SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ____________to___________
Commission File No. 333-3326
DIATIDE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3078258
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Nine Delta Drive, Londonderry, NH 03053
(Address of registrant's (Zip Code)
principal executive offices)
(603) 437-8970 2835
Registrant's telephone number, (Primary Standard Industrial
including area code) Classification Code Number)
---------------
Securities Registered Pursuant to Section 12 (b) of The Act: NONE
Securities Registered Pursuant to Section 12 (g) of The Act:
Common Stock $0.001 Par Value
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. [ ]
On March 12, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $37,171,000 based on the last
reported sales price of the Common Stock on the Nasdaq National Market. There
were 10,582,775 shares of $0.001 par value Common Stock outstanding as of March
12, 1999.
Documents Incorporated by Reference
<TABLE>
<CAPTION>
Document Description 10-K Part into which Incorporated
<S> <C>
Portions of the Registrant's Definitive Proxy Statement to be filed
with the Securities and Exchange Commission for the Annual
Meeting of Stockholders to be held May 14, 1999........................ Items 10, 11, 12 and 13 of Part III
</TABLE>
1
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PART I
ITEM 1. BUSINESS
Overview
We are engaged in the discovery, development and commercialization of patented
imaging and therapeutic drugs. Most of our products incorporate radioactive
isotopes as an active component. In addition, most of our products are based on
our patented peptides which target diseased tissues. We call our peptide-based
imaging products "Techtides" and our peptide-based therapeutic products
"Theratides." Our products address a variety of life-threatening diseases and
conditions, such as cancer, cardiovascular disease and infection.
Techtides(R)
AcuTect(TM). We received marketing approval from the FDA, after a priority
review, for our Techtide AcuTect in September 1998 for imaging of acute venous
thrombosis in the lower extremities. AcuTect is a synthetic peptide that is
coupled or "labelled," with the radioisotope technetium-99m. A thrombus is a
blood clot. Patients with acute deep vein thrombosis are at risk of pulmonary
embolism, which occurs when a clot associated with acute thrombosis breaks free,
travels to the lungs and blocks blood to the lungs. We began marketing AcuTect
in the United States in October 1998.
NeoTect(TM). We received an approvable letter from the FDA after a priority
review with respect to our application for marketing approval of our Techtide
NeoTect in December 1998. NeoTect is a technetium labelled synthetic peptide for
imaging malignant tumors in the lung. We expect to begin marketing this product
in the U.S. in the third quarter of 1999, subject to final FDA approval.
Other Techtide Programs. We are conducting clinical trials of AcuTect and
NeoTect for additional indications. In addition, we are engaged in clinical
development of three additional Techtides.
o P748 for nuclear medicine imaging of pulmonary emboli. A pulmonary
embolus is a blood clot that blocks blood flow to the lungs.
o P483H for nuclear medicine imaging of inflammation due to infection.
o P773 for nuclear medicine imaging of unstable atherosclerotic plaque.
Unstable plaque can lead to thrombus formation that may block an
artery.
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Techtide Technology. We develop our Techtides by applying our patented peptide
and radiolabelling technologies to produce technetium-99m labeled synthetic
peptides for use as medical imaging agents. Because Techtides are designed to
bind selectively with molecular targets that occur as disease is developing, we
believe that Techtides have the potential to produce images based on the process
of disease rather than the anatomical result of disease. In addition, we believe
that nuclear medicine imaging with Techtides may be more accurate, more
cost-effective, less invasive and/or safer than alternative imaging procedures
for certain diseases or conditions.
Marketing and Development Strategy. We are marketing AcuTect in the United
States in collaboration with Nycomed Imaging ASA pursuant to a co-promotion
arrangement. Nycomed is one of the world's leading producers of medical imaging
agents. Nycomed has exercised options granted by us to it to copromote AcuTect
and NeoTect in the United States and to license both AcuTect and NeoTect for
sale in Europe, South Africa and certain countries in the Middle East. Nycomed
also holds options to license P748, P483H and P773 for sale in Europe, South
Africa and certain countries in the Middle East. We are actively seeking
additional collaborations with respect to our Techtide programs that are not
subject to Nycomed's options. Although we are engaging in limited clinical
development of our Techtides in order to generate sufficient data to enter into
discussions with potential collaborative partners, we do not intend to engage in
any significant clinical trials of our Techtides without first obtaining
financial support from a collaborative partner or unless our capital resources
increase significantly.
Therapeutic Programs
Theratides. We are building on our core areas of expertise from our Techtide
program in peptide engineering and radiolabelling chemistry by developing
synthetic peptide based therapeutic radiopharmaceuticals and other synthetic
peptide based therapeutic compounds. Our two primary Theratide programs are:
o We are conducting preclinical testing of a range of Theratides
comprised of a targeting peptide that binds selectively with molecular
markers on certain types of tumors coupled with a powerful
radioisotope that can deliver cell-killing radioactivity to these
tumors. In a preclinical test involving human lung tumors transplanted
into nude mice, the mice treated with one of these Theratides
demonstrated a statistically significant lower tumor volume increase
after 20 days in comparison with untreated controls. We are also
conducting research with respect to cancer therapeutics composed of a
synthetic peptide coupled with non-radioactive anticancer agents.
o We are developing a compound that couples one of our patented
targeting peptides with fibrolase, an enzyme which has been shown to
break down arterial thrombi in animal studies. We believe that this
hybrid compound may target arterial thrombi in a highly specific
manner. In vitro tests of this compound have demonstrated that this
compound will bind to platelets involved in arterial clots.
Tin-117m DTPA. We are conducting Phase 2 clinical trials of Tin-117m DTPA. This
product is a non-peptide based radiopharmaceutical for the reduction of pain due
to metatastic cancer to the bone. This compound is comprised of the radioisotope
Tin-117m, which has an affinity for bone, combined with DTPA, a common organic
compound used to make Tin-117m soluble so that it will remain in the circulatory
system until it reaches the bone.
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Diatide Technology
Techtides and Theratides are based on Diatide's patented technology that
combines synthetic peptide targeted molecules that target particular tissues
with radioisotopes or other molecules. The synthetic peptides used in Techtides
and Theratides are small molecules that are designed to bind with high
specificity and affinity with certain molecular targets on diseased tissues. The
molecules that Diatide attaches to these peptides include:
o In the case of Techtides, technetium, a commonly-used radioisotope
which emits gamma rays that can be detected for imaging purposes using
widely available nuclear medicine diagnostic equipment.
o In the case of Theratides, radioisotopes that emit beta or alpha
particles that are lethal to tumors as well as other molecules that
have therapeutic effects.
Diatide's Techtide and Theratide technology builds on recent advances in
molecular biology and peptide chemistry that have led to the characterization of
cell receptors associated with various active disease states and the structure
of peptides that bind to these cell receptors.
Diatide develops Techtides and Theratides by applying its patented technologies
in the areas of peptide engineering and radiolabelling chemistry. After Diatide
identifies a medical imaging or therapeutic need relating to a selected disease,
it uses rational drug design principles to develop a synthetic peptide that it
believes will bind with high affinity to a molecular target that occurs as the
disease is developing. These molecular targets typically involve cell receptors
that are implicated in the disease process.
Using patented methods of peptide synthesis, Diatide combines linkers and
chelating agents to engineer its peptides so that these peptides may be easily
labeled with a radioisotope or combined with another type of molecule in a
manner that preserves the selectivity and binding characteristics of the
peptides. Diatide also incorporates into these compounds additional peptide or
amino acid units to improve biodistribution and clearance from the body of
excess Techtides or Theratides that do not bind with targeted receptors. Diatide
uses its medicinal chemistry expertise to optimize the way these products travel
through the body.
Because the synthetic peptides designed by Diatide bind with radioisotopes in a
very efficient manner, the amount of peptide required to produce Techtides and
Theratides is relatively low, which reduces development and manufacturing time
and costs. Diatide's technology for coupling synthetic peptides with
radioisotopes or other molecules is the subject of 49 issued United States
patents.
The synthetic peptides used by Diatide in its Techtides and Theratides are
relatively small molecules, composed of approximately 10 to 30 amino acids
(building blocks). These amino acids are readily available and the peptides are
inexpensive to synthesize. The relatively small size and design of these
synthetic peptide molecules permits them to diffuse quickly to target sites in
the body and to be removed quickly from the bloodstream, facilitating rapid
imaging of areas of interest in the case of Techtides, and limiting the toxicity
that could otherwise result from the radioisotopes or other molecules used in
Diatide's Theratides in the case of Theratides.
Diatide designs its Techtides to be administered to patients by simple
intravenous injection. Diatide believes that it will be possible to obtain a
nuclear medicine image using Techtides within several minutes to two hours
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after administration, with the precise time varying depending on the type of
procedure. Accordingly, Diatide expects that nuclear medicine imaging with
Techtides will be performed in a single procedure in a one-day hospital visit.
Advantages of Techtides
Diatide believes that nuclear medicine imaging with Techtides provides the
following advantages in comparison with other imaging methods and other nuclear
medicine imaging agents:
o Improved Diagnostic Information. Nuclear medicine imaging with
Techtides provides images by targeting molecular sites that occur as
disease is developing, such as activated platelets in clots and
somatostatin receptors on tumors. This approach is fundamentally
different from the approach used in other medical imaging modalities
and may provide biological information which is not available through
other modalities. This information may affect patient management and
clinical outcomes by permitting nuclear medicine physicians to make a
more definitive diagnosis of disease. Such a diagnosis may avoid the
costs and delays incident to additional diagnostic tests or an
inappropriate course of therapy. This information also may facilitate
diagnosis at an earlier stage of disease development, when therapy can
more favorably alter the outcome.
o Exploit Large Installed Base of Nuclear Medicine Equipment and
Know-how. Techtides are designed to be used in nuclear medicine
imaging procedures that employ the large installed base of nuclear
medicine imaging equipment in hospitals and clinical facilities and
are based on well-known imaging techniques and protocols. As a result,
nuclear medicine imaging with Techtides is not expected to require the
purchase of additional equipment or substantial additional training of
nuclear medicine physicians and technicians.
o Potential Economic Benefits. The components of the synthetic peptides
used by Diatide in its Techtide products are readily available and
inexpensive to synthesize with established techniques. Technetium also
is widely available and inexpensive. The efficient manner in which
Diatide's synthetic peptides bind with technetium limits the amount of
peptide required in the production process. These features result in a
low manufacturing cost of the product. Diatide believes that this low
cost of production will allow it to offer Techtides at price levels
that will be attractive if Techtides exhibit the performance and
safety characteristics expected by Diatide.
o Faster Imaging. Techtides are designed to diffuse rapidly to, and bind
tightly with, their molecular targets and for the portion of the dose
that does not bind with the target to quickly clear the circulatory
system. Diatide believes that these attributes, along with the
favorable characteristics of technetium, will permit Techtides to
produce high quality images within a short time (typically a few
minutes to two hours) after administration. Accordingly, Diatide
believes that imaging procedures with Techtides may be performed in a
single procedure, avoiding the need for an overnight hospital stay or
multiple hospital visits.
o Safety and Ease of Administration. Because Techtides are relatively
small molecules that contain only trace amounts of technetium and
peptide, Techtides will not be administered at doses that will be
pharmacologically active. No clinically significant product related
adverse side effects have been
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identified in the more than 2,000 patients imaged with Techtides to
date. Moreover, imaging procedures with Techtides do not involve
discomfort or serious adverse side effect risks that accompany certain
competing modalities, such as angiography and contrast venography.
o Comparison with monoclonal antibodies. Diatide believes that peptides
offer several significant advantages in comparison with monoclonal
antibodies as carrier molecules for radiopharmaceutical imaging
agents. Radiolabelled monoclonal antibodies are large molecules that
are relatively difficult to produce, typically require a long period
of time after administration for imaging (four to forty-eight hours)
and clear the body slowly. This slow clearance can adversely affect
image quality in some cases. In addition, some monoclonal antibodies
have engendered adverse immune responses caused by their derivation
from mouse-derived proteins. Monoclonal antibodies are currently made
primarily through cell fermentation techniques, which may expose them
to biological contaminants. Moreover, it is significantly easier to
modify peptides to optimize their pharmacokinetic properties than to
modify monoclonal antibodies for such purpose.
Advantages of Theratides
Diatide believes that the use of Theratides for therapeutic purposes provides
the following advantages:
o Targeting of Diseased Tissue. The synthetic peptides used in
Theratides are small molecules that are designed to bind with high
specificity and affinity with certain molecular targets on diseased
tissue. By coupling a radioisotope or other molecules intended to have
therapeutic effects with Diatide's synthetic peptide cancer molecules,
Diatide believes that Theratides can deliver a therapeutic agent
directly to the targeted tissue with specificity. Diatide believes
that this specificity may enable Theratides to seek out and treat
micrometastases that either evade detection during surgery or which,
because of their location, are not susceptible to surgical removal.
o Reduced Toxicity. Because of the intended targeting and specificity of
Diatide's Theratides, Diatide believes that its Theratides will not
have the toxicities associated with other therapies such as
chemotherapy in which the therapeutic (and potentially toxic)
treatment is not limited to the diseased tissue. The Company believes
that Theratides will be more concentrated at the site of disease than
chemotherapy or radiation therapy.
Diatide Strategy
Diatide is applying its patented technology in the areas of peptide engineering
and radiolabelling chemistry to develop novel targeted pharmaceuticals. Diatide
is directing its development programs at large existing markets which it
believes are not adequately served by existing products or modalities. The key
elements of Diatide's business strategy include:
o Penetrate Market for Techtides. Diatide introduced AcuTect into the
market in the United States in October 1998 and expects to introduce
NeoTect in the United States in the third quarter of 1999. Diatide is
collaborating with Nycomed in a comprehensive manner in connection
with the distribution, marketing and sale of AcuTect and expects to do
so in connection with NeoTect.
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Diatide is implementing a range of programs to familiarize physicians
with these products and their attributes in order to penetrate the
relevant markets, including grand rounds programs in which recognized
physicians conduct seminars in hospitals to educate other physicians
about these products, targeted sampling programs, "seed trials" for
exploring off label indications and publication of case studies.
o Leverage Techtide Expertise Into Theratides Program. Diatide's
Theratide program builds upon Diatide's considerable expertise in
peptide engineering and radiolabelling chemistry. In Theratides,
Diatide has replaced the technetium component that is used for imaging
purposes with radioisotopes that emit alpha or beta particles that are
lethal to tumors as well as other agents that are intended to have
therapeutic effects. Diatide is designing its Theratides to target and
destroy diseased tissue and in particular tumors.
o Establish Marketing Collaborations. Diatide is a party to United
States co-promotion and licensing arrangements in Europe, South Africa
and certain countries in the Middle East with Nycomed relating to
AcuTect and NeoTect. Nycomed has the option to extend its overseas
licensing rights to certain additional Techtides. Diatide is seeking
to enter into additional strategic corporate collaborations to secure
additional financial support for our research and development
activities for both its diagnostic and therapeutic product programs
and to enhance the sales and marketing, distribution and promotion of
its products on a worldwide basis.
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Products
The table below summarizes Diatide's principal products and their
development status.
<TABLE>
<CAPTION>
Product Name Indication Status (1) Marketing
- - ------------ ---------- ---------- Collaboration (2)
-----------------
<S> <C> <C> <C>
Imaging Products
(Techtides)
AcuTect Deep Vein On Market in U.S. Nycomed
Thrombosis
NeoTect Lung Cancer Tumors Approvable NDA Nycomed
Filed MAA
P748 Pulmonary Embolism Phase 1/2 Nycomed option in
Europe, certain
countries in the Middle
East and South Africa
P483H Inflammation due Phase 1/2 Nycomed option in
to infection Europe, certain
countries in the Middle
East and South Africa
P773 Atherosclerotic Phase 1 Nycomed option in
Plaque Europe, certain
countries in the Middle
East and South Africa
Therapeutic
Products
Theratides Various tumors, Preclinical None
including lung,
breast, lymphoma
and malignant
melanoma
Vascular Thrombi Preclinical None
Tin-117m DTA Reduction of Pain Phase 2 None
due to Metastatic
Cancer to the
Bone for:
Osteoblastic
tumors (Prostate
cancer)
Osteolytic tumors Phase 2 None
(multiple Primary
cancers,
primarily breast)
</TABLE>
(1) Preclinical. A compound is undergoing testing and being evaluated by Diatide
in relevant assays and/or animal models to assess potential product
characteristics, safety and utility.
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Phase 1 Clinical Trial. The product is administered to healthy human subjects
and tested for safety, dosimetry, tolerance, metabolism, distribution, excretion
and pharmacokinetics.
Phase 2 Clinical Trial. The product is administered to a limited patient
population to (i) evaluate the effectiveness for specific indications, (ii)
determine dose response and optimal dosage and (iii) identify possible adverse
effects and safety risks.
Phase 3 Clinical Trial. The product is administered to an expanded patient
population to (i) further test the product for safety, (ii) further evaluate
clinical effectiveness and (iii) obtain additional information for labeling.
Approvable NDA. The FDA determines that the application substantially meets the
requirements for marketing approval and believes it can approve the NDA, subject
to commitments or conditions on the part of Diatide.
MAA. The Marketing Approval Application seeking permission to market a drug in
the member states of the European Union and certain other countries which have
agreed to be bound by the authorization decisions of the European Medicine
Evaluation Agency (EMEA).
(2) Nycomed is co-promoting AcuTect in the U.S. and has exercised its option to
co-promote NeoTect in the U.S. and to license these two products in Europe,
South Africa and certain countries in the Middle East. Nycomed has an option to
license P748, P483H and P773 in Europe, South Africa and certain countries in
the Middle East.
Imaging Products
AcuTect
Regulatory Status. The FDA approved Diatide's NDA covering AcuTect for imaging
of acute venous thrombosis in the lower extremities on September 14, 1998.
Diatide introduced AcuTect to the market in the United States in collaboration
with Nycomed in October 1998. Sales of AcuTect in the United States for the
quarter ended December 31, 1998 totalled $177,000.
In December 1998, Nycomed withdrew the MAA covering AcuTect filed by it with the
EMEA in October 1997 covering AcuTect. The decision to withdraw the MAA was
based in part on the EMEA's having questioned the reliability of contrast
venography used in this study as an appropriate comparative diagnostic procedure
for evaluating the efficacy of AcuTect and Diatide's and Nycomed's belief that
EMEA approval could best be obtained by withdrawing the MAA and working with the
EMEA to design and conduct new clinical studies that can address the EMEA's
concerns. Diatide expects that Nycomed will make such resubmission in 2000.
Disease Background. AcuTect targets a molecular receptor, named GP IIb/IIIa,
which is present in high numbers on platelets involved in blood clot formation.
A number of pharmaceutical and biotechnology companies have selected the GP
IIb/IIIa receptor as a target for therapeutic cardiovascular products. One such
product, ReoPro(R), has been approved by the FDA and a number of other product
candidates are in various phases of clinical trials.
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In DVT, a blood clot, known as a thrombus, forms in the veins of the lower legs,
thighs, pelvic areas or, less frequently, in the upper extremities of humans.
These clots typically form as a result of trauma, surgery or stasis due to
inactivity. Patients with DVT are at risk of pulmonary embolism, which occurs
when a clot associated with DVT breaks free, travels to the lungs and blocks
blood flow to the lungs.
Clots in the venous system can be characterized as either acute (recently
formed) or chronic (older). Physicians generally believe that acute clots
present the highest risk of dislodging and producing a pulmonary embolus and
therefore require aggressive treatment. Chronic clots may be less fragile, a
state in which they pose little or no risk of producing a pulmonary embolus.
Such chronic clots normally do not require aggressive treatment. No existing
imaging modality is able to accurately differentiate chronic clots from acute
clots.
There are approximately 2,000,000 episodes of DVT in the United States each
year, of which approximately 600,000 result in pulmonary embolism. Approximately
60,000 deaths occur each year in the United States as a result of pulmonary
emboli. It is important to accurately diagnose and treat patients with DVT in a
timely fashion to prevent them from developing pulmonary embolism.
Competing Diagnostic Modalities. Doppler ultrasound and contrast venography are
the primary modalities used to diagnose DVT. In the United States, Doppler
ultrasound imaging is increasingly used for this purpose because it is
relatively inexpensive and non-invasive. In 1996, approximately 1,700,000
ultrasound procedures for imaging of DVT were performed in the United States,
and approximately 1,400,000 such procedures were performed in Europe.
The diagnosis resulting from Doppler ultrasound is highly dependent on the skill
of the operator. In addition, this Doppler ultrasound is not FDA-validated for
the diagnosis of DVT. Although Doppler ultrasound is considered reasonably
accurate in identifying DVT in the thigh and behind the knee, it is less
efficacious in the area below the knee, in the pelvis and, in some patients, in
the upper extremities of the body. Doppler ultrasound also is of limited
effectiveness in imaging obese patients, patients with swelling and
post-surgical orthopedic patients. Doppler ultrasound cannot reliably diagnosis
acute disease in approximately 88% of patients with recurrent DVT symptoms,
while only approximately 33% of such patients are experiencing an acute event.
Contrast venography is used to diagnose DVT both as a primary imaging modality,
particularly in Europe, and when the results of ultrasound are indeterminate.
Contrast venography is currently recognized as the standard imaging modality
used to identify DVT. In a contrast venography procedure, a contrast agent is
infused into the patient's vein and imaged by x-ray. Although this procedure
produces high quality images in a large percentage of cases, it is painful, more
expensive than ultrasound and can result in serious adverse side effects,
including the triggering of thrombosis. In 1996, approximately 250,000 contrast
venography procedures for imaging of DVT were performed in the United States,
and approximately 600,000 such procedures were performed in Europe.
Potential Advantages of AcuTect. Diatide believes that nuclear medicine imaging
with AcuTect permits diagnosis of DVT without the pain, degree of invasiveness
and risk of serious adverse side effects associated with contrast venography.
Diatide also believes that AcuTect is an attractive alternative to Doppler
ultrasound in diagnosing DVT in certain areas, such as below the knee and in the
pelvis, and in certain patients, such as obese patients and patients with
swelling, where ultrasound is less efficacious.
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Activated platelets are present in higher concentrations in acute clots than in
chronic clots. Because the GP 11b/IIIa receptor which is targeted by AcuTect is
present in high numbers on these platelets, Diatide believes that nuclear
medicine imaging with AcuTect may enable physicians to distinguish between
chronic clots and acute clots. Such information may be critical to management of
DVT patients, especially patients who previously have experienced DVT. An
anticoagulant most likely would be prescribed in the case of an acute clot,
while it is possible that a less aggressive intervention would be taken in the
case of a chronic clot. If AcuTect is shown to differentiate acute clots from
chronic clots, nuclear medicine imaging with this Techtide also might be useful
to monitor the effect of anticoagulant therapy, which carries a risk of
bleeding.
Clinical Trials. As part of its approval of Diatide's NDA covering AcuTect, the
FDA required Diatide to conduct certain post-NDA approval (Phase 4) preclinical
and clinical studies of AcuTect. These studies will include a clinical outcomes
study of AcuTect in patients with acute venous thrombosis. Diatide is currently
conducting certain of these studies and is in the planning process regarding the
design of other required studies.
AcuTect for Carotid Thrombus. Diatide is investigating the use of AcuTect for
additional indications. In particular, Diatide is conducting clinical trials of
AcuTect for medical imaging of carotid thrombus.
Disease Background. Carotid thrombi are blood clots that are attached to
the inside wall of the carotids, the major arteries supplying blood to the
brain. A carotid thrombus poses a two-fold threat to a patient. First, it
indicates the presence of unstable plaque underlying the thrombus because
stable plaque does not cause a thrombus to form on its surface. The
unstable plaque may rupture without warning and cause a stroke, either by
blocking the vessel or by releasing debris into the vessel which is then
carried into the brain, causing a blockage. Secondly, carotid thrombi often
break off and are carried into the brain, where they block blood vessels
and cause stroke.
Competing Diagnostic Modalities. Carotid disease is primarily diagnosed by
ultrasound and carotid angiography. Angiography is currently recognized as
the most accurate imaging modality for this purpose. Carotid angiography is
an invasive procedure involving the placement of a catheter in the artery
and the injection of a contrast agent. When used for the diagnosis of
carotid thrombus, both carotid angiography and ultrasound detect only the
degree of blockage of the artery. Neither procedure is able to detect
reliably the presence or absence of thrombi in an artery as opposed to some
other form of blockage, such as arteriosclerosis.
Potential Advantages of AcuTect. Diatide is developing AcuTect for imaging
of carotid thrombus because clots located in arteries have substantially
more activated platelets than clots formed in the venous system. As
described above, AcuTect is designed to bind to the GP IIb/IIIa receptor on
activated platelets, which are found in thrombi. Diatide believes that
nuclear medicine imaging of carotid thrombus with AcuTect may provide a
more valuable diagnosis than existing modalities if this procedure can be
shown to enable physicians to identify the presence or absence of thrombi,
as opposed to arteriosclerosis, in the artery. If thrombi are present,
immediate carotid surgery (endarterectomy) or immediate administration of
an anticoagulant may be required. If both carotid arteries are severely
narrowed, determining the location of thrombi is important since such a
determination would mandate that, if only one side has thrombus, that side
be operated on first in order to avoid a stroke, which would have a high
likelihood of occurring if the opposite side were operated on first.
Clinical Trial Results. Diatide completed a Phase 2 clinical trial of
AcuTect for the diagnosis of carotid thrombus in December 1995. This study
was conducted at one site in the United States, involved ten patients
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and compared AcuTect with ultrasound and pathology. The compound was well
tolerated by all of the patients with no clinically significant adverse
side effects. The results of this Phase 2 clinical trial indicated on a
preliminary basis that AcuTect may be able to identify both thrombi on
carotid plaque and intra-arterial thrombi associated with atherosclerotic
plaque. Diatide initiated additional Phase 2 clinical trials of AcuTect for
imaging of carotid thrombus in February 1997. In this study AcuTect is
being compared with pathology. This study involves 40 patients at eight
sites in the United States and Canada.
Off-label Use. In addition to its clinical trials, Diatide intends to support
recognized physicians and institutions conducting clinical studies of AcuTect
for imaging of clots in parts of the body other than the deep venous system.
Diatide believes that publication of the results of such studies by such
physicians or institutions may increase off-label use of AcuTect.
NeoTect for Lung Cancer Tumors
Regulatory Status. Diatide filed an NDA with the FDA covering NeoTect for
imaging malignant tumors in the lung in June 1998. In December 1998, Diatide
received an approvable letter from the FDA following a priority review with
respect to this application. Diatide expects to receive final FDA approval of
NeoTect and to introduce NeoTect to the market in the U.S. in the third quarter
of 1999. However, the FDA has not approved Diatide's NDA for NeoTect, and
Diatide may not market NeoTect until the NDA is approved. There can be no
assurance that such approval in fact will be granted by the FDA or as to the
timing of the approval. In November 1998, Nycomed filed an MAA with the EMEA
seeking permission to market NeoTect in Europe for imaging malignant tumors in
the lung.
Disease Background. Cancer is often manifested in tissue masses called tumors.
Cancer often causes death, particularly when tumor cells metastasize and spread
to other parts of the body. The detection of metastases, or small secondary
tumors, is often difficult. In addition, certain primary tumors are difficult to
identify with conventional imaging technology.
Certain cancerous tumors overexpress the receptor for the hormone somatostatin.
NeoTect targets and binds to the somatostatin receptor. Detection of
overexpression of the somatostatin receptor has been found to be useful for
locating certain cancerous tumors, staging these tumors to determine the extent
of disease involvement and monitoring treatment. Such information is important
in determining the appropriate patient therapy and the effectiveness of the
therapy. Tumors associated with the overexpression of the somatostatin receptor
include lung and breast tumors, melanomas and neuroendrocrine tumors.
There will be an estimated 171,500 new cases of lung cancer in 1998 in the
United States, making lung cancer the most common malignancy in men and women in
the United States. Approximately two percent of all routine chest x-rays in the
United States reveal the existence of a solitary pulmonary nodule, a single,
undefined object found in the lung. Thirty-eight percent of solitary pulmonary
nodules are cancerous.
Alternative Diagnostic Modalities. Under most circumstances, non-invasive
diagnostic methods are insufficient to rule out cancer in patients whose chest
x-rays reveal a solitary pulmonary module. As a result, it is necessary to
perform a needle biopsy or surgery. Fourteen percent of patients who undergo
needle biopsy suffer a collapsed lung as a result of the procedure.
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Potential Advantages of NeoTect. Diatide believes that by differentiating
between benign and malignant lung masses NeoTect will enable physicians to rule
out cancer in certain non-cancerous patients whose x-rays reveal a solitary
pulmonary nodule, thereby eliminating the cost of a surgical procedure and
saving patients the pain, emotional trauma and risk of a collapsed lung. In
addition to ruling out cancer, Diatide believes that NeoTect will be useful in
the diagnosing of lung cancer, the staging of the disease for potential surgery
and the follow-up after treatment to monitor the progress of treatment.
Clinical Trial Results. In late 1997, Diatide completed two pivotal Phase 3
clinical trials of NeoTect for the diagnosis of lung cancer. In these trials
NeoTect was compared with biopsy. These two pivotal Phase 3 clinical trials were
conducted at approximately 24 sites in the United States and Europe and involved
approximately 226 patients. The protocol for these clinical trials required an
agreement rate of approximately 80% between blinded reads of NeoTect and biopsy.
This agreement rate would be judged significant if the lower confidence interval
was greater than 70%. In the first trial, the agreement rate for the two methods
of diagnosis in identifying malignancy was 76.8%, with a lower confidence
interval of 69.2%. In the second trial, the agreement rate was 81.6%, with an
lower confidence interval of 74.4%.
Diatide is considering conducting clinical trials in the future with respect to
the imaging of metastases of breast cancer and melanoma with NeoTect. Diatide
initiated a clinical trial of NeoTect for the melanoma indication in 1996, but
did not complete this trial because of the costs involved in making certain
changes in the trial protocol recommended by the FDA. In this trial, NeoTect was
compared with CT and biopsy. The trial involved approximately 66 patients at 7
sites in the United States. The compound was well tolerated by all patients with
no clinically significant adverse side effects.
P748 for Pulmonary Embolism
Diatide is conducting clinical trials of the Techtide P748 for medical imaging
of pulmonary emboli. Pending the results of the trials, Diatide will evaluate
whether to continue clinical trials in light of Diatide's resources at such
time.
Disease Background. As with AcuTect, P748 targets the GP IIb/IIIa receptor on
platelets involved in blood clot formation. A pulmonary embolus is a blood clot
that blocks blood flow to the lungs and often is fatal. There are approximately
600,000 annual episodes of pulmonary emboli in the United States. Approximately
60,000 deaths occur each year in the United States as a result of pulmonary
emboli.
Competing Diagnostic Modalities. To diagnose pulmonary emboli, physicians
generally first x-ray the patient to rule out other causes of the patient's
symptoms. Next, physicians typically perform perfusion and ventilation scans, a
two-step nuclear medicine imaging procedure involving the use of
technetium-labeled albumin and a radiolabelled gas, typically xenon-133. This
dual procedure is minimally invasive, but frequently gives inconclusive results.
In 1996, approximately 978,000 perfusion studies and 870,000 ventilation studies
for imaging of pulmonary emboli were performed in the United States. If the
results of the perfusion and ventilation scans are inconclusive, physicians
often perform a pulmonary angiogram, which is currently recognized as the most
accurate imaging modality used to identify pulmonary emboli. A pulmonary
angiogram is an invasive procedure involving the placement of a catheter near
the pulmonary artery and the injection of a contrast agent. In 1996,
approximately 50,000 pulmonary angiograms for imaging of pulmonary emboli were
performed in the United States.
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Potential Advantages of P748. Based on the results of preclinical tests and
pilot studies of P748, Diatide believes that diagnosis with P748 may provide
significant improvements in accuracy in comparison with perfusion and
ventilation studies. Diatide further believes that nuclear medicine imaging with
P748 will be significantly less invasive than a pulmonary angiogram, while
potentially providing the same quality of diagnosis. As a result, P748 may be
particularly attractive in situations in which the patient is repeatedly imaged
over time to monitor the effects of thrombolytic agents which are administered
as therapies for this disease. Optimizing dosage of thrombolytic agents is
important to minimize the serious side effects associated with the bleeding that
may be caused by these agents. These side effects include ulcer or
gastrointestinal bleeding and cerebral hemorrhage, which may cause stroke and
death.
Clinical Trial Results. Diatide's current Phase 2 clinical trial of P748 is a
randomized dose ranging study for the diagnosis of pulmonary embolism. This
study is being conducted at six sites in the United States and Canada and will
involve approximately 30 patients. It compares P748 with pulmonary angiography.
Diatide has completed two pilot studies and one Phase 1 clinical trial of
different formulations of P748 involving 24 patents and ten normal volunteers.
In these trials, P748 was well tolerated by all subjects with no clinically
significant adverse side effects.
P483H for Inflammation Due to Infection
Diatide has conducted clinical trials of the Techtide P483H for medical imaging
of inflammation due to infection, such as post-surgical infection, osteomyelitis
(bone infection), the location of white blood cells associated with fevers of
unknown origin and occult (hidden) infections. Based on the results of the
trials, Diatide is currently developing a revised formulation of P483H with
particular attention to dose recovery from the vial issues. Diatide expects that
once it has developed an appropriate formulation of P483H, which, among other
things, increases the dose recovery from the vial of the product, it will
evaluate whether to commence clinical trials of the revised formulation in light
of Diatide's resources at such time.
Disease Background. Each year in the United States there are over 2,000,000
cases of inflammation due to infection.
Competing Diagnostic Modality. The most specific current procedure for medical
imaging of inflammation due to infection involves removing blood from the
patient, isolating white blood cells in the patient's blood, radiolabelling the
white blood cells with indium-111 or with technetium coupled to a carrier
molecule and then injecting the white blood cells back into the patient where
they localize around the site of the infection and emit radiation which can be
detected using a gamma camera. Although radiolabelled white blood cells are
highly specific, this imaging procedure is expensive, difficult to administer
and often fails to yield good image quality quickly.
Potential Advantages of P483H. Diatide is designing P483H to bind in the
patient's body with white blood cells present at localized sites of infection.
In addition, Diatide is designing this product to be administered by injection.
As a result, it will not require handling of the patient's blood, which entails
exposure to blood-borne diseases such as HIV.
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Clinical Trial Results. Diatide completed Phase 2 clinical trials of P483H in
May 1997. These trials involved approximately 30 patients at four centers in the
United States. A preliminary analysis of the results indicated that in 29
evaluable patients the sensitivity, specificity and agreement rate of
technetium-99m P483H compared to institutional diagnosis were 83%, 91% and 86%,
respectively. In 16 patients in whom an indium-111-labeled white blood cell scan
was also performed (16 patients) both tests had a sensitivity of 81% compared
institutional diagnosis, suggesting comparable efficacy of technetium-99m P483H
and indium-111-labeled white blood cells.
P773 for Atherosclerotic Plaque
Diatide filed an IND in December 1997 to commence Phase 1 clinical trials of the
Techtide P773 for medical imaging of unstable atherosclerotic plaque. This IND
became effective in January 1998. Diatide is currently developing a revised
formulation of P773. Diatide expects that once it has developed an appropriate
formulation of P773 for clinical trials, it will evaluate whether to commence
clinical trials of P773 in light of Diatide's resources at such time.
Disease Background. Atherosclerosis is caused by the accumulation of cholesterol
in the walls of arteries. Continued accumulation leads to the formation of
plaque. There are two types of atherosclerotic plaque, stable and unstable.
Stable plaque may not require aggressive treatment. Unstable plaque grows
rapidly and can easily rupture leading to thrombus formation that may block an
artery. Common sites of atherosclerosis are the coronary and carotid arteries.
Obstruction of blood flow in these sites may result in transient ischemic
attacks, stroke, angina and heart attack.
Each year approximately 600,000 persons in the United States suffer a stroke,
which is the third leading cause of death in the United States. Transient
ischemic attacks are a warning sign of stroke and occur in about 10% of stroke
victims. Each year approximately 1,100,000 persons have heart attacks in the
United States, which is the leading cause of death in the United States. Angina
is caused by partial blockage of a coronary artery from thrombosis. Angina
causes some muscle damage and limits the amount of work that the affected
portion of the heart can do. There are an estimated 7,200,000 persons in the
United States who suffer from angina, with 350,000 new cases occurring each
year. Atherosclerosis is the leading cause of these diseases.
Competing Diagnostic Modalities. Several imaging modalities are currently used
to detect the sites of atherosclerosis, including angiography, ultrasound and
nuclear medicine imaging procedures with thallium-201. However, none of these
procedures permits accurate determination of whether atherosclerotic plaque is
stable or unstable. Diatide believes that an imaging product that is able to
detect sites of unstable atherosclerotic plaque may provide early detection of
cardiovascular disease that might enable physicians to manage treatment of this
disease before costly interventional measures become necessary.
Other Imaging Programs
In addition to its more advanced imaging product candidates described above,
Diatide is conducting research and development activities with respect to
Techtides for medical imaging of colorectal, breast, and prostate tumors as well
as additional thrombus and inflammation imaging agents. In each of these
programs, Diatide has identified active compounds and is evaluating these
compounds in relevant assays and/or animal models. In addition, Diatide believes
that several of its Techtides described above have the potential to address
additional indications. For example, based on preclinical and clinical results
to date, Diatide believes that, because they
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target the GP IIb/IIIa platelet receptor, AcuTect and P748 may be useful in
detecting thrombi in other circumstances, such as the monitoring of thrombi
associated with coronary heart disease, angioplasty, vascular stents and stroke.
Therapeutic Products
Theratides for Treatment of Cancer
Diatide is conducting preclinical testing of various Theratides for the
treatment of cancer. Diatide believes that Theratides may be useful in the
treatment of a range of cancers, including lung, breast, prostate and colorectal
cancer as well as non-Hodgkins lymphoma.
Most of the Theratides that Diatide is developing as cancer therapies consist of
a synthetic targeting peptide coupled with a powerful radioisotope that can
deliver cell-killing radioactivity to the cancer. The peptides used in these
compounds target and bind with certain receptors that are implicated in various
forms of cancer. For example, one of the peptides that Diatide is examining in
these tests is P829, which is the same peptide that is a component in NeoTect.
This peptide targets and binds to the somatostatin receptor which is
overexpressed in certain types of cancerous tumors.
Diatide is designing its Theratides for the treatment of cancer to bind with
target receptors on a highly specific basis. Diatide believes that its Theratide
technology may enable it to develop compounds that are able to seek out and
treat micrometastases that either evade detection during surgery or which,
because of their location, are not susceptible to surgical removal.
In a preclinical test involving human small cell lung tumors transplanted into
nude mice, the mice treated with one of Diatide's anticancer Theratides
demonstrated a statistically significant lower tumor volume increase after 20
days in tumor volume increase in comparison with untreated controls.
A variety of therapies are available for the treatment of cancer. The principal
treatments include radiation therapy, chemotherapy and surgical removal. Diatide
expects that the principal competitive therapy for its anticancer Theratides
will be radioimmunotherapy, which involves the use of monoclonal antibodies
(rather than peptides) as the carrier molecules for radioisotopes that can
deliver cell-killing radioactivity to the cancer. However, as noted above,
Diatide believes that the peptides included in its Theratides offer significant
advantages in comparison with monoclonal antibodies relating to ease of
production, length of time to clear the body (with associated toxic effects) and
immune responses engendered by some monoclonal antibodies.
Theratides for Treatment of Arterial Thrombosis
Diatide is conducting preclinical testing of a Theratide for the treatment of
arterial thrombosis. This Theratide consists of a synthetic peptide that targets
the GPIIb/IIIa receptor linked with an enzyme named fibrolase. Fibrolase
dissolves fibrin, which is a principal component of thrombi.
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In animal studies, fibrolase has been shown to break down arterial thrombi.
However, fibrolase also can degrade fibrinogen in the blood stream, not just at
the site of thrombosis, because fibrolase does not inherently target thrombi. As
a result, fibrolase alone can cause bleeding.
The goal of Diatide's development program for this Theratide is to confer
thrombus specificity on fibrolase by linking it with a synthetic peptide that
targets the GPIIb/IIIa receptor. As described above, this receptor is present in
high numbers on activated platelets that are involved in blood clot formation.
In vitro tests of this compound have demonstrated that this compound will bind
to platelets involved in arterial clots. Also, in these tests, the coupling of
the targeting peptide to fibrolase did not interfere with the ability of
fibrolase to dissolve fibrin. In addition, the coupling of fibrolase with the
targeting peptide did not interfere with the peptide's ability to bind to
platelets.
The National Heart, Lung and Blood Institute of the National Institutes of
Health awarded Diatide a $475,000 Phase 2 research grant to evaluate the
effectiveness of a hybrid compound comprised of a synthetic peptide coupled with
fibrolase as a thrombus dissolving agent in animal models. Dose response
relationships with tissue plasminogen activator (tPA) and streptokinase are
being evaluated.
Other corporate and academic researchers are evaluating the treatment of
arterial thrombosis through the use of other types of hybrid therapeutics. One
of these hybrids involves the combination of tPA or streptokinase, other clot
dissolving enzymes, to antibodies that bind with various components of thrombi,
including fibrin. Diatide believes that its Theratide approach may be preferable
for two reasons:
o Diatide believes that the targeting synthetic peptide in its Theratide
may demonstrate a high level of specificity for arterial thrombi.
o In contrast with tPA and streptokinase, fibrolase is not susceptible
to degradation as a result of the activity of two common blood
components.
The market for antithrombolitic agents in the United States is estimated to
exceed $300 million annually. The pharmaceutical therapies that currently are
available for the treatment of arterial thrombosis is ineffective in
approximately 35% of all cases. In addition, in approximately 15% to 25% of
successfully treated patients, the closing of the reopened blood vessels occurs.
Diatide believes that its Theratide may prevent this closing or reocclusion
because of its retained antiplatelet effects. Diatide further believes that its
Theratide may be effective in treating the 20% of patients whose coronary
arteries remain closed or occluded even after aggressive thrombolitic and
anticoagulent treatments.
Tin-117m DTPA for Reduction of Pain Due to Metastatic Cancer to the Bone
Diatide is conducting Phase 2 clinical trials of Tin-117m DTPA as a therapy for
the reduction of pain due to metastatic cancer to the bone. Diatide has licensed
the exclusive worldwide rights to Tin-117m DTPA under a royalty-bearing license
from Associated Universities Inc., the operator of Brookhaven National
Laboratories. These rights include an issued United States composition of matter
patent. This compound is comprised of the radioisotope Tin-117m, which has an
affinity for bone, combined with DTPA. DPTA is a common organic
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compound that is used to make Tin-117m soluble so that it will remain in the
circulatory system until it reaches the bone.
Disease Background. The three most prevalent cancers, prostate, breast and lung,
metastasize to the bone in approximately 45% to 75% of patients. In 1997, there
were approximately 210,000 new cases of prostate cancer, 180,000 new cases of
breast cancer and 180,000 new cases of lung cancer in the United States.
Competing Therapies. The normal course of treatment for the bone pain associated
with these cancers has been external beam radiation, chemotherapy, analgesics
and opiates. These methods are costly and lead to a poor quality of life in
late-stage patients.
In 1993, the first therapeutic radiopharmaceutical for this indication,
Metastron, was approved for routine use by the FDA. The FDA approved a second
therapeutic radiopharmaceutical, Quadramet(R), in 1997. Both Metastron and
Quadramet have been shown to significantly reduce metastatic bone pain for up to
six months with a single injection.
Potential Advantages of Tin-117m DTPA. Diatide believes that
radiopharmaceuticals are well suited for this type of therapy because they can
deliver a high level of radiation to multiple metastases. However, Metastron,
Quadramet and certain other radioisotopes for the reduction of pain due to
metastatic cancer to the bone that are under development are dose limited due to
myelosuppression, the destruction of bone marrow cells, which is the source of
white blood cells and platelets. Myelosuppression is a particular problem for
patients suffering from breast cancer, who already have suppressed bone marrow
due to chemotherapy.
Because of the radiation characteristics of Tin-117m and based on published data
for other radioisotopes, Diatide believes that Tin-117m will result in less
myelosuppression than other radioisotopes. In addition, Metastron and Quadramet
are approved for a limited subset of patients with cancer bone pain. Diatide is
testing Tin-117m for its efficacy in palliating bone pain in a broader range of
cancer patients.
Clinical Trial Results. Diatide is conducting a Phase 2 trial of Tin-117m DTPA
to evaluate the safety and efficacy of three dose levels of Tin-117m DTPA
against Metastron for palliation of bone pain from bone metastases in patients
with prostate cancer. The trial will involve approximately 100 patients and is
due to complete enrollment in 1999.
A dose-escalating Phase 2 clinical trial of Tin-117m DTPA was begun by BNL and
completed by Diatide in 1995. This Phase 2 clinical study was conducted at four
sites in the United States and involved 47 patients. Tin-117m DTPA was well
tolerated by all patients with no drug related clinically significant adverse
side effects. Approximately 70% of the patients in this study were noted to
experience complete or partial pain relief.
Corporate Collaborations
A key element of Diatide's business strategy is to enter into collaborations
with pharmaceutical companies to secure financial support for its research and
development activities and to enhance the sales and marketing, distribution and
promotion of Diatide's products worldwide upon receipt of requisite regulatory
approvals. Diatide is a party to one such collaboration, with Nycomed, and is
actively seeking additional collaborations
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with respect to its Techtide programs that are not subject to Nycomed's options
and its Theratide and Tin-117m DTPA therapeutic programs.
Nycomed Collaboration
In August 1995, Diatide entered into a comprehensive strategic alliance relating
to its Techtides with Nycomed. The strategic alliance provided for research and
development support and a marketing collaboration. In August 1998, Nycomed
terminated the research and development support, effective December 31, 1998.
At the time the alliance was established, Nycomed made a $10 million equity
investment in Diatide. Through December 31, 1998, Nycomed made additional
payments totalling approximately $14 million to Diatide for research and
development support and achieving certain development milestones. Diatide will
be entitled to an additional $2 million milestone payment from Nycomed upon FDA
approval of Diatide's NDA covering NeoTect. Nycomed is one of the world's
leading producers of medical imaging agents, with net worldwide revenues from
medical imaging operations of approximately $1.1 billion in 1997.
Under Diatide's agreements with Nycomed, Diatide granted Nycomed an option to
obtain exclusive co-promotion rights with respect to Diatide's Techtides in the
United States and an option to obtain exclusive distribution and license rights
with respect to these Techtides in Europe, South Africa and certain countries in
the Middle East. Nycomed has exercised its co-promotion and licensing options
with respect to AcuTect and NeoTect.
As a result of Nycomed having terminated its research and development support,
Nycomed has no rights to co-promote in the United States any additional
Techtides and its option to license additional Techtides in Europe, South Africa
and certain countries in the Middle East is limited to P748, P483H and P773. As
to each such additional Techtide, the license option is exercisable by Nycomed
at any time prior to the expiration of the 60-day period following the date on
which Diatide enrolls its first patient in a Phase 3 clinical trial with respect
to such Techtide.
Under the United States co-promotion agreement, Nycomed is required to market
and promote, on a joint basis with Diatide, AcuTect and NeoTect. Nycomed has
primary responsibility for promoting products to group purchasing organizations,
hospital pharmacies and other relevant departments at hospitals. Diatide has
primary responsibility for promotion to commercial radiopharmacies. Nycomed's
United States co-promotion rights with respect to these Techtides will expire on
the fifth anniversary of the first sale of the product in the United States. In
certain limited cases involving additions to the indications of a previously
optioned product, Nycomed may extend the term of its co-promotion rights up to
an additional five years by agreeing to fund 50% of Diatide's costs of
conducting the Phase 3 clinical trials required with respect to such additional
indications. Diatide retains the right to manufacture Techtides which are
subject to this co-promotion arrangement. Diatide is required to pay Nycomed a
specified percentage of United States adjusted net sales of each co-promoted
Techtide.
Under the distribution and license agreement, Nycomed is required to make
certain milestone payments to Diatide upon the achievement of specified
regulatory objectives with respect to Techtides that Nycomed exercises its
option to distribute and license. In 1998, Nycomed paid to Diatide $4 million in
milestone payments. In addition, Nycomed is required to pay running royalties as
to such Techtides based on a percentage
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of Nycomed's net sales in the licensed territory. Diatide generally is
responsible for conducting all required clinical trials of Techtides licensed by
Nycomed. Nycomed is responsible for prosecuting the marketing approval
applications in the licensed territory and the funding of additional market
studies to support the marketing of licensed products. Nycomed is required to
purchase from Diatide, and Diatide is required to supply to Nycomed, Nycomed's
requirements of licensed products at specified transfer prices.
Diatide has agreed that generally it will not market or sell in the licensed
territory (including the United States during the term of the co-promotion
agreement in the case of AcuTect and Neotect) any substantially similar product
that is targeted at the same receptor and has substantially the same clinical
indications as any Techtide for which Nycomed has exercised its option to
distribute and license.
Marketing and Distribution
Diatide plans to market both the diagnostic and therapeutic products for which
it obtains regulatory approval primarily through co-marketing, licensing and
distribution arrangements with pharmaceutical company collaborators. For
example, Diatide is currently marketing AcuTect in the United States through its
co-promotion arrangement with Nycomed. Subject to obtaining necessary regulatory
approvals, Diatide expects to co-promote NeoTect in the United States with
Nycomed and that Nycomed will market both AcuTect and NeoTect in Europe, certain
countries of the Middle East and South Africa pursuant to the licenses granted
to it by Diatide. Diatide believes that this approach will both increase market
penetration and commercial acceptance of its products and enable Diatide to
avoid the need to expend significant funds to develop a large sales force.
In the United States, Diatide expects that its in-house sales force primarily
will market Diatide's products to commercial radiopharmacies. These
radiopharmacies currently serve as the distribution channel for approximately
80% of all unit dose radiopharmaceuticals sold in the United States. Diatide
anticipates that its marketing organization initially will consist of a small
number of sales representatives, coordinated by a director of sales and
marketing and assisted by a small marketing and technical support group. As of
February 28, 1999, Diatide employed seven persons in marketing and sales
functions.
Because Diatide's Techtides are being designed for imaging of some disease
states that have not previously been diagnosed with radiopharmaceuticals,
Diatide believes that a successful marketing program will require significant
efforts to familiarize attending physicians with the availability and attributes
of these products. In this regard, Diatide has implemented a range of programs
to familiarize physicians with AcuTect, including grand rounds programs in which
recognized physicians conduct seminars in hospitals to educate other physicians
about AcuTect, targeted AcuTect sampling programs, "seed trials" for exploring
off label indications and publication of case studies. Diatide expects to look
to its pharmaceutical company partners, which typically have large sales forces,
to detail Diatide's products with hospital physicians, such as nuclear medicine
physicians and radiologists, as well as referring physicians, such as
oncologists, cardiologists and vascular surgeons.
Manufacturing
The principal components of Diatide's Techtides and most of Diatide's Theratides
are synthetic peptides and radioisotopes, such as technetium and rhenium.
Technetium is a commonly used radioisotope which emits or
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signals that can be detected using widely available nuclear medicine diagnostic
equipment. The peptides are synthesized from readily available amino acids. The
production process involves inexpensive and well-established solid phase peptide
synthesis technology. Technetium and rhenium radioisotopes are available from a
variety of commercial suppliers and are inexpensive.
Diatide synthesizes the peptides that it requires for its research activities.
Diatide purchases the peptides required for clinical trials of its Techtides and
commercial production of AcuTect from a large pharmaceutical manufacturer. This
manufacturer produces synthetic peptides in accordance with the FDA's
requirements for current Good Manufacturing Practice ("cGMP"). Diatide contracts
with other third parties for the assembly and shipment of AcuTect. Diatide
expects to enter into similar arrangements with respect to the manufacture,
assembly and shipment of NeoTect and its other Techtides and Theratides.
Diatide packages and ships AcuTect and plans to package and ship its other
Techtides in the form of non-radioactive ("cold") kits consisting only of the
Diatide-engineered peptide. Prior to administration, a commercial or hospital
radiopharmacy combines technetium-99 with the peptide, which is designed to
permit this coupling to occur in a simple process. In some cases, heating of the
synthetic peptide/technetium mixture is expected to be required for a short
period of time to facilitate coupling. This heating process is customary in the
preparation of radiopharmaceuticals.
The manufacturing process for Tin-117m DTPA is more complicated than that used
for Techtides. Diatide expects that Tin-117m DTPA will be radiolabelled when
supplied and will have approximately a 30-day shelf life. Diatide has entered
into an arrangement with a third-party manufacturer to supply it with the
Tin-117m DTPA required for clinical trials of this compound. Diatide expects to
enter into a similar arrangement for the supply of commercial quantities of this
compound if it obtains regulatory clearance for commercial sale.
Concurrently with the development of its Theratides, Diatide is developing and
evaluating different manufacturing processes for its Theratides, giving due
consideration to the cost, availability and characteristics of the components of
the Theratides.
Any manufacturing operations by Diatide will be subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling and
disposal of certain materials and waste products.
Patents, Trade Secrets and Licenses
Patented protection for Diatide's product candidates, processes and know-how is
very important to Diatide's business. Diatide's policy is to file patent
applications to protect technology, inventions and improvements that are
considered important to the development of its business. Diatide also relies
upon trade secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.
Diatide Patents and Patent Applications. Diatide owns 42 United States patents.
Thirteen of these patents cover technology relating to labeling peptides with
technetium. Two were acquired from Receptor Laboratories and cover a method of
generating and screening peptide libraries. Ten of Diatide's patents cover the
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composition of matter of AcuTect, and five cover the composition of matter of
NeoTect. Eleven cover peptide agents for imaging and therapy of tumors, and
eleven cover technetium-labeled peptides for imaging inflammation. Diatide also
has over 40 pending United States patent applications for a wide variety of
technologies relating to labeling peptides with technetium, as well as specific
compositions of matter useful for nuclear medicine imaging of thrombosis, tumors
and inflammation due to infection. Diatide has sought corresponding foreign
patent protection in other major industrial countries in respect of its most
commercially important technologies. To date, Diatide has been granted 20
patents in South Africa, 14 patents in Australia, 13 patents in Europe, and one
patent in Japan.
Licenses From Third Parties. Diatide has licensed various patents and other
technology from third parties pursuant to license agreements, including
exclusive licenses from the NIH, New England Deaconess Hospital and Associated
Universities Inc., the operator of Brookhaven National Laboratories, and
non-exclusive licenses from Centocor, Inc. and Merck & Co., Inc. Among other
things, these licenses cover the products that Diatide is developing for nuclear
medicine imaging of atherosclerotic plaque, the treatment of bone pain
associated with metastatic cancer, thrombus (pulmonary embolism imaging and
technology related to a component of AcuTect. These third party licenses impose
various commercialization, sublicensing, royalty and other payment, insurance
and other obligations on Diatide.
Patent Interference With RhoMed. In December 1998, the United States Patent and
Trademark Office declared an interference between a patent application filed by
Diatide and a patent issued to RhoMed Incorporated, a wholly-owned subsidiary of
Palatin Technologies, Inc. Diatide's pending application is intended to provide
protection for an element of AcuTect. Diatide has been named as the senior party
in the interference proceeding thereby placing the burden of proving prior
inventorship on Palatin.
Confidentiality Agreements. Diatide's practice is to require its employees,
consultants, members of its Scientific Advisory Board, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with it. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with Diatide is to be kept confidential and not
disclosed to third parties, subject to a right to publish certain information in
the scientific literature in certain circumstances and subject to other specific
exceptions. In the case of employees, the agreements provide that all inventions
conceived by the individual shall be the exclusive property of Diatide
Government Regulation
The research, testing, manufacture, labeling, distribution, sale, marketing,
promotion and advertising of Diatide's products and its ongoing research and
development activities are subject to extensive and rigorous regulation by
governmental authorities in the United States and other countries.
FDA Approval
In the United States, pharmaceutical products intended for therapeutic or
diagnostic use in humans are subject to rigorous and extensive FDA regulation
before and after approval. The process of completing preclinical studies
22
<PAGE>
and clinical trials and obtaining FDA approvals for a new drug can take a number
of years and requires the expenditure of substantial resources.
The steps required before a new pharmaceutical product for human use may be
marketed in the United States include:
o preclinical tests;
o submission to the FDA of an IND application, which must become
effective before human clinical trials may commence;
o adequate and well-controlled human clinical trials to establish the
safety and effectiveness of the product;
o submission of an NDA to the FDA, which application is not
automatically accepted for consideration by the FDA; and
o FDA approval of the NDA prior to any commercial sale or shipment of
the product.
These required steps apply to products intended for diagnostic as well as
therapeutic use. However, the clinical testing of diagnostic products may in
some cases take less time to complete than that of therapeutic products because
therapeutic products must be shown to cure, mitigate, treat, or prevent disease.
Preclinical tests include laboratory evaluation of product chemistry and animal
studies to gain preliminary information of a product's pharmacology and
toxicology and to identify any safety problems that would preclude testing in
humans. Products must generally be manufactured according to cGMP. Preclinical
safety tests must be conducted by laboratories that comply with FDA regulations
regarding Good Laboratory Practice ("GLP"). The results of the preclinical tests
are submitted to the FDA as part of an IND application. The FDA reviews these
results prior to the commencement of human clinical trials. Unless the FDA
objects to, or makes comments or raises questions concerning, an IND, the IND
will become effective 30 days following its receipt by the FDA, at which time
initial clinical studies may begin. However, companies often obtain affirmative
FDA approval before beginning such studies.
Clinical trials involve the administration of the investigational new drug to
healthy volunteers and to patients under the supervision of a qualified
principal investigator. The sponsor must conduct the clinical trials in
accordance with the FDA's Good Clinical Practice requirements under protocols
that detail, among other things, the objectives of the study, the parameters to
be used to monitor safety and the effectiveness criteria to be evaluated. The
protocol must be submitted to the FDA as part of the IND. Further, the sponsor
must conduct each clinical study under the auspices of an Institutional Review
Board ("IRB"). The IRB will consider, among other things, ethical factors, the
safety of human subjects, the possible liability of the institution and the
informed consent disclosure which must be made to participants in the clinical
trial.
Clinical trials are typically conducted in sequential phases, although the
phases may overlap.
23
<PAGE>
o Phase 1. In Phase 1, the investigational new drug usually is
administered to between 10 and 50 healthy human subjects and is tested
for safety, dosimetry, tolerance, metabolism, distribution, excretion
and pharmacokinetics.
o Phase 2. Phase 2 involves studies in a limited patient population,
usually 10 to 70 persons, to evaluate the effectiveness of the
investigational new drug for specific indications, determine dose
response and optimal dosage and identify possible adverse effects and
safety risks.
o Phase 3. When an investigational new drug is found to have an effect
and to have an acceptable safety profile in Phase 2 evaluation, Phase
3 trials are undertaken to further test for safety, further evaluate
clinical effectiveness and to obtain additional information for
labelling. Phase 3 trials are conducted in an expanded patient
population at geographically dispersed clinical study sites.
The FDA may at any time impose a clinical hold on ongoing clinical trial at any
time if it is felt that the participants are being exposed to an unanticipated
or unacceptable health risk. In addition, Diatide may suspend clinical trials
for the same reasons. If the FDA imposes a clinical hold, clinical trials may
not recommence without prior FDA authorization and then only under terms
authorized by the FDA.
It is customary in the nuclear medicine imaging industry to conduct pilot
studies in a limited patient population, usually 3 to 25 persons, to determine
whether the product candidate warrants further clinical trials based on
preliminary indications of efficacy. These pilot studies may be performed in the
United States after an IND has become effective or outside of the United States
prior to the filing of an IND in the United States in accordance with government
regulations and institutional procedures.
In order to obtain marketing approval of a product in the United States, Diatide
is required to submit an NDA to the FDA. The NDA includes the results of the
pharmaceutical development, preclinical studies, clinical studies, chemistry and
manufacturing data and the proposed labelling. The FDA may refuse to accept the
NDA for filing if certain administrative and NDA content criteria are not
satisfied. Even after accepting the NDA for review, the FDA may require
additional testing or information before approving the NDA. The FDA must deny an
NDA if applicable regulatory requirements are not ultimately satisfied. If
regulatory approval of a product is granted, such approval may require
post-marketing testing and surveillance to monitor the safety of the product or
may entail limitations on the indicated uses for which it may be marketed.
Finally, the FDA may withdraw product approvals if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
In addition to product approval, Diatide is required to obtain a satisfactory
inspection by the FDA covering its manufacturing facilities or the facilities of
its suppliers before it is permitted to market the product in the United States.
The FDA will review the manufacturing procedures and inspect the manufacturer's
facilities and equipment for compliance with GMP and other requirements. Any
material change in the manufacturing process, equipment or location necessitates
additional preclinical and/or clinical data and additional FDA review and
approval before marketing.
24
<PAGE>
Foreign Regulatory Approval
Diatide is required to obtain the approval of governmental regulatory
authorities comparable to the FDA in foreign countries prior to the commencement
of clinical trials and subsequent marketing of a pharmaceutical product in such
countries. This requirement applies even if Diatide has obtained FDA approval in
the United States. The approval procedure varies from country to country. The
time required may be longer or shorter than that required for FDA approval. A
centralized procedure is effective for the Member States of the European Union
and certain other countries who have agreed to be bound by the approval
decisions of the EMEA.
Pharmaceutical products generally may not be freely exported from the United
States until the FDA has approved the product for marketing in the United
States. However, a company may apply to the FDA for permission to export
finished products to a limited number of countries prior to obtaining FDA
approval for marketing in the United States if the products are covered by an
effective IND or a pending NDA and certain other requirements are met.
Other Regulation
In addition to regulations enforced by the FDA, Diatide also is subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. Diatide's research and development involve the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds.
Although Diatide believes that its safety procedures for storing, handling,
using and disposing of such materials comply with the standards prescribed by
applicable regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, Diatide could be held liable for any damages that result. Any such
liability could have a material adverse effect on Diatide.
Competition
Diatide is subject to intense competition with respect to both its diagnostic
and therapeutic products. Certain radiopharmaceuticals already have been
approved for sale for the diagnosis or treatment of the indications targeted by
Diatide's products under development. In particular, OctreoScan, a peptide-based
radiopharmaceutical using the radioisotope indium-III, is available for the
diagnosis of neuroendocrine tumors, Ceretec, a radiopharmaceutical labeled with
technetium, is available for imaging of inflammation due to infection, and
Metastron and Quadramet are available for the reduction of pain due to
metastatic cancer to the bone.
With respect to Diatide's diagnostic products, there are several well
established medical imaging modalities that currently, and will continue to,
compete against nuclear medicine imaging. These modalities include x-rays, CT,
MRI, ultrasound and other nuclear medicine imaging approaches. In addition,
Diatide is aware of a number of companies which are developing and testing
peptide based radiopharmaceuticals for diagnostic purposes.
There are alternative therapeutics available for the treatment of cancer
indications that are the subject of Diatide's therapeutic programs. These
competitive development activities include radiolabeled monoclonal antibodies
(MABs) for non-Hodgkins lymphoma and neuroendocrine tumors, vaccines for
non-small cell lung cancer, and non-radiolabeled MABs which target changing the
physiology that supports tumor growth.
25
<PAGE>
Key competitive factors affecting these technologies and products include:
o effectiveness
o safety
o reliability
o availability
o price
o patent position
Another important factor is the timing of market introduction of Diatide's or
competitive products. Accordingly, the relative speed with which Diatide can
develop products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market is expected to be an
important competitive factor.
Diatide's competitive position will also depend upon its ability to attract and
retain qualified personnel, to obtain patent protection or otherwise develop
patented products or processes, and to secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
Employees
As of December 31, 1998, we had 88 full-time employees, of whom 15 hold Ph.D.
degrees, two hold M.D.s and 19 hold other advanced degrees. Sixty-three of these
employees are engaged in research and development activities and 25 are employed
in finance and general and administrative activities. Many of Diatide's
management and professional employees have had prior experience with
pharmaceutical, biotechnology or medical products companies, particularly in the
imaging field. None of Diatide's employees is covered by a collective bargaining
agreement. Management considers relations with its employees to be good.
ITEM 2. PROPERTIES
Diatide leases laboratory and office space in two facilities. The first lease,
for approximately 20,000 square feet in Londonderry, New Hampshire, expires in
December 1999. The second lease, approximately 11,000 square feet in Bedford,
New Hampshire, expires in May 2000. Diatide expects to renew both of the leases
in 1999 on similar terms to the existing leases.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS to a VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1998.
26
<PAGE>
Executive Officers
The following table provides information concerning the executive officers of
the Company:
---------------------------------
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Executive Officers:
Richard T. Dean, Ph.D. . . . . . 51 President, Chief Executive Officer, and Director
Ronald B. Kinder. . . . . . . . . 50 Executive Vice President, Chief Operating Officer and Secretary
Daniel F. Harrington . . . . . . 42 Vice President, Chief Financial Officer, and Treasurer
Gerald F. Eisen. . . . . . . . . 50 Vice President of Clinical Operations
</TABLE>
Richard T. Dean, Ph.D., President, Chief Executive Officer, and a Director since
April 1990, is a founder of the Company. Prior to joining the Company, Dr. Dean
served as Director of Radiopharmaceutical Research and Development at Centocor,
Inc., a pharmaceutical company ("Centocor"), from 1986 to 1990, where he was
responsible for cardiovascular radiopharmaceutical imaging agent research and
development. From 1981 to 1986, Dr. Dean served in a variety of positions at
Mallinckrodt, a pharmaceutical and surgical instruments company, most recently
as Associate Director, Diagnostic Chemistry Research and Development. Dr. Dean
received a B.S. in chemical engineering from Cornell University, an M.S. in
chemistry from the University of Michigan and a Ph.D. in organic chemistry from
the University of California, Berkeley.
Ronald B. Kinder, Executive Vice President, Chief Operating Officer and
Secretary, joined the Company in April 1994. Prior to joining the Company, Mr.
Kinder served as Vice President and General Manager of Teledyne Waterpik, Inc.,
a medical products company, from 1989 to 1994. From 1986 to 1989, Mr. Kinder
served as Director of Marketing and Sales for Gambro, Inc., a medical technology
products company, and from 1970 to 1986, Mr. Kinder served in a variety of
positions at Mallinckrodt, most recently as Director of Marketing, Diagnostic
Products Division. Mr. Kinder received a B.A. in zoology from the University of
Missouri and a M.B.A. from St. Louis University.
Daniel F. Harrington, Vice President, Chief Financial Officer and Treasurer,
joined the Company in December 1996. Prior to joining the Company, Mr.
Harrington served as Chief Financial Officer of GenRad, Inc., an electronic
systems and software company, during 1996 and Vice President of Financial
Planning and Analysis during 1995. From 1993 to 1995, Mr. Harrington served as
Director of Operations Finance & Logistics at Waters Corporation, an analytical
instrument company, and from 1987 to 1993 served in a variety of positions at
Millipore Corporation, a purification technology company, most recently as
Director of Finance. Mr. Harrington received a BA in Economics from St. Anslem
College.
Gerald F. Eisen, Vice President, Clinical Operations, joined the Company in July
1998. Prior to joining the Company, Mr. Eisen served as Senior Director of
Clinical Affairs of Genzyme Corporation, a biopharmaceutical company, from 1997
to 1998 and as Director of Clinical Affairs from 1995 to 1997. From 1977 to 1994
Mr. Eisen served in a variety of positions at Janssen Pharmaceutica, Inc., a
pharmaceutical company, most recently as Associate Director of Clinical
Research. Mr. Eisen received a BS in biology from Waynesburg College.
27
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Diatide's Common Stock is traded on the Nasdaq National Market. Diatide's
trading symbol is "DITI". The following table summarizes the high and low sales
prices per share of the Common Stock for the periods indicated below as reported
on the Nasdaq National Market.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
1997
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . $ 7 7/8 $ 6 1/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . $ 6 7/8 $ 4 1/2
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . $ 14 1/8 $ 5
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . $ 12 1/4 $ 5 7/8
1998
First Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . $ 11 1/8 $ 8 1/8
Second Quarter. . . . . . . . . . . . . . . . . . . . . . . . . $ 10 3/4 $ 6 7/8
Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . $ 10 1/8 $ 5 5/8
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . . . . . $ 8 1/4 $ 4 1/2
1999
First Quarter (through March 12, 1999) $ 8 1/2 $ 4 11/16
</TABLE>
The reported closing price of the Common Stock on the Nasdaq National Market on
March 12, 1999 was $ 5 1/16. There were approximately 132 stockholders of record
at December 31, 1998.
We have not paid cash dividends on Diatide Common Stock. Diatide does not intend
to pay cash dividends on its Common Stock in the foreseeable future.
On January 19, 1999, the Company completed the sale of 825,309 shares of Series
B Convertible Preferred Stock to two investors in a private transaction for $6.0
million, net of issuance costs. The securities were sold in reliance on the
exemption afforded by Section 4 (2) of the Securities Act of 1933. The Series B
Convertible Preferred Stock is convertible into shares of the Company's Common
Stock on a one-for-one basis, subject to adjustment for certain events. The
Company also issued Common Stock Purchase Warrants to the investors to purchase
in the aggregate 123,795 shares of Common Stock at an exercise price of $8.72
per share. The Warrants will expire on January 19, 2001.
28
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues . . . . . . . . . . . . . $ 6,385 $ 4,140 $ 2,606 $ 1,519 $ 208
Costs and expenses:
Cost of products sold . . . 89 -- -- -- --
Research and development (3) 10,940 11,762 11,976 6,556 4,445
Selling, general and
administrative (3) . . . . 6,229 4,172 3,167 1,636 1,714
------- ------- -------- ------- -------
Loss from operations . . . . . . . (10,873) (11,794) (12,537) (6,673) (5,951)
Interest income . . . . . . . . . 664 807 721 306 199
Interest expense . . . . . . . . . (8) (2) (18) (46) (7)
------- -------- -------- ------- -------
Net loss . . . . . . . . . . . . $(10,217) $(10,989) $(11,834) $(6,413) $(5,759)
======== ======= ======== ======= =======
Net loss and pro forma net loss
per share (1)(2) $ (0.97) $ (1.05) $ (1.28) $ (0.92)
======== ======== ======== =======
Shares used in computing net
loss and pro forma net loss
per share (1)(2). . . . . . . . 10,562 10,487 9,252 6,958
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
marketable securities . . . . . . $ 7,664 $ 17,533 $ 16,787 $ 9,078 $ 2,710
Working capital . . . . . . . . . 5,008 14,880 13,612 8,227 1,899
Total assets . . . . . . . . . . 10,273 19,016 18,315 10,652 3,696
Long-term debt, net of current
portion. . . . . . . . . . . . . 251 10 13 89 286
Deficit accumulated during the
development stage. . . . . . . (55,387) (45,170) (34,181) (22,347) (15,934)
Total stockholders' equity . . . . 6,126 15,908 14,684 9,281 2,492
</TABLE>
(1) See Note 2 to Notes to Financial Statements for information concerning the
computation of pro forma net loss per share and shares used in computing
pro forma net loss per share.
(2) Net loss and proforma net loss per share and the shares used in so
computing for 1996 and 1995 have been restated to reflect the requirements
of Statement No. 128 "Earnings per Share" of the Financial Accounting
Standards Board and Staff Accounting Bulletin No. 98.
(3) Reclassifications of intellectual property costs from research and
development to selling, general and administrative were made to 1997 and
1996 statements to conform to the current year presentation.
29
<PAGE>
ITEM 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
General
Diatide is a specialty pharmaceutical company engaged in the discovery,
development and commercialization of patented imaging and therapeutic drugs. In
September 1998, we received marketing approval from the FDA of our Techtide
AcuTect. We began marketing AcuTect in the U.S. in October 1998 with our
corporate partner Nycomed. In June 1998, we submitted to the FDA an NDA for
NeoTect (formerly P829), for diagnosing malignancy of lung masses, and received
notification that its NDA was assigned priority status. In December 1998 we
received a letter from the FDA stating that the NDA for NeoTect is approvable,
subject to Diatide clarifying certain details and formally agreeing to conduct
certain Phase 4 studies. However, the FDA has not yet granted marketing approval
for NeoTect, and there can be no assurance that such approval will be granted or
as to the timing of such approval.
All revenues received by Diatide from inception through December 31, 1998 have
resulted from research and development support payments and the option exercise
payments and the milestone fees for AcuTect and NeoTect from Nycomed under the
Company's collaborative agreements with Nycomed, research grants from the
National Institutes of Health and the Department of Defense, fees received for
entering into option agreements with a pharmaceutical company and, in the fourth
quarter of 1998, product sales of AcuTect.
Diatide has incurred net losses since its inception. We expect to incur
additional significant operating losses over the next 12 to 24 months. We also
expect cumulative net losses to increase during the initial marketing of AcuTect
and as the Company's research and development and clinical trial efforts
continue. We expect that research and development expenses during 1999 will be
at approximately the same level as in 1998 as we continue more advanced
preclinical studies and late-stage clinical trials. We expect personnel and
patent costs will increase in the future. Patent costs also would increase if
Diatide became involved in litigation or administrative proceedings involving
its patents or those of third parties. We expect manufacturing, marketing,
sales, and distribution costs will increase in the future to support the
commercialization of AcuTect and NeoTect. Diatide has incurred cumulative net
losses since inception through December 31, 1998 of $55,387,000.
Results of Operation
Years Ended December 31, 1998 and 1997
Revenues. Diatide had revenues of $6,385,000 and $4,140,000 for the years
ended December 31, 1998 and 1997, respectively. Revenues in 1998 included
$2,000,000 of research and development support payments, a $2,000,000 milestone
fee for the filing of an NDA for NeoTect and a $2,000,000 milestone fee for the
FDA approval of AcuTect, all paid to Diatide by Nycomed under Diatide's
collaborative agreements with Nycomed. Revenues in 1998 also included $207,000
of contract revenues received under research grants from the NIH and, in the
fourth quarter, $177,000 from initial sales of AcuTect. Revenues in 1997 were
comprised of $140,000 of contract revenues received under grants from the NIH
and $2,000,000 of research and development support payments and a $2,000,000
milestone payment for the FDA filing of an NDA for AcuTect paid to Diatide by
Nycomed under Diatide's collaborative agreements with Nycomed. In August 1998,
Nycomed terminated its obligation to make further research and development
support payments to Diatide, effective December 31, 1998.
Research and development. During the years ended December 31, 1998 and
1997, we expended $10,940,000 and $11,762,000, respectively, on research and
development activities. Research and development costs in 1998 reflect the
preparation and filing of an NDA for NeoTect and increased research activity for
therapeutic drugs. Research and development costs in 1997 reflect the
preparation and filing of an NDA for AcuTect and NeoTect clinical trial costs.
30
<PAGE>
In 1995, Diatide recorded deferred compensation of $1,663,000 related to the
grant of stock options to employees involved in research and development, which
is being amortized over the vesting periods of such options (generally five
years). Research and development expenses in 1998 and 1997 included $137,000 and
$321,000, respectively, of amortization expense related to this deferred
compensation.
Selling, general and administrative. Diatide's selling, general and
administrative expenses were $6,229,000 and $4,172,000 in 1998 and 1997,
respectively. The $2,057,000 increase in 1998 resulted from increases in
promotional costs, including staffing and outside services shared with Nycomed
under our co-promotion agreement, to support the Company's marketing launch of
AcuTect and increases in staffing and related costs required to support an
increased level of activities for commercial operations.
Interest. Interest income was $664,000 in the year ended December 31, 1998
compared with $807,000 in the year ended December 31, 1997, reflecting a
decrease in the level of cash, cash equivalents and marketable securities during
1998 compared to 1997.
Net loss. As a result of the above factors, Diatide incurred net losses of
$10,217,000 and $10,989,000 in the years ended December 31, 1998 and 1997,
respectively.
Years Ended December 31, 1997 and 1996
Revenues. We had revenues of $4,140,000 and $2,606,000 in 1997 and 1996,
respectively. Revenues in 1997 were comprised of $2,000,000 of research and
development support payments and a $2,000,00 milestone fee for the FDA filing of
an NDA for AcuTect received by Diatide under its collaborative agreements with
Nycomed and $140,000 of contract revenues under research grants. Revenues in
1996 were comprised of $2,000,000 of research and development support payments
received by Diatide under its collaborative agreements with Nycomed and $106,000
of contract revenues under research grants and a $500,000 option exercise
payment for NeoTect.
Research and development. During 1997 and 1996, we expended $11,762,000 and
$11,976,000, respectively, on research and development activities. The $214,000
decrease in 1997 resulted from reduced clinical trial activity for AcuTect in
1997 as compared to 1996 and the timing of costs of other clinical trials, which
were offset in part by increases in staffing and increased clinical trial
activity for NeoTect in 1997 as compared to 1996.
In 1995, Diatide recorded deferred compensation of $1,663,000 related to the
grant of stock options to employees involved in research and development, which
is being amortized over the vesting periods of such options (generally five
years). Research and development expenses in 1997 and 1996 included $321,000 and
$334,000, respectively, of amortization expense related to this deferred
compensation.
Selling, general and administrative. The Company's selling, general and
administrative expenses were $4,172,000 and $3,167,000 in 1997 and 1996,
respectively. During 1997, increases in staffing and related costs were required
to support the Company's anticipated increased level of activities for
commercial operations.
Interest. Interest income was $807,000 in 1997 compared with $721,000 in
1996, reflecting a higher level of cash, cash equivalents and marketable
securities during 1997 resulting from the proceeds of the Company's initial
public offering in June 1996 and issuance of Series A convertible preferred
stock and common stock warrants in September 1997. Interest expense in 1997 and
1996 was $2,000 and $19,000, respectively, comprised primarily of interest
incurred on borrowings to finance the purchase of equipment and leasehold
improvements. During the third quarter of 1996, we repaid our bank borrowings.
Net Loss. As a result of the above factors, Diatide incurred net
losses of $10,989,000 and $11,834,000 in 1997 and 1996, respectively.
Liquidity and Capital Resources
In September 1997, Diatide issued 1,210,256 shares of Series A convertible
preferred stock and warrants to purchase 181,538 shares of Common Stock to three
institutional investors in a private offering, raising $11.6 million of net
proceeds. We completed our initial public offering of 2,200,000 shares of Common
Stock in June 1996, raising approximately $16.4 million of net proceeds. As of
December 31, 1998, we had $7,664,000 of cash, cash equivalents and marketable
securities and working capital of $5,008,000. In January 1999, Diatide issued
825,309 shares of Series B convertible preferred stock and warrants to purchase
123,795 shares of common stock to two institutional investors in a private
offering, raising $6.0 million of net proceeds.
Our future capital requirements will depend on many factors, including:
[box] revenues and margins on sales of AcuTect;
[box] continued progress in our research and product development programs, as
well as the magnitude of these programs;
[box] the scope and results of preclinical studies and clinical trials;
[box] the time and costs involved in obtaining regulatory approvals;
[box] competing technological and market developments;
[box] our ability to establish and maintain collaborative academic and
commercial research, development and marketing relationships;
[box] the costs and success of commercialization activities and arrangements;
[box] the costs involved in preparing, filing, prosecuting,maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs; and
[box] the costs of obtaining any required licenses of third parties'
technologies.
During 1998 and 1997, Diatide's capital expenditures totaled $858,000 and
$388,000, respectively, primarily for the development of business information
systems to support commercial operations and the acquisition of certain
laboratory equipment and furniture and fixtures in 1998 and laboratory and
computer equipment in 1997. We expect 1999 capital expenditures to approximate
the 1997 level.
Based upon our current operating plan, we anticipate that our existing capital
resources, together with anticipated product revenues from sales of AcuTect,
will be adequate to satisfy our capital requirements through 1999. However, the
timing and extent of our capital requirements will be materially dependent on
the actual level of product sales and the margin on such sales. In the future,
we may be required to raise additional funds, including through collaborative
relationships and public or private financings. Such additional financing may
not be available to us or may not be available on acceptable terms.
With the termination of the research and development relationship with Nycomed,
Diatide has no committed external sources of capital, and as noted above,
expects to incur significant operating losses over the next 12 to 24 months. The
Company intends to seek additional equity, debt and lease financing to fund
future operations, depending upon the terms on which such sources of funding may
be available from time to time. In addition, the Company intends to seek
additional collaborative development and commercialization relationships with
potential corporate partners in order to fund certain of its programs, including
the future development and commercialization of its Techtide programs (other
than the programs covered by Nycomed's options), its Sn-117m DTPA program and
its Theratide program. If we are unable to obtain adequate funding on a timely
basis, we may be required to significantly curtail one or more of our research
or product development programs, or we also could be required to seek funds
through arrangements with collaborative partners or others that may require us
to relinquish rights to certain of our technologies, product candidates or
products which we would otherwise pursue on our own.
31
<PAGE>
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This includes our scientific and manufacturing equipment containing
computer-related components. This could result in a system failure or
miscalculations causing disruptions of operations or inaccuracies in computer
output.
We have developed a strategy to address the potential exposures related to the
impact on our computer systems and equipment for the year 2000 and beyond. Our
plan to resolve the Year 2000 Issue involves the following four phases:
assessment, remediation, testing, and implementation. We recently completed the
implementation of enterprise-wide business information systems to support
commercial operations at a cost of approximately $512,000 to date. These systems
are Year 2000 compliant. To date, we have completed our assessment of other
information and operational systems, including scientific and manufacturing
control systems and equipment, that could be significantly affected by the Year
2000. That assessment indicated that software and hardware (embedded chips) used
in certain scientific equipment could be significantly affected by the Year
2000. We are 20% complete on the remediation phase for this equipment. We expect
to complete remediation efforts no later than September 30, 1999. Testing and
implementation of affected equipment is expected to be complete by November 30,
1999.
Because Diatide has relationships with, and is to varying degrees dependent
upon, a large number of third parties that provide information, goods and
services to Diatide, we are also subject to risks associated with such third
parties' Year 2000 issues. These third parties include financial institutions,
customers, distributors, suppliers, vendors, research partners and governmental
entities. If significant numbers of these third parties experience failures on
their computer systems or equipment due to Year 2000 non-compliance, it could
affect our ability to process transactions, manufacture products, or engage in
similar normal business activities. We have instituted programs, including
internal records review and use of external questionnaires, to identify key
third parties, assess their level of Year 2000 compliance, update contracts and
address any non-compliance issues. To date, we are not aware of any third party
Year 2000 issue that would materially impact Diatide's results of operations,
liquidity or capital resources. However, Diatide has no means of ensuring that
external agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could materially
impact Diatide. The effect of non-compliance by external agents is not
determinable. We have contingency plans for certain critical applications
provided by third parties and are working on such plans for others. These
contingency plans involve, among other actions, manual workarounds, increasing
inventories, and adjusting staffing strategies.
The total cost of the Year 2000 systems assessments and conversions, excluding
the recently implemented business information systems, is funded through
operating cash flows. Diatide is expensing or capitalizing these costs as
appropriate in accordance with generally accepted accounting principles. We
currently expect such amount to be less than $100,000. The actual financial
impact could, however, exceed this estimate.
Our plans to complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, and other factors.
Estimates on the status of completion and the expected completion dates are
based on costs incurred to date compared to total expected costs. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
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This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Risk Factors."
Risk Factors
We Are At An Early Stage of Development
We were founded in February 1990 and only introduced our first product into the
market in October 1998. All but two of our products are in research or
development. The products that we have not yet completed developing will require
additional research and development, extensive preclinical studies and clinical
trials and regulatory approval prior to any commercial sales.
We Are Subject to Technological Uncertainty in Our Development Efforts
We must successfully address a number of technological challenges to complete
the development of certain of our potential products. These products may not be
efficacious or may prove to have undesirable or unintended side effects,
toxicities or other characteristics that may prevent or limit commercial use.
The use of synthetic peptides in radiopharmaceuticals, which is central to our
technology, is new to nuclear medicine. We believe that the FDA has granted
marketing approval of only two imaging products, including AcuTect, based on
this scientific approach and has not approved any therapeutic products based on
this approach.
There Are Uncertainties Related to Clinical Trials
In order to obtain regulatory approvals for the commercial sale of any of our
products under development, we will be required to demonstrate through
preclinical testing and clinical trials that the product is safe and
efficacious. We currently are conducting preclinical tests and clinical trials
of a number of potential products. The results from preclinical testing and
early clinical trials of a product that is under development may not be
predictive of results that will be obtained in large-scale later clinical
trials. We may not be able successfully to complete those clinical trials that
we initiate. In addition, we may not be able to complete such trials on a timely
basis.
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Two examples of ways in which the results of early clinical trial can affect
development of product candidates are:
o In Phase I clinical trials of one of our Techtides, P483H for medical
imaging of infection due to inflammation, the compound concentrated in
patients' stomachs at unexpectedly high levels. As a result, we
conducted additional preclinical testing of this compound and
alternative compounds in animals to determine the cause of this
phenomenon. We recently initiated a Phase I clinical trial of a new
formulation of P483H.
o In a pilot study of a compound for medical imaging of atherosclerotic
plaque, we determined that the compound did not exhibit sufficient
sensitivity to warrant continuing development. We synthesized new
compounds for this indication and screened them in animal models.
The rate of completion of our clinical trials is dependent on the rate of
patient enrollment. Patient enrollment is a function of many factors, including
the size of the patient population, the nature of the protocol, the proximity of
patients to clinical sites and the eligibility criteria for the study. Delays in
planned patient enrollment may result in increased costs and program delays. For
example, patient enrollment in our Phase 2 clinical trial of Tin-117m DTPA has
been slower than anticipated because of the reluctance of prospective patients
who are suffering from pain due to metastatic cancer to the bone to receive a
placebo.
There Is No Certainty That We Will Obtain Regulatory Approvals; The Approval
Process Is Costly And Lengthy
The production and the marketing of our products and our ongoing research and
development activities are subject to extensive regulation by federal, state and
local governmental authorities in the United States and other countries.
Clearing the regulatory process for the commercial marketing of a pharmaceutical
product takes many years and requires the expenditure of substantial resources.
We have had only limited experience in filing and prosecuting applications
necessary to gain regulatory approvals. Thus, we may not be able to obtain
regulatory approvals to conduct clinical trials of or manufacture or market any
of our potential products.
Factors that may affect the regulatory process for our product candidates
include:
o Our analysis of data obtained from preclinical and clinical activities
is subject to confirmation and interpretation by regulatory
authorities, which could delay, limit or prevent regulatory approval.
o We or the FDA may suspend clinical trials at any time if the
participants are being exposed to unanticipated or unacceptable health
risks.
o Any regulatory approval to market a product may be subject to
limitations on the indicated uses for which we may market the product.
These limitations may limit the size of the market for the product.
If we fail to comply with applicable regulatory requirements, we may be subject
to fines, suspension or withdrawal of regulatory approvals, product recalls,
seizure of products, operating restrictions and criminal prosecutions.
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As to products for which we obtain marketing approval, we, the manufacturer of
the product (if other than us) and the manufacturing facilities will be subject
to continual review and periodic inspections by the FDA. The subsequent
discovery of previously unknown problems with the product, manufacturer or
facility may result in restrictions on the product or manufacturer, including
withdrawal of the product from the market.
The FDA may change its policies as to regulatory matters in the future. Also,
additional statutes or regulations applicable to our business may be adopted.
Such policy changes or additional statutes or regulations impose substantial
additional costs or otherwise adversely affect our operations.
The Nuclear Regulatory Commission and state authorities regulate the use,
handling, storage and disposal of products containing radioisotopes, such as
Tin-117m DTPA and sources of technetium. We must comply with these regulations
in connection with the testing, manufacturing and marketing of or products and
product candidates.
We also are subject to numerous and varying foreign regulatory requirements
governing the design and conduct of clinical trials and the manufacturing and
marketing of our products. The approval procedure varies among countries. The
time required to obtain foreign approvals often differs from that required to
obtain FDA approval. Approval by the FDA does not ensure approval by regulatory
authorities in other countries. For example, although the FDA has granted an NDA
permitting us to market AcuTect in the United States, Nycomed withdrew the MAA
filed with the EMEA relating to AcuTect because of the unfavorable preliminary
response of the EMEA to such application.
We may not receive regulatory approvals to conduct clinical trials of our
products or to manufacture or market our products. In addition, regulatory
agencies may not grant such approvals on a timely basis or may revoke previously
granted approvals. All of these events may have a material adverse effect on our
business, financial condition and results of operations.
All of the foregoing regulatory matters also are applicable to development,
manufacturing and marketing undertaken by our licensees and other collaborators.
There is Uncertainty as to the Market Acceptance of Our Technology and Products
The commercial success of our products that are approved for marketing by the
FDA will depend upon their acceptance by the medical community and third party
payors as clinically useful, cost-effective and safe. The synthetic
peptide-based radiopharmaceutical and other peptide based technology that we are
developing is relatively new. As a result, peptide based radiopharmaceuticals
have not been extensively tested in humans or used in the medical community.
These factors may make it more difficult for us to achieve market acceptance of
our products, particularly the first products that we introduce to the market
based on this new technology.
Other factors that we believe will materially affect market acceptance of our
products include:
o The timing of the receipt of marketing approvals and the countries in
which such approvals are obtained;
o The safety, efficacy and ease of administration of the product; and
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o The success of physician education programs.
We Need to Establish Collaborative Commercial Relationships; We Are Dependent On
Our Collaborative Partners
An important element of our business strategy is entering into strategic
alliances or marketing and distribution arrangements with corporate partners for
the development, commercialization, marketing and distribution of certain of our
potential products. To date, we have only entered into one such arrangement with
only one corporate partner, Nycomed. In August 1998, Nycomed terminated the
research and development portion of its alliance with us, effective December 31,
1998. We are actively seeking additional collaborations with respect to our
Techtide programs that are not subject to Nycomed's options and our Theratide
and Tin-117m DTPA therapeutic programs. Although we are engaging in limited
clinical development of our Techtides and Tin-117m DTPA and preclinical
development of our Theratides in order to generate sufficient data to enter into
discussions with potential collaborative partners, we do not intend to engage in
any significant clinical trials of our Techtides or Theratides without first
obtaining financial support from a collaborative partner unless our existing
capital resources increase significantly.
We may not be able to negotiate any additional collaborative or marketing and
distribution arrangements. Moreover, the terms of any such arrangement may not
be favorable to us. If we are unable to establish additional collaborative
arrangements, our business may be adversely affected.
Our existing collaboration with Nycomed and any future collaboration arrangement
that we may enter into with other third parties may not be scientifically or
commercially successful. In particular, it is likely that a significant portion
of any payments due from the collaborator to us will be contingent upon
completion of development milestones or be based upon a percentage of net sales.
The factors that may affect the success of our collaborations include:
o Our collaborative partners may be pursuing alternative technologies or
developing alternative products, either on their own or in
collaboration with others, that may be competitive with the product as
to which they are collaborating with us. For example, Nycomed
manufactures and distributes a wide variety of imaging agents for
other imaging modalities that may compete against the products that
Nycomed licenses from us or co-markets with us.
o The success of our corporate partners in marketing any successfully
developed products within the geographic areas in which such partners
are granted marketing rights will materially affect our commercial
success. For example, Nycomed has primary responsibility for the
promotion of AcuTect in the United States and, subject to obtaining
final marketing approval from the FDA, will have such responsibility
for the marketing of NeoTect in the United States. A reduction in
sales efforts or a discontinuance of sales of the our products by
collaborative or corporate partners may result in reduced revenues to
us.
o Our collaborative partners generally will have various rights to
terminate the collaboration with us. If a collaborator terminates such
a collaboration, it may be difficult for us to attract a new
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collaborator to work with us as to the particular product. In
addition, the announcement of the termination can adversely affect the
perception of us in the business and financial communities.
We Have Not Been Profitable
We have incurred net losses since our inception. At December 31, 1998, our
accumulated deficit was approximately $55.4 million. We received our first
revenues from product sales only in October 1998. We expect to incur additional
significant operating losses over the next 12 to 24 months and expect cumulative
losses to increase during the initial marketing of AcuTect and as the Company's
research and development and clinical trial efforts continue. We expect that our
losses will fluctuate from quarter to quarter and that such fluctuations may be
substantial.
We Expect To Require Additional Funding
Our future capital requirements will depend on many factors, including:
o continued progress in our research and product development programs,
as well as the magnitude of these programs;
o the scope and results of preclinical studies and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o competing technological and market developments;
o the ability of the Company to establish and maintain collaborative
academic and commercial research, development and marketing
relationships;
o the costs and success of commercialization activities and
arrangements;
o the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs; and
o the costs of obtaining any required licenses of third parties
technologies.
Based upon our current operating plan, we anticipate that our existing capital
resources, will be adequate to satisfy our capital requirements through 1999. In
the future, we may be required to raise additional funds, including through
collaborative relationships and public or private financings. Such additional
financing may not be available to us or may not be available on acceptable
terms.
If we raise additional funds by issuing equity securities, further dilution to
our then existing stockholders will result. In addition, the terms of the
financing may adversely affect the holdings or the rights of such
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stockholders. If we are unable to obtain adequate funding on a timely basis, we
may be required to significantly curtail one or more of our research or product
development programs or reduce our marketing and sales initiatives, or we also
could be required to seek funds through arrangements with collaborative partners
or others that may require us to relinquish rights to certain of its
technologies, product candidates or products which we would otherwise pursue on
our own.
We Face Significant Competition
The pharmaceutical and biotechnology industries are highly competitive and
characterized by rapid and substantial technological change. Our competitors
include pharmaceutical and chemical companies, biotechnology firms, universities
and other research institutions. Many of these competitors are conducting
extensive research and development activities on technologies and products
similar to or competitive with our technologies and products.
Particular competitive factors that we believe may affect us include:
o Many other companies are actively seeking to develop nuclear medicine
imaging agents that will compete with our Techtides. These competitive
products may be more effective than our products or may render our
technologies and products obsolete or noncompetitive.
o Certain radiopharmaceuticals already have been approved for sale for
the diagnosis or treatment of the indications targeted by our
products. In particular, OctreoScan(R), a peptide based
radiopharmaceutical, is available for the diagnosis of neuroendocrine
tumors, Ceretec(R), a radiopharmaceutical labeled with technetium, is
available for imaging inflammation due to infection, and Metastron(R)
and Quadramet(R) are available for the reduction of pain due to
metastatic cancer to the bone.
o There are several well-established medical imaging modalities that
compete against nuclear medicine imaging, including x-rays, CT, MRI
and ultrasound.
o Many of our competitors have substantially greater financial,
technical and human resources than we have, including greater
experience and capabilities in undertaking preclinical studies and
human clinical trials, obtaining FDA and other regulatory approvals
and manufacturing and marketing pharmaceuticals. Our principal
competitors include such large companies as Du Pont Merck and
Mallinckrodt.
In addition, there are alternative therapeutics available for the treatment of
the cancer and cardiovascular indications that are the subject of our Theratide
programs. These competitive development activities include radiolabeled
monoclonal antibodies (MABs) for non-Hodgkins lymphoma and neuroendocrine
tumors, vaccines for non-small cell lung cancer, and non-radiolabeled MABs which
target changing the physiology that supports tumor growth.
Our Success Depends on Our Protecting Our Patents and Patented Rights
Our success depends in significant part on our ability to develop patentable
products, to obtain patent protection for our products, both in the United
States and in other countries, and to enforce these patents. The patent
positions of pharmaceutical and biotechnology firms, including us, are generally
uncertain and involve complex legal and factual questions. As a result, patents
may not issue from any patent applications that we own or license. If patents
do issue, the claims allowed may not be sufficiently broad to protect our
technology. In
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addition, issued patents that we own or license may be challenged, invalidated
or circumvented. Our patents also may not afford us protection against
competitors with similar technology.
Our success also depends on our not infringing patents issued to competitors or
others. We are aware of patents and patent applications belonging to competitors
and others that may require us to alter our products or processes, pay licensing
fees or cease certain activities.
We may not be able to obtain a license to any technology owned by a third party
that we require to manufacture or market one or more products. Even if we can
obtain a license, the financial and other forms may be disadvantageous.
Our success also depends on our maintaining the confidentiality of our trade
secrets and patented know-how. We seek to protect such information by entering
into confidentiality agreements with our employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors. These
agreements may be breached by such parties. We may not be able to obtain an
adequate, or perhaps, any remedy to remedy such a breach. In addition, our trade
secrets may otherwise become known or be independently developed by our
competitors.
We Are A Party To A Patent Interference Relating To An Element of AcuTect
In December 1998, at our request the United States Patent and Trademark Office
declared an interference between a patent application filed by us and a patent
issued to RhoMed Incorporated, a wholly-owned subsidiary of Palatin
Technologies, Inc. This proceeding will determine the patentability of the
technology that is the subject matter of the interference as well as which party
first developed this technology. If the technology is patentable, the party that
first developed the technology will be awarded the United States patent rights.
The process of resolving an interference can take many years. If the technology
that is the subject of this proceeding is found to be patentable and RhoMed is
found to be the party that first developed the technology, we may not be able to
manufacture or market AcuTect in the United States without a license from
RhoMed. RhoMed would be under no obligation to grant us such a license or to do
so on commercially acceptable terms. Accordingly, an adverse outcome in this
proceeding could materially adversely affect our business, financial position
and results of operations.
We May Become Involved in Additional Proceedings Relating to
Intellectual Property Rights
The pharmaceutical and biotechnology industries have been characterized by
significant litigation and interference and other proceedings regarding patents,
patent applications and other intellectual property rights. In addition to the
interference proceeding with RhoMed, we may become parties to additional patent
litigation and other proceedings in the future. The types of situations in which
we may become parties to such litigation or proceedings include:
o We may initiate litigation or other proceedings against third parties
to enforce our patent rights.
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o We may initiate litigation or other proceedings against third parties
to seek to invalidate the patents held by such third parties or to
obtain a judgment that our products or processes do not infringe such
third parties' patents.
o If our competitors file patent applications that claim technology also
claimed by us, we may participate in interference or opposition
proceedings to determine the priority of invention.
o If third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights,
we will need to defend against such proceedings.
An adverse outcome in any litigation or other proceeding could subject us to
significant liabilities to third parties and require us to cease using the
technology that is at issue or to license the technology from third parties. We
may not be able to obtain any required licenses on commercially acceptable terms
or at all. Thus, an unfavorable outcome in any patent litigation or other
proceeding could have a material adverse effect on our business, financial
condition or results of operations.
The cost to us of any patent litigation or other proceeding, even if resolved in
our favor, could be substantial. Some of our competitors may be able to sustain
the cost of such litigation and proceedings more effectively than we can because
of their substantially greater resources. Uncertainties resulting from the
initiation and continuation of patent litigation or other proceedings could have
a material adverse effect on our ability to compete in the marketplace. Patent
litigation and other proceedings may also absorb significant management time.
Our Patent Licenses are Subject to Termination in Certain Circumstances
We are a party to a number of patent licenses that are important to our business
and expect to enter into additional patent licenses in the future. These
licenses impose various commercialization, sublicensing, royalty, insurance and
other obligations on us. If we fail to comply with these requirements, t he
licensor will have the right to terminate the license.
We Have Only Limited Sales and Marketing Experience
We introduced our first product to the market in October 1998 and have only
limited product sales, marketing and distribution experience. Although we plan
to rely significantly on collaborative partners for the marketing and
distribution of its products through co-marketing, other licensing or
distribution arrangements, we expect to market and sell certain of our products
directly and to engage in certain other marketing activities in collaboration
with our partners. For example, under our United States co-promotion agreement
with Nycomed, we have primary responsibility for promotion of the products
covered by such agreement to commercial radiopharmacies.
Our strategy of relying on collaborative partners to market and distribute our
products will result in our being dependent upon the success of the efforts of
these collaborators in performing such functions. The terms of these marketing
and distribution arrangements may not be favorable to us. In addition, our
partner may not successfully market our products. In many instances we may have
little or no control over our partners' activities in marketing and distributing
our products.
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If our plan to rely on corporate partners for significant aspects of marketing
and selling our products is unsuccessful for any reason, we may need to recruit
and train a far larger marketing and sales force than we currently anticipate
doing. In such event, we would face a number of additional risks, including:
o we may not be able to attract and build a sufficient marketing staff
or sales force;
o the cost of establishing such a marketing staff or sales force may not
be justifiable in light of anticipated product revenues; and
o the Company's direct sales and marketing efforts may not be
successful.
We Have Only Limited Manufacturing Capabilities And Will Be Dependent On Third
Party Manufacturers
We lack commercial scale facilities to manufacture our products in accordance
with current GMP requirements prescribed by the FDA. We have relied on a large
third party pharmaceutical company for the manufacture of our peptides for
clinical trials and for commercial sale of AcuTect. Similarly, we have entered
into an arrangement with a GMP-qualified third party manufacturer for the supply
of Tin-117m for clinical trials.
We expect to be dependent on third party manufacturers or collaborative partners
for all of our commercial production of peptides. There are a limited number of
manufacturers that operate under GMP regulations capable of manufacturing our
products. In the event that we are unable to obtain contract manufacturing, or
obtain such manufacturing on commercially reasonable terms, we may not be able
to commercialize our products as planned.
We are dependent upon our third party suppliers to perform their obligations in
a timely manner. If such third party suppliers fail to will perform their
obligations, we may be adversely affected in a number of ways, including:
o we may not be able to meet commercial demands for our products;
o we may not be able to initiate or continue clinical trials of products
that are under development; and
o we may be delayed in submitting applications for regulatory approvals
of our products.
We have no experience in manufacturing on a commercial scale and no facilities
or equipment to do so. If we determine to develop our own manufacturing
capabilities, we will need to recruit qualified personnel and build or lease the
requisite facilities and equipment. We may not be able to successfully develop
our own manufacturing capabilities. Moreover, it may be very costly and time
consuming for us to develop such capabilities.
The manufacture of products by us and our suppliers is subject to regulation by
the FDA and comparable agencies in foreign countries. Delay in complying or
failure to comply with such manufacturing requirements
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could materially adversely affect the marketing of our products and our
business, financial condition and results of operations.
We Are Dependent Upon a Sole Source Supplier for Our Peptides
We purchase our synthetic peptides from a sole source supplier. We may enter
into similar arrangements with respect to other components of our products.
While we are aware of alternative sources for our peptides, the establishment of
additional or replacement suppliers could be time consuming, result in a supply
interruption or cause significant regulatory delays and expense. The
establishment of an alternative source of supply or any significant supply
interruption could have a materially adverse effect on our ability to develop
and manufacture our products.
Hazardous Materials That We Handle in Our Business
Our research and development involves the controlled use of hazardous materials,
chemicals and radioactive compounds. There are risks of accidental contamination
or injury from our handling , storing and disposing of these materials. In the
event of an accident, we could be held liable for significant damages
We Will Be Exposed To Product Liability Claims And May Not Be Able To Obtain
Adequate Product Liability Insurance
Our business exposes us to potential product liability risks which are inherent
in the testing, manufacturing, marketing and sale of human diagnostic and
therapeutic products. Product liability claims might be made by consumers,
health care providers or pharmaceutical companies or others that sell our
products. If product liability claims are made with respect to our products, we
may need to recall such products or change the indications for which they may be
used.
We have only limited product liability insurance coverage. This coverage is
subject to various deductibles. Product liability coverage is expensive. In the
future, we may not be able to maintain or obtain such product liability
insurance at a reasonable cost or in sufficient amounts to protect us against
losses due to liability claims. Accordingly, such claims could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Uncertainty of Pharmaceutical Pricing, Reimbursement and Healthcare Reform
Measure
The availability of reimbursement by governmental and other third party payors
affects the market for any pharmaceutical product. These third party payors
continually attempt to contain or reduce the costs of healthcare by challenging
the prices charged for medical products and services. In certain foreign
countries, particularly the countries of the European Union, the pricing of
prescription pharmaceuticals is subject to governmental control.
In both the United States and certain foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the healthcare system.
Further proposals are likely. The potential for adoption
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of these proposals affects or will affect our ability to raise capital, obtain
additional collaborative partners and market our products.
If we or our collaborators obtain marketing approvals for our products, we
expect to experience pricing pressure due to the trend toward managed health
care, the increasing influence of health maintenance organizations and
additional legislative proposals. We may not be able to sell our products
profitably if reimbursement is unavailable or limited in scope or amount.
We Need to Attract and Retain of Key Management and Qualified Personnel
We are highly dependent on the principal members of our management and
scientific staff, particularly Dr. Dean, our President and Chief Executive
Officer. The loss of the services of these individuals could have a material
adverse effect on our business. We are a party to an employment agreement with
Dr. Dean that extends through April 2, 2000, subject to automatic extension for
additional one-year periods unless either Dr. Dean or we provide written notice
to the contrary to the other party at least six months prior to the expiration
period.
Recruiting and retaining qualified scientific personnel to perform research and
development work in the future will be critical to the Company's success. We may
not be able to attract and retain highly skilled personnel on acceptable terms
given the competition for experienced scientists among pharmaceutical,
biotechnology and health care companies, universities and non-profit research
institutions. We do not carry key-man insurance with respect to any of our
executive officers.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Diatide is exposed to changes in interest rates primarily from its investments
in certain available-for-sale securities and long term obligations under capital
leases. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes.
The following table provides information about Diatide's financial instruments
that are sensitive to changes in interest rates as of December 31, 1998. For
investment securities and debt obligations, the table presents principal cash
flows and related weighted-average interest rates by expected maturity dates.
Additionally, we assumed our available-for-sale securities, comprised of cash
management investment funds and corporate bonds, are similar enough to aggregate
those securities for presentation purposes.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(dollars in thousands)
<TABLE>
<CAPTION>
1999 2000 2001 Total
---- ---- ---- -----
<S> <C> <C> <C> <C>
Available-For-Sale Securities $7,472 -- -- $7,472
Average Interest Rate 5.2% -- -- --
Long-term Debt, including Current Portion
(Fixed Rate) $137 $157 $144 $438
Average Interest Rate 13.5% 13.5% 13.5% --
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statements required to be filed hereunder are filed as Appendix A
hereto, are listed under Item 14 (a) and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part in the Company's
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 14, 1999 (the "Definitive Proxy Statement") under the caption "Proposal 1 -
Election of Directors," which section is incorporated herein by this reference.
The information required by this item is also contained in part under the
caption "Executive Officers and Significant Employees" in Part I of this Annual
Report on Form 10-K, following Item 4.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Definitive Proxy
Statement under the caption "Proposal 1 - Election of Directors," which section
is incorporated herein by this reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Definitive Proxy
Statement under the caption "Stock Ownership of Certain Beneficial Owners and
Management," which section is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Definitive Proxy
Statement under the caption "Certain Relationships and Related Transactions,"
which section is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as Appendix A hereto and are included as part
of this Annual Report on Form 10-K:
(a)(1) Financial Statements:
<TABLE>
<CAPTION>
Page
- - --------------------------------------------------------------------------------
<S> <C>
Balance Sheets at December 31, 1998 and 1997 F-3
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 and the period
February 6, 1990 (date of inception) to
December 31, 1998 F-4
Statements of Stockholders' Equity for the period of
February 6, 1990 (date of inception) to December 31, F-5
1998
Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996 and the
period February 6, 1990 (date of inception)
to December 31, 1998 F-6
Notes to Financial Statements F-7
</TABLE>
(a)(2) Financial Statement Schedules:
All schedules have been omitted because they are not required or because the
required information is provided in the Financial Statements or Notes thereto.
(a)(3) Exhibits:
The list of Exhibits filed as a part of this Annual Report on Form 10-K are set
forth on the Exhibits Index immediately preceding such exhibits, and is
incorporated herein by this reference.
(b) Reports on Form 8-K:
None.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this twenty-ninth
day of March, 1999.
DIATIDE, INC.
By: /s/ Richard T. Dean
-------------------------------------------------------
Richard T. Dean
President, Chief Executive Officer and Director
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
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Richard T. Dean President, Chief Executive Officer, and March 29, 1999
--------------- Director (Principal Executive
Richard T. Dean Officer)
/s/ Daniel F. Harrington Vice President, Chief Financial Officer, March 29, 1999
-------------------- and Treasurer (Principal Financial and
Daniel F. Harrington Accounting Officer)
/s/ Joseph F. Lovett Director March 29, 1999
----------------
Joseph F. Lovett
/s/ Donald L. Murfin Director March 29, 1999
----------------
Donald L. Murfin
/s/ Gustav A. Christensen Director March 29, 1999
---------------------
Gustav A. Christensen
/s/ Robert S. Lees Director March 29, 1999
--------------
Robert S. Lees
/s/ Hirsch Handmaker Director March 29, 1999
----------------
Hirsch Handmaker
</TABLE>
45
<PAGE>
APPENDIX A
DIATIDE, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors..................... F-2
Balance Sheets at December 31, 1998 and 1997....... F-3
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 and the period F-4
February 6, 1990 (date of inception) to December
31, 1998.........................................
Statements of Stockholders' Equity for the period
February 6, 1990 (date of inception) to December F-5
31, 1998.........................................
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 and the period F-6
February 6, 1990 (date of inception) to December
31, 1998.........................................
Notes to Financial Statements...................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Diatide, Inc.
We have audited the accompanying balance sheets of Diatide, Inc. (a company
in the development stage) as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998, and for the period February
6, 1990 (date of inception) to 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Diatide, Inc. (a company in the
development stage) 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, and for the period February 6, 1990 (date of inception) to
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Manchester, New Hampshire
February 9, 1999
F-2
<PAGE>
DIATIDE, INC.
(A Company in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1997
-----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 2)......... $ 6,663,654 $ 3,857,973
Marketable securities (Note 2)............. 1,000,000 13,674,629
Accounts receivable........................ 555,861 125,337
Inventories................................ 477,740 --
Other current assets....................... 207,405 320,275
----------- -----------
Total current assets........................... 8,904,660 17,978,214
Property and equipment, at cost:
Laboratory equipment....................... 1,599,784 1,438,119
Office equipment, furniture and fixtures.. 1,438,921 811,429
Leasehold improvements..................... 580,815 511,685
----------- -----------
3,619,520 2,761,233
Less accumulated depreciation and
amortization........................... 2,262,220 1,734,562
---------- -----------
1,357,300 1,026,671
Other assets................................... 10,783 10,783
---------- ---------
Total assets................................... $10,272,743 $19,015,668
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued
expenses (Note 3)....................... $ 2,226,514 $ 1,571,870
Accrued clinical expenses.................. 674,765 1,522,675
Accrued promotion and royalty
expenses-related party (Note 9)......... 807,527 --
Current portion of long-term debt
(Note 4)................................ 187,388 3,460
----------- ----------
Total current liabilities...................... 3,896,194 3,098,005
Long-term debt, less current portion
(Note 4)...................................... 250,572 9,716
Commitments and contingencies (Notes 7
and 11)....................................... -- --
Stockholders' equity (Note 5):
Preferred stock, $0.01 par value:
Authorized shares -- 10,591,874
Series A convertible preferred stock:
Authorized shares -- 1,300,000
Issued and outstanding shares
-- 1,210,256 (liquidation value
of $11,800,000)..................... 12,103 12,103
Common stock, $0.001 par value:
Authorized shares -- 50,000,000
Issued shares-- 10,585,216
(10,539,783 in 1997)................... 10,585 10,540
Additional paid-in capital................. 61,731,596 61,433,218
Deferred compensation...................... (241,272) (377,928)
Deficit accumulated during the
development stage....................... (55,387,011) (45,169,962)
----------- ----------
6,126,001 15,907,971
Less: 4,800 shares of Common Stock
in treasury, at cost.................... (24) (24)
----------- ----------
Total stockholders' equity.................... 6,125,977 15,907,947
----------- ----------
Total liabilities and stockholders' equity.... $10,272,743 $19,015,668
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
DIATIDE, INC.
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Feb. 6, 1990
Year Ended (Date of
December 31, Inception) to
December 31,
1998 1997 1996 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues
License fees.............. $ 4,000,000 $ 2,000,000 $ 500,000 $ 7,300,000
Sponsored research........ 2,000,000 2,000,000 2,000,000 6,778,388
Product sales, net........ 177,180 -- -- 177,180
Research grants........... 207,479 140,000 106,073 902,977
------------ ------------ ------------ -------------
Total revenues................ 6,384,659 4,140,000 2,606,073 15,158,545
------------ ------------ ------------ -------------
Cost and expenses:
Cost of products sold.... 88,617 -- -- 88,617
Research and
Development............ 10,939,749 11,762,311 11,976,276 53,437,986
Selling, general and
Administrative......... 6,228,799 4,171,928 3,166,499 19,675,800
------------ ------------ ------------ -------------
Total costs and expenses...... (17,257,165) (15,934,239) (15,142,775) (73,202,403)
------------ ------------ ------------ -------------
Loss from operations.......... (10,872,506) (11,794,239) (12,536,702) (58,043,858)
Other income (expense):
Interest income........... 663,689 807,161 721,365 2,907,350
Interest expense.......... (8,232) (1,619) (18,549) (250,503)
------------ ------------ ------------ -------------
Total other income (expense).. 655,457 805,542 702,816 2,656,847
------------ ------------ ------------ -------------
Net loss...................... $(10,217,049) $(10,988,697) $(11,833,886) $ (55,387,011)
============ ============ ============ =============
Net loss per common share (Pro
forma net loss per common
share in 1996) (Note 2)... $ (0.97) $ (1.05) $ (1.28)
============ ============ ============
Shares used in computing net
loss per common share or pro
forma net loss per common
share (Note 2).............. 10,561,750 10,487,457 9,251,615
</TABLE>
See accompanying notes.
F-4
<PAGE>
DIATIDE, INC.
(A Company in the Development Stage)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the period February 6, 1990 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
Convertible Prefered Stock Common Stock
------------------------- ------------
Additional
Shares Amount Shares Amount Paid-In Capital
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C>
Sale of Series A preferred stock for cash,
April and September 1990 (net of issuance
costs of $7,000)........................... 2,000,000 $ 20,000 -- $ -- $ 1,973,000
Sale of common stock for cash, September and
December 1990.............................. 224,142 224 1,502
Net loss....................................
----------------------------------------------------------------------------------------
Balance at December 31, 1990................ 2,000,000 20,000 224,142 224 1,974,502
Sale of common stock for cash, May, July,
August, September and November 1991........ 190,393 190 1,260
Sale of Series B preferred stock for cash,
December 1991 (net of issuance
costs of $31,300).......................... 1,861,514 18,615 3,675,718
Conversion of convertible notes and accrued
interest to Series B preferred stock,
December 1991.............................. 688,505 6,885 1,367,520
Net loss....................................
----------------------------------------------------------------------------------------
Balance at December 31, 1991................ 4,550,019 45,500 414,535 414 7,019,000
Sale of Series C preferred stock for cash,
January 1992 .............................. 52,200 522 103,878
Issuance of common stock through exercise of
stock options.............................. 2,400 3 797
Net loss....................................
----------------------------------------------------------------------------------------
Balance at December 31, 1992................ 4,602,219 46,022 416,935 417 7,123,675
Sale of Series C preferred stock for cash,
November 1993 (net of issuance costs
of $234,268)............................... 3,669,944 36,699 8,903,893
Conversion of convertible notes and accrued
interest to preferred stock,
November 1993.............................. 772,199 7,722 1,922,775
Issuance of common stock through exercise
of stock options.......................... 30 10
Repurchase of common stock, at cost.........
Net loss....................................
----------------------------------------------------------------------------------------
Balance at December 31, 1993................ 9,044,362 90,443 416,965 417 17,950,353
Sale of Series C preferred stock for cash,
January 1994............................... 147,512 1,476 367,305
Issuance of common stock through exercise of
stock options.............................. 48,300 48 16,052
Net loss....................................
----------------------------------------------------------------------------------------
Balance at December 31, 1994................ 9,191,874 91,919 465,265 465 18,333,710
Sale of Series D preferred stock for cash,
May 1995 (net of issuance costs
of $17,449)................................ 860,054 8,601 3,414,166
Sale of Series E preferred stock for cash,
August 1995 (net of issuance costs
of $268,740)............................... 2,500,000 25,000 9,706,260
Issuance of common stock through exercise
of stock options........................... 13,650 14 4,544
Deferred compensation associated with stock
option grants.............................. 1,663,000
Amortization of deferred compensation.......
Net loss....................................
----------------------------------------------------------------------------------------
Balance at December 31, 1995................ 12,551,928 125,520 478,915 479 33,121,680
Conversion of preferred stock to
common stock............................... (12,551,928) (125,520) 7,531,140 7,531 117,989
Issuance of common stock, net of issuance
costs of $2,329,097........................ 2,200,000 2,200 16,370,101
Issuance of common stock through exercise
of stock options........................... 74,195 74 54,983
Issuance of common stock upon exercise of
warrants................................... 119,998 120 399,473
Compensation associated with stock
option grants.............................. 75,960
Amortization of deferred compensation.......
Net loss....................................
----------------------------------------------------------------------------------------
Balance at December 31, 1996................ -- -- 10,404,248 10,404 50,140,186
Issuance of Series A convertible preferred
stock and warrants, net of issuance costs
of $246,219................................ 1,210,256 12,103 11,541,678
Issuance of common stock under stock plans.. 135,535 136 155,460
Compensation associated with stock option
grants..................................... 182,925
Reversal of deferred compensation associated
with cancellation of stock option grants .. (587,031)
Amortization of deferred compensation ......
Net loss....................................
----------------------------------------------------------------------------------------
Balance at December 31, 1997................ 1,210,256 12,103 10,539,783 10,540 61,433,218
Issuance of common stock under stock plans.. 45,433 45 177,178
Compensation associated with stock
option grants.............................. 121,200
Amortization of deferred compensation.......
Net loss....................................
----------------------------------------------------------------------------------------
Balance at December 31, 1998................ 1,210,256 $ 12,103 10,585,216 $ 10,585 $61,731,596
========= ======== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Deferred During the Treasury Stockholders'
Compensation Development Stage Stock Equity
------------ ----------------- ----- ------
<S> <C> <C> <C> <C>
Sale of Series A preferred stock for cash,
April and September 1990 (net of issuance
costs of $7,000)........................... $ -- $ -- $ -- $ 1,993,000
Sale of common stock for cash, September and
December 1990.............................. 1,726
Net loss.................................... (1,035,107) (1,035,107)
----------------------------------------------------------------------------------------
Balance at December 31, 1990................ -- (1,035,107) -- 959,619
Sale of common stock for cash, May, July,
August, September and November 1991........ 1,450
Sale of Series B preferred stock for cash,
December 1991 (net of issuance
costs of $31,300).......................... 3,694,333
Conversion of convertible notes and accrued
interest to Series B preferred stock,
December 1991.............................. 1,374,405
Net loss.................................... (1,812,256) (1,812,256)
----------------------------------------------------------------------------------------
Balance at December 31, 1991................ -- (2,847,363) -- 4,217,551
Sale of Series C preferred stock for cash,
January 1992 .............................. 104,400
Issuance of common stock through exercise of
stock options.............................. 800
Net loss.................................... (3,348,827) (3,348,827)
----------------------------------------------------------------------------------------
Balance at December 31, 1992................ -- (6,196,190) -- 973,924
Sale of Series C preferred stock for cash,
November 1993 (net of issuance costs
of $234,268)............................... 8,940,592
Conversion of convertible notes and accrued
interest to preferred stock,
November 1993.............................. 1,930,497
Issuance of common stock through exercise
of stock options.......................... 10
Repurchase of common stock, at cost......... (24) (24)
Net loss.................................... (3,979,105) (3,979,105)
----------------------------------------------------------------------------------------
Balance at December 31, 1993................ -- (10,175,295) (24) 7,865,894
Sale of Series C preferred stock for cash,
January 1994............................... 368,781
Issuance of common stock through exercise of
stock options.............................. 16,100
Net loss.................................... (5,758,892) (5,758,892)
----------------------------------------------------------------------------------------
Balance at December 31, 1994................ -- (15,934,187) (24) 2,491,883
Sale of Series D preferred stock for cash,
May 1995 (net of issuance costs
of $17,449)................................ 3,422,767
Sale of Series E preferred stock for cash,
August 1995 (net of issuance costs
of $268,740)............................... 9,731,260
Issuance of common stock through exercise
of stock options........................... 4,558
Deferred compensation associated with stock
option grants.............................. (1,663,000) --
Amortization of deferred compensation....... 44,000 44,000
Net loss.................................... (6,413,192) (6,413,192)
----------------------------------------------------------------------------------------
Balance at December 31, 1995................ (1,619,000) (22,347,379) (24) 9,281,276
Conversion of preferred stock to
common stock............................... --
Issuance of common stock, net of issuance
costs of $2,329,097........................ 16,372,301
Issuance of common stock through exercise
of stock options........................... 55,057
Issuance of common stock upon exercise of
warrants................................... 399,593
Compensation associated with stock
option grants.............................. 75,960
Amortization of deferred compensation....... 333,517 333,517
Net loss.................................... (11,833,886) (11,833,886)
----------------------------------------------------------------------------------------
Balance at December 31, 1996................ (1,285,483) (34,181,265) (24) 14,683,818
Issuance of Series A convertible preferred
stock and warrants, net of issuance costs
of $246,219................................ 11,553,781
Issuance of common stock under stock plans.. 155,596
Compensation associated with stock option
grants..................................... 182,925
Reversal of deferred compensation associated
with cancellation of stock option grants .. 587,031 --
Amortization of deferred compensation ...... 320,524 320,524
Net loss.................................... (10,988,697) (10,988,697)
----------------------------------------------------------------------------------------
Balance at December 31, 1997................ (377,928) (45,169,962) (24) 15,907,947
Issuance of common stock under stock plans.. 177,223
Compensation associated with stock
option grants.............................. 121,200
Amortization of deferred compensation....... 136,656 136,656
Net loss.................................... (10,217,049) (10,217,049)
----------------------------------------------------------------------------------------
Balance at December 31, 1998................ $ (241,272) $(55,387,011) $ (24) $ 6,125,977
============= ============ ========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
DIATIDE, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Feb. 6, 1990
Year Ended (Date of
December 31, Inception) to
------------ December 31,
1998 1997 1996 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Activities
Net loss $(10,217,049) $(10,988,697) $(11,833,886) $(55,387,011)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 527,658 434,511 417,353 2,301,075
Cancellation of accrued interest -- -- -- 111,438
Amortization of deferred compensation 136,656 320,524 333,517 834,697
Compensation associated with stock option grants 121,200 182,925 75,960 380,085
Changes in operating assets and liabilities:
Accounts receivable (430,524) (125,337) -- (555,861)
Inventories (477,740) -- -- (477,740)
Other current assets 112,870 123,501 (12,602) (207,405)
Other assets -- -- 5,809 (49,638)
Accounts payable and accrued expenses 654,644 56,965 1,110,455 2,226,514
Accrued clinical expenses (847,910) (260,622) 1,377,038 674,765
Accrued clinical expenses - related party -- (316,529) 226,529 --
Accrued promotion and royalty expenses
- related party 807,527 -- -- 807,527
Deferred revenue -- -- (166,666) --
----------- ----------- ------------ ------------
Cash used in operating activities (9,612,668) (10,572,759) (8,466,493) (49,341,554)
Investing activities
Additions to property and equipment (399,589) (387,693) (608,352) (3,141,464)
Purchases of marketable securities (2,001,404) (17,991,856) (12,134,381) (36,620,986)
Proceeds from sales of marketable securities 14,676,033 15,099,859 5,345,094 35,620,986
----------- ----------- ------------ ------------
Cash provided by (used in) investing activities 12,275,040 (3,279,690) (7,397,639) (4,141,464)
Financing activities
Sale of preferred stock -- 11,553,781 -- 39,808,914
Issuance of convertible notes -- -- -- 3,508,464
Repayment of convertible notes -- -- -- (315,000)
Issuance of long-term debt -- -- -- 900,518
Repayment of long-term debt (33,914) (3,162) (306,592) (940,614)
Sale of common stock, net of issuance costs 177,223 155,596 16,826,951 17,184,414
Capitalized financing costs -- -- 263,783 --
Repurchase of common stock -- -- -- (24)
----------- ----------- ------------ ------------
Cash provided by financing activities 143,309 11,706,215 16,784,142 60,146,672
----------- ----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,805,681 (2,146,234) 920,010 6,663,654
Cash and cash equivalents at beginning of period 3,857,973 6,004,207 5,084,197 --
----------- ----------- ------------ ------------
Cash and cash equivalents at end of period $ 6,663,654 $ 3,857,973 $ 6,004,207 $ 6,663,654
=========== =========== =========== ===========
Non-cash transactions:
Acquisition of equipment through capital
lease obligations $ 458,698 -- $ 19,358 $ 478,056
Conversion of convertible notes and accrued [A2] [A3] [A4]
accrued interest to preferred stock -- -- -- $ 3,304,902
Deferred compensation associated with
stock options issued (cancelled) at less than
fair value -- $ (587,031) -- 1,075,969
</TABLE>
See accompanying notes.
F-6
<PAGE>
DIATIDE, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Organization
Diatide, Inc. was founded in February 1990 and is a development stage
specialty pharmaceutical company engaged in the discovery, development and
commercialization of patented, disease-specific imaging agents and therapeutics
for life-threatening conditions. Since inception, principal activities have been
to develop business plans, obtain financing, perform research and development,
and recruit and train personnel. Accordingly, the ultimate completion of the
Company's planned operations is contingent upon the successful completion of
technology development, obtaining financing and, ultimately, achieving
profitable operations. The Company began marketing and selling its first
product, AcuTect(TM), in the U.S. in the fourth quarter of 1998.
2. Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity
of three months or less to be cash equivalents. Substantially all cash and cash
equivalents at December 31, 1998 and 1997 are invested in money market
investment accounts, short-term government-backed securities, or commercial
paper. These cash and cash equivalents are maintained with high credit quality
financial institutions.
Marketable Securities
The Company's marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses, if any, reported in a separate component of stockholders'equity. The
following is a summary of available-for-sale securities as of December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash Equivalents:
Cash management investment fund $6,472,237 $ 1,746,624
Commercial paper -- 1,995,425
---------- -----------
$6,472,237 $ 3,742,049
========== ===========
Marketable Securities:
Corporate bonds $1,000,000 $13,174,629
Certificate of deposit -- 500,000
---------- -----------
$1,000,000 $13,674,629
========== ===========
</TABLE>
The fair value of these investments approximates their cost and, therefore,
there are no unrealized gains or losses as of December 31, 1998 and 1997. As of
December 31, 1998, the contract maturities of all marketable securities are one
year or less.
F-7
<PAGE>
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market. Inventories at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Raw Materials $274,758
Finished Goods 202,982
--------
$477,740
========
</TABLE>
Property and Equipment
Property and equipment are stated at cost and are being depreciated using the
straight-line method over the estimated useful lives of three to five years.
Leasehold improvements are stated at cost and are being amortized over the
lesser of the term of the lease or estimated useful life of the asset. Office
equipment includes $478,056 and $19,358 for leases that have been capitalized,
and $49,131 and $6,049 of related accumulated amortization, at December 31, 1998
and 1997, respectively. Amortization of equipment under capital leases is
included in depreciation expense in the accompanying financial statements.
Income Taxes
The liability method is used to account for income taxes. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted rates and laws that will be in effect when the
differences are expected to be reversed.
Revenue Recognition
Revenue from product sales is recognized upon shipment to end users. Revenues
from license fees are recognized as the fees are earned based upon the
occurrence of certain events or the achievement of specified milestones in
accordance with the underlying license arrangements. Revenues from research
grants are recognized as reimbursable expenses are incurred. Revenue from
sponsored research is recognized ratably over the term of the underlying
research arrangement. For collaborative arrangements which include both revenue
received from license fees and sponsored research and funds received associated
with the purchase of the Company's equity, the Company accounts for the
respective revenue and equity components in accordance with the substance of the
underlying agreements. The Company accounts for the equity component based on
the estimated fair value of the Company's securities issued at the date upon
which the Company reached agreement on the significant terms of the respective
agreements.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense, including
the Company's portion of AcuTect promotional costs shared with Nycomed Imaging
AS under a co-promotion agreement (see Note 9), was $875,000 in 1998.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's 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.
Fair Value of Financial Instruments
F-8
<PAGE>
The carrying amounts reported in the Company's balance sheets for accounts
receivable, accounts payable, and long-term debt approximate their fair value.
The fair value of the Company's long-term debt is estimated using discounted
cash flow analyses, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
Stock Compensation
The Company follows the intrinsic value method of accounting for stock option
grants to employees and directors under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25). The Company follows the
fair value method of accounting for stock option grants to individuals other
than employees and directors under FAS Statement No. 123, "Accounting for
Stock-Based Compensation" (FAS No. 123).
Net Loss and Pro Forma Net Loss Per Share
Basic and diluted earnings per share is calculated in accordance
with FAS Statement No. 128, "Earnings per Share" (FAS No. 128). Under
FAS No. 128, common stock equivalents, such as outstanding stock
options and convertible preferred stocks, are excluded in calculating
diluted earnings per share if their effect would be anti-dilutive.
Accordingly, basic earnings per share and diluted earnings per share
are the same for the Company.
Pro forma net loss per share for the year ended December 31, 1996 is computed
using the weighted average number of outstanding shares of Common Stock and
Common Stock equivalents, assuming the conversion of Series A, B, C, D and E
Convertible Preferred Stock into common shares (as of their original date of
issuance), which occurred upon completion of the initial public offering.
Historical earnings per share have not been presented for the year ended
December 31, 1996 since such amounts are not deemed meaningful due to the
significant change in the Company's capital structure that occurred in
connection with the offering in June 1996.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." FAS
Statement No. 133 is effective for fiscal years beginning after December 15,
1998. The Company believes that the adoption of this new accounting standard
will not have a material impact on the Company's financial statements.
Reclassifications
Certain reclassifications were made to prior year statements to conform to
the current year presentation.
F-9
<PAGE>
3. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following at December
31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Accounts payable...................................................... $844,776 $410,296
Accrued research and development expenses............................. 305,653 120,868
Accrued professional fees............................................. 240,572 350,097
Accrued other......................................................... 835,513 690,609
---------- ----------
$2,226,514 $1,571,870
========== ==========
</TABLE>
Long-Term Debt
In December 1998, the Company entered into a master lease agreement,
pursuant to which the Company may lease equipment and software, having an
aggregate acquisition cost of up to $2,500,000, for research, development and
manufacturing purposes. The basic lease payments under the lease line are
determined based on current market rates of interest at the inception of each
equipment schedule take-down and are payable in monthly installments over a
three or four year period, depending on the underlying equipment. The lease
agreement includes different purchase options depending on the underlying
equipment, which include a fairvalue purchase option and bargain purchase
option. As of December 31, 1998, the Company has leased equipment and software
under this line with a cost basis aggregating $458,698.
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Capital lease, payable in monthly installments of $15,219,
beginning December 1998 through October 2001 ................... $428,260 --
Capital lease, payable in monthly installments of $397,
beginning March 1996 through March 2001 ........................ 9,700 13,176
-------- ------
437,960 13,176
Less current portion................................................. 187,388 3,460
-------- ------
$250,572 $9,716
======== ======
</TABLE>
Aggregate maturities on capital lease obligations are $187,388 in 1999 and 2000,
and $153,061 in 2001. These minimum payments total $527,837, of which $89,877
represents interest and the remaining $437,960 reflects the present value of the
minimum payments. Cash paid for interest was approximately $8,200 in 1998,
$1,300 in 1997, and $19,000 in 1996.
5. Stockholders' Equity
Convertible Preferred Stock
On September 23, 1997, the Company completed the sale of 1,210,256 shares of
the Company's Series A convertible preferred stock to three of the Company's
existing investors in a private transaction for $11.6 million, net of issuance
costs. The Series A Preferred Stock is convertible into the Company's Common
Stock on a one-for-one basis, subject to adjustment for certain events. Each
share of Series A Preferred Stock is entitled to the same number of votes as
each share of Common Stock into which it is convertible and will vote together
with the Common Stock. Dividends on the Common Stock, if and when declared by
the Board of Directors, are payable to the holders of the Series A Preferred
Stock based on the number of shares of Common Stock into which the Series A
Preferred Stock is convertible before any distribution to the holders of the
Common Stock. The Series A Preferred Stock holders are entitled to priority
liquidation rights of an amount equal to $9.75 per share, as adjusted for
certain events, plus any declared but unpaid dividends.
The Company also issued Common Stock Purchase Warrants (the "Warrants") to
the investors to purchase in the aggregate 181,538 shares of Common Stock at an
exercise price of $11.70 per share. The Warrants will expire on September 23,
1999. The Company has allocated $21,785 of the net proceeds to the Warrants to
reflect the fair value of such warrants relative to the fair value of the Series
A Preferred Stock. This amount is included in additional paid-in capital in the
accompanying financial statements.
Under the terms of a Registration Rights Agreement, dated as of September 23,
1997, the investors holding in the aggregate at least 51% of the Stockholder
Registrable Shares (as defined) have the right to require the Company to
register the Common Stock issuable upon the conversion of the Series A Preferred
Stock or the exercise of the Warrants at any time after October 1, 1998. The
Series A Preferred Stock is redeemable solely at the Company's option after
September 23, 2000 and, accordingly, is classified as equity in the accompanying
financial statements.
In connection with the Company's initial public offering in June 1996, all
shares of Series A, Series B, Series C, Series D and Series E Convertible
Preferred Stock outstanding as of June 12, 1996 (collectively, the "Convertible
Preferred Stock") were automatically converted on a 6-for-10 basis into
7,531,140 shares of the Company's Common Stock.
Common Stock
Common stockholders are entitled to one vote per share and to dividends when
declared by the Board of Directors.
Stock Option Plans
1992 Stock Option Plan
In April 1992, the Board of Directors established the 1992 Stock Option
Plan (the "Plan"). The Plan provides for the issuance or award of incentive
and nonqualified stock options at prices to be determined by the Board of
Directors. In January 1996, the Board of Directors authorized an increase
in the number of shares of common stock available for issuance under the
Plan from 720,000 to 2,000,000. All employees and, in the case of awards
other than incentive stock options, directors and consultants to the
Company are eligible for awards under the Plan. The term of all stock
options granted may not exceed ten years. Options granted under the Plan
generally vest in annual increments over five years. Certain options
granted in 1998 and 1997 vest in increments as the Company achieves certain
corporate milestones or vest in their entirety over periods of five to
eight years, whichever is earlier.
During 1995, the Company issued stock options to purchase shares of
common stock at exercise prices below the deemed fair value of the common
stock at the date of grant. The Company recorded an increase to additional
paid-in-capital and a corresponding charge to deferred compensation in the
amount of $1,663,000 to recognize the aggregate difference between the
deemed fair value and the option exercise price. During 1997, certain of
the options were cancelled and $587,031 of the deferred compensation was
reversed against additional paid-in capital. The deferred compensation
continues to be amortized over the option vesting period of five years.
Amortization expense of $136,656, $320,524, and $333,517, was recorded in
1998, 1997 and 1996, respectively.
1996 Director Stock Option Plan
In January 1996, the Company's Board of Directors adopted the 1996 Director
Stock Option Plan (the "Director Plan"), which became effective upon the
closing of the initial public offering of the Company's Common Stock in
June 1996. Under the Director Plan, options to purchase 5,000 shares of
common stock were granted to each existing non-employee director at the
closing of the initial public offering in June 1996. Thereafter, options to
purchase 5,000 shares of Common Stock have been and will be granted to each
new director upon his or her initial election to the Board of Directors.
Annual options to purchase 2,500 shares of Common Stock are granted to each
non-employee director on May 1 of each year commencing in 1997. The
exercise price of options granted under the Director Plan is the fair
market value of the shares on the date of grant. All options vest on the
first anniversary of the date of grant, although the exercisability of
these options will be accelerated upon the occurrence of a change of
control of the Company, as defined. A total of 250,000 shares of Common
Stock are available for grant under the Director Plan. Options to purchase
15,000, 22,500 and 35,000 shares of Common Stock were granted in 1998, 1997
and 1996, respectively, under this plan, 42,500 of which were exercisable
at December 31, 1998.
1996 Employee Stock Purchase Plan
In January 1996, the Company's Board of Directors adopted the 1996
Employee Stock Purchase Plan (the "Purchase Plan"). All individuals
employed a minimum of 20 hours per week and five months in any calendar
year are eligible to participate in the Purchase Plan. Participants in the
plan are entitled to purchase Common Stock during specified semi-annual
periods through the accumulation of payroll, at the lower of 85% of the
fair market value of the stock at the beginning or end of the offering
period. At December 31, 1998, 32,924 shares had been issued under the plan
and 467,076 shares were available for future issuance.
The Company follows FAS No. 123 in accounting for stock options granted to
individuals other than employees and directors. During 1998 and 1997, the
Company granted options to purchase 40,000 and 100,000 shares, respectively,
under its stock plans to consultants. The fair values of these options was
estimated at the date of grant using a Black-Scholes option pricing model as
summarized below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Fair value of options granted $223,000 $434,000
Weighted-average assumptions:
Risk-free interest rate 4.75% 6.09%
Dividend yield 0.0% 0.0%
Volatility factor of the
expected market price
of the Company's common stock 0.71 0.72
Expected life of options 10.0 years 4.3 years
</TABLE>
The fair value is being amortized over the options vesting periods.
Amortization expense of $121,200 and $182,925 was recorded in 1998 and 1997,
respectively.
The Company has elected to follow APB 25 in accounting for its stock
options granted to employees and directors and its Purchase Plan because, as
discussed below, the alternative fair value accounting provided for under FAS
No. 123, requires the use valuation models that were not developed for use in
valuing employee stock options or employee stock purchase plans. Under APB 25,
when the exercise price of the Company's stock options equals the market price
of the underlying stock on the date of grant, no compensation is recognized.
Also, because the Purchase Plan provisions meet the criteria required by APB 25,
no compensation is recognized.
Pro forma information regarding net loss and net loss per share is required
by FAS No. 123, and has been determined as if the Company had accounted for all
stock option grants and employee stock purchases under the fair value method of
that Statement. The fair value for these options and purchases was estimated at
the date of grant and at the beginning of each offering period, respectively,
using a Black-Scholes pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Description Option Plans Purchase Plans
----------- ------------ --------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Risk-free interest rate 4.89% 6.15% 6.06% 5.02% 6.01%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0%
Volatility factor of the expected
market price of the Company's
common stock 0.71 0.69 0.75 .71 .69
Expected life of option or term of
offering period 8.48 years 5.8 years 3.5 years 0.5 years 0.5 years
Fair value of options granted
(exercise price equals market
price) $5.42 $4.13 $4.02
Fair value of shares purchased $3.15 $2.06
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock options and purchase plan
offerings have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock plans. Also, the valuation model has only been
applied to options granted since January 1, 1995, as permitted under the
provisions of FAS No. 123; therefore, the pro forma net loss and net loss per
share reported below do not reflect the impact of all options granted and are
not indicative of the effect of recording amortization expense under FAS No.
123 in future periods. The pro forma effect of FAS No. 123 will not be fully
reflected until 1999.
For purposes of pro forma disclosures, the estimated fair value of the
options and stock purchases is amortized to expense over the options' vesting
period and stock purchase offering period, respectively. The Company's pro
forma net loss and pro forma net loss per share for the years ending December
31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss $(10,966,633) $(11,546,513) $(12,125,241)
Pro forma net loss per share $ (1.04) $ (1.10) $ (1.31)
share
</TABLE>
F-10
<PAGE>
A summary of activity under the Company's stock option plans for the years
ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of year 1,091,764 $ 4.53 699,577 $ 2.21 627,247 $ 0.64
Granted-exercise
price equals market 360,501 7.37 556,984 6.41 161,090 7.44
price
Exercised (31,275) (2.60) (116,769) (0.60) (57,860) (0.42)
Forfeited (56,648) (6.64) (48,028) (2.03) (30,900) (0.95)
--------- --------- --------
Outstanding - end
of year 1,364,342 $ 5.24 1,091,764 $ 4.53 699,577 $ 2.21
========= ========= ========= ======== ======= =======
Exercisable at end of
year 526,084 $ 3.24 385,341 $ 2.60 315,235 $ 0.83
</TABLE>
The following table summarizes exercise prices and remaining contractual
lives of options outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Number of Weighted- Average Number of Weighted-
Range of Options Average Remaining Options Average
Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price
--------------- ----------- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.33 - $1.67 358,662 $ 0.56 4.9 years 287,022 $ 0.49
$4.88 - $6.88 383,019 $ 5.84 8.4 years 132,933 $ 5.61
$7.00 - $7.88 494,500 $ 7.13 9.1 years 76,300 $ 7.15
$8.00 - $14.13 128,161 $ 9.24 8.9 years 29,829 $ 9.02
--------- -------
1,364,342 526,084
</TABLE>
Reserved Shares
At December 31, 1998, there were 3,928,330 shares of common stock reserved
for issuance under the Company's stock plans and warrant agreement and upon
conversion of the Series A Convertible Preferred Stock.
6. Income Taxes
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $51.0 million and general business
credit carryforwards of approximately $2.7 million which expire through 2013.
The future utilization of net operating loss and general business credit
carryforwards may be subject to limitation under the change in stock ownership
rules of the Internal Revenue Code. For financial reporting purposes, a
F-11
<PAGE>
valuation allowance of $20,868,000 ($16,593,000 in 1997) has been recognized to
offset the deferred tax assets related to these carryforwards since uncertainty
exists with respect to future realization of such carryforwards.
The significant components of the Company's deferred tax liabilities and
assets are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards.................. $17,398,000 $14,069,000
General business tax credits ...................... 2,747,000 2,073,000
Depreciation....................................... 110,000 50,000
Accrued expenses................................... 613,000 401,000
----------- -----------
Total deferred tax assets....................... 20,868,000 16,593,000
Valuation allowance for deferred tax assets.......... (20,868,000) (16,593,000)
----------- -----------
Net deferred tax assets......................... $ -- $ --
=========== ===========
</TABLE>
7. Leases
The Company leases two facilities under seperate operating leases which call
for base monthly rental payments plus a pro-rata share of common area
maintenance costs. The lease agreement for the first facility, approximately
20,000 square feet of office and research laboratory space, expires December
1999. The second agreement, for approximately 11,000 square feet of office
space, expires May 2000. Rent expense was approximately $243,000 in 1998,
$96,000 in 1997, and $80,000 in 1996. Future minimum lease payments will be
approximately $307,000 in 1999 and $70,000 in 2000.
8. Employee Benefit Plan
During 1992, the Company established a defined contribution plan pursuant to
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
employees of the Company and provides for discretionary Company contributions.
The amount expensed under the plan was $44,000 in 1998, $20,000 in 1997, and
$23,900 in 1996.
9. Nycomed Agreements
In August 1995, the Company and Nycomed Imaging AS (Nycomed), a shareholder
of the Company, entered into a series of agreements for multiple product
development and joint marketing involving certain of the Company's peptide-based
imaging agents for nuclear medicine and giving Nycomed the option for five years
to an exclusive license for such products for Europe, South Africa and certain
countries in the Middle East, as well as an exclusive co-promotion agreement for
products in the United States. Under the terms of the agreements, Nycomed paid
the Company for research and development support. In addition, Nycomed has paid
and will pay option fees and milestone fees for certain achievements. Nycomed
will receive royalties on product sales in the U.S. and will pay royalties on
product sales in Europe, South Africa and the Middle East. In August 1998,
Nycomed terminated the option and development agreement between the Company and
Nycomed. As a result, Nycomed discontinued research and development support
payments effective December 31, 1998. This decision does not affect the
co-promotion activities ongoing relating to the Company's two lead products,
AcuTect(TM) and NeoTect(TM). During 1998, 1997 and 1996, the Company received
$6,000,000, $4,000,000, and $2,500,000, respectively, under these agreements.
Additionally, as of December 31, 1998, the Company has accrued $808,000 for its
portion of promotional costs and royalties on product sales due to Nycomed. The
Company has also recorded a receivable due from Nycomed for promotion costs
incurred by Diatide of $275,000 as of December 31, 1998, which is included in
accounts receivable in the accompanying financial statements.
10. Related Parties
The Company is a party to a number of clinical trial agreements with the
Arizona Institute of Nuclear Medicine, an organization for which a director and
a scientific advisor of the Company serves as Executive Director. Each of these
agreements provides for the Arizona Institute to act as a site for clinical
trials of the Company's products and provides that the director will serve as
principal investigator in connection with the conduct of the clinical trials at
the site. During 1998, 1997 and 1996, the Company paid to the Arizona Institute
a total of $12,260, $261,462 and $134,400, respectively, under those agreements.
Under the terms of a scientific advisory consulting agreement, the Company paid
Healthcare Technology Group, an entity of which the director is the principal, a
total of $54,978, $48,579 and $48,214, in 1998, 1997 and 1996, respectively.
Additionally, under the 1992 Stock Option Plan, the Company granted Healthcare
Technology Group options to purchase Common Stock as summarized below:
1998 1997
---- ----
Option Shares 40,000 30,000
Exercise Price $ 7.000 $ 7.375
The 1997 option becomes exercisable in five equal annual installments in arrears
beginning in January 1998; the 1998 option becomes exercisable in five equal
installments as the Company achieves certain corporate milestones or vests in
its entirety after eight years, whichever is earlier.
The Company has several clinical services agreements with Certus
International, an affiliate of a former officer of the Company. Under these
agreements, Certus provides clinical services and data management services
relating to clinical trials for several of the Company's products. Additionally,
the Company has retained Certus to perform certain other consulting services,
including review of clinical trial protocols, in connection with certain of the
Company's other clinical trials. On July 31, 1997, the officer terminated his
employment with the Company. During 1997 and 1996, the Company incurred expenses
of $566,000, and $1,261,000, respectively, for services rendered by Certus.
11. Other Matters
In December 1998, the United States Patent and Trademark Office declared an
interference between a patent application filed by Diatide and a patent issued
to another company. Diatide's pending application is intended to provide
protection for an element of AcuTect. Diatide has been named as the senior party
in the interference proceeding. Diatide intends to challenge the validity of the
patent granted to the other company if the patent is asserted against Diatide,
and Diatide will seek to enforce its own patents if any product of any other
company infringes Diatide's patent claims.
12. Subsequent Event
On January 19, 1999, the Company completed the sale of 825,309 shares of
Series B Convertible Preferred Stock to two investors in a private transaction
for $6.0 million, net of issuance costs. The preferred stock is convertible into
shares of the Company's Common Stock on a one-for-one basis, subject to
adjustment for certain events. The Company also issued Common Stock Purchase
Warrants to the investors to purchase in the aggregate 123,795 shares of Common
Stock at an exercise price of $8.72 per share. The Warrants will expire on
January 19, 2001.
Under the terms of a Registration Rights Agreement, dated as of January 19,
1999, the investors holding in the aggregate at least 51% of the Stockholder
Registrable Shares (as defined therein) have the right to require the Company to
register the Common Stock issuable upon the conversion of the preferred stock or
the exercise of the warrants at any time after January 19, 2000.
F-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- - ------- --------------------------------------------------------------------
<S> <C>
***3.1 -- Restated Certificate of Incorporation, as amended.
*3.2 -- Amended and Restated By-Laws of the Registrant .
*4.1 -- Specimen Certificate for shares of Common Stock, $0.001 par
value, of the Registrant
4.2 -- Specimen Certificate for shares of Series A Convertible Preferred
Stock, $.01 par value, of the Registrant
***4.3 -- Specimen Certificate for shares of Series B Convertible Preferred
Stock, $.01 par value, of the Registrant
***4.4 -- Form of Common Stock Purchase Warrant dated as of January 19,
1999
*+10.1 -- License Agreement effective as of May 31, 1994 between the
Registrant and Associated Universities, Inc.
*+10.2 -- License Agreement dated March 2, 1990 between the Registrant and
New England Deaconess Hospital
*+10.3 -- Patent License Agreement dated June 16, 1993 between National
Institutes of Health and the Registrant as licensee
*+10.4 -- Distribution and License Agreement effective as of August 11,
1995 between the Registrant and Nycomed Imaging AS
*+10.5 -- Agreement for Co-Promotion of Optioned Product(s) in the United
States effective as of August 11, 1995 between the Registrant and
Nycomed Inc
*+10.6 -- Option and Development Agreement dated August 11, 1995 between
the Registrant and Nycomed Imaging AS, as amended
*+10.7 -- License Agreement dated January 16, 1996 between the Registrant
and Centocor, Inc
*+10.8 -- License Agreement dated February 27, 1996 between the Registrant
and Merck & Co., Inc
*10.9 -- Lease dated March 14, 1996 between the Registrant and Cottage
Street Trust for Offices and laboratory space located at 9 Delta
Drive, Londonderry, New Hampshire
*10.10 -- Series D Convertible Preferred Stock and Warrant Purchase
Agreement dated May 17, 1995 between the Registrant and Certain
Stockholders of the Company, as Amended
*10.11 -- Registration Rights Agreement dated August 19, 1992 between the
Registrant and Silicon Valley Bank
*10.12 -- Registration Rights Agreement dated December 19, 1990 between the
Registrant and Richard T. Dean, as amended
*10.13 -- Registration Rights Agreement dated December 23, 1990 between the
Registrant and Robert S. Lees
*++10.14 -- 1992 Stock Option Plan, as amended.
*++10.15 -- 1996 Employee Stock Purchase Plan .
*++10.16 -- 1996 Director Stock Option Plan .
*++10.18 -- Employment Agreement dated March 16, 1990 between the Registrant
and Richard T. Dean, as amended
*++10.19 -- Consulting Agreement dated April 2, 1990 between the Registrant
and Robert S. Lees
**10.23 -- Registration Rights Agreement dated as of September 23, 1997
among Chase Venture Capital Associates, L.P., Medsource S.A., Neomed
Fund Limited and the Company
**10.24 -- Form of Common Stock Purchase Warrant dated as of September 23,
1997 and executed by the Company
**10.25 -- Securities Purchase Agreement dated as of September 23, 1997
among Chase Venture Capital Associates, L.P., Medsource S.A., Neomed
Fund Limited and the Company
****10.26 -- Consulting Agreement dated January 1, 1998 between the
Registrant and Healthcare Technology Group .
***10.27 -- Securities Purchase Agreement dated January 19, 1999, among
Alta BioPharma Partners, L.P., Alta Embarcadero BioPharma Partners,
LLC and the Registrant.
***10.28 -- Registration Rights Agreement dated as of January 19, 1999, among
Alta BioPharma Partners, L.P. Alta Embarcadero BioPharma Partners,
LLC and the Registrant
23.2 -- Consent of Ernst & Young LLP .
27 -- Financial Data Schedule .
</TABLE>
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-3326).
** Incorporated by referenced to Exhibits to the Current Report on Form 8-K
(File No. 000-28434).
*** Incorporated by referenced to Exhibits to the Current Report on
Form 8-K dated January 25, 1999 (File No. 000-28434).
**** Incorporated by reference to Exhibits to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1997.
+ Confidential treatment granted as to certain portions, which portions are
omitted and filed separately with the Commission.
++ Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Annual Report on Form 10-K.
F-13
EXHIBIT 4.2
RESTRICTED SECURITIES SEE LEGENDS ON REVERSE SIDE
INCORPORATED UNDER THE LAWS OF
DELAWARE
NUMBER SHARES
-X- -X-
DIATIDE,INC.
FULLY PAID NON-ASSESSABLE
Series A Convertible Preferred Stock
$0.01 Par Value Per Share
This Certifies that XXX SPECIMEN XXX
------------------------------------------------------
is the owner of --- Zero --- Shares of the Capital Stock of
--------------
Diatide, Inc.
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF. the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this XXxx day of XX A.D. XX
-------------- ------------ -----------
- - ------------------------------------ -------------------------------------
President Treasurer
<PAGE>
For Value Received, _____hereby sell, assign and transfer
unto ________________________________________________________
_______________________________________________________Shares
of the Capital Stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint
_____________________________________________________________
to transfer the said Stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated______________________ ____
In presence of
____________________________________ ______________________________________
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
DIATIDE, INC.
Certificate
FOR
0
SHARES
OF
Capital Stock
ISSUED TO
XXX SPECIMEN XXX
---------------------------
DATED
XXXX XX XXXX
The shares represented by this certificate have not been registered under the
Securities Act of 1933, as amended, and may not be transferred, pledged or
hypothecated unless and until such shares are registered under such Act or an
opinion of counsel satisfactory to the Company is obtained to the effect that
such registration is not required.
The corporation has more than one class of stock authorized to be issued. The
corporation will furnish without charge to each stockholder upon written request
a copy of the full text of the preferences, voting powers, qualifications and
special and relative rights of the shares of each class of stock (and any series
thereof) authorized to be issued by the corporation as set forth in the
Certificate of Incorporation of the corporation and amendments thereto filed
with the Secretary of the State of Delaware.
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Forms S-8 No. 333-12121, 333-12105, and 333-12103) pertaining to the
1992 Stock Option Plan, 1996 Director Option Plan, and 1996 Employee Stock
Option Plan of Diatide, Inc. of our report dated February 9, 1999, with respect
to the financial statements of Diatide, Inc. included in the Annual Report (Form
10-K) for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Manchester, New Hampshire
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<CIK> 0001011888
<NAME> DIATIDE, INC.
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,663,654
<SECURITIES> 1,000,000
<RECEIVABLES> 555,861
<ALLOWANCES> 0
<INVENTORY> 477,740
<CURRENT-ASSETS> 207,405
<PP&E> 3,619,520
<DEPRECIATION> 2,262,220
<TOTAL-ASSETS> 10,272,743
<CURRENT-LIABILITIES> 3,896,194
<BONDS> 250,572
0
12,103
<COMMON> 10,585
<OTHER-SE> 6,103,313
<TOTAL-LIABILITY-AND-EQUITY> 10,272,743
<SALES> 177,180
<TOTAL-REVENUES> 6,384,659
<CGS> 88,617
<TOTAL-COSTS> 88,617
<OTHER-EXPENSES> 17,168,548
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,232
<INCOME-PRETAX> (10,217,049)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,217,049)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,217,049)
<EPS-PRIMARY> (0.97)
<EPS-DILUTED> (0.97)
</TABLE>
