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, 1997 File Number 0-12957
[LOGO] 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: (732) 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 10, 1997 was approximately $153,784,000. There is no market
for the Series A Cumulative Convertible Preferred Stock, the only other class of
voting stock.
As of September 10, 1997, there were 30,888,290 shares of Common Stock, par
value $.01 per share, outstanding.
The Index to Exhibits appears on page 25.
Documents Incorporated by Reference
The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on December 2, 1997, 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.
1997 Form 10-K Annual Report
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners
and Management 24
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 25
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The following trademarks and service marks appear in this Annual Report:
ADAGEN(R) and ONCASPAR(R) are registered trademarks of Enzon, Inc.; SCA(R)
is a registered trademark of Enzon Labs Inc.; Elspar(R) is a registered
trademark of Merck & Co., Inc; INTRON A(R) is a registered trademark of
Schering-Plough Corporation; Hycamtin(TM) is a trademark of SmithKline
Beecham plc; Camptosar(R) 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(R))
proteins.
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.
The Company has received marketing approval from the United States Food and
Drug Administration ("FDA") for two of its products: (i) ONCASPAR(R), for the
indication of acute lymphoblastic leukemia ("ALL") in patients who are
hypersensitive to native forms of L-asparaginase and (ii) ADAGEN(R), the first
successful application of enzyme replacement therapy for an inherited disease to
treat a rare form of Severe Combined Immunodeficiency Disease ("SCID"), commonly
known as the "Bubble Boy Disease". ONCASPAR is the enzyme L-asparaginase
modified by the Company's PEG Process and ADAGEN is the enzyme adenosine
deaminase ("ADA") modified by the Company's PEG Process.
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") and in
Europe by Medac GmbH ("MEDAC"). The Company is entitled to royalties on the
sales of ONCASPAR by RPR, as well as manufacturing revenue from the production
of ONCASPAR. The Company's agreement with MEDAC requires MEDAC to purchase
ONCASPAR from the Company at a set price which increases over the term of the
agreement. RPR and MEDAC are currently conducting clinical trials to expand the
use and approved indications for ONCASPAR.
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, 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 expired in late 1996.
The Company has made significant improvements to the original PEG Process,
collectively referred to as Second Generation PEG Technology, and has applied
for and received numerous patents for such improvements. One of the components
of the Second Generation PEG Technology is new linker chemistries; the chemical
binding of the PEG to the unmodified protein. These new linkers provide an
enhanced binding of the PEG to the protein resulting in a more stable compound
with increased circulation life. The second generation technology also allows
PEG to bind to different parts of the protein, which may result in more activity
of the modified protein. Attachment of PEG to the incorrect site on the protein
can result in a loss of its activity or therapeutic effect.
Two products are currently in clinical trials using the Second Generation
PEG Technology; a PEG modified version of Schering-Plough Corporation's
("Schering-Plough") product, INTRON A(R) (interferon alfa 2b), a
genetically-engineered anticancer-antiviral drug, and the Company's product
PEG-hemoglobin, a hemoglobin-based oxygen-carrier being developed for the
radiosensitization of solid hypoxic tumors.
PEG-Intron A, a modified form of Schering-Plough's INTRON A, was developed
by Enzon to have longer
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lasting activity and an enhanced safety profile. PEG-Intron A is currently in a
large scale Phase III clinical trial in the United States and Europe. It is
expected that PEG-Intron A will be administered once a week, compared to the
current regimen for unmodified INTRON A of three times a week. During August
1997, Enzon received $2,500,000 in milestone payments from Schering-Plough as a
result of the product moving into Phase III clinical trials. Enzon is entitled
to an additional $3,000,000 in payments from Schering-Plough, subject to the
achievement of additional milestones in the product's development. The Company
is also entitled to royalties on worldwide sales of PEG-Intron A and has the
option to be the exclusive manufacturer of PEG-Intron A for the U.S. market.
Schering-Plough's sales of INTRON A were approximately $524 million in 1996. The
worldwide market for alpha interferon products is estimated to be in excess of
$1 billion. The patents covering Schering's INTRON A will begin to expire in
2001. The Company's Second Generation PEG Technology patents which cover the
modified product should offer extended patent life.
Preclinical studies conducted at Enzon, the University of Wisconsin School
of Veterinary Medicine and Dana Farber Cancer Institute, indicate that the
Company's hemoglobin-based oxygen-carrier, 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. It is estimated that
approximately 800,000 cases of solid hypoxic tumors are diagnosed each year in
the United States.
The Company is currently conducting a multi-dose, multi-center clinical
trial of PEG-hemoglobin in cancer patients receiving radiation treatment.
Patients entering this trial receive once-a-week infusions of PEG-hemoglobin
followed by five days of radiation treatment. The protocol for this study calls
for this regimen to be repeated for three weeks. The primary purpose of this
trial is to evaluate safety related to multiple doses of PEG-hemoglobin and
radiation therapy.
The Company also has developed a Third Generation PEG Technology that gives
PEG-modified compounds "Pro Drug" attributes. This is accomplished by attaching
PEG to a compound by means of a covalent bond that is designed to break down
over time, thereby releasing the therapeutic moiety (therapeutic portion 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 the "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 potentially large patient
populations. The Company is currently applying its Pro Drug/Transport Technology
to certain anticancer agents. Preliminary animal studies have shown that a
compound modified with the Company's Third Generation PEG Technology accumulates
in tumors. A PEG-modified version of camptothecin, a topo-1 inhibitor, is
currently in preclinical studies. The Company is preparing to file an
Investigational New Drug Application (IND) during the first half of calendar
1998.
The Company also has an extensive licensing program for its second
proprietary technology, SCA protein technology. SCA proteins are genetically
engineered proteins designed to overcome the problems hampering the diagnostic
and therapeutic use of conventional monoclonal antibodies. Preclinical 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 an active form inside
cells. SCA proteins can be produced through intracellular expression (inside
cells) more readily than monoclonal antibodies.
Currently, there are nine SCA proteins in Phase I or II clinical trials by
various corporations and institutions. 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 Company ("Bristol-Myers"), Baxter
Healthcare Corporation ("Baxter"), Eli Lilly & Co. ("Eli Lilly"), Alexion
Pharmaceuticals Inc. ("Alexion Pharmaceuticals"), 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.
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The Company also has a license agreement with Green Cross Corporation
("Green Cross") for the development of a recombinant Human Serum Albumin (rHSA),
a blood volume expander. Green Cross has reported that it recently completed a
Phase III trial for this indication in Japan. The agreement, which the Company
acquired as part of the acquisition of Genex Corporation in 1991, entitles Enzon
to a royalty on sales of an rHSA product sold by Green Cross. The Company and
Green Cross are currently attempting to resolve a dispute regarding the royalty
rate called for in the agreement. If the parties cannot come to an agreement,
the Company may proceed to arbitration to settle this issue.
Information contained in this Annual Report 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 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 U.S. 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
currently approved in the United States and Germany and is used in conjunction
with other chemotherapeutics to treat patients with ALL who are hypersensitive
(allergic) to native (unmodified) forms of L-asparaginase. ONCASPAR is marketed
in the U.S. by RPR and in Europe by MEDAC.
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(R).
In addition to pediatric ALL, native L-asparaginase sold by other companies
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, and in other additional indications,
including non-Hodgkins lymphoma. These indications represent larger patient
populations and revenue potential than the limited current approved indication.
RPR has completed two small pilot studies in the U.S. for treatment of adults
with ALL. These trials showed a response rate of greater than 90%. The Company
expects MEDAC to initiate similar trials in the near future.
The therapeutic value of unmodified L-asparaginase is limited by two
inherent aspects 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. 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 enabling its use in patients
who are allergic to unmodified L-asparaginase.
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RPR Agreement
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 provided 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 certain 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
on the Consolidated Balance Sheets as of June 30, 1997 and 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 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 upon one year's prior notice to Enzon. Upon any termination all
rights under the Amended RPR License Agreement revert to Enzon.
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 Product requirements for sales in
North America.
MEDAC Agreement
During October 1996, the Company entered into an exclusive license
agreement with MEDAC to sell ONCASPAR in Europe and Russia. The agreement
provides for MEDAC to purchase ONCASPAR from the Company at certain established
prices which increase over the initial five year term of the agreement. Under
the agreement, MEDAC is responsible for obtaining additional approvals and
indications in the licensed territories, beyond the currently approved
hypersensitive indication in Germany. Upon completion of a pharmacokinetics
study, MEDAC plans to file for approval in the rest of Europe and will be
required to meet certain minimum purchase requirements.
ADAGEN
ADAGEN, the Company's first FDA approved product, is currently being used
to treat 51 patients in seven countries. ADAGEN represents the first successful
application of enzyme replacement therapy for an inherited disease. ADAGEN, the
enzyme 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 Enzon. Distribution of
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ADAGEN in Europe and Japan 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. The Company's
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, 1997, 1996 and 1995
were $8,935,000, $8,696,000 and $8,305,000, respectively. Currently, the only
alternatives to ADAGEN treatment are well matched bone marrow transplants.
Patients that are unable to receive successful bone marrow transplants are
expected to require ADAGEN injections for the rest of their lives. Sales of
ADAGEN are expected to continue to be limited due to the small patient
population worldwide.
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, 1997, 1996 and 1995 were approximately $8,520,000, $10,124,000
and $12,084,000, respectively. The decreases in research and development
expenditures were due to reductions in research administration and clinical
staff and the narrowing of the Company's research efforts to focus on
technologies and products with large revenue potential.
The Company's research and development activities during fiscal 1997
concentrated primarily on the continued development of PEG-hemoglobin,
preclinical work on PEG-Camptothecin, the Company's first product to use third
generation Pro Drug/Transport Technology and continued research and development
of the Company's proprietary technologies.
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 and 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 a
desired site in the body. It is believed that this will result in less toxicity
to the surrounding tissue and increased 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 therapeutic proteins or chemical compounds
that are difficult to deliver. PEG is a relatively non-reactive and non-toxic
polymer that is typically used in many food and pharmaceutical 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 its 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 that
significantly improve their therapeutic performance, and in some cases enables
proteins to be therapeutically effective which, in their unmodified forms, have
proven to be non-efficacious. The PEG Process was originally covered by a broad
patent which expired in late 1996.
The Company has developed proprietary know-how, collectively referred to as
Second Generation PEG
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Technology, 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 desired 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. These improvements allow PEG to bind to
different parts of the molecules, which may result in more activity of the
modified protein. Attachment of PEG to the wrong site on the protein can result
in a loss of its activity or therapeutic effect. The main objective of the first
and second generation technology is to permanently attach PEG to the unmodified
protein. Currently, there are two second generation products in clinical trials,
including a PEG modified version of Schering-Plough's INTRON A, which is in a
Phase III clinical trial in the U.S. and Europe. See "Strategic Alliances and
License Agreements - Schering". The Company has received patents for numerous
improvements to the PEG Process. See "Patents".
Pro Drug/Transport Technology
The Company recently has developed a third generation PEG technology that
gives PEG-modified compounds "Pro Drug" attributes. This is accomplished by
attaching PEG to a compound 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 by others.
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
cancer chemotherapy agents. One such compound, a PEG-modified version of
camptothecin, a topo-1 inhibitor, is in preclinical studies in preparation for
an anticipated IND filing during the first half of calendar 1998. The Company
believes that the covalent attachment of PEG can inactivate the drug's toxic
mechanisms, while allowing the drug to circulate in the bloodstream for longer
periods of time, thereby allowing the compound to accumulate in the proximity of
the tumor site. Preliminary animal studies have shown that a compound modified
with the Company's Third Generation PEG Technology accumulates in tumors. The
covalent bond used in the third generation technology to attach the PEG to the
drug is designed to deteriorate over time, resulting in the PEG falling off and
allowing the compound to resume its activity. Animal studies conducted by the
Company thus far have demonstrated increases in the therapeutic index of
compounds modified by the Company's Pro Drug/Transport Technology. 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.
The binding specificity of SCA proteins has been demonstrated through the
preparation and in vitro testing of
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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
preclinical studies that SCA proteins localize to specific tumors and rapidly
penetrate the tumors.
Currently, there are nine SCA proteins in Phase I or II 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 that those organizations who have not yet licensed this
technology will have to obtain a license from Enzon to commercialize these
products. The following are some examples of research being conducted in the SCA
area:
Scientists at the University of Alabama are conducting research
utilizing SCA proteins produced inside the body at the cell level, in gene
therapy for ovarian cancer. SCA proteins produced in an intracellular
environment (inside the cell) via gene therapy are known as intrabodies.
Animal data generated from these studies has revealed that SCA proteins
produced through intracellular expression increased the response of several
prevalent human cancers (e.g. breast, lung, ovarian, stomach) to
chemotherapy. A clinical protocol has been published by these investigators
for this application.
The Company's licensee, Alexion Pharmaceuticals, has developed an SCA
protein application using monomeric humanized scFv directed against
complement protein C5, which causes inflammation in cardiopulmonary bypass
and myocardial infarction patients. Alexion's compound is designed to block
C5 production, which causes inflammation. Alexion has completed a Phase
I/II trial in 16 coronary bypass patients. The trial showed that the drug
was well tolerated and showed biological efficacy. Alexion has moved this
compound into a Phase II clinical trial.
Another application of the Company's SCA technology is in the area of
"T-Bodies". T-Cells are one of the body's natural defenses against cancer
and infections. T-Body technology is the adding of the gene code of an SCA
protein to a T-cell which has been removed from the body. The T-Cells can
be modified through recombinant technology to have the SCA receptors
specific to targeting a certain antigen, thereby concentrating the T-Cell
on a specific area. Cell Genesys, an Enzon licensee, has had success in
applying T-Bodies in preclinical studies with the CC49 SCA protein. In May
1997, an IND application was filed for a clinical trial focusing on colon
cancer. Another clinical trial involving T-Body technology is underway at
the National Cancer Institute and extensive T-body research has been
reported by several European laboratories.
SCA proteins are also being used in antibody engineering, through the
use of phage display library technology, for isolation of antibody
specificities. Using phage display technology, it is possible to
conveniently isolate a human high-affinity SCA protein specificity to
virtually any target antigen, including anti-self specificities. Cambridge
Antibody Technology Ltd. ("CAT"), a pioneer in the development of
combinatorial antibody libraries (the "Phage Antibody System"), currently
has several licensing agreements with global pharmaceutical and
biotechnology companies for use of this library. Because CAT licenses
Enzon's SCA technology for this library, Enzon should receive royalties on
any SCA protein products developed with this technology.
The Company believes it has a dominant patent position in SCA protein
technology and has received numerous patents, the most recent of which expires
in 2013. See "Patents".
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".
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Products and Technologies Under Development
Hemoglobin-Based Oxygen-Carrier
The Company is currently developing a hemoglobin-based oxygen-carrier,
PEG-hemoglobin, for use as a radiosensitizer, in conjunction with radiation
treatment of solid hypoxic tumors. Over the last three years, the Company has
focused its development on those indications for which donated whole blood is
not effective. This is due to the relative safety, adequate supply and low cost
of the current donated blood supply. The Company believes that the
radiosensitization indication also offers advantages in the FDA approval
process.
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.
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.
The Company has 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. 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 regimen to be repeated 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 and glioma are
diagnosed each year in the United States.
The Company believes that one of the significant advantages that
PEG-hemoglobin has over other products currently being developed is its long
circulation life. The Company believes that hemoglobin, modified through its PEG
Process, will overcome the well-documented problems of toxicity and short
circulating life associated with other forms of hemoglobin-based oxygen-carriers
that have been developed. The extended circulating life demonstrated in the
Phase I safety study may enable 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 regular veterinary care and testing. This
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 recently upgraded pilot plant
at its facility 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 III clinical trials.
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<PAGE>
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 third generation Pro Drug/Transport
Technology to oncolytic chemical compounds. The Company believes that by
adjusting the way PEG is covalently attached to oncolytics, PEG attachment can
be used to inactivate the oncolytics's toxic mechanism, while allowing the
compound to circulate in the bloodstream for long periods of time, thereby
allowing the compound to accumulate in the proximity of tumor sites. Preliminary
animal tests have shown that a third generation PEG-modified compound
accumulates in tumors. The covalent bond used in the third generation technology
to attach PEG to the drug is designed to break down over time resulting in the
PEG falling off the compound, allowing the compound to resume its activity. The
Company has selected its first candidate for development, a PEG modified form of
camptothecin, a topo-1 inhibitor. This compound is currently in preclinical
studies in preparation for the anticipated filing of an IND in the first half of
calendar 1998. Camptothecin is a substance that for many years has been known to
be a very effective oncolytic agent with drug delivery problems. Recently,
camptothecin derivatives, Hycamtin(TM) and Camptosar(R), have been approved by
the FDA. While these two new products improved the solubility of camptothecin,
the Company believes that its Pro Drug/Transport Technology has additional
delivery advantages and increased therapeutic value.
Single-Chain Antigen-Binding (SCA) Proteins
The Company's research efforts in the SCA protein area are designed to
expand the technology and enhance the Company's dominant patent position, as
opposed to internal development of products in this area.
Currently, there are nine SCA proteins in Phase I or II clinical trials by
various corporations and institutions, including a product developed by one of
the Company's licensees, Alexion Pharmaceuticals, which is in Phase II clinical
trials. Some of the areas being explored are cancer therapy, cardiovascular
indications and AIDS.
Strategic Alliances and License Agreements
In addition to internal product development, the Company utilizes joint
development and licensing arrangements with other pharmaceutical and
biopharmaceutical companies, to expand the pipeline of products utilizing its
proprietary PEG and SCA protein 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. Currently, the
Company's partners have two products in Phase III clinical trials and one in
Phase II.
Schering Agreement
The Company and Schering Corporation ("Schering"), a subsidiary of
Schering-Plough, entered into an agreement in November 1990 (the "Schering
Agreement") to apply the Company's PEG Process to develop a modified form of
Schering-Plough's INTRON A (interferon alfa 2b), a genetically-engineered
anticancer and antiviral drug with longer activity. A PEG-modified version of
INTRON A is currently in a large scale Phase III clinical trial in the United
States and Europe. The trial calls for administration of PEG-Intron A once a
week as compared to the current regimen for unmodified INTRON A of three times a
week. PEG-Intron A utilizes the Company's Second Generation PEG Technology.
INTRON A is currently approved in the United States for use in chronic
hepatitis B, chronic hepatitis C,
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<PAGE>
AIDS-related Kaposi's sarcoma, venereal warts, hairy cell leukemia and malignant
melanoma. It is approved for use in 65 countries for 16 disease indications.
Schering-Plough reported 1996 INTRON A sales of $524 million worldwide.
Under the license agreement, which was amended in 1995, the Company
transferred proprietary manufacturing rights for PEG-Intron A to Schering for
$3,000,000. The Company will 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. In connection with the amendment of the agreement in 1995, 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 has the option to become Schering's exclusive
manufacturer of PEG-Intron A for the United States market upon FDA approval of
such product.
Enzon is entitled to receive future sequential payments, subject to the
achievement of certain milestones in the product's development program. During
August 1997, Enzon received $2,500,000 in milestone payments from Schering as a
result of the product moving into Phase III clinical trials. Enzon is entitled
to an additional $3,000,000 in payments from Schering, subject to the
achievement of certain milestones in the product's development.
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.
Green Cross Agreement
The Company has a license agreement with Green Cross for the development of
a recombinant Human Serum Albumin (rHSA), a blood volume expander. Green Cross
has reported that it recently completed a Phase III trial for this indication in
Japan. The agreement, which the Company acquired as part of the acquisition of
Genex Corporation in 1991, entitles Enzon to a royalty on sales of an rHSA
product sold by Green Cross in much of Asia and North and South America.
Currently, Green Cross is only developing this product for the Japanese market.
The royalty is payable under the agreement for the first fifteen years of
commercial sales. The parties are currently attempting to resolve a dispute
regarding the royalty rate called for in the agreement. If the parties cannot
come to an agreement, the Company may proceed to arbitration to settle this
issue.
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SCA Protein Technology Licenses
The Company's SCA protein licenses are primarily on a non-exclusive basis,
and in most cases, provide for the partner to pay for all development costs and
to market the products. Enzon receives a royalty on the sale of any SCA protein
product developed, as well as in most cases, payments based on the achievement
of certain milestones in the product development. The Company has approximately
16 non-exclusive SCA protein licences. The following is a list of certain of the
Company's SCA protein licenses.
<TABLE>
<CAPTION>
Corporate Partner Agreement Date Product Disease or Indica Program Status
- ----------------- -------------- ------- ----------------- --------------
<S> <C> <C> <C> <C>
Alexion Pharmaceuticals, Inc. May 1996 Complement Cardiopulmonary Phase II
Protein C5 bypass and myocar-
dial infarction
Baxter Healthcare Corporation November 1992 SCA proteins Cancer Research
Bristol-Myers Squibb Company September 1993/July 1994 SCA proteins All Therapeutics Phase I/II
Cambridge Antibody Technology Ltd. September 1996 Phage Display Library All Therapeutics Research
Cell Genesys Inc. November 1993 SCA/Receptor Technology Cell Therapy IND Submitted
Eli Lilly and Co. December 1992 SCA proteins Undetermined Research
Gencell Division of RPR December 1995 SCA proteins Gene Therapy Research
</TABLE>
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 on sales.
With respect to ONCASPAR, the Company has granted exclusive marketing rights to
RPR for North America and to MEDAC for Europe and Russia, pursuant to the
agreements described in "Products on the Market - ONCASPAR".
The Company expects to retain marketing partners for 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
partners 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
supplier of PEG, in the event it becomes necessary, without material disruption
of its business.
The Company manufactures its two FDA approved products; ADAGEN and ONCASPAR
in its South Plainfield, New Jersey facility. Prior to the approval of its
product and on a continuing basis, the Company's facility is inspected by two
branches of the FDA, the Center for Drugs Evaluation and Research and the Center
for Biologics Evaluation and Research, for compliance with the FDA's current
Good Manufacturing Practices. The facility has also been inspected by the
Canadian Health Protection Branch and the German Federal Institute for Drugs and
Medical Devices, the
13
<PAGE>
equivalent of the FDA in those countries. The manufacturing facility was granted
an establishment license by the FDA in February 1994.
Except for PEG-hemoglobin, the Company purchases the unmodified compounds
utilized in its approved products and products under development from outside
suppliers. The Company has a supply contract with an outside supplier for the
unmodified ADA used in the manufacture of ADAGEN and the unmodified
L-asparaginases used in the manufacture of ONCASPAR. The Company is currently
discussing extending its supply agreement for unmodified L-asparaginase used in
the U.S. market, which expires on December 31, 1997. The Company purchases
unmodified L-asparaginase used in the production of ONCASPAR for MEDAC from a
different supplier.
During the fiscal year ended June 30, 1997, the Company wrote-off
approximately $592,000 of unmodified L-asparaginase purchased under its U.S.
supply contract. 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
and continued expansion into markets outside the U.S. 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 currently obtains its raw hemoglobin from two small colonies of
animals which are isolated and receive regular veterinary care and testing. This
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.
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.
Delays in obtaining or an inability to obtain any unmodified compound which
the Company does not produce, including unmodified ADA 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, preclinical 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
preclinical 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, preclinical
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 IND, which is filed to obtain approval to begin
human clinical testing. The human clinical testing
14
<PAGE>
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 for
marketing in the U.S. during 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.
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 ADA deficient
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 National Institute of Health, ("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 patients
in these trials are also receiving ADAGEN treatment in addition to the gene
therapy. 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 ADA deficient SCID. To date, patients in gene therapy
clinical trials have not been able to stop ADAGEN treatment and therefore, the
trial has been inconclusive.
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 to unmodified forms of L-asparaginase. The long-term
survival and cure of ALL patients generally depends upon achieving a sustainable
first remission. Currently, there is one unmodified form of L-asparaginase
available in the United States (Elspar) and several available in Europe. The
Company believes that ONCASPAR has 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
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<PAGE>
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.
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.
These "synthetic allosteric modifier" compounds are currently being studied in
clinical trials for their 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.
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 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 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.
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 a
greater reduction in tumor size.
There are several technologies which compete with the Company's SCA protein
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 organizations have active
programs in SCA proteins. The Company believes that its patent position on SCA
proteins will require companies that have not licensed its SCA protein patents
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.
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The original PEG Process patent which was licensed from Research
Technologies Corp. expired 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 the expiration of the original
PEG Process patent 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 pending 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 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 and 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(TM)) 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.
Employees
As of June 30, 1997, Enzon employed 86 persons, of whom 31 were engaged in
research and development activities, 34 were engaged in manufacturing, and 21
were engaged in administration and management. As of June 30, 1997, the Company
had 16 employees who hold Ph.D. degrees. The Company believes that it has been
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.
Item 2. Properties
The Company owns no real property. The following are all of the facilities
that Enzon currently leases:
<TABLE>
<CAPTION>
Approx. Approx.
Principal Square Annual Lease
Location Operations Footage Rent Expiration
-------- ---------- ------- ---- ----------
<S> <C> <C> <C> <C>
20 Kingsbridge Road Research & Development 56,000 $496,000(1) June 15, 2007
Piscataway, NJ and Administrative
40 Cragwood Road Warehousing 88,000 845,000(2) December 31, 1998
S. Plainfield, NJ
300 Corporate Ct. Manufacturing 24,000 183,000 March 31, 2007
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 sub-rental income of $221,000; the sublease is for approximately
27,412 square feet.
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<PAGE>
The Company believes that its facilities are well maintained and generally
adequate for its present and future anticipated needs.
Item 3. Legal Proceedings
The Company is being sued, in the United States District Court for the
District of New Jersey, by a former financial advisor asserting that under the
May 2, 1995 letter agreement ("Letter Agreement") between Enzon and LBC Capital
Resources Inc. ("LBC"), LBC was entitled to a commission in connection with the
Company's January and March 1996 private placements, comprised of $500,000 and
warrants to purchase 1,000,000 shares of Enzon common stock at an exercise price
of $2.50 per share. LBC has also asserted that it is entitled to an additional
fee of $175,000 and warrants to purchase 250,000 shares of Enzon common stock
when and if any of the warrants obtained pursuant to the private placements are
exercised. LBC has claimed $3,000,000 in compensatory damages, plus punitive
damages, counsel fees and costs for the alleged breach of the Letter Agreement.
The Company believes that no such commission was due under the Letter Agreement
and denies any liability under the Letter Agreement. The Company intends to
defend this lawsuit vigorously.
There is no other pending material litigation 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, 1997 and 1996, as reported by the NASDAQ
National Market. The quotations shown represent inter-dealer prices without
adjustment for retail markups, markdowns or commissions, and may not necessarily
reflect actual transactions.
High Low
---- ---
Year Ended June 30, 1997
First Quarter 3 1/2 2 1/16
Second Quarter 3 1/4 2 1/8
Third Quarter 3 1/2 2 3/8
Fourth Quarter 3 1/16 2 1/8
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
As of September 10, 1997 there were 2,810 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.
19
<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, 1997.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 12,727,052 $ 12,681,281 $ 15,826,437 $ 14,797,499 $ 8,414,349
Net Loss $ (4,557,025) $ (5,175,279) $ (6,291,491) $(16,495,226) $(24,601,310)
Net Loss per Share $ (0.16) $ (.20) $ (.26) $ (.71) $ (1.15)
Dividends on
Common Stock None None None None None
</TABLE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $16,005,278 $21,963,856 $19,184,042 $20,543,252 $33,920,859
Long-Term
Obligations $ -- $ 1,728 $ 4,076 $ 115,733 $ 141,772
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Fiscal Years Ended June 30, 1997, 1996 and 1995
Revenues. Revenues for the year ended June 30, 1997 increased to
$12,727,000 as compared to $12,681,000 for fiscal 1996. 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
increased by 10% to $11,596,000 for the year ended June 30, 1997 as compared to
$10,502,000 for the prior year. The increase was due to an increase in ONCASPAR
revenues and an increase in ADAGEN sales of approximately 3%, resulting from an
increase in patients receiving ADAGEN treatment. Net sales of ADAGEN, which is
marketed by Enzon, for the years ended June 30, 1997 and 1996 were $8,935,000
and $8,696,000, respectively. ONCASPAR, the Company's other approved product, is
marketed in the U.S. by RPR and in Europe by MEDAC. ONCASPAR revenues increased
due to an increase in sales of ONCASPAR by RPR as well as an increase in the
royalty rate under the RPR agreement during the second half of fiscal 1996, to
23.5% as compared to the former rate of 10.0%. The increase was also due to the
commencement of shipments during fiscal 1997 of ONCASPAR to MEDAC for the
European market. 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 its
partners and increased royalties on RPR sales of ONCASPAR for the currently
approved indication. RPR and MEDAC are conducting clinical trials to expand the
use of ONCASPAR beyond its current approved indication which could also result
in additional revenues from this product. There can be no assurance that any
particular sales levels of ONCASPAR or ADAGEN will be achieved or maintained.
Contract revenue for the year ended June 30, 1997 decreased by 48% to
$1,131,000, as compared to $2,179,000 for fiscal 1996. The decrease was
principally due to the one-time gain, in the prior year, related to the exercise
of warrants received from Neoprobe Corporation and sale of the underlying
securities. The warrants were consideration related to a licensing agreement for
the Company's SCA protein technology. During the years ended June 30, 1997 and
1996, the Company had export sales of $2,029,000 and $2,270,000, respectively.
Sales in Europe were $1,600,000 and $1,858,000 for the years ended June 30, 1997
and 1996, respectively.
Revenues for the year ended June 30, 1996 decreased by 20% to $12,681,000
as compared to $15,826,000 for fiscal 1995. 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
20
<PAGE>
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. Under the Company's amended agreement with Schering, the Company
transferred the know-how and non U.S. manufacturing rights for PEG-Intron A to
Schering. It is anticipated that Schering will manufacture all future clinical
trial material. This decrease was offset in part by increased ADAGEN sales and
increased revenues from ONCASPAR, which is marketed by RPR, of approximately
$640,000. ADAGEN sales for the years ending 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.
Cost of Sales. Cost of sales, as a percentage of sales, decreased to 33%
for the year ended June 30, 1997 as compared to 34% for fiscal 1996. The
decrease was due to a reduction in the write-off of excess raw material used in
the production of ONCASPAR.
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 4 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.
Research and Development. Research and development expenses decreased by
16% for both of the years ended June 30, 1997 and 1996, when compared to the
prior years. The decreases were primarily due to (i) reductions in personnel
made during fiscal 1996, principally in the clinical and research administration
areas, and related costs, such as payroll taxes and benefits and (ii) other cost
containment measures resulting from the narrowing of the Company's research
efforts to focus on technologies and products with large revenue potential.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 1997 decreased by 8% to
$5,528,000 from $6,011,000 for the year ended June 30, 1996. The decrease was
due to (i) reductions in personnel and related costs, such as payroll taxes and
benefits, and (ii) other cost containment measures taken by the Company.
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, (ii) a reduction in facility and occupancy
costs, and (iii) other cost containment measures taken by the Company.
Other Income/Expense. Other income/expense decreased by $1,218,000 to
$605,000 for the year ended June 30, 1997 as compared to $1,823,000 last year.
The decrease was due principally to the recognition in the prior year as other
income of approximately $1,313,000 representing the unused portion of an advance
received under a development and license agreement with Sanofi Winthrop
("Sanofi"). During October 1995, the Company learned that Sanofi intended to
cease development of PEG-SOD (Dismutec(TM)) 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
recognized as other income the amount due Sanofi previously recorded as a
current liability.
Other income/expense increased by $829,000 to $1,823,000 for the year ended
June 30, 1996 as compared to $994,000 for the year ended June 30, 1995. The
increase was due principally to the recognition during fiscal 1996 of the Sanofi
advance discussed above.
21
<PAGE>
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS
128 establishes standards for computing and presenting earnings per share. In
accordance with the effective date of SFAS 128, the Company will adopt SFAS 128
as of December 31, 1997. This statement is not expected to have a material
impact on the Company's consolidated financial statements.
Liquidity and Capital Resources
Enzon had $8,316,000 in cash and cash equivalents as of June 30, 1997. 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, 1997 decreased by $4,350,000 from June 30, 1996. The
decrease in cash reserves was the result of the funding of operations.
During August 1997, the Company received $2,500,000 from Schering in
milestone payments under the Company's license agreement for PEG Intron-A. The
payments were the result of PEG Intron-A moving into Phase III clinical trials.
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 an original 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, 1997, an aggregate of $2,377,000 in royalties
payable by RPR has been offset against the original credit.
As of June 30, 1997, 940,808 shares of 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, 1997, there were accrued and unpaid dividends totaling $1,585,000 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.
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
and one-half 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.
22
<PAGE>
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
Not applicable.
23
<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 2, 1997.
24
<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>
Page Number
or
Exhibit Incorporation
Number Description By Reference
------ ----------- ------------
<S> <C> <C>
3(i) Certificate of Incorporation, as amended ^
3(ii) By-laws, as amended *(4.2)
3(iii) Certificate of Designations, Preferences and Rights of Series D Convertible
Preferred Stock ^^^^3(iii)
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)
10.4 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 Employment Agreement with Peter G. Tombros dated as of
April 5, 1997 o
10.16 Stock Purchase Agreement dated as of June 30, 1995 ~~~(10.16)
10.17 Securities Purchase Agreement dated as of January 31, 1996 ~~~(10.17)
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
10.18 Registration Rights Agreements dated as of January 31, 1996 ~~~(10.18)
10.19 Warrants dated as of February 7, 1996 and issued pursuant to the Securities
Purchase Agreement dated as of January 31, 1996 ~~~(10.19)
10.20 Securities Purchase Agreement dated as of March 15, 1996 ^(10.20)
10.21 Registration Rights Agreement dated as of March 15, 1996 ^(10.21)
10.22 Warrant dated as of March 15, 1996 and issued pursuant to the Securities Purchase
Agreement dated as of March 15, 1996 ^(10.22)
10.23 Amendment dated March 25, 1994 to License Agreement dated
September 7, 1989 between the Company and Research Corporation
Technologies, Inc. ^^^(10.23)
10.24 Independent Directors' Stock Plan ^^^(10.24)
10.25 Stock Exchange Agreement dated February 28, 1997, by and between the
Company and GFL Performance Fund Ltd. ^^^^(10.25)
10.26 Agreement Regarding Registration Rights Under Registration Rights Agreement
dated March 10, 1997, by and between the Company and Clearwater Fund IV LLC ^^^^(10.26)
21.0 Subsidiaries of Registrant o
23.0 Consent of KPMG Peat Marwick LLP o
27.0 Financial Data Schedule o
99.0 Factors to Consider in Connection with Forward-Looking Statements o
</TABLE>
o 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, 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.
26
<PAGE>
~~ 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.
~~~ 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.
^^^ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 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, 1997 and incorporated herein by
reference thereto.
(b) Reports on Form 8-K
None
27
<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 26, 1997 By: /s/ Peter G. Tombros
--------------------
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:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Peter G. Tombros President, Chief Executive September 26, 1997
- ------------------------- Officer and Director
Peter G. Tombros (Principal Executive Officer)
/s/ Kenneth J. Zuerblis Vice President, Finance September 26, 1997
- ------------------------- and Chief Financial Officer
Kenneth J. Zuerblis (Principal Financial and
Accounting Officer)
/s/ Randy H. Thurman Chairman of the Board September 26, 1997
- -------------------------
Randy H. Thurman
/s/ Rolf A. Classon Director September 26, 1997
- -------------------------
Rolf A. Classon
/s/ Rosina B. Dixon Director September 26, 1997
- -------------------------
Rosina B. Dixon
/s/ Robert LeBuhn Director September 26, 1997
- -------------------------
Robert LeBuhn
Director September 26, 1997
- -------------------------
A.M. "Don" MacKinnon
</TABLE>
28
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Index
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets -- June 30, 1997 and 1996 F-3
Consolidated Statements of Operations -- Years ended
June 30, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity --
Years ended June 30, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows -- Years ended
June 30, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements - Years
ended June 30, 1997, 1996 and 1995 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
September 8, 1997
F-2
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,315,752 $ 12,666,050
Accounts receivable 2,433,762 2,123,691
Inventories 859,873 985,378
Accrued interest receivable 19,643 50,587
Prepaid expenses and other current assets 68,089 383,731
------------- -------------
Total current assets 11,697,119 16,209,437
------------- -------------
Property and equipment 15,676,525 15,640,823
Less accumulated depreciation and amortization 12,923,802 11,617,690
------------- -------------
2,752,723 4,023,133
------------- -------------
Other assets:
Investments 78,293 78,293
Deposits and deferred charges 34,575 55,945
Patents, net 1,442,568 1,597,048
------------- -------------
1,555,436 1,731,286
------------- -------------
Total assets $ 16,005,278 $ 21,963,856
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,910,737 $ 2,078,924
Accrued expenses 3,504,966 4,387,052
------------- -------------
Total current liabilities 5,415,703 6,465,976
------------- -------------
Accrued rent 870,012 980,908
Royalty advance - RPR 1,177,682 1,600,786
Other liabilities -- 1,728
------------- -------------
2,047,694 2,583,422
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares; issued and
outstanding 109,000 shares in 1997 and 169,000 in 1996 (liquidation
preferences aggregating $2,725,000 in 1997
and $8,725,000 in 1996) 1,090 1,690
Common stock-$.01 par value, authorized 40,000,000 shares;
issued and outstanding 30,797,735 shares in 1997 and
27,706,396 shares in 1996 307,977 277,064
Additional paid-in capital 121,426,159 121,272,024
Accumulated deficit (113,193,345) (108,636,320)
------------- -------------
Total stockholders' equity 8,541,881 12,914,458
------------- -------------
Total liabilities and stockholders' equity $ 16,005,278 $ 21,963,856
============= =============
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Sales $ 11,595,985 $ 10,501,985 $ 11,024,432
Contract revenue 1,131,067 2,179,296 4,802,005
------------ ------------ ------------
Total revenues 12,727,052 12,681,281 15,826,437
------------ ------------ ------------
Costs and expenses:
Cost of sales 3,840,198 3,545,341 2,918,737
Research and development expenses 8,520,366 10,123,525 12,083,960
Selling, general and administrative expenses 5,528,174 6,010,639 6,916,393
Restructuring expense -- -- 1,192,971
------------ ------------ ------------
Total costs and expenses 17,888,738 19,679,505 23,112,061
------------ ------------ ------------
Operating loss (5,161,686) (6,998,224) (7,285,624)
------------ ------------ ------------
Other income (expense):
Interest and dividend income 584,384 449,855 236,848
Interest expense (14,891) (12,886) (3,988)
Other 35,168 1,385,976 761,273
------------ ------------ ------------
604,661 1,822,945 994,133
------------ ------------ ------------
Net loss ($ 4,557,025) ($ 5,175,279) ($ 6,291,491)
============ ============ ============
Net loss per common share ($ 0.16) ($ 0.20) ($ 0.26)
============ ============ ============
Weighted average number of common
shares outstanding during the period 29,045,605 26,823,142 25,184,718
============ ============ ============
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Preferred stock Common stock
------------------------------ --------------------------------
Amount Number of Par Amount Number of Par
per share Shares Value per share Shares Value
--------- ------ ----- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994 109,000 $1,090 -- 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
option -- -- -- 2.25 100,000 1,000
Common stock issued to Schering Corporation -- -- -- 2.36 847,489 8,475
Common stock issued for acquisition of
Enzon Labs Inc. -- -- -- 8.88 127 1
Issuance of common stock warrants for
Enzon Labs Inc. -- -- -- 2.02 -- --
Net loss -- -- -- -- -- --
------ ---------- --------
Balance, June 30, 1995 -- 109,000 1,090 26,328,874 263,289
Common stock issued for exercise of
non-qualified stock options -- -- -- 2.54 15,980 160
Issuance of common stock warrants -- -- -- -- -- --
Proceeds from Private Placement,
January 1996 100.00 40,000 400 2.74 1,094,890 10,949
Proceeds from Private Placement,
March 1996 100.00 20,000 200 3.75 266,667 2,666
Consulting expense for issuance of stock
options -- -- -- -- -- --
Donation of common stock -- -- -- -- (15) --
Net loss -- -- -- -- -- --
------- ------ ---------- --------
Balance, June 30, 1996 carried forward 169,000 $1,690 27,706,396 $277,064
======= ====== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Additional
paid-in Accumulated
capital Deficit Total
------- ------- -----
<S> <C> <C> <C>
Balance, July 1, 1994 $107,520,250 ($97,169,550) $10,596,063
Compensation expense related to vesting
of stock options 31,535 -- 31,535
Proceeds from public shelf offering 1,742,524 -- 1,752,064
Common stock issued for building purchase
option 224,000 -- 225,000
Common stock issued to Schering Corporation 1,974,575 -- 1,983,050
Common stock issued for acquisition of
Enzon Labs Inc. 1,126 -- 1,127
Issuance of common stock warrants for
Enzon Labs Inc. 170 -- 170
Net loss -- (6,291,491) (6,291,491)
------------ ------------- ----------
Balance, June 30, 1995 111,494,180 (103,461,041) 8,297,518
Common stock issued for exercise of
non-qualified stock options 40,376 -- 40,536
Issuance of common stock warrants 246,000 -- 246,000
Proceeds from Private Placement,
January 1996 6,661,006 -- 6,672,355
Proceeds from Private Placement,
March 1996 2,768,920 -- 2,771,786
Consulting expense for issuance of stock --
options 61,542 -- 61,542
Donation of common stock -- -- --
Net loss -- (5,175,279) (5,175,279)
------------ ------------- ----------
Balance, June 30, 1996 carried forward $121,272,024 ($108,636,320) $12,914,458
============ ============= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements. (continued)
F-5
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Preferred stock Common stock
------------------------------ --------------------------------
Amount Number of Par Amount Number of Par
per share Shares Value per share Shares Value
--------- ------ ----- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 brought forward 169,000 $1,690 27,706,396 $277,064
Common stock issued for exercise of
non-qualified stock options -- -- -- 2.36 11,219 112
Common stock issued for Independent
Directors' Stock Plan -- -- -- 2.97 25,903 259
Consulting expense for issuance of stock
options -- -- -- -- -- --
Common stock issued on conversion of
Series B Preferred Stock 1.95 (40,000) (400) 1.95 2,038,989 20,390
Common stock issued on conversion of
Series D Preferred Stock 1.97 (20,000) (200) 1.97 1,015,228 10,152
Net loss -- -- -- -- -- --
------- ------ ---------- --------
Balance, June 30, 1997 109,000 $1,090 30,797,735 $307,977
=== ==== ======= ====== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Additional
paid-in Accumulated
capital Deficit Total
------- ------- -----
<S> <C> <C> <C>
Balance, June 30, 1996 brought forward $121,272,024 ($108,636,320) $12,914,458
Common stock issued for exercise of
non-qualified stock options 26,499 -- 26,611
Common stock issued for Independent
Directors' Stock Plan 76,598 -- 76,857
Consulting expense for issuance of stock
options 80,984 -- 80,984
Common stock issued on conversion of
Series B Preferred Stock (19,993) -- (3)
Common stock issued on conversion of
Series D Preferred Stock (9,953) -- (1)
Net loss -- (4,557,025) (4,557,025)
------------ ------------- ----------
Balance, June 30, 1997 $121,426,159 ($113,193,345) $8,541,881
============ ============= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($ 4,557,025) ($ 5,175,279) ($6,291,491)
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 1,653,331 2,051,735 2,477,671
Reserve for shutdown of Enzon Labs Inc. -- -- (71,743)
(Gain) loss on retirement of assets (35,168) 69,444 9,003
Non-cash expense for issuance of common stock and stock
options 157,841 61,542 31,535
Non-cash portion of restructuring expense -- -- 1,100,094
Changes in assets and liabilities, excluding acquisition items:
(Increase) decrease in accounts receivable (310,071) 238,586 (433,824)
Decrease (increase) in inventories 125,505 (192,925) 147,370
Decrease (increase) in accrued interest receivable 30,944 (40,913) (4,489)
Decrease (increase) in prepaid expenses and other current
assets 315,642 (208,179) (68,222)
Decrease in cash surrender value of life insurance -- -- 67,871
Decrease (increase) in other assets 21,370 (8,995) 126,448
(Decrease) increase in accounts payable (168,187) 516,956 (857,603)
(Decrease) increase in accrued expenses (522,761) 102,700 (749,193)
Decrease in accrued rent (110,896) (25,600) (854,274)
(Decrease) increase in royalty advance - RPR (780,081) (867,922) 3,355,603
Decrease in other liabilities (1,728) (2,348) (110,360)
------------ ------------ -----------
Net cash used in operating activities (4,181,284) (4,794,027) (2,125,604)
------------ ------------ -----------
Cash flows from investing activities:
Capital expenditures (873,754) (136,789) (387,020)
Proceeds from sale of equipment 680,481 11,283 861,521
Proceeds from cash surrender value of officers' life insurance -- -- 305,315
------------ ------------ -----------
Net cash (used in) provided by investing activities (193,273) (125,506) 779,816
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, preferred stock
and warrants 26,607 9,484,677 3,735,114
Principal payments of obligations under capital leases (2,348) (2,083) (17,798)
------------ ------------ -----------
Net cash provided by financing activities 24,259 9,482,594 3,717,316
------------ ------------ -----------
Net (decrease) increase in cash and cash equivalents (4,350,298) 4,563,061 2,371,528
Cash and cash equivalents at beginning of period 12,666,050 8,102,989 5,731,461
------------ ------------ -----------
Cash and cash equivalents at end of period $ 8,315,752 $ 12,666,050 $ 8,102,989
============ ============ ===========
</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, 1997, 1996 and 1995
(1) Company Overview
Enzon, Inc. ("Enzon" or "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 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, 1997.
Inventory Costing and Idle Capacity
Inventories are stated at the lower of cost or market. Cost is
determined using 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.
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, or 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, 1997
and 1996 was $875,000 and $721,000, 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.
Long-lived Assets
In accordance with Statement of Financial Accounting Standards No.
121, "Accounting for long-lived assets" (SFAS 121), the Company reviews
long-lived assets for impairment whenever events or changes in business
circumstances occur that indicate that the carrying amount of the assets
may not be recoverable. The Company assesses the recoverability of
long-lived assets held and to be used based on undiscounted cash flows and
measures the impairment, if any, using discounted cash flows. Adoption of
SFAS No. 121 did not have a material impact on the Company's consolidated
financial position, operating results or cash flows.
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.
F-9
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
Research and Development
Research and development costs are expensed as incurred.
Stockholders' Equity
The Company maintains a Non-Qualified Stock Option Plan (the "Stock
Option Plan") for which it applies Accounting Principles Board ("APB")
Opinion No. 25 ,"Accounting for Stock Issued to Employees," and related
interpretations in accounting for the Stock Option Plan.
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 $15,000 in 1997, $13,000
in 1996 and $4,000 in 1995. There were no income tax payments made for the
years ended June 30, 1997, 1996 and 1995.
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. 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" or "Series B Preferred Stock")
and Series C Convertible Preferred Stock ("Series C Preferred Shares" or
"Series C Preferred Stock"), 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 and a half 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 for the years ended June 30, 1997, 1996 and 1995,
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
Reclassifications
Certain prior year balances were reclassified to conform to the 1997
presentation.
(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) Commitments and Contingencies
The Company has a long-term supply agreement for unmodified
L-asparaginase, one of the raw materials used in ONCASPAR produced for the
U.S. market, under which the Company is required to purchase minimum
quantities of this raw material on an annual basis. Under the agreement,
the Company is currently required to purchase $1,275,000 of material for
the year ending December 31, 1997. The Company is currently discussing
extending this agreement and revising the minimum purchase requirements.
During the fiscal years ended June 30, 1997 and 1996, the Company expensed
approximately $592,000 and $701,000, respectively, related to the
satisfaction of the minimum purchase requirements for unmodified
L-asparaginase under this supply contract. 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. The Company also has a
3-year employment agreement, dated April 5, 1997, with its Chief Executive
Officer which provides for severance payments in addition to the change in
control provisions discussed above.
F-11
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company is being sued by a former financial advisor asserting that
under a May 2, 1995, letter agreement ("Letter Agreement") between Enzon
and LBC Capital Resources Inc. ("LBC"), LBC was entitled to a commission in
connection with the Company's January and March 1996 private placements,
comprised of $500,000 and warrants to purchase 1,000,000 shares of Enzon
common stock at an exercise price of $2.50 per share. LBC has also asserted
that it is entitled to an additional fee of $175,000 and warrants to
purchase 250,000 shares of Enzon common stock when and if any of the
warrants obtained pursuant to the private placements are exercised. LBC has
claimed $3,000,000 in compensatory damages, plus punitive damages, counsel
fees and costs for the alleged breach of the Letter Agreement. The Company
believes that no such commission was due under the Letter Agreement and
denies any liability under the Letter Agreement. The Company intends to
defend this lawsuit vigorously.
(5) Inventories
Inventories consist of the following:
June 30,
-----------------------
1997 1996
-------- --------
Raw materials $269,000 $206,000
Work in process 269,000 383,000
Finished goods 322,000 396,000
-------- --------
$860,000 $985,000
(6) Property and Equipment
Property and equipment consist of the following:
June 30,
-------------------------- Estimated
1997 1996 useful lives
----------- ----------- ------------
Equipment $ 9,107,000 $9,128,000 3-7 years
Furniture and fixtures 1,530,000 1,586,000 7 years
Vehicles 29,000 29,000 3 years
Leasehold improvements 5,010,000 4,898,000 3-15 years
----------- -----------
$15,676,000 $15,641,000
=========== ===========
Depreciation and amortization charged to operations, relating to
property and equipment, totaled $1,499,000, $1,891,000 and $2,317,000 for
the years ended June 30, 1997, 1996 and 1995, respectively.
(7) Stockholders' Equity
During the year ended June 30, 1995, the Company sold to Susquehanna
Brokerage Services, Inc. ("Susquehanna"), in a public shelf offering,
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.
F-12
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 11).
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.
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.
During the year ended June 30, 1997, all of the outstanding shares of
Series B Preferred Stock were converted into Common Stock. The 40,000
shares of Series B Preferred Stock which were converted resulted in the
issuance of 2,038,989 shares of Common Stock.
During March 1997, all of the outstanding Series C Preferred Stock was
exchanged for newly issued Series D Preferred Stock. The Series D Preferred
Stock contained the same provisions as the Series C Preferred Stock, with
the exception of the elimination of a restriction on the maximum number of
shares which could be held by the holding institution. During March 1997,
all of the outstanding Series D Preferred Stock was converted into Common
Stock. The 20,000 shares of Series D Preferred Stock which were converted
resulted in the issuance of 1,015,228 shares of Common Stock. The sole
institutional owner of the Common Stock issued in conjunction with the
conversion of the Series D Preferred Stock has agreed not to sell the
1,015,228 common shares issued for a period of one year without the
Company's consent.
Series A Preferred Stock
The Company's Series A Preferred Shares are convertible into Common
Stock at a conversion rate of $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, 1997 and 1996, undeclared accrued dividends in
arrears were $1,585,000 or $14.54 per share and $1,367,000 or $12.54 per
share, respectively. All Common Shares are junior in rank to the Series A
Preferred Shares, with respect to the preferences as to dividends,
distributions and payments upon the liquidation, dissolution or winding up
of the Company.
F-13
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
There were no conversions of Series A Preferred Shares during the
years ended June 30, 1997, 1996 or 1995. As of June 30, 1997 and 1996, the
Company had 109,000 shares of Series A Preferred Shares outstanding with a
liquidation preference of $25 per share or $2,725,000.
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, 1997, the Company has reserved its common shares for
special purposes as detailed below:
Shares issuable upon conversion of
Series A Preferred Shares 248,000
Shares issuable upon exercise of outstanding warrants 1,039,000
Non-Qualified Stock Option Plan 5,650,000
Other options 200,000
---------
7,137,000
=========
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.
Series B and C Preferred Stock Warrants
As of June 30, 1997 and 1996, warrants to purchase 688,686 shares of
common stock at $4.11 and 200,000 shares of common stock at $5.63, issued
in connection with the private placements of Series B and C Preferred
Shares, were outstanding.
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.
(8) Independent Directors' Stock Plan
On December 3, 1996, the stockholders voted to approve the Company's
Independent Directors' Stock Plan, which provides for compensation in the
form of quarterly grants of Common Stock to independent directors serving
on the Company's Board of Directors. Each independent director is granted
shares of Common Stock equivalent to $2,500 per quarter plus $500 per Board
of Director's meeting attended. The number of shares issued is based on the
fair market value of Common Stock on the last trading day of the applicable
quarter. During the year ended June 30, 1997, the Company issued 25,903
shares of Common Stock to non-executive directors, pursuant to the
Independent Directors' Stock Plan. The shares issued represent payment for
services rendered for the period from January 16, 1996 through March 31,
1997.
F-14
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Non-Qualified Stock Option Plan
In November 1987, the Company's Board of Directors adopted a Non-Qualified
Stock Option Plan (the "Stock Option Plan"). The number of shares reserved
for issuance under the Company's Stock Option Plan is 6,200,000. As of June
30, 1997, 5,650,000 shares of Common Stock were 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
granted must be at least 100% of the fair market value of the stock at the
time the option is granted. Options may be exercised for a period of up to
ten years from the date they are 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.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation". The Company continues to use APB No. 25,
"Accounting for Stock Issued to Employees," to account for the Stock Option
Plan. All options granted under the Stock Option Plan are granted with
exercise prices which equal or exceed the fair market value of the stock at
the date of grant, accordingly, there is no compensation expense recognized
for options granted to employees. The Company records compensation expense
equal to the value of stock options granted for consulting services
rendered to the Company by non-employees. The value of the options granted
to non-employees is determined by the Black-Scholes option-pricing model.
The following pro forma financial information shows the effect and the
Company's net loss and loss per share, had compensation expense been
recognized consistent with SFAS No. 123.
1997 1996
------------ ------------
Net loss - as reported ($4,557,000) ($5,175,000)
Net loss - pro forma ($5,927,000) ($5,645,000)
Loss per share - as reported ($.16) ($.20)
Loss per share - pro forma ($.21) ($.22)
The pro forma effect on the loss for the years ended June 30, 1997 and 1996
is not necessarily indicative of the pro forma effect on earnings in future
years since it does not take into effect the pro forma compensation expense
related to grants made prior to the year ended June 30, 1996. The fair
value of each option granted during the years ended June 30, 1997 and 1996
is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: (i) dividend yield of 0%, (ii)
expected term of five years, (iii) expected volatility of 82% and 78%, and
(iv) a risk-free interest rate of 6.45% and 6.09% for the years ended June
30, 1997 and 1996, respectively. The weighted average fair value at the
date of grant for options granted during the years ended June 30, 1997 and
1996 was $2.78 and $3.51 per share, respectively.
F-15
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following is a summary of the activity in the Company's Stock Option
Plan:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Range of
Shares Price Prices
------ ----- ------
<S> <C> <C> <C>
Outstanding at July 1, 1994 2,834,000 $ 6.19 $2.38 to $15.25
Granted at exercise prices which exceeded the
fair market value on the date of grant 571,000 2.63 $2.63
Granted at exercise prices which equalled the
fair market value on the date of grant 843,000 2.24 $1.88 to $3.13
Cancelled (645,000) 4.78 $2.09 to $15.25
---------
Outstanding at June 30, 1995 3,603,000 4.95 $1.88 to $14.88
Granted at exercise prices which exceeded the
fair market value on the date of grant 4,000 3.38 $3.38
Granted at exercise prices which equalled the
fair market value on the date of grant 763,000 3.51 $2.38 to $4.75
Exercised (16,000) 2.54 $2.09 to $2.81
Cancelled (796,000) 4.50 $2.09 to $11.00
---------
Outstanding at June 30, 1996 3,558,000 4.75 $1.88 to $14.88
Granted at exercise prices which exceeded the
fair market value on the date of grant 3,000 2.81 $2.81
Granted at exercise prices which equalled the
fair market value on the date of grant 1,469,000 2.78 $2.31 to $3.41
Exercised (11,000) 2.37 $2.00 to $2.63
Cancelled (822,000) 6.26 $2.00 to $14.25
---------
Outstanding at June 30, 1997 4,197,000 3.77 $1.88 to $14.88
=========
</TABLE>
As of June 30, 1997, the Plan had options outstanding and exercisable by
price range as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.88 to $2.50 490,000 7.70 $ 2.08 487,000 $ 2.08
$2.56 to $2.63 495,000 8.24 2.60 277,000 2.63
$2.69 to $2.75 460,000 8.86 2.71 157,000 2.75
$2.81 to $2.88 584,000 8.92 2.81 45,000 2.84
$2.94 to $3.41 526,000 9.06 3.12 101,000 3.37
$3.50 to $4.50 810,000 7.17 4.05 683,000 4.14
$4.56 to $7.50 531,000 4.59 6.18 531,000 6.18
$7.63 to $14.88 301,000 1.63 8.08 301,000 8.08
--------- ---------
$1.88 to $14.88 4,197,000 7.30 3.77 2,582,000 4.33
========= =========
</TABLE>
F-16
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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. 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.
At June 30, 1997 and 1996, the tax effects of temporary differences
that give rise to the deferred tax assets and deferred tax liabilities are
as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Inventories $50,000 $151,000
Investment valuation reserve 86,000 86,000
Contribution carryover 17,000 12,000
Compensated absences 111,000 98,000
Excess of financial statement over tax depreciation 627,000 368,000
Royalty advance - RPR 842,000 1,153,000
Non-deductible expenses 301,000 343,000
Federal and state net operating loss carryforwards 40,385,000 38,495,000
Research and development and investment tax credit carryforwards 6,912,000 6,407,000
----------- -----------
Total gross deferred tax assets 49,331,000 47,113,000
Less valuation allowance (48,625,000) (46,407,000)
----------- -----------
Net deferred tax assets 706,000 706,000
----------- -----------
Deferred tax liabilities:
Step up in basis of assets related to acquisition of Enzon Labs Inc. (706,000) (706,000)
----------- -----------
Total gross deferred tax liabilities (706,000) (706,000)
----------- -----------
Net deferred tax $0 $0
=========== ===========
</TABLE>
F-17
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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,
1997 and 1996 was an increase of $2,218,000 and $2,810,000, respectively.
Subsequently recognized tax benefits for the years ended June 30, 1997 and
1996 of $984,000 and $954,000, respectively, relating to the valuation
allowance for deferred tax assets will be allocated to additional paid-in
capital.
At June 30, 1997, the Company had federal net operating loss
carryforwards of approximately $102,541,000 for tax reporting purposes,
which expire in the years 1998 to 2012. The Company also has investment tax
credit carryforwards of approximately $30,000 and research and development
tax credit carryforwards of approximately $5,985,000 for tax reporting
purposes which expire in the years 1998 to 2012.
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, 1997, the Company had a total of $67,208,000 of acquired Enzon Labs net
operating loss carryforwards, which expire between December 31, 1997 and
October 31, 2006. As a result of the change in ownership, the utilization
of these carryforwards is limited to $613,000 per year.
(11) Significant Agreements
Schering Agreement
The Company and Schering Corporation ("Schering"), a subsidiary of
Schering-Plough Corporation, entered into an agreement in November 1990
(the "Schering Agreement") to apply the Company's PEG Process to develop a
modified form of Schering's INTRON A (interferon alfa 2b), a
genetically-engineered anticancer and antiviral drug with longer lasting
activity. A PEG modified INTRON A, developed by the Company, is currently
in a large scale Phase III clinical trial in the United States and Europe.
The trial calls for administration of PEG-Intron A once a week as compared
to the current regimen for unmodified INTRON A of three times a week.
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, hairy cell leukemia and malignant melanoma. It is approved for use
in 65 countries for a total of 16 disease indications. Schering-Plough
Corporation reported 1996 INTRON A sales of $524 million worldwide.
Under the license agreement, which was amended in 1995, the Company
transfered proprietary 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 was paid during the year ended June 30, 1997. 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, of which two
payments totaling $2,500,000 were received in August 1997 related to the
commencement of a Phase III clinical trial. 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.
F-18
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
Rhone-Poulenc Rorer Agreement
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 License Agreement. Under this agreement, Enzon received
licensing payments totaling $6,000,000 and was entitled to 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.
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.
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 Sheets as
of June 30, 1997 and 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
the License Agreement and for five years thereafter. The 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 RPR exclusive licenses 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.
MEDAC Agreement
During October 1996, the Company entered into an exclusive license
agreement with Medac GmbH ("MEDAC") to sell ONCASPAR in Europe and Russia.
The agreement provides for MEDAC to purchase ONCASPAR from the Company at
certain established prices which increase over the initial term of the five
year agreement. Under the agreement, MEDAC is responsible for obtaining
additional approvals and indications in the licensed territories, beyond
the currently approved hypersensitive indication, in Germany. Upon
completion of a pharmacokinetic study, MEDAC plans to file for approval in
the rest of Europe and will be required to meet certain minimum purchase
requirements.
F-19
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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, 1997 are:
Year ending Capital Operating
June 30, leases leases
----------- --------- ----------
1998 $2,000 $1,923,000
1999 -- 1,453,000
2000 -- 897,000
2001 -- 716,000
2002 -- 683,000
Later years, through 2007 -- 3,753,000
------ ----------
Total minimum lease payments $2,000 $9,425,000
====== ==========
Rent expense amounted to $1,608,000, $1,469,000 and $1,642,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
The Company currently subleases a portion of its facilities. For the
years ended June 30, 1997, 1996 and 1995, rent expense is net of subrental
income of $233,000, $249,000 and $353,000, respectively.
(13) Retirement Plans
The Company maintains a defined contribution, 401(k) pension plan for
substantially all its employees. The Company currently matches 50% of the
employee's contribution of up to 6% of compensation, as defined. Prior to
August 9, 1996, the Company's match was 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. Total company contributions for the years
ended June 30, 1997, 1996 and 1995 were $105,000, $63,000, and $80,000,
respectively.
(14) Accrued Expenses
Accrued expenses consist of:
June 30,
--------------------------
1997 1996
---------- ----------
Accrued wages and vacation $484,000 $466,000
Accrued Medicaid rebates 989,000 996,000
Current portion of royalty
advance - RPR 930,000 1,287,000
Accrual for commitments 340,000 250,000
Other 762,000 1,388,000
---------- ----------
$3,505,000 $4,387,000
========== ==========
F-20
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Sales Information
During the years ended June 30, 1997, 1996 and 1995, the Company had
export sales of $2,029,000, $2,270,000 and $2,105,000, respectively. Sales
to Europe represented $1,600,000, $1,858,000 and $1,841,000 during the
years ended June 30, 1997, 1996 and 1995, respectively.
ADAGEN sales represent approximately 77% of the Company's total net
sales for the year ended June 30, 1997. ADAGEN's Orphan Drug designation
under the Orphan Drug Act expired in 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 54%, 46% and 42% of the
Company's ADAGEN sales for the years ended June 30, 1997, 1996 and 1995,
respectively, were made to Medicaid patients.
(16) 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(TM)) 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-21
<PAGE>
EXHIBIT INDEX
Exhibit Page
Numbers Description Number
- ------- ----------- ------
10.15 Employment Agreement with Peter G. Tombros dated as of
April 5, 1997 E1
21.0 Subsidiaries of Registrant E23
23.0 Consent of KPMG Peat Marwick LLP E24
27.0 Financial Data Schedule E25
99.0 Additional Exhibits E26
Exhibit 10.15
EMPLOYMENT AGREEMENT
Employment Agreement dated as of April 5, 1997, between Enzon, Inc., a
Delaware Corporation (the "Company"), having an address at 20 Kingsbridge Road,
Piscataway, New Jersey 08854, and Peter Tombros ("Executive"), having an address
at 159 Lambert Road, New Canaan, CT 06840.
WITNESSETH:
WHEREAS, the Company is a biopharmaceutical company engaged in developing
advanced therapeutics for life threatening diseases; and
WHEREAS, Executive has extensive experience as an executive of a
pharmaceutical company and a biopharmaceutical company; and
WHEREAS, the Company desires to continue the employment of the Executive
and the Executive desires to continue such employment on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the employment of Executive by the
Company, the above premises and the mutual agreements hereinafter set forth, the
parties hereto agree as follows:
1. Duties.
(a) The Company employs the Executive as its President and Chief Executive
Officer and Executive accepts such employment subject to the terms and
conditions hereof. As President and Chief Executive Officer, Executive shall
have the
E-5
<PAGE>
authority and duty generally to supervise and direct the business of the
Company, subject to the control of the Board of Directors (the "Board") of the
Company and of any duly authorized Committees of the Board.
(b) Executive agrees to devote substantially all of his time, during
regular business hours, to the affairs of the Company and shall at all times act
with due regard to the best interests of the Company.
2. Noncompetition and Confidentiality.
(a) The "Noncompete Period" shall be (i) the term of this Agreement and,
(ii) (A) the two (2) year period immediately following termination of
Executive's employment with the Company in the event Executive voluntarily
terminates his employment, other than pursuant to Section 4(b)(i) hereof, or the
Company terminates Executive's employment pursuant to Section 4(b)(ii) hereof,
or (B) any period of time for which the Executive receives base salary payments
from the Company pursuant to Section 3(d) hereof in the event Executive's
employment with the Company is terminated for any reason which would entitle
Executive to base salary payments under Section 3(d) hereof in the event
Executive's employment is Terminated for any reason which would entitle
Executive to base salary payment under Section 3(d) hereof. During the
Noncompete Period, Executive will not directly, or indirectly, whether as an
officer, director, stockholder, partner, proprietor, associate, employee,
consultant, representative or otherwise, become or be interested in, or
associated with any
2
<PAGE>
other person, corporation, firm, partnership or entity engaged to a significant
degree in (x) modifying enzymes, protein-based biopharmaceuticals or other
pharmaceuticals in a manner similar to that described in U.S. Patent No.
4,179,337, or U.S. Patent No. 4,946,778, (y) developing single-chain
antigen-binding proteins or (z) any technology or area of business in which the
Company becomes involved to a significant degree during the term of this
Agreement. For purposes of the preceding sentence to determine whether any
entity is engaged in such activities to a "significant degree" comparison will
be made to the Company's operations at that time. In other words, an entity will
be deemed to be engaged in an activity to a significant degree if the number of
employees and/or amount of funds devoted by such entity to such activity would
be material to the Company's operations at that time. Executive is hereby
prohibited from ever using any of the Company's proprietary information or trade
secrets to conduct any business. The provision contained in the preceding
sentence shall survive the termination of Executive's employment pursuant to
Section 4 hereof or otherwise. In the event Executive breaches any of the
covenants set forth in this Section 2(a), the running of the period of
restriction set forth herein shall recommence upon Executive's compliance with
the terms of this Section 2(a).
(b) Executive recognizes and acknowledges that information relating to the
Company's business, including, but not limited to, information relating to
patent applications filed or to be filed by the Company, trade secrets relating
to the
3
<PAGE>
Company's products or services, and information relating to the Company's
research and development activities, shall be and remain the sole and exclusive
property of the Company and is a valuable, special and unique asset of the
Company's business. The Executive will not, during or after the term of his
employment by the Company, disclose any such information to any person,
corporation, firm, partnership or other entity; provided, however, that,
notwithstanding the foregoing, during the term of Executive's employment with
the Company, Executive may make such disclosure if such disclosure is in the
Company's best interests, is made in order to promote and enhance the Company's
business, and sufficient arrangements are made with the person or entity to whom
such disclosure is made to ensure the confidentiality of such disclosure. The
provisions of this Section 2(b) shall survive the termination of Executive's
employment pursuant to Section 4 hereof or otherwise.
(c) Executive agrees that the covenants and agreements contained in this
Section 2 are the essence of this Agreement; that each of such covenants is
reasonable and necessary to protect and preserve the Company's interests,
properties and business; that irreparable loss and damage will be suffered by
the Company should Executive breach any of such covenants and agreements; that
given the unique nature of the Company's business such loss and damage would be
suffered by the Company regardless of where a breach of such covenants and
agreements occur, thus, making the absence of a geographical limitation
reasonable; that
4
<PAGE>
each of such covenants and agreements is separate, distinct and severable not
only from the other of such covenants and agreements but also from the other and
remaining provisions of this Agreement; that the unenforceability or breach of
any such covenant or agreement shall not affect the validity or enforceability
of any other such covenant or agreement or any other provision of this
Agreement; and that, in addition to other remedies available to it, the Company
shall be entitled to both temporary and permanent injunctions and any other
rights or remedies it may have, at law or in equity, to prevent a breach or
contemplated breach by Executive of any such covenants or agreements.
Notwithstanding anything herein to the contrary, if a period of time or other
restriction specified in this Section 2 should be determined to be unreasonable
in a judicial proceeding, then the period of time or other restriction shall be
revised so that the covenants contained in this Section 2 may be enforced during
such period of time and in accordance with such other restrictions as may be
determined to be reasonable.
(d) Executive agrees to assign and does hereby assign to the Company all
tangible and intangible property, including, but not limited to, inventions,
developments or discoveries conceived, made or discovered by Executive solely or
in collaboration with others during the term of Executive's employment with the
Company, which relate in any manner to the Company's business.
5
<PAGE>
3. Compensation and Other Benefits.
For all services rendered by Executive and all covenants undertaken by him
pursuant to this Agreement, the Company shall pay, and Executive shall accept,
the compensation set forth in this Section 3.
(a) Executive shall receive an annual base salary of Three Hundred
Thirty-Six Thousand Dollars ($336,000.00) during the term of employment
hereunder, payable in accordance with the Company's normal payroll practices for
its senior management. The Company may, at any time, in the discretion of the
Board, increase, but not decrease, Executive's base salary in response to
increases in the cost of living or based upon merit as a result of a positive
review of Executive's performance by the Board. Executive shall be entitled to
begin receiving his salary hereunder on the Effective Date.
(b) Executive shall be entitled to participate in the Senior Management
Performance Incentive Program, as approved by the Board or Compensation
Committee and any other incentive program hereafter established and available to
executive officers of the Company (the "Program"). There shall be no guarantee
that any payment or grant of options shall be made under the Program, and a
payment or grant of options in one year does not imply that a similar payment or
grant, or any payment or grant, will be made in subsequent years.
(c) In addition to any options which may be granted to Executive pursuant
to Section 3(b) hereof, Executive is
6
<PAGE>
hereby granted options to purchase an aggregate of 300,000 shares of the
Company's common stock, $.01 par value (the "Common Stock") under the Company's
Non-Qualified Stock Option Plan, as amended (the "Non-Qualified Plan") at the
per share exercise price equal to the closing price of the Common Stock on April
15, 1997. Such options shall vest and become exercisable as to such 300,000
shares of Common Stock on April 5, 2002, if, except as otherwise provided in
Section 3(d), Executive shall then be employed by the Company; provided,
however, that such options immediately shall vest and become exercisable upon
the occurrence of each of the respective events described below, provided that,
except as otherwise provided in Section 3(d), Executive is then employed by the
Company, in which case such options will vest as to the number of shares set
forth opposite each such event (the "Accelerated Vesting Schedule"). In any
event such options shall be exercisable as to each tranche of shares in the
event of accelerated vesting pursuant to the Accelerated Vesting Schedule or as
to the entire 300,000 shares in the event there is no such accelerated vesting
for a term of five (5) years from the respective date of vesting (the
"Expiration Date"). Such options shall be represented by a NonQualified Stock
Option Certificate (the "Option Certificate") in the form attached hereto as
Exhibit A.
7
<PAGE>
Options Event
------- -----
100,000 shares Such options shall vest and become exercisable
when the closing price of the Common Stock is at
least four dollars ($4.00) as reported on the
NASDAQ National Market for at least twenty (20)
consecutive trading days.
100,000 shares Such options shall vest and become exercisable
when the closing price of the Common Stock is at
least five dollars ($5.00) as reported on the
NASDAQ National Market for at least twenty (20)
consecutive trading days.
100,000 shares Such options shall vest and become exercisable as
when the closing price of the Common Stock is at
least six dollars ($6.00) as reported on the
NASDAQ National Market for at least twenty (20)
consecutive trading days.
The prices and number of shares set forth above shall be adjusted for stock
splits, stock dividends and other similar recapitalization events.
(d) In the event the Company terminates Executive's employment hereunder
for any reason, except "For Cause" pursuant to Section 4(b)(ii) hereof or due to
Executive's Disability or Death pursuant to Sections 4(b)(iii) or 4(b)(iv)
8
<PAGE>
hereof, respectively, or Executive terminates his employment hereunder pursuant
to Section 4(b)(i) hereof, prior to the second anniversary of the Effective Date
(the "Second Anniversary Date"), Executive shall receive either (A) the
remainder of his base salary hereunder payable through the Second Anniversary
Date or (B) his base salary hereunder payable for one year immediately following
such termination, whichever shall be greater. In the event the Company
terminates Executive's employment for any reason, except "For Cause" pursuant to
Section 4(b)(ii) hereof or due to Executive's Disability or Death pursuant to
Sections 4(b)(iii) or 4(b)(iv) hereof, respectively, or Executive terminates his
employment hereunder pursuant to Section 4(b)(i) hereof, subsequent to the
Second Anniversary Date, Executive shall receive his base salary hereunder
payable for one year immediately following such termination or until Executive
becomes otherwise employed on a full-time basis, whichever is sooner. In the
event the Executive's employment with the Company is terminated for any reason,
except for Employee's voluntary resignation or pursuant to Section 4(b)(ii),
(iii) or (iv) hereof, the options granted pursuant to Section 3(c) hereof which
are exercisable at the time of such termination (the "Vested Options") shall
remain exercisable during the relevant exercise period or periods set forth in
Section 3(c) hereof and those options granted pursuant to Section 3(c) hereof
which are not exercisable at the time of such termination (the "Non-Vested
Options") shall become exercisable in accordance with the Accelerated Vesting
Schedule provisions of
9
<PAGE>
Section 3(c) in the same manner as if the Executive's employment had not been
terminated; provided that all such Non-Vested Options will terminate and be of
no further force and effect to the extent such options have not vested in
accordance with the Accelerated Vesting Schedule on or prior to April 5, 2002.
In the event the Company terminates Executive's employment "For Cause" pursuant
to Section 4(b)(ii) hereof or Executive terminates his employment hereunder for
any reason other than as provided in Section 4(b)(i) hereof, Executive shall
receive no further payments from the Company, all Vested Options at the time of
such termination shall remain exercisable during the relevant exercise period or
periods set forth in Section 3(c) and those options granted pursuant to Section
3(c) hereof which are Non-Vested Options at the time of such termination shall
terminate immediately as of the date of such termination. All salary and
severance payments made to Executive hereunder shall be made in accordance with
the Company's normal payroll practices for senior management.
(e) In the event the Company terminates Executive's employment due to
Executive's Disability pursuant to Section 4(b)(iii) of this Agreement, the
Company shall pay to Executive, during the six-month period following such
termination, an amount equal to the difference between Executive's base salary
hereunder for such six months (exclusive of benefits) and the amount received by
Executive during such six-month period under any employee disability policy
maintained by the Company for the benefit of Executive. The Company shall
calculate and pay any
10
<PAGE>
amounts due herein no less frequently than semi-monthly. The options granted
pursuant to Section 3(c) hereof which are Vested Options at the time of such
termination shall remain exercisable during the relevant exercise period or
periods set forth in Section 3(c) hereof and a pro rata portion (based upon the
number of days which have elapsed at the time of such termination in the five
(5) year period commencing on the Effective Date and ending on May 5, 2002 (the
"Vesting Period")) of the options which are Non-Vested Options at the time of
such termination shall become exercisable immediately upon such termination. For
example, if such termination occurs 50% of the way through the Vesting Period,
50% of the total number of Non-Vested Options shall vest and become exercisable.
It is acknowledged and agreed that the immediately preceding sentence shall be
deemed a waiver and modification of the restrictions imposed on the exercise of
options in the event of disability under Section H of the Non-Qualified Plan and
that such waiver and modification was authorized and approved by the
Compensation Committee of the Board (the "Committee") as permitted by Section H
of the Non-Qualified Plan.
(f) In the event Executive's employment is terminated due to his death
pursuant to Section 4(b)(iv) of this Agreement, the Company shall pay to
Executive's estate, during the six-month period following such termination,
Executive's base salary hereunder for such six months (exclusive of benefits).
The options granted pursuant to Section 3(c) hereof which are Vested
11
<PAGE>
Options at the time of such termination shall remain exercisable during the
relevant exercise period or periods set forth in Section 3(c) hereof and a pro
rata portion (based upon the number of days which have elapsed at the time of
such termination in the Vesting Period) of the options which are Non-Vested
Options at the time of such termination shall become exercisable immediately
upon such termination and shall remain exercisable for the five (5) year period
commencing on such date of termination. For example, if such termination occurs
50% of the way through the Vesting Period, 50% of the total number of Non-Vested
Options shall vest and become exercisable. It is acknowledged and agreed that
the immediately preceding sentence shall be deemed to be a waiver and
modification of the restrictions imposed on the exercise of options in the event
of death under Section I of the Non-Qualified Plan and that such waiver and
modification was authorized and approved by the Committee as permitted by
Section I of the Non-Qualified Plan.
(g) In the event of a Change of Control, the Change of Control Agreement
dated as of January 20, 1995, between Executive and Company shall govern, except
as specifically set forth herein with respect to the options granted to
Executive pursuant to Section 3(c) hereof. For purposes hereof "Change of
Control" shall mean: (i) A "Board Change" which, for purposes of this Agreement,
shall have occurred if a majority of the seats (other than vacant seats) on the
Company's Board were to be occupied by individuals who were neither (A)
nominated by a majority of the Incumbent Directors nor (B) appointed by
directors so nominated. An "Incumbent Director" is a member of the Board who has
been either (A) nominated by a
12
<PAGE>
majority of the directors of the Company then in office or (B) appointed by
directors so nominated, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of either an actual or
threatened election contest (as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person (as defined herein) other than the Board;
or (ii) the acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of a majority of the then outstanding voting securities of the Company (the
"Outstanding Company Voting Securities"); provided, however, that the following
acquisitions shall not constitute a Change of Control: (A) any acquisition by
the Company, or (B) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company, or (C) any public offering or private placement by the Company of
its voting securities; or (iii) a merger or consolidation of the Company with
another entity in which neither the Company nor a corporation that, prior to the
merger or consolidation, was a subsidiary of the Company, shall be
13
<PAGE>
the surviving entity; or (iv) a merger or consolidation of the Company following
which either the Company or a corporation that, prior to the merger or
consolidation, was a subsidiary of the Company, shall be the surviving entity
and a majority of the Outstanding Company Voting Securities is owned by a Person
or Persons who were not "beneficial owners" of a majority of the Outstanding
Company Voting Securities immediately prior to such merger or consolidation; or
(v) a voluntary or involuntary liquidation of the Company; or (vi) a sale or
disposition by the Company of at least 80% of its assets in a single transaction
or a series of transactions (other than a sale or disposition of assets to a
subsidiary of the Company in a transaction not involving a Change of Control or
a change in control of such subsidiary). If any of the Change in Control events
specified in (iii), (v) or (vi) above occur, any options granted pursuant to
Section 3(c) hereof which are Non-Vested Options as of the effective date of
such Change in Control event shall vest immediately prior to such effective date
(and Employee will be provided a reasonable opportunity to exercise such options
prior to such effective date) to the extent provided in the Accelerated Vesting
Schedule to the extent the shareholders of the Company receive a payment for
their shares of Common Stock in connection with such Change in Control event
which is equal to the closing price levels set forth in the Accelerated Vesting
Schedule. In the event any of the Change in Control events specified in (iii),
(v) or (vi) above occur, all Vested Options and Non-Vested Options granted under
Section 3(c)
14
<PAGE>
shall terminate as of the effective date of such Change in Control event to the
extent not previously exercised. If any of the Change in Control events
specified in (i), (ii) or (iv) above occur, the options granted pursuant to
Section 3(c) hereof which are Vested Options as of the effective date of such
Change in Control event shall remain exercisable during the relevant exercise
period or periods set forth in Section 3(c) hereof and those options granted
under Section 3(c) hereof which are Non-Vested Options as of the effective date
of such Change in Control shall become exercisable and remain exercisable in
accordance with the Accelerated Vesting Schedule provisions of Section 3(c) in
the same manner as if such Change in Control event had not occurred.
Notwithstanding any provisions contained in Section L of the Non-Qualified Plan
or in the Option Certificate pertaining to the exercise of the options granted
pursuant to Section 3(c) hereof, if any of the events specified in (iii), (v) or
(vi) above occur the provisions contained herein shall apply.
(h) Executive shall be entitled to vacations in accordance with the policy
of the Company with respect to its senior management, in effect from time to
time and shall be eligible to participate in any pension, profit sharing or
similar plan and any health, hospitalization, medical, accident, disability,
sick leave, supplementary income benefit, life insurance or other similar
benefit plan or program of the Company now existing or hereafter established and
available to the Company's employees generally or to key employees as a group,
in
15
<PAGE>
all cases to the extent his age, health and other qualifications make him
eligible to participate. Executive also shall be entitled to such additional
benefits as may be granted to him from time to time by the Board. Upon the
termination of Executive's employment for any reason, the Company shall pay
Executive for any unused accrued vacation time.
(i) Executive shall be reimbursed for reasonable travel, entertainment and
other expenses associated with the performance of his duties hereunder, promptly
upon his delivery of appropriate receipts and other documentation evidencing the
incurrence of such expenses.
(j) All compensation payable and other benefits provided under this Section
3 shall be subject to customary withholding for income, F.I.C.A. and other
employment taxes.
(k) All options granted pursuant to this Section 3 shall be issued in
accordance with and be subject to the terms and conditions of the Non-Qualified
Plan. Except as otherwise specifically set forth herein, if there exists a
conflict between the terms of the Non-Qualified Plan and the terms of this
Agreement, the terms of the Non-Qualified Plan shall govern. If there exists a
conflict between the terms of this Agreement and the Option Certificate, the
Option Certificate shall govern. Executive has reviewed the Non-Qualified Plan
and the form of the Option Certificate prior to executing this Agreement.
16
<PAGE>
(l) All options and terms and conditions pertaining thereto granted
pursuant to this Section 3 shall extend beyond the Termination Date of this
Agreement.
4. Term and Termination of this Agreement
(a) The term of employment pursuant to this Agreement shall commence as of
April 5, 1997 (the "Effective Date") and will terminate at the close of business
on April 4, 2000 (the "Termination Date") unless earlier terminated as provided
herein.
(b) Executive's employment by the Company hereunder may be terminated prior
to the Termination Date:
(i) By Executive at any time upon the breach by the Company of any
material term of this Agreement, provided that Executive shall have sent
written notice of such breach to the Chairman of the Board and the Company
shall have failed to correct such breach within thirty (30) days of its
receipt of such notice;
(ii) By the Company immediately For Cause. For purposes hereof "For
Cause" shall mean (A) any willful and knowing material breach of this
Agreement by Executive; (B) any attempt by Executive to secure any personal
profit in connection with the business of the Company not previously
disclosed to and approved by the Company and a majority of its Board of
Directors; (C) Executive's criminal conviction for fraud, embezzlement,
bribery or any felonious offense; or (D) Executive's commission of any
willful and intentional act of fraud or dishonesty against the
17
<PAGE>
Company. In the event the Company terminates Executive's employment "For
Cause" the Board shall provide Executive as soon as practicable (but not
later than seven (7) business days thereafter) with a written explanation
of the reasons for such termination;
(iii) By the Company upon Executive's Disability. For purposes hereof
"Disability" shall mean a physical or mental condition which prevents
Executive from performing his duties hereunder for a continuous six month
period or for a total of six months during any 18 month period;
(iv) Upon the death of Executive; or
(v) By the Company upon a unanimous determination by the Company's
Board of Directors (other than Executive if Executive is then a member of
the Board) that Executive has failed to meet the performance criteria which
would reasonably be expected of someone in his position. In the event the
Company terminates Executive's employment based upon such determination by
the Board, the Board shall provide Executive as soon as practicable (but
not later than seven (7) business days thereafter) with a written
explanation of the facts on which the termination is based.
(c) Except as otherwise provided herein, upon termination of Executive's
employment hereunder, the Company shall have no further obligation to Executive
or his personal representative with respect to remuneration due under this
Agreement.
18
<PAGE>
5. Notices.
All notices, requests, demands and other communications provided for by
this Agreement shall be in writing and shall be deemed to have been given when
delivered by hand and acknowledged by receipt or when mailed at any general or
branch United States Post Office enclosed in a registered or certified postpaid
envelope and addressed to the address of the respective party stated below or to
such changed address as the party may have fixed by notice:
To the Company: Enzon, Inc.
20 Kingsbridge Road
Piscataway, NJ 08854
Attn: Corporate Secretary
To Executive: Peter Tombros
159 Lambert Road
New Canaan, Connecticut 06840
6. Miscellaneous.
(a) This Agreement shall be construed, interpreted and governed by the laws
of the State of New Jersey, without regard to the conflicts of law provisions
thereof.
(b) This Agreement shall be binding upon and inure to the benefit of
Executive, his legal representatives, heirs and distributees, and shall be
binding upon and inure to the benefit of the Company, and its successors and
assigns; provided, however, that, because this Agreement is a personal service
contract, Executive shall not assign any of his employment duties or obligations
hereunder and any purported assignment shall be null and void ab initio.
19
<PAGE>
(c) Except as otherwise specifically provided herein, this Agreement
contains the entire agreement of the parties with respect to its subject matter,
and no waiver, modification or change of any of its provisions shall be valid
unless in writing and signed by the party against whom such claimed waiver,
modification or change is sought to be enforced.
(d) Except as otherwise specifically provided for hereunder, the waiver of
any breach of any duty, term or condition of this Agreement shall not be deemed
to constitute a waiver of any preceding or succeeding breach of the same or of
any other duty, term or condition of this Agreement.
(e) The headings of the sections and subsections of this Agreement are
inserted for convenience only and shall not be deemed to constitute a part
hereof or to affect the meaning thereof.
(f) Executive represents and warrants that his performance of all of the
terms of this Agreement and of his obligations as an executive of the Company
does not and will not breach any non-competition agreement or agreement to keep
in confidence any proprietary information or knowledge acquired by him in
confidence or in trust from a third party prior to his employment with the
Company.
(g) Any claim or controversy arising out of or relating to this Agreement
or the breach hereof shall be settled by arbitration in accordance with the laws
of the State of New Jersey. Such arbitration shall be conducted in the State of
New
20
<PAGE>
Jersey in accordance with the rules then existing of the American Arbitration
Association. Judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof. In the event of any dispute arising
under this Agreement, the prevailing party shall be entitled to reasonable legal
fees and disbursements incurred in connection therewith.
21
<PAGE>
(h) Whenever the context requires, any pronouns used herein shall include
the corresponding masculine, feminine or neuter forms, and the singular forms of
nouns and pronouns shall include the plural forms and vice versa.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the day and year first above written.
EXECUTIVE
/s/PETER TOMBROS
-------------------------
Peter Tombros
ENZON, INC.
By:/s/JOHN A. CARUSO
-----------------------
John A. Caruso
Vice President, Business
Development, General Counsel
22
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.
E23
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 8, 1997, relating to the consolidated
balance sheets of Enzon, Inc. and subsidiaries as of June 30, 1997 and 1996, 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, 1997,
which report appears in the June 30, 1997 annual report on Form 10-K of Enzon,
Inc.
/s/ KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Short Hills, New Jersey
September 29, 1997
E24
<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, 1997
and the Consolidated Statement of Operations for the year ended June 30,
1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,315,752
<SECURITIES> 0
<RECEIVABLES> 2,433,762
<ALLOWANCES> 0
<INVENTORY> 859,873
<CURRENT-ASSETS> 11,697,119
<PP&E> 15,676,525
<DEPRECIATION> 12,923,802
<TOTAL-ASSETS> 16,005,278
<CURRENT-LIABILITIES> 5,415,703
<BONDS> 0
0
1,090
<COMMON> 307,977
<OTHER-SE> 8,232,814
<TOTAL-LIABILITY-AND-EQUITY> 16,005,278
<SALES> 11,595,985
<TOTAL-REVENUES> 12,727,052
<CGS> 3,840,198
<TOTAL-COSTS> 17,888,738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,891
<INCOME-PRETAX> (4,557,025)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,557,025)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,557,025)
<EPS-PRIMARY> (0.16)
<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(R), sales of
ONCASPAR(R), sales of its products for research purposes, contract research and
development fees, technology transfer and license fees and royalty advances. At
June 30, 1997 the Company had an accumulated deficit of approximately
$113,193,000. 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, 1997, an aggregate of
$2,377,000 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.
During October 1996, the Company entered into an exclusive license and marketing
agreement for ONCASPAR in Europe and Russia with Medac GmbH ("MEDAC"). Under the
agreement, MEDAC purchases ONCASPAR from the Company at set prices which
increase over the term of the agreement. The agreement also contains certain
minimum annual purchase requirements. 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, 1997 were
approximately $8,316,000. 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
and one half 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.
E26
<PAGE>
Raw Materials and Dependence Upon Suppliers. Except for PEG hemoglobin, the
Company purchases from outside suppliers the unmodified compounds utilized in
its approved products and products under development. 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 has a supply contract with each of
the outside suppliers of unmodified adenosine deaminase used in the manufacture
of ADAGEN and the unmodified L-asparaginase used in the manufacture of ONCASPAR.
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, preclinical 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 preclinical 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, or 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 patent held by Research Corporation Technologies, Inc.
("Research Corporation") upon which the PEG Process is based expired in December
1996. 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. 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.
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 exclusive marketing rights to RPR
in North America and
E27
<PAGE>
MEDAC in Europe and Russia. 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.
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. Although Enzon is not aware of any competitor that has achieved the
same level as the Company in utilizing PEG technology in developing drug
products, it is aware of other companies that 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(R)) 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 the Company
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 that
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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.
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.
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