UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
/ / Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 0-10379
INTERFERON SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2313648
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
783 Jersey Avenue, New Brunswick, New Jersey 08901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (908) 249-3250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 25, 1997, the aggregate market value of the
outstanding shares of the registrant's Common Stock, par value $.01
per share, held by non-affiliates (assuming for this calculation
only that all officers and directors are affiliates) was
approximately $66,110,960 based on the last reported sale price of
such stock on the NASDAQ Small Cap Market on March 24, 1997.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable
date.
Class Outstanding at March 25, 1997
Common Stock, par value $.01
per share 12,285,105 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1997
Annual Meeting of Stockholders are incorporated by reference into
Part III hereof.
<PAGE>
TABLE OF CONTENTS
Page
Item 1. Business 1
Item 2. Properties 21
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 52
Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management 53
Item 13. Certain Relationships and Related Transactions 53
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 54
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
Interferon Sciences, Inc. (the "Company") is a
biopharmaceutical company engaged in the study, manufacture, and
sale of pharmaceutical products based on its highly purified,
multispecies, natural source alpha interferon ("Natural Alpha
Interferon"). The Company's ALFERON N Injection(R) (Interferon
Alfa-n3) product has been approved by the United States Food and
Drug Administration ("FDA") for the treatment of certain types of
genital warts and is being studied for potential use in the
treatment of HIV, hepatitis C, and other indications. The Company
also is studying ALFERON N Gel(R) and ALFERON LDO(R), the Company's
topical and oral formulations of Natural Alpha Interferon, for the
potential treatment of viral and immune system diseases.
(b) Financial Information about Business Segments.
This Item is not applicable because the Company has only a
single line of business.
(c) Narrative Description of Business
Clinical Trials Summary
The table appearing below summarizes the more detailed
information contained elsewhere in this report concerning clinical
trials of ALFERON N Injection, ALFERON N Gel, and ALFERON LDO being
conducted or proposed to be conducted and is qualified in its
entirety by reference to that information.
Potential Status of Clinical
Product Application/ Trials(1) Sponsor
Indications
ALFERON N HIV-infected Initial Phase 1 completed (2)
Injection patients
Phase 3 in progress Company
Hepatitis C Three multi-center Company
Phase 2 -- two completed,
one in progress
Phase 2 in Mexico (3)
in progress
Phase 3 in previously Company
untreated patients in
progress
Multiple Phase 2 proposed Company (4)
sclerosis
Hepatitis B Phase 2 proposed Company (5)
ALFERON Cervical Phase 2 completed Company
N Gel dysplasia
Intravaginal Phase 2 proposed Company (4)
warts
Mucocutaneous Phase 2 proposed Company (4)
herpes in
immuno-
compromised
patients
Recurrent Phase 2 proposed Company (5)
genital herpes
ALFERON HIV-infected Two initial Phase 2 Company
LDO patients completed
Phase 3 in progress (6)
__________
(1) Generally, clinical trials for pharmaceutical products
are conducted in three phases. In Phase 1, studies are
conducted to determine safety and tolerance. In Phase 2,
studies are conducted to gain preliminary evidence as to the
efficacy of the product as well as additional safety data. In
Phase 3, studies are conducted to provide sufficient data to
establish safety and statistical proof of efficacy in a
specific dose. Phase 3 is the final stage of such clinical
studies prior to the submission of an application for approval
of a new drug or licensure of a biological product or for new
uses of a previously-approved product. See "Business --
Governmental Regulation."
(2) Sponsored by Walter Reed Army Institute of Research
("Walter Reed"). Funded by Purdue Pharma L.P. (collectively
with its affiliates, "Purdue") and the Company.
(3) Sponsored by Industria Farmaceutica Andromaco, S.A. De
C.V. ("Andromaco").
(4) This trial may be funded in whole or in part from the
Company's working capital. If not funded in whole from the
Company's working capital, the timing of this trial will be
dependent upon the Company's ability to obtain additional
funding or a sponsor.
(5) This trial will not be funded from the Company's working
capital. The timing of this trial will be dependent upon the
Company's ability to obtain additional funding or a sponsor.
(6) Sponsored by the National Institute of Allergy and
Infectious Diseases ("NIAID"). The Company provides clinical
supplies.
Scientific Background
Interferons are a group of proteins produced and secreted by
cells to combat diseases. Researchers have identified four major
classes of human interferon: alpha, beta, gamma, and omega. The
Company's three ALFERON products contain a form of alpha
interferon. The worldwide market for injectable alpha interferon-
based products has experienced rapid growth and various alpha
interferon injectable products are approved for 17 different
medical uses in more than 82 countries.
Alpha interferons are manufactured commercially in three ways:
by genetic engineering, by cell culture, and from human white blood
cells. In the United States, only two types of alpha interferon
are approved for commercial sale: recombinant (genetically
engineered) alpha interferon and Natural Alpha Interferon, which is
manufactured from human white blood cells. Outside of the United
States, sales of alpha interferon produced by cell culture account
for a significant portion of the market.
The Company believes that the potential advantages of Natural
Alpha Interferon over recombinant interferon may be based upon
their respective molecular compositions. An analysis of Natural
Alpha Interferon shows that it is composed of a family of proteins
containing many different molecular species of interferon. In
contrast, recombinant alpha interferons each contain only a single
species. Researchers have reported that the various species of
interferon may have differing anti-viral activity depending upon
the strain of virus. Natural Alpha Interferon presents a broad
complement of species which the Company believes may account for
its higher efficacy in laboratory studies with the HIV virus
compared with that of single species recombinant alpha interferon.
Natural Alpha Interferon is also glycosylated, or partially covered
with sugar molecules, which does not occur with recombinant alpha
interferon. The Company believes that the absence of glycosylation
may be responsible for the production of interferon-neutralizing
antibodies seen in patients treated with recombinant alpha
interferon.
The production of Natural Alpha Interferon is dependent upon
a supply of human white blood cells and other essential materials.
The Company currently obtains white blood cells from FDA-licensed
blood donor centers. The Company currently has no long-term
commitments for a supply of such white blood cells.
ALFERON N Injection
Approved Indication. On October 10, 1989, the FDA approved
ALFERON N Injection for the intralesional treatment of refractory
(resistant to other treatment) or recurring external genital warts
in patients 18 years of age or older. Substantially all of the
Company's revenues, to date, have been generated from the sale of
ALFERON N Injection for such treatment. Genital warts, a sexually
transmitted disease, are caused by certain types of human papilloma
viruses. A published report estimates that approximately eight
million new and recurrent cases of genital warts occur annually in
the United States alone. Genital warts are usually treated using
caustic chemicals or through physical removal methods. These
procedures can be quite painful and effective treatment is often
difficult to achieve.
Clinical Trials for New Indications. In an effort to obtain
approval to market ALFERON N Injection for additional indications
in the United States and around the world, the Company is focusing
its research program on conducting and planning various clinical
trials for new indications.
HIV-infected patients. The Human Immunodeficiency Virus
("HIV") infection is at epidemic levels in the world. The World
Health Organization projects that this virus will affect 30 to 40
million people by the year 2000. HIV infection usually signals the
start of a progressive disease that compromises the immune systems,
ultimately resulting in Acquired Immune Deficiency Syndrome
("AIDS"). The United States Centers for Disease Control estimates
that as of the middle of 1995, there were approximately 460,000
cases of AIDS in the United States and approximately 4.5 million
cases of AIDS worldwide. According to preliminary data from the
United States Centers for Disease Control, HIV infection became the
leading cause of death in persons ages 25-44 in the U.S. in 1995.
HIV-infected patients can be asymptomatic for many years before
being afflicted by opportunistic infections or cancer. The Company
believes that slowing the progression of the HIV infection in
healthier patients may help fight against the development of
opportunistic infections and cancer.
An article published in AIDS Research and Human Retroviruses
in 1993 by investigators at Walter Reed in collaboration with the
Company's scientists indicated that the various interferon species
display vast differences in their ability to affect virus
replication. Walter Reed researchers found that the Company's
Natural Alpha Interferon was 10 to 100 times more effective than
equal concentrations of recombinant interferons in blocking the
replication of HIV-1, the AIDS virus, in infected human cells in
vitro.
Moreover, the Company's scientists were able to separate
members of the interferon family in single protein fractions or
clusters of proteins using advanced fractionation techniques. The
individual fractions were tested for their ability to block HIV
replication in the laboratory by researchers at Walter Reed. They
found that the unusual anti-HIV activity was attributable to very
specific fractions in the Company's product. The most active
fractions are not present in marketed recombinant interferon.
This information provided additional support for a long-held
belief of the Company that its Natural Alpha Interferon has unique
anti-viral properties distinguishing it from recombinant interferon
products. In addition, published reports of trials using
recombinant alpha interferon in asymptomatic HIV-infected patients
indicated that while high doses blocked virus production in many
cases, such doses resulted in high levels of adverse reactions,
thereby limiting the usefulness of the recombinant product. These
facts led the Walter Reed researchers to conduct a Phase 1 clinical
trial with the Company's product in asymptomatic HIV-infected
patients.
In March 1992, Walter Reed launched a Phase 1 clinical trial
with asymptomatic HIV-infected patients to investigate the safety
and tolerance, at several dose regimens, of ALFERON N Injection,
self-injected subcutaneously for periods of up to 24 weeks. The
investigators concluded that the treatment was "surprisingly" well
tolerated by patients, at all dose regimens. Preliminary findings
were reported by Walter Reed at the IXth International Conference
on AIDS in Berlin in 1993. The investigators also reported that
CD4 white blood cell counts (which usually decrease in HIV-infected
patients) either stabilized or improved in most patients while on
therapy and that the expected interferon side effects, such as flu-
like symptoms, were rare or absent in the majority of patients
treated with the Company's product.
Although this Phase 1 clinical trial was designed primarily to
provide safety information on various doses of ALFERON N Injection
used for extended periods of time, there were encouraging
indications that certain disease parameters had stabilized or even
improved in certain patients by the end of the experimental
treatment.
In a follow-up analysis of patients' blood testing data, it
was found that after an average of 16 months after treatment, CD4
white blood cell counts remained essentially unchanged or were
higher than at the onset of the trial in 11 of 20 patients. In
addition, the amount of HIV detectable in the patients' blood, as
measured by polymerase chain reaction ("PCR") testing, declined in
a dose dependent manner (the greatest declines were observed in the
highest dose group). Also, none of the patients were found to have
developed neutralizing antibodies to Natural Alpha Interferon, even
after being treated three times weekly for many months. These
results were reported at the Third International Congress on
Biological Response Modifiers held in Cancun, Mexico in January
1995 and were selected for a poster presentation at the 35th
Interscience Conference on Antimicrobial Agents and Chemotherapy
held in San Francisco in September 1995. An extensive report was
published in the May 1996 issue of the Journal of Infectious
Diseases.
It is important to note that, because of the small number of
study participants and the absence of a control group, no firm
conclusions can be drawn from these observations. However, based
on the safety and preliminary efficacy data obtained from this
trial and after meeting with the FDA, the Company commenced a
multi-center Phase 3 clinical trial of ALFERON N Injection in HIV-
infected patients. This randomized, double-blind, placebo-
controlled trial is designed to evaluate the safety and efficacy of
ALFERON N Injection in the treatment of HIV-positive patients, some
of whom may be taking other FDA-approved antiviral agents.
Enrolled patients must have CD4 white blood cell counts of at least
250 cells per microliter and a viral burden (as determined by PCR
testing) of at least 2,000 RNA copies per milliliter. Enrollment
for the Phase 3 trial is expected to be completed shortly at 16
centers. If the results of the treatment phase are favorable, the
Company intends to seek FDA-approval of ALFERON N Injection in the
treatment of HIV-positive patients in late 1997 or early 1998.
After satisfactorily completing the 24-week treatment phase,
patients are eligible to enroll in a separate open-label
continuation study to evaluate the safety and efficacy of different
maintenance treatment regimens. To date, approximately 25% of the
patients have completed the treatment phase and all of these
patients have chosen to enroll in the continuation study. However,
there can be no assurance that ALFERON N Injection for the
treatment of patients with HIV will be cost-effective, safe, and
effective or that the Company will be able to obtain FDA approval
for such use. Furthermore, even if such approval is obtained, there
can be no assurance that such product will be commercially
successful or will produce significant revenues or profits for the
Company.
Hepatitis C. Chronic viral hepatitis is a liver infection
caused by various hepatitis viruses. The United States Centers for
Disease Control estimates that nearly four million people in the
United States are presently infected with the hepatitis C virus
("HCV"), a majority of whom become chronic carriers and will suffer
gradual deterioration of their liver and possibly cancer of the
liver. Several brands of recombinant and cell-cultured interferon
have been approved by various regulatory agencies worldwide for the
treatment of hepatitis C, including two recombinant products in the
United States. See "Business -- ALFERON N Injection --
Competition." However, reports have indicated that many patients
either do not respond to treatment with the recombinant products or
relapse after treatment. The Company has recently completed two
multi-center, randomized, open-label, dose-ranging Phase 2 clinical
trials utilizing ALFERON N Injection with patients chronically
infected with HCV and is presently conducting one additional such
trial. The objective of the Company's HCV clinical studies is to
compare the safety and efficacy of different doses of Natural Alpha
Interferon injected subcutaneously in naive (previously untreated),
refractory (unsuccessfully treated with recombinant interferon),
and relapsing (initially responded to recombinant interferon but
later relapsed) patients.
Patients in the naive study were treated at one of six centers
with one of four dose levels of ALFERON N Injection administered
subcutaneously three times per week. 77 patients were enrolled in
the study with 66 patients completing the 24 weeks of treatment.
Of the 66, 63 completed the 24 weeks of follow-up. In general,
treatment was well tolerated, even at the highest dose.
Results based on ALT values (ALT is a liver enzyme whose
change is used to determine the effectiveness of the therapy)
indicated a significant dose-dependent response at the end of
treatment. Complete response rates (normalization of ALT) ranged
from 11% (2 of 18) for the lowest dose group to 67% (12 of 18) for
the highest. At the end of the follow-up period, complete response
rates ranged from 8% (1 of 13) for the second to lowest dose group
to 44% (8 of 18) for the highest. 33% (6 of 18) of the patients
receiving the highest dose exhibited a sustained complete response
(normal ALT at the end of treatment and throughout the follow-up
period).
In addition to the ALT testing, the quantity of HCV in the
bloodstream of patients was measured by PCR testing. Such testing
also indicated a significant dose-dependent response as measured by
the proportion of patients having no detectable HCV in the
bloodstream at the end of treatment. The percent of patients with
no detectable HCV in the bloodstream ranged from 0% (0 of 17) for
the lowest dose group to 59% (10 of 17) for the highest. At the
end of the follow-up period, the percent of patients with no
detectable HCV in the bloodstream ranged from 0% (0 of 15) for the
lowest dose group to 24% (4 of 17) for the highest. 18% (3 of 17)
of the patients receiving the highest dose had no detectable HCV in
the bloodstream at the end of treatment and throughout the follow-
up period. There was a high correlation among patients between ALT
response and detectable HCV in the bloodstream at the end of
treatment and at the end of the follow-up period.
Based on an abstract of the results submitted to the American
Association for the Study of Liver Diseases ("AASLD"), this study
was selected for an oral presentation at the AASLD meeting that
took place in November 1995. In addition, the results of this
study were published in the February 1997 issue of Hepatology.
Patients in the refractory study were treated at one of seven
centers with one of three dose levels of ALFERON N Injection
administered subcutaneously three times per week. 69 patients were
enrolled in the study with 63 patients completing the 24 weeks of
treatment. Of the 63, 58 completed the 24 weeks of follow-up.
Again, in general, treatment was well tolerated, even at the
highest dose.
Results based on ALT values indicated a significant response
at the end of treatment, as measured by normalization or near
normalization (ALT less than 150% of the upper limit of normal) of
ALT, in the highest dose group. At the end of treatment, the
complete or near complete response rates were 14% for the lowest (3
of 22) and middle (3 of 21) dose groups and 25% (5 of 20) for the
highest. 12% of the patients who have completed follow-up (7 of
58) had complete or near complete response rates at the end of
follow-up, including 20% of the patients (4 of 20) in the lowest
dose group, 5% (1 of 19) in the middle dose group, and 11% (2 of
19) in the highest dose group. Two patients with antibodies at the
commencement of the study to the only recombinant interferon
product then approved for treatment of hepatitis C had complete
responses: one at the end of treatment (the patient relapsed during
the follow-up period) and the other at the end of the follow-up
period.
In addition to the ALT testing, the quantity of HCV in the
bloodstream of patients was measured by PCR testing. Such testing
also indicated a significant response at the end of treatment, as
measured by the proportion of patients having at least a 90%
reduction in detectable HCV in the bloodstream, in the highest dose
group. At the end of treatment, the percent of patients with at
least a 90% reduction in detectable HCV in the bloodstream ranged
from 6% (1 of 18) for the middle dose group to 37% (7 of 19) for
the highest. 3% of the patients who have completed follow-up and
for whom PCR testing data are available (1 of 36, such patient
being in the lowest dose group) showed at least a 90% reduction in
detectable HCV in the bloodstream at the end of follow-up.
At the end of treatment, the percent of patients with either
normalization or near normalization of ALT, or at least a 90%
reduction in detectable HCV in the bloodstream, was 23% (5 of 22)
for the lowest dose group, 14% (3 of 21) for the middle, and 45% (9
of 20) for the highest.
Based on an abstract of the available results submitted to the
AASLD, this study was selected for a poster presentation at the
AASLD meeting that took place in November 1995.
Studies with relapsing patients were commenced in five
centers, following a protocol which only permitted patients who had
been previously treated with a single six-month course of
recombinant interferon therapy. However, since so many patients
have a disease relapse after a single course of recombinant
interferon therapy, many of them had been treated with two or more
courses of this therapy, and therefore did not qualify for this
study. The inability to enroll qualified patients delayed the
trial and led the Company to amend its protocol to allow for
enrollment of patients who have received up to three six-month
courses of recombinant interferon therapy. Even with the amended
protocol, the Company has experienced difficulties in enrolling
patients and, as a result, three of the five initial study centers
discontinued patient enrollment. The two other centers are still
open for enrollment. In addition, analysis of the data, after
approximately 50% of the patients had been treated, indicated that
the most favorable response occurred at the highest dose.
Therefore, the Company decided to modify the protocol to change
from a dose-ranging study to a study of only the highest dose. The
study will continue after the protocol is amended.
The Company believes that the results of the trial with naive
patients are promising. In addition, treatment of naive patients
with ALFERON N Injection did not produce any interferon-
neutralizing antibodies. The Company also believes that the
results of the trial with refractory patients are promising. After
meeting with the FDA, the Company commenced in the second quarter
of 1996 a Phase 3 multi-center, randomized, controlled clinical
trial designed to evaluate the safety and efficacy of ALFERON N
Injection in naive chronic hepatitis C patients. Currently,
approximately 65% of the required patients have been enrolled. In
December 1996, the Company requested that clinical investigators in
this study temporarily stop enrolling new patients because of a
drug shortage caused by the unanticipated increase in commercial
sales of ALFERON N Injection during the fourth quarter of 1996.
The investigators were recently notified to resume screening
patients as of April 1997, now that sufficient drug supplies have
been produced. The Company presently believes that enrollment in
this study should be completed in the second quarter in 1997. The
trial consists of a 24-week treatment phase and 24-week follow-up
and also includes an interim analysis after approximately one-third
of the enrolled patients complete the treatment phase. If results
at the end of such interim analysis demonstrate at a very high
level of statistical significance that ALFERON N Injection is
effective, the Company intends to seek FDA approval by the end of
the first quarter or early second quarter of 1998, while continuing
to treat patients enrolled in the study. If FDA approval is not
sought based on the interim analysis and results at the end of
follow-up are favorable, the Company intends to seek FDA approval
by the end of the third quarter of 1998. However, there can be no
assurance that such efficacy results will be demonstrated at the
time of the interim analysis or at all or that the use of ALFERON
N Injection for the treatment of patients with hepatitis C will be
cost-effective, safe, and effective or that the Company will be
able to obtain FDA approval for such use. Furthermore, even if
such approval is obtained, there can be no assurance that such
product will be commercially successful or will produce significant
revenues or profits for the Company.
In addition to the Company's HCV clinical studies, Andromaco
has agreed to sponsor, under both United States and Mexican
Investigational New Drug applications, a Phase 2 clinical trial of
the use of ALFERON N Injection in patients infected with HCV. In
the trial, which commenced in the third quarter of 1996 at the
National Institute of Nutrition in Mexico City, patients are being
treated using a different treatment schedule and frequency from
that used in the previous trials conducted by the Company on
patients infected with HCV. The trial is designed to provide
information to help evaluate the safety and efficacy of this
altered treatment regimen. See "Business -- ALFERON N Injection --
Marketing and Distribution."
Multiple Sclerosis. Multiple sclerosis ("MS") is a chronic,
sometimes progressive, immune-mediated disease of the central
nervous system that is believed to occur in genetically predisposed
individuals following exposure to an environmental factor, such as
virus infection. The disease affects an estimated 250,000 to
350,000 people in the United States, primarily young adults.
Symptoms of MS, including vision problems, muscle weakness, slurred
speech, and poor coordination, are believed to occur when the
patient's own cells attack and ultimately destroy the insulating
myelin sheath surrounding the brain and spinal cord nerve fibers,
resulting in improper transmission of signals throughout the
nervous system.
In the United States, two recombinant forms of beta interferon
have been approved for the treatment of relapsing-remitting MS.
However, reports in the scientific literature and elsewhere have
indicated that the significant adverse reactions associated with
the treatments may limit their usefulness. Based in part on
encouraging anecdotal reports on the use of ALFERON N Injection in
MA patients, the Company is planning to conduct a clinical trial in
order to investigate the potential use of ALFERON N Injection for
the treatment of MS, which may be funded in whole or in part from
the Company's working capital. If not funded in whole from the
Company's working capital, the timing of this trial will be
dependent upon the Company's ability to obtain additional funding
or a sponsor.
Chronic Viral Hepatitis B. Hepatitis B is currently the most
common form of hepatitis. Approximately three and a half to four
million people in the United States are infected with the hepatitis
B virus ("HBV"), with some 300,000 new infections occurring
annually and over 200 million infected people worldwide. HBV is
transmitted through contact with infected blood, sexual
intercourse, and needle-sharing among intravenous drug users.
Infants born to infected mothers may become infected as they pass
through the birth canal. According to the Centers for Disease
Control, approximately 25% of hepatitis B patients develop
irreversible chronic liver conditions, and about 10% of all
patients become lifetime carriers and can transmit the virus to
others. The Company is currently planning clinical trials using
ALFERON N Injection in persons infected with hepatitis B; however,
the Company does not anticipate starting the clinical trials unless
additional funding or a sponsor is secured.
Marketing and Distribution. In 1988, the Company entered into
exclusive marketing and distribution agreements with Purdue with
respect to ALFERON N Injection. The Company reacquired from Purdue
in 1993 and 1994 all marketing and distribution rights except in
the United States and Canada and in May 1996 reacquired the
remaining marketing and distribution rights. In connection with
the 1996 reacquisition, Purdue agreed, among other things, (i) to
provide during the first year after the reacquisition certain
distribution services to the Company with respect to 24,000 vials
of ALFERON N Injection at an aggregate cost of $240,000 and (ii) to
provide during the second year after the reacquisition, if
requested by the Company, certain distribution services to the
Company with respect to up to 30,000 vials of ALFERON N Injection
at a cost of $15 per vial. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company believes that the reacquisition of marketing and
distribution rights from Purdue will provide it with greater
financial flexibility and control over the distribution of ALFERON
N Injection. Since the reacquisition, the Company has focused its
marketing efforts in the United States on making additional sales
to existing customers. In September 1996, the Company hired an
executive vice president for sales and marketing, and has
subsequently hired a director of marketing and sales in the United
States, a director of insurance reimbursement, and a sales
representative. The executive vice president for sales and
marketing is evaluating the Company's marketing strategy based on
sales experience to date and is considering a number of options,
including expanding the Company's sales force and entering into
agreements with marketing partners in addition to those described
below.
In April 1996, the Company entered into a supply and
distribution agreement (the "Cell Pharm Agreement") with Cell Pharm
GmbH ("Cell Pharm"). Cell Pharm, headquartered in Hanover,
Germany, is a privately-owned pharmaceutical company primarily
involved in the distribution and manufacture of products for cancer
treatment and other uses. The Cell Pharm Agreement, which
terminates on June 30, 2001, unless renewed, grants Cell Pharm
rights to distribute, promote, and sell ALFERON N Injection in
Germany. The Cell Pharm Agreement provides that the Company will
supply Cell Pharm with ALFERON N Injection at specified prices, and
obligates Cell Pharm to purchase specified minimum amounts in each
annual period. In addition, Cell Pharm is required to pay the
Company 50% of the incremental revenue Cell Pharm receives as a
result of selling ALFERON N Injection at a price higher than a
specified price. Cell Pharm is required to maintain an active and
efficient sales and customer service organization with adequately
trained personnel for marketing and selling ALFERON N Injection.
Cell Pharm represents to the Company that it has obtained, and Cell
Pharm agrees to maintain in effect, all registrations, approvals,
and consents from governments in Germany as are necessary to permit
or facilitate the lawful handling, promotion, and resale of ALFERON
N Injection in Germany. Cell Pharm has informed the Company that
it intends to market ALFERON N Injection under the trade name
Cellferon(R), pursuant to Cell Pharm's existing regulatory approval
to market Cellferon in Germany for the treatment of hairy cell
leukemia and for the treatment of patients who develop antibodies
against recombinant alpha interferons.
In the first quarter of 1995, the Company concluded an
agreement with Fujimoto Diagnostics, Inc. ("Fujimoto") for the
commercialization of ALFERON N Injection and ALFERON N Gel in Japan
(the "Fujimoto Agreement"). Fujimoto is affiliated with Fujimoto
Pharmaceutical Company, a 60-year old company with facilities in
central Japan. The Fujimoto Agreement grants Fujimoto exclusive
rights to develop, distribute, and sell ALFERON N Injection and
ALFERON N Gel in Japan. Pursuant to the terms of the Fujimoto
Agreement, Fujimoto agreed to fund and conduct all preclinical and
clinical studies required for Japanese regulatory approval. The
Company will supply Fujimoto with ALFERON N Injection and will also
manufacture and supply Fujimoto with ALFERON N Gel. Fujimoto will
also purchase certain quantities of ALFERON N Injection and ALFERON
N Gel at agreed-upon prices during the preclinical and clinical
phases. Fujimoto has advised the Company that it will initially
focus on the use of ALFERON N Injection for the treatment of
patients infected with HCV. The first indication to be developed
for ALFERON N Gel has not yet been determined. Fujimoto has
incurred higher than anticipated development expenses, and Fujimoto
has determined that there may be greater difficulties in obtaining
Japanese regulatory approval than originally anticipated. In
March, 1997, Fujimoto and the Company terminated the Fujimoto
Agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Governmental
Regulation."
In February 1994, the Company entered into an exclusive
distribution agreement for ALFERON N Injection in Mexico with
Andromaco, a privately-held pharmaceutical company headquartered in
Mexico City which specializes in oncology and immunology products.
Under the agreement, Andromaco applied for and recently obtained
approval from the Mexican regulatory authorities to sell ALFERON N
Injection for the treatment of genital warts, which will be
marketed under the trade name ALTEMOL(R). Andromaco has agreed to
sponsor, under both United States and Mexican Investigational New
Drug applications, a Phase 2 clinical trial of the use of ALFERON
N Injection in patients infected with HCV. See "Business -- ALFERON
N Injection -- Clinical Trials for New Indications -- Hepatitis C."
The agreement establishes performance milestones for the
maintenance of distribution rights by Andromaco in Mexico. In
addition, the Company has a buy-out option to reacquire the
marketing and distribution rights in Mexico under certain terms and
conditions.
Manufacturing. The purified drug concentrate utilized in the
formulation of ALFERON N Injection is manufactured in the Company's
facility located in New Brunswick, New Jersey, and ALFERON N
Injection is formulated and packaged at a production facility
located in McPherson, Kansas and operated by Sanofi Winthrop, Inc.
("Sanofi") pursuant to a processing and supply agreement entered
into in September 1994. Under the terms of the agreement with
Sanofi, the Company pays Sanofi an agreed price to formulate and
package ALFERON N Injection in accordance with specifications
provided by the Company. These facilities received FDA approval in
October 1989. Subsequently, the Company developed process
improvements and completed an expansion of its manufacturing
facility, both of which were approved by the FDA in June 1991. The
process improvements and expanded facility enabled the Company to
reduce the manufacturing costs of ALFERON N Injection and gave the
Company increased production capacity for ALFERON N Injection.
Since the beginning of 1996, the Company increased its physical
manufacturing capacity by 50%. The Company is evaluating another
expansion of its manufacturing facility, which would provide
significantly increased production capacity in the event that the
Company's Phase 3 clinical trials in progress for HIV and hepatitis
C are successfully concluded and ALFERON N Injection is approved
for the treatment of these new indications by the FDA (of which
there can be no assurance). Such expansion would also have to be
approved by the FDA. See "Business -- ALFERON N Injection --
Clinical Trials for New Indications," "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Governmental Regulation," and "Properties."
Competition. Presently, INTRON(R) A, manufactured by Schering
Plough Corp. ("Schering"), is the one other injectable interferon
product approved by the FDA for the treatment of genital warts.
INTRON A is made from recombinant alpha interferon. Since the
production of INTRON A is not dependent on a source of human blood
cells, it may be able to be produced in greater volume and at a
lower cost than ALFERON N Injection. Currently, the Company's
wholesale price on a per unit basis of ALFERON N Injection is
substantially higher than that of INTRON A. In March 1997,
Minnesota Mining & Manufacturing Co. received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical
cream, for the treatment of genital warts. ALFERON N Injection
also competes with surgical, chemical, and other methods of
treating genital warts. The Company cannot assess the impact
products developed by the Company's competitors or advances in
other methods of the treatment of genital warts will have on the
commercial viability of its product.
If and when the Company obtains approvals for additional
indications of ALFERON N Injection and its proposed products (such
as the approval obtained by Cell Pharm in Germany), it expects to
compete primarily on the basis of product performance and price
with a number of pharmaceutical companies, both in the United
States and abroad.
A number of synthetic antiviral compounds have been approved
in the United States and certain foreign countries for the
treatment, primarily in combination therapy, of HIV and AIDS,
including reverse transcriptase inhibitors (nucleoside analogues)
such as Epivir(R) and Retrovir(R) (manufactured by Glaxo Wellcome
Inc.), Hivid(R) (manufactured by Roche Laboratories, Inc.), and
Zerit(R) and Videx(R) (manufactured by Bristol-Myers Squibb
Company) and protease inhibitors such as Crixivan(R) (manufactured
by Merck & Co., Inc.), Invirase(R) (manufactured by Roche
Laboratories, Inc.), and Norvir(R) (manufactured by Abbott
Laboratories). Also, Viramune(R), a non-nucleoside reverse
transcriptase inhibitor (manufactured by Boehringer Ingelheim
Corporation), was recently approved by the FDA for use in
combination with nucleoside analogues for the treatment of HIV-
infected adults.
Schering's recombinant interferon product is already approved
for the treatment of hepatitis C and hepatitis B in the United
States and other markets, as well as for many other medical uses.
Roche Pharmaceuticals's recombinant interferon product was recently
approved for the treatment of hepatitis C in the United States and
for other medical uses in foreign countries.
In the United States, two recombinant forms of beta interferon
have been approved for the treatment of relapsing-remitting MS.
Many of the Company's potential competitors are among the
largest pharmaceutical companies in the world, are well known to
the public and the medical community, and have substantially
greater financial resources and product development, manufacturing,
and marketing capabilities than the Company or its marketing
partners. Therefore, there can be no assurance that, if the
Company is able to obtain regulatory approval of ALFERON N
Injection for the treatment of any additional diseases, it will be
able to achieve any significant penetration into those markets.
ALFERON N Gel
ALFERON N Gel is a topical, Natural Alpha Interferon
preparation which the Company has developed and believes has
potential in the treatment of cervical dysplasia, intravaginal
warts, and mucocutaneous and genital herpes.
Clinical Trials. The Company has completed one clinical trial
and may conduct other clinical trials for its ALFERON N Gel
formulation to develop applications and obtain initial approvals
for such products.
Cervical Dysplasia and Intravaginal Warts. Affecting
approximately 500,000 to one million women each year in the United
States alone, cervical dysplasia, or abnormal cervical cells, has
been identified as a potential precursor to cervical cancer.
Cervical cancer strikes approximately 13,000 women in the United
States each year, causing 5,000 deaths, and is responsible for more
than half a million deaths worldwide. Cervical dysplasia is caused
by certain strains of the human papilloma virus ("HPV"), the same
family of viruses that causes genital warts. The Company has
completed a Phase 2 dose-ranging study using ALFERON N Gel at the
Columbia- Presbyterian Medical Center in New York for the treatment
of mild cervical dysplasia. Pap smears, identification tests for
the presence of virus, and cervical biopsies indicated that ALFERON
N Gel appears to have the potential for improving the course of
cervical dysplasia in the majority of patients who completed the
treatment course. Based upon these results, a physician-sponsored
study in HIV-infected women with cervical dysplasia commenced in
August 1995. However, the study was discontinued at the request of
the physician-sponsor due to the loss of the physician's study
coordinator and a change in the physician's priorities.
The Company is planning to conduct a clinical trial in order
to investigate the potential use of ALFERON N Gel for the treatment
of intravaginal warts (which are also caused by the HPV), which may
be funded in whole or in part from the Company's working capital.
If not funded from the Company's working capital, the timing of
this trial will be dependent upon the Company's ability to obtain
additional funding or a sponsor.
Other widespread dermatological lesions potentially treatable
with ALFERON N Gel therapy. Nearly 30 million people in the U.S.
are infected with the herpes simplex type II virus, which is the
infectious virus that causes genital herpes. Up to 500,000 new
cases are reported each year, according to the Alan Guttmacher
Institute. To date, there is no cure for genital herpes.
Preliminary findings with a previous formulation of recombinant
interferon in the Company's proprietary gel showed significant
shortening of the contagious period and relief of symptoms, but the
Company will not start clinical trials unless additional funding or
a sponsor is secured.
ALFERON N Gel may also be of benefit to immunocompromised
patients with mucocutaneous herpes. Patients with this form of
herpes suffer from persistent skin lesions which have become
resistant to existing therapies. The Company is planning to
conduct a clinical trial in order to investigate the potential use
of ALFERON N Gel for the treatment of this indication, which may be
funded in whole or in part from the Company's working capital. If
not funded from the Company's working capital, the timing of this
trial will be dependent upon the Company's ability to obtain
additional funding or a sponsor.
Marketing and Distribution. The Company does not have any
marketing agreement with respect to ALFERON N Gel and, if FDA
approval is obtained, no assurance can be given that the Company
will be able to enter into a marketing agreement on terms
satisfactory to the Company. The Company may utilize its own sales
force to market ALFERON N Gel if FDA approval is obtained. See
"Business -- ALFERON N Injection -- Marketing and Distribution."
Competition. The Company believes that two antiviral products
are presently sold in the United States for the treatment of
recurrent genital herpes: Zovirax(R) (manufactured by Glaxo
Wellcome Inc.) which contains acyclovir and is administered orally,
topically, or intravenously and Famvir(R) (manufactured by
SmithKline Beecham Pharmaceuticals) which contains famcyclovir and
is administered orally. The only current treatment for cervical
dysplasia in the United States is surgery.
ALFERON LDO
ALFERON LDO is a low dose oral liquid Natural Alpha Interferon
preparation which the Company has developed and believes has
potential in the treatment of several quality-of-life parameters of
importance to patients infected with HIV.
Clinical Trials for ALFERON LDO. As described below, the
Company has completed two Phase 2 clinical trials, and one Phase 3
clinical trial is in progress, for its ALFERON LDO formulation for
the treatment of HIV-infected patients.
HIV-infected patients. The Company has completed two double-
blind studies at Mount Sinai Medical Center in New York involving
ALFERON LDO. One was a placebo-controlled study in AIDS-related
complex ("ARC") patients, and the other was a dose ranging study in
AIDS or ARC patients. The results from the placebo-controlled
study did not demonstrate a significant improvement or alteration
in the expected progression of the disease, although patients
receiving ALFERON LDO reported greater energy and appetite than
those given the placebo. The results from the dose ranging study
indicate that one of the doses may promote weight gain and an
increase in energy and overall well-being.
At the insistence of AIDS groups and community-based
physicians who had been using low-dose formulations of interferon
in their practice, the NIAID launched in the second quarter of 1996
a Phase 3 trial of three preparations of low-dose oral interferon,
including ALFERON LDO. An advisory committee comprised of
representatives from the Company and other interferon
manufacturers, AIDS support groups, the FDA, and the National
Institutes of Health was organized to design this multicenter
study, which is examining the effectiveness of low dose oral alpha
interferon therapy on several quality-of-life parameters of
importance to patients infected with HIV. Patients enrolled in the
study were randomly assigned to one of four treatment groups, with
all participants receiving three compounds. In three of the
groups, patients are receiving one active compound and two
placebos. Patients in the fourth group are receiving only
placebos. Neither the physician nor the patient will know which
group the patient was assigned to until after the study, which has
a six-month treatment phase and six-month follow-up period, is
ended and the analysis is completed. While in the study, patients
will be permitted to take antiretroviral drugs and therapies
against opportunistic infections. To date, approximately one-third
of patients are enrolled. The Company has provided clinical
quantities of ALFERON LDO for use in the study.
Marketing and Distribution. The Company does not have a
marketing agreement with respect to ALFERON LDO and, if FDA
approval of ALFERON LDO is obtained, no assurance can be given that
the Company will be able to enter into a marketing agreement for
such products on terms satisfactory to the Company. The Company may
utilize its own sales force to market ALFERON LDO if FDA approval
is obtained. See "Business -- ALFERON N Injection -- Marketing and
Distribution."
Competition. Under the terms of a licensing agreement (as
amended, the "Amarillo Agreement") with Amarillo Bioscience, Inc.
(formerly Amarillo Cell Culture Company, Incorporated) ("Amarillo")
(i) the Company has the exclusive right to sell ALFERON LDO,
containing Natural Alpha Interferon, in the United States and all
foreign countries other than Japan, (ii) Amarillo and Pharma
Pacific Management Pty. Ltd. ("PPM"), a company which has also
obtained a license from Amarillo, each has the right to sell any
interferon other than Natural Alpha Interferon in the United States
and all foreign countries other than Japan, and (iii) Hayashibara
Biochemical Laboratory has the right to sell its low dose alpha
interferon in Japan. See "Business -- Licenses and Royalty
Obligations." Therefore, with respect to low dose oral interferon
products, the Company will potentially compete with Amarillo and
PPM in the United States and in the rest of the world except Japan
and with Hayashibara Biochemical Laboratory in Japan. In addition,
the Company will potentially compete with the manufacturers of the
synthetic antiviral compounds that have been approved in the United
States and certain foreign countries for the treatment of HIV and
AIDS. See "Business -- ALFERON N Injection -- Competition."
Patents
In the second quarter of 1996, the Company was issued a United
States patent, comprised of 15 claims, for Natural Alpha
Interferon. The three major claims are for (i) a highly purified
Natural Alpha Interferon composition produced from human peripheral
blood leukocytes and (ii) an improved method to produce this
composition. The issuance of this patent gives the Company
protection for the manufacture, use, and sale of its Natural Alpha
Interferon product in the United States and prevents a competitor
from producing or using equivalent products derived from human
peripheral blood leukocytes. Patent applications have also been
filed in selected foreign countries.
Also in the second quarter of 1996, the Company was issued a
United States patent, comprised of four claims, that will expand
the Company's portfolio on overall technologies in the interferon
field. The biological activities of interferon take place when the
interferon binds to Type 1 interferon receptor proteins, which are
present in various human cells. The major claim is the composition
claim for an interferon receptor protein specifically binding alpha
and beta, but not gamma, interferon. The receptor, which is
isolated from a cancerous cell line, binds both natural and
recombinant alpha interferons and is a variant form of the human
interferon receptor (Type 1) which has been found in some cases of
acute leukemia. The claimed receptor protein could be used to
produce anti-receptor antibodies that may have potential use in
diagnostic testing for tumors or cancers which have an abnormal
number of receptors. The claimed receptor protein may also have
potential use as a therapeutic agent for those diseases which have
aberrant production of interferon, by binding to and neutralizing
the excess interferon.
The United States Patent and Trademark Office has also issued
two patents to the Company which disclose and claim topical
interferon preparations. The patents encompass interferon
preparations for the topical delivery of one or more interferons to
the site of a disease which responds therapeutically to interferon,
and a system for delivering interferon topically which prevents
oxidation of the protein. The inventions specifically encompass
the topical treatment for treating viral diseases, such as herpes
genitalis, with alpha interferon. The Company has various other
issued patents and patent applications pending in the field of
biotechnology, purification processes, and therapeutics.
Licenses and Royalty Obligations
F. Hoffmann-LaRoche Ltd. and Hoffmann-LaRoche, Inc.
(collectively, "Hoffmann") have been issued patents covering human
alpha interferon in many countries throughout the world. As of
March 31, 1995, the Company obtained a non-exclusive perpetual
license from Hoffmann (the "Hoffmann Agreement") which grants the
Company the worldwide rights to make, use, and sell, without a
potential patent infringement claim from Hoffmann, any formulation
of Natural Alpha Interferon. The Hoffmann Agreement replaced a
1988 non-exclusive license which, as amended, granted the Company
the right to make, use, and sell in the United States, without a
potential patent infringement claim from Hoffmann, injectable
formulations of Natural Alpha Interferon for the treatment of
genital warts or patients with diseases refractory to recombinant
interferon therapy. The Hoffmann Agreement permits the Company to
grant marketing rights with respect to Natural Alpha Interferon
products to third parties, except that the Company cannot grant
marketing rights with respect to injectable products in any country
in which Hoffmann has patent rights covered by the Hoffmann
Agreement (the "Hoffmann Territory") to any third party not listed
on a schedule of approximately 50 potential marketing partners
without the consent of Hoffmann, which consent cannot be
unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is
obligated to pay Hoffmann an aggregate royalty on net sales (as
defined) of Natural Alpha Interferon products by the Company in an
amount equal to (i) 8% of net sales in the Hoffmann Territory, and
2% of net sales outside the Hoffmann Territory of products
manufactured in the Hoffmann Territory, up to $75,000,000 of net
sales in any calendar year and (ii) 9.5% of net sales in the
Hoffmann Territory, and 2% of net sales outside the Hoffmann
Territory of products manufactured in the Hoffmann Territory, in
excess of $75,000,000 of net sales in any calendar year, provided
that the total royalty payable in any calendar year shall not
exceed $8,000,000. The Hoffmann Agreement can be terminated by the
Company on 30 days' notice with respect to the United States
patent, any individual foreign patent, or all patents owned by
Hoffmann. If the Hoffmann Agreement is terminated with respect to
the patents owned by Hoffmann in a specified country, such country
is no longer included in the Hoffmann Territory. When the Company
received FDA approval for ALFERON N Injection for the treatment of
genital warts in 1989, the Company became obligated to issue shares
of its Common Stock to Hoffmann as a prepaid royalty against future
net sales by the Company. Under the terms of the Hoffmann
Agreement, certain payments previously made to Hoffmann (including
a portion of the value of the Common Stock previously issued to
Hoffmann) are available as offsets against 50% of the Company's
future royalty obligations to Hoffmann until the Company obtains an
FDA approval to market ALFERON N Injection for an additional
indication. For the years ended December 31, 1996, 1995 and 1994,
the Company applied $77,584, $50,437 and $39,177 respectively, of
the prepayments previously made to Hoffmann against the amounts
due. As of December 31, 1996, the Company had approximately
$514,046 of credits available to offset its future royalty
obligations to Hoffmann.
In October 1989, the Company entered into the Amarillo
Agreement. Amarillo, which is located in Amarillo, Texas, is in
the business of the research and development of animal health
products and became a public company in 1996. Under the terms of
the Amarillo Agreement, the Company has a non-exclusive license
under all of Amarillo's issued patents, patent applications, and
"know-how" relating to the treatment of humans by the oral
administration of Natural Alpha Interferon in low doses. In
addition, Amarillo has the right to purchase the Company's Natural
Alpha Interferon for use in the animal health market and is
obligated to pay royalties to the Company based upon sales using
the Company's Natural Alpha Interferon.
The Company will be obligated to pay Amarillo royalties of 10%
on the sales of Natural Alpha Interferon products using Amarillo's
patented technology as determined under the Amarillo Agreement. In
addition, the Company is a party to certain license agreements,
including the Hoffmann Agreement, pursuant to which it is obligated
to pay royalties based upon commercial exploitation of ALFERON N
Gel and ALFERON LDO. Under the terms of such license agreements,
the Company would pay royalties of up to 13.5% and 19.5% of net
sales of ALFERON N Gel and ALFERON LDO, respectively.
In addition, the Company agreed to pay National Patent
Development Corporation ("NPDC") a royalty of $1 million in
connection with the acquisition of certain intellectual property
and technology rights from NPDC. Such amount is payable if and
when the Company generates income before taxes, limited to 25% of
such income before income taxes per year until the amount is paid
in full.
Governmental Regulation
Regulations imposed by U.S. federal, state, and local
authorities, as well as their counterparts in other countries, are
a significant factor in the conduct of the research, development,
manufacturing, and marketing activities for present and proposed
products developed by the Company.
The Company's or its licensees' potential products will
require regulatory approval by governmental agencies prior to
commercialization. In particular, human medical products are
subject to rigorous pre-clinical and clinical testing and other
approval procedures by the FDA in the United States and similar
health authorities in foreign countries. Various federal and, in
some cases, state statutes and regulations also govern or influence
the manufacturing, safety, labeling, storage, record keeping, and
marketing of such products, including the use, manufacture,
storage, handling, and disposal of hazardous materials and certain
waste products. The process of obtaining these approvals and the
subsequent compliance with applicable federal and foreign statutes
and regulations involves a time-consuming process and requires the
expenditure of substantial resources.
The effect of government regulation may be to delay for a
considerable period of time or prevent the marketing of any product
that the Company may develop and/or impose costly procedures on the
Company's activities, the result of which may be to furnish an
advantage to the Company's competitors. Any delay in obtaining or
failure to obtain such approvals would adversely affect the
marketing of the Company's products and the ability to earn product
revenue.
Before testing of any agents with potential therapeutic value
in healthy human test subjects or patients may begin, stringent
government requirements for pre-clinical data must be satisfied.
These data, obtained from studies in several animal species, as
well as from laboratory studies, are submitted in a Notice of
Claimed Investigational Exemption for a New Drug or its equivalent
in countries outside the U.S. where clinical studies are to be
conducted. If the necessary authorizations are received, the
Company then conducts clinical tests of its products on human
beings at various unaffiliated medical centers and institutions.
Initial trials (Phase 1) are conducted on a small number of
volunteers to determine whether the drug is safe for human beings.
If the initial trials demonstrate the safety of the product, trials
(Phase 2) are then conducted on patients affected with the disease
or condition under investigation to establish the proper dose and
dosing interval. The findings of these trials are then used to
design and implement large-scale controlled trials (Phase 3) to
provide statistical proof of effectiveness and adequate evidence of
safety to meet FDA and/or foreign approval requirements.
The FDA closely monitors the progress of each of the phases of
clinical testing and may, at its discretion, re-evaluate, alter,
suspend, or terminate the testing based on the data which have been
accumulated to that point and its assessment of the risk/benefit
ratio to the patient. Estimates of the total time required for
completing clinical testing vary between four and ten years. Upon
successful completion of clinical testing of a new drug, a company
typically submits a New Drug Application ("NDA"), or for biological
products such as Natural Alpha Interferon, a Product and
Establishment License Applications ("PLA/ELA") to the FDA
summarizing the results and observations of the drugs during the
clinical trials.
Each facility in which products are produced and packaged,
whether operated by the Company or a third party, must meet the
FDA's standards for current good manufacturing practices and must
also be approved prior to marketing any product produced or
packaged in such facility. Any significant change in the
production process which may be commercially required, including
changes in sources of certain raw materials, or any change in the
location of the production facilities will also require FDA
approval. To the extent a portion of the manufacturing process for
a product is handled by an entity other than the Company, the
Company must similarly receive FDA approval for the other entity's
participation in the manufacturing process. The Company has
entered into an agreement with Sanofi, pursuant to which Sanofi
formulates and packages ALFERON N Injection. The Company presently
has a biologic establishment license for the facilities in which it
produces ALFERON N Injection, which includes the facilities in
which Sanofi formulates and packages ALFERON N Injection. In
addition, FDA approval would have to be obtained if the Company
should choose to use an outside formulator and/or packager for
ALFERON N Gel or ALFERON LDO.
Once the manufacture and sale of a product is approved,
various FDA regulations govern the production processes and
marketing activities of such product. A post-marketing testing,
surveillance, and reporting program may be required to monitor the
product's usage and effects. Product approvals may be withdrawn,
or other actions may be ordered, if compliance with regulatory
standards is not maintained.
Each individual lot of Natural Alpha Interferon produced must
be tested for compliance with specifications and released for sale
by the FDA prior to distribution in the marketplace. Even after
initial FDA marketing approval for a product has been granted,
further studies may be required to provide additional data on
safety or efficacy; to obtain approval for marketing a product as
a treatment for specific diseases other than those for which the
product was originally approved; to change the dosage levels of a
product; to support new safety or efficacy claims for the product;
or to support changes in manufacturing methods, facilities, sources
of raw materials, or packaging.
In many markets, effective commercialization also requires
inclusion of the product in national, state, provincial, or
institutional formularies or cost reimbursement systems. The
impact of new or changed laws or regulations cannot be predicted
with any accuracy. The Company uses its own staff of regulatory
affairs professionals and outside consultants to enable it to
monitor compliance, not only with FDA laws and regulations, but
also with state and foreign government laws and regulations.
Promotional and educational communications by the Company and
its distributors also are regulated by the FDA and are governed by
statutory and regulatory restrictions and FDA policies regarding
the type and extent of data necessary to support claims that may be
made. The Company currently does not have data adequate to satisfy
FDA requirements with respect to potential comparative claims
between Natural Alpha Interferon and competing recombinant
interferon products.
For marketing outside the United States, the Company will also
be subject to foreign regulatory requirements governing human
clinical trials, manufacturing, and marketing approval for drugs
and other medical products. The requirements governing the conduct
of clinical trials, product licensing, pricing, and reimbursement
vary widely from country to country. In addition to its United
States approval, ALFERON N Injection has received regulatory
approval in Mexico, Germany, Hong Kong, and Singapore, and
registration filings have been submitted in certain other
countries.
Under certain circumstances, the Company may be required to
obtain FDA authorization to export products for sale in foreign
countries. For instance, in most cases, the Company may not export
products that have not been approved by the FDA unless it first
obtains an export permit from the FDA. However, these FDA export
restrictions generally do not apply if the Company's products are
exported in conformance with their United States approvals or are
manufactured outside the United States. At the present time, the
Company does not have any foreign manufacturing facilities.
In May 1990, the Company's licensee applied for a product
license in the United Kingdom for the use of ALFERON N Injection
for the intralesional treatment of refractory or recurring external
genital warts in patients 18 years of age or older. The Company's
licensee was advised that additional information and possibly
clinical work would be necessary to resolve certain quality and
safety issues
before a product license would be recommended. The Company has
determined not to pursue this matter.
Research Staff and Employees
As of March 15, 1997, the Company had approximately 77 full-time
employees, of whom approximately 13 hold Ph.D. degrees and 41 hold
other degrees in scientific or technical fields. Of such
employees, approximately 18 were engaged in research and product
development, 24 were engaged in manufacturing and quality control,
and the remainder were general and administrative personnel.
Research and Development
During the fiscal years ended December 31, 1996, 1995, and
1994, the Company expended approximately $6.4 million, $3.7
million, and $5.2 million, respectively for research and
development. Substantially all of these expenditures were for
Company-sponsored research and development programs.
Executive Officers of the Registrant
The following table sets forth the names of the principal
executive officers of the Company as of March 15, 1997 and their
positions with the Company. The principal business experience of
the executive officers for the last five years is also described
below.
Name Age Position
Samuel H. Ronel, Ph.D 60 Chairman of the Board
Lawrence M. Gordon 43 Chief Executive Officer
and a Director
Stanley G. Schutzbank, Ph.D. 51 President and a Director
Magnus Precht 44 Executive Vice President,
Sales and Marketing
Donald W. Anderson 47 Controller (Principal
Accounting and Financial
Officer) and Secretary
Drew Stoudt 49 Vice President, Regulatory
Affairs and Quality
Mei-June Liao, Ph.D. 45 Vice President, Research
and Development
James R. Knill, M.D. 64 Vice President,
Medical Affairs
Robert P. Hansen 53 Vice President,
Manufacturing
Samuel H. Ronel, Ph.D. has been Chairman of the Board since
February 1997 and was Vice Chairman of the Board from January 1996
to February 1997 and President, Chief Executive Officer, and a
director of the Company from 1981 to January 1996. He was
responsible for the interferon research and development program
since its inception in 1979. Dr. Ronel joined NPDC in 1970 and
served as the Vice President of Research and Development of NPDC
and as the President of Hydro Med Sciences, a division of NPDC,
from 1976 to September 1996. Dr. Ronel served as President of the
Association of Biotechnology Companies, an international
organization representing United States and foreign biotechnology
firms, from 1986-88 and has served as a member of its Board of
Directors until 1993. Dr. Ronel was elected to the Board of
Directors of The Biotechnology Industry Organization in 1993.
Lawrence M. Gordon has been Chief Executive Officer and a
director of the Company since January 1996, Vice President of the
Company from June 1991 to January 1996, General Counsel of the
Company from 1984 to January 1996, General Counsel of NPDC since
November 1986, and Vice President of NPDC from June 1991 to
September 1996. He was Associate General Counsel of NPDC from 1983
through November 1986.
Stanley G. Schutzbank, Ph.D. has been President of the Company
since January 1996, Executive Vice President of the Company from
1981 to January 1996, and a director of the Company since 1981 and
has been associated with the interferon research and development
program since its inception in 1979. He is involved with all facets
of administration and planning of the Company and has coordinated
compliance with FDA regulations governing manufacturing and
clinical testing of interferon, leading to the approval of ALFERON
N Injection in 1989. Dr. Schutzbank joined NPDC in 1972 and served
as the Corporate Director of Regulatory and Clinical Affairs of
NPDC from 1976 to September 1996 and as Executive Vice President of
Hydro Med Sciences from 1982 to September 1996. Dr. Schutzbank is
a member of the Regulatory Affairs Professionals Society and has
served as Chairman of the Regulatory Affairs Certification Board
from its inception until 1994. Dr. Schutzbank received the 1991
Richard E. Greco Regulatory Affairs Professional of the Year Award
for his leadership in developing the United States Regulatory
Affairs Certification Program. In September 1995, Dr. Schutzbank
was elected to serve as President-elect in 1996, President in 1997,
and Chairman of the Board in 1998 of the Regulatory Affairs
Professionals Society.
Magnus Precht has been Executive Vice President, Sales and
Marketing of the Company since September 1996. Mr. Precht was
employed by Pharmacia and Upjohn from 1983 to September 1996,
serving from 1990 to September 1996 as Vice President and General
Manager of Pharmacia's United States Peptide Hormones Division. He
was Scandinavian Product Manager for Abbott Laboratories prior to
working at Pharmacia.
Donald W. Anderson has been the Controller of the Company
since 1981 and Corporate Secretary of the Company since 1988. He
was an officer of various subsidiaries of NPDC from 1976 to
September 1996.
Drew Stoudt has been Vice President, Regulatory Affairs and
Quality of the Company since March 1991. He was Vice President,
Quality Assurance and Quality Control from February 1990 to March
1991. Mr. Stoudt has served as Director of Quality Assurance for
the Company and other divisions of NPDC from 1985 to 1990.
Mei-June Liao, Ph.D. has been Vice President, Research and
Development of the Company since March 1995. She has served as a
Director, Research & Development since 1987, and held senior
positions in the Company's Research & Development Department since
1983. Dr. Liao received her Ph.D. from Yale University and
completed a three-year post doctoral appointment at the
Massachusetts Institute of Technology under the direction of Nobel
Laureate in Medicine, Professor H. Gobind Khorana. Dr. Liao has
authored many scientific publications and invention disclosures.
James R. Knill, M.D. has been Vice President, Medical Affairs
of the Company since September 1996 and a consultant to the Company
from November 1995 to September 1996. Dr. Knill was employed as
Vice President of Medical Affairs for Cytogen Corporation from 1994
to 1995 and as consultant for Cytogen Corporation from 1995 to July
1996. He was previously employed for more than 20 years as Vice
President of Medical Affairs for Bristol-Myers Squibb Company.
Robert P. Hansen has been Vice President, Manufacturing of the
Company since February 1997. He served as a Director of
Manufacturing since 1995, and held senior positions in the
Company's Manufacturing Department since 1987.
(d) Financial Information About Foreign and Domestic
Operations and Export Sales
All of the Company's material operations and sales are
conducted in the United States.
Item 2. Properties
The Company's executive offices and its research and
production facilities are located at 783 Jersey Avenue, New
Brunswick, New Jersey 08901, and its telephone number is (908) 249-
3250. The Company also maintains offices at 9 West 57th Street,
New York, New York 10019, the cost of which is included in the
Management Agreement.
The Company owns two free standing buildings comprising
approximately 44,000 square feet located in New Brunswick, New
Jersey. The Company occupies approximately 25,000 square feet for
staff offices, for the production and purification of interferon,
for quality control and research activities, and for the storage of
raw, in process and finished materials. The Company also shares
approximately 9,000 square feet with NPDC, and leases approximately
10,000 square feet to NPDC.
The Company believes that its current facilities are suitable
and adequate for research and development and commercial production
of purified interferon, well maintained, and in good condition.
Substantially all equipment owned by the Company has been acquired
over the past ten years and is in good working condition.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
The Common Stock is traded in the over-the counter market and
is quoted on the NASDAQ Small Cap Market under the symbol IFSC.
Effective August 3, 1995, the trading market for the Common Stock
was changed from the NASDAQ National Market System to the NASDAQ
Small Cap Market because of the failure of the Company to satisfy
the listing requirements for the NASDAQ National Market System.
The following table sets forth for each period indicated, the high
and low sales prices for the Common Stock as reported on the NASDAQ
National Market System through August 2, 1995 and on the NASDAQ
Small Cap Market commencing August 3, 1995. All prices have been
adjusted for a one-for-four reverse stock split that became
effective as of 5:00 p.m. New York City time on March 21, 1997.
1996 1995
Quarter High Low High Low
First... $10 1/4 $ 6 $12 $ 5 1/4
Second... 12 7 1/4 10 6 3/4
Third.... 8 1/4 4 1/2 11 6 3/4
Fourth... 7 7/8 3 1/2 12 3/8 6 1/4
As of March 3, 1997, the Company had 839 stockholders of
record.
The Company has not paid any dividends on the Common Stock
since its inception and does not contemplate paying dividends on
the Common Stock in the foreseeable future.
On December 24, 1996, the Company sold in a private placement
1,403,750 shares of Common Stock at a price of $6.50 per share. The
shares were sold to GT Global Health Care Fund (875,000), GT Global
Fund, Inc. Global Healthcare Class (250,000 shares), and GT Global
Fund, Inc. Global Theme Class (125,000 shares), each of which is a
mutual fund managed by Chancellor LGT Asset Management, Inc.;
Public Employee Retirement System of Idaho (103,750 shares); and
City of Milford Pension & Retirement Fund (50,000 shares). The
Company received aggregate cash consideration of $9,124,375 less
expenses of $61,300. Sunrise Securities Corp. acted as
placement agent and in connection therewith received a commission
(which it assigned to its designees) of 122,066 shares of Common
Stock and options to purchase 122,066 shares of Common Stock at a
purchase price of $7.80 per share. The options are exercisable for
a period of four years, commencing on December 24, 1997. The
private placement and the issuance of shares and options to
designees of Sunrise were made in reliance upon the exemption
provided by Section 4(2) of the Securities Act of 1933 (the
"Securities Act") for a transaction by an issuer not involving any
public offering and/or Rule 506 of Regulation D promulgated under
the Securities Act.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -Liquidity and Capital
Resources."
<PAGE>
Item 6. Selected Financial Data
(Thousands of dollars except per share data)
<TABLE>
Year Ended December 31,
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Revenues $ 2,092 $ 1,296 $ 1,166 $ 51 $ 3,306
Research and development
costs, net 6,400 3,726 5,196 4,151 3,983
General and administrative
expense 3,405 1,940 4,974 2,367 2,113
Loss from operations (12,426) (7,447) (11,782) (8,347) (5,953)
Interest and other income
(expense), net 441 75 (295) (113) (44)
Net loss (11,986) (7,372) (12,078) (8,460) (5,997)
Net loss per share of
common stock* (1.20) (1.11) (2.47) (2.19) (1.67)
Dividends NONE NONE NONE NONE NONE
</TABLE>
__________________________________
*All periods have been restated to reflect the effect of the one-for-four
reverse stock split that became effective as of 5:00 p.m. New York City time on
March 21, 1997 (see Note 19 to the Consolidated Financial Statements).
<TABLE>
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total assets $ 27,743 $ 13,953 $ 8,182 $ 20,301 $ 21,096
Current maturities of
long-term debt -- -- 409 1,999 2,001
Long-term debt, net of
current maturities -- -- -- 138 1,679
Common Stock subject to
repurchase commitment -- -- 2,730 -- --
Working capital (deficiency) 19,929 7,062 (782) 7,985 7,706
Stockholders' equity 25,374 12,827 2,979 17,131 16,157
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Since January 1981, the Company has been primarily engaged in
the research and development of pharmaceutical products containing
Natural Alpha Interferon. The Company has experienced significant
operating losses since its inception. Although the Company
received FDA approval in October 1989 to market ALFERON N Injection
in the United States for the treatment of certain genital warts and
ALFERON N Injection currently is marketed and sold in the United
States by the Company, in Mexico by Andromaco, and in Germany by
Cell Pharm, the Company has had limited revenues from the sale of
ALFERON N Injection to date. For the Company to operate
profitably, the Company must sell significantly more ALFERON N
Injection. Increased sales will depend primarily upon the
expansion of existing markets and/or successful attainment of FDA
approval to market ALFERON N Injection for additional indications.
The future revenues and profitability of, and availability of
capital for, biotechnology companies may be affected by the
continuing efforts of governmental and third-party payors to
contain or reduce the costs of health care through various means.
The Company has primarily financed its operations to date through
private placements and public offerings of the Company's
securities. All per share amounts have been adjusted for a one-
for-four reverse stock split that became effective as of 5:00 p.m.
New York City time on March 21, 1997.
Liquidity and Capital Resources
As of March 1, 1997, the Company had an aggregate of $14.8
million in cash and cash equivalents. Until utilized, such cash
and cash equivalents are being invested principally in short-term
interest-bearing investments.
The Company requires substantial funds to conduct research
and development and preclinical and clinical testing and to market
its products. The Company anticipates that its future capital
requirements will increase as a result of the repurchase of certain
marketing rights from Purdue. For the years ended December 31,
1996, 1995, and 1994, the cash utilized by the Company's operations
was approximately $13.3 million, $7.1 million, and $7.8 million,
respectively. The Company's future capital requirements will
depend on many factors, including: continued scientific progress in
its drug development programs; the magnitude of these programs;
progress with preclinical testing and clinical trials; the time and
costs involved in obtaining regulatory approvals; the costs
involved in filing, prosecuting, and enforcing patent claims;
competing technologies and market developments; changes in its
existing research relationships; the ability of the Company to
establish collaborative arrangements; and effective
commercialization activities and arrangements.
Based on the Company's estimates of revenues and expenses,
management believes that the cash available at March 1, 1997, will
be sufficient to enable the Company to continue operations for
approximately 16 months. However, actual results, especially with
respect to revenues, may differ materially from such estimates, and
no assurance can be given that additional funding will not be
required sooner than anticipated or that such additional funding,
whether from financial markets or collaborative or other
arrangements with corporate partners or from other sources, will be
available when needed or on terms acceptable to the Company.
Insufficient funds will require the Company to delay, scale back,
or eliminate certain or all of its research and development
programs or to license third parties to commercialize products or
technologies that the Company would otherwise seek to develop
itself or to shut down or curtail its manufacturing facility.
On December 24, 1996, the Company sold in a private placement
(the "December 1996 Private Placement") 1,403,750 shares of Common
Stock at a price of $6.50 per share. The $9,124,375 of proceeds
from such sale (less expenses of $61,300 excluding the impact of
shares of common stock and warrants issued to the placement agent
as additional compensation) will be used (i) to increase the
Company's inventory of ALFERON N Injection in response to increased
market demand, (ii) to expand the Company's manufacturing facility
(see "Properties"), (iii) to increase the Company's marketing and
sales capabilities, and (iv) to fund the Company's clinical
programs.
On May 2, 1996, the Company completed the sale of 2,000,000
shares of Common Stock for an aggregate of $16,000,000 (the "May
1996 Offering"). Of the net proceeds of $14,453,000 from the May
1996 Offering, the Company has used an aggregate of $3,760,000 to
pay Purdue and anticipates that it will use approximately
$6,000,000 for research, product development and clinical trials of
the Company's products and the balance for working capital and
general corporate purposes.
In August and September 1995, the Company completed the sale
of 3,000,000 shares of Common Stock for an aggregate of $14,400,000
(the "August/September 1995 Offering"). Of the $12,494,000 of net
proceeds from the August/September 1995 Offering, the Company has
used $1,870,000 to repay indebtedness to certain principal
stockholders and anticipates that it will use approximately
$7,000,000 for research, product development, and clinical trials
of the Company's products and the balance for working capital and
general corporate purposes.
Between May and August 1995, three principal stockholders of
the Company loaned the Company an aggregate of $1,870,000. Such
loans bore interest at prime plus 2% and were repaid with a portion
of the proceeds of the August/September 1995 Offering.
In April 1995, Amarillo and PPM agreed to purchase an
aggregate of $750,000 of Common Stock at $8.00 per share, all of
which cash was received during the second quarter of 1995.
In connection with the Fujimoto Agreement, in the first
quarter of 1995 Fujimoto purchased $1,500,000 of Common Stock at
$5.80 per share (the then market price) and agreed to purchase an
additional $500,000 of Common Stock on February 6, 1996 at the then
market price. During January 1996, Fujimoto advised the Company
that, to date, it had incurred higher than anticipated development
expenses, and that it had determined that there may be greater
difficulties in obtaining Japanese regulatory approval than
originally anticipated. Fujimoto therefore requested that the
Company renegotiate such investment agreement. and the Company met
with Fujimoto to consider its request. As a result of such
meeting, during the third quarter of 1996 Fujimoto purchased the
additional $500,000 of Common Stock originally scheduled for
purchase on February 6, 1996 and reimbursed the Company $133,000
for the cancellation of a prior commitment to purchase ALFERON N
Injection. The $133,000 was recorded as other revenues in the
third quarter of 1996. In March, 1997, Fujimoto and the Company
terminated the Fujimoto Agreement.
In 1988, the Company entered into exclusive marketing and
distribution agreements with Purdue with respect to ALFERON N
Injection. The Company reacquired from Purdue in 1993 and 1994 all
except United States and Canadian marketing rights.
In January 1994, the Company amended its marketing and
distribution agreements with Purdue. Pursuant to such amended
agreements, the Company assumed sole responsibility to conduct and
fund clinical trials required to obtain FDA approval for additional
indications for ALFERON N Injection. Prior to these amendments,
Purdue was responsible for the payment of the costs of such
clinical trials. During June and July 1996, respectively, the
Company commenced a Phase 3 clinical trial in HIV-positive patients
and a Phase 3 clinical trial in chronic Hepatitis C patients. See
"Business -- ALFERON N Injection -- Clinical Trials for New
Indications." The Company anticipates that the expansion of its
research and development efforts and clinical trial activities and
its assuming responsibility for the conduct and funding thereof
will increase operating expenses. The Company intends to seek to
enter into joint ventures or other arrangements with strategic
partners who agree to bear all or part of such expenses.
In May 1996, the Company reacquired the United States and
Canadian marketing rights from Purdue for $3,313,705, which was
charged to expense in the second quarter of 1996. In connection
with the reacquisition of United States and Canadian marketing
rights (i) Purdue agreed to provide during the first year after the
reacquisition certain distribution services to the Company with
respect to 24,000 vials of ALFERON N Injection at an aggregate cost
of $240,000, (ii) Purdue agreed to provide during the second year
after the reacquisition, if requested by the Company, certain
distribution services to the Company with respect to up to 30,000
vials of ALFERON N Injection at a cost of $15 per vial, and (iii)
the Company purchased from Purdue all vials of ALFERON N Injection
and all other assets of Purdue used exclusively in its ALFERON N
Injection business at an aggregate cost of $206,307.
The Company believes that while the reacquisition of
marketing rights from Purdue will increase the Company's future
capital requirements, such reacquisition provides it with greater
financial flexibility and control over the distribution of ALFERON
N Injection. See "Business -- ALFERON N Injection -- Marketing and
Distribution."
During January 1994, Purdue ordered 45,000 vials of ALFERON
N Injection at an agreed upon price, which were shipped between
June 1994 and November 1995. In June 1995, the Company received
purchase orders from Purdue totaling 22,744 vials of ALFERON N
Injection, of which 4,431 vials were shipped in November 1995. The
balance of the order was cancelled when the Company reacquired the
marketing rights for ALFERON N Injection in the United States and
Canada from Purdue. Purdue has informed the Company that during
the period from January 1, 1996 through May 6, 1996 and the years
ended December 31, 1995 and 1994, it sold approximately 5,200
vials, 23,900 vials and 25,000 vials, respectively, and distributed
as free samples approximately 90 vials, 400 vials and 2,000 vials,
respectively, of ALFERON N Injection from its inventory. In
addition, during the period from May 6, 1996 through December 31,
1996, the Company sold approximately 16,100 vials and distributed
as free samples approximately 100 vials.
Results of Operations
Year Ended December 31, 1996 versus Year Ended December 31, 1995
For the year ended December 31, 1996 (the "1996 Period"), the
Company's revenues of $2,091,907 included $1,939,595 from the sale
of ALFERON N Injection and the balance from sales of research
products and revenues resulting from the cancellation of a prior
commitment to purchase ALFERON N Injection. Revenues of $1,295,662
for the year ended December 31, 1995 (the "1995 Period") included
$1,260,933 from the sale of ALFERON N Injection and the balance
from sales of research products. Sales of ALFERON N Injection to
Purdue declined from approximately $918,000 in the 1995 Period to
none in the 1996 Period, offset by direct sales of ALFERON N
Injection of approximately $1,810,000 by the Company in the 1996
Period after it reacquired the United States and Canadian marketing
rights for ALFERON N Injection from Purdue in May 1996. There were
no sales to Purdue during the 1996 Period because the Company was
negotiating the reacquisition of United States and Canadian
marketing rights from Purdue during such period and Purdue had
adequate inventory from which to make sales pending the
consummation of such reacquisition. Cost of goods sold and
excess/idle production costs totaled $1,399,610 and $3,076,249 for
the 1996 Period and 1995 Period, respectively. Substantially all
of the inventory which was sold during the 1996 Period and the 1995
Period had previously been written down to its then net realizable
value. Since the facility was operating during the 1996 Period and
1995 Period, excess/idle production costs primarily represented
current production costs in excess of the estimated net realizable
value of the inventory produced. The positive gross margin
achieved during the 1996 Period reflects the higher selling prices
of ALFERON N Injection realized as a result of the reacquisition of
United States marketing rights, as well as the low carrying values
of inventories written down in prior periods due to the sales
prices specified in the Purdue distribution agreements.
Research and development expenses during the 1996 Period of
$6,400,313 increased by $2,674,083 from $3,726,230 for the 1995
Period, principally because the Company has increased its level of
clinical research on ALFERON N Injection. The Company received
$258,984 and $181,992 during the 1996 Period and 1995 Period,
respectively, as rental income from NPDC for the use of a portion
of the Company's facilities, which offset research and development
expenses.
General and administrative expenses for the 1996 Period were
$3,404,578 as compared to $1,939,864 for the 1995 Period. The
increase of $1,464,714 was principally due to nonrecurring
compensation expenses of approximately $768,000 ($517,000 of which
was paid in shares of Common Stock) and the balance to increases in
payroll and other operating expenses, including distribution
expenses of $160,000 for ALFERON N Injection incurred pursuant to
the distribution agreement with Purdue which was entered into in
connection with the Company's reacquisition of marketing rights.
NPDC provides certain administrative services for which the Company
paid NPDC $120,000 for each of the 1996 Period and 1995 Period. In
addition, for the 1996 Period and 1995 Period, the Company
reimbursed NPDC $195,000 and $249,996, respectively, for expenses
paid by NPDC on behalf of the Company. During the 1995 Period,
NPDC provided to the Company, at its estimated cost, certain
personnel which the Company used in its operations. For the 1995
Period, payments to NPDC for the services provided to the Company
by NPDC personnel amounted to $871,149. Commencing January 1,
1996, most of the NPDC personnel who had been providing a portion
of their time to the Company became employees of the Company and
are now providing a portion of their time to NPDC at the Company's
estimated cost. For the 1996 Period, receipts from NPDC for the
services provided to NPDC by Company personnel amounted to $351,759
and payments to NPDC for the services provided to the Company by
NPDC personnel amounted to $154,758.
The $3,313,705 cost of reacquisition of marketing rights from
Purdue was charged to expense in the second quarter of 1996.
Interest and other income for the 1996 Period was $440,755 as
compared to $155,478 for the 1995 Period. The increase of $285,277
was due to more funds available for investment in the current
period.
Interest expense for the 1996 Period and 1995 Period was zero
and $80,511, respectively. The decrease was due to the absence of
interest bearing debt during the 1996 Period.
As a result of the foregoing, the Company incurred net losses
of $11,985,544 and $7,371,714 for the 1996 Period and 1995 Period,
respectively.
Year Ended December 31, 1995 versus Year Ended December 31, 1994
For the year ended December 31, 1995 (the "1995 Period"), the
Company's revenues of $1,295,662 included $1,260,933 from the sale
of ALFERON N Injection and the balance from sales of research
products and other revenues. Revenues of $1,165,931 for the year
ended December 31, 1994 (the "1994 Period") included $979,425 from
the sale of ALFERON N Injection and the balance from sales of
research products, contract research, and other revenues. Cost of
goods sold and excess/idle production costs totaled $3,076,249 in
the 1995 Period and $2,778,109 in the 1994 Period. The inventory
which was sold in the 1995 Period and the 1994 Period had been
written down to its net realizable value. For the portion of the
1995 Period and the 1994 Period during which the facility was
operating, excess/idle production costs primarily represented
current production costs in excess of the estimated net realizable
value of inventory produced which resulted from limited production
volumes. Excess/idle production costs were reduced by suspending
ALFERON N Injection production during a portion of both the 1995
Period and the 1994 Period.
Research and development expenses during the 1995 Period of
$3,726,230 decreased by $1,469,469 from $5,195,699 for the 1994
Period, principally because the Company reduced its level of
research and product development on ALFERON N Injection. The
Company received $181,992 and $150,000 during the 1995 Period and
1994 Period, respectively, as rental income from NPDC for the use
of a portion of the Company's facilities, which offset research and
development expenses.
General and administrative expenses for the 1995 Period were
$1,939,864 as compared to $4,974,224 for the 1994 Period. The
decrease of $3,034,360 was principally due to the amortization and
subsequent write-off of prepaid royalties totaling $2,100,000 in
the 1994 Period and decreases in payroll and other expenses in the
1995 Period. NPDC provides certain administrative services for
which the Company paid NPDC $120,000 for each of the 1995 Period
and the 1994 Period. In addition, during the 1995 Period and the
1994 Period, NPDC provided to the Company, at its estimated cost,
certain personnel and services which the Company used in its
operations. For the 1995 Period and the 1994 Period, such charges
amounted to $1,121,145 and $1,194,380, respectively. Commencing
January 1, 1996, the NPDC personnel who had been providing such
services to the Company became employees of the Company, and will
provide certain services to NPDC at the Company's estimated cost.
Interest and other income for the 1995 Period was $155,478 as
compared to $157,929 for the 1994 Period.
For the 1994 Period, the Company realized a net loss of
$300,430 on the sales of marketable securities which resulted from
declines in the fair value of the Company's investments in
obligations of agencies of the United States Government.
Interest expense for the 1995 Period and the 1994 Period was
$80,511 and $152,935, respectively. The decrease of $72,424 was
due to reduced long-term debt.
As a result of the foregoing, the Company incurred net losses
of $7,371,714 and $12,077,537 for the 1995 Period and the 1994
Period, respectively.
Recent Tax and Accounting Developments
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." Statement 121 requires the Company to estimate the
future cash flows expected to result from the use and eventual
disposition of its property, plant and equipment, and if the sum of
such cash flows is less than the carrying amount of these assets,
to recognize an impairment loss to the extent, if any, that the
carrying amount of the assets exceeds their fair values. The
Company believes that, although it has a current period operating
loss and a history of operating losses, expected future cash flows
derived from these assets will be at least equal to their carrying
values, and that no impairment loss will be indicated. The Company
bases this assessment both upon expected future product revenues
and upon the fact that it completed a major manufacturing facility
expansion and purchase of manufacturing equipment in 1991, the cost
of which constitutes a major portion of the carrying value of its
property, plant and equipment. The Company believes that its
facility will be suitable for a number of years without significant
repairs.
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under SFAS 123, the Company may elect
either a "fair value" based method or the "intrinsic value" based
method of accounting prescribed by APB No. 25, "Accounting for
Stock Issued to Employees," for its stock-based compensation
arrangements. Under the "intrinsic value" based method, the
Company is required to disclose in the footnotes to the
consolidated financial statements net income and earnings per share
computed under the "fair value" based method. The Company has
elected to continue accounting for stock-based compensation
arrangements using the "intrinsic value" based method; therefore,
the adoption of SFAS 123 did not impact the Company's results of
operations or financial condition.
Forward-Looking Statements
This report contains certain forward-looking statements
reflecting management's current views with respect to future events
and financial performance. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking
statements, including, but not limited to, uncertainty of obtaining
additional funding for the Company; uncertainty of obtaining United
States regulatory approvals for the Company's products under
development and foreign regulatory approvals for the Company's FDA-
approved product and products under development and, if such
approvals are obtained, uncertainty of the successful commercial
development of such products; substantial competition from
companies with substantially greater resources than the Company in
the Company's present and potential businesses; no guaranteed
source of required materials for the Company's products; dependence
on certain distributors to market the Company's products; potential
adverse side effects from the use of the Company's products;
potential patent infringement claims against the Company; possible
inability of the Company to protect its technology; uncertainty of
pharmaceutical pricing; substantial royalty obligations payable by
the Company; limited production experience of the Company; risk of
product liability; and risk of loss of key management personnel,
all of which are difficult to predict and many of which are beyond
the control of the Company.
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . 33
Financial Statements:
Consolidated Balance Sheets - December 31, 1996 and 1995 . . . . . . . 34
Consolidated Statements of Operations - Years ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 1996, 1995 and 1994 . . . . . . . . 36
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . 37
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Interferon Sciences, Inc.:
We have audited the consolidated financial statements of Interferon
Sciences, Inc. and subsidiary as listed in the accompanying index.
These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Interferon Sciences, Inc. and subsidiary at December
31, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
New York, New York
February 21, 1997
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31,
<S> <C> <C>
1996 1995
ASSETS
Current assets
Cash and cash equivalents $ 17,491,955 $ 7,221,108
Accounts and other receivables 233,037 47,351
Inventories 4,328,598 815,978
Receivables from NPDC and affiliated companies 82,902 27,211
Prepaid expenses and other current assets 162,019 76,000
Total current assets 22,298,511 8,187,648
Property, plant and equipment, at cost
Land 140,650 140,650
Buildings and improvements 7,611,994 7,384,102
Equipment 4,720,936 4,369,424
12,473,580 11,894,176
Less accumulated depreciation and amortization (7,514,747) (6,760,181)
4,958,833 5,133,995
Intangible assets, net of accumulated amortization
of $1,080,542 and $1,049,923
Patent costs 311,619 341,596
Other assets 173,900 289,343
$ 27,742,863 $ 13,952,582
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,908,381 $ 872,552
Accrued expenses 460,651 253,254
Total current liabilities 2,369,032 1,125,806
Commitments and contingencies
Stockholders' equity*
Preferred stock, par value $.01 per share; authorized
- 5,000,000 shares; none issued and outstanding
Common stock, par value $.01 per share; authorized
- 55,000,000 shares; issued and outstanding
- 12,276,195 and 8,612,192 shares 122,762 86,122
Capital in excess of par value 107,396,184 82,900,225
Accumulated deficit (82,145,115) (70,159,571)
Total stockholders' equity 25,373,831 12,826,776
$ 27,742,863 $ 13,952,582
</TABLE>
*Stockholders' equity has been restated to reflect the effect of the one-for-
four reverse stock split (see Note 19 to the Consolidated Financial Statements).
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Revenues
Sales
ALFERON N Injection $ 1,939,595 $ 1,260,933 $ 979,425
Research products and other
revenues 152,312 34,729 186,506
Total revenues 2,091,907 1,295,662 1,165,931
Costs and expenses
Cost of goods sold and excess/idle
production costs 1,399,610 3,076,249 2,778,109
Research and development
(net of $258,984, $181,992 and $150,000
of rental income received from NPDC) 6,400,313 3,726,230 5,195,699
General and administrative (includes
$469,758, $1,241,145 and $1,314,380 of
payments to NPDC for management fees
and reimbursements of certain
salaries and operating expenses;
net of $351,759 received from NPDC
in 1996 for reimbursements of
certain salaries) 3,404,578 1,939,864 4,974,224
Cost of reacquisition of
marketing rights 3,313,705
Total costs and expenses 14,518,206 8,742,343 12,948,032
Loss from operations (12,426,299) (7,446,681) (11,782,101)
Interest and other income 440,755 155,478 157,929
Net loss on sales of
marketable securities (300,430)
Interest expense (includes $34,889
in 1995 to NPDC) (80,511) (152,935)
Net loss $ (11,985,544) $ (7,371,714) $ (12,077,537)
Net loss per share* $ (1.20) $ (1.11) $ (2.47)
Weighted average number of
shares outstanding* 10,015,616 6,661,664 4,898,571
</TABLE>
*All periods have been restated to reflect the effect of the one-for-four
reverse stock split (see Note 19 to the Consolidated Financial Statements).
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<S> <C> <C> <C> <C> <C>
Capital in Total
Common Stock Common Stock excess of Accumulated stockholders'
Shares Amount par value deficit equity
Balance at December 31, 1993 4,866,071* $ 48,661* $ 67,792,216* $ (50,710,320) $ 17,130,557
Net proceeds from sale of common stock
and warrants 152,500 1,525 1,474,910 1,476,435
Commitment to purchase common stock from
Purdue Frederick, Runham and Banela (248,748) (2,488) (3,977,488) (3,979,976)
Net proceeds from the sale of common stock
to Sentinel Charitable Remainder Trust 107,500 1,075 428,925 430,000
Net loss (12,077,537) (12,077,537)
Balance at December 31, 1994 4,877,323 48,773 65,718,563 (62,787,857) 2,979,479
Net proceeds from public sale
of common stock 3,000,000 30,000 12,464,035 12,494,035
Termination of commitment to repurchase
common stock from Purdue Frederick 154,998 1,550 2,478,426 2,479,976
Net proceeds from sale of common stock
to Fujimoto Diagnostics, Inc. 258,621 2,586 1,479,914 1,482,500
Net proceeds from sale of common stock
to Amarillo Bioscience, Inc. and its licensee 93,750 938 741,562 742,500
Issuance of common stock in exchange
for warrants to purchase common stock 225,000 2,250 (2,250)
Proceeds from exercise of common stock options 2,500 25 19,975 20,000
Net loss (7,371,714) (7,371,714)
Balance at December 31, 1995 8,612,192 86,122 82,900,225 (70,159,571) 12,826,776
Net proceeds from public and private sale of
common stock 3,525,816 35,258 23,480,817 23,516,075
Net proceeds from sale of common stock
to Fujimoto Diagnostics, Inc. 71,806 718 499,282 500,000
Common stock issued as compensation 66,381 664 515,860 516,524
Net loss (11,985,544) (11,985,544)
Balance at December 31, 1996 12,276,195 $ 122,762 $107,396,184 $ (82,145,115) $ 25,373,831
</TABLE>
*All periods have been restated to reflect the effect of the one-for-four
reverse stock split (see Note 19 to the Consolidated Financial Statements).
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Cash flows from operations:
Net loss $ (11,985,544) $ (7,371,714) $ (12,077,537)
Adjustments to reconcile net loss
to net cash used for
operating activities:
Depreciation and amortization 785,185 777,276 2,926,439
Compensation paid with common stock 516,524
Reduction of other assets 150,000 50,000
Net loss on sales of marketable securities 300,430
Change in operating assets
and liabilities:
Receivables from NPDC and affiliated companies (55,691) (7,210) (1,500)
Inventories (3,512,620) 213,180 1,129,847
Consignment inventory 220,410 (220,410)
Accounts and other receivables (185,686) (561,805) (647,897)
Prepaid expenses and other current assets (86,019) (20,779) 154,958
Accounts payable and accrued expenses 1,243,226 (503,219) 604,359
Net cash used for operations (13,280,625) (7,103,861) (7,781,311)
Cash flows from investing activities:
Sales of marketable securities 6,490,406
Purchases of marketable securities (2,496,445)
Additions to property, plant and equipment (579,404) (68,107) (82,498)
Reductions (additions) to intangible and other assets 114,801 (132,954) (101,345)
Net cash (used for) provided by investing activities (464,603) (201,061) 3,810,118
Cash flows from financing activities:
Net proceeds from purchase agreement with D. Blech 430,000
Net proceeds from sale of common stock and warrants 24,016,075 14,719,035 1,476,435
(Decrease) increase in advances from NPDC (134,347) 126,297
Reduction of long-term debt (409,275) (1,727,989)
Purchase of common stock from Runham and Banela (250,000)
Loans from principal stockholders 1,870,000
Repayment of loans from principal stockholders (1,870,000)
Proceeds from exercise of common stock options 20,000
Net cash provided by financing activities 24,016,075 14,195,413 54,743
Net increase (decrease) in cash and cash equivalents 10,270,847 6,890,491 (3,916,450)
Cash and cash equivalents at beginning of year 7,221,108 330,617 4,247,067
Cash and cash equivalents at end of year $ 17,491,955 $ 7,221,108 $ 330,617
Cash paid for interest expense $ $ 79,166 $ 205,190
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization, Business and Transactions with National
Patent
Interferon Sciences, Inc. (the "Company") is a
biopharmaceutical company engaged in the study, manufacture, and
sale of pharmaceutical products based on its highly purified,
multispecies, natural source alpha interferon ("Natural Alpha
Interferon"). The Company's ALFERON(R) N Injection (Interferon
Alfa-n3) product has been approved by the United States Food and
Drug Administration ("FDA") for the treatment of certain types of
genital warts and is being studied for potential use in the
treatment of HIV, hepatitis C, and other indications. The Company
also is studying ALFERON N Gel and ALFERON LDO(R), the Company's
topical and oral formulations of Natural Alpha Interferon, for the
potential treatment of viral and immune system diseases. (See Note
6).
The Company is a party to a management agreement with National
Patent Development Corporation ("NPDC") pursuant to which certain
legal, financial and administrative services have been provided by
employees of NPDC. The fee for such services in 1996, 1995 and
1994 was $120,000 annually. In addition, during such years NPDC
provided to the Company, at its estimated cost, certain personnel
and services which the Company used in its operations. For the
years ended December 31, 1996, 1995 and 1994, such charges amounted
to $349,758, $1,121,145 and $1,194,380, respectively. Commencing
January 1, 1996, the NPDC personnel who had been providing such
services to the Company became employees of the Company, and
provided certain services to NPDC at the Company's estimated cost.
For the year ended December 31, 1996, such charges to NPDC amounted
to $351,759. The Company was also covered under NPDC's insurance
policies except for certain policies which the Company has in its
own name beginning in 1994. The Company's allocated portion of
insurance costs was zero, $15,000 and $114,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Company owns the buildings which contain its offices and
laboratories and presently leases out a portion of the buildings to
NPDC. Total occupancy costs for the years ended December 31, 1996,
1995 and 1994 were approximately $991,000, $729,000 and $760,000,
respectively. NPDC paid to the Company as rent NPDC's
proportionate share of such occupancy costs (based on both square
feet occupied and number of personnel), which amounted to $258,984,
$181,992 and $150,000, respectively.
See Note 16 for information with respect to royalty
obligations to NPDC.
Note 2. Summary of Significant Accounting Policies
Principles of consolidation -- The financial statements
include the operations of the Company and Interferon Sciences
Development Corporation ("ISD"), its wholly owned subsidiary.
Statements of cash flows -- For purposes of the statements of
cash flows, the Company considers all highly liquid instruments
with maturities of three months or less from purchase date to be
cash equivalents.
Property, plant and equipment -- Property, plant and equipment
are carried at cost. Major additions and betterments are
capitalized while maintenance and repairs which do not extend the
lives of the assets are expensed currently.
Depreciation -- The Company provides for depreciation and
amortization of plant and equipment following the straight-line
method over the estimated useful lives of such assets as follows:
Estimated
Class of Assets Useful Lives
Buildings and Improvements 15 to 30 years
Equipment 5 to 10 years
Intangible assets -- The Company capitalizes costs to obtain
and maintain patents and licenses. Patent costs are amortized over
17 years and license costs are amortized over 5 years, each on a
straight-line basis. To the extent a patent is determined to be
worthless, the related capitalized cost is immediately expensed.
Revenue recognition -- Sales are recorded generally upon
shipment of product. However, when a sale is made subject to a
right of return, revenues are not recognized until notification by
the customer that the product has been resold, and the related
product is recorded as consignment inventory until such
notification.
Collaborative agreement research and development revenues and
costs -- The costs of performing research and development are
reported when incurred. Generally, the Company matches its
collaborative research and development revenues in the same
accounting periods in which the related research costs are
incurred. However, when the revenues are exhausted, the Company
has the option to continue the research activities at its own
expense.
Inventories -- Inventories, consisting of raw materials, work
in process and finished goods, are stated at the lower of cost or
market on a FIFO basis. Inventories, if any, which are expected to
become obsolete before sale or use in research are written off.
Stock option plan -- Prior to January 1, 1996, the Company
accounted for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996,
the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as
if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
Pension plan -- The Company's employees are included in NPDC's
pension plan. The Company provides for its allocable share of such
costs as they accrue. Effective December 31, 1991, the plan
benefits were frozen (See Note 13).
Reverse stock split -- As a result of a one-for-four reverse
stock split effective as of 5:00 PM, New York City time on March
21, 1997, all shares and per share information have been restated.
Net loss per share -- Net loss per share is based on the
weighted average number of shares of Common Stock outstanding
during the period.
Note 3. Operations and Liquidity
The Company has experienced significant operating losses since
its inception in 1980. As of December 31, 1996, the Company had an
accumulated deficit of approximately $82.1 million. For the years
ended December 31, 1996, 1995 and 1994, the Company had losses from
operations of approximately $12.4 million, $7.4 million and $11.8
million, respectively. Although the Company received FDA approval
in October 1989 to market ALFERON N Injection in the United States
for the treatment of certain genital warts and ALFERON N Injection
currently is marketed and sold in the United States by the Company,
in Mexico by Industria Farmaceutica Andromaco, S.A. De C.V. and in
Germany by Cell Pharm GmbH ("Cell Pharm"), the Company has had
limited revenues from the sale of ALFERON N Injection to date. For
the Company to operate profitably, the Company must sell
significantly more ALFERON N Injection. Increased sales will
depend primarily upon the expansion of existing markets and/or
successful attainment of FDA approval to market ALFERON N Injection
for additional indications, of which there can be no assurance.
There can be no assurance that sufficient quantities of ALFERON N
Injection will be sold to allow the Company to operate profitably.
Based on the Company's estimates of revenues and expenses,
management believes that the cash available will be sufficient to
enable the Company to continue operations through approximately
June, 1998. However, actual results, especially with respect to
revenues, may differ materially from such estimates, and no
assurance can be given that additional funding will not be required
sooner than anticipated or that such additional funding, whether
from financial markets or collaborative or other arrangements with
corporate partners or from other sources, will be available when
needed or on terms acceptable to the Company. Insufficient funds
will require the Company to delay, scale back, or eliminate certain
or all of its research and development programs or to license third
parties to commercialize products or technologies that the Company
would otherwise seek to develop itself or to shut down or curtail
its manufacturing facility.
Note 4. Agreements with Hoffmann-LaRoche
F. Hoffmann-LaRoche Ltd. and Hoffmann-LaRoche, Inc.
(collectively, "Hoffmann") have been issued patents covering human
alpha interferon in many countries throughout the world. As of
March 31, 1995, the Company obtained a non-exclusive perpetual
license from Hoffmann (the "Hoffmann Agreement") which grants the
Company the worldwide rights to make, use, and sell, without a
potential patent infringement claim from Hoffmann, any formulation
of Natural Alpha Interferon. The Hoffmann Agreement replaced a
1988 non-exclusive license which, as amended, granted the Company
the right to make, use, and sell in the United States, without a
potential patent infringement claim from Hoffmann, injectable
formulations of Natural Alpha Interferon for the treatment of
genital warts or patients with diseases refractory to recombinant
interferon therapy. The Hoffmann Agreement permits the Company to
grant marketing rights with respect to Natural Alpha Interferon
products to third parties, except that the Company cannot grant
marketing rights with respect to injectable products in any country
in which Hoffmann has patent rights covered by the Hoffmann
Agreement (the "Hoffmann Territory") to any third party not listed
on a schedule of approximately 50 potential marketing partners
without the consent of Hoffmann, which consent cannot be
unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is
obligated to pay Hoffmann an aggregate royalty on net sales (as
defined) of Natural Alpha Interferon products by the Company in an
amount equal to (i) 8% of net sales in the Hoffmann Territory, and
2% of net sales outside the Hoffmann Territory of products
manufactured in the Hoffmann Territory, up to $75,000,000 of net
sales in any calendar year and (ii) 9.5% of net sales in the
Hoffmann Territory, and 2% of net sales outside the Hoffmann
Territory of products manufactured in the Hoffmann Territory, in
excess of $75,000,000 of net sales in any calendar year, provided
that the total royalty payable in any calendar year shall not
exceed $8,000,000. The Hoffmann Agreement can be terminated by the
Company on 30 days' notice with respect to the United States
patent, any individual foreign patent, or all patents owned by
Hoffmann. If the Hoffmann Agreement is terminated with respect to
the patents owned by Hoffmann in a specified country, such country
is no longer included in the Hoffmann Territory. When the Company
received FDA approval for ALFERON N Injection for the treatment of
genital warts in 1989, the Company became obligated to issue shares
of its Common Stock to Hoffmann as a prepaid royalty against future
net sales by the Company. Under the terms of the Hoffmann
Agreement, certain payments previously made to Hoffmann (including
a portion of the value of the Common Stock previously issued to
Hoffmann) are available as offsets against 50% of the Company's
future royalty obligations to Hoffmann until the Company obtains an
FDA approval to market ALFERON N Injection for an additional
indication. As of December 31, 1996, the Company had approximately
$514,046 of credits available to offset its future royalty
obligations to Hoffmann.
During the second quarter of 1994, the Company adopted a
policy of amortizing prepaid royalties at the greater of the
straight line rate over a five-year period or the amount of
royalties incurred based upon sales. During the third quarter of
1994, the Company, in its quarterly evaluation of whether the
unamortized balance of prepaid royalties is realizable, determined
that it was prudent to write off such prepaid royalties. During
1994, the amortization and writeoff of prepaid royalties totaling
$2,100,000 were included as general and administrative expense in
the statements of operations and reflected as depreciation and
amortization in the statements of cash flows.
For the years ended December 31, 1996, 1995 and 1994, the
Company applied $77,584, $50,437 and $39,177 respectively, of the
prepayments previously made to Hoffmann against the amounts due.
Note 5. Agreements with Purdue
In 1988, the Company entered into exclusive marketing and
distribution agreements with affiliates of The Purdue Frederick
Company (collectively, "Purdue") with respect to ALFERON N
Injection. The Company reacquired from Purdue in 1993 and 1994 all
marketing rights except in the United States and Canada. In May
1996, the Company reacquired the United States and Canadian
marketing rights from Purdue for $3,313,705, which was charged to
expense in the second quarter of 1996.
In connection with the reacquisition of United States and
Canadian marketing rights (i) Purdue agreed to provide during the
first year after the reacquisition certain distribution services to
the Company with respect to 24,000 vials of ALFERON N Injection at
an aggregate cost of $240,000, (ii) Purdue agreed to provide during
the second year after the reacquisition, if requested by the
Company, certain distribution services to the Company with respect
to up to 30,000 vials of ALFERON N Injection at a cost of $15 per
vial, and (iii) the Company purchased from Purdue all vials of
ALFERON N Injection and all other assets of Purdue used exclusively
in its ALFERON N Injection business at an aggregate cost of
$206,307.
<PAGE>
Note 6. Research and Development Agreement with Interferon
Sciences Research Partners, Ltd.
During January 1984, the Company organized ISD to act as the
sole general partner of Interferon Sciences Research Partners,
Ltd., a New Jersey limited partnership (the "Partnership"). The
Company and the Partnership entered into a development contract
whereby the Company received substantially all of the net proceeds
($4,414,475) of the Partnership's public offering of limited
partnership interests. The Company used the proceeds to perform
research, development and clinical testing on behalf of the
Partnership for the development of ALFERON Gel containing
recombinant interferon.
In connection with the formation of the Partnership, ISD
agreed to make additional cash contributions for purposes of
continuing development of ALFERON Gel if the Partnership exhausted
its funds prior to development of such product. ISD is wholly
dependent upon the Company for capital to fund such commitment.
The Partnership exhausted its funds during 1986, and the Company
contributed a total of $1,997,000 during the period from 1986 to
1990, for the continued development of ALFERON Gel. During May
1987, the Company filed a Product License Application with the FDA
for approval to market ALFERON Gel. At a meeting with the FDA in
February, 1990, the FDA indicated that additional process
development and clinical trials would be necessary prior to
approval of ALFERON Gel. The Company believed, at that time, that
the costs to complete the required process development and clinical
trials would be substantial, and there could be no assurance that
the clinical trials would be successful.
As a result of the above events, in March 1992, the Company
withdrew its FDA Product License Application for ALFERON Gel
containing recombinant interferon. In place of single species
recombinant interferon, previously ALFERON Gel's active ingredient,
the Company commenced, in 1992, further development of ALFERON Gel
using the Company's natural source multi-species alpha interferon
("ALFERON N Gel"). Assuming successful development and commercial
exploitation of ALFERON N Gel, the Company may be obligated to pay
the Partnership royalties equal to 4% of the Company's net sales of
ALFERON N Gel and 15% of revenues received from sublicensing
ALFERON N Gel.
Note 7. Agreement with Fujimoto Diagnostics, Inc.
In the first quarter of 1995, the Company concluded an
agreement with Fujimoto Diagnostics, Inc. ("Fujimoto"), a
pharmaceutical company located in Osaka, Japan, for the
commercialization of the Company's ALFERON N Injection and ALFERON
N Gel in Japan. In connection with the agreement, Fujimoto
purchased $1,500,000 of Common Stock at $5.80 per share (the then
market price), all of which cash was received during the first
quarter of 1995, and agreed to purchase an additional $500,000 of
Common Stock on February 6, 1996 at the then market price. During
January 1996, Fujimoto advised the Company that, to date, it had
incurred higher than anticipated development expenses, and that it
had determined that there may be greater difficulties in obtaining
Japanese regulatory approval than originally anticipated. Fujimoto
therefore requested that the Company renegotiate such investment
agreement, and the Company met with Fujimoto to consider its
request. As a result of such meeting, during the third quarter of
1996 Fujimoto purchased the additional $500,000 of Common Stock
originally scheduled for purchase on February 6, 1996 and
reimbursed the Company $133,000 for the cancellation of a prior
commitment to purchase ALFERON N Injection. The $133,000 was
recorded as other revenues in the third quarter of 1996. In March,
1997, Fujimoto and the Company terminated the Fujimoto Agreement.
Note 8. Agreement with Cell Pharm GmbH
In April 1996, the Company entered into a supply and
distribution agreement (the "Cell Pharm Agreement") with Cell
Pharm. Cell Pharm, headquartered in Hanover, Germany, is a
privately-owned pharmaceutical company primarily involved in the
distribution and manufacture of products for cancer treatment and
other uses. The Cell Pharm Agreement, which terminates on June 30,
2001, unless renewed, grants Cell Pharm rights to distribute,
promote, and sell ALFERON N Injection in Germany. The Cell Pharm
Agreement provides that the Company will supply Cell Pharm with
ALFERON N Injection at specified prices, and obligates Cell Pharm
to purchase specified minimum amounts in each annual period. In
addition, Cell Pharm is required to pay the Company 50% of the
incremental revenue Cell Pharm receives as a result of selling
ALFERON N Injection at a price higher than a specified price. Cell
Pharm is required to maintain an active and efficient sales and
customer service organization with adequately trained personnel for
marketing and selling ALFERON N Injection. Cell Pharm represents
to the Company that it has obtained, and Cell Pharm agrees to
maintain in effect, all registrations, approvals, and consents from
governments in Germany as are necessary to permit or facilitate the
lawful handling, promotion, and resale of ALFERON N Injection in
Germany. Cell Pharm has informed the Company that it intends to
market ALFERON N Injection under the trade name Cellferon(R),
pursuant to Cell Pharm's existing regulatory approval to market
Cellferon in Germany for the treatment of hairy cell leukemia and
for the treatment of patients who develop antibodies against
recombinant alpha interferons.
Note 9. Marketable Securities
During 1994, the Company's marketable securities consisted
of United States Government obligations. The Company classified
these debt securities as available-for-sale and recorded them at
their fair value. Unrealized holding gains and losses on
available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until
realized. A decline in the market value of any available-for-
sale security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost
basis for the security. Realized gains and losses for securities
classified as available-for-sale are included in earnings and are
derived using the specific identification method for determining
the cost of securities sold.
Proceeds from the sale of marketable securities were
$6,490,406 for the year ended December 31, 1994. Net realized
losses on such sales for the year ended December 31, 1994 were
$300,430. All of the Company's marketable securities were sold by
December 31, 1994.
Note 10. Inventories
Inventories, consisting of material, labor and overhead, are
classified as follows:
December 31,
1996 1995
Finished goods . . . . . . . . . . . . . . . . $2,563,755 $344,550
Work in process. . . . . . . . . . . . . . . . 1,106,214 162,567
Raw materials. . . . . . . . . . . . . . . . . 658,629 308,861
$4,328,598 $815,978
Finished goods consists of vials of ALFERON N Injection.
Inventories at December 31, 1995 were written down to estimated net
realizable value, based principally on sales prices specified in
the Purdue Distribution Agreements. The positive gross margin
achieved in 1996 reflects the higher selling prices of ALFERON N
Injection realized as a result of the reacquisition of United
States marketing rights, as well as the lower carrying values of
inventories written down in prior periods (see Note 5).
Write downs of inventories at December 31, 1995 and 1994 to their
estimated net realizable values are included in cost of goods sold
and excess/idle production costs for 1995 and 1994.
Note 11. Income Taxes
On May 30, 1991, NPDC exchanged the Company's Class B Common
Stock for an equal number of shares of the Company's Common Stock.
As a result, on that date the Company ceased to be included in
NPDC's consolidated Federal income tax return. For periods
subsequent to May 30, 1991, the Company files its own consolidated
Federal income tax return, including its wholly-owned subsidiary.
As a result of the loss allocation rules contained in the
Federal income tax consolidated return regulations, approximately
$6,008,000 of net operating loss carryforwards, which expire in
2001-2006, are available to the Company upon ceasing to be a member
of NPDC's consolidated return group. In addition, the Company has
net operating loss carryforwards from tax years prior to joining
the NPDC consolidated return group of approximately $2,126,000,
which expire in 1997-1998. Further, the Company has net operating
loss carryforwards for periods subsequent to May 31, 1991, and
through December 31, 1995 of approximately $36,305,000, which
expire in 2006-2010. For the year ended December 31, 1996, the
Company had a tax net operating loss of $11,692,000, which expires
in 2011.
The Company believes that the events culminating with the
closing of its Common Stock Offering on August 22, 1995 resulted in
an "ownership change" under Internal Revenue Code Section 382 with
respect to its stock. The Company believes that as a result of the
ownership change, the future utility of its pre-change net
operating losses are limited to an annual amount of approximately
$3,230,000. In addition, the Company has approximately $116,000 of
investment tax credit carryforwards and $973,000 of research and
development credit carryforwards that are, in accordance with
Internal Revenue Code Section 383, subject to the annual limitation
under Internal Revenue Code Section 382. The following table
summarizes the tax net operating losses as of December 31, 1996:
Description Amount Years Expire
Subject to Section 382 $38,860,000 1997 - 2010
Not Subject to Section 382 17,271,000 2010 - 2011
$56,131,000
A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax asset will not be
realized. The Company has determined, based on the Company's
recent history of annual net losses, that a full valuation
allowance is appropriate.
The Company has, as of December 31, 1996, deferred tax assets
of approximately $20,173,000, deferred tax liabilities of
approximately $122,000 and a valuation allowance of approximately
$20,051,000. At January 1, 1996, the valuation allowance was
$15,985,000. The increase to the valuation allowance of $4,066,000
is due primarily to net operating losses. The tax effects that
give rise to these deferred tax assets and liabilities consist of
the following as of December 31, 1996 and 1995:
Deferred tax assets 1996 1995
Net operating loss carryforwards $ 19,084,000 $ 15,118,000
Tax credit carryforwards 1,089,000 1,089,000
20,173,000 16,207,000
Deferred tax liabilities
Property and equipment,
principally due to differences
in depreciation (122,000) (222,000)
Net deferred tax asset 20,051,000 15,985,000
Valuation allowance (20,051,000) (15,985,000)
Net deferred tax asset after
valuation allowance $ --- $ ---
Note 12. Stock Options, Warrants and Other Shares Reserved
In 1981, the Company adopted the 1981 Stock Option Plan (the
"Plan"), authorizing a committee of the Board of Directors to grant
options, over a 10-year period, to purchase not more than 125,000
shares of Common Stock to officers, directors, employees and
consultants of the Company. Since 1981, the Plan has been amended
several times to increase the number of shares issuable under the
Plan to 875,000 and to extend the Plan until 2001. Pursuant to the
terms of the Plan, no option may be exercised after 10 years from
the date of grant. The exercise price for any option issued may not
be less than 85 percent of the market price of the common stock on
the date of issuance.
At December 31, 1996, the per share weighted-average fair
value of stock options granted during 1996 and 1995 was $3.44 and
$5.16 on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: 1996 -
expected dividend yield of 0.0%, risk-free interest rate of 5.8%,
expected volatility of 77.2% and an expected life of 3.3 years;
1995 - expected dividend yield of 0.0%, risk-free interest rate of
5.9%, expected volatility of 77.2% and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its
Plan, and accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net
loss would have been increased to the pro forma amounts indicated
below:
1996 1995
Net loss as reported $(11,985,544) $ (7,371,714)
pro forma (13,251,799) (7,519,328)
Net loss per share as reported $ (1.20) $ (1.11)
pro forma (1.32) (1.13)
Pro forma net loss reflects only options granted in 1996 and
1995. In addition, compensation cost is reflected over the options
vesting period. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts presented above.
Employee stock option activity for options under the Plan
during the periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
Balance at December 31, 1994 718,588 $8.23
Granted 142,500 7.76
Exercised (2,500) 8.00
Forfeited (54,500) 8.08
Expired (42,750) 9.00
Balance at December 31, 1995 761,338 8.11
Granted 364,325 6.08
Exercised --- ---
Forfeited (1,275) 7.90
Expired (324,325) 8.10
Balance at December 31, 1996 800,063 $7.19
At December 31, 1996, the range of exercise prices and
weighted-average remaining contractual life of outstanding options
was $4.36 - $11.00 and 2.20 years, respectively.
At December 31, 1996 and 1995, the number of options
exercisable was 677,113 and 615,738 respectively, and the weighted-
average exercise price of those options was $7.12 and $8.17,
respectively.
Information regarding all Options and Warrants
Changes in options and warrants outstanding during the years
ended December 31, 1996, 1995 and 1994, options and warrants
exercisable and shares reserved for issuance at December 31, 1996,
1995 and 1994 are as follows:
Price Range Number of
Per Share Shares
Outstanding at December 31, 1993 $ 8.52 - $ 40.00 2,149,963
Granted 8.00 - 10.80 579,675
Exercised --
Terminated 12.52 - 40.00 (659,550)
Outstanding at December 31, 1994 8.00 - 26.00 2,070,088
Granted 6.24 - 16.80 480,068
Exercised 8.00 - (2,500)
Terminated 8.00 - 26.00 (1,227,250)
Outstanding at December 31, 1995 6.24 - 16.80 1,320,406
Granted 4.36 - 9.60 564,325
Exercised --
Terminated 7.24 - 9.00 (408,471)
Outstanding at December 31, 1996 4.36 - 16.80 1,476,260
Exercisable
December 31, 1994 8.00 - 26.00 1,960,300
December 31, 1995 6.24 - 16.80 893,973
December 31, 1996 4.36 - 16.80 1,153,310
Shares reserved for issuance
December 31, 1994 2,142,830
December 31, 1995 1,347,899
December 31, 1996 1,465,028
Options and warrants outstanding and exercisable, and shares
reserved for issuance at December 31, 1994, include 5,000 shares
under a warrant agreement with U.S. Capital Corporation. Such
warrants expired unexercised in 1995.
Options and warrants outstanding and exercisable, and shares
reserved for issuance at December 31, 1993, include 93,750 shares
under warrant agreements with Purdue. Such warrants were
terminated in 1994 as a result of the amended marketing and
distribution agreements with Purdue.
Options and warrants outstanding and exercisable, and shares
reserved for issuance at December 31, 1995, include 82,871 shares,
and at December 31, 1994, include 50,000 shares, under warrant
agreements with the underwriter of the October 1991 public offering
of Common Stock. Such warrants expired unexercised in 1996.
Options and warrants outstanding and exercisable, and shares
reserved for issuance at December 31, 1996, 1995 and 1994, include
31,250 shares under a warrant agreement with Strategic Growth
International, the Company's outside public relations advisor.
Options and warrants outstanding and exercisable, and shares
reserved for issuance at December 31, 1996 and 1995 include 148,865
shares and at December 31, 1994 include 1,250,000 shares under a
warrant agreement with David Blech. During 1995, David Blech and
certain other parties agreed to exchange 2,250,000 Class A Warrants
and 2,250,000 Class B Warrants for 225,000 shares of Common Stock.
Options and Warrants outstanding and exercisable, and shares
reserved for issuance at December 31, 1996, 1995 and 1994 include
15,250 shares under a warrant agreement issued as a commission in
connection with the sale of shares of Common Stock to an
institutional investor.
Options and warrants outstanding and shares reserved for
issuance at December 31, 1996 and 1995, and options and warrants
exercisable at December 31, 1996, include 280,833 shares under
warrant agreements with the underwriter of the August/September
1995 Offering.
Options and warrants outstanding and shares reserved for
issuance at December 31, 1996, include 200,000 shares under warrant
agreements with the underwriter of the May 1996 Offering.
Note 13. Pension and Investment Plans
NPDC had a Defined Benefit Pension Plan (the "Plan") for
employees of certain divisions and subsidiaries including those of
the Company. Benefits were based primarily on years of service and
a fixed rate of benefits per year of service. Contributions were
intended to provide not only for benefits attributed to service to
date but also for those expected to be earned in the future.
Effective December 31, 1991, the Plan benefits were frozen.
In the future, accrued vested benefits will be paid to terminated
participants in the form of a lump sum distribution in cases where
the accrued vested benefit is less than $3,500. Terminated
participants can elect a lump sum distribution if the accrued
vested benefit is greater than $3,500 but less than $7,500.
In the event that the accrued vested benefit exceeds the
$7,500 payable limit as outlined in the Plan, payment will be
deferred until a terminated vested participant reaches age 65 or
elects early retirement, at age 60 or later. As of December 31,
1996, 1995 and 1994, the projected benefit obligation of the NPDC
Plan was $5,549,000, $5,890,000, and $4,469,000 and the fair value
of plan assets was $4,481,600, $4,352,900, and $3,405,000. The
discount rate used in determining the actuarial present value of
the projected benefit obligation was 7.25%. The expected long-term
rate of return on assets was 10%.
NPDC has announced its intention to terminate the Plan during
1997. In this termination, NPDC will provide additional funding to
the Plan such that Plan assets will be sufficient to satisfy all
benefit liabilities under the Plan, with respect to each
participant and each beneficiary of a deceased participant. This
will be accomplished by the purchase of irrevocable annuity
contracts from an insurer or by an alternative form of distribution
provided for under the Plan.
Effective March 1, 1992, NPDC adopted the 1992 401(k) Savings
Plan (the "Savings Plan"). Effective December 31, 1991, the Plan
participants would no longer accrue benefits under the Defined
Benefit Pension Plan, but became eligible to participate in NPDC's
Savings Plan.
NPDC's Savings Plan is for employees who have completed one
year of service; however, past vesting service credit was
recognized for employees who participated in the Savings Plan at
the date of initial enrollment, March 1, 1992.
The Savings Plan permits pre-tax contributions to the Savings
Plan by participants pursuant to Section 401(k) of the Internal
Revenue Code of 2% to 6% of base compensation. The Company matches
40% of the participants' eligible contributions based on a formula
set forth in the Savings Plan. For 1996, 1995 and 1994, the
Company's contribution to the Savings Plan was $79,000, $49,000 and
$53,000, respectively. Participants are fully vested in their
contributions and may withdraw such contributions at time of
employment termination, or at age 59 1/2, or earlier in the event of
financial hardship. Amounts otherwise are paid at retirement or in
the event of death or disability. Employer contributions vest at a
rate of 20% per year.
The Savings Plan is administered by a trustee appointed by the
Board of Directors of NPDC and all contributions are held by the
trustee and invested at the participants' direction in various
mutual funds.
The Company does not provide any post-retirement benefits,
other than pensions, to its employees.
Note 14. Profit Sharing Plan
Effective June 6, 1988, the Company adopted the 1988 Profit
Sharing Plan (the "Profit Sharing Plan") providing key employees
and consultants with an opportunity to share in the profits of the
Company. The Profit Sharing Plan is administered by the Company's
Compensation Committee.
Pursuant to the terms of the Profit Sharing Plan, the
Compensation Committee, in its sole discretion, based upon the
significance of the employee's contributions to the operations of
the Company, selects certain key employees and consultants of the
Company who are entitled to participate in the Profit Sharing Plan
and determines the extent of their participation. The amount of the
Company's profits available for distribution to the participants
(the "Distribution Pool") is the lesser of (a) 10% of the Company's
income before taxes and profit sharing expense and (b) an amount
equal to 100% of the base salary for such year of all the
participants in the Profit Sharing Plan. A number of key employees
are eligible to participate in the Profit Sharing Plan.
The Compensation Committee may require as a condition to
participation that a participant remain in the employ of the
Company until the end of the fiscal year for which payment is to be
made. Payments required to be made under the Profit Sharing Plan
must be made within 10 days of the filing of the Company's tax
return. To date, there have been no contributions by the Company
under the Profit Sharing Plan.
Note 15. Non-cash Financing and Investing Activities
During the years ended December 31, 1996, 1995 and 1994 the
following noncash financing and investing activities occurred:
1996:
The Company issued 66,381 shares, valued at $516,524, of
Common Stock as compensation.
The Company issued 122,066 shares of Common Stock for services
provided by the underwriter of the December 24, 1996 private
placement.
1995:
Offset of receivables in settlement of obligation to
repurchase Common Stock for $550,000 and forgiveness of balance
due.
By agreement, the Company terminated a commitment to
repurchase 154,998 shares, valued at $2,479,976, of Common Stock
from Purdue.
1994:
The Company committed to purchase 233,123 shares, valued at
$3,729,976, of its Common Stock from Purdue.
Offset of receivables of $700,000 in settlement of obligation
to repurchase Common Stock.
Note 16. Commitments and Contingencies
As consideration for the transfer to the Company of certain
licenses, rights and assets upon the formation of the Company by
NPDC, the Company agreed to pay NPDC royalties of $1,000,000, but
such payments will be made only with respect to those years in
which the Company has income before income taxes, and will be
limited to 25% of such income.
See Notes 4 and 6 for information relating to royalties
payable to Hoffmann and the Partnership, respectively.
In October 1989, the Company entered into a license agreement
with a non-affiliated party for co-exclusive rights to certain low
dose oral formulations of interferon. The Company will be required
to pay a royalty of 10% of net sales, as defined, of products
produced and marketed by the Company that may be developed under
the license agreement.
Note 17. Use of Estimates in the Preparation of Financial
Statements
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.
Note 18. Fair Value of Financial Instruments
The carrying values of financial instruments, including cash
and cash equivalents, accounts receivable and accounts payable,
approximate fair market values, because of short maturities or
interest rates that approximate current rates.
Note 19. Subsequent Event
On March 21, 1997, the Company's stockholders approved a
proposal to amend the Company's Restated Certificate of
Incorporation to effect a one-for-four reverse stock split of the
Company's Common Stock. The reverse stock split became effective
as of 5:00 PM, New York City time, on March 21, 1997 (the
"Effective Time"). As of March 21, 1997, there were 49,104,779
shares of Common Stock outstanding and after the Effective Time
there were approximately 12,276,000 shares of Common Stock
outstanding.
The par value of the Common Stock did not change as a result
of the reverse stock split. Cash was paid in lieu of fractional
shares based on the last reported sale price of the new Common
Stock on the first trading date after the Effective Time.
The balance sheets at December 31, 1996 and 1995 as well as
the loss per share and average outstanding shares for the years
ended December 31, 1996, 1995 and 1994 have been restated to
reflect the reverse split as if it had occurred on January 1, 1994.
<PAGE>
Item 9. Changes and Disagreements with Accountants on Accounting
and Financial Disclosure
There has been no change of accountants since January 1, 1994.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors of the Company is
incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, which proxy statement will
be filed not later than 120 days after the end of the fiscal year
covered by this report.
Item 11. Executive Compensation
Information with respect to compensation of executives of the
Company is incorporated herein by reference to the Company's
definitive proxy statement pursuant to Regulation 14A, which proxy
statement will be filed not later than 120 days after the end of
the fiscal year covered by this Report.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information with respect to Security Ownership of Certain
Beneficial Owners and Management is incorporated herein by
reference to the Company's definitive proxy statement pursuant to
Regulation 14A, which statement will be filed not later than 120
days after the end of the fiscal year covered by this Report.
Item 13. Certain Relationships and Related Transactions
Information with respect to Certain Relationships and Related
Transactions is incorporated herein by reference to the Company's
definitive proxy statement pursuant to Regulation 14A, which
statement will be filed not later than 120 days after the end of
the fiscal year covered by this Report.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a)(1) The following financial statements
are included in Part II, Item 8:
Page
Independent Auditor's Report 33
Financial Statements:
Consolidated Balance Sheets -
December 31, 1996 and 1995 34
Consolidated Statements of
Operations - Years ended
December 31, 1996, 1995, and 1994 35
Consolidated Statements of Changes in
Stockholders' Equity - Years ended
December 31, 1996, 1995 and 1994 36
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995,
and 1994 37
Notes to Consolidated Financial Statements 38
(a)(2) Schedules have been omitted because they are not
required or are not applicable, or the required information
has been included in the financial statements or the notes
thereto.
(a)(3) See accompanying Index to Exhibits
(b) There were no reports on Form 8-K filed by the Registrant
during the last quarter of the period covered by this
report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INTERFERON SCIENCES, INC.
By: /s/ Lawrence M. Gordon
Lawrence M. Gordon
Chief Executive Officer
Dated: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ Samuel H. Ronel Chairman of the Board March 27, 1997
Samuel H. Ronel, Ph.D.
/s/ Lawrence M. Gordon Chief Executive Officer March 27, 1997
Lawrence M. Gordon and Director
(Principal Executive
Officer)
/s/ Stanley G. Schutzbank President and Director March 27, 1997
Stanley G Schutzbank, Ph.D.
___________________ Director March __, 1997
Leon Botstein, Ph.D.
__________________ Director March __, 1997
Jerome I. Feldman
_____________________ Director March __, 1997
Sheldon L. Glashow
/s/ Scott N. Greenberg Director March 27, 1997
Scott N. Greenberg
____________________ Director March __, 1997
Roald Hoffmann, Ph.D.
/s/ Martin M. Pollak Director March 27, 1997
Martin M. Pollak
/s/ Donald W. Anderson Controller (Principal March 27, 1997
Donald W. Anderson Accounting and
Financial Officer)
The foregoing constitute a majority of the members of the
Board of Directors.
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
3.1 - Restated Certificate of Incorporation of the Registrant.
Incorporated herein by reference to Exhibit 3B of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988.
3.2 - Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant. Incorporated herein by reference
to Exhibit 3.4 of Registration Statement No. 33-40902.
3.3 - Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant. Incorporated herein by reference
to Exhibit 3.2 of Registration Statement No. 33-40902.
3.4 - Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant. Incorporated herein by reference
to Exhibit 3.4 of Registration Statement No. 33-00845.
3.5 - Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant.*
3.6 - By-Laws of the Registrant, as amended. Incorporated herein
by reference to Exhibit 3.2 of Registration Statement No. 2-7117.
4.1 - Form of Underwriter's Purchase Option issued in connection
with the August/September 1995 Offering. Incorporated herein by
reference to Exhibit 4.1 of Registration Statement No. 33-59479.
4.2 - Form of Underwriter's Purchase Option issued in connection
with the May 1996 Offering. Incorporated herein by reference to
Exhibit 4.4 of Registration Statement No. 333-00845.
4.3 - Form of Purchase Option issued in connection with the
December 1996 Private Placement.*
10.1 - Transfer and License Agreement among National Patent, Hydron
Laboratories, Inc. and the Registrant dated as of January 1, 1981.
Incorporated herein by reference to Exhibit 10.8 of the
Registrant's Registration Statement No. 2-71117.
10.2 - Management Services Agreement dated January 1, 1981 between
the Registrant and National Patent. Incorporated herein by
reference to Exhibit 10.9 of the Registration Statement No. 2-
71117.
10.3 - Registrant's 1981 Stock Option Plan, as amended.
Incorporated herein by reference to Exhibit 10.3 to Registration
Statement No. 33-59479.
10.4 - Cross License Agreement dated October 26, 1984 between the
Registrant and the Partnership. Incorporated herein by reference
to Exhibit 10V of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1984.
10.5 - Supply Agreement dated September 25, 1992 between the
Registrant and Celltech Limited. Incorporated herein by reference
to Exhibit 10.27 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992.
10.6 - Profit Sharing Plan of the Registrant. Incorporated herein
by reference to Exhibit 10X of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988.
10.7 - License Agreement dated October 20, 1989 between the
Registrant and Amarillo Cell Culture Company, Incorporated.
Incorporated herein by reference to Exhibit 10Y of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1989.
10.8 - Distribution Agreement dated June 14, 1991 between Purdue
Pharma L.P. and the Registrant. Incorporated herein by reference
to Exhibit 10.26 of Registration Statement No. 33-40902.
10.9 - Amended and Restated Distribution Agreement dated June 14,
1991 between Mundipharma Pharmaceutical Corporation and the
Registrant. Incorporated herein by reference to Exhibit 10.27 of
Registration Statement No. 33-40902.
10.10 - NPDC 401(k) Savings Plan dated January 9, 1992, effective
March 1, 1992. Incorporated herein by reference to Exhibit 10.12 to
the Registrant's Annual Report on Form 10-K for the Year ended
December 31, 1992.
10.11 - Amendment dated January 26, 1994 to the Distribution
Agreement dated June 14, 1991 between the Registrant and Purdue
Pharma L.P. Incorporated herein by reference to Exhibit 10.18 to
the Registrant's Annual Report on Form 10-K for the Year ended
December 31, 1993.
10.12 - Amendment dated January 26, 1994 to the Amended and
Restated Distribution Agreement dated June 14, 1991 between the
Registrant and Mundipharma Pharmaceutical Company. Incorporated
herein by reference to Exhibit 10.19 to the Registrant's Annual
Report on Form 10-K for the Year ended December 31, 1993.
10.13 - Amended and Restated RS Agreement dated January 26, 1994
among the Registrant, Mundipharma Pharmaceutical Company and Purdue
Pharma L.P. Incorporated herein by reference to Exhibit 10.20 to
the Registrant's Annual Report on Form 10-K for the Year ended
December 31, 1993.
10.14 - Agreement dated January 26, 1994 between the Registrant and
The Purdue Frederick Company. Incorporated herein by reference to
exhibit 10.21 to the Registrant's Annual Report on Form 10-K for
the Year ended December 31, 1993.
10.15 - Agreement dated January 26, 1994 among the Registrant,
Banela Corporation and Runham Corporation. Incorporated herein by
reference to Exhibit 10.22 to the Registrant's Annual Report on
Form 10-K for the Year ended December 31, 1993.
10.16 - Purchase Agreement dated as of May 28, 1993 between the
Registrant and David Blech. Incorporated herein by reference to
Exhibit 10.26 to Registration Statement No. 33-78952.
10.17 - Form of Warrant to be issued pursuant to the Purchase
Agreement. Incorporated herein by reference to Exhibit 10.28 to
Registration Statement No. 33-78952.
10.18 - Distribution Agreement dated as of February 3, 1994 between
Registrant and Industria Farmaceutica Andromaco, S.A. Incorporated
herein by reference to Exhibit 6(a) to the Registrant's Quarterly
Report on Form 10-Q/A for the quarter ended September 30, 1994.
10.19 - Processing and Supply Agreement dated as of September 1,
1994 between Registrant and Sanofi Winthrop L.P. Incorporated
herein by reference to Exhibit 6(a) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
10.20 - Amendment dated March 24, 1995 to Distribution Agreement
dated as of February 3, 1994 between Registrant and Industria
Farmaceutica Andromaco S.A. Incorporated herein by reference to
Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.
10.21 - Purchase and Exchange Agreement dated as of December 6,
1994 between the Registrant, David Blech and certain designated
purchasers. Incorporated herein by reference to Exhibit 10.31 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.22 - Purchase and Exchange Agreement dated as of January 31,
1995 between the Registrant and Neoprobe Corp. Incorporated herein
by reference to Exhibit 10.32 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994.
10.23 - Stock Purchase Agreement dated as of January 24, 1995
between the Registrant and Fujimoto Diagnostics Inc. Incorporated
herein by reference to Exhibit 10.33 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
10.24 - Agreement dated as of January 24, 1995, between the
Registrant and Fujimoto Diagnostics, Inc. Incorporated herein by
reference to Exhibit 10.34 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994.
10.25 - Form of Stock Purchase Agreement dated as of August 31,
1994 between the Registrant and Dimensional Funds Advisors, Inc.
Incorporated herein by reference to Exhibit 10.35 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994.
10.26 - Form of Warrant Agreement dated as of August 31, 1994
between the Registrant and Capello Capital Corp. Incorporated
herein by reference to Exhibit 10.36 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
10.27 - Amendment dated March 29, 1995 to Agreement dated January
26, 1994 between the Registrant and The Purdue Frederick Company.
Incorporated herein by reference to Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994.
10.28 - Amendment dated March 29, 1995 to Agreement dated January
26, 1994 between the Registrant, Banela Corporation and Runham
Corporation. Incorporated herein by reference to Exhibit 10.38 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.29 - Amendment dated March 29, 1995 to Distribution Agreement
dated June 14, 1991 between the Registrant and Purdue Pharma L.P.
Incorporated herein by reference to Exhibit 10.39 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994.
10.30 - Amendment dated March 29, 1995 to Amended and Restated
Distribution Agreement dated June 14, 1991 between the Registrant
and Mundipharma Pharmaceutical Company. Incorporated herein by
reference to Exhibit 10.40 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994.
10.31 - Amendment dated March 29, 1995 to Amended and Restated RS
Agreement dated January 26, 1994 among the Registrant, Mundipharma
Pharmaceutical Company and Purdue Pharma L.P. Incorporated herein
by reference to Exhibit 10.41 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994.
10.32 - Letter dated March 29, 1995 between the Registrant and
Purdue Pharma L.P. Incorporated herein by reference to Exhibit
10.42 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994.
10.33 - License Agreement, dated as of March 29, 1995, among the
Registrant, Hoffmann-La Roche, Inc. and F. Hoffmann La-Roche, Ltd.
Incorporated herein by reference to Exhibit 10.42 to Registration
Statement No. 33-59479.
10.34 - Amendment of ACC/ISI License Agreement, dated April 27,
1995, between Registrant and Amarillo Cell Culture Company,
Incorporated. Incorporated herein by reference to Exhibit 10.43 to
Registration Statement No. 33-59479.
10.35 - Form of note issued by the Registrant to National Patent
Development Corporation, Biotechnology Investment Group, L.L.C.,
and Edward Blech Charitable Remainder Trust. Incorporated herein by
reference to Exhibit 10.44 to Registration Statement No. 33-59479.
10.36 - Form of note issued by the Registrant to National Patent
Development Corporation and Biotechnology Investment Group, L.L.C.
Incorporated herein by reference to Exhibit 10.45 to Registration
Statement No. 33-59479.
10.37 - Amendment, dated July 31, 1995, to the Distribution
Agreement, dated June 14, 1991, between the Registrant and Purdue
Pharma L.P. Incorporated herein by reference to Exhibit 10.46 to
Registration Statement No. 33-59479.
10.38 - Amendment, dated July 31, 1995, to the Amended and Restated
Distribution Agreement, dated June 14, 1991, between the Registrant
and Mundipharma Pharmaceutical Company. Incorporated herein by
reference to Exhibit 10.47 to Registration Statement No. 33-59479.
10.39 - Letter dated July 31, 1995, between The Purdue Frederick
Company and the Registrant. Incorporated herein by reference to
Exhibit 10.48 to Registration Statement No. 33-59479.
10.40 - Letter dated July 31, 1995, by and among the Registrant,
Banela Corporation, and Runham Corporation. Incorporated herein by
reference to Exhibit 10.49 to Registration Statement No. 33-59479.
10.41 - Amended and Restated R S Agreement, dated July 31, 1995, by
and among the Registrant, Mundipharma Pharmaceutical Company, and
Purdue Pharma L.P. Incorporated herein by reference to Exhibit
10.50 to Registration Statement No. 33-59479.
10.42 - Settlement Agreement, dated April 27, 1995, among the
Registrant, Amarillo Cell Culture Company, Incorporated, Pharma
Pacific Management Pty. Ltd., Pharma Pacific Pty. Ltd., Pharma
Pacific Ltd., and Fernz Corporation Limited. Incorporated herein
by reference to Exhibit 10.51 to Registration Statement No. 33-
59479.
10.43 - PPM/ACC Sub License Agreement, dated April 27, 1995,
between Pharma Pacific Management Pty. Ltd., and Amarillo Cell
Culture Company, Incorporated. Incorporated herein by reference to
Exhibit 10.52 to Registration Statement No. 33-59479.
10.44 - Letter Agreement, dated April 29, 1992, between the
Registrant and Strategic Growth International, Inc. Incorporated
herein by reference to Exhibit 10.53 to Registration Statement No.
33-59479.
10.45 - Agreement, dated May 27, 1993, between the Registrant and
Strategic Growth International, Inc. Incorporated herein by
reference to Exhibit 10.54 to Registration Statement No. 33-59479.
10.46 - Lease Agreement, dated August 1, 1995, between the
Registrant and National Patent Development Corporation.
Incorporated herein by reference to Exhibit 10.55 to Registration
Statement No. 33-59479.
10.47 - Amendment dated January 1, 1996 to Management Services
Agreement dated January 1, 1981 between the Registrant and National
Patent Development Corporation. Incorporated herein by reference
to Exhibit 10.47 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995.
10.48 - Supply and Distribution Agreement, dated as of April 3,
1996, between the Registrant and Cell Pharm GmbH. Incorporated
herein by reference to Exhibit 10.56 to Registration Statement No.
333-00845.
10.49 - Quality Assurance Agreement, dated as of April 3, 1996,
between the Registrant and Cell Pharm GmbH. Incorporated herein by
reference to Exhibit 10.57 to Registration Statement No. 333-00845.
10.50 - RS Agreement, dated April 23, 1996, by and among the
Registrant, Mundipharma Pharmaceutical Company, and Purdue Pharma
L.P. Incorporated herein by reference to Exhibit 10.58 to
Registration Statement No. 333-00845.
10.51 - Agreement, dated April 23, 1996, between the Registrant and
Purdue Pharma L.P. Incorporated herein by reference to Exhibit
10.59 to Registration Statement No. 333-00845.
10.52 - Agreement, dated April 23, 1996, between the Registrant and
Mundipharma Pharmaceutical Company. Incorporated herein by
reference to Exhibit 10.60 to Registration Statement No. 333-00845.
10.53 - Form of Subscription Agreement used in connection with the
December 1996 Private Placement.*
21.0 - Subsidiaries of the Registrant. *
23.1 - Consent of Independent Auditors. *
_________________
*Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000351532
<NAME> INTERFERON SCIENCES, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,491,955
<SECURITIES> 0
<RECEIVABLES> 233,037
<ALLOWANCES> 0
<INVENTORY> 4,328,598
<CURRENT-ASSETS> 22,298,511
<PP&E> 12,473,580
<DEPRECIATION> 7,514,747
<TOTAL-ASSETS> 27,742,863
<CURRENT-LIABILITIES> 2,369,032
<BONDS> 0
0
0
<COMMON> 122,762
<OTHER-SE> 25,251,069
<TOTAL-LIABILITY-AND-EQUITY> 27,742,863
<SALES> 2,091,907
<TOTAL-REVENUES> 2,091,907
<CGS> 1,399,610
<TOTAL-COSTS> 1,399,610
<OTHER-EXPENSES> 13,118,596
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,985,544)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,985,544)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,985,544)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
Exhibit 21
Subsidiaries of the Registrant
Name Jurisdiction
Interferon Sciences Development Corporation Delaware
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
INTERFERON SCIENCES, INC.
We consent to incorporation by reference in (i) the Registration Statement (No.
33-64921) on Form S-3, (ii) the Registration Statement (No. 333-04381) on Form
S-3, (iii) the Registration Statement (No. 333-19451) on Form S-3, and (iv) the
Registration Statement (No. 33-30209) on Form S-8 of Interferon Sciences, Inc.
of our report dated February 21, 1997 relating to the consolidated balance
sheets of Interferon Sciences, Inc. as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1996, which report appears in the December 31, 1996 annual report on Form 10-K
of Interferon Sciences, Inc.
KPMG Peat Marwick LLP
New York, New York
March 27, 1997
