respiratory - Genaera Corporation

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Genaera Corporation Annual Report 2001
F O C U S I N G O N I N N O VAT I V E P R O D U C T D E V E L O P M E N T
G E N A E R A C O R P O R AT I O N P R O D U C T P I P E L I N E
Genaera Corporation is a biopharmaceutical company committed to developing medicines for serious diseases from genomics and natural products.
Research and development efforts are focused on anti-angiogenesis, obesity, infectious diseases and respiratory diseases.
“WE ARE FOCUSED ON DEVELOPING
anti-angiogenesis
O
S
OH
O
CLINICAL
INNOVATIVE THERAPIES BASED ON
SQUALAMINE
CUTTING-EDGE SCIENCE, TARGETING
• Novel low molecular weight aminosterol from natural source
• Unique multifaceted anti-angiogenic mechanism
• Directly inactivates endothelial cells
• Regression of abnormal blood vessels
SERIOUS ILLNESSES REPRESENTING
Indication(s)
Solid tumors, including non-small cell lung cancer and ovarian cancer
Fibrodysplasia ossificans progressiva (FOP)
Eye disease, “wet” macular degeneration
O
PRECLINICAL
obesity
MAJOR PHARMACEUTICAL MARKETS.
OUR PRODUCTS IN DEVELOPMENT ARE
DERIVED FROM TWO TECHNOLOGY
PLATFORMS: NATURAL MOLECULES,
AND THERAPEUTICS FROM VALIDATED
H 2N
HN
N
H
N
H
OH
H
TRODULAMINE
• Novel low molecular weight aminosterol from natural source
• Strong efficacy in multiple obesity models
• Regulates appetite, produces weight loss, normalizes blood sugar and
serum cholesterol
Indication(s)
Medically significant obesity
respiratory
GENOMICS-BASED DISEASE TARGETS.
THESE INVESTIGATIONAL TREATMENTS
ARE FOCUSED ON SIGNIFICANT
UNMET MEDICAL NEEDS IN CHRONIC
RESPIRATORY DISEASES, INFECTIOUS
IL9 ANTIBODY
DISEASES, OBESITY, CANCER AND
• First genomics based development program
• Treats the root cause of asthma
• Regulates risk factors associated with asthma
EYE DISEASES.”
Indication(s)
Asthma
Chronic respiratory diseases
respiratory
MUCOREGULATORS
• Second genomics based development program
• Anion channel regulates mucin production during disease in cells
lining airways
• Channel inhibitors block the production of secreted gel-forming mucins
Indication(s)
Cystic fibrosis
Asthma
Chronic sinusitis
Chronic bronchitis
DEAR STOCKHOLDERS
OUR MISSION
We are focused on developing innovative therapies based on
cutting-edge science, targeting serious illnesses representing
major pharmaceutical markets. Our products in development
are derived from two technology platforms: natural molecules,
and therapeutics from validated genomics-based disease targets. These investigational treatments are focused on significant unmet medical needs in chronic respiratory diseases,
infectious diseases, obesity, cancer and eye diseases.
THE YEAR IN REVIEW
I am pleased to summarize the many accomplishments of
our well-trained and committed team during 2001. Squalamine
is our most advanced program in clinical development.
Squalamine is a potent direct acting anti-angiogenic small
molecule with a unique intracellular mechanism that inhibits
the action of multiple growth factors, including VEGF (vascular
endothelial growth factor), on endothelial cells. This mechanism
report that a neutralizing antibody treatment for asthma already
is believed to be broadly applicable to a variety of cancers and
is in development. Finally, we began clinical investigations in
eye diseases, including age related macular degeneration
asthma with LOMUCIN, our oral mucoregulator therapy,
(AMD). The FDA has granted us orphan drug status for
designed to decrease mucus overproduction in chronic respi-
squalamine as a treatment for ovarian cancer, and in May 2001
ratory diseases. We also began a partnership with the U.S.
we announced positive Phase 2 data in non-small cell lung
Cystic Fibrosis Foundation that includes their financial support
and advanced ovarian cancers. We also began a Phase 2b
for the clinical investigation of LOMUCIN in cystic fibrosis.
randomized multicenter clinical trial in non-small cell lung
cancer for squalamine to optimize dosing regimens in conjunc-
CONCLUDING REMARKS
tion with first-line chemotherapy. During 2001, we finished
We thank our stockholders for their continued support. The
recruitment in our ovarian Phase 2 trial and began prepara-
development of pharmaceutical products is a long-term and
tions for clinical testing of squalamine in AMD, and in a regis-
highly technical process. Nevertheless, experience tells us that
tration trial for advanced ovarian cancer.
success should bring great value for our investors. We antici-
Trodulamine (formerly produlestan) is our second naturally
pate 2002 to be another action-packed year with the expected
occurring aminosterol in development, as a treatment for med-
initiation of additional clinical programs and steady progress
ically significant obesity. This compound regulates factors in
toward commercialization. I look forward to communicating
the central nervous system controlling appetite. We initiated
our progress to you throughout the year.
formal safety testing for trodulamine, along with manufacturing
Sincerely,
preparations, in anticipation of clinical studies. With respect to
our genomics efforts, independent investigations have defined
a broad role for interleukin-9 (IL9) controlling other known factors contributing to asthma. We partnered our proprietary IL9
ROY CLIFFORD LEVITT, M.D.
program early in 2001 with MedImmune, and I am pleased to
President and Chief Executive Officer
1
2001 TIMELINE
JANUARY
FEBRUARY
MARCH
APRIL
MAY
Genaera and the Ludwig Institute
for Cancer Research (LICR) establish a new collaborative agreement
based on the discovery and development of novel genes and proteins as pharmaceutical targets and
therapeutics. Under the agreement,
Genaera and LICR are assigned
primary commercial rights to intellectual property for a number of
novel genes and proteins with
therapeutic potential.
Genaera receives a patent from
the United States Trade and Patent
Office covering the use and
administration of a blocking antibody to interleukin-9 (IL9), the
Company’s proprietary product,
for the treatment of asthma and
bronchial hyperresponsiveness.
Genaera Corporation officially
changes its corporate name from
Magainin Pharmaceuticals Inc.
and begins trading on the Nasdaq
National Market under the ticker
symbol “GENR”.
MedImmune, Inc. and Genaera
enter into a research collaboration
and a worldwide exclusive licensing
agreement to develop and commercialize antibodies or recombinant
molecules against IL9 and/or
its receptor to treat symptoms
of asthma and other respiratory
diseases.
Genaera presents positive results
for squalamine, in its first therapeutic clinical study in non-small
cell lung cancer (NSCLC), at the
meeting of the American Society
of Clinical Oncology (ASCO). The
Company also announces early
positive results in ongoing recurrent
and resistant advanced ovarian
cancer clinical trial.
In the journal Respiratory Research,
an article is published reviewing
international research conducted
by Genaera scientists and many
renowned academic institutions
demonstrating the role of interleukin-9 (IL9) as an important therapeutic target for asthma.
The Company presents data on a
gene from its Respiratory Gene
Database, MMP-12, at the American Academy of Allergy, Asthma
and Immunology (AAAAI).
Genaera and collaborators presented preclinical data for
squalamine in cancer, including the
mechanism of signaling pathway
blockade of the angiogenic growth
factor VEGF by squalamine, at the
American Association for Cancer
Research (AACR).
Company researchers present preclinical data for squalamine in eye
disease at the Association for
Research in Vision and Ophthalmology (ARVO). The research,
demonstrating the potential for
vessel regression in a primate
model of neovascular eye disease,
was conducted in collaboration with
Tulane University Health Sciences
Center of New Orleans, Louisiana,
under the direction of Gholam
Peyman, M.D.
Trodulamine, the Company’s second aminosterol development
compound, demonstrates potent
and specific appetite suppressant
properties in animal models, as
published in the International
Journal of Obesity.
Genaera scientists and collaborators present four new preclinical
studies on its mucoregulator program at the meeting of the American Thoracic Society.
Squalamine is granted Orphan
Drug designation for the treatment
of ovarian cancer by the U.S. Food
and Drug Administration (FDA).
2
AUGUST
SEPTEMBER
OCTOBER
NOVEMBER
DECEMBER
The first clinical trial for testing
LOMUCIN is initiated. This is the
first test of a compound that takes
a new approach to treating chronic
respiratory diseases, including
asthma, based on the discovery
by Genaera scientists of a gene,
hCLCA1, that regulates abnormal
mucus production.
Genaera announces the award of
up to $1.7 million from the Cystic
Fibrosis Foundation to support
the development of LOMUCIN, a
new drug that inhibits the excess
production of mucus that clogs
the small airways in chronic diseases like cystic fibrosis, asthma
and COPD.
Genaera presents data on its
mucoregulator therapy at the
North American Cystic Fibrosis
Conference.
Genaera commences a Phase 2b
clinical trial designed to test squalamine for the treatment of patients
with non-small cell lung cancer
(NSCLC).
Genaera prepares its first clinical
trial in fibrodysplasia ossificans
progressiva with squalamine.
Five world-renowned physician scientists are appointed to Genaera’s
Respiratory Development Advisory
Board: Stephen I. Rennard, M.D.,
University of Nebraska Medical
Center; Jack A. Elias, M.D., Yale
University School of Medicine;
Romain A. Pauwels, M.D., Ph.D.,
Ghent University Hospital, Belgium;
N. Gerry McElvaney, M.D., Royal
College of Surgeons, Ireland, and
Qutayba A. Hamid, M.D., Ph.D.,
McGill University, Montreal, Canada.
The Company participates in the
UBS Warburg Global Life Science
Conference and at the Techvest LLC
Annual Healthcare Conference.
The American Journal of Respiratory Cell and Molecular Biology
publishes an article describing the
identification, by Genaera scientists, of a novel calcium activated
chloride channel (hCLCA1) that
regulates abnormal mucus production and has potential as an
important therapeutic target for
asthma, and other respiratory and
sinus diseases.
The Company participates in the
18th Annual Robertson Stephens
Medical Conference held in New
York City.
Genaera announces the publication
of results of a Phase 1 clinical trial
of squalamine in advanced cancer
patients. The research was conducted in collaboration with investigators at the Lombardi Cancer
Center at Georgetown University
Medical Center and is published in
Clinical Cancer Research.
3
SQUALAMINE IS A MULTI-FACETED ANTIANGIOGENIC MOLECULE THAT POSSESSES
A UNIQUE CHEMICAL STRUCTURE AND
MECHANISM OF ACTION THAT DIFFERENTIATES IT FROM OTHER THERAPIES
UNDER DEVELOPMENT FOR CANCER
AND “WET” MACULAR DEGENERATION
N AT U R A L P R O D U C T D I S C O V E RY A N D D E V E L O P M E N T
INTRODUCTION
lung cancer (NSCLC). This multicenter randomized study is
Advanced ovarian cancer is our lead indication for the
Genaera’s philosophy has been to excel in scientific discovery
evaluating up to 90 patients receiving weekly dosing of squal-
clinical testing of squalamine. In May 2001, we also announced
providing new insights into the genesis of serious illnesses.
amine, combined with weekly chemotherapy of carboplatin
positive data from its ongoing multicenter, open label, Phase 2
Our accomplishments have allowed us to leverage our
and paclitaxel, in patients with Stage IIIB or Stage IV advanced
trial in recurrent and resistant advanced ovarian cancer. In this
genomics efforts with natural product discovery to work
disease. Half of the patients receive a squalamine dose of 100
study, 39% of evaluable patients (7 of 18) have had an objective
2
2
toward the development of important new treatments for can-
mg/m , and the other half receive a dose of 200 mg/m . The
response to the study regimen of carboplatin and squalamine.
cer, obesity, chronic obstructive lung diseases and infectious
optimization in dosing regimen has the potential to yield an
There were two complete, and five partial responses. The
diseases. We believe our history of cutting-edge science has
improved safety and efficacy profile for the combination of squal-
majority of these responses were in patients with measurable
fueled our current focus on innovative product development.
amine and the chemotherapy agents in this disease indication.
disease, with recurrence after two or more approved therapies.
In May 2001, we announced results from our Phase 2a
Squalamine has been granted Orphan Drug designation for
SQUALAMINE
trial in NSCLC, examining the preliminary efficacy and safety of
the treatment of ovarian cancer by the U.S. Food and Drug
Squalamine, an anti-angiogenic agent, is our lead drug candi-
squalamine, combined with carboplatin and paclitaxel. Objective
Administration (FDA).
date, and is presently in Phase 2 clinical studies for the treat-
responses were observed in 29% of patients (9 of 31), receiving
ment of solid tumors. Clinical studies currently are ongoing in
the treatment dose of squalamine (300 mg/m2/day) for one or
OPHTHALMIC DISEASE
non-small cell lung cancer and ovarian cancer, in conjunction
more cycles of therapy. Overall, for all patients enrolled in the
Genaera anticipates the start of clinical trials in age-related
with leading chemotherapeutics.
study, at all doses of squalamine, 27% of patients (12 of 45)
macular degeneration (AMD) in 2002. Preclinical studies have
Squalamine is the first clinical drug candidate in a class of
experienced an objective response. An objective response is
demonstrated that systemic squalamine administration in pri-
naturally occurring, pharmacologically active, small molecules
defined as a 50% or greater reduction in tumor size, with a
mates leads to inhibition of the development of ocular neovas-
known as aminosterols. Squalamine is a potent anti-angiogenic
duration of at least 4 weeks. The median survival time has been
cularization and partial regression of abnormal vessels. The
molecule with a unique multifaceted mechanism of action that
determined for the first 18 patients in the study, which was the
dose for squalamine to produce these effects is 12 mg/m2
blocks the action of a number of angiogenic growth factors,
dose escalation portion, as 10.4 months. The Kaplan-Meier
twice weekly, which is less than 10% of the doses currently
including vascular endothelial growth factor (VEGF).
estimates of median survival for all patients in the study are 10
being used successfully in squalamine clinical trials for
to 11 months. In comparison, the historical benchmark objec-
patients with advanced cancers.
CANCER
tive response rate for this group of patients treated with carbo-
Angiogenesis resulting from AMD is the leading cause of
In November 2001 we announced the commencement of a
platin and paclitaxel alone is 15%, with 8.2 months survival, as
legal blindness among adults age 50 or older in the Western
Phase 2b clinical trial designed to test squalamine, an angiogen-
demonstrated in the large Eastern Cooperative Oncology
world. About 25-30 million people are affected globally. This
esis inhibitor, for the treatment of patients with non-small cell
Group study presented at the ASCO meeting in May 2000.
number is expected to triple over the next 25 years.
5
AMD appears to come in two types: the “dry” form and
squalamine has the potential to inhibit the progression of the
OTHER AMINOSTEROLS
the more severe “wet” form. Dry AMD, the more common
muscle growths seen in FOP, and prevent the muscle turning
Our discovery of natural aminosterols has been complemented
and milder form of AMD, accounts for 85% to 90% of all
into bone.
by a combinatorial chemistry and biology program that has
cases. Dry AMD results in varying forms of sight loss and may
In 2001, Genaera filed an investigational new drug appli-
produced many synthetic aminosterols. These natural aminos-
or may not eventually develop into the wet form. Although the
cation (IND) with the FDA, which was accepted, to support the
terols and their synthetic analogues are being developed as a
wet form of AMD accounts for only 10% to 15% of all AMD
initiation of clinical trials testing squalamine in FOP in 2002.
class of agents that are able to block cellular activation in spe-
cases, the chance for severe sight loss is much greater. It is
cific cell types.
responsible for 90% of severe vision loss associated with
TRODULAMINE
AMD. Approximately 500,000 new cases of wet AMD are
Trodulamine, formerly produlestan, is our second natural
cacy in preclinical models to pursue additional research that
diagnosed annually worldwide. In North America alone,
aminosterol product. Our scientists have demonstrated the
could lead to the development of a new treatment for inflamma-
approximately 200,000 new cases of wet AMD are diagnosed
ability to reduce the weight of genetically altered mice, gener-
tory disorders. These anti-inflammatory aminosterols represent
each year. Wet AMD is caused by the growth of abnormal
ally very obese mice about 10 times their normal size, to that
a novel class of compounds with significant potential for a wide
blood vessels, or choroidal neovascularization, under the cen-
of a normal healthy mouse. Body weights of healthy animals,
range of systemic and topical anti-inflammatory indications.
tral part of the retina, the macula, which is required for fine
including animals with diet induced obesity, have also been
(detailed) vision.
reduced through the administration of trodulamine.
Genaera researchers have shown preclinical efficacy with
Since 1996, we have maintained a respiratory product devel-
FOP
trodulamine, and demonstrated that animal food intake can be
opment program that capitalizes on respiratory genomics
Anti-angiogenic therapy may have important medical benefits
regulated in a reversible manner, leading to changes in body
research at the Company. Our programs seek to identify
in other debilitating conditions where angiogenesis is an
weight. Preclinical data on trodulamine demonstrate it is a
appropriate targets for pharmaceutical intervention that aim to
important part of the disease process. Fibrodysplasia ossificans
potent appetite suppressant with the ability to normalize blood
control the root cause of human disease. We believe that phar-
progressiva (FOP) is one of these conditions. FOP is a rare
sugar, as well as high blood cholesterol levels, in obese animals.
maceuticals developed for use against these specific targets
genetic disorder in which there is progressive formation of
While this molecule is very different in function, it has a
have the potential for greater effectiveness and fewer side
new bone in the large muscles, leading to progressive immo-
similar chemical structure to squalamine, and thus allows us to
effects than pharmaceuticals developed through more tradi-
bility and disability. Similar to cancer, these growths in
leverage a second aminosterol development project utilizing
tional processes. The Company’s genomics efforts also have
the swollen muscles are nourished by a network of newly
the infrastructure built for squalamine.
resulted in the creation of the Respiratory Gene Database, a
Our lead compounds have demonstrated sufficient effi-
GENOMICS AND RESPIRATORY TREATMENTS
formed primitive blood vessels, as a result of active angiogen-
library of genes that contains novel validated therapeutic tar-
esis in the lesions. By blocking the angiogenic process,
gets relevant to a variety of respiratory conditions.
6
GENAERA HAS PRODUCED TWO PRODUCT
DEVELOPMENT PROGRAMS FROM ITS
RESPIRATORY GENOMICS EFFORTS, WHICH
HAVE VALIDATED NOVEL THERAPEUTIC
TARGETS RELEVANT TO A VARIETY OF
RESPIRATORY DISORDERS
F R O M G E N E I D E N T I F I C AT I O N T O N E W T H E R A P I E S
demonstrate the broad role of IL9 in asthma. IL9 is a gene that
with conditions exacerbated by excess mucus production
varies in DNA structure and function in asthmatic and allergic
where mucoregulator therapy may be of benefit. Mucus over-
humans and animals. Scientific studies indicate that IL9
production and small airway plugging is one of the hallmarks of
controls other well known factors involved in promoting lung
asthma, and is a cause of death from asthma. Excess mucus
inflammation in asthma. Genaera has developed a strong
production also is associated with COPD and chronic bronchi-
patent position around this product having first discovered and
tis. The orphan disease state of cystic fibrosis is characterized
documented a role for this cytokine in asthma.
by a dramatic increase in mucus production, and mucoregula-
We are committed to working with MedImmune to develop
tor therapy may be beneficial in this condition as well.
a major product addressing the substantial unmet need in
This year, Genaera scientists published the discovery of a
asthma with a novel neutralizing antibody therapy to IL9 that
gene, called mCLCA3, in the lungs of “asthmatic” mice, and the
treats the underlying root cause, not just the symptoms, of this
identification of the equivalent human gene, hCLCA1. Further
common chronic disease.
research has demonstrated that hCLCA1 appears to regulate
inducible lung and sinus mucus production, and to participate
MUCIN: MUCOREGULATORS
in regulating antigen-stimulated epithelial cell functions in a
More than 50 million patients in the United States suffer
Genaera’s second genomics-based program has led to the
number of pulmonary and sinus disorders.
from some form of respiratory disease, including respiratory
identification of several small molecules, believed to be drug
Based on the identification of hCLCA1, Genaera is testing
allergies, asthma, chronic bronchitis, and other chronic obstruc-
development candidates, to inhibit the overproduction of
LOMUCIN, a small molecule oral therapy, as its second
tive pulmonary disease (COPD).
mucin. Small molecule therapeutics that decrease mucin gene
genomics-based therapeutic in development. LOMUCIN is
production, so-called “mucoregulators,” have the potential to
intended to block the hCLCA1-dependent mucus overproduc-
ASTHMA: IL9 ANTIBODY
yield novel therapeutics for mucus overproduction in a number
tion present in respiratory and sinus disorders, and thereby
Our first genomics-based program is the development of a
of chronic diseases.
provide a new strategy for opening the airways and easing
blocking antibody to IL9, to treat the root cause of asthma. In
There is extensive unmet medical need for a therapy that
breathing in patients with these diseases. The first clinical trial
April 2001, Genaera entered into a collaborative agreement
can prevent abnormal mucus production. Chronic sinusitis is
for LOMUCIN was initiated in asthma in August 2001, and
with MedImmune, relating to the development of an IL9 prod-
one of the most common reasons for physician visits in the
other clinical trials are in preparation including testing in cystic
uct for asthma.
United States, with approximately 35 million cases per year. It
fibrosis. Clinical development in cystic fibrosis is supported
Genetic studies to identify the root cause of asthma, in
is believed that many of the symptoms of chronic sinusitis
by an initial grant of up to $1.7 million from the U.S. Cystic
both human families and animal models, have pinpointed IL9
result from excess mucus production. Among other respiratory
Fibrosis Foundation.
as a mediator of asthma, and functional genomic analyses
diseases, there are up to an estimated 50 million patients
8
F I N A N C I A L TA B L E O F C O N T E N T S
Selected Financial Data
10
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
11
Consolidated Balance Sheets
16
Consolidated Statements of Operations
17
Consolidated Statements of Changes in
Stockholders’ Equity and Comprehensive Loss
18
Consolidated Statements of Cash Flows
19
Notes to Consolidated Financial Statements
20
Independent Auditors’ Report
29
Corporate Information
30
9
S E L E C T E D F I N A N C I A L D ATA
The following tables summarize certain selected financial data and are derived from the financial statements that have been audited by KPMG LLP, independent accountants. The selected financial data
below should be read in conjunction with the Consolidated Financial Statements and Notes thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the
other financial information included herein.
Year Ended December 31,
2001
(In thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues:
Collaborative research agreement
$
Costs and expenses:
Research and development
General and administrative
880
2000
$
—
1999
$
—
1998
$
1997
—
$ 10,088
10,974
3,423
10,074
2,583
9,876
2,870
21,456
3,292
22,875
3,246
14,397
12,657
12,746
24,748
26,121
Loss from operations
Interest income
Interest expense
(13,517)
849
(244)
(12,657)
883
(605)
(12,746)
755
(225)
(24,748)
1,640
(196)
(16,033)
1,770
(118)
Net loss
Dividends on preferred stock
(12,912)
111
(12,379)
45
(12,216)
—
(23,304)
—
(14,381)
—
Net loss applicable to common stockholders
$ (13,023)
$ (12,424)
$ (12,216)
$ (23,304)
$ (14,381)
Net loss applicable to common stockholders per share—basic and diluted
$
$
$
$
$
Weighted average shares outstanding—basic and diluted
(0.40)
32,711
(0.42)
29,375
(0.52)
23,706
(1.05)
(0.73)
22,235
19,679
December 31,
(In thousands)
BALANCE SHEET DATA:
Cash and investments
Total assets
Long-term liabilities
Redeemable convertible preferred stock
Accumulated deficit
Stockholders’ equity
OTHER DATA:
Working capital
10
2001
2000
1999
1998
1997
$ 16,078
17,816
1,579
1,044
(170,591)
9,610
$ 19,033
20,701
2,010
1,233
(157,568)
11,473
$ 10,644
12,731
3,015
—
(145,144)
6,552
$ 22,871
25,891
58
—
(132,928)
14,680
$ 39,061
42,444
1,096
—
(109,624)
34,870
10,713
13,393
7,608
11,897
33,073
M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R A T I O N S
Genaera Corporation AR 2001
FORWARD-LOOKING STATEMENTS
efforts are focused on anti-angiogenesis, respiratory dis-
management to make estimates and assumptions that affect
Our disclosure and analysis in this Annual Report contains some
eases, obesity, and infectious diseases. We changed our name
the amounts reported in our financial statements and accom-
forward-looking statements. Forward-looking statements give our
from Magainin Pharmaceuticals Inc. to Genaera Corporation
panying notes. Actual results could differ materially from those
current expectations or forecasts of future events. You can iden-
on March 9, 2001.
estimates. The items in our financial statements requiring
tify these statements by the fact that they do not relate strictly to
Since commencing operations in 1988, we have not gen-
historical or current facts. Such statements may include words
erated any revenue from product sales, and we have funded
significant estimates and judgments are as follows:
such as “anticipate,” “estimate,” “expect,” “project,” “intend,”
operations primarily from the proceeds of public and private
“plan,” “believe,” “hope,” and other words and terms of similar
placements of securities and research and development col-
Contract revenue for research and development is recorded
meaning in connection with any discussion of future operating or
laboration payments and related equity investments. We have
as earned based on the performance requirements of the
financial performance. In particular, these include statements
incurred a loss in each year since our inception, and we expect
contract. Non-refundable contract fees for which no further
relating to present or anticipated scientific progress, development
to incur substantial additional losses for at least the next sev-
performance obligations exist, and for which there is no con-
of potential pharmaceutical products, future revenues, capital
eral years. We expect that losses may fluctuate, and that such
tinuing involvement by us, are recognized on the earlier of
expenditures, research and development expenditures, future
fluctuations may be substantial. At December 31, 2001, our
when the payments are received or when collection is assured.
financing and collaborations, personnel, manufacturing require-
accumulated deficit was approximately $170,591,000. We will
Revenue from non-refundable up-front license fees and certain
ments and capabilities, the impact of new accounting pro-
need to raise additional funds in the future to continue our
guaranteed payments where we continue involvement through
nouncements, and other statements regarding matters that are
operations.
development collaboration is recognized on a straight-line
Revenue Recognition
The following discussion is included to describe our
basis over the development period. Revenue associated with
There are important factors that could cause actual results
financial position and results of operations for each of the pre-
performance milestones is recognized based upon the
to differ materially from those expressed or implied by such
vious three years in the period ended December 31, 2001. The
achievement of the milestones, as defined in the respective
forward-looking statements, including those addressed under
Consolidated Financial Statements and Notes thereto contain
agreements. Revenue under R&D cost reimbursement con-
“Risk Factors Related to Our Business” in our filings with the U.S.
detailed information that should be referred to in conjunction
tracts or government grants is recognized as the related costs
Securities and Exchange Commission.
with this discussion.
are incurred. Advance payments received in excess of
not historical facts or statements of current condition.
amounts earned are classified as liabilities until earned.
We undertake no obligation to publicly update any forwardlooking statements, whether as a result of new information, future
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
events or otherwise, except as required by law. You are advised,
The SEC recently released cautionary advice regarding critical
however, to consult any further disclosures we make on related
accounting policies. The SEC has defined critical policies and
subjects in our filings with the U.S. Securities and Exchange
practices as items that are both most important to the por-
Commission.
trayal of a company’s financial condition and results, and
require management’s most difficult, subjective or complex
OVERVIEW
judgments, often as a result of the need to make estimates
Genaera Corporation is a biopharmaceutical company com-
about the effects of matters that are inherently uncertain. The
mitted to developing medicines for serious diseases from
preparation of our financial statements in conformity with
genomics and natural products. Our research and development
accounting principles generally accepted in the U.S. requires
Payments received that are refundable also are classified as
liabilities until the refund provision expires. We make an estimate as to the appropriate deferral period for recognition of
revenue on any collaborative fees received. Changes in these
estimates, due to the evolution of the development program,
can have a significant effect on the timing of revenue recorded.
Research and Development Expenses
Research and development expenses include related salaries,
contractor fees, and facility costs. R&D expenses consist of
independent R&D contract costs, contract manufacturing costs
11
(continued)
and costs associated with collaborative R&D arrangements. In
compensation cost is recognized and charged to operations
and mucoregulator programs. Research and development
addition, we fund R&D at other research institutions under
over the service period, which is usually the vesting period.
expenses increased in the year ended December 31, 2000, as
agreements that are generally cancelable. R&D expenses also
Estimating the fair value of equity securities involves a number
compared to the year ended December 31, 1999, due to
include external activities such as investigator-sponsored
of judgments and variables that are subject to significant
increases in squalamine development, clinical and manufac-
trials. All such costs are charged to R&D expense systemati-
change. A change in the fair value estimate could have a
turing activity as well as preclinical and development activity in
cally as incurred, which may be measured by percentage of
significant effect on the amount of compensation cost.
our mucoregulator, IL9 antibody and trodulamine programs.
The level of research and development expenses in future peri-
completion, contract milestones, patient enrollment or the passage of time. At the initiation of certain contracts, we must
RESULTS OF OPERATIONS
ods will depend principally upon the progress of our research
make an estimate as to the duration and expected completion
Revenues
and development programs and our capital resources.
date of the contract, which may require a change due to accel-
We have received no revenues from product sales. Revenues
erations, delays or other adjustments to the contract period or
General and Administrative Expenses
recorded to date have consisted principally of revenues recog-
work performed. Changes in these estimates could have a sig-
nized under collaborations with third parties. In April 2001, we
nificant effect on the amount of R&D costs in a specific period.
entered into a research collaboration and licensing agreement
Stock-Based Compensation
with MedImmune to develop and commercialize therapies
We account for stock-based employee compensation under
the intrinsic value-based method set forth by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Effective
January 1, 1996, we adopted the disclosure-only provisions of
related to our IL9 program. MedImmune is expected to fund at
least $2.5 million for our research and development activities
through April 2003, payable in eight equal quarterly installments. For the year ended December 31, 2001, we recognized
$880,000 in revenue related to this agreement.
We recognized general and administrative expenses of $3.4 million, $2.6 million and $2.9 million in 2001, 2000 and 1999,
respectively. General and administrative expenses consist
principally of personnel costs, professional fees and public
company expenses. Such expenses have increased in the
year ended December 31, 2001, as compared to the same
period a year ago, due principally to increases in personnel
related to general corporate activities, including business development. General and administrative expenses decreased mar-
Statement of Financial Accounting Standards (SFAS) No. 123,
Research and Development Expenses
ginally in 2000 as compared to the prior year due principally to
Accounting for Stock-Based Compensation. Stock or other
We recognized research and development expenses of
a moderate decrease in personnel and professional fees.
equity-based compensation for non-employees must be
$11.0 million, $10.1 million and $9.9 million in 2001, 2000 and
accounted for under the fair value-based method as required
Other Income and Expense
1999, respectively. Research and development expenses con-
by SFAS No. 123 and Emerging Issues Task Force (EITF)
sist principally of personnel costs, contract research, develop-
No. 96-18, Accounting for Equity Instruments that are Issued
ment and manufacturing costs and facility costs. Research
to Other Than Employees for Acquiring, or in Conjunction
and development expenses increased in the year ended
with Selling, Goods or Services, and other related interpreta-
December 31, 2001, as compared to the same period a year
tions. Under this method, the equity-based instrument is val-
ago, due to ongoing squalamine development efforts as well
ued at either the fair value of the consideration received or the
as additional preclinical and development activities in our
equity instrument issued on the date of grant. The resulting
trodulamine (formerly referred to as produlestan), IL9 antibody
12
We recognized other income of $0.8 million, $0.9 million and
$0.8 million in 2001, 2000 and 1999, respectively. We recognized other expenses of $0.2 million, $0.6 million and $0.2 million in 2001, 2000 and 1999, respectively. Other income is
primarily comprised of interest income generated from cash
and investments. Other expense is primarily comprised of
interest expense related to our indebtedness to a bank and,
through February 2001, the recognition of interest expense on
the accretion from a discounted value to face value of the
long-term obligation to Abbott Laboratories. Interest income
decreased slightly during the year ended December 31, 2001,
as compared to the same period a year ago, due to declining
investment interest yields, substantially offset by higher aver-
• $11,678,000 raised from a private placement completed in
August 2000;
• $688,000 raised from a private placement in December
2000; and
April 2001.
age investment balances. Interest income increased slightly
In addition to the above, we have funded our operations
during the year ended December 31, 2000, as compared to the
from contract and grant revenues, research and development
prior year, due to higher investment balances. Interest expense
expense reimbursements, interest income, lease financing and
decreased during the year ended December 31, 2001, as com-
debt financing.
us. As a result of our financing activities during 2000 and other
cash inflows, $1.4 million of this liability was payable and paid
to Abbott on March 1, 2001. As a result of our financing activities during 2001 and other cash inflows, $480,000 of this liability becomes payable to Abbott on March 1, 2002 and thus
has been included in current liabilities at December 31, 2001.
The remaining amount of $1.5 million due to Abbott is included
in long-term liabilities as of December 31, 2001.
Long-term accrued development expense decreased by
$431,000 to $1.6 million at December 31, 2001 due to the trans-
pared to the prior year, due to rate decreases and our no
Our goal is to conduct significant research, preclinical
longer recognizing additional interest expense on the long-
development, clinical testing and manufacturing activities over
Under the terms of our $2.5 million bank debt, we make
term obligation to Abbott subsequent to February 2001. This
the next several years. We expect that these activities,
monthly interest-only payments at an annual rate of 6.753%,
obligation is now recorded at its face value. Interest expense
together with projected general and administrative expenses,
with principal due in June 2002. Our current intention is to refi-
increased during the year ended December 31, 2000, as com-
will result in continued and significant losses.
nance this loan prior to its maturity. We maintain cash and
pared to the prior year, due to recognizing additional interest
expense on the long-term obligation to Abbott.
Current liabilities decreased by $402,000 to $5.6 million at
fer of a portion of the amount owed Abbott to current liabilities.
investments of $2.8 million as collateral for the obligation.
December 31, 2001, due to the $1.4 million payment of our
Our capital expenditure requirements will depend upon
short-term obligation to Abbott in the first quarter of 2001 off-
numerous factors, including the progress of our research and
LIQUIDITY AND CAPITAL RESOURCES
set partially by an increase in accounts payable and accrued
development programs, the time and cost required to obtain
Cash and investments were $16.1 million at December 31,
expenses resulting from the timing of our development con-
regulatory approvals, our ability to enter into additional col-
2001 as compared to $19.0 million at December 31, 2000. The
tracts. Prior to 1999, we had an agreement with Abbott provid-
laborative arrangements, the demand for products based on
primary use of cash was to finance our operations.
ing for the purchase of approximately $10.0 million of bulk
our technology, if and when such products are approved, and
Since inception, we have funded our operations primarily
drug substance for LOCILEX Cream. As FDA approval of
possible acquisitions of products, technologies and compa-
from the proceeds of public and private placements of our
LOCILEX Cream did not occur, we renegotiated this agree-
nies. We had no significant capital commitments as of
securities totaling approximately $154.0 million since our initial
ment with Abbott in 1999, paying Abbott $4.2 million and
December 31, 2001.
public offering in December 1991 and including the following
receiving partial delivery of material. An additional $3.4 million
In April 2001, we entered into a research collaboration
offerings in 1999, 2000 and 2001:
was due to Abbott and payable if we receive in excess of
and licensing agreement and a preferred stock purchase
• $3,915,000 raised from a public offering completed in
$10.0 million of additional funds in any year beginning in 2000,
agreement with MedImmune, Inc. pursuant to which we
in which case 15% of such excess over $10.0 million shall be
received $10.0 million. MedImmune is expected to fund at
payable to Abbott. We have no further purchase commitments
least $2.5 million for our research and development activities
to Abbott, and Abbott has no further supply requirements to
through April 2003, of which $938,000 has been received
October 1999;
May 2000;
13
(continued)
through December 31, 2001. Of that amount, $880,000 was
potential products. If we are unable to raise such funds, we
research and development programs or enter into collabora-
recognized as revenue and the remaining $58,000 was
may be unable to complete our development activities for any
tions with third parties to commercialize potential products or
included in other current liabilities.
of our proposed products.
technologies that we might otherwise seek to develop or com-
We expect our level of research and development spend-
We regularly explore alternative means of financing our
mercialize ourselves, or seek other arrangements. If we engage
ing in 2002 to be approximately the same as in 2001. After
operations and seek funding through various sources, including
in collaborations, we may receive lower consideration upon
considering the MedImmune transaction, and in the absence
public and private securities offerings, collaborative arrange-
commercialization of such products than if we had not entered
of raising additional funds or significantly reducing expenses,
ments with third parties and other strategic alliances and busi-
into such arrangements, or if we entered into such arrange-
we believe we will have sufficient resources to sustain opera-
ness transactions. We currently do not have any commitments
ments at later stages in the product development process.
tions through 2002. However, we will need to raise substantial
to obtain additional funds, and may be unable to obtain suffi-
Additional factors that may impact our ability to raise capital are
additional funds in the future to continue our research and
cient funding in the future on acceptable terms. If we cannot
described under “Risk Factors Related to Our Business” in our
development programs beyond 2002 and to commercialize our
obtain funding, we will need to delay, scale back or eliminate
filings with the U. S. Securities and Exchange Commission.
Contractual Cash Obligations
The table below sets forth our contractual obligations at December 31, 2001 (in thousands):
Cash Payments Due by Period
Contractual Cash Obligations
Total
Less Than 1 Year
1–3 Years
After 5 Years
$ —
$2,500
$2,500
—
$ —
Abbott settlement 2
2,009
480
1,529
—
—
Operating lease on building 3
2,141
327
689
737
388
Bank debt 1
$
4–5 Years
Operating leases and maintenance contracts on equipment
421
196
165
57
3
R&D contracts
653
531
90
32
—
Clinical trial contracts
704
704
—
—
—
Manufacturing contracts
549
549
—
—
—
$8,977
$5,287
$2,473
$826
$391
Total contractual cash obligations
Notes:
1
We maintain cash and investments of approximately $2,792,000 as collateral for this obligation. Our current intention is to refinance this obligation prior to its maturity.
Payable if we receive in excess of $10 million of additional funds in any year beginning in 2000, in which case 15% of such excess over $10 million shall be payable to Abbott.
3
The lease provides for escalations relating to increases in the Consumer Price Index not to exceed 7% but no less than 3.5% beginning in December 2002. We have assumed a minimum lease payment escalation of 3.5%
for the purposes of this table.
2
14
NEW ACCOUNTING PRONOUNCEMENTS
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
management believes that a sudden change in interest rates
In June 2001, the Financial Accounting Standards Board
MARKET RISK
would not have a material effect on the value of the portfolio.
issued two statements as a result of its deliberations on the
We are exposed to risks associated with interest rate changes.
Management estimates that if the average annualized yield of
business combinations project, Statement of Financial
Our exposure to market risk for changes in interest rates
our investments had decreased by 100 basis points, our
Accounting
Business
relates primarily to our investment portfolio. We invest in only
interest income for the year ended December 31, 2001 would
Combinations, and SFAS No. 142, Goodwill and Other
U.S. government debt instruments that meet high quality
have decreased by approximately $196,000. This estimate
Intangible Assets. SFAS No. 141, which eliminates the use of
credit standards, as specified in our investment policy. The
assumes that the decrease occurred on the first day of 2001
the pooling-of-interests method of accounting, is effective for
policy also limits the amount of credit exposure we may have
and reduced the annualized yield of each investment instru-
any business combinations initiated after June 30, 2001 and
to any one issue, issuer or type of investment.
ment by 100 basis points. The impact on our future interest
Standards
(SFAS)
No.
141,
also includes the criteria for the recognition of intangible
As of December 31, 2001, our portfolio investments
assets separately from goodwill. SFAS No. 142 will be effective
consisted of $2.0 million in cash and $14.1 million in U.S.
for fiscal years beginning after December 15, 2001 and will
government debt instruments having a maturity of less than
require that goodwill and certain intangibles not be amortized,
one year. Due to the nature of our investment portfolio,
income will depend largely on the gross amount of our
investment portfolio.
We do not currently have any significant direct foreign
currency exchange rate risk.
but rather be subject to an impairment test at least annually.
SFAS Nos. 141 and 142 will not have an impact on our historical financial statements at adoption as we currently do not
have any intangible assets or goodwill.
15
C O N S O L I D AT E D B A L A N C E S H E E T S
December 31,
2001
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments (Note 3)
Prepaid expenses and other
$
Total current assets
Fixed assets, net (Note 4)
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note 5)
Notes payable (Note 6)
Accrued development expense—short-term (Note 15)
Other current liabilities
Total current liabilities
Accrued development expense—long-term (Note 15)
Other liabilities
Series A redeemable convertible preferred stock (liquidation value of $1,044 and $1,233 at December 31, 2001 and
December 31, 2000, respectively) (Note 7)
Commitments, contingencies and other matters (Note 15)
Stockholders’ equity:
Preferred stock—$.001 par value; 9,211 shares authorized; 0.9 and 1.2 shares issued and outstanding as Series A redeemable
convertible preferred stock at December 31, 2001 and December 31, 2000, respectively; 10.0 shares issued and outstanding
as Series B convertible preferred stock at December 31, 2001 (liquidation value of $10,000); none issued at December 31, 2000
Common stock—$.002 par value; 75,000 shares authorized; 32,864 and 32,393 shares issued and outstanding at December 31, 2001
and December 31, 2000, respectively
Additional paid-in capital
Accumulated other comprehensive income—unrealized gain on investments
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to financial statements.
16
2000
1,973
14,105
218
$
599
18,434
345
16,296
1,456
64
19,378
1,144
179
$ 17,816
$ 20,701
$
$
2,521
2,500
480
82
2,093
2,500
1,392
—
5,583
1,529
50
5,985
1,967
43
1,044
1,233
—
—
66
180,112
23
(170,591)
65
168,967
9
(157,568)
9,610
11,473
$ 17,816
$ 20,701
C O N S O L I D AT E D S TAT E M E N T S O F O P E R AT I O N S
2001
Collaborative research agreement revenues
$
Costs and expenses:
Research and development
General and administrative
880
2000
$
—
1999
$
—
10,974
3,423
10,074
2,583
9,876
2,870
14,397
12,657
12,746
Loss from operations
Interest income
Interest expense
(13,517)
849
(244)
(12,657)
883
(605)
(12,746)
755
(225)
Net loss
(12,912)
111
(12,379)
45
(12,216)
—
$(13,023)
$(12,424)
$(12,216)
$
$
$
Pro forma amounts assuming the new revenue recognition principle is applied retroactively:
Net loss
(0.40)
32,711
(0.42)
29,375
(0.52)
23,706
$(11,058)
$(11,058)
$
(0.47)
17
C O N S O L I D AT E D S TAT E M E N T S O F C H A N G E S I N S T O C K H O L D E R S ’ E Q U I T Y A N D C O M P R E H E N S I V E L O S S
Common Stock
(In thousands)
Balance at December 31, 1998
Exercise of stock options, issuance of stock and compensation
expense under option grants and stock awards
Common stock issued pursuant to public offering
Comprehensive loss:
Net loss
Carrying value adjustment
Total comprehensive loss
Exercise of stock options and compensation expense under
option grants and stock awards
Common stock issued pursuant to collaboration agreement
Common stock issued pursuant to private placement
Comprehensive loss:
Net loss
Exercise of stock options and compensation expense under
option grants and stock awards
Convertible preferred stock issued
Comprehensive loss:
Net loss
18
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
Number
of Shares
Amount
Additional
Paid-in
Capital
22,910
$46
$147,553
$ 9
$(132,928)
$ 14,680
33
4,000
—
8
195
3,907
—
—
—
—
195
3,915
—
—
—
—
—
—
—
(22)
(12,216)
—
(12,216)
(22)
—
—
—
—
—
(12,238)
26,943
54
151,655
(13)
(145,144)
6,552
211
1,086
4,153
—
1
2
8
—
697
4,945
11,670
—
—
—
—
—
—
—
—
(45)
698
4,947
11,678
(45)
—
—
—
—
—
—
—
22
(12,379)
—
(12,379)
22
—
—
—
—
—
(12,357)
32,393
65
168,967
9
(157,568)
11,473
471
—
—
1
—
—
1,237
9,908
—
—
—
—
—
—
(111)
1,238
9,908
(111)
—
—
—
—
—
—
—
14
(12,912)
—
(12,912)
14
—
—
—
—
—
(12,898)
32,864
$66
$180,112
$ 23
$(170,591)
$ 9,610
C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S
2001
2000
1999
$(12,912)
$(12,379)
$(12,216)
838
(663)
373
(300)
920
(654)
248
—
1,004
(493)
195
—
242
428
(1,350)
89
(230)
1,429
397
(10)
(39)
(7,989)
2,962
(5)
Net cash used in operating activities
(13,255)
(10,279)
(16,581)
Cash Flows From Investing Activities:
Purchase of investments
Proceeds from maturities of investments
Proceeds from sale of investments
Capital expenditures
(34,173)
39,179
—
(1,150)
(30,574)
21,025
—
(271)
(31,780)
41,418
1,000
(32)
Net cash provided by (used in) investing activities
3,856
(9,820)
10,606
Cash Flows From Financing Activities:
Payments of notes payable
Proceeds from notes payable
Proceeds from issuance of Series A redeemable convertible preferred stock
Net proceeds from issuance of Series B convertible preferred stock
Net proceeds from issuance of common stock
Proceeds from exercise of options
—
—
—
9,908
—
865
—
—
1,188
—
16,625
450
(2,500)
2,500
—
—
3,915
—
10,773
18,263
3,915
1,374
599
(1,836)
2,435
(2,060)
4,495
(In thousands)
Cash Flows From Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Amortization of investment discounts/premiums
Compensation expense on option grants and equity awards
Receipt and retirement of Series A redeemable convertible preferred stock
Changes in operating assets and liabilities:
Prepaid expenses and other
Accounts payable and accrued expenses
Accrued development expenses
Other liabilities
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$ 1,973
$
599
$ 2,435
Supplemental Cash Flow Information:
Cash paid during the period for interest
$
$
205
$
208
223
19
N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
NOTE 1. THE COMPANY
Investments
recognition in financial statements, including the recognition of
Genaera Corporation (“Genaera” or the “Company”), a
Investments purchased with a maturity of more than three
non-refundable fees received upon entering into arrangements
Delaware corporation, was incorporated on June 29, 1987.
months, and that mature less than twelve months from the bal-
(“up-front fees”). In previous years, prior to SAB 101, the
Genaera is a biopharmaceutical company committed to devel-
ance sheet date, are classified as short-term investments. Long-
Company recognized up-front fees in the period in which they
oping medicines for serious diseases from genomics and natu-
term investments are those with maturities greater than twelve
were received. Post implementation of SAB 101, any revenues
ral products. The Company’s research and development efforts
months from the balance sheet date. The Company generally
from research and development arrangements are recognized
are focused on anti-angiogenesis, obesity, infectious diseases
holds investments to maturity; however, since the Company
in accordance with the terms of the related agreements, either
and respiratory diseases. On March 9, 2001, the Company
may, from time to time, sell securities to meet cash require-
as services are performed or as milestones are achieved.
changed its name from Magainin Pharmaceuticals Inc. to
ments, the Company classifies its investments as available-for-
Revenues related to up-front fees are now deferred and recog-
Genaera Corporation.
sale as defined by SFAS No. 115, Accounting for Certain
nized over specified future performance periods.
The Company is managed and operated as one business.
Investments in Debt and Equity Securities. Available-for-sale
The Company implemented SAB 101, as amended, effec-
A single management team that reports to the Chief Executive
securities are carried at market value with unrealized gains and
tive January 1, 2000. The adoption of this new accounting
Officer comprehensively manages the entire business. Accord-
losses, which are temporary, reported as a separate compo-
principle did not have an impact on the Company’s results of
ingly, the Company does not prepare discrete financial infor-
nent of stockholders’ equity. Gross realized gains and losses
operations for the year ended December 31, 2000. For the
mation with respect to separate product areas or by location,
on the sales of investment securities are determined on the
year ended December 31, 1997, the Company recognized rev-
and does not have separately reportable segments as defined
specific identification method.
enues of $5,000,000 related to a non-refundable, up-front
license fee received in connection with a collaboration agree-
by Statement of Financial Accounting Standards (“SFAS”)
No. 131, Disclosures about Segments of an Enterprise and
Related Information.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
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 amounts reported in the financial
Fixed Assets and Depreciation
ment with GlaxoSmithKline for LOCILEX Cream. On a pro
Fixed assets are recorded at cost and depreciated using the
forma basis under SAB 101, this fee would have been deferred
straight-line method over the estimated useful lives of the
and amortized over an estimated development period of
assets including: three (3) years for computers/software, five
approximately 29 months. In 1999, as a result of the Food
(5) years for laboratory and office equipment and seven (7)
and Drug Administration’s (“FDA”) decision not to approve
years for furniture and fixtures. Equipment under capital leases
LOCILEX Cream, the Company was no longer required to
and leasehold improvements are amortized using the straight-
perform development activities pursuant to this agreement.
line method over the term of the respective lease, or their esti-
The pro forma effects of retroactive application of this new rev-
mated useful lives, whichever is shorter. Expenditures for
enue recognition principle on net loss and net loss applicable
maintenance and repairs are charged to expense as incurred.
to common stockholders, and related per share amounts, for
the year ended December 31, 1999 are presented in the
statements and related notes. Actual results could differ from
Revenue Recognition
those estimates.
In December 1999, the staff of the U.S. Securities and
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments purchased with a maturity of three months or less to be
cash equivalents.
20
accompanying consolidated statements of operations.
Exchange Commission (“SEC”) issued Staff Accounting Bul-
Research and Development
letin No. 101, Revenue Recognition in Financial Statements
Research and development (“R&D”) expenses include related
(“SAB 101”). SAB 101 summarizes certain of the staff’s views in
salaries, contractor fees, and facility costs. R&D expenses con-
applying generally accepted accounting principles to revenue
sist of independent R&D contract costs, contract manufacturing
costs and costs associated with collaborative R&D arrange-
of grant. The resulting compensation cost is recognized and
components. Comprehensive income consists of reported net
ments. In addition, the Company funds R&D at other research
charged to operations over the service period, which is usually
income or loss and “other comprehensive income” (i.e., other
institutions under agreements that are generally cancelable. R&D
the vesting period.
gains and losses affecting stockholders’ equity that, under
expenses also include external activities such as investigatorsponsored trials. All such costs are charged to R&D expense
generally accepted accounting principals, are excluded from
Income Taxes
net income or loss as reported on the statement of opera-
systematically as incurred, which may be measured by contract
The Company accounts for income taxes using the asset and
tions). With regard to the Company, other comprehensive
milestones, patient enrollment or the passage of time.
liability method as prescribed by SFAS No. 109, Accounting
income consists of unrealized gains and losses on marketable
for Income Taxes. Deferred tax assets and liabilities are deter-
securities.
Patent Costs
mined based on differences between the financial reporting
Patent-related costs, including professional fees and filing
and tax bases of assets and liabilities, and are measured using
New Accounting Pronouncements
fees, are expensed as incurred.
the enacted tax rates and laws that will be in effect when the
In June 2001, the Financial Accounting Standards Board
differences are expected to reverse. The measurement of
issued two statements as a result of its deliberations on the
deferred tax assets is reduced, if necessary, by a valuation
business combinations project, SFAS No. 141, Business Com-
Expense related to the facility lease is recorded on a straight-
allowance for any tax benefits which are not expected to be
binations, and SFAS No. 142, Goodwill and Other Intangible
line basis over the lease term. The difference between rent
realized. The effect on deferred tax assets and liabilities of a
Assets. SFAS No. 141, which eliminates the use of the pooling-
expense incurred and the amount paid is recorded as deferred
change in tax rates is recognized in the period in which tax
of-interests method of accounting, is effective for any business
rent and is amortized over the lease term.
rate changes are enacted.
combinations initiated after June 30, 2001 and also includes
Stock-Based Compensation
Loss Per Share
The Company accounts for stock-based employee compen-
The Company calculates loss per share under the provisions of
beginning after December 15, 2001 and will require that good-
sation under the intrinsic value-based method set forth
SFAS No. 128, Earnings Per Share. SFAS No. 128 requires a
will and certain intangibles not be amortized, but rather be
by Accounting Principles Board (“APB”) Opinion No. 25,
dual presentation of “basic” and “diluted” loss per share on
subject to an impairment test at least annually. SFAS Nos. 141
Accounting for Stock Issued to Employees, and related inter-
the face of the income statement. Basic loss per share is com-
and 142 will not have an impact on the Company’s historical
pretations. Effective January 1, 1996, the Company adopted
puted by dividing the net loss by the weighted average number
financial statements at adoption as the Company currently
the disclosure-only provisions of SFAS No. 123, Accounting
of shares of common stock outstanding during each period.
does not have any intangible assets or goodwill.
for Stock-Based Compensation, for stock-based compensa-
Diluted loss per share includes the dilutive effect, if any, from
tion issued to employees. Stock or other equity-based com-
the potential exercise or conversion of securities, such as
pensation for non-employees must be accounted for under the
stock options and warrants, which would result in the issuance
fair value-based method as required by SFAS No. 123 and
of shares of common stock. Basic and diluted loss per share
Emerging Issues Task Force (EITF) No. 96-18, Accounting for
amounts are the same because the Company reported a loss
Equity Instruments that are Issued to Other Than Employees
for all periods presented.
Lease Expense
the criteria for the recognition of intangible assets separately
for Acquiring, or in Conjunction with Selling, Goods or Services,
and other related interpretations. Under this method, the equity-
Comprehensive Income
based instrument is valued at either the fair value of the con-
SFAS No. 130, Reporting Comprehensive Income, establishes
sideration received or the equity instrument issued on the date
standards for the reporting of comprehensive income and its
from goodwill. SFAS No. 142 will be effective for fiscal years
NOTE 3. INVESTMENTS
The Company invests in securities of the U.S. Treasury and
U.S. government agencies. Excess cash is invested on a
short-term basis in U.S. government-based money market
funds. The Company had unrealized gains of $23,000 and
$9,000 at December 31, 2001 and 2000, respectively. The
Company has not realized any losses on its investments during
the years ended December 31, 2001, 2000 or 1999.
21
(continued)
NOTE 4. FIXED ASSETS
in June 2002. The Company maintains cash and investments
before May 10, 2005 are convertible at any one date during the
Fixed assets are stated at cost and are summarized as follows
of approximately $2,792,000 as collateral for the note payable.
six-month period beginning on May 10, 2005. Shares of the
(in thousands):
The Company’s current intention is to refinance this loan prior
Series A Preferred Stock issued on or after May 10, 2005 are
to its maturity. Interest expense related to this note payable for
convertible at any one date during the six-month period begin-
the years ended December 31, 2001, 2000 and 1999 was
ning on December 31, 2008. In addition, the Series A Preferred
approximately $196,000, $208,000 and $190,000, respectively.
Stock shall also be convertible at the holder’s option after
December 31,
2001
2000
$ 3,862
$ 3,536
Leasehold improvements
1,437
1,149
Construction in progress
430
—
5,729
4,685
(4,273)
(3,541)
$ 1,456
$ 1,144
Laboratory and office equipment
November 10, 2000 (1) in the event of a merger, consolidation
NOTE 7. PREFERRED STOCK
or sale of substantially all of the assets of the Company or (2) at
The Company’s certificate of incorporation provides the board
any time following the first date when the total number of com-
of directors the power to issue shares of preferred stock with-
mon shares outstanding, on a fully-diluted and as-converted
out stockholder approval. This preferred stock could have vot-
basis, multiplied by the preceding 10-day average closing
ing rights, including voting rights that could be superior to that
price of such date is less than 500% of the aggregate Original
of the Company’s common stock, and the board of directors
Issue Price plus accrued and unpaid cumulative dividends on
has the power to determine these voting rights. As of
the Series A Preferred Stock. In any event, the aggregate num-
December 31, 2001, the Company’s board of directors has
ber of common shares issued upon conversion of the shares
Accounts payable and accrued expenses consist of the follow-
designated 80,000 shares of preferred stock as Series A
of Series A Preferred Stock shall not exceed 5,388,595 shares
ing (in thousands):
redeemable convertible preferred stock (the “Series A
nor shall such aggregate conversions result in Genentech ben-
Less accumulated depreciation
and amortization
NOTE 5. ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
Preferred Stock”), 888 shares of which are outstanding and
eficially owning more than 10% of the Company’s common
2001
2000
issued to Genentech, Inc., and 10,000 shares of preferred
stock. In the event of a conversion which would exceed these
$ 476
$ 190
stock as Series B convertible preferred stock (the “Series B
limits, the Company would be required to redeem such shares
Manufacturing development costs
549
710
Preferred Stock”), all of which are outstanding and issued to
at a cash redemption price of $1,000 per share plus accrued
Clinical and regulatory costs
481
444
MedImmune, Inc. The issuances to both Genentech and
and unpaid cumulative dividends to the date of conversion.
Employee compensation
463
—
MedImmune were in connection with collaborative agreements
The Series A Preferred Stock may also be redeemed, in whole
Professional fees
249
428
237
222
(see “NOTE 12. Collaborative Agreements”). The Series B
or in part, at any time at the Company’s option at a cash
Preclinical costs
99
Preferred Stock was purchased by MedImmune in April 2001
redemption price of $1,000 per share plus accrued and unpaid
66
for $10,000,000.
cumulative dividends to the date of redemption. The Series A
$2,521
$2,093
December 31,
Accounts payable
Other
The Series A Preferred Stock is convertible, in whole or in
Preferred Stock ranks senior to the Company’s common stock
part, at the Company’s (subject to defined limitations) or
as to liquidation and dividend rights. In the event of any liqui-
NOTE 6. NOTE PAYABLE
holder’s option, into shares of the Company’s common stock
dation, dissolution or winding up of the Company, the Series A
In the second quarter of 2001, the Company refinanced its
at a conversion rate determined by dividing the original issue
Preferred Stock has a liquidation preference of $1,000 per
$2,500,000 note payable with the same bank. Under the terms
price of $1,000 per share (“Original Issue Price”) by the 5-day
share plus accumulated and unpaid cumulative dividends to the
of this arrangement, the Company makes monthly interest-
average closing price of the common stock as of the conver-
date of liquidation. Cumulative preferred dividends under the
only payments at an annual rate of 6.753%, with principal due
sion date. Shares of the Series A Preferred Stock issued
Series A Preferred Stock are payable in arrears on a quarterly
22
basis at an annual rate of the prime rate plus 2%. Preferred
accrued and unpaid cumulative dividends to the date of
exercise price of $3.50 per share. These warrants expire on
dividends of $156,000 have been accrued as of December 31,
redemption. Holders of the Series B Preferred Stock have no
August 17, 2007 and are subject to adjustment under certain
2001 on the Series A Preferred Stock. Holders of the Series A
rights to dividends other than the right to participate in any div-
circumstances. Such circumstances include the issuance of
Preferred Shares have limited voting rights and generally do
idends that may be declared on the Company’s common stock
shares of common stock by the Company for a consideration
not have the right to vote on matters submitted to the holders
based on the conversion of such Series B Preferred Stock
per share less than the exercise price of the warrants, and the
of the Company’s common stock.
shares into common stock. With respect to liquidation and div-
issuance by the Company of securities convertible into shares
Prior to April 19, 2006, the Series B Preferred Stock is
idend rights, the Series B Preferred Stock ranks senior to the
of common stock for which the exercise or conversion price,
convertible, in whole or in part, at the holder’s option, into
Company’s common stock and junior to the Company’s Series
when added to the purchase price of such convertible securi-
shares of the Company’s common stock at a conversion rate
A Preferred Stock. In the event of any liquidation, dissolution
ties, is less than the exercise price of the warrants. All such
of 200 shares of common stock for each share of Series B
or winding up of the Company, the Series B Preferred Stock
warrants are currently exercisable.
Preferred Stock. The maximum aggregate number of common
has a liquidation preference of $1,000 per share plus accrued
In connection with the execution of an agreement with an
shares issued upon a conversion of all of the shares of Series
and unpaid cumulative dividends to the date of liquidation.
investment bank to provide future financing to the Company, on
B Preferred Stock before April 19, 2006 is 2,000,000 shares.
Holders of the Series B Preferred Shares have limited voting
December 12, 2001 the Company granted to the investment
The Series B Preferred Stock is convertible after April 19,
rights and generally do not have the right to vote on matters
bank two separate warrants to purchase 50,000 shares and
2006, in whole or in part, at the Company’s or holder’s option,
submitted to the holders of the Company’s common stock.
200,000 shares of the Company’s common stock at an exercise
into shares of the Company’s common stock at a conversion
price of $3.79 per share. The warrant to purchase 50,000 shares
rate determined by dividing the original issue price of $1,000
NOTE 8. COMMON STOCK
vests either (i) equally in four installments on the first through
per share by the lesser of (i) $5.00 or (ii) the 20-day average
In May 2000, the Company issued 1,085,973 shares of its
fourth 3-month anniversaries of the date of grant or (ii) entirely
closing price of the common stock as of the conversion date
common stock to Genentech for approximately $5,000,000
upon the closing of a financing with aggregate gross proceeds
(the “Post-April 19, 2006 Conversion Rate”). However, the
less issuance costs.
of not less than $15,000,000. The warrant to purchase 200,000
Company may not exercise its option to convert if the closing
In August 2000, the Company sold 4,153,196 shares of its
shares was cancelled without vesting subsequent to
price of the common stock is less than $2.15 per share on the
common stock, through a private placement, at a price of
December 31, 2001 as a result of the investment bank’s termi-
day prior to notice of conversion. In addition, the Series B
$3.00 per share. Net proceeds to the Company from the offer-
nation by the Company. The warrant to purchase 50,000 shares
Preferred Stock shall be automatically convertible at any time
ing totaled approximately $11,678,000, after offering costs,
of common stock expires on December 12, 2006. The compen-
in the event of a merger, consolidation or sale of substantially
which included a cash fee paid and warrants (see “NOTE 9.
sation expense for the warrant to purchase 50,000 shares of
all of the assets of the Company (a “Merger Event”), at the
Warrants”).
common stock granted to this investment bank is recognized
Post-April 19, 2006 Conversion Rate. The maximum aggregate
number of common shares issued upon conversion of all of
In May 2001, the Company increased the number of
shares of its authorized common stock to 75,000,000 shares.
the shares of Series B Preferred Stock after April 19, 2006 or at
over the respective service period in accordance with vesting
provisions. Compensation expense related to this warrant for
the year ended December 31, 2001 was approximately $13,000
any time as a result of a Merger Event is 4,642,741 shares of
NOTE 9. WARRANTS
determined using a Black-Scholes valuation model. The amount
common stock. The Series B Preferred Stock may also be
In connection with its August 2000 private placement, the
of compensation expense recognized in future years is subject
redeemed, in whole or in part, at any time at the Company’s
Company granted to the placement agent warrants to pur-
to adjustment based upon changes in the price of the
option at a cash redemption price of $1,000 per share plus
chase 167,166 shares of the Company’s common stock at an
Company’s common stock and other measures of fair value.
23
(continued)
NOTE 10. COMMON STOCK OPTIONS AND
RESTRICTED COMMON STOCK AWARDS
2001, the stockholders approved an amendment to the
may have a term of more than 10 years), the exercise price of
Company’s Amended 1998 Equity Compensation Plan to
an option, and the rate at which options may be exercised.
In May 1996, the stockholders approved the amended 1992
increase the number of shares of common stock issuable
Incentive stock options may be granted only to employees of
Stock Option Plan (the “1992 Plan”) which provides for the
thereunder to 3,500,000 shares.
the Company. Nonqualified stock options may be granted to
granting of options for the purchase of up to 2,500,000
The plans provide for the granting of incentive stock
employees, directors or consultants of the Company. The
shares of common stock. In May 1998, the stockholders
options and nonqualified stock options and are administered
exercise price of options under the 1992 Plan and the 1998
approved the 1998 Equity Compensation Plan (the “1998
by a committee of the Company’s board of directors. The
Plan cannot be less than the fair market value of the underlying
Plan”) which provides for the granting of options and stock
committee has the authority to determine the term during
common stock on the date of the grant.
awards of up to 1,500,000 shares of common stock. In May
which an option may be exercised (provided that no option
A summary of the status of the Company’s stock options as of December 31, 2001, 2000 and 1999, and changes during the years ended on those dates, is presented below (in thousands, except
per share data):
2001
Outstanding at beginning of year
2000
1999
Shares
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
Shares
Weighted Average
Exercise Price
3,680
$4.51
3,662
$4.70
3,588
$5.94
Granted
832
$3.36
760
$3.89
833
$1.96
Exercised
(424)
$2.05
(171)
$2.63
(1)
$0.07
Forfeited
(343)
$3.63
(571)
$5.67
(758)
$7.46
Outstanding at end of year
3,745
$4.62
3,680
$4.51
3,662
$4.70
Exercisable at end of year
2,057
$5.70
2,109
$5.28
2,141
$4.71
The following table summarizes information about stock options outstanding and exercisable as of December 31, 2001 (in thousands, except per share data):
Options Outstanding
Range of
Exercise Prices
Shares
Outstanding
Options Exercisable
Weighted Average
Remaining Contractual Life
Weighted Average
Exercise Price
Shares
Exercisable
Weighted Average
Exercise Price
$1.03–$ 2.72
727
7.9 Years
$1.97
288
$1.84
$2.97–$ 3.50
674
7.8 Years
$3.19
345
$3.21
$3.61–$ 3.94
867
7.6 Years
$3.68
250
$3.76
$4.31–$ 5.75
705
6.6 Years
$4.84
404
$5.07
$7.13–$16.75
772
4.5 Years
$9.20
770
$9.21
$1.03–$16.75
3,745
6.9 Years
$4.62
2,057
$5.70
24
The Company applies APB Opinion No. 25 and related
The 1998 Plan also provides for the issuance of common
these unvested options is subject to adjustment based upon
interpretations in accounting for options. Accordingly, no com-
stock awards, up to a maximum of 375,000 shares. Such
changes in the price of the Company’s common stock and
pensation cost has been recognized for employee stock option
awards shall be made subject to such performance require-
other measures of fair value.
grants. Had compensation cost for employee stock option
ments, vesting provisions, transfer restrictions or other restric-
grants been determined based on the fair value at the grant
tions and conditions as a committee of the Company’s board
NOTE 11. INCOME TAXES
dates for awards consistent with the method of SFAS No. 123,
of directors may determine. As of December 31, 2001, a total
As of December 31, 2001, the Company has approximately
the Company’s net loss and net loss per share would have
of 206,000 shares have been awarded under the 1998 Plan,
$102,445,000 of net operating loss (“NOL”) carryforwards for
been increased to the pro forma amounts indicated below (in
vesting over a four-year period from the award date. The cost
federal income tax purposes (expiring in years 2003 through
thousands, except per share data):
of these awards will be recognized as expense over the vest-
2021). In addition, the Company has NOL carryforwards for
ing period. As of December 31, 2001, 117,625 shares have
state income tax purposes of approximately $66,576,000
been issued pursuant to the vesting of these awards.
(expiring in years 2005 through 2011). Pennsylvania has a
Compensation expense related to these stock awards for the
$2,000,000 annual limitation on the utilization of NOL carryfor-
years ended December 31, 2001, 2000 and 1999 was approx-
wards, thus the Company is not likely to utilize most of its state
imately $209,000, $194,000 and $158,000, respectively.
NOL carryforwards. The Company also has approximately
2001
Net loss applicable to
common stockholders:
As reported
Pro forma
Net loss applicable to common
stockholders per share—
basic and diluted:
As reported
Pro forma
$(13,023)
$(15,799)
2000
$(12,424)
$(14,991)
1999
$(12,216)
$(14,966)
The Company granted options to purchase 25,000 and
$6,609,000 of research and development tax credits carryfor-
15,000 shares of the Company’s common stock to consultants
wards available to offset future federal income tax liability
in the years ended December 31, 2000 and 1999, respectively.
(expiring in years 2005 through 2021). The NOL carryforward
(0.52)
(0.63)
The compensation expense for options granted to consultants
differs from the accumulated deficit principally due to differ-
is recognized over the respective service periods ranging up to
ences in the recognition of certain expenses between financial
The resulting effect on pro forma net loss and pro forma net
one year or in accordance with vesting provisions.
and federal tax reporting. Additionally, at December 31, 2001,
loss per share disclosed above may not be representative of the
Compensation expense related to these options for the years
a portion of the gross deferred tax asset will reduce equity to
effects on a pro forma basis in future years. The fair value of each
ended December 31, 2001, 2000 and 1999 was approximately
the extent that such assets are realized.
option grant is estimated on the date of grant using the Black-
$70,000, $11,000 and $37,000, respectively. The amount of
Under the Tax Reform Act of 1986, the utilization of a cor-
Scholes option-pricing model with the following assumptions:
compensation expense recognized in future years is subject to
poration’s NOL carryforward and research and development
adjustment based upon changes in the price of the Company’s
tax credits are limited following a change in ownership of
common stock and other measures of fair value.
greater than 50% within a three-year period. Due to the
$
$
(0.40)
(0.48)
2001
Range of risk free
interest rates
Dividend yield
Volatility factor
Weighted average expected
life of options (in years)
Weighted average fair value
of options granted during
the year
4.2%–5.2%
0%
100%
7.0
$2.81
$
$
(0.42)
(0.51)
2000
5.4%–6.7%
0%
100%
7.3
$3.32
$
$
1999
5.0%–6.4%
0%
86%
6.0
$1.54
The Company recorded compensation expense of approx-
Company’s prior equity transactions, the Company’s net oper-
imately $73,000 and $18,000 for the years ended December 31,
ating loss and tax credit carryforwards may be subject to an
2001 and 2000, respectively, related to a former officer who
annual limitation generally determined by multiplying the mar-
entered into a consulting contract in 2000 with the Company
ket value of the Company on the date of the ownership change
subsequent to his employment and retained unvested options
by the federal long-term tax-exempt rate. Any amount exceed-
to purchase 97,500 shares of the Company’s common stock
ing the annual limitation may be carried forward to future years
after his transition to non-employee status. The amount
for the balance of the NOL and tax credit carryforward period.
of compensation expense recognized in future years on
25
(continued)
Deferred income taxes reflect the net tax effects of tem-
NOTE 12. COLLABORATIVE ARRANGEMENTS
Genentech and the Company executed a settlement agree-
porary differences between carrying amounts of assets and
In February 1997, the Company entered into a development,
ment pursuant to which all licensed technology under the
liabilities for financial reporting purposes and the amounts
supply and distribution agreement in North America with
Genentech Agreement was returned to the Company. At that
used for income tax purposes. In assessing the realizability of
GlaxoSmithKline for LOCILEX Cream (the “GlaxoSmithKline
time, $300,000 in development expenditures owed to the
deferred tax assets, management considers whether it is more
Agreement”). GlaxoSmithKline has paid the Company
Company by Genentech were settled by the return to the
likely than not that some portion or all of the deferred tax
$10,000,000 under this agreement. The Company had hoped
Company and cancellation of 300 shares of the Series A
assets will not be realized. The ultimate realization of deferred
to commercialize LOCILEX Cream in the near-term. However,
Preferred Stock previously issued to Genentech. This $300,000
tax assets is dependent upon generation of future taxable
with the FDA’s decision not to approve LOCILEX Cream,
was accounted for as a reduction to research and development
income during the periods in which temporary differences rep-
near-term commercialization will not occur, and the Company
expenses for the year ended December 31, 2001.
resenting net future deductible amounts become deductible.
will generate no revenues from LOCILEX Cream in the
In April 2001, the Company entered into a research collab-
Due to the uncertainty of the Company’s ability to realize the
near future. The GlaxoSmithKline Agreement also gives
oration and licensing agreement with MedImmune to develop
benefit of the deferred tax asset, the deferred tax assets are
GlaxoSmithKline rights to terminate the arrangement, and,
and commercialize therapies related to the Company’s IL9 pro-
fully offset by a valuation allowance at December 31, 2001 and
under certain conditions, the right to negotiate for rights
gram. The companies also will collaborate on the creation of
2000. The net change in the valuation allowance for deferred
to another Genaera product development candidate.
specific assays and respiratory disease models for use in
tax assets at December 31, 2001 and 2000 was an increase of
GlaxoSmithKline remains the Company’s exclusive sales,
assessing product candidates developed by MedImmune.
$3,856,000 and $6,177,000, respectively. The expected tax
marketing and distribution partner for the North American
MedImmune will be responsible for development, manufactur-
benefit calculated using a federal statutory tax rate of 34% has
territory for LOCILEX Cream.
ing, clinical testing, and marketing of any resulting product.
been reduced to an actual benefit of zero due primarily to the
In May 2000, the Company entered into a research,
MedImmune is expected to fund at least $2,500,000 for
development and commercialization collaboration agreement
research and development activities at the Company through
Significant components of the net deferred tax assets
with Genentech Inc. related to the Company’s IL9 antibody
April 2003 (the “R&D Funding”), which will be recognized by the
as of December 31, 2001 and 2000 consists of the following
development program and related respiratory technology (the
Company as revenues on a straight-line basis over the two-
(in thousands):
“Genentech Agreement”), which replaced a December 1998
year period. In addition to the R&D Funding, MedImmune will
collaboration agreement. The Company and Genentech simul-
also reimburse the Company for certain external costs incurred
taneously executed a Stock Purchase Agreement (the “Stock
by the Company in connection with the IL9 research plan,
$ 36,150
Purchase Agreement”) pursuant to which the Company
which will be recognized by the Company as a reduction to
aforementioned valuation allowance.
2001
2000
Deferred tax assets:
Net operating losses
$ 42,507
6,609
6,238
received from Genentech approximately $5,000,000 in
research and development expenses. For the year ended
Capitalized research and development
28,485
30,915
exchange for the issuance of 1,085,973 shares of its common
December 31, 2001, the Company recognized $880,000 as rev-
Accrued expenses, reserves and other
902
1,272
stock and $500,000 for the issuance of 500 shares of its Series
enue related to the R&D Funding, which approximated the
Depreciation
243
315
A Preferred Stock. In November 2000, the Company issued
Company’s costs to obtain that revenue, and $132,000 of
78,746
74,890
688 of its Series A Preferred Stock to Genentech for $688,000
external cost reimbursements as an offset to research and
(78,746)
(74,890)
which represented further development funding. In December
development expenses. The Company could receive up to
2000, Genentech provided notice to the Company of its elec-
$55,000,000 if future milestones are successfully achieved, plus
tion to terminate the Genentech Agreement. In April 2001,
royalties on any product resulting from this agreement.
Research credits
Valuation allowance
Deferred tax assets, net
26
$
—
$
—
In September 2001, the Company received a contingent
award of up to $1,700,000 from an affiliate of the Cystic
different market assumptions or estimation methodologies
Equipment Leases
may have an effect on the estimated fair value amounts.
The Company has entered into multiple operating leases for its
Fibrosis Foundation (“CFF”) to support early clinical evaluation
Cash equivalents, accounts payable, accrued expenses
of LOMUCIN involving patients with cystic fibrosis. This
and investments are carried at amounts which reasonably
award has been granted and shall be paid to the Company
approximate their fair values due to the short-term nature of
from time to time upon the achievement of certain develop-
these instruments. The estimated fair value of the Company’s
ment milestones. Of this grant, $50,000 was received as of
note payable is estimated to be approximately equal to its car-
December 31, 2001 and was recorded as a long-term liability
rying value of $2,500,000 at December 31, 2001 due to the
because it is refundable to the CFF upon marketing approval
short-term nature of this note.
by the FDA or upon the Company’s election not to enter
Phase 3 clinical trials or to commercialize the product within
NOTE 15. COMMITMENTS, CONTINGENCIES
two years of milestone completion, assuming efficacy is demon-
AND OTHER MATTERS
Facility Lease
resultant product up to 1% based upon the amount of funding
The Company has entered into an operating lease for its labo-
ultimately provided by the CFF.
ratory and corporate office facilities. Minimum annual rent
the plan. No such Company contributions have been made
during the years ended December 31, 2001, 2000 or 1999.
$149
2003
113
2004
45
2005
45
2006
13
3
Equipment rental expense was approximately $240,000,
2001, 2000 and 1999, respectively.
Year Ended
December 31,
Manufacturing
full-time, eligible employees. Employee contributions are vol-
Company, at its discretion, may make certain contributions to
2002
$151,000, and $148,000 for the years ended December 31,
NOTE 13. 401(K) PLAN
maximum amount allowable under federal tax regulations. The
Year Ended
December 31,
$368
payments through 2007 are as follows (in thousands):
untary and are determined on an individual basis, limited to the
lease payments through 2007 are as follows (in thousands):
2007
strated. The CFF is also due a royalty on net sales of any
The Company maintains a 401(k) retirement plan available to all
laboratory and corporate office equipment. Minimum annual
2002
$ 327
2003
339
2004
350
2005
362
2006
375
2007
388
In January 1999 and prior, the Company entered into several
agreements with Abbott Laboratories providing for the purchase of approximately $10,000,000 of bulk drug substance to
be used in the manufacturing process for LOCILEX Cream.
As the FDA did not approve LOCILEX Cream, the Company
renegotiated this agreement with Abbott in September 1999,
$2,141
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were deter-
The lease provides for escalations relating to increases in
mined by management, using available market information and
the Consumer Price Index not to exceed 7% but no less than
valuation methodologies. Considerable judgment is necessary
3.5%. Rent expense, which includes the cost of common area
to interpret market data and develop estimated fair market
maintenance and other building operating expenses paid to
value. Accordingly, the estimates presented herein are not
the landlord, was approximately $362,000, $357,000 and
necessarily indicative of the amounts the Company could
$440,000 for the years ended December 31, 2001, 2000 and
realize on disposition of the financial instruments. The use of
1999, respectively.
paying Abbott $4,200,000 at that time and receiving partial
delivery of material. An additional $3,400,000 was due to
Abbott and payable if the Company receives in excess of
$10,000,000 of additional funds (as defined in the agreement)
in any year beginning in 2000, in which case the Company
must pay 15% of such excess over $10,000,000 to Abbott.
The Company recorded this conditional obligation as a liability
in 1999 at its then present value. As a result of the Company’s
27
(continued)
financing activities during 2000 and other cash inflows,
In April 2001, the Company entered into a research col-
scale back or eliminate research and development programs
$1,392,000 of this liability was payable and paid to Abbott on
laboration and licensing agreement and a preferred stock pur-
or enter into collaborations with third parties to commercialize
March 1, 2001. As a result of the Company’s financing activi-
chase agreement with MedImmune under which the Company
potential products or technologies that it might otherwise seek
ties during 2001 (see “NOTE 7. Preferred Stock”) and other
received $10,000,000. MedImmune is expected to fund at
to develop or commercialize independently, or seek other
cash inflows, $480,000 of this liability becomes payable to
least $2,500,000 for research and development activities of the
arrangements. If the Company engages in collaborations, it will
Abbott on March 1, 2002 and thus has been included in cur-
Company through April 2003, of which $937,500 has been
receive lower consideration upon commercialization of such
rent liabilities at December 31, 2001. The remaining amount of
received through December 31, 2001.
products than if it had not entered into such arrangements or if
$1,529,000 due to Abbott is included in long-term liabilities as
of December 31, 2001.
After considering the MedImmune transaction, and in the
it entered into such arrangements at later stages in the product
absence of raising additional funds or significantly reducing
development process.
expenses, the Company believes it will have sufficient
Liquidity
resources to sustain operations through 2002. The Company
NOTE 16. QUARTERLY RESULTS (UNAUDITED)
The Company has not generated any revenues from product
regularly explores alternative means of financing its operations
The following table contains selected unaudited Statement of
sales and has funded operations primarily from the proceeds
and seeks funding through various sources, including public
Operations information for each quarter of the fiscal years
of public and private placements of its securities. Substantial
and private securities offerings, collaborative arrangements
ended December 31, 2001 and 2000 (in thousands, except per
additional financing will be required by the Company in the
with third parties and other strategic alliances and business
share amounts). The Company believes that the following
near-term to fund its continuing research and development
transactions. The Company currently does not have any com-
information reflects all normal recurring adjustments necessary
activities. No assurance can be given that any such financing
mitments to obtain additional funds and may be unable to
for a fair presentation of the information for the periods pre-
will be available when needed or that the Company’s research
obtain sufficient funding in the future on acceptable terms, if at
sented. The operating results for any quarter are not necessarily
and development efforts will be successful.
all. If the Company cannot obtain funding, it will need to delay,
indicative of results for any future period.
Year Ended December 31, 2001
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Collaborative research agreement revenues
$
$
$
$
$
$
$
$
Net loss
$ (2,932)
$ (2,733)
$ (3,748)
$ (3,499)
$ (2,424)
$ (3,056)
$ (3,309)
$ (3,590)
$ (2,963)
$ (2,764)
$ (3,768)
$ (3,528)
$ (2,424)
$ (3,063)
$ (3,325)
$ (3,612)
$
$
$
$
$
$
$
$
28
—
(.09)
32,397
250
(.08)
32,737
315
(.11)
32,841
315
(.11)
32,863
—
(.09)
26,996
—
(.11)
27,743
—
(.11)
30,328
—
(.11)
32,390
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
Genaera Corporation:
We have audited the accompanying consolidated balance sheets
Those standards require that we plan and perform the audit to
December 31, 2001 and 2000, and the results of their opera-
of Genaera Corporation (formerly Magainin Pharmaceuticals Inc.)
obtain reasonable assurance about whether the financial state-
tions and their cash flows for each of the years in the three-
and subsidiary as of December 31, 2001 and 2000, and the
ments are free of material misstatement. An audit includes
year period ended December 31, 2001, in conformity with
related consolidated statements of operations, changes in
examining, on a test basis, evidence supporting the amounts
accounting principles generally accepted in the United States
stockholders’ equity and comprehensive loss and cash flows
and disclosures in the financial statements. An audit also
of America.
for each of the years in the three-year period ended December
includes assessing the accounting principles used and signifi-
31, 2001. These consolidated financial statements are the
cant estimates made by management, as well as evaluating
responsibility of the Company’s management. Our responsibil-
the overall financial statement presentation. We believe that
ity is to express an opinion on these consolidated financial
our audits provide a reasonable basis for our opinion.
statements based on our audits.
In our opinion, the consolidated financial statements
We conducted our audits in accordance with auditing
referred to above present fairly, in all material respects, the
Princeton, New Jersey
standards generally accepted in the United States of America.
financial position of Genaera Corporation and subsidiary as of
February 15, 2002
29
C O R P O R AT E I N F O R M AT I O N
CORPORATE HEADQUARTERS
PRICE RANGE OF COMMON STOCK
NUMBER OF HOLDERS OF COMMON STOCK
Genaera Corporation
From December 12, 1991, the date of our initial public offering,
At March 20, 2002, there were approximately 366 stockholders
5110 Campus Drive
until March 9, 2001 our common stock was included for quo-
of record and approximately 9,313 beneficial holders of the
Plymouth Meeting, PA 19462
tation on the National Association of Securities Dealers
Company’s common stock.
Telephone: 610-941-4020
Automated Quotation System (“Nasdaq”) National Market
Facsimile: 610-941-5399
under the symbol “MAGN.” On March 9, 2001, we changed
SEC FORM 10-K AND REQUESTS FOR INFORMATION
Website: www.genaera.com
our name to Genaera Corporation and, on March 12, 2001, our
A copy of the Company’s annual report to the Securities and
Email: info@genaera.com
common stock began inclusion for quotation on the Nasdaq
Exchange Commission on Form 10-K is available without
National Market under the symbol “GENR.” The quarterly
charge upon written request to:
STOCKHOLDER INQUIRIES
ranges of high and low closing bid prices per share of our
Investor Relations
Inquiries regarding transfer requirements, lost certificates and
common stock are shown below.
Genaera Corporation
changes of address should be directed to the Company’s
Transfer Agent.
TRANSFER AGENT AND REGISTRAR
StockTrans, Inc.
Low
1st Quarter
$ 3.06
$1.91
2nd Quarter
$ 4.79
$1.82
3rd Quarter
$ 4.65
$2.05
ANNUAL STOCKHOLDERS’ MEETING
4th Quarter
$ 4.10
$2.11
The next annual meeting of the stockholders will be held on
High
Low
44 West Lancaster Avenue
1-800-733-1121
1st Quarter
$10.50
$1.78
2nd Quarter
$ 5.00
$2.50
COUNSEL
3rd Quarter
$ 5.38
$3.06
Morgan, Lewis & Bockius LLP
4th Quarter
$ 4.06
$2.09
1701 Market Street
DIVIDENDS
The Company has not paid any cash dividends since its incepINDEPENDENT AUDITORS
tion and does not anticipate paying any cash dividends in the
KPMG LLP
foreseeable future. It is the present policy of the board of direc-
Princeton Pike Corporate Center
tors to retain all earnings, if any, to finance the developments
989 Lenox Drive
of the Company’s business.
Lawrenceville, NJ 08648
30
May 16, 2002, 10:00 A.M. at the DoubleTree Guest Suites,
Ardmore, PA 19003
Philadelphia, PA 19103-2921
5110 Campus Drive
High
640 West Germantown Pike, Plymouth Meeting, PA 19462.
C O R P O R AT E I N F O R M AT I O N
OFFICERS AND MANAGEMENT
BOARD OF DIRECTORS
Roy C. Levitt, M.D.
Michael R. Dougherty
Chairman
President and Chief Operating Officer
Genomics Collaborative Inc.
Kenneth J. Holroyd, M.D., MBA
Executive Vice President and Chief Business Officer
Sean M. Johnston, Ph.D., MBA
Senior Vice President, Manufacturing
Michael E. Petrone, M.D., MPH
Vice President, Clinical Research
Christopher P. Schnittker, CPA
Vice President and Chief Financial Officer
Michael M. Yoshitsu, Ph.D.
Vice President, Business Development
Bernard Canavan, M.D.
Retired President
American Home Products Corporation
R. Frank Ecock
Retired Vice President
Merck & Company, Inc.
Zola P. Horovitz, Ph.D.
Retired Vice President
Bristol-Myers Squibb Company
left to right:
MICHAEL YOSHITSU
CHRISTOPHER SCHNITTKER
Roy C. Levitt, M.D.
Genaera Corporation
ROY LEVITT (seated)
MICHAEL PETRONE
SEAN JOHNSTON
Designed by Curran & Connors, Inc. / www.curran-connors.com
KENNETH HOLROYD
Charles A. Sanders, M.D.
Retired Chairman and Chief Executive Officer
Glaxo Inc.
Robert F. Shapiro
Vice Chairman and Partner
Klingenstein, Fields & Co., LLC
Former President and Co-Chairman
Wertheim Schroder & Co.
James B. Wyngaarden, M.D.
Emeritus Professor of Medicine
Duke University
Former Director
National Institutes of Health
5110 Campus Drive

respiratory - Genaera Corporation

Transcription

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