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, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to _________.
Commission File Number 0-21863
EPIX Medical, Inc.
(Exact name of Registrant as Specified in its Charter)
Delaware 04-3030815
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
71 Rogers Street
Cambridge, Massachusetts 02142
- ---------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 499-1400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
--------------------------------------
(Title of Class)
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 No X
--- ---
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. [ ]
The aggregate market value, based upon the closing sale price of the shares
as reported by the Nasdaq National Market, of voting stock held by
non-affiliates (without admitting that any person whose shares are not included
in such calculation is an affiliate) at March 1, 1997 was $28,309,277.
As of March 1, 1997, 8,628,739 shares of the registrant's Common Stock,
$.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders to be held on June 20, 1997 are incorporated by
reference into Part III of this Report on Form 10-K.
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PART I
ITEM 1. BUSINESS DESCRIPTION
General
EPIX Medical, Inc. ("EPIX" or the "Company") is developing targeted
contrast agents both to improve the capability and expand the use of magnetic
resonance imaging ("MRI") as a diagnostic tool for a variety of diseases. The
Company was incorporated in Delaware in 1988 and commenced operations in 1992.
The Company changed its name from Metasyn, Inc. in November 1996.
Background
The Company is developing targeted contrast agents both to improve the
capability and expand the use of MRI as a diagnostic tool for a variety of
diseases. Contrast agents that are targeted or specific are designed to bind to
a particular organ or organ system. The Company's principal product under
development, MS-325, is an injectable vascular contrast agent designed for
multiple vascular imaging indications, including coronary artery disease("CAD")
and peripheral vascular disease ("PVD"). The Company believes that MS-325 will
significantly enhance the quality of images and provide physicians with a
clinically superior, noninvasive (i.e., no more invasive than a peripheral
intravenous injection ("I.V.")) and cost-effective method for diagnosing
cardiovascular disease. The Company further believes that MS-325 will simplify
the diagnostic pathway for a number of cardiovascular diseases and in many cases
replace highly invasive (i.e., more invasive than a peripheral I.V. up to and
including a surgical procedure) and expensive X-ray angiography, which is
currently considered the definitive diagnostic exam for assessing cardiovascular
disease. The Company is presently conducting Phase I clinical trials of MS-325,
and 35 subjects have received MS-325 to date with no clinically significant
adverse effects reported. The Company has entered into strategic alliances with
Mallinckrodt Group Inc. ("Mallinckrodt") and Daiichi Radioisotope Laboratories,
Ltd. ("Daiichi") for the development and commercialization worldwide of MS-325
and other vascular contrast agents. MS-325 is a magnetically active, injectable
small molecule. It binds to the blood protein albumin, remains at high
concentrations in the bloodstream throughout the MRI exam, and is designed to be
excreted safely through the kidneys over time. Because of its affinity for
albumin, MS-325 provides the image acquisition time and signal strength needed
to obtain a high contrast, high resolution image of the cardiovascular system.
The Company is also investigating additional imaging applications for MS-325,
including tumor imaging. The Company believes that its proprietary technology
platform will enable it to create additional contrast agents that target
particular tissue and fluid types. Research efforts are ongoing in the areas of
thrombosis (blood clots) and functional brain imaging.
Magnetic Resonance Imaging Background
In MRI, images are obtained by placing a portion of the patient's body in
a magnetic field and applying safe, low-energy radio waves. The different organs
and tissues in the body respond uniquely to the MRI's electromagnetic field and
these responses are then scanned
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and converted into a three-dimensional image. MRI can easily provide high
contrast, high resolution images of anatomy deep inside the body.
The use of MRI, which was developed in the 1970s, has grown steadily over
the past decade due to declining costs, increased clinical effectiveness,
reduced exam times and more comprehensive coverage by third-party payors. As an
example, a standard MRI brain exam, which in 1985 required 60 minutes and cost
approximately $1,500, now takes only 30 minutes, costs approximately half as
much and can identify tumors that are over 50% smaller than those detectable in
1985. The installed base of MRI scanners in the United States grew from fewer
than 400 scanners in 1985 to an estimated 3,900 in 1995, during which year there
were an estimated 8.5 million MRI exams performed.
Underlying MRI's economic and clinical advancement is the consistent and rapid
technological progress achieved by MRI equipment manufacturers such as General
Electric, Siemens and Philips. Over the past 10 years, MRI equipment
manufacturers have achieved significant improvements in both MRI hardware and
software while reducing the price of a new machine by more than 35%. The primary
hardware components in an MRI scanner are the magnet, gradients, radio frequency
coils and computer processors and memory. Since 1985, gradients have quadrupled
in speed and power, and enhancements in radio frequency coils have improved the
signal-to-noise ratio by over 100%. Improvements in computer processors, memory
and software, including new techniques to improve scanning, image processing and
motion compensation, have been even more dramatic.
Images obtained in certain applications of MRI can be enhanced through the
use of contrast agents. Contrast agents are injected into a vein in the
patient's arm prior to a scan and are designed to amplify the contrast between
various tissues, organs and anatomic structures. Currently available MRI
contrast agents are primarily non-specific gadolinium compounds which diffuse
throughout the body following injection. They are effective at enhancing images
of certain tissue types, primarily in the brain and spine, but lack the efficacy
to be clinically useful for many vascular applications. Non-specific contrast
agents are used in an estimated 25% of MRI exams and their usage has grown
approximately 40% over the last four years.
MRI has been established as the modality of choice for a broad range of
indications, including brain tumors, many spinal disorders and knee injuries.
Nevertheless, MRI has been used sparingly as an imaging modality for the
vascular system due to its limited ability to image arteries and veins in
patients. In particular, cardiac motion currently precludes MRI of the coronary
arteries. Several leading MRI manufactures, academic centers and others are
developing hardware and software solutions to the problem of cardiac motion. In
both CAD and PVD, clinically significant magnetic resonance images of the
arterial anatomy are also limited by MRI's inability to provide sufficient
contrast between the arteries and the surrounding tissues. Further, MRI studies
using the existing non-specific contrast agents are limited by their rapid
diffusion out of the vascular system. Consequently, many experts believe MRI
contrast agents which remain in the vascular system for extended periods of time
will be necessary to obtain sufficient contrast for clinically relevant vascular
images.
The EPIX Solution
The Company believes that MS-325, together with the anticipated hardware
and software solutions to the cardiac motion problem, will enable widespread
clinical use of MRI to diagnose CAD. The Company also believes that MS-325 will
significantly expand the use of currently available MRI equipment in diagnosing
PVD. MS-325 has been designed to be used
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with MRI to provide physicians with a clinically superior, noninvasive and
cost-effective diagnostic pathway by eliminating many X-ray angiograms and
ancillary tests.
MS-325: Cardiology Indications
Background. It is estimated that approximately 500,000 people in the
United States die of CAD each year, making it the leading cause of death. CAD is
characterized by the accumulation of plaque on the arterial walls, leading to a
disruption in blood flow to the heart muscle. This interruption of blood to the
heart can cause ischemia (lack of oxygen) or infarction (death of heart tissue)
and result in significant morbidity or death. In order to diagnose a patient who
exhibits apparent symptoms of CAD, prescribe an effective treatment and monitor
the results of intervention, a physician often requires information on the
anatomy and function of the heart and, specifically, the coronary arteries. Due,
in part, to the lack of cost-effective, noninvasive, comprehensive diagnostic
imaging procedures, diagnosis of CAD is currently a complex and expensive
process. Based on independent sources, the Company believes that in 1995 over
six million patients in the United States underwent over 11 million various
diagnostic tests for the diagnosis of CAD at an estimated cost of approximately
$7.0 billion. The Company believes that MRI-based cardiac evaluations using
MS-325 would simplify the process of diagnosing CAD, significantly improving
patient outcomes and lowering total medical costs.
Traditional Approach to CAD Diagnosis. The current diagnostic process for
CAD is complex, expensive and can involve multiple, often inconclusive, tests.
While the specific diagnostic pathway may vary for any given patient, several
appointments for multiple diagnostic exams may be necessary prior to formulation
of a treatment plan. Figure 1 below outlines the traditional approach to CAD
diagnosis.
Figure 1 - Coronary Artery Disease: Traditional diagnostic pathway
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
7% Acute/Critical 60% Drug Therapy
---- Ischemia ---- or Rule Out
| | CAD
| Traditional |
Initial | Non-Invasive |
Chest Pain | Imaging | 50% Drug
Workup | o Stress echo- | ---- Therapy or
| cardiogram | | No Therapy
o EKG | Indeterminate | |
o Exercise |51% Non-acute o Nuclear stress | |27%
stress test ---- Myocardial ---- perfusion study | Coronary ---- PTCA
| Infarction |40% X-ray |
6.75 Million |42% 3.44 Million ---- Angiography |
Patients ---- Rule Out CAD Patients |23%
1.38 Million ---- CABG
Patients
</TABLE>
- --------------------------------------------------------------------------------
Note: Percentages are estimates derived by the Company from both data
compiled by the Company and data obtained from independent sources. Actual
diagnostic outcomes could vary depending on numerous factors, including
geographical location of the patient, type of medical setting in which the
tests are administered and physician practice patterns.
An estimated 6.75 million patients enter the CAD diagnostic pathway in the
United States after experiencing chest pain or shortness of breath. An
electrocardiogram ("EKG") is often performed at this stage. Approximately 7% of
these patients present with severe pain and acute or critical ischemia and are
immediately triaged for treatment. For the remaining 93%, the physician
completes a work-up, history and physical exam to determine whether the patient
exhibits symptoms consistent with CAD and has any of the risk factors for CAD,
such as smoking, high cholesterol, family history, excess weight, diabetes or
high blood pressure. A patient with an abnormal EKG or significant risk factors
will likely be referred to a cardiologist for further testing. The cardiologist
will typically continue the work-up with an exercise stress test. Based on EKG
and exercise stress test results, CAD is ruled out for approximately 42% of all
patients entering the diagnostic pathway. For the remaining 51% of all patients,
results of the exercise stress test are indeterminate and the cardiologist
generally will perform a stress echocardiogram and/or a nuclear stress perfusion
study. Approximately 60% of patients undergoing these tests receive either drug
therapy or no further treatment. For the remaining 40% of patients, for whom the
stress echocardiogram or a nuclear stress perfusion study is positive or
indeterminate, a coronary X-ray angiogram is often prescribed. Approximately 50%
of the patients who receive coronary X-ray angiograms are either treated
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with drugs or require no therapy. If the coronary X-ray angiogram indicates
surgically correctable disease, the patient will be scheduled for a percutaneous
transluminal coronary angioplasty ("PTCA"), a procedure designed to enlarge
partially blocked arteries, or referred to a cardiac surgeon for a coronary
artery bypass graft ("CABG"), a surgical procedure designed to circumvent a
blocked or partially blocked artery or arteries with a vascular graft.
As indicated above, the following tests are generally part of the traditional
diagnostic pathway for CAD:
o EKGs measure the electrical potential of the heart using several surface
electrodes. Varying patterns of monitored electrical activity may indicate
heart abnormalities, including ischemic heart disease or a previous heart
attack.
o Exercise stress tests measure a patient's ability to exercise without
chest pain. For certain patients with extreme results, the test can be
used to confirm or exclude the presence of blockages which significantly
decrease blood flow and sometimes to prescribe drug therapy. However, for
most patients the test is inconclusive. The test provides no information
on the anatomy of the coronary arteries.
o Stress echocardiograms use transthoracic ultrasound to measure motion of
the walls of the heart under physical or pharmacological stress. In most
cases, a lack of blood flow to a particular area of the heart will be
reflected in atypical motion of the heart wall. The test is noninvasive
and costs between $300 and $900. While a normal stress echocardiogram
usually eliminates the possibility of blockages which significantly
decrease blood flow, the test is often inconclusive and provides no
information on the anatomy of the coronary arteries. Over 800,000 stress
echocardiograms were performed in the United States in 1995 at an
estimated cost of over $250 million.
o Nuclear stress perfusion studies, which measure the flow of blood to
cardiac tissue, can be used either as the critical diagnostic test prior
to X-ray angiography or to confirm the impact on blood flow of an
intermediate blockage identified through X-ray angiography. These tests
are noninvasive, use small quantities of ionizing radiation and cost
between $600 and $1,400. A patient is injected with a radiopharmaceutical
and then a gamma camera is used to detect uptake of the agent in the heart
muscle. A deficiency in blood flow to particular regions of the heart is
shown on the resultant images. While the test can identify the effects of
CAD, it provides no information on the anatomy of the coronary arteries
and it cannot determine the location of blockages. Approximately 2.7
million nuclear stress perfusion studies were conducted in the United
States in 1995 at an estimated cost of $1.9 billion.
o Coronary X-ray angiography is currently considered by many to be the
definitive diagnostic exam for imaging the coronary artery anatomy. It
uses conventional X-ray technology enhanced with iodinated contrast media.
Coronary X-ray angiography is highly invasive and costs between $2,000 and
$6,000 per procedure. The procedure requires an interventional
cardiologist to puncture the femoral artery in the patient's groin area
and feed a catheter up into the patient's heart. During X-ray imaging, up
to 100 milliliters of contrast media are injected into the catheter,
effectively replacing blood flow in the heart and associated arteries for
approximately two seconds. This cardiac catheterization must be performed
in a surgical setting and requires patient monitoring for at least six
hours after the procedure.
Approximately 5% of patients undergoing a coronary X-ray angiogram
experience serious side effects, including renal failure, limb loss and death,
which may be caused by both the insertion of the catheter and the high dosage of
iodinated radio-opaque dye. In addition,
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coronary X-ray angiography does not always provide sufficient information for
clinical decision-making. While the procedure identifies the location of
arterial blockages, in many cases it cannot conclusively determine their impact
on blood flow. Therefore, for many blockages, a nuclear stress perfusion study
must be performed to enable the physician to make a definitive diagnosis. Due to
the expensive nature of coronary X-ray angiography, its high risk of
complications, and the fact that approximately 50% of the patients undergoing
coronary X-ray angiograms ultimately are diagnosed as having conditions that do
not warrant invasive therapy, physicians employ a battery of tests to triage
patients in an effort to avoid this procedure. However, because a diagnostic
coronary X-ray angiogram is currently the only test that can image the coronary
artery anatomy, approximately 1.4 million such procedures were performed in the
United States in 1995 at an approximate cost of $3.8 billion.
The EPIX Approach to CAD Diagnosis. The Company believes that MS-325,
coupled with anticipated advances in software and hardware for MRI equipment,
will enable physicians to use cardiac MRI to perform a noninvasive, integrated
cardiac exam for the diagnosis of CAD. Such a procedure is designed to provide
information on coronary artery anatomy, including location of arterial
blockages, perfusion and cardiac function, in one sitting early in the
diagnostic pathway. Because the procedure is intended to provide physicians with
more comprehensive diagnostic information at an earlier stage of the diagnostic
pathway, physicians will be able to make a more informed diagnosis, and arrange
for appropriate patient treatment, sooner than would otherwise be possible,
thereby achieving better patient outcomes at a lower cost. Although several
leading MRI manufacturers, academic centers and others are developing advanced
hardware and software, there can be no assurance when, or if, these techniques
will enable MS-325 to provide clinically relevant images in cardiac indications
currently being pursued. Figure 2 below outlines the EPIX approach to the
diagnosis of CAD.
Figure 2 - Coronary Artery Disease: EPIX diagnostic pathway
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
7% Acute/Critical 80% Drug Therapy
---- Ischemia ---- or Rule Out CAD
| |
| EPIX Solution |
Initial | MS-325/MRI |
Chest Pain | | 9% Coronary
Workup | o Anatomy ---- X-ray ---- CABG
| | Angiography
o EKG | Indeterminate o Perfusion |
o Exercise |51% Non-acute | 0.31 Million
stress test ---- Myocardial ---- o Function | Patients
| Infarction |11%
6.75 Million |42% 3.44 Million ---- PTCA
Patients ---- Rule Out CAD Patients
</TABLE>
- --------------------------------------------------------------------------------
Note: Percentages are estimates derived by the Company from both data
compiled by the Company and data obtained from independent sources. Actual
diagnostic outcomes could vary depending on numerous factors, including
geographical location of the patient, type of medical setting in which the
tests are administered and physician practice patterns.
The Company believes that the use of MS-325 with MRI to perform integrated
cardiac exams will simplify and improve the diagnostic work-up for CAD by
enabling noninvasive cardiologists (approximately 80% of all cardiologists) to
visualize the coronary arteries noninvasively early in the work-up. Under the
EPIX approach for CAD assessment, a patient who has an indeterminate EKG and
exercise stress test would be referred for a noninvasive, integrated cardiac
exam. Unlike the invasive nature of coronary X-ray angiography, the patient
would receive a single injection of MS-325 in a vein in the arm prior to the
exam and then enter the MRI scanner.
The exam is expected to provide the physician with three-dimensional
anatomic detail of the coronary arteries as well as the perfusion and functional
information currently provided by stress echocardiograms and nuclear stress
perfusion studies. Based on the results of the MS-325-based integrated cardiac
exam, the cardiologist would either prescribe no treatment, prescribe drug
therapy or refer the patient to an interventional cardiologist (i.e., a
cardiologist who performs invasive procedures) for a PTCA or surgical planning
for a CABG. Because the MRI exam using MS-325 is expected to provide all of the
anatomic information currently provided by a coronary X-ray angiogram, the need
for coronary X-ray angiography
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as a diagnostic tool will be reduced. Only in the limited number of cases where
CABG is deemed necessary would the patient be subjected to invasive coronary
X-ray angiography for surgical planning.
The Company believes that the EPIX simplified diagnostic pathway could
result in significant cost savings to the United States healthcare system for
the diagnosis of CAD. These savings are predicated on providing noninvasive
coronary artery anatomic information earlier in the CAD work-up. In 1995, for
the approximately 3.44 million patients in the United States completing the
traditional diagnostic pathway, the total cost of the diagnostic work-up for CAD
was approximately $5.4 billion. Under the EPIX approach to diagnosis of CAD,
both stress echocardiograms and nuclear stress perfusion studies could be
eliminated. In addition, because an MRI exam with MS-325 is expected to provide
physicians with anatomic information early in the CAD work-up, the Company
believes that half of the patients who undergo coronary X-ray angiography but do
not ultimately require invasive therapy will be able to avoid a coronary X-ray
angiogram. The estimated total cost for the 3.44 million patients completing the
EPIX diagnostic pathway for CAD would be $3.2 billion, yielding approximately
$2.2 billion in savings to the United States healthcare system based on
estimated 1995 procedure costs.
Figure 3 - Estimated Savings: Traditional CAD diagnostic
pathway versus EPIX diagnostic pathway
- --------------------------------------------------------------------------------
Traditional
60% Drug Therapy
$500 ---- or Rule Out
| CAD
Traditional |
Non-Invasive |
Imaging | 50% Drug
o Stress echo- | ---- Therapy or
cardiogram | | Rule Out CAD
| |
o Nuclear stress | $2,700 |27%
perfusion study | Coronary ---- PTCA
|40% X-ray |
---- Angiography |
|23%
3.44 Million ---- CABG
Patients
1.38 Million
Patients
Estimated Total U.S. Cost = $5.4 billion
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EPIX
80% Drug Therapy
---- or Rule Out CAD
$700 |
EPIX Solution |
MS-325/MRI | $2,700
| 9% Coronary
o Anatomy ---- X-Ray ---- CABG
| Angiography
o Perfusion |
| 0.31 Million
o Function | Patients
|11%
3.44 Million ---- PTCA
Patients
Estimated Total U.S. Cost = $3.2 billion
- --------------------------------------------------------------------------------
Note: Percentages are estimates derived by the Company from both data
compiled by the Company and data obtained from independent sources. Actual
diagnostic outcomes could vary depending on numerous factors, including
geographical location of the patient, type of medical setting in which the
tests are administered and physician practice patterns.
Post-Intervention Monitoring and "Relooks." The Company believes that,
after either a PTCA or a CABG, optimal patient management would include
follow-up exams to determine re-forming of blockages ("restenosis") as well as
proper functioning of grafts. However, while it is estimated that approximately
400,000 PTCAs and 500,000 CABGs were performed in the United States in 1995,
only a small proportion of the patients undergoing these procedures received
follow-up coronary X-ray angiography ("relooks"). Due to the risk, discomfort
and expense associated with coronary X-ray angiography, follow-up imaging
currently is limited, which can lead to increased patient management costs and
poorer outcomes due to undiagnosed restenosis and other complications. The
Company believes that the availability of MS-325 may lead to an increase in
follow-up exams using MRI. Furthermore, the Company believes that MS-325 would
enable noninvasive cardiologists to visualize the coronary arteries of the
increasing number of patients who have been treated with thrombolytic therapy
(streptokinase and TPA).
MS-325: Radiology Indications
Background. PVD affects arteries throughout the body and results in
significant morbidity and mortality. There are approximately 600,000 vascular
operations, 400,000 strokes and 100,000 amputations (primarily related to PVD)
each year in the United States. Similar to CAD, blockage of arteries outside the
heart can lead to ischemia (lack of oxygen) or infarction (death of tissue).
Complications from PVD include pain, limitations in mobility, amputation of the
extremities, hypertension, kidney failure in the case of renal arteries, or
stroke in the case of carotid or cerebral arteries. The need for imaging the
vascular system
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outside the heart extends to many areas of the body, including the carotid
arteries, vessels of the leg, the aorta and pulmonary arteries.
Traditional Approach to PVD Diagnosis. A patient with PVD may present with
a wide range of symptoms, such as leg pain, gangrene, hypertension, renal
failure, stroke or transient ischemic attack ("TIA"), a brief episode of
cerebral ischemia usually characterized by blurred vision, slurred speech,
numbness or paralysis. The appropriate initial diagnostic tests vary according
to the particular PVD indication. Traditional imaging modalities for diagnosing
PVD, such as ultrasound, nuclear medicine and computer assisted tomography
("CT"), frequently do not provide definitive diagnostic information. For
example, ultrasound and renal nuclear scans have poor image quality, leading to
exams which are frequently indeterminate. CT can be used for certain
radiological applications, but can only image a limited area during each scan
due to the large amounts of potentially toxic X-ray contrast media required.
With the exception of imaging carotid arteries, MRI has not made a
significant impact on the diagnosis of PVD to date. Non-contrast MRI studies of
the vascular system, which measure blood flow and not anatomy, are often
ineffective when used in patients with disease because of their limitations in
imaging the blood flow associated with PVD, which may be either minimal or
turbulent. Even for the imaging of carotid arteries, where flow-based MRI has
had a substantial clinical impact, the lack of direct anatomic data limits its
ability to provide a quantitative measurement of stenosis required for accurate
diagnosis. MRI studies using existing non-specific contrast agents are limited
by the rapid diffusion of the agents out of the vascular system.
As with the diagnostic work-up of CAD, a peripheral X-ray angiogram is
generally considered to be the definitive diagnostic exam for radiological
indications. In the work-up of PVD of the lower extremities, for example, the
patient typically presents with leg pain, gangrene or limited mobility. The
surgeon checks the patient's pulse in the ankles and performs two noninvasive
exams, impedance plethysmography and ankle brachial index measurements, which
confirm that the patient has PVD and often localizes the disease within the
limb. An ultrasound exam is sometimes performed at this stage. Peripheral X-ray
angiography is then performed to visualize the extent of the disease and to plan
for surgery. Like coronary X-ray angiograms, peripheral X-ray angiograms are
performed in a surgical setting and involve the puncture of the femoral artery
in the groin area, the placement of a catheter in the artery and the replacement
of blood by X-ray contrast media. While peripheral X-ray angiograms have
slightly lower morbidity rates compared to coronary X-ray angiograms, the risks
are significant with complications, including limb loss and renal failure,
occurring at a rate of 1.7%. The cost of peripheral X-ray angiography is
estimated to range from less than $1,000 to almost $3,000 per procedure. Despite
the drawbacks of peripheral X-ray angiography, approximately 1.9 million of
these procedures were performed in the United States in 1995. Figure 4 below
outlines the traditional diagnostic pathway for various forms of PVD.
Figure 4 - Peripheral Vascular Disease: Traditional diagnostic pathway
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Anatomic Area Current Diagnostic Exams
- ----------------------
Carotid Ultrasound
Artery ---- MRI ----| |
- ---------------------- | |
| |
- ---------------------- | |
Aorta ---- CT | ---- Surgery
- ---------------------- Ultrasound ----| |
| Peripheral |
- ---------------------- | X-ray |
Renal Renal nuclear scan | Angiography |
Arteries ---- Ultrasound ----| | Percutaneous
- ---------------------- | ---- Transluminal
| | Angioplasty
- ---------------------- Impedance | | (PTA)
Extremities ---- plethysmography (IPG) | |
- ---------------------- Ankle Brachial Index (ABI) ----| |
| Ultrasound
|
|
|
[GRAPHIC OF HUMAN BODY]
</TABLE>
- --------------------------------------------------------------------------------
The EPIX Approach to PVD Diagnosis. The Company believes that the use of
MS-325 with MRI will simplify and improve the PVD diagnostic pathway by enabling
radiologists to visualize peripheral arteries noninvasively early in the work-up
with resolution sufficient to provide a definitive diagnosis and surgical plan.
Although several available MRI contrast agents also provide high resolution,
they diffuse out of the cardiovascular system rapidly,
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making it possible to obtain detailed anatomic images only over a limited area.
MS-325 is designed to remain in the blood vessels for over an hour providing
sufficient time for detailed images of large portions of the vascular system. By
significantly increasing the contrast of the vascular system and using the MRI
equipment currently in widespread use, the Company believes that MS-325 will
enable MRI to overcome the principal problem that has limited its clinical
effectiveness in diagnosing PVD.
An MRI exam utilizing MS-325 is intended to provide sufficient anatomic
detail for a definitive diagnosis and the anatomic data necessary for surgical
planning. Unlike peripheral X-ray angiography which, due to its invasive and
painful nature, high cost and risk of complications, is often deferred in favor
of noninvasive, often inconclusive exams, an MRI exam utilizing MS-325 is
intended for use early in the PVD work-up. Phase I clinical trials to date have
yielded measurements of signal intensity over time consistent with the Company's
belief that MRI with MS-325 will provide physicians with diagnostic information
clinically equivalent to peripheral X-ray angiography earlier in the diagnostic
pathway. Consequently, the Company believes that MS-325-based MRI exams would
not only replace a large portion of the approximately 1.9 million peripheral
X-ray angiograms performed in the United States each year, but would also be
used in a significant number of instances where ultrasound, nuclear medicine or
other noninvasive modalities are currently employed but lack definitive
diagnostic capability as described above. Based upon estimated 1995 procedure
costs, the Company believes that the use of MS-325 with MRI to diagnose PVD
could yield savings to the United States healthcare system of nearly $1.0
billion.
Thrombosis is another vascular disease outside the heart that is diagnosed
with a variety of radiological imaging techniques. Commonly referred to as
"blood clots," thrombosis can occur in the legs, arms, pelvis, lungs and neck,
and is the cause of over 400,000 deaths per year in the United States. Blood
clots can cause death from a pulmonary embolus (an obstruction in the pulmonary
vasculature), stroke or heart attack. Ultrasound and nuclear stress perfusion
studies are used early in the work-up in an attempt to defer peripheral X-ray
angiography because of cost, mortality and complications. These noninvasive
modalities are often indeterminate. Although limited in use because of the
mortality and complication rate, peripheral X-ray angiography, as in PVD,
continues to be considered by many to be the definitive diagnostic tool. The
Company believes that an MRI exam using MS-325 will be able to noninvasively
provide diagnostic information which is clinically equivalent to peripheral
X-ray angiography for the diagnosis of blood clots in selected cases.
Business Strategy
The Company's objective is to become a leader in MRI contrast agents. It
will seek to do so by pursuing a strategy based on commercializing MS-325 and
developing new applications for its proprietary technology platform.
The Company's key business objectives are to:
Establish the safety and clinical utility of MS-325 for multiple vascular
imaging indications. The Company is conducting Phase I clinical trials to
establish the safety of MS-325 for human use, after which it intends to conduct
separate Phase II and Phase III clinical trials initially for radiology
indications to be followed by cardiology indications.
Achieve market acceptance of MS-325. The Company intends to collect
pharmacoeconomic and clinical data that demonstrates that MRI enhanced with
MS-325 is superior to the traditional diagnostic pathway. Through its strategic
partners' extensive worldwide marketing and sales networks, the Company intends
to present this data to both physicians and third-party payors. The Company
believes that third-party payors will
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promote the use of MS-325 because of its potential for substantial cost savings
and clinical benefits.
Broaden the use of MS-325 to additional clinical indications. The Company
intends to evaluate MS-325 for use in the diagnosis of various tumors. For
example, the Company is currently planning a Phase II clinical trial for the use
of MS-325 in the diagnosis of breast cancer. Based on the physical properties of
MS-325 and preclinical studies, the Company believes that MS-325 has potential
application as part of a noninvasive imaging procedure that would enable
physicians to discriminate between malignant and benign breast masses in
patients with indeterminate mammograms or palpable lumps.
Develop new targeted MRI contrast agents. In addition to evaluating the
use of MS-325 in diagnosing thrombosis, the Company is developing
thrombosis-specific MRI contrast agents based on its proprietary technology
platform. The Company is also pursuing a discovery program for functional brain
imaging.
Maximize the value of strategic alliances. The Company currently has
strategic alliances with Mallinckrodt and Daiichi. The Company entered into
these alliances, and will seek to enter into future strategic alliances with
pharmaceutical and imaging agent industry leaders, in order to obtain access to
resources and infrastructure to leverage the Company's strengths.
Technology
Background
The products under development by the Company are based upon its
proprietary biophysics technology platform. The Company's product candidates are
small molecule chelates (soluble metal-organic complexes) containing a
magnetically active metal element which elicit a strong MRI signal and are
designed to be safely excreted through the kidneys over time. The Company has
developed significant expertise in the design, synthesis and characterization of
metal-containing complexes for in vivo use. While the contrast agents primarily
used in MRI today are non-targeted in that they diffuse indiscriminately
throughout the tissues of the body, the Company believes that its proprietary
technology platform will enable it to design contrast agents which are capable
of targeting specific tissues or organs by binding to particular proteins. The
Company's proprietary biophysics technology platform consists of two key
elements:
Receptor-Induced Magnetic Enhancement
Receptor-induced magnetic enhancement ("RIME") technology, which was
developed by Dr. Randall Lauffer, the Company's founder, while at Massachusetts
General Hospital ("MGH"), allows targeting of a contrast agent to particular
tissue and fluid types in the body while simultaneously multiplying the signal
enhancing effect of the agent and is now exclusively licensed by the Company
under patents held by MGH. RIME technology involves the design of metal
complexes that bind to particular proteins and receptor molecules in the body.
This binding causes increased concentration and retention of the contrast agent
in the specific tissues and fluids that contain targeted receptor molecules. The
binding also causes a special magnetic effect based on the complex biophysics of
MRI contrast agents. One of the factors that determines an MRI contrast agent's
signal enhancing effect is its rotation, or tumbling rate, in solution. When an
agent binds to a large molecule through the RIME process, the agent's tumbling
rate decreases substantially, resulting in a corresponding increase in the
strength of the agent's magnetic signal, which is detectable by MRI.
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Enzyme Sensing Technology
Developed by EPIX scientists, enzyme sensing technology is an extension of
the RIME technology that allows MRI to probe biological events on the molecular
level for the first time, thereby increasing the sensitivity of MRI. The Company
is developing small molecule contrast agents that become active in the presence
of certain enzymes which allows them to bind to their target receptor molecules
and express their full RIME signal enhancement. Because the presence of elevated
levels of particular enzymes occur only in certain biological situations, enzyme
sensing technology would allow MRI to scan for specific biological events
currently undetectable with MRI.
EPIX Products and Development Programs
MS-325
The Company's lead product candidate, MS-325, is a targeted vascular
contrast agent intended for use with MRI. MS-325 is a gadolinium-based small
molecule chelate, engineered with the Company's proprietary RIME technology.
Animal studies have demonstrated that, when injected into the bloodstream,
MS-325 binds reversibly to the blood protein albumin and is designed to be
excreted safely through the kidneys over time. This allows the agent to remain
at high concentrations in the bloodstream during the imaging procedure and then
be gradually excreted from the body. The Company has designed the half-life of
the agent to allow for the optimal imaging window of at least one hour. In
animal studies, MS-325 has exhibited signal enhancement that is significantly
stronger than currently available agents. In an image enhanced by MS-325 using
standard MRI techniques, the blood, which is infused with gadolinium, gives off
a strong magnetic signal and appears bright while the surrounding tissue gives
off a very low magnetic signal and appears dark.
While MS-325 is based on the Company's proprietary technology platform,
its chemical composition is similar to currently available MRI contrast agents
which have a strong safety record and are known to cause few, if any, side
effects. Furthermore, due to the increased magnetic signal elicited by MS-325,
the Company expects it to be used at a similar or lower dose than currently
available MRI contrast agents. As a result of these factors, the Company
believes that MS-325 will have a safety profile comparable to currently
available MRI contrast agents.
The Company submitted an IND application for MS-325 to the FDA on July 22,
1996 and commenced a Phase I clinical trial on September 6, 1996. Thirty-five
subjects participated in the clinical safety monitoring portion of the trial,
which ended on November 22, 1996. Eighteen of these subjects, who were divided
into three different dosing groups, participated in a typical Phase I safety
study in which the dose of MS-325 was gradually increased from one group to the
next. The remaining 17 subjects, who received the highest dose tested, were also
imaged in order to confirm the appropriateness of the dose and to evaluate the
imaging characteristics of MS-325. Vital signs, blood chemistries and other
biological and physical markers were monitored in all subjects. Based on
preliminary results, no clinically significant adverse effects have been
reported. The Company submitted its report on the Phase I Trial to the FDA in
February 1997 and expects to commence Phase II trials for radiology indications
in the second quarter of 1997.
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In addition to the diagnosis of CAD and PVD, the Company intends to pursue
the use of MS-325 for additional clinical indications, including thrombosis,
commonly referred to as "blood clots." The Company believes that MRI with MS-325
could eliminate the need for selected ultrasound and nuclear medicine studies of
thrombosis while providing, noninvasively, diagnostic information which is
clinically equivalent to that provided by peripheral X-ray angiography.
The Company further believes that, based on the physical properties of
MS-325 and preclinical studies, MS- 325 has potential application as part of a
noninvasive imaging procedure that would enable physicians to discriminate
between malignant and benign breast masses in patients with indeterminate
mammograms or palpable lumps. Another potential application for MS-325 in the
diagnosis of breast cancer is in defining the size of malignant lesions. The
Company believes that an MRI breast exam using MS-325 could allow better
determination of eligibility for breast-conserving therapy.
Other Research and Development Programs
Thrombosis Imaging. The Company is developing new agents designed
specifically for imaging blood clots. The Company is seeking to develop a
targeted contrast agent and protocol that would enable MRI to illuminate blood
clots against a dark background. The Company believes that its proprietary
technology platform could also enable MRI to differentiate old and new clot
formations and that such a product would change the diagnostic pathway for many
of the conditions associated with thrombotic disease, including pulmonary
embolism and deep vein thrombosis. The Company believes that use of the new
approach would lead to better medical outcomes due to earlier definitive
diagnosis. Early diagnosis is especially important for clots in the pelvis and
vena cava, the large vein through which blood returns to the heart, because of
their increased likelihood of migrating to the lungs where the clots can be
fatal. The Company believes that a thrombosis-specific contrast agent could
largely replace the noninvasive modalities currently in use, including nuclear
medicine ventilation/perfusion scans.
Functional Brain Imaging. Functional brain imaging involves measuring
small changes in the brain to, in effect, "watch" the brain function in real
time. In the past, these cognitive function mapping studies were done using
modalities such as electro-encephalograms and nuclear medicine, both of which
are generally recognized to have low resolution and provide limited clinical
information. Recently however, investigators at a number of institutions,
including MGH, have developed a new brain imaging technique using MRI. Even in
its present experimental form, the technique is rapidly being adopted by many
leading neuroscience centers throughout the world. The technique detects small
increases in blood volume or flow that accompany the greater metabolic activity
in stimulated brain regions, thus allowing one to watch, in real time, different
regions of the brain "light up" as a person thinks, moves or views objects. At
present, studies are being conducted using a specialized MRI technique which
does not employ a contrast agent. However, these studies are currently difficult
to interpret since blood flow changes induced by cognitive activity are subtle
and associated signals are weak. Clinical applications of functional brain
imaging are potentially broad, including pre-surgical planning,
neurodegenerative disease diagnosis and psychiatry.
EPIX is currently conducting preclinical testing of prototype brain
imaging agents with researchers at MGH based on the Company's proprietary
technology platform. The Company is seeking to establish the feasibility of
developing an agent that would be able to magnify the signal from small volume
changes in blood flow to particular areas of the brain. The Company believes
that such a contrast agent could enable highly illuminated three-dimensional MRI
scans of brain function.
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Strategic Alliances
The Company's strategy includes entering into alliances with leaders in
the pharmaceutical and diagnostic imaging industries to facilitate the
development, manufacture, marketing, sale and distribution of its products. To
date, the Company has formed strategic alliances with Mallinckrodt and Daiichi
for the development and commercialization of MS-325.
Mallinckrodt Group Inc.
Pursuant to a collaboration agreement between the Company and
Mallinckrodt, which was executed in August 1996, the Company granted
Mallinckrodt an exclusive license to develop and commercialize MS-325 worldwide,
excluding Japan. The agreement also provides for potential collaboration and
cost sharing arrangements in connection with future MRI vascular agent programs,
whether developed by the Company or Mallinckrodt or in-licensed by either party.
The operations of the collaboration are supervised by a joint steering committee
comprised of an equal number of representatives of both parties. Mallinckrodt
and the Company will collaborate on the clinical development of MS-325,
beginning with Phase I clinical trials. The Company has primary responsibility
for conducting Phase I and Phase II clinical trials and for manufacturing MS-325
for such trials. Mallinckrodt will assume primary responsibility for development
and manufacturing starting with Phase III clinical trials. Mallinckrodt will
also be responsible for the marketing and distribution of MS-325 worldwide,
excluding Japan. The agreement imposes certain development due diligence
obligations on both of the parties and certain marketing due diligence
obligations on Mallinckrodt.
The Company received a $6.0 million license fee upon execution of the
agreement with Mallinckrodt. The agreement provides for an additional $2.0
million payment upon the earlier of a specified date or the achievement of an
MS-325 milestone. Mallinckrodt and the Company will generally share equally in
the worldwide, excluding Japan, development and manufacturing scale-up and
product launch costs of MS-325 and all future MRI vascular agents which may be
covered by the agreement. The parties' current obligations with respect to
MS-325 development costs are limited to a specified amount. Under the
arrangement, the Company will share in future operating profits, if any.
The agreement provides that Mallinckrodt may not develop, market or sell
any MRI vascular agent worldwide except Japan other than those that are part of
the collaboration without the approval of the joint steering committee (in which
case they, if approved, would become part of the collaboration).
Daiichi Radioisotope Laboratories, Ltd.
Pursuant to a development and license agreement, which was entered into in
March 1996, the Company granted Daiichi an exclusive license to develop and
commercialize MS-325 in Japan. Under this arrangement, Daiichi will assume
primary responsibility for clinical development, regulatory approval, marketing
and distribution of MS-325 in Japan. The Company retained the right and
obligation to manufacture MS-325 for development activities and commercial sale
under the agreement. However, Daiichi may, under certain circumstances, elect to
formulate MS-325 purchased from the Company into a final product. The agreement
imposes certain development due diligence obligations on both parties and
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marketing due diligence obligations on Daiichi. The agreement may be terminated
by Daiichi upon 30 days prior written notice if Daiichi determines in its
reasonable opinion that MS-325 lacks clinical efficacy, presents serious side
effects or otherwise exhibits unacceptable properties. In connection with this
strategic alliance, the Company received an up-front fee from Daiichi in the
amount of $3.0 million and Daiichi is required to make future payments to EPIX
up to an aggregate amount of $3.3 million, upon the achievement of certain
MS-325 development milestones. Daiichi also made a $5.0 million equity
investment in the Company. Daiichi will make royalty payments to the Company on
net sales of MS-325 in Japan.
In 1992, the Company entered into an agency agreement with Sumitomo
Corporation ("Sumitomo") whereby the Company engaged Sumitomo as its exclusive
agent to assist the Company in entering into arrangements with third parties for
the development and commercialization of vascular, liver and tumor MRI agents in
Japan. Sumitomo assigned this agreement to Summit Pharmaceuticals International
Corporation ("Summit") in 1995. In accordance with the agreement, the Company
paid Summit a specified percentage on all amounts received by the Company from
Daiichi to date and will make payments to Summit on future milestone payments it
receives from Daiichi, if any. The Company will be obliged to make such payments
with respect to future arrangements with partners headquartered in Japan if
entered into prior to the first anniversary of the termination of the agency
agreement.
Competition
The healthcare industry is characterized by extensive research efforts and
rapid technological change, and there are many companies that are working to
develop products similar to the Company's. There are currently no targeted
vascular contrast agents for use with MRI. However, there are a number of
non-specific MRI agents approved by the U.S. Food and Drug Administration
("FDA") for marketing in the United States and certain foreign markets that are
likely to compete with the Company's products for certain applications.
Magnevist(R) by Schering-AG, Dotarem(R) by Guerbet, S.A., Omniscan(R) by Nycomed
Imaging ASA, and ProHance(R) by Bracco S.p.A. are all such products. The Company
is aware of other agents under development that may have application in vascular
imaging. There can be no assurance that the Company's competitors will not
succeed in the future in developing products that are more effective than any
that are being developed by the Company. The Company believes that its ability
to compete within the MRI contrast agent market is dependent on a number of
factors, including the success and timeliness with which it completes FDA
trials, the breadth of applications, if any, for which it receives approval, and
the effectiveness, cost, safety and ease of use of the Company's products in
comparison to the products of the Company's competitors. The success of the
Company will also be based on physician acceptance of MRI as a primary imaging
modality for certain cardiovascular and other applications.
The Company has many competitors including pharmaceutical, biotechnology
and chemical companies, a number of which, including both of the Company's
strategic partners, are actively developing and marketing products that, if
commercialized, would compete with the Company's product candidates. Many of
these competitors have substantially greater capital and other resources than
the Company and may represent significant competition for the Company. Such
companies may succeed in developing technologies and products that are more
effective or less costly than any of those that may be developed by the Company,
and such companies may be more successful than the Company in developing,
manufacturing and marketing products. Furthermore, there are several
well-established medical imaging modalities that currently compete, and will
continue to compete, with MRI, including X-ray
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angiography, CT, nuclear medicine and ultrasound. Other companies are actively
developing the capabilities of the competing modalities to enhance their
effectiveness in CVS imaging. There can be no assurance that the Company will be
able to compete successfully in the future or that developments by others will
not render MS-325 or the Company's future product candidates obsolete or
non-competitive or that the Company's collaborators or customers will not choose
to use competing technologies or products.
Patents and Proprietary Rights
EPIX considers the protection of its proprietary technologies to be
material to its business prospects. The Company pursues a comprehensive patent
program in the United States and in other countries where it believes that
significant market opportunities exist.
The Company owns or has exclusively licensed patents and patent
applications on the critical aspects of its core technology as well as many
specific applications of this technology. EPIX has exclusively licensed two
patents in the United States broadly covering RIME technology, albumin binding
with metal chelates, and liver targeting metal chelates, and has received notice
of allowance for similar patent applications in Japan and Europe. The Company
has exclusively licensed four additional patents in the United States and
received notice of allowance of an additional U.S. patent covering novel metal
chelates, with similar patent applications in Japan and Europe. Finally, the
Company has patent applications pending in the United States, Japan and Europe
covering various aspects of its RIME technology. The Company's patent protection
for MS-325 currently extends to 2007 in the United States, Japan and Europe. If
the currently pending patent applications issue, this protection will be
extended until 17 years after the date of issue in the United States, and until
2016 in Europe and Japan.
An issued patent grants to the owner the right to exclude others from
practicing inventions claimed therein. In the United States, a patent filed
before June 8, 1995 is enforceable for 17 years from the date of issuance or 20
years from the deemed date of filing the underlying patent applications,
whichever is longer. Patents based on applications filed from June 8, 1995
expire 20 years from the deemed date. The General Agreement on Tariffs and Trade
provides that patents whose applications were filed on or after June 8, 1995 are
effective for 20 years from filing. This new rule is generally regarded as
unfavorable to pharmaceutical companies, where the time period between patent
filing and commercialization of the patented product may be extended many years
because of the lengthy development cycle and regulatory process.
The patent positions of pharmaceutical and biopharmaceutical firms involve
complex legal and factual questions. There can be no assurance that the
Company's issued patents, or any patents that may be issued in the future, will
effectively protect the Company's technology or provide a competitive advantage.
There can be no assurance that any of the Company's patents or patent
applications will not be challenged, invalidated or circumvented in the future.
The Company's commercial success will also depend on its ability to
operate without infringing upon the patents of others in the United States and
abroad. If any third-party patents are upheld as valid and enforceable in any
judicial or administrative proceeding, the Company could be prevented from
practicing the subject matter claimed in such patents, or would be required to
obtain licenses from the patent owners of each such patent, or to redesign its
products or
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processes, to avoid infringement. There can be no assurance that such licenses
would be available or, if available, would be available on terms acceptable to
the Company or that the Company would be successful in any attempt to redesign
its products or processes to avoid infringement. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
There are pending or issued patents, held by parties not affiliated with
the Company, relating to technologies used by the Company in the development or
use of certain of the Company's product candidates. In particular, the Company
is aware of certain patents in the United States, Japan and elsewhere owned by
or licensed to one party that relate to MRI contrast agents and which may cover
certain of the Company's MRI product candidates, including MS-325. Mallinckrodt,
one of the Company's partners, has rights from this third party under those
patents which the Company and Mallinckrodt believe will permit Mallinckrodt to
manufacture, market and sell MS-325 and other products developed pursuant to the
collaboration agreement between the Company and Mallinckrodt were MS-325 and
those other products to be held to fall within the claims of those third-party
patents. If the agreement with Mallinckrodt is terminated by either party, the
Company would be required to enter into a strategic alliance with another party
having a license from this third party or obtain a license from this third party
directly or from others licensed by this third party in order to manufacture,
market and sell MS-325 and other chelate-based MRI contrast agents. However,
there can be no assurance that the Company would be able to consummate a
strategic alliance with a party having this third-party license or obtain a
license on commercially reasonable terms, if at all. The patent rights of this
third party in Japan will expire in 2002, before such time as the Company
presently anticipates that Daiichi will have material sales of MS-325 in Japan
and, therefore, the Company believes that the existence of such patents in Japan
is unlikely to have a material adverse effect on the Company. However, in the
event that Daiichi commercializes MS-325 in Japan before 2002, it may be
required to obtain an appropriate license or take other measures to avoid
infringement of the third party patents, including delaying the commencement of
product sales. There can be no assurance that the Company's current or future
activities will not be challenged, that additional patents will not be issued
containing claims materially constraining the proposed activities of the
Company, that the Company will not be required to obtain licenses from third
parties, or that the Company will not become involved in costly, time-consuming
litigation regarding patents in the field of contrast agents, including actions
brought to challenge or invalidate the Company's own patent rights. At the same
time, the Company is aware of certain products under development by the third
party referred to above and others which it believes may infringe certain of the
Company's exclusively licensed patents. The Company intends to pursue license or
cross-license arrangements with or, if necessary and appropriate, infringement
proceedings against, these parties upon their seeking final regulatory approval
for the marketing and sale of any such products.
Many of the Company's competitors are continuing to actively pursue patent
protection for activities and discoveries similar to the Company's. There can be
no assurance that these competitors, many of which have substantially greater
resources than the Company and have made substantial investments in competing
technologies, will not in the future seek to assert that the Company's products
or chemical processes infringe their existing patents and/or will not seek new
patents that claim to cover aspects of the Company's technology. Furthermore,
patent applications in the United States are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a specified period after filing. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and the
filing of related patent applications. In addition, patents issued and patent
applications filed relating to biopharmaceuticals are numerous. Therefore, there
can be no assurance that the Company is aware of all competitive patents, either
pending or issued, that relate to products or processes used or proposed to be
used by the Company.
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The Company and MGH have entered into a license agreement pursuant to
which MGH has granted the Company an exclusive worldwide license to the patents
and patent applications which relate to the Company's only product candidate,
MS-325. The MGH License imposed certain due diligence obligations with respect
to the development of products covered by the license, all of which have been
fulfilled to date. The MGH License requires the Company to pay royalties on net
sales of MS-325 by the Company. The Company must also pay MGH a percentage of
all royalties received by the Company from its sublicensees. Accordingly, the
Company will be required to make payments to MGH on profits generated under the
Mallinckrodt collaboration, if any, and on royalties received from Daiichi under
its license agreement, if any. Failure of the Company to comply with these
requirements could result in the conversion of the license from being exclusive
to non-exclusive in nature or termination of the license agreement itself. Any
such event would have a material adverse effect on the Company's business,
financial condition and results of operations.
The pharmaceutical and biotechnology industries have been characterized by
extensive litigation regarding patents and other intellectual property rights.
Litigation may be necessary to enforce any patents issued to the Company and or
determine the scope and validity of others' proprietary rights. The Company may
have to participate in interference proceedings declared by the United States
Patent and Trademark Office or by foreign agencies to determine the priority of
inventions. Any involvement in litigation surrounding these issues could require
extensive costs to the Company as well as be a significant distraction for
management. Such costs could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting or advisory relationships with the
Company. These agreements require disclosure and assignment to the Company of
ideas, developments, discoveries and inventions made by employees, consultants
and advisors. There can be no assurance, however, that these agreements will not
be breached or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.
The Company intends to vigorously protect and defend its intellectual
property. Costly and time-consuming litigation brought by the Company may be
necessary to enforce patents issued to the Company, to protect trade secrets or
know-how owned by the Company, or to determine the enforceability, scope, and
validity of the proprietary rights of others.
Manufacturing
The Company currently manufactures, as part of its ongoing development
efforts, small batches of MS-325 (not made in compliance with Good Manufacturing
Practices ("GMP") ) in its laboratories located in Cambridge, Massachusetts. The
Company has contracted for the manufacture in accordance with GMP of MS-325 from
outside contractors for use in preclinical and Phase I and II clinical trials.
As part of its strategic alliance with the Company, Mallinckrodt will serve as
primary manufacturer for MS-325 thereafter. If Mallinckrodt is unable to produce
MS-325 in adequate amounts and at a reasonable cost or to comply with any
applicable regulations, including GMP, it could have a material adverse effect
on the Company's business, financial condition and results of operations.
Furthermore, should
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Mallinckrodt fail to fulfill its manufacturing responsibilities satisfactorily,
the Company could be forced to find an alternative manufacturer. There can be no
assurance that the Company would be able to find such an alternative
manufacturer. In the event the Company was forced to develop its own
FDA-approved full-scale manufacturing capability, it would require significant
expenditures of capital and management attention and resources and could require
the Company to obtain a license from a third party, and would result in a delay
in the approval or commercialization of MS-325. There can be no assurance that
the Company would be able to obtain such a license on commercially reasonable
terms, if at all. The Company currently procures the raw materials for the
various components of MS-325 from a broad variety of vendors and, wherever
possible, maintains relationships with multiple vendors for each component.
There are a number of components of MS-325 for which the largest suppliers may
have significant control over the market price due to controlling market shares.
If any one of the Company's suppliers decided to increase prices significantly
or reduce quantities of any component of MS-325 available for sale to the
Company, it could have a material adverse effect on the Company's ability to
commercialize MS-325 and on the Company's business, financial condition and
results of operations. See "Strategic Alliances."
Government Regulation
The manufacture and commercial distribution of the Company's product
candidates are subject to extensive governmental regulation in the United States
and other countries. Pharmaceuticals, including contrast imaging agents for use
with MRI, are regulated in the United States by the FDA under the Food, Drug and
Cosmetic Act ("FD&C Act") and require FDA approval prior to commercial
distribution. Pursuant to the FD&C Act, pharmaceutical manufacturers and
distributors must be registered with the FDA and are subject to ongoing FDA
regulation, including periodic FDA inspection of their facilities and review of
their operating procedures. Noncompliance with applicable requirements can
result in failure to receive approval, withdrawal of approval, total or partial
suspension of production, fines, injunctions, civil penalties, recalls or
seizure of products and criminal prosecution, each of which would have a
material adverse effect on the Company's business, financial conditions and
results of operations.
In order to undertake clinical trials and market pharmaceutical products
for diagnostic or therapeutic use in humans, the procedures and safety standards
established by the FDA and comparable agencies in foreign countries must be
followed. In the United States, a company seeking approval to market a new
pharmaceutical must obtain FDA approval of a new drug application ("NDA").
Before an NDA may be filed, however, a certain procedure is typically followed.
This includes: (i) performance of preclinical laboratory and animal studies;
(ii) submission to the FDA of an investigal new drug ("IND") application, which
must become effective before human clinical trials may commence; (iii)
completion of adequate and well-controlled human clinical trials to establish
the safety and efficacy of the pharmaceutical for its intended application; (iv)
submission to the FDA of an NDA; and (v) approval of the NDA by the FDA prior to
any commercial sale or shipment of the agent.
Preclinical studies include laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of the product and
its formulation. The results of the preclinical studies are submitted to the FDA
as part of an IND, and unless the FDA objects, the IND will become effective 30
days following its receipt by the FDA. Clinical trials are conducted in
accordance with protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol together with information about the clinical
investigators who will perform the studies and the institutions at which
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the trials will be performed are submitted to the FDA as part of the IND. An
independent institutional review board ("IRB") at each institution at which the
trial will be conducted will also be asked by the principal investigator at that
institution to approve, according to FDA regulations governing IRBs, the trials
that will be performed at that institution. The IRB will consider, among other
things, ethical factors, the protection of human subjects and the possible
liability of the institution.
Clinical trials under the IND are typically conducted in three sequential
phases, but the phases may overlap. In Phase I, the initial introduction of the
pharmaceutical into humans, the pharmaceutical is tested for safety, dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology in
healthy adult subjects. Imaging agents may also be subject to a Phase IB trial
under which an agent's imaging characteristics in humans are first evaluated.
Phase II involves a detailed evaluation of the safety and efficacy of the agent
in a range of doses in patients with the disease or condition being studied.
Phase III clinical trials typically consist of evaluation of safety and efficacy
in a larger patient population and at more institutions.
The Company submitted an IND for MS-325 to the FDA on July 22, 1996 and
commenced Phase I clinical trials on September 6, 1996. The clinical safety
monitoring portion of the trial ended on November 22, 1996. Upon the successful
completion of the Phase I clinical trials, the Company intends to conduct
concurrent but separate Phase II and Phase III clinical trials for different
cardiology and radiology indications. The process of completing clinical testing
and obtaining FDA approval for a new product is likely to take a number of
years. When the study as described in the IND is complete, and assuming that the
results support the safety and efficacy of the product for that indication, the
Company intends to submit an NDA to the FDA. The NDA approval process can be
expensive, uncertain and lengthy. Although the FDA is supposed to complete its
review of an NDA within 180 days of the date that it is filed, the review time
is often significantly extended by the FDA which may require more information or
clarification of information already provided in the NDA. During the review
period, an FDA advisory committee likely will be asked to review and evaluate
the application and provide recommendations to the FDA about approval of the
pharmaceutical. In addition, the FDA will inspect the facility at which the
pharmaceutical is manufactured to ensure compliance with GMP and other
applicable regulations. Failure of the third-party manufacturers to comply or
come into compliance with GMP requirements could significantly delay FDA
approval of the NDA. The FDA may grant an unconditional approval of an agent for
a particular indication or may grant approval conditioned on further
post-marketing testing and/or surveillance programs to monitor the agent's
efficacy and side effects. Results of these post-marketing programs may prevent
or limit the further marketing of the agent. In addition, additional studies and
a supplement to the initially approved NDA will be required to gain approval for
the use of an approved product in indications other than those for which the NDA
was approved initially.
While the Company, because of its agreement with Mallinckrodt, does not
currently intend to manufacture any of its products itself once they are
approved, it may choose to do so in the future. Should the Company decide to
manufacture its products, the Company would be required to obtain a license from
a third party having rights to patents which may cover certain of the Company's
contrast agents. There can be no assurance that the Company would be able to
obtain such a license from the third party. Furthermore, the Company's
manufacturing facilities would be subject to inspection and approval by the FDA
before the Company could begin commercial distribution of product from its own
manufacturing facilities. See "Patents and Proprietary Rights."
After an NDA is approved, the Company would continue to be subject to
pervasive and continuing regulation by the FDA, including record keeping
requirements, reporting of adverse experience from the use of the agent and
other requirements imposed by the FDA. FDA regulations also require FDA approval
of an NDA supplement for certain changes if they
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affect the safety and efficacy of the pharmaceutical, including, but not limited
to, new indications for use, labeling changes, the use of a different facility
to manufacture, process or package the product, changes in manufacturing methods
or quality control systems and changes in specifications for the product.
Failure by the Company to receive approval of an NDA supplement could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The advertising of most FDA-regulated products is subject to FDA and
Federal Trade Commission jurisdiction, but the FDA has sole jurisdiction over
advertisements for prescription drugs. The Company is and may be subject to
regulation under state and Federal law regarding occupational safety, laboratory
practices, handling of chemicals, environmental protection and hazardous
substance control. The Company also will be subject to other present and
possible future local, state, federal and foreign regulation. Failure to comply
with regulatory requirements could have a material adverse effect on the
Company's business, financial conditions and results of operations.
Approval and marketing of pharmaceutical products outside of the United
States are subject to regulatory requirements that vary widely from country to
country. In the European Union ("EU"), the general trend has been towards
coordination of common standards for clinical testing of new agents, leading to
changes in various requirements imposed by each EU country. The level of
regulation in the EU and other foreign jurisdictions varies widely. The time
required to obtain regulatory approval from comparable regulatory agencies in
each foreign country may be longer or shorter than that required for FDA
approval. In addition, in certain foreign markets the Company may be subject to
governmentally mandated prices for its products.
Regulations regarding the approval, manufacture and sale of the Company's
product candidates are subject to change. The Company cannot predict what
impact, if any, such changes might have on its business, financial condition or
results of operations.
The Company's research, development and manufacturing processes require
the use of hazardous substances and testing on certain laboratory animals. As a
result, the Company is also subject to federal, state, and local laws,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials and
waste as well as the use of and care of laboratory animals. These laws and
regulations are all subject to change. The Company cannot predict what impact,
if any, such changes might have on its business, financial condition or results
of operations.
Reimbursement
The Company expects that sales volumes and prices of its products will be
dependent in large measure on the availability of reimbursement from third-party
payors and that individuals seldom would be willing or able to pay directly for
all the costs associated with procedures which in the future may incorporate the
use of the Company's products. The Company expects that its products will be
purchased by hospitals, clinics, doctors and other users that bill various
third-party payors, such as Medicare, Medicaid and other government insurance
programs, and private payors including indemnity insurers, Blue Cross Blue
Shield plans and managed care organizations ("MCOs") such as health maintenance
organizations. Most of these third-party payors provide coverage for MRI for
some indications when it is medically necessary, but the amount that a
third-party payor will pay for MRI may not include a separate payment for a
contrast imaging agent that is used with MRI. Reimbursement rates vary depending
on the procedure performed, the third-party payor, the type of insurance plan
and other factors. For example, Medicare pays hospitals a
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prospectively determined amount for an in-patient stay based on a Medicare
beneficiary's discharge diagnosis related group ("DRG"). This payment includes
payment for any procedure, including MRI, that is performed while a beneficiary
is in the hospital. No additional payment is made for contrast agents used
during the procedure. Other third-party payors may pay a hospital an additional
amount for an MRI procedure performed on an in-patient according to another
methodology such as a fee schedule or a percentage of charge. Such payment may
or may not include a payment for a contrast imaging agent. In the outpatient
setting, Medicare and other third-party payors may pay for all, some portion of,
or none of the cost of contrast agents used with MRI.
Third-party payors carefully review and increasingly challenge the prices
charged for procedures and medical products. In the past few years, the amounts
paid for radiology procedures in particular have come under careful scrutiny and
have been subject to decreasing reimbursement rates. In addition, an increasing
percentage of insured individuals are receiving their medical care through MCOs
which monitor and often require preapproval of the services that a member will
receive. Many MCOs are paying their providers on a capitated basis which puts
the providers at financial risk for the services provided to their patients by
paying them a predetermined payment per member per month. The percentage of
individuals covered by MCOs is expected to grow in the United States over the
next decade. Even Medicare is shifting many of its beneficiaries into managed
care plans. The Company believes that the managed care approach to healthcare
and the growth in capitated arrangements and other arrangements under which the
providers are at financial risk for the services that are provided to their
patients will facilitate the market acceptance of its products, as it believes
that the use of its products will significantly lower the overall costs and
improve the effectiveness of managing patient populations. There can be no
assurance, however, that the Company's products will be available, will lower
costs of care for any patients or that providers will choose to utilize them
even if they do, or if reimbursement will be available.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have a material adverse effect on market
acceptance of the Company's product candidates in the international markets in
which such approvals are sought.
The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost of
medical products and services has led to, and will continue to lead to,
increased pressures on the health care industry, both foreign and domestic, to
reduce the cost of products and services, including products offered by the
Company. There can be no assurance, in either the United States or foreign
markets, that third party reimbursement and coverage will be available or
adequate, that current reimbursement amounts will not be decreased in the future
or that future legislation, regulation, or reimbursement policies of third-party
payors will not otherwise adversely affect the demand for the Company's product
candidates or its ability to sell its product candidates on a profitable basis,
particularly if MRI exams enhanced with the Company's contrast agents are more
expensive than competing vascular imaging techniques that are equally effective.
The unavailability or inadequacy of third-party payor coverage or reimbursement
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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Product Liability Insurance
The clinical and commercial development of pharmaceuticals, including
contrast imaging agents such as those being developed by the Company, may entail
exposure to product liability claims. While the Company has never been subject
to any liability claims stemming from the manufacture of or preclinical or
clinical trials of its products, there can be no assurance that it will not face
such claims in the future. While the Company currently has product liability
insurance coverage for the clinical research use of its product candidates,
there can be no assurance that such coverage limits will be adequate nor that a
successful product liability lawsuit would not have a material adverse effect on
the Company. The Company does not have product liability insurance coverage for
the commercial sale of its products but intends to obtain such coverage if and
when its products are commercialized. If and when MS-325 or other EPIX product
candidates are approved for marketing by the FDA, or similar foreign regulatory
bodies, there can be no assurance that sufficient product liability insurance
will be available on terms acceptable to the Company or at all.
Employees
As of December 31, 1996 the Company employed 36 persons on a full-time
basis, of which 26 were involved in research and development and 10 in
administration and general management. Fifteen of the Company's employees hold
Ph.D. or M.D. degrees. The Company believes that its relations are good with all
of its employees. None of the Company's employees is a party to a collective
bargaining agreement.
Research and Development
During the fiscal years ended December 31, 1996 and 1995 and March 31,
1995 the Company incurred research and development expenses of $6,878,666,
$4,164,940 and $2,407,113, respectively.
ITEM 2. PROPERTIES
The Company leases a total of 17,050 square feet of space at 71 Rogers
Street and adjacent locations, all in Cambridge, Massachusetts. The leases for
such facilities expire on December 31, 1997. The description of the lease terms
is incorporated herein by reference from Note 5 of the Notes to Financial
Statements. The Company is currently negotiating a new lease for an additional
five year period. The Company believes that its current facilities are adequate
to meet its requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In December 1996, the holders of all of the outstanding shares of the
Company's Common Stock and preferred stock (specifically, the holders of
2,307,721 shares of the Company's Common Stock, 93,691 shares of the Company's
Series A Convertible Preferred Stock, 2,643,736 shares of the Company's Series B
Convertible Preferred Stock, 1,432,318 shares of the Company's Series C
Convertible Preferred Stock, 1,700,002 shares of the Company's Series D
Convertible Preferred Stock and 868,329 shares of the Company's Series E
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Convertible Preferred Stock), voting as a single class, unanimously adopted the
votes and consented to the actions summarized below. There were no abstentions
or broker non-votes.
1. Approval of Certificate of Amendment to the Company's Restated Certificate
of Incorporation.
To approve a Certificate of Amendment to the Restated Certificate of
Incorporation (the "Certificate of Amendment") providing for an increase
in the number of authorized shares of Common Stock from 11,500,000 shares
to 15,000,000 shares and a 1-for-1.5 reverse stock split.
2. Approval of Further Amendment to and Restatement of the Company's Restated
Certificate of Incorporation Contemporaneously with Initial Public
Offering.
To approve a Restated Certificate of Incorporation of the Company (the
"Restated Certificate"), subject to the closing of the Company's initial
public offering, providing for, among other things, a decrease in the
number of authorized shares of Preferred Stock from 6,813,393 shares to
1,000,000 shares, blank check preferred stock, the elimination of all
previously designated classes of preferred stock, classification of the
Board of Directors and supermajority voting for certain corporate
transactions.
3. Approval of Amended and Restated By-laws.
To approve and adopt the Amended and Restated By-laws of the Company,
effective upon the closing of the Company's initial public offering,
providing for, among other things, procedures for stockholder nominations
and proposals and the elimination of the ability of stockholders to act by
written consent.
4. Election of Directors.
To divide the Board of Directors into the following classes, effective
upon the filing of the Restated Certificate, with each director to serve
until the annual meeting of stockholders for the year indicated opposite
such director's name and until his successor is elected and qualified or
until his earlier resignation or removal:
Term
Name Expires
Class I
Randall B. Lauffer 1997
Luke B. Evnin 1997
Class II
Stanley T. Crooke 1998
Class III
Michael D. Webb 1999
Christopher F.O. Gabrieli 1999
5. Adoption of the Company's Amended and Restated 1992 Equity Incentive Plan.
To approve and adopt the Company's Amended and Restated 1992 Equity
Incentive Plan (the "1992 Plan").
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6. Reservation of Additional Shares for 1992 Plan.
To ratify and confirm the increase in the number of shares of the
Company's Common Stock reserved for issuance under the 1992 Plan from
1,749,852 shares to 2,399,852 shares (subject to adjustment for stock
splits and other similar capital changes).
7. Adoption of the Company's 1996 Employee Stock Purchase Plan.
To approve and adopt the Company's 1996 Employee Stock Purchase Plan (the
"Purchase Plan") and ratify and confirm the reservation of 100,000 shares
of the Common Stock for issuance under the Purchase Plan (subject to
adjustment for stock splits and other similar capital changes).
8. Adoption of the Company's 1996 Director Stock Option Plan.
To approve and adopt the Company's 1996 Director Stock Option Plan (the
"Director Plan") and ratify and confirm the reservation of 100,000 shares
of the Common Stock for issuance under the Director Plan (subject to
adjustment for stock splits and other similar capital changes).
9. Approval of Form of Indemnification Agreement.
To approve for use by the Company a form of Indemnification Agreement.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers, directors and key employees of the Company as of December 31, 1996:
Name Age Position
Michael D. Webb 38 President, Chief Executive Officer,
Secretary and Director
James E. Smith, Ph.D. 53 Executive Vice President, Research &
Development
Randall B. Lauffer, Ph.D. 39 Chief Scientific Officer and Director
E. Kent Yucel, M.D. 40 Senior Vice President and Chief Medical
Officer
Susan M. Flint 45 Vice President, Regulatory Affairs
Stephen C. Knight, M.D. 36 Vice President, Strategic Planning &
Corporate Development
Jeffrey R. Lentz 43 Vice President, Finance & Administration,
Chief Financial Officer, Treasurer and
Assistant Secretary
Michael D. Webb joined the Company in December 1994 from Ciba-Corning
Diagnostics, Inc., a medical instrument company, where he was most recently
Senior Vice President, Worldwide Marketing and Strategic Planning. From 1984 to
1989, Mr. Webb was a senior consultant at
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Booz, Allen & Hamilton, Inc., a consulting company, specializing in health care
and life sciences. Mr. Webb holds an MM degree in marketing and finance from the
J.L. Kellogg Graduate School of Management at Northwestern University.
Dr. James E. Smith joined the Company in February 1996. Prior to joining the
Company, Dr. Smith worked for 16 years at Du Pont Merck Pharmaceutical Company,
a pharmaceutical company, where his experience included research and
development, regulatory, QA/QC and manufacturing for the radio-pharmaceutical
division, most recently as Senior Director of Radiopharmaceutical Research and
Development. Dr. Smith has published and lectured on radiopharmaceutical
research and development. Dr. Smith received his Ph.D. degree in inorganic
chemistry from the University of Washington.
Dr. Randall B. Lauffer founded the Company in November 1988 and served as Chief
Executive Officer until December 1994 and as Chairman until October 1996. From
November 1983 to March 1992, Dr. Lauffer was a member of the faculty of Harvard
Medical School, serving most recently as Assistant Professor of Radiology from
1987 to 1992. During this time he was also Director of the NMR Contrast Media
Laboratory at MGH as well as an NIH Postdoctoral Fellow and an NIH New
Investigator. Dr. Lauffer holds a Ph.D. degree in inorganic chemistry from
Cornell University.
Dr. E. Kent Yucel joined the Company in June 1996. From March 1993 to July 1996,
he was Chief of Vascular and Interventional Radiology and Director of MRI at
Boston Medical Center and Professor of Radiology at Boston University Medical
School. From July 1988 to February 1993 he served as Assistant Professor of
Radiology at MGH and Harvard Medical School. Dr. Yucel is a Professor of
Radiology at Boston University Medical School and retains a part time clinical
appointment in the Radiology Department at Boston Medical Center. Dr. Yucel
received his M.D. degree from Harvard Medical School.
Ms. Susan M. Flint joined the Company in April 1995. She is a Regulatory Affairs
specialist with over twenty years of experience in regulatory submissions and
clinical trials. She was a regulatory affairs/clinical research consultant to
various companies, including EPIX, from April 1993 to April 1995. Ms. Flint
previously held the position of Director of Clinical Trials at Advanced
Magnetics, Inc. from February 1989 to March 1993 and Director of Regulatory
Affairs at Du Pont Pharmaceutical Company from June 1975 to January 1989. Ms.
Flint is certified by the Regulatory Affairs Professional Society. She received
her M.S. degree in pharmacology from Northeastern University.
Dr. Stephen C. Knight joined the Company in July 1996. From April 1991 to June
1996, Dr. Knight was a senior consultant with Arthur D. Little, a consulting
company, specializing in biotechnology, pharmaceuticals and valuation. Dr.
Knight was also a consultant at APM, Inc., a consulting company. Prior to 1990,
Dr. Knight performed research at AT&T Bell Laboratories, the National Institute
of Neurological and Communicative Diseases and Stroke, and Yale University. He
serves on the board of directors of Pharmos, Inc. Dr. Knight holds an M.D. from
the Yale University School of Medicine and an MPPM degree from the Yale School
of Organization and Management.
Jeffrey R. Lentz joined the Company in May 1996 as Vice President, Finance and
Administration. He is also the Company's Chief Financial Officer and Treasurer.
Prior to joining the Company, Mr. Lentz worked from August 1994 to May 1996 in
private practice as a consultant and in venture capital. Mr. Lentz served as
Director of Finance with Nova Biomedical Corporation, a medical instrument
company, from March 1993 to August 1994 and as a senior manager with Ernst &
Young LLP, an accounting firm, from November 1986 to November 1992. Mr. Lentz is
a certified public accountant and holds an M.S. degree from Northeastern
University.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.01 par value ("Common Stock") is traded on
the Nasdaq Stock Market under the symbol "EPIX", and is listed in Nasdaq's
National Market. There was no public market for the Company's Common Stock at
December 31, 1996. As of December 31, 1996 there were approximately 60 holders
of record of the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the period from inception
(November 29, 1988) through March 31, 1993, each of the two years in the period
ended March 31, 1995, the nine months ended December 31, 1995 and the year ended
December 31, 1996 are derived from Financial Statements of the Company. The
financial statements as of December 31, 1996, December 31, 1995 and March 31,
1995 and the nine months ended December 31, 1995 and for each of the two years
in the period ended March 31, 1995 are included elsewhere herein. The following
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Financial Statements,
related Notes and other financial information included herein.
<TABLE>
<CAPTION>
Period from inception Year Ended Nine Months
(November 30, 1988) March 31, Ended Year Ended
through March 31, -------------------- December 31, December 31,
(in thousands, except per share data) 1993 1994 1995 1995 (2) 1996
---- ---- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ............................ $1,000 $1,700 $412 $900 $10,010
Operating income (loss) ............. (311) (579) (2,820) (4,770) 269
Net income (loss) ................... (270) (617) (2,778) (4,893) 268
Net income (loss) per share (1) ..... $(0.70) $0.03
Shares used in per share calculations 6,973 7,711
March 31, December 31,
------------------------------------ -------------------------
Balance Sheet Data: 1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Cash, cash equivalents and
marketable securities .............. $114 $4,154 $1,079 $150 $10,664
Working capital (deficit) .......... (142) 3,574 516 (1,327) 8,299
Total assets ....................... 1,118 5,050 2,141 1,211 12,575
Capital lease obligations,
less current portion ............... 13 292 107 342 176
Redeemable convertible
preferred stock .................... - 3,941 3,949 3,956 17,204
Total stockholders' equity (deficit) 773 200 (2,552) (7,336) (7,240)
</TABLE>
- ----------------------
(1) See Note 2 to Notes to Financial Statements for a description of the
calculation of net income (loss) per share. Reflects a 1-for-1.5 reverse
stock split effected on December 6, 1996.
(2) In 1995 the Company changed its fiscal year end from March 31 to
December 31.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Since commencing operations in 1992, the Company has been engaged
principally in the research and development of its product candidates as well as
seeking various regulatory clearances and patent protection. The Company has had
no revenues from product sales and has incurred losses since inception through
December 31, 1996 aggregating approximately $8.3 million. The Company has
received revenues in connection with various licensing and collaboration
agreements. In August 1996, the Company entered into a strategic alliance with
Mallinckrodt pursuant to which it received $6.0 million in up-front license
fees. The agreement provides for an additional $2.0 million payment upon the
earlier of a specified date or the achievement of an MS-325 development
milestone. In March 1996, the Company entered into a strategic alliance with
Daiichi. Under this agreement, the Company received $3.0 million in license fees
and $5.0 million from the sale of shares of the Company's preferred stock, and
is entitled to receive up to $3.3 million in future payments based upon the
Company's achievement of certain product development milestones.
The Company reported profitable operating results for the year ended
December 31, 1996 due to significant license fees and milestone payments
received from Mallinckrodt and Daiichi. However, the Company expects continued
operating losses for the next several years as it incurs expenses to support
research, development and efforts to obtain regulatory approvals.
The Company's initial product candidate, MS-325, is currently the
Company's only product candidate undergoing human clinical trials. The Company
filed an IND application for MS-325 in July 1996 and initiated Phase I clinical
trials in September 1996.
In 1995, the Company changed its fiscal year end from March 31 to December
31. As a result, the fiscal year ended December 31, 1995 includes only nine
months of operations as compared to 12 months in 1996. The Company anticipates
fluctuation in its quarterly results of operations due to several factors,
including: the timing of fees and milestone payments received from strategic
partners; the formation of new strategic alliances by the Company; the timing of
expenditures in connection with research and development activities; the timing
of product introductions and associated launch, marketing and sales activities;
and the timing and extent of product acceptance for different indications and
geographical areas of the world.
Results of Operations
Comparison of Year Ended December 31, 1996 and Nine Months Ended December 31,
1995
Revenues. Revenues for the year ended December 31, 1996 were $10.0 million, as
compared to $900,000 for the nine-month period ended December 31, 1995. Revenues
for the year ended December 31, 1996 included $6.0 million in license fees and
approximately $1.0 million of development contract revenue from Mallinckrodt.
Revenues during 1996 also included $3.0 million in license fees (net of 10%
foreign withholding tax) received from Daiichi for the rights to commercialize
MS-325 in Japan. Revenues for the nine-month period ended December 31, 1995
consisted entirely of payments received from a pharmaceutical company as
consideration for an option for certain rights to the Company's future contrast
agents in
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<PAGE>
Japan. The option expired and the rights to the agent were subsequently licensed
to a third party.
Research and development expenses. Research and development expenses for the
year ended December 31, 1996 were $6.9 million, as compared to $4.2 million for
the nine-month period ended December 31, 1995. This increase was due primarily
to increased MS-325 development costs associated with the commencement of Phase
I clinical trials in September 1996.
General and administrative expenses. General and administrative expenses for the
year ended December 31, 1996 were $2.9 million, as compared to $1.5 million for
the nine-month period ended December 31, 1995. The $1.4 million increase was
largely due to increased personnel costs associated with recruitment and
compensation of additional senior management (approximately $390,000) and
increased expenses for strategic consulting and business development activities.
Significant secondary causes of the increase include higher patent costs as well
as increased agency fees and legal expenses associated principally with the
formation of collaborative agreements. In addition, general and administrative
expenses for 1996 included $250,000 of nonrecurring expense incurred in
connection with the restructuring of a liver agent development program which was
terminated by the Company in 1995. The Company had terminated the program after
reassessing the anticipated future product development costs under the program
measured against the size of the potential market for products. As part of a
negotiated termination of the agreement covering the development program, the
Company paid the contracting party $250,000 and gave a non-exclusive license to
the technology developed to date under the program in exchange for royalty
payments on future sales of products by the contracting party. The Company
expects total general and administrative expenses to increase as the Company's
product candidates advance through clinical trials and to eventual
commercialization.
Interest expense and income. Interest expense for the year ended December 31,
1996 was $289,000, as compared to $151,000, for the nine-month period ended
December 31, 1995. This increase was due to higher borrowings under promissory
notes and bridge loans. Interest income for the year ended December 31, 1996 was
$288,000, as compared to $28,000, for the nine-month period ended December 31,
1995. This increase was due to higher average cash available for investment
during 1996.
Comparison of Nine Months Ended December 31, 1995 and Year Ended March 31, 1995
Revenues. Revenues for the nine-month period ended December 31, 1995 consisted
of the aforementioned $900,000 received as consideration for an option for
certain rights to contrast agents which has since expired. Revenue for the year
ended March 31, 1995 of $411,000 consisted principally of research and license
fees received from a Japanese company in connection with a liver agent
development program which was terminated by the Company in 1995.
Research and development expenses. Research and development expenses were $4.2
million for the nine-month period ended December 31, 1995, as compared to $2.4
million for the year ended March 31, 1995. The increase was attributable to
increased payments to third parties for research studies, hiring of additional
staff and building the infrastructure required to perform research, development
and regulatory activities with respect to the Company's product candidates,
principally MS-325.
General and administrative expenses. General and administrative expenses were
$1.5 million for the nine-month period ended December 31, 1995, as compared to
$825,000 for the year
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ended March 31, 1995, reflecting the investment in personnel and facilities to
support the Company's expanded operations. General and administrative expenses
for the nine-month period ended December 31, 1995 exceeded those for the year
ended March 31, 1995 largely due to increased salaries ($150,000) and higher
legal costs ($117,000), due principally to the formation of various
collaborations. Also contributing to the increase were increased patent costs
attributable to the timing and increased scope of patent activities and
nonrecurring license fee expense incurred in connection with the development of
MS-325.
Interest expense and income. Interest expense for the nine-month period ended
December 31, 1995 was $151,000, as compared to $79,000 for the year ended March
31, 1995, The increase was due primarily to additional interest expense related
to the convertible promissory notes issued in May and November 1995. Interest
income for the nine-month period ended December 31, 1995 was $28,000, as
compared to $121,000 for the year ended March 31, 1995. The decrease was due to
lower average cash available for investment.
Liquidity and Capital Resources
The Company has financed its operations since inception principally
through the sale of shares of its preferred stock, with proceeds therefrom
totaling approximately $18.4 million (including $3.8 million from convertible
debt securities that were converted to shares of the Company's preferred stock)
and payments aggregating $13.6 million received from third parties, including
Mallinckrodt and Daiichi, in connection with collaboration and license
arrangements. In addition, the Company arranged capital lease lines under which
it has borrowed $1.4 million to date to partially fund approximately $2.4
million of capital expenditures. From inception through December 31, 1996, the
Company has incurred $22.2 million of operating costs, including $15.3 million
related to the research and development of technology and new product
candidates, including MS-325.
During the year ended December 31, 1996, operating activities provided
$1.7 million of cash, as license fees received in connection with collaboration
agreements more than offset operating expenses during the period. During the
same period, investing activities included $695,000 for the purchase of fixed
assets, consisting principally of laboratory and office equipment. During the
fourth quarter of 1996, the Company expanded its cash management program to
include the purchase of $8.0 million in short-term marketable securities
consisting principally of Federal Government and Agency Obligations. Financing
activities during 1996 provided $9.7 million of cash primarily in the form of
net proceeds from the sale of shares of the Company's preferred stock, totaling
$9.3 million, and the issuance of notes payable aggregating $900,000, which were
subsequently converted into shares of preferred stock of the Company.
Operating activities during the nine-month period ended December 31, 1995
used $3.5 million in cash, primarily for continued spending on research and
development of MS-325 and for general and administrative expenses. Proceeds from
a sale leaseback arrangement more than offset capital expenditures during the
same period; consequently, investing activities provided $137,000 of cash during
the period. Other significant cash flow events during the period included $2.7
million of proceeds received from the issuance of promissory notes which were
subsequently converted in 1996 into shares of preferred stock of the Company.
The Company does not anticipate the receipt of license fees from new
collaboration agreements at any time in the immediate future. Because of
anticipated spending to support development of MS-325 and new research programs,
the Company does not expect positive cash flow from operating activities for any
future quarterly or annual period prior to commercialization of MS-325. The
Company anticipates continued investments in fixed assets,
29
<PAGE>
including equipment and facilities expansion to support new and continuing
research and development programs. The Company intends to seek additional debt
financing to support any necessary facilities expansion and equipment
requirements that may occur in the foreseeable future.
Should the Company be unable to negotiate an extension of its existing
lease or obtain equipment lease financing at reasonable terms, the Company would
be required to find new facilities, modify its current capital plans, seek
alternative sources of debt or equity financing or use existing cash to fund
such expenditures.
The Company has reported only tax losses to date and therefore has not
paid federal or state income taxes since inception. The Company accounts for
income taxes under Statement of Financial Accounting Standards No. 109 (FAS
109). Realization of deferred taxes is dependent on future events and earnings,
if any, the timing and extent of which are uncertain. Accordingly, the benefit
of deferred tax assets has been fully reserved as of December 31, 1996 and 1995.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $7.3 million available to offset future taxable income. These
amounts expire at various times through 2010. As a result of ownership changes
resulting from recent sales of equity securities, the Company's ability to use
the loss carryforwards is subject to limitations as defined in Sections 382 and
383 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company
currently estimates that the annual limitation on its use of net operating
losses through May 31, 1996 will be approximately $900,000. Pursuant to Section
382 of the Code, the change in ownership resulting from the Company's initial
public offering and any other future sale of stock may limit utilization of
future losses in any one year. The Company is also eligible for research and
development tax credits approximating $400,000 at December 31, 1996, which can
be carried forward to offset federal taxable income. The annual limitation and
the timing of attaining profitability may result in the expiration of net
operating loss and tax credit carryforwards before utilization.
The Company's principal source of liquidity consists of cash, cash
equivalents and marketable securities totaling $10.7 million at December 31,
1996. The Company is eligible to receive an additional $2.0 million of revenues
from Mallinckrodt and $3.3 million from Daiichi upon the attainment of certain
product development milestones. The Company's agreement with Mallinckrodt
requires Mallinckrodt to fund a portion of the future development costs of
MS-325 up to a specified maximum amount. The Company expects that its cash needs
will increase significantly in future periods due to pending and planned
clinical trials and other increased operating expenses. The Company estimates
that the cash and cash equivalents available at December 31, 1996 will be
sufficient to meet the Company's capital requirements through June 1998. The
Company's future capital requirements will, however, depend on many factors,
including the progress of the Company's research and development programs and
clinical trials, the time and costs required to gain regulatory approvals, the
ability of the Company to obtain and retain continued funding from third parties
under collaborative agreements, the costs of filing, prosecuting and enforcing
patents, patent applications, patent claims and trademarks, the status of
competing products and the market acceptance of the Company's products, if and
when approved. The Company may be required to raise substantial additional funds
to complete development of any product candidate, whether or not it receives
milestone payments under its collaborations with Mallinckrodt and Daiichi, or to
commercialize any products if and when approved by the FDA. The Company may be
required to obtain such additional funds through future public or private sales
of equity securities, equipment lease financings or through strategic alliances.
There can be no assurance that additional financing will be available on
acceptable terms, if at all.
The Company does not believe that inflation has had a material impact on
its operations.
30
<PAGE>
The discussion included in this section as well as elsewhere in the Annual
report on Form 10-K may contain forward-looking statements based on current
expectation of the Company's management. Such statements are subject to risks
and uncertainties which could cause actual results to differ from those
projected. See Factors Regarding Forward Looking Statements" attached hereto as
Exhibit 99.1 and incorporated by reference into this Form 10-K. Readers are
cautioned not to place undue reliance on the forward looking statements which
speak only as the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
may be made to reflect events or circumstances occurring after the date hereof
or to reflect the occurrence of unanticipated events.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and supplementary data appear at pages F-1 through
F-23 of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors. The information required under this item is incorporated herein
by reference to the section entitled "Election of Officers" in the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
June 20, 1997 (the "1997 Proxy Statement") to be filed with the Commission not
later than April 30, 1997.
(b) Executive Officers. See Item 4A of Part I above.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference to the section entitled "Executive Compensation" in the 1997 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference to the section entitled "Share Ownership" in the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference to the section entitled "Certain Transactions" in the 1997 Proxy
Statement.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Documents filed as part of this Report:
1. Financial Statements:
Index to Financial Statements F-1
Report of Independent Auditors F-2
Financial Statements
Balance Sheets F-3
Statements of Operations F-5
Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit) F-6
Statements of Cash Flows F-8
Notes to Financial Statements F-10
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits
3.1 Restated Certificate of Incorporation of the Company. Filed as
Exhibit 3.3 to the Company's Registration Statement on Form S-1
(File No. 333-17581) and incorporated herein by reference.
3.2 Amended and Restated By-Laws of the Company. Filed as
Exhibit 3.5 to the Company's Registration Statement on Form S-1
(File No. 333-17581) and incorporated herein by reference.
4.1 Specimen certificate for shares of Common Stock of the Company.
Filed as Exhibit 4.1 to the Company's Registration Statement on Form
S-1 (File No. 333-17581) and incorporated herein by reference.
10.1+ Agency Agreement between the Company and Sumitomo Corporation dated
March 13, 1992. Filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated herein
by reference.
10.2+ Amendment to the Agency Agreement between the Company and Sumitomo
Corporation dated June 26, 1992. Filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.3 Short Form Lease from Trustees of the Cambridge East Trust to the
Company dated July 1, 1992. Filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
32
<PAGE>
10.4 Form of Warrant to Purchase Shares of Series A Convertible Preferred
Stock dated December 21, 1992. Filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.5 Dominion Ventures Master Lease Agreement No. 8050 dated December 21,
1992. Filed as Exhibit 10.5 to the Company's Registration Statement
on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.6 First Amendment to Master Lease Agreement No. 8050 dated May 14,
1993. Filed as Exhibit 10.6 to the Company's Registration Statement
on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.7 Second Amendment to Master Lease Agreement No. 8050 dated August 5,
1993. Filed as Exhibit 10.7 to the Company's Registration Statement
on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.8 First Amendment Lease From Trustees of the Cambridge Trust to the
Company dated October 20, 1993. Filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.9 Warrant to Purchase Shares of Series B Convertible Preferred Stock
dated June 6, 1994. Filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.10 Second Amendment to Master Lease Agreement No. 8050 dated June 6,
1994. Filed as Exhibit 10.10 to the Company's Registration Statement
on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.11+ Amendment Agreement to the Agency Agreement between the Company and
Sumitomo Corporation dated September 15, 1994. Filed as Exhibit
10.11 to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.12 Second Amendment Lease From Trustees of the Cambridge East Trust to
the Company dated September 17, 1994. Filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.13 Convertible Promissory Note Purchase Agreement by and among the
Company and certain purchasers named therein dated May 26, 1995.
Filed as Exhibit 10.13 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by reference.
10.14+ Amended and Restated License Agreement between the Company and The
General Hospital Corporation dated July 10, 1995. Filed as Exhibit
10.14 to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.15 Warrant to Purchase Shares of Series C Convertible Preferred Stock
dated August 2, 1995. Filed as Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.16 Third Amendment to the Master Lease Agreement No. 8050 dated August
2, 1995. Filed as Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated herein
by reference.
10.17 Amendment No. 1 to Convertible Promissory Note Purchase Agreement by
and among the Company and certain purchasers named therein dated
January 19, 1996. Filed as Exhibit 10.17 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.18+ Extension Agreement to Agency Agreement between the Company and
Sumitomo Corporation dated March 5, 1996. Filed as Exhibit 10.18 to
the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.19+ Development and License Agreement dated March 29, 1996 by and among
the Company and Daiichi Radioisotope Laboratories, Ltd. Filed as
Exhibit 10.19 to the
33
<PAGE>
Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.20 Third Amendment Lease From Trustees of the Cambridge East Trust to
the Company dated May 1, 1996. Filed as Exhibit 10.20 to the
Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.21 Series D Convertible Preferred Stock Purchase Agreement by and among
the Company and certain purchasers named therein dated May 29, 1996.
Filed as Exhibit 10.21 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by reference.
10.22 Third Amended and Restated Stockholders' Rights Agreement by and
among the Company and certain of its stockholders named therein
dated May 29, 1996. Filed as Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.23 Form of Warrant to Purchase Shares of Series D Preferred Stock dated
May 29, 1996. Filed as Exhibit 10.23 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated herein
by reference.
10.24 Amendment No. 1 to Third Amended and Restated Stockholders' Rights
Agreement dated May 31, 1996. Filed as Exhibit 10.24 to the
Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.25 Series E Convertible Preferred Stock Purchase Agreement dated May
31, 1996 between the Company and Daiichi Radioisotope Laboratories,
Ltd. Filed as Exhibit 10.25 to the Company's Registration Statement
on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.26+ Strategic Collaboration Agreement between the Company and
Mallinckrodt Medical, Inc. and Mallinckrodt Group Inc. dated August
30, 1996. Filed as Exhibit 10.26 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated herein
by reference.
10.27 Amendment No. 2 to Third Amended and Restated Stockholders' Rights
Agreement dated December 6, 1996. Filed as Exhibit 10.27 to the
Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.28# Amended and Restated 1992 Equity Incentive Plan. Filed as Exhibit
10.28 to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.29# Form of Incentive Stock Option Certificate. Filed as Exhibit 10.29
to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.30 Form of Nonstatutory Stock Option Certificate. Filed as Exhibit
10.30 to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.31# 1996 Director Stock Option Plan. Filed as Exhibit 10.31 to the
Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.32# 1996 Employee Stock Purchase Plan. Filed as Exhibit 10.32 to the
Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.33 Form of Consulting and Confidentiality Agreement between the Company
and certain consultants of the Company. Filed as Exhibit 10.33 to
the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.34 Form of Invention and Non-Disclosure Agreement between the Company
and certain employees of the Company. Filed as Exhibit 10.34 to the
Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.35 Form of Non-Competition and Non-Solicitation Agreement between the
Company and certain employees of the Company. Filed as Exhibit 10.35
to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
34
<PAGE>
10.36 Form of Common Stock Purchase Agreement. Filed as Exhibit 10.36 to
the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.37 Form of Stock Purchase and Right of First Refusal Agreement. Filed
as Exhibit 10.37 to the Company's Registration Statement on Form S-1
(File No. 333-17581) and incorporated herein by reference.
11.1 Statement re: computation of per share earnings. Filed herewith.
24.1 Power of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule. Filed herewith.
99.1 Important Factors Regarding Forward-Looking Statements. Filed
herewith.
- -------------
+ Certain confidential material contained in the document has been omitted
and filed separately with the Securities and Exchange Commission pursuant
to Rule 406 of the Securities Act of 1933, as amended.
# Identifies a management contract or compensatory plan or agreement in
which an executive officer or director of the Company participates.
35
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors F-2
Financial Statements
Balance Sheets F-3
Statements of Operations F-5
Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit) F-6
Statements of Cash Flows F-8
Notes to Financial Statements F-10
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
EPIX Medical, Inc.
We have audited the accompanying balance sheets of EPIX Medical, Inc. (a company
in the development stage) as of December 31, 1996 and 1995, and the related
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit), and cash flows for the year ended December 31,
1996, the nine months ended December 31, 1995, the year ended March 31, 1995,
and the period from inception (November 29, 1988) to December 31, 1996. 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 EPIX Medical, Inc. at December
31, 1996 and 1995, and the results of its operations and its cash flows for the
year ended December 31, 1996, the nine months ended December 31, 1995, the year
ended March 31, 1995, and the period from inception (November 29, 1988) to
December 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
January 11, 1997
except for Note 15, which
the date is February 13, 1997
F-2
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1996 1995
----------- ----------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 2,667,892 $ 149,686
Marketable securities 7,996,186
Prepaid expenses 57,135 58,940
Other current assets 12,221 13,178
----------- ----------
Total current assets 10,733,434 221,804
Property and equipment, net 994,179 856,912
Notes receivable from officer 295,344 51,878
Other assets 551,610 80,171
=========== ==========
Total assets $12,574,567 $1,210,765
=========== ==========
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of capital lease obligations $ 208,571 $ 304,416
Accounts payable and accrued expenses 2,225,713 1,244,201
----------- ----------
Total current liabilities 2,434,284 1,548,617
Capital lease obligations, less current portion 176,269 342,256
Promissory notes 2,700,000
Redeemable convertible preferred stock:
Series B, $.01 par value, 2,655,138 shares
authorized; 2,643,736 shares issued and
outstanding at December 31, 1996
and December 31, 1995 ($6,416,368
liquidation value at December 31, 1996) 3,963,682 3,955,505
Series C, $.01 par value, 1,445,536 shares
authorized; 1,432,318 shares issued and
outstanding at December 31, 1996 ($3,565,063
liquidation value at December 31, 1996) 3,251,444
Series D, $.01 par value, 1,740,002 shares
authorized; 1,700,002 shares issued and
outstanding at December 31, 1996 ($5,641,777
liquidation value at December 31, 1996) 5,072,575
Series E, $.01 par value, 868,329 shares
authorized; 868,329 shares issued and
outstanding at December 31, 1996 ($4,916,106
liquidation value at December 31, 1996) 4,916,106
</TABLE>
F-3
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1996 1995
----------- -----------
<S> <C> <C>
Stockholders' deficit:
Series A convertible preferred stock,
$.01 par value, 104,388 shares authorized;
93,691 shares issued and outstanding at
December 31, 1996 and December 31, 1995 $ 1,037,664 $ 1,037,664
Common stock, $.01 par value, 15,000,000
shares authorized; 1,563,808 and 1,564,451 shares
issued and outstanding at December 31, 1996
and December 31, 1995, respectively 15,644 15,638
Additional paid-in capital 112,960 198,418
Accretion of redeemable convertible
preferred stock to redemption value (101,059) (14,269)
Deficit accumulated during the development stage (8,305,002) (8,573,064)
----------- -----------
Total stockholders' deficit (7,239,793) (7,335,613)
----------- -----------
Total liabilities and stockholders' deficit $12,574,567 $ 1,210,765
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception
Nine months (November 29,
Year ended ended Year ended 1988) to
December 31, December 31, March 31, December 31,
1996 1995 1995 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $10,009,739 $ 900,000 $ 411,509 $14,021,248
Research and development 6,878,666 4,164,940 2,407,113 15,301,923
General and administrative 2,861,906 1,504,811 824,769 6,930,009
------------ ----------- ----------- -----------
Total operating expenses 9,740,572 5,669,751 3,231,882 22,231,932
------------ ----------- ----------- -----------
Operating income (loss) 269,167 (4,769,751) (2,820,373) (8,210,684)
Interest expense (288,776) (151,057) (78,672) (585,481)
Interest income 287,671 27,880 120,845 506,630
------------ ----------- ----------- -----------
Net income (loss) $ 268,062 $(4,892,928) $(2,778,200) $(8,289,535)
============ =========== =========== ===========
Earnings per share:
Pro-forma net income
(loss) per share $0.03 $(0.70)
============ ===========
Weighted-average common
stock and stock equivalents 7,711,000 6,973,000
============ ===========
</TABLE>
F-5
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<CAPTION>
Redeemable Convertible
Preferred Stock Convertible Preferred Common Stock
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock in May 333,330 $3,333
1989
Issuance of Series A preferred
stock in March 1992 (net of
legal costs of $12,336) 93,691 $1,037,664
Cumulative net loss for the
period November 29, 1988
(date of inception) through
March 31, 1992
------------------------------------------------------------------------------
Balance at March 31, 1992 93,691 1,037,664 333,330 3,333
Issuance of common stock in
April 1992 as payment for 5,186 52
consulting services received
Net loss
------------------------------------------------------------------------------
Balance at March 31, 1993 93,691 1,037,664 338,516 3,385
Issuance of common stock in
February 1994 as payment
for consulting services 5,186 52
received
Three-for-one stock dividend
declared and paid in March 1,031,118 10,311
1994
Issuance of Series B preferred
stock in March 1994, net of
issuance costs of $58,764 2,643,736 $3,941,236
Issuance of warrants in
conjunction with financing
Net loss
------------------------------------------------------------------------------
Balance at March 31, 1994 2,643,736 3,941,236 93,691 1,037,664 1,374,820 13,748
Issuance of common stock upon
exercise of options 66,866 669
Issuance of warrants in
conjunction
with financing
Accretion of redeemable
convertible
preferred stock to 8,147
redemption value
Net loss
------------------------------------------------------------------------------
Balance at March 31, 1995 2,643,736 3,949,383 93,691 1,037,664 1,441,686 14,417
</TABLE>
<TABLE>
<CAPTION>
Accretion of
Dividends Deficit
Dividends on Accumulated
Redeemable Development Total
Additional Convertible in the Stockholders'
Paid in Preferred Development Equity
Capital Stock Stage (Deficit)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock in May 1989 $1,667 $5,000
Issuance of Series A preferred
stock in March 1992 (net of
legal costs of $12,336) 1,037,664
Cumulative net loss for the
period November 29, 1988
(date of inception) through $(27,911) (27,911)
March 31, 1992 ----------------------------------------------------------------
Balance at March 31, 1992 1,667 (27,911) 1,014,753
Issuance of common stock in
April 1992 as payment for 26 78
consulting services received
Net loss (242,078) (242,078)
----------------------------------------------------------------
Balance at March 31, 1993 1,693 (269,989) 772,753
Issuance of common stock in
February 1994 as payment
for consulting services 26 78
received
Three-for-one stock dividend
declared and paid in March 5,156 (15,467)
1994
Issuance of Series B preferred
stock in March 1994, net of
issuance costs of $58,764
Issuance of warrants in
conjunction with financing 43,391 43,391
Net loss (616,480) (616,480)
----------------------------------------------------------------
Balance at March 31, 1994 50,266 (901,936) 199,742
Issuance of common stock upon
exercise of options 27,415 28,084
Issuance of warrants in
conjunction
with financing 6,925 6,925
Accretion of redeemable
convertible
preferred stock to (8,147) (8,147)
redemption value
Net loss (2,778,200) (2,778,200)
----------------------------------------------------------------
Balance at March 31, 1995 84,606 (8,147) (3,680,136) (2,551,596)
</TABLE>
F-6
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<CAPTION>
Redeemable Convertible
Preferred Stock Convertible Preferred Common Stock
Stock
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock upon
exercise of options 38,399 384
Issuance of common stock in
July 1995 under license 83,723 837
agreement
Accretion of redeemable
convertible preferred stock 6,122
to redemption value
Issuance of warrants in
conjunction with financing
Net loss
------------------------------------------------------------------------------
Balance at December 31, 1995 2,643,736 3,955,505 93,691 1,037,664 1,563,808 15,638
Issuance of common stock upon
exercise of options 67,309 673
Issuance of Series C preferred
stock upon conversion of
convertible notes and
interest thereon in May 1,432,318 3,210,177
1996, net of issuance costs
of $12,560
Issuance of warrants in
conjunction with financing
Issuance of Series D preferred
stock for cash in May 1996,
net of issuance costs of 1,500,002 4,468,963
$31,043
Issuance of Series D preferred
stock upon conversion of 200,000 600,000
Bridge Notes in May 1996
Issuance of Series E preferred
stock in May and August
1996, net of issuance costs 868,329 4,882,372
of $117,628
Issuance of compensatory stock
option grants
Repurchase of common stock from
officer in May 1996 (66,666) (667)
Accretion of redeemable
convertible preferred stock 86,790
to redemption value
Net income
------------------------------------------------------------------------------
Balance at December 31, 1996 6,644,385 $17,203,807 93,691 $1,037,664 1,564,451 $15,644
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Accretion of
Dividends Deficit
Dividends on Accumulated
Redeemable Development Total
Additional Convertible in the Stockholders'
Paid in Preferred Development Equity
Capital Stock Stage (Deficit)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock upon
exercise of options 16,874 17,258
Issuance of common stock in
July 1995 under license 68,235 69,072
agreement
Accretion of redeemable
convertible preferred stock (6,122) (6,122)
to redemption value
Issuance of warrants in
conjunction with financing 28,703 28,703
Net loss (4,892,928) (4,892,928)
----------------------------------------------------------------
Balance at December 31, 1995 198,418 (14,269) (8,573,064) (7,335,613)
Issuance of common stock upon
exercise of options 38,313 38,986
Issuance of Series C preferred
stock upon conversion of
convertible notes and
interest thereon in May
1996, net of issuance costs
of $12,560
Issuance of warrants in
conjunction with financing 78,236 78,236
Issuance of Series D preferred
stock for cash in May 1996,
net of issuance costs of
$31,043
Issuance of Series D preferred
stock upon conversion of
Bridge Notes in May 1996
Issuance of Series E preferred
stock in May and August
1996, net of issuance costs
of $117,628
Issuance of compensatory stock
option grants 67,326 67,326
Repurchase of common stock from
officer in May 1996 (269,333) (270,000)
Accretion of redeemable
convertible preferred stock (86,790) (86,790)
to redemption value
Net income 268,062 268,062
----------------------------------------------------------------
Balance at December 31, 1996 $112,960 $(101,059) $(8,305,002) $(7,239,793)
================================================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
inception
Nine months (November 28,
Year ended ended Year ended 1988) to
December 31, December 31 March 31, December 31,
1996 1995 1995 1996
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) $ 268,062 $(4,892,928) $(2,778,200) $(8,289,535)
Adjustments to reconcile net income
(loss) to cash provided (used) by
operating actives:
Depreciation and amortization 549,241 396,673 285,515 1,652,644
Expenses paid with equity
instruments 136,526 67,816 204,342
Change in operating assets and
liabilities:
Prepaid expenses and other
current assets 14,517 16,411 (2,769) (139,649)
Accounts payable and accrued
expenses 707,588 872,018 (36,009) 1,951,789
----------------- ------------------ ------------------ -----------------
Net cash provided (used) by operating
activities 1,675,934 (3,540,010) (2,531,463) (4,620,409)
Investing activities
Purchase of fixed assets (694,893) (324,429) (367,830) (2,383,052)
Proceeds from lease financing of
fixed assets 17,173 511,145 41,468 1,122,853
Purchase of marketable securities (7,996,186) (10,352,696)
Proceeds from sale of marketable
securities 2,356,510 2,356,510
Issuance of notes receivable from
officer (230,000) (50,000) (280,000)
----------------- ------------------ ------------------ -----------------
Net cash provided (used) by investing
activities (8,903,906) 136,716 2,030,148 (9,536,385)
----------------- ------------------ ------------------ -----------------
</TABLE>
F-8
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Period from
inception
Nine months (November 28,
Year ended ended Year ended 1988) to
December 31, December 31, March 31, December 31,
1996 1995 1995 1996
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Financing activities
Repayment of capital lease obligations $ (274,143) $ (245,489) $ (245,399) $ (926,733)
Proceeds from issuance of promissory
notes 300,000 2,700,000 3,000,000
Proceeds from issuance of bridge notes 600,000 600,000
Proceeds from sale of Series B
redeemable convertible preferred stock 3,941,236
Proceeds from sale of Series D
redeemable convertible preferred stock 4,468,963 4,468,963
Proceeds from sale of Series E
redeemable convertible preferred stock 4,882,372 4,882,372
Proceeds from sale of Series A
convertible preferred stock 1,037,664
Repurchase of stock from officer (270,000) (270,000)
Sale of common stock 38,986 18,514 28,084 90,584
Proceeds from issuance of warrants 600 600
----------------- ------------------ ------------------ -----------------
Net cash provided (used) by financing
activities 9,746,178 2,473,625 (217,315) 16,824,686
----------------- ------------------ ------------------ -----------------
Increase (decrease) in cash and cash
equivalents 2,518,206 (929,669) (718,630) 2,667,892
Cash and cash equivalents at beginning
of period 149,686 1,079,355 1,797,985
----------------- ------------------ ------------------ -----------------
Cash and cash equivalents at end of
period $2,667,892 $149,686 $1,079,355 $2,667,892
================= ================== ================== =================
Supplemental cash flow information
Cash paid for interest $96,455 $51,441 $78,672 $293,544
================= ================== ================== =================
</TABLE>
See accompanying notes.
F-9
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
EPIX Medical, Inc. ("EPIX" or the "Company") was formed on November 29, 1988 as
a Delaware corporation and commenced operations in 1992. The Company is
developing targeted contrast agents both to improve the capability and expand
the use of magnetic resonance imaging ("MRI") as a tool for diagnosing a variety
of diseases. The Company's principal product under development, MS-325, is an
injectable contrast agent designed for multiple vascular imaging indications.
The Company is a development-stage enterprise, as defined in Statement of
Financial Accounting Standards No. 7, and has, since inception, been engaged in
the research and development of its product candidates as well as seeking
regulatory clearances and patent protection and raising capital to fund
operations.
As more fully described in Note 15, the Company completed an initial public
offering of 2,300,000 shares of its Common Stock at a price of $7.00 per share.
The net proceeds, after underwriter discounts and offering expenses, aggregated
approximately $14.3 million which the Company expects to use for research and
development and funding of clinical trials in support of regulatory approvals
and for general corporate purposes.
Change of Year End
Subsequent to March 31, 1995, the Company elected to change its fiscal year end
from March 31 to December 31.
Reverse Stock Split
A reverse stock split was approved by the Board of Directors and Stockholders of
the Company in December 1996, whereby one share of Common Stock is outstanding
after the split for each 1.5 shares of Common Stock outstanding prior to the
split. All share and per share amounts related to Common Stock presented in the
accompanying financial statements have been restated to reflect the reverse
stock split.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant Revenues
For the year ended December 31, 1996, one source represented 70% of revenues and
another source represented 30% of revenues. All of the revenues received during
the nine-month period ended December 31, 1995 were derived from a single source.
For the year ended March 31, 1995, one source represented 61% and another source
represented 39% of the total revenues.
F-10
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all investments with original maturities of three months
or less to be cash equivalents. Cash equivalents consist of money market
accounts and short-term investments.
Property and Equipment
Property and Equipment are recorded at historical cost. Depreciation on
laboratory equipment and furniture, fixtures and other equipment is determined
using the straight-line method over the estimated useful lives of the related
assets, ranging from 3 to 5 years. Leasehold improvements are amortized using
the straight-line method over the shorter of the asset life or the remaining
life of the lease. Expenditures for maintenance and repairs are charged to
expense; betterments are capitalized.
Capital Lease Obligations
Assets and liabilities relating to capital leases are recorded at the present
value of the future minimum rental payments using interest rates appropriate at
the inception of the lease.
Income Taxes
The Company provides for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
taxes are recognized using the liability method, whereby tax rates are applied
to cumulative temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes based on when and how they are expected to affect the tax return. A
valuation allowance is provided to the extent that there is uncertainty as to
the Company's ability to generate taxable income in the future to realize the
benefit from its net deferred tax asset.
Fair Value of Financial Instruments
In 1995, the Company adopted SFAS No. 107, "Disclosure About the Fair Value of
Financial Instruments," which requires the disclosure of the fair value of
financial instruments. At December 31, 1996 and 1995, the Company's financial
instruments consist of cash, cash equivalents, marketable securities, notes
receivable from a related party, accounts payable and accrued expenses, capital
lease obligations, promissory notes payable and mandatorily redeemable preferred
stock. Fair value of issued equity instruments is based upon negotiated prices
and includes cash and the fair value of other consideration received. The fair
value of available-for-sale securities at December 31, 1996 approximates cost.
F-11
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mandatorily Redeemable Preferred Stock
Mandatorily redeemable preferred stock is recorded upon issuance at fair value,
net of issuance costs, and periodically accreted to redemption value using the
interest method.
Revenue Recognition
Revenues from non-refundable license fees are recognized upon execution of the
underlying license agreement. Option, license and milestone payments under
collaborative agreements are recorded as earned based upon the provisions of
each agreement. Payments received for which revenue has not been earned are
recorded as deferred revenue.
Technology, Licenses and Patents
Costs associated with technology, licenses and patents are expensed as incurred.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
stock-based compensation plans, rather than the alternative fair value
accounting method provided for under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." ("SFAS 123"). The Company
will provide the required discosures as put forth in SFAS 123. Under APB 25,
when the exercise price of options granted under these plans equals the market
price of the underlying stock on the date of grant, no compensation expense is
required.
Pro-forma Net Income (Loss) Per Share
Pro-forma net income (loss) per share is computed using the weighted-average
number of outstanding shares of common stock and common stock equivalents,
assuming conversion of all convertible preferred stock into common stock (as of
their original date of issuance). Common stock equivalents are excluded from the
pro-forma net income (loss) per share computation when their effect is
anti-dilutive; however, pursuant to the requirements of the Securities and
Exchange Commission, common stock equivalent shares relating to stock options
and warrants (using the treasury stock method and an assumed initial public
offering price) and convertible preferred stock issued during the twelve-month
period prior to the initial public offering are included for all periods
presented, whether or not they are anti-dilutive. Earnings per share have not
been presented for all historical periods because such amounts are not
considered meaningful due to the significant change in the Company's capital
structure that would occur in connection with the Company's proposed initial
public offering.
F-12
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which establishes criteria
for the recognition and measurement of impairment loss associated with
long-lived assets. The Company has adopted this standard in 1996, and its
adoption did not have a material impact on the Company's financial position or
results of operations.
3. MARKETABLE SECURITIES
Marketable Securities consist of the following:
December 31
1996
-----------
Available-for-sale securities:
Federal agency obligations $ 7,496,886
Bank Obligations 499,300
-----------
$ 7,996,186
===========
The fair value of available-for-sale securities at December 31, 1996
approximates cost. The above marketable securities all mature within one year or
less.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31
1996 1995
----------- -----------
Laboratory equipment $1,520,170 $1,163,370
Leasehold improvements 516,160 462,099
Furniture, fixtures and other equipment 470,169 215,869
----------- -----------
2,506,499 1,841,338
Less accumulated depreciation and amortization 1,512,320 984,426
----------- -----------
$ 994,179 $ 856,912
=========== ===========
F-13
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. LEASES
The Company has entered into a number of capital leases for equipment, including
sale and leaseback transactions involving certain equipment. Assets under
capital leases, the majority of which are laboratory equipment, totaled
$1,382,350 and $1,320,994 at December 31, 1996 and 1995, respectively.
Accumulated amortization relating to assets under capital leases was $993,437
and $661,257 at December 31, 1996 and 1995, respectively. In December 1996 the
Company arranged a new lease facility which provides for additional lease
financing up to an aggregate of $1 million.
Additionally, the Company leases office space under operating lease
arrangements. The initial term of the lease expires in December 1997 and is
renewable with 12 months notice for an additional five year term.
Future minimum commitments under leases with non-cancelable terms of one or more
years are as follows at December 31, 1996:
Capital Operating
Leases Leases
--------- ---------
1997 $252,161 $197,556
1998 186,555
1999 10,761
-------- --------
Total minimum lease payments 449,477 $197,556
========
Less amounts representing interest 64,637
--------
Present value minimum lease payments 384,840
Less amounts due within one year 208,571
--------
$176,269
========
Rent expense amounted to approximately $174,666, $86,100 and $94,600 for the
twelve months ended December 31, 1996, the nine months ended December 31, 1995
and the twelve months ended March 31, 1995, respectively, and approximately
$487,000 for the period from inception (November 29, 1988) to December 31, 1996.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31
1996 1995
---------- ----------
Accounts payable $ 428,746 $ 615,174
Accrued development expenses 963,447 435,562
Accrued interest expense 99,616
Accrued legal expense 176,209
Accrued public offering costs 294,893
Accrued license restructuring cost 250,000
Other accrued expenses 112,418 93,849
---------- ----------
Total accounts payable and accrued expenses $2,225,713 $1,244,201
========== ==========
F-14
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. PROMISSORY NOTES
During 1995, the Company issued 10% Promissory Notes ("Promissory Notes") in an
aggregate amount of $2,700,000 which became due upon demand on or after February
15, 1996.
In January 1996, the Company issued convertible promissory notes for an
aggregate amount of $3,015,862 ("Convertible Notes") in exchange for $300,000 of
cash and cancellation of the Promissory Notes and accrued interest thereon. The
Convertible Notes were issued at an annual interest rate of 10% and became due
upon demand on or after February 15, 1996.
In February 1996, the Company issued additional convertible promissory notes for
an aggregate amount of $600,000 ("Bridge Notes") which became due upon demand,
with interest at a rate of 10% per year.
In May 1996 the Promissory Notes and Bridge Notes were converted to Redeemable
Convertible Preferred Stock (see Note 8). Because it was contemplated that the
Convertible Notes for which the Promissory Notes were subsequently exchanged
would be converted during 1996, the Promissory Notes were classified as
long-term at December 31, 1995.
8. CAPITAL STOCK
In addition to the sale of its Common Stock, the Company has authorized and
issued one series of convertible preferred stock ("Series A Preferred Stock")
and four series of redeemable, convertible preferred stock ("Series B , Series
C, Series D and Series E Preferred Stock").
In May 1996, the Convertible Notes (see Note 7) and accrued interest thereon
were converted at a conversion price of $2.25 into 1,432,318 shares of the
Company's Series C Preferred Stock.
In May 1996, the Company issued 1,700,002 shares of Series D Preferred Stock,
priced at $3.00 per share, in exchange for cash and cancellation of the Bridge
Notes (see Note 7) and accrued interest thereon.
The sale of the Series E Preferred Stock, was completed in two separate
closings, one in May 1996 and the other in August 1996, for a total of 868,329
shares at a price of $5.76 per share.
Conversion Rights of Preferred Stockholders
The following table shows the number of shares of Common Stock into which
outstanding shares of each Series of Preferred Stock are convertible at December
31, 1996:
Series A 320,723
Series B 1,762,484
Series C 954,872
Series D 1,133,325
Series E 578,885
---------
Total 4,750,289
=========
F-15
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. CAPITAL STOCK (Continued)
The number of shares of Common Stock into which shares of Preferred Stock are
convertible is subject to adjustment upon the occurrence of certain events
principally related to changes in the capital structure, such as stock splits,
stock dividends, business combination or other recapitalization or
reorganization affecting such shares. All shares of Preferred Stock
automatically convert to Common Stock upon an initial public offering meeting
certain criteria related to size and share price.
Redemption Rights
Under the Company's Restated Certificate of Incorporation adopted in May 1996,
at any time on or after May 29, 2001, holders of two thirds of the then
outstanding shares of the Series B, Series C, Series D and Series E Preferred
Stock may require the Company to redeem such series of preferred stock at
specified redemption prices (equal, as of December 31, 1996, to the original
purchase price of each such series) plus any undeclared but unpaid dividends
thereon. The consent of the holders of a majority of the outstanding shares of
Series D Preferred Stock is required to effect a redemption of any securities
prior to the redemption of Series D Preferred Stock. The holders of Series C and
Series E Preferred Stock are entitled to a $.05 per share annual dividend if,
when and as declared by the Board of Directors which must be paid prior to
payment of any other dividends.
Voting Rights and Election of Directors
Each holder of Preferred Stock shall be entitled to the number of votes equal to
the number of shares of Common Stock into which the Preferred Stock is
convertible. The Series A Preferred Stockholders with the Common Stockholders,
voting as a single class, have the right to elect two directors of the Company.
The holders of Series B and Series C Preferred Stock, voting as a single class,
are also entitled to elect two directors. All other directors are elected by the
Preferred Stockholders and Common Stockholders voting together as a single
class.
Liquidation Preferences
In the event of a liquidation, dissolution or winding up of the Company the
holders of Preferred Stock are entitled to receive a specified per share amount
(in each case subject to adjustment, in the event of any stock dividends, stock
split, combination or other similar recapitalization affecting such shares) plus
any other declared but unpaid dividends thereon. In addition, holders of Series
B, Series C, Series D and Series E Preferred Stock are entitled to receive a
preferential, cumulative cash dividend of 18% per annum, compounded annually
from the date of issuance. In the event of liquidation, the holders of Series D
Preferred Stock rank senior to all other Series of Preferred Stock. The
following table shows, by Series, the specified per share amount and accrued
dividends payable to Preferred Stockholders upon liquidation as of December 31,
1996:
Per share Total
Liquidation Accumulated
Price Dividends
Series A $11.21
Series B $1.51 $22,446
Series C $2.25 $41,267
Series D $3.00 $3,612
Series E $5.76 $33,734
F-16
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. CAPITAL STOCK (Continued)
On December 10, 1996, the Company filed a registration statement with the
Securities and Exchange Commission in order to permit the Company to sell shares
of its Common Stock to the public. Upon consummation of the offering, all of the
Preferred Stock issued and outstanding will automatically convert into 4,750,289
shares of Common Stock. Immediately following such conversion, all currently
outstanding shares of Preferred Stock will be canceled, retired and eliminated
from the Company's authorized shares of capital stock and the number of
authorized shares of Preferred Stock will be decreased to 1,000,000 shares.
9. WARRANTS
In connection with a master lease line (see Note 5), the Company has issued
warrants to purchase shares of Series A, Series B and Series C Preferred Stock.
In connection with the issuance of Bridge Notes and the sale of Series D
preferred stock, the Company issued warrants to purchase shares of Series D
Preferred Stock (see Note 6). Information on warrants issued through and
outstanding as of December 31, 1996 is as follows:
Exercisable
Warrants Exercised Warrants
---------------- ---------------------------------------
Shares of
Preferred Shares of Common Warrant Exercise
Description Stock Reserved Stock Reserved Price
- -----------------------------------------------------------------------------
Series A 10,697 36,618 $11.21
Series B 11,402 7,601 $ 1.51
Series C 13,218 8,812 $ 4.54
Series D 40,000 26,665 $ 3.00
Warrants for the purchase of 9,365 and 1,332 shares of the Company's Series A
Preferred Stock expire the earlier of five years from the date of an initial
public offering or on December 21, 2002 and August 5, 2002, respectively.
Warrants to purchase 11,402 shares of the Company's Series B Preferred Stock and
13,218 shares of the Company's Series C Preferred Stock expire on the earlier of
five years from the date of an initial public offering or June 6, 2004 and
August 2, 2005, respectively.
The value ascribed to the warrants aggregating $79,019 has been accounted for as
additional paid in capital.
F-17
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. EQUITY PLANS
Equity Incentive Plan
On July 1, 1992, the Company adopted the 1992 Equity Incentive Plan, which
provides stock awards to purchase shares of Common Stock to be granted to
employees and consultants under incentive and non-statutory stock option
agreements. In December 1996, the Company amended the 1992 Equity Incentive Plan
(as amended, "the Equity Plan") to, among other things, increase the number of
shares reserved for issuance pursuant to grants. The Equity Plan provides for
the grant of stock options (incentive and non-statutory), stock appreciation
rights, performance shares, restricted stock or stock units for the purchase of
an aggregate of 1,599,901 shares of Common Stock, subject to adjustment for
stock-splits and similar capital changes. Awards under the Equity Plan can be
granted to officers, employees and other individuals as determined by the
committee of the Board of Directors which administers the Equity Plan. The
Compensation Committee selects the participants and establishes the terms and
conditions of each option or other equity right granted under the Equity Plan,
including the exercise price, the number of shares subject to options or other
equity rights and the time at which such options become exercisable.
Stock option information relating to the Equity Incentive Plan is as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Options Option price average Available for average
Outstanding range per share exercise price Grant Exercisable exercisable price
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1993 107,926 $0.42 $0.42 725,259 6,975 $0.42
Granted 142,648 $0.42 $0.42
---------
March 31, 1994 250,624 $0.42 $0.42 582,611 34,592 $0.42
Granted 359,131 $0.45 $0.43
Exercised (66,866) $0.42 $0.42
Canceled (1,400) $0.42 $0.42
---------
March 31, 1995 541,489 $0.42-$0.45 $0.43 224,880 143,207 $0.43
Granted 133,993 $0.45-$0.83 $0.55
Exercised (38,399) $0.42-$0.45 $0.45
Canceled (40,933) $0.42-$0.45 $0.45
---------
December 31, 1995 596,150 $0.42-$0.83 $0.47 131,820 200,631 $0.44
Granted 753,896 $0.83-$8.50 $3.59
Exercised (67,309) $0.42-$0.83 $0.58
Canceled (4,934) $0.42-$0.45 $0.45
---------
December 31, 1996 1,277,803 $0.42-$8.50 $2.30 149,524 392,933 $1.21
=========
</TABLE>
1996 Employee Stock Purchase Plan
In December 1996, the Company adopted the Company's 1996 Employee Stock Purchase
Plan (the "Purchase Plan") under which employees may purchase shares of Common
Stock at a discount from fair market value. There are 66,666 shares of Common
Stock reserved for issuance under the Purchase Plan. To date, no shares of
Common Stock have been issued under the Purchase Plan. The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the code. Rights to purchase Common Stock under the Purchase Plan
are granted at the discretion of the Compensation Committee, which determines
the frequency and
F-18
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. COMMON STOCK (Continued)
duration of individual offerings under the Purchase Plan and the dates when
stock may be purchased. Eligible employees participate voluntarily and may
withdraw from any offering at any time before stock is purchased. Participation
terminates automatically upon termination of employment. The purchase price per
share of Common Stock in an offering is 85% of the lesser of its fair market
value at the beginning of the offering period or on the applicable exercise date
and may be paid through payroll deductions, periodic lump sum payments or a
combination of both. The Purchase Plan terminates in December 2006.
1996 Directors Stock Option Plan
In December 1996, the Board of Directors and stockholders of the Company adopted
the Company's 1996 Director Stock Option Plan (the "Director Plan"). All of the
directors who are not employees of the Company (the "Eligible Directors") are
currently eligible to participate in the Director Plan. There are 66,666 shares
of Common Stock reserved for issuance under the Director Plan. Upon the election
or reelection of an Eligible Director, such director is automatically granted an
option to purchase 6,666 shares of Common Stock (the "Option"). Each Option
becomes exercisable with respect to 1,333 shares on each anniversary date of
grant for a period of five years, provided that the option holder is still a
director of the Company at the opening of business such date. The Options have a
term of ten years. The exercise price for the Options is equal to fair value at
the date of grant. The exercise price may be paid in cash or shares of Common
Stock or combination of both.
FAS 123 Pro Forma Information
The pro forma information as required by FAS 123 is presented below and has been
determined as if the Company accounted for its employee stock options under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model. For
pro forma purposes the fair value of the options is amortized over the options'
vesting period:
<TABLE>
<CAPTION>
Nine Months
Year ended ended
December 31 December 31
1996 1995
----------- -----------
<S> <C> <C>
Assumptions:
Risk free interest rates 6.34% 5.85%
Dividend yields
Volatility factors 0.60 0.60
Weighted average option life (in years) 5.53 4.92
Pro forma amounts
Weighted average fair value of options granted $ 2.16 $ 0.31
Weighted average contractual life (in years) 8.59 8.53
Net income (loss) $ 48,866 $(4,896,608)
Net income (loss) per share $ 0.01 $ (0.70)
</TABLE>
F-19
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. COMMON STOCK (Continued)
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 use of highly
subjective assumptions. Because the Company's stock options have characteristics
that are significantly different from traded options and because changes in the
valuation 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 employee stock options.
11. INCOME TAXES
The Company has incurred losses since inception and, due to the degree of
uncertainty related to the ultimate use of the loss carryforwards, fully
reserved this tax benefit. The Company has the following total deferred tax
assets as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $2,921,000 $3,137,000
Research and development tax credits 400,000 300,000
Book over tax depreciation and amortization 383,000 113,400
Other 18,000 19,900
---------- ----------
Total deferred tax assets 3,722,000 3,570,300
Valuation allowances (3,722,000) (3,570,300)
---------- ----------
Deferred income taxes, net $ - 0 - $ - 0 -
========== ==========
</TABLE>
As of December 31, 1996, the Company has net operating loss carryforwards for
income tax purposes of approximately $7.3 million, which expire through the year
2010. The valuation allowance increased by $151,700 during the twelve months
ended December 31, 1996, $2,088,700 during the nine months ended December 31,
1995 and $1,212,900 during the twelve months ended March 31, 1995, due primarily
to the additional allowance for the net operating losses incurred in the
respective periods. The tax net operating loss carryforwards differ from the
accumulated deficit principally due to temporary differences in the recognition
of certain revenue and expense items for financial and tax reporting purposes.
As a result of an ownership change occurring in May 1996 (see Note 8), the
Company's ability to utilize its tax loss carryforwards and tax credits is
subject to limitations as defined in Internal Revenue Code Sections 382 and 383.
The Company currently estimates that their annual limitation on the use of tax
loss carryforwards through May 31, 1996 will be approximately $900,000. Research
and development tax credits through May 31, 1996 of approximately $300,000
cannot be utilized until such tax loss carryforwards are fully utilized.
12. DEFINED CONTRIBUTION PLAN
During the year ended March 31, 1995, the Company began a defined contribution
401(k) plan which covers substantially all employees. The plan permits
participants to make contributions from 1% to 15% of their compensation (as
defined).
F-20
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
13. RELATED PARTY TRANSACTION
During 1995 and 1996 the Company received promissory notes from one executive
officer and director. These transactions are summarized below:
<TABLE>
<CAPTION>
Shares of Company Common Stock
Date of Interest Provided as Collateral
Note Term Amount Rate
------------------ ------------ ------------ -------------- --------------------------------
<S> <C> <C> <C> <C>
June 26, 1995 10 years $50,000 7.31% 14,814
April 5, 1996 10 years $50,000 6.51% 14,814
May 31, 1996 10 years $230,000 6.83% 44,444
</TABLE>
The notes are subject to certain acceleration clauses. In May 1996, the Company
also repurchased from the same officer of the Company, 66,666 shares of Common
Stock at a price per share of $4.05.
14. SIGNIFICANT AGREEMENTS
The Company has a license agreement with Massachusetts General Hospital ("MGH")
for the exclusive license of a number of patents and patent applications on
which the Company's research and development efforts are significantly based. In
exchange, the Company will remit royalties based on a specified percentage of
revenues. Under this agreement, the Company is required to pay for all patent
application costs related to the licensed technology. On July 10, 1995, the
Company issued and sold to the MGH 83,723 shares of the Company's Common Stock
for $1,256 as consideration for certain modifications to the license. The
Company expensed the difference between proceeds received and fair value at the
time of issuance, approximately $68,000.
In March 1992, the Company entered into an Agency Agreement with Sumitomo Corp.
("Sumitomo") to assist the Company in entering into collaboration and licensing
arrangements with other companies in Japan for the development, manufacture,
distribution and sale of the Company's future products. At that time, Sumitomo
purchased 66,923 shares of the Company's Series A Preferred Stock, $.01 par
value, for $11.21 per share. In October 1995, Sumitomo assigned the Agency
Agreement and its shares to Summit Pharmaceutical International Corporation
("Agent"). Under the terms of the amended Agency Agreement, which expired and
was extended for one year in March 1996, the Company is required to pay the
Agent certain commissions and fees, based on a stipulated percentage of amounts
received by the Company as license fees, milestone payments or capital
investments.
Also, in March 1992, the Company entered into a $3.5 million development and
license agreement with, a Japanese manufacturer and distributor ("Japanese
Manufacturer and Distributor") of medical products. Under the terms of the
agreement, the Company received funding for research and development through the
sale of Preferred Stock and license rights to the Company's liver MRI contrast
agent product candidate. In March of 1992, the Japanese Manufacturer and
Distributor purchased an equity interest in the Company in accordance with the
agreement by acquiring 26,768 shares of Series A Preferred Stock for $11.21 per
share. As of December 31, 1996, the Company had received an aggregate of $2.7
million in revenues (net of withholding tax) under this agreement.
F-21
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
14. SIGNIFICANT AGREEMENTS (Continued)
In December 1996, the Company and the Japanese Manufacturer and Distributor
agreed to restructure the existing agreement. In connection with the
restructuring, the parties terminated further collaboration efforts and the
Japanese Manufacturer and Distributor relinquished its exclusive rights in Japan
to the liver MRI agent in exchange for a non-exclusive technology license and a
$250,000 payment from the Company. The Company is entitled to receive royalties
based upon specified percentage of future revenues, if any, from the sale of
liver MRI contrast agents by the Japanese Manufacturer and Distributor.
In March 1996, the Company entered into marketing, development and license
agreements with Daiichi Radioisotope Laboratories Ltd., a Japanese
pharmaceutical company ("Daiichi") covering the Company's vascular MRI contrast
agent. During 1996, the Company received a license fee of $3.0 million (net of
withholding tax) upon execution of the agreement and proceeds from the issuance
of 868,329 shares of Series E Preferred Stock at price of $5.76 per share (see
Note 8). In addition, the Company is entitled to receive future milestone
payments of up to $3.3 million (net of withholding tax) The agreements also
provide for the Company to supply product to Daiichi and to receive royalties
for sales made by Daiichi in Japan.
In August 1996, the Company entered into a strategic collaboration agreement
with Mallinckrodt Group Inc. ("Mallinckrodt"), a U.S. pharmaceutical company,
involving research, development and marketing of MS-325 and future MRI vascular
contrast agents developed or in-licensed by either party. Under the terms of the
agreement, each party is obligated to fund a portion of the development cost of
MS-325 up to a specified maximum amount. Mallinckrodt will have the right to
manufacture MS-325 and to market the product worldwide except Japan. During
1996, the Company received a $6.0 million license fee payment upon execution of
the agreement is eligible to receive a future additional $2.0 million upon the
earlier of the completion of a specified milestone or a designated date. Under
the agreement, the Company will share in future operating profits from the sale
of products covered under the agreement.
15. SUBSEQUENT EVENTS
On February 4, 1997 the Company completed an initial public offering of
2,000,000 shares of its Common Stock at a price of $7.00 per share. On February
13, 1997 the Company issued an additional 300,000 shares of its Common Stock at
a price of $7.00 per share to cover an underwriters over-allotment option. The
net proceeds, after underwriter discounts and offering expenses, aggregated
approximately $14.3 million which the Company expects to use for research and
development and funding of clinical trials in support of regulatory regulatory
and reimbursement approvals and for general corporate purposes.
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized.
EPIX MEDICAL, INC.
Date: March 27, 1997 By: /s/ Michael D. Webb
----------------------
Michael D. Webb
President and Chief
Executive Officer
We the undersigned officer and directors of EPIX Medical, Inc., hereby
severally constitute Michael D. Webb, Jeffrey R. Lentz and William T. Whelan,
and each of them singly, our true and lawful attorneys, with full power to them
and each of them to sign for use, in our names and in the capacity indicated
below, any and all amendments to this annual report on this Form 10-K for the
fiscal year ended December 31, 1996, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorneys-in-fact
may cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Michael D. Webb President, Chief Executive Officer March 27, 1997
- ------------------------------ and Director (Principal Executive Officer)
Michael D. Webb
/s/ Jeffrey R. Lentz Chief Financial Officer, and Vice March 27, 1997
- ------------------------------ President, Finance and Administration
Jeffrey R. Lentz (Principal Financial Officer and
Principal Accounting Officer)
/s/ Christopher F. O. Gabrieli Chairman of the Board March 27, 1997
- ------------------------------ and Director
Christopher F. O. Gabrieli
/s/ Stanley T. Crooke, M.D., Ph.D.
- ------------------------------ Director March 27, 1997
Stanley T. Crooke, M.D., Ph.D.
/s/ Luke B. Evnin, Ph.D.
- ------------------------------ Director March 27, 1997
Luke B. Evnin, Ph.D.
/s/ Randall B. Lauffer, Ph.D.
- ------------------------------ Director March 27, 1997
Randall B. Lauffer, Ph.D.
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Company. Filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File
No. 333-17581) and incorporated herein by reference.
3.2 Form of Amended and Restated By-Laws of the Company. Filed as Exhibit
3.5 to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
4.1 Specimen certificate for shares of Common Stock of the Company. Filed
as Exhibit 4.1 to the Company's Registration Statement on Form S-1
(File No. 333-17581) and incorporated herein by reference.
10.1+ Agency Agreement between the Company and Sumitomo Corporation dated
March 13, 1992. Filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.2+ Amendment to the Agency Agreement between the Company and Sumitomo
Corporation dated June 26, 1992. Filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.3 Short Form Lease from Trustees of the Cambridge East Trust to the
Company dated July 1, 1992. Filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.4 Form of Warrant to Purchase Shares of Series A Convertible Preferred
Stock dated December 21, 1992. Filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.5 Dominion Ventures Master Lease Agreement No. 8050 dated December 21,
1992. Filed as Exhibit 10.5 to the Company's Registration Statement
on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.6 First Amendment to Master Lease Agreement No. 8050 dated May 14,
1993. Filed as Exhibit 10.6 to the Company's Registration Statement
on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.7 Second Amendment to Master Lease Agreement No. 8050 dated August 5,
1993. Filed as Exhibit 10.7 to the Company's Registration Statement
on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.8 First Amendment Lease From Trustees of the Cambridge Trust to the
Company dated October 20, 1993. Filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.9 Warrant to Purchase Shares of Series B Convertible Preferred Stock
dated June 6, 1994. Filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.10 Second Amendment to Master Lease Agreement No. 8050 dated June 6,
1994. Filed as Exhibit 10.10 to the Company's Registration Statement
on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.11+ Amendment Agreement to the Agency Agreement between the Company and
Sumitomo Corporation dated September 15, 1994. Filed as Exhibit 10.11
to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.12 Second Amendment Lease From Trustees of the Cambridge East Trust to
the Company dated September 17, 1994. Filed as Exhibit 10.12 to the
Company's
<PAGE>
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.13 Convertible Promissory Note Purchase Agreement by and among the
Company and certain purchasers named therein dated May 26, 1995.
Filed as Exhibit 10.13 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by reference.
10.14+ Amended and Restated License Agreement between the Company and The
General Hospital Corporation dated July 10, 1995. Filed as Exhibit
10.14 to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.15 Warrant to Purchase Shares of Series C Convertible Preferred Stock
dated August 2, 1995. Filed as Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.16 Third Amendment to the Master Lease Agreement No. 8050 dated August
2, 1995. Filed as Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.17 Amendment No. 1 to Convertible Promissory Note Purchase Agreement by
and among the Company and certain purchasers named therein dated
January 19, 1996. Filed as Exhibit 10.17 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.18+ Extension Agreement to Agency Agreement between the Company and
Sumitomo Corporation dated March 5, 1996. Filed as Exhibit 10.18 to
the Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.19+ Development and License Agreement dated March 29, 1996 by and among
the Company and Daiichi Radioisotope Laboratories, Ltd. Filed as
Exhibit 10.19 to the Company's Registration Statement on Form S-1
(File No. 333-17581) and incorporated herein by reference.
10.20 Third Amendment Lease From Trustees of the Cambridge East Trust to
the Company dated May 1, 1996. Filed as Exhibit 10.20 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.21 Series D Convertible Preferred Stock Purchase Agreement by and among
the Company and certain purchasers named therein dated May 29, 1996.
Filed as Exhibit 10.21 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by reference.
10.22 Third Amended and Restated Stockholders' Rights Agreement by and
among the Company and certain of its stockholders named therein dated
May 29, 1996. Filed as Exhibit 10.22 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.23 Form of Warrant to Purchase Shares of Series D Preferred Stock dated
May 29, 1996. Filed as Exhibit 10.23 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.24 Amendment No. 1 to Third Amended and Restated Stockholders' Rights
Agreement dated May 31, 1996. Filed as Exhibit 10.24 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.25 Series E Convertible Preferred Stock Purchase Agreement dated May 31,
1996 between the Company and Daiichi Radioisotope Laboratories, Ltd.
Filed as Exhibit 10.25 to the Company's Registration Statement on
Form S-1 (File No. 333-17581) and incorporated herein by reference.
<PAGE>
10.26+ Strategic Collaboration Agreement between the Company and
Mallinckrodt Medical, Inc. and Mallinckrodt Group Inc. dated August
30, 1996. Filed as Exhibit 10.26 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.27 Amendment No. 2 to Third Amended and Restated Stockholders' Rights
Agreement dated December 6, 1996. Filed as Exhibit 10.27 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.28# Amended and Restated 1992 Equity Incentive Plan. Filed as Exhibit
10.28 to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.29# Form of Incentive Stock Option Certificate. Filed as Exhibit 10.29 to
the Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.30 Form of Nonstatutory Stock Option Certificate. Filed as Exhibit 10.30
to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.31# 1996 Director Stock Option Plan. Filed as Exhibit 10.31 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.32# 1996 Employee Stock Purchase Plan. Filed as Exhibit 10.32 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.33 Form of Consulting and Confidentiality Agreement between the Company
and certain consultants of the Company. Filed as Exhibit 10.33 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.34 Form of Invention and Non-Disclosure Agreement between the Company
and certain employees of the Company. Filed as Exhibit 10.34 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.35 Form of Non-Competition and Non-Solicitation Agreement between the
Company and certain employees of the Company. Filed as Exhibit 10.35
to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.36 Form of Common Stock Purchase Agreement. Filed as Exhibit 10.36 to
the Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.37 Form of Stock Purchase and Right of First Refusal Agreement. Filed as
Exhibit 10.37 to the Company's Registration Statement on Form S-1
(File No. 333-17581) and incorporated herein by reference.
11.1 Statement re: computation of per share earnings. Filed herewith.
24.1 Power of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule. Filed herewith.
99.1 Important Factors Regarding Forward-Looking Statements. Filed
herewith.
- ---------------------------
+ Certain confidential material contained in the document has been
omitted and filed separately with the Securities and Exchange
Commission pursuant to Rule 406 of the Securities Act of 1933, as
amended.
# Identifies a management contract or compensatory plan or agreement in
which an executive officer or director of the Company participates.
Exhibit 11.1
COMPUTATION OF PRO-FORMA INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Year ended Nine months
December 31, December 31,
1996 1995
<S> <C> <C>
Weighted average common shares outstanding 1,539,681 1,507,182
Options, based on treasury stock method (1) 1,364,825 697,529
Warrants, based on treasury stock method 56,317 17,777
Redeemable convertible preferred stock, as if converted (2) 4,429,590 4,429,590
Convertible preferred stock, as if converted 320,731 320,731
------------- -------------
Total 7,711,144 6,972,809
============= ============
Net income (loss) $268,062 $(4,892,928)
============= ============
Pro-forma net income (loss) per share $0.03 $(0.70)
============= =============
</TABLE>
(1) Includes options issued within 12 months prior to initial public offering
as if issued at beginning of earliest period presented.
(2) Includes convertible preferred stock issued within 12 months prior to
initial public offering as if issued at beginning of earliest period
presented.
EXHIBIT 99.1
Important Factors Regarding Forward Looking Statements
From time to time, EPIX Medical, Inc., through its management, may make
forward looking statements, such as statements concerning then expected future
revenues or earnings or concerning projected plans, performance, product
development and commercialization, as well as other estimates relating to future
operations. There are certain key factors that could cause future results to
differ materially from those anticipated by management including, but not
limited to, the following:
Early Stage of Development; No Product Sales to Date. The Company
commenced operations in 1992 and is a development stage company. The Company
currently has no products for sale nor is there any guarantee that it will ever
have marketable products. All of the Company's product candidates are in
research or development, and no revenues have been generated from product sales.
To date, the Company has financed its operations through its initial public
offering, private sales of equity securities, equipment lease financings and
license payments from its strategic partners. To achieve profitable operations,
the Company, alone or with others, must successfully develop, obtain regulatory
approval for, introduce, market and sell products. The Company does not expect
to receive revenue from the sale of any of its product candidates for the next
several years. There can be no assurance that the Company's product development
efforts will be successfully completed, that required regulatory approvals will
be obtained in a timely manner, if at all, that its product candidates can be
manufactured at an acceptable cost and with acceptable quality or that any
approved products can be successfully marketed.
Dependence on MS-325. MS-325 is currently the Company's only product
candidate in human clinical trials, and there is no guarantee that any of its
other development projects will yield a product candidate suitable for entry
into clinical trials. The failure of MS-325 to achieve regulatory approval and
market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on MRI Advancements for Cardiac Applications. Existing MRI
scanners do not have the capability to perform coronary angiography without
improvements in current MRI hardware and software. The success of cardiac
applications of MS-325 is therefore dependent on advancements in MRI hardware
and software. Although several leading MRI manufacturers, academic centers and
others are developing advanced hardware and software, there can be no assurance
when, or if, these techniques will enable MS-325 to provide clinically relevant
images in cardiac indications currently being pursued.
Uncertainty of Market Acceptance of Technology and Products. The
commercial success of MS-325 and the Company's other product candidates, when
and if approved for marketing by the United States Food and Drug Administration
(the "FDA") and corresponding foreign agencies, will depend on their acceptance
by the medical community and third-party payors as clinically useful,
cost-effective and safe. While contrast agents are currently used in an
estimated 25% of all MRI exams, there are no targeted vascular agents approved
by the FDA in use. Furthermore, clinical use of MRI for vascular imaging has
been limited, and use of MRI for cardiac imaging has occurred mainly in
research. Market acceptance, and thus sales of the Company's product candidates,
will depend on several factors, including safety, price, ease of administration,
effectiveness and the rate of adoption of up-to-date MRI technology. Market
acceptance will also depend on the ability of the Company and its strategic
partners to educate the medical community and third-party payors about the
benefits of diagnostic imaging with MRI enhanced with the Company's product
candidates compared to imaging with other modalities. The Company's MRI contrast
agents represent a new approach to imaging the cardiovascular system ("CVS"),
and market acceptance both of MRI as an appropriate imaging technique for the
CVS and of the Company's product candidates is critical to the Company's
success. There can be no assurance that the Company's product candidates will
gain market acceptance. Failure to achieve market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Intense Competition and Risk of Technological Obsolescence. Medical
technology is subject to intense competition and rapid technological change. The
Company has many competitors, including pharmaceutical, biotechnology and
chemical companies, a number of which, including both of the Company's strategic
partners, are actively developing and marketing products that could compete with
the Company's product candidates. Many of these competitors have substantially
greater capital and other resources than the Company and may represent
significant competition for the Company. Such companies may succeed in
developing technologies and products that are more effective or less costly than
any of those that may be developed by the Company, and such companies may be
more successful than the Company in developing, manufacturing and marketing
products. Furthermore, there are several well-established medical imaging
modalities that currently compete, and will continue to compete, with MRI
including X-ray angiography, computer assisted tomography ("CT"), nuclear
medicine and ultrasound. Other companies are actively developing the
capabilities of the competing modalities to enhance their effectiveness in CVS
imaging. There can be no assurance that the Company will be able to compete
successfully in the future or that developments by others will not render MS-325
or the
1
<PAGE>
Company's future product candidates obsolete or non-competitive or that the
Company's strategic partners or customers will not choose to use competing
technologies or products.
Dependence on Licensed Technology. The Company and Massachusetts
General Hospital ("MGH") have entered into a license agreement (the "MGH
License") pursuant to which the Company is the exclusive licensee to certain
technology, including certain patents and patent applications, which relates to
the Company's product candidates, including MS-325. The MGH License imposes
various commercialization, sub-licensing, royalty and other obligations on the
Company. Failure of the Company to comply with these and other requirements
could result in the conversion of the license from being exclusive to
non-exclusive in nature or termination of the license agreement itself. Any such
event would have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Strategic Partners. The Company is dependent on strategic
partners for support in product development and the regulatory approval process
as well as a variety of activities including manufacturing, marketing and
distribution of its products in the United States and abroad, when and if its
product candidates are approved for marketing by the FDA and corresponding
foreign agencies. To date, the Company has entered into two strategic alliances:
a collaboration agreement with Mallinckrodt Group Inc. ("Mallinckrodt") to
develop and commercialize MS-325 and other MRI vascular agents worldwide,
excluding Japan, and a development and license agreement with Daiichi
Radioisotope Laboratories, Ltd. ("Daiichi") for the development and
commercialization of MS-325 in Japan. The Company may not receive milestone
payments from these alliances should MS-325 fail to meet certain performance
targets in clinical trials. Further, the Company's receipt of revenues from
strategic alliances is affected by the level of efforts of its partners. There
can be no assurance that the Company's partners will devote the resources
necessary to complete development, and commence marketing, of MS-325 in their
respective territories, or that they will successfully market MS-325. Both
Mallinckrodt and Daiichi currently manufacture imaging agents for other
modalities that will compete against MS-325. Mallinckrodt and the Company will
share responsibility for setting the price of the product worldwide, except
Japan, and Daiichi will be responsible for setting the product price in Japan.
There can be no assurance that either Mallinckrodt or Daiichi will do so in a
manner that maximizes revenues for the Company. In addition, Daiichi has the
right to terminate its agreement on short notice under certain circumstances,
and there is no guarantee that it will not exercise this right. The failure of
the Company to receive milestone payments, a reduction or discontinuance of
efforts by the Company's partners or the termination of these alliances would
have a material adverse effect on the Company's business, financial condition
and results of operations.
There can be no assurance that the Company will be successful in entering into
additional strategic alliances for the development and commercialization of
future product candidates, nor that these alliances, if entered into, will be on
terms favorable to the Company or will be successful. If the Company were unable
to enter into future strategic alliances with capable partners on commercially
reasonable terms, the development and commercialization of future product
candidates would be delayed and possibly postponed indefinitely.
Unproven Safety and Effectiveness of Product Candidates; Uncertainties
Related to Clinical Trials. The Company's product candidates are in research and
development and will require additional research and development, extensive
clinical testing and regulatory approval prior to any commercial sales. The
Company cannot predict if or when any of its products under development will be
commercialized. The Company currently has only one product candidate, MS-325, in
clinical trials. The Company will be required to complete successfully clinical
trials in the United States to demonstrate the safety and efficacy of MS-325,
currently in Phase I clinical trials, prior to obtaining FDA approval. There can
be no assurance that clinical trials will be successful, or that they will be
completed in a timely manner. Although no clinically significant adverse effects
from MS-325 in Phase I clinical trials have been reported to date, results are
based on preliminary data only, and there can be no assurance that serious side
effects will not be reported as the clinical trial proceeds. The results from
early clinical trials may not be predictive of results that will be obtained in
large scale clinical trials, as a number of companies have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. There can be no assurance that Phase II or Phase III clinical trials for
MS-325 will be conducted or that such trials, if begun, will demonstrate any
efficacy or will be completed successfully in a timely manner, if at all. The
rate of completion of the Company's clinical trials is dependent upon, among
other things, the rate of patient enrollment. Patient enrollment is a function
of many factors, including the size of the patient population, the nature of the
clinical protocol under which MS-325 will be studied, the proximity of the
patient to a clinical site and the eligibility criteria for the study. Delays in
planned patient enrollment may result in increased costs, regulatory filing
delays, or both. Furthermore, the Company, the FDA or other regulatory
authorities may suspend or terminate clinical trials at any time. Failure to
complete successfully any of its clinical trials on a timely basis or at all
would have a material adverse effect on the Company's business, financial
condition and results of operations.
2
<PAGE>
Uncertainty Regarding Patents and Proprietary Rights. The Company
considers the protection of its proprietary technologies to be material to its
business prospects. The Company pursues a comprehensive patent program for its
product candidates in the United States and in other countries where it believes
that significant market opportunities exist. The Company owns or has an
exclusive license to patents and patent applications on the critical aspects of
its core technology as well as many specific applications of this technology.
However, the patent positions of pharmaceutical and biopharmaceutical firms
including the Company generally include complex legal and factual questions.
There can be no assurance that the issued patents owned or licensed to the
Company, or any patents that may be issued in the future, will effectively
protect the Company's technology or provide a competitive advantage. There can
be no assurance that any of the patents or patent applications owned or licensed
by the Company will not be challenged, invalidated or circumvented in the
future.
The Company's commercial success will also depend on its ability to
operate without infringing upon the patents of others in the United States and
abroad. If any third-party patents are upheld as valid and enforceable in any
judicial or administrative proceeding, the Company could be prevented from
practicing the subject matter claimed in such patents, or would be required to
obtain licenses from the owners of each such patent, or to redesign its products
or processes to avoid infringement. There are pending or issued patents, held by
parties not affiliated with the Company, relating to technologies used by the
Company in the development or use of certain of the Company's contrast agents.
In particular, the Company is aware of certain patents in the United States,
Japan and elsewhere owned by or licensed to one party that relate to MRI
contrast agents and which may cover certain of the Company's MRI contrast
agents, including MS-325. Mallinckrodt, one of the Company's strategic partners,
has rights from this third party under those patents which the Company and
Mallinckrodt believe will permit Mallinckrodt to manufacture, market and sell
MS-325 and other products developed pursuant to the collaboration agreement
between the Company and Mallinckrodt were MS-325 and those other products to be
held to fall within the claims of those third-party patents. If the agreement
with Mallinckrodt is terminated by either party, the Company would likely be
required to enter into a strategic alliance with another party having a license
from this third party or obtain a license from this third party directly or from
others licensed by this third party in order to manufacture, market and sell
MS-325 and other chelate-based MRI contrast agents. However, there can be no
assurance that the Company would be able to consummate a strategic alliance with
a party having this third-party license or obtain licenses from third parties on
commercially reasonable terms, if at all. The patent rights of this third party
in Japan will expire in 2002, before such time as the Company presently
anticipates that Daiichi will have material sales of MS-325 in Japan and,
therefore, the Company believes that the existence of such patents in Japan is
unlikely to have a material adverse effect on the Company. However, in the event
that Daiichi commercializes MS-325 in Japan before 2002, it may be required to
obtain an appropriate license from this third party or from others licensed by
this third party, or take other measures to avoid infringement of third-party
patents, including delaying the commencement of product sales. There can be no
assurance that the Company's current or future activities will not be challenged
in the future, that additional patents will not be issued containing claims
materially constraining the proposed activities of the Company, that the Company
will not be required to obtain licenses from third parties, or that the Company
will not become involved in costly, time-consuming litigation regarding patents
in the field of contrast agents, including actions brought to challenge or
invalidate the Company's own patent rights.
Many of the Company's competitors are continuing to actively pursue
patent protection for activities and discoveries similar to the Company's. There
can be no assurance that these competitors, many of which have substantially
greater resources than the Company and have made substantial investments in
competing technologies, will not seek to assert that the Company's products or
chemical processes infringe their existing patents and/or will not seek new
patents that claim to cover aspects of the Company's technology. Furthermore,
patent applications in the United States are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a specified period after filing. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and the
filing of related patent applications. In addition, patents issued and patent
applications filed relating to pharmaceuticals are numerous. Therefore, there
can be no assurance that the Company is aware of all competitive patents, either
pending or issued, that relate to products or processes used or proposed to be
used by the Company.
The pharmaceutical and biotechnology industries have been characterized
by extensive litigation regarding patents and other intellectual property
rights. Litigation may be necessary to enforce any patents issued to the Company
and/or determine the scope and validity of others' proprietary rights. The
Company may have to participate in interference proceedings declared by the
United States Patent and Trademark Office or by foreign agencies to determine
the priority of inventions. Any involvement in litigation surrounding these
issues could result in extensive costs to the Company as well as be a
significant distraction for management. Such costs could have a material adverse
effect on the Company's business, financial condition and results of operations.
3
<PAGE>
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
with their employment, consulting or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Furthermore,
there can be no assurance that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology. Several of
the Company's management and scientific personnel were formerly associated with
other pharmaceutical and biotechnology companies and academic institutions. In
some cases, these individuals are conducting research in similar areas with
which they were involved prior to joining the Company. As a result, the Company,
as well as these individuals, could be subject to claims of violation of trade
secrets and similar claims.
The Company intends to vigorously protect and defend its intellectual
property. Costly and time-consuming litigation brought by the Company may be
necessary to enforce patents issued to the Company, to protect trade secrets or
know-how owned by the Company, or to determine the enforceability, scope and
validity of the proprietary rights of others.
Extensive Government Regulation; No Assurance of Regulatory Approval.
The Company is subject to extensive governmental regulatory requirements and a
lengthy approval process for its product candidates. The development and
commercial use of the Company's product candidates will be regulated by numerous
federal, state and local governmental authorities in the United States,
including the FDA and comparable foreign regulatory agencies abroad. The nature
of the Company's research and development and manufacturing processes requires
the use of hazardous substances and testing on certain laboratory animals.
Accordingly, the Company is subject to extensive federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and wastes, as well as the use of and care for laboratory animals.
Although the Company believes it is in compliance with all such laws and
maintains policies and procedures to ensure that it remains in compliance, there
can be no assurance that accidents will not happen that would expose the Company
to legal risk and/or financial loss. Furthermore, there can be no assurance that
current laws will not be changed or that new laws will not be passed that force
the Company to change its policies and procedures, an event which could impose
significant costs on the Company.
The regulatory approval process for new MRI contrast agents, including
required preclinical studies and clinical trials, is lengthy and expensive.
Although certain employees of the Company have experience in obtaining
regulatory approvals, the Company itself has only limited experience in filing
or pursuing applications necessary to gain regulatory approvals. Preclinical
testing of the Company's product development candidates is subject to Good
Laboratory Practices ("GLP") as prescribed by the FDA and the manufacture of any
products developed by the Company will be subject to Good Manufacturing
Practices ("GMP") as prescribed by the FDA. There can be no assurance that the
necessary FDA clearances and subsequent approvals will be obtained in a timely
manner, if at all. There can be no assurance as to the length of the clinical
trial period or the number of patients that will be required to be tested in the
clinical trials in order to establish the safety and efficacy of MS-325 or any
future product candidates of the Company. The Company may encounter
unanticipated delays or significant costs in its efforts to secure necessary
approvals. There can be no assurance, even after the performance of clinical
trials and the passage of time and the expenditure of such resources, that
regulatory approval will be obtained for MS-325 or any other product candidates
that may be developed by the Company. The Company's analysis of data obtained
from preclinical and clinical activities is subject to confirmation and
interpretation by regulatory authorities which could delay, limit or prevent FDA
regulatory approval. Future United States legislative or administrative actions
also could prevent or delay regulatory approval of the Company's product
candidates. Even if regulatory approvals are obtained, they may include
significant limitations on the indicated uses for which a product may be
marketed. A marketed product also is subject to continual FDA and other
regulatory agency review and regulation. Later discovery of previously unknown
problems or failure to comply with the applicable regulatory requirements may
result in restrictions on the marketing of a product or withdrawal of the
product from the market, as well as possible civil or criminal sanctions.
Further, many academic institutions and companies conducting research and
clinical trials in the MRI contrast agent field are using a variety of
approaches and technologies. Any adverse results obtained by such researchers in
preclinical studies or clinical trials could adversely affect the regulatory
environment for MRI contrast agents generally. In addition, if marketing
approval is obtained, the FDA may require post-marketing testing and
surveillance programs to monitor the product's efficacy and side effects.
Results of these post-marketing programs may prevent or limit the further
marketing of the monitored product.
The Company and its strategic partners are also subject to numerous and
varying foreign regulatory requirements governing the design and conduct of
clinical trials and the manufacturing and marketing of its products. The foreign
regulatory approval process may include all of the risks associated with
obtaining FDA
4
<PAGE>
approval set forth above, and there can be no assurance that foreign regulatory
approvals will be obtained on a timely basis, if at all.
History of Operating Losses and Accumulated Deficit; Uncertainty of
Future Profitability. The Company's future financial results are uncertain. The
Company has experienced significant losses since it commenced operations in
1992. As of December 31, 1996, the Company had accumulated net losses of
approximately $8.3 million. These losses have resulted primarily from expenses
associated with the Company's research and development activities, including
preclinical and clinical trials, and general and administrative expenses. The
Company anticipates that its research and development expenses will increase
significantly in the future and it expects to incur substantial losses over at
least the next several years. There can be no assurance that the Company will
ever be able to generate revenues from the sale of products. Moreover, even if
the Company generates product revenues, there can be no assurance that the
Company will be able to achieve or sustain profitability. The Company's results
of operations have varied and will continue to vary significantly from quarter
to quarter and depend on, among other factors: the timing of fees and milestone
payments received from strategic partners; the formation of new strategic
alliances by the Company; the timing of expenditures in connection with research
and development activities, including clinical trials; the timing of product
introductions and associated launch, marketing and sales activities; and the
timing and extent of product acceptance for different indications and
geographical areas of the world.
Future Capital Needs; Uncertainty of Additional Funding. Since
inception, the Company has funded its operations primarily through its initial
public offering of Common Stock, private sales of equity securities, equipment
lease financings and license payments from its strategic partners. The Company
believes that existing cash and cash equivalents will be sufficient to fund its
operations through June 1998. The Company believes that it will need to raise
substantial additional funds for research, development and other expenses,
through equity or debt financings, strategic alliances or otherwise, prior to
commercialization of any of its product candidates. The Company's future
liquidity and capital requirements will depend upon numerous factors, including
the following: the progress and scope of clinical trials; the timing and costs
of filing future regulatory submissions; the timing and costs required to
receive both United States and foreign governmental approvals; the cost of
filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; the extent to which the Company's products gain
market acceptance; the timing and costs of product introductions; the extent of
the Company's ongoing research and development programs; the costs of training
physicians to become proficient with the use of the Company's products; and, if
necessary once regulatory approvals are received, the costs of developing
marketing and distribution capabilities. There can be no assurance that
additional financing will be available on terms acceptable to the Company, or at
all. The Company's inability to fund its capital requirements would have a
material adverse effect on the Company's business, financial condition and
results of operations. If adequate funds are not available, the Company may be
required to curtail operations significantly or to obtain funds by entering into
arrangements with strategic partners or others that may require the Company to
relinquish rights to certain of its technologies, product candidates, products
or potential markets. To the extent that additional capital is raised through
the sale of equity or securities convertible into equity, the issuance of such
securities could result in dilution to the Company's existing stockholders.
Limited Manufacturing Capability. The Company does not have, nor does
it currently have plans to develop, full-scale manufacturing capability for
MS-325. While it does manufacture small amounts of MS-325 for research and
development efforts, the Company intends to rely on Mallinckrodt as the primary
manufacturer of MS-325 for Phase III clinical trials as well as for any future
human clinical trials and commercial use. If Mallinckrodt is unable to produce
MS-325 in adequate amounts and at a reasonable cost or to comply with any
applicable regulations, including GMP, it could have a material adverse effect
on the Company's business, financial condition and results of operations.
Furthermore, should Mallinckrodt fail to fulfill its manufacturing
responsibilities satisfactorily, the Company could be forced to find an
alternative manufacturer. There can be no assurance that the Company would be
able to find such an alternative manufacturer. In the event the Company were
forced to develop its own FDA-approved full-scale manufacturing capability, it
would require significant expenditures of capital and management attention and
resources and could require the Company to obtain a license from a third party,
and would result in a delay in the approval or commercialization of MS-325.
There can be no assurance that the Company would be able to obtain such a
license on commercially reasonable terms, if at all.
Dependence on Suppliers. The Company currently procures the raw
materials for the various components of MS-325 from a broad variety of vendors
and, wherever possible, maintains relationships with multiple vendors for each
component. There are a number of components of MS-325 for which the largest
suppliers may have significant control over the market price due to controlling
market shares. If any one of the Company's suppliers decided to increase prices
significantly or reduce quantities of components of MS-325 available for sale to
the Company, it could have a material adverse effect on the Company's ability to
commercialize MS-325 and on the Company's business, financial condition and
results of operations.
5
<PAGE>
Potential Product Liability Exposure and Insurance. The clinical
testing, manufacturing and marketing of the Company's product candidates may
expose the Company to product liability claims, and there can be no assurance
that the Company will not experience material product liability losses in the
future. The Company currently has limited product liability insurance for the
use of its product candidates in clinical research, but there can be no
assurance that such coverage will continue to be available on terms acceptable
to the Company or that such coverage will be adequate for liabilities actually
incurred. The Company does not have product liability insurance coverage for the
commercial sale of its products but intends to obtain such coverage if and when
its product candidates are commercialized. However, there can be no assurance
that the Company will be able to obtain adequate additional product liability
insurance coverage on acceptable terms, if at all. A successful claim brought
against the Company in excess of available insurance coverage, or any claim or
product recall that results in significant adverse publicity against the
Company, may have a material adverse effect on the Company's business, financial
condition and results of operations.
Uncertainty of Adequate Reimbursement. The Company could be adversely
affected by changes in reimbursement policies of governmental or private
healthcare payors, particularly to the extent any such changes affect
reimbursement for procedures in which the Company's product candidates would be
used. Failure by physicians, hospitals and other users of the Company's products
to obtain sufficient reimbursement from third-party payors for the procedures in
which the Company's product candidates would be used or adverse changes in
governmental and private third-party payors' policies toward reimbursement for
such procedures would have a material adverse effect on the Company's business,
financial condition and results of operations. If the Company obtains the
necessary foreign regulatory approvals, market acceptance of the Company's
product candidates in international markets would be dependent, in part, upon
the availability of reimbursement within prevailing healthcare payment systems.
Reimbursement and healthcare payment systems in international markets vary
significantly by country, and include both government sponsored health care and
private insurance. The Company intends to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner, if at all, and failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.
Dependence Upon Key Personnel. The Company's future business and
operating results depend in significant part upon the continued contributions of
its key technical and senior management personnel, many of whom would be
difficult to replace and certain of whom perform important functions for the
Company beyond those functions suggested by their respective job title or
description. The Company's future business and operating results also depend in
significant part upon its ability to attract and retain qualified management,
operational and technical personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be successful in attracting
or retaining such personnel. Although the Company maintains key life insurance
on the lives of certain officers, the loss of any key employee, the failure of
any key employee to perform in his or her current position, or the Company's
inability to attract and retain skilled employees, as needed, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Possible Volatility of Share Price. The market prices of the capital
stock of medical technology companies have historically been very volatile, and
the market price of the shares of the Company's Common Stock may be highly
volatile. The market price of the shares of the Company's Common Stock may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technological innovations, new
products or new contracts by the Company or its competitors, developments with
respect to patents or proprietary rights, conditions and trends in the
pharmaceutical and other technology industries, adoption of new accounting
standards affecting such industries, changes in financial estimates by
securities analysts, general market conditions and other factors. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stock of development stage companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a particular company's
securities, class action securities litigation has often been brought against
that company. Such litigation, if brought against the Company, could result in
substantial costs and a diversion of management's attention and resources.
Anti-Takeover Effect of Certain Charter and By-Law Provisions and
Delaware Law. The Company's Restated Certificate of Incorporation (the "Restated
Certificate") authorizes the Board of Directors to issue, without stockholder
approval, up to 1,000,000 shares of preferred stock ("Preferred Stock") with
voting, conversion and other rights and preferences that could adversely affect
the voting power or other rights of the holders of Common Stock. The issuance of
Preferred Stock or of rights to purchase Preferred Stock could be used to
discourage an unsolicited acquisition proposal. In addition, the possible
issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's
6
<PAGE>
Common Stock or limit the price that investors might be willing to pay for
shares of the Company's Common Stock. The Restated Certificate provides for
staggered terms for the members of the Board of Directors. A staggered Board of
Directors and certain provisions of the Company's By-laws (the "By-laws") and of
Delaware law applicable to the Company could delay or make more difficult a
merger, tender offer or proxy contest involving the Company. The Company, for
example, is subject to Section 203 of the General Corporate Law of Delaware
which, subject to certain exceptions, restricts certain transactions and
business combinations between a corporation and a stockholder owning 15% or more
of the corporation's outstanding voting stock (an "interested stockholder") for
a period of three years from the date the stockholder becomes an interested
stockholder. These provisions may have the effect of delaying or preventing a
change of control of the Company without action by the stockholders and,
therefore, could adversely affect the price of the Company's Stock.
Control by Directors and Officers. As of December 31, 1996, the present
directors, executive officers and principal stockholders of the Company and
their affiliates beneficially owned approximately 72.5% of the outstanding
Common Stock of the Company (on an as-converted basis). As a result, these
stockholders will be able to significantly influence corporate actions requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may have the
effect of delaying or preventing a change in control of the Company.
Absence of Dividends. To date, the Company has neither declared nor
paid any cash dividends on shares of its Common Stock and does not anticipate
paying any cash dividends in the foreseeable future.
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF EPIX MEDICAL, INC. AS OF DECEMBER 31, 1996 AND FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> EPIX MEDICAL, INC.
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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