
unacceptable.
If we do not prove in clinical trials that our product candidates are safe
and effective, we will not obtain marketing approvals from the FDA and other
applicable regulatory authorities. In particular, one or more of our product
candidates may not exhibit the expected medical benefits in humans, may cause
harmful side effects or may have other unexpected characteristics that preclude
regulatory approval for any or all indications of use or limit commercial use if
approved.
The length of time necessary to complete clinical trials varies
significantly and is difficult to predict. Factors that can cause delay or
termination of our clinical trials include:
- slower than expected patient enrollment due to the nature of the
protocol, the proximity of patients to clinical sites, the
eligibility criteria for the study, competition with clinical trials
for other drug candidates or other factors;
- adverse results in pre-clinical safety or toxicity studies;
- lower than expected retention rates of patients in a clinical trial;
- inadequately trained or insufficient personnel at the study site to
assist in overseeing and monitoring clinical trials;
- delays in approvals from a study site's review board, or other
required approvals;
- longer treatment time required to demonstrate effectiveness or
determine the appropriate product dose;
- lack of sufficient supplies of the product candidate;
- adverse medical events or side effects in treated patients;
- lack of effectiveness of the product candidate being tested; and
- regulatory changes.
18
Even if we obtain positive results from pre-clinical or clinical studies
for a particular product, we may not achieve the same success in future studies
of that product. Data obtained from pre-clinical and clinical studies are
susceptible to varying interpretations that could delay, limit or prevent
regulatory approval. In addition, we may encounter delays or rejections based
upon changes in FDA policy for drug approval during the period of product
development and FDA regulatory review of each submitted NDA. We may encounter
similar delays in foreign countries. Moreover, regulatory approval may entail
limitations on the indicated uses of the drug. Failure to obtain requisite
governmental approvals or failure to obtain approvals of the scope requested
will delay or preclude our licensees or marketing partners from marketing our
products or limit the commercial use of such products and will have a material
adverse effect on our business, financial condition and results of operations.
In addition, some or all of the clinical trials we undertake may not
demonstrate sufficient safety and efficacy to obtain the requisite regulatory
approvals, which could prevent or delay the creation of marketable products. Our
product development costs will increase if we have delays in testing or
approvals, if we need to perform more, larger or different clinical trials than
planned or if our trials are not successful. Delays in our clinical trials may
harm our financial results and the commercial prospects for our products.
IF WE DO NOT SUCCESSFULLY DEVELOP ANY PRODUCTS, OR ARE UNABLE TO DERIVE REVENUES
FROM PRODUCT SALES, WE WILL NEVER BE PROFITABLE.
Virtually all of our revenues to date have been generated from
collaborative research agreements and interest income. We have not received any
revenues from product sales. We may not realize product revenues on a timely
basis, if at all, and there can be no assurance that we will ever be profitable.
At December 31, 2004, we had an accumulated deficit of $205,713,000. We
anticipate that we will incur substantial, potentially greater, losses in the
future as we continue our research, development and clinical studies. We have
not yet requested or received regulatory approval for any product from the FDA
or any other regulatory body. All of our product candidates, including our lead
candidate, alagebrium, are still in research, pre-clinical or clinical
development. We may not succeed in the development and marketing of any
therapeutic or diagnostic product. We do not have any product other than
alagebrium in active clinical development, and there can be no assurance that we
will be able to bring any other compound into clinical development. Adverse
results of any pre-clinical or clinical study could cause us to materially
modify our clinical development programs, resulting in delays and increased
expenditures, or cease development for all or part of our ongoing studies of
alagebrium. As we announced in December 2004, findings of a two-year toxicity
study indicated that male Sprague Dawley rats exposed to high doses of
alagebrium over their natural lifetime developed dose-related increases in liver
cell alterations and tumors, and that the liver tumor rate was slightly over the
expected background rate in this gender and species of rat. The relevance of
these findings to humans is unknown. As we further announced, we have
voluntarily and temporarily suspended enrollment of patients into our ongoing
clinical studies of alagebrium, pending receipt of additional pre-clinical data.
Prior to resuming enrollment in any of our clinical studies of alagebrium, we
intend to review all relevant findings with appropriate oversight entities,
including the DMC, IRBs and the FDA. We cannot predict at this time that
enrollment in our clinical studies will resume. If we are unable to resume
enrollment in our clinical studies in a timely manner, or at all, our business
will be materially adversely affected. We have discussed these findings with the
FDA and intend to conduct additional studies to explore the mechanism by which
the liver tumors developed and will provide that information to the agency. We
cannot yet determine what effect, if any, these preliminary results will have on
our ability to complete clinical development of alagebrium in a timely manner,
or at all.
To achieve profitable operations, we must, alone or with others,
successfully identify, develop, introduce and market proprietary products. Such
products will require significant additional investment, development and
pre-clinical and clinical testing prior to potential regulatory approval and
commercialization. The development of new pharmaceutical products is highly
uncertain and subject to a number of significant risks. Potential products that
appear to be promising at early stages of development may not reach the market
for a number of reasons. Potential products may be found ineffective or cause
harmful side effects during pre-clinical testing or clinical studies, fail to
receive necessary regulatory approvals, be difficult to manufacture on a large
scale, be uneconomical, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. We may not be able to
undertake additional clinical studies. In addition, our product development
efforts may not be successfully completed, we may not obtain regulatory
approvals, and our products, if introduced, may not be successfully marketed or
achieve customer acceptance. We do not expect any of our products, including
alagebrium, to be commercially available for a number of years, if at all.
19
IF WE ARE UNABLE TO FORM THE COLLABORATIVE RELATIONSHIPS THAT OUR BUSINESS
STRATEGY REQUIRES, THEN OUR PROGRAMS WILL SUFFER AND WE MAY NOT BE ABLE TO
DEVELOP PRODUCTS.
Our strategy for developing and deriving revenues from our products
depends, in large part, upon entering into arrangements with research
collaborators, corporate partners and others. We intend to enter into these
arrangements, especially in target indications in which our potential
collaborator has particular therapeutic expertise or that involve a market that
must be served by large sales and marketing organizations. The potential market,
pre-clinical and clinical study results and safety profile of our product
candidates may not be attractive to potential corporate partners. As noted
above, a recent preliminary report of a two-year toxicity study found that male
rats exposed to high doses of alagebrium over their natural lifetime developed
dose-related increases in liver cell alterations and tumors, and that the liver
tumor rate was slightly over the expected background rate in this gender and
species of rat. Also, as noted above, in February 2005, we voluntarily and
temporarily suspended enrollment into our ongoing clinical studies of alagebrium
pending receipt of additional pre-clinical data. Such results could adversely
affect our ability to enter into research and development collaborations with
respect to alagebrium. We face significant competition in seeking appropriate
collaborators and these collaborations are complex and time-consuming to
negotiate and document. We may not be able to negotiate collaborations on
acceptable terms, or at all. If that were to occur, we may have to curtail the
development of a particular product candidate, reduce or delay its development
program or one or more of our other development programs, delay its potential
commercialization or reduce the scope of our sales or marketing activities, or
increase our expenditures and undertake development or commercialization
activities at our own expense. If we elect to increase our expenditures to fund
development or commercialization activities on our own, we may need to obtain
additional capital, which may not be available to us on acceptable terms, or at
all. If we do not have sufficient funds, we will not be able to bring our
product candidates to market and generate product revenue.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH
SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS AND STOCK PRICE.
We are in the process of documenting and testing our internal control
procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act, which requires annual management assessments of the
effectiveness of our internal controls over financial reporting and a report by
our independent registered public accounting firm addressing these assessments.
In meetings with management and with the Audit Committee of the Board of
Directors, J.H. Cohn LLP, or J.H. Cohn, our independent registered public
accounting firm, informed us that, based on its preliminary review of our
internal controls as required by Section 404 of the Sarbanes-Oxley Act, we have
certain weaknesses, which in their opinion have the potential to be deemed to be
material weaknesses in our internal controls relating to information technology
controls and process controls with respect to processing of outgoing checks. We
are working with J.H. Cohn to be able to determine definitively the
classification of these control deficiencies. During the completion of our
testing, we and J.H. Cohn may identify certain additional weaknesses or
deficiencies that we are not able to remediate in time to meet the deadline
imposed by the Sarbanes-Oxley Act for compliance with the requirements of
Section 404. As permitted by the SEC Release Nos. 33-8238 and 34-47986, and SEC
Exemptive Order No. 34-50754, we intend to file our management's report on
internal controls and J.H. Cohn's related attestation report as part of an
amendment to this Annual Report on Form 10-K no later than May 2, 2005. We will
include our conclusions with respect to the issues referred to above in the
Form 10-K amendment. The ultimate resolution of this could adversely effect our
business and stock price.
IF WE ARE ABLE TO FORM COLLABORATIVE RELATIONSHIPS, BUT ARE UNABLE TO MAINTAIN
THEM, OUR PRODUCT DEVELOPMENT MAY BE DELAYED AND DISPUTES OVER RIGHTS TO
TECHNOLOGY MAY RESULT.
We may form collaborative relationships that, in some cases, will make us
dependent upon outside partners to conduct pre-clinical testing and clinical
studies and to provide adequate funding for our development programs.
In general, collaborations involving our product candidates pose the
following risks to us:
- collaborators may fail to adequately perform the scientific and
pre-clinical studies;
- collaborators have significant discretion in determining the efforts
and resources that they will apply to these collaborations;
- collaborators may not pursue further development and
commercialization of our product candidates or may elect not to
continue or renew research and development programs based on
pre-clinical or
20
clinical study results, changes in their strategic focus or
available funding or external factors, such as an acquisition that
diverts resources or creates competing priorities;
- collaborators may delay clinical trials, provide insufficient
funding for a clinical program, stop a clinical study or abandon a
product candidate, repeat or conduct new clinical trials or require
a new formulation of a product candidate for clinical testing;
- collaborators could independently develop, or develop with third
parties, products that compete directly or indirectly with our
products or product candidates if the collaborators believe that
competitive products are more likely to be successfully developed or
can be commercialized under terms that are more economically
attractive;
- collaborators with marketing and distribution rights to one or more
products may not commit enough resources to their marketing and
distribution;
- collaborators may not properly maintain or defend our intellectual
property rights or may use our proprietary information in such a way
as to invite litigation that could jeopardize or invalidate our
proprietary information or expose us to potential litigation;
- disputes may arise between us and the collaborators that result in
the delay or termination of the research, development or
commercialization of our product candidates or that result in costly
litigation or arbitration that diverts management attention and
resources; and
- collaborations may be terminated and, if terminated, may result in a
need for additional capital to pursue further development of the
applicable product candidates.
In addition, there have been a significant number of recent business
combinations among large pharmaceutical companies that have resulted in a
reduced number of potential future collaborators. If a present or future
collaborator of ours were to be involved in a business combination, the
continued pursuit and emphasis on our product development program could be
delayed, diminished or terminated.
OUR PRODUCT CANDIDATES WILL REMAIN SUBJECT TO ONGOING REGULATORY REVIEW EVEN IF
THEY RECEIVE MARKETING APPROVAL. IF WE FAIL TO COMPLY WITH CONTINUING
REGULATIONS, WE COULD LOSE THESE APPROVALS AND THE SALE OF OUR PRODUCTS COULD BE
SUSPENDED.
Even if we receive regulatory approval to market a particular product
candidate, the approval could be granted with the condition that we conduct
additional costly post-approval studies or that we limit the indicated uses
included in our labeling. Moreover, the product may later cause adverse effects
that limit or prevent its widespread use, force us to withdraw it from the
market or impede or delay our ability to obtain regulatory approvals in
additional countries. In addition, the manufacturer of the product and its
facilities will continue to be subject to FDA review and periodic inspections to
ensure adherence to applicable regulations. After receiving marketing approval,
the manufacturing, labeling, packaging, adverse event reporting, storage,
advertising, promotion and record keeping related to the product will remain
subject to extensive regulatory requirements. We may be slow to adapt, or we may
never adapt, to changes in existing regulatory requirements or adoption of new
regulatory requirements.
If we fail to comply with the regulatory requirements of the FDA and other
applicable United States and foreign regulatory authorities or if previously
unknown problems with our products, manufacturers or manufacturing processes are
discovered, we could be subject to administrative or judicially imposed
sanctions, including:
- restrictions on the products, manufacturers or manufacturing
processes;
- warning letters;
- civil or criminal penalties;
- fines;
21
- injunctions;
- product seizures or detentions;
- import bans;
- voluntary or mandatory product recalls and publicity requirements;
- suspension or withdrawal of regulatory approvals;
- total or partial suspension of production; and
- refusal to approve pending applications for marketing approval of
new drugs or supplements to approved applications.
IF WE CANNOT SUCCESSFULLY DEVELOP A MARKETING AND SALES FORCE OR MAINTAIN
SUITABLE ARRANGEMENTS WITH THIRD PARTIES TO MARKET AND SELL OUR PRODUCTS, OUR
ABILITY TO DELIVER PRODUCTS TO THE MARKET MAY BE IMPAIRED.
We currently have no experience in marketing or selling pharmaceutical
products. In order to achieve commercial success for any approved product, we
must either develop a marketing and sales force ourselves, or, where appropriate
and permissible, enter into arrangements with third parties to market and sell
our products. We might not be successful in developing marketing and sales
capabilities. Further, we may not be able to enter into marketing and sales
agreements with others on acceptable terms, and any such arrangements, if
entered into, may be terminated. If we develop our own marketing and sales
capability, we will compete with other companies that currently have
experienced, well funded and larger marketing and sales operations. To the
extent that we enter into co-promotion or other sales and marketing arrangements
with other companies, our revenues will depend on the efforts of others, which
may not be successful.
IF WE CANNOT SUCCESSFULLY FORM AND MAINTAIN SUITABLE ARRANGEMENTS WITH THIRD
PARTIES FOR THE MANUFACTURING OF THE PRODUCTS WE MAY DEVELOP, OUR ABILITY TO
DEVELOP OR DELIVER PRODUCTS MAY BE IMPAIRED.
We have no experience in manufacturing products and do not have
manufacturing facilities. Consequently, we are dependent on contract
manufacturers for the production of products for development and commercial
purposes. The manufacture of our products for clinical trials and commercial
purposes is subject to current cGMP regulations promulgated by the FDA. In the
event that we are unable to obtain or retain third-party manufacturing
capabilities for our products, we will not be able to commercialize our products
as planned. Our reliance on third-party manufacturers will expose us to risks
that could delay or prevent the initiation or completion of our clinical trials,
the submission of applications for regulatory approvals, the approval of our
products by the FDA or the commercialization of our products or result in higher
costs or lost product revenues. In particular, contract manufacturers:
- could encounter difficulties in achieving volume production, quality
control and quality assurance and suffer shortages of qualified
personnel, which could result in their inability to manufacture
sufficient quantities of drugs to meet our clinical schedules or to
commercialize our product candidates;
- could terminate or choose not to renew the manufacturing agreement,
based on their own business priorities, at a time that is costly or
inconvenient for us;
- could fail to establish and follow FDA-mandated cGMPs, as required
for FDA approval of our product candidates, or fail to document
their adherence to cGMPs, either of which could lead to significant
delays in the availability of material for clinical study and delay
or prevent filing or approval of marketing applications for our
product candidates; and
- could breach, or fail to perform as agreed, under the manufacturing
agreement.
Changing any manufacturer that we engage for a particular product or
product candidate may be difficult, as the number of potential manufacturers is
limited, and we will have to compete with third parties for access to those
manufacturing facilities. cGMP processes and procedures typically must be
reviewed and approved by the
22
FDA, and changing manufacturers may require re-validation of any new facility
for cGMP compliance, which would likely be costly and time-consuming. We may not
be able to engage replacement manufacturers on acceptable terms quickly or at
all. In addition, contract manufacturers located in foreign countries may be
subject to import limitations or bans. As a result, if any of our contract
manufacturers is unable, for whatever reason, to supply the contracted amounts
of our products that we successfully bring to market, a shortage would result
which would have a negative impact on our revenues.
Drug manufacturers are subject to ongoing periodic unannounced inspection
by the FDA, the U.S. Drug Enforcement Agency and corresponding state and foreign
agencies to ensure strict compliance with cGMPs, other government regulations
and corresponding foreign standards. While we are obligated to audit the
performance of third-party contractors, we do not have control over our
third-party manufacturers' compliance with these regulations and standards.
Failure by our third-party manufacturers or us to comply with applicable
regulations could result in sanctions being imposed on us, including fines,
injunctions, civil penalties, failure of the government to grant pre-market
approval of drugs, delays, suspension or withdrawal of approvals, seizures or
recalls of product, operating restrictions and criminal prosecutions. Our
current dependence upon others for the manufacture of our products may adversely
affect our profit margin, if any, on the sale of future products and our ability
to develop and deliver such products on a timely and competitive basis.
IF WE ARE NOT ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO OUR
SUCCESS, THE DEVELOPMENT AND ANY POSSIBLE SALES OF OUR PRODUCT CANDIDATES COULD
SUFFER AND COMPETITORS COULD FORCE OUR PRODUCTS COMPLETELY OUT OF THE MARKET.
Our success will depend on our ability to obtain patent protection for our
products, preserve our trade secrets, prevent third parties from infringing upon
our proprietary rights and operate without infringing upon the proprietary
rights of others, both in the United States and abroad.
The degree of patent protection afforded to pharmaceutical inventions is
uncertain and our potential products are subject to this uncertainty.
Competitors may develop competitive products outside the protection that may be
afforded by the claims of our patents. We are aware that other parties have been
issued patents and have filed patent applications in the United States and
foreign countries with respect to other agents that have an effect on A.G.E.s.,
or the formation of A.G.E. crosslinks. In addition, although we have several
patent applications pending to protect proprietary technology and potential
products, these patents may not be issued, and the claims of any patents that do
issue, may not provide significant protection of our technology or products. In
addition, we may not enjoy any patent protection beyond the expiration dates of
our currently issued patents.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to maintain, develop and expand
our competitive position, which we seek to protect, in part, by confidentiality
agreements with our corporate partners, collaborators, employees and
consultants. We also have invention or patent assignment agreements with our
employees and certain, but not all, corporate partners and consultants. Relevant
inventions may be developed by a person not bound by an invention assignment
agreement. Binding agreements may be breached, and we may not have adequate
remedies for such breach. In addition, our trade secrets may become known to or
be independently discovered by competitors.
THE EFFECT OF ACCOUNTING RULES RELATING TO OUR EQUITY COMPENSATION ARRANGEMENTS
MAY HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE AND FINANCIAL CONDITION.
Based on the performance of our stock and in order to bolster employee
retention, we repriced certain employee stock options on February 2, 1999. As a
result of this repricing, options to purchase 1.06 million shares of stock were
repriced and certain vesting periods related to these options were modified or
extended. This repricing may have a material adverse impact on future financial
performance based on the Financial Accounting Standards Board, or the FASB,
Interpretation No. 44, or FIN No. 44, "Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of Accounting Principles Board,
or APB Opinion No. 25." This interpretation requires us to record compensation
expense or benefit, which is adjusted every quarter, for increases or decreases
in the fair value of the repriced options based on changes in our stock price
from the value at July 1, 2000, until the adoption of newly issued accounting
rules on July 1, 2005 described below. The options expire at various dates
through January 2008.
In December 2004, the FASB issued Statement of Financial Accounting
Standards, or SFAS, No. 123 (revised 2004), "Share-Based Payment," or SFAS No.
123(R), which replaces the FASB Statement No. 123 and will be effective for
public companies beginning no later than July 1, 2005. This Statement
23
requires that the costs of employee share-based payments be measured at fair
value on the awards' grant date using an option-pricing model and recognized in
the financial statements over the requisite service period. We are currently
determining which transition method we will adopt and are evaluating the impact
SFAS No. 123(R) will have on our financial position and results of operations.
However, we believe it may have a material effect on our results of operations.
IF WE ARE NOT ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE
DEVELOPMENT AND MARKETING OF CURES AND THERAPIES FOR CARDIOVASCULAR DISEASES,
DIABETES, ERECTILE DYSFUNCTION AND THE OTHER CONDITIONS FOR WHICH WE SEEK TO
DEVELOP PRODUCTS, WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS.
We are engaged in pharmaceutical fields characterized by extensive
research efforts and rapid technological progress. Many established
pharmaceutical and biotechnology companies with financial, technical and human
resources greater than ours are attempting to develop, or have developed,
products that would be competitive with our products. Many of these companies
have extensive experience in pre-clinical and human clinical studies. Other
companies may succeed in developing products that are safer, more efficacious or
less costly than any we may develop and may also be more successful than us in
production and marketing. Rapid technological development by others may result
in our products becoming obsolete before we recover a significant portion of the
research, development or commercialization expenses incurred with respect to
those products.
Certain technologies under development by other pharmaceutical companies
could result in better treatments for cardiovascular disease, diabetes and its
related complications or ED. Several large companies have initiated or expanded
research, development and licensing efforts to build pharmaceutical franchises
focusing on these medical conditions, and some companies already have products
approved and available for commercial sale to treat these indications. It is
possible that one or more of these initiatives may reduce or eliminate the
market for some of our products. In addition, other companies have initiated
research in the inhibition or crosslink breaking of A.G.E.s.
IF GOVERNMENTS AND THIRD-PARTY PAYERS CONTINUE THEIR EFFORTS TO CONTAIN OR
DECREASE THE COSTS OF HEALTHCARE, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR
PRODUCTS SUCCESSFULLY.
In certain foreign markets, pricing and/or profitability of prescription
pharmaceuticals are subject to government control. In the United States, we
expect that there will continue to be federal and state initiatives to control
and/or reduce pharmaceutical expenditures. In addition, increasing emphasis on
managed care in the United States will continue to put pressure on
pharmaceutical pricing. Cost control initiatives could decrease the price that
we receive for any products for which we may receive regulatory approval to
develop and sell in the future and could have a material adverse effect on our
business, financial condition and results of operations. Further, to the extent
that cost control initiatives have a material adverse effect on our corporate
partners, our ability to commercialize our products may be adversely affected.
Our ability to commercialize pharmaceutical products may depend, in part, on the
extent to which reimbursement for the products will be available from government
health administration authorities, private health insurers and other third-party
payers. Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products, and third-party payers, including Medicare,
frequently challenge the prices charged for medical products and services. In
addition, third-party insurance coverage may not be available to patients for
any products developed by us. Government and other third-party payers are
attempting to contain healthcare costs by limiting both coverage and the level
of reimbursement for new therapeutic products and by refusing in some cases to
provide coverage for uses of approved products for disease indications for which
the FDA has not granted labeling approval. If government and other third-party
payers for our products do not provide adequate coverage and reimbursement
levels, the market acceptance of these products would be adversely affected.
IF THE USERS OF THE PRODUCTS THAT WE ARE DEVELOPING CLAIM THAT OUR PRODUCTS HAVE
HARMED THEM, WE MAY BE SUBJECT TO COSTLY AND DAMAGING PRODUCT LIABILITY
LITIGATION, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The use of any of our potential products in clinical studies and the sale
of any approved products, including the testing and commercialization of
alagebrium or other compounds, may expose us to liability claims resulting from
the use of products or product candidates. Claims could be made directly by
participants in our clinical studies, consumers, pharmaceutical companies or
others. We maintain product liability insurance coverage for claims arising from
the use of our products in clinical studies. However, coverage is becoming
increasingly expensive, and we may not be able to maintain or acquire insurance
at a reasonable cost or in sufficient amounts to protect us against losses due
to liability that could have a material adverse effect on our business,
financial condition
24
and results of operations. We may not be able to obtain commercially reasonable
product liability insurance for any product approved for marketing in the
future, and insurance coverage and our resources may not be sufficient to
satisfy any liability resulting from product liability claims. A successful
product liability claim or series of claims brought against us could have a
material adverse effect on our business, financial condition and results of
operations.
IF WE ARE UNABLE TO ATTRACT AND RETAIN THE KEY PERSONNEL ON WHOM OUR SUCCESS
DEPENDS, OUR PRODUCT DEVELOPMENT, MARKETING AND COMMERCIALIZATION PLANS COULD
SUFFER.
We depend on the principal members of our management and scientific staff.
The loss of services of any of these personnel could impede the achievement of
our development objectives. Furthermore, recruiting and retaining qualified
scientific personnel to perform research and development work in the future will
also be critical to our success. We may not be able to attract and retain
personnel on acceptable terms given the competition between pharmaceutical and
healthcare companies, universities and non-profit research institutions for
experienced managers and scientists. In addition, we rely on consultants to
assist us in formulating our research and development strategy. All of our
consultants are employed by other entities and may have commitments to or
consulting or advisory contracts with those other entities that may limit their
availability to us.
ITEM 2. PROPERTIES.
We lease 10,800 square feet of space in a building in Parsippany, New
Jersey, which contains our executive and administrative offices. The lease,
which commenced on December 1, 2003, has a three-year term.
ITEM 3. LEGAL PROCEEDINGS.
On December 8, 2004, we filed a complaint in federal court in the District
of New Jersey against Advanced Biologics L.L.C., or Advanced, alleging breach of
Advanced's obligations under a contract research organization agreement. In the
complaint, we seek damages exceeding $500,000. Advanced has asserted that we owe
approximately $35,000 under the contract. We strenuously dispute Advanced's
assertion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders during the
fourth quarter of the year ended December 31, 2004.
25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the American Stock Exchange under the symbol
"ALT." The following table sets forth, for the periods indicated, the high and
low sales price for our common stock, as reported by the American Stock
Exchange:
2004 High Low
------------------ ------ ---------
First Quarter..... $ 2.39 $ 1.57
Second Quarter.... 1.89 1.01
Third Quarter..... 1.20 0.65
Fourth Quarter.... 1.59 0.77
2003 High Low
------------------ ------ ---------
First Quarter..... $ 4.37 $ 1.95
Second Quarter.... 5.65 3.17
Third Quarter..... 7.50 1.25
Fourth Quarter.... 2.18 1.41
As of March 3, 2005, there were 338 holders of the common stock. On March
3, 2005, the last sale price reported on the American Stock Exchange for the
common stock was $0.75 per share.
We have neither paid nor declared dividends on our common stock since our
inception and do not plan to pay dividends in the foreseeable future. Any
earnings that we may realize will be returned to finance our growth.
The market prices for securities of biotechnology and pharmaceutical
companies, including ours, have historically been highly volatile, and the
market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors, such as fluctuations in our operating results, announcements
of technological innovations or new therapeutic products by us or others,
clinical trial results, developments concerning agreements with collaborators,
governmental regulation, developments in patent or other proprietary rights,
public concern as to the safety of drugs developed by us or others, future sales
of substantial amounts of common stock by existing stockholders and general
market conditions, can have an adverse effect on the market price of the common
stock.
The information called for by Item 201(d) of Regulation S-K is provided in
response to Item 12 of this Annual Report on Form 10-K, which is incorporated
herein by reference.
In connection with our July 2, 2004 registered offering of 8,000,000
shares of common stock at $1.00 per share, we issued a five-year warrant to
purchase up to an aggregate of 272,500 shares of common stock at $1.30 per share
to the placement agent, Rodman & Renshaw, LLC, in consideration of the
introduction of investors to us. No underwriters were involved in the
transaction, and there were no underwriting discounts or commissions. We relied
upon the exemption from registration set forth in Section 4(2) of the Securities
Act of 1933, as amended, because the transaction did not involve any public
offering by us.
26
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth financial data with respect to us as of and
for the five years ended December 31, 2004. The selected financial data has been
derived from our audited financial statements. The selected financial data below
should be read in conjunction with the audited financial statements and related
notes included elsewhere in this Annual Report on Form 10-K and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7:
Year Ended December 31,
----------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:
Income:
Investment income ............................ $ 182 $ 179 $ 410 $ 452 $ 570
Other income ................................. 152 --- --- --- ---
--------- --------- --------- --------- ---------
Total income ............................... 334 179 410 452 570
--------- --------- --------- --------- ---------
Expenses:
Research and development
(which includes non-cash variable stock
compensation expense/(benefit) in 2004,
2003, 2002 and 2001 of $0, $20, $(94)
and $165, respectively) .................... 10,147 9,930 14,992 8,461 6,375
General and administrative
(which includes non-cash variable stock
compensation expense/(benefit) in 2004,
2003, 2002 and 2001 of $0, $0, $(1,316)
and $657, respectively) .................... 4,532 5,046 2,946 4,761 5,313
--------- --------- --------- --------- ---------
Total expenses .......................... 14,679 14,976 17,938 13,222 11,688
--------- --------- --------- --------- ---------
Loss before income tax benefit .................. (14,345) (14,797) (17,528) (12,770) (11,118)
Income tax benefit .............................. 386 345 647 1,187 1,548
--------- --------- --------- --------- ---------
Net loss ........................................ (13,959) (14,452) (16,881) (11,583) (9,570)
Preferred stock dividends ....................... 4,135 3,791 3,485 3,204 2,945
Common stock warrant deemed dividends ........... --- --- --- 210 ---
--------- --------- --------- --------- ---------
Net loss applicable to common
stockholders ................................ $ (18,094) $ (18,243) $ (20,366) $ (14,997) $ (12,515)
========= ========= ========= ========= =========
Basic/diluted net loss per share applicable to
common stockholders ......................... $ (0.41) $ (0.50) $ (0.64) $ (0.61) $ (0.63)
========= ========= ========= ========= =========
Weighted average common shares used in
computing basic/diluted net loss per share.... 44,349 36,190 31,793 24,556 19,861
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments ....................... $ 11,176 $ 16,679 $ 17,439 $ 10,726 $ 9,955
Working capital ................................. 8,740 15,033 13,786 9,758 9,754
Total assets .................................... 11,642 17,255 18,099 13,233 13,389
Accumulated deficit ............................. (205,713) (187,619) (169,376) (149,009) (134,011)
Total stockholders' equity ...................... 9,047 15,384 14,303 10,871 11,453
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We are a product-based biopharmaceutical company engaged in the discovery
and development of small molecule drugs to reverse or slow down diseases of
aging and complications of diabetes. Our product candidates represent novel
approaches to some of the largest pharmaceutical markets. Our lead compound,
alagebrium, is in Phase 2 clinical development for systolic hypertension, DHF
and ED. We have identified several other promising drug candidates for future
development; none of these other candidates is currently in active clinical
development. Our pharmaceutical candidates were developed as a result of our
research on the A.G.E. pathway, a fundamental pathological process and
inevitable consequence of aging that causes or contributes to many medical
disorders.
27
Alagebrium is our lead product candidate and we believe it to be the only
A.G.E. Crosslink Breaker in advanced human clinical testing. We initiated
several Phase 2 studies of alagebrium during 2004: the SPECTRA trial in systolic
hypertension and the PEDESTAL study in heart failure, as well as a study in
endothelial dysfunction. We initiated a Phase 2a study in ED, EMERALD, in
January 2005. Several Phase 2 clinical studies have been completed: the DIAMOND
study in DHF, the SAPPHIRE/SILVER trial in systolic hypertension and a study in
cardiovascular compliance. Of the approximately 1,300 patients who have
participated in the Phase 1 and Phase 2 clinical studies of alagebrium to date,
approximately 1,000 patients have received alagebrium and approximately 300
patients have received placebo. The compound has demonstrated an excellent
safety profile in all human clinical testing to date.
In December 2004, we announced that findings of a two-year toxicity study
indicated that male Sprague Dawley rats exposed to high doses of alagebrium over
their natural lifetime developed dose-related increases in liver cell
alterations and tumors, and that the liver tumor rate was slightly over the
expected background rate in this gender and species of rat. The relevance of
these findings to humans is unknown. Our DMC has reviewed the cumulative human
safety data and previous pre-clinical experience of alagebrium and found that
the data did not demonstrate an association with the lifetime carcinogenicity
study in rats. We have previously completed four genotoxicity studies of
alagebrium to help determine potential toxicities in humans, and these studies
have not indicated any potential human risk. Earlier pre-clinical toxicity
studies found no mutagenic or carcinogenic activity in either rats or mice. We
also announced in December 2004 our intent to conduct a series of pre-clinical
experiments to explore the mechanism by which the liver tumors developed and the
relevance of such tumors to human exposure. In February 2005, we voluntarily and
temporarily suspended enrollment of new patients into our ongoing clinical
studies of alagebrium pending receipt of additional pre-clinical data, which are
expected by mid-year 2005. We expect that decisions regarding resumption of
enrollment will be made at that time. Prior to resuming enrollment into any of
our clinical studies of alagebrium, we intend to review all relevant findings
with appropriate oversight entities, including our DMC, IRBs and the FDA. We
cannot predict at this time when enrollment in our clinical studies will resume,
if ever. If we are unable to resume enrollment in our clinical studies in a
timely manner, or at all, our business will be materially adversely affected.
Our primary priorities are to continue the clinical development of
alagebrium in systolic hypertension, diastolic dysfunction in heart failure and
ED and to ensure that we have the funding and personnel necessary to accomplish
this objective.
As we continue clinical development of alagebrium, we will determine if it
is appropriate to retain development and marketing rights for one or several
indications in North America, while at the same time continuing to evaluate
potential corporate partnerships for the further development and ultimate
marketing of the compound in other territories throughout the world. We believe
that alagebrium may address the cardiovascular, diabetes, urology and primary
care physician markets.
We continue to evaluate potential pre-clinical and clinical trials in
other therapeutic indications in which A.G.E. Crosslink Breaker compounds may
address significant unmet needs. In addition to our clinical studies in systolic
hypertension, heart failure, endothelial dysfunction and ED, we have early
research studies focused on atherosclerosis; Alzheimer's disease; photoaging of
the skin; eye diseases, including AMD and glaucoma; and diabetic complications,
including renal diseases.
Since our inception in October 1986, we have devoted substantially all of
our resources to research, drug discovery and development programs. To date, we
have not generated any revenues from the sale of products and do not expect to
generate any such revenues for a number of years, if at all. We have incurred an
accumulated deficit of $205,713,000 as of December 31, 2004, and expect to incur
net losses, potentially greater than losses in prior years, for a number of
years.
We have financed our operations through proceeds from public offerings of
common stock, private placements of common and preferred equity securities,
revenue from former collaborative relationships, reimbursement of certain of our
research and development expenses by our collaborative partners, investment
income earned on cash balances and short-term investments and the sale of a
portion of our New Jersey State net operating loss carryforwards.
Our business is subject to significant risks including, but not limited
to, (1) our ability to resume enrollment in our clinical studies of alagebrium,
(2) our ability to obtain funding, (3) the risks inherent in our research and
development efforts, including clinical trials and the length, expense and
uncertainty of the process of
28
seeking regulatory approvals for our product candidates, (4) our reliance on
alagebrium, which is our only significant drug candidate, (5) uncertainties
associated with obtaining and enforcing our patents and with the patent rights
of others, (6) uncertainties regarding government healthcare reforms and product
pricing and reimbursement levels, (7) technological change and competition, (8)
manufacturing uncertainties, and (9) dependence on collaborative partners and
other third parties. Even if our product candidates appear promising at an early
stage of development, they may not reach the market for numerous reasons. These
reasons include the possibilities that the products will prove ineffective or
unsafe during pre-clinical or clinical studies, will fail to receive necessary
regulatory approvals, will be difficult to manufacture on a large scale, will be
uneconomical to market or will be precluded from commercialization by
proprietary rights of third parties. These risks and others are discussed under
the heading "Forward-Looking Statements and Cautionary Statements."
RESULTS OF OPERATIONS
Years Ended December 2004, 2003, 2002
Revenues
Total revenues for 2004, 2003 and 2002 were $334,000, $179,000 and
$410,000, respectively. Revenues were derived from interest earned on cash and
cash equivalents, other income, and short-term investments. Investment income in
2004 was slightly higher than 2003 due to an increase in short-term interest
rates, partially offset by lower investment balances. In 2004, other income
included approximately $52,000 derived from the sale of fully depreciated
laboratory equipment and supplies and a reimbursement of $100,000 for
improvements made to our former Ramsey facility. The decrease in revenues in
2003 versus 2002 was attributed to decreased investment balances and decreased
interest rates.
Operating Expenses
Total expenses decreased to $14,679,000 in 2004 from $14,976,000 in 2003
and from $17,938,000 in 2002 and consisted primarily of research and development
expenses. Total expenses also included non-cash stock compensation
expense/(benefit) resulting from our repricing of certain stock options of $0,
$20,000 and ($1,409,000) in 2004, 2003 and 2002, respectively.
Research and development expenses were $10,147,000 in 2004, $9,930,000 in
2003 and $14,992,000 in 2002, and included non-cash variable stock compensation
expense/(benefit) of $0, $20,000 and $(94,000), respectively. These expenses
consisted primarily of third-party expenses associated with pre-clinical and
clinical studies, manufacturing costs, including the development and preparation
of clinical supplies, personnel and personnel-related expenses and an allocation
of facility expense.
In 2004, we continued the clinical development of alagebrium. In March
2004, we initiated SPECTRA, a Phase 2b clinical trial in patients with systolic
hypertension. The trial is being conducted at over 70 clinical sites throughout
the United States and approximately 400 patients are expected to be enrolled. In
February 2005, we voluntarily and temporarily suspended enrollment of new
patients into SPECTRA pending receipt of additional pre-clinical data. We expect
that decisions regarding resumption of enrollment will be made upon receipt of
additional pre-clinical data. Prior to resuming enrollment in any of our
clinical studies of alagebrium, we intend to review all relevant findings with
appropriate oversight entities, including our DMC, IRBs and the FDA.
In April 2004, we initiated PEDESTAL, a Phase 2a study being conducted at
Baylor Heart Clinic in Houston. PEDESTAL is designed to evaluate the effect of
alagebrium on diastolic dysfunction and left ventricular mass in patients with
significant heart failure. In December 2004, we announced preliminary data from
the initial 14 (of planned 20) patients in the study. As with SPECTRA, in
February 2005, we voluntarily and temporarily suspended enrollment of new
patients into PEDESTAL. We expect that decisions regarding resumption of
enrollment will be made upon receipt of additional pre-clinical data. Prior to
resuming enrollment in any of our clinical studies of alagebrium, we intend to
review all relevant findings with appropriate oversight entities, including our
DMC, IRBs and the FDA.
Research and development expenses increased to $10,147,000 in 2004 from
$9,930,000 in 2003, an increase of $218,000, or 2.2%. This was primarily related
to increased clinical trial costs and manufacturing
29
expenses and offset by lower facility cost. In 2004, $3,222,000 of the total
research and development expenditures related to SPECTRA. The 2004 results also
included $3,901,000 in personnel and personnel-related costs, $1,088,000 of
manufacturing costs primarily related to tableting, packaging and drug stability
studies, $472,000 in facility allocation, $459,000 in consulting expense,
$392,000 in pre-clinical expenses and $387,000 in trial-related insurance.
Research and development expenses decreased to $9,930,000 in 2003 from
$14,992,000 in 2002, a decrease of $5,062,000, or 33.8%. In 2003, $1,788,000 of
the total research and development expenditures was related to the Phase 2b
SAPPHIRE/SILVER trial. The equivalent amount in 2002 was $6,631,000. This
reduction is a result of the completion of the Phase 2b SAPPHIRE/SILVER trial in
July 2003. The 2003 results also included $4,147,000 in personnel and
personnel-related costs, $1,279,000 in facility allocation, $751,000 in
pre-clinical expenses, $672,000 of manufacturing costs (tableting, drug
stability studies and active pharmaceutical ingredient development) and $432,000
in consulting expense.
General and administrative expenses were $4,532,000 in 2004, a decrease
from $5,046,000 in 2003 and an increase from $2,946,000 in 2002. The decrease
included $266,000 in patent expense as a result of higher expenses in 2003
associated with changing patent counsel; $320,000 in reduced facility expenses
associated with the relocation to Parsippany and $137,000 in reduced marketing
expenses related to the use of consultants. The increase in 2003 over 2002 is
primarily related to $550,000 of marketing costs incurred during 2003 associated
with the unblinding of data from the SAPPHIRE/SILVER trial and non-cash variable
stock compensation benefit in 2002 of $(1,316,000).
At December 31, 2004, we had available federal net operating loss
carryforwards of $155,533,000, which expire in various amounts from the years
2006 through 2024, and state net operating loss carryforwards of $80,211,000,
which expire in the years 2005 through 2011. In addition, at December 31, 2004,
we had federal research and development tax credit carryforwards of $6,859,000
and state research and development tax credit carryforwards of $1,519,000.
Net Loss
We had net losses of $13,959,000 in 2004, $14,452,000 in 2003 and
$16,882,000 in 2002. Included in our net loss in 2004, 2003 and 2002 was the
sale of $3,456,000, $2,083,000 and $1,839,000, respectively, of our state net
operating loss carryforwards and $123,000, $209,000 and $578,000, respectively,
of our state research and development tax credit carryforwards. The proceeds
from the sale of these carryforwards in 2004, 2003 and 2002 were $386,000,
$345,000 and $647,000, respectively.
Included in the net loss applicable to common stockholders for 2004, 2003
and 2002 were preferred stock dividends of $4,135,000, $3,791,000 and
$3,485,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents at December 31, 2004 of $11,176,000
compared to $16,679,000 at December 31, 2003, a decrease of $5,503,000. Cash
used in operating activities for the year ended December 31, 2004, totaled
$13,110,000 (net of $386,000 of cash received for the sales of our New Jersey
state net operating loss carryforwards and state research and development tax
credit carryforwards) and consisted primarily of research and development
expenses, personnel and related costs, and facility expenses. Cash provided by
investing activities totaled $20,646 for the year ended December 31, 2004 and
included $81,000 of capital expenditures offset by a decrease in restricted cash
of $50,000 required by our facility lease, and proceeds from the sale of
equipment of $52,000. Cash provided by financing activities for the year ended
December 31, 2004 was $7,586,000 and arose from a July 2004 public offering of
8,000,000 shares of common stock at $1.00 per share, which provided net proceeds
of $7,581,000, and $5,000 in proceeds from stock option exercises.
In January 2005, we completed a public offering of 9,523,813 shares of
common stock at $1.05 per share, which provided net proceeds of $9,545,000 (see
Notes 2 and 10).
In 2004, 2003 and 2002, we sold $3,456,000, $2,083,000 and $1,839,000,
respectively, of our gross state net operating loss carryforwards and $123,000,
$209,000 and $578,000, respectively, of our state research and development tax
credit carryforwards under the State of New Jersey's Technology Business Tax
Certificate Transfer Program or the Program. The Program allows qualified
technology and biotechnology businesses in New Jersey to
30
sell unused amounts of net operating loss carryforwards and defined research and
development tax credits for cash. Due to the uncertainty at any time as to our
ability to effectuate the sale of our available New Jersey state net operating
losses, and since we have no control or influence over the Program, the benefits
are recorded once the agreement with the counterparty is signed and the sale is
approved by the State. The proceeds from the sale in 2004, 2003 and 2002 were
$386,000, $345,000 and $647,000, respectively, and such amounts were recorded as
a tax benefit in the statements of operations. As of December 31, 2004, we had
state net loss carryforwards and state research and development tax credit
carryforwards available for sale of $81,730,000. We cannot be certain if we will
be able to sell any or all of these carryforwards under the Program.
We do not have any approved products and currently derive cash from sales
of our securities, sales of our New Jersey state net operating loss
carryforwards and interest on cash and cash equivalents. We are highly
susceptible to conditions in the global financial markets and in the
pharmaceutical industry. Positive and negative movement in those markets will
continue to pose opportunities and challenges to us. Previous downturns in the
market valuations of biotechnology companies and of the equity markets more
generally have restricted our ability to raise additional capital on favorable
terms.
We expect to utilize cash and cash equivalents to fund our operating
activities, including the ongoing Phase 2 studies of our lead compound,
alagebrium. The first two of these Phase 2 studies, the SPECTRA trial and the
PEDESTAL study were initiated in 2004, and the EMERALD study was initiated in
2005. In February 2005, we voluntarily and temporarily suspended enrollment of
new patients into our ongoing clinical studies of alagebrium pending receipt of
additional pre-clinical data, which are expected by mid-year 2005. We expect
that decisions regarding resumption of enrollment will be made at that time.
Clinical studies of alagebrium are ongoing and patients currently enrolled in
these clinical studies are continuing treatment. Assuming enrollment is resumed
by mid-year 2005, the remaining cost of these studies, exclusive of our internal
cost, is estimated to be $7.1 million. The cost includes executed, but
cancelable, agreements with outside organizations. The estimated cost includes
additional expenses for SPECTRA as a result of our decision to increase the
number of clinical sites and to engage a clinical research organization. In
January 2005, we completed a sale of common stock, which provided net proceeds
of approximately $9.5 million. We will actively continue to pursue fund-raising
possibilities through the sale of our equity securities. If we are unsuccessful
in our efforts to raise additional funds through the sale of additional equity
securities, we will be required to significantly reduce or curtail our research
and product development activities, including the number of patients enrolled in
our studies, and other operations if our level of cash and cash equivalents
falls below anticipated levels. We have the intent and ability to quickly and
significantly reduce the cash burn rate, if necessary, as we have limited fixed
commitments. We expect to have sufficient cash and cash equivalents to satisfy
our working capital requirements at least into the first quarter of 2006, either
by future fund-raising or, if needed, curtailment actions.
The amount and timing of our future capital requirements will depend on
numerous factors, including the progress of our research and development
programs, the number and characteristics of product candidates that we pursue,
the conduct of pre-clinical tests and clinical studies, the status and timelines
of regulatory submissions, the costs associated with protecting patents and
other proprietary rights, the development of marketing and sales capabilities,
our ability to complete strategic collaborations and the availability of
third-party funding.
Our current priorities and the focus of our resources are the evaluation
and continued development of alagebrium and determining the optimal course for
the development of other compounds in our patent estate. As we continue clinical
development of alagebrium, we will determine if it is appropriate to retain
development and marketing rights for one or several indications in North
America, while at the same time, continuing to evaluate potential corporate
partnerships for the further development and ultimate marketing of the compound
throughout the world.
We will require, over the long term, substantial additional funding to
pursue development and commercialization of alagebrium and our other product
candidates and to continue our operations. We believe that satisfying these
capital requirements over the long term will require successful
commercialization of our product candidates, particularly alagebrium. However,
it is uncertain whether alagebrium or any product candidate will be approved or
will be commercially successful.
31
Selling securities to satisfy our short-term and long-term capital
requirements may have the effect of materially diluting the current holders of
our outstanding stock. We may also seek additional funding through corporate
collaborations and other financing vehicles. There can be no assurance that such
funding will be available at all or on terms acceptable to us. If adequate funds
are not available, we may be required to curtail significantly one or more of
our research and development programs. If we obtain funds through arrangements
with collaborative partners or others, we may be required to relinquish rights
to certain of our technologies or product candidates. If we are unable to obtain
the necessary funding, we may need to cease operations.
COMMITMENTS
The table below presents our contractual obligations as of December 31,
2004:
Payments Due by Period
----------------------------------------------------
Within 1 1-3 4-5 After 5
Total Year Years Years Years
---------- ----------- -------- -------- -------
Contractual Obligations:
Operating lease commitments........... $ 661,445 $ 320,939 $340,506 $ --- $ ---
Employment agreements (1)............. 873,681 873,681 --- --- ---
---------- ----------- -------- -------- -------
Total contractual obligations...... $1,535,126 $ 1,194,620 $340,506 $ --- $ ---
========== =========== ======== ======== =======
(1) We have employment agreements with key executives, which provide that
either party may terminate the agreement upon 30 days' prior written
notice. If we terminate all of the agreements without cause, we are
subject to a salary continuation obligation totaling $873,681.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC issued a statement concerning certain views of
the SEC regarding the appropriate amount of disclosure by publicly held
companies with respect to their critical accounting policies. In particular, the
SEC expressed its view that in order to enhance investor understanding of
financial statements, companies should explain the effects of critical
accounting policies as they are applied, the judgments made in the application
of these policies and the likelihood of materially different reported results if
different assumptions or conditions were to prevail. We have since carefully
reviewed the disclosures included in our filings with the SEC, including,
without limitation, this Annual Report on Form 10-K and accompanying audited
financial statements and related notes thereto. We believe the effect of the
following accounting policy is significant to our results of operations and
financial condition.
We account for options granted to employees and directors using the
intrinsic value method in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As such, compensation
expense is recorded on fixed stock grants only if the current fair value of the
underlying stock exceeds the exercise price of the option at the date of grant
and it is recognized on a straight-line basis over the vesting period. Based on
the performance of our stock, we repriced certain employee stock options on
February 2, 1999. As a result of this repricing, options to purchase 1.06
million shares of stock were repriced and certain vesting periods related to
these options were modified or extended. FIN No. 44, "Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB Opinion No.
25" requires us to record compensation expense or benefit, which is adjusted
every quarter, for increases or decreases in the fair value of the repriced
options based on changes in our stock price from the value at July 1, 2000,
until the adoption of newly issued accounting rules on July 1, 2005 described
below. As a result, net loss applicable to common stockholders and net loss per
share applicable to common stockholders may be subject to volatility. Had we
accounted for repricing of stock option grants in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," the expense related to the vested
options would have been recorded at the repricing date, and the expense related
to non-vested options would have been recorded over the vesting period.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment," or SFAS No. 123(R), which replaces the FASB Statement No.
123 and will be effective for us beginning no later than July 1, 2005. This
Statement requires that the costs of employee share-based payments be measured
at fair value on the awards' grant date using an option-pricing model and
recognized in the financial statements over the requisite service period.
32
SFAS No. 123(R) allows for two alternative transition methods. The first method
is the modified prospective application whereby compensation cost for the
portion of awards for which the requisite service has not yet been rendered that
are outstanding as of the adoption date will be recognized over the remaining
service period. The compensation cost for that portion of awards will be based
on the grant date fair value of those awards as calculated for pro forma
disclosures under SFAS No. 123, as originally issued. All new awards and awards
that are modified, repurchased or cancelled after the option date will be
accounted for under the provisions of SFAS No. 123(R). The second method is the
modified retrospective application, which requires that we restate prior period
financial statements. The modified retrospective application may be applied
either to all prior periods or only to prior interim periods in the year of
adoption of this statement. We are currently determining which transition method
we will adopt and are evaluating the impact SFAS No. 123(R) will have on our
financial position and results of operations. However, we believe it may have a
material effect on our results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk for changes in interest rates relates
primarily to our investment in marketable securities. We do not use derivative
financial instruments in our investments. Our investments consist primarily of
debt instruments of the United States government, government agencies, financial
institutions and corporations with strong credit ratings.
Accordingly, we do not believe that there is any material market risk
exposure with respect to derivative or other financial instruments that would
require disclosure under this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(a) The financial statements required to be filed pursuant to this Item 8
are appended to this Annual Report on Form 10-K. A list of the financial
statements filed herewith is found at "Index to Financial" on page 37.
(b) The unaudited quarterly financial data for the two-year period ended
December 31, 2004 is as follows:
Net Loss
Loss Before Applicable to
Income Tax Common Basic/Diluted
Income Expenses Benefit Stockholders Loss Per Share
-------- -------- ----------- ------------- --------------
(in thousands, except per share amounts)
2004
First Quarter............. $ 89 $ 3,824 $ (3,735) $ (4,731) $ (0.12)
Second Quarter............ 129 3,631 (3,502) (4,519) (0.11)
Third Quarter............. 55 3,065 (3,010) (4,060) (0.08)
Fourth Quarter............ 61 4,159 (4,098) (4,784) (0.10)
-------- -------- --------- --------- --------
Total Year............. $ 334 $ 14,679 $ (14,345) $ (18,094) $ (0.41)
2003
First Quarter............. $ 49 $ 5,272 $ (5,223) $ (6,128) $ (0.18)
Second Quarter............ 55 5,117 (5,062) (5,997) (0.17)
Third Quarter............. 36 1,743 (1,707) (2,672) (0.07)
Fourth Quarter............ 39 2,844 (2,805) (3,446) (0.08)
-------- -------- --------- --------- --------
Total Year............. $ 179 $ 14,976 $ (14,797) $ (18,243) $ (0.50)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and our Vice President, Finance, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e)) under the
Exchange Act as of the end of the fiscal year covered by this Annual Report on
Form 10-K. Based upon that evaluation, the Chief Executive Officer and the Vice
President, Finance, have concluded that as of the end of such fiscal year
subject to the weaknesses being considered as discussed in the final paragraph
of this Item 9A, our current disclosure controls and procedures are adequate and
effective to ensure that
33
information required to be disclosed in the reports we file under the Exchange
Act is recorded, processed, summarized and reported on a timely basis.
(b) Changes in Internal Controls. There was no change in our internal
controls over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) during the last quarter of the year ended December 31, 2004 that
has materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
We are in the process of documenting and testing our internal control
procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act, which requires annual management assessments of the
effectiveness of our internal controls over financial reporting and a report by
our independent registered public accounting firm addressing these assessments.
In meetings with management and with the Audit Committee of the Board of
Directors, J.H. Cohn LLP, or J.H. Cohn, our independent registered public
accounting firm, informed us that, based on its preliminary review, of our
internal Controls as required by Section 404 of the Sarbanes-Oxley Act, we have
certain weaknesses, which in their opinion have the potential to be deemed to be
material weaknesses in our internal controls relating to information technology
controls and process controls with respect to processing of outgoing checks. We
are working with J.H. Cohn to be able to determine definitively the
classification of these control deficiencies. During the completion of our
testing, we and J.H. Cohn may identify certain additional weaknesses or
deficiencies that we are not able to remediate in time to meet the deadline
imposed by the Sarbanes-Oxley Act for compliance with the requirements of
Section 404. As permitted by the SEC Release Nos. 33-8238 and 34-47986, and SEC
Exemptive Order No. 34-50754, we intend to file our management's report on
internal controls and J.H. Cohn's related attestation report as part of an
amendment to this Annual Report on Form 10-K no later than May 2, 2005. We will
include our conclusions with respect to the issues referred to above in the
Form 10-K amendment.
ITEM 9B. OTHER INFORMATION.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The response to this Item is incorporated by reference from the discussion
responsive thereto under the captions "Election of Directors," "Executive
Officers," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Code
of Business Conduct and Ethics" in our Proxy Statement for the 2005 Annual
Meeting of Stockholders to be held on June 29, 2005.
Disclosure regarding any amendments to, or waivers from, provisions of the
Code of Conduct and Ethics that apply to our directors, principal executive and
financial officers will be included in a Current Report on Form 8-K within four
business days following the date of the amendment or waiver, unless website
posting of such amendments or waivers is permitted by the Rules of the American
Stock Exchange.
ITEM 11. EXECUTIVE COMPENSATION.
The response to this Item is incorporated by reference from the discussion
responsive thereto under the captions "Executive Compensation," "Election of
Directors - Compensation of Directors" and "Compensation Committee Report" in
our Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on
June 29, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The response to this Item is incorporated by reference from the discussion
responsive thereto under the captions "Executive Compensation - Equity
Compensation Plan Information" and "Security Ownership of Certain Beneficial
Owners and Management" in our Proxy Statement for the 2005 Annual Meeting of
Stockholders to be held on June 29, 2005.
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this Item is incorporated by reference from the discussion
responsive thereto under the caption "Certain Relationships and Related
Transactions" in our Proxy Statement for the 2005 Annual Meeting of Stockholders
to be held on June 29, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The response to this Item is incorporated by reference from the discussion
responsive thereto under the caption "Ratification of the Appointment of
Independent Registered Public Accounting Firm" in our Proxy Statement for the
2005 Annual Meeting of Stockholders to be held on June 29, 2005.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS.
(a) Financial Statements.
Our audited financial statements and the Reports of the Independent
Registered Public Accounting Firms are appended to this Annual Report on Form
10-K. Reference is made to the "Index to Financial Statements" on page 37.
(b) Exhibits.
The exhibits required to be filed are listed on the "Exhibit Index"
attached hereto, which is incorporated herein by reference.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized this 15th
day of March 2005.
ALTEON INC.
By: /s/ Kenneth I. Moch
--------------------------------------------
Kenneth I. Moch
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------------------------------- ------------------------------------------------ --------------
/s/ Kenneth I. Moch Chairman of the Board, March 15, 2005
------------------------------
Kenneth I. Moch President and Chief Executive Officer
(principal executive officer)
/s/ Elizabeth A. O'Dell Vice President, Finance, Secretary and Treasurer March 15, 2005
------------------------------
Elizabeth A. O'Dell (principal accounting officer)
/s/ Edwin D. Bransome, Jr., M.D. Director March 15, 2005
---------------------------------
Edwin D. Bransome, Jr., M.D.
/s/ Marilyn G. Breslow Director March 15, 2005
------------------------------
Marilyn G. Breslow
/s/ Alan J. Dalby Director March 15, 2005
------------------------------
Alan J. Dalby
/s/ David K. McCurdy Director March 15, 2005
------------------------------
David K. McCurdy
/s/ Thomas A. Moore Director March 15, 2005
------------------------------
Thomas A. Moore
/s/ George M. Naimark, Ph.D. Director March 15, 2005
------------------------------
George M. Naimark, Ph.D.
/s/ Mark Novitch, M.D. Director March 15, 2005
------------------------------
Mark Novitch, M.D.
36
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm - J.H. Cohn LLP............. 38
Report of Independent Registered Public Accounting Firm - KPMG LLP.................. 39
Financial Statements:
Balance Sheets at December 31, 2004 and 2003............................... 40
Statements of Operations for the years ended
December 31, 2004, 2003 and 2002........................................ 41
Statements of Stockholders' Equity for the years ended
December 31, 2004, 2003 and 2002........................................ 42
Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002........................................ 43
Notes to Financial Statements.............................................. 44
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Alteon Inc.:
We have audited the accompanying balance sheet of Alteon Inc. as of December 31,
2004, and the related statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alteon Inc. as of December 31,
2004, and its results of operations and cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ J.H. Cohn LLP
Roseland, New Jersey
February 25, 2005
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Alteon Inc.:
We have audited the accompanying balance sheet of Alteon Inc. as of December 31,
2003, and the related statements of operations, stockholders' equity and cash
flows for the years ended December 31, 2003 and 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alteon Inc. as of December 31,
2003, and the results of its operations and its cash flows for the years ended
December 31, 2003 and 2002, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Short Hills, New Jersey
March 3, 2004
39
ALTEON INC.
BALANCE SHEETS
December 31, December 31,
2004 2003
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 11,175,762 $ 16,678,582
Other current assets .................................... 159,364 225,439
------------- -------------
Total current assets .................................. 11,335,126 16,904,021
Property and equipment, net ................................ 107,269 100,964
Restricted cash ............................................ 200,000 250,000
------------- -------------
Total assets .......................................... $ 11,642,395 $ 17,254,985
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................ $ 593,094 $ 470,841
Accrued expenses ........................................ 2,002,381 1,399,712
------------- -------------
Total liabilities ..................................... 2,595,475 1,870,553
------------- -------------
Stockholders' Equity:
Preferred stock, $0.01 par value,
1,993,329 shares authorized, and 1,277 and 1,174 shares
of Series G and 3,836 and 3,525 shares of Series H
issued and outstanding, as of December 31, 2004 and
December 31, 2003, respectively. The liquidation value
at December 31, 2004 was $51,127,569 .................. 51 47
Common stock, $0.01 par value,
175,000,000 and 80,000,000 shares authorized, and
48,472,898 and 40,467,148 shares issued and
outstanding, as of December 31, 2004 and December
31, 2003, respectively ................................ 484,729 404,671
Additional paid-in capital .............................. 214,274,790 202,598,573
Accumulated deficit ..................................... (205,712,650) (187,618,859)
------------- -------------
Total stockholders' equity ............................ 9,046,920 15,384,432
------------- -------------
Total liabilities and stockholders' equity ................. $ 11,642,395 $ 17,254,985
============= =============
The accompanying notes are an integral part of
these financial statements.
40
ALTEON INC.
STATEMENTS OF OPERATIONS
Year ended December 31,
---------------------------------------------
2004 2003 2002
------------- ------------- -------------
Income:
Investment income..................................................... $ 182,574 $ 179,006 $ 409,853
Other income ....................................................... 151,821 --- ---
------------ ------------ ------------
Total income..................................................... 334,395 179,006 409,853
------------ ------------ ------------
Expenses:
Research and development
(which includes non-cash variable stock compensation
expense/(benefit) in 2004, 2003 and 2002
of $0, $20,019 and $(93,516), respectively)......................... 10,147,298 9,929,704 14,992,418
General and administrative
(which includes non-cash variable stock
compensation expense/(benefit) in 2004, 2003 and 2002 of $0,
$0, and $(1,315,635), respectively)................................. 4,531,953 5,046,357 2,945,846
------------ ------------ ------------
Total expenses................................................... 14,679,251 14,976,061 17,938,264
------------ ------------ ------------
Loss before income tax benefit........................................... (14,344,856) (14,797,055) (17,528,411)
Income tax benefit.................................................... 386,210 344,637 646,500
------------ ------------ ------------
Net loss................................................................. (13,958,646) (14,452,418) (16,881,911)
Preferred stock dividends............................................. 4,135,145 3,790,847 3,485,042
------------ ------------ ------------
Net loss applicable to common stockholders............................... $(18,093,791) $(18,243,265) $(20,366,953)
============ ============ ============
Basic/diluted net loss per share applicable
to common stockholders ............................................... $ (0.41) $ (0.50) $ (0.64)
============ ============ ============
Weighted average common shares used in computing basic/diluted net
loss per share applicable to common stockholders...................... 44,349,015 36,189,655 31,793,466
============ ============ ============
The accompanying notes are an integral part of these financial statements.
41
ALTEON INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Additional
----------------- ---------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------- ------- ----------- --------- -------------- ---------------
Balances at
DECEMBER 31, 2001........................... 3,972 $ 40 27,314,846 $ 273,148 $ 159,596,934 $ (149,008,641)
Net loss.................................. --- --- --- --- --- (16,881,911)
Change in unrealized gains/(losses)....... --- --- --- --- --- ---
Comprehensive loss........................
Issuance of Series G and H
preferred stock dividends............... 348 3 --- --- 3,485,039 (3,485,042)
Exercise of employee stock
options................................. --- --- 121,710 1,217 120,797 ---
Public offerings of common stock.......... --- --- 6,164,285 61,643 21,513,373 ---
Compensation benefit related to
variable plan employee stock
options................................. --- --- --- --- (1,409,151) ---
Compensation expense
in connection with the issuance
of non-qualified stock options
granted to non-employees................ --- --- --- --- 34,424 ---
----- ------- ---------- --------- ------------- --------------
DECEMBER 31, 2002........................... 4,320 43 33,600,841 336,008 183,341,416 (169,375,594)
Net loss.................................. --- --- --- --- --- (14,452,418)
Change in unrealized gains/(losses)....... --- --- --- --- --- ---
Comprehensive loss........................
Issuance of Series G and H
preferred stock dividends............... 379 4 --- --- 3,790,843 (3,790,847)
Exercise of employee stock
options................................. --- --- 51,688 517 54,937 ---
Public offerings of common stock.......... --- --- 6,757,146 67,571 15,360,705 ---
Exercise of warrants...................... --- --- 57,473 575 (575) ---
Compensation expense related to
variable plan employee stock
options................................. --- --- --- --- 20,019 ---
Compensation expense
in connection with the issuance
of non-qualified stock options
granted to non-employees................ --- --- --- --- 31,228 ---
----- ------- ---------- --------- ------------- --------------
DECEMBER 31, 2003........................... 4,699 47 40,467,148 404,671 202,598,573 (187,618,859)
Net loss.................................. --- --- --- --- --- (13,958,646)
Issuance of Series G and H
preferred stock dividends............... 414 4 --- --- 4,135,141 (4,135,145)
Exercise of employee stock
options................................. --- --- 5,750 58 5,027 ---
Public offerings of common stock.......... --- --- 8,000,000 80,000 7,501,318 ---
Compensation expense
in connection with the issuance
of non-qualified stock options
granted to non-employees................ --- --- --- --- 34,731 ---
----- ------- ---------- --------- ------------- --------------
DECEMBER 31, 2004........................... 5,113 $ 51 48,472,898 $ 484,729 $ 214,274,790 $ (205,712,650)
===== ======= ========== ========= ============= ==============
Accumulated
Other Total
Comprehensive Stockholders'
Income/(Loss) Equity
-------------- ------------
Balances at
DECEMBER 31, 2001........................... $ 9,465 $ 10,870,946
------------
Net loss.................................. --- (16,881,911)
Change in unrealized gains/(losses)....... (8,101) (8,101)
------------
Comprehensive loss........................ (16,890,012)
Issuance of Series G and H
preferred stock dividends............... --- ---
Exercise of employee stock
options................................. --- 122,014
Public offerings of common stock.......... --- 21,575,016
Compensation benefit related to
variable plan employee stock
options................................. --- (1,409,151)
Compensation expense
in connection with the issuance
of non-qualified stock options
granted to non-employees................ --- 34,424
------------- ------------
DECEMBER 31, 2002........................... 1,364 14,303,237
------------
Net loss.................................. --- (14,452,418)
Change in unrealized gains/(losses)....... (1,364) (1,364)
------------
Comprehensive loss........................ (14,453,782)
Issuance of Series G and H
preferred stock dividends............... --- ---
Exercise of employee stock
options................................. --- 55,454
Public offerings of common stock.......... --- 15,428,276
Exercise of warrants...................... --- ---
Compensation expense related to
variable plan employee stock
options................................. --- 20,019
Compensation expense
in connection with the issuance
of non-qualified stock options
granted to non-employees................ --- 31,228
------------- ------------
DECEMBER 31, 2003........................... --- 15,384,432
Net loss.................................. --- (13,958,646)
Issuance of Series G and H
preferred stock dividends............... --- ---
Exercise of employee stock
options................................. --- 5,085
Public offerings of common stock.......... --- 7,581,318
Compensation expense
in connection with the issuance
of non-qualified stock options
granted to non-employees................ --- 34,731
------------- ------------
DECEMBER 31, 2004........................... $ --- $ 9,046,920
============= ============
The accompanying notes are an integral part of these financial statements.
42
ALTEON INC.
STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------------------------
2004 2003 2002
-------------- -------------- ---------------
Cash flows from operating activities:
Net loss................................................................. $ (13,958,646) $ (14,452,418) $ (16,881,911)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................ 74,870 502,826 637,162
Stock compensation expense............................................... 34,731 31,228 34,424
Gain on sale of laboratory equipment..................................... (51,821) --- ---
Non-cash compensation expense/(benefit) related
to variable plan employee stock options.............................. --- 20,019 (1,409,151)
Changes in operating assets and liabilities:
Other current assets..................................................... 66,075 (82,315) 1,254,456
Accounts payable and accrued expenses.................................... 724,922 (1,925,570) 1,433,990
-------------- -------------- --------------
Net cash used in operating activities................................ (13,109,869) (15,906,230) (14,931,030)
-------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures..................................................... (81,175) (86,167) (45,109)
Proceeds from sale of laboratory equipment............................... 51,821 --- ---
Purchases of marketable securities....................................... --- (3,015,164) (18,020,917)
Maturities of marketable securities...................................... --- 6,000,000 21,503,000
Restricted cash.......................................................... 50,000 (250,000) ---
-------------- -------------- --------------
Net cash provided by investing activities............................ 20,646 2,648,669 3,436,974
-------------- -------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock............................... 7,581,318 15,428,276 21,575,016
Net proceeds from exercise of employee stock
options.............................................................. 5,085 55,454 122,014
-------------- -------------- --------------
Net cash provided by financing activities........................... 7,586,403 15,483,730 21,697,030
-------------- -------------- --------------
Net (decrease)/increase in cash and cash equivalents............................ (5,502,820) 2,226,169 10,202,974
Cash and cash equivalents, beginning of year.................................... 16,678,582 14,452,413 4,249,439
-------------- -------------- --------------
Cash and cash equivalents, end of year.......................................... $ 11,175,762 $ 16,678,582 $ 14,452,413
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
43
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Alteon Inc., or Alteon, or the Company, is a product-based
biopharmaceutical company engaged in the discovery and development of small
molecule drugs to reverse or slow down diseases of aging and complications of
diabetes. The Company's product candidates represent novel approaches to some of
the largest pharmaceutical markets. The Company conducts its business in one
operating segment. Alteon's lead compound, alagebrium chloride (formerly
ALT-711), is in Phase 2 clinical development for systolic hypertension,
diastolic dysfunction in heart failure, or DHF, and erectile dysfunction, or ED.
The Company has identified several other promising drug candidates for future
development; none of these other candidates is currently in active clinical
development. The Company's pharmaceutical candidates were developed as a result
of its research on the Advanced Glycation End-Product, or A.G.E., pathway, a
fundamental pathological process and inevitable consequence of aging that causes
or contributes to many medical disorders. All of the Company's products are in
research or development, and no revenues have been generated from product sales.
Alagebrium is Alteon's lead product candidate and is believed to be the
only A.G.E. Crosslink Breaker in advanced human clinical testing. Based on
evidence of alagebrium's demonstrated safety, efficacy and biological activity
to date, several Phase 2a studies were initiated during 2004: the Phase 2b
SPECTRA trial (Systolic Pressure EffiCacy and Safety TRial of Alagebrium) in
systolic hypertension; the Phase 2a PEDESTAL study (Patients with Impaired
Ejection Fraction and Diastolic Dysfunction: Efficacy and Safety Trial of
ALagebrium) in heart failure; and a study in endothelial dysfunction. A Phase 2a
study in ED, EMERALD (Efficacy and Safety of AlagebriuM in ERectile Dysfunction
in MALe Diabetics), was initiated in January 2005.
In December 2004, Alteon announced that findings of a two-year toxicity
study indicated that male Sprague Dawley rats exposed to high doses of
alagebrium over their natural lifetime developed dose-related increases in liver
cell alterations and tumors, and that the liver tumor rate was slightly over the
expected background rate in this gender and species of rat. The relevance of
these findings to humans is unknown. The Company's Data Monitoring Committee, or
DMC, has reviewed the cumulative human safety data and previous pre-clinical
experience of alagebrium and found that the data did not demonstrate an
association with the lifetime carcinogenicity study in rats. The Company has
previously completed four genotoxicity studies of alagebrium to help determine
potential toxicities in humans, and these studies have not indicated any
potential human risk. Earlier pre-clinical toxicity studies found no mutagenic
or carcinogenic activity in either rats or mice. The Company also announced in
December 2004 its intent to conduct a series of pre-clinical experiments to
explore the mechanism by which the liver tumors developed and the relevance of
such tumors to human exposure. In February 2005, based on initial findings from
one of these subsequent studies that provided further direction for further
analysis, Alteon voluntarily and temporarily suspended enrollment of new
patients into its ongoing clinical studies pending receipt of additional
pre-clinical data, which are expected by mid-year 2005. The Company expects that
decisions regarding resumption of enrollment will be made at that time. Prior to
resuming enrollment in any of its clinical studies of alagebrium, the Company
intends to review all relevant findings with appropriate oversight entities,
including its DMC, Investigational Review Boards, or IRBs, and the U.S. Food
and Drug administration, or the FDA. Alteon cannot predict at this time when
enrollment in its clinical studies will resume, if ever. If the Company is
unable to resume enrollment in its clinical studies in a timely manner, or at
all, its business will be materially adversely affected.
As Alteon continues clinical development of alagebrium, it will determine
if it is appropriate to retain development and marketing rights for one or
several indications in North America, while at the same time continuing to
evaluate potential corporate partnerships for the further development and
ultimate marketing of the compound in other territories throughout the world.
The Company believes that alagebrium may address the cardiovascular, diabetes
urology and primary care physician markets.
Alteon plans to continue to evaluate potential pre-clinical and clinical
studies in other therapeutic indications in which A.G.E. Crosslink Breaker
compounds may address significant unmet needs. In addition to its ongoing
clinical studies in systolic hypertension, heart failure and ED, the Company has
early research studies focused on atherosclerosis; Alzheimer's disease;
photoaging of the skin; eye diseases, including Age-related Macular
Degeneration, or AMD, and glaucoma; and diabetic complications, including renal
diseases.
44
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's business is subject to significant risks including, but not
limited to, (1) Alteon's ability to resume enrollment in its clinical studies,
(2) the ability to obtain funding, (3) the risks inherent in its research and
development efforts, including clinical trials and the length, expense and
uncertainty of the process of seeking regulatory approvals for its product
candidates, (4) its reliance on alagebrium, which is its only significant drug
candidate, (5) uncertainties associated with obtaining and enforcing its patents
and with the patent rights of others, (6) uncertainties regarding government
healthcare reforms and product pricing and reimbursement levels, (7)
technological change and competition, (8) manufacturing uncertainties, and (9)
dependence on collaborative partners and other third parties. Even if the
Company's product candidates appear promising at an early stage of development,
they may not reach the market for numerous reasons. These reasons include the
possibilities that the products will prove ineffective or unsafe during
pre-clinical or clinical studies, will fail to receive necessary regulatory
approvals, will be difficult to manufacture on a large scale, will be
uneconomical to market or will be precluded from commercialization by
proprietary rights of third parties.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Estimates are used for, but not limited to: accrued expenses, income tax
valuation allowances and assumptions utilized within the Black-Scholes options
pricing model and the model itself. Accounting estimates require the use of
judgment regarding uncertain future events and their related effects and,
accordingly, may change as additional information is obtained.
Cash and Cash Equivalents and Short-Term Investments
Cash and cash equivalents include cash and highly liquid investments that
have a maturity of less than three months at the time of purchase. Short-term
investments are considered available-for-sale and are recorded at fair value, as
determined by quoted market prices, with changes in fair value recorded as a
component of accumulated other comprehensive income/(loss).
Financial Instruments
Financial instruments reflected in the balance sheets are recorded at
cost, which approximates fair value for cash equivalents, restricted cash,
accounts payable and other current liabilities.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the useful lives of owned
assets, which range from three to five years.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to the future undiscounted net
cash flows expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets and
would be charged to operations.
45
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Research and Development
Expenditures for research and development are charged to operations as
incurred.
Stock-Based Compensation
The Company accounts for employee stock-based compensation and awards
issued to non-employee directors using the intrinsic value method under
Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, under which no compensation
cost (excluding those options granted below fair market value) has been
recognized. Stock option awards issued to consultants and contractors are
accounted for in accordance with Statement of Financial Accounting Standards, or
SFAS, No. 123, "Accounting for Stock-Based Compensation," SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure" and
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments
that are Issued To Other Than Employees for Acquiring or In Conjunction with
Selling Goods or Services." In March 2000, the Financial Accounting Standards
Board, or the FASB, released Interpretation No. 44, or FIN No. 44, "Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25." The interpretation became effective on July 1, 2000, but in
some circumstances applies to transactions that occurred prior to the effective
date. Under the interpretation, stock options that are repriced must be
accounted for as variable-plan arrangements until the options are exercised,
forfeited or expire. This requirement applies to any options repriced after
December 15, 1998 (see Note 7).
If the Company had applied the fair value recognition provisions of SFAS
No. 123 to its employee and director option grants and had amortized the value
over the vesting period, the Company's pro forma net loss and net loss per share
applicable to common stockholders for 2004, 2003 and 2002 would be as follows:
Year Ended December 31,
-----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Net loss, as reported ................................. $(13,958,646) $(14,452,418) $(16,881,911)
Add: Variable non-cash employee
and director stock compensation expense/(benefit)
recognized in the statements of operations....... --- 20,019 (1,409,151)
Less: Total stock-based employee and director
compensation expense determined under
fair value method ............................... (868,390) (1,316,721) (1,892,584)
------------ ------------ ------------
Pro forma net loss .................................... (14,827,036) (15,749,120) (20,183,646)
Preferred stock dividends ............................. 4,135,145 3,790,847 3,485,042
------------ ------------ ------------
Pro forma net loss applicable to common stockholders .. $(18,962,181) $(19,539,967) $(23,668,688)
============ ============ ============
Net loss per share applicable to common stockholders:
Basic/diluted, as reported ...................... $ (0.41) $ (0.50) $ (0.64)
Basic/diluted, pro forma ....................... $ (0.43) $ (0.54) $ (0.74)
The fair value of each stock option grant, for recognition or disclosure
purposes, is calculated on the date of grant using the Black-Scholes option
pricing model with the following assumptions used for grants in 2004, 2003 and
2002, respectively: weighted average risk-free interest rate of 3.34 %, 3.24%
and 2.90%, respectively; weighted average expected life of 4.07, 5.31 and 4.49
years, respectively, and the contractual life for grants to consultants and
contractors; expected dividend yield of 0%; and weighted average expected
volatility of 134.16%, 132.35% and 108.98%, respectively.
As a result of issuance of SFAS No. 123(R), the Company will be required
to expense the fair value of employee stock options over the vesting period,
beginning with its fiscal quarter ending September 30, 2005.
46
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis and net operating loss and tax credit carryforwards. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in operations in the period that includes the
enactment date.
Net Loss Per Share Applicable to Common Stockholders
Basic net loss per share is computed by dividing net loss applicable to
common stockholders by the weighted average number of shares outstanding during
the year. Diluted net loss per share is the same as basic net loss per share
applicable to common stockholders, since the assumed exercise of stock options
and warrants and the conversion of preferred stock would be antidilutive. The
amount of potentially dilutive shares excluded from the calculation as of
December 31, 2004, 2003 and 2002 was 50,297,525, 36,969,371 and 28,870,120
shares, respectively.
NOTE 2 -- LIQUIDITY
The Company has devoted substantially all of its resources to research,
drug discovery and development programs. To date, it has not generated any
revenues from the sale of products and does not expect to generate any such
revenues for a number of years, if at all. As a result, Alteon has incurred net
losses since inception, has an accumulated deficit of $205,713,000 at December
31, 2004, and expects to incur net losses, potentially greater than losses in
prior years, for a number of years.
The Company has financed its operations through proceeds from the sale of
common and preferred equity securities, revenue from former collaborative
relationships, reimbursement of certain of our research and development expenses
by collaborative partners, investment income earned on cash and cash equivalent
balances and short-term investments and the sale of a portion of the Company's
New Jersey state net operating loss carryforwards and research and development
tax credit carryforwards.
In February 2005, Alteon voluntarily and temporarily suspended enrollment
of new patients into its ongoing clinical studies of alagebrium pending receipt
of additional pre-clinical data, which are expected by mid-year 2005. The
Company expects that decisions regarding resumption of enrollment will be made
at that time. Four clinical studies of alagebrium are ongoing and patients
currently enrolled in these clinical studies are permitted to continue
treatment.
As of December 31, 2004, the Company had working capital of $8,739,651,
including $11,175,762 of cash and cash equivalents. During 2004, the Company
sold 8,000,000 shares of common stock, raising net proceeds of $7,581,318 (see
Note 7). The Company's cash used in operating activities for the years ended
December 31, 2004, 2003 and 2002 was $13,109,869, $15,906,230 and $14,931,030,
respectively. The Company expects to utilize cash and cash equivalents to fund
its operating activities, including the ongoing Phase 2 studies of our lead
compound, alagebrium. In January 2005, the Company completed the sale of
9,523,813 shares of common stock, which provided net proceeds of approximately
$9.5 million. The Company will actively continue to pursue fund-raising
possibilities through the sale of its equity securities. If the Company is
unsuccessful in its efforts to raise additional funds through the sale of
additional equity securities or if the level of cash and cash equivalents falls
below anticipated levels, Alteon will be required to significantly reduce or
curtail its research and product development activities, including the number of
patients enrolled in the studies and other operations. The Company has the
ability to quickly and significantly reduce the cash burn rate, if necessary, as
it has limited fixed commitments. The Company expects to have sufficient cash
and cash equivalents to satisfy its working capital requirements at least into
the first quarter of 2006, either by future fund-raising or, if needed,
curtailment actions.
47
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The amount and timing of the Company's future capital requirements will
depend on numerous factors, including the progress of its research and
development programs, the number and characteristics of product candidates that
it pursues, the conduct of pre-clinical tests and clinical studies, the status
and timelines of regulatory submissions, the costs associated with protecting
patents and other proprietary rights, the development of marketing and sales
capabilities, the ability to complete strategic collaborations and the
availability of third-party funding.
The Company will require, over the long term, substantial new funding to
pursue development and commercialization of alagebrium and its other product
candidates and to continue its operations. Alteon believes that satisfying these
capital requirements over the long term will require successful
commercialization of its product candidates, particularly alagebrium. However,
it is uncertain whether any products will be approved or will be commercially
successful.
Selling securities to satisfy the Company's short-term and long-term
capital requirements may have the effect of materially diluting the current
holders of its outstanding stock. Alteon may also seek additional funding
through corporate collaborations and other financing vehicles. There can be no
assurance that such funding will be available at all or on terms acceptable to
the Company. If adequate funds are not available, the Company may be required to
curtail significantly one or more of its research and development programs. If
funds are obtained through arrangements with collaborative partners or others,
the Company may be required to relinquish rights to certain of its technologies
or product candidates. If Alteon is unable to obtain the necessary funding, it
may need to cease operations.
NOTE 3 -- PROPERTY AND EQUIPMENT
December 31,
------------------------
2004 2003
---------- ----------
Laboratory equipment ............................. $ 24,650 $ 24,650
Furniture and equipment .......................... 218,627 140,561
Computer equipment ............................... 141,959 138,850
--------- ---------
385,236 304,061
Less: Accumulated depreciation & amortization .... (277,967) (203,097)
--------- ---------
$ 107,269 $ 100,964
========= =========
Depreciation and amortization expense was $74,870, $502,826 and $637,162
for the years ended December 31, 2004, 2003 and 2002, respectively.
NOTE 4 -- COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
On November 6, 2002, Alteon entered into an agreement, effective as of
April 15, 2002, with The Picower Institute for Medical Research, or The Picower,
which terminated its License Agreement dated as of September 5, 1991. Pursuant
to this termination agreement, The Picower assigned to Alteon all of its
patents, patent applications and other technology related to A.G.E.s and Alteon
agreed to prosecute and maintain the patents and patent applications. Alteon
will pay The Picower royalties on any sales of products falling within the
claims of these patents and patent applications until they expire or are allowed
to lapse.
The Company has also entered into various arrangements with independent
research laboratories to conduct studies in conjunction with the development of
the Company's technology. The Company pays for this research and receives
certain rights to inventions or discoveries that may arise from this research.
48
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- ACCRUED EXPENSES
Accrued expenses consisted of the following:
December 31,
------------------------
2004 2003
---------- ----------
Clinical trial expense ............ $1,326,175 $ 793,485
Professional fees ................. 255,756 216,537
Payroll and related expenses ...... 293,813 239,997
Rent expense ...................... 25,465 21,953
Patent fees ....................... 56,197 64,608
Other ............................. 44,975 63,132
---------- ----------
$2,002,381 $1,399,712
========== ==========
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
Commitments
The Company's lease for its office and laboratory space in Ramsey, New
Jersey, expired on November 1, 2003, was extended through January 31, 2004 and
has expired. Alteon signed a three-year lease, which commenced December 1, 2003,
for office space in Parsippany, New Jersey. Annual rent over the term of the
lease ranges from $260,000 in the first year to $280,000 in the third year. As a
provision of the lease, Alteon provided a letter of credit, which is
collateralized with a $200,000 restricted certificate of deposit at December 31,
2004 ($250,000 at December 31, 2003). As of December 31, 2004, future minimum
rentals under operating leases, including office equipment, that have initial or
remaining non-cancelable terms in excess of one year are as follows:
Operating Leases
----------------
2005 ............... $320,939
2006 ............... 331,769
2007 ............... 8,737
Thereafter ......... ---
--------
$661,445
========
Rent expense for the years ended December 31, 2004, 2003 and 2002 was
$351,499, $674,493 and $604,690, respectively.
The Company has employment agreements with its executive officers, which
provide for salary continuation if Alteon terminates an agreement without cause.
Contingencies
In the ordinary course of its business, the Company may from time to time
be subject to claims and lawsuits.
NOTE 7 -- STOCKHOLDERS' EQUITY
Common/Preferred Stock Issuances
In July 2004, Alteon completed a public offering of 8,000,000 shares of
common stock at $1.00 per share, which provided net proceeds of $7,581,318. In
connection with this offering, the Company issued a five-year warrant to
purchase 272,500 shares of common stock at $1.30 per share. In connection with
this offering, certain warrants previously issued in 2000, the 2000 Warrants,
were repriced from $1.75 to $1.00 per share pursuant to antidilution provisions
connected to the warrants.
49
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In October 2003, Alteon completed a public offering of 4,457,146 shares of
common stock at $1.75 per share, which provided net proceeds of $7,772,331.
In July 2003, warrants for 87,462 shares of common stock were exercised in
a "net" exercise transaction in which the exercise price was paid by
cancellation of 29,989 shares of common stock issuable upon the exercise for a
net issuance of 57,473 shares. The shares canceled in payment of the exercise
were valued at the average of the closing prices on the American Stock Exchange
for the 20 business days prior to the exercise of the warrants.
In March 2003, Alteon completed a public offering of 2,300,000 shares of
common stock at $3.50 per share, which provided net proceeds of $7,655,945.
In December 2002, Alteon completed a public offering of 1,714,285 shares
of common stock at $1.75 per share, which provided net proceeds of $2,964,495.
In connection with this offering, certain of the 2000 Warrants were repriced
from $2.25 to $1.75 per share pursuant to antidilution provisions connected to
the warrants.
In January 2002, Alteon completed a public offering of 4,450,000 shares of
common stock at $4.25 per share, which provided net proceeds of $18,610,521.
In connection with a 2000 offering of common stock, Alteon issued a
seven-year warrant to purchase 1,133,636 shares of common stock and 1,046,174
are outstanding as of December 31, 2004. In connection with subsequent
offerings, the exercise price of 953,890 of the 2000 Warrants was adjusted to
$1.00 per share, which could be adjusted further if Alteon sells common stock
below $1.00 per share. The exercise price of 46,142 of the 2000 Warrants, which
was adjusted to $2.92 per share, and 46,142 of the 2000 Warrants, which was
adjusted to $2.93 per share, are not subject to further adjustment upon the sale
of more common stock.
The following table summarizes the outstanding warrants:
Warrants Outstanding at Warrants Outstanding at
December 31, 2004 December 31, 2003
---------------------------- -------------------------------
Exercise Price Exercise Price
Warrants Per Warrant Warrants Per Warrant
-------- -------------- -------- --------------
272,500 $1.30 953,890 $ 1.75
953,890 1.00 46,142 2.93
46,142 2.93 46,142 2.92
46,142 2.92 60,000 4.03
--------- ---------
1,318,674 1,106,174
========= =========
In December 1997, the Company and Genentech, Inc., or Genentech, entered
into a stock purchase agreement pursuant to which Genentech agreed to buy shares
of common stock, Series G Preferred Stock and Series H Preferred Stock. In
December 1997, Genentech purchased common stock and Series G Preferred Stock for
an aggregate purchase price of $15,000,000. On July 27, 1998 and October 1,
1998, Genentech purchased $8,000,000 and $14,544,000, respectively, of Series H
Preferred Stock. As of December 31, 2004, 2003 and 2002, respectively,
$4,135,145, $3,790,847 and $3,485,042 of Preferred Stockholder dividends were
recorded. Series G Preferred Stock and Series H Preferred Stock dividends are
payable quarterly in shares of preferred stock at a rate of 8.5% of the
accumulated balance. Each share of Series G Preferred Stock and Series H
Preferred Stock is convertible, upon 70 days' prior written notice, into the
number of shares of common stock determined by dividing $10,000 by the average
of the closing sales price of the common stock, as reported on the American
Stock Exchange, for the 20 business days immediately preceding the date of
conversion. At December 31, 2004, the Series G and Series H Preferred Stock
would have been convertible into 10,599,253 common stock shares and 31,830,291
common stock shares, respectively, and had a total liquidation value of
$51,127,569. The Series G and Series H Preferred Stock have no voting rights.
Stock Option Plan
The Company has established two stock option plans for its employees,
officers, directors, consultants and independent contractors. Options to
purchase up to 4,192,000 shares of the Company's common stock may be
50
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
granted under the first plan, and options to purchase up to 7,000,000 shares of
the Company's common stock may be granted under the second plan.
The plans are administered by a committee of the Board of Directors, which
may grant either non-qualified or incentive stock options. The committee
determines the exercise price and vesting schedule at the time the option is
granted. Options vest over various periods and may expire no later than 10 years
from date of grant. Each option entitles the holder to purchase one share of
common stock at the indicated exercise price. The plans also provide for certain
antidilution and change in control rights, as defined.
In March 2005, the Company's Board of Directors approved the adoption of a
new stock plan, the "2005 Stock Plan." Upon shareholder approval of the new
stock plan at the Company's annual meeting, the two existing stock option plans
will be terminated.
The following table summarizes the activity in the Company's stock
options:
Weighted
Weighted Average
Average Grant Date
Options Exercise Price Fair Value
---------- -------------- ----------
Balance, December 31, 2001.......... 4,705,306 $3.15
Granted at market price............. 676,400 2.94 $1.62
Granted above market price.......... 250,000 1.95 1.06
Granted below market price.......... 10,000 0.01 4.37
Exercised........................... (121,710) 1.02
Canceled............................ (83,717) 4.25
----------
Balance, December 31, 2002.......... 5,436,279 3.08
Granted at market price............. 812,465 2.41 $1.99
Exercised........................... (51,688) 1.07
Canceled............................ (217,738) 5.13
----------
Balance, December 31, 2003.......... 5,979,318 2.93
Granted at market price............. 1,663,409 1.09 $0.89
Exercised........................... (5,750) 0.88
Canceled............................ (1,087,670) 4.39
----------
Balance, December 31, 2004 6,549,307 $2.22
========== =====
Stock options exercisable at December 31, 2004, 2003 and 2002 were
4,132,909, 4,337,316 and 3,836,930, respectively, at weighted average grant date
exercise prices of $2.64, $3.06 and $3.08, respectively.
51
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information regarding stock options
outstanding at December 31, 2004:
Options Outstanding at Options Exercisable at
December 31, 2004 December 31, 2004
------------------------------------------------- ----------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life (Years) Price Exercisable Price
----------------- ----------- ------------------------ -------- ------------- ---------
$0.781 - $ 1.000 903,405 4.28 $ 0.87 857,905 $ 0.87
1.030 - 1.030 1,373,409 9.93 1.03 --- ---
1.063 - 1.300 1,041,577 3.96 1.12 899,077 1.09
1.310 - 1.990 1,028,543 8.13 1.72 543,099 1.76
2.100 - 3.875 1,087,105 5.78 3.06 865,102 3.18
3.900 - 7.000 1,072,268 5.70 5.15 924,726 5.27
8.625 - 15.000 43,000 1.53 13.60 43,000 13.60
--------- ---------
$0.781 - $ 15.000 6,549,307 6.48 $ 2.22 4,132,909 $ 2.64
========= =========
Included in options at December 31, 2004 are 1,606,667 options granted to
certain executives with option exercise prices ranging from $0.875 per share to
$4.38 per share, the fair value of the Company's common stock on the date of
grant. Such options vest upon the earlier of five years after grant or upon
achievement of certain Company milestones. Expenses recorded for options granted
to consultants totaled $34,731, $31,228 and $34,424 in 2004, 2003 and 2002,
respectively.
On February 2, 1999, the Company repriced certain stock options. In
accordance with FIN No. 44, the Company recognized a total non-cash stock
compensation expense/(benefit) resulting from the repricing for the years ended
December 31, 2004, 2003 and 2002 of $0, $20,019 and $(1,409,151), respectively,
which included research and development charges of $0, $20,019 and $(93,516) and
general and administrative charges of $0, $0 and $(1,315,635), respectively. As
of December 31, 2004, there were 540,684 repriced options outstanding, which
expire on various dates through January 2008.
NOTE 8 -- SAVINGS AND RETIREMENT PLAN
The Company maintains a savings and retirement plan under Section 401(k)
of the Internal Revenue Code that allows eligible employees to annually
contribute a portion of their annual salary to the plan. In 1998, the Company
began making discretionary contributions at a rate of 25% of an employee's
contribution up to a maximum of 5% of the employee's base salary, as defined.
The Company made contributions of $62,641, $59,183 and $54,024 for the years
ended December 31, 2004, 2003 and 2002, respectively.
NOTE 9 -- INCOME TAXES
The components of the deferred tax assets and the valuation allowance are
as follows:
December 31,
------------------------------
2004 2003
------------- -------------
Net operating loss carryforwards ................ $ 57,700,000 $ 54,800,000
Research and development credits ................ 8,400,000 8,000,000
Capitalized research and development expenses ... 11,800,000 8,900,000
Other temporary differences ..................... 700,000 2,200,000
------------ ------------
Gross deferred tax assets ....................... 78,600,000 73,900,000
Valuation allowance ............................. (78,600,000) (73,900,000)
------------ ------------
Net deferred tax assets ......................... $ --- $ ---
============ ============
52
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The effective tax rate varied from the statutory rate, as follows:
December 31,
-------------------------
2004 2003 2002
---- ---- ----
Statutory federal income tax rate ................ (34.0)% (34.0)% (34.0)%
State income tax rate (net of federal benefit) ... (6.0)% (6.0)% (6.0)%
Certain nondeductible expenses ................... 0.1% 0.0% 0.0%
Effect of net operating loss carryforwards and
valuation allowance ......................... 37.2% 37.7% 36.3%
------ ------ -----
Effective tax rate .......................... (2.7)% (2.3)% (3.7)%
====== ====== =====
At December 31, 2004, the Company had available federal net operating loss
carryforwards of $155,533,000, which expire in the years 2006 through 2024 for
income tax purposes and state net operating loss carryforwards of $80,211,000,
which expire in the years 2005 through 2011. In addition, the Company has
federal research and development tax credit carryforwards of $6,859,000 and
state research and development tax credit carryforwards of $1,519,000. The
amount of federal net operating loss and research and development tax credit
carryforwards that can be utilized in any one period may become limited by
federal income tax regulations if a cumulative change in ownership of more than
50% occurs within a three-year period.
Given the Company's history of incurring operating losses, management
believes that it is unlikely that any of the deferred tax assets will be
recoverable. As a result, a valuation allowance equal to the gross deferred tax
assets was established. The valuation allowance increased by $4,700,000,
$5,100,000 and $6,700,000 in 2004, 2003 and 2002, respectively. In 2004, 2003
and 2002, the Company sold $3,456,000, $2,083,000 and $1,839,000, respectively,
of its state net operating loss carryforwards and $123,000, $209,000 and
$578,000, respectively, of its state research and development tax credit
carryforwards under the State of New Jersey's Technology Business Tax
Certificate Transfer Program, or the Program. The Program allows qualified
technology and biotechnology businesses in New Jersey to sell unused amounts of
net operating loss carryforwards and defined research and development tax
credits for cash. The proceeds from the sale of the Company's carryforwards and
credits in 2004, 2003 and 2002 were $386,000, $345,000 and $647,000,
respectively, and such amounts were recorded as a tax benefit in the statements
of operations. Due to the uncertainty at any time as to the Company's ability to
effectuate the sale of Alteon's available New Jersey state net operating losses,
and since the Company has no control or influence over the Program, the benefits
are recorded once the agreement with the counterparty is signed and the sale is
approved by the State.
NOTE 10 -- SUBSEQUENT EVENT
In January 2005, Alteon completed a public offering of 9,523,813 shares of
common stock at $1.05 per share, which provided net proceeds of approximately
$9,545,000. In connection with this offering, the Company issued a five-year
warrant to purchase 312,381 shares of common stock at $1.37 per share.
53
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
------- ------------------------------------------------------------------
3.1 Restated Certificate of Incorporation, as amended. (Incorporated
by reference to Exhibit 3.1 to the Company's Report on Form 10-Q
filed on November 10, 1999, SEC File Number 000-19529.)
3.2 Certificate of the Voting Powers, Designations, Preference and
Relative Participating, Optional and Other Special Rights and
Qualifications, Limitations or Restrictions of Series F Preferred
Stock of Alteon Inc. (Incorporated by reference to Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, SEC File Number 001-16043.)
3.3 Certificate of Retirement of Alteon Inc., dated September 10,
2000. (Incorporated by reference to Exhibit 3.1 to the Company's
Report on Form 10-Q filed on November 10, 1999, SEC File Number
000-19529.)
3.4 Certificate of Designations of Series G Preferred Stock of Alteon
Inc. (Incorporated by reference to Exhibit 3.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
SEC File Number 000-19529.)
3.5 Certificate of Amendment of Certificate of Designations of Series
G Preferred Stock of Alteon Inc. (Incorporated by reference to
Exhibit 3.4 to the Company's Report on Form 10-Q filed on August
14, 1998, SEC File Number 000-19529.)
3.6 Certificate of Designations of Series H Preferred Stock of Alteon
Inc. (Incorporated by reference to Exhibit 3.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
SEC File Number 000-19529.)
3.7 Amended Certificate of Designations of Series H Preferred Stock of
Alteon Inc. (Incorporated by reference to Exhibit 3.6 to the
Company's Report on Form 10-Q filed on August 14, 1998, SEC File
Number 000-19529.)
3.8 Certificate of Retirement of Alteon Inc., dated November 20,
2000. (Incorporated by reference to Exhibit 3.8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
SEC File Number 001-16043.)
3.9 Certificate of Amendment to Restated Certificate of Incorporation
of Alteon Inc., dated June 7, 2001. (Incorporated by reference to
Exhibit 3.8 to the Company's Report on Form 10-Q filed on August
14, 2001, SEC File Number 001-16043.)
3.10 By-laws, as amended. (Incorporated by reference to Exhibit 3.10 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, SEC File Number 001-16043.)
3.11 Certificate of Amendment to Restated Certificate of Incorporation
of Alteon Inc., dated September 17, 2004. (Incorporated by
reference to Exhibit 3.1 to the Company's Report on Form 10-Q
filed on November 9, 2004, SEC File Number 001-16043.)
3.12 Amended Certificate of Designations of Series G Preferred Stock of
Alteon Inc., dated October 6, 2004. (Incorporated by reference to
Exhibit 3.2 to the Company's Report on Form 10-Q filed on November
9, 2004, SEC File Number 001-16043.)
4.1 Stockholders' Rights Agreement between Alteon Inc. and Registrar
and Transfer Company, as Rights Agent, dated as of July 27, 1995.
(Incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, SEC File
Number 001-16043.)
4.2 Amendment to Stockholders' Rights Agreement between Alteon Inc.
and Registrar and Transfer Company, as Rights Agent, dated as of
April 24, 1997. (Incorporated by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K filed on May 9, 1997, SEC
File Number 000-19529.)
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
------- ------------------------------------------------------------------
4.3 Registration Rights Agreement between Alteon Inc. and the
investors named on the signature page thereof, dated as of April
24, 1997. (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on May 9, 1997, SEC
File Number 000-19529.)
4.4 Form of Common Stock Purchase Warrant. (Incorporated by reference
to Exhibit 4.2 to the Company's Current Report on Form 8-K filed
on May 9, 1997, SEC File Number 000-19529.)
4.5 Amendment to Stockholders' Rights Agreement between Alteon Inc.
and Registrar and Transfer Company, as Rights Agent, dated as of
December 1, 1997. (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on December 10, 1997,
SEC File Number 000-19529.)
4.6 Registration Rights Agreement, dated September 29, 2000.
(Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on October 5, 2000, SEC File Number
001-16043.)
4.7 Form of Series 1 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form
8-K filed on October 5, 2000, SEC File Number 001-16043.)
4.8 Form of Series 2 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.3 to the Company's Current Report on Form
8-K filed on October 5, 2000, SEC File Number 001-16043.)
4.9 Notice of Appointment of The American Stock Transfer & Trust
Company as successor Rights Agent, dated August 29, 2002, pursuant
to Stockholders' Rights Agreement dated as of July 27, 1995.
(Incorporated by reference to Exhibit 4.4 of the Company's Report
on Form 10-Q filed on November 13, 2002, SEC File Number
001-16043.)
4.10 Form of Common Stock Purchase Warrant, dated July 2, 2004.
4.11 Form of Common Stock Purchase Warrant, dated January 5, 2005.
10.1+ Amended and Restated 1987 Stock Option Plan. (Incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997, SEC File Number
000-19529.)
10.2+ Amended 1995 Stock Option Plan. (Incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, SEC File Number 001-16043.)
10.3 Form of Employee's or Consultant's Invention Assignment,
Confidential Information and Non-Competition Agreement executed by
all key employees and consultants as employed or retained from
time to time. (Incorporated by Reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1, SEC File Number
33-42574, which became effective on November 1, 1991.)
10.4 Lease Agreement between Ramsey Associates and Alteon Inc., dated
January 11, 1993. (Incorporated by reference to Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, SEC File No. 001-16043.)
10.5+ Employment Agreement between Alteon Inc. and Elizabeth O'Dell,
dated as of October 21, 2000. (Incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, SEC File Number 001-16043.)
10.6+ Alteon Inc. Change in Control Severance Benefits Plan.
(Incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000,
SEC File Number 001-16043.)
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
------- ------------------------------------------------------------------
10.7 Preferred Stock Investment Agreement between Alteon Inc. and the
investors named on the signature page thereof, dated as of April
24, 1997. (Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on May 9, 1997, SEC
File Number 000-19529.)
10.8+ Amended and Restated Employment Agreement between Alteon Inc. and
Kenneth I. Moch, dated as of December 15, 1998. (Incorporated by
reference to Exhibit 10.28 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999, SEC File Number
000-19529.)
10.9 Common Stock and Warrants Purchase Agreement among Alteon Inc. and
EGM Medical Technology Fund, L.P., EGM Technology Offshore Fund,
Narragansett I, L.P., Narragansett Offshore, Ltd., S.A.C. Capital
Associates, LLC, SDS Merchant Fund, LP and Herriot Tabuteau, dated
as of September 29, 2000. (Incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed on October
5, 2000, SEC File Number 001-16043.)
10.10+ Letter Agreement between Alteon Inc. and Kenneth I. Moch, dated
December 3, 2001, amending Amended and Restated Employment
Agreement dated as of December 15, 1998. (Incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on Form
10-K for the year ended December 31, 2001, SEC File Number
001-16043.)
10.11 Stock Purchase Agreement between Alteon Inc. and the Purchasers
named therein, dated January 4, 2002. (Incorporated by reference
to the Company's Current Report on Form 8-K filed on January 7,
2002, SEC File Number 001-16043.)
10.12+ Employment agreement between Alteon Inc. and Judith S. Hedstrom,
dated as of February 11, 2002. (Incorporated by reference to
Exhibit 10.2 of the Company's Report on Form 10-Q filed on May 14,
2002, SEC File Number 001-16043.)
10.13 Stock Purchase Agreement between Alteon Inc. and the Purchasers
named therein, dated December 20, 2002. (Incorporated by reference
to Exhibit 10.1 of the Company's Current Report on Form 8-K filed
on December 24, 2002, SEC File Number 001-16043.)
10.14+ Letter Agreement between Alteon Inc. and Judith S. Hedstrom, dated
June 5, 2003, amending Employment Agreement, dated as of February
11, 2002. (Incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q filed on August 11, 2003,
SEC File Number 001-16043.)
10.15+ Letter Agreement between Alteon Inc. and Elizabeth O'Dell, dated
June 5, 2003, amending Employment Agreement, dated as of October
21, 2000. (Incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q filed on August 11, 2003,
SEC File Number 001-16043.)
10.16 Stock Purchase Agreement, dated October 15, 2003. (Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K filed on October 20, 2003, SEC File Number 001-16043.)
10.17 Amendment to Stock Purchase Agreement, dated October 24, 2003.
(Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q filed on November 13, 2003, SEC File
Number 001-16043.)
10.18+ Letter Agreement between Alteon Inc. and Elizabeth O'Dell, dated
December 22, 2003, amending Amended and Restated Employment
Agreement, dated as of June 5, 2003. (Incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K filed on
March 12, 2003, SEC File Number 001-16043.)
10.19+ Amended and Restated Employment Agreement between Alteon Inc. and
Kenneth I. Moch, dated as of December 15, 2004, amending Amended
and Restated Employment Agreement, dated as of December 15, 1998.
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
------- ------------------------------------------------------------------
10.20+ Amended and Restated Employment Agreement between Alteon Inc. and
Judith S, Hedstrom, dated February 11, 2005, amending Employment
Agreement, dated as of February 11, 2002.
10.21 Alteon Inc. Description of Director Compensation Arrangements.
10.22 Alteon Inc. Description of Executive Officer Compensation
Arrangements.
23.1 Consent of J.H. Cohn LLP.
23.2 Consent of KPMG LLP.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
----------
+ Denotes a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) to this Form 10-K.