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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
- ----------
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
- ----------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number 000-24505
COLLATERAL THERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0661290
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
11622 El Camino Real, San Diego, California 92130
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 619-794-3400
Indicate by a check whether the registrant (1) has filed all reports required to
be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
----- -----
As of April 16, 1999, Registrant had 10,585,139 shares of its Common Stock
outstanding.
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COLLATERAL THERAPEUTICS, INC.
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INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 1
Statements of Operations 2
Statements of Cash Flows 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 26
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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<CAPTION>
COLLATERAL THERAPEUTICS, INC.
BALANCE SHEETS
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MARCH 31, DECEMBER 31,
1999 1998
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(UNAUDITED) (NOTE)
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ASSETS
Current assets:
Cash and cash equivalents $ 11,913,074 $ 14,041,777
Short-term investments 967,074 1,219,385
Prepaid expenses and other current assets 731,837 519,848
---------------------- ----------------------
Total current assets 13,611,985 15,781,010
Restricted cash - noncurrent 72,600 72,600
Property and equipment, net 3,362,644 3,413,127
---------------------- ----------------------
Total Assets $ 17,047,229 $ 19,266,737
---------------------- ----------------------
---------------------- ----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 366,225 $ 858,819
Accrued expenses 576,413 787,917
Notes payable to a related party, including accrued interest 632,824 624,385
Note payable to bank 222,222 222,222
Deferred revenue 254,393 164,232
---------------------- ----------------------
Total current liabilities 2,052,077 2,657,575
Note payable to bank 685,185 722,222
Stockholders' equity:
Common Stock, par value $.001; 40,000,000 shares authorized; 10,584,189
and 10,521,903 shares issued and outstanding
at March 31, 1999 and December 31, 1998, respectively 10,584 10,522
Additional paid-in capital 24,185,287 24,124,429
Deferred compensation (799,593) (986,062)
Note receivable secured by common stock (168,750) (165,000)
Accumulated other comprehensive loss (1,206) (4,487)
Accumulated deficit (8,916,355) (7,092,462)
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Total stockholders' equity 14,309,967 15,886,940
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Total Liabilities and Stockholders' Equity $ 17,047,229 $ 19,266,737
---------------------- ----------------------
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</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
1
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<CAPTION>
COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED MARCH 31,
1999 1998
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(UNAUDITED)
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Revenues under collaborative
research and development
agreement with a related party $ 1,722,819 $ 989,378
Expenses:
Research and development 2,312,441 1,454,615
General and administrative 1,369,013 759,260
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Total operating expenses 3,681,454 2,213,875
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Loss from operations (1,958,635) (1,224,497)
Interest income 165,788 91,056
Interest expense (31,046) (9,932)
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Net loss $ (1,823,893) $ (1,143,373)
------------------ ------------------
------------------ ------------------
Net loss per share (basic and diluted) $ (0.17) $ (0.22)
------------------ ------------------
------------------ ------------------
Weighted average shares used in
computing net loss per share
(basic and diluted) 10,486,260 5,313,236
------------------ ------------------
------------------ ------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
2
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<TABLE>
<CAPTION>
COLLATERAL THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
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THREE MONTHS ENDED MARCH 31,
1999 1998
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(UNAUDITED)
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OPERATING ACTIVITIES:
Net loss $ (1,823,893) $ (1,143,373)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 205,902 32,188
Amortization of deferred compensation 186,469 207,332
Changes in operating assets and liabilities:
Milestone receivable from a related party 2,000,000
Prepaid expenses and other current assets (211,989) (278,138)
Accounts payable and accrued expenses (695,659) 63,523
Deferred revenue 90,161 160,622
Restricted cash - (672,600)
Other 1,841 -
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Net cash provided by (used in) operating activities (2,247,168) 369,554
---------------------- ----------------------
INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments 250,000 -
Purchases of property and equipment (155,419) (298,585)
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Net cash provided by (used for) investing activities 94,581 (298,585)
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FINANCING ACTIVITIES:
Proceeds from issuance of common stock 60,920 -
Payments on note payable to bank (37,036) -
---------------------- ----------------------
Net cash provided by financing activities 23,884 -
---------------------- ----------------------
Net increase (decrease) in cash and cash equivalents (2,128,703) 70,969
Cash and cash equivalents at beginning of period 14,041,777 5,605,361
---------------------- ----------------------
Cash and cash equivalents at end of period $ 11,913,074 $ 5,676,330
---------------------- ----------------------
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</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
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COLLATERAL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
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1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND BUSINESS
We are focused on the discovery, development and commercialization of
non-surgical gene therapy products for the treatment of cardiovascular
diseases, including coronary artery disease, peripheral vascular disease,
congestive heart failure and heart attack. We intend to focus on research and
development of products while leveraging our technology through the
establishment of product development, manufacturing and marketing
collaborations with select pharmaceutical and biotechnology companies. We
were incorporated in California on April 3, 1995 and reincorporated in
Delaware on May 28, 1998.
INTERIM CONDENSED FINANCIAL STATEMENTS
The balance sheet as of March 31, 1999 and the statements of operations
and cash flows for the three months ended March 31, 1999 and 1998 are
unaudited. In the opinion of management all adjustments, consisting only of
normal recurring accruals, considered necessary for a fair presentation have
been included. Interim results are not necessarily indicative of the results
to be expected for the full year. As these are condensed financial
statements, you should also read the financial statements and footnotes
contained in our latest Form 10-K.
2. COMPREHENSIVE LOSS
Total comprehensive loss was $1,820,612 and $1,143,373 for the three
months ended March 31, 1999 and 1998, respectively.
3. NET LOSS PER SHARE
Recent interpretations by the SEC have altered the treatment of
preferred stock previously included in computing certain earnings per share
data in periods prior to our initial public offering, completed in July 1998.
We previously considered preferred stock, which converted into common stock
upon completion of the public offering, as outstanding from the date of
original issuance ("as-if converted method") in computing earnings per share.
To conform with the recent interpretations, we have revised our calculation
of earnings (loss) per share for all pre-offering periods to exclude the
impact of preferred shares.
When we filed our Post-Effective Amendment No. 3 to Form S-1 with the
SEC on July 2, 1998, we followed the then-current SEC interpretations for the
treatment of preferred stock in presenting pro forma net loss per share
(basic and diluted) on the Statements of Operations. For comparative
purposes, the schedule below presents the net loss per share (basic and
diluted) for the three months ended March 31, 1999 and 1998 and the pro forma
net loss per share for the three months ended March 31, 1998, under the as-if
converted method.
4
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THREE MONTHS ENDED
MARCH 31,
------------------------------------------
1999 1998
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PRO FORMA
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Net loss............................................... $ (1,823,893) $ (1,143,373)
Weighted average shares of common stock outstanding and
shares used in computing net loss per share (basic and
diluted)............................................... 10,486,260 5,313,236
-------------------- --------------------
Net loss per share (basic and diluted)................... $ (0.17) $ (0.22)
-------------------- --------------------
Pro forma adjustment to reflect the effect of the
assumed conversion of preferred stock.................. - 2,320,926
-------------------- --------------------
Shares used in computing pro forma net loss per share
(basic and diluted).................................... 10,486,260 7,634,162
-------------------- --------------------
Pro forma net loss per share
(basic and diluted)................................... $ ( 0.17) $ (0.15)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED IN ITEM 1. OF THIS QUARTERLY REPORT
ON FORM 10-Q AND THE AUDITED FINANCIAL STATEMENTS AND RELATED NOTES AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1998. SEE "RISKS AND UNCERTAINTIES" FOR A DISCUSSION OF FACTORS
KNOWN TO US THAT COULD CAUSE REPORTED FINANCIAL INFORMATION NOT TO BE
NECESSARILY INDICATIVE OF FUTURE RESULTS. WE ARE NOT OBLIGATED TO PUBLICLY
RELEASE THE RESULTS OF ANY REVISIONS TO FORWARD-LOOKING STATEMENTS TO REFLECT
EVENTS AND CIRCUMSTANCES ARISING AFTER THE DATE THIS REPORT IS FILED.
OVERVIEW
We are focused on the discovery, development and commercialization of
non-surgical gene therapy products for the treatment of cardiovascular
diseases, including coronary artery disease, peripheral vascular disease,
congestive heart failure and heart attack. We believe that our products under
development hold the potential to revolutionize the treatment of
cardiovascular diseases and that our products may result in a new standard of
care. This standard might offer patients simpler, more cost-effective and
lower-risk alternatives to currently available treatments, such as coronary
artery bypass surgery, angioplasty and certain drug therapy. Our initial
non-surgical gene therapy products are designed to promote and enhance
angiogenesis, a natural biological process that results in the growth of
additional blood vessels which can carry blood flow to oxygen-deprived
tissues.
In May 1996, we entered into a collaboration, license and royalty
agreement with Schering AG of Germany for angiogenic gene therapy products.
Under this collaboration, Schering AG has made equity investments and
provided loans to us. In addition, the collaboration provides for Schering
AG, subject to certain conditions, to pay research support through April
2001, to make additional payments upon satisfying certain research,
development and commercialization
5
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milestones and, when and if angiogenic gene therapy products developed under
the collaboration are commercialized, to make royalty payments to us based on
worldwide net sales of such products.
This collaboration has been structured to provide us with financial
resources and product development support to enable us to determine the
safety and efficacy of certain angiogenic gene therapy products. However, the
timing and amounts of such payments cannot be predicted with certainty and
may not occur if product development milestones are not achieved. Schering AG
has the unilateral right to terminate this agreement on 60 days prior written
notice to us. Upon such notice, Schering AG is required to pay us a
termination fee. In addition, Schering AG has agreed to provide us with
copies of all investigational new drug applications or any other such
submissions that had been filed by Schering AG with all regulatory health
authorities with respect to products covered under the Schering agreement,
and to allow us to reference such documents.
Our revenue to date is primarily attributable to our collaboration with
Schering AG, entered into in May 1996. Under this collaboration, we received
aggregate research funding of $14.7 million from May 1996 through March 31,
1999, which included $2.0 million for the achievement of a milestone relating
to the development of GENERX-TM- and $0.3 million which was recorded as
deferred revenue as of March 31, 1999. From our incorporation in 1995 through
March 31, 1999, collaboration revenues for ongoing research support and
related operating expenses have trended upward due to accelerated research
and development efforts as we have broadened our research in the field of
angiogenic gene therapy to include two angiogenic gene therapy products,
GENEVX-TM- and GENVASCOR-TM-.
Since inception, we have also conducted research in the area of
non-surgical cardiovascular gene therapy that is not funded by our
collaboration with Schering AG. Accordingly, our operating expenses have
exceeded revenues each year. Losses have resulted principally from costs
incurred in research and development activities related to our efforts to
develop our technologies in the area of non-surgical cardiovascular gene
therapy and from administrative costs required to support our efforts, to the
extent our costs were not covered by the Schering AG collaboration. Losses
have totaled $8.9 million over the four years since our inception in April of
1995.
Our losses through March 31, 1999 have been primarily funded by our
initial public offering, the private sale of equity securities and receipt of
loans. Our ability to achieve profitability is dependent on our ability to
successfully develop our products and then successfully market our products
through current or future collaborative partners. We may never achieve
profitability at all, or on a sustained basis.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Our collaborative revenue was $1.7 million and $1.0 million for the
three months ended March 31, 1999 and 1998, respectively. All revenue was
derived from our research and development agreement with Schering AG. The
increase in revenue was due to increased costs reimbursable to us under such
agreement associated with accelerated research and development activities.
6
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Research and development expenses for the three months ended March 31,
1999 rose to $2.3 million from $1.5 million for the three months ended March
31, 1998. Higher research and development expenses were primarily due to
increased expenses associated with additional personnel, increased expenses
for supplies and operations of our new preclinical research center and
increased use of outside research institutions and consultants.
General and administrative expenses were $1.4 million for the three
months ended March 31, 1999 compared to $0.8 million for the three months
ended March 31, 1998. The increase was primarily due to increased expenses
for personnel to support expanded research efforts, increased costs related
to our new corporate facilities, increased costs associated with being a
public company and increased investor relations and educational materials.
LIQUIDITY AND CAPITAL RESOURCES
In 1998, we completed an initial public offering of 2.2 million shares
of our common stock, providing us with proceeds, net of underwriting fees and
offering expenses, of $13.0 million. Through March 31, 1999, we financed our
operations primarily through public and private offerings of equity
securities, collaborative research revenue and loans from Schering AG, a bank
loan and interest income. From inception through March 31, 1999, we raised
$13.0 million in net proceeds from our initial public offering, an aggregate
of $10.3 million through private sales of equity securities and receipt of
loans, including $5.7 million in equity investments and $500,000 in loans
from Schering AG, $3.1 million in equity provided by other private investors,
and $1.0 million borrowed from a bank. We are making monthly principal
payments of $18,500 plus interest on the bank loan. These payments extend
through April 2003. The loan bears interest at prime plus 1.25% (9% at March
31, 1999) and is secured by the equipment and furniture acquired. The loan is
subject to certain covenants including minimum working capital levels and the
requirement that we must obtain the lender's consent for certain additional
indebtedness. The $500,000 in loans from Schering AG consists of two
promissory notes issued in 1995 to fund operations. The notes bear interest
at 1% below the prime rate, which was 6.75% at March 31, 1999. The notes are
secured by our assets, except for certain equipment purchased in 1998, which
are pledged on a first priority basis under our bank loan. Principal and
interest on these notes are due and payable upon demand on or after June 30,
1999.
At March 31, 1999, cash and cash equivalents and short-term investments
were $12.9 million compared to $15.3 million at December 31, 1998. Decreases
in cash, cash equivalents and short-term investments were primarily due to
research and development expenses and general and administrative expenses not
funded under our collaboration with Schering AG. We generally invest excess
cash in high credit quality debt instruments of corporations and financial
institutions. Working capital decreased by $1.6 million to $11.6 million
during the quarter ended March 31, 1999. This decrease was primarily due to
the $1.8 million loss for the quarter.
We have entered into certain technology license agreements in addition
to the Schering agreement related to our technology portfolio covering
methods of gene therapy, therapeutic genes, and gene delivery vectors. To
retain certain licensing rights under these cancelable agreements, we
anticipate that we may be required to make aggregate payments of
approximately $1.2 million through 2000.
7
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Our core technologies are focused on the development of non-surgical
cardiovascular gene therapy products that promote angiogenesis, enhance
myocardial adrenergic signaling or promote heart muscle regeneration. We have
in-licensed certain technology covering proprietary methods of gene therapy
and a portfolio of therapeutic genes for use with our methods of gene
therapy. We have currently designated one gene, fibroblast growth factor-4,
licensed from New York University, for use in the development of two
angiogenic gene therapy products: (1) GENERX-TM-, a non-surgical angiogenic
gene therapy product as a treatment for patients with stable exertional
angina due to coronary artery disease, and (2) GENVASCOR-TM-, a non-surgical
angiogenic gene therapy treatment for patients with peripheral vascular
disease. These are the only angiogenic gene therapy products currently in
development by us for which a specific gene has been designated. Upon any
successful commercialization of these two angiogenic gene therapy products
using this designated gene, the total financial milestone obligations,
licensing fees and other related amounts payable by us under license
agreements with New York University, covering the use of the fibroblast
growth factor-4 gene, and the University of California, covering certain
technology relating to methods of gene therapy, could total up to $5.0
million. This amount includes $1.2 million, which we have already paid as of
March 31, 1999. In addition, upon any successful commercialization of such
products, we would be required to make, under the license agreements, royalty
payments on worldwide net sales of products that utilize such gene. However,
we may, in our sole discretion, change such designated gene at any time and
the license agreement covering such designated gene could be terminated by us.
In addition to GENERX-TM- and GENVASCOR-TM-, we have two other
non-surgical angiogenic gene therapy products, GENEVX-TM- and GENECOR-TM-,
which are progressing through our pre-clinical research. The angiogenic genes
to be designated by us for use in development of GENEVX-TM- and GENECOR-TM-
will not be finalized until we have progressed further in our evaluation
process. Based on our current agreements covering in-licensed technology, if
our non-surgical cardiovascular gene therapy products are successfully
commercialized, our total financial obligations pursuant to licensing
agreements with respect to all four of our products which are currently
beyond the research stage could range from between $6.9 million to $8.2
million, of which $3.0 million has been paid through March 31, 1999. Our
financial obligations will vary depending on the selections of therapeutic
genes for use in our angiogenic gene therapy products, GENEVX-TM- and
GENECOR-TM-. However, such amounts could be significantly increased or
decreased depending on the outcome of our research and commercialization
activities pursuant to the collaboration with Schering AG and/or the outcome
of our internally-funded research. In addition, we would be required to pay a
royalty on worldwide net sales of products that utilize in-licensed
technology. The information set forth above with respect to potential fees
payable by us for in-licensed technology involves many variables and is
subject to a high degree of potential variation. We may also be required to
obtain license rights to other methods of gene therapy, therapeutic genes
and/or vectors based on our product development and commercialization
requirements.
To date, all revenue received by us has been from our collaboration with
Schering AG, and we expect that substantially all revenue for the next
several years will continue to come from this and other potential
collaborations. Under the Schering agreement, we may receive: (1) research
and development funding for an initial product, which amount may be adjusted
to support research and development for additional products within the field
of angiogenic gene therapy, (2) milestone payments for the initial product
and for each new product based on our achievement of milestones pertaining to
certain regulatory filings and the development and commercialization of
products; and
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(3) royalty payments based on worldwide net sales of each product and an
additional royalty based on worldwide net sales and the product's cost of
goods, up to a maximum specified royalty rate. We may not be able to
establish additional collaborations on acceptable terms, if at all, or assure
that current or future collaborations will be successful and provide adequate
funding to meet our needs. Schering AG currently reimburses us for research
and development expenses related to certain angiogenic gene therapy products
and for certain related administrative expenses. We expect to incur increases
in operating expenses over the next two years as we accelerate our research
and development activities consistent with product development programs and
other collaborations into which we may enter. Increases in operating expenses
will include, but are not limited to, increased personnel costs, rent,
supplies and other costs resulting from operating our new facilities. To the
extent such costs are incurred in fields other than angiogenic gene therapy
or are otherwise not reimbursable under the current arrangement with Schering
AG, we intend to use proceeds from the public offering completed in July 1998
and future debt or equity financings to cover such expenses.
Based on our business strategy, the development of non-surgical
cardiovascular gene therapy products will require our continued commitment of
substantial resources to conduct research, preclinical studies and clinical
trials, and to augment quality control, regulatory and administrative
capabilities. Our future capital requirements will depend on many factors,
including the pace of scientific progress in our research and development
programs, the magnitude of these programs, the scope and results of
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims, competing technological
and market developments, our dependence on third parties for activities
related to the development and commercialization of our potential products
(including our need to establish additional collaborations and potential
changes to our existing collaboration with Schering AG), the cost of
third-party manufacturing arrangements and the effectiveness of our product
commercialization activities. We believe that our available cash and
anticipated sources of funding including Schering AG, together with the net
proceeds of the public offering, would be adequate to satisfy our anticipated
capital requirements through the second quarter of 2000. We expect that we
will seek any additional capital needed to fund our operations through new
collaborations, the extension of our existing collaboration, or through
public or private equity or debt financings. We may not be able to obtain
additional financing on acceptable terms if at all. Any inability to obtain
additional financing could have a material adverse effect on us. In addition,
so long as certain debt remains outstanding, we must obtain creditors'
consents for certain additional indebtedness.
IMPACT OF THE YEAR 2000 OR Y2K
The Y2K issue refers to the inability of certain date-sensitive computer
chips, software and systems to accept other than two-digit entries in the
date field. As a result, in the Year 2000, many systems could mistake "00"
for 1900 or any other incorrect year, resulting in system failures or
miscalculations. These failures or miscalculations could disrupt operations,
including manufacturing, the processing of transactions and other normal
business activities. This is a significant issue for most companies. The
ramifications cannot be predicted with any degree of certainty. Our failures
or the failures of any of our collaborators, clinical trial sites, suppliers
or any other third parties' computers systems could have a material adverse
impact on our operations.
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STATE OF READINESS. We recognize the need to minimize the potential
adverse impact of Y2K issues on our operations. We have developed a
three-phase program for Y2K systems compliance. The first phase is to assess
our key systems for Y2K readiness. This phase includes assessing the impact
of third parties whose systems may not be Y2K compliant. The second phase
involves the testing of key systems for Y2K deficiencies. The final phase
involves the development of contingency plans for unresolved Y2K
deficiencies, such as our suppliers and service providers failing to
adequately address their Y2K problems.
ASSESSMENT. Since we are a relatively new company, the majority of our
information technology and non-information technology systems were acquired
during 1998. We have purchased well-known hardware and software believed to
be Y2K compliant. We do not develop or customize any key software. To further
confirm the readiness of critical systems, we obtained documentation from
hardware and software manufacturers. This documentation indicated that all
such systems were Y2K compliant. Our main systems do not interface directly
with those of third parties. We have contacted and will continue to contact
key suppliers of goods and services to assess their readiness. However, we
are unable to control whether our current and future collaborative partners',
clinical trial sites', or suppliers' systems are Y2K compliant. The
assessment phase was completed in the first quarter of 1999.
TESTING. We tested our workstations in a Y2K environment to ensure
systems perform properly. However, we do not intend to test recently
purchased software and hardware that have been certified as Y2K compliant by
the manufacturers. The testing phase of our Y2K evaluation was completed in
the first quarter of 1999.
COSTS TO ADDRESS OUR Y2K ISSUES. We are expensing Y2K compliance costs
as incurred. We do not expect these costs to be material to our financial
position or results of operations. To date the costs related to Y2K issues
have been minimal, consisting only of time spent by existing personnel to
review systems, obtain documentation, and carry out other procedures
discussed above. We have not needed to incur capital expenditures to address
Y2K problems. We expect our total cost of reviewing and obtaining Y2K
compliance to be less than $25,000. This estimate is based on currently
available information and will be updated if deemed necessary.
THE RISKS OF OUR Y2K ISSUES. If any key information technologies or
embedded microprocessor technology systems are overlooked, there could be a
material adverse effect on our business. For example, our operations could be
adversely affected to the extent that our suppliers, collaborators, or
clinical trial sites are adversely affected by Y2K.
Further, if our vendors or the suppliers of our necessary energy,
telecommunications and transportation needs fail to provide us with (1) the
materials and services which are necessary to develop our products, (2) the
electrical power and other utilities necessary to sustain our operations, or
(3) reliable means of transporting supplies to us, such failure could have a
material adverse effect on our business.
OUR CONTINGENCY PLAN. Our contingency plan includes identifying
alternatives for all key laboratory suppliers and services. Further, we
maintain a short-term back-up power generation system for key scientific
equipment at our preclinical research center. The back-up power system is
expected to be adequate to sustain our preclinical research center for at
least several days. However, we do not maintain a back-up power generation
system for our
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administrative office. Although our contingency plan is essentially complete,
we intend to update it on an ongoing basis as needed.
RISKS AND UNCERTAINTIES
RISKS RELATED TO OUR BUSINESS
OUR PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND MAY NEVER BE
SUCCESSFULLY COMMERCIALIZED.
All of our potential products are in the early stages of development.
Even if they advance in development we cannot be sure that we or our partners
could obtain regulatory product approvals. Before we can sell our products,
we must undertake the time-consuming and costly process of developing,
testing and obtaining regulatory approval for each product. To date, only one
of our products, GENERX-TM-, has advanced to clinical trials. To date,
regulatory authorities have not reviewed or approved any of our products.
After developing, testing and obtaining regulatory product approval, we,
alone or with others, must market and sell our products to achieve profitable
operations. We do not expect our products to be available for sale for a
number of years, if at all. There are many reasons that we may fail in our
efforts to develop our products, including the possibility that:
- our products will be ineffective, toxic or will not receive regulatory
clearances,
- our products will be too expensive to manufacture or market or will
not achieve broad market acceptance,
- others will hold proprietary rights that will prevent us from
marketing our products, or
- others will market equivalent or superior products.
The success of our business depends on our ability to successfully
develop and market our products.
OUR PRODUCTS MAY NOT SUCCESSFULLY COMPLETE CLINICAL TRIALS REQUIRED FOR
COMMERCIALIZATION.
THE CLINICAL TRIALS PROCESS IS COMPLEX AND UNCERTAIN. We cannot be
certain that we will successfully complete clinical trials necessary to
receive regulatory product approvals. This process is lengthy and expensive.
To obtain regulatory approvals, we must demonstrate through preclinical
studies and clinical trials that our products are safe and effective for use
in at least one medical indication. Promising results in preclinical studies
and initial clinical trials do not ensure successful results in later
clinical trials, which test broader human use of our products. Many companies
in our industry have suffered significant setbacks in advanced clinical
trials, despite promising results in earlier trials. Clinical trials may not
result in a marketable product.
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Other factors may adversely affect clinical trials. For example,
clinical trials are often conducted with patients who have the most advanced
stages of disease. During the course of treatment, these patients can die or
suffer other adverse conditions for reasons that may not be related to the
proposed product being tested. These reactions may nevertheless adversely
affect our clinical trial results and our business.
In addition, our ability to complete clinical trials depends on many
factors, including, obtaining adequate clinical supplies and having a
sufficient rate of patient recruitment. For example, patient recruitment is a
function of many factors, including:
- the size of the patient population;
- the proximity of patients to clinical sites; and
- the eligibility criteria for the trial.
Even if patients are successfully recruited, we cannot be sure that they
will complete the treatment process. Delays in patient enrollment or
treatment in clinical trials may result in increased costs, program delays or
both, which could adversely affect us.
With respect to foreign markets, we or our partner will also be subject
to foreign regulatory requirements governing clinical trials. Even if we
complete clinical trials, we may not be able to submit a marketing
application. If we submit an application, the regulatory authorities may not
review or approve it in a timely manner, if at all.
OUR COLLABORATORS MAY CONTROL ASPECTS OF OUR CLINICAL TRIALS. Our
collaborative partners may have or acquire rights to control aspects of our
product development and clinical programs. For example, Schering AG has
certain rights to control the planning and implementation of product
development and clinical programs related to angiogenic gene therapy
products. As a result, we may not be able to conduct these programs in the
manner we currently contemplate.
If we fail to demonstrate adequately the safety and effectiveness of a
product, the FDA may delay or withhold product approval, which would
adversely affect our business. In addition, the FDA may require additional
clinical trials, which could result in increased costs and significant
development delays.
OUR PRODUCTS MAY HAVE UNACCEPTABLE SIDE EFFECTS. Possible side effects
of gene therapy technologies may be serious and life-threatening. For
example, possible serious side effects of viral vector-based gene transfer
include viral infections resulting from contamination with
replication-competent viruses and inflammation or other injury to the heart
or other parts of the body. In addition, the development of cancer in a
patient is a possible side effect of all methods of gene transfer.
Furthermore, there is a possibility of side effects or decreased
effectiveness associated with an immune response toward any viral vector or
gene used in our treatments. The possibility of such response may increase if
there is a need to deliver the viral vector more than once. The occurrence of
any unacceptable side effects during or after preclinical and clinical
testing of our potential products could delay approval of our products and
adversely affect our business.
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WE HAVE INCURRED LOSSES SINCE INCEPTION AND MAY NEVER BE PROFITABLE.
We formed our company in 1995 and have only a limited operating history
to review in evaluating our business and prospects. We have incurred
operating losses since our inception in 1995. As of March 31, 1999, our
accumulated deficit was approximately $8.9 million. We expect to incur
additional losses for the foreseeable future. We also expect our losses to
increase as our research and development efforts and clinical trials progress.
To date, we have not generated any revenue from product sales. We do not
expect to generate any revenue from our products for a number of years, if at
all. If we, alone or with our collaborators, do not successfully develop,
manufacture and commercialize our products, we may never achieve
profitability. Even if we do achieve profitability, we cannot predict the
level of such profitability.
RISKS RELATED TO PATENTS AND PROPRIETARY INFORMATION.
OUR BUSINESS SUCCESS DEPENDS UPON OUR PATENTS AND PROPRIETARY
INFORMATION. Our business success will depend in part on our ability and that
of our licensors to:
- obtain patent protection for our methods of gene therapy, therapeutic
genes and/or gene-delivery vectors both in the U.S. and in foreign
countries,
- defend patents once obtained,
- maintain trade secrets and operate without infringing upon the patents
and proprietary rights of others, and
- obtain appropriate licenses to patents or proprietary rights held by
others with respect to our technology, both in the U.S. and in foreign
countries.
WE MAY NOT HAVE ADEQUATE PATENT PROTECTION FOR OUR PRODUCTS. We cannot
be certain that we or our collaborators will have adequate patent protection
for our products. We intend to file additional applications for patents
covering our methods of gene therapy, therapeutic genes and gene delivery
vectors. To date, we exclusively license rights covered by two U.S. issued
patents. We have also filed or have licensed rights to more than 10 currently
pending patent applications in the U.S. relating to our technology, as well
as foreign counterparts of certain of these applications. We cannot be
certain that patents will issue from any of these applications. Even if
patents are issued to us or to our licensors, these patents may be
challenged, held unenforceable, invalidated or circumvented. In addition, the
rights granted may provide insufficient proprietary protection or commercial
advantage.
The patent positions of pharmaceutical and biotechnology companies,
including our own, are often uncertain and involve complex legal and factual
questions. In addition, the coverage claimed in a patent application can be
significantly reduced before, and in some cases after, a patent is issued. We
do not know whether any patent applications will result in the issuance of
patents. If any patents are issued, we do not know whether the patents will
be subjected to further proceedings limiting their scope, whether they will
provide significant proprietary protection or will be held unenforceable,
circumvented or invalidated. Patent applications in the U.S. are maintained
in secrecy until patents issue. Patent applications in other countries
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generally are not published until up to 18 months after they are first filed.
Further, publication of discoveries in scientific or patent literature often
lags behind actual discoveries. As a result, we cannot be certain that we
were or any licensor was the first creator of inventions covered by our
patents or applications or that we were or our licensor was the first to file
such patent applications. Changes in patent laws may also adversely affect
our operations.
A number of pharmaceutical and biotechnology companies and research and
academic institutions have developed technologies, filed patent applications
or received patents on various technologies that may be related to our
business. Some of these technologies, applications or patents may conflict
with our technologies or patent applications. A conflict could limit the
scope of the patents, if any, that we may be able to obtain or result in
denial of our or our licensor's patent applications. In addition, if patents
that cover our activities are issued to other companies, we cannot be sure
that we could develop or obtain alternative technology.
In addition, some of our products rely on patented inventions developed
using U.S. government resources. The U.S. government retains certain rights
in such patents, and may choose to exercise its rights.
WE MAY NOT BE ABLE TO SUCCESSFULLY RESOLVE A CONFLICT REGARDING PATENT
RIGHTS. As the biotechnology industry expands and more patents are issued,
the risk increases that our processes and potential products may give rise to
claims that they infringe on the patents of others. Others could bring legal
actions against us claiming damages and seeking to stop clinical testing,
manufacturing and marketing of the affected product or use of the affected
process. Litigation may be necessary to enforce our proprietary rights or to
determine the enforceability, scope and validity of proprietary rights of
others. If we become involved in litigation, it could be costly and divert
our efforts and resources. If there were an adverse outcome of any
litigation, our business could be adversely affected.
In addition, if any of our competitors file patent applications in the
U.S. claiming technology also invented by us, we may participate in
interference proceedings held by the U.S. Patent and Trademark Office to
determine priority of invention and the right to a patent for the technology.
Like litigation, interference proceedings can be lengthy and often result in
substantial costs and diversion of resources.
Besides potential liability for significant damages, we could be
required to obtain a license to continue to make or market the affected
product or use the affected process. Costs of a license may be substantial
and could include ongoing royalties. We may not be able to obtain such a
license on acceptable terms.
WE MAY NOT HAVE ADEQUATE PROTECTION FOR OUR UNPATENTED PROPRIETARY
INFORMATION. We also rely on trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
our competitive position. However, others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets or disclose our technology. To protect our
trade secrets, we require confidentiality agreements upon beginning
employment, consulting or collaboration with us. Agreements with employees
also provide that all inventions resulting from work performed by them while
in our employ will be our exclusive property. However, these agreements may
not provide meaningful protection of our trade secrets or adequate remedies
in the event of unauthorized use or disclosure of such information. Likewise,
our trade
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secrets or know-how may become known through other means or be independently
discovered by our competitors. Any of these events could adversely affect our
business.
RISKS RELATED TO OUR RELIANCE ON COLLABORATIVE RELATIONSHIPS AND LICENSING
ARRANGEMENTS.
WE MAY NOT BE ABLE TO SUCCESSFULLY ESTABLISH AND MAINTAIN COLLABORATIVE
AND LICENSING ARRANGEMENTS. Our strategy for the development, testing,
manufacturing and commercialization of our potential products relies on our
establishing and maintaining collaborations with corporate partners,
licensors, licensees and others. At present we have a collaboration with
Schering AG. We may not be able to maintain or expand this collaboration or
establish additional collaborations or licensing arrangements necessary to
develop and commercialize potential products based on our technology. If we
are successful in establishing additional collaborations or licensing
arrangements, they may not be on favorable terms. The collaborations or
licensing arrangements also may not ultimately be successful. Any failure to
enter into additional collaborative or licensing arrangements on favorable
terms would adversely affect our business.
Under our current strategy, and for the foreseeable future, we will rely
on our collaborative partners to develop or market our products. As a result,
we will depend on collaborators to perform the following activities:
- fund preclinical studies,
- fund clinical development,
- obtain regulatory approval, and
- manufacture and market any successfully developed products.
We may not be able to control the amount and timing of resources our
current and future collaborators devote to our programs or potential
products. For example, manufacturers of our products may have significant
discretion over whether or not to pursue development activities with us. We
also cannot be certain that our collaborators will not pursue alternative
technologies, on their own or with others, to develop competitive gene
therapy products. If our collaborators develop competitive products, they may
withdraw support for our programs. Our collaborative partners also may breach
or terminate our agreements or otherwise fail to conduct their collaborative
activities successfully. As a result, our product development could be
delayed or terminated, which would adversely affect our business. In
addition, revenues we receive from marketed products under our collaborations
may depend on the marketing and sales efforts of our collaborators.
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Disputes may arise with our collaborators about who has ownership rights
to any technology developed. These disputes could have the following results:
- delay achievement of milestones or receipt of milestone payments,
- adversely affect collaborative research, development and
commercialization of certain potential products or
- lead to litigation or arbitration.
Any of these results could be time consuming, expensive and adversely
affect our business.
WE FACE ADDITIONAL RISKS RELATED TO OUR AGREEMENT WITH SCHERING AG. We
have entered into a research and development collaboration with Schering AG
in the field of angiogenic gene therapy. Under this agreement, Schering AG
has the following rights that could adversely affect the development of
potential products under our collaboration:
- discretion to pursue or not to pursue any development programs with
us,
- the right to terminate the agreement at any time if we materially
breach the agreement or on 60 days written notice subject to the
payment of a termination fee, and
- the right to terminate the agreement upon 90 days written notice,
without payment of a termination fee, if a competitor of Schering AG
or us acquires substantially all of our assets or 49% or more of our
voting stock.
We cannot be certain that this collaboration will continue or will be
successful.
We also intend to rely on our collaboration with Schering AG for
significant continued funding of our angiogenic gene therapy research
efforts. We cannot be certain Schering AG will continue to fund this
research, especially if they develop competitive products. If they reduce or
terminate this funding, we may have to fund clinical trials, product
development and commercialization ourselves by using additional resources or
by scaling back or terminating other research and development programs. In
addition, the rights to terminate could discourage interested buyers and
impact the value of our business. We also may need to seek alternative
collaborations or financing sources or sell or license rights to some of our
proprietary technology. If Schering AG withdraws support for our programs, it
could have a material adverse effect on our business.
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WE WILL NEED ADDITIONAL FUNDS TO CONTINUE OUR OPERATIONS IN THE FUTURE.
We will need substantial additional resources to develop our products.
Our future capital requirements will depend on many factors, including:
- the pace of scientific progress in our research and development
programs,
- the magnitude of our research and development programs,
- the scope and results of preclinical studies and clinical trials,
- the time and costs involved in obtaining regulatory approvals,
- the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims,
- the costs involved in any potential litigation,
- competing technological and market developments,
- our ability to establish additional collaborations,
- changes in existing collaborations,
- our dependence on others for development and commercialization of our
potential products,
- the cost of manufacturing and
- the effectiveness of our commercialization activities.
We believe that our cash and anticipated sources of funding, including
Schering AG, the net proceeds of our initial public offering and future debt
or equity financings will be adequate to satisfy our anticipated capital
needs through the second quarter of 2000. We intend to seek any additional
capital needed to fund our operations through new collaborations, the
extension of our existing collaboration or through public or private equity
or debt financings. However, additional financing may not be available on
acceptable terms or at all. Any inability to obtain additional financing
could adversely affect our business.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
We expect that our operating results will fluctuate from quarter to
quarter based on when we incur expenses and receive revenues from our
collaborative arrangements and other sources. The level of funding by
Schering AG may vary or they may withdraw funding altogether from one or more
of our products. If Schering AG were to withdraw funding, it could have a
material adverse affect on our business. We believe that some of these
fluctuations may be significant and could affect our stock price.
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WE MAY NOT BE ABLE TO SUCCESSFULLY MANUFACTURE OUR PRODUCTS.
We cannot be certain that we will be able to successfully manufacture
our products. We do not have internal manufacturing capabilities. Our current
strategy is to establish relationships with our collaborators and others to
manufacture our products for clinical trials and commercial sales. To date,
we have established a manufacturing relationship as part of our collaboration
with Schering AG. The agreement provides that Schering AG is solely
responsible for manufacturing gene therapy products developed under our
collaboration. We cannot be certain, however, that we will be able to
maintain our relationship with Schering AG or establish relationships with
other manufacturers on commercially acceptable terms. Any failure to do so
would adversely affect our business.
Further, our manufacturers may experience a variety of problems in
manufacturing our products, including:
- an inability to manufacture commercial quantities of our products on a
cost-effective basis,
- non-compliance with Good Manufacturing Practices mandated by the FDA
or by any foreign regulatory authority,
- manufacturing or quality control problems, or
- an inability to maintain the governmental licenses and approvals
required to continue manufacturing our products.
Any of these events could adversely affect our profitability and our
ability to develop and commercialize products on a timely and competitive
basis.
WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET AND SELL OUR PRODUCTS.
Our success will depend on the market acceptance of our products. The
degree of market acceptance will depend upon a number of factors, including:
- the receipt and scope of regulatory approvals,
- the establishment and demonstration in the medical community of the
safety and effectiveness of our products and their potential
advantages over other treatments, and
- reimbursement policies of government and healthcare payors.
In the past, parts of the medical community have been concerned with the
potential safety and effectiveness of gene therapy products derived from
disease-causing viruses such as adenoviruses, which we use in our proposed
gene therapy products. Physicians, patients, payors or the medical community
in general may not accept our products as safe or may not use any product
that we may develop. Failure to achieve or maintain significant market
acceptance would adversely affect our business.
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We do not have internal marketing and sales capabilities and may not be
able to successfully market and sell our products. Our current strategy is to
market and sell our products through our collaborative partners. For example,
our collaboration with Schering AG provides that they will be solely
responsible for marketing and selling gene therapy products we develop
together. We cannot be certain, however, that we will be able to maintain our
relationship with Schering AG or establish relationships with other drug or
healthcare companies with distribution systems and direct sales forces on
commercially acceptable terms. If we are required to market and sell our
products directly, we will need to develop a marketing and sales force with
technical expertise and distribution capability. Creating a marketing and
sales infrastructure is expensive and time-consuming and thus could divert
resources from other aspects of our business. In addition, to the extent we
enter into co-promotion or other licensing arrangements, any revenues we
receive will be dependent on the efforts of others, and we cannot be certain
that their efforts will be successful.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND ADVISORS.
Our success depends on the key members of our scientific and management
staff. The loss of one or more of these key members could impede our
development objectives. We do not have employment agreements with our
scientific or management staff. Certain key scientific staff members have
entered into scientific advisory consulting agreements with us. However,
these agreements may be terminated at any time by either party.
Our future success also depends on recruiting additional qualified
management, operations and scientific personnel. To pursue our research and
development programs, we will need to hire additional qualified scientists
and managers. There is intense competition for these qualified personnel
among numerous pharmaceutical and biotechnology companies, universities and
other research institutions. We may not be able to continue to attract and
retain the personnel necessary to develop our business. Any failure to
attract and retain key personnel could adversely affect our business
In addition, we rely on the members of our scientific advisory board to
help formulate our research and development strategy. All of our scientific
advisors are employed by others and may have commitments to, or consulting
contracts with, other entities that may limit their availability to us. Each
scientific advisor has agreed not to perform services for us that might
conflict with services the advisor performs for another entity. However, a
conflict of interest could result from these services and could adversely
affect our business.
WE MAY NOT HAVE ADEQUATE PROTECTION AGAINST PRODUCT LIABILITY.
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacture and sale of human healthcare products.
We have limited product liability insurance for our Phase 1/2 human clinical
trial for GENERX(TM). As it becomes necessary, we intend to expand our
insurance coverage to include clinical trials of other products under
development and the manufacture and commercial sale of our potential
products. We may be unable to obtain additional product liability insurance
on commercially acceptable terms. Failure to obtain product liability
insurance or to otherwise protect against product liability claims could
prevent or delay the commercialization of our products. Without insurance or
with inadequate insurance, a successful product liability claim or series of
claims could adversely affect our business. In addition, a product recall
could adversely affect our business.
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WE MAY INCUR SUBSTANTIAL COST RELATED TO OUR USE OF HAZARDOUS MATERIALS.
We use hazardous materials in our research and development activities.
As a result, we are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of hazardous
materials. The risk of contamination or injury from our activities exists.
For example, if an accident occurs, we could be responsible for any damages
and the amount of the damages could exceed our resources. In addition, we may
incur significant costs to comply with environmental laws and regulations in
the future. Any of these events could adversely affect our business.
OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT FLUCTUATIONS.
The market prices and trading volumes for securities of emerging
companies in our industry have historically been highly volatile and have
experienced significant fluctuations. Often, these fluctuations have been
unrelated or disproportionate to the operating performance of companies. The
market price of our common stock may be affected by announcements regarding:
- results of research,
- development testing,
- technological innovations,
- new commercial products,
- government regulation,
- developments concerning proprietary rights,
- litigation,
- public perception regarding the safety of our products or
- securities analysts' expectations.
Since our common stock is thinly traded, its price can also fluctuate
significantly as a result of large stock transactions. These fluctuations
could adversely affect our profitability and our ability to raise additional
capital and may delay commercialization of our products.
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OUR CHARTER AND BYLAWS CONTAIN PROVISIONS THAT MAY PREVENT TRANSACTIONS THAT
COULD BE BENEFICIAL TO STOCKHOLDERS.
Our charter and bylaws restrict certain actions by our stockholders. For
example:
- Our stockholders can act at a duly called annual or special meeting
but they may not act by written consent;
- Special meetings can only be called by our chief executive officer,
president, or chairman of the board or by our president or secretary
at the written request of a majority of the board of directors; and
- Stockholders also must give advance notice to the secretary of any
nominations for director or other business to be brought by
stockholders at any stockholders' meeting.
Some of these restrictions can only be amended by a super-majority vote
of members of the board and/or the stockholders. These and other provisions
of our charter and bylaws, as well as certain provisions of Delaware law,
could prevent changes in our management and discourage, delay or prevent a
merger, tender offer or proxy contest, even if the events could be beneficial
to our stockholders. These provisions could also limit the price that
investors might be willing to pay for our stock.
In addition, our charter authorizes our board of directors to issue
shares of undesignated preferred stock without stockholder approval on terms
that the board may determine. The issuance of preferred stock could decrease
the amount of earnings and assets available for distribution to our other
stockholders or otherwise adversely affect their rights and powers, including
voting rights. Moreover, the issuance of preferred stock may make it more
difficult for another party to acquire, or may discourage another party from
acquiring, voting control of us.
IF WE FAIL TO BE YEAR 2000 COMPLIANT IT COULD HARM OUR BUSINESS.
We have not fully completed tests to assure that our information
technology systems will function properly in the year 2000. If any key
information technologies or embedded microprocessor technology systems
related to our business and operations are not year 2000 compliant, there
could be a material adverse effect on our business. For further information
regarding the status of our ongoing investigations, related risks,
contingency plans and expenses, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Impact of the Year
2000 or Y2K."
RISKS RELATED TO OUR INDUSTRY
WE FACE INTENSE COMPETITION IN OUR INDUSTRY. In light of the intense
competition in our industry, we may not successfully manufacture and market
any potential products. We compete with several different types of entities,
including early-stage gene therapy companies, fully-integrated pharmaceutical
companies, universities, research institutions, governmental agencies and
other healthcare providers, as well as medical device companies.
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A number of companies and institutions are developing technologies,
therapies and/or products that could compete with our potential products. For
example, there are a number of potential gene therapy, cell therapy
treatments and angiogenic protein infusion therapies which could compete with
our potential products. Our products could also compete with drugs or other
pharmaceutical products. In addition, a number of new surgical procedures
could compete with our potential products, including:
- laser-based systems to stimulate angiogenesis in the heart, and
- catheter-based treatments including balloon angioplasty, atherectomy
and coronary stenting.
Many of our competitors have larger research and development staffs and
substantially more financial and other resources. These competitors also have
more experience and capability in researching, developing and testing
products in clinical trials, in obtaining FDA and other regulatory approvals
and in manufacturing, marketing and distribution.
In addition, the competitive positions of other early-stage companies
may be enhanced significantly through their collaborative arrangements with
large pharmaceutical companies, biotechnology companies or academic
institutions, which may be more beneficial than our collaborative
arrangements. Our competitors may succeed in developing, obtaining patent
protection for, receiving regulatory approvals for, or commercializing
products at a more rapid pace. If we are successful in commercializing our
products, we will be required to compete with respect to manufacturing
efficiency and marketing capabilities, areas in which we have no experience.
We also compete with others in acquiring products or technology from
research institutions, universities or others. Our competitors may develop or
acquire new technologies and products that are available for sale before our
potential products or are more effective than our potential products.
Any of these developments could render our potential products less
competitive or obsolete, and could have a material adverse effect on our
business. Further, gene therapy in general is a new and rapidly developing
technology. We expect this technology to undergo significant change in the
future. If there is rapid technological development, our current and future
products or methods may become obsolete before we can successfully
commercialize them.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION IN OUR INDUSTRY AND MAY
FAIL TO RECEIVE REGULATORY APPROVAL.
We and our collaborators are subject to extensive government regulation.
The FDA and foreign regulatory authorities require rigorous preclinical
testing, clinical trials and other product approval procedures. Numerous
regulations also govern the manufacturing, safety, labeling, storage, record
keeping, reporting and marketing of our drug products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary greatly from country to country. The process of obtaining
these approvals and complying with applicable government regulations is time
consuming and expensive. The time required to complete testing and obtain
approvals is uncertain, and approval may not be obtained. If product
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modification is needed, the test period could be substantially extended which
could adversely affect our business.
In addition, changes in regulatory policy or additional regulations
adopted during product development could also result in delays or rejections.
For example, gene therapy is relatively new and is only beginning to be
extensively tested in humans. Regulatory authorities may significantly modify
the requirements governing gene therapy.
Even after substantial time and expense, we may not be able to obtain
regulatory product approval by the FDA or any equivalent foreign authorities.
Moreover, the regulatory authorities may require us or our partners to
demonstrate that our products are improved treatments relative to other
therapies. If we obtain regulatory product approval, the approval may limit
the uses for which we may market the product. After regulatory approval is
obtained, our product, its manufacturer and related manufacturing facilities
will be subject to continual review and periodic inspections. Any subsequent
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on the product or manufacturer, including
withdrawal of the product from the market.
We are also subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control
Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state or local laws and regulations. We or our
partners may also be subject to similar regulations in other countries.
Failure to comply with such regulatory requirements or to obtain product
approvals could impair our ability to market our products and adversely
affect our business.
RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTY REIMBURSEMENT.
Our commercial success will depend heavily upon whether consumers will
be reimbursed for the use of our products. Third-party payors, such as
government and private insurance plans, may not authorize or otherwise budget
reimbursement for our products. Additionally, third-party payors, including
Medicare, are increasingly challenging the prices charged for medical
products and services. We may be required to provide substantial cost-benefit
analysis data to demonstrate that our products are cost-effective.
Third-party payors may not pay the prices set for our products or reimburse
consumers for the use of our products.
Federal and state regulations also affect the reimbursement to
healthcare providers of fees and capital equipment costs in connection with
medical treatment.
HEALTHCARE REFORM MAY ADVERSELY IMPACT THE COMMERCIALIZATION OF OUR PRODUCTS.
The efforts of governments and third-party payors to contain or reduce
the cost of healthcare will continue to affect our business and financial
condition as a biotechnology company. In foreign markets, pricing or
profitability of medical products and services may be subject to government
control. In the U.S., we expect that there will continue to be federal and
state proposals for government control of pricing and profitability. In
addition, increasing emphasis on managed healthcare has increased pressure on
pricing of medical products and will continue to do so. These cost controls
may have a material adverse effect on our revenues and profitability and may
affect our ability to raise additional capital.
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In addition, cost control initiatives could adversely affect our
business in a number of ways, including:
- decreasing the price we, or any of our partners or licensees, receive
for any of our products,
- preventing the recovery of development costs, which could be
substantial, and
- minimizing profit margins.
Further, our commercialization strategy depends on our collaborators. As
a result, our ability to commercialize our products and realize royalties may
be hindered if cost control initiatives adversely affect our collaborators.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We are a development stage company with products in the early stages of
development. As a result, a substantial number of statements contained in
this quarterly report on Form 10-Q and the 1998 annual report on Form 10-K,
including without limitation, statements containing the words "believes,"
"anticipates," "expects" and words of similar import, may constitute
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements, or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, those discussed under the caption "Risks and Uncertainties" as well
as those factors addressed in our annual report on Form 10-K filed with the
Securities and Exchange Commission. Given these uncertainties, investors and
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. We undertake no obligation to release publicly
the results of any revisions to these forward-looking statements to reflect
events and circumstances arising after the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None
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PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On July 8, 1998, we offered for sale 2.2 million shares of our
common stock priced at $7.25 per share, for an aggregate offering price of
$15,950,000, in an initial public offering led by an underwriting group
consisting of Bear, Stearns & Co. Inc., Raymond James & Associates, Inc. and
Vector Securities International, Inc. The registration statement on Form S-1
filed by us with the SEC in connection with the offering (File No.
333-51029), as amended, was declared effective by the SEC on June 24, 1998.
We then filed three post-effective amendments to the registration statement.
On July, 2, 1998, concurrent with our filing of post-effective amendment No.
3 to the registration statement, the SEC declared our amended registration
statement effective. Our net proceeds from the offering, after deducting the
total expenses, were $13.0 million.
Since the completion of the public offering in July 1998, the net
offering proceeds have been applied to approximately $5.0 million in working
capital and general corporate expenditures, including research and
development, and approximately $1.0 to purchase machinery, equipment and
leasehold improvements. Working capital and general corporate expenditures
include approximately $69,000 that was paid to our general counsel firm. A
partner of the general counsel firm is a member of our board of directors and
is a less than 10% stockholder. Except for our payment to our general counsel
firm, all of the payments indicated above were direct or indirect payments to
entities or persons other than: our directors, our officers, owners of
greater than 10% of any of our equity securities or our affiliates. We have
temporarily invested the $7.0 million balance of the offering proceeds in
cash equivalents and short-term investments. The cash equivalents consist
primarily of high credit quality debt instruments of corporations and
financial institutions with maturities of three months or less when purchased.
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Incorporated by reference to the Second Restated Certificate of
Incorporation of the Company filed as Exhibit 3.1 to the Form
10-Q for the quarter ended June 30, 1998, filed on August 6,
1998.
3.2 Incorporated by reference to the Restated Bylaws of the Company
filed as Exhibit 3.4 to Registration Statement No. 333-51029 on
Form S-1 filed on April 24, 1998, as amended.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the three month period ended
March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned.
COLLATERAL THERAPEUTICS, INC.
Date: April 30, 1999 \s\ Christopher J. Reinhard
---------------------------------
Christopher J. Reinhard
Chief Operating and Financial Officer
(Principal Financial and Accounting Officer)
26
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