Filed Pursuant to Rule 424(b)(1)
Registration Statement No. 333-17581
PROSPECTUS
[LOGOTYPE]
EPIX MEDICAL
2,000,000 Shares
Common Stock
All of the 2,000,000 shares of Common Stock offered hereby are being sold
by EPIX Medical, Inc. ("EPIX" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Common Stock has been approved for quotation
on the Nasdaq National Market under the symbol EPIX.
-------------
The shares offered hereby involve a high degree of risk.
See "Risk Factors" commencing on page 5.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
- --------------------------------------------------------------------------------
Per Share $7.00 $.49 $6.51
- --------------------------------------------------------------------------------
Total (3) $14,000,000 $980,000 $13,020,000
================================================================================
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $700,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase
up to 300,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$16,100,000, $1,127,000 and $14,973,000, respectively. See "Underwriting."
-------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about February 4, 1997, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST WESSELS, ARNOLD & HENDERSON
January 30, 1997
<PAGE>
MS-325: NONINVASIVE CARDIOVASCULAR IMAGING
- --------------------------------------------------------------------------------
[EPIX LOGO]
EPIX Medical, Inc. is developing targeted contrast agents to improve the
capability of magnetic resonance imaging ("MRI") to diagnose a variety of
diseases. The Company's principal product under development, MS-325, is an
injectable vascular contrast agent. The Company believes that MS-325 will
simplify the diagnostic pathway for a number of diseases and in many cases
replace highly invasive and expensive X-ray angiography. The Company does not
have any commercially available products at this time.
- --------------------------------------------------------------------------------
X-RAY ANGIOGRAPHY
[bullet] X-ray angiography is generally considered to be the definitive
diagnostic exam for assessing cardiovascular disease.
[bullet] Approximately 3.3 million diagnostic X-ray
angiograms are performed annually
in the U.S.
[bullet] X-ray angiography is highly invasive (i.e., more
invasive than a peripheral intravenous injection
("I.V.") up to and including a surgical procedure),
painful and expensive.
[bullet] A catheter is fed into the patient
through an arterial puncture in the
groin area to introduce contrast media
and enable an X-ray to be taken.
[bullet] Complications from X-ray angiography
include renal failure, limb loss
and death.
[Photograph of x-ray angiography]
[Photograph of x-ray angiography]
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THE EPIX
SOLUTION
[bullet] EPIX is developing MS-325 to provide
physicians with a clinically superior,
noninvasive (i.e., no more invasive than
a peripheral I.V.) and cost-effective
diagnostic procedure.
[bullet] The patient receives a single injection
of MS-325 in an arm vein and then
enters an MRI scanner.
[bullet] MS-325 binds to the blood protein
albumin and is designed to be excreted
safely through the kidneys over time.
[bullet] A Phase I clinical trial of MS-325
commenced in September 1996.
[Photograph of MRI exam]
- --------------------------------------------------------------------------------
MS-325 IS CURRENTLY BEING EVALUATED IN A PHASE I CLINICAL TRIAL AND NEITHER
MS-325 NOR OTHER CONTRAST AGENTS UNDER DEVELOPMENT HAVE RECEIVED MARKETING
APPROVAL FROM THE FDA OR ANY FOREIGN REGULATORY BODY.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
HUMAN STUDIES WITH MS-325
- --------------------------------------------------------------------------------
[EPIX LOGO]
EPIX Medical is currently evaluating the safety of MS-325 in a Phase I clinical
trial. The MRI images below were obtained from subjects enrolled in this trial.
- --------------------------------------------------------------------------------
Carotid Arteries
Enhanced right carotid artery showing
the profile of the human subject.
[Photo: MRI of carotid artery]
- --------------------------------------------------------------------------------
Coronary Arteries
Left:
Cross section of the heart, showing the
enhanced right coronary artery (arrow).
Top Right:
Three-dimensional computer-rendered
view of portions of the ascending aorta
and right coronary artery (arrow).
Bottom Right:
Major coronary arteries in a different
subject; RCA=right coronary artery,
LAD= left anterior descending artery,
LCx= left circumflex artery.
[Photo: MRI of coronary arteries (3 views)]
- -------------------------------------------------------------------------------
Pulmonary Vessels
Enhanced pulmonary arteries and veins
of the lungs.
[Photo: MRI of pulmonary vessels]
THE IMAGES ABOVE ARE FROM A PHASE I CLINICAL TRIAL OF THE EPIX VASCULAR IMAGING
AGENT, MS-325, AN INJECTABLE CONTRAST AGENT FOR USE IN MAGNETIC RESONANCE
IMAGING. MS-325 IS CURRENTLY BEING EVALUATED IN CLINICAL TRIALS AND HAS NOT
RECEIVED MARKETING APPROVAL FROM THE FDA OR ANY FOREIGN REGULATORY BODY.
<PAGE>
HUMAN STUDIES WITH MS-325
- --------------------------------------------------------------------------------
[Diagram of aorta and renal arteries]
Aorta and Renal Arteries
The renal arteries extend
from the aorta to the kidneys
(shown on either side of
the image). The aorta then
bifurcates into the iliac
arteries.
[Photo: MRI of aorta and renal arteries]
- --------------------------------------------------------------------------------
[Diagram of thigh vessels]
Thigh Vessels
Left:
The left femoral artery (arrow)
can be viewed at any angle
from the 3D dataset.
Right:
The femoral artery can be
isolated and displayed using
computer techniques.
[Photo: MRI of thigh vessels]
[Photo: MRI of isolated femoral artery]
- --------------------------------------------------------------------------------
[Diagram of calf vessels]
Calf Vessels
Left:
Arteries can be seen with
attendant pairs of veins on
either side.
Center:
Isolated left tibial arterial
tree.
Right:
Isolated left saphenous vein.
[Photo: MRI of calf vessels]
[Photo: MRI of isolated tibial artery]
[Photo: MRI of isolated saphenous vein]
- --------------------------------------------------------------------------------
THE IMAGES ABOVE ARE FROM A PHASE I CLINICAL TRIAL OF THE EPIX VASCULAR IMAGING
AGENT, MS-325, AN INJECTABLE CONTRAST AGENT FOR USE IN MAGNETIC RESONANCE
IMAGING. MS-325 IS CURRENTLY BEING EVALUATED IN CLINICAL TRIALS AND HAS NOT
RECEIVED MARKETING APPROVAL FROM THE FDA OR ANY FOREIGN REGULATORY BODY.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. The Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
The Company
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'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 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's objective is to become a worldwide leader in MRI contrast
agents by pursuing a strategy based on commercializing MS-325 and developing
new applications for its proprietary technology platform. EPIX has entered
into strategic alliances with Mallinckrodt Group Inc. ("Mallinckrodt") and
Daiichi Radioisotope Laboratories, Ltd. ("Daiichi") for the development and
commercialization of MS-325 and other vascular contrast agents.
The use of MRI has grown steadily over the past 10 years due to reduced cost
and improved imaging capabilities and now provides an effective diagnostic
modality for a broad range of applications. MRI manufacturers have improved
the hardware and software of their systems, reducing the time per procedure
drastically while significantly enhancing resolution. While MRI is currently
used extensively to image many organs and tissues in the body, its use in
imaging the arteries and veins has been limited. Prior attempts to develop
contrast agents to facilitate the clinical usefulness of MRI for the
cardiovascular system have had limited success. Unlike most currently
available cardiovascular contrast agents, which are non-specific, MS-325 is a
targeted intravascular contrast agent designed to bind to a common blood
protein, albumin. 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. EPIX believes that the
advantages of MS-325, coupled with the reduced cost and improved imaging
capabilities of MRI, will lead to significantly expanded use of MRI to
diagnose cardiovascular and other diseases.
Cardiovascular disease is a growing worldwide problem. It is estimated that
approximately 500,000 people in the United States die of CAD each year,
making it the leading cause of death. PVD affects arteries throughout the
body, resulting in approximately 600,000 vascular operations, 400,000 strokes
and 100,000 amputations (primarily related to PVD) each year in the United
States. Diagnosis of CAD and PVD is currently very complex and expensive,
requires multiple tests and ultimately relies upon a painful and costly X-ray
angiogram for a definitive diagnosis. Approximately 3.3 million diagnostic
X-ray angiograms were performed in the United States in 1995 at an estimated
cost of $5.9 billion. The Company believes that MS-325, together with
anticipated hardware and software solutions to problems associated with
cardiac motion, 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. If such a product were
available today, the Company believes that it could eliminate many X-ray
angiograms and ancillary tests, dramatically improving the current approach
to the diagnosis of cardiovascular disease. The Company believes, based on
1995 estimated procedure costs, that savings to the United States healthcare
system for CAD alone could exceed $2.0 billion.
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. 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 and functional brain imaging.
3
<PAGE>
Certain persons and entities related to Accel IV L.P. and Bessemer Venture
Partners III L.P. have indicated their non-binding intention to purchase
approximately 344,740 shares of Common Stock in this offering. Any
such sale will be made on the same terms as sales to other investors in this
offering. No assurance can be given that the aforementioned persons and entities
will purchase any or all of such shares.
The Company was incorporated in Delaware in 1988 and commenced operations in
1992. The Company's principal executive offices are located at 71 Rogers
Street, Cambridge, Massachusetts, 02142-1118, and its telephone number is
(617) 499-1400. The Company recently changed its name from Metasyn, Inc.
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company 2,000,000 shares
Common Stock to be outstanding after the
offering 8,314,740 shares (1)
Use of proceeds To fund research and development, clinical trials,
working capital requirements and other general
corporate purposes.
Proposed Nasdaq National Market Symbol EPIX
</TABLE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Period from inception Year Ended Nine Months Ended
(November 29, 1988) March 31, Ended September 30,
through March 31, ------------------- December 31, ------------------
1993 1994 1995 1995 (2) 1995 1996
--------------------- -------- --------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $1,000 $1,700 $ 412 $ 900 $ 900 $9,635
Operating income (loss) (311) (579) (2,820) (4,770) (3,438) 2,471
Net income (loss) (270) (617) (2,778) (4,893) (3,475) 2,338
Pro forma:
Net income (loss) per share (3) $ (0.70) $ 0.30
Shares used in per share
calculations 6,973 7,711
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------
Actual Pro Forma (4) As Adjusted (5)
--------- -------------- ----------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $11,735 $11,735 $24,055
Working capital 10,882 10,882 23,202
Total assets 13,815 13,815 26,135
Capital lease obligations, less current portion 198 198 198
Redeemable convertible preferred stock 17,166 -- --
Total stockholders' equity (deficit) (5,151) 12,015 24,335
</TABLE>
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(1) Based on the number of shares outstanding at December 31, 1996. Excludes
1,277,803 shares of Common Stock reserved for issuance upon the exercise
of outstanding options at a weighted average exercise price of $2.30 per
share, of which options to purchase 392,933 shares were exercisable, and
79,696 shares of Common Stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $3.98 per share. See
"Capitalization," "Dilution" and "Description of Capital Stock."
(2) The Company changed its fiscal year end from March 31 to December 31
commencing with the fiscal year ended December 31, 1995.
(3) See Note 2 to Notes to Financial Statements for a description of the
calculation of pro forma net income (loss) per share.
(4) Reflects the automatic conversion of all outstanding shares of preferred
stock into shares of Common Stock contemporaneously with the closing of
this offering.
(5) As adjusted to give effect to sale of the 2,000,000 shares of Common
Stock offered hereby and the application of the net proceeds thereof.
See "Use of Proceeds" and "Capitalization."
-------------
Except as otherwise noted, all information in this Prospectus (i) reflects a
1-for-1.5 reverse stock split effected on December 6, 1996, (ii) assumes no
exercise of the Underwriters' over-allotment option, (iii) reflects the
conversion of all outstanding shares of preferred stock into an aggregate of
4,750,289 shares of Common Stock effective upon the closing of this offering
and (iv) reflects an amendment to the Company's Restated Certificate of
Incorporation to be effective upon the closing of this offering to create a
class of authorized but undesignated preferred stock. See "Description of
Capital Stock," "Underwriting" and Notes to Financial Statements.
4
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result
of certain factors, including
those set forth below and elsewhere in this Prospectus. The following risk
factors should be considered carefully in addition to the other information
presented in this Prospectus before purchasing the shares of Common Stock
offered hereby.
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 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
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. See "Business--EPIX
Products and Development Programs."
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.
See "Business--Magnetic Resonance Imaging Background" and "--The EPIX
Solution--The EPIX Approach to CAD Diagnosis."
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. See
"Business--Business Strategy" and "--Competition."
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.
5
<PAGE>
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 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. See "Business--Competition."
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. See
"Business--Patents and Proprietary Rights."
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 to develop
and commercialize MS-325 and other MRI vascular agents worldwide, excluding
Japan, and a development and license agreement with 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. See "Business--Strategic Alliances" and "--Manufacturing."
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
6
<PAGE>
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. See "Business--Government Regulation."
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. See "Business--Patents and Proprietary Rights."
7
<PAGE>
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.
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. See "Business--Patents and
Proprietary Rights."
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
8
<PAGE>
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 approval set forth above, and there can be no assurance
that foreign regulatory approvals will be obtained on a timely basis, if at
all. See "Business--Government Regulation."
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 September 30, 1996, the Company had accumulated net losses of
approximately $6.2 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Future Capital Needs; Uncertainty of Additional Funding. Since inception,
the Company has funded its operations primarily through private sales of
equity securities, equipment lease financings and license payments from its
strategic partners. The Company believes that the proceeds of this offering,
together with 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,
9
<PAGE>
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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.
See "Risk Factors--Uncertainty Regarding Patents and Proprietary Rights" and
"Business--Strategic Alliances" and "--Manufacturing."
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. See "Business--Manufacturing."
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. See "Business--Product Liability Insurance."
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
10
<PAGE>
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. See
"Business--Reimbursement."
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. See
"Management--Executive Officers and Directors."
No Public Market; Possible Volatility of Share Price. Prior to this
offering, there has been no public market for the Common Stock, and there can
be no assurance that an active trading market will develop or be sustained
after this offering. The initial public offering price will be determined
through negotiations among the Company and the representatives of the
Underwriters based on several factors and may not be indicative of the market
price of the Common Stock after this offering. The market prices of the
capital stock of medical technology companies have historically been very
volatile, and the market price of the shares of Common Stock may be highly
volatile. The market price of the shares of the 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 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. See "Underwriting."
Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware
Law. The Company's Restated Certificate of Incorporation as it is proposed to
be amended and restated concurrently with the closing of this offering (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 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, will be 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
11
<PAGE>
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. See "Management," "Description of Capital
Stock--Preferred Stock" and "--Anti-Takeover Measures."
Control by Directors and Officers. Upon completion of this offering, the
present directors, executive officers and principal stockholders of the
Company and their affiliates will beneficially own approximately 67.7% of the
outstanding Common Stock of the Company. 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. See "Principal
Stockholders."
Broad Discretion of Management to Allocate Offering Proceeds. The Company
expects to use the net proceeds of this offering for research and development
and funding of clinical trials in support of regulatory and reimbursement
approvals and for working capital and general corporate purposes. The Company
is not yet able to estimate precisely the allocation of the proceeds among
such uses, and the timing and amount of expenditures will vary depending upon
numerous factors. The Company's management will have broad discretion to
allocate the proceeds of this offering and the timing of expenditures. See
"Use of Proceeds."
Shares Eligible for Future Sale; Registration Rights. Future sales of Common
Stock in the public market following this offering could adversely affect the
market price of the Common Stock. Upon completion of this offering, the
Company will have 8,314,740 shares of Common Stock outstanding, assuming no
exercise of options and warrants outstanding on December 31, 1996. Of these
shares, the 2,000,000 shares sold in this offering (plus any additional
shares sold upon exercise of the Underwriters' over-allotment option) will be
freely transferable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), unless they are held by "affiliates" of the
Company as that term is used under the Securities Act and the regulations
promulgated thereunder. Of the 6,314,740 remaining shares, approximately
112,357 shares of Common Stock will be eligible for sale under Rules 144 and 701
under the Securities Act on the ninety-first day after the effectiveness of this
offering. Stockholders of the Company, who will hold in the aggregate 6,202,383
shares of Common Stock after this offering, have agreed, subject to certain
limited exceptions, not to sell or otherwise dispose of any of the shares held
by them as of the date of this Prospectus for a period of 180 days after the
date of this Prospectus (the "lock-up period") without the prior written consent
of Hambrecht & Quist LLC. However, Hambrecht & Quist LLC may in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. At the end of the aforementioned
lock-up period, an additional 3,950,721 shares of Common Stock (plus
approximately 318,638 shares issuable upon exercise of vested options and
outstanding warrants) will be eligible for immediate resale, subject to
compliance with Rules 144 and Rule 701 under the Securities Act. An additional
2,177,587 shares of Common Stock held by existing stockholders will become
eligible for sale at various times over a period of less than two years and
could be sold earlier if the holders exercise any available registration rights.
The holders of 4,750,289 shares of Common Stock have the right in certain
circumstances to require the Company to register their shares under the
Securities Act for resale to the public beginning at the end of the lock-up
period. If such holders, by exercising their demand registration rights, cause a
large number of shares to be registered and sold in the public market, such
sales could have an adverse effect on the market price for the Company's Common
Stock. If the Company were required to include in a Company-initiated
registration shares held by such holders pursuant to the exercise of their
piggyback registration rights, such sales may have an adverse effect on the
Company's ability to raise needed capital and could also have an adverse effect
on the market price for the Company's Common Stock. In addition, approximately
90 days after the date of this Prospectus, the Company expects to file a
registration statement on Form S-8 registering a total of approximately
1,560,654 shares of Common Stock subject to outstanding stock options or
reserved for issuance under the Company's stock option and stock purchase plans.
See "Management--Director Compensation," "--Stock Plans," "Description of
Capital Stock," "Shares Eligible for Future Sale--Registration Rights" and
"Underwriting."
Immediate and Substantial Dilution. Purchasers of the shares of Common Stock
offered hereby will experience immediate and substantial dilution in the net
tangible book value of their investment from the initial
12
<PAGE>
public offering price. Additional dilution will occur upon exercise of
outstanding options and warrants. See "Dilution," "Description of Capital
Stock--Stock Purchase Warrants" and "Shares Eligible for Future Sale."
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. See "Dividend Policy."
Forward-looking Statements. This Prospectus contains forward-looking
statements, which may be deemed to include the Company's plans to continue
the development and achieve commercial introduction of its product
candidates. Actual results could differ from those projected in any
forward-looking statement for the reasons detailed in the other sections of
this "Risk Factors" section or elsewhere in this Prospectus.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby after deducting the underwriting
discounts and estimated offering expenses are estimated to be $12,320,000
($14,273,000 if the Underwriters' over-allotment option is exercised in
full). The Company expects to use the net proceeds for research and
development and funding of clinical trials in support of regulatory and
reimbursement approvals and for working capital and general corporate
purposes. The Company is not yet able to estimate precisely the allocation of
the proceeds among such uses, and the timing and amount of expenditures will
vary depending upon numerous factors. The Company's Board of Directors and
management retain complete discretion with respect to the allocation of such
proceeds and the timing of expenditures. Although the Company may use a
portion of the net proceeds for possible licensing or acquisition of products
and technologies that are complementary to those of the Company, or
acquisitions of businesses that are complementary to those of the Company,
there are no current plans or commitments in this regard. Pending such uses,
the Company plans to invest the net proceeds in investment grade,
interest-bearing securities. The Company intends to invest and use the
proceeds so as not to be considered an "investment company" under the
Investment Company Act of 1940, as amended.
The Company believes that the net proceeds from the offering and its
existing cash and cash equivalents will be sufficient to fund its operations
through June 1998. Thereafter, the Company may require additional funds to
support its operating requirements or for other purposes and may seek to
raise such additional funds through public or private equity financing or
from other sources. There can be no assurance that additional financing will
be available at all or that, if available, such financing would be obtainable
on terms favorable to the Company and would not be dilutive. See "Risk
Factors--Future Capital Needs; Uncertainty of Additional Funding," "--Broad
Discretion of Management to Allocate Offering Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
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.
14
<PAGE>
CAPITALIZATION
The following table sets forth, at September 30, 1996, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company,
giving effect to the conversion upon the closing of the offering of 6,738,076
shares of Preferred Stock into 4,750,289 shares of Common Stock and (iii) the
capitalization of the Company on an as adjusted basis to give effect to the
issuance and sale by the Company of 2,000,000 shares of Common Stock after
deducting the underwriting discounts and estimated offering expenses. This
table should be read in conjunction with the Financial Statements of the
Company and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------
Actual Pro forma As Adjusted
------- ---------- -----------
(in thousands)
<S> <C> <C> <C>
Capital lease obligations, less current portion $ 198 $ 198 $ 198
-------- -------- --------
Series B Redeemable Convertible Preferred Stock, $.01 par value;
2,655,138 shares authorized; 2,643,736 shares issued and outstanding
actual; none issued and outstanding pro forma and as adjusted 3,961 -- --
-------- -------- --------
Series C Redeemable Convertible Preferred Stock, $.01 par value;
1,445,536 shares authorized; 1,432,318 shares issued and outstanding
actual; none issued and outstanding pro forma and as adjusted 3,234 -- --
-------- -------- --------
Series D Redeemable Convertible Preferred Stock, $.01 par value;
1,740,002 shares authorized; 1,700,002 shares issued and outstanding
actual; none issued and outstanding pro forma and as adjusted 5,071 -- --
-------- -------- --------
Series E Redeemable Convertible Preferred Stock, $.01 par value; 868,329
shares authorized; 868,329 shares issued and outstanding actual; none
issued and outstanding pro forma and as adjusted 4,900 -- --
-------- -------- --------
Stockholders' equity deficit (1):
Series A Convertible Preferred Stock, $.01 par value; 104,388 shares
authorized; 93,691 shares issued and outstanding actual; none issued
and outstanding pro forma and as adjusted 1,038 -- --
Common Stock, $.01 par value; 15,000,000 shares authorized;
1,539,673 shares issued and outstanding actual; 6,289,969 shares
issued and outstanding pro forma; 8,289,969 shares issued and
outstanding as adjusted (2) 15 63 83
Additional paid-in capital 94 18,187 30,487
Accretion of dividends on redeemable convertible preferred stock (63) -- --
Accumulated deficit (6,235) (6,235) (6,235)
-------- -------- --------
Total stockholders' equity (deficit) (5,151) 12,015 24,335
-------- -------- --------
Total capitalization $12,213 $12,213 $24,533
======== ======== ========
</TABLE>
- -------------
(1) Effective upon the closing of this offering, the Company's Restated
Certificate of Incorporation will be further amended and restated to,
among other matters, reduce the number of authorized shares of Preferred
Stock from 6,813,393 to 1,000,000, none of which will be outstanding upon
the closing of the offering. See "Description of Capital Stock--Preferred
Stock."
(2) Excludes (i) 1,292,517 shares of Common Stock issuable upon exercise of
options outstanding at September 30, 1996 at a weighted average exercise
price of $2.20 per share, of which options to purchase 329,330 shares of
Common Stock were exercisable, and (ii) 79,696 shares of Common Stock
issuable of upon exercise of warrants outstanding at September 30, 1996
at a weighted average exercise price of $3.98 per share. See
"Management--Stock Plans," "Description of Capital Stock" and Notes 8 and
9 to Notes to Financial Statements.
15
<PAGE>
DILUTION
As of September 30, 1996, the Company had a pro forma net tangible book
value of approximately $12.0 million, or $1.91 per share of Common Stock. Pro
forma net tangible book value per share represents the amount of total
tangible assets, less total liabilities, divided by the number of shares of
Common Stock then outstanding after giving effect to the conversion of all
outstanding shares of Preferred Stock into shares of Common Stock upon the
completion of this offering. After giving effect to the sale of 2,000,000
shares of Common Stock offered hereby and after deduction of the underwriting
discounts and estimated offering expenses payable by the Company, the adjusted
pro forma net tangible book value of the Company as of September 30, 1996 would
have been $24.3 million, or $2.94 per share of Common Stock. This represents an
immediate increase in pro forma net tangible book value of $1.03 per share to
existing investors and an immediate dilution of $4.06 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial offering price per share $7.00
Pro forma net tangible book value per share before the offering $1.91
Increase attributable to new investors 1.03
-------
Adjusted pro forma net tangible book value per share after the offering 2.94
-----
Dilution per share to new investors $4.06
=====
</TABLE>
The following table summarizes on a pro forma basis as of September 30, 1996
the difference between the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share
paid:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------------- -------------------------
Average Price
Number Percent Amount Percent Per Share
------------ --------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders 6,289,962 75.9% $18,494,711 56.9% $ 2.94
New investors 2,000,000 24.1 14,000,000 43.1 7.00
--------- ----- ----------- ------ -----
Total 8,289,962 100.0% $32,494,711 100.0%
========= ====== =========== ======
</TABLE>
The foregoing computations assume no exercise of warrants or stock options
outstanding at September 30, 1996, at which date there were 1,292,517 shares
of Common Stock issuable upon exercise of outstanding options at a weighted
average exercise price of $2.20 per share, of which options to purchase
329,330 shares of Common Stock were exercisable, and 79,696 shares of Common
Stock issuable of upon exercise of outstanding warrants at a weighted average
exercise price of $3.98 per share. See "Management--Stock Plans" and
"Description of Capital Stock."
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the period from inception
(November 29, 1988) through March 31, 1993, the nine months ended December
31, 1995, and for each of the two years in the period ended March 31, 1995
are derived from Financial Statements of the Company which have been audited
by Ernst & Young LLP, independent auditors. The financial statements as of
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 and the
report of Ernst & Young LLP relating thereto are included elsewhere herein.
The financial data for the nine months ended September 30, 1996 and 1995 are
derived from unaudited financial statements included elsewhere herein. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for
these periods. Operating results for the nine months ended September 30, 1996
are not indicative of the results that may be expected for the entire year
ending December 31, 1996. 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>
Nine Months
Period from inception Year Ended Nine Months Ended
(November 29, 1988) March 31, Ended September 30,
through March 31, --------------------- December 31, ----------------------
1993 1994 1995 1995 (1) 1995 1996
--------------------- --------- ----------- -------------- ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $1,000 $1,700 $ 412 $ 900 $ 900 $ 9,635
Operating expenses:
Research and development 470 1,382 2,407 4,165 2,989 4,952
General and administrative 841 897 825 1,505 1,349 2,212
------ ------ ------ ------ ------ -------
Total operating expenses 1,311 2,279 3,232 5,670 4,338 7,164
------ ------ ------ ------ ------ -------
Operating income (loss) (311) (579) (2,820) (4,770) (3,438) 2,471
Interest income (expense), net 41 (38) 42 (123) (37) (133)
------ ------ ------ ------ ------ -------
Net income (loss) $ (270) $(617) $(2,778) $(4,893) $(3,475) $2,338
====== ====== ====== ====== ====== =======
Pro forma:
Net income (loss) per share (2) $ (0.70) $ 0.30
Shares used in per share
calculations (2) 6,973 7,711
</TABLE>
<TABLE>
<CAPTION>
March 31,
-----------------------------
December 31, September 30,
1993 1994 1995 1995 (1) 1996
-------- --------- --------- -------------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 114 $ 4,154 $ 1,079 $ 150 $11,735
Working capital (deficit) (142) 3,574 516 (1,327) 10,882
Total assets 1,118 5,050 2,141 1,211 13,815
Capital lease obligations, less current portion 13 292 107 342 198
Redeemable convertible preferred stock -- 3,941 3,949 3,956 17,166
Total stockholders' equity (deficit) 773 200 (2,552) (7,336) (5,151)
</TABLE>
- -------------
(1) The Company changed its fiscal year end from March 31 to December 31
commencing with the fiscal year ended December 31, 1995.
(2) See Note 2 to Notes to Financial Statements for a description of the
calculation of pro forma net income (loss) per share.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussion in this Prospectus contains
certain forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and
intentions. The cautionary statements made in this Prospectus should be read
as being applicable to all related forward-looking statements wherever they
appear in this Prospectus. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute
to such differences include those discussed in "Risk Factors," as well as
those discussed elsewhere herein.
Overview
The Company was incorporated in 1988. 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 September 30, 1996 aggregating
approximately $6.2 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 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 nine-month period
ended September 30, 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
Investigational New Drug ("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. 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 Nine Months Ended September 30, 1996 and 1995
Revenues. Revenues for the nine-month period ended September 30, 1996 were
$9.6 million as compared to $900,000 for the corresponding period of 1995.
Revenues for the nine-month period ended September 30, 1996 included $6.0
million in license fees and approximately $665,000 of development contract
revenue from Mallinckrodt. Revenues for the period 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 September 30, 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 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
nine-month period ended September 30, 1996 were $5.0 million as compared to
$3.0 million for the corresponding period of 1995. This increase was due
primarily to increased MS-325 development costs associated with the
commencement of Phase I clinical trials in September 1996.
18
<PAGE>
General and administrative expenses. General and administrative expenses for
the nine-month period ended September 30, 1996 were $2.2 million as compared
to $1.3 million for the corresponding period of 1995. The $900,000 increase
was due to increased personnel costs associated with recruitment and
compensation of additional senior managers (approximately $235,000) and
increased expenses for strategic consulting and business development
activities ($128,000). 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 the 1996 period 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 income and expense. Interest income for the nine-month period ended
September 30, 1996 was $140,000 as compared to $63,000 for the corresponding
period of 1995. This increase was due to higher average cash available for
investment. Interest expense for the nine-month period ended September 30,
1996 was $274,000 as compared to $100,000 for the corresponding period of
1995. This increase was due to higher borrowings under promissory notes and
bridge loans.
Comparison of Nine Months Ended December 31, 1995 and Years Ended March 31,
1995 and 1994
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 years ended March 31, 1995 and 1994 of $411,000 and $1.7 million,
respectively, 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 and $1.4 million for the
year ended March 31, 1994. The respective year-to-year increases were
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 ended March 31, 1995 and $897,000 for the
year ended March 31, 1994, 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. General and administrative expenses for the
year ended March 31, 1994 exceeded those for the year ended March 31, 1995
due primarily to a finder's fee paid in 1994 to a third party in connection
with identifying possible collaborative partners for the Company's liver
agent development program.
Interest income and expense. Interest income for the nine-month period ended
December 31, 1995 was $28,000 as compared to $121,000 and $29,000 for the
years ended March 31, 1995 and 1994, respectively. The decrease in interest
income for the nine-month period ended December 31, 1995 as compared to the
prior fiscal period was due to lower average cash available for investment.
Interest income for the year ended March 31, 1995 increased over the prior
fiscal year primarily due to higher average invested cash balances resulting
from the Series B Convertible Preferred Stock financing completed in March
1994. Interest expense for the nine-month period ended December 31, 1995 was
$151,000 as compared to $79,000 and $67,000 for the years ended March 31,
1995 and 1994, respectively. The increased interest expense for the
nine-month period ended
19
<PAGE>
December 31, 1995 was due primarily to additional interest expense related to
the convertible promissory notes issued in May and November 1995.
Liquidity and Capital Resources
The Company has financed its operations since inception principally through
the sale of its Preferred Stock, with proceeds therefrom totaling $18.4
million (including $3.8 million from convertible debt securities that were
converted to 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 $2.2 million of capital expenditures. From
inception through September 30, 1996, the Company has incurred $19.7 million
of costs attributable to operating activities, including $13.4 million
related to the research and development of technology and new product
candidates, including MS-325.
During the nine-month period ended September 30, 1996, operating activities
provided $2.6 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 used $756,000 of cash
primarily for the purchase of fixed assets, consisting principally of
laboratory and office equipment. Financing activities during the nine-month
period ended September 30, 1996 provided $9.8 million of cash primarily in
the form of net proceeds from the sale of the Company's preferred stock,
totaling $9.3 million and the issuance of notes payable aggregating $900,000,
which were subsequently converted into 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 $136,000
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 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, 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 September
30, 1996 and 1995. At September 30, 1996, the Company had net operating loss
carryforwards of approximately $7.8 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 this 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 $300,000 at
September 30, 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.
20
<PAGE>
The Company's principal source of liquidity consists of cash and cash
equivalents totaling $11.7 million at September 30, 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
net proceeds of this offering and existing cash and cash equivalents 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.
21
<PAGE>
BUSINESS
Overview
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 CAD and 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
and 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 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
22
<PAGE>
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 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.
23
<PAGE>
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
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:
(bullet) 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.
(bullet) 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.
(bullet) 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.
(bullet) 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.
(bullet) 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.
24
<PAGE>
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, 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. See "Risk Factors--Dependence on MRI Advancements for Cardiac
Applications." 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.
25
<PAGE>
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 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 diagnosit 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
26
<PAGE>
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 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 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.
27
<PAGE>
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,
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, although not completed, 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
28
<PAGE>
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 Phase II and Phase III clinical trials for multiple cardiology and
radiology indications. The Company intends to conduct the clinical trial
programs for cardiology and radiology indications concurrently to the extent
possible.
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 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
29
<PAGE>
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.
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 anticipates that the final audit of
the Phase I data will be completed by February 1997. Assuming successful
completion of the Phase I clinical trial, the Company intends to conduct
concurrent but separate Phase II and Phase III clinical trials for different
cardiology and radiology indications.
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
30
<PAGE>
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.
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. See "Risk
Factors--Dependence on Strategic Partners."
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.
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<PAGE>
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 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
FDA-approved targeted vascular contrast agents for use with MRI. However,
there are a number of non-specific MRI agents approved 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. See "Risk
Factors--Uncertainty of Market Acceptance of Technology and Products."
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
32
<PAGE>
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 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 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,
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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. See "Risk Factors--Uncertainty Regarding Patents and
Proprietary 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 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.
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
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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. See "Risk
Factors--Uncertainty Regarding Patents and Proprietary Rights."
Manufacturing
The Company currently manufactures, as part of its ongoing development
efforts, small non-GMP batches of MS-325 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
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 "Business--Strategic Alliances," "Risk
Factors--Uncertainty Regarding Patents and Proprietary Rights," "--Limited
Manufacturing Capability" and "--Dependence on Suppliers."
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.
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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 application for an IND, 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 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
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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 "Business--Patents and Proprietary
Rights" and "Risk Factors--Uncertainty Regarding 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 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 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
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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.
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.
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Facilities
The Company leases a total of 17,050 square feet of space at 71 Rogers
Street and adjacent locations, all in Cambridge, Massachusetts. The lease
runs until December 31, 1997. The Company believes that its current
facilities are adequate to meet its requirements for the foreseeable future.
Employees
As of November 30, 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. See "Management--Executive Officers and
Directors."
Legal Proceedings
The Company is not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers, directors and key employees of the Company as of December 31, 1996:
<TABLE>
<CAPTION>
Name Age Position
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael D. Webb 38 President, Chief Executive Officer, Secretary and Director
James E. Smith, Ph.D. 53 Executive Vice President, Research and 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 and Corporate Development
Jeffrey R. Lentz 43 Vice President, Finance and Administration, Chief Financial Officer,
Treasurer and Assistant Secretary
Christopher F. O. Gabrieli (1)(2) 36 Chairman of the Board
Luke B. Evnin, Ph.D. (1)(2) 33 Director
Stanley T. Crooke, M.D., Ph.D. (1) 51 Director and Chairman of the Scientific Advisory Board
</TABLE>
- -------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Michael D. Webb joined EPIX in December 1994 from Ciba-Corning Diagnostics,
Inc., where he was most recently Senior Vice President, Worldwide Marketing
and Strategic Planning. During his tenure at Ciba from April 1989 to December
1994, Mr. Webb's achievements included the development and commercialization
of the ACS:180(r) immunodiagnostics system. From 1984 to 1989, Mr. Webb was a
senior consultant at Booz, Allen & Hamilton, Inc., specializing in healthcare
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 has over 20 years experience in the in vivo diagnostics
industry. Prior to joining EPIX in February 1996, Dr. Smith worked for 16
years at Du Pont Merck 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, Chief Scientific Officer, 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 is the
primary inventor of the Company's core technology and is the originator of
several types of MRI technology, including hepatobiliary (liver-enhancing)
agents, vascular agents, tissue blood flow agents, and strategies to increase
the magnetic efficiency of MRI agents in the body. He has written over 50
scientific publications and two books, and has been named on several U.S.
patents. Dr. Lauffer holds a Ph.D. degree in inorganic chemistry from Cornell
University.
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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 was
Principal Investigator for a Phase III vascular imaging trial of Prohance(R),
the nonspecific MRI agent now sold by Bracco. Dr. Yucel is the editor and
co-author of Magnetic Resonance Angiography (McGraw-Hill, 1995). 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. She has filed a number of applications for INDs and ten
NDAs, along with several medical device applications. 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
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 from
March 1993 to August 1994 and as a senior manager with Ernst & Young LLP from
November 1986 to November 1992. Mr. Lentz is a certified public accountant
and holds an M.S. degree from Northeastern University.
Christopher F. O. Gabrieli has served as a director of the Company since
February 1994. He has been a General Partner at Bessemer Venture Partners in
Wellesley Hills, Massachusetts since September 1986, where he is responsible
for the firm's venture capital investment activities in healthcare and the
life sciences. He currently serves on the boards of directors of Isis
Pharmaceuticals, where he was a co-founder, Opta Food Ingredients and several
privately held biomedical companies. Prior to joining Bessemer, Mr. Gabrieli
was a founder, President and director of GMIS, Inc., a supplier of clinical
information systems. Mr. Gabrieli is a graduate of Harvard College.
Dr. Luke B. Evnin has served as a director of the Company since February
1994. He is a General Partner at Accel Partners, where he has been involved
in the firm's biomedical investing activities since September 1990. He
currently serves on the boards of directors of several private companies
including Iotek, Sonix Technologies, and Signal Pharmaceuticals. Dr. Evnin
received his Ph.D. degree from the Department of Biochemistry at the
University of California at San Francisco.
Dr. Stanley T. Crooke has served as a director of the Company since January
1996. Since 1987, he has been Chairman and Chief Executive Officer of Isis
Pharmaceuticals in Carlsbad, California. Dr. Crooke serves on the boards of
directors of GeneMedicine, SIBIA and the Biotechnology Industry Organization.
Dr. Crooke holds an M.D. degree and a Ph.D. degree in pharmacology, both from
Baylor College of Medicine, where Dr. Crooke has served as an adjunct
professor of pharmacology.
The Company, the holders of the Company's Series A and Series B Convertible
Preferred Stock and certain of the holders of the Company's Common Stock (the
"Common Holders"), including Dr. Lauffer, are parties to an Amended and
Restated Stockholders' Voting Agreement pursuant to which each such
stockholder has agreed to elect (i) two directors designated by the Common
Holders and the Series A stockholders, voting together as a class, (ii) two
directors designated by the Series B stockholders, one to be designated by
Accel IV L.P. and certain related persons and one to be designated by
Bessemer Venture Partners III L.P. and (iii) two directors mutually agreeable
to Dr. Lauffer and the holders of a majority of then outstanding shares of
Series
41
<PAGE>
B Convertible Preferred Stock. Drs. Lauffer and Evnin and Mr. Gabrieli were
elected pursuant to this agreement. This agreement will automatically
terminate upon the consummation of this offering.
The Company's Restated Certificate, to be filed concurrently with the
closing of this offering, provides for a classified board of directors
consisting of three classes, with each class being as nearly equal in number
as possible. The term of one class expires and their successors are elected
for a term of three years at each annual meeting of the Company's
stockholders. The Company has designated two class I directors (Drs. Evnin
and Lauffer), one class II director (Dr. Crooke) and two class III directors
(Messrs. Gabrieli and Webb). These class I, class II and class III directors
will serve until the annual meeting of stockholders to be held in 1997, 1998
and 1999, respectively, and until their respective successors are duly
elected and qualified, or until their earlier resignation or removal. The
Restated Certificate provides that directors may be removed only for cause by
a majority of stockholders. See "Description of Capital Stock--Anti-Takeover
Measures." There are no family relationships among any of the directors or
executive officers.
Board Committees
The Company has standing Audit and Compensation Committees of the Board of
Directors. The Audit Committee consists of Dr. Evnin and Mr. Gabrieli. The
primary function of the Audit Committee is to assist the Board of Directors
in the discharge of its duties and responsibilities by providing the Board
with an independent review of the financial health of the Company and of the
reliability of the Company's financial controls and financial reporting
systems. The Audit Committee reviews the general scope of the Company's
annual audit, the fee charged by the Company's independent accountants and
other matters relating to internal control systems.
The Compensation Committee of the Board of Directors determines the
compensation to be paid to all executive officers of the Company, including
the Chief Executive Officer. The Compensation Committee's duties include the
administration of the Company's Amended and Restated 1992 Equity Incentive
Plan (the "Equity Plan") and the 1996 Employee Stock Purchase Plan. The
Compensation Committee is currently composed of Drs. Crooke and Evnin and Mr.
Gabrieli.
Scientific Advisory Board
The Company's Scientific Advisory Board consists of individuals with
demonstrated expertise in various fields who advise the Company concerning
long-term scientific planning, research and development. Members also
evaluate the Company's research program, recommend personnel to the Company
and advise the Company on technology matters. While the Scientific Advisory
Board has not met collectively, its members have been available individually
to advise the Company on specific scientific and technical issues. Scientific
Advisory Board members are compensated on a time and expenses basis and some
members have received nonstatutory stock options under the Equity Plan. The
Company has entered into consulting agreements with a number of the
Scientific Advisory Board members.
No member of the Scientific Advisory Board is employed by the Company, and
members may have other commitments to or consulting or advisory contracts
with their employers or other entities that may conflict or compete with
their obligations to the Company. Accordingly, such persons are expected to
devote only a small portion of their time to the Company. The current members
of the Company's Scientific Advisory Board are:
Stanley T. Crooke, M.D., Ph.D., Chairman of the Scientific Advisory Board.
See "Management--Executive Officers and Directors."
Lawrence H. Cohn, M.D., is Professor of Surgery at Harvard Medical School
and Chief of Cardiac Surgery at the Brigham and Women's Hospital in Boston.
He is a member of the Council on Cardiovascular Surgery at the American Heart
Association and serves on the editorial boards of the Journal of the American
College of Cardiology, American Heart Journal, the Journal of Cardiovascular
Surgery, and the Harvard Heart Letter. Dr. Cohn is an author of over 300
scientific papers in the area of cardiovascular surgery.
Richard S. J. Frackowiak, M.D., is Professor and Head of the Wellcome
Department of Cognitive Neurology and Director of the Leopold Muller
Functional Imaging Laboratory at the Institute of Neurology in London. He is
also Consultant Neurologist at the National Hospital for Neurology and
Neurosurgery. Dr. Frackowiak is Editor-in-Chief of NeuroImage: a Journal of
Brain Function and Deputy Chief Editor of the Journal of
42
<PAGE>
Cerebral Blood Flow and Metabolism. He has published over 200 scientific
papers in the area of function brain imaging.
Jean-Marie Lehn, Ph.D., is Professor of Chemistry at the Universite Louis
Pasteur, Strasbourg, France. He has authored over 400 scientific papers in
the areas of organic, bio-organic and inorganic chemistry. Dr. Lehn shared
the 1987 Nobel Prize in Chemistry for the design of the first cryptand, a
cage-like complexing agent for metal ions.
Kenneth N. Raymond, Ph.D., is Professor of Chemistry at the University of
California, Berkeley. He is Chair of the Inorganic Division of the American
Chemical Society and serves on the editorial boards of Advances in Inorganic
Chemistry, the Journal of Biological Inorganic Chemistry, the Journal of
Coordination Chemistry, and BioMetals. Dr. Raymond has published over 260
scientific papers on the structural, biological and medical aspects of metals
such as iron and gadolinium.
Bruce R. Rosen, M.D., Ph.D., is an Associate Professor of Radiology at
Harvard Medical School and Co-Director of the Massachusetts General Hospital
NMR Center. He is also Director of the Radiological Sciences Joint Program at
the Harvard/Massachusetts Institute of Technology Division of Health Sciences
and Technology. Dr. Rosen serves on the Board of Trustees of the
International Society of Magnetic Resonance in Medicine and is on the
editorial boards of Magnetic Resonance Imaging and the Journal of Computer
Assisted Tomography. He is also Associate Editor of Human Brain Mapping. Dr.
Rosen has published over 100 scientific papers in MRI, including the first
studies of real-time cognitive activity in the human brain.
Burton E. Sobel, M.D., is the E. L. Amidon Professor and Chairman of the
Department of Medicine and Professor of Biochemistry at the University of
Vermont. He is also Physician-in-Chief at Fletcher Allen Health Care in
Burlington, VT. Dr. Sobel is a Fellow of the American College of Cardiology
and the Royal Society of Medicine and has various editorial positions with
Circulation, American Journal of Cardiology, Coronary Artery Disease, and
Fibrinolysis. He has published extensively in the area of coronary artery
disease.
Christopher T. Walsh, Ph.D., is the Hamilton Kuhn Professor and Chairman of
the Department of Biological Chemistry and Molecular Pharmacology at Harvard
Medical School. He is a member of the National Academy of Sciences, the
Institute of Medicine, and the National Institutes of Health General Medical
Sciences Council. Dr. Walsh serves on the Scientific Advisory Boards of KOSAN
Biosciences and IDUN Pharmaceuticals, and he is a director of LeukoSite. He
has over 400 publications in the areas of enzymatic reactions and the
mechanisms of drug action.
Director Compensation
Directors currently receive no compensation for their service on the
Company's Board of Directors except pursuant to the 1996 Director Stock
Option Plan (the "Director Plan") described below.
1996 Director Stock Option Plan. In December 1996, the Board of Directors
and stockholders of the Company adopted 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
optionee is still a director of the Company at the opening of business on
such date. The Options have a term of ten years. The exercise price for the
Options is equal to the last sale price for the Common Stock on the business
day immediately preceding the date of grant, as reported on the Nasdaq
National Market. The exercise price may be paid in cash or shares of Common
Stock, or a combination of both.
43
<PAGE>
Executive Compensation
The following table sets forth certain compensation information for the
Chief Executive Officer of the Company and the one other executive officer of
the Company whose salary and bonus for the year ended December 31, 1996
exceeded $100,000 (together, the "Named Executive Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------------- ---------------------
Securities Underlying
Name and Principal Position Year Salary Bonus Options (#) All Other Compensation
- -------------------------------------- ------ -------------- --------- --------------------- ------------------------
<S> <C> <C> <C> <C> <C>
Michael D. Webb, 1996 $175,000 -- 83,333 --
President and Chief Executive Officer 1995 $175,000 -- -- $30,000 (1)
Randall B. Lauffer, Ph.D., 1996 $160,000 -- -- $ 1,100 (2)
Chief Scientific Officer 1995 $158,367 -- -- $ 1,100 (2)
James E. Smith, Ph.D., 1996 $200,615 (4) -- 106,666 --
Executive Vice President, 1995 $ 82,238 (5) -- -- --
Research and Development (3)
Susan M. Flint, (6) 1996 $112,300 -- 16,666 --
Vice President, Regulatory Affairs 1995 $ 26,282 (7) -- 46,666 --
Stephen C. Knight, M.D., 1996 $ 80,000 $30,000 133,333 --
Vice President, Strategic Planning
and Corporate Development (8)
</TABLE>
- -------------
(1) Consists of payment made upon commencement of employment with the
Company.
(2) Consists of life insurance premiums paid by the Company on behalf of Dr.
Lauffer on a policy for the benefit of Dr. Lauffer.
(3) Dr. Smith became an employee of the Company in February 1996. Prior
thereto, he was engaged as a consultant to the Company.
(4) Includes $37,200 compensation earned for consulting services.
(5) Includes $82,238 compensation earned for consulting services.
(6) Ms. Flint became an employee of the Company in April 1995. Prior thereto,
she was engaged as a consultant to the Company.
(7) Consists of compensation earned for consulting services.
(8) Dr. Knight became an employee of the Company in July 1996.
44
<PAGE>
The following table sets forth certain information regarding options granted
during the fiscal year ended December 31, 1996 by the Company to the Named
Executive Officers.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Individual Grant Value
-------------------------------------------------------- at Assumed Annual Rates
Number of Percent of of Stock Price
Securities Total Options Appreciation
Underlying Granted to Exercise or for Option Terms (1)
Options Employees in Base Price Expiration -----------------------
Name Granted (#) Fiscal Year ($/share) Date 5% 10%
----------------------------------------- --------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Webb 83,333 (2) 11.1% $ 5.250 8/7/06 $275,140 $697,260
Randall B. Lauffer, Ph.D. 0 -- -- -- -- --
James E. Smith, Ph.D. 100,000 (3) 13.3% $ 0.825 2/1/06 $ 51,884 $131,484
33,333 (4) 4.4% $ 5.250 8/7/06 $110,055 $278,902
Susan M. Flint 16,666 (5) 2.2% $ 5.250 8/7/06 $ 55,026 $139,447
Stephen C. Knight, M.D. 133,333 (6) 17.7% $ 4.500 6/17/06 $377,336 $956,243
</TABLE>
- -------------
(1) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the price of the underlying Common Stock. No gain to the
optionees is possible without an increase in price of the underlying
Common Stock, which will benefit all stockholders proportionately.
(2) The option becomes exercisable as to 16.8% of the shares covered by such
option:
(bullet) upon the earlier of (i) commencement of Phase III clinical trials
for MS-325 or a clinically equivalent vascular agent as determined
by the Company's Board of Directors or (ii) August 7, 2005;
(bullet) upon the earlier of (i) the first anniversary of the date of
commencement of Phase III clinical trials for MS-325 or a clinically
equivalent vascular agent as determined by the Company's Board of
Directors or (ii) August 7, 2005;
(bullet) upon the earlier of (i) the second anniversary of the date of
commencement of Phase III clinical trials for MS-325 or a clinically
equivalent vascular agent as determined by the Company's Board of
Directors or (ii) August 7, 2005;
(bullet) upon the earlier of (i) the first anniversary of the date of receipt
of NDA approval for MS-325 or a clinically equivalent vascular agent
as determined by the Company's Board of Directors or (ii) August 7,
2005; and
(bullet) upon the earlier of (i) the second anniversary of the date of
receipt of NDA approval for MS-325 or a clinically equivalent
vascular agent as determined by the Company's Board of Directors or
(ii) August 7, 2005.
The option also becomes exercisable as to 16% of the shares covered by such
option upon the earlier of (i) the date of receipt of NDA approval for
MS-325 or a clinically equivalent vascular agent as determined by the
Company's Board of Directors or (ii) August 7, 2005.
(3) The option became exercisable as to 16% of the shares covered by such
option on February 23, 1996. The option also became exercisable as to 20%
of the shares on August 21, 1996 (30 days after the FDA's receipt of the
Company's MS-325 IND filing for MS-325). The option becomes exercisable
as to 16% of the shares covered by such option February 23 of each of
1997, 1998, 1999 and 2000.
(4) The option becomes exercisable as to 50% of the shares covered by such
option upon the earlier of (i) commencement of Phase III clinical trials
for MS-325 or a clinically equivalent vascular agent as determined by the
Company's Board of Directors or (ii) August 7, 2004. The option also
becomes exercisable as to 50% of the shares covered upon the earlier of
(i) receipt of NDA approval for MS-325 or a clinically equivalent
vascular agent as determined by the Company's Board of Directors or (ii)
August 7, 2004.
45
<PAGE>
(5) The option becomes exercisable as to 50% of the shares covered by such
option upon the earlier of (i) commencement of Phase III clinical trials
for MS-325 or a clinically equivalent vascular agent as determined by the
Company's Board of Directors or (ii) August 7, 2004. The option also
becomes exercisable as to 50% of the shares covered by such option upon
the earlier of (i) receipt of NDA approval for MS-325 or a clinically
equivalent vascular agent as determined by the Board of Directors or (ii)
August 7, 2004.
(6) The option became exercisable as to 12.5% of the shares covered by such
option on July 17, 1996. The option becomes exercisable as to 12.5% of
the shares covered by such option on July 17 of each of 1997, 1998, 1999,
2000 and 2001. The option also becomes exercisable as to 25% of the
shares covered by such option on the earlier of (i) completion of a major
corporate milestone which he has personally led for the Company as
determined by the Company's Chief Executive Officer and on approval by
the Company's Board of Directors or (ii) June 17, 2005.
The following table sets forth certain information concerning exercisable
and unexercisable stock options held by the Named Executive Officers as of
December 31, 1996:
Aggregated Option Exercises In Last Fiscal Year And
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying
Unexercised Value of Unexercised
Shares Options at In-The-Money Options
Acquired Fiscal Year-End at Fiscal Year-End (1)
in Value ------------------------------- -------------------------------
Name Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- ----------- ------------ -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Webb 33,333 $268,197 105,179 241,955 $846,270 $1,547,105
Randall B. Lauffer, Ph.D.
(2) -- -- -- -- -- --
James E. Smith, Ph.D. -- -- 42,666 97,333 327,462 599,532
Susan M. Flint -- -- 14,667 48,665 118,012 311,632
Stephen C. Knight, M.D. -- -- 16,666 116,667 66,664 466,668
</TABLE>
- -------------
(1) Based on the difference between the fair market value of the underlying
shares of Common Stock on December 31, 1996 as determined by the Board of
Directors and the option exercise price.
(2) Dr. Lauffer does not hold any stock options.
46
<PAGE>
Stock Plans
Amended and Restated 1992 Equity Incentive Plan. The Company's 1992 Equity
Incentive Plan was adopted in July 1992 and amended and restated in December
1996 (as amended and restated, the "Equity Plan"). The Equity Plan is
designed to provide the Company flexibility in awarding equity incentives by
providing for multiple types of incentives that may be awarded. The purpose
of the Equity Plan is to attract and retain key employees of and consultants
of the Company and to enable them to participate in the long-term growth of
the Company. The Equity Plan provides for the grant of stock options
(incentive and nonstatutory), 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, each of whose members is a
"non-employee director" within the meaning of Rule 16b-3 under the
Securities Act. The Compensation Committee of the Board of Directors
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. The exercise price of all "incentive
stock options" within the meaning of Section 422 of the Code, granted under
the Equity Plan must be at least equal to 100% of the fair market value of
the option shares on the date of grant. The term of any incentive stock
option granted under the Equity Plan may not exceed ten years.
As of December 31, 1996, options to purchase an aggregate of 1,497,644
shares of Common Stock had been granted under the Equity Plan. Options to
purchase 172,574 shares were exercised as of such date and options to
purchase 47,267 shares were cancelled. Of the options to purchase an
aggregate of 1,277,803 shares of Common Stock that were outstanding as of
such date, options to purchase 392,933 shares were exercisable. No stock
appreciation rights or award other than option grants have been granted under
the Equity Plan.
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 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 termina-tion 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.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company. The Compensation Committee also administers various
incentive compensation and benefit plans. See "Management--Stock Plans." The
Compensation Committee currently consists of Drs. Crooke and Evnin and Mr.
Gabrieli. Dr. Evnin is a General Partner of Accel Partners, a venture capital
firm and a principal stockholder of the Company. Mr. Gabrieli is a General
Partner of Bessemer Venture Partners, a venture capital firm and a principal
stockholder of the Company. See "Certain Transactions" and "Principal
Stockholders."
47
<PAGE>
CERTAIN TRANSACTIONS
In May 1995, the Company issued convertible promissory notes to Accel IV
L.P., Bessemer Venture Partners III L.P. and certain related persons in the
aggregate principal amount of $1,500,000 bearing interest at a rate of 10%
per annum and convertible into shares of Series C Convertible Preferred Stock
at a conversion price of $4.54 per share (the "1995 Convertible Notes"). Dr.
Luke B. Evnin, a director of the Company, is a General Partner of Accel IV
Associates L.P., the General Partner of Accel IV L.P. See footnotes (2) and
(10) to the table set forth under "Principal Stockholders." Christopher F.O.
Gabrieli, Chairman of the Company, is a General Partner of Deer III & Co.,
the General Partner of Bessemer Venture Partners III L.P. See footnotes (3)
and (9) to the table set forth under "Principal Stockholders."
In November and December 1995, Accel IV L.P., Bessemer Venture Partners III
L.P. and certain related persons made bridge loans to the Company in an
aggregate principal amount of $1,200,000 in exchange for promissory notes
bearing interest at a rate of 10% per annum and convertible into shares of
the Company's securities in the Company's next permanent equity financing
(the "1995 Bridge Notes").
In January 1996, the 1995 Convertible Notes were amended and restated (the
"Amended 1995 Convertible Notes") to, among other things, change the
conversion price to between $1.51 and $2.25 per share, depending on certain
events of conversion. At such time, the Company also issued additional
convertible promissory notes to the holders of the Amended 1995 Convertible
Notes in an aggregate principal amount of $1,515,862 (the "1996 Convertible
Notes") with the same terms as the Amended 1995 Convertible Notes in exchange
for cash and the surrender of the 1995 Bridge Notes (including accrued
interest thereon).
In February 1996, Accel IV L.P., Bessemer Venture Partners III L.P. and
certain related persons made bridge loans to the Company in the aggregate
principal amount of $600,000 in exchange for promissory notes bearing
interest at a rate of 10% per annum (the "1996 Bridge Notes").
In March 1996, the Company entered into a Development and License Agreement
with Daiichi. Pursuant to such agreement, the Company granted Daiichi an
exclusive license to develop and market MS-325 in Japan in exchange for an
up-front fee of $3.0 million and future milestone payments for up to an
aggregate of $3.3 million and royalty payments on net sales of MS-325 in
Japan. In addition, pursuant to the agreement with Daiichi, in May and August
1996, the Company sold an aggregate of 868,329 shares of Series E Convertible
Preferred Stock to Daiichi (which will convert into an aggregate amount of
578,886 shares of Common Stock upon the closing of this offering) at a price
of $5.76 per share.
In May 1996, the Company sold 1,700,002 shares of Series D Convertible
Preferred Stock (which will convert into 1,133,325 shares of Common Stock
upon the closing of this offering) at a price of $3.00 per share (the "Series
D Financing"). In connection with the Series D Financing, Accel IV L.P.,
Bessemer Venture Partners III L.P. and certain related persons surrendered
their respective 1996 Bridge Notes as partial payment for their respective
shares of Series D Preferred Stock and each received cash payments from the
Company in the aggregate amount of $9,698 for accrued interest on their
respective 1996 Bridge Notes. Through the Series D Financing, Accel IV L.P.
and certain related persons purchased 266,668 shares (244,267 shares held by
Accel IV L.P., 9,867 shares held by Accel Investors '93 L.P., 5,067 shares
held by Accel Keiretsu L.P., 5,867 shares held by Ellmore C. Patterson
Partners and 1,600 shares held by Prosper Partners), Bessemer Venture
Partners III L.P. and certain related persons purchased 266,667 shares
(213,696 shares held by Bessemer Venture Partners III L.P. and 40,983 shares
held by certain related persons, including 9,990 shares held directly by Mr.
Gabrieli and 1,998 shares held by the Gabrieli Family Foundation, of which
Mr. Gabrieli is President), affiliates of Advent International Corporation
purchased 666,667 shares (365,000 shares held by Rovent II Limited
Partnership, 200,000 shares held by Advent Performance Materials Limited
Partnership, 66,667 shares held by Adwest Limited Partnership and 35,000
shares held by Advent Partners Limited Partnership) and Fidelity Ventures
Ltd. purchased 500,000 shares.
Concurrently with the Series D Financing, Accel IV L.P., Bessemer Ventures
Partners III L.P. and certain related persons converted the entire principal
amount of their respective Amended 1995 Convertible Notes and 1996
Convertible Notes, plus accrued interest, into 1,432,318 shares of Series C
Convertible Preferred Stock (which will convert into 954,872 shares of Common
Stock upon the closing of this offering) as follows: 656,006 shares held by
Accel IV L.P.; 26,498 shares held by Accel Investors '93 L.P.; 13,607 shares
held by Accel Keiretsu L.P.; 15,755 shares held by Ellmore C. Patterson
Partners; 4,296 shares held by Prosper Partners); 642,837 shares
48
<PAGE>
held by Bessemer Venture Partners III L.P.; and 43,386 shares held by certain
persons related to Bessemer Venture Partners III L.P., including 25,328
shares held directly by Mr. Gabrieli and 4,605 shares held by the Gabrieli
Family Foundation.
In May 1996, the Company repurchased from Randall B. Lauffer, Ph.D., a
director and executive officer of the Company, 66,666 shares of Common Stock
at a price per share of $4.05.
In June 1995 and April 1996, the Company made two loans to Dr. Lauffer, each
in the principal amount of $50,000 and bearing interest at the rate of 7.31%
and 6.51% per annum, respectively (the Applicable Federal Rates for long term
loans announced for such months), and each secured by a pledge of 14,814
shares of the Company's Common Stock held by Dr. Lauffer. As of November 30,
1996, the outstanding amounts on these loans were $55,352.82 and $52,140.27,
respectively. In May 1996, the Company made a loan to Dr. Lauffer in the
principal amount of $180,000 bearing interest at the rate of 6.83% per annum
(the Applicable Federal Rate for long term loans announced for May 1996) and
secured by a pledge of 44,444 shares of the Company's Common Stock held by
Dr. Lauffer. As of November 30, 1996, the outstanding amount on this loan was
$186,197.52. Each of these loans is subject to acceleration upon the
voluntary termination of Dr. Lauffer's employment, among other events.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table and footnotes set forth certain information regarding
the beneficial ownership of the Company's Common Stock as of December 31,
1996 by (i) persons known by the Company to beneficially own 5% or more of
the Company's Common Stock, (ii) the Named Executive Officers, (iii) each
director of the Company and (iv) all current executive officers and directors
as a group:
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned (1)
-----------------------
Number of Shares
Beneficially Owned Before After
Beneficial Owners (1) Offering Offering
---------------------------------------------------------- --------------------- ----------- -----------
<S> <C> <C> <C>
Accel IV L.P. and certain related persons (2) 1,586,353 25.1% 19.1%
One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Bessemer Venture Partners III
L.P. and certain related persons (3) 1,575,395 24.9 18.9
Bessemer Venture Partners
1025 Old Country Road
Suite 205
Westbury, NY 11590
Daiichi Radioisotope Laboratories, Ltd. (4) 578,885 9.2 7.0
17-10, Kyobashi 1-chome Chuo-ku
Tokyo, 104 Japan
Affiliates of Advent International Corporation (5) 455,019 7.2 5.5
101 Federal Street
Boston, MA 02110
Fidelity Ventures Ltd. (6) 357,636 5.7 4.3
82 Devonshire Street, R25C
Boston, MA 02109
Michael D. Webb (7) 171,845 2.7 2.0
Randall B. Lauffer, Ph.D. (8) 1,266,664 20.1 15.2
Christopher F.O. Gabrieli (9) 1,575,395 24.9 18.9
Luke B. Evnin, Ph.D. (10) 1,586,353 25.1 19.1
Stanley T. Crooke, M.D., Ph.D. (11) 11,041 * *
All current executive officers and directors as a group
(10 persons) (12) 4,678,626 72.5% 55.7%
</TABLE>
- -------------
* Indicates less than 1%.
(1) Reflects the conversion, contemporaneously with the closing of this
offering, of all outstanding shares of preferred stock of the Company
into an aggregate of 4,750,289 shares of Common Stock. The number of
shares of Common Stock deemed outstanding after this offering includes
the 2,000,000 shares of Common Stock of the Company being offered for
sale in this offering. The persons and entities named in the table have
sole voting and investment power with respect to the shares beneficially
owned by them, except as noted below. Share numbers include shares of
Common Stock issuable pursuant to the outstanding options and warrants
that may be exercised within the 60-day period following December 31,
1996.
(2) Consists of the following shares and warrants exercisable within the
60-day period following December 31, 1996: 1,440,897 shares and a
warrant to purchase 12,213 shares held by Accel IV L.P.; 58,200 shares
and a warrant to purchase 493 shares held by Accel Investors '93 L.P.;
34,604 shares and a warrant to purchase 293 shares held by Ellmore C.
Patterson Partners; 29,885 shares and a warrant to purchase 253 shares
held by
50
<PAGE>
Accel Keiretsu L.P.; and 9,435 shares and a warrant to purchase 80 shares
held by Prosper Partners. Accel IV Associates L.P. is the General Partner
of Accel IV L.P. and has voting and investment control over the shares held
by Accel IV L.P. Arthur C. Patterson, James R. Swartz, James W. Bryer, Paul
H. Klingenstein, Luke B. Evnin, Eugene D. Hill, III, G. Carter Sednaoui and
the Swartz Family Partnership L.P. are the General Partners of Accel IV
Associates L.P. Messrs. Patterson, Swartz, Klingenstein, Bryer, Evnin and
Sednaoui are the General Partners of Accel Investors '93 L.P. and have
voting and investment control over shares held by Accel Investors '93 L.P.
Mr. Patterson is the sole General Partner of Ellmore C. Patterson Partners
and has voting and investment control over shares held by Ellmore C.
Patterson Partners. Accel Partners & Co. L.P. is the General Partner of
Accel Keiretsu L.P. and has voting and investment control over shares held
by Accel Keiretsu L.P. Messrs. Patterson and Swartz are the co-owners and
partners of Accel Partners & Co. L.P. Messrs. Klingenstein and Sednaoui are
the attorneys-in-fact for Prosper Partners and disclaim beneficial
ownership of shares held by Prosper Partners. Does not include shares that
certain persons and entities related to Accel IV L.P. may purchase in this
offering. Such persons and entities have indicated a non-binding intention
to purchase 110,740 shares in this offering. If such shares are purchased,
Accel IV L.P. and related persons and entities will own 20.4% of the Common
Stock outstanding after this offering.
(3) Includes the following shares held by the following persons and
entities related to Bessemer Venture Partners III L.P. as to which Bessemer
Venture Partners III L.P. has voting and investment control: William T.
Burgin (1,969); Robert H. Buescher (3,366); G. Felda Hardymon (18,366);
Christopher F.O. Gabrieli (32,357); David J. Cowan (5,125); Brimstone
Island Co. L.P. (1,969); Gabrieli Family Foundation (6,604); Diane N.
McPartlin (528); Ravi B. Mhatre (666); Gautam A. Prakash (3,713); Robi L.
Soni (1,705); Rodney A. Cohen (1,222); Richard R. Davis (4,045); Adam P.
Godfrey (1,662); Barbara M. Henagan (2,997); Belisarius Corp. (7,667);
Robert J.S. Roriston (947); Russell D. Sternlicht (639); Quentin Corp.
(11,152); and BVP III Special Situations L.P. (26,465). Also includes a
warrant to purchase 13,333 shares exercisable within the 60-day period
following December 31, 1996 held by Bessemer Venture Partners III L.P. Does
not include shares held by the following persons related to Bessemer
Venture Partners III L.P. as to which shares Bessemer Venture Partners III
L.P. does not possess voting or investment control: Michael Barash (1,666);
Neill H. Brownstein (6,184); C. Samantha Chen (1,124); Rachel J. Erickson
(660); and John K. Rodakis (1,321). Messrs. Burgin, Buescher, Gabrieli,
Hardymon and Cowen are the voting General Partners of Deer III & Co., the
General Partner of Bessemer Venture Partners III L.P. and BVP III Special
Situations L.P. and disclaim beneficial ownership of shares and the warrant
held by Bessemer Venture Partners III L.P. and shares held by BVP III
Special Situations L.P. except to the extent of their partnership interest.
Does not include shares that Bessemer Venture Partners III L.P. and certain
related persons and entities may purchase in this offering. Bessemer
Venture Partners III L.P. and certain related persons and entities have
indicated a non-binding intention to purchase 234,000 shares in this
offering. If such shares are purchased, Bessemer Venture Parners III L.P.
and certain related persons and entities will own 21.3% of the Common Stock
outstanding after this offering.
(4) Osamu Ikeda, M.D., President and Chief Executive Officer of Daiichi
Radioisotope Laboratories, Ltd., has voting and investment control over
these shares.
(5) Includes the ownership by the following venture capital funds managed by
Advent International Corporation: 249,125 shares held by Rovent II
Limited Partnership, 136,506 shares held by Advent Performance Materials
Limited Partnership, 45,501 shares held by Adwest Limited Partnership,
23,887 shares held by Advent Partners Limited Partnership. In its
capacity as manager of these funds, Advent International Corporation
exercises sole voting and investment power with respect to all shares
held by these funds. Advent International Corporation exercises its
voting and investment power through a group of three persons, none of
whom may act independently and a majority of whom must act in concert to
exercise voting or investment power over the beneficial holdings of such
entity. Therefore, no individual in this group is deemed to share voting
or investment power.
(6) Includes 16,375 shares subject to options exercisable within the 60-day
period following December 31, 1996 held by FMR Corp. FMR Corp. is the
parent and sole owner of Fidelity Capital Associates, Inc., the General
Partner of Fidelity Ventures Ltd.
(7) Includes 105,179 shares subject to options exercisable within the 60-day
period following December 31, 1996.
(8) Includes 26,666 shares held by Dr. Lauffer's wife and 16,000 shares held
in a trust for the benefit of Dr. Lauffer's children as to which Dr.
Lauffer disclaims beneficial ownership. Also includes 1,000,000 shares
held by a trust for the benefit of Dr. Lauffer as to which shares Dr.
Lauffer has voting and investment control.
51
<PAGE>
(9) See footnote (3) above. Mr. Gabrieli disclaims beneficial ownership of
these shares except to the extent of his proportionate pecuniary
interest therein or with respect to shares held in his name.
(10) See footnote (2) above. Dr. Evnin disclaims beneficial ownership of
these shares except to the extent of his proportionate pecuniary
interest in shares held by Accel IV L.P. and Accel Investors '93 L.P.
(11) Consists of options exercisable within the 60-day period following
December 31, 1996.
(12) See footnotes (2), (3) and (7)--(11) above. Includes an additional
140,464 shares subject to options exercisable within the 60-day period
following December 31, 1996.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of 15,000,000
shares of Common Stock, $0.01 par value per share, and 6,813,393 shares of
Preferred Stock, $0.01 par value per share. Upon the closing of this
offering, the authorized capital stock of the Company will consist of
15,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock
after giving effect to the amendment and restatement of the Company's
Restated Certificate of Incorporation to delete references to the Series A,
Series B, Series C, Series D and Series E Convertible Preferred Stock. Prior
to this offering, there were outstanding an aggregate of (i) 1,564,451 shares
of Common Stock and (ii) 6,738,076 shares of Preferred Stock, consisting of
93,691 shares of Series A Convertible Preferred Stock, 2,643,736 shares of
Series B Convertible Preferred Stock, 1,432,318 shares of Series C
Convertible Preferred Stock, 1,700,002 shares of Series D Convertible
Preferred Stock and 868,329 shares of Series E Convertible Preferred Stock,
which shares will automatically convert into an aggregate of 4,750,289 shares
of Common Stock upon the closing of this offering. As of the date of this
Prospectus, the Company had 60 shareholders. Upon the closing of this
offering, the Company will have 8,314,740 shares of Common Stock outstanding.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by (i) the provisions of the Company's Restated
Certificate and By-laws (each as filed and effected, respectively, on or
before the closing of this offering and included as exhibits to the
Registration Statement) and (ii) the provisions of applicable law.
Common Stock
Holders of Common Stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." Upon the liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in the assets
of the Company available for distribution to its stockholders, subject to the
preferential rights of any then outstanding shares of Preferred Stock. No
shares of Preferred Stock will be outstanding immediately following the
closing of this offering. The Common Stock outstanding upon the effective
date of the Registration Statement, and the shares offered by the Company
hereby, upon issuance and sale, will be fully paid and nonassessable.
Preferred Stock
The Company is currently authorized to issue 6,813,393 shares of Preferred
Stock. Upon the consummation of the offering, all of the issued and
outstanding shares of Preferred Stock will be converted into an aggregate of
4,750,289 shares of Common Stock. Immediately following such conversion, all
currently outstanding shares of Preferred Stock will be cancelled, 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.
Upon consummation of the offering, the Company's Board of Directors will
have the authority to issue up to 1,000,000 shares of Preferred Stock in one
or more series and to fix the relative rights, preferences, privileges,
qualifications, limitations and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences, sinking fund terms
and the number of shares constituting any series or the designation of such
series, without further vote or action by the stockholders. The Company
believes that the power to issue Preferred Stock will provide flexibility in
connection with possible corporate transactions. The issuance of Preferred
Stock could adversely affect the voting power of the holders of Common Stock
and restrict their rights to receive payment upon liquidation and could have
the effect of delaying, deferring or preventing a change-in-control of the
Company. See "Description of Capital Stock--Anti-Takeover Measures." The
Company has no present plans to issue any shares of Preferred Stock.
Stock Purchase Warrants
During the period from December 1992 to May 1996, the Company issued
warrants to purchase an aggregate of 75,317 shares of Preferred Stock in
connection with equipment leasing transactions and equity financings,
including (i) two warrants exercisable for an aggregate amount of 10,697
shares of Company's Series A Convertible Preferred Stock at an exercise price
of $11.21. per share (which will be exercisable for an aggregate of 36,618
shares of Common Stock at an exercise price of $3.27 per share upon
consummation of this offering), (ii) a warrant exercisable for 11,402 shares
of Company's Series B Convertible Preferred Stock at an exercise price of
$1.51 per share (which will be exercisable for 7,601 shares of Common Stock
at an exercise price of $2.27 upon consummation of this offering), (iii) a
warrant exercisable for 13,218 shares of Company's Series C
53
<PAGE>
Convertible Preferred Stock at an exercise price of $4.54 per share (which
will be exercisable for 8,812 shares of Common Stock at an exercise price of
$6.81 upon consummation of this offering) and (iv) six warrants exercisable
for an aggregate of 40,000 shares of Company's Series D Convertible Preferred
Stock at an exercise price of $3.00 per share (which will be exercisable for
an aggregate of 26,665 shares of Common Stock at an exercise price of $4.50
upon consummation of this offering) (collectively, the "Preferred Stock
Warrants"). The Preferred Stock Warrants will expire five years after the
date of the closing of the offering. The exercise price of each Preferred
Stock Warrant is subject to adjustment in the event of a stock split,
combination or dividend by the Company. The number and kind of securities for
which each Preferred Stock Warrant is exercisable is subject to adjustment in
the event of a merger or reclassification by the Company.
Anti-Takeover Measures
In addition to the Board of Directors' ability to issue shares of Preferred
Stock, the Restated Certificate and the By-laws contain several other
provisions that are commonly considered to discourage unsolicited takeover
bids. The Restated Certificate includes a provision classifying the Board of
Directors into three classes with staggered three-year terms, and the
By-laws include a provision prohibiting stockholder action by written consent
except as otherwise provided by law. Under the Restated Certificate and
By-laws, the Board of Directors may enlarge the size of the Board and fill
any vacancies on the Board. The Restated Certificate requires the approval of
the holders of at least 66-2/3% of the outstanding capital stock of the
Company prior to (i) the merger of the Company into another entity, (ii) the
sale or disposition of all or substantially all of the Company's assets,
(iii) the issuance or transfer by the Company of its securities having a
market value in excess of $500,000 and (iv) engaging in any other business
combination transaction, unless such transaction has been approved by a
majority of the Board of Directors. Further, provisions of the By-laws and
the Restated Certificate provide that the stockholders may amend the By-laws
or certain provisions of the Restated Certificate only with the affirmative
vote of 66-2/3% of the Company's capital stock. The By-laws provide that
nominations for directors may not be made by stockholders at any annual or
special meeting unless the stockholder intending to make a nomination
notifies the Company of its intention a specified period in advance and
furnishes certain information. The By-laws also provide that special meetings
of the Company's stockholders may be called only by the President or the
Board of Directors and require advance notice of business to be brought by a
stockholder before the annual meeting.
Upon the consummation of the offering made hereby, the Company will be
subject to the provisions of Section 203 of the Delaware General Corporation
Law, a law regulating corporate takeovers (the "Anti-Takeover Law"). In
certain circumstances, the Anti-Takeover Law prevents certain Delaware
corporations, including those whose securities are listed on the Nasdaq
National Market, from engaging in a "business combination" (which includes a
merger or sale of more than ten percent of the corporation's assets) with an
"interested stockholder" (a stockholder who owns 15% or more of the
corporation's outstanding voting stock) for three years following the date on
which such stockholder became an "interested stockholder" subject to certain
exceptions, unless the transaction is approved by the board of directors and
the holders of at least 66-2/3% of the outstanding voting stock of the
corporation (excluding shares held by the interested stockholder). The
statutory ban does not apply if, upon consummation of the transaction in
which any person becomes an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares held by persons who are both directors and
officers or by certain employee stock plans). A Delaware corporation subject
to the Anti-Takeover Law may "opt out" of the Anti-Takeover Law with an
express provision either in its certificate of incorporation or by-laws
resulting from a stockholders' amendment approved by at least a majority of
the outstanding voting shares; such an amendment is effective following
expiration of twelve months from adoption. The Company has not "opted out" of
the Anti-Takeover Law.
The foregoing provisions of the Restated Certificate and By-laws and
Delaware law could have the effect of discouraging others from attempting
hostile takeovers of the Company and, as a consequence, they may also inhibit
temporary fluctuations in the market price of the Common Stock that might
result from actual or rumored hostile takeover attempts. Such provisions may
also have the effect of preventing changes in the management of the Company.
It is possible that such provisions could make it more difficult to
accomplish transactions which stockholders may otherwise deem to be in their
best interests.
Transfer Agent
The transfer agent and registrar for the Common Stock is Boston EquiServe
Limited Partnership.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 8,314,740 shares of
Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option or of any other outstanding options. Of these shares,
the 2,000,000 shares sold in this offering will be freely transferable,
without restriction or further registration under the Securities Act, except
for shares purchased by "affiliates" of the Company as that term is defined
in Rule 144 under the Securities Act.
The remaining 6,314,740 outstanding shares of Common Stock are owned by
existing stockholders and are deemed "Restricted Shares" under Rule 144.
These may not be resold, except pursuant to an effective registration
statement or an applicable exemption from registration. Of these remaining
shares, approximately 112,357 shares of Common Stock will be eligible for
sale under Rules 144 and 701 on the ninety-first day after the effectiveness
of this offering. Stockholders of the Company, holding in the aggregate
6,202,383 shares of Common Stock, have agreed to enter into the 180-day
lock-up agreements described below. At the end of such 180-day period, an
additional 3,950,721 shares of Common Stock will be eligible for sale under
Rules 144 and 701. The remaining Restricted Shares will become eligible from
time to time thereafter upon the expiration of the minimum two-year holding
period prescribed by Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned Restricted Shares for at least two years from the later of the date
such Restricted Shares were acquired from the Company and (if applicable) the
date they were acquired from an affiliate, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1%
of the then outstanding shares of Common Stock or the average weekly trading
volume in the public market during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner and notice of sale and the availability of public information
concerning the Company. All sales of shares of the Company's Common Stock,
including Restricted Shares, held by affiliates of the Company must be sold
under Rule 144, subject to the foregoing volume limitations and other
restrictions.
The Commission has proposed an amendment to Rule 144 which would reduce the
holding period required for shares subject to Rule 144 from two years to one
year. If this proposal is adopted as of the expected closing of this
offering, an additional 1,946,033 shares of Common Stock would become
eligible for sale by existing stockholders to the public after the expiration
of the 180-day lock-up period.
The Company's directors and executive officers and certain of its
stockholders have agreed that they will not, without the prior written
consent of the representatives of the Underwriters, offer to sell, sell,
contract to sell, grant any option to sell or otherwise dispose of or require
the Company to file with the Commission a registration statement under the
Securities Act to register any shares of Common Stock or securities
convertible or exchangeable for shares of Common Stock or warrants or other
rights to acquire shares of Common Stock during the 180-day period following
the effective date of the Registration Statement.
The Company plans to file registration statements under the Securities Act
to register approximately 1,427,322, 66,666 and 66,666 shares of Common Stock
issuable under the Equity Plan, the Director Plan and the Stock Purchase
Plan, respectively, 90 days after the date of this Prospectus. Upon
registration, such shares will be eligible for immediate resale upon
exercise, subject, in the case of affiliates, to the volume, manner of sale
and notice requirements of Rule 144.
No prediction can be made as to the effect, if any, that market sales of
additional shares or the availability of such additional shares for sale will
have on the market price of the Common Stock. Nevertheless, sales of
substantial amounts of Common Stock in the public market may have an adverse
impact on the market price for the Common Stock. See "Risk Factors--Shares
Eligible for Future Sale; Registration Rights" and "--Immediate and
Substantial Dilution."
Registration Rights
The holders of the 4,750,289 shares of Common Stock to be issued on
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock (the
"Registrable Shares") are entitled to certain rights with respect to
registration of the Registrable Shares under the Securities Act beginning at
the end of the lock-up period. If the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders,
55
<PAGE>
such holders are entitled to notice of such registration and are entitled to
include such Registrable Shares in the registration. The rights are subject
to certain conditions and limitations, among them, the right of the
underwriters of a registered offering to limit the number of shares included
in such registration. Holders of Registrable Shares benefiting from these
rights may also require the Company to file at its expense a registration
statement under the Securities Act with respect to their shares of Common
Stock and, subject to certain conditions and limitations, the Company is
required to use its best efforts to effect such registration. Furthermore,
such holders may, subject to certain conditions and limitations, require the
Company to file additional registration statements on Form S-3 with respect
to such Registrable Shares. Such holders did not have the right to have
shares of Common Stock registered under the Securities Act as part of this
offering.
56
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist
LLC and Wessels, Arnold & Henderson, L.L.C., have severally agreed to
purchase from the Company the following respective numbers of shares of
Common Stock:
Number of
Name Shares
- ------------------------------------ ---------
Hambrecht & Quist LLC 690,000
Wessels, Arnold & Henderson, L.L.C. 690,000
Cowen & Company 75,000
Montgomery Securities 75,000
SBC Warlburg 75,000
UBS Securities LLC 75,000
Dain Bosworth Incorporated 40,000
Janney Montgomery Scott 40,000
Needham & Company, Inc. 40,000
Piper Jaffray Inc. 40,000
Tucker Anthony Incorporated 40,000
Van Kasper & Company 40,000
Vector Securities International, Inc. 40,000
Volpe, Welty & Company 40,000
---------
Total 2,000,000
=========
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $.27 per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $.10 per share to certain other
dealers. After the initial public offering of the shares, the offering price
and other selling terms may be changed by the Representatives of the
Underwriters. The Representatives have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discount, set forth on the cover page of this Prospectus. To
the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased
by it shown in the above table bears to the total number of shares of Common
Stock offered hereby. The Company will be obligated, pursuant to the option,
to sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to
contribute to payments the Underwriters may be required to make in respect
thereof.
Certain existing stockholders of the Company, including the executive
officers and directors, who will own in the aggregate 6,202,383 shares of
Common Stock after this offering, have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares
of Common Stock or securities exchangeable for or convertible into
57
<PAGE>
shares of Common Stock owned by them during the 180-day period following the
date of this Prospectus. The Company has agreed that, it will not, without the
prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock,
other than pursuant to its equity benefit plans, during the 180-day period
following the date of this Prospectus.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiation among the Company and the Representatives.
Among the factors to be considered in determining the initial public offering
price are prevailing market and economic conditions, revenues and earnings of
the Company, market valuations of other companies engaged in activities
similar to those of the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant.
Certain persons and entities related to Accel IV L.P. have indicated their
non-binding intention to purchase 110,740 shares of Common Stock in this
offering. Bessemer Venture Partners III L.P. and certain related persons and
entities have indicated their non-binding intention to purchase 234,000 shares
in this offering. Any such sale will be made on the same terms as sales to other
investors in this offering. No assurance can be given that the aforementioned
persons and entities will purchase any or all of such shares. To the extent such
persons and entities purchase any such shares, such shares will be subject to
the lock-up agreements discussed above. Hambrecht & Quist LLC, in its capacity
as representative of the Underwriters, has represented to the Company that it
will not release such shares from the lock-up agreements before the expiration
of the 90-day period following the date of this Prospectus, if at all. See
"Principal Stockholders."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Palmer & Dodge LLP, Boston, Massachusetts. William T.
Whelan, a partner of Palmer & Dodge LLP, is an Assistant Secretary of the
Company. Certain legal matters are being passed upon for the Underwriters by
Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The financial statements of the Company at December 31, 1995 and March 31,
1995 and for the nine months ended December 31, 1995, and for each of the two
years in the period ended March 31, 1995 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the shares of Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules
thereto. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules thereto. All statements made in this Prospectus
regarding the contents of any contract, agreement or other document filed as
an exhibit to the Registration Statement are qualified by reference to the
copy of such document filed as an exhibit to the Registration Statement. A
copy of the Registration Statement may be inspected without charge at the
offices of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of all or any part thereof may be obtained from the Commission
upon the payment of certain fees prescribed by the Commission. Such reports
and other information can also be reviewed through the Commission's Web site
(http://www.sec.gov).
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of
each fiscal year containing unaudited financial information.
58
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Report of Independent Auditors F-3
Financial Statements
Balance Sheets F-4
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
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<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, 1995 and March 31, 1995,
and the related statements of operations, redeemable convertible preferred stock
and stockholders' equity (deficit), and cash flows for the nine months ended
December 31, 1995, and each of the two years in the period ended March 31, 1995.
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.
Since the date of completion of the audit of the accompanying financial
statements and initial issuance of our report thereon dated April 12, 1996,
except for Note 14, as to which the date is May 14, 1996, which report contained
an explanatory paragraph regarding the Company's ability to continue as a going
concern, the Company, as discussed in Note 14, has received significant proceeds
from the sale of Preferred Stock and from strategic collaboration agreements.
Therefore the conditions that raised substantial doubt about whether the Company
will continue as a going concern no longer exist.
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, 1995 and March 31, 1995, and the results of its operations and its
cash flows for the nine months ended December 31, 1995, and each of the two
years in the period ended March 31, 1995, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
April 12, 1996, except for Note 14, as
to which the date is August 30, 1996
F-3
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31 September 30
1995 1995 1996
-------------- -------------- --------------
Assets (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,079,355 $ 149,686 $11,734,558
Accounts receivable 665,088
Prepaid expenses 49,496 58,940 74,695
Other current assets 23,000 13,178 10,267
----------- ----------- -----------
Total current assets 1,151,851 221,804 12,484,608
Property and equipment, net 890,814 856,912 981,498
Notes receivable from officer 51,878 290,437
Other assets 98,082 80,171 58,735
----------- ----------- -----------
Total assets $ 2,140,747 $ 1,210,765 $13,815,278
=========== =========== ===========
Liabilities and Stockholders' Deficit (Unaudited)
Current liabilities:
Current portion of capital lease obligations $ 263,657 $ 304,416 $ 239,679
Accounts payable and accrued expenses 372,183 1,244,201 1,362,574
----------- ----------- -----------
Total current liabilities 635,840 1,548,617 1,602,253
Capital lease obligations, less current portion 107,120 342,256 198,459
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 March 31, 1995, December 31,
1995 and September 30, 1996 ($6,170,731 liquidation value at
September 30, 1996) 3,949,383 3,955,505 3,961,636
Series C, $.01 par value, 1,445,536 shares authorized; 1,432,318
shares issued and outstanding at September 30, 1996 ($3,485,238
liquidation value at September 30, 1996) 3,233,694
Series D, $.01 par value, 1,740,002 shares authorized; 1,700,002
shares issued and outstanding at September 30, 1996 ($5,515,452
liquidation value at September 30, 1996) 5,071,027
Series E, $.01 par value, 868,329 shares authorized; 868,329
shares issued and outstanding at September 30, 1996 ($5,319,631
liquidation value at September 30, 1996) 4,899,755
Stockholders' deficit:
Series A convertible preferred stock, $.01 par value, 104,388
shares authorized; 93,691 shares issued and outstanding at March
31, 1995, December 31, 1995 and September 30, 1996 1,037,664 1,037,664 1,037,664
Common stock, $.01 par value, 15,000,000 shares authorized;
1,441,686, 1,563,808 and 1,539,673 shares issued and outstanding
at March 31, 1995, December 31, 1995 and September 30, 1996,
respectively 14,417 15,638 15,396
Additional paid-in capital 84,606 198,418 93,990
Accretion of redeemable convertible preferred stock to
redemption value (8,147) (14,269) (63,364)
Deficit accumulated during the development stage (3,680,136) (8,573,064) (6,235,232)
----------- ----------- -----------
Total stockholders' deficit (2,551,596) (7,335,613) (5,151,546)
----------- ----------- -----------
Total liabilities and stockholders' deficit $ 2,140,747 $ 1,210,765 $13,815,278
=========== =========== ===========
</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 Year ended ended Nine months ended 1988) to
March 31 March 31 December 31 September 30 September 30
1994 1995 1995 1995 1996 1996
---------------------------- --------------- --------------- ------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues $1,700,000 $ 411,509 $ 900,000 $ 900,000 $9,635,088 $13,646,597
Operating expenses:
Research and development 1,381,528 2,407,113 4,164,940 2,989,257 4,951,652 13,374,909
General and administrative 897,117 824,769 1,504,811 1,348,358 2,212,086 6,280,189
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 2,278,645 3,231,882 5,669,751 4,337,615 7,163,738 19,655,098
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) (578,645) (2,820,373) (4,769,751) (3,437,615) 2,471,350 (6,008,501)
Interest expense (66,976) (78,672) (151,057) (100,077) (273,640) (570,345)
Interest income 29,141 120,845 27,880 62,943 140,122 359,081
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ (616,480) $(2,778,200) $(4,892,928) $(3,474,749) $2,337,832 $(6,219,765)
=========== =========== =========== =========== =========== ===========
Pro forma (unaudited):
Net income (loss) per share $ (0.70) $ 0.30
=========== ===========
Weighted-average common
stock and equivalents 6,973,000 7,711,000
=========== ===========
</TABLE>
See accompanying notes.
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 Series A
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
---------------------- ------------------ ------------------
Shares Amount Shares Amount Shares Amount
--------- ------------ ------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock in May 1989 333,330 $ 3,333
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 consulting services received 5,186 52
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
received 5,186 52
Three-for-one stock dividend declared and
paid in March 1994 1,031,118 10,311
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 redemption value 8,147
Net loss
--------- ------------ ------ ----------- --------- --------
Balance at March 31, 1995 2,643,736 3,949,383 93,691 1,037,664 1,441,686 14,417
Cumulative
Accretion of
Dividends on Deficit
Redeemable Accumulated Total
Additional Convertible During 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 March 31, 1992 $(27,911) (27,911)
--------- ------------ ------------- -------------
Balance at March 31, 1992 1,667 (27,911) 1,014,753
Issuance of common stock in April 1992 as
payment for consulting services received 26 78
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
received 26 78
Three-for-one stock dividend declared and
paid in March 1994 5,156 (15,467)
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 redemption value $(8,147) (8,147)
Net loss (2,778,200) (2,778,200)
--------- ------------ ------------- -------------
Balance at March 31, 1995 84,606 (8,147) (3,680,136) (2,551,596)
F-6
<PAGE>
<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 agreement 83,723 837
Accretion of redeemable convertible
preferred stock to redemption value 6,122
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 (unaudited) 42,531 425
Issuance of Series C preferred stock upon
conversion of Convertible Notes and
interest thereon in May 1996, net of
issuance costs of $12,560 (unaudited) 1,432,318 3,210,177
Issuance of warrants in conjunction with
financing (unaudited)
Issuance of Series D preferred stock for
cash in May 1996, net of issuance costs
of $31,043 (unaudited) 1,500,002 4,468,963
Issuance of Series D preferred stock upon
conversion of Bridge Notes in May 1996
(unaudited) 200,000 600,000
Issuance of Series E preferred stock in
May and August 1996, net of issuance
costs of $117,628 (unaudited) 868,329 4,882,372
Issuance of compensatory stock option
grants (unaudited)
Repurchase of common stock from officer in
May 1996 (unaudited) (66,666) (667)
Accretion of redeemable convertible
preferred stock to redemption value
(unaudited) 49,095
Net income (unaudited)
--------- ------------ ------ ----------- --------- --------
Balance at September 30, 1996 (unaudited) 6,644,385 $17,166,112 93,691 $1,037,664 1,539,673 $15,396
========= ============ ====== =========== ========= ========
<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 agreement 68,235 69,072
Accretion of redeemable convertible
preferred stock to redemption value (6,122) (6,122)
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 (unaudited) 19,343 19,768
Issuance of Series C preferred stock upon
conversion of Convertible Notes and
interest thereon in May 1996, net of
issuance costs of $12,560 (unaudited)
Issuance of warrants in conjunction with
financing (unaudited) 78,236 78,236
Issuance of Series D preferred stock for
cash in May 1996, net of issuance costs
of $31,043 (unaudited)
Issuance of Series D preferred stock upon
conversion of Bridge Notes in May 1996
(unaudited)
Issuance of Series E preferred stock in
May and August 1996, net of issuance
costs of $117,628 (unaudited)
Issuance of compensatory stock option
grants (unaudited) 67,326 67,326
Repurchase of common stock from officer in
May 1996 (unaudited) (269,333) (270,000)
Accretion of redeemable convertible
preferred stock to redemption value
(unaudited) (49,095) (49,095)
Net income (unaudited) 2,337,832 2,337,832
--------- ------------ ------------- -------------
Balance at September 30, 1996 (unaudited) $ 93,990 $(63,364) $(6,235,232) $(5,151,546)
========= ============ ============= =============
</TABLE>
See accompanying notes.
F-7
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months
Year ended Year ended ended
March 31 March 31 December 31
1994 1995 1995
-------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (616,480) $(2,778,200) $(4,892,928)
Adjustments to reconcile net
income (loss) to cash provided
(used) by operating activities:
Depreciation and amortization 295,370 285,515 396,673
Expenses paid with equity
instruments 67,816
Change in operating assets and
liabilities:
Accounts receivable
Prepaid expenses and other
current assets 50,928 (2,769) 16,411
Accounts payable and accrued
expenses 80,922 (36,009) 872,018
----------- ----------- -----------
Net cash provided (used)
by operating activities (189,260) (2,531,463) (3,540,010)
Investing activities
Purchase of fixed assets (106,299) (367,830) (324,429)
Proceeds from sale leaseback of
fixed assets 553,067 41,468 511,145
Purchase of marketable securities (2,356,510)
Proceeds from sale of marketable
securities 2,356,510
Issuance of note receivable from
officer (50,000)
----------- ----------- -----------
Net cash provided (used) by
investing activities (1,909,742) 2,030,148 136,716
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Period from
inception
Nine months ended (November 29,
September 30 1988) to
----------------------------- September 30
1995 1996 1996
--------------- ------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating activities
Net income (loss) $(3,474,749) $2,337,832 $(6,219,765)
Adjustments to reconcile net
income (loss) to cash provided
(used) by operating activities:
Depreciation and amortization 279,432 406,169 1,509,572
Expenses paid with equity
instruments 67,816 136,526 204,342
Change in operating assets and
liabilities:
Accounts receivable (665,088) (665,088)
Prepaid expenses and other
current assets 16,357 32 (154,134)
Accounts payable and accrued
expenses 185,999 341,110 1,585,311
----------- ----------- -----------
Net cash provided (used)
by operating activities (2,925,145) 2,556,581 (3,739,762)
Investing activities
Purchase of fixed assets (402,969) (542,812) (2,230,971)
Proceeds from sale leaseback of
fixed assets 274,114 17,173 1,122,853
Purchase of marketable securities (2,356,510)
Proceeds from sale of marketable
securities 1,945,621 2,356,510
Issuance of note receivable from
officer (50,000) (230,000) (280,000)
----------- ----------- -----------
Net cash provided (used) by
investing activities 1,766,766 (755,639) (1,388,118)
----------- ----------- -----------
</TABLE>
F-8
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Nine months
Year ended Year ended ended
March 31 March 31 December 31
1994 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
Financing activities
Repayment of capital lease obligations $ (157,975) $ (245,399) $ (245,489)
Proceeds from issuance of promissory notes 2,700,000
Proceeds from issuance of bridge notes
Proceeds from sale of Series B redeemable
convertible preferred stock 3,941,236
Proceeds from sale of Series D redeemable
convertible preferred stock
Proceeds from sale of Series E redeemable
convertible preferred stock
Proceeds from sale of Series A convertible
preferred stock
Repurchase of stock from officer
Sale of common stock 28,084 18,514
Proceeds from issuance of warrants 600
----------- ----------- -----------
Net cash provided (used) by financing
activities 3,783,261 (217,315) 2,473,625
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents 1,684,259 (718,630) (929,669)
Cash and cash equivalents at beginning of
period 113,726 1,797,985 1,079,355
----------- ----------- -----------
Cash and cash equivalents at end of period $1,797,985 $1,079,355 $ 149,686
=========== =========== ===========
Supplemental cash flow information
Cash paid for interest $ 66,976 $ 78,672 $ 51,441
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Period from
Nine months ended inception
September 30 (November 29,
---------------------------- 1988) to
September 30
1995 1996 1996
------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Financing activities
Repayment of capital lease obligations $ (200,315) $ (217,173) $ (869,763)
Proceeds from issuance of promissory notes 1,500,000 300,000 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 31,636 19,768 71,366
Proceeds from issuance of warrants 600
----------- ----------- -----------
Net cash provided (used) by financing
activities 1,331,321 9,783,930 16,862,438
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents 172,942 11,584,872 11,734,558
Cash and cash equivalents at beginning of
period 154,009 149,686 --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 326,951 $11,734,558 $11,734,558
=========== =========== ===========
Supplemental cash flow information
Cash paid for interest $ 47,885 $ 81,319 $ 278,408
=========== =========== ===========
</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 diagnostic tool for 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.
Change of Year End
Subsequent to March 31, 1995, the Company elected to change its fiscal year
end from March 31 to December 31.
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
All of the revenues received during the year ended March 31, 1994 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. All of
the revenues received during the nine months ended December 31, 1995 were
derived from a single source.
2. SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements
The balance sheet as of September 30, 1996 and the related statements of
operations, redeemable convertible preferred stock and stockholders' equity
(deficit) and cash flows for the nine months ended September 30, 1995 and 1996
and the period from inception (November 29, 1988) to September 30, 1996, are
unaudited and, in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation. The
results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the entire year.
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.
F-10
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, "Disclosures about the Fair Value
of Financial Instruments," which requires the disclosure of the fair value of
financial instruments. At December 31, 1995, the Company's financial instruments
consist of cash, cash equivalents, 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.
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 and Funded Research
Revenues from nonrefundable license fees and options to acquire license
rights, where no future obligation exists or is expected, are recognized upon
execution of the underlying license agreement. Non-refundable fees for which
collection is subject to attainment of future milestones (such as contractually
specified dates and commencement or completion of specified clinical trials) are
recorded when such milestones are attained. Revenues from research and
development collaborations are recognized in accordance with the underlying
agreement as research and development is conducted. Revenues from joint
development projects with third parties are recorded for amounts due from third
parties when the Company expends more than its contractual share of total
project costs. [The Company records as research and development expense its
obligation to such third parties which occurs when the Company expends less than
its contractual share of the total project costs.] 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." 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 (Unaudited)
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 Series A Convertible Preferred Stock
("Series A Preferred Stock"), Series B Redeemable Convertible Preferred Stock
("Series B Preferred Stock"),
F-11
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Series C Redeemable Convertible Preferred Stock ("Series C Preferred Stock"),
Series D Redeemable Convertible Preferred Stock ("Series D Preferred Stock") and
Series E Redeemable Convertible Preferred Stock ("Series E Preferred Stock")
into Common Stock (as of their original date of issuance), which will occur upon
completion of the Company's proposed initial public offering. 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.
Historical earnings per share have not been presented because such amounts are
not considered meaningful due to the significant change in the Company's capital
structure that will occur in connection with the Company's proposed initial
public offering.
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. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31 December 31
1995 1995
------------ -------------
<S> <C> <C>
Laboratory equipment $ 918,466 $1,163,370
Leasehold improvements 417,955 462,099
Furniture, fixtures and other equipment 157,068 215,869
--------- ---------
1,493,489 1,841,338
Less accumulated depreciation and amortization 602,675 984,426
--------- ---------
$ 890,814 $ 856,912
========= =========
</TABLE>
4. LEASES
Under a $1.4 million lease line, 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 $800,737 and $1,320,994 at March 31, 1995 and
December 31, 1995, respectively. Accumulated amortization relating to assets
under capital leases was $383,809 and $661,257 at March 31, 1995 and December
31, 1995 respectively.
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, 1995:
F-12
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
----------- -----------
<S> <C> <C>
1996 $381,280 $110,000
1997 228,096 120,000
1998 160,591
-------- --------
Total minimum lease payments 769,967 $230,000
========
Less amounts representing interest 123,295
--------
Present value minimum lease payments 646,672
Less amounts due within one year 304,416
--------
$342,256
========
</TABLE>
Rent expense amounted to approximately $79,819, $94,600 and $86,100 for the
twelve months ended March 31, 1994, March 31, 1995, and for the nine months
ended December 31, 1995 respectively, and approximately $312,500 for the period
from inception (November 29, 1988) to December 31, 1995.
Included in accounts payable and accrued expenses were the following items
at March 31, 1995 and December 31, 1995:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1995
----------- --------------
<S> <C> <C>
Accounts payable $147,623 $ 615,174
Accrued development costs 435,562
Accrued interest 99,616
Accrued licensing expense 72,707 27,972
Accrued payroll 86,601 15,990
Accrued professional fees 32,173
Other accrued expenses 33,079 49,887
--------- ---------
Total accounts payable and accrued expenses $372,183 $1,244,201
========= =========
</TABLE>
6. PROMISSORY NOTES
In May 1995, the Company issued Promissory Notes ("Promissory Notes") in an
aggregate amount of $1,500,000, which approximates fair value. The Promissory
Notes bear interest at the rate of 10% per year and become due upon demand on or
after February 15, 1996. The Promissory Notes and accrued interest thereon are
convertible, at any time after the date of issuance, into shares of the Series C
Preferred Stock, at an initial conversion price of $4.54 per share. The initial
conversion price per share shall be subject to adjustment from time to time as
provided in the agreement. In November and December 1995, the Company issued a
series of additional Promissory Notes aggregating $1,200,000 with the same terms
of interest and repayment. It is contemplated that the Convertible Notes (see
Note 14) for which the Promissory Notes may subsequently be exchanged will be
converted concurrent with a Series D Preferred Stock equity financing during
1996. Accordingly, all the Promissory Notes have been classified as long-term at
December 31, 1995.
7. CAPITAL STOCK
Shares of Series A Preferred Stock and Series B Preferred Stock are
convertible into shares of Common Stock by dividing $11.21 by the Series A
Preferred Stock conversion price in effect at the time of conversion and, in the
case of the Series B Preferred Stock, by dividing $1.51 by the Series B
Preferred Stock conversion price in effect at the time of conversion. The
conversion price for Series A and Series B Preferred Stock is subject to
adjustment from time to time based upon terms identified in the respective
agreements. The Company has reserved 320,723 and 1,762,484 shares of Common
Stock for issuance upon conversion of the Series A and Series B Preferred Stock,
respectively, at December 31, 1995.
F-13
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. WARRANTS
The stockholders of Series A and Series B Preferred Stock are entitled to
have voting rights equal to the number of Common Stocks into which the Preferred
Stocks may be converted at such time and shall be entitled to elect two
directors of the Company. Upon liquidation, the holders of Series B Preferred
Stock are also entitled to a cumulative liquidating cash dividend of 18% per
annum, compounded annually from the date of issuance, plus any other declared
but unpaid dividends thereon. In the event of liquidation, the holders of Series
A and Series B Preferred Stock are entitled to be paid an amount equal to $11.21
per share plus all declared and unpaid dividends in the case of Series A
Preferred Stock and $1.51 per share plus unpaid cumulative dividends and any
other declared but unpaid dividends thereon in the case of Series B Preferred
Stock, subject to adjustment, in the event of any stock dividends, stock split,
combination or other similar recapitalization affecting such shares. As of
December 31, 1995, aggregate cumulative unpaid dividends on Series B Preferred
Stock is $1,496,364 ($0.85 per share). At any time on or after February 1, 2000,
the holders of 67% or more of the then outstanding shares of Series B Preferred
Stock are entitled to require the Company to redeem shares of Series B Preferred
Stock then held by such stockholders. Upon exercise of the redemption right by
the Series B stockholders, the Company is required to pay such Series B
stockholders an amount equal to $1.51 per share, subject to adjustments from
time to time as identified in the agreement, plus all accrued but unpaid
dividends.
In connection with a master line of leasing (see Note 5) the Company has
issued two warrants to purchase shares of the Company's Series A Preferred Stock
at an exercise price of $11.21 per share, subject to adjustment. The Company has
reserved 10,697 shares of Series A Preferred Stock and 36,618 shares of Common
Stock for issuance upon exercise of the warrants and subsequent conversion by
the Warrant Holders of Series A Preferred Stock into Common Stock. Warrants for
the purchase of 9,365 and 1,332 shares of the Company's Series A Preferred Stock
remain outstanding as of December 31, 1995 and expire the earlier of five years
from the date of an initial public offering or on December 21, 2002 and August
5, 2002, respectively.
During the year ended March 31, 1995, and in connection with the master
lease line, the Company issued a warrant to purchase shares of the Company's
Series B Preferred Stock ("Series B Warrants") at an exercise price of $1.51 per
share, subject to adjustment. The Company has reserved 11,402 shares of the
Company's Series B Preferred Stock and 7,601 shares of Common Stock for issuance
upon exercise of the warrants and subsequent conversion by the Warrant Holders
of Series B Preferred Stock into Common Stock. Warrants to purchase 11,402
shares of the Company's Series B Preferred Stock remain outstanding as of
December 31, 1995 and expire on the earlier of five years from the date of an
initial public offering or June 6, 2004.
During the nine months ended December 31, 1995, in connection with the
master lease line, the Company issued a warrant to purchase shares of the
Company's Series C Preferred Stock at an exercise price of $4.54 per share,
subject to adjustment. The Company has reserved 13,218 shares of the Company's
Series C Stock and 8,812 shares of Common Stock for issuance upon exercise of
the warrants and subsequent conversion by the Warrant Holders of Series C
Preferred Stock into Common Stock. Warrants to purchase 13,218 shares of the
Company's Series C Preferred Stock remain outstanding as of December 31, 1995
and expire on the earlier of five years from the date of an initial public
offering or August 2, 2005.
The value ascribed to the warrants aggregating $79,019 has been accounted
for as additional paid in capital.
9. 1992 EQUITY INCENTIVE PLAN
On July 1, 1992, the Company adopted the 1992 Equity Incentive Plan (the
"Equity Plan"), which provides stock awards to purchase shares of Common Stock
to be granted to employees and consultants under incentive and nonstatutory
stock option agreements. Under the Plan, the exercise price for stock options
shall not be less than fair market value of the optioned stock at the date of
grant. The options are exercisable over a period determined by the Board of
Directors, but not longer than ten years after the date they are granted. Stock
option information is as follows:
F-14
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. 1992 EQUITY INCENTIVE PLAN (Continued)
<TABLE>
<CAPTION>
Options Option price Available for
Outstanding range per share Grant Exercisable
-------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
March 31, 1993 107,976 $0.42 725,259 6,975
======== ========
Granted 142,648 $0.42
--------
March 31, 1994 250,624 $0.42 582,611 34,592
======== ========
Granted 359,131 $0.45
Exercised (66,866) $0.42
Canceled (1,400) $0.42
--------
March 31, 1995 541,489 $0.42 - $0.45 224,880 143,207
======== ========
Granted 133,993 $0.45 - $0.83
Exercised (38,399) $0.42 - $0.45
Canceled (40,933) $0.42 - $0.45
--------
December 31, 1995 596,150 $0.42 - $0.83 131,820 200,631
======== ========
Granted (unaudited) 738,898 $0.83 - $6.75
Exercised (unaudited) (42,531) $0.42 - $0.83
--------
September 30, 1996 (unaudited) 1,292,517 $0.42 - $6.75 159,563 329,330
======== ======== ========
</TABLE>
10. 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 March 31, 1995 and December 31, 1995:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1995
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,273,000 $ 3,137,000
Research and development tax credits 100,000 300,000
Book over tax depreciation and amortization 79,800 113,400
Other 18,800 9,900
--------- ---------
Total deferred tax assets 1,471,600 3,560,300
Valuation allowances (1,471,600) (3,560,300)
--------- ---------
Deferred income taxes, net $ -0- $ -0-
========= =========
</TABLE>
As of December 31, 1995, the Company has net operating loss carryforwards
for income tax purposes of approximately $7.8 million, which expire through the
year 2010. The valuation allowance increased by $200,483, $1,212,900 and
$2,088,700 in the twelve months ended March 31, 1994 and March 31, 1995 and the
nine months ended December 31, 1995 respectively, 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.
11. 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-15
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. RELATED PARTY TRANSACTION
In June 1995, the Company received a promissory note from a director and
executive officer of the Company in exchange for the principal amount of
$50,000. The note is due in June 2005 and bears interest at an annual rate of
7.31% (the applicable Federal Rate at issuance). The note is subject to certain
acceleration clauses and is secured by a pledge of 14,814 shares of the
Company's Common Stock held by the borrower.
13. 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, the Japanese Company 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. The Company will also receive royalties on future sales
of the liver contrast agent. In exchange, the Japanese Manufacturer and
Distributor received exclusive rights to develop and commercialize the product
in Japan and certain rights in other countries in the Far East (see Note 14). 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,
1995, the Company had received an aggregate of $2.7 million in revenues (net of
withholding tax) under this agreement.
14. SUBSEQUENT EVENTS
In January 1996, the Company issued convertible promissory notes for an
aggregate amount of $3,015,862 ("Convertible Notes") (see Note 6) in exchange
for $300,000 of cash and cancellation of $2.7 million of previously issued
promissory notes and accrued interest thereon. The Convertible Notes bear
interest at the rate of 10% per year and become due upon demand on or after
February 15, 1996. The Convertible Notes and accrued interest thereon are
convertible, at any time after the date of issuance, into shares of the
Company's Series C Preferred Stock at an initial conversion price that will be
between $1.51 and $2.25 depending upon certain events of conversion. The initial
conversion price per share shall be subject to further adjustment.
The stockholders of Series C Preferred Stock will be entitled to have
voting rights equal to the number of shares of Common Stock into which such
shares of Preferred Stock may be converted at such time. In the event of
liquidation, the holders of Series C Preferred Stock will be entitled to be paid
an amount equal to the
F-16
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
14. SUBSEQUENT EVENTS (Continued)
price per share at which shares of Series C Preferred Stock are initially issued
plus unpaid cumulative dividends plus any other declared but unpaid dividends
thereon, subject to adjustment in the event of any stock dividends, stock split,
combination or other similar recapitalization affecting such shares.
Shares of Series C Preferred Stock, upon issuance, will be convertible into
Common Stock by dividing the initial price per share at which such shares are
issued by the Series C Preferred Stock conversion price in effect at the time of
conversion. The initial conversion price for Series C Preferred Stock, $2.25 per
share, is subject to adjustment. The Company has reserved 954,872 shares of
Common Stock for issuance upon conversion of the Series C Preferred Stock.
In February 1996, the Company also issued convertible promissory notes for
an aggregate amount of $600,000 ("Bridge Notes") which bear interest at a rate
of 10% per year and are due upon demand. The Bridge Notes and accrued interest
thereon are convertible, at any time after the date of issuance, on an
equivalent basis into securities of the next equity financing which is expected
to be Series D Preferred Stock, with an initial conversion price of $3.00 per
share which is subject to adjustment. The Company has reserved 1,133,325 shares
of Common Stock for issuance upon conversion of the Series D Preferred Stock.
In March 1996, the Company entered into marketing, development and license
agreements with Daiichi Radioisotope Laboratories Ltd., a Japanese
pharmaceutical company ("Daiichi"). The agreements cover the Company's vascular
MRI contrast agent and provide for the Company to receive a license fee of $3.0
million (net of withholding tax), milestone payments of up to $3.3 million (net
of withholding tax) and proceeds from the issuance of 868,329 shares of Series E
Preferred Stock at price of $5.76 per share. The milestone payments are keyed to
the achievement of certain research and development milestones, such as the
commencement of various clinical trials. The agreements also provides for the
Company to supply product to Daiichi and to receive royalties for sales made by
Daiichi in Japan.
In April 1996, the Company received a promissory note from a director and
executive officer of the Company in exchange for the principal amount of
$50,000. The note is due in April 2006 and bears interest at an annual rate of
6.51% (the applicable Federal Rate at issuance). The note is subject to certain
acceleration clauses and is secured by a pledge of 14,814 shares of the
Company's Common Stock held by the borrower.
In May 1996, the Convertible Notes and accrued interest thereon were
converted into 1,432,318 shares of the 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 the Bridge Notes and
accrued interest thereon.
In May 1996, the Company issued warrants to purchase 40,000 shares of the
Company's Series D Preferred Stock at an exercise price of $3.00 per share,
subject to adjustment. The Company has reserved 26,665 shares of Common Stock
for issuance upon exercise of the warrants and subsequent conversion of Series D
Preferred Stock.
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. The Company has reserved 578,885 shares of Common Stock for issuance
upon conversion of the Series E Preferred Stock.
Under the Company's Restated Certificate of Incorporation adopted in May
1996, at any time prior 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 September 30, 1996, to the original
purchase price of each such series) plus any declared 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
F-17
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
14. SUBSEQUENT EVENTS (Continued)
dividend if, when and as declared by the Board of Directors which must be paid
prior to payment of any other dividends.
In May 1996, the Company received a promissory note from an officer of the
Company in exchange for the amount of $180,000. The note is due in May 2006 and
bears interest at an annual rate of 6.83% (the applicable Federal Rate at
issuance). The note is subject to certain acceleration clauses and is secured by
a pledge of 44,444 shares of the Company's Common Stock held by the borrower.
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.
As a result of the above noted ownership change, 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.
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. The Company received a $6.0 million license fee payment upon execution of
the agreement and is eligible to receive an additional $2.0 million upon the
earlier of the completion of a specified milestone or a designated date. The
Company is also entitled to reimbursement from Mallinckrodt of development costs
that the Company incurs during any quarter in excess of its contractual share of
total project costs. To the extent the Company's development costs during any
quarter are less than the Company's share of the total project costs, the
Company is obligated to repay Mallinckrodt. At September 30, 1996, no such
amounts have been collected or paid in connection with this cost sharing
arrangement. Under the agreement, the Company will share in future operating
profits from the sale of products covered under the agreement.
In November 1996, the Board of Directors of the Company authorized
management to file 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. If the offering is consummated under terms presently anticipated,
all of the Preferred Stock issued and outstanding will automatically convert
into 4,750,296 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.
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 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.
F-18
<PAGE>
EPIX MEDICAL, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
14. SUBSEQUENT EVENTS (Continued)
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 optionee 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 the last sale
price for the Common Stock on the business day immediately preceding the date of
grant, as reported on The Nasdaq National Market. The exercise price may be paid
in cash or shares of Common Stock, or a combination of both.
In December 1996, the Company amended the 1992 Equity Plan. The Equity
Plan is designed to provide the Company flexibility in awarding equity
incentives by providing for multiple types of incentives that may be awarded.
The purpose of the Equity Plan is to attract and retain key employees of and
consultants of the Company and to enable them to participate in the long-term
growth of the Company. The Equity Plan provides for the grant of stock
options (incentive and nonstatutory), 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. The exercise
price of all "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), granted under the
Equity Plan must be at least equal to 100% of the fair market value of the
option shares on the date of grant. The term of any incentive stock option
granted under the Equity Plan may not exceed ten years.
A reverse stock split was approved by the Board of Directors 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.
In December 1996, the Company and the Japanese Manufacturer and Distributor
agreed to restructure an existing agreement to collaborate on the development
and commercialization of a liver MRI contrast agent. 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.
F-19
<PAGE>
[INSIDE PANEL PAGE]
TECHNOLOGY AND RESEARCH PIPELINE
- --------------------------------------------------------------------------------
[EPIX LOGO]
MS-325 and the Next
Generation of Targeted
MRI Agents
[bullet] MS-325 was designed by EPIX
scientists to bind to the blood
protein albumin and provide an
enhanced magnetic signal.
[bullet] EPIX scientists are developing
additional targeting and signal
enhancement technologies to
expand the number of diseases
which can be detected with MRI.
[Diagram of MS-325 molecular structure]
[Diagram caption: Chemical structure of MS-325]
[Diagram of MS-325 attached to albumin]
[Diagram caption: MS-325 fitting into albumin binding site]
[Diagram of MS-325 mechanism of action]
[Diagram caption: MS-325 mechanism of action: signal enhancement upon binding
to albumin]
- --------------------------------------------------------------------------------
EPIX Products and Research Areas
In addition to developing MS-325 for vascular applications, EPIX is conducting
research in the following areas:
[bullet] MS-325 for MRI exams to diagnose tumors, including breast cancer;
[bullet] Thrombus-seeking agents for the detection of blood clots throughout
the body; and
[bullet] Functional brain-imaging agents to enhance the use of MRI in
differentiating among the many neurodegenerative and psychiatric
diseases.
[Diagram demonstrating current areas of research]
[Diagram captions: Brain Activation
Thrombus
Vascular MS-325]
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MS-325 IS CURRENTLY BEING EVALUATED IN CLINICAL TRIALS AND NEITHER MS-325 NOR
OTHER CONTRAST AGENTS UNDER DEVELOPMENT HAVE RECEIVED MARKETING APPROVAL FROM
THE FDA OR ANY FOREIGN REGULATORY BODY.
<PAGE>
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy to any person in any jurisdiction in which
such offer or solicitation would be unlawful, or to any person to whom it is
unlawful. Neither the delivery of this Prospectus nor any offer or sale made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company or that the information
contained herein is correct as of any time subsequent to the date hereof.
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TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 5
Use of Proceeds 14
Dividend Policy 14
Capitalization 15
Dilution 16
Selected Financial Data 17
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 18
Business 22
Management 40
Certain Transactions 48
Principal Stockholders 50
Description of Capital Stock 53
Shares Eligible for Future Sale 55
Underwriting 57
Legal Matters 58
Experts 58
Additional Information 58
Index to Financial Statements F-1
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Until February 24, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligations of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
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2,000,000 Shares
[EPIX LOGO]
Common Stock
PROSPECTUS
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HAMBRECHT & QUIST
WESSELS, ARNOLD &
HENDERSON
January 30, 1997
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