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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, 1998
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 02451
(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)
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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 Stock Market(R), 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 17, 1999 was $278,623,247.
As of March 17, 1999, 16,855,603 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 1999 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. In October 1998, the
Company received approval from the United States Food and Drug Administration
(the "FDA") for its lead product Renagel(R)* Capsules (sevelamer hydrochloride).
Additionally, throughout 1998, the Company continued its product development
efforts focused on therapeutic agents for the treatment of hypercholesterolemia
(elevated LDL cholesterol levels); obesity; and infectious diseases.
Renagel Capsules had been studied in over 400 hemodialysis patients prior to
FDA approval, and is indicated for the treatment of elevated serum phosphorous
levels (hyperphosphatemia) in end stage renal disease ("ESRD") patients.
Commercial sales of Renagel commenced in November 1998 through a joint venture
(the "Renagel JV") between the Company and Genzyme Corporation ("Genzyme"). In
May and July 1998, the Renagel JV filed applications for marketing authorization
in Canada and Europe, respectively, and regulatory review is ongoing in those
territories.
The Company recently completed two Phase 3 clinical trials of
Cholestagel(R)*. The first was designed to evaluate the effectiveness of
Cholestagel in lowering LDL cholesterol levels, and the second was designed to
evaluate once daily and split dosing regimens. The preliminary data from these
trials support the results of Phase 2 studies. In December 1998, the Company
initiated two additional Phase 2 clinical trials designed to evaluate the
efficacy of Cholestagel in combination with low doses of two widely prescribed
HMG-CoA reductase inhibitors, commonly referred to as "statins." The Company
expects that the results of the Phase 3 pivotal trials and the results of the
combination studies will form the basis for the filing of a New Drug Application
("NDA") for Cholestagel in mid-1999.
In 1998, the Company continued its anti-obesity drug discovery program
focusing on the identification of polymers that act in the gastrointestinal
tract to bind triglycerides. The Company also continued its efforts in the area
of infectious diseases focusing on the discovery of polymers that bind to and
inactivate the toxins of Clostridium difficile, a major cause of
antibiotic-associated diarrhea.
The Company commenced operations in 1992 and has incurred operating losses
since that time. As of December 31, 1998, the Company had an accumulated deficit
of approximately $66.5 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 polymers are designed to 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
* Renagel and Cholestagel are registered trademarks of the Company.
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selectively bind target molecules. The Company designs its polymers to carry a
high density of 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 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.
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
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.
RENAGEL CAPSULES
Overview
The United States Health Care Financing Administration ("HCFA") estimates
that, at the end of 1997, approximately 230,000 patients in the United States
were receiving chronic dialysis treatment for end-stage renal disease. According
to HCFA data, the number of dialysis patients in the United States increased by
7% to 10% annually between 1985 and 1997. Based on reported growth rates of
approximately 5% to 7% per year, the Company estimates that the number of
dialysis patients in Western Europe in 1997 was in excess of 180,000. In Japan,
with reported growth rates of approximately 6% per year, the Company estimates
that the number of dialysis patients in 1997 was approximately 175,000.
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, a portion of the
patients in the early stages of chronic kidney failure (the pre-dialysis
population) also use phosphate binders.
In October 1998, the Company received FDA approval for Renagel Capsules
(sevelamer hydrochloride). Other available phosphate binders include calcium
acetate, the only other FDA-approved phosphate binder, and calcium carbonate and
aluminum hydroxide, neither of which is approved in the United States for the
control of hyperphosphatemia. The treatment of hyperphosphatemia with calcium
has been shown to result in elevations in blood calcium levels (hypercalcemia).
Treatment with aluminum has
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been shown to result in aluminum-related osteomalacia (softening of the bones),
anemia and dialysis dementia (deterioration of intellectual function). Renagel
is the first approved calcium-free and aluminum-free phosphate binder. Renagel
offers physicians the ability to aggressively treat hyperphosphatemia without
the risk of aluminum toxicity and with significantly decreased incidences of
hypercalcemia.
Product Development
The Company began the clinical development of Renagel in December 1994 with
the initiation of a Phase 1 clinical trial designed to establish safety,
toleration and efficacy in 24 healthy volunteers. The FDA's approval of Renagel
less than four years later, in October 1998, followed completion of the
Company's clinical development program in which the efficacy of Renagel Capsules
in lowering serum phosphorus levels was demonstrated in numerous clinical trials
conducted in over 400 hemodialysis patients. Renagel Capsules is indicated for
the reduction of serum phosphorus in ESRD patients.
In a crossover Phase 3 study conducted in 84 hyperphosphatemic ESRD patients
on hemodialysis, the safety and efficacy of Renagel was compared 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. Analysis of adverse events in
the dialysis population is complicated by ESRD-related disturbances in the
function of every major organ system and by complications associated with
dialysis. Therefore, adverse events can be anticipated to be frequent. In the
study, there was no significant difference between the most common
treatment-emergent adverse events reported with Renagel Capsules and calcium
acetate: diarrhea (16% and 10%, respectively), infection (15% and 11%,
respectively), and pain (13% and 16%, respectively).
The results of an open-label Phase 3 study conducted in 172
hyperphosphatemic ESRD patients on hemodialysis indicated that mean serum
phosphorus declined by 2.5 mg/dL while calcium levels remained within the normal
range throughout the eight week treatment period. The effects of Renagel
observed in this Phase 3 study were also observed in an open-label study
conducted over a 44 week treatment period in 192 hyperphosphatemic ESRD patients
on hemodialysis. In the long-term study, adverse events possibly related to
Renagel Capsules were not dose related and included nausea (7%), constipation
(2%), diarrhea (4%), flatulence (4%) and dyspepsia (5%).
In May and July 1998, the Renagel JV filed applications for marketing
authorization for Renagel Capsules (sevelamer hydrochloride) in Canada and
Europe, respectively. Regulatory review in these territories in ongoing.
The Renagel JV is currently conducting additional clinical studies to
support the marketing of Renagel Capsules.
Commercialization and Manufacturing
In June 1997, the Company formed the Renagel JV, a joint venture with
Genzyme for the final development and commercialization of Renagel in the United
States, Europe and other territories not previously licensed to Chugai
Pharmaceutical Co., Ltd. See "Development and Marketing Agreements." The Renagel
JV launched Renagel for commercial sale in the United States in November 1998.
Renagel is currently marketed by an experienced dedicated sales force consisting
of 38 sales representatives and 4 regional sales managers.
The Renagel JV will continue to rely upon third parties to manufacture
commercial quantities of Renagel, including the starting material for the
product, bulk material and finished goods. Together, the Renagel JV and the
Company currently have in place two long-term fixed price supply agreements for
Renagel bulk material, and one long-term fixed price agreement for finished
goods. Should any of these manufacturing relationships terminate or should any
of the suppliers be unable to satisfy the Renagel JV's requirements for starting
material, bulk material or finished goods, the Renagel JV may be unable to
continue the commercialization of Renagel as expected, and the Company's
business and financial condition could be materially and adversely affected.
* PhosLo is a trademark of Braintree Laboratories.
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CHOLESTAGEL
Overview
Since the mid-1980s, elevated LDL cholesterol (hypercholesterolemia) has
been widely recognized as a significant risk factor for coronary heart disease.
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 1998, the worldwide market
for cholesterol-reducing drugs exceeded $9 billion. During 1998, the United
States market for cholesterol reducing drugs experienced dollar growth of
approximately 25%.
While the risks of hypercholesterolemia are well recognized, the condition
remains significantly under-treated worldwide. An estimated 24 million Americans
require drug therapy to achieve adequate reductions in cholesterol levels.
However, only 6 million Americans are receiving cholesterol-reducing drugs.
Worldwide, approximately one-quarter of the 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 or II 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 HMG-CoA reductase
inhibitors exceeded $8 billion in 1998. 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, the NCEP guideline recommends that physicians prescribe
bile acid sequestrants as first-line drug therapy.
Sales of bile acid sequestrants in the United States, which totaled
approximately $80 million in 1998, have been declining over the past several
years. The Company believes that this decline is due to the large dosages
required for, and the reported gastrointestinal side effects associated with,
currently marketed bile acid sequestrants. The most widely prescribed bile acid
sequestrant in the United States is cholestyramine, a polymer resin. Typically,
patients must drink a mixture of two to three tablespoons of cholestyramine in
eight ounces of water twice a day. The gastrointestinal 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. Additionally, some patients who discontinue bile acid sequestrant
therapy may not receive any alternate treatment.
The Company believes that, following completion of its clinical development
program and FDA review, 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 lower doses than currently available bile acid
sequestrants and available in a convenient dosage form. 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. 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."
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Product Development
GelTex is developing Cholestagel for the reduction of elevated LDL
cholesterol levels in patients with hypercholesterolemia. In 1998, the Company
continued its comprehensive clinical development program designed to evaluate
the effectiveness of Cholestagel as monotherapy for patients with mild to
moderate hypercholesterolemia and in combination with statins for patients with
higher levels of LDL cholesterol. The Company expects that the results of its
Phase 3 trials evaluating Cholestagel as monotherapy, and three Phase 2 trials
designed to evaluate the efficacy of Cholestagel in combination with three
widely prescribed statins will form the basis for the filing of a NDA for
Cholestagel in mid-1999.
In the first quarter of 1999, the Company received the results of two Phase
3 clinical trials. In the first trial, a double-blind, placebo-controlled trial
conducted over a treatment period of six months in 466 hypercholesterolemic
patients, reductions of LDL cholesterol were observed at all four dosing levels,
including a 16 percent reduction at a dosing level of 3.8 grams of Cholestagel
per day, and a 20 percent reduction at 4.5 grams per day. The side effects
reported by those patients on Cholestagel were minimal and were similar to those
experienced by patients on placebo.
The second Phase 3 trial conducted in 100 hypercholesterolemic patients over
a treatment period of six weeks was designed to evaluate the
cholesterol-lowering activity of Cholestagel in once daily and split dosing. The
results of this trial indicate that once daily is similar in efficacy to split
dosing.
In the beginning of the second quarter of 1999, the Company expects to
receive data from two Phase 2 clinical trials. These trials were designed to
evaluate the cholesterol-lowering effect achieved by administering Cholestagel
in combination with a low dose of two of the most widely prescribed HMG-CoA
reductase inhibitors. These trials are similar in design to a Phase 2 trial
completed in September 1997 in which the Company analyzed the
cholesterol-lowering effect achieved with the administration of a low dose of
Cholestagel in combination with a low dose of lovastatin, 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 Company has developed a tablet formulation of Cholestagel that will
reduce the number of pills required to achieve a targeted reduction in
cholesterol. The Company is currently conducting bioequivalency tests with the
tablet formulation in order to permit the inclusion of the tablet formulation in
the Cholestagel NDA. While the Company believes that the FDA will accept the
bioequivalency tests and not require additional clinical trials to be conducted
with the tablet formulation, there can be no assurance that such tests will be
acceptable. Should the FDA require additional clinical trials with the tablet
formulation of Cholestagel, such additional studies will be time consuming and
expensive.
Second Generation Compound and Plans for Commercialization
In the first quarter of 1999, the Company announced the results of a Phase
1/2 trial conducted with a second generation lipid-altering compound. The data
from this study of 36 hypercholesteremic patients indicate that the second
generation product is twice as potent as Cholestagel with patients experiencing
a 19% decrease in LDL cholesterol at a dosing level of 2.5 grams per day,
without significant side effects.
The Company intends to enter into collaborations with third parties in
order to pursue additional clinical development and commercialization of the
second generation compound and to commercialize Cholestagel. If the Company is
unable to conclude agreements with partners as planned, the Company will either
have to delay the continued development of the second generation compound and/or
the 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.
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ANTI-OBESITY PROGRAM
Overview
Obesity is a global healthcare concern and represents one of the most
serious problems facing the medical community today. 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 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.
Dietary fat is a major source of calories and contributes to obesity and its
associated health problems, including diabetes, coronary artery disease and
hypertension. On average, a person on a western diet consumes approximately 35
percent of their calories in the form of fat, predominately triglycerides. In
the gastrointestinal tract, ingested fat is broken down into fatty acids by
pancreatic lipase, permitting absorption by the intestinal lining. The fatty
acids are then transported throughout the bloodstream to body tissues. An excess
of fat delivered to body tissues leads to obesity.
One approach to the treatment of obesity is to inhibit the activity of
lipase in the gastrointestinal tract and prevent the digestion of triglycerides
into fatty acids. By preventing fat breakdown, fat is eliminated from the body
and a patient loses weight. In clinical trials, lipase inhibitors have been
shown to cause significant and sustained reductions in body weight. However, the
treatment of obesity by inhibiting the activity of lipase can be limited by the
gastrointestinal side effects, in particular, oily leakage in the stool,
associated with the elimination of undigested triglyceride from the intestine.
Application of the Company's Technology
The Company has synthesized novel polymers that work within the
gastrointestinal tract and either inhibit lipase or bind to fat. In 1998, the
Company focused its efforts and resources on the development of polymers that
work within the gastrointestinal tract to bind triglycerides and reduce the side
effects of lipase inhibition. When administered with a lipase inhibitor, the
Company's lead compounds have been shown to prevent the occurrence of oily
leakage in the stool caused by lipase inhibition in experimental animal models.
This is achieved by changing the physical characteristic of the oil in the stool
rather than reducing the amount of oil excreted. The Company believes that a
non-absorbed fat binder that could be used in combination with a lipase
inhibitor would offer significant benefits in the treatment of obesity. The
Company plans to select a compound for clinical development by mid-1999.
INFECTIOUS DISEASES 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 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. During 1998, the Company
focused its research in this area on non-absorbed compounds for the treatment of
gastrointestinal diseases and non-systemic infections such as those associated
with artificial surfaces, such as catheters, and wounds.
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Application of the Company's Technology
During 1998, the Company focused its research efforts on identifying
polymers that bind, inhibit or inactivate toxins which are essential virulence
factors in diseases caused by many bacterial infections, such as Clostridium
difficile (C. difficile). C. difficile is a major cause of antibiotic-associated
diarrhea and is a significant problem in hospitals and extended care facilities,
affecting at least 500,000 patients per year. Under normal conditions the
bacteria flora of the gastrointestinal tract prevent the growth of C. difficile.
However, in hospitalized patients, antibiotics that are used to treat unrelated
infections alter the normal intestinal flora, allowing for the proliferation of
C. difficile. C. difficile releases two toxins, Toxin A and Toxin B, which cause
the pathological effects. The clinical symptoms of the infection range from
diarrhea to severe colitis.
C. difficile is currently treated with antibiotics. However, concerns over
antibiotic resistance and a significant relapse rate in patients with the
disease has created a need for new therapies to treat this disease. GelTex has
identified polymers that have exhibited promising in vitro inactivation of C.
difficile toxins. The Company believes this presents a new approach for the
management and prevention of hospital-associated C. difficile.
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 the Renagel JV, a 50/50 joint
venture under which the parties finalized the development of and will
commercialize Renagel Capsules (sevelamer hydrochloride) in all countries other
than Japan and other Pacific Rim countries. In 1998, the Company received a
payment of $15 million from Genzyme in connection with the FDA approval of
Renagel, and the Company will receive an additional $10 million in October 1999.
Under the agreement, the Company and Genzyme are each required to make capital
contributions to the Renagel JV 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, 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 in the territory to the Renagel JV and Genzyme was appointed as the
exclusive distributor of Renagel in the territory. The Renagel JV commenced
sales of Renagel Capsules in November 1998 with an experienced and dedicated
sales force consisting of 38 sales representatives and 4 regional managers.
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. In 1998, Chugai entered into an agreement with Kirin Brewery Co. Ltd.
to jointly develop and commercialize Renagel in Japan and certain other Pacific
Rim countries.
The agreement between GelTex and Chugai 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
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Company received two milestone payments of $1 million each from Chugai, in
December 1996 and December 1997 upon Chugai's initiation of Phase 1 and Phase 2
clinical trials, respectively.
STARTING MATERIAL AND MANUFACTURING
The Company's two lead products, Renagel Capsules and Cholestagel, 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 two suppliers and is
purchasing quantities of this material from one supplier under purchase orders
issued to this supplier. 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 material. In addition, the Renagel JV has entered into a
long-term fixed price supply agreement with Genzyme Corporation to manufacture
bulk quantities of Renagel, and the Renagel JV will be obligated to purchase
minimum quantities of material from Genzyme beginning in 1999. The Company has
obtained pharmaceutical grade bulk production quantities of Cholestagel from one
supplier and expects to enter into a long-term supply agreement with this
supplier. In 1998, the Company concluded 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 the processes for the manufacture of commercial quantities of
Cholestagel and to increase capacities and efficiencies for the commercial
production of Renagel. 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 13 issued U.S. patents and approximately 30 pending U.S.
patent applications. In addition, the Company has filed over 100 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
9
<PAGE> 10
Cholestagel and other polymeric materials. There can be no assurance that any
patents will issue from any of the Company's other 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
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. In addition to Renagel Capsules, there are several other
phosphate binders available or under development. A prescription calcium acetate
preparation is currently the only other product approved in the United States
for the treatment of elevated phosphorus levels in patients with end-stage renal
disease. Other products used as phosphate binders include over-the-counter
calcium- and aluminum-based antacids and dietary calcium supplements. The
treatment of hyperphosphatemia with calcium has been shown to result in
hypercalcemia, and the treatment of hyperphosphatemia with aluminum has been
shown to result in aluminum-related osteomalacia (softening of the bones),
anemia and dialysis dementia (deterioration of intellectual function). Despite
the lower price points associated with other phosphate binders, the Company
believes that Renagel will effectively compete with existing phosphate binders.
Renagel is the only phosphate binder that is both aluminum-free and
calcium-free. As a result, Renagel offers an opportunity to aggressively treat
hyperphosphatemia without the risk of aluminum intoxication, and with
significantly decreased incidences of hypercalcemia.
In the cholesterol-reduction field, products are currently available that
address many of the needs of the market. These products include other bile acid
sequestrants, HMG-CoA reductase inhibitors, fibric acid derivatives and
niacin-based products. In 1998, sales of HMG-CoA reductase inhibitors
represented approximately 97% of the market for cholesterol-reducing drugs sold
in the United States. Combined worldwide sales of HMG-CoA reductase inhibitors
exceeded $8 billion in 1998. 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. The
most widely prescribed bile acid sequestrant in the United States is
cholestyramine, a polymer resin. The Company believes that Cholestagel will
effectively compete with currently available bile acid sequestrants by offering
improved potency 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 and phosphate-binding 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
10
<PAGE> 11
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 from laboratory studies, are submitted in an
Investigational New Drug ("IND") application (or its equivalent in countries
outside the United States) in the country in which 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 1, 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 pharmacology effects. Phase 2
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 3 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. For studies conducted in the United States, 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 in a NDA
for marketing approval and to other health authorities as a marketing
authorization application or similar dossier. The process of completing clinical
trials for a new drug is likely to take a number of years and requires 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, including 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. Alternately, they may require additional testing or information.
Even after initial FDA or other health authority approval has been obtained,
further studies, including Phase 4 post-marketing studies, may be required to
provide additional data on safety or effectiveness. In addition, new studies
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
approved. Also, the FDA and other regulatory authorities 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 most 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 in the European Union, 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
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<PAGE> 12
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 4, 1999, GelTex had 107 full-time employees. Ninety-two of these
individuals (29 of whom hold Ph.D. or M.D. degrees) are involved in research and
development, and 15 are in general and administrative functions. The Company has
also engaged a number of expert consultants from a variety of different
disciplines, with expertise in polymer chemistry, medicinal chemistry, molecular
recognition, clinical pharmacology and clinical medicine.
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:
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<PAGE> 13
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark Skaletsky 50 President, Chief Executive
Officer and Director
Edmund J. Sybertz, Ph.D. 48 Senior Vice President, Research
and Development
Joan E. Bell, Ph.D. 43 Vice President, Project
Management and Strategic Planning
Steven K. Burke, M.D. 38 Vice President, Clinical Research
Paul J. Mellett, Jr. 43 Vice President, Administration
and Finance, Chief Financial
Officer and Treasurer
Douglas Reed, M.D. 45 Vice President, Business
Development
</TABLE>
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 also 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.,
LeukoSite, Inc. and Microcide Pharmaceuticals.
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.
JOAN E. BELL, Ph.D., Vice President, Project Management and Strategic
Planning. Dr. Bell joined the Company in February 1999. Prior to joining GelTex,
Dr. Bell was Vice President, Development Management from 1998 to 1999 and
Director, R & D Administration from 1993 to 1998 at Genetics Institute of
Wyeth-Ayerst, a research-based pharmaceutical and health care products company.
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.
DOUGLAS REED, M.D., Vice President, Business Development. Dr. Reed joined
GelTex in 1998 after having served as Vice President, Business Development of
NPS Pharmaceuticals, Inc., a pharmaceutical company, from 1996 to 1998. Dr. Reed
was Vice President of S.R. One, Limited Venture Investments, an affiliate of
Smith Kline Beecham, from 1991 to 1996.
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<PAGE> 14
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. The Company also leases approximately 6,000 square feet of
office space located at 78 Fourth Avenue, Waltham, Massachusetts under a
sublease that will expire in July 2000.
In October 1998, the Company entered into a synthetic lease transaction
under which the lessor has agreed to fund up to an aggregate of $25.0 million
for the purchase of a new building to serve as the Company's new headquarters
and for the costs associated with the build-out of this facility. The Company
will serve as construction agent for the lessor and intends to build-out
approximately 67,000 square feet of laboratory and office space. Upon completion
of the build-out, the Company intends to move all of its operations into the new
facility and sublease the facility located at Nine Fourth Avenue. The lease term
commenced on October 21, 1998, and will continue for seven years thereafter. The
Company has the option to purchase the building and improvements during the
lease term and at the end of the lease (see Note 14 to the Notes to Financial
Statements).
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 Stock Market(R) 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 Company's Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
1997
<S> <C> <C>
First Quarter $27 $18 1/4
Second Quarter 23 15 3/4
Third Quarter. 27 17 1/2
Fourth Quarter 32 24
1998
First Quarter 29 7/8 25 5/8
Second Quarter 27 1/16 18 5/8
Third Quarter. 24 3/4 14 5/8
Fourth Quarter 27 3/8 16 1/4
</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 10, 1999, there were approximately 160 holders of record and
3,990 beneficial holders of the Company's Common Stock.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December 31,
1998 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,
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
<S> <C> <C> <C> <C> <C>
License fee and research revenue............... $ 3,000 $ 750 $ 1,244 $ 1,000 $ 25,000
Collaborative Joint Venture project reimbursement - - - 9,196 7,658
Research grant................................. - 157 419 289 -
------- ------- -------- -------- --------
Total revenue................................ 3,000 907 1,663 10,485 32,658
Costs and Expenses:
Research and development....................... 3,655 6,504 21,755 22,251 27,904
Collaborative Joint Venture project costs...... - - - 9,196 7,658
------- ------- -------- -------- --------
Total research and development............... 3,655 6,504 21,755 31,447 35,562
General and administrative..................... 1,280 1,873 2,924 4,089 5,583
Other, nonrecurring............................ - - 230 - -
------- ------- -------- -------- --------
Total costs and expenses..................... 4,935 8,377 24,909 35,536 41,145
------- ------- -------- -------- --------
Loss from operations............................. (1,935) (7,470) (23,246) (25,051) (8,487)
Interest income.................................. 303 684 3,343 3,095 5,069
Interest expense................................. (51) (99) (75) (218) (613)
Equity in loss of Joint Venture.................. - - - (2,310) (7,536)
------- ------- -------- --------- --------
Net loss......................................... $(1,683) $(6,885) $(19,978) $(24,484) (11,567)
======= ======= ======== ======== ========
Net loss per common share and per common share
assuming dilution............................. $ (0.27) $ (0.85) $ (1.60) $ (1.80) $ (0.72)
======= ======= ======== ======== ========
Shares used in computing net loss per common
share and per common share assuming dilution... 6,139 8,109 12,513 13,592 16,023
DECEMBER 31,
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities.................................... $13,953 $33,175 $73,425 $ 52,623 $ 104,952
Working capital................................. 12,665 31,824 72,461 49,099 110,821
Total assets.................................... 16,111 35,993 78,068 67,118 133,445
Long term obligations, less current portion..... 671 420 124 6,923 5,206
Stockholders' equity............................ 13,979 33,650 75,056 53,418 120,020
</TABLE>
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Since inception, the Company has devoted substantially all of its resources
to its research and product development programs, including the development of
processes to manufacture product candidates. GelTex has not generated
significant revenue 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 $66.5 million at December 31, 1998. Losses have
resulted principally from costs incurred in research and development, and
manufacturing and clinical testing of products and potential products, and from
general and administrative expenses. The Company expects its research and
development expenses to continue to increase in connection with the continuing
development of processes for the manufacture of commercial quantities of
Cholestagel(R) and the expansion of its anti-obesity, infectious diseases and
other research programs. In addition, the Company expects to report continuing
losses from its interest in the Renagel JV through at least the first quarter of
2000. 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 successful commercialization of
Renagel, the ability to obtain regulatory approval for Cholestagel, 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
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 1998, 1997 and 1996
The Company earned total revenue of $32.7 million in 1998, compared to $10.5
million earned in 1997 and $1.7 million earned during 1996. Included in 1998
revenue is a $25.0 million milestone fee earned on October 30, 1998, when the
Company received FDA marketing approval for Renagel. Under the terms of the
agreement establishing the Renagel JV, the Company received $15.0 million of
this milestone from Genzyme in 1998 and will receive the remaining $10.0 million
on October 30, 1999. The agreement also provides that the Company and Genzyme
are each expected to fund the Renagel JV 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 JV for 100% of the costs incurred. During 1998 and 1997, the Company
earned $7.6 million and $9.2 million, respectively, in reimbursement revenue
from the Renagel JV 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 JV. In 1997, the Company's other sources
of revenue consisted of a $1.0 million milestone payment from a corporate
partner and approximately $290,000 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.
The Company's total operating expenses for 1998 were $41.1 million, compared
to $35.5 million in 1997 and $24.9 million in 1996. Research and development
expenses increased 13% to $35.6 million in 1998 from the $31.4 million incurred
in 1997, which was a 44% increase over the $21.8 million incurred in 1996. The
increase during 1998 was due primarily to increased clinical trial and process
development costs for Cholestagel, as well as increased personnel and related
research and development costs associated with the Company's anti-obesity and
infectious diseases programs. 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. Also
contributing to the increased spending in 1997 was an increase in clinical trial
expense
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<PAGE> 17
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 diseases programs. General and
administrative expenses increased approximately 37% to $5.6 million in 1998 from
$4.1 million in 1997 and $2.9 million in 1996, due primarily to increased
business development costs and increased administrative personnel and related
costs.
The Company's equity in the loss of the Renagel JV was $7.5 million in 1998
compared to $2.3 million for 1997. There was no corresponding amount in 1996.
The increase in 1998 was primarily a result of the increase in marketing and
sales costs associated with the commercial launch of Renagel in November 1998,
offset by approximately $266,000 in sales. The Company expects that the Renagel
JV will continue to operate at a loss at least through the first quarter of
2000. Interest income increased to $5.1 million from $3.1 million in 1997
because of a significantly higher average balance of available cash to invest
due to the infusion of $76 million from the March 1998 public offering of common
stock. Interest income in 1997 was slightly lower than interest income of $3.3
million in 1996 due to a decrease in cash available for investment during 1997.
Liquidity and Capital Resources
On March 24, 1998, the Company received $76 million in net proceeds from a
public offering of 3,000,000 shares of its common stock. The Company financed
its operations through December 31, 1998, primarily with a total of $163.3
million in net proceeds from three public offerings of equity securities, $20.3
million from private sales of equity securities, $48.1 million consisting of
license fees and milestone payments earned in connection with its collaborative
relationships and Renagel JV project reimbursement and $12.5 million in interest
income. Cash, cash equivalents and marketable securities were $104.9 million at
December 31, 1998, compared to $52.6 million at December 31, 1997.
In order to establish the Renagel JV, the Company formed RenaGel LLC in June
1997, as the sole initial member and licensed all of its rights to Renagel
Capsules (outside of Japan and certain Pacific Rim countries) to the Renagel JV.
Immediately thereafter, the Company transferred 50% of its interest in the
Renagel JV to Genzyme and Genzyme agreed to pay the Company $25.0 million,
consisting of a $15.0 million non-refundable payment which was paid in 1998 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 JV 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, 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 JV, Genzyme also purchased 100,000
shares of GelTex Common Stock in 1997 for $2.5 million in cash.
In April 1997, the Company entered into a Contract Manufacturing Agreement
with The Dow Chemical Company for Renagel Capsules. In 1998, the Company elected
to incur $2.75 million in additional equipment costs to increase capacity at
Dow's existing plant. In 1998, $350,000 of these costs was paid, and the Company
expects the remainder will come due in 1999. The Contract Manufacturing
Agreement also requires the Company to purchase minimum quantities of product.
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. In 1999, the Company entered into a Manufacturing
Services Agreement with Dow to evaluate certain commercially available
technology which may be utilized in the next generation plant and to begin
initial design and engineering of the plant. The Company is obligated to pay
$1.35 million for these services, of which $250,000 was paid in 1998, and the
remainder is expected to come due in 1999. The Company expects that it will
exercise its right under the agreement to fund additional engineering and design
work in order to receive price and quantity commitments from Dow. The Company
expects the additional costs will be approximately $750,000.
The Renagel JV entered into a Contract Manufacturing Agreement effective
January 1998 with Genzyme which provides for Genzyme to serve as a second source
of supply for Renagel. This agreement requires the Renagel JV to satisfy minimum
purchase obligations beginning in 1999, provided that
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<PAGE> 18
Genzyme's facility has received regulatory approval.
All of the above-referenced costs and minimum purchase obligation arising
under the manufacturing agreements with Dow and Genzyme will be a portion of the
costs associated with the Renagel JV and, to the extent that each company is
funding 50% of the budgeted costs and expenses of the Renagel JV, these costs
and expenses will be borne equally by the Company and Genzyme Corporation.
In February 1999, the Company entered into a Pilot Plant Validation
Agreement with a contract manufacturer in Austria in connection with the
manufacture of Cholestagel. The Company is obligated under the terms of the
agreement, including certain product acceptance provisions, to pay approximately
47.9 million Austrian schillings (approximately $4.1 million as of December 31,
1998) in 1999. Payments made as of December 31, 1998 under the terms of the
arrangement were approximately $1.0 million. The Company utilizes foreign
exchange contracts as hedges against exposure in the exchange rates associated
with these obligations.
On October 21, 1998, the Company entered into a synthetic lease transaction
under which the lessor has agreed to fund up to an aggregate of $25.0 million
for the purchase of a new building to serve as the Company's next headquarters
and for the costs associated with the build-out of this facility. The synthetic
lease is asset-based financing structured to be treated as an operating lease
for accounting purposes. The Company will serve as construction agent for the
lessor. The lease term commenced on October 21, 1998, and will continue for
seven years thereafter. During the construction phase, which is expected to
continue through October 1999, rent payments will be capitalized and added to
the principal amount funded by the lessor. Thereafter, the Company will pay rent
on a monthly basis, the amount of which will be based upon the total amount
funded by the lessor and the application of a variable interest rate. The
Company currently expects that the rent will be approximately $2.0 million a
year. During the term of the lease, the Company has the option to purchase the
building and the improvements for a purchase price equal to the total amount
funded by lessor, plus any accrued and unpaid rent and certain other costs
outlined in the agreements (the "Purchase Price"). At the end of the lease term,
the Company has the option to (i) purchase the building and the improvements for
the Purchase Price, (ii) arrange for the facility to be purchased by a third
party, or (iii) return the building and improvements to the lessor; provided,
however, in the case of options (ii) and (iii), the Company is contingently
liable to the extent the lessor is not able to realize 85% of the Purchase Price
upon the sale or other disposition of the property. At December 31, 1998, the
lessor's total accumulated cost for the land and the partial build-out of the
facility was approximately $11.3 million.
In May 1997, the Company entered into a $5 million term loan to finance
build-out costs of its present facility. This loan was increased by $3 million
in October 1997 to finance capital equipment costs associated with its Contract
Manufacturing Agreement for Renagel. In June 1998, these two instruments were
consolidated and the terms were modified such that the consolidated loan is
payable in quarterly installments through June 30, 2002, with a final payment of
$1.2 million due on September 30, 2002. At December 31, 1998, the outstanding
principal balance on this debt was $6.7 million.
The Company leases its present facility under a ten-year agreement expiring
in February 2007. This lease requires annual payments of $302,000 until March
2002, and $353,000 for the remainder of the term. The Company intends to
sublease this facility upon completion of the build-out of its new facility,
which is anticipated to occur in October 1999. The Company continues to lease a
prior facility under an agreement expiring in 2004. The prior facility has been
sublet under an agreement expiring in 2000.
At December 31, 1998, the Company had net operating loss carryforwards for
income tax purposes of approximately $65.4 million which expire through 2018.
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 may be subject to limitation under the changes in stock
ownership rules of the Internal Revenue Code of 1986, as amended. Because of
this potential 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
2001. However, the Company's cash requirements may
18
<PAGE> 19
increase materially from those now planned if Renagel is not commercially
successful, or because of results of the Company's research and development
efforts, 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.
Year 2000
The Year 2000 problem is a result of software programs being written using
two digits rather than four to define the applicable year. The Company
recognizes the risk that its information technology ("IT") systems and other
systems such as telephones, building access control systems and heating and
ventilation equipment ("embedded systems") may have date-sensitive software or
embedded chips that may recognize a date using "00" as the year 1900 rather than
the year 2000. This error could result in system failure or miscalculations
causing disruptions to the Company's research and development, financial,
administration and communication operations. The Company also has business
relationships with third parties that are themselves reliant on IT and embedded
systems to conduct their businesses. The Company recognizes the need to ensure
its operations will not be adversely impacted by Year 2000 software and hardware
failure both internally and from third parties with which the Company has an
important relationship.
In 1998, the Company developed a plan to ensure that its systems would be
Year 2000 compliant. The plan consists of four phases: (1)
assessment--identifying all IT systems that use date functions and assessing
Year 2000 functionality and compliance, (2) remediation-- reprogramming or
replacing inventoried items to ensure Year 2000 compliance, (3) testing--
testing the code modifications or new inventory with other associated systems,
including date testing and quality assurance to ensure successful operation in
the post-1999 environment, and (4) implementation--returning all remediated and
successfully tested items back into normal operation. This plan encompasses IT
and embedded systems, as well as third party exposure.
The Company's State of Readiness
As of December 31, 1998, the Company has completed all four phases of the
plan for its IT systems and has concluded that its IT systems are Year 2000
compliant. The assessment phase for the embedded systems is complete. The
assessment indicated that certain systems are not Year 2000 compliant. The
Company will complete the remaining three phases of testing for these
non-compliant systems by December 1999. The cost of remediating these
non-compliant systems will be approximately $100,000 and will be funded from
available cash.
Third Parties and Their Exposure to Year 2000
The Company has initiated formal communications with all significant third
parties, primarily, clinical trial sites, contract research organizations and
contract manufacturers. The Company has requested and has received from a
majority of these third parties, written statements regarding their knowledge of
and plans for being Year 2000 compliant. The Company has one direct system
interface with a third party and has received verification that the system
interface is Year 2000 compliant.
Contingency Plans
The Company has not yet developed a comprehensive contingency plan to
address situations that may result if the Company or any of the third parties
upon which the Company is dependent are unable to achieve Year 2000 readiness.
However, the Company's Year 2000 compliance program is ongoing and its scope,
including the development of contingency plans for the most reasonably likely
worst case scenario, will continue to be evaluated.
Risks
The Company's management believes it has an effective plan in place to
mitigate the risks of the Year
19
<PAGE> 20
2000 issue in a timely manner. However, as noted above, the Company has not yet
completed all necessary phases of its Year 2000 plan. In the event that the
Company is not able to complete the necessary phases, the Company could
experience business interruptions. In addition, the inability of a third party
upon which the Company is dependent to complete its Year 2000 compliance program
in a timely manner, as well as disruptions in the general economy resulting from
the Year 2000 issue could have a material adverse impact on the Company's
results of operations, liquidity or financial position.
Factors Affecting Future Operating Results
Except for historical information contained herein, the discussion in this
section, as well as elsewhere in this Annual Report, contains forward-looking
statements including, without limitation, statements regarding the timing,
sufficiency, and results of clinical trials, the establishment of corporate
partnering agreements, the timing of the Company's cash requirements and the
potential applications of the Company's technology. These statements 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 above. 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. The Company undertakes no obligation to
publicly announce the result of any revisions to these forward-looking
statements which may be made to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events.
Minimal Product Sales to Date; Risks Related to Lead Product and Potential
Products
As of December 31, 1998, the Renagel JV has generated minimal revenue from
product sales in the amount of approximately $266,000. The Company has not
generated any other revenue from product sales. Although the FDA has granted
marketing approval for Renagel Capsules, no assurance can be given that the
product will receive market acceptance and meet sales expectations. Renagel is
currently undergoing regulatory review in Europe and Canada. No assurance can be
given that the product will be approved by the regulatory authorities in those
territories or, if approved, will be successfully marketed by Genzyme. The
Company recently completed two Phase 3 clinical trials of Cholestagel. In
December 1998, the Company initiated two Phase 2 clinical trials designed to
evaluate the efficacy of Cholestagel in combination with low doses of two widely
prescribed HMG-CoA reductase inhibitors, commonly referred to as "statins". The
Company expects that the results of the Phase 3 pivotal trials and the results
of the combination studies will form the basis for the filing of a new drug
application for Cholestagel in mid-1999. There can be no assurance that the
results of any of the Company's clinical trials will be sufficient to meet the
FDA's requirements for product approval. 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.
Dependence on Corporate Alliances; Limited Relevant Sales and Marketing
Experience
The Company has entered into the Renagel JV with Genzyme relating to the
final development and commercialization of Renagel Capsules and intends to enter
into development and marketing agreements for the continued development and
commercialization of Cholestagel and the Company's second generation bile acid
sequestrant. 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 has built
its own specialty sales force to sell 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.
20
<PAGE> 21
Dependence on Others for Manufacturing; Single Sources of Supply; Process
Development Risks
The Company and the Renagel JV will continue to 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 two suppliers and is purchasing quantities of this
material from one supplier under purchase orders issued to this supplier. The
Company has entered into a long-term fixed price supply agreement with The Dow
Chemical Company, its first supplier of Renagel bulk material. Additionally, the
Renagel JV has entered into a long-term fixed price supply agreement with
Genzyme Corporation to manufacture Renagel bulk material. The Company has not
concluded a commercial supply agreement with the manufacturer of Cholestagel
bulk material. The Company has negotiated a long-term fixed price service
agreement with one encapsulator to formulate Renagel 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 or the Renagel JV's
requirements for starting material, bulk material or finished goods, the Company
or the Renagel JV 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 or the Renagel JV will be
successful in obtaining additional sources for any of the products or services
described above or 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 to increase capacities and efficiencies for the commercial
production of 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 diseases 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item is incorporated by reference from the
discussion under the heading Financial Instruments in the Notes to the Financial
Statements included in this Annual Report on Form 10-K.
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.
21
<PAGE> 22
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, 1999 (the "1999 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 1999 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 1999 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 1999 Proxy Statement.
22
<PAGE> 23
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:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors...................... F-2
Balance Sheets as of December 31, 1998 and 1997..... F-3
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............... F-4
Statements of Changes in Stockholders' Equity for
the years ended December 31, 1998, 1997 and
1996........................................... F-5
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............... F-6
Notes to Financial Statements....................... F-7
</TABLE>
(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,
1998.
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 22, 1999 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, 1998, 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mark Skaletsky Director , President and Chief March 22, 1999
---------------------- Executive Officer
Mark Skaletsky (Principal Executive Officer)
/s/ Paul Mellett Vice President, Administration and March 22, 1999
---------------------- Finance (Principal Financial and
Paul Mellett Accounting Officer)
/s/ Robert Carpenter Chairman of the Board March 22, 1999
---------------------- and Director
Robert Carpenter
/s/ J. Richard Crout Director March 22, 1999
----------------------
J. Richard Crout
/s/ Henri Termeer Director March 22, 1999
----------------------
Henri Termeer
/s/ Jesse Treu Director March 22, 1999
----------------------
Jesse Treu
</TABLE>
24
<PAGE> 25
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.......................................................... F-2
Balance Sheets as of December 31, 1998 and 1997......................................... F-3
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996................................................... F-4
Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996............................................. F-5
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996................................................... F-6
Notes to Financial Statements........................................................... F-7
</TABLE>
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, 1998 and 1997, 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, 1998. 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. The financial
statements of RenaGel LLC (a limited liability company in which the Company has
a 50% interest) as of and for the year ended December 31, 1998, have been
audited by other auditors whose report has been furnished to us; insofar as our
opinion on the consolidated financial statements relates to data included for
RenaGel LLC, it is based solely on their report.
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, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of GelTex Pharmaceuticals, Inc. at December 31, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
February 23, 1999
F-2
<PAGE> 27
GELTEX PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 30,874,900 $ 26,689,190
Marketable securities ................................. 74,077,436 25,933,722
Prepaid expenses and other current assets ............. 2,708,487 1,428,793
Due from affiliates ................................... 10,251,100 --
Due from Joint Venture ................................ 1,128,124 1,823,877
------------ ------------
Total current assets ....................................... 119,040,047 55,875,582
Long-term receivables, affiliates .......................... 470,000 --
Long-term receivables ...................................... 32,725 27,000
Property and equipment, net ................................ 7,899,470 7,659,328
Intangible assets, net ..................................... 818,963 466,673
Investment in Joint Venture ................................ 5,183,580 3,089,196
------------ ------------
$133,444,785 $ 67,117,779
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................. $ 4,848,728 $ 4,827,752
Due to Joint Venture .................................. 1,349,400 --
Current portion of long-term obligations .............. 2,020,614 1,949,053
------------ ------------
Total current liabilities .................................. 8,218,742 6,776,805
Long-term obligations, less current portion ................ 5,206,180 6,922,666
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 shares
authorized; 16,792,444 and 13,642,264 shares
issued and outstanding at December 31, 1998 and
1997, respectively................................. 167,924 136,423
Additional paid-in capital ............................ 186,762,715 108,658,239
Deferred compensation ................................. (663,722) (509,632)
Accumulated other comprehensive income ................ 264,388 77,402
Accumulated deficit ................................... (66,511,442) (54,944,124)
------------ ------------
Total stockholders' equity ................................. 120,019,863 53,418,308
------------ ------------
$133,444,785 $ 67,117,779
============ ============
</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,
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
License fee and research revenue ........ $ 25,000,000 $ 1,000,010 $ 1,244,474
Collaborative Joint Venture project
Reimbursement ......................... 7,658,232 9,195,727 --
Research grant .......................... -- 289,254 418,541
------------ ------------ ------------
Total revenue ................................ 32,658,232 10,484,991 1,663,015
COSTS AND EXPENSES:
Research and development ................ 27,904,064 22,251,062 21,755,298
Collaborative Joint Venture project
costs ................................. 7,658,232 9,195,727 --
------------ ------------ ------------
Total research and development ..... 35,562,296 31,446,789 21,755,298
General and administrative .............. 5,583,361 4,089,467 2,923,569
Other, nonrecurring costs ............... -- -- 230,000
------------ ------------ ------------
Total costs and expenses ..................... 41,145,657 35,536,256 24,908,867
------------ ------------ ------------
Loss from operations ......................... (8,487,425) (25,051,265) (23,245,852)
Equity in loss of Joint Venture .............. (7,535,630) (2,310,345) --
Interest income .............................. 5,069,250 3,094,874 3,342,723
Interest expense ............................. (613,513) (217,142) (75,015)
------------ ------------ ------------
Net loss ..................................... $(11,567,318) $(24,483,878) $(19,978,144)
============ ============ ============
Net loss per common share and common share
assuming dilution .......................... $ (0.72) $ (1.80) $ (1.60)
============ ============ ============
Shares used in computing net loss per common
share and common share assuming dilution ... 16,023,000 13,592,000 12,513,000
</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>
COMMON
STOCK ADDITIONAL DEFERRED ACCUMULATED
SHARES AMOUNTS PAID-IN-CAPITAL COMPENSATION DEFICIT
----------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ................... 10,535,065 $ 105,350 $ 44,000,986 $ (55,825) $(10,482,102)
Comprehensive income:
Net Loss ................................... (19,978,144)
Other comprehensive loss, unrealized loss
on available for sale securities ...........
Comprehensive income .........................
Issuance of Common Stock under stock ......... 103,837 1,039 152,868
Option plan and exercise of
warrants ...................................
Issuance of Common Stock under
employee Stock purchase plan ............... 7,400 74 113,919
Deferred compensation associated with stock
Option grants ..............................
Amortization of deferred compensation ........ 9,696
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 -- --
----------- ------------ ------------ ----------- ------------
Balance at December 31, 1996 ................. 13,521,302 135,213 105,407,670 (46,129) (30,460,246)
Comprehensive income:
Net Loss ................................... (24,483,878)
Other comprehensive income, unrealized
gain on available for sale securities ......
Comprehensive income .........................
Issuance of common stock under stock option
plan and exercise of warrants .............. 16,758 168 89,265
Issuance of stock to Joint
Venture partner ............................ 100,000 1,000 2,495,678
Issuance of stock under employee stock
Purchase plan .............................. 4,204 42 71,426
Deferred compensation associated with stock
option grants .............................. 594,200 (594,200)
Amortization of deferred
compensation ............................... -- -- -- 130,697 --
----------- ------------ ------------ ----------- ------------
Balance at December 31, 1997 ................. 13,642,264 136,423 108,658,239 (509,632) (54,944,124)
Comprehensive income:
Net Loss ................................... (11,567,318)
Other comprehensive income, unrealized
gain on available for sale securities ......
Comprehensive income .........................
Issuance of common stock under stock
option plan and exercise of warrants ....... 130,549 1,305 1,033,150
Issuance of common stock under employee
stock purchase plan ........................ 19,631 196 317,527
Deferred compensation associated with stock
option grants .............................. 1,024,190 (1,024,190)
Amortization of deferred compensation ........ 870,100
Issuance of common stock through a follow-
on Public Offering, net of offering costs of
$5,240,391 ................................. 3,000,000 30,000 75,729,609 -- --
----------- ------------ ------------ ----------- ------------
Balance of December 31, 1998 ................. 16,792,444 $ 167,924 $186,762,715 $ (663,722) $(66,511,442)
=========== ============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
OTHER STOCK
COMPREHENSIVE -HOLDERS'
INCOME EQUITY
------------- ------------
<S> <C> <C> <C>
Balance at January 1, 1996 ................... $ 81,590 $ 33,649,999
Comprehensive income:
Net Loss ................................... (19,978,144)
Other comprehensive loss, unrealized loss
on available for sale securities ........... (61,623) (61,623)
------------
Comprehensive income ......................... (20,039,767)
------------
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
Deferred compensation associated with stock
Option grants ..............................
Amortization of deferred compensation ........ 9,696
Issuance of Common Stock through a
Secondary Public Offering, net of Offering
costs of $4,237,602 ........................ -- 61,168,647
-------- ------------
Balance at December 31, 1996 ................. 19,967 75,056,475
Comprehensive income:
Net Loss ................................... (24,483,878)
Other comprehensive income, unrealized
gain on available for sale securities ...... 57,435 57,435
------------
Comprehensive income ......................... (24,426,443)
Issuance of common stock under stock option
plan and exercise of warrants .............. 89,433
Issuance of stock to Joint
Venture partner ............................ 2,496,678
Issuance of stock under employee stock
Purchase plan .............................. 71,468
Deferred compensation associated with stock
option grants .............................. --
Amortization of deferred
compensation ............................... -- 130,697
-------- ------------
Balance at December 31, 1997 ................. 77,402 53,418,308
Comprehensive income:
Net Loss ................................... (11,567,318)
Other comprehensive income, unrealized
gain on available for sale securities ...... 186,986 186,986
------------
Comprehensive income ......................... (11,380,332)
Issuance of common stock under stock
option plan and exercise of warrants ....... 1,034,455
Issuance of common stock under employee
stock purchase plan ........................ 317,723
Deferred compensation associated with stock
option grants .............................. --
Amortization of deferred compensation ........ 870,100
Issuance of common stock through a follow-
on Public Offering, net of offering costs of
$5,240,391 ................................. -- 75,759,609
-------- ------------
Balance of December 31, 1998 ................. $264,388 $120,019,863
======== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 30
GELTEX PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ............................................ $ (11,567,318) $(24,483,878) $(19,978,144)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization .................. 1,536,564 1,193,394 745,805
Equity in net loss of Joint Venture ............ 7,535,630 2,310,345 --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets . (1,279,694) 495,085 (1,351,014)
Due from affiliates ....................... (10,251,100) -- --
Due from Joint Venture .................... 695,753 (1,823,877) --
Long term receivables, affiliates ......... (470,000) -- --
Long term receivables ..................... (5,725) (7,000) --
Accounts payable and accrued expenses ..... 20,976 2,331,883 1,107,453
Amount due to Joint Venture ............... 1,349,400 -- --
------------- ------------ ------------
Net cash used in operating activities ............... (12,435,514) (19,984,048) (19,475,900)
INVESTING ACTIVITIES
Purchase of marketable securities ................... (212,710,698) (26,388,812) (89,360,425)
Proceeds from sale and maturities of marketable
securities ........................................ 165,624,065 53,135,619 57,670,818
Investment in Joint Venture ......................... (9,630,014) (5,399,541) --
Purchase of intangible assets ....................... (592,790) (259,904) (327,829)
Purchase of property and equipment, net ............. (1,536,206) (6,228,763) (882,998)
------------- ------------ ------------
Net cash provided by (used in) investing activities . (58,845,643) 14,858,599 (32,900,434)
FINANCING ACTIVITIES
Sale of Common Stock and warrants, net of issuance
costs ............................................. 76,794,069 2,586,111 61,322,554
Proceeds from employee stock purchase plan .......... 317,723 71,468 113,993
Proceeds from financing of assets ................... -- 8,782,495 --
Payments on notes payable ........................... (1,644,925) (426,900) (438,736)
------------- ------------ ------------
Net cash provided by financing activities ........... 75,466,867 11,013,174 60,997,811
Increase in cash and cash equivalents ............... 4,185,710 5,887,725 8,621,477
Cash and cash equivalents at beginning of year ...... 26,689,190 20,801,465 12,179,988
------------- ------------ ------------
Cash and cash equivalents at end of year ............ $ 30,874,900 $ 26,689,190 $ 20,801,465
============= ============ ============
Interest paid ....................................... $ 613,513 $ 217,142 $ 75,015
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 31
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS
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. In 1998, the
Company received marketing approval from the United States Food and Drug
Administration for its lead product, Renagel(R) Capsules (sevelamer
hydrocholoride). Commercial sales of Renagel commenced in November 1998 through
a Joint Venture with Genzyme Corporation (see Note 3). Additionally, throughout
1998, the Company continued its product development efforts focusing on
therapeutic agents for the treatment of hypercholesterolemia (elevated LDL
cholesterol levels), obesity and infectious diseases.
2. SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption had no impact on the Company's net income
or stockholders' equity. The Statement requires unrealized gains or losses on
the Company's available-for-sale securities which, prior to adoption, were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of the Statement.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Statement superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise." Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. The Statement also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Under this Statement, the Company's operations are treated as one operating
segment as it only reports profit and loss information on an aggregate basis to
the chief operating decision-makers of the Company. The adoption of the
Statement did not affect the Company's results of operations or its financial
position.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pensions and Other Post-retirement
Benefits," which is required to be adopted for fiscal years beginning after
December 15, 1997. The Statement amends FASB Statement Nos. 87, 88 and 106 in
that it revises employers' disclosures about pension and post-retirement benefit
plans. Adoption of this standard had no effect on the Company's results of
operations or its financial position.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 1999. The Statement requires
that all derivative instruments be recorded on the balance sheet at their fair
market value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, then the
type of hedge transaction. Management of the Company anticipates that, due to
its limited use of derivative instruments, the adoption of this Statement will
not have a significant effect on the Company's results of operations or its
financial position.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting the
Costs of Start-Up Activities." The Statement is effective beginning on January
1, 1999, and requires that start-up costs capitalized prior to January 1, 1999,
be written off and any future start-up costs to be expensed as incurred.
Adoption of this Statement will not have a significant effect on the Company's
results of operations or its financial position.
F-7
<PAGE> 32
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 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 Accumulated Other
Comprehensive Income. 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. 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, as 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. 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, 1998 and 1997 was $774,026 and $533,526,
respectively.
F-8
<PAGE> 33
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.
EARNINGS PER COMMON AND POTENTIAL COMMON SHARE
The Company accounts for earnings per share in accordance with the
provisions of the Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share." Basic earnings per share excludes any dilutive effect of
options, warrants or convertible securities. Due to its loss position, diluted
earnings per share is the same amount as basic earnings per share. Options to
purchase 2,023,006 shares of common stock at $.125 - $30.75 per share were
outstanding at December 31, 1998.
FINANCIAL INSTRUMENTS
The Company utilizes foreign exchange forward contracts as hedges against
exposure to fluctuations in exchange rates associated with certain commitments
denominated in foreign currencies (see Note 4). Gains and losses are deferred
and recognized as adjustments of carrying amounts when the hedged transaction
occurs. As of December 31, 1998, the Company had $1.4 million of foreign
exchange contracts outstanding. Deferred gains or losses at December 31, 1998
are not material as the contracts' fair market value approximates its notional
value.
In order to mitigate the impact of fluctuations in U.S. interest rates, the
Company entered into an interest rate swap in June 1998 on an outstanding
long-term obligation (see Note 11). The Company swapped its variable rate of
interest, LIBOR plus 1.55%, for a fixed rate of interest of 7.49%. Net interest
payable or receivable is determined on a quarterly basis and is insignificant at
December 31, 1998.
The Company does not hold or issue derivative financial instruments for
trading purposes.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents, short-term instruments and
financial instruments used in hedging activities.
The Company places its temporary cash investments with high credit quality
financial institutions and in high quality commercial paper and, by policy,
limits the amount of credit exposure with any one financial institution. The
counterparty to the agreements relating to the Company's foreign exchange
commitments is a high credit quality financial institution. The Company does not
believe that there is a significant risk of nonperformance by this counterparty.
3. JOINT VENTURE AGREEMENT
Formation of the Joint Venture
In June 1997, the Company entered into a joint venture with Genzyme
Corporation for the final development and commercialization of Renagel(R)
Capsules (the "Joint Venture"). Under the agreement, Genzyme paid the Company a
$15.0 million non-refundable payment in 1998 upon receipt of marketing approval
from the FDA, and will make an additional $10.0 million non-refundable payment
one year after FDA approval in October 1999. This $10.0 million non-refundable
payment is included in Due from affiliates as of December 31, 1998. The terms of
the Joint Venture require the Company and Genzyme to each make capital
contributions to the 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.
F-9
<PAGE> 34
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. JOINT VENTURE AGREEMENT (CONTINUED)
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. 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, 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. As
of December 31, 1998, Genzyme and the Company had contributed $15,029,401 and
$13,680,001, respectively, to the Joint Venture through periodic contributions.
As of December 31, 1998, $1,349,400 was owed to the Joint Venture by the
Company. The Company recorded this amount as a current liability. The Joint
Venture has recorded this amount as a contra equity account.
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 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 receipt of FDA approval to market Renagel. 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 $10.0 million that is
due one year after FDA marketing approval.
F-10
<PAGE> 35
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. JOINT VENTURE AGREEMENT (CONTINUED)
Summarized financial information regarding the Joint Venture as of, and
for the year ended, December 31, 1998 is as follows:
<TABLE>
<S> <C>
Revenues.......................................................... $ 265,820
Cost of products sold............................................. 113,352
Selling, general and administrative expenses...................... 6,493,358
Research and development expenses................................. 8,778,651
Interest income................................................... 22,058
-----------
Net loss.......................................................... 15,097,483
Current assets.................................................... 9,930,565
Non-current assets................................................ 7,208,522
Current liabilities............................................... 8,147,893
Non-current liabilities........................................... 0
</TABLE>
Summarized financial information regarding the Joint Venture as of, and
for year ended, December 31, 1997 is as follows:
<TABLE>
<S> <C>
Revenues.......................................................... $ 0
Research and 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 AGREEMENTS
RENAGEL
In April 1997, the Company entered into a Contract Manufacturing Agreement
with The Dow Chemical Company for Renagel Capsules. In 1998, the Company elected
to incur $2.75 million in additional equipment costs to increase capacity at
Dow's existing plant, of which $350,000 was paid in 1998, and the Company
expects the remainder will come due in 1999. The Contract Manufacturing
Agreement also requires the Company to purchase minimum quantities of product.
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. In 1999, the Company entered into a Manufacturing
Services Agreement with Dow to evaluate certain commercially available
technology which may be utilized in the next generation plant and to begin
initial design and engineering of the plant. The Company is obligated to pay
$1.35 million for these services, and has made $250,000 of payments under this
obligation. The remainder is expected to come due in 1999. The Company expects
that it will exercise its right under the agreement to fund additional
engineering and design work in order to receive price and quantity commitments
from Dow. The Company expects the additional cost will be approximately
$750,000.
All of the above-referenced capital equipment costs and the minimum purchase
obligations 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 Joint Venture, these costs and expenses will be borne equally by the Company
and Genzyme Corporation.
F-11
<PAGE> 36
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. MANUFACTURING AGREEMENTS (CONTINUED)
CHOLESTAGEL
In February 1999, the Company entered into a Pilot Plant Validation
Agreement with a contract manufacturer in Austria. The Company is obligated
under the terms of the agreement, including certain product acceptance
provisions, to pay approximately 47.9 million Austrian schillings (approximately
$4.1 million as of December 31, 1998) in 1999. Payments made as of December 31,
1998 under the terms of the arrangement were approximately $1.0 million. As
described in Note 2, the Company utilizes foreign exchange contracts as hedges
against exposure in the exchange rates associated with these obligations.
5. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities:
DECEMBER 31, 1998:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Corporate Securities . $70,372,614 $238,388 $(13,923) $ 70,597,079
U.S. Government Obligations 16,967,112 39,922 -- 17,007,034
Money Market Accounts ..... 12,417,649 -- -- 12,417,649
----------- -------- -------- ------------
Total ..................... $99,757,375 $278,310 $(13,923) $100,021,762
=========== ======== ======== ============
</TABLE>
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>
The fair value of available-for-sale securities is determined using the
published closing prices of these securities as of December 31, 1998 and 1997.
These securities are classified at their estimated fair value in the
accompanying balance sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash equivalents.................................... $ 25,944,326 $23,661,310
Marketable securities............................... 74,077,436 25,933,722
------------ -----------
$100,021,762 $49,595,032
============ ===========
</TABLE>
The cost and estimated fair value of available-for-sale debt securities,
which excludes money market accounts, at December 31, 1998, by contractual
maturity, are shown below.
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less............................. $50,363,748 $50,463,641
Due after one year through two years................ 36,975,978 37,140,472
----------- -----------
$87,339,726 $87,604,113
=========== ===========
</TABLE>
F-12
<PAGE> 37
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accounts payable and accrued expenses consist of the following at December 31:
1998 1997
---------- ----------
<S> <C> <C>
Accounts payable........................................................... $3,698,102 $3,404,322
Accrued research and development expenses.................................. - 466,043
Accrued compensation....................................................... 604,729 467,939
Accrued other.............................................................. 545,897 489,448
---------- ----------
$4,848,728 $4,827,752
========== ==========
</TABLE>
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
At December 31, property and equipment consisted of the following:
1998 1997
----------- ----------
<S> <C> <C>
Leasehold improvements..................................................... $ 7,011,258 $6,971,467
Equipment.................................................................. 4,230,814 2,734,399
----------- ----------
11,242,072 9,705,866
Less accumulated depreciation and amortization............................. 3,342,602 2,046,538
----------- ----------
Property and equipment, net................................................ $ 7,899,470 $7,659,328
=========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
was approximately $1,296,064, $816,000 and $585,000, respectively. Leasehold
improvements of $1,718,986 with accumulated amortization of $1,022,613 were
subject to a sublease arrangement (see Note 14).
8. STOCKHOLDERS' EQUITY
In March 1998, the Company completed a public offering of its common stock,
selling 3,000,000 common shares, with net proceeds to the Company of $75,759,609
after deducting offering costs.
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 offeror 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 (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) 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.
F-13
<PAGE> 38
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998, the Company has reserved 2,750,000 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. 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,
1998, options to purchase 105,000 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.
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
19,631 shares issued under the ESPP at an average price of $16 per share in
1998, 4,204 shares at an average price of $17 per share in 1997, and 7,400
shares at an average price of $16 per share in 1996.
All directors who are not employees of the Company are currently eligible to
participate in the Company's 1995 Director Stock Option Plan ("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 prior to December 15, 1998, 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 $16,242,487, or $1.01 per share,
$25,947,119, or $1.91 per share, and $20,415,636 or $1.63 per share, in 1998,
1997 and 1996, respectively.
The fair value of stock options granted and stock purchase shares issued
during 1998, 1997 and 1996 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 1998, 1997 and 1996: volatility
of 67%, 48% and 60%, respectively, risk-free interest rate of 6%, 6% and 6.2%,
respectively, weighted average expected life (years) of four, and no dividends.
The effects on fiscal 1998, 1997 and 1996 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.
F-14
<PAGE> 39
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. EQUITY INCENTIVE PLANS AND STOCK WARRANTS - CONTINUED
The weighted average per share exercise price of stock options granted,
exercised and canceled during 1998 was $23.38, $8.17 and $16.91, respectively.
The weighted average fair value of stock options granted during 1998 was $9.97
per share. The weighted average fair value of stock purchase shares issued
during 1998 was $4.95 per share.
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 exercise price of the
1,439,479 and 749,229 options outstanding and exercisable as of December 31,
1997, was $21.56 and $17.28, respectively.
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. The weighted average exercise price of the
1,013,781 and 472,813 options outstanding and exercisable as of December 31,
1996, was $17.09 and $14.61, respectively.
A summary of activity in the Plan and the Directors Plan through December
31, 1998 follows:
<TABLE>
<CAPTION>
OPTIONS
AVAILABLE PRICE
FOR AWARD OUTSTANDING PER SHARE
--------- ----------- ---------------
<S> <C> <C> <C>
Balance at January 1, 1996. 162,434 785,200 $ .125--$11.25
Authorized................. 400,000 -- --
Awarded.................... (336,400) 336,400 $ 11.75--$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 -- --
Awarded.................... (560,800) 560,800 $ 17.25--$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
Authorized................. 750,000 -- --
Awarded.................... (800,175) 800,175 $15.375--$29.25
Exercised.................. -- (124,339) $ .125--$24.75
Canceled or repurchased.... 95,809 (92,309) $ .25--$30.75
-------- --------- ---------------
Balance at December 31, 1998 148,264 2,023,006 $ .125--$30.75
</TABLE>
Deferred compensation of $1,024,190 recorded in 1998 represents the fair
value of options to purchase common stock granted to certain non-employees in
return for consulting services and is included in the table above. The related
compensation expense is being amortized ratably over the periods of service.
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 and the weighted average exercise price of options
exercisable under the Plan and the Directors Plan as of December 31, 1998
follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING WEIGHTED-
AVERAGE CONTRACTUAL AVERAGE
PRICE PER OPTIONS EXERCISE LIFE OPTIONS EXERCISE
SHARE OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE
-------------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ .125--$.32 360,589 $ .27 5.54 360,589 $ .27
$ 9.00--$15.00 165,000 $11.70 7.16 157,000 $11.72
$15.01--$24.25 799,435 $20.01 8.33 753,182 $19.83
$24.26--$30.75 697,982 $26.41 9.00 594,959 $26.32
---------- ------ --------- ------
2,023,006 $22.75 1,865,730 $22.44
========== ====== ========= ======
</TABLE>
In November 1998, a warrant to purchase 11,400 shares of the Company's
Common Stock at an exercise price of $2.50 per share was exercised.
10. INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $65,414,000 and research and development tax credit carryforwards
of approximately $5,529,000, which expire through 2018. 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 may be subject
to limitations under the change in stock ownership rules of the Internal Revenue
Service.
The difference between the Company's expected tax provision (benefit), as
computed by applying the U.S. Federal Corporate Tax Rate of 34% to income (loss)
before provision for income taxes and the actual tax is attributable to tax
losses for which the Company has not recognized any tax benefit.
Significant components of the Company's deferred tax assets as of December
31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 26,166,000 $ 21,802,000
Research and development tax credits........................ 5,529,000 3,739,000
Other....................................................... 661,000 506,000
------------ ------------
Total deferred tax assets........................................ 32,356,000 26,047,000
Valuation allowance.................................... (32,029,000) (25,829,000)
------------- ------------
Net deferred tax assets.......................................... 327,000 218,000
Deferred tax liabilities:
Intangible assets and other............................ (327,000) (218,000)
------------- ------------
Total deferred tax liabilities......................... (327,000) (218,000)
------------- ------------
Net deferred tax asset (liability)............................... $ -- $ --
============ ============
</TABLE>
The valuation allowance increased by $6,200,000 and $12,121,000 during 1998
and 1997, respectively, due primarily to the increase in tax credits and net
operating loss carryforwards.
F-16
<PAGE> 41
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG TERM OBLIGATIONS
Long term obligations consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Note payable to a bank bearing interest at LIBOR plus 1.55% (6.86% at
December 31, 1998) payable in quarterly installments commencing
June 30, 1998 through June 30, 2002 with a final payment of
$1,178,571 due on September 30, 2002................................. $ 6,725,206 $ --
Note payable to a bank bearing interest at LIBOR plus 1.75% (7.06% at
December 31, 1998) payable in monthly installments through
December, 2001...................................................... -- 4,990,003
Note payable to a bank bearing interest at prime (7.75% at December 31,
1998) 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 (7.75% at December 31,
1998) payable in monthly installments through December, 2000......... 501,588 757,357
Note payable to a bank................................................. -- 124,359
----------- -----------
7,226,794 8,871,719
Less current portion................................................... (2,020,614) (1,949,053)
----------- -----------
$ 5,206,180 $ 6,922,666
=========== ===========
</TABLE>
In June 1998, the Company consolidated two of its outstanding obligations
and amended the terms of the obligations in the following manner: the initial
outstanding loan repayment schedule was changed from a monthly to a quarterly
payment schedule; the final expiration date of the initial loan was extended to
September 30, 2002, from December 1, 2001, and the interest rate on the
indebtedness was reduced from LIBOR plus 175 basis points to LIBOR plus 155
basis points, which was 6.86% at December 31, 1998. The second loan was modified
in that the interest rate on the indebtedness was changed from the prime rate to
LIBOR plus 155 basis points.
In order to mitigate the impact of fluctuations in U.S. interest rates, the
Company entered into an interest rate swap in June 1998 on its principal note
payable to a bank. The Company swapped its variable rate of interest, LIBOR plus
1.55%, for a fixed rate of interest of 7.49%. Net interest payable or receivable
is determined on a quarterly basis and is insignificant at December 31, 1998.
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.
At December 31, 1998 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, 1998, the maturities of long term obligations are as
follows:
<TABLE>
<S> <C> <C>
1999........................................................... $ 2,020,614
2000........................................................... 1,646,336
2001........................................................... 1,421,952
2002........................................................... 2,137,892
</TABLE>
Management believes that the carrying value of notes payable approximates
fair value at December 31, 1998, given that the interest rates on the Company's
bank debt are based on incremental borrowing rates currently available on loans
with similar terms and maturities.
F-17
<PAGE> 42
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. LICENSE AGREEMENT
In December 1994, the Company entered into a license agreement (the
"Agreement") with a Japanese pharmaceutical company (the "Partner") whereby the
Company granted to the Partner a license to make, use, and sell certain of the
Company's products in certain areas of the world, as defined by the Agreement
(the "Territories"). The Agreement requires the Partner to bear all costs to
develop and commercialize the licensed products in the respective Territories.
In consideration of this Agreement, the Company received a non-refundable
license fee in 1994 and milestone payments in 1996 and 1997. The 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. 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, 1998, 1997 and
1996.
14. COMMITMENTS
On October 21, 1998, the Company entered into a synthetic lease transaction
under which the lessor has committed to fund up to an aggregate of $25.0 million
for the purchase of a new building to serve as the Company's new headquarters
and for the costs associated with the build-out of this facility. The synthetic
lease is asset-based financing structured to be treated as an operating lease
for accounting purposes. The Company will serve as construction agent for the
lessor.
The lease term commenced on October 21, 1998, and will continue for seven
years thereafter. During the construction phase, which is expected to continue
through October 1999, rent payments will be capitalized and added to the
principal amount funded by lessor. Thereafter, the Company will pay rent on a
monthly basis, the amount of which will be based upon the total amount funded by
the lessor and the application of a variable interest rate. During the term of
the lease, the Company has the option to purchase the building and the
improvements for a purchase price equal to the total amount funded by the
lessor, plus any accrued and unpaid rent and certain other costs outlined in the
agreements (the "Purchase Price"). At the end of the lease term, the Company has
the option to (i) purchase the building and the improvements for the Purchase
Price, (ii) arrange for the facility to be purchased by a third party, or (iii)
return the building and improvements to the lessor; provided, however, in the
case of options (ii) and (iii), the Company is contingently liable to the extent
the lessor is not able to realize 85% of the Purchase Price upon the sale or
other disposition of the property. At December 31, 1998, the lessors total
accumulated cost for the land and the partial build-out of the facility was
approximately $11.3 million.
Under the terms of the synthetic lease, 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. The Company was in
compliance with these terms at December 31, 1998.
The Company leases its current offices and research laboratories under an
operating lease with an initial ten-year term and a provision for a five-year
extension. The Company has entered into a sublease arrangement for its prior
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 under these agreements are as follows:
F-18
<PAGE> 43
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS - (CONTINUED)
<TABLE>
<CAPTION>
LEASE SUBLEASE
PAYMENTS PAYMENTS
---------- --------
<S> <C> <C> <C>
1999................................... $ 377,400 $280,140
2000................................... 377,400 256,800
2001................................... 377,400 -
2002................................... 415,200 -
2003................................... 427,800 -
Thereafter............................. 1,184,100 -
---------- --------
Total.................................. $3,159,300 $536,940
========== ========
</TABLE>
The future minimum lease payments relating to the synthetic lease, which are
not included in the table above, will be approximately $2.0 million per year
beginning upon completion of the build-out and continuing for approximately six
years, thereafter.
Rental expense charged to operations was approximately $441,850 in 1998,
$279,600 in 1997 and $76,400 in 1996.
RESEARCH CONTRACTS
The Company routinely contracts with universities, medical centers, contract
research organizations, and other institutions for the conduct of research and
clinical studies on the Company's behalf. These agreements are generally for the
duration of the contracted study and contain provisions that allow the Company
to terminate the study prior to its completion.
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 Specimen certificate for shares of Common Stock of the Company.
Filed as Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (File No. 33-97322) and incorporated herein by reference.
4.2 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.
4.3 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.
4.4 Amended and Restated Facility One Term Note issued to Fleet
National Bank dated as of May 21, 1997. Filed as Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 and incorporated herein by reference.
4.5 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.
4.6 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.
4.9 Second Loan Modification Agreement between the Company and Fleet
National Bank dated as of June 30, 1998 filed as Exhibit 4.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 and incorporated herein by reference.
10.1# Amended and Restated 1992 Equity Incentive Plan filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference.
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.
<PAGE> 45
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* 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.
10.5 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.
10.6 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.
10.7 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.
10.8# 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.
10.9# Form 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.
10.10# Amended and Restated 1995 Director Stock Option Plan. Filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by
reference.
10.11# 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.
10.12 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.
10.13* 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.
10.14* 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.
10.15 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.
10.16* 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.
<PAGE> 46
10.17* 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.
10.18# Letter Agreement between the Company and Paul J. Mellett, Jr.
dated March 11, 1997. Filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ended 1997 and
incorporated herein by reference.
10.19# Letter Agreement between the Company and Edmund J. Sybertz, Jr.
dated November 17, 1997. Filed as Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the year ended 1997 and
incorporated herein by reference.
10.20# Promissory Note in favor of the Company executed by Edmund J.
Sybertz, Jr. on June 30, 1998. Filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998 and incorporated herein by reference.
10.21 Purchase and Sale Agreement between Sodexho USA, Inc. and Service
Supply Corporation and the Company dated as of August 4, 1998.
Filed as Exhibit 10.5 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 and incorporated herein
by reference.
10.22 Agency Agreement by and between First Security Bank, N.A. and the
Company dated October 21, 1998. Filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 and incorporated herein by reference.
10.23 Lease Agreement by and between First Security Bank, N.A. and the
Company dated October 21, 1998. Filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 and incorporated herein by reference.
10.24* Manufacturing and Supply Agreement (United States) between RenaGel
LLC and Circa Pharmaceuticals, Inc. dated as of July 31, 1998.
Filed as Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998.
23.1 Consent of Ernst & Young LLP, independent auditors. Filed
herewith.
23.2 Consent of PricewaterhouseCoopers LLP, independent accountants.
Filed herewith.
24.1 Power of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule. Filed herewith.
99.1 RenaGel LLC Financial Statements For the Year Ended December 31,
1998 and the period June 6, 1997 (date of inception) through
December 31, 1997. Filed herewith.
* Certain confidential material contained in Exhibit 10.4, 10.13,
10.14, 10.16, 10.17 and 10.24 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 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 333-60699, 333-60703, 333-00864, 333-06779, 333-08535) of GelTex
Pharmaceuticals, Inc. of our report dated February 23, 1999 with respect to the
financial statements of GelTex Pharmaceuticals, Inc. included in its Annual
Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Boston, Massachusetts
March 30, 1999
<PAGE> 1
Exhibit 23.2
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statements of
GelTex Pharmaceuticals, Inc. on Form S-8 (File Nos. 333-60699, 333-60703,
333-00864, 333-06779, 333-08535) of our report, dated February 23, 1999, on our
audit of the financial statements of RenaGel LLC as of December 31, 1998 and for
the year ended December 31, 1998, which report is included in this Annual Report
on Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GELTEX
PHARMACEUTICALS, INC. FINANCIAL STATEMENTS AND THE NOTES THERETO FOR THE YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 30,874,900
<SECURITIES> 74,077,436
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 119,040,047
<PP&E> 11,319,885
<DEPRECIATION> (3,420,415)
<TOTAL-ASSETS> 133,444,785
<CURRENT-LIABILITIES> 8,218,742
<BONDS> 0
0
0
<COMMON> 167,924
<OTHER-SE> 119,851,939
<TOTAL-LIABILITY-AND-EQUITY> 133,444,785
<SALES> 0
<TOTAL-REVENUES> 32,658,232
<CGS> 0
<TOTAL-COSTS> 41,145,657
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 613,513
<INCOME-PRETAX> (11,567,318)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,567,318)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
<TABLE>
<CAPTION>
RENAGEL LLC
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
-------
<S> <C>
Report of Independent Accountants 1
Balance Sheets as of December 31, 1998 and 1997 2
Statements of Operations for the year ended December 31, 1998 and the period
June 6, 1997 (date of inception) through December 31, 1997 3
Statements of Changes in Venturers' Capital for the year ended December 31, 1998
and the period June 6, 1997 (date of inception)
through December 31, 1997 4
Statements of Cash Flows for the year ended December 31, 1998 and the period
June 6, 1997 (date of inception) through December 31, 1997. 5
Notes to Audited Financial Statements 6-10
</TABLE>
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Steering Committee of
RenaGel LLC:
In our opinion, the accompanying balance sheet and the related statements of
operations, changes in venturers' capital and of cash flows present fairly, in
all material respects, the financial position of RenaGel LLC at December 31,
1998, and the results of its operations and its cash flows for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the management of RenaGel
LLC; our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above. The financial statements of RenaGel LLC for the period from June 6, 1997
through December 31, 1997 were audited by other independent accountants whose
report dated February 9, 1998 expressed an unqualified opinion on those
statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 1999
1
<PAGE> 3
RENAGEL LLC
BALANCE SHEETS
AS OF DECEMBER 31,
(000'S)
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,140 $ 2,110
Trade accounts receivable, net 2,213 -
Inventory 6,577 -
Prepaid expenses and other current assets - 102
-------- --------
Total current assets 9,930 2,212
Plant and equipment:
Plant and equipment 6,540 -
Accumulated depreciation (395) -
-------- --------
Plant and equipment, net 6,145 -
Construction-in-progress 600 4,765
-------- --------
Total plant and equipment 6,745 4,765
Intangible assets, net 464 -
-------- --------
Total assets $ 17,139 $ 6,977
======== ========
LIABILITIES AND VENTURERS' CAPITAL
Current liabilities:
Due to members $ 3,345 $ 1,799
Deferred revenue 1,947 -
Accrued expenses 2,855 -
---------- ---------
Total current liabilities 8,147 1,799
Commitments and contingencies - -
Venturers' capital:
Capital 28,708 9,798
Accumulated deficit (19,716) (4,620)
---------- ---------
Total venturers' capital 8,992 5,178
---------- ---------
Total liabilities and venturers' capital $ 17,139 $ 6,977
========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 4
RENAGEL LLC
STATEMENTS OF OPERATIONS
(000'S)
<TABLE>
<CAPTION>
For the period
June 6, 1997 (date
For the year of inception) through
Ended December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Revenues:
Net product sales $ 266 -
----------- ----------
Total revenues 266 -
Operating costs and expenses:
Cost of products sold 113 -
Selling, general and administrative 6,493 $ 35
Research and development 8,778 4,588
----------- ----------
Total operating costs and expenses 15,384 4,623
--------- ----------
Operating loss (15,118) (4,623)
Other income
Interest income 22 3
----------- ----------
Total other income 22 3
----------- ----------
Net loss $ (15,096) $ (4,620)
=========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
RENAGEL LLC
STATEMENTS OF CHANGES IN VENTURERS' CAPITAL
For the year ended December 31, 1998 and
for the period June 6, 1997 (date of inception) through
December 31, 1997
(000's)
<TABLE>
<CAPTION>
Total
GelTex Genzyme Venturers'
Pharmaceuticals, Inc. Corporation Capital/(Deficit)
--------------------- ----------- -----------------
<S> <C> <C> <C>
Balance at June 6, 1997 $ - $ - $ -
Capital contributions 4,899 4,899 9,798
Net loss (2,310) (2,310) (4,620)
------------ ----------- -----------
Balance at December 31, 1997 2,589 2,589 5,178
Capital contributions 8,780 10,130 18,910
Net loss (7,548) (7,548) (15,096)
------------ ----------- -----------
Balance at December 31, 1998 $ 3,821 $ 5,171 $ 8,992
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
RENAGEL LLC
STATEMENTS OF CASH FLOWS
For the year ended December 31, 1998 and
for the period June 6, 1997 (date of inception) through
December 31, 1997
(000's)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net loss................................................... $ (15,096) $ (4,620)
Reconciliation of net loss to net cash used
in operating activities:
Depreciation and amortization.......................... 431 -
Increase (decrease) in cash from changes in working capital:
Accounts receivable...................................... (2,213) -
Inventories.............................................. (6,577) -
Prepaid expenses and other current assets................ 102 (102)
Accrued expenses and deferred revenue.................... 4,802 -
Due to members........................................... 1,546 1,799
----------- -------------
Net cash used in operating activities.................. (17,005) (2,923)
Investing activities:
Purchases of plant and equipment........................... (2,375) (4,765)
Purchases of intangibles................................... (500) -
----------- ----------------
Net cash used in investing activities.................... (2,875) (4,765)
Financing activities:
Capital contributions...................................... 18,910 9,798
----------- -------------
Net cash provided by financing activities................ 18,910 9,798
----------- -------------
Increase (decrease) in cash and cash equivalents.............. (970) 2,110
Cash, beginning of period..................................... 2,110 -
----------- ----------------
Cash, end of period........................................... $ 1,140 $ 2,110
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 7
RENAGEL LLC
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ORGANIZATION:
------------------------------------
RenaGel LLC (the "Company") is a limited liability company organized under
the laws of the State of Delaware. The Company is 50% owned by GelTex
Pharmaceuticals, Inc. ("GelTex") and 50% owned by Genzyme Corporation
("Genzyme"), hereinafter collectively referred to as the "Members" or the
"Venturers." The Company was organized in June 1997 to function as a joint
venture for the final development and commercialization of Renagel(R)
Capsules (sevelamer hydrochloride) ("Renagel(R) Capsules"), and other
potential collaboration products. Until recently, the Company had been a
development stage enterprise as it had not derived revenues from planned
principal operations. Marketing approval for Renagel(R) Capsules was
granted by the U.S. Food and Drug Administration (the "FDA") in October
1998, and the Company began the sale and distribution of Renagel(R)
Capsules in November 1998, and therefore is no longer considered a
development stage enterprise.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, `Disclosures about Segments of an
Enterprise and Related Information' ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. SFAS 133 requires
companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in
fair value, gains or losses, depends on the intended use of the derivative
and its resulting designation. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company will
adopt SFAS 133 by January 1, 2000. The Company is evaluating SFAS 133 to
determine its impact on its financial statements.
BASIS OF PRESENTATION
The Company is considered a partnership for federal and state income tax
purposes. As such, items of income, loss, deductions and credits flow
through to the Owners. The Owners have responsibility for the payment of
any income tax and are entitled to losses for their proportionate share of
taxable income or loss of the Company.
continued
6
<PAGE> 8
RENAGEL LLC
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
-------------------------------------------------------
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
UNCERTAINTIES
The Company is subject to risks common to companies in the biotechnology
industry, including (i) the accuracy of the Company's estimates of the size
and characteristics of markets addressed or to be addressed by the
Company's products and services, (ii) market acceptance of the Company's
products, (iii) the Company's ability to obtain reimbursement for its
products from third-party payers, where appropriate, (iv) the ability of
the Company to obtain adequate patent and other proprietary rights
protection for its products, (v) the ability of the Company and its
contract manufacturers to produce sufficient quantities of its products for
commercialization activities, (vi) the ability of the Company to obtain
timely regulatory approval for its products outside of the United States
and the timing and extent of decisions made by regulatory agencies and
(vii) the accuracy of the Company's information concerning the products and
resources of competitors and potential competitors.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, consisting principally of money market funds and
municipal notes purchased with initial maturities of three months or less,
are valued at cost plus accrued interest, which approximates market.
INVENTORY
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
TRANSACTIONS AND AFFILIATES
The majority of the Company's operating expenses are from payments to the
Members for project expenses incurred, either as internal operating costs
or as third-party obligations on behalf of the Company. At December 31,
1998 and 1997, the Company owed $3,345,000 and $1,799,000, respectively, to
the Members for project expenses and other costs, including inventory,
plant and equipment, incurred by the Members on behalf of the Company.
Continued
7
<PAGE> 9
RENAGEL LLC
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
-------------------------------------------------------
PLANT AND EQUIPMENT
Plant and equipment are stated at cost and are being depreciated using the
straight-line method over estimated useful lives of seven years. For
products expected to be commercialized, the Company capitalizes, to
construction-in-progress certain costs incurred beginning when the product
and related process are deemed to have demonstrated technological
feasibility and ending when the related assets are substantially complete
and ready for their intended use. The Company's production line became
operational in July 1998 and was reclassified out of construction-in-
progress at that time. The current construction-in-progress figure of
$600,000 is comprised of progress payments for the Company's plant
expansion project. At December 31, 1998, the Company is obligated to make
payments aggregating approximately $4.2 million for plant expansion.
INTANGIBLE ASSETS
Intangible assets consist of licensed technology and are stated at cost and
are amortized using the straight line method over an estimated useful life
of seven years.
As of December 31, 1998 accumulated amortization of intangible assets was
$36,000.
REVENUE RECOGNITION
Revenue is recognized when goods are shipped and title has passed and is
net of third party allowances and rebates, as applicable. For sales to
wholesalers which have terms other than the Company's standard payment and
discount terms, revenue is recognized when the product is sold by
wholesalers to end-users. As of December 31, 1998, $1,947,000 of revenue
was deferred related to 1998 shipments of product with extended payment
terms which had not been sold by the wholesaler by year-end.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period incurred. These
costs are primarily comprised of development efforts performed by the
Members, on behalf of the Company, or payments to third parties made by the
Members, on behalf of the Company, during the respective periods.
continued
8
<PAGE> 10
RENAGEL LLC
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. ACCOUNTS RECEIVABLE
-------------------
The Company's trade receivables primarily represent amounts due from
healthcare product distributors. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
Accounts receivable are stated at fair value.
4. INVENTORIES
-----------
Inventories as of December 31, 1998 were comprised of work in progress of
$3,988,000 and finished goods of $2,589,000. Approximately $892,000 of
finished goods relates to product shipped to wholesalers in 1998 for which
revenue was deferred as of December 31, 1998. Such product was held at the
wholesalers at December 31, 1998.
5. VENTURERS' CAPITAL
------------------
As of December 31, 1998 and 1997, venturers' capital is comprised of
monthly capital contributions made by the Members to fund budgeted costs
and expenses of the Company in accordance with the Collaboration Agreement,
net of losses allocated to the Members. As of December 31, 1998 there was
an unpaid capital contribution of $1,349,000 owed to the Company from
GelTex, which has been netted against venturers' capital in the
accompanying financial statements. The amount was subsequently paid in
January 1999.
6. FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND
----------------------------------------------------------------------
SUPPLIERS
---------
The Company operates in the human healthcare industry and manufactures and
markets its products in the United States. The Company's principal
manufacturing facilities are located in the United States. The Company
purchases substantially all of its' material from one supplier and is
highly dependent upon the manufacturing capabilities of that supplier.
continued
9
<PAGE> 11
RENAGEL LLC
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. COMMITMENTS AND CONTINGENCIES
-----------------------------
GelTex entered into a Contract Manufacturing Agreement with the Dow
Chemical Company. This agreement requires the Company to purchase minimum
quantities of product. The minimums are based upon the Company's estimated
product requirements and are subject to increase as product sales increase
and as the manufacturer increases the capacity for the product.
Additionally, the Company and Genzyme have entered into a contract
manufacturing agreement dated January 1, 1998, under which Genzyme will
manufacture a portion of the Company's minimum supply requirements of
Renagel(R) Capsules.
10
