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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
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Commission
For the fiscal year ended JUNE 30, 1996File Number 0-12957
ENZON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2372868
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
20 KINGSBRIDGE ROAD, PISCATAWAY, NEW JERSEY 08854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 980-4500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(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. X
The aggregate market value of the Common Stock, par value $.01 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on September 17, 1996 was approximately $62,227,000. There is no market
for the Series A Cumulative Convertible Preferred Stock, the only other class
of voting stock.
As of September 17, 1996, there were 27,707,643 shares of Common Stock,
par value $.01 per share, outstanding.
The Index to Exhibits appears on page 26.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on December 3, 1996, to be filed with the
Commission not later than 120 days after the close of the registrant's fiscal
year, has been incorporated by reference, in whole or in part, into Part III
Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.
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ENZON, INC.
1996 Form 10-K Annual Report
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 3
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 24
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management 25
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 26
The following trademarks and service marks appear in this Annual Report:
ADAGEN(registered trademark) and ONCASPAR(registered trademark) are
registered trademarks of Enzon, Inc.; SCA(registered trademark) is a
registered trademark of Enzon Labs Inc.; Elspar(registered trademark) is
a registered trademark of Merck & Co., Inc; Erwinase(registered
trademark) is a registered trademark of Porton Products Limited; INTRON
A(registered trademark) is a registered trademark of Schering
Corporation; BABS(trademark) is a trademark of Creative BioMolecules,
Inc.; Taxol(registered trademark) is a registered trademark of Bristol-
Myers Squibb Co.; Hycamptin(trademark) is a trademark of SmithKline
Beecham plc; Taxotere(registered trademark) is a registered trademark of
Rhone-Poulenc Rorer Pharmaceuticals Inc.
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PART I
ITEM 1. BUSINESS
Overview
Enzon, Inc. ("Enzon" or the "Company") is a biopharmaceutical company
that develops, manufactures and markets enhanced therapeutics for
life-threatening diseases through the application of its proprietary
technologies, PEG Modification or the PEG Process and Single-Chain
Antigen-Binding (SCA(registered trademark)) proteins.
The Company has received marketing approval from the United States Food
and Drug Administration ("FDA") for two of its products: (i)
ONCASPAR(registered trademark), approved in February 1994 for the indication of
acute lymphoblastic leukemia ("ALL") in patients who are hypersensitive to
native forms of L-asparaginase and (ii) ADAGEN(registered trademark), the first
successful application of enzyme replacement therapy for an inherited disease,
approved in March 1990, to treat a rare form of Severe Combined
Immunodeficiency Disease ("SCID"), commonly known as the "Bubble Boy Disease".
The Company manufactures both ADAGEN and ONCASPAR in its South
Plainfield, New Jersey facility and markets ADAGEN on a worldwide basis.
ONCASPAR is marketed in the U.S. by Rhone-Poulenc Rorer Pharmaceuticals, Inc.
("RPR"). The Company received $6,000,000 from RPR related to the granting of
this license and is also entitled to royalties on the sales of ONCASPAR in the
U.S. by RPR of 23.5% to 43.5%, based on the sales level of ONCASPAR. Royalties
payable to the Company are being offset against an original credit of
$5,970,000, which includes $3,500,000 in advance royalties received in fiscal
1995. The Company has also granted exclusive licenses to sell ONCASPAR in
Canada and Mexico to RPR in exchange for royalty payments on future sales and
is currently pursuing additional licenses for marketing and distribution rights
outside North America. RPR is currently conducting clinical trials in expanded
indications for ONCASPAR.
ONCASPAR is the enzyme L-asparaginase modified by the Company's PEG
Process and ADAGEN is the enzyme adenosine deaminase modified by the Company's
PEG Process. The PEG Process involves chemically attaching polyethylene glycol
("PEG"), a relatively non-reactive and non-toxic polymer, to proteins,
chemicals and certain other pharmaceuticals for the purpose of enhancing their
therapeutic value. The attachment of PEG helps to disguise the modified
compound and reduce the recognition of the compound by the immune system,
thereby generally lowering potential immunogenicity. Both the increased
molecular size and lower immunogenicity result in extended circulating blood
life, in some cases from minutes to days. The PEG Process also significantly
increases the solubility of the modified compound which enhances the delivery
of the native compound. The PEG Process was originally covered by a broad
patent which is due to expire in late 1996. The Company has made significant
improvements to the original PEG Process and has applied for and received
numerous patents for such improvements.
The Company recently has developed technology that gives PEG-modified
compounds "Pro Drug" attributes. This is accomplished by attaching PEG by
means of a covalent bond that is designed to deteriorate over time, thereby
releasing the therapeutic moiety (therapeutic part of the compound) in the
proximity of the target tissue. These attributes could significantly enhance
the therapeutic value of new chemicals, as well as drugs already marketed. The
Company believes that this "Pro Drug/Transport Technology" has broad usefulness
and that it can be applied to a wide range of drugs, such as cancer
chemotherapy agents, antibiotics, anti-fungals and immunosuppressants, as well
as to proteins and peptides, including enzymes and growth factors. The markets
for these drugs and biologicals have large potential patient populations. The
Company is currently applying its Pro Drug/Transport Technology to certain
anticancer agents that are in the early research stage.
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The Company's lead development candidate, PEG-hemoglobin, is a
hemoglobin-based oxygen carrier, commonly referred to as a red blood cell
substitute, and is currently being developed by the Company as a
radiosensitizer for use with radiation treatment of solid hypoxic tumors.
Preclinical studies conducted at Enzon, the University of Wisconsin School of
Veterinary Medicine and Dana Farber Cancer Institute, indicate that PEG-
hemoglobin may be useful in treating solid tumors. These studies suggest that
PEG-hemoglobin delivers oxygen to solid hypoxic tumors, thereby enhancing the
ability of radiation therapy to significantly decrease the size of these
tumors.
During fiscal 1996, the Company completed a Phase I safety study for PEG-
hemoglobin in which 34 normal volunteers received a single dose of PEG-
hemoglobin in amounts up to 45 grams, the equivalent of 1.5 units of whole
blood. The Company is currently conducting a multi-dose, multi-center clinical
trial of PEG-hemoglobin in cancer patients receiving radiation treatment.
Patients entering this new trial receive once-a-week infusions of PEG-
hemoglobin followed by five days of radiation treatment. The protocol for this
study calls for this to be repeated weekly for three weeks. The primary
purpose of this trial is to evaluate safety related to multiple doses of PEG-
hemoglobin and radiation therapy. It is estimated that approximately 800,000
cases of solid hypoxic tumors are diagnosed each year in the United States.
The Company is pursuing a dual strategy for commercializing its
proprietary technologies. In addition to developing and manufacturing
products, using the Company's proprietary technology, and marketing such
products, the Company has established strategic alliances in which Enzon
licenses its proprietary technologies and products in exchange for milestone
payments, manufacturing revenues and/or royalties.
One such license is the Company's agreement with Schering Corporation
("Schering") to apply the PEG Process to Schering's product, INTRON
A(registered trademark) (interferon alfa 2b), a genetically-engineered
anticancer-antiviral drug. Schering indicates that the PEG-modified version of
INTRON A is currently in clinical trials. Under the agreement, the Company is
entitled to royalties on worldwide sales of PEG-INTRON A, if any, and payments
of approximately $5,500,000 subject to the achievement of certain milestones in
the product's development. Sales by Schering of the unmodified version of
INTRON A were reported as $433 million for 1995. The Company has the option,
upon FDA approval, to be Schering's exclusive manufacturer of PEG-INTRON A for
the U.S. market.
The Company also has an extensive licensing program for its SCA protein
technology. SCA proteins are genetically engineered proteins designed to
overcome the problems hampering the diagnostic and therapeutic use of
conventional monoclonal antibodies. Pre-clinical studies have shown that SCA
proteins target and penetrate tumors more readily than conventional monoclonal
antibodies. In addition to these advantages, because SCA proteins are
developed at the gene level, they are better suited for targeted delivery of
gene therapy vectors and fully-human SCA proteins can be isolated directly,
with no need for costly "humanization" procedures. Also, many gene therapy
methods require that proteins be produced in active form inside cells. SCA
proteins can be produced through intracellular expression (inside cells) more
readily than monoclonal antibodies.
Currently, there are eight SCA proteins in Phase I clinical trials by
various institutions, including a product developed by the Company, SCA-CC49.
Some of the areas being explored are cancer therapy, cardiovascular indications
and AIDS.
The Company has granted non-exclusive SCA licenses to more than a dozen
companies, including Bristol-Myers Squibb, Inc. ("Bristol-Myers"), Baxter
Healthcare Corporation ("Baxter"), Eli Lilly & Co. ("Eli Lilly") and the
Gencell division of RPR ("RPR/Gencell"). These licenses generally provide for
upfront payments, milestone payments and royalties on sales of FDA approved
products.
Information contained herein contains "forward-looking statements" which
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
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strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The matters set forth in Exhibit
99.0 hereto constitute cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results indicated in such forward-looking statements. Other factors
could also cause actual results to vary materially from the future results
indicated in such forward-looking statements.
PRODUCTS ON THE MARKET
The Company currently has two products on the market, ONCASPAR and
ADAGEN. The Company received marketing approval from the FDA for ONCASPAR in
February 1994 and for ADAGEN in March 1990.
ONCASPAR
ONCASPAR, the enzyme L-asparaginase modified by the PEG Process, is used
in conjunction with other chemotherapeutics to treat patients with ALL who are
hypersensitive (allergic) to native (unmodified) forms of L-asparaginase.
L-asparaginase is an enzyme which depletes the amino acid asparagine, a
non-essential amino acid upon which certain leukemic cells are dependent for
survival. Accordingly, the depletion of plasma asparagine levels selectively
starves these leukemic cells. L-asparaginase is a component of standard
pediatric ALL remission induction therapies. Unmodified L-asparaginase is
currently marketed in the U.S. as Elspar(registered trademark).
Erwinase(registered trademark), another form of unmodified L-asparaginase, is
also available in the United States on a compassionate use basis, but is not
FDA approved.
The therapeutic value of unmodified L-asparaginase is limited by two
inherent features of the enzyme. First, its short half-life in blood (less than
1.5 days) requires every-other-day injections, causing significant discomfort
and inconvenience to patients. Secondly, the enzyme's non-human source makes it
inherently immunogenic, resulting in a high incidence of allergic reactions,
some of which may be severe, necessitating the discontinuance of the
L-asparaginase therapy.
Through PEG Modification, Enzon believes ONCASPAR offers significant
therapeutic advantages over unmodified L-asparaginase. Namely, ONCASPAR has a
significantly increased half-life in blood (greater than five days), allowing
every-other-week administration, making its use more tolerable to patients than
unmodified L-asparaginase. PEG Modification also disguises the enzyme's foreign
nature, generally reducing its immunogenicity, and accordingly, the incidence
of allergic reactions.
ONCASPAR was launched in the United States by RPR during March 1994. The
Company has granted RPR an exclusive license (the "Amended RPR License
Agreement") in the United States to sell ONCASPAR, and any other PEG-
asparaginase product (the "Product") developed by Enzon or RPR during the term
of the Amended RPR License Agreement. Under this agreement, Enzon has received
licensing payments totaling $6,000,000 and was entitled to a base royalty of
10% for the year ended December 31, 1995 and 23.5% thereafter, until 2008, on
net sales of ONCASPAR up to agreed upon amounts. Additionally, the Amended RPR
License Agreement provides for a super royalty of 23.5% for the year ended
December 31, 1995 and 43.5% thereafter, until 2008, on net sales of ONCASPAR
which exceed the agreed upon amounts, with the limitation that the total
royalties earned for any such year shall not exceed 33% of net sales. The
Amended RPR License Agreement also provides for a payment of $3,500,000 in
advance royalties, which was received in January 1995.
The payment of base royalties to Enzon under the Amended RPR License
Agreement will be offset by an original credit of $5,970,000, which represents
the royalty advance plus reimbursement of certain amounts due to RPR under the
original RPR License Agreement and interest expense. Super royalties will be
paid to the Company when earned. The royalty advance is shown as a long term
liability, with the corresponding current portion included in accrued expenses
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on the Consolidated Balance Sheet as of June 30, 1996. The royalty advance
will be reduced as base royalties are recognized under the agreement.
The Amended RPR License Agreement prohibits RPR from selling a competing
PEG-asparaginase product anywhere in the world during the term of such
agreement and for five years thereafter. The Amended RPR License Agreement
terminates in December 2008, subject to early termination by either party due
to a default by the other or by RPR at any time on one year's prior notice to
Enzon. Upon any termination all rights under the Amended RPR License Agreement
revert to Enzon.
In addition to pediatric ALL, L-asparaginase is used in Europe to treat
adult ALL and Non-Hodgkins Lymphoma. RPR is currently conducting clinical
trials to expand the use of ONCASPAR in ALL treatment beyond the hypersensitive
label indication, as well as for additional indications. RPR is responsible
for all future clinical development of ONCASPAR in North America.
The Company has also granted exclusive licenses to RPR to sell ONCASPAR
in Canada and Mexico. These agreements provide for RPR to obtain marketing
approval of ONCASPAR in Canada and Mexico and for the Company to receive
royalties on sales of ONCASPAR in these countries, if any. A separate supply
agreement with RPR requires RPR to purchase from Enzon all of RPR's
requirements for the Product for sales in North America.
In November 1994, the Company received approval in Germany for
therapeutic use of ONCASPAR in patients with ALL who are hypersensitive to
native (unmodifed) forms of L-asparaginase. Currently, the Company is not
selling ONCASPAR in Germany. The Company is pursuing marketing and
distribution agreements in countries outside of North America, including
Germany.
ADAGEN
ADAGEN, the Company's first FDA approved product, is currently being used
to treat 44 patients in seven countries. ADAGEN represents the first successful
application of enzyme replacement therapy for an inherited disease. ADAGEN's
Orphan Drug designation under the Orphan Drug Act provides the Company with
marketing exclusivity in the United States through March 1997. The Company
believes the expiration of ADAGEN's Orphan Drug designation will not have a
material impact on the sales of ADAGEN.
ADAGEN, the enzyme adenosine deaminase ("ADA") modified through the PEG
Process, was developed by the Company for the treatment of ADA deficiency
associated with SCID. Commonly known as the "Bubble Boy Disease", SCID is a
congenital disease that results in children being born without fully
functioning immune systems, leaving them susceptible to a wide range of
infectious diseases. Injections of unmodified ADA would not be effective
because of its short circulating life (less than thirty minutes) and the
potential for immunogenic reactions to a bovine-sourced enzyme. The attachment
of PEG to ADA allows ADA to achieve its full therapeutic effect by increasing
its circulating life and masking the ADA to avoid immunogenic reactions.
ADAGEN is being marketed on a worldwide basis and sold in the United
States by the Company. Distribution of ADAGEN in Europe is being handled by a
European firm. Enzon believes many newborns with ADA-deficient SCID go
undiagnosed, and is therefore focusing its marketing efforts for ADAGEN on new
patient identification. Its marketing efforts include educational
presentations and publications designed to encourage early diagnosis and
subsequent ADAGEN treatment.
Sales of ADAGEN for the fiscal years ended June 30, 1996, 1995 and 1994
were $8,696,000, $8,305,000 and $7,601,000, respectively. Sales of ADAGEN are
expected to continue to be limited due to the small patient population
worldwide.
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RESEARCH AND DEVELOPMENT
The Company's primary source of new products is its internal research and
development activities. Research and development expenses for the fiscal years
ended June 30, 1996, 1995 and 1994 were approximately $10,124,000, $12,084,000
and $17,665,000, respectively. During fiscal 1996, research and development
expenses were divided as follows: 19% for research; 49% for clinical and
regulatory affairs; and 32% for pre-clinical activities.
The Company's research and development activities during fiscal 1996
concentrated primarily on the continued development of PEG-hemoglobin, as well
as work on several oncology products using the Company's Pro Drug/Transport
Technology. These activities related principally to Phase I clinical testing,
scale up and process development and preclinical testing.
TECHNOLOGIES AND CAPABILITIES
The Company's technologies are focused in the area of drug delivery. The
Company's PEG Modification technology is able to lower the potential
immunogenicity, extend the circulating life, as well as enhance solubility of
the modified compound. The Company believes its SCA and Pro Drug/Transport
Technologies may be able to achieve targeting of the modified compound to the
desired site in the body. It is believed that this will result in less
toxicity to the surrounding tissue and an increase in the therapeutic effect
due to a high concentration of the compound in the targeted tissue. The
Company is currently applying its technologies to compounds with known
therapeutic efficacy that suffer from delivery problems. This encompasses
undeveloped compounds as well as products already on the market.
PEG MODIFICATION
Enzon's proprietary technology, PEG Modification or the PEG Process,
involves chemically attaching PEG to proteins or chemical therapeutic compounds
that are difficult to deliver. PEG is a relatively non-reactive and non-toxic
polymer that has been designated as a GRAS (Generally Regarded As Safe)
compound and is typically used in many food and drug products. Attachment of
PEG disguises the protein and reduces its recognition by the immune system,
thereby generally lowering potential immunogenicity and extending its
circulating life, in some cases from minutes to days. Chemical compounds have
an added drawback in that they are typically water-insoluble, which makes
delivery difficult, or in some cases, impossible. The Company believes the
attachment of PEG to chemical substances not only disguises the chemical,
thereby lowering potential immunogenicity and extending their circulatory life,
but also greatly increases the solubility of these compounds. Enzon believes
that compounds modified by the PEG Process may offer significant advantages
over their unmodified forms. These advantages include: (i) extended circulating
life, (ii) reduced incidence of allergic reactions, (iii) reduced dosages with
corresponding lower toxicity without diminished efficacy, (iv) increased drug
stability, and (v) enhanced drug solubility. Modification of proteins with the
PEG Process often causes these proteins to have characteristics which
significantly improve their therapeutic performance, and in some cases enables
proteins to be therapeutically effective which, in their unmodified forms, have
proven to be unacceptably toxic or non-efficacious.
The Company and its senior scientists have developed proprietary know-how
which significantly improves the PEG Process over that described in the
original patent covering this technology. This proprietary know-how enables
the Company to tailor the PEG Process in order to produce the targeted results
for the particular substance being modified. This know-how includes, among
other things, proprietary linkers for the attachment of PEG to compounds, the
selection of the appropriate attachment sites on the surface of the compound,
and the amount and type of PEG used. The Company has filed patent applications
and has received patents for numerous improvements to the PEG Process. See
"Patents".
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PRO DRUG/TRANSPORT TECHNOLOGY
The Company recently has developed technology that gives PEG-modified
compounds "Pro Drug" attributes. This is accomplished by attaching PEG by
means of a covalent bond that is designed to deteriorate over time, thereby
releasing the therapeutic moiety in the proximity of the target tissue. These
attributes could significantly enhance the therapeutic value of new chemicals,
as well as drugs already marketed. The Company believes that this technology
has broad usefulness and that it can be applied to a wide range of drugs, such
as cancer chemotherapy agents, antibiotics, anti-fungals and
immunosuppressants, as well as to proteins and peptides, including enzymes and
growth factors. The markets for these drugs and biologicals have large
potential patient populations.
The Company is currently applying its Pro Drug/Transport Technology to
two cancer chemotherapy agents. The Company believes that, by adjusting the
way PEG is covalently attached to these drugs, PEG attachment can be used to
inactivate the drugs' toxic mechanisms, while allowing them to circulate in the
bloodstream for longer periods of time and enhancing their antitumor effects.
Animal studies conducted by the Company thus far have demonstrated increases
in the therapeutic index of both drugs. However, there can be no assurance
that these advantages can be attained or that drugs based on this technology
will be approved by the FDA.
The Company has filed several patent applications relating to its Pro
Drug/Transport Technology (See "Patents").
SINGLE-CHAIN ANTIGEN-BINDING (SCA) PROTEINS
Enzon's proprietary SCA proteins are genetically engineered proteins
designed to overcome the problems associated with the therapeutic uses of
monoclonal antibodies. SCA proteins have the binding specificity and affinity
of monoclonal antibodies, but Enzon believes that SCA proteins offer at least
five significant advantages over conventional monoclonal antibodies: (i)
greater tumor penetration for cancer imaging and therapy, (ii) more specific
localization to target sites in the body, (iii) a significant decrease in the
immunogenic problems associated with monoclonals due to the SCA protein's small
size and rapid clearance from the body, (iv) easier and more cost effective
scale-up for manufacturing, and (v) enhanced screening capabilities which allow
for the testing of SCA proteins for desired specificities using simple
screening methods. In addition to these advantages, because SCA proteins are
developed at the gene level, they are better suited for targeted delivery of
gene therapy vectors and fully-human SCA proteins can be isolated directly,
with no need for costly "humanization" procedures. Also, many gene therapy
methods require that proteins be produced in active form inside cells. SCA
proteins can be produced through intracellular expression (inside cells) more
readily than monoclonal antibodies.
Enzon's research and development capabilities for engineering SCA
proteins include: (i) using computer modeling to design linker peptides to
connect the two protein chains, and (ii) linking the two protein chains that
make up the antigen-binding region of a natural antibody with such designed
peptides, producing a single-chain protein that preserves the structural and
functional integrity of the binding region. The resulting protein chain is
approximately one-sixth the size of a natural antibody. The SCA protein has a
binding specificity and affinity nearly identical to that of a single binding
region of the monoclonal antibody from which the SCA protein was derived.
The binding specificity of SCA proteins has been demonstrated through the
preparation and in vitro testing of more than a dozen different SCA proteins by
Enzon. In addition, the Company, in collaboration with Dr. Jeffrey Schlom of
the Laboratory of Tumor Immunology and Biology at the National Cancer Institute
("NCI"), has shown in published pre-clinical studies that SCA proteins localize
to specific tumors and rapidly penetrate the tumors.
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The Company intends to commercialize its SCA protein technology by
licensing the technology to other companies. To date, the Company has granted
SCA licenses to more than a dozen companies, including Bristol-Myers, Baxter,
Eli Lilly and RPR/Gencell. These licenses generally provide for upfront
payments, milestone payments and royalties on sales of FDA approved products.
(See "Strategic Alliances and License Agreements").
Currently, there are eight SCA proteins in Phase I clinical trials by
various organizations including licensees and academic institutions. Some of
the areas being explored are cancer therapy, cardiovascular indications and
AIDS. The Company believes those organizations that have not licensed this
technology will have to obtain a license from the Company to commercialize
these products.
The Company has received numerous patents for the SCA technology, the
most recent of which expires in 2013 (See "Patents").
PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT
HEMOGLOBIN BASED OXYGEN CARRIER
Hemoglobin is the protein, encased in red blood cells, which transports
oxygen throughout the body. Over the last three decades, scientists have been
attempting to modify the hemoglobin molecule for use as an artificial blood
substitute, to replace the use of donated whole blood. While the Company's
hemoglobin-based oxygen carrier, PEG-hemoglobin, has all of the attributes of a
true red blood cell substitute, the Company has chosen to develop a product
that does not compete with indications for which donated whole blood is
utilized for the following reasons:
RELATIVE SAFETY OF CURRENT BLOOD SUPPLY. The implementation of stringent
screening processes, which include not only the testing of collected
blood to ensure it is free of all forms of HIV and hepatitis, but also
careful screening of blood donors, has resulted in vast improvement in
the safety of donor blood. Heat treating technologies that destroy HIV
have also been implemented, prompting the FDA to deem the blood supply to
be safe.
CURRENT COST ENVIRONMENT WILL LIMIT REIMBURSEMENT OF AN ARTIFICIAL BLOOD
SUBSTITUTE. Given the relative safety of the donated blood supply and
the emergence of managed care and cost containment measures instituted in
the U.S. health care system, obtaining reimbursement for artificial blood
substitute products at a level significantly higher than the cost of
donated blood will be difficult or impossible. Management believes that
unless the price of blood substitute products under development are in
line with the price of donated blood, it will be extremely difficult for
blood substitute products to compete effectively with donated blood.
DONATED BLOOD SUPPLY HAS REMAINED ADEQUATE. In the U.S., there generally
has not been a significant shortage of donated blood, due to the
sophisticated collection systems in place.
CLINICAL ENDPOINTS FOR APPROVAL OF A BLOOD SUBSTITUTE HAVE NOT BEEN
CLEARLY ESTABLISHED BY THE FDA. In 1994, the FDA published a paper
entitled "Points to Consider in the Development of a Hemoglobin-Based
Oxygen Carrier" that discusses the problems associated with determining
clinical endpoints that will demonstrate efficacy of a hemoglobin-based
oxygen carrier. The paper recommends the following indications that will
simplify such endpoints: regional perfusion (radiosensitization), acute
hemorrhagic shock and perioperative applications. The endpoints used for
radiosensitization will be the same as the endpoints established for
cytotoxic agents, a reduction in tumor size.
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These factors have resulted in Enzon focusing its development of a
hemoglobin-based oxygen carrier on indications where donated whole blood is
unable to deliver oxygen, resulting, if such development efforts are
successful, in a product which will not have to compete with donated blood.
Such indications include radiosensitization (regional perfusion), stroke and
ischemia. In addition, the Company believes PEG-hemoglobin could be used as a
blood substitute in those countries that do not have the sophisticated blood
collection systems that exist in the U.S.
Consistent with the FDA's Points to Consider, Enzon is developing its
hemoglobin-based oxygen carrier as a radiosensitizer for use in radiation
treatment of solid hypoxic tumors. Preclinical studies conducted at Enzon,
the University of Wisconsin School of Veterinary Medicine and Dana Farber
Cancer Institute, indicate that PEG-hemoglobin may be useful in treating solid
tumors which are generally hypoxic or under-oxygenated. These studies suggest
that PEG-hemoglobin delivers oxygen to solid hypoxic tumors, thereby enhancing
the effects of radiation therapy and significantly decreasing the size of these
tumors. Preclinical studies at Dana Farber Cancer Institute have suggested
that PEG-hemoglobin may also sensitize solid hypoxic tumors to chemotherapy.
During fiscal 1996, the Company completed a Phase I safety study for PEG-
hemoglobin in which 34 normal volunteers received a single dose of PEG-
hemoglobin in amounts up to 45 grams, the equivalent of 1.5 units of whole
blood. This study demonstrated that PEG-hemoglobin, in its active form,
circulates in the blood for approximately eleven days. The Company is
currently conducting a multi-dose, multi-center clinical trial of PEG-
hemoglobin in cancer patients receiving radiation treatment. Patients entering
this new trial receive once-a-week infusions of PEG-hemoglobin followed by five
days of radiation treatment. The protocol for this study calls for this to be
repeated weekly for three weeks. The primary purpose of this trial is to
evaluate safety related to multiple doses of PEG-hemoglobin and radiation
therapy. It is estimated that approximately 800,000 cases of solid hypoxic
tumors, such as head and neck, lung, mammary, colon, prostate, bladder,
fibrous, histiocytoma, brain mastases and glioma are diagnosed each year in the
United States.
Hemoglobin by itself is very toxic and has a short circulation life.
Many of the undesirable effects historically associated with hemoglobin based
blood substitutes, such as vasoconstriction, kidney dysfunction and liver
dysfunction, are a result of these properties. The Company believes that
hemoglobin, modified through its PEG Process, will overcome the well-documented
problems of toxicity and short circulating blood life associated with other
forms of hemoglobin-based oxygen carriers that have been developed. The
Company believes this is one of the significant advantages that PEG-hemoglobin
has over other products being developed as red blood substitutes. The extended
circulation life demonstrated in the Phase I safety study enables PEG-
hemoglobin to be administered once a week for the radiation treatment protocol.
Enzon has chosen to develop PEG-hemoglobin utilizing bovine hemoglobin, based
upon its superior oxygen-carrying properties, relative stability, availability
and low cost.
The Company currently obtains its raw hemoglobin from two small colonies
of animals which are isolated and receive constant veterinary care and testing,
which should insure that the animals remain disease free. In addition to
keeping the animals disease free, the Company's manufacturing process provides
or will provide virus removal, inactivation and filtration steps. Enzon
believes it can supply the potential market demand for PEG-hemoglobin through a
relatively small number of animals.
The Company uses a proprietary process for the separation and
purification of the bovine hemoglobin and the attachment of PEG to the
hemoglobin molecule.
Enzon presently produces PEG-hemoglobin in a pilot plant at its
facilities in South Plainfield, New Jersey. This plant is expected to supply
the quantities of PEG-hemoglobin needed for all ongoing research and
development through Phase II clinical trials. The current production schedule
for PEG-hemoglobin will fully utilize the pilot facility for the foreseeable
future, thus precluding the resumption of PEG-glucocerebrosidase production,
which was suspended in January 1996.
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The Company estimates that development of a PEG-hemoglobin product will
take several years and require substantial additional funds. There can be no
assurance that a PEG-hemoglobin product can be successfully developed and
brought to market. Due to the significant costs associated with the development
and marketing of this product, the Company is currently exploring potential
collaborative arrangements with one or more established pharmaceutical
companies. To date, no such agreements have been concluded and there can be no
assurance that any such agreements will be consummated. Furthermore, there can
be no assurance of market acceptability of a hemoglobin-based oxygen carrier
produced from bovine hemoglobin.
PRO DRUG/TRANSPORT TECHNOLOGY
The Company is currently applying its Pro Drug/Transport Technology to
two oncolytic chemical compounds, Paclitaxel (Taxol(registered trademark)) and
Camptothecin, a plant alkaloid. Both of the projects are in the early research
stage and neither has been selected as a candidate for full product
development. Both compounds represent substances with known therapeutic
efficacy that have delivery problems. Taxol, a Paclitaxel product sold by
Bristol-Myers, had reported worldwide sales of $580 million in 1995. The
patent for Taxol expires in the U.S. in 1997. Recently, a Taxol derivative,
Taxotere(registered trademark), was approved by the FDA and is being marketed
by RPR. Camptothecin is a substance that for many years has been known to be a
very effective oncolytic with drug delivery problems. Recently a Camptothecin
derivative, Hycamptin(trademark), was approved by the FDA and is being
marketed by SmithKline Beecham. While these two new products improved the
solubility and effectiveness of these substances, the Company believes that its
Pro Drug/Transport Technology has additional delivery advantages over these
products and could significantly increase the therapeutic value of the
products.
SINGLE-CHAIN ANTIGEN-BINDING (SCA) PROTEINS
The Company is also working on expanding the use of SCA technology in the
area of gene therapy. Because SCA proteins are developed at the gene level,
they are better suited for targeted delivery of gene therapy vectors and fully-
human SCA proteins can be isolated directly, with no need for costly
"humanization" procedures. Also, many gene therapy methods require that
proteins be produced in active form inside cells. SCA proteins can be
produced through intracellular expression (inside cells) more readily than
monoclonal antibodies.
The Company's efforts are designed to expand the technology and enhance
the Company's patent position for its SCA technology, as opposed to internal
development of products in this area.
STRATEGIC ALLIANCES AND LICENSE AGREEMENTS
Enzon develops and manufactures, under joint arrangements with other
pharmaceutical and biopharmaceutical companies, protein-based products
utilizing its proprietary PEG and SCA technologies. Enzon believes that its
technologies can be used to improve products which are already on the market or
that are under development, thus producing therapeutic products which will
provide a safer, more effective and more convenient therapy.
Enzon's agreements with its strategic alliance partners provide, in most
cases, for Enzon's partners to pay the costs of development, clinical testing,
obtaining regulatory approval and commercialization of the products. The
alliance partner receives marketing rights, and in some cases manufacturing
rights, to the products developed. Enzon receives milestone payments,
manufacturing revenues and/or royalty payments based on product sales. The
following is a list of certain of the Company's strategic alliance partners:
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
CORPORATE PARTNER AGREEMENT DATE PRODUCT DISEASE OR INDICATION PROGRAM STATUS
Schering Corporation November 1990/ PEG-INTRON A Various Phase I
June 1995 Clinical Trials
Gencell Division of RPR December 1995 SCA proteins Gene Therapy Research
Baxter Healthcare November 1992 SCA proteins Cancer Research
Corporation
Eli Lilly and Co. December 1992 SCA proteins Undetermined Research
Bristol-Myers Squibb, Inc. September 1993/ SCA proteins All TherapeuticsResearch
July 1994
</TABLE>
SCHERING AGREEMENT
In November 1990, Enzon and Schering Corporation ("Schering"), a
subsidiary of Schering-Plough Corporation, signed an agreement (the "Schering
Agreement") to apply the PEG Process to Schering's INTRON A (interferon alfa
2b), a genetically-engineered anticancer and antiviral drug. According to
published sources, INTRON A, as it is currently formulated, must be
administered at least three times a week by injection and can produce side
effects such as fever and occasionally depressed blood count. A PEG form of
INTRON A would be designed to improve the administration regimen by increasing
the product's blood circulating life.
INTRON A is currently approved in the United States for use in chronic
hepatitis B, chronic hepatitis C, AIDS-related Kaposi's sarcoma, venereal warts
and hairy cell leukemia. It is approved for use in 65 countries for a total of
16 disease indications. Schering-Plough Corporation reported 1995 INTRON A
sales of $433 million worldwide. In August 1992, a Phase I human clinical
trial began using PEG-INTRON A for the indication of hepatitis. The protocol
for that trial was completed. Schering and Enzon amended the Schering
Agreement to develop a PEG-INTRON A formulation having improved performance
characteristics. Pursuant to the amended agreement, the Company has prepared
and delivered several PEG-INTRON A formulations for Schering's evaluation for
additional clinical trials.
On June 30, 1995, the Company and Schering further amended the Schering
Agreement pursuant to which Enzon agreed to transfer proprietary know-how and
manufacturing rights for PEG-INTRON A to Schering for $3,000,000, of which
$2,000,000 was paid on June 30, 1995 and $1,000,000 will be paid upon
completion of the know-how transfer, as defined in such amended agreement. In
connection with the amendment, the Company also sold to Schering approximately
847,000 shares of unregistered, newly issued Common Stock for $2,000,000 in
gross proceeds. Under the current Schering Agreement, Enzon retained an option
to become Schering's exclusive manufacturer of PEG-INTRON A for the United
States market upon FDA approval of such product.
During the year ended June 30, 1992, the Company received the first
milestone payment of $450,000, under the Schering Agreement, related to the
filing of an Investigational New Drug Application. Enzon is entitled to
receive future sequential payments, totaling approximately $5,500,000, subject
to the achievement of certain milestones in the product's development program,
as well as payments for the clinical material it produces. The Company will
also receive royalties on worldwide sales of PEG-INTRON A, if any. Schering
will be responsible for conducting and funding the clinical studies, obtaining
regulatory approval and marketing the product worldwide on an exclusive basis.
The Schering Agreement terminates, on a country-by-country basis, upon
the expiration of the last to expire of any future patents covering the product
which may be issued to Enzon, or 15 years after the product is approved for
commercial sale, whichever shall be the later to occur. This agreement is
subject to Schering's right of early termination if the product does not meet
specifications, if Enzon fails to obtain or maintain the requisite product
liability insurance, or if Schering makes certain payments to Enzon. If
Schering terminates the agreement because the product does not meet
specifications, Enzon may be required to refund certain of the milestone
payments.
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<PAGE>
RPR/GENCELL AGREEMENT
In December 1995, Enzon and RPR/Gencell signed an agreement granting
RPR/Gencell a worldwide, non-exclusive license to use Enzon's SCA protein
technology for intracellular expression of SCA proteins and for targeted
vectors in the field of cell and gene therapy. RPR/Gencell, the cell and gene
therapy division of RPR, is planning to apply this technology to its IN VIVO
and EX VIVO gene therapy programs in cancer, cardiovascular disease and
immunology.
Under the agreement, the Company received approximately $1,000,000 during
the fiscal year ended June 30, 1996 for signing the license agreement. The
Company is also entitled to receive additional payments subject to the
achievement of certain milestones in the development program, as well as a
royalty on sales, if any, of products developed with this technology.
BRISTOL-MYERS AGREEMENT
In September 1993, the Company and Bristol-Myers signed a license
agreement for Enzon's SCA protein technology granting Bristol-Myers a world-
wide, semi-exclusive license for a particular antigen. Bristol-Myers will
apply the technology to develop cancer therapies based on antibodies targeting
certain cancer cells. Under the agreement, Enzon is entitled to receive
certain upfront payments and sequential payments, subject to the achievement of
certain milestones in the development program. Bristol-Myers will have the
right to manufacture and market products which it develops and Enzon will
receive certain royalties on Bristol-Myers sales, if any. During fiscal 1995,
Bristol-Myers paid $1,800,000 to Enzon and exercised an option under the
contract to acquire a world-wide non-exclusive license for SCA protein
technology. The non-exclusive license is for all therapeutic fields.
BAXTER AGREEMENT
In November 1992, Enzon and Baxter signed an agreement granting Baxter a
non-exclusive worldwide license to Enzon's SCA protein technology. It is
anticipated that Baxter will use the SCA proteins in its cancer research
programs focusing on human stem cell isolation and gene therapy.
Under the agreement, Enzon is entitled to receive certain upfront
payments and sequential payments, subject to the achievement of certain
milestones in the development programs. Baxter will have the exclusive
worldwide right to manufacture and market any products which it develops and
Enzon will receive certain royalties on Baxter's sales, if any.
ELI LILLY (HYBRITECH) AGREEMENT
In December 1992, Enzon and Hybritech Incorporated ("Hybritech"), a
subsidiary of Eli Lilly, signed an agreement granting Hybritech a non-exclusive
worldwide license to Enzon's SCA protein technology. Hybritech subsequently
assigned this agreement to Eli Lilly. Under the agreement, Enzon received
upfront payments totaling $1,200,000 and is entitled to receive certain
royalties on sales of products that may be developed using Enzon's SCA protein
technology.
MARKETING
Other than ADAGEN, which the Company markets on a worldwide basis to a
small patient population, the Company does not engage in the direct commercial
marketing of any of its products and therefore does not have an established
sales force. For certain of its products, the Company has provided exclusive
marketing rights to its corporate partners in return for royalties to be
received on sales. With respect to ONCASPAR, the Company has granted RPR
exclusive marketing rights in North America pursuant to the agreements
described in "Products on the Market - ONCASPAR".
13
<PAGE>
The Company expects to retain marketing partners to market ONCASPAR in
other foreign markets and is currently pursuing arrangements in this regard.
There can be no assurance that the Company will conclude any such arrangements.
Regarding the marketing of certain of the Company's other future products, the
Company expects to evaluate whether to create a sales force to market certain
products in the United States or to continue to enter into license and
marketing agreements with others for United States and foreign markets. These
agreements generally provide that all or a significant portion of the marketing
of these products will be conducted by the Company's licensees or marketing
partners. In addition, under certain of these agreements, the Company's
licensee or marketing partner may have all or a significant portion of the
development and regulatory approval responsibilities.
RAW MATERIALS AND MANUFACTURING
In the manufacture of its products, the Company couples activated forms
of PEG to the unmodified proteins. In the case of PEG, the Company does not
have a long-term supply agreement, but maintains what it believes to be an
adequate inventory which should provide the Company sufficient time to find an
alternate supply of PEG, in the event it becomes necessary, without material
disruption of its business.
With respect to Enzon's manufacturing facilities, prior to the approval
of both ADAGEN and ONCASPAR, the Company's manufacturing facility was inspected
by the FDA for compliance with its guidelines for current good manufacturing
practices. The manufacturing facility was granted an establishment license by
the FDA in February 1994.
The Company currently obtains its raw hemoglobin from two small colonies
of animals which are isolated and receive constant veterinary care and testing,
which should insure that the animals remain disease free. In addition to
keeping the animals disease free, the Company's manufacturing process provides
or will provide virus removal, inactivation and filtration steps. Enzon
believes it can supply the potential market demand for PEG-hemoglobin through a
relatively small number of animals.
Although the Company is currently producing many of the unmodified
compounds utilized in products it has under development, including purified
bovine hemoglobin for use in its PEG-hemoglobin product, it may be required to
obtain supply contracts with outside suppliers for certain unmodified
compounds. The Company does not produce the unmodified adenosine deaminase
used in the manufacture of ADAGEN or the unmodified L-asparaginase used in the
manufacture of ONCASPAR and has a supply contract with an outside supplier for
each of these unmodified proteins. The supply contract for unmodified L-
asparaginase which expires in December 1997, contains minimum purchase
requirements. Schering is required under the Schering Agreement to provide the
Company with unmodified INTRON A if the Company exercises its option to
manufacture PEG-INTRON A for the United States market.
During the fiscal year ended June 30, 1996, the Company wrote-off
approximately $351,000 of unmodified L-asparaginase purchased under its supply
contract. The Company also paid a penalty of $350,000 related to the
satisfaction of its purchase requirements for the calendar year ended December
31, 1995. While it is possible that the Company may incur similar losses on
its remaining purchase commitments under this supply agreement, the Company
does not consider such losses probable, nor can the amount of any loss which
may be incurred in the future presently be estimated due to a number of
factors, including but not limited to potential increased demand for ONCASPAR
from RPR, expansion into additional markets outside the U.S. and the
possibility that the Company could renegotiate the level of required purchases.
If the Company does not achieve increases in sales of ONCASPAR beyond current
levels or cannot renegotiate its commitment, a loss would be incurred on the
remaining purchase commitment.
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<PAGE>
Delays in obtaining or an inability to obtain any unmodified compound
which the Company does not produce, including unmodified adenosine deaminase or
L-asparaginase, could have a material adverse effect on the Company. In the
event the Company is required to locate an alternate supplier for an unmodified
compound utilized in a product which is being sold commercially or which is in
clinical development, the Company will likely be required to do additional
testing, which could cause delay and additional expense, to demonstrate that
the alternate supplier's material is biologically and chemically equivalent to
the unmodified compound previously used. Such evaluations could include one or
all of the following: chemical, pre-clinical and clinical studies. Requirements
for such evaluations would be determined by the stage of the product's
development and the reviewing division of the FDA. If such alternate material
is not demonstrated to be chemically and biologically equivalent to the
previously used unmodified compound, the Company will likely be required to
repeat some or all of the pre-clinical and clinical trials with such compound.
The marketing of an FDA approved drug could be disrupted while such tests are
conducted. Even if the alternate material is shown to be chemically and
biologically equivalent to the previously used compound, the FDA may require
the Company to conduct additional clinical trials with such alternate material.
GOVERNMENT REGULATION
The manufacturing and marketing of pharmaceutical products in the United
States requires the approval of the FDA under the Federal Food, Drug and
Cosmetic Act. Similar approvals by comparable agencies are required in most
foreign countries. The FDA has established mandatory procedures and safety
standards which apply to the clinical testing, manufacture and marketing of
pharmaceutical products. Obtaining FDA approval for a new therapeutic may take
several years and involve substantial expenditures. Pharmaceutical
manufacturing facilities are also regulated by state, local and other
authorities.
As an initial step in the FDA regulatory approval process, pre-clinical
studies are conducted in animal models to assess the drug's efficacy and to
identify potential safety problems. The results of these studies are submitted
to the FDA as a part of the Investigational New Drug Application ("IND"), which
is filed to obtain approval to begin human clinical testing. The human clinical
testing program may involve up to three phases. Data from human trials are
submitted to the FDA in a New Drug Application ("NDA") or Product License
Application ("PLA"). Preparing an NDA or PLA involves considerable data
collection, verification and analysis.
ADAGEN was approved by the FDA in March 1990. ONCASPAR was approved by
the FDA in February 1994 and in Germany in November 1994 for patients with ALL
who are hypersensitive to native forms of L-asparaginase, and in Russia in
April 1993 for therapeutic use in a broad range of cancers. Except for these
approvals, none of the Company's other products have been approved for sale and
use in humans in the United States or elsewhere. Difficulties or unanticipated
costs may be encountered by the Company or its licensees or marketing partners
in their respective efforts to secure necessary governmental approvals, which
could delay or preclude the Company or its licensees or marketing partners from
marketing their products.
With respect to patented products, delays imposed by the government
approval process may materially reduce the period during which the Company will
have the exclusive right to exploit them. See "Patents".
COMPETITION
Many established biotechnology and pharmaceutical companies with greater
resources than the Company are engaged in activities that are competitive with
those of Enzon and may develop products or technologies which compete with
those of the Company. Although Enzon believes that the experience of its
personnel in biotechnology, the patents which have been licensed by or issued
to the Company and the proprietary know-how developed by the Company provide it
with a competitive advantage in its field, there can be no assurance that the
Company will be able to maintain any competitive advantage, should it exist, in
view of the greater size and resources of many of the Company's competitors.
15
<PAGE>
Enzon is aware that other companies are conducting research on chemically
modified therapeutic proteins and that certain companies are modifying
pharmaceutical products, including proteins, by attaching PEG. While the
Company believes that products modified with its PEG Process are superior to
these other products, there is no assurance that this will prove to be the
case. Other than the Company's products ONCASPAR and ADAGEN, the Company is
unaware of any PEG-modified therapeutic proteins which are currently available
commercially for therapeutic use. Nevertheless, other drugs or treatment
modalities which are currently available or that may be developed in the
future, and which treat the same diseases as those which the Company's products
are designed to treat, may be competitive with the Company's products.
Prior to the development of ADAGEN, the Company's first FDA approved
product, the only treatment available to patients afflicted with SCID was a
bone marrow transplant. Completing a successful transplant depends upon finding
a matched donor, the probability of which is low. More recently, researchers at
the NIH have been attempting to treat SCID patients with gene therapy, which if
successfully developed, would compete with, and could eventually replace ADAGEN
as a treatment. The theory behind gene therapy is that cultured T-lymphocytes
that are genetically engineered and injected back into the patient will express
permanently and at normal levels, adenosine deaminase, the deficient enzyme in
people afflicted with SCID. To date, gene therapy clinical trials have not
been conclusive. Those patients currently being treated with gene therapy have
continued to be treated with ADAGEN.
Current standard treatment of patients with ALL includes administering
unmodified L-asparaginase along with the drugs vincristine, prednisone and
daunomycin. Studies have shown that long-term treatment with L-asparaginase
increases the disease free survival in high risk patients. ONCASPAR, the
Company's PEG-modified L-asparaginase product, is used to treat patients with
ALL who are hypersensitive (allergic) to unmodified forms of L-asparaginase.
The long-term survival and cure of ALL patients depends upon achieving a
sustainable first remission. Currently, there are two unmodified forms of
L-asparaginase available in the United States -- Elspar and Erwinase. The
Company believes that ONCASPAR has the following two advantages over these
unmodified forms of L-asparaginase: increased circulating blood life and
generally reduced immunogenicity.
Several companies are actively pursuing the development of agents to
increase the oxygen level in solid tumors and thereby enhance the efficacy of
radiation and/or chemotherapy that could compete with PEG-hemoglobin. Some of
these agents are also being tested in clinical trials. In addition, many
conventional cytotoxic agents are currently used in combination with each other
and/or with radiation to give additive or synergistic anti-cancer effects.
Hyperbaric oxygen chambers have been used clinically to increase the
oxygen content of tumors and thereby improve the effectiveness of radiation
therapy. However, this method is relatively costly and cumbersome, and is
therefore not widely practiced. Compounds that decrease the affinity of
hemoglobin for oxygen and thereby increase the level of free oxygen in the
blood have been known for some time. At least one such "synthetic allosteric
modifier" compound is reportedly being studied in clinical trials for its
ability to increase the level of oxygen in tumors, which could enhance the
efficacy of radiation therapy and/or chemotherapy. Compounds that inhibit the
ability of cancer cells to repair radiation damage to their DNA are also known,
and one such compound is reportedly in clinical trials as an adjunct to
radiation therapy.
The Company believes that PEG-hemoglobin, due to its long circulation
life, will deliver more oxygen to hypoxic tumors than the products currently
under development and therefore, in combination with radiation, should result
in greater reduction in tumor size.
Companies are also actively pursuing the development of hemoglobin-based
oxygen carriers for use as a blood substitute and certain of these products are
currently also being tested in clinical trials. Companies developing
hemoglobin-based products have researched the use of human, bovine, genetically
engineered and transgenic hemoglobin. Each source of hemoglobin has various
16
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problems associated with it. Currently, the Company believes that none of the
other companies developing hemoglobin-based oxygen carriers as blood
substitutes are pursuing a radiosensitization indication.
Certain of the Company's competitors are attempting to develop oxygen
carriers using perfluorocarbons ("PFC"). The FDA has allowed PFC trials only
for very limited applications where benefits may be realized from localized,
short-term use of very small amounts of the substance. PFCs are currently
approved by the FDA for limited use in angioplasty patients. Clinical trials of
PFC-based oxygen carriers for treatment of anemia were halted prior to
completion.
There are several technologies which compete with the Company's SCA
technology, including chimeric antibodies, humanized antibodies, human
monoclonal antibodies, recombinant antibody FAB fragments, low molecular weight
peptides and mimetics. These competing technologies can be categorized into
two areas: (i) those modifying the monoclonal to minimize immunological
reaction to a foreign protein, which is the strategy employed with chimerics,
humanized antibodies and human monoclonal antibodies, and (ii) those creating
smaller portions of the monoclonal which are more specific to the target and
have fewer side effects, as is the case with FAB fragments and low molecular
weight peptides. Enzon believes that the smaller size of its SCA proteins
should permit better penetration into the tumor, result in rapid clearance from
the blood and cause a significant decrease in the immunogenic problems
associated with conventional monoclonal antibodies. A number of companies have
active programs in SCA proteins. The Company believes that its patent position
on SCA proteins will require these other companies to obtain licenses from
Enzon in order to commercialize their products, but there can be no assurance
that this will prove to be the case.
PATENTS
The Company has licensed, and been issued, a number of patents in the
United States and other countries and has other patent applications pending to
protect its proprietary technology. Although the Company believes that its
patents provide adequate protection for the conduct of its business there can
be no assurance that such patents will be of substantial protection or
commercial benefit to the Company, will afford the Company adequate protection
from competing products, will not be challenged or declared invalid, or that
additional United States patents or foreign patent equivalents will be issued
to the Company. The degree of patent protection to be afforded to
biotechnological inventions is uncertain and the Company's products are subject
to this uncertainty. The Company is aware of certain issued patents and patent
applications, and there may be other patents and applications, containing
subject matter which the Company or its licensees or collaborators may require
in order to research, develop or commercialize at least some of the Company's
products. There can be no assurance that licenses under such subject matter
will be available on acceptable terms. The Company expects that there may be
significant litigation in the industry regarding patents and other proprietary
rights and, if Enzon were to become involved in such litigation, it could
consume a substantial amount of the Company's resources. In addition, the
Company relies heavily on its proprietary technologies for which pending patent
applications have been filed and on unpatented know-how developed by the
Company. Insofar as the Company relies on trade secrets and unpatented
know-how to maintain its competitive technological position, there can be no
assurance that others may not independently develop the same or similar
technologies. Although the Company has taken steps to protect its trade
secrets and unpatented know-how, third-parties nonetheless may gain access to
such information.
The original PEG Process patent which was licensed from Research
Technologies Corp. is due to expire in December 1996. The Company has made
significant improvements to the original PEG Process and has applied for and
received numerous patents for such improvements. The Company believes, based
on new patents received and applications pending, that this expiration will
not have a material impact on its business.
In the field of SCA proteins, the Company has several United States and
foreign patents and patent applications, including a patent granted in August
1990 covering the genes needed to encode SCA proteins. Creative BioMolecules,
Inc. ("Creative") provoked an interference with the patent and on June 28,
1991, the United States Patent and Trademark Office entered summary judgment
17
<PAGE>
terminating the interference proceeding and upholding the Company's patent.
Creative subsequently lost its appeal of this decision in the United States
Court of Appeals. Creative did not file a petition for review of this decision
by the United States Supreme Court within the required time period.
In November 1993, Enzon and Creative signed collaborative agreements in
the field of Enzon's SCA protein technology and Creative's Biosynthetic
Antibody Binding Site (BABS(trademark)) protein technology. Under the
agreements, each company is free, under a non-exclusive, worldwide license, to
develop and sell products utilizing the technology claimed by both companies'
antibody engineering patents, without paying royalties to the other. Each is
also free to market products in collaboration with third parties, but the third
parties will be required to pay royalties on products covered by the patents
which will be shared by the companies, except in certain instances. Enzon has
the exclusive right to market licenses under both companies' patents other than
to Creative's collaborators. In addition, the agreements provide for the
release and discharge by each company of the other, from any and all claims
based on past infringement of the technology which is the subject of the
agreements. The agreement also provides for any future disputes between the
companies, regarding new patents in the area of engineered monoclonal
antibodies, to be resolved pursuant to agreed upon procedures.
Although the Company believes that its patents provide adequate
protection for the conduct of its business as described herein, there can be no
assurance that such patents will be of substantial protection from competing
products, will not be challenged or declared invalid, or that additional United
States patents or foreign patent equivalents will be issued to the Company.
EMPLOYEES
As of June 30, 1996, Enzon employed 101 persons, of whom 47 were engaged
in research and development activities, 33 were engaged in manufacturing, and
21 were engaged in administration and management. As of June 30, 1996, the
Company had 20 employees who hold Ph.D. degrees. The Company believes that it
has been highly successful in attracting skilled and experienced scientific
personnel; however, competition for such personnel is intensifying. None of
the Company's employees are covered by a collective bargaining agreement. All
of the Company's employees are covered by confidentiality agreements. Enzon
considers relations with its employees to be good.
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ITEM 2. PROPERTIES
The Company owns no real property. The following are all of the
facilities that Enzon currently leases:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
APPROX. APPROX.
PRINCIPAL SQUARE ANNUAL LEASE
LOCATION OPERATIONS FOOTAGE RENT EXPIRATION
20 Kingsbridge RoadResearch 56,000 $496,000(1) June 15, 2007
Piscataway, NJ & Development &
Administrative
40 Cragwood Road Research & 88,000 814,000(2) December 31, 1998
S. Plainfield, NJDevelopment, Pilot
Scale Manufacturing
300 Corporate Ct.Manufacturing 24,000 183,000 November 30, 1998
S. Plainfield, NJ
</TABLE>
(1) Under the terms of the lease, annual rent increases over the remaining
term of the lease from $496,000 to $581,000.
(2) Net of subrental income of $221,000; the sublease is for approximately
27,412 square feet.
The Company believes that its facilities are well maintained and
generally adequate for its present and future anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending to which the Company is a party
or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and
is quoted on the NASDAQ National Market under the trading symbol "ENZN".
The following table sets forth the high and low sale prices for the
Common Stock for the years ended June 30, 1996 and 1995, as reported by the
NASDAQ National Market. The quotations shown represent inter-dealer prices
without adjustment for retail mark-ups, mark downs or commissions, and may not
necessarily reflect actual transactions.
HIGH LOW
Year Ended June 30, 1996
First Quarter 4 1/8 2 3/16
Second Quarter 3 7/8 1 15/16
Third Quarter 5 1/2 2 1/8
Fourth Quarter 4 5/8 2 3/4
Year Ended June 30, 1995
First Quarter 3 1/4 2 1/8
Second Quarter 3 1/8 1 1/2
Third Quarter 2 1/2 1 11/16
Fourth Quarter 2 7/8 1 3/4
As of September 17, 1996 there were 3,021 holders of record of the Common
Stock.
The Company has paid no dividends on its Common Stock since its inception
and does not plan to pay dividends on its Common Stock in the foreseeable
future. Except as may be utilized to pay dividends payable on the Company's
outstanding Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Shares" or "Series A Preferred Stock"), any earnings which the
Company may realize will be retained to finance the growth of the Company. In
addition, no dividends may be paid or set apart for payment on the Common Stock
unless the Company shall have paid in full, or made appropriate provision for
the payment in full of, all dividends which have then accumulated on the Series
A Preferred Shares.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is the selected financial data for the Company for the
five fiscal years ended June 30, 1996.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
YEAR ENDED JUNE 30,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Revenues $ 12,681,281 $ 15,826,437 $ 14,797,499 $ 8,414,349 $ 5,684,944
Net Loss $ (5,175,279) $ (6,291,491) $(16,495,226) $(24,601,310) $(28,182,829)
Net Loss
per Share $ (.20) $ (.26) $ (.71) $ (1.15) $ (1.46)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Dividends on
Common Stock None None None None None
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
JUNE 30,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Total Assets $21,963,856 $19,184,042 $20,543,252 $33,920,859 $39,310,862
Long-Term
Obligations $ 1,728$ 4,076 $ 115,733 $ 141,772 $ 232,958
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 1996, 1995 AND 1994
REVENUES. Revenues for the year ended June 30, 1996 decreased by 20% to
$12,681,000 as compared to $15,826,000 for fiscal 1995. The components of
revenues are sales, which consist of sales of the Company's products and
royalties on the sale of such products by others, and contract revenues. Sales
decreased by 5% to $10,502,000 for the year ended June 30, 1996 as compared to
$11,024,000 for the prior year. The decrease was principally due to an absence
of any shipments of PEG-INTRON A to the Company's collaborative partner,
Schering, during the year ended June 30, 1996 compared to shipments of
approximately $1,135,000 recorded during the year ended June 30,1995. In June
1995, the Company amended its agreement with Schering and agreed to transfer
the know-how and manufacturing rights for PEG-INTRON A to Schering. It is
anticipated that Schering will manufacture all future clinical trial material.
Enzon has the option to manufacture PEG-INTRON A for the U.S. market upon FDA
approval, should it occur. This decrease was offset in part by increased
ADAGEN sales of approximately $391,000 and increased revenues from ONCASPAR,
which is marketed by RPR, of approximately $249,000. The Company expects sales
of ADAGEN to increase at comparable rates as those achieved during the last two
years as additional patients are treated. The Company also anticipates
moderate growth of ONCASPAR sales to RPR and increased royalties on RPR sales
of ONCASPAR. Currently RPR is conducting clinical trials to expand the use of
ONCASPAR beyond its current FDA approved indication which could also result in
additional revenues from this product. The Company is also pursuing licensing
agreements for the sale of ONCASPAR outside of North America. There can be no
assurance that any particular sales levels of ONCASPAR or ADAGEN will be
achieved or maintained. ADAGEN sales for the year ended June 30, 1996 and 1995
were $8,696,000 and $8,305,000, respectively. Contract revenue for the year
ended June 30, 1996 decreased by 55% to $2,179,000, as compared to $4,802,000
for fiscal 1995. The decrease was principally due to a payment of $2,000,000
recorded during the prior fiscal year from Schering related to the amendment of
the Company's PEG-Intron A license with Schering. During the years ended June
30, 1996 and 1995, the Company had export sales of $2,270,000 and $2,105,000,
respectively. Sales in Europe were $1,858,000 and $1,841,000 for the years
ended June 30, 1996 and 1995, respectively.
21
<PAGE>
Revenues for the fiscal year ended June 30, 1995 increased by 7% to
$15,826,000 as compared to $14,797,000 for fiscal 1994. Sales increased by 35%
to $11,024,000 for the year ended June 30, 1995 as compared to $8,182,000 for
the prior year, due to the shipments of clinical material to Schering of
approximately $1,135,000, an increase in sales of ADAGEN of $704,000 due to an
increase in patients receiving the product and increased ONCASPAR revenues from
RPR of approximately $1,129,000. ADAGEN sales for the years ended June 30,
1995 and 1994 were $8,305,000 and $7,601,000, respectively. Contract revenue
for the year ended June 30, 1995 decreased by 27% to $4,802,000, as compared to
$6,616,000 for fiscal 1994. The decrease was principally due to a one time
payment received during fiscal 1994 from RPR related to the FDA approval of
ONCASPAR. The decrease was offset in part by a payment of $1,800,000 recorded
in fiscal 1995 from Bristol-Myers related to the exercise of its option under
an agreement dated September 1993, to acquire a worldwide non-exclusive license
for all therapeutic indications for the Company's SCA protein technology and
$2,000,000 received related to the amendment of the Company's agreement with
Schering. During the fiscal years ended June 30, 1995 and 1994, the Company
had export sales of $2,105,000 and $2,085,000, respectively. Sales in Europe
were $1,841,000 and $1,957,000 for the years ended June 30, 1995 and 1994,
respectively.
COST OF SALES. Cost of sales, as a percentage of sales, increased to 34%
for the year ended June 30, 1996 as compared to 26% for fiscal 1995. The
increase was due primarily to a payment in lieu of satisfying the minimum
purchase requirements under the Company's long-term supply agreement for a raw
material used in the production of ONCASPAR and the write-off of excess
inventories of this raw material. While it is possible that the Company may
incur similar losses on its remaining purchase commitments under the supply
agreement (see Note 5 to the Consolidated Financial Statements), the Company
does not consider such losses probable, nor can the amount of any loss which
may be incurred in the future presently be estimated due to a number of
factors, including but not limited to potential increased demand for ONCASPAR
from RPR, expansion into additional markets outside the U.S. and the
possibility that the Company could renegotiate the level of required purchases.
If the Company does not achieve increases in sales of ONCASPAR beyond current
levels or cannot renegotiate its commitment, a loss would be incurred on the
remaining purchase commitment.
Cost of sales, as a percentage of sales, for fiscal 1995 was 26% as
compared to 27% in fiscal 1994. An increase in the charge to cost of goods
sold related to idle capacity at the Company's manufacturing facility was
offset by a decrease in the write-off of excess raw material (PEG). Prior to
the approval of ONCASPAR, the Company's first FDA approved drug for a
potentially large patient population, idle capacity was charged to research and
development expense.
RESEARCH AND DEVELOPMENT. Research and development expenses for the year
ended June 30, 1996 decreased by 16% to $10,124,000 from $12,084,000 for the
year ended June 30, 1995. This decrease was primarily due to reductions in
personnel, principally in the clinical and research administration areas, and
related costs, such as payroll taxes and benefits totaling approximately
$1,150,000 and other cost containment measures taken by the Company.
Research and development expenses in fiscal 1995 decreased by 32% to
$12,084,000 as compared to $17,665,000 in fiscal 1994. The decrease was
principally due to (i) reductions in personnel, principally in the clinical and
scientific administration areas, and related costs such as payroll taxes and
benefits totaling approximately $2,124,000, (ii) decreased research facility
and occupancy costs of $1,150,000, (iii) the charging of $832,000 in idle
capacity to cost of sales, rather than research and development, as was the
case in the first nine months of fiscal 1994, and (iv) other cost containment
measures implemented by the Company. The decreases in research facility and
occupancy costs related to a one time credit received from one of the Company's
landlords, the sublease of certain facilities and the termination of one of the
Company's long-term facility leases and the resulting consolidation of its
operations.
22
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended June 30, 1996 decreased by 13% to
$6,011,000 from $6,916,000 for the year ended June 30, 1995. The decrease was
due to (i) reductions in personnel and related costs, such as payroll taxes and
benefits of approximately $510,000, (ii) a reduction in facility and occupancy
costs of approximately $486,000, and (iii) other cost containment measures
taken by the Company.
Selling, general and administrative expenses for fiscal 1995 decreased by
41% to $6,916,000 from $11,710,000 for fiscal 1994. The decrease was due to
(i) reductions in personnel and related costs, such as payroll taxes and
benefits of approximately $2,690,000, (ii) a decrease in marketing and
advertising costs for ONCASPAR as a result of the Company's license agreement
with RPR totaling $291,000, and (iii) other cost containment measures taken by
the Company. Under the Company's exclusive U.S. marketing rights license, RPR
is responsible for all marketing and advertising costs related to ONCASPAR.
RESTRUCTURING EXPENSE. During the year ended June 30, 1995, the Company
recorded a restructuring expense related to a reduction in its workforce and
the termination of a long-term facility lease.
OTHER INCOME/EXPENSE. Other income/expense increased by $829,000 to
$1,823,000 for the year ended June 30, 1996 as compared to $994,000 last year.
The increase was due principally to the recognition as other income of
approximately $1,313,000 representing the unused portion of an advance received
under a development and license agreement with Sanofi. During October 1995,
the Company learned that Sanofi intended to cease development of PEG-SOD
(Dismutec) due to the product's failure to show a statistically significant
difference between the treatment group and the control group in a pivotal Phase
III trial. Due, in part, to this product failure, the Company believes it has
no further obligations under its agreement with Sanofi with respect to the
$1,313,000 advance and therefore, the Company has recognized as other income
the amount due Sanofi previously recorded as a current liability. Other
income/expense in the prior year principally consisted of a one-time insurance
payment.
Other income/expense increased to $994,000 for fiscal 1995 as compared to
$250,000 for fiscal 1994. The increase was principally due to an insurance
settlement of $645,000 received during fiscal 1995 related to ADAGEN that was
destroyed in shipment.
The Company will adopt the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" as of July 1, 1996. This
statement is not expected to have a material impact on the Company's
consolidated financial statements.
The Company anticipates electing to continue its current accounting
methodology regarding stock options granted to employees and will add the
required additional footnote disclosures prescribed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in its
consolidated financial statements for the year ending June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Enzon had $12,666,000 in cash and cash equivalents as of June 30, 1996.
The Company invests its excess cash in a portfolio of high-grade marketable
securities and United States government-backed securities.
The Company's cash reserves as of June 30, 1996 increased by $4,563,000
from June 30, 1995. The increase in cash reserves reflects approximately
$9,444,000 in net proceeds (after payment of related expenses) received from
the Company's private placement of its Common Stock, Series B Convertible
Preferred Shares ("Series B Preferred Shares") and warrants to purchase Common
Stock in January 1996 and the private placement of its Common Stock, Series C
Convertible Preferred Shares ("Series C Preferred Shares") and warrants to
purchase Common Stock in March 1996. This increase was offset in part by the
funding of operations.
23
<PAGE>
The Company's Amended RPR License Agreement for ONCASPAR provides for a
payment of $3,500,000 in advance royalties which was received from RPR in
January 1995. Royalties due under the Amended RPR License Agreement will be
offset against a credit of $5,970,000, which represents the royalty advance
plus reimbursement of certain amounts due RPR under the previous agreement and
interest expense, before cash payments will be made under the agreement. The
royalty advance is shown as a long term liability with the corresponding
current portion included in accrued expenses on the consolidated balance sheets
and will be reduced as royalties are recognized under the agreement. Through
June 30, 1996, an aggregate of $1,045,000 in royalties payable by RPR has been
offset against the original credit.
As of June 30, 1996, 940,808 shares of Series A Cumulative Convertible
Preferred Shares ("Series A Preferred Shares") had been converted into
3,093,411 shares of Common Stock. Accrued dividends on the converted Series A
Preferred Shares in the aggregate of $1,792,000 were settled by the issuance of
232,383 shares of Common Stock. The Company does not presently intend to pay
cash dividends on the Series A Preferred Shares. As of June 30, 1996, there
were $1,367,000 of accrued and unpaid dividends on the Series A Preferred
Shares. These dividends are payable in cash or Common Stock at the Company's
option and accrue on the outstanding Series A Preferred Shares at the rate of
$218,000 per year. As of June 30, 1996, there had been no conversion of the
Series B Preferred Shares or Series C Preferred Shares. Neither the Series B
Preferred Shares nor the Series C Preferred Shares carry stated dividends.
To date, the Company's sources of cash have been the proceeds from the
sale of its stock through public and private placements, sales of ADAGEN, sales
of ONCASPAR, sales of its products for research purposes, contract research and
development fees, technology transfer and license fees and royalty advances.
The Company's current sources of liquidity are its cash, cash equivalents and
interest earned on such cash reserves, sales of ADAGEN, sales of ONCASPAR,
sales of its products for research purposes and license fees. Management
believes that its current sources of liquidity will be sufficient to meet its
anticipated cash requirements, based on current spending levels, for
approximately the next two years.
Upon exhaustion of the Company's current cash reserves, the Company's
continued operations will depend on its ability to realize significant revenues
from the commercial sale of its products, raise additional funds through equity
or debt financing, or obtain significant licensing, technology transfer or
contract research and development fees. There can be no assurance that these
sales, financings or revenue generating activities will be successful.
In management's opinion, the effect of inflation on the Company's past
operations has not been significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this
report commencing on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
24
<PAGE>
PART III
The information required by Item 10 - Directors and Executive Officers of
the Registrant; Item 11 - Executive Compensation; Item 12 - Security Ownership
of Certain Beneficial Owners and Management; and Item 13 - Certain
Relationships and Related Transactions is incorporated into Part III of this
Annual Report on Form 10-K by reference to the Company's Proxy Statement for
the Annual Meeting of Stockholders scheduled to be held on December 3, 1996.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as
a separate section of this report commencing on page F-1.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
<TABLE>
<CAPTION>
Exhibit Page Number or
NUMBER DESCRIPTION Incorporation BY
REFERENCE
<S> <C> <C>
3(i) Certificate of Incorporation, as amended ####
3(ii) By-laws, as amended *(4.2)
10.0 Employment Agreement dated March 25, 1994 with Peter G. Tombros #(10.17)
10.1 Form of Change of Control Agreements dated as of January 20, 1995
entered into with the Company's Executive Officers |(10.2)
10.2 Lease - 300-C Corporate Court, South
Plainfield, New Jersey ***(10.3)
10.3 Modification of Lease - 300-C Corporate Court, South Plainfield
New Jersey ++(10.3)
10.4 Lease Termination Agreement dated March 31, 1995 for
20 Kingsbridge Road and 40 Kingsbridge Road, Piscataway, New Jersey |(10.6)
10.5 Option Agreement dated April 1, 1995 regarding 20 Kingsbridge Road,
Piscataway, New Jersey |(10.7)
10.6 Form of Lease - 40 Cragwood Road, South
Plainfield, New Jersey ****(10.9)
10.7 Lease 300A-B Corporate Court, South Plainfield, New Jersey +++(10.10)
10.8 Stock Purchase Agreement dated March 5, 1987
between the Company and Eastman Kodak Company ****(10.7)
10.9 Amendment dated June 19, 1989 to Stock Purchase
Agreement between the Company and
Eastman Kodak Company **(10.10)
10.10 Form of Stock Purchase Agreement between the Company
and the purchasers of the Series A Cumulative
Convertible Preferred Stock +(10.11)
10.11 Amendment to License Agreement and Revised License Agreement
between the Company and RCT dated
April 25, 1985 ++++(10.5)
10.12 Amendment dated as of May 3, 1989 to Revised License Agreement
dated April 25, 1985 between the Company and Research
Corporation **(10.14)
10.13 License Agreement dated September 7, 1989 between the Company
and Research Corporation Technologies, Inc. **(10.15)
10.14 Master Lease Agreement and Purchase Leaseback Agreement dated
October 28, 1994 between the Company and Comdisco, Inc. ##(10.16)
10.15 Amendment dated as of May 15, 1995 to Employment Agreement with
Peter G. Tombros ||(10.17)
26
<PAGE>
10.16 Stock Purchase Agreement dated as of June 30, 1995 |||
10.17 Securities Purchase Agreement dated as of January 31, 1996 |||
10.18 Registration Rights Agreements dated as of January 31, 1996 |||
10.19 Warrants dated as of February 7, 1996 and issued pursuant to the
Securities |||
Purchase Agreement dated as of January 31, 1996
10.20 Securities Purchase Agreement dated as of March 15, 1996 ####
10.21 Registration Rights Agreement dated as of March 15, 1996 ####
10.22 Warrant dated as of March 15, 1996 and issued pursuant to the ####
Securities Purchase Agreement dated as of March 15, 1996
21.0 Subsidiaries of Registrant ###
23.0 Consent of KPMG Peat Marwick LLP ###
27.0 Financial Data Schedule ###
99.0 Additional Exhibits ###
</TABLE>
### Filed herewith.
* Previously filed as an exhibit to the Company's Registration
Statement on Form S-2 (File No. 33-34874) and incorporated herein
by reference thereto.
** Previously filed as exhibits to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1989 and incorporated
herein by reference thereto.
*** Previously filed as an exhibit to the Company's Registration
Statement on Form S-18 (File No. 2-88240-NY) and incorporated
herein by reference thereto.
**** Previously filed as exhibits to the Company's Registration
Statement on Form S-1 (File No. 2-96279) filed with the Commission
and incorporated herein by reference thereto.
+ Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-39391) filed with the Commission
and incorporated herein by reference thereto.
++ Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1992 and incorporated
herein by reference thereto.
+++ Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993 and incorporated
herein by reference thereto.
++++ Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1985 and incorporated
herein by reference thereto.
# Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated April 5, 1994 and incorporated herein by reference
thereto.
## Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q for the quarter ended December 31, 1994 and incorporated
herein by reference thereto.
| Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q for the quarter ended March 31, 1995 and incorporated
herein by reference thereto.
|| Previously filed as an exhibit to the Company's annual report on
Form 10-K for the fiscal year ended June 30, 1995 and incorporated
herein by reference thereto.
27
<PAGE>
||| Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q for the quarter ended December 31, 1995 and incorporated
herein by reference thereto.
#### Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q for the quarter ended March 31, 1996 and incorporated
herein by reference thereto.
(b) Reports on Form 8-K
On June 25, 1996, the Company filed with the Commission a Current Report
on Form 8-K dated June 10, 1996 relating to the exercise by the Company of a
warrant to purchase 150,000 shares of Neoprobe Corporation common stock. (Item
5).
On May 29, 1996, the Company filed with the Commission a Current Report
on Form 8-K dated May 20, 1996 relating to the Company's Phase Ib clinical
trials. (Item 5).
On April 30, 1996, the Company filed with the Commission a Current Report
on Form 8-K dated January 11, 1996 relating to the Company's receipt of two
additional United States patents for PEG-hemoglobin. (Item 5).
On April 24, 1996, the Company filed with the Commission a Current Report
on Form 8-K dated January 11, 1996 relating to changes in the Company's board,
the formation of a Steering Committee and an inquiry from NASDAQ. (Item 5).
28
<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.
ENZON, INC.
Dated: September 27, 1996 /S/ PETER G. TOMBROS
By: Peter G. Tombros
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
/S/ PETER G. TOMBROS President, Chief Executive September 27, 1996
Peter G. Tombros Officer and Director
(Principal Executive Officer)
/S/ KENNETH J. ZUERBLIS Vice President, Finance September 27, 1996
Kenneth J. Zuerblis and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/S/ RANDY H. THURMAN Chairman of the Board September 27, 1996
Randy H. Thurman
/S/ ROSINA B. DIXON Director September 27, 1996
Rosina B. Dixon
/S/ ROBERT LEBUHN Director September 27, 1996
Robert LeBuhn
/S/ A.M. "DON" MACKINNON Director September 27, 1996
A.M. "Don" MacKinnon
29
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Index
PAGE
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - June 30, 1996 and 1995 F-3
Consolidated Statements of Operations - Years ended
June 30, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity -
Years ended June 30, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows - Years ended
June 30, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements - Years
ended June 30, 1996, 1995 and 1994 F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Enzon, Inc.:
We have audited the consolidated financial statements of Enzon, Inc. and
subsidiaries 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 Enzon, Inc. and
subsidiaries as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1996, in conformity with generally accepted accounting principles.
/s/KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
New York, New York
September 24, 1996
F-2
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,666,050 $8,102,989
Accounts receivable 2,123,691 2,362,277
Inventories 985,378 792,453
Accrued interest receivable 50,587 9,674
Prepaid expenses 383,731 175,552
Total current assets 16,209,437 11,442,945
Property and equipment 15,640,823 15,758,058
Less accumulated depreciation and amortization 11,617,690 9,968,024
4,023,133 5,790,034
Other assets:
Investments 78,293 78,616
Deposits and deferred charges 55,945 46,627
Patents, net 1,597,048 1,825,820
1,731,286 1,951,063
Total assets $21,963,856 $19,184,042
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,078,924 $1,561,968
Accrued expenses 4,387,052 4,045,302
Other accrued liabilities - due to Sanofi - 1,312,829
Total current liabilities 6,465,976 6,920,099
Accrued rent 980,908 1,006,508
Royalty advance - RPR 1,600,786 2,955,841
Other liabilities 1,728 4,076
2,583,422 3,966,425
Commitments and contingencies
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares;
issued and outstanding 169,000 shares in 1996 and 109,000 in 1995
(liquidation preferences aggregating $8,725,000 in 1996 and
$2,725,000 in 1995) 1,690 1,090
Common stock-$.01 par value, authorized 40,000,000 shares; issued
and outstanding 27,706,396 shares in 1996 and 26,328,874 shares in
1995 277,064 263,289
Additional paid-in capital 121,272,024 111,494,180
Accumulated deficit (108,636,320) (103,461,041)
Total stockholders' equity 12,914,458 8,297,518
Total liabilities and stockholders' equity $21,963,856 $19,184,042
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 1996, 1995 and 1994
YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Revenues
Sales $10,501,985 $11,024,432 $8,181,999
Contract revenue 2,179,296 4,802,005 6,615,500
Total revenues 12,681,281 15,826,437 14,797,499
Costs and expenses
Cost of sales 3,545,341 2,918,737 2,168,398
Research and development expenses 10,123,525 12,083,960 17,665,014
Selling, general and administrative expenses 6,010,639 6,916,393 11,709,735
Restructuring expense - 1,192,971 -
Total costs and expenses 19,679,505 23,112,061 31,543,147
Operating loss (6,998,224) (7,285,624) (16,745,648)
Other income (expense)
Interest and dividend income 449,855 236,848 306,381
Interest expense (12,886) (3,988) (19,068)
Other 1,385,976 761,273 (36,891)
1,822,945 994,133 250,422
Net loss ($5,175,279) ($6,291,491) ($16,495,226)
Net loss per common share ($0.20) ($0.26) (0.71)
Weighted average number of common
shares outstanding during the period 26,823,142 25,184,718 23,646,061
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
PREFERRED STOCK
<TABLE>
<CAPTION>
Amount Number
Per Share of Shares Par Value
<S> <C> <C> <C>
Balance, July 1, 1993 117,000 $1,170
Common stock issued for exercise - - -
of non-qualified stock options
Common stock issued on conversion of 25.00 (8,000) (80)
preferred stock
Dividends issued on preferred stock - - -
Proceeds from public offering on - - -
April 22, 1994
Compensation expense related to vesting - - -
of stock options
Common stock issued for acquisition of - - -
Enzon Labs Inc.
Issuance of common stock warrants for - - -
Enzon Labs Inc.
Net loss - - -
Balance, June 30, 1994 109,000 1,090
Compensation expense related to vesting - - -
of stock options
Proceeds from public shelf offering - - -
Common stock issued for building - - -
purchase option
Common stock issued to Schering - - -
Corporation
Common stock issued for acquisition - - -
of Enzon Labs Inc.
Issuance of common stock warrants for - - -
Enzon Labs Inc.
Net loss - - -
Balance, June 30, 1995 carried forward 109,000 $1,090
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(continued)
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
COMMON STOCK
<TABLE>
<CAPTION>
Amount Number
Per Share of Shares Par Value
<S> <C> <C> <C>
Balance, July 1, 1993 23,471,537 $234,715
Common stock issued for exercise $4.12 140,850 1,409
of non-qualified stock options
Common stock issued on conversion of 9.10 21,978 220
preferred stock
Dividends issued on preferred stock 9.10 7,032 70
Proceeds from public offering on 2.55 785,358 7,854
April 22, 1994
Compensation expense related to vesting - - -
of stock options
Common stock issued for acquisition of 8.88 503 5
Enzon Labs Inc.
Issuance of common stock warrants for 2.02 - -
Enzon Labs Inc.
Net loss - - -
Balance, June 30, 1994 24,427,258 244,273
Compensation expense related to vesting - - -
of stock options
Proceeds from public shelf offering 2.06 954,000 9,540
Common stock issued for building purchase 2.25 100,000 1,000
option
Common stock issued to Schering 2.36 847,489 8,475
Corporation
Common stock issued for acquisition 8.88 127 1
of Enzon Labs Inc.
Issuance of common stock warrants for 2.02 - -
Enzon Labs Inc.
Net loss - - -
Balance, June 30, 1995 carried forward 26,328,874 $263,289
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(continued)
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional Accumulated Deficit
paid-in Capital Total
<S> <C> <C> <C>
Balance, July 1, 1993 $105,068,743 ($80,610,324) $24,694,304
Common stock issued for exercise 578,942 - 580,351
of non-qualified stock options
Common stock issued on conversion of (140) - -
preferred stock
Dividends issued on preferred stock 63,921 (64,000) (9)
Proceeds from public offering on 1,624,025 - 1,631,879
April 22, 1994
Compensation expense related to vesting 179,465 - 179,465
of stock options
Common stock issued for acquisition of 4,459 - 4,464
Enzon Labs Inc.
Issuance of common stock warrants for 835 - 835
Enzon Labs Inc.
Net loss - (16,495,226) (16,495,226)
Balance, June 30, 1994 107,520,250 (97,169,550) 10,596,063
Compensation expense related to vesting 31,535 - 31,535
of stock options
Proceeds from public shelf offering 1,742,524 - 1,752,064
Common stock issued for building 224,000 - 225,000
purchase option
Common stock issued to Schering 1,974,575 - 1,983,050
Corporation
Common stock issued for acquisition 1,126 - 1,127
of Enzon Labs Inc.
Issuance of common stock warrants for 170 - 170
Enzon Labs Inc.
Net loss - (6,291,491) (6,291,491)
Balance, June 30, 1995 carried forward $111,494,180 ($103,461,041) $8,297,518
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
PREFERRED STOCK
<TABLE>
<CAPTION>
Amount Number Par
Per Share of Shares Value
<S> <C> <C> <C>
Balance, June 30, 1995 brought forward 109,000 $1,090
Common stock issued for exercise - - -
of non-qualified stock options
Issuance of common stock warrants - - -
Proceeds from private placement, 100.00 40,000 400
January 1996
Proceeds from private placement, 100.00 20,000 200
March 1996
Consulting expense for issuance of - - -
stock options
Donation of common stock - - -
Net loss - - -
Balance, June 30, 1996 169,000 $1,690
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(continued)
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
COMMON STOCK
<TABLE>
<CAPTION>
Amount Number Par
Per Share of Shares Value
<S> <C> <C> <C>
Balance, June 30, 1995 brought forward 26,328,874 $263,289
Common stock issued for exercise 2.54 15,980 160
of non-qualified stock options
Issuance of common stock warrants - - -
Proceeds from private placement, 2.74 1,094,890 10,949
January 1996
Proceeds from private placement, 3.75 266,667 2,666
March 1996
Consulting expense for issuance of - - -
stock options
Donation of common stock - (15) -
Net loss - - -
Balance, June 30, 1996 27,706,396 $277,064
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(continued)
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional Accumulated Deficit
paid-in Capital Total
<S> <C> <C> <C>
Balance, June 30, 1995 brought forward $111,494,180 ($103,461,041) $8,297,518
Common stock issued for exercise 40,376 - 40,536
of non-qualified stock options
Issuance of common stock warrants 246,000 - 246,000
Proceeds from private placement, 6,661,006 - 6,672,355
January 1996
Proceeds from private placement, 2,768,920 - 2,771,786
March 1996
Consulting expense for issuance of 61,542 - 61,542
stock options
Donation of common stock - - -
Net loss - (5,175,279) (5,175,279)
Balance, June 30, 1996 $121,272,024 ($108,636,320) $12,914,458
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
<S> <C> <C> <C>
1996 1995 1994
Cash flows from operating activities:
Net loss ($5,175,279) ($6,291,491) ($16,495,226)
Adjustments to reconcile net loss to net cash used
in operating activities:
Decrease in liability recognized pursuant to Sanofi Agreement (1,312,829) - -
Depreciation and amortization 2,051,735 2,477,671 2,796,654
Reserve for shutdown Enzon Labs Inc. - (71,743) (1,203,563)
Loss on retirement of assets 69,444 9,003 38,868
Non-cash expense for issuance of stock options 61,542 31,535 179,465
Non-cash portion of restructuring expense - 1,100,094 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 238,586 (433,824) (313,141)
(Increase) decrease in inventories (192,925) 147,370 117,614
(Increase) decrease in accrued interest receivable (40,913) (4,489) 151,611
(Increase) decrease in prepaid expenses (208,179) (68,222) 222,179
Decrease (increase) in cash surrender value of life insurance - 67,871 (66,148)
(Increase) decrease in other assets (8,995) 126,448 5,303
Increase (decrease) in accounts payable 516,956 (857,603) 407,433
Increase (decrease) in accrued expenses 589,833 (349,431) 1,200,481
(Decrease) increase in accrued rent (25,600) (854,274) 345,755
(Decrease) increase in royalty advance - RPR (1,355,055) 2,955,841 -
Decrease in other liabilities (2,348) (110,360) (1,340)
Net cash used in operating activities (4,794,027) (2,125,604) (12,614,055)
Cash flows from investing activities:
Capital expenditures (136,789) (387,020) (828,711)
Proceeds from sale of equipment 11,283 861,521 41,600
Proceeds from sale of short-term investments - - 4,947,393
Proceeds from cash surrender value of officer's life insurance - 305,315 -
Net cash (used in) provided by investing activities (125,506) 779,816 4,160,282
Cash flows from financing activities:
Proceeds from issuance of common stock, preferred 9,484,677 3,735,114 2,212,221
stock and warrants
Principal payments of obligations under capital leases (2,083) (17,798) (22,833)
Net cash provided by financing activities 9,482,594 3,717,316 2,189,388
Net increase (decrease) in cash and cash equivalents 4,563,061 2,371,528 (6,264,385)
Cash and cash equivalents at beginning of period 8,102,989 5,731,461 11,995,846
Cash and cash equivalents at end of period $12,666,050 $8,102,989 $5,731,461
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended June 30, 1996, 1995 and 1994
(1) COMPANY OVERVIEW
Enzon, Inc. ("Enzon" or "the Company") is a biopharmaceutical
company that develops, manufactures and markets enhanced therapeutics for
life-threatening diseases through the application of its proprietary
technologies. The Company was originally incorporated in 1981. To date,
the Company's sources of cash have been the proceeds from the sale of its
stock through public offerings and private placements, sales of ADAGEN,
sales of ONCASPAR, sales of its products for research purposes, contract
research and development fees, technology transfer and license fees and
royalty advances. The manufacturing and marketing of pharmaceutical
products in the United States is subject to stringent governmental
regulation and the sale of any of the Company's products for use in
humans in the United States will require the prior approval of the United
States Food and Drug Administration ("FDA"). To date, ADAGEN and
ONCASPAR are the only products of the Company which have been approved
for marketing by the FDA.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany transactions
and balances are eliminated in consolidation. 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.
INVESTMENTS
Cash equivalents include investments which consist primarily of
debt securities and time deposits. The Company invests its excess cash
in a portfolio of marketable securities of institutions with strong
credit ratings and U.S. Government backed securities.
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," (SFAS No. 115) on July 1, 1994. Under SFAS No.
115, the Company classifies its investment securities as held-to-
maturity. Held-to-maturity securities are those securities which the
Company has the ability and intent to hold to maturity. Held-to-maturity
securities are recorded at cost which approximated the fair value of the
investments at June 30, 1996.
INVENTORY COSTING AND IDLE CAPACITY
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method and includes the cost of raw
materials, labor and overhead.
Costs associated with idle capacity at the Company's manufacturing
facility are charged to cost of sales as incurred. Prior to the fourth
quarter of the year ended June 30, 1994 and the approval of ONCASPAR, the
Company's first FDA approved drug for a potentially large patient
population, costs associated with idle capacity at the Company's
manufacturing facility were charged to research and development expenses.
F-8
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
PATENTS
The Company has licensed, and been issued, a number of patents in
the United States and other countries and has other patent applications
pending to protect its proprietary technology. Although the Company
believes that its patents provide adequate protection for the conduct of
its business, there can be no assurance that such patents will be of
substantial protection or commercial benefit to the Company, will afford
the Company adequate protection from competing products, will not be
challenged or declared invalid, or that additional United States patents
or foreign patent equivalents will be issued to the Company. The degree
of patent protection to be afforded to biotechnological inventions is
uncertain and the Company's products are subject to this uncertainty.
Patents related to the acquisition of Enzon Labs Inc., formerly
Genex Corporation, were recorded at their fair value at the date of
acquisition and are being amortized over the estimated useful lives of
the patents ranging from 7 to 17 years. Accumulated amortization as of
June 30, 1996 and 1995 was $721,000 and $588,000, respectively.
Costs related to the filing of patent applications related to the
Company's products and technology are expensed as incurred.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is
computed using the straight-line method. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is recognized
in operations for the period. The cost of repairs and maintenance is
charged to operations as incurred; significant renewals and betterments
are capitalized.
REVENUE RECOGNITION
Reimbursement from third party payors for ADAGEN is handled on an
individual basis due to the high cost of treatment and limited patient
population. Because of the uncertainty of reimbursement and the
Company's commitment of supply to the patient regardless of whether or
not the Company will be reimbursed, revenues for the sale of ADAGEN are
recognized when reimbursement from third party payors becomes likely.
Revenues from the sale of the Company's other products that are
sold are recognized at the time of shipment and provision is made for
estimated returns.
Contract revenues are recorded as the earnings process is
completed.
Royalties under the Company's license agreement with Rhone-Poulenc
Rorer Pharmaceuticals, Inc. ("RPR") (See Note 11), related to the sale of
ONCASPAR by RPR, are recognized when earned.
F-9
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
CASH FLOW INFORMATION
The Company considers all highly liquid securities with original
maturities of three months or less to be cash equivalents.
Cash payments for interest were approximately $13,000 in 1996,
$4,000 in 1995, and $5,000 in 1994. There were no income tax payments
made for the years ended June 30, 1996, 1995, and 1994.
During the year ended June 30, 1995, the Company issued 100,000
shares of unregistered Common Stock in order to acquire an option to
purchase the facility it currently leases in Piscataway, New Jersey.
During the year ended June 30, 1994, 8,000 shares of Series A Cumulative
Convertible Preferred Stock ("Series A Preferred Shares") were converted
to 22,000 shares of Common Stock. Accrued dividends of $64,000 on the
Series A Cumulative Convertible Preferred Stock that was converted were
settled by issuing 7,000 shares of Common Stock and cash payments
totaling $9 for fractional shares for the year ended June 30, 1994. There
were no conversions of the Series A Preferred Shares during the years
ended June 30, 1996 or 1995. As part of the commission due to the real
estate broker in connection with the termination of the Company's lease
at 40 Kingsbridge Road, the Company issued 150,000 five-year warrants to
purchase the Company's Common Stock at $2.50 per share during the year
ended June 30, 1996 (See Note 3). Also, in connection with the Company's
private placements of Common Stock, Series B Convertible Preferred Stock
("Series B Preferred Shares"), and Series C Convertible Preferred Stock
("Series C Preferred Shares"), the Company issued an aggregate of 50,000
five-year warrants to purchase the Company's Common Stock, at $4.11 per
share as a finder's fee, during the year ended June 30, 1996. These
transactions are non-cash financing activities.
Management believes that its current sources of liquidity will be
sufficient to meet anticipated cash requirements, based on current
spending levels, for approximately the next two years. Upon exhaustion
of the Company's current cash reserves, the Company's continued
operations will depend on, among other things, its ability to realize
significant revenues from the commercial sale of products, raise
additional funds through equity or debt financing or obtain significant
licensing, technology transfer or contract research and development fees.
There can be no assurance that these sales, financings or revenue
generating activities will be successful.
NET LOSS PER COMMON SHARE
Net loss per common share is based on net loss for the relevant
period, adjusted for cumulative, undeclared Series A Preferred Stock
dividends of $218,000, $218,000 and $230,000 for the years ended June 30,
1996, 1995 and 1994, respectively, divided by the weighted average number
of shares issued and outstanding during the period. Stock options,
warrants and Common Stock issuable upon conversion of the preferred stock
are not reflected as their effect would be antidilutive for both primary
and fully diluted earnings per share computations.
F-10
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) RESTRUCTURING EXPENSE
During the year ended June 30, 1995, the Company reduced its
workforce by approximately 22 employees. As a result of these
reductions, the Company was able to move its general and administrative
operations into its existing research and development facility at 20
Kingsbridge Road in Piscataway, New Jersey.
On March 31, 1995, the Company terminated its lease for 83,000
square feet at 40 Kingsbridge Road in Piscataway, New Jersey, its former
general and administrative facility. As part of the termination
agreement, the landlord was able to draw down on a $600,000 letter of
credit that served as the security deposit for both buildings that the
Company occupied on Kingsbridge Road in Piscataway. The termination
payment, severance related to staff reductions, write-off of leasehold
improvements, moving expenses and the commission due the Company's real
estate broker related to the termination of the 40 Kingsbridge lease were
recorded as a restructuring charge during the year ended June 30, 1995.
Approximately $227,000 of the restructuring expense represents severance
related to the staff reduction and the remaining $966,000 represents
expenses incurred in conjunction with the lease termination. As part of
the commission due the Company's real estate broker, 150,000 five-year
warrants to purchase the Company's Common Stock at $2.50 per share were
issued in August 1995. All of the restructuring charges recorded have
been paid as of June 30, 1996.
(4) RELATED PARTY TRANSACTIONS
The Company has license agreements with Research Corporation and
its successor, Research Corporation Technologies, Inc. ("RCT"), related
to the original PEG Process patent. The PEG Process was developed at
Rutgers University in New Brunswick, New Jersey by Dr. Frank Davis, one
of the Company's original founders, and two other inventors not
affiliated with the Company. These agreements granted the Company an
exclusive license to make, use and sell specific patented processes and
products in countries in which a patent has been granted. The patent
license under the agreement expires in December 1996.
The Company's obligation to pay royalties on sales of ADAGEN under
the agreement terminates on the expiration of the patent in December
1996. Royalties for ONCASPAR will be paid until 1999. As of June 30,
1996 and 1995, the Company had approximately $212,000 and $286,000
related to such agreements recorded as accrued expenses in the
Consolidated Balance Sheets.
During August 1992, the Company entered into a license agreement
with two employees of the Company and an unrelated party to license a
protein related technology. The Company paid $20,000 to each of the
parties upon signing of the agreement and agreed to pay royalties of
between 3% and 6% of net sales. The agreement was terminated in June
1996, and the Company gave up all rights related to the original patents
for this technology. The agreement also provided for a yearly
maintenance fee of $15,000 commencing on January 30, 1993. The Company
paid yearly maintenance fees of $15,000 under this agreement in each of
the fiscal years ended June 30, 1996, 1995 and 1994.
F-11
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) COMMITMENTS AND CONTINGENCIES
The Company has a long-term supply agreement for unmodified L-
asparaginase, one of the raw materials used in ONCASPAR, under which the
Company is required to purchase minimum quantities of this raw material
on an annual basis. Under the agreement, which was amended during the
fiscal year ended June 30, 1995, the Company is currently required to
purchase $2,125,000 in raw material during the term of the contract,
which expires on December 31, 1997. During the years ended June 30, 1996
and 1995, the Company purchased approximately $850,000 related to this
contract. The purchase requirements for the years ending December 31,
1996 and 1997 are $850,000 and $1,275,000, respectively. During the
fiscal year ended June 30, 1996, the Company wrote-off approximately
$351,000 of unmodified L-asparaginase purchased under this supply
contract. The Company also paid a penalty of $350,000 related to the
satisfaction of its purchase requirements for the calendar year ended
December 31, 1995. While it is possible that the Company may incur
similar losses on its remaining purchase commitments under this supply
agreement, the Company does not consider such losses probable, nor can
the amount of any loss which may be incurred in the future presently be
estimated due to a number of factors, including but not limited to
potential increased demand for ONCASPAR from RPR, expansion into
additional markets outside the U.S. and the possibility that the Company
could renegotiate the level of required purchases. If the Company does
not achieve increases in sales of ONCASPAR beyond current levels or
cannot renegotiate its commitment, a loss would be incurred on the
remaining purchase commitment.
The Company has agreements with certain members of its upper
management which provide for payments following a termination of
employment occurring after a change in control of the Company.
(6) INVENTORIES
Inventories consist of the following:
JUNE 30,
1996 1995
Raw materials $206,000 $398,000
Work in process 383,000 134,000
Finished goods 396,000 260,000
$985,000 $792,000
F-12
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30, Estimated
1996 1995 USEFUL LIVES
Equipment $9,128,000 $9,284,000 3-7 years
Furniture and fixtures 1,586,000 1,598,000 7 years
Vehicles 29,000 29,000 3 years
Leasehold improvements 4,898,000 4,847,000 3-15 years
$15,641,000 $15,758,000
Depreciation and amortization charged to operations, relating to
property and equipment, were $1,891,000, $2,317,000 and $2,636,000 for
the years ended June 30, 1996, 1995 and 1994, respectively.
(8) STOCKHOLDERS' EQUITY
On February 1, 1994, an option to purchase 150,000 shares of the
Company's Common Stock became exercisable. This option was granted to
the Company's former Chairman of the Board in 1989 and became exercisable
upon the FDA's approval of ONCASPAR. The approval of ONCASPAR resulted
in a non-cash compensation charge representing the difference between the
exercise price of the option and the market value of the underlying
Common Stock.
On May 26, 1994, the Company sold 785,000 shares of Common Stock to
Susquehanna Brokerage Services, Inc. ("Susquehanna") in a public shelf
offering at a weighted average price of $2.55 per share, resulting in net
proceeds to the Company of approximately $1,632,000.
During the year ended June 30, 1995, the Company sold to
Susquehanna, in a public shelf offering, an additional 954,000 shares of
newly issued Common Stock. The shares were sold at a weighted average
price of $2.06 per share, resulting in net proceeds to the Company of
approximately $1,752,000.
On April 1, 1995, the Company issued 100,000 shares of newly
issued, unregistered Common Stock, valued at $2.25 per share, in
consideration for an option to purchase the facility it currently leases
in Piscataway, New Jersey.
On June 30, 1995, in conjunction with the license of know-how
related to PEG-INTRON A, the Company sold 847,000 shares of newly issued,
unregistered Common Stock to Schering Corporation, resulting in net
proceeds of approximately $1,983,000 (See Note 10).
In January 1996, the Company completed a private placement of
1,094,890 shares of Common Stock and 40,000 Series B Preferred Shares
resulting in gross proceeds of $7,000,000. In March 1996, the Company
completed a private placement of 266,667 shares of Common Stock and
20,000 Series C Preferred Shares resulting in gross proceeds of
$3,000,000. The two private placements resulted in net cash proceeds of
approximately $9,444,000 after payment of related expenses and a finder's
fee.
F-13
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In connection with the January 1996 and March 1996 private
placements, the Company issued five-year warrants to purchase 638,686
shares of Common Stock at $4.11 per share and 200,000 shares of Common
Stock at $5.63 per share, respectively. The Company paid a finder's fee
in cash and issued five-year warrants to purchase 50,000 shares of Common
Stock at $4.11 per share related to the 1996 private placements.
PREFERRED STOCK
The Company's Series A Preferred Shares are convertible into Common
Stock at an annually increasing rate per share with a maximum conversion
rate of $11 per share. As of June 30, 1996 and 1995, the conversion rate
was $11 per share. The value of the Series A Preferred Shares for
conversion purposes is $25 per share. Holders of the Series A Preferred
Shares are entitled to an annual dividend of $2 per share, payable
semiannually, but only when and if declared by the Board of Directors,
out of funds legally available. Dividends on the Series A Preferred
Shares are cumulative and accrue and accumulate but will not be paid,
except in liquidation or upon conversion, until such time as the Board of
Directors deems it appropriate in light of the Company's then current
financial condition. No dividends are to be paid or set apart for
payment on the Company's Common Stock, nor are any shares of Common Stock
to be redeemed, retired or otherwise acquired for valuable consideration
unless the Company has paid in full or made appropriate provision for the
payment in full of all dividends which have then accumulated on the
Series A Preferred Shares. Holders of the Series A Preferred Shares are
entitled to one vote per share on matters to be voted upon by the
stockholders of the Company. As of June 30, 1996 and 1995 undeclared
accrued dividends in arrears were $1,367,000 or $12.54 per share and
$1,149,000 or $10.54 per share, respectively. All Common Shares are
junior in rank to the Series A Preferred Shares, Series B Preferred
Shares and Series C Preferred Shares with respect to the preferences as
to dividends, distributions and payments upon the liquidation,
dissolution or winding up of the Company.
During the year ended June 30, 1994, 8,000 Series A Preferred
Shares were converted into 22,000 shares of Common Stock. There were no
conversions of Series A Preferred Shares during the years ended June 30,
1996 or 1995. As of June 30, 1996 and 1995, the Company had 109,000
shares of Series A Preferred Shares outstanding with a liquidation
preference of $25 per share or $2,725,000.
The stated value of each Series B Preferred Share and Series C
Preferred Share is $100. The Company's Series B Preferred Shares and
Series C Preferred Shares are convertible at a conversion price equal to
80% of the average of the closing bid price of the Common Stock for the
five consecutive trading days needed ("the Average Market Price") ending
one trading day prior to the date of conversion as reported by the
National Association of Securities Dealers Automated Quotation National
Market. The Series B Preferred Shares and the Series C Preferred Shares
will not pay a dividend and do not have voting rights. In connection
with the January 1996 and March 1996 private placements, the Company
agreed to register and has filed a registration statement for the Common
Stock issued, the shares of Common Stock underlying the Series B
Preferred Shares, the shares of Common Stock underlying the Series C
Preferred Shares, the shares of Common Stock underlying the warrants and
certain shares of Common Stock issuable in the event the Company does not
comply with certain of its obligations under the registration rights
agreements. As of June 30, 1996, the 40,000 Series B Preferred Shares
and 20,000 Series C Preferred Shares issued during fiscal 1996 were
outstanding. The Series B Preferred Shares and Series C Preferred Shares
have a liquidation preference of $100 per share or an aggregate of
$6,000,000.
F-14
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per
share on matters to be voted upon by the stockholders of the Company.
As of June 30, 1996, the Company has reserved its common shares for
special purposes as detailed below:
Shares issuable upon conversion of:
Series A Preferred Shares 248,000
Series B Preferred Shares 1,581,000
Series C Preferred Shares 791,000
Shares issuable upon exercise of
outstanding warrants 1,039,000
Non-Qualified Stock Option Plan 5,661,000
Other options 200,000
9,520,000
The Common Stock issuable upon conversion of the Series B Preferred
Shares and Series C Preferred Shares is based on an assumed conversion
price of $2.53 which would have been the conversion price if the Series B
and Series C Preferred Shares were converted on June 30, 1996.
SERIES A PREFERRED STOCK WARRANTS
In connection with the private placement of the Series A Preferred
Shares, the Company issued warrants to purchase 82,000 Series A Preferred
Shares. Prior to the year ended June 30, 1995, 22,000 warrants were
exercised. During the year ended June 30, 1995, the remaining warrants
expired.
ENZON LABS WARRANTS
In connection with the acquisition of Enzon Labs Inc., the Company
agreed to issue warrants to purchase 583,000 shares of Common Stock.
Prior to the year ended June 30, 1995, 100 warrants were exercised.
During the year ended June 30, 1995, the remaining warrants expired.
(9) NON-QUALIFIED STOCK OPTION PLAN
In November 1987, the Company's Board of Directors adopted a Non-
Qualified Stock Option Plan (the "Plan"). On December 5, 1995, the
stockholders voted to increase the number of shares reserved for issuance
under the Plan from 5,000,000 to 6,200,000. Under the Plan, as amended,
5,661,000 shares of Common Stock as of June 30, 1996 are reserved for
issuance pursuant to options which may be granted to employees, non-
employee directors or consultants to the Company. The exercise price of
the options must be at least 100% of the fair market value of the stock
at the time the option is granted and an option may be exercised for a
period of up to ten years from the date it is granted. The other terms
and conditions of the options generally are to be determined by the Board
of Directors, or an option committee appointed by the Board, at their
discretion.
F-15
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A summary of the activity relating to the Plan follows:
Number of shares
UNDER OPTION
Outstanding at July 1, 1993 2,041,000
Granted at prices ranging from $2.38 to $6.00 1,292,000
Exercised at prices ranging from $3.75 to $4.88 (140,000)
Canceled at prices ranging from $4.00 to $14.88 (355,000)
Outstanding at June 30, 1994 2,838,000
Granted at prices ranging from $1.88 to $3.13 1,412,000
Canceled at prices ranging from $2.09 to $15.25 (645,000)
Outstanding at June 30, 1995 3,605,000
Granted at prices ranging from $2.38 to $4.75 768,000
Exercised at prices ranging from $2.09 to $2.80 (16,000)
Canceled at prices ranging from $2.09 to $11.00 (794,000)
Outstanding at June 30, 1996 3,563,000
At June 30, 1996, 2,295,000 of the outstanding options were
exercisable at prices per share ranging from $2.00 to $14.88.
On August 24, 1994, the Compensation Committee of the Board of
Directors of the Company extended the exercise period of all outstanding
five year options to ten years under the Plan. None of the options
extended had exercise prices less than the fair market value of the
Company's Common Stock on August 24, 1994, and accordingly, no
compensation expense was recorded.
(10) INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109
(SFAS No. 109), "Accounting for Income Taxes" as of July 1, 1993. Under
the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109,
the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date. The effects of adopting SFAS No. 109 were not material to the
financial statements at July 1, 1993.
F-16
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At June 30, 1996 and 1995, the tax effects of temporary differences
that give rise to the deferred tax assets and deferred tax liabilities
are as follows:
1996 1995
Deferred tax assets:
Inventories $151,000 $57,000
Investment valuation reserve 86,000 86,000
Contribution carryover 12,000 10,000
Compensated absences 98,000 103,000
Excess of financial statement over tax
depreciation 368,000 146,000
Royalty advance - RPR 1,153,000 1,340,000
Sanofi liability - 524,000
Non-deductible expenses 343,000 457,000
Federal and state net operating loss
carryforwards 38,495,000 35,816,000
Research and development and investment
tax credit carryforwards 6,407,000 5,770,000
Total gross deferred tax assets 47,113,000 44,309,000
Less valuation allowance (46,407,000)(43,597,000)
Net deferred tax assets 706,000 712,000
Deferred tax liabilities:
Step up in basis of assets related to
acquisition of Enzon Labs Inc. (706,000) (712,000)
Total gross deferred tax liabilities (706,000) (712,000)
Net deferred tax $0 $0
A valuation allowance is provided when it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
The net change in the total valuation allowance for the years ended June
30, 1996 and 1995 were increases of $2,810,000 and $2,187,000,
respectively. Subsequently recognized tax benefits for the years ended
June 30, 1996 and 1995 of $954,000 and $940,000 relating to the valuation
allowance for deferred tax assets will be allocated to additional paid-in
capital.
At June 30, 1996, the Company had federal net operating loss
carryforwards of approximately $97,565,000 for tax reporting purposes,
which expire in the years 1997 to 2011. The Company also has investment
tax credit carryforwards of approximately $30,000 and research and
development tax credit carryforwards of approximately $6,377,000 for tax
reporting purposes which expire in the years 1998 to 2011.
As part of the Company's acquisition of Enzon Labs Inc., the
Company acquired the net operating loss carryforwards of Enzon Labs Inc..
As of June 30, 1996, the Company had a total of $67,754,000 of acquired
Enzon Labs net operating loss carryforwards, which expire between October
31, 1996 and October 31, 2006. As a result of the change in ownership
the utilization of these carryforwards is limited to $613,000 per year.
F-17
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) SIGNIFICANT AGREEMENTS
RHONE-POULENC RORER AGREEMENT
The Company has granted RPR an exclusive license ("the License
Agreement") in the United States to sell ONCASPAR, and any other PEG-
asparaginase product (the "Product") developed by Enzon or RPR during the
term of the License Agreement. Under this agreement, Enzon was entitled
to licensing payments totaling $6,000,000, of which $500,000 and
$5,500,000 were paid during the fiscal years ended June 30, 1995 and
1994, respectively.
During January 1995, the Company amended its exclusive U.S.
marketing rights license with RPR for ONCASPAR. Under the amended
agreement, Enzon earned a base royalty of 10% for the year ended December
31, 1995 and will earn 23.5% thereafter, until 2008, on net sales of
ONCASPAR up to agreed upon amounts, as opposed to 50% of net profits
provided for under the original agreement. Additionally, the License
Agreement provides for a super royalty of 23.5% for the year ended
December 31, 1995 and 43.5% thereafter, until 2008 on net sales of
ONCASPAR which exceed the agreed upon amounts, with the limitation that
the total royalties earned for any such year shall not exceed 33% of net
sales. The amended agreement also provides for a payment of $3,500,000
in advance royalties, which was received in January 1995.
Base royalties due under the amended agreement will be offset
against a credit of $5,970,000 (which represents the royalty advance plus
reimbursement of certain amounts due to RPR under the previous agreement
and interest expense) before cash payments for base royalties will be
made. Super royalties will be paid to the Company when earned. The
royalty advance is shown as a long term liability, with the corresponding
current portion included in accrued expenses on the Consolidated Balance
Sheet as of June 30, 1996. The royalty advance will be reduced as base
royalties are recognized under the agreement.
The agreement prohibits RPR from selling a competing PEG-
asparaginase product anywhere in the world during the term of the License
Agreement and for five years thereafter. The revised License Agreement
terminates in December 2008, subject to early termination by either party
due to a default by the other or by RPR at any time on one year's prior
notice to Enzon. Upon any termination all rights under the License
Agreement revert to Enzon.
The Company has also granted exclusive licenses to sell ONCASPAR in
Canada and Mexico to RPR. These agreements provide for RPR to obtain
marketing approval of ONCASPAR in Canada and Mexico and for the Company
to receive royalties on sales of ONCASPAR in these countries, if any.
The Company is currently pursuing other licenses for marketing and
distribution rights for ONCASPAR outside North America. A separate
supply agreement with RPR requires RPR to purchase from Enzon all of
RPR's requirements for the Product for sales in North America.
SCHERING AGREEMENT
In November 1990, Enzon and Schering Corporation ("Schering")
signed an agreement (the "Schering Agreement") to apply the PEG Process
to Schering's INTRON A (interferon alfa 2b), a genetically-engineered
anticancer and antiviral drug.
F-18
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
On June 30, 1995, the Company and Schering amended the Schering
Agreement pursuant to which Enzon agreed to transfer proprietary know-how
and manufacturing rights for PEG-INTRON A to Schering for $3,000,000, of
which $2,000,000 was paid on June 30, 1995 and $1,000,000 will be paid
upon completion of the know-how transfer, as defined in such amended
agreements. In connection with the amendment, the Company also sold to
Schering 847,000 shares of unregistered, newly issued Common Stock for
$2,000,000 in gross proceeds. Under the current Schering Agreement,
Enzon retained an option to become Schering's exclusive manufacturer of
PEG-INTRON A for the United States market upon FDA approval of such
product.
Under the Schering Agreement, Enzon is entitled to receive
sequential payments, totaling approximately $5,500,000, subject to the
achievement of certain milestones in the product's development program,
as well as payments for the clinical material it produces. The Company
will also receive royalties on worldwide sales of PEG-INTRON A, if any.
Schering will be responsible for conducting and funding the clinical
studies, obtaining regulatory approval and marketing the product
worldwide on an exclusive basis.
The Schering Agreement terminates, on a country-by-country basis,
upon the expiration of the last to expire of any future patents covering
the product which may be issued to Enzon, or 15 years after the product
is approved for commercial sale, whichever shall be the later to occur.
This agreement is subject to Schering's right of early termination if the
product does not meet specifications, or if Enzon fails to obtain or
maintain the requisite product liability insurance, or if Schering makes
certain payments to Enzon. If Schering terminates the agreement because
the product does not meet specifications, Enzon may be required to refund
certain of the milestone payments.
RPR/GENCELL AGREEMENT
In December 1995, Enzon and the Gencell Division of RPR
("RPR/Gencell") signed an agreement granting RPR/Gencell a worldwide,
non-exclusive license to use Enzon's Single-Chain Antigen-Binding (SCA)
protein technology for intracellular expression of SCA proteins and for
targeted vectors in the field of cell and gene therapy. RPR/Gencell, the
cell and gene therapy division of RPR, is planning to apply this
technology to its in vivo and ex vivo gene therapy programs in cancer,
cardiovascular disease and immunology.
Under the agreement, the Company received approximately $1,000,000
during the fiscal year ended June 30, 1996 for signing the license
agreement. The Company is also entitled to receive additional payments
subject to the achievement of certain milestones in the development
program, as well as a royalty on sales, if any, of products developed
with this technology.
BAXTER AGREEMENT
In November 1992, Enzon and Baxter Healthcare Corporation
("Baxter") signed an agreement granting Baxter a non-exclusive worldwide
license to Enzon's SCA protein technology. It is anticipated that
Baxter's biotech group will use the SCA proteins in its cancer research
programs focusing on human stem cell isolation and gene therapy.
F-19
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Under the agreement, the Company is entitled to sequential
payments, subject to the achievement of certain milestones in the
products' development of $500,000 for each product developed, up to a
maximum of $2,500,000. Baxter will have the exclusive worldwide rights
to manufacture and market any products which it develops and Enzon will
receive certain royalties on Baxter's sales, if any.
ELI LILLY (HYBRITECH) AGREEMENT
In December 1992, Enzon and Hybritech Incorporated ("Hybritech"), a
subsidiary of Eli Lilly & Co., signed an agreement granting Hybritech a
non-exclusive worldwide license to Enzon's SCA protein technology. Under
the agreement, Enzon received upfront payments totaling $1,200,000, of
which $700,000 was received during the year ended June 30, 1994, and will
receive certain royalties on Hybritech sales of products, if any, that
may be developed using Enzon's SCA protein technology.
BRISTOL-MYERS SQUIBB
In September 1993, the Company and Bristol-Myers Squibb ("Bristol-
Myers") signed a license agreement for Enzon's SCA protein technology
granting Bristol-Myers a worldwide, semi-exclusive license for a
particular antigen. Under the agreement, Enzon is entitled to receive
certain upfront payments and sequential payments, subject to the
achievement of certain milestones in the development program. Bristol-
Myers will have the right to manufacture and market products which it
develops and Enzon will receive certain royalties on Bristol-Myers sales,
if any. Enzon also granted Bristol-Myers options to take non-exclusive
licenses under patent rights for other applications/fields for certain
additional payments. During the year ended June 30, 1994, Enzon received
$200,000 under this agreement. In July 1994, Bristol-Myers
paid $1,800,000 to Enzon and exercised its option to acquire a worldwide
non-exclusive license for SCA protein technology. The non-exclusive
license is for all areas of drug development.
(12) LEASES
The Company has several leases for office, warehouse, production
and research facilities and equipment.
Future minimum lease payments, net of subleases, for noncancellable
operating leases (with initial or remaining lease terms in excess of one
year) and the present value of future minimum capital lease payments as
of June 30, 1996 are:
Year ending Capital Operating
JUNE 30, LEASES LEASES
1997 $2,000 $1,682,000
1998 2,000 1,706,000
1999 - 1,130,000
2000 - 496,000
2001 - 496,000
Later years, through 2007 - 3,382,000
Total minimum lease payments $4,000 $8,892,000
Rent expense amounted to $1,469,000, $1,642,000 and $2,181,000 for
the years ended June 30, 1996, 1995 and 1994, respectively.
F-20
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company currently subleases a portion of its facilities. For
the years ended June 30, 1996, 1995 and 1994, rent expense is net of
subrental income of $249,000, $353,000 and $101,000, respectively.
(13) CASH SURRENDER VALUE OF LIFE INSURANCE
As of June 30, 1996, the Company owned a split-dollar life
insurance policy for its former Chairman of the Board with a face value
of $3,000,000. Under the split-dollar agreement, in the event of death,
the Company will receive the greater of the cash accumulation value or
the premiums paid. The remainder of the death benefit, as defined, paid
by the insurance company, will be paid to the named beneficiaries of the
insured. The Company is currently in the process of canceling this
policy. The Company also maintains a key man life insurance policy with
a face value of $1,000,000 on its President and Chief Executive Officer.
In July 1992, the Company took a loan against the split dollar life
insurance policy for $674,000. At June 30, 1996 and 1995, the cash
surrender value of $914,000 and $847,000, respectively, less the
outstanding loan balance and accrued interest of $914,000 and $847,000,
respectively, is recorded in other assets in the Consolidated Balance
Sheets.
During the year ended June 30, 1995, the Company canceled a
separate single premium key man life insurance policy on its former
Chairman of the Board and received the cash surrender value of $305,000.
(14) RETIREMENT PLANS
The Company maintains a defined contribution, 401(k), pension plan
for substantially all its employees. For the years ended June 30, 1996,
1995 and 1994, the Company matched 25% of the employee's contribution of
up to 6% of compensation, as defined. Effective, January 1, 1995, the
Company's match is invested solely in a fund which purchases the
Company's Common Stock in the open market. Effective August 9, 1996, the
Company increased its match to 50% of the employee's contribution of up
to 6% of compensation, as defined. Total Company contributions for the
years ended June 30, 1996, 1995 and 1994 were $63,000, $80,000 and
$94,000, respectively.
(15) ACCRUED EXPENSES
Accrued expenses consist of:
JUNE 30,
1996 1995
Accrued wages and vacation $466,000 $398,000
Reserve for product returns - 298,000
Accrued employee medical claims 239,000 278,000
Accrued Medicaid rebates 996,000 813,000
Accrued restructuring costs - 758,000
Current portion of royalty
advance - RPR 1,287,000 400,000
Other 1,399,000 1,100,000
$4,387,000 $4,045,000
F-21
<PAGE>
ENZON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) FOURTH QUARTER INFORMATION
During the fourth quarter of the year ended June 30, 1994, the
Company recorded a charge to operations for excess raw material (PEG) of
$618,000.
(17) SALES INFORMATION
During the years ended June 30, 1996, 1995 and 1994, the Company
had export sales of $2,270,000, $2,105,000 and $2,085,000, respectively.
Sales to Europe represented $1,858,000, $1,841,000 and $1,957,000 during
the years ended June 30, 1996, 1995 and 1994, respectively.
ADAGEN sales represent approximately 83% of the Company's total net
sales for the year ended June 30, 1996. ADAGEN's Orphan Drug designation
under the Orphan Drug Act provides the Company with marketing exclusivity
in the United States through March 1997. The Company believes the
expiration of ADAGEN's Orphan Drug designation will not have a material
impact on the sales of ADAGEN. Approximately 46%, 42% and 28% of the
Company's ADAGEN sales for the years ended June 30, 1996, 1995 and 1994,
respectively, were made to Medicaid patients.
(18) OTHER INCOME
During the year ended June 30, 1996, the Company recognized as
other income approximately $1,313,000, representing the unused portion of
an advance received under a development and license agreement with Sanofi
Winthrop, Inc. ("Sanofi"). Under the agreement with Sanofi, Enzon
transferred all responsibility for the development and regulatory
approval in the United States for PEG-superoxide dismutase ("PEG-SOD") in
return for 40% of the net profits from sales of PEG-SOD in the United
States. During October 1995, the Company learned that Sanofi intended to
cease development of PEG-SOD (Dismutec(trademark)) due to the product's
failure to show a statistically significant difference between the
treatment group and the control group in a pivotal Phase III trial. Due,
in part, to this product failure, the Company believes it has no further
obligations under its agreement with Sanofi with respect to the
$1,313,000 advance and therefore, the Company has recognized as other
income the amount due Sanofi previously recorded as a current liability.
During the year ended June 30, 1995, the Company received
approximately $645,000 for an insurance settlement related to ADAGEN that
was destroyed in shipment.
F-22
<PAGE>
EXHIBIT INDEX
Exhibit Page
NUMBERS DESCRIPTION NUMBER
21.0 Subsidiaries of Registrant E1
23.0 Consent of KPMG Peat Marwick LLP E2
27.0 Financial Data Schedule E3
99.0 Additional Exhibits E4
<PAGE>
EXHIBIT 21.0
SUBSIDIARIES OF REGISTRANT
Symvex Inc. is a wholly-owned subsidiary of the Registrant incorporated in the
State of Delaware. Symvex Inc. did business under its own name.
Enzon Labs Inc., is a wholly-owned subsidiary of the Registrant incorporated in
the State of Delaware. Enzon Labs Inc. does business under its own name.
Enzon Pharm. B.V. is a wholly-owned subsidiary of the Registrant incorporated
in the Netherlands.
Enzon GmbH is a wholly-owned subsidiary of the Registrant incorporated in
Germany.
E1
<PAGE>
EXHIBIT 23.0
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Enzon Inc.:
We consent to incorporation by reference in the Registration Statement No. 33-
50904 on Form S-8 and Registration Statement No. 333-1535 on Form S-3 of Enzon,
Inc. of our report dated September 24, 1996, relating to the consolidated
balance sheets of Enzon, Inc. and subsidiaries as of June 30, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended June 30,
1996, which report appears in the June 30, 1996 annual report on Form 10-K of
Enzon, Inc.
/s/KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
New York, New York
September 27, 1996
E2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Enzon,
Inc. and Subsidiaries Consolidated Balance Sheet as of June 30, 1996 and the
Consolidated Statement of Operations for the year ended June 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 12,666,050
<SECURITIES> 0
<RECEIVABLES> 2,123,691
<ALLOWANCES> 0
<INVENTORY> 985,378
<CURRENT-ASSETS> 16,209,437
<PP&E> 15,640,823
<DEPRECIATION> 11,617,690
<TOTAL-ASSETS> 21,963,856
<CURRENT-LIABILITIES> 6,465,976
<BONDS> 0
0
1,690
<COMMON> 277,064
<OTHER-SE> 12,635,704
<TOTAL-LIABILITY-AND-EQUITY> 21,963,856
<SALES> 10,501,985
<TOTAL-REVENUES> 12,681,281
<CGS> 3,545,341
<TOTAL-COSTS> 19,679,505
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,886
<INCOME-PRETAX> (5,175,279)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,175,279)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,175,279)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.0
CERTAIN FACTORS TO CONSIDER IN CONNECTION
WITH FORWARD LOOKING STATEMENTS
ACCUMULATED DEFICIT AND UNCERTAINTY OF FUTURE PROFITABILITY. Enzon, Inc.
(the "Company" or "Enzon") was originally incorporated in 1981. To date, the
Company's sources of cash have been the proceeds from the sale of its stock
through public offerings and private placements, sales of ADAGEN(registered
trademark), sales of ONCASPAR(registered trademark), sales of its products for
research purposes, contract research and development fees, technology transfer
and license fees and royalty advances. At June 30, 1996 the Company had an
accumulated deficit of approximately $108,636,000. To date, ADAGEN and
ONCASPAR are the only products of the Company which have been approved for
marketing by the Food and Drug Administration (the "FDA"), having been approved
in March 1990 and February 1994, respectively. In 1993, the Company granted
exclusive U.S. marketing rights for ONCASPAR to Rhone-Poulenc Rorer
Pharmaceuticals, Inc. ("RPR") in consideration for which the Company has
received an aggregate of $6,000,000 of license fees. Under this license
agreement (the "Amended License Agreement"), the Company is entitled to a base
royalty of 10% for the year ended December 31, 1995 and of 23.5% thereafter,
until 2008. During 1995, RPR paid the Company $3,500,000 in advance royalties.
Payments of base royalties under the RPR agreement will be offset against a
credit in the original amount of $5,970,000, which represents the royalty
advance plus reimbursement of certain amounts due RPR under the original
agreement and interest expense. Through June 30, 1996, an aggregate of
$1,045,000 in royalties payable by RPR had been offset against the original
credit. The Company anticipates moderate growth of ONCASPAR sales to RPR and
increased royalties on RPR sales of ONCASPAR; however, there can be no
assurance that any particular sales level of ONCASPAR will be achieved or
maintained. The Company intends to pursue future licensing, marketing and
development arrangements that may result in additional fees to the Company
prior to its receiving revenues from commercial sales of its products which are
sufficient for the Company to earn a profit. There can be no assurance,
however, that the Company will be able to successfully consummate any such
arrangements or receive such fees in the future. Although the Company has been
receiving reimbursement from most third-party payors for ADAGEN, there can be
no assurance that reimbursement at these levels will continue. Lifetime limits
on benefits which are included in most private health insurance policies could
permit insurers to cease reimbursement for ADAGEN. Potential investors should
be aware of the difficulties a biopharmaceutical enterprise such as the Company
encounters, especially in view of the intense competition in the pharmaceutical
industry in which the Company competes. There can be no assurance that the
Company's plans will either materialize or prove successful, that its products
under development will be successfully developed or that its products will
generate revenues sufficient to enable the Company to earn a profit.
NEED FOR FINANCING. The Company's current sources of liquidity are its
cash reserves, and interest earned on such cash reserves, sales of ADAGEN,
sales of ONCASPAR, sales of its products for research purposes, and license
fees. There can be no assurance as to the level of sales of the Company's FDA
approved products, ADAGEN and ONCASPAR, or the amount of royalties realized
from the commercial sale of ONCASPAR pursuant to the Company's license with
RPR. Total cash reserves, including short term investments, as of June 30,
1996 were approximately $12,666,000. Management believes that the foregoing
sources of liquidity, will be sufficient to meet the Company's anticipated cash
requirements, based on current spending levels, for approximately the next two
years. The Company's continued operations thereafter will depend upon its
ability to realize revenues from the commercial sale of its products which are
sufficient to cover its operating and capital expense requirements, raise funds
through equity or debt financing, or obtain significant contract research and
development fees or license fees. To the extent the Company is unable to obtain
funds, it may be required to curtail its activities or sell additional
securities. There can be no assurance that any of the foregoing fund raising
activities will successfully meet the Company's anticipated cash needs.
E4-1
<PAGE>
RAW MATERIALS AND DEPENDENCE UPON SUPPLIERS. The Company is currently
producing many of the unmodified compounds utilized in products it has under
development, including purified bovine hemoglobin for use in its PEG-hemoglobin
product. There can be no assurance that the purified bovine hemoglobin used in
the manufacture of PEG-hemoglobin can be produced in the amounts necessary to
expand the current clinical trials. The Company may be required to obtain
supply contracts with outside suppliers for certain unmodified compounds. The
Company does not produce the unmodified adenosine deaminase used in the
manufacture of ADAGEN or the unmodified L-asparaginase used in the manufacture
of ONCASPAR and has a supply contract with an outside supplier for each of
these unmodified proteins. Delays in obtaining or an inability to obtain any
unmodified compound which the Company does not produce, including unmodified
adenosine deaminase, unmodified L-asparaginase or unmodified bovine blood could
have a material adverse effect on the Company. In the event the Company is
required to locate an alternate supplier for an unmodified compound utilized in
a product which is being sold commercially or which is in clinical development,
the Company will likely be required to do additional testing, which could cause
delays and additional expenses, to demonstrate that the alternate supplier's
material is biologically and chemically equivalent to the unmodified compound
previously used. Such evaluations could include chemical, pre-clinical and
clinical studies and could delay development of a product which is in clinical
trials, limit commercial sales of an FDA approved product and cause the Company
to incur significant additional expense. Requirements for such evaluations
would be determined by the stage of the product's development and the reviewing
division of the FDA. If such alternate material is not demonstrated to be
chemically and biologically equivalent to the previously used unmodified
compound, the Company will likely be required to repeat some or all of the
pre-clinical and clinical trials conducted for such compound. The marketing of
an FDA approved drug could be disrupted while such tests are conducted. Even
if the alternate material is shown to be chemically and biologically equivalent
to the previously used compound, the FDA may require the Company to conduct
additional clinical trials with such alternate material.
PATENTS AND PROPRIETARY TECHNOLOGY. The Company has licensed, and been
issued, a number of patents in the United States and other countries and has
other patent applications pending to protect its proprietary technology.
Although the Company believes that its patents provide adequate protection for
the conduct of its business, there can be no assurance that such patents will
be of substantial protection or commercial benefit to the Company, will afford
the Company adequate protection from competing products, will not be challenged
or declared invalid, or that additional United States patents or foreign patent
equivalents will be issued to the Company. The degree of patent protection to
be afforded to biotechnological inventions is uncertain and the Company's
products are subject to this uncertainty. The Company is aware of certain
issued patents and patent applications, and there may be other patents and
applications, containing subject matter which the Company or its licensees or
collaborators may require in order to research, develop or commercialize at
least some of the Company's products. There can be no assurance that licenses
under such subject matter will be available on acceptable terms. The Company
expects that there may be significant litigation in the industry regarding
patents and other proprietary rights and, if Enzon were to become involved in
such litigation, it could consume a substantial amount of the Company's
resources. In addition, the Company relies heavily on its proprietary
technologies for which pending patent applications have been filed and on
unpatented know-how developed by the Company. Insofar as the Company relies on
trade secrets and unpatented know-how to maintain its competitive technological
position, there can be no assurance that others may not independently develop
the same or similar technologies. Although the Company has taken steps to
protect its trade secrets and unpatented know-how, third-parties nonetheless
may gain access to such information.
Research Corporation Technologies, Inc. ("Research Corporation") holds
the original patent upon which the PEG Process is based. Research
Corporation's patent in the United States expires in December 1996 and its
patents in certain foreign countries have expired. Although the Company has
obtained numerous improvement patents in connection with the PEG Process which
it believes represent state of the art technology, there can be no assurance
that any of these patents will enable the Company to prevent infringement or
that competitors will not develop competitive products outside the protection
that may be afforded by these patents. The Company is aware that others have
also filed patent applications and have been granted patents in the United
States and other countries with respect to the application of PEG to proteins.
Upon the expiration of the Research Corporation patent, other parties will be
permitted to make, use, or sell products covered by the claims of the Research
Corporation patent, subject to other patents, including those held by the
Company. The Company does not believe that the expiration of the Research
Corporation patent will have a material adverse effect on the Company, but
there can be no assurance that this will be the case.
E4-2
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MARKETING UNCERTAINTIES AND DEPENDENCE ON MARKETING PARTNERS. Other than
ADAGEN, which the Company markets on a worldwide basis to a small patient
population, the Company does not engage in the direct commercial marketing of
any of its products and therefore does not have an established sales force.
For certain of its products, the Company has provided exclusive marketing
rights to its corporate partners in return for royalties to be received on
sales. With respect to ONCASPAR, the Company has granted RPR exclusive
marketing rights in North America. The Company expects to retain marketing
partners to market ONCASPAR in other foreign markets and is currently pursuing
arrangements in this regard. There can be no assurance that such discussions
will result in the Company concluding such arrangements. Regarding the
marketing of certain of the Company's other future products, the Company
expects to evaluate whether to create a sales force to market certain products
in the United States or to continue to enter into license and marketing
agreements with others for United States and foreign markets. These agreements
generally provide that all or a significant portion of the marketing of these
products will be conducted by the Company's licensees or marketing partners.
In addition, under certain of these agreements, the Company's licensee or
marketing partner may have all or a significant portion of the development and
regulatory approval responsibilities. Should the licensee or marketing partner
fail to develop a marketable product (to the extent it is responsible for
product development) or fail to market a product successfully, if it is
developed, the Company's business may be adversely affected. There can be no
assurance that the Company's marketing strategy will be successful. Under the
Company's marketing and license agreements, the Company's marketing partners
and licensees may have the right to terminate the agreement and abandon the
product at any time for any reason without significant payments. The Company
is aware that certain of its marketing partners are pursuing parallel
development of products on their own and with other collaborative partners
which may compete with the licensed products and there can be no assurance that
the Company's other current or future marketing partners will not also pursue
such parallel courses.
REIMBURSEMENT FROM THIRD-PARTY PAYORS. Sales of the Company's products
will be dependent in part on the availability of reimbursement from third-party
payors, such as governmental health administration authorities, private health
insurers and other organizations. There can be no assurance that such
reimbursement will be available or will permit the Company to sell its products
at price levels sufficient for it to realize an appropriate return on its
investment in product development. Since patients who receive ADAGEN will be
required to do so for their entire lives (unless a cure or another treatment is
developed), lifetime limits on benefits which are included in most private
health insurance policies could permit insurers to cease reimbursement for
ADAGEN.
GOVERNMENT REGULATION. The manufacturing and marketing of pharmaceutical
products in the United States is subject to stringent governmental regulation
and the sale of any of the Company's products for use in humans in the United
States will require the prior approval of the FDA. Similar approvals by
comparable agencies are required in most foreign countries. The FDA has
established mandatory procedures and safety standards which apply to the
clinical testing, manufacture and marketing of pharmaceutical products.
Pharmaceutical manufacturing facilities are also regulated by state, local and
other authorities. Obtaining FDA approval for a new therapeutic may take
several years and involve substantial expenditures. ADAGEN was approved by the
FDA in March 1990. ONCASPAR was approved by the FDA in February 1994 and in
Germany in November 1994 for patients with acute lymphoblastic leukemia who are
hypersensitive to native forms of L-asparaginase, and in Russia in April 1993
for therapeutic use in a broad range of cancers. Except for these approvals,
none of the Company's other products have been approved for sale and use in
humans in the United States or elsewhere. There can be no assurance that the
Company will be able to obtain FDA approval for any of its other products.
Failure to obtain requisite governmental approvals or failure to obtain
approvals of the scope requested, will delay or preclude the Company or its
licensees or marketing partners from marketing their products, or limit the
commercial use of the products, and thereby may have a material adverse affect
on the Company's liquidity and financial condition.
E4-3
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INTENSE COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. Many
established biotechnology and pharmaceutical companies with resources greater
than those of the Company are engaged in activities that are competitive with
Enzon's and may develop products or technologies which compete with those of
the Company's. Although Enzon is not aware of any competitor which has achieved
the same level as the Company in utilizing PEG technology in developing drug
products, it is aware of other companies which are engaged in this field and
there can be no assurance that competitors will not successfully develop such
products in the future. Although there are other companies engaged in the
development of Single-Chain Antigen-Binding (SCA(registered trademark))
proteins, Enzon believes that these companies will be required to obtain a
license under Enzon's SCA patents in order to commercialize any such product.
There can be no assurance, however, that this will prove to be the case. Rapid
technological development by others may result in the Company's products
becoming obsolete before the Company recovers a significant portion of the
research, development and commercialization expenses incurred with respect to
those products. Enzon believes that the experience of certain of its personnel
in research and development, and its patents and proprietary know-how may
provide it with a competitive advantage in its field; however, there can be no
assurance that the Company will be able to maintain such a competitive
advantage, should it exist, in view of the greater size and resources of many
of its competitors. Other drugs or treatment modalities which are currently
available or that may be developed in the future, and which treat the same
diseases as those which the Company's products are designed to treat, may be
competitive with the Company's products.
POTENTIAL PRODUCT LIABILITY. The use of the Company's products during
testing or after regulatory approval entails an inherent risk of adverse
effects which could expose the Company to product liability claims. The
Company maintains product liability insurance coverage in the total amount of
$10,000,000 for claims arising from the use of its products in clinical trials
prior to FDA approval and for claims arising from the use of its products after
FDA approval. There can be no assurance that the Company will be able to
maintain its existing insurance coverage or obtain coverage for the use of its
other products in the future. Management believes that the Company maintains
adequate insurance coverage for the operation of its business at this time;
however, there can be no assurance that such insurance coverage and the
resources of the Company would be sufficient to satisfy any liability resulting
from product liability claims.
DIVIDEND POLICY AND RESTRICTIONS. The Company has paid no dividends on
its common stock, $.01 par value (the "Common Stock") since its inception and
does not plan to pay dividends on its Common Stock in the foreseeable future.
Except as may be utilized to pay the dividends payable on the Company's Series
A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"), any
earnings which the Company may realize will be retained to finance the growth
of the Company. In addition, the terms of the Series A Preferred Stock
restrict the payment of dividends on other classes and series of stock. The
holders of the Series B Convertible Preferred Shares and Series C Convertible
Preferred Shares are not entitled to dividends.
POSSIBLE VOLATILITY OF STOCK PRICE. Since the Company's initial public
offering, the market price of the Company's Common Stock has fluctuated over a
wide range and it is likely that the price of the Common Stock will fluctuate
in the future. Announcements regarding technical innovations, the development
of new products, the status of corporate collaborations and supply
arrangements, regulatory approvals, patent or proprietary rights or other
developments by the Company or its competitors could have a significant impact
on the market price of the Common Stock.
E4-4
