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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-26872
GELTEX PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 04-3136767
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Nine Fourth Avenue
Waltham, Massachusetts 02154
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 290-5888
Securities registered pursuant to Section 12(b) of the Act: None
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(g) of the Act Common Stock, $.01 par value per share
Junior Participating Preferred Stock
Purchase Rights
(Title of Class)
</TABLE>
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value, based upon the closing sale price of the shares
as reported by the Nasdaq National Market, of voting stock held by
non-affiliates (without admitting that any person whose shares are not included
in such calculation is an affiliate) at March 24, 1998 was $340,793,163.
As of March 24, 1998, 16,687,553 shares of the registrant's Common Stock,
$.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS 1998 ANNUAL
MEETING OF STOCKHOLDERS ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS REPORT ON FORM 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
GelTex Pharmaceuticals, Inc. ("GelTex" or the "Company") is developing
non-absorbed, polymer-based pharmaceuticals that selectively bind to and
eliminate target substances from the intestinal tract. The Company's product
development efforts are focused on therapeutic agents for the treatment of
hyperphosphatemia (elevated phosphorous levels) in patients with chronic kidney
failure; hypercholesterolemia (elevated LDL cholesterol levels); obesity; and
infectious diseases.
The Company's most advanced product candidate, RenaGel(R) phosphate binder,
is an orally administered, non-absorbed hydrogel for the control of
hyperphosphatemia in patients with chronic kidney failure. In November 1997,
GelTex filed a NDA with the FDA for RenaGel phosphate binder. The Company,
together with its joint venture partner, Genzyme Corporation ("Genzyme"),
intends to file applications for RenaGel marketing authorization in Europe and
Canada in mid-1998.
GelTex is also developing CholestaGel(R), an orally administered,
non-absorbed hydrogel, for the reduction of elevated LDL cholesterol levels in
patients with hypercholesterolemia. In December 1997, GelTex commenced a Phase
III clinical study of CholestaGel. The double-blind, placebo controlled study is
designed to evaluate the efficacy and tolerability of the drug at four dosage
levels over a six month treatment period. The Company intends to initiate
another Phase III study of CholestaGel in mid-1998 in order to evaluate once
daily and split dosing regimens. The Company expects to file a NDA for
CholestaGel in 1999.
The Company has initiated an anti-obesity drug discovery program focused on
the development of non-absorbed polymers that act in the gastrointestinal tract
to inhibit the body's absorption of fat. The Company is continuing to expand its
infectious disease program focused on the development of non-absorbed
polymer-based pharmaceuticals to treat or prevent non-systemic infectious
diseases.
The Company commenced operations in 1992 and has incurred operating losses
since that time. As of December 31, 1997, the Company had an accumulated deficit
of approximately $55 million. Although the time required to reach sustained
profitability is highly uncertain, the Company expects operating losses to
continue through at least the beginning of 2000.
THE COMPANY'S TECHNOLOGY
During the digestive process, the intestinal tract delivers nutrients and
water to the bloodstream and eliminates waste products and indigestible
materials through the bowel. Absorption of nutrients, electrolytes, water and
certain digestive substances such as bile acids is controlled by the intestinal
wall, which acts as a gateway from the intestines to the bloodstream, allowing
small molecules to pass from the intestinal tract into the bloodstream and
preventing larger molecules from entering circulation. Orally administered drugs
are either absorbed through the intestinal wall into the bloodstream, or are
non-absorbed and achieve their intended therapeutic effect by acting in the
intestinal tract. Non-absorbed drugs are less likely to cause the toxicities
associated with many absorbed drugs.
GelTex's pharmaceuticals act in the intestinal tract without absorption into
the bloodstream, thereby minimizing the potential for adverse effects. The
Company's product development approach represents an advance in the use of
polymer hydrogels as pharmaceuticals. The Company's technology combines an
understanding of chemical interactions necessary for molecular recognition with
the ability to design and synthesize polymer hydrogels. The Company's technology
enables it to combine commercially available monomers that have distinct
structural qualities to create proprietary, non-absorbed polymers that
selectively bind target molecules. The Company designs its polymers to carry a
high density of selective binding sites for the targeted molecules, making them
potent at low dosage levels.
GelTex's products are designed to be orally administered in capsule or
tablet form. The hydrogels are not broken down during the digestive process and,
as a result, are too large to be absorbed through the intestinal wall and into
the bloodstream. As the hydrogels pass through the stomach and into the
intestines, they selectively and tightly bind targeted molecules and absorb
significant amounts of water, forming a soft, gelatinous material. In this form,
the hydrogel passes easily through the intestinal tract and, with the attached
target molecules, is excreted from the body.
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The Company's enabling technology offers the following benefits:
- Broad Application to Diseases and Conditions. The Company believes its
enabling technology is applicable to a broad range of diseases and
conditions treatable through the intestinal tract such as elevated
phosphorus levels, elevated LDL cholesterol, obesity and certain
infectious diseases.
- Low Risk of Adverse Side Effects. The Company's polymer-based products
currently under development are designed to be non-absorbed and well
tolerated. Since the products act only in the intestinal tract and are
not absorbed into the bloodstream, they are less likely to cause the
toxicities associated with many absorbed drugs.
- Convenient Oral Dosage Form. The Company's polymer-based products are
designed to be potent at low dosage levels, thereby permitting oral
administration in a convenient capsule or tablet form.
PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
The key elements of the Company's product development and commercialization
strategy include: (i) applying the Company's polymer technology to produce drug
therapies that act in the intestinal tract; (ii) producing pharmaceuticals for
which there are major and well defined markets; (iii) producing pharmaceuticals
that offer significant improvements over available therapies or treat diseases
for which no effective therapy currently exists; and (iv) collaborating with
strategic partners to fund the manufacture and distribution of the Company's
products and product development activities. The Company believes that the
safety profile and well defined clinical pathways of its products have
contributed to its clinical progress to date.
The Company has novel pharmaceutical products in various stages of
regulatory review, clinical testing and research and development for the
treatment of elevated phosphorus levels, elevated LDL cholesterol, obesity and
infectious diseases. The table below outlines the status of the Company's
product development and research programs.
<TABLE>
<CAPTION>
PRODUCT/PROGRAM INTENDED INDICATIONS DEVELOPMENT STATUS*
- --------------- -------------------- -------------------
<S> <C> <C>
RenaGel Control of elevated phosphorus NDA filed with the FDA in
levels in patients with chronic November 1997
kidney failure European and Canadian marketing
authorization applications
expected to be filed in mid-1998
CholestaGel Reduction of elevated First Phase III clinical trial
cholesterol in patients with commenced December 1997
primary hypercholesterolemia Second Phase III clinical trial
(elevated low-density to be initiated in mid-1998
lipoprotein (LDL) cholesterol) NDA expected to be filed with
the FDA in 1999
Anti-Obesity Inhibit absorption of fat Pre-clinical
Infectious Disease Treatment or prevention of non- Research
systemic infectious diseases
</TABLE>
- ----------
* "Clinical trials" refers to testing in humans. "Pre-clinical" refers to
testing in animals. "Research" includes the discovery or creation of prototype
compounds, in vitro studies of those compounds and preliminary evaluation in
animals. See "Government Regulation."
RENAGEL PHOSPHATE BINDER
Overview
The United States Health Care Financing Administration ("HCFA") estimates
that, at the end of 1996, approximately 214,000 patients in the United States
were receiving chronic dialysis treatment for end-stage kidney disease.
According to HCFA data, the number of dialysis patients in the United States
increased by 7% to 10% annually between 1985 and 1996. Based on reported growth
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rates of approximately 5% to 7% per year, the Company estimates that the number
of dialysis patients in Western Europe in 1996 was in excess of 170,000. In
Japan, with reported growth rates of approximately 6% per year, the Company
estimates that the number of dialysis patients in 1996 was approximately
165,000.
Control of blood phosphorus levels is central to the prevention of renal
bone disease in patients with chronic kidney failure. Phosphate is absorbed into
the bloodstream through the small intestine from protein-rich high-phosphate
foods such as meat, fish and dairy products. Healthy kidneys maintain a delicate
balance between phosphorus and calcium levels in the blood by excreting excess
phosphorus in the urine. In patients with chronic kidney failure, the kidneys
are unable to remove enough phosphorus to maintain the necessary balance.
Elevated phosphorus levels signal the body to excrete parathyroid hormone
("PTH"), which breaks down bone to release calcium into the blood in an effort
to reestablish the balance between calcium and phosphorus. Chronic kidney
failure patients with uncontrolled elevated phosphorus levels experience bone
loss as well as calcification of the circulatory system caused by excessive
amounts of phosphorus and calcium in the blood.
To reduce elevated phosphorus levels, nearly all dialysis patients use some
form of phosphate binder, currently the only available treatment for
hyperphosphatemia. Phosphate binders bind dietary phosphate in the intestinal
tract, thereby preventing its absorption into the bloodstream. The Company
estimates that the potential worldwide market for phosphate binders for dialysis
patients is between $300 and $500 million. In addition to the dialysis
population, many patients in the early stages of chronic kidney failure (the
pre-dialysis population) use phosphate binders. The Company estimates that
greater than 700,000 Americans can be classified as pre-dialysis patients.
Currently available phosphate binders include calcium acetate, the only
FDA-approved phosphate binder, and calcium carbonate and aluminum hydroxide,
neither of which is approved in the United States for the control of
hyperphosphatemia in patients with chronic kidney failure. In order to achieve
adequate reductions in phosphate absorption, calcium acetate and calcium
carbonate, the most commonly used agents, must be taken at doses which can lead
to constipation and noncompliance. In addition, calcium therapy requires
frequent monitoring because its use can cause dangerous elevations of blood
calcium levels (hypercalcemia). Hypercalcemia occurs in 25% to 50% of patients
taking calcium-based binders. Aluminum hydroxide is more effective at lower
doses than calcium acetate or calcium carbonate, but it is infrequently used
because aluminum absorbed from the intestinal tract accumulates in the tissues
of patients with chronic kidney failure, causing aluminum-related osteomalacia
(softening of the bones), anemia and dialysis dementia (deterioration of
intellectual function). The Company believes that a non-absorbed, calcium-free
and aluminum-free phosphate binder will offer significant benefits in the
treatment of hyperphosphatemia in patients with chronic kidney failure.
Development Status
GelTex has developed RenaGel phosphate binder for the control of
hyperphosphatemia in patients with chronic kidney failure. GelTex filed a NDA
for RenaGel with the FDA in November 1997. The product is designed to provide
significant advantages over currently available phosphate binders. RenaGel binds
dietary phosphate without the use of either calcium or aluminum and, therefore,
will not cause hypercalcemia or aluminum toxicities. Additionally, RenaGel has
been formulated in a convenient capsule form that is more palatable than the
chalky chewable and acidic uncoated tablet forms of currently available
phosphate binders. Although the Company believes that RenaGel will offer these
advantages over currently available phosphate binders, there can be no assurance
that RenaGel will compete successfully with existing therapies for hyper-
phosphatemia and achieve market acceptance. See "Competition."
The Company filed an Investigational New Drug Application ("IND") for
RenaGel with the FDA in November 1994, three years prior to the filing of the
NDA. The Company commenced the clinical development of the product in December
1994 with a Phase I clinical trial, designed to establish safety, toleration and
phosphate binding efficacy in 24 healthy volunteers. The trial demonstrated that
RenaGel was well tolerated and that the adverse reaction profile of RenaGel was
similar to that of placebo. The trial also demonstrated a dose-dependent
decrease in urinary phosphorus excretion, indicating that RenaGel bound dietary
phosphate, leaving less to be absorbed into the bloodstream.
The safety, efficacy, and tolerability of RenaGel in 36 dialysis patients
was studied in a Phase IIa clinical trial completed in August 1995. This study
was designed to demonstrate that RenaGel is equivalent in potency to currently
available calcium-based phosphate binders. In this study, RenaGel was shown to
be safe and well tolerated by dialysis patients. All patients completed drug
treatment and the adverse reaction profile of RenaGel was similar to that of the
placebo. This trial demonstrated that RenaGel produces a dose-dependent decrease
in serum phosphorus levels and is approximately equal in potency to the
currently available calcium-based phosphate binders.
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The Company completed a two month open-label, dose titration Phase IIb
clinical trial in 48 dialysis patients in April 1996 at five clinical sites.
This trial design followed the expected treatment regimen for RenaGel, which
will involve initiation of therapy at a low dose, followed by bi-weekly dose
titration until the dose reflects the unique dietary phosphate intake of each
patient. Results of this trial demonstrated that RenaGel significantly decreased
serum phosphorus without increasing serum calcium, while maintaining adequate
control of PTH levels.
GelTex completed two pivotal Phase III clinical trials in the first quarter
of 1997. The first trial, a 172-patient, open-label study, confirmed and
expanded the results of the Company's Phase IIb study, demonstrating RenaGel's
ability to control phosphorus levels without elevating calcium levels. The
reduction of serum phosphorus levels resulting from RenaGel treatment is shown
in the graph below. Results of this study also suggest that reducing phosphorus
levels in the absence of calcium supplementation can aid in the control of PTH
levels.
<TABLE>
<CAPTION>
RENAGEL PHASE III STUDY
CLINICAL RESULTS: CONTROL OF SERUM PHOSPHORUS LEVELS
[CLINICAL RESULTS CHART OMITTED; SUCH INFORMATION
IS SUMMARIZED IN TABULAR FORM BELOW]
MEASUREMENT PERIOD DURATION OF
(FISCAL YEAR COVERED) WASHOUT RENAGEL TREATMENT WASHOUT
<S> <C> <C> <C>
0 6.80
1 8.00
2 9.10 9.10
3 8.20
4 7.70
5 7.20
6 7.10
7 7.10
8 6.80
9 6.70
10 6.60 6.60
11 7.40
12 8.00
</TABLE>
Study of 172 patients on calcium and/or aluminum therapy with controlled
phosphorus levels (baseline) who were taken off calcium and aluminum for
a two week period (washout) and then treated with RenaGel for eight
weeks. The primary endpoint is the change in serum phosphorus levels
(statistically significant reduction of serum phosphorus levels from
phosphorus levels at end of washout).
The second Phase III trial was an 82-patient crossover study, designed to
compare the safety and efficacy of RenaGel with that of calcium acetate
(PhosLo(R)). Results of this trial showed that RenaGel is as effective as
calcium acetate in reducing serum phosphorus levels with significantly fewer
incidents of hypercalcemia.
The Company is currently conducting an extended use study of RenaGel
involving 192 patients. The study, which is expected to conclude in the second
quarter of 1998, is designed to provide additional safety data and long-term
efficacy data. In mid-1998, the Company expects to commence a pivotal study
necessary to support applications in Europe and the United States for a
pre-dialysis indication for RenaGel. In addition, the Company is continuing its
efforts to develop additional more convenient dosage formulations of RenaGel.
In June 1997, the Company formed a 50/50 joint venture with Genzyme for the
final development and commercialization of RenaGel phosphate binder in the
United States, Europe and other territories not previously licensed to Chugai
Pharmaceutical Co., Ltd. ("Chugai"). See "Development and Marketing Agreements."
The Company will rely upon third parties to manufacture commercial
quantities of RenaGel, including the starting material for the product, bulk
material and finished goods. The Company currently has in place one long-term
fixed price supply agreement for RenaGel bulk material, but does not have
agreements in place with its current suppliers of the starting material or
finished goods. Should any of the Company's manufacturing relationships
terminate or should any of the suppliers be unable to satisfy the Company's
requirements for starting material, bulk material or finished goods,
respectively, the Company would be unable to commercialize its products as
expected, and the Company's business and financial condition would be materially
and adversely affected.
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CHOLESTAGEL NON-ABSORBED CHOLESTEROL REDUCER
Overview
Elevated LDL cholesterol (hypercholesterolemia) has been widely recognized
as a significant risk factor for coronary heart disease since the mid-1980s. As
a result of the increased awareness and the broad prevalence of elevated LDL
cholesterol, cholesterol-reducing drugs have emerged as one of the largest and
fastest growing pharmaceutical product categories. In 1996, the worldwide market
for cholesterol-reducing drugs exceeded $6 billion.
While the risks of hypercholesterolemia are well recognized, the condition
remains significantly under-treated worldwide. According to a 1993 report from
the National Cholesterol Education Program ("NCEP") of the National Institutes
of Health, an estimated 65 million Americans have elevated cholesterol levels.
Of these, 13 million would require both drug and diet therapy to achieve
adequate reductions in cholesterol levels. A separate 1993 study showed that
only 5 million Americans were receiving cholesterol-reducing drugs. Worldwide,
only an estimated one-third of individuals who should be receiving
cholesterol-reducing drugs are receiving therapy. The market for
cholesterol-reducing drugs is expected to grow as awareness and diagnosis
continue to increase.
Physicians frequently prescribe a low fat, low cholesterol diet (the NCEP
Step I diet) as an initial approach to lowering elevated cholesterol. In cases
where dietary changes alone do not adequately lower a patient's cholesterol
levels, drug therapy may be needed. Physicians have the option of prescribing
one of two types of therapies: non-absorbed cholesterol-reducing drugs (i.e.,
bile acid sequestrants) or several classes of absorbed agents. One class of
absorbed agents is the HMG-CoA reductase inhibitors (generally referred to as
"statins"), the most widely prescribed class of cholesterol-reducing agents in
the United States. Combined worldwide sales of the three leading HMG-CoA
reductase inhibitors exceeded $5 billion in 1996. These drugs work by blocking
cholesterol synthesis and enhancing the liver's ability to clear LDL cholesterol
from the blood.
Bile acid sequestrants, an alternative therapy to absorbed agents such as
HMG-CoA reductase inhibitors, have been marketed for decades. Bile acids are
synthesized by the liver from cholesterol and secreted into the intestines to
aid digestion of fats. Bile acid sequestrants bind to bile acids in the
intestinal tract and increase their excretion from the body. To replenish the
bile acid pool, the liver draws cholesterol from the bloodstream, resulting in a
reduction in blood cholesterol levels. Bile acid sequestrants work without
entering the bloodstream and are generally regarded as safer than absorbed
agents such as HMG-CoA reductase inhibitors, which require frequent liver
function tests. Since cholesterol-reduction therapy typically involves a
life-long drug regimen, many doctors prescribe bile acid sequestrants as
first-line drug therapy, especially for primary prevention of coronary heart
disease and in younger patients.
Sales of bile acid sequestrants in the United States exceeded $111 million
in 1996. The most widely prescribed bile acid sequestrant in the United States
is cholestyramine, a polymer resin which is based on a single monomer.
Cholestyramine is an inefficient and weak binder of bile acids and, therefore,
must be taken in large quantities. Typically, patients must drink a mixture of
two to three tablespoons of cholestyramine in eight ounces of water twice a day.
The unpleasant intestinal side effects (such as constipation) and necessarily
large doses of currently available bile acid sequestrants prompt many patients
to discontinue this therapy. As a result, many physicians either switch patients
to or initially prescribe HMG-CoA reductase inhibitors. The Company believes
that a bile acid sequestrant with improved efficacy and a more convenient dosage
form will increase patient acceptance and use of bile acid sequestrant therapy.
Development Status
GelTex is developing CholestaGel for the reduction of elevated LDL
cholesterol levels in patients with hypercholesterolemia. In December 1997,
GelTex initiated the first of two Phase III clinical trials for CholestaGel. The
Company believes that the structural design of CholestaGel represents a
significant advance over existing bile acid sequestrants in that it carries a
high density of high affinity bile acid binding sites, making it more potent at
lower doses than currently marketed agents. The Company believes that
CholestaGel will meet the needs of the market for a non-absorbed
cholesterol-reducing drug that is safe and well tolerated in long term use,
effective at low doses and available in a more convenient dosage form. The
Company also believes that CholestaGel may be a particularly appropriate therapy
for young people with elevated cholesterol levels who may be on therapy for the
rest of their lives and that CholestaGel may expand treatment of mild-to-
moderate cholesterol elevations (LDL cholesterol from 130 to 160 mg/dL) by
giving physicians a safer therapy to prescribe to patients at lower risk of
coronary heart disease.
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Although the Company believes that CholestaGel will offer certain advantages
over currently available bile acid sequestrants, currently marketed products
often have a significant advantage over new entrants. Additionally, while the
Company believes that a bile acid sequestrant with improved efficacy and a more
convenient dosage form will increase patient acceptance and use of bile acid
sequestrant therapy, currently available HMG-CoA reductase inhibitors have
achieved widespread market acceptance, with worldwide sales of the three leading
products exceeding $5 billion in 1996. There can be no assurance that
CholestaGel will compete effectively with existing bile acid sequestrants or
that the availability of CholestaGel will expand the use or acceptance of bile
sequestrants. See "Competition."
The Company filed an IND for CholestaGel with the FDA in May 1995, and
commenced the clinical development of CholestaGel in June 1995. In March 1996,
the Company completed a Phase IIa study of CholestaGel. This study was designed
to evaluate the safety, tolerability and lipid-lowering efficacy of CholestaGel
in subjects with LDL cholesterol levels exceeding 160 mg/dL. Analysis of the
data from this study indicates that patients receiving 1.2 grams b.i.d. (twice
daily) of CholestaGel experienced an average 27 mg/dL (15%) reduction in LDL
cholesterol, and patients receiving 3.6 grams b.i.d. experienced an average 50
mg/dL (29%) reduction. Patients receiving placebo experienced no meaningful
change in LDL cholesterol levels. No dose-limiting side effects were reported.
In February 1997, the Company completed a Phase IIb, 147-patient dose
ranging study looking at four dose levels of CholestaGel. Analysis of the data
from this study indicates patients receiving 1.6 grams b.i.d. of CholestaGel
experienced an average 24 mg/dL (12%) reduction in LDL cholesterol and patients
receiving 2.0 grams b.i.d. experienced an average 35 mg/dL (17%) reduction. This
study also showed that CholestaGel was well tolerated with a lack of
gastrointestinal side effects, which are significant problems with existing bile
acid sequestrants. In February 1997, the Company also completed a Phase IIc
clinical trial of CholestaGel. This study compared once daily dosing versus
twice daily dosing in 119 patients. All patients took a total of 1.6 grams per
day. Results of this study indicate that once daily dosing is at least as
effective as split dosing.
In December 1997, the Company initiated the first of two planned Phase III
trials of CholestaGel. The first is a double-blind, placebo controlled study of
560 patients at 18 sites. The study is designed to evaluate the efficacy and
tolerability of CholestaGel at four dosage levels over a treatment period of six
months. The Company plans to commence a second Phase III trial for CholestaGel
in mid-1998. The study is expected to be conducted with 120 patients at six
sites over a treatment period of six weeks. The second Phase III study is
designed to confirm the results of the Company's Phase IIc clinical study which
showed that once daily dosing is at least as effective as split dosing regimens.
Assuming successful completion of these Phase III clinical studies, the Company
expects to file a NDA for CholestaGel in 1999.
If the results of the Company's Phase III trials for CholestaGel are not
satisfactory, the Company may need to conduct additional Phase III clinical
trials. Any such additional studies would likely be time consuming and
expensive. There can be no assurance that the results of any of the Company's
Phase III clinical trials will be satisfactory. Should the Company determine
that the results of its Phase III clinical trials for CholestaGel are sufficient
to meet the FDA's requirements for product approval, there can be no assurance
that the FDA will concur with the Company's analysis and approve CholestaGel for
commercial sale. The failure of the Company to obtain FDA approval for
CholestaGel, or any significant delay in obtaining such approval, would have a
material adverse effect on the Company.
In addition to the benefits which the Company expects CholestaGel to provide
as monotherapy, the Company believes that many patients may benefit by combining
low doses of CholestaGel and HMG-CoA reductase inhibitors. Currently available
bile acid sequestrants are approved for use in combination with HMG-CoA
reductase inhibitors. In September 1997, the Company announced positive results
from a Phase II clinical trial designed to evaluate the cholesterol lowering
effect achieved by administering a low dose of CholestaGel in combination with a
low dose of lovastatin, a generic form of a leading HMG-CoA reductase inhibitor.
In the 134-patient study, a low dose of CholestaGel (2.4 grams) administered
with half of the lowest recommended dose of lovastatin (10 mg), dosed together
and separately, produced a 60 mg/dL (34%) and 53 mg/dL (32%) reduction in LDL
cholesterol, respectively. This reduction was approximately 50% greater than
that achieved with low dose lovastatin alone. The chart below presents the
results of the combination study. The Company intends to commence development of
a product combining low doses of CholestaGel and lovastatin in a single
formulation in late 1998.
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CHOLESTAGEL PHASE II STUDY
CLINICAL RESULTS: COMBINATION STUDY WITH LOVASTATIN;
CHANGES IN LDL CHOLESTEROL
[CLINICAL RESULTS BAR GRAPH OMITTED; SUCH INFORMATION
IS SUMMARIZED IN TABULAR FORM BELOW]
mg/dL
Placebo 0
CholestaGel (2.4 g) -- 14.6
Lovastatin (10 mg) -- 39.5
CholestaGel/Lovastatin dosed -- 60.2
together
CholestaGel/Lovastatin dosed -- 53.1
apart
The Company is conducting an extended use study with CholestaGel in 260
patients. The study, which is expected to conclude in late 1998, is designed to
provide additional safety data and long term efficacy data.
The Company is continuing to develop a tablet formulation of CholestaGel
that will reduce the number of pills required to achieve a targeted reduction in
cholesterol. The Company is also conducting pre-clinical studies in an effort to
identify more potent bile acid sequestrant polymers that can further improve the
dosing necessary to achieve a targeted reduction in cholesterol.
The Company intends to commercialize CholestaGel through collaborations with
third parties. If the Company is unable to conclude agreements with partners as
planned, the Company will either have to delay the continued development and
commercialization of CholestaGel or expend its resources to fund such
activities. This could result in a need for the Company to seek additional
sources of funding, and there can be no assurance that such funding will be
available to the Company when needed or on acceptable terms.
ANTI-OBESITY PROGRAM
Overview
Obesity is a global healthcare concern and represents one of the most
serious problems facing the medical community today. It is generally recognized
that people who have a body weight exceeding 20% of ideal weight or who have a
body mass index, defined as body weight in kilograms divided by height in meters
squared, of greater than 27 are obese. In 1996, the World Health Organization
expressed its concern that the prevalence of obesity is increasing at an
alarming rate in both industrialized and developing countries. According to
recent industry data, one-third, or 58 million, of all adult Americans are
obese. This chronic and often debilitating disease, which is associated with an
increase in mortality and morbidity, has a significant impact on the healthcare
system. The health problems associated with obesity, including diabetes,
coronary artery disease and hypertension, are reported to result in more than
$60 billion annually in health care costs and loss of income in the United
States.
The conventional therapy for the treatment of obesity is behavioral
modification, which includes a change in quantity and quality of food and a
regular exercise program. However, less than 5% of all patients who enter most
weight loss programs are successful in losing weight. Approximately 66% of all
patients who initially lose weight regain the weight in one year, and virtually
all of them regain the weight in five years. Because obesity is believed to be a
complex metabolic disease with genetic and behavioral components, the medical
community and the obese patient population continue to seek effective
anti-obesity agents.
There are three general approaches for pharmacological intervention for the
treatment of obesity: (i) drugs which achieve their therapeutic effect by
decreasing the patient's appetite; (ii) drugs which block the absorption of fat;
and (iii) drugs which stimulate basal metabolism. Drugs that have been approved
for use in the United States fall into the first category and include: a
combination therapy of phentermine and fenfluramine (Phen/fen), which has been
widely used during the past ten years; dexfenfluamine (Redux) which received FDA
approval in May 1996; and subutramine (Meridia) which received FDA approval in
November 1996. However, the currently available drugs are only recommended for
short term use of up to 12 months. In addition, Phen/fen and Redux have recently
been associated with incidences of primary pulmonary hypertension and heart
valve problems, leading to their voluntary
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withdrawal from the market. In addition to the drugs that have been approved for
use, orlistat, a drug which blocks the absorption of fat from the
gastrointestinal tract, has been submitted to the FDA for approval. According to
the National Task Force on the Prevention and Treatment of Obesity, an effective
obesity treatment will require long term drug treatment, in conjunction with
diet and behavior modification. The Company believes that a non-absorbed agent
that inhibits the absorption of fat may offer significant benefits in the long
term treatment of obesity.
Application of the Company's Technology
The Company is developing non-absorbed polymers that act within the
gastrointestinal tract to inhibit the absorption of fat. In the gastrointestinal
tract, ingested fat is broken down by pancreatic lipase, permitting absorption
by the intestinal lining. The fat is then transported throughout the bloodstream
to body tissues. An excess of fat delivered to body tissues leads to obesity.
By preventing fat breakdown, fat is eliminated from the body and a patient loses
weight.
The Company has synthesized novel polymers that work within the
gastrointestinal tract and either bind to lipase and inhibit the enzyme activity
or bind to fat and make it inaccessible to lipase. The Company is engaged in
pre-clinical in vitro and in vivo animal studies with both classes of compounds.
In animal studies conducted in rats, the Company has seen a two-fold and a
ten-fold increase in the amount of fecal fat excreted following treatment with
its pancreatic lipase inhibitor compounds and its fat binding compounds,
respectively. The Company has initiated long term studies in obese rats to study
the weight reducing effects of the two classes of compounds. The Company plans
to select one or more candidate compounds for clinical development in early
1999. The Company believes that its pancreatic lipase inhibitors or its fat
binding polymers, used alone or in combination, may offer a safe and effective
long term treatment for obesity.
INFECTIOUS DISEASE PROGRAM
Overview
The treatment of infectious diseases has become increasingly more
complicated with the recent appearance and recognition of new pathogenic
organisms, and the emergence of resistance to available antibiotics. Organisms
and resistance patterns previously thought to be exotic or rare are becoming
increasingly more prevalent. These events have stimulated renewed interest
throughout the pharmaceutical and biotechnology industries in research and
development focused on the treatment of infectious diseases. The Company
believes that the use of polymers as antimicrobial agents represents a novel
technological approach to the treatment of infectious disease.
The Company is applying its expertise in polymer design and synthesis and
molecular recognition technology to discover and develop polymer-based
pharmaceuticals designed to treat infectious diseases. The Company's research in
this area is initially focused on non-absorbed compounds for the treatment of
non-systemic infections in surface sites, including gastrointestinal,
genitourinary, skin and wound, and respiratory tract infections. In the area of
infectious disease, the Company believes that polymers may be designed to
achieve their therapeutic effect by (i) killing or inhibiting microbial growth,
(ii) inhibiting the adherence of pathogens to host cell surfaces, (iii) binding
and inactivating microbial toxins essential for virulence and (iv) acting
synergistically with commercially available and investigatory antibiotics.
The Company's initial goal of demonstrating the feasibility of the use of
polymers as antimicrobials was directed at two diarrheal pathogens,
Cryptosporidium parvum and rotavirus. GelTex scientists developed polymers which
effectively inactivated both Cryptosporidium and rotavirus in in vivo
experiments in cultured cells and in experimentally infected animals. Both
programs demonstrated the feasibility of the Company's approach. However, the
Company has chosen not to pursue the development of polymer-based
pharmaceuticals for the treatment of either cryptosporidiosis or rotavirus. In
the case of cryptosporidiosis, the Company's decision was based on the emergence
of protease-inhibitor regimes for the treatment of AIDS patients, which has
caused the overall incidence of cryptosporidiosis and other AIDS-related
infections to decrease dramatically. In the case of rotavirus infections, there
is now a highly efficacious vaccine available for the treatment of the disorder.
Applications of the Company's Technology
During the development of anti-cryptosporidium polymers, the Company
designed polymers active on pathogen surfaces. Unlike conventional antibiotics
which often act through mechanisms targeting single (often intracellular)
enzymes, the Company's polymers have mechanisms combining charge and
hydrophobicity similar to those of peptide antibiotics. GelTex believes that by
targeting the extracellular activity sites it will be able to develop
polymer-based drugs against which pathogens may not become resistant. In
9
<PAGE> 10
addition, because the mechanism of action of the polymers appears to be
profoundly different from conventional antibiotics, the Company believes that
its polymer-based pharmaceuticals could act synergistically with other
anti-infectives. The Company has commenced a screening program to characterize
activities of numerous polymer classes against panels of important human
bacterial and other types of pathogens.
In collaboration with several academic scientists, the Company is also
investigating the potential use of its polymers to bind, inhibit or inactivate
toxins which are essential virulence factors in diseases caused by many
bacterial infections. The preliminary experiments have resulted in in vitro
demonstrations of activity against several toxins important in gastrointestinal
infections. The Company believes that this presents a new approach for the
management and prevention of hospital-associated gastrointestinal infections.
In addition, the Company believes that its technology may be useful in the
treatment of disorders affecting mucins that line various human organ sites such
as the gastrointestinal tract, respiratory tract and the genitourinary tract.
DEVELOPMENT AND MARKETING AGREEMENTS
The Company's strategy is to commercialize its products through development
and marketing agreements with pharmaceutical companies or other strategic
partners. GelTex expects that such agreements will provide the Company with (i)
financial support in the form of license, research and development and/or
milestone payments, (ii) capabilities in research and development and sales and
marketing and (iii) a revenue stream on product sales following regulatory
approvals.
Genzyme Corporation
In June 1997, GelTex and Genzyme formed a 50/50 joint venture (the "RenaGel
Joint Venture") under which the parties will finalize the development of and
commercialize RenaGel phosphate binder in all countries other than Japan and
other Pacific Rim countries. Under the agreement, the Company and Genzyme are
each required to make capital contributions to the RenaGel Joint Venture in an
amount equal to 50% of all costs and expenses associated with the development
and commercialization of RenaGel, including costs and expenses incurred by
either party in performing under the agreement, and the Company and Genzyme will
share equally in the profits generated from sales of the product. To the extent
that either party fails to fund its 50% share of costs and expenses and the
other party does not exercise its right to terminate the agreement or compel
performance of the funding obligation, the profit sharing interests and the
future funding obligations of the parties will be proportionately adjusted to
correspond to the cumulative amount of capital contributions made by each party
as of such date. Under the agreement, GelTex licensed all of its rights to
RenaGel phosphate binder in the territory to the RenaGel Joint Venture and
Genzyme was appointed as the exclusive distributor of RenaGel in the territory.
Under the agreement, the Company transferred to Genzyme 50% of the Company's
initial 100% equity interest in the RenaGel Joint Venture and Genzyme agreed to
pay GelTex $15 million upon the receipt of marketing approval from the FDA and
$10 million one year following FDA approval. In addition, Genzyme purchased
100,000 shares of GelTex Common Stock for $2.5 million in cash.
Chugai Pharmaceutical Co., Ltd.
In December 1994, GelTex granted Chugai an exclusive license to develop and
commercialize RenaGel in Japan and other Pacific Rim countries. Chugai, a
leading Japanese pharmaceutical company, is the largest distributor in Japan of
rHuEPO, a product which is used to treat anemia in patients with chronic kidney
failure.
The agreement provides for Chugai to fund the development of RenaGel in
Japan and other Pacific Rim countries and grants Chugai the exclusive right to
manufacture and market the product in the territory. Chugai made an upfront
license payment to GelTex and has agreed to make milestone payments to GelTex,
payable throughout the development process in Japan. Chugai will pay a royalty
to GelTex on net product sales in the territory. Chugai has the right to
terminate the agreement on short notice at any time prior to product approval in
Japan. Termination will relieve Chugai of any further payment obligations under
the agreement and will end any license granted to Chugai by GelTex. The Company
has received two milestone payments of $1 million each from Chugai, the first in
December 1996 upon Chugai's initiation of a Phase I clinical trial for RenaGel
in Japan and the second in December 1997.
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<PAGE> 11
STARTING MATERIAL AND MANUFACTURING
The Company's two lead products, RenaGel phosphate binder and CholestaGel
cholesterol reducer, are manufactured from a starting material which is covered
by patents owned by a third party. The Company has obtained a non-exclusive
license under these patents to manufacture the material in connection with the
production of RenaGel and CholestaGel. The Company may not sublicense its rights
under this license without the licensor's consent, except to the Company's
current supplier of the starting material and certain other parties specified in
the license. The license agreement may be terminated upon short notice if the
Company fails to meet its material obligations under the license agreement,
including lump sum payments, royalties and confidentiality obligations.
The Company has chosen not to build the capacity to manufacture its
potential products and, therefore, purchases from third party manufacturers its
compounds for pre-clinical research and clinical trial purposes and expects to
be dependent on third party manufacturers for commercial production. The Company
has non-exclusively sublicensed its rights to manufacture the starting material
for its two lead compounds, RenaGel and CholestaGel, to one supplier and is
purchasing quantities of this material under purchase orders issued to this
supplier. The Company has also obtained pharmaceutical grade bulk production
quantities of RenaGel and CholestaGel from two suppliers (one for each
compound). This bulk production is being used in clinical trials of CholestaGel
and was used in clinical trials of RenaGel. The Company has entered into a long
term, fixed price commercial manufacturing arrangement with The Dow Chemical
Company, its supplier of RenaGel bulk material. The Dow agreement requires the
Company to purchase minimum quantities of the material beginning this year. The
Company is in discussions with a second supplier for RenaGel bulk material and
is currently negotiating a long term, fixed price manufacturing agreement with
the manufacturer of CholestaGel bulk material. In addition, the Company is
negotiating a long term fixed price service agreement with one encapsulator to
formulate RenaGel bulk material into finished product.
The Company is continuing to work with its third party manufacturers to
optimize processes for the manufacture of commercial quantities of RenaGel and
CholestaGel. In the event the continuing process development work is not
successful, the Company's profit margins could be adversely affected.
The Company is exploring relationships with other suppliers to complement
its relationships with its existing suppliers. The Company has established a
quality control program, including a set of standard operating procedures,
intended to ensure that third party manufacturers under contract produce the
Company's compounds in accordance with the FDA's current Good Manufacturing
Practices.
The production of GelTex's compounds is based in part on technology that the
Company believes to be proprietary. GelTex maintains confidentiality agreements,
contractual arrangements and patent filings to protect this proprietary
knowledge. In the event that the Company's manufacturers fail to abide by the
limitations or confidentiality restrictions in the manufacturing arrangements,
the proprietary nature of GelTex's technology could be adversely affected and,
consequently, any competitive advantage that GelTex has achieved as a result of
the proprietary nature of this technology could be jeopardized.
PATENTS AND TRADE SECRETS
The biotechnology and pharmaceutical industries place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. The Company actively seeks, when appropriate, protection
for its products and proprietary information by means of United States and
foreign patents and registration of its trademarks. In addition, the Company
relies upon trade secrets and contractual arrangements to protect certain of its
proprietary information and products.
The Company has 11 issued U.S. patents and approximately 25 pending U.S.
patents. In addition, the Company has filed approximately 60 international and
foreign counterparts. The U.S. patents issued to the Company cover technology
related to RenaGel and a class of other orally administered non-absorbed
phosphate-binding polymers and their use in the treatment of hyperphosphatemia
and technology related to CholestaGel and other polymeric materials. There can
be no assurance that any patents will issue from any of the Company's patent
applications. Further, there can be no assurance that any current or future
patents will provide the Company with significant protection against competitive
products or otherwise be of commercial value.
Much of the Company's technology and many of its processes are dependent
upon the knowledge, experience and skills of its scientific and technical
personnel. To protect its rights to its proprietary know-how and technology, the
Company requires all employees, consultants, advisors and collaborators to enter
into confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside the Company. These agreements require disclosure
and assignment to the Company of ideas, developments, discoveries and inventions
made by employees and, when possible and appropriate, consultants, advisors and
11
<PAGE> 12
collaborators. There can be no assurance that these agreements will effectively
prevent disclosure of the Company's confidential information or will provide
meaningful protection for the Company's confidential information if there is
unauthorized use or disclosure. Furthermore, the Company's business may be
adversely affected by competitors who independently develop substantially
equivalent or improved technology.
COMPETITION
The pharmaceutical industry is intensely competitive. Many companies,
including biotechnology, chemical and pharmaceutical companies, are actively
engaged in activities similar to those of the Company, including research and
development of products for hyperphosphatemia, hypercholesterolemia, obesity and
infectious diseases.
Phosphate binders are currently the only available treatment for
hyperphosphatemia. There are several phosphate binders available or under
development. A prescription calcium acetate preparation is currently the only
product approved in the United States for the control of elevated phosphorus
levels in patients with chronic kidney failure. Other products used as phosphate
binders include over-the-counter calcium- and aluminum-based antacids and
dietary calcium supplements. Calcium acetate and calcium carbonate, the most
commonly used agents, must be taken at sufficient doses to achieve adequate
reductions in phosphate absorption, which can lead to constipation and patient
noncompliance. In addition, calcium therapy requires frequent monitoring because
its use can cause hypercalcemia. Aluminum hydroxide is more effective at lower
doses than calcium acetate or calcium carbonate, but it is infrequently used
because aluminum absorbed from the intestinal tract accumulates in the tissues
of patients with chronic kidney failure, causing aluminum-related osteomalacia,
anemia and dialysis dementia. RenaGel binds dietary phosphate without the use of
either calcium or aluminum and, therefore, will not cause hypercalcemia or
aluminum toxicities. The Company believes that RenaGel will effectively compete
with existing phosphate binders by offering an excellent tolerability profile
and a more palatable formulation than that of currently available phosphate
binders.
In the cholesterol-reduction field, products are currently available that
address some of the needs of the market. These products include other bile acid
sequestrants, HMG-CoA reductase inhibitors, fibric acid derivatives and niacin.
In 1996, sales of HMG-CoA reductase inhibitors represented approximately 94% of
the market for cholesterol-reducing drugs sold in the United States. Combined
worldwide sales of the three leading HMG-CoA reductase inhibitors exceeded $5
billion in 1996. Bile acid sequestrants work without entering the bloodstream
and are generally regarded as safer than absorbed agents such as HMG-CoA
reductase inhibitors, which require frequent liver function tests. However, the
unpleasant intestinal side affects and necessarily large doses of currently
available bile acid sequestrants prompt many patients to discontinue this
therapy. The most widely prescribed bile acid sequestrant in the United States
is cholestyramine, a polymer resin which is based on a single monomer.
Cholestyramine is an inefficient and weak binder of bile acids and, therefore,
must be taken in large quantities. The Company believes that CholestaGel will
effectively compete with currently available bile acid sequestrants by offering
improved efficacy and tolerability and a more palatable formulation than that of
currently available bile acid sequestrants. However, currently marketed products
often have a significant competitive advantage over new entrants and there can
be no assurance that the Company will be able to secure a sufficient percentage
of its targeted market to meet its current revenue projections. Failure to do so
will adversely affect the Company's ability to achieve and sustain
profitability.
In addition to currently available therapies, several of the Company's
competitors are engaged in development activities and clinical trials of other
types of cholesterol-reducing agents. Many of the Company's competitors have
substantially greater financial and other resources, larger research and
development staffs and more extensive marketing and manufacturing organizations
than the Company. These competitors may also compete with the Company in
establishing development and marketing agreements with pharmaceutical companies.
There are also academic institutions, governmental agencies and other research
organizations that are conducting research in areas in which the Company is
working.
GOVERNMENT REGULATION
The development, manufacture and potential sale of therapeutics is subject
to extensive regulation by United States and foreign governmental authorities.
In particular, pharmaceutical products are subject to rigorous pre-clinical and
clinical testing and to other approval requirements by the FDA in the United
States under the Federal Food, Drug and Cosmetic Act and the Public Health
Service Act and by comparable agencies in most foreign countries.
Before testing of any agents with potential therapeutic value in healthy
human test subjects or patients may begin, stringent government requirements for
pre-clinical data must be satisfied. The data, obtained from studies in several
animal species, as well as
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<PAGE> 13
from laboratory studies, are submitted in an IND application or its equivalent
in countries outside the United States where clinical studies are to be
conducted. The pre-clinical data must provide an adequate basis for evaluating
both the safety and the scientific rationale for the initiation of clinical
trials.
Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. In Phase I, which frequently begins with the initial
introduction of the compound into healthy human subjects prior to introduction
into patients, the product is tested for safety, adverse affects, dosage,
tolerance, absorption, metabolism, excretion and clinical pharmacology. Phase II
typically involves studies in a small sample of the intended patient population
to assess the efficacy of the compound for a specific indication, to determine
dose tolerance and the optimal dose range as well as to gather additional
information relating to safety and potential adverse effects. Phase III trials
are undertaken to further evaluate clinical safety and efficacy in an expanded
patient population at geographically dispersed study sites, in order to
determine the overall risk-benefit ratio of the compound and to provide an
adequate basis for product labeling. Each trial is conducted in accordance with
certain standards under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Data from pre-clinical and clinical trials are submitted to the FDA as a NDA
for marketing approval and to other health authorities as a marketing
authorization application. The process of completing clinical trials for a new
drug is likely to take a number of years and require the expenditure of
substantial resources. Preparing a NDA or marketing authorization application
involves considerable data collection, verification, analysis and expense, and
there can be no assurance that FDA or any other health authority approval will
be granted on a timely basis, if at all. The approval process is affected by a
number of factors, primarily the risks and benefits demonstrated in clinical
trials as well as the severity of the disease and the availability of
alternative treatments. The FDA or other health authorities may deny a NDA or
marketing authorization application if the authority's regulatory criteria are
not satisfied or may require additional testing or information.
Even after initial FDA or other health authority approval has been obtained,
further studies, including Phase IV post-marketing studies, may be required to
provide additional data on safety and will be required to gain approval for the
use of a product as a treatment for clinical indications other than those for
which the product was initially tested. Also, the FDA or other regulatory
authorities may require post-marketing reporting to monitor the side effects of
the drug. Results of post-marketing programs may limit or expand the further
marketing of the products. Further, if there are any modifications to the drug,
including changes in indication, manufacturing process or labeling or a change
in manufacturing facility, an application seeking approval of such changes will
be required to be submitted to the FDA or other regulatory authority.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country, and the time required for approval may be longer
or shorter than that required for FDA approval. Although there are some
procedures for unified filings for certain European countries, in general, each
country at this time has its own procedures and requirements. Further, the FDA
regulates the export of products produced in the United States and may prohibit
the export even if such products are approved for sale in other countries.
In addition to the statutes and regulations described above, the Company is
also subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resources
Conservation and Recovery Act and other present and potential future federal,
state and local regulations.
Completing the multitude of steps necessary before marketing can begin
requires the expenditure of considerable resources and a lengthy period of time.
Delay or failure in obtaining the required approvals, clearances or permits by
the Company, its corporate partners or its licensees would have a material
adverse effect on the ability of the Company to generate sales or royalty
revenue. The impact of new or changed laws or regulations cannot be predicted
with any accuracy.
HUMAN RESOURCES
As of March 21, 1998, GelTex had 76 full-time employees. Sixty-four of these
individuals (22 of whom hold Ph.D. or M.D. degrees) are involved in research and
development, and 12 are in general and administrative functions. Members of the
Company's Scientific Advisory Board and Bile Acid Advisory Board come from a
number of different disciplines, with expertise in polymer chemistry, medicinal
chemistry, molecular recognition, clinical pharmacology and clinical medicine.
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<PAGE> 14
RESEARCH AND DEVELOPMENT COSTS
The information required by Item 101(c)(xi) of Regulation S-K is
incorporated by reference from Part II, Item 8 "Financial Statements and
Supplementary Data" and specifically from the "Statement of Operations" set
forth on page F-4 of the Company's attached financial statements.
ITEM 1(A) MANAGEMENT
EXECUTIVE OFFICERS
The executive officers of the Company, who are elected to serve at the
discretion of the Board of Directors, are as follows:
NAME AGE POSITION
- ---- --- --------
Mark Skaletsky................ 49 President, Chief Executive Officer and
Director
Edmund J. Sybertz, Ph.D....... 47 Senior Vice President, Research and
Development
Steven K. Burke, M.D.......... 37 Vice President, Clinical Research
Paul J. Mellett, Jr........... 42 Vice President, Administration and
Finance, Chief Financial Officer and
Treasurer
MARK SKALETSKY, President, Chief Executive Officer and Director. Mr.
Skaletsky joined GelTex in May 1993 as President, Chief Executive Officer and a
Director of the Company. He served as Treasurer of the Company from August 1993
until May 1997. Mr. Skaletsky previously served from 1988 to 1993 as Chairman
and Chief Executive Officer of Enzytech, Inc., a biotechnology company, and
President and Chief Operating Officer of Biogen, Inc., a biotechnology company,
from 1983 to 1988. He is a director of Isis Pharmaceuticals, Inc. and LeukoSite,
Inc.
EDMUND J. SYBERTZ, JR., PH.D., Senior Vice President, Research and
Development. Dr. Sybertz joined the Company in March 1998. Prior to joining
GelTex, Dr. Sybertz held various positions of increasing responsibility at
Schering Plough Research Institute, the pharmaceutical research arm of
Schering-Plough Corporation, a pharmaceuticals corporation, from 1979 to 1998,
including most recently Senior Director and Presidential Fellow, Biological
Research, New Drug Discovery.
STEVEN K. BURKE, M.D., Vice President, Clinical Research. Dr. Burke joined
GelTex in 1994 after having served as Associate Director, Gastrointestinal
Clinical Research of Glaxo, Inc., a pharmaceutical company, from 1992 to 1994
and Assistant Clinical Professor of Medicine, Gastroenterology, at the
University of North Carolina from 1993 until 1994. Dr. Burke currently also
serves as a Staff Physician, Gastroenterology, at the Brockton/West Roxbury VA
Medical Center. He was a Research Fellow in Gastroenterology from 1991 to 1992
and a Clinical Fellow in Gastroenterology from 1990 to 1991 at Brigham and
Women's Hospital.
PAUL J. MELLETT, JR., Vice-President, Administration and Finance, Chief
Financial Officer and Treasurer. Mr. Mellett joined the Company in April 1997
from Marshall Contractors, Inc. where he most recently served as Chief Financial
Officer. Marshall Contractors, Inc. is a construction management firm
specializing in biotechnology and microelectronics projects. Before joining
Marshall Contractors, Inc. in 1994, Mr. Mellett was an Audit Partner with
Deloitte & Touche LLP in Boston which he joined in 1977.
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<PAGE> 15
SCIENTIFIC AND BILE ACID ADVISORY BOARDS
The Company's Scientific Advisory Board consists of individuals with
demonstrated expertise in various fields who advise the Company concerning
long-term scientific planning, research and development. Members also evaluate
the Company's research programs, recommend personnel to the Company and advise
the Company on technological matters. In addition to its Scientific Advisory
Board, GelTex has established consulting relationships with a number of
scientific and medical experts who advise the Company on a project- specific
basis. One of the most important of these is the Company's Bile Acid Advisory
Board, a group of leading experts in the field of bile acids and bile acid
sequestrants who help to guide the Company's efforts in this area.
No member of the Scientific Advisory Board or the Bile Acid Advisory Board
is employed by the Company, and members may have other commitments to or
consulting or advisory contracts with their employers or other entities that may
conflict or compete with their obligations to the Company. Accordingly, such
persons are expected to devote only a small portion of their time to the
Company.
The members of the Company's Scientific Advisory and Bile Acid Advisory
Boards are:
NAME PRINCIPAL OCCUPATION
SCIENTIFIC ADVISORY BOARD
George Whitesides, Ph.D. (Chairman) Mallinckrodt Professor of Chemistry,
Harvard University
Joseph Bonventre, M.D. Associate Professor of Medicine,
Harvard Medical School; Associate
Professor Of Health Sciences and
Technology, Massachusetts Institute
of Technology
Martin C. Carey, M.D., D.Sc. Professor of Medicine, Harvard
University, Brigham and Women's
Hospital
John Thomas LaMont, M.D. Chief, Division of Gastroenterology,
Beth Israel Hospital; Charlotte F.
& Irving W. Rabb Professor of
Medicine, Harvard Medical School
Andrew G. Plaut, M.D. Professor of Medicine, Tufts University
School of Medicine; Director, Core
Center for Gastroenterology
Research, an NIH Center at New
England Medical Center Hospital and
Tufts University School of Medicine
BILE ACID ADVISORY BOARD
Martin C. Carey, M.D., D.Sc. Professor of Medicine, Harvard
University, Brigham and Women's
Hospital
Scott Grundy, M.D., Ph.D. Professor of Internal Medicine and
BioChemistry University of Texas
Southwest Medical Center
Alan Hofmann, M.D., Ph.D. Professor of Medicine in
Gastroenterology, University of
California, San Diego
Willis Maddrey, M.D. Executive Vice President, Clinical
Affairs, Southwest Medical Center
Robert Nicolosi, Ph.D. Director of Cardiovascular Research,
University of Massachusetts, Lowell
Ken Setchell, Ph.D. Professor, Department of Pediatrics,
Director of Clinical Mass
Spectrometry, Children's Hospital,
Cincinnati
Randolph C. Steer, M.D., Ph.D. Independent Pharmaceutical Consultant
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<PAGE> 16
ITEM 2. PROPERTIES
The Company leases approximately 25,000 square feet of laboratory and office
space in one building at Nine Fourth Avenue, Waltham, Massachusetts. The lease
expires in March 2007 and the Company has the option to extend the lease until
March 2012.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "GELX." The following table sets forth, for the periods indicated, the
range of the high and low last sale prices for the Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996
First Quarter.................................... $ 27 $ 12
Second Quarter................................... 28 14 1/2
Third Quarter.................................... 20 3/4 11
Fourth Quarter................................... 24 1/2 15 3/4
1997
First Quarter.................................... $ 27 $ 18 1/4
Second Quarter................................... 23 15 3/4
Third Quarter.................................... 27 17 1/2
Fourth Quarter................................... 32 24
</TABLE>
The Company has never declared or paid cash dividends on shares of its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. The Company currently intends to retain future earnings, if any, for use
in its business. In addition, the terms of the Company's bank debt prohibit the
payment of dividends.
As of March 21, 1998, there were approximately 129 holders of record of the
Company's Common Stock.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December 31,
1997 are derived from the Company's audited financial statements. The data set
forth below should be read in conjunction with the Company's audited financial
statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in the
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License fee and research revenue .. $ -- $ 3,000 $ 750 $ 1,244 $ 1,000
Collaborative RenaGel Joint Venture
project reimbursement ........... -- -- -- -- 9,196
Research grant .................... -- -- 157 419 289
-------- -------- -------- -------- --------
Total revenue ................... -- 3,000 907 1,663 10,485
Costs and Expenses:
Research and development .......... 808 3,655 6,504 21,755 22,251
Collaborative RenaGel Joint Venture
project costs ................... -- -- -- -- 9,196
-------- -------- -------- -------- --------
Total research and development .. 808 3,655 6,504 21,755 31,447
General and administrative ........ 777 1,280 1,873 2,924 4,089
Other, nonrecurring ............... -- -- -- 230 --
-------- -------- -------- -------- --------
Total costs and expenses ........ 1,585 4,935 8,377 24,909 35,536
-------- -------- -------- -------- --------
Loss from operations ................ (1,585) (1,935) (7,470) (23,246) (25,051)
Interest income ..................... 66 303 684 3,343 3,095
Interest expense .................... -- (51) (99) (75) (218)
Equity in loss of RenaGel Joint
Venture ........................... -- -- -- -- (2,310)
-------- -------- -------- -------- --------
Net loss ............................ $ (1,519) $ (1,683) $ (6,885) $(19,978) $(24,484)
======== ======== ======== ======== ========
Net loss per share(1) ............... $ (0.27) $ (0.85) $ (1.60) $ (1.80)
======== ======== ======== ========
Shares used in computing net loss per
share(1) .......................... 6,139 8,109 12,513 13,592
<CAPTION>
DECEMBER 31,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and
marketable securities ............. $ 5,626 $ 13,953 $ 33,175 $ 73,425 $ 52,623
Working capital ..................... 5,399 12,665 31,824 72,461 49,099
Total assets ........................ 5,992 16,111 35,993 78,068 67,118
Long term obligations, less
current portion ................... -- 671 420 124 6,923
Stockholders' equity ................ 5,721 13,979 33,650 75,056 53,418
</TABLE>
- ----------
(1) Historical earnings per share for fiscal year 1993 have not been presented
because such amounts are not deemed meaningful due to the significant change
in the Company's capital structure that occurred in connection with the
initial public offering of the Company's Common Stock in 1995.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
The Company was incorporated on November 15, 1991 (date of inception) and
commenced operations in 1992. Since inception, the Company has devoted
substantially all of its resources to its research and product development
programs, including manufacturing potential products. GelTex has generated no
revenues from product sales and has been dependent upon funding from external
financing, strategic corporate alliances, interest income and government grants.
The Company has not been profitable since inception and had an accumulated
deficit of $55.0 million at December 31, 1997. Losses have resulted principally
from costs incurred in research and development, and manufacturing and clinical
testing of potential products, and from general and administrative expenses. The
Company expects its research and development expenses to continue to increase in
connection with Phase III clinical trials for CholestaGel, the continuing
development of processes for the manufacture of commercial quantities of
CholestaGel, and the expansion of its anti-obesity, infectious disease and other
research programs. In addition, the Company expects to report increasing losses
from its interest in the RenaGel Joint Venture during the period leading to the
market introduction of RenaGel. As a result, the Company expects to incur
additional operating losses through at least the beginning of 2000. The
Company's ability to achieve and sustain profitability is dependent on the
timely receipt of FDA approval for RenaGel phosphate binder, the success of the
Phase III clinical trials of, and the ability to obtain regulatory approval for,
CholestaGel cholesterol reducer, the Company's ability to enter into product
development and commercialization agreements with corporate partners, and the
Company's ability to secure and maintain contract manufacturing services for the
commercial supply of its potential products at an acceptable cost. Revenue the
Company may earn from Genzyme in connection with the RenaGel Joint Venture or
other revenue earned from any other strategic corporate alliances may result in
the Company experiencing periods of profitability. However, the Company's
results of operations for such periods may not be indicative of the Company's
results of operations for other periods in which the Company does not earn
revenue from strategic corporate alliances.
RESULTS OF OPERATIONS
Fiscal Years Ended 1997, 1996 and 1995
The Company earned total revenue of $10.5 million in 1997 compared to $1.7
million earned during 1996 and $907,000 earned during 1995. Under the terms of
the RenaGel Joint Venture, the Company and Genzyme are each expected to fund the
RenaGel Joint Venture in an amount equal to 50% of budgeted costs and expenses
associated with the final development and commercialization of RenaGel for the
relevant period. Each party that incurs project expenses, either as internal
operating costs or third party obligations, is reimbursed by the RenaGel Joint
Venture for 100% of the costs incurred. During 1997, $9.2 million in revenue
earned by the Company represents reimbursement from the RenaGel Joint Venture
for certain development and manufacturing costs incurred by the Company. The
amount of reimbursement revenue earned by the Company will vary according to the
obligations of, and related expenses incurred by, the Company, and is expected
to decrease in the future as the Company completes its development activities
for the RenaGel Joint Venture. In 1997, the Company's other sources of revenue
consisted of a $1.0 million milestone payment from a corporate partner and
approximately $300,000 under a grant from the United States Department of
Commerce's Advanced Technology Program. The Company has received all the
payments it is expected to receive under this grant. Revenue earned during 1996
consisted of $1.2 million in milestone payments and research revenue from a
corporate partner and $419,000 from the Department of Commerce grant. In 1995,
the Company earned $750,000 of research revenue from a corporate partner and
$157,000 from the same Department of Commerce grant.
The Company's total operating expenses for 1997 were $35.5 million, compared
to $24.9 million in 1996 and $8.4 million in 1995. Research and development
expenses increased 44% to $31.4 million in 1997 from the $21.8 million incurred
in 1996, which was triple the $6.5 million spent in 1995. The increase during
1997 was due primarily to increased process development costs for the
manufacture of RenaGel and CholestaGel, costs associated with manufacturing
RenaGel in preparation for filing the NDA, and costs incurred in filing the NDA
for RenaGel, as well as increased clinical trial expense associated with
CholestaGel and increases in personnel and related research and development
costs associated with the initiation of the Company's anti-obesity program and
the expansion of the infectious disease program. The increase during 1996 was
due primarily to increasing third party expenses associated with the development
of RenaGel and CholestaGel, including the production of clinical trial material,
clinical trial expenses and process development expenses. General and
administrative expenses increased approximately 41% to $4.1 million in 1997 from
$2.9 million in 1996 and $1.9 million in 1995 due primarily to increased
business development costs and increased administrative personnel and related
costs.
18
<PAGE> 19
The Company's equity in the loss of the RenaGel Joint Venture was $2.3
million for 1997, which represents the Company's 50% portion of the RenaGel
Joint Venture's loss for the year. There was no corresponding amount in prior
years. The Company expects that the RenaGel Joint Venture will continue to
operate at a loss at least into 1999.
Interest income decreased slightly to $3.1 million in 1997 from $3.3 million
in 1996 due to a decrease in cash and marketable securities balances available
for investment. Interest income in 1996 exceeded the interest income of $684,000
in 1995 due to higher average cash and marketable securities balances available
in 1996 resulting from the Company's initial public offering in November 1995
and from a follow-on public offering in May 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through December 31, 1997 primarily
with $87.3 million in net proceeds from two public offerings of equity
securities, $20.3 million from private sales of equity securities, $15.5 million
from license fees and research and development revenues from the RenaGel Joint
Venture and other collaborative research agreements and $7.4 million in interest
income. Cash, cash equivalents and marketable securities were $52.6 million at
December 31, 1997, compared to $73.4 million at December 31, 1996. In March
1998, the Company completed a third public offering of equity securities from
which it received $76.0 million in net proceeds. As a result of the offering,
at March 25, 1998, cash and cash equivalents and marketable securities were
approximately $120.0 million.
In June 1997, the Company formed RenaGel LLC (the "RenaGel Joint Venture")
as the sole initial member and licensed all of its rights to RenaGel phosphate
binder (outside of Japan and certain Pacific Rim countries) to the RenaGel Joint
Venture. Immediately thereafter, the Company transferred 50% of its interest in
the RenaGel Joint Venture to Genzyme and Genzyme agreed to pay the Company $25.0
million, consisting of a $15.0 million non-refundable payment due upon receipt
of marketing approval from the FDA, and a $10.0 million non-refundable payment
due one year after FDA approval. Under the agreement, the Company and Genzyme
are each required to make capital contributions to the RenaGel Joint Venture in
an amount equal to 50% of all costs and expenses associated with the development
and commercialization of RenaGel, including costs and expenses incurred by
either party in performing under the agreement, and the Company and Genzyme will
share equally in the profits generated from sales of the product. To the extent
that either party fails to fund its 50% share of costs and expenses and the
other party does not exercise its right to terminate the agreement or compel
performance of the funding obligation, the profit sharing interests and the
future funding obligations of the parties will be proportionately adjusted to
correspond to the cumulative amount of capital contributions made by each party
as of such date. In connection with the purchase of its interest in the RenaGel
Joint Venture, Genzyme also purchased 100,000 shares of GelTex Common Stock for
$2.5 million in cash.
In April 1997, the Company entered into a contract manufacturing agreement
for RenaGel phosphate binder. Under the terms of the agreement, the Company is
required to fund capital equipment costs of approximately $6.0 million. The
Company elected to fund its portion of the capital equipment costs through third
party financing as discussed below, and the Company paid the RenaGel Joint
Venture the majority of its portion of the capital equipment costs in the fourth
quarter of 1997. The Company may be obligated to pay up to $3.75 million in
additional equipment costs in the event that the Company requires the
manufacturer to increase capacity and implement certain manufacturing changes
designed to result in a lower product cost. The contract manufacturing agreement
also requires the Company to purchase minimum quantities of product beginning in
1998. The minimums are based upon the Company's estimated product requirements
and are subject to increases as product sales increase and as the manufacturer
increases its capacity for the product. As a result of the execution of the
contract manufacturing agreement, the Company will be obligated to make a $1.0
million payment to a third party that developed certain process development
technology under contract to the Company. All of the above-referenced capital
equipment costs, the minimum purchase obligations and the third party payment
are costs associated with the RenaGel Joint Venture and, to the extent that each
company is funding 50% of the budgeted costs and expenses of the RenaGel Joint
Venture, they will be borne equally by the Company and Genzyme.
In May 1997, the Company entered into a $5.0 million term loan to finance
the cost of leasehold improvements to, and equipment purchases for, its new
facility. The agreement provides for repayment of the principal amount of the
loan in 48 equal monthly installments which commenced in January 1998. The loan
bears interest at the bank's prime rate, and certain equipment purchased with
funds received under the term loan has been pledged as collateral. In October
1997 this term loan was increased by $3.0 million to finance the Company's
portion of the capital equipment costs under the contract manufacturing
agreement for RenaGel. At December 31, 1997, the Company had fully drawn down on
this loan. In addition, at December 31, 1997, the Company had approximately
$757,000 outstanding on an equipment line of credit with a bank, bearing
interest at the bank's prime rate and due in monthly installments through
December 2000.
19
<PAGE> 20
In February 1997, the Company entered into a ten year lease for its new
research and development and administrative facility. The lease requires annual
payments of $302,000 for the first five years and $353,000 for the remainder of
the term. The Company will continue to lease an administrative and research and
development facility at its previous location through 2004. In October 1997, the
Company entered into a three year sublease agreement covering the facility.
At December 31, 1997, the Company had net operating loss carryforwards for
income tax purposes of approximately $55.0 million which expire through 2012.
Since the Company expects to incur operating losses through at least the
beginning of 2000, the Company believes that it is more likely than not that all
of the deferred tax assets will not be realized, and therefore no tax benefit
for the prior losses has been provided. The future utilization of net operating
loss carryforwards will be subject to limitation under the changes in stock
ownership rules of the Internal Revenue Code of 1986, as amended. Because of
this limitation, it is possible that taxable income in future years, which would
otherwise be offset by net operating losses, will not be offset and therefore
will be subject to tax.
The Company believes that its existing cash balances and marketable
securities, will be sufficient to fund its operations through at least the year
2000. However, the Company's cash requirements may increase materially from
those now planned if FDA approval of the RenaGel NDA is delayed or not obtained,
or because of results of the Company's research and development efforts, results
of clinical trials, the Company's inability to enter into new relationships with
strategic partners, competitive technological advances, the FDA regulatory
process and other factors. Adequate additional funds, whether through additional
sales of securities or collaborative or other arrangements with corporate
partners or from other sources, may not be available when needed or on terms
acceptable to the Company. Insufficient funds may require the Company to delay,
scale back or eliminate certain of its research and product development programs
or to license third parties to commercialize products or technologies under
terms that the Company might otherwise find unacceptable.
IMPACT OF YEAR 2000
The Company has conducted an assessment of its software and related systems
and believes they are year 2000 compliant.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The discussion in this section as well as elsewhere in this Annual Report on
Form 10-K contains forward-looking statements that represent the current
expectations of the Company's management. Actual results could differ materially
from those projected due to factors affecting the Company's cash requirements as
described in the preceding paragraph. In addition, the Company's ability to
achieve the results projected is subject to certain risks and uncertainties
regarding the Company's business such as those set forth below. Readers are
cautioned not to place undue reliance upon these forward-looking statements
which speak only as of the date hereof.
NO PRODUCT SALES TO DATE; RISKS RELATED TO LEAD PRODUCTS
GelTex has generated no revenues to date from product sales. The Company's
potential products are in various stages of research, development, clinical
testing and FDA review. Although the Company has filed a NDA for its first
product, RenaGel phosphate binder, no assurance can be given that the FDA will
approve the NDA or that, if approved, the product will be successfully marketed
by Genzyme, the Company's joint venture partner. In December 1997, the Company
initiated the first of two planned Phase III clinical trials for CholestaGel. If
the results of these trials are not satisfactory, the Company may need to
conduct additional Phase III clinical trials. Any such additional studies would
likely be time consuming and expensive. There can be no assurance that the
results of any of the Company's Phase III clinical trials will be satisfactory.
Should the Company determine that the results of its Phase III clinical trials
for CholestaGel are sufficient to meet the FDA's requirements for product
approval, there can be no assurance that the FDA will concur with the Company's
analysis and approve CholestaGel for commercial sale. The failure of the Company
to obtain FDA approval for RenaGel or CholestaGel, or any significant delay in
obtaining such approvals, would have a material adverse effect on the Company.
20
<PAGE> 21
DEPENDENCE ON CORPORATE ALLIANCES; LIMITED RELEVANT SALES AND MARKETING
EXPERIENCE
The Company has entered into a joint venture with Genzyme relating to the
final development and commercialization of RenaGel phosphate binder (the
"RenaGel Joint Venture") and intends to enter into development and marketing
agreements for the continued development and commercialization of CholestaGel
non-absorbed cholesterol reducer. The Company plans to rely upon corporate
partners to conduct certain clinical trials, obtain certain regulatory approvals
for and market other potential products. If the Company is unable to conclude
agreements with partners as planned, the Company will have to either delay the
continued development and commercialization of its products or expend its
resources to fund such activities. This could result in a need for the Company
to seek additional sources of funding, and there can be no assurance that such
funding will be available to the Company when needed or on acceptable terms. To
the extent that the Company is successful in obtaining corporate partners for
its products, it will be dependent upon the efforts of these partners and there
can be no assurance that such efforts will be successful. Although Genzyme is
building its own specialty sales force to market RenaGel, it does not have
previous experience marketing to physicians who treat patients with kidney
failure and there can be no assurance that Genzyme will be successful in
achieving market acceptance for RenaGel.
DEPENDENCE ON OTHERS FOR MANUFACTURING; SINGLE SOURCES OF SUPPLY; PROCESS
DEVELOPMENT RISKS
The Company will rely upon third parties to manufacture commercial
quantities of its products. The Company has non-exclusively sublicensed its
rights to manufacture the starting material for RenaGel and CholestaGel to one
supplier and is purchasing quantities of this material under purchase orders
issued to this supplier. The Company has also obtained bulk pharmaceutical grade
production quantities of RenaGel and CholestaGel from two suppliers (one for
each product). The Company has entered into a long-term fixed price supply
agreement with The Dow Chemical Company, the manufacturer of RenaGel bulk
material, but has not concluded a commercial supply agreement with the
manufacturer of CholestaGel bulk material. The Company is negotiating a
long-term fixed price service agreement with one encapsulator to formulate bulk
material into finished product. Should any of these manufacturing relationships
terminate or should any of the suppliers be unable to satisfy the Company's
requirements for starting material, bulk material or finished goods,
respectively, the Company would be unable to commercialize its products as
expected, and the Company's business and financial condition would be materially
and adversely affected. There can be no assurance that the Company will be
successful in obtaining second sources for any of the products or services
described above or that it will be able to obtain such products or services on
commercially reasonable terms.
In addition, the Company is continuing to work with its third party
manufacturers to optimize processes for the manufacture of commercial quantities
of CholestaGel and RenaGel. In the event that the Company's process development
work is unsuccessful, the Company's anticipated profit margins could be
adversely affected.
RELIANCE ON LICENSE TO MANUFACTURE STARTING MATERIAL
A third party has patents covering the starting material employed in the
manufacture of RenaGel and CholestaGel. The Company has obtained a non-exclusive
license under these patents to manufacture the material in connection with the
production of RenaGel and CholestaGel. The Company may not sublicense its rights
under this license without the licensor's consent, except to the Company's
current supplier of the starting material and certain other parties specified in
the license. The license agreement may be terminated upon short notice if the
Company fails to meet its material obligations under the license agreement,
including lump sum payments, royalties and confidentiality obligations. If the
license is terminated and the owner of the patent is unwilling to supply
material to GelTex, the Company may not be able to commercialize its lead
products using current manufacturing procedures, if at all.
TECHNOLOGICAL UNCERTAINTY AND EARLY STAGE OF PRODUCT DEVELOPMENT
The Company's anti-obesity and infectious disease programs are the primary
focus of the Company's research and development efforts and are in early stages
of pre-clinical development and research, respectively. There can be no
assurance that these programs or the Company's other research and development
activities will be successful or that any product candidates will be chosen from
pre-clinical studies. Should the Company commence the clinical development of
any compounds, there can be no assurance that clinical trials of products under
development will demonstrate the safety and efficacy of such products at all or
to the extent necessary to obtain regulatory approvals. With respect to its
research and development activities, the Company may encounter unanticipated
problems, including development, regulatory, manufacturing and marketing
difficulties, some of which may be beyond the Company's ability to resolve.
21
<PAGE> 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data appear at pages F-1 through F-19
of this Annual Report on Form 10-K immediately following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS. The information with respect to directors required by this
item is incorporated herein by reference from the section entitled "Election of
Directors" in the Company's definitive Proxy Statement for its Annual Meeting of
Stockholders to be held on May 27, 1998 (the "1998 Proxy Statement").
(b) EXECUTIVE OFFICERS. See the section entitled "Management-Executive
Officers" in Item 1(a) in Part I above.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
from the section entitled "Executive Compensation" in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
from the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
from the section entitled "Certain Transactions" in the 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS:
PAGE
----
Report of Independent Auditors.................................... F-2
Balance Sheets as of December 31, 1997 and 1996................... F-3
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995............................. F-4
Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995....................... F-5
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................. F-6
Notes to Financial Statements..................................... F-7
22
<PAGE> 23
(2) FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(3) EXHIBITS
See Exhibit Index immediately following the Financial Statements.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fiscal quarter ended
December 31, 1997.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GELTEX PHARMACEUTICALS, INC.
Date: March 30, 1998 By: /s/ Mark Skaletsky
-------------------------------------
Mark Skaletsky
President and Chief Executive Officer
We, the undersigned officer and directors of GelTex Pharmaceuticals, Inc.,
hereby severally constitute Mark Skaletsky and Elizabeth Grammer, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them to sign for us, in our names and in the capacity indicated below, any and
all amendments to this Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Mark Skaletsky Director , President and Chief March 30, 1998
- ------------------------ Executive Officer
Mark Skaletsky (Principal Executive Officer)
/s/ Paul Mellett Vice President, Administration and March 30, 1998
- ------------------------ Finance (Principal Financial and
Paul Mellett Accounting Officer)
/s/ Robert Carpenter Chairman of the Board March 30, 1998
- ------------------------ and Director
Robert Carpenter
/s/ J. Richard Crout Director March 30, 1998
- ------------------------
J. Richard Crout
/s/ Henri Termeer Director March 30, 1998
- ------------------------
Henri Termeer
/s/ Jesse Treu Director March 30, 1998
- ------------------------
Jesse Treu
/s/ George Whitesides Director March 30, 1998
- ------------------------
George Whitesides
26
<PAGE> 25
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors......................................... F-2
Balance Sheets as of December 31, 1997 and 1996........................ F-3
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.................................. F-4
Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995............................ F-5
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................. F-6
Notes to Financial Statements.......................................... F-7
F-1
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
GelTex Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of GelTex Pharmaceuticals,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GelTex Pharmaceuticals, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
February 9, 1998
F-2
<PAGE> 27
GELTEX PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (inclusive of reverse repurchase
agreements of $8,720,000 at December 31, 1996) ........... $ 26,689,190 $ 20,801,465
Marketable securities ..................................... 25,933,722 52,623,094
Prepaid expenses and other current assets ................. 1,428,793 1,923,878
Due from Joint Venture .................................... 1,823,877 --
------------- -------------
Total current assets ........................................... 55,875,582 75,348,437
Long-term receivables .......................................... 27,000 20,000
Property and equipment, net .................................... 7,659,328 2,246,910
Intangible assets, net ......................................... 466,673 453,123
Investment in Joint Venture .................................... 3,089,196 --
------------- -------------
$ 67,117,779 $ 78,068,470
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities
Accounts payable and accrued expenses ..................... $ 4,827,752 $ 2,495,869
Current portion of long-term obligations .................. 1,949,053 391,766
------------- -------------
Total current liabilities ...................................... 6,776,805 2,887,635
Long-term obligations, less current portion .................... 6,922,666 124,360
Commitments and contingencies
Stockholders' equity:
Undesignated Preferred Stock, $.01 par value, 5,000,000
shares authorized, none issued or outstanding ............ -- --
Common Stock, $.01 par value, 50,000,000 and 20,000,000
shares authorized; 13,642,264 and 13,521,302 shares issued
and outstanding at December 31, 1997 and 1996,
respectively ............................................. 136,423 135,213
Additional paid-in capital ................................ 108,658,239 105,407,670
Deferred compensation ..................................... (509,632) (46,129)
Unrealized gain on available-for-sale securities .......... 77,402 19,967
Accumulated deficit ....................................... (54,944,124) (30,460,246)
------------- -------------
Total stockholders' equity ..................................... 53,418,308 75,056,475
------------- -------------
$ 67,117,779 $ 78,068,470
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 28
GELTEX PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
License fee and research revenue ................ $ 1,000,010 $ 1,244,474 $ 750,000
Collaborative Joint Venture project reimbursement 9,195,727 -- --
Research grant .................................. 289,254 418,541 157,410
------------ ------------ ------------
Total revenue ........................................ 10,484,991 1,663,015 907,410
COSTS AND EXPENSES:
Research and development ........................ 22,251,062 21,755,298 6,503,788
Collaborative Joint Venture project costs ....... 9,195,727 -- --
------------ ------------ ------------
Total research and development ............. 31,446,789 21,755,298 6,503,788
General and administrative ...................... 4,089,467 2,923,569 1,873,247
Other, nonrecurring costs ....................... -- 230,000 --
------------ ------------ ------------
Total costs and expenses ............................. 35,536,256 24,908,867 8,377,035
------------ ------------ ------------
Loss from operations ................................. (25,051,265) (23,245,852) (7,469,625)
Equity in loss of RenaGel Joint Venture .............. (2,310,345) -- --
Interest income ...................................... 3,094,874 3,342,723 684,138
Interest expense ..................................... (217,142) (75,015) (99,158)
------------ ------------ ------------
Net loss ............................................. $(24,483,878) $(19,978,144) $ (6,884,645)
============ ============ ============
Basic and diluted net loss per share ................. $ (1.80) $ (1.60) $ (.85)
============ ============ ============
Shares used in computing basic and diluted net loss
per share .......................................... 13,592,000 12,513,000 8,109,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 29
GELTEX PHARMACEUTICALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------------- ---------------------------- PAID IN
SHARES AMOUNTS SHARES AMOUNTS CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 ....................... 6,598,949 $ 17,665,688 588,916 $ 5,889 $ 5,260
------------ ------------ ------------ ------------ ------------
Issuance of Common Stock under stock option plan
and exercise of warrants ....................... 472,200 4,722 110,533
Adjustment to Unrealized gain (loss) on
Available-for-sale securities
Deferred compensation associated with stock option
grants ......................................... 77,178
Amortization of deferred compensation
Issuance of Common Stock upon conversion of all
outstanding Preferred Stock .................... (6,598,949) $(17,665,688) 6,598,949 65,989 17,599,699
Issuance of Common Stock through an Initial Public
Offering, net of offering Costs of $2,512,934 .. 2,875,000 28,750 26,208,316
Net loss..........................................
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 ..................... -0- -0- 10,535,065 105,350 44,000,986
------------ ------------ ------------ ------------ ------------
Issuance of Common Stock under stock option plan
and exercise of warrants ....................... 103,837 1,039 152,868
Issuance of Common Stock under employee stock
purchase plan .................................. 7,400 74 113,919
Adjustment to Unrealized gain (loss) on
available-for-sale securities
Amortization of deferred compensation
Issuance of Common Stock through a Secondary
Public Offering, net of Offering costs of
$4,237,602 ..................................... 2,875,000 28,750 61,139,897
Net loss..........................................
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 ..................... -0- -0- 13,521,302 135,213 105,407,670
------------ ------------ ------------ ------------ ------------
Issuance of Common Stock under stock option plan
and exercise of warrants - net ................. 16,758 168 89,265
Issuance of Common Stock to Joint Venture
Partner ........................................ 100,000 1,000 2,495,678
Issuance of Common Stock under employee stock
purchase plan .................................. 4,204 42 71,426
Adjustment to Unrealized gain (loss) on
available-for-sale securities
Deferred compensation associated with stock option
grants ......................................... 594,200
Amortization of deferred compensation
Net loss..........................................
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 ..................... -0- -0- 13,642,264 $ 136,423 $108,658,239
============ ============ ============ ============ ============
</TABLE>
F-5
<PAGE> 30
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON AVAILABLE TOTAL
DEFERRED ACCUMULATED FOR SALE STOCKHOLDERS'
COMPENSATION DEFICIT SECURITIES EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1, 1995 .................. $ (3,597,457) $ (100,406) $ 13,978,974
------------ ------------ ------------ ------------
Issuance of Common Stock under stock option
plan and exercise of warrants ............. 115,255
Adjustment to Unrealized gain (loss) on
Available-for-sale securities ............. $ 181,996 181,996
Deferred compensation associated with stock
option grants ............................. $ (77,178) --
Amortization of deferred compensation ....... 21,353 21,353
Issuance of Common Stock upon conversion of
all outstanding Preferred Stock ........... --
Issuance of Common Stock through an Initial
Public Offering, net of offering Costs of
$2,512,934 ................................ 26,237,066
Net loss .................................... -- (6,884,645) -- (6,884,645)
------------ ------------ ------------ ------------
Balance at December 31, 1995 ................ (55,825) (10,482,102) 81,590 $ 33,649,999
------------ ------------ ------------ ------------
Issuance of Common Stock under stock option
plan and exercise of warrants ............. 153,907
Issuance of Common Stock under employee stock
purchase plan ............................. 113,993
Adjustment to Unrealized gain (loss) on
available-for-sale securities ............. (61,623) (61,623)
Amortization of deferred compensation ....... 9,696 9,696
Issuance of Common Stock through a Secondary
Public Offering, net of Offering costs of
$4,237,601 ................................ 61,168,647
Net loss .................................... (19,978,144) (19,978,144)
------------ ------------ ------------ ------------
Balance at December 31, 1996 ................ (46,129) (30,460,246) 19,967 75,056,475
------------ ------------ ------------ ------------
Issuance of Common Stock under stock option
plan and exercise of warrants - net ....... 89,433
Issuance of Common Stock to Joint Venture
Partner ................................... 2,496,678
Issuance of Common Stock under employee stock
purchase plan ............................. 71,468
Adjustment to Unrealized gain (loss) on
available-for-sale securities ............. 57,435 57,435
Deferred compensation associated with stock
option grants ............................. (594,200)
Amortization of deferred compensation ....... 130,697 130,697
Net loss .................................... (24,483,878) (24,483,878)
------------ ------------ ------------ ------------
Balance at December 31, 1997 ................ $ (509,632) $(54,944,124) $ 77,402 $ 53,418,308
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 31
GELTEX PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................... $(24,483,878) $(19,978,144) $ (6,884,645)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ..................... 1,193,394 745,805 503,730
Equity in net loss of RenaGel Joint Venture ....... 2,310,345 -- --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets .... 495,085 (1,351,014) (399,619)
Due from Joint Venture ....................... (1,823,877) -- --
Long term receivables ........................ (7,000) -- 20,000
Accounts payable and accrued expenses ........ 2,331,883 1,107,453 333,501
------------ ------------ ------------
Net cash used in operating activities .................. (19,984,048) (19,475,900) (6,427,033)
INVESTING ACTIVITIES
Purchase of marketable securities ...................... (26,388,812) (89,360,425) (21,713,604)
Proceeds from sale and maturities of marketable
securities ........................................... 53,135,619 57,670,818 8,293,470
Investment in Joint Venture ............................ (5,399,541) -- --
Purchase of intangible assets .......................... (259,904) (327,829) (265,469)
Purchase of property and equipment, net ................ (6,228,763) (882,998) (497,889)
------------ ------------ ------------
Net cash provided by (used in) investing activities .... 14,858,599 (32,900,434) (14,183,492)
FINANCING ACTIVITIES
Sale of Common Stock and warrants, net of issuance costs 2,586,111 61,322,554 26,352,321
Proceeds from employee stock purchase plan ............. 71,468 113,993 --
Proceeds from financing of assets ...................... 8,782,495 -- 300,000
Payments on notes payable and capital lease
obligations .......................................... (426,900) (438,736) (421,918)
------------ ------------ ------------
Net cash provided by financing activities .............. 11,013,174 60,997,811 26,230,403
------------ ------------ ------------
Increase in cash and cash equivalents .................. 5,887,725 8,621,477 5,619,878
Cash and cash equivalents at beginning of year ......... 20,801,465 12,179,988 6,560,110
------------ ------------ ------------
Cash and cash equivalents at end of year ............... $ 26,689,190 $ 20,801,465 $ 12,179,988
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 32
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NATURE OF BUSINESS AND PRESENTATION
GelTex Pharmaceuticals, Inc. (the "Company") is engaged in the design and
development of non-absorbed polymer-based pharmaceuticals that selectively bind
to and eliminate target substances from the intestinal tract.
Through 1996 the Company was considered a development stage company. During
1997, the Company entered into a Joint Venture arrangement with a corporate
partner for the final development and commercialization of RenaGel(R) phosphate
binder (see Note 3) and recognized revenue from the Joint Venture. Accordingly,
the Company believes it is no longer in the development stage and has removed
the references and reporting requirements of Statement of Financial Accounting
Standards No. 7, "Accounting and Reporting by Development Stage Companies."
2. SIGNIFICANT ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 129, "Disclosure of Information About Capital Structure,"
which is applicable to all companies and required to be adopted for fiscal
years beginning after December 15, 1997. Capital structure disclosures
required by Statement No. 129 include liquidation preferences of preferred
stock, information about the pertinent rights and privileges of the
outstanding equity securities, and the redemption amounts for all issues of
capital stock that are redeemable at fixed or determinable prices on fixed
determinable dates. Adoption of this standard is not expected to have a
material impact on the Company's financial statements or results of
operations.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income," which is required to be adopted
for fiscal years beginning after December 15, 1997. The Statement
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Adoption of this standard is not expected to have a material impact on the
Company's financial statements or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about segments of an Enterprise and Related
Information," which is required to be adopted for fiscal years beginning
after December 15, 1997. The Statement changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to shareholders. Adoption of this standard is not expected to have a
material impact on the Company's financial statements or results of
operations.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation plans in accordance
with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25). Accordingly,
deferred compensation is recorded to the extent that the current market
price of the underlying stock exceeds the exercise price on the date of
grant. Such deferred compensation is amortized over the respective vesting
periods
F-8
<PAGE> 33
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
of such option grants. The Company adopted the disclosure requirements of
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock Based Compensation" (SFAS No. 123), and provides pro forma net loss
and pro forma loss per share note disclosures for employee stock option
grants made after 1994 as if the fair-value based method defined in SFAS No.
123 had been applied. Transactions with non-employees, in which goods or
services are the consideration received for the issuance of equity
instruments, are accounted for using the fair market value method defined in
SFAS No. 123 (See Note 9).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less and money market funds to be cash
equivalents. These cash equivalents are classified as "available-for-sale"
and are carried at fair value, with unrealized gains and losses reported in
a separate component of stockholders' equity. Realized gains and losses and
declines in value which are judged to be other than temporary on
available-for-sale securities are included in investment income. The cost of
securities sold is based on the specific identification method. Interest and
dividends and amortization of premiums and accretion of discounts on
available-for-sale securities are included in interest income.
At December 31, 1996, the Company held certain securities under
agreements to resell on January 2, 1997 ("Reverse Repurchase Agreements").
Due to the short-term nature of the agreements, the Company did not take
possession of the securities which were instead held in the Company's
safekeeping account at its investment advisor bank. The Company purchases
only high grade securities, typically with short maturities.
MARKETABLE SECURITIES
Marketable securities consist of U.S. government obligations and
high-grade commercial instruments maturing within one to two years and are
classified as available-for-sale. The Company considers these investments,
which represent funds available for current operations, an integral part of
their cash management activities. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates
such designation on an ongoing basis.
PROPERTY AND EQUIPMENT
Equipment, furniture and fixtures are stated at cost and are being
depreciated using the straight-line method over estimated useful lives of
five years. Equipment under capital leases is stated at the present value of
future lease obligations and is depreciated over the life of the leases.
Leasehold improvements are stated at cost and are amortized over the
remaining life of the related building lease.
INTANGIBLE ASSETS
The Company capitalizes the costs of purchased technology and obtaining
patents on its technology. These capitalized costs are amortized over their
estimated future lives of five years using the straight-line method.
Accumulated amortization at December 31, 1997 and 1996 was $533,526 and
$287,172, respectively.
F-9
<PAGE> 34
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
REVENUE RECOGNITION
The Company recognizes grant revenue and collaborative Joint Venture
revenue as reimbursable expenses are incurred and license fee revenue when
performance obligations, if any, are satisfied.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share." Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Basic earnings per share excludes any dilutive effect of options,
warrants or convertible securities. Due to its loss position, the Company's
previous net loss per share amounts conform to Statement No. 128
requirements for basic earnings per share. Also due to its loss position,
diluted earnings per share is the same amount as basic earnings per share.
Pursuant to the requirements of the Securities and Exchange Commission,
common stock equivalent shares relating to certain stock options and
convertible preferred stock issued prior to the Company's public offering in
November 1995 are included for all periods prior to the offering whether or
not they are anti-dilutive. Options to purchase 1,435,479 shares of common
stock at $.125 -- $30.75 per share and warrants to purchase 11,400 shares of
common stock at $2.50 per share were outstanding at December 31, 1997.
3. JOINT VENTURE AGREEMENT
FORMATION OF THE JOINT VENTURE
In June 1997, the Company entered into a joint venture with Genzyme
Corporation (Genzyme) for the final development and commercialization of
RenaGel(R) phosphate binder through the establishment of RenaGel LLC, a
Delaware limited liability company (the "Joint Venture").
Initially, the Company formed RenaGel LLC as the sole member and
exclusively licensed all of its rights to RenaGel phosphate binder (outside
of Japan and certain Pacific Rim countries) to the Joint Venture. In
consideration of Genzyme's agreement to fund 50% of the costs and expenses
of the Joint Venture and to pay GelTex $25.0 million, consisting of a $15.0
million payment due upon receipt of marketing approval from the Food and
Drug Administration ("FDA") and a $10.0 million payment due one year after
FDA approval, the Company transferred a 50% interest in the Joint Venture to
Genzyme. Genzyme's 50% ownership interest in the Joint Venture is not
contingent upon the receipt of FDA approval to market RenaGel. In connection
with the formation of the Joint Venture, Genzyme also purchased 100,000
shares of GelTex Common Stock for $2.5 million in cash.
CAPITAL CONTRIBUTIONS TO THE JOINT VENTURE
Under the terms of the joint venture agreement, GelTex and Genzyme each
make equal capital contributions to the Joint Venture which are accounted
for by the parties as investments in the Joint Venture. The amount of the
periodic capital contributions are based upon the costs incurred for product
development and commercialization ("Project Costs") which are approved by
both parties. The obligation to make periodic contributions is not
contingent upon the receipt of FDA approval to market the product. To the
extent that either party fails to make all or any portion of a required
periodic capital contribution to the Joint Venture and the other party does
not exercise its right to terminate the agreement or compel performance of
the funding obligation, each party's percentage ownership interest in the
Joint Venture will be immediately adjusted to correspond to the cumulative
amount of capital contributions made by each party as of such date.
Thereafter, each party's monthly capital contribution will be made in
proportion to each party's adjusted percentage ownership interest in the
Joint Venture. At December 31, 1997 each party had contributed $4,899,415 to
the Joint Venture through periodic contributions, representing each party's
50% share of a total of $9,798,830 in periodic capital contributions to the
Joint Venture.
F-10
<PAGE> 35
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. JOINT VENTURE AGREEMENT - (CONTINUED)
REIMBURSEMENT OF PROJECT COSTS
The Company and Genzyme have agreed to undertake product development and
commercialization activities on behalf of the Joint Venture. Project Costs
include certain costs associated with the design and development of the
product manufacturing process, receipt of regulatory approval, product
distribution and marketing and selling the product, and such other costs
necessary to manufacture and sell the product commercially. The Project
Costs incurred by GelTex and Genzyme under the development and
commercialization plans, either as internal operating costs or as third
party obligations, are fully reimbursed to the parties by the Joint Venture,
without regard to the percentage ownership interest of the parties. In the
accompanying statement of operations, Collaborative Joint Venture project
reimbursement represents project costs incurred by the Company and billed to
the Joint Venture. Under the terms of the agreement, it is expected that
GelTex will primarily conduct the final development activities for the
product and Genzyme will have primary responsibility for the
commercialization activities. In the accompanying balance sheet, Due from
Joint Venture represents Project Costs billed to the Joint Venture but not
yet reimbursed. Accounting for the Joint Venture
The Company accounts for its investment in the Joint Venture using the
equity method of accounting. Accordingly, the Company recognizes its 50%
ownership interest in the net income or net loss of the Joint Venture in the
accompanying statement of operations as Equity in Loss of RenaGel Joint
Venture.
TERMINATION OF THE JOINT VENTURE
The Joint Venture can be terminated for certain material breaches which
remain uncured after a stated period of time has lapsed; upon the bankruptcy
or change of control of either party; or for any reason with one year prior
written notice at any time after (i) receipt of FDA approval to market
RenaGel or (ii) July 31, 1999 if FDA approval has not been granted by such
date. Depending upon the reason for termination, each party has certain
rights to purchase the other's interest in the Joint Venture and proceed
with the development and commercialization of RenaGel on its own.
Termination of the Joint Venture will in no event relieve Genzyme of its
obligation to pay the $25.0 million that will become due upon receipt of FDA
marketing approval.
Summarized financial information regarding the Joint Venture as of
December 31, 1997 is as follows:
<TABLE>
<S> <C>
Revenues.......................... $ -0-
Research & development expenses... 4,624,000
Interest income................... 3,000
Net loss.......................... 4,621,000
Current assets.................... 2,237,000
Non-current assets................ 4,765,000
Current liabilities............... 1,824,000
Non-current liabilities........... -0-
</TABLE>
4. MANUFACTURING AGREEMENT
In April 1997, the Company entered into a contract manufacturing
agreement for RenaGel(R) phosphate binder. Under the terms of the agreement,
the Company is required to fund one-half of initial capital equipment costs
of approximately $6.0 million, of which the Company had paid $2,250,000 at
December 31, 1997. The Company may be obligated to pay up to $3.75 million
in additional equipment costs in the event that the Company requires the
manufacturer to increase capacity and implement certain manufacturing
changes designed to result in a lower product unit cost. The contract
manufacturing agreement also requires the Company to purchase minimum
quantities of product beginning in 1998. The minimums are based upon the
Company's estimated product requirements and are subject to increases as
product sales increase and as the manufacturer increases its capacity for
the product. All of the above-referenced capital equipment costs and the
minimum purchase obligations are costs associated with the Joint Venture
with Genzyme Corporation and, to the extent that each company is funding 50%
of the budgeted costs and expenses of the Joint Venture, they will be borne
equally by the Company and Genzyme Corporation.
F-11
<PAGE> 36
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities:
DECEMBER 31, 1997:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Corporate Securities . $31,554,211 $ 69,639 $ (68,438) $31,555,412
U.S. Government Obligations 10,350,225 76,201 -- 10,426,426
Money Market Accounts ..... 7,613,194 -- -- 7,613,194
----------- ----------- ----------- -----------
Total ..................... $49,517,630 $ 145,840 $ (68,438) $49,595,032
=========== =========== =========== ===========
</TABLE>
DECEMBER 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Corporate Securities . $48,336,763 $ -- $(4,030) $48,332,733
U.S. Government Obligations 20,106,537 23,997 -- 20,130,534
Money Market Accounts ..... 4,928,183 -- -- 4,928,183
----------- ----------- ------- -----------
Total ..................... $73,371,483 $ 23,997 $(4,030) $73,391,450
=========== =========== ======= ===========
</TABLE>
The fair value of available-for-sale securities is determined using the
published closing prices of these securities as of December 31, 1997 and
1996. These securities are classified at their estimated fair value in the
accompanying balance sheet as follows:
DECEMBER 31,
1997 1996
------------ ------------
Cash equivalents.............. $ 23,661,310 $ 20,768,356
Marketable securities......... 25,933,722 52,623,094
------------ ------------
$ 49,595,032 $ 73,391,450
============ ============
The cost and estimated fair value of available-for-sale debt securities,
which excludes money market accounts, at December 31, 1997, by contractual
maturity, are shown below.
ESTIMATED
COST FAIR VALUE
------------ ------------
Due in one year or less....... $ 41,904,436 $ 41,981,838
============ ============
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
December 31:
1997 1996
---------- ----------
Accounts payable......................... $3,404,322 $1,209,777
Accrued research and development expenses 466,043 711,153
Accrued compensation..................... 467,939 329,548
Accrued other............................ 489,448 245,391
---------- ----------
$4,827,752 $2,495,869
========== ==========
F-12
<PAGE> 37
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Leasehold improvements........................ $6,971,467 $1,718,986
Equipment..................................... 2,734,399 1,758,117
---------- ----------
9,705,866 3,477,103
Less accumulated depreciation and amortization 2,046,538 1,230,193
---------- ----------
Property and equipment, net................... $7,659,328 $2,246,910
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was approximately $816,000, $585,000 and $400,000, respectively.
At December 31, 1997 and 1996, property under capitalized leases includes
$92,194 in equipment and $900,000 in leasehold improvements with aggregate
accumulated amortization at December 31, 1997 and 1996 of $362,016 and $299,677
respectively. Additionally, leasehold improvements of $1,718,986 with
accumulated amortization of $644,732 were subject to a sublease arrangement (See
Note 15).
8. STOCKHOLDERS' EQUITY
The Company has a Shareholder Rights Plan (the "Rights Plan") designed to
protect shareholders from unsolicited attempts to acquire the Company on terms
that do not maximize stockholder value. In connection with the Rights Plan, the
Board of Directors designated 500,000 shares of the Company's preferred stock as
Series A Junior Participating Preferred Stock. Under the Rights Plan, a right to
purchase one one-hundredth of one share of the Series A Junior Participating
Stock (the "Rights") was distributed as a dividend for each share of Common
Stock. The terms of the Rights Plan provide that the Rights will become
exercisable upon the earlier of the tenth day after any person or group (other
than a person or group eligible to file statements on Schedule 13G who or which,
the Board of Directors determines shall not be an Acquiring Person, as defined
in the Rights Plan) acquires 20% or more of the Company's outstanding Common
Stock or the tenth business day after any person or group commences a tender or
exchange offer which would, if completed, result in the offer or owning 20% or
more of the Company's outstanding Common Stock. The Rights may generally be
redeemed by action of the Board of Directors at $0.001 per Right at any time
prior to the tenth day following the public announcement that any person or
group has acquired 20% or more of the outstanding Common Stock of the Company.
The Rights expire on March 11, 2006. The Rights have certain anti-takeover
effects in that they would cause substantial dilution to the party attempting to
acquire the Company.
In certain circumstances, the Rights allow the Company's stockholders to
purchase the number of shares of the Company's Common Stock having a market
value at the time of the transaction equal to twice the exercise price of the
Rights, or in certain circumstances, the stockholders would be able to acquire
that number of shares of the acquirer's common stock having a market value, at
the time of the transaction, equal to twice the exercise price of the Rights.
The Company will continue to issue Rights with future issuances of common stock.
9. EQUITY INCENTIVE PLANS AND STOCK WARRANTS
Under the Company's 1992 Equity Incentive Plan (the "Plan"), employees and
directors of and consultants to the Company are eligible for awards. At December
31, 1997, the Company has reserved 2,000,000 shares of its Common Stock for
awards. Awards can consist of incentive and nonstatutory stock options, stock
appreciation rights, restricted stock awards and other stock-based awards.
Certain incentive and nonstatutory options granted under the Plan may be
exercised upon grant and vest over five years and certain others are exercisable
over a four-year vesting period; however, the Company maintains the right to
repurchase any unvested shares of Common Stock upon termination of such
stockholder's employment with the Company. Of the total options outstanding at
December 31, 1997, options to purchase 225,000 shares of the Company's Common
Stock vest upon the earlier of the achievement by the Company of certain product
development milestones or December 2004.
F-13
<PAGE> 38
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. EQUITY INCENTIVE PLANS AND STOCK WARRANTS - (CONTINUED)
Incentive stock options are granted with an option price of not less than
the fair market value of the Common Stock at the award date. Nonstatutory
options may be granted at prices as determined by the Board of Directors. Stock
appreciation rights may be awarded in tandem with stock options or alone. Stock
appreciation rights granted alone may be granted at prices as determined by the
Board. The Board may also award performance shares, restricted stock and stock
units subject to such terms, restrictions, performance criteria, vesting
requirements and other conditions deemed appropriate.
The Company has a 1995 Employee Stock Purchase Plan (the "ESPP") which
provides for the grant of rights to eligible employees to purchase up to 250,000
shares of the Company's Common Stock at the lesser of 85% of the fair market
value at the beginning or the end of the established offering period. There were
4,204 shares issued under the ESPP at an average price of $17 per share in 1997
and 7,400 shares at an average price of $16 per share in 1996. There were no
shares issued under the ESPP in 1995.
Under the Company's 1995 Director Stock Option Plan (the "Directors Plan"),
all directors who are not employees of the Company are currently eligible to
participate in the Directors Plan. The Directors Plan provides for the granting
of options with a term of 10 years to purchase up to 110,000 shares of Common
Stock at an exercise price equal to the fair market value of Common Stock at the
date of grant. Generally, upon election or re-election at each annual meeting,
each eligible director shall be granted options to purchase 4,000 shares of
Common Stock for each year of the term of office to be served. The options
granted vest in annual installments of 4,000 shares over the term served.
The Company applies APB 25 and related interpretations in accounting for its
stock-based compensation plans, including its 1992 Equity Incentive Plan, its
1995 Employee Stock Purchase Plan, and its 1995 Director Stock Option Plan.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Had compensation expense for the Company's stock-based compensation plans
been determined based upon the fair market value at the grant date for stock
option awards ("stock options") and at the end of the plan period for stock
purchased under its Employee Stock Purchase Plan ("stock purchase shares"),
consistent with the methodology prescribed under SFAS 123, the Company's net
loss and net loss per share would have been $25,947,119, or $1.91 per share,
$20,415,636, or $1.63 per share, and $6,928,242 or $.85 per share, in 1997, 1996
and 1995, respectively.
The fair value of stock options granted and stock purchase shares issued
during 1997, 1996 and 1995 was estimated at the date of the grant and the end of
the plan period, respectively, using the Black-Scholes option-pricing model with
the following weighted average assumptions for 1997, 1996 and 1995,
respectively: volatility of 48%, 60% and 60%, risk-free interest rate of 6%,
6.2% and 6.3%, weighted average expected life (years) of 4, 4 and 6.4, and no
dividends. The effects on fiscal 1997, 1996 and 1995 pro forma net loss and net
loss per share of expensing the estimated fair value of stock options and stock
purchase shares are not necessarily representative of the effects on reported
net loss for future years due to such things as the vesting period of the stock
options and the potential for issuance of additional stock options and stock
purchase shares in future years.
The weighted average per share exercise price of stock options granted,
exercised and canceled during 1997 was $23.49, $2.41 and $7.25, respectively.
The weighted average fair value of stock options granted during 1997 was $10.27
per share. The weighted average fair value of stock purchase shares issued
during 1997 was $5.10 per share.
The weighted average per share exercise price of stock options granted,
exercised and canceled during 1996 was $18.48, $2.02 and $5.53, respectively.
The weighted average fair value of stock options granted during 1996 was $9.38
per share. The weighted average fair value of stock purchase shares issued
during 1996 was $5.49 per share.
F-14
<PAGE> 39
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. EQUITY INCENTIVE PLANS AND STOCK WARRANTS - (CONTINUED)
A summary of activity in the Plan and the Directors Plan through December
31, 1997 follows:
<TABLE>
<CAPTION>
OPTIONS
---------------------------------------------
AVAILABLE
FOR PRICE
AWARD OUTSTANDING PER SHARE
---------- ---------- ---------------
<S> <C> <C> <C>
Balance at January 1, 1995 ... 51,584 645,500 $.125 -- $ .32
Authorized .................... 700,000 --
Awarded ....................... (589,150) 589,150 $ .32 -- $11.25
Exercised ..................... -- (449,450) $.125 -- $ .32
---------- ----------
Balance at December 31, 1995 .. 162,434 785,200 $.125 -- $11.25
Authorized .................... 400,000 -- $11.75
Awarded ....................... (336,400) 336,400 -- $24.25
Exercised ..................... -- (76,668) $.125 -- $13.00
Canceled or repurchased ....... 35,051 (31,151) $ .25 -- $ 9.00
---------- ----------
Balance at December 31, 1996 .. 261,085 1,013,781 $.125 -- $24.25
Authorized .................... 310,000 -- $17.25
Awarded ....................... (560,800) 560,800 -- $30.75
Exercised ..................... -- (57,507) $.125 -- $20.50
Canceled or repurchased ....... 92,345 (77,595) $ .32 -- $25.00
---------- ----------
Balance at December 31, 1997 .. 102,630 1,439,479 $.125 -- $30.75
========== ==========
</TABLE>
Deferred compensation of $594,200 recorded in 1997 represents the fair value
of options to purchase common stock granted to certain non-employees in return
for consulting services and included in the table above. Such compensation
expense is being amortized ratably over the periods of service.
A summary of the weighted-average exercise price and remaining contractual
life of options outstanding under the Plan and the Directors Plan as of December
31, 1997 follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING
AVERAGE CONTRACTUAL
PRICE PER OPTIONS EXERCISE LIFE
SHARE OUTSTANDING PRICE (YEARS)
------------- ----------- -------- -----------
<S> <C> <C> <C>
$ .125-$ .32 450,134 $ .28 6.69
$ 9-$ 15 197,667 $ 11.78 8.18
$ 16-$24.25 544,387 $ 20.21 8.84
$24.75-$30.75 247,291 $ 27.49 9.14
</TABLE>
F-15
<PAGE> 40
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. EQUITY INCENTIVE PLANS AND STOCK WARRANTS - (CONTINUED)
A summary of the weighted-average exercise price and remaining contractual
life of options outstanding under the Plan and the Directors Plan as of December
31, 1996 follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING
AVERAGE CONTRACTUAL
PRICE PER OPTIONS EXERCISE LIFE
SHARE OUTSTANDING PRICE (YEARS)
------------- ----------- -------- -----------
<S> <C> <C> <C>
$ .125-$ .32 534,617 $ .28 7.71
$ 9-$ 15 227,764 $ 11.73 9.15
$ 16-$24.25 251,400 $ 20.37 9.64
</TABLE>
A summary of the weighted-average exercise price of options exercisable
under the Plan and the Directors Plan as of December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
PRICE PER OPTIONS EXERCISE
SHARE EXERCISABLE PRICE
------------- ----------- ---------
<S> <C> <C> <C>
$ .125-$ .32 450,134 $ .28
$ 9-$ 15 134,600 $ 11.44
$ 16-$24.25 157,806 $ 20.19
$24.75-$30.75 6,689 $ 27.39
</TABLE>
A summary of the weighted-average exercise price of options exercisable
under the Plan and the Directors Plan as of December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
PRICE PER OPTIONS EXERCISE
SHARE EXERCISABLE PRICE
------------- ----------- ---------
<S> <C> <C>
$ .125-$ .32 309,617 $ .30
$ 9-$ 15 119,697 $ 11.77
$ 16-$24.25 43,499 $ 20.56
</TABLE>
At December 31, 1997 and 1996, the Company had a warrant outstanding to
purchase 11,400 shares of the Company's Common Stock at an exercise price of
$2.50 per share. This warrant expires on November 8, 2000.
10. INCOME TAXES
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $54,505,000 and research and development tax credit carry forwards
of approximately $3,739,000, which expire through 2012. Since the Company has
incurred only losses since its inception and due to the degree of uncertainty
related to the ultimate use of the loss carryforwards and tax credits, the
Company has fully reserved this tax benefit. Additionally, the future
utilization of net operating loss carryforwards and tax credits will be subject
to limitations under the change in stock ownership rules of the Internal Revenue
Service.
F-16
<PAGE> 41
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES - (CONTINUED)
Significant components of the Company's deferred tax assets as of December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ........ $ 21,802,000 $ 12,373,000
Research and development tax credits .... 3,739,000 1,290,000
Other ................................... 506,000 236,000
------------ ------------
Total deferred tax assets .................... 26,047,000 13,899,000
Valuation allowance ................ (25,829,000) (13,708,000)
------------ ------------
Net deferred tax assets ...................... 218,000 191,000
Deferred tax liabilities:
Intangible assets and other ........ (218,000) (191,000)
Total deferred tax liabilities ..... (218,000) (191,000)
Net deferred tax asset (liability) ........... $ -- $ --
============ ============
</TABLE>
The valuation allowance increased by $12,121,000 and $8,872,000 during 1997
and 1996, respectively, due primarily to the increase in tax credits and net
operating loss carryforwards.
11. LONG TERM OBLIGATIONS
Long term obligations consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Note payable to a bank bearing interest at LIBOR plus 1.75% (7.66% at
December 31, 1997) payable in monthly installments through December,
2001 ............................................................... $ 4,990,003 $ --
Note payable to a bank bearing interest at prime (8.5% at December 31,
1997) payable in quarterly installments commencing June 1998 through
June, 2002 with a final payment of $1,178,571 due on September 30,
2002 ............................................................... 3,000,000 --
Note payable to a bank bearing interest at prime (8.5% at December 31,
1997) payable in monthly installments through December, 2000 ....... 757,357 --
Note payable to a bank ............................................... 124,359 288,398
Capital lease obligation ............................................. -- 227,728
----------- -----------
8,871,719 516,126
Less current portion ................................................. (1,949,053) (391,766)
----------- -----------
$ 6,922,666 $ 124,360
=========== ===========
</TABLE>
F-17
<PAGE> 42
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG TERM OBLIGATIONS - (CONTINUED)
The bank loan proceeds have been used to finance the build-out of new
facilities and the acquisition of certain equipment. Under the terms of the loan
agreements, the Company is required to comply with certain financial covenants
which, among other things, require the maintenance of minimum levels of cash,
tangible net worth, liquidity and debt service coverage and prohibits the
payment of dividends. At December 31, 1997 the Company was in compliance with
such covenants.
Substantially all of the Company's equipment is pledged as collateral under
the loan agreements,
At December 31, 1997, the maturities of long term obligations are as
follows:
<TABLE>
<S> <C>
1998........................... $1,949,053
1999........................... 1,953,292
2000........................... 1,907,429
2001........................... 1,676,068
2002........................... 1,385,877
</TABLE>
In 1996, the Company determined that it was likely to exercise an option to
acquire title to certain leasehold improvements, which was exercised in 1997.
Accordingly, in 1996 the Company recorded a non-recurring charge of $230,000 in
connection with such option.
Given the variable rate of interest on the Company's bank debt, management
believes that the carrying value of notes payable approximates the fair value at
December 31, 1997.
12. LICENSE AGREEMENTS
In December 1994 and October 1995, the Company entered into license
agreements (the "Agreements") with two Japanese pharmaceutical companies (the
"Partners") whereby the Company granted to the Partners licenses to make, use,
and sell certain of the Company's products in certain areas of the world, as
defined by the Agreements (the "Territories"). The Agreements require the
Partners to bear all costs to develop and commercialize the licensed products in
the respective Territories. In consideration of these Agreements, the Company
received a non-refundable license fee in 1994, research support revenue in 1995
and 1996, and milestone payments in 1996 and 1997. The payment of the license
fee received in 1994 and the milestone payment in 1996 were made net of a 10%
withholding tax, which was paid on the Company's behalf by the respective
partner. The Agreement requires the Company to remit to this partner any future
tax benefit received by the Company as a result of the withholding taxes paid.
The 1995 Agreement was canceled in 1996. The 1994 Agreement calls for additional
milestone payments to be paid to the Company through the commercialization of
the product licensed under the Agreement and royalties based on certain
percentages of sales, as defined in the Agreement.
13. RESEARCH GRANT
In February 1995, the Company was awarded a Federal research grant of $2.0
million. The grant is to be paid to the Company for reimbursement of expenses
related to the development of certain products through January 1998.
F-18
<PAGE> 43
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. EMPLOYEE BENEFIT PLAN
The Company maintains an Employment Retirement Plan ("401(k) Plan") under
section 401(k) of the Internal Revenue Code covering all full-time employees.
Employee contributions may be made to the 401(k) Plan up to limits established
by the Internal Revenue Service. Company matching contributions may be made at
the discretion of the Board of Directors. The Company did not make a
contribution to the 401(k) Plan for the years ended December 31, 1997, 1996 and
1995.
15. COMMITMENTS
During 1997, the Company relocated to an expanded facility. The Company
leases its new offices and research laboratories under an operating lease with
an initial ten year term and a provision for a five year extension. In October
1997, the Company entered into a sublease arrangement for its old facility with
another company for an initial three year term with an option to extend for one
year. The original lease agreement between the Company and landlord remains in
effect. Total annual future minimum lease payments and minimum sublease payments
are as follows:
<TABLE>
<CAPTION>
LEASE SUBLEASE
PAYMENTS PAYMENTS
---------- ----------
<S> <C> <C>
1998......................... $377,400 $ 280,140
1999......................... 377,400 280,140
2000......................... 377,400 256,800
2001......................... 377,400 --
2002......................... 415,200 --
Thereafter................... 1,612,500 --
---------- ----------
Total........................ $3,537,300 $ 817,080
========== ==========
</TABLE>
Rental expense charged to operations was approximately $279,600 in 1997,
$76,400 in 1996 and $78,900 in 1995.
16. SUBSEQUENT EVENT
In January 1998, the Board of Directors authorized the management of the
Company to file a Registration Statement with the Securities and Exchange
Commission covering the sale by the Company of Shares of Common Stock at a
price to the public of up to $85,000,000.
F-19
<PAGE> 44
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation of the Company dated
June 4, 1996. Filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-3 (No. 333-45151) and
incorporated herein by reference.
3.2 Amended and Restated By-laws of the Company, as amended. Filed
as Exhibit 3.3 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference.
4.1 Rights Agreement dated as of March 1, 1996 between the Company
and American Stock Transfer & Trust Company. Filed as Exhibit
1 to the Company's Registration Statement on Form 8-A dated
March 1, 1996 and incorporated herein by reference.
4.2 First Amendment to Rights Agreement between the Company and
American Stock Transfer and Trust Company dated as of July 29,
1997. Filed as Exhibit 4.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference.
4.3 Promissory Note dated May 21, 1997 issued to Fleet Bank. Filed
as Exhibit 4.3 to the Company's Registration Statement on Form
S-3 (No. 333-45151) and incorporated herein by reference.
4.4 Security Agreement (Equipment) between the Company and Fleet
National Bank dated May 21, 1997. Filed as Exhibit 4.4 to the
Company's Registration Statement on Form S-3 (No. 333-45151)
and incorporated herein by reference.
4.5 Letter Agreement between the Company and Fleet National Bank
dated May 21, 1997. Filed as Exhibit 4.5 to the Company's
Registration Statement on Form S-3 (No. 333-45151) and
incorporated herein by reference.
4.7 Promissory Note dated October 31, 1997 issued to Fleet
National Bank. Filed as Exhibit 4.6 to the Company's
Registration Statement on Form S-3 (No. 333-45151) and
incorporated herein by reference.
4.8 Loan Modification Agreement between the Company and Fleet
National Bank dated October 31, 1997. Filed as Exhibit 4.7 to
the Company's Registration Statement on Form S-3 (No.
333-45151) and incorporated herein by reference.
10.1# 1992 Equity Incentive Plan, as amended. Filed as Exhibit 99.1
to the Company's Registration Statement on Form S-8 (File No.
333-08535) and incorporated herein by reference.
<PAGE> 45
10.2 Express Master Lease Agreement with Equipment Schedule No.
VL-1 between the Company and Comdisco, Inc. dated September
27, 1993. Filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (File No. 33-97322) and incorporated
herein by reference.
10.3 Promissory Note executed by the Company in favor of Silicon
Valley Bank dated December 9, 1993 with Commercial Security
Agreement attached thereto. Filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (File No.
33-97322) and incorporated herein by reference.
10.4 Agreement of Sublease between the Company and H&Q Waltham
Limited Partnership dated May 4, 1994, with Exhibit B thereto
(Lease Agreement between the Company and Hickory Drive
Properties Realty Trust dated April 12, 1994). Filed as
Exhibit 10.9 to the Company's Registration Statement on Form
S-1 (File No. 33-97322) and incorporated herein by reference.
10.5* License Agreement between the Company and Chugai
Pharmaceutical Co., Ltd. dated December 26, 1994. Filed as
Exhibit 10.14 to the Company's Registration Statement on Form
S-1 (File No. 33-97322) and incorporated herein by reference.
10.6 Promissory Note executed by the Company in favor of Silicon
Valley Bank dated February 2, 1995. Filed as Exhibit 10.15 to
the Company's Registration Statement on Form S-1 (File No.
33-97322) and incorporated herein by reference.
10.7 Form of Common Stock Purchase Agreement. Filed as Exhibit
10.17 to the Company's Registration Statement on Form S-1
(File No. 33-97322) and incorporated herein by reference.
10.8 Form of Restricted Common Stock Purchase Agreement. Filed as
Exhibit 10.18 to the Company's Registration Statement on Form
S-1 (File No. 33-97322) and incorporated herein by reference.
10.9# Form of Incentive Stock Option Certificate. Filed as Exhibit
10.19 to the Company's Registration Statement on Form S-1
(File No. 33-97322) and incorporated herein by reference.
10.10# Forms of Nonstatutory Stock Option Certificate. Filed as
Exhibit 10.20 to the Company's Registration Statement on Form
S-1 (File No. 33-97322) and incorporated herein by reference.
10.11# 1995 Director Stock Option Plan. Filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference.
10.12# 1995 Employee Stock Purchase Plan. Filed as Exhibit 99.1 to
the Company's Registration Statement on Form S-8 (File No.
333-00864) and incorporated herein by reference.
10.13 Lease Agreement dated February 28, 1997, between the Company
and J. F. White Properties, Inc. Filed as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.14* Contract Manufacturing Agreement between the Company and The
Dow Chemical Company. Filed as Exhibit 10.17 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 and incorporated herein by reference.
F-21
<PAGE> 46
10.15* Collaboration Agreement among the Company, Genzyme Corporation
and RenaGel LLC dated as of June 17, 1997. Filed as Exhibit
10.18 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by
reference.
10.16 Purchase Agreement between the Company and Genzyme Corporation
dated as of June 17, 1997. Filed as Exhibit 10.19 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference.
10.17* Operating Agreement of RenaGel LLC dated as of June 17, 1997.
Filed as Exhibit 10.20 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 and incorporated
herein by reference.
10.18* License Agreement between the Company and Nitto Boseki Co.,
Ltd. Dated as of June 9, 1997. Filed as Exhibit 10.21 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference.
10.19# Letter Agreement between the Company and Paul J. Mellett, Jr.
dated March 11, 1997. Filed herewith.
10.20# Letter Agreement between the Company and Edmund J. Sybertz,
Jr. dated November 17, 1997. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors. Filed
herewith.
24.1 Power of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule. Filed herewith.
* Certain confidential material contained in Exhibit 10.5,
10.14, 10.15, 10.17 and 10.18 has been omitted and filed
separately with the Securities and Exchange Commission.
# Identifies a management contract or compensatory plan or
agreement in which an executive officer or director of the
Company participates.
<PAGE> 1
EXHIBIT 10.19
[GELTEX PHARMACEUTICALS, INC. LOGO]
March 11, 1997
Mr. Paul J. Mellett
108 Cedar Street
Walpole, MA 02081
Dear Paul:
It is my pleasure to extend to you an offer of employment with GelTex
Pharmaceuticals, Inc.
We would like you to join us as Chief Financial Officer. Your compensation will
consist of a salary of $175,000 per year, paid in 26 biweekly pay periods. In
addition, you will also be eligible for a bonus opportunity equal to 20% of your
base salary on an annual basis. In 1997 you will be eligible for 75% of the
bonus opportunity. GelTek will also pay you a $10,000 sign-on bonus upon
initiation of employment. Finally, as we discussed, in the event that GelTex
terminates your employment without case, you will be eligible to receive six
months of severance pay which will be equal to six months of your base salary.
In addition, GelTex has a program of benefits which currently consists of the
following:
- Two weeks paid vacation per year, increasing to three weeks after two
years of employment
- Eleven company holidays, one of which is a floating holiday that may
be taken at your discretion.
- Term life insurance paid for by the company equal to two times your
annual salary.
- 401K retirement plan.
GelTex also has a contributory health plan. We use the Guardian insurance
program which covers the entire Boston area and allows you to pick your own
primary physician from an extensive list. If you elect to participate, the
company pays 75% of the cost of the insurance and the remaining 25% would be
deducted from your pay.
<PAGE> 2
The dental insurance benefit offered by GelTex is the comprehensive plan of
Delta Dental Plan of Massachusetts. If you elect to participate, the company
pays 75% of the cost and the remaining 25% would be deducted from your pay.
In addition, we will grant you an option to purchase 50,000 shares of GelTex
common stock at the closing price on the day your employment begins. This option
vests over a 4 year period at the rate of 1/48 per month of service from the
date of the option grant. In general, GelTex believes that ownership of common
stock is the best way to significantly motivate and reward long term
contributions to the company.
If accepted and agreed upon, please sign both copies of the offer letter,
retaining one copy for your files and returning the other to GelTex.
Paul, all of us at GelTex are most impressed by you. We are convinced that you
could make key contributions to the success and growth of our company. We think
that GelTex will be a very exciting place to work over the next few years and we
would like you to join us in that excitement.
Sincerely,
/s/ Mark Skaletsky
Mark Skaletsky
President and CEO
Accepted by:
/s/ Paul J. Mellett
- ------------------------
Paul J. Mellett
Date: March 3, 1997
<PAGE> 1
EXHIBIT 10.20
[GELTEX PHARMACEUTICALS, INC. LOGO]
November 17, 1997
Edmund J. Sybertz, Ph.D.
RD 2 10 Ryan Court
Chester, NJ 07930
Dear Ted:
It is my pleasure to extend to you an offer of employment with GelTex
Pharmaceuticals, Inc. We would like you to join us in February 1998, as Senior
Vice President, Research and Development. Your bi-weekly rate of pay will be
$7,692.31, which is the equivalent of an annual rate of $200,000, based on a
40-hour workweek. After you have been employed for one year, and annually
thereafter, you will be eligible for a performance and salary review on or near
your anniversary date.
You will be eligible for a bonus opportunity equal to 30% or more of your base
salary on an annual basis subject to the approval of the Board of Directors of
GelTex. In the event that GelTex terminates your employment without cause, you
will be eligible to receive six months of severance pay, which will be equal to
six months of your base salary.
In addition, we will grant you an option to purchase 110,000 shares of GelTex
common stock at the closing price on the day your employment begins. Ten
thousand shares will vest immediately, with the remaining shares vesting over a
four year period at the rate of 1/48 per month of service from the date of the
option grant. GelTex believes that ownership of common stock is the best way to
significantly motivate and reward long term contributions to the company.
GelTex will pay the usual and customary closing costs of your existing home in
New Jersey and on a new home in the Boston area. If necessary, the company will
make available a "bridge loan" to provide for the down payment and associated
purchase costs of your new home. The terms of the loan will be determined at a
later date. If selling your home becomes a problem, we will discuss suitable
arrangements to allow you to sell your home. GelTex will also pay the costs
associated with moving your household goods to this area and up to six months
temporary living expenses.
<PAGE> 2
In addition, you will be eligible for the company benefits described below:
- Three weeks paid vacation per year, increasing to four weeks after
five years of employment.
- Eleven paid holidays, including a floating holiday that may be taken
at your discretion.
- Company paid term life insurance equal to two times your annual
salary.
- Long-term disability insurance which provides up to 60% of your
monthly salary.
- Group health insurance through The Guardian. The company pays 75% of
the premium for family or individual coverage.
- Group dental insurance through the Delta Dental Plan. The company
pays 75% of the premium for family or individual coverage.
- Participation in the GelTex Pharmaceuticals 401(k) Plan. Each
employee may contribute up to 15% of gross pay (subject to an IRS
maximum) which will then be excluded from the employee's taxable
income.
- Participation in the GelTex Pharmaceuticals Employee Stock Purchase
Plan. The purpose of the plan is to provide employees an opportunity
to purchase shares of common stock of the company.
- Tuition assistance of up to $3,000 per year for relevant academic
courses.
- Participation in the GelTex Pharmaceuticals Flexible Benefits Plan
which allows you to fund for eligible dependent care expenses on a
pre-tax basis.
While the foregoing represents the current benefits, they are continuously being
reviewed and are subject to modification. Also, the above is a summary of the
benefits. Complete descriptions are contained in the appropriate plan documents
or other company documents, and will be discussed in detail with
<PAGE> 3
Dr. Sybertz
Page 3
you during your first few days of employment. This letter constitutes the entire
understanding of the terms of your employment and supersedes any prior written
or oral statements. In addition, nothing herein shall be construed as, or
interpreted to constitute, the terms of a contract of employment for either a
definite or indefinite time.
Your employment with GelTex Pharmaceuticals will be conditional upon documents
establishing that you are authorized to work for GelTex Pharmaceuticals pursuant
to the Immigration Reform and Control Act of 1986. These documents must be
provided to the company within your first three days of employment. You will
also have to complete certain other standard company forms and documents.
If accepted and agreed upon, please sign both copies of the offer letter,
retaining one copy for your files and returning the other to GelTex
Pharmaceuticals.
Ted, all of us at GelTex are most impressed by you. We are convinced that you
could make key contributions to the success and growth of our company. We think
that GelTex will be a very exciting place to work over the next few years and we
would like you to join us in that excitement.
Sincerely,
/s/ Mark Skaletsky
Mark Skaletsky
President and CEO
Accepted by:
/s/ Edmund J. Sybertz, Ph.D.
- ----------------------------
Edmund J. Sybertz, Ph.D.
Date: January 19, 1997
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-00864, 333-06779, 333-08535, and Form S-3 No. 333-45151) of
GelTex Pharmaceuticals, Inc. of our report dated February 9, 1998 with respect
to the financial statements of GelTex Pharmaceuticals, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Boston, Massachusetts
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
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