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, 1999 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. __
The aggregate market value of the Common Stock, par value $.01 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on September 17, 1999 was approximately $1,078,697,000. There is no market
for the Series A Cumulative Convertible Preferred Stock, the only other class of
voting stock.
As of September 17, 1999, there were 36,721,599 shares of Common Stock, par
value $.01 per share, outstanding.
The Index to Exhibits appears on page 30.
Documents Incorporated by Reference
The registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on December 7, 1999, 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.
1999 Form 10-K Annual Report
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 18
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 20
Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements With Accountants on Accounting and 29
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 30
Item 13. Certain Relationships and Related Transactions 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 30
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The following trademarks and service marks appear in this Annual Report:
ADAGEN(R), ONCASPAR(R) and PROTHECAN(R) are registered trademarks of Enzon,
Inc.; SCA(R) is a registered trademark of SCA Ventures Inc., formerly Enzon
Labs Inc.; Elspar(R) is a registered trademark of Merck & Co., Inc;
INTRON(R) A is a registered trademark of Schering-Plough Corporation;
REBETRON(TM) and PEG-Intron(TM) are trademarks of Schering-Plough
Corporation; REBETOL(R) is a registered trademark of ICN Pharmaceuticals,
Inc.; Hycamtin(TM) is a trademark of SmithKline Beecham plc; Camptosar(R)
is a registered trademark of Rhone-Poulenc Rorer Pharmaceuticals Inc.;
Roferon(R)-A is a registered trademark of Hoffmann-LaRoche, Inc. and
Pegasys(TM) is a trademark of Hoffman-LaRoche.
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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 two proprietary technologies: (i)
polyethylene glycol ("PEG") Modification or the PEG Process and (ii)
single-chain antigen-binding ("SCA(R)") proteins. Enzon is focusing its internal
research activities on applying its proprietary technologies to compounds of
known therapeutic efficacy in order to enhance the performance of these
compounds. The Company is commercializing its proprietary technologies by
developing products internally and in cooperation with strategic partners. To
date, the Company and its partners have successfully commercialized two
products, ONCASPAR(R) and ADAGEN(R) (described below). The Company currently has
two products in clinical development as well as several compounds in preclinical
development and has established more than 15 strategic alliances and license
relationships for the development of products using the Company's proprietary
technologies. The Company believes that its partners are dedicating substantial
resources to the development of products which incorporate Enzon's proprietary
technologies. These efforts include the development of PEG-Intron(TM), a PEG
modified version of Schering-Plough Corporation's ("Schering-Plough") product
and, INTRON(R) A (interferon alfa 2b), a genetically-engineered
anticancer-antiviral drug. Schering-Plough is currently conducting late stage
clinical trials for PEG-Intron in several indications.
PEG Technology
The PEG process involves chemically attaching 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 "PEG
Process"). The attachment of PEG helps to disguise the compound and reduce the
recognition of the compound by the immune system, generally lowering potential
immunogenicity and extending the life of such compounds in the circulatory
system. The PEG Process also increases the solubility of the modified compound,
which enhances the delivery of the native compound. To date, Enzon's
commercialized products are PEG modified proteins. Through enhancements, Enzon
is applying its PEG technology to more traditional pharmaceutical "organic"
compounds.
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 certain patents covering some improvements. One of the
components of the Second Generation PEG Technology is new linker chemistries;
the chemical binding of PEG to unmodified proteins. These new linkers provide an
enhanced binding of the PEG to the protein resulting in a more stable compound
with increased circulation life and may result in more activity of the modified
protein.
The Company also has developed a Third Generation PEG Technology that is
designed to enable the technology to be expanded to certain organic compounds
and would give such 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 active ingredient in the
proximity of various tissues. In animal models the Company has been able to
demonstrate that Third Generation PEG modified compounds preferentially
accumulate in tumors. The attachment of PEG can also increase the solubility of
organic compounds, which are typically insoluble. The Company believes that the
"Pro Drug/Transport Technology" can be applied to a wide range of small
molecules, such as cancer chemotherapy agents, antibiotics, anti-fungals and
immunosuppressants, as well as to proteins and peptides, including enzymes and
growth factors. There can be no assurance that such application will result in
safe, effective, or commercially viable pharmaceutical products.
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PEG Products under Development
The Company currently has two products that utilize its PEG Technology in
human clinical trials as well as additional compounds in preclinical trials. The
first product is PEG-Intron, a PEG modified version of Schering-Plough's
product, INTRON A (interferon alfa 2b), a genetically-engineered
anticancer-antiviral drug. Schering-Plough is currently conducting late stage
clinical trials for use of PEG-Intron in the treatment of hepatitis C and
cancer. The second product under development is PROTHECAN(R), a PEG modified
version of camptothecin, a potent topoisomerase-1 inhibitor, for use in certain
cancers. PROTHECAN, which utilizes the Company's Third Generation PEG
Technology, is currently in a Phase I safety trial being conducted by Enzon. In
addition, the Company has several additional Third Generation PEG Technology
products in preclinical testing.
PEG-Intron was developed by the Company in conjunction with Schering-Plough
to have potentially longer lasting activity, an enhanced safety profile and
improved efficacy compared to the currently marketed form of INTRON A.
PEG-Intron is currently in large scale Phase III clinical trials in hepatitis C
patients as a monotherapy and in combination with REBETOL(R) (ribavirin) in the
United States, Europe and Japan. PEG-Intron is also in large scale Phase III
clinical trials for two cancer indications, chronic myelogenous leukemia and
malignant melanoma. The product is also in several earlier stage clinical trials
for the treatment of solid tumors and other leukemias. It is expected that
PEG-Intron will be administered once per week, compared to the current regimen
for unmodified INTRON A of three times or more per week. Moreover, it is
anticipated that PEG-Intron will have an improved side effect profile and an
improved therapeutic index. Currently, some patients on unmodified INTRON A
experience debilitating flu-like symptoms.
Pursuant to an agreement with Schering-Plough, the Company will receive
royalties on worldwide sales of PEG-Intron and milestone payments.
Schering-Plough's combined sales of INTRON A and REBETOL (REBETRON(TM)
Combination Therapy) were approximately $719 million in 1998. The worldwide
market for alpha interferon products is estimated to be in excess of $1.5
billion for all approved indications. The Company's Second Generation PEG
Technology patents that cover the modified product should afford Schering-Plough
extended patent life for PEG-Intron.
Marketed PEG Products
The Company received marketing approval from the United States Food and
Drug Administration ("FDA") for two first generation PEG technology products:
(i) ADAGEN, the PEG formulation of adenosine deaminase ("ADA"), 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" and (ii) ONCASPAR, the PEG formulation of
asparaginase, for the indication of acute lymphoblastic leukemia ("ALL") in
patients who are hypersensitive to native forms of L-asparaginase.
ADAGEN is marketed by Enzon on a worldwide basis. ONCASPAR is marketed in
the U.S. and Canada by Rhone-Poulenc Rorer Pharmaceuticals, Inc. and certain of
its affiliated entities ("RPR") and in Europe by Medac GmbH ("MEDAC").
Currently, the Company is temporarily distributing ONCASPAR in the U.S. and
Canada on a limited basis due to a manufacturing problem encountered during the
year. It is anticipated that this problem will be resolved in the next year and
that RPR will resume distribution of the product. The Company has also granted
exclusive licenses to RPR to sell ONCASPAR in the Pacific Rim and Mexico. When
ONCASPAR is distributed by RPR, the Company is entitled to royalties on the
sales of ONCASPAR in North America and manufacturing revenue from the production
of ONCASPAR. The Company's agreements with RPR for the Pacific Rim and with
MEDAC require the partners to purchase ONCASPAR from the Company at a set price,
which increases over the term of the agreements. In addition, the agreements
provide for minimum purchase quantities. The Company manufactures both ADAGEN
and ONCASPAR in its South Plainfield, New Jersey facility.
SCA Technology
Enzon's other proprietary technology is SCA protein technology. SCA
proteins are genetically engineered proteins designed to expand on the
therapeutic and diagnostic applications possible with monoclonal antibodies.
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SCA proteins have the binding specificity and affinity of monoclonal antibodies,
and Enzon believes that SCA proteins offer at least five additional benefits
that expand the utility of antigen binding proteins: (i) greater tissue
penetration for both diagnostic imaging and therapy, (ii) more specific
localization to target sites in the body, (iii) a significant decrease in
immunogenic problems when compared with mouse-based antibodies, (iv) easier and
more cost effective scale-up for manufacturing when compared with monoclonal
antibodies and (v) enhanced screening capabilities which allow for the more
rapid assessment of SCA proteins of desired specificity using high throughput
screening methods. In addition to these benefits, fully-human SCA proteins can
be isolated directly from human SCA libraries without the need for costly and
time consuming "humanization" procedures. SCA proteins are also readily produced
through intracellular expression (inside cells) allowing for their use in gene
therapy applications where SCA molecules act as specific inhibitors of cell
function.
Currently, there are eleven SCA proteins that have either completed or are
in Phase I or II clinical trials by various organizations, including licensees
of the Company and academic institutions. Some of the areas being explored are
cancer therapy, cardiovascular indications and AIDS. The Company has begun a
program to develop SCA compounds in-house. The Company has granted non-exclusive
licenses to more than a dozen companies, including Bristol-Myers Squibb Company,
Baxter Healthcare Corporation, Eli Lilly & Co., Alexion Pharmaceuticals Inc.,
and the Gencell division of RPR. These licenses generally provide for upfront
payments, milestone payments and royalties on sales of FDA approved products.
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 the section entitled Risk Factors, 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 has received U.S. marketing approval from the FDA for two First
Generation PEG Technology products, ADAGEN and ONCASPAR. The Company received
approval from the FDA for ADAGEN in March 1990 and for ONCASPAR in February
1994.
ADAGEN
ADAGEN, the Company's first FDA approved product, is currently being used
to treat 61 patients in 7 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 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, 1999, 1998 and 1997
were $11,246,000, $10,107,000 and $8,935,000, respectively. Currently, the only
alternative to ADAGEN treatment is a well-matched bone marrow transplant.
Patients that are unable to receive successful bone marrow transplants are
expected to
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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.
ONCASPAR
ONCASPAR, the enzyme L-asparaginase modified by the PEG Process, is
currently approved in the United States, Canada 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. and Canada 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. by Merck & Co. as Elspar(R).
Native L-asparaginase sold by other companies is used in Europe to treat
adult ALL and non-Hodgkins lymphoma, in addition to pediatric ALL. 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.
ONCASPAR was launched in the United States by RPR during March 1994. The
Company has granted RPR an exclusive license (the "Amended RPR U.S. 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 U.S. License Agreement. During fiscal 1999, the FDA and
the Company agreed to institute temporary labeling modifications for ONCASPAR
and assumed the responsibility for distribution of ONCASPAR. The temporary
labeling and distribution modifications were a result of an increased level of
particulates in certain batches of ONCASPAR, manufactured by the Company. The
Company has been able to manufacture several batches of ONCASPAR which contain
acceptable levels of particulates and anticipates a final resolution of the
problem during fiscal 2000. It is expected that RPR will resume distribution of
ONCASPAR at that time. There can be no assurance that this solution will be
acceptable to the FDA. If the Company is unable to resolve this problem it is
possible that the FDA may not permit the Company to continue to distribute this
product. An extended disruption in the marketing and distribution of ONCASPAR
could have a material adverse impact on future ONCASPAR sales. During May 1999,
the FDA further limited the distribution of ONCASPAR to patients who are
hypersensitive to other forms of L-asparaginase.
RPR Agreements
Under the Company's Amended RPR U.S. License Agreement, Enzon has received
licensing payments totaling $6,000,000 and is entitled to a base royalty of
23.5% until 2008, on net sales of ONCASPAR up to agreed upon amounts.
Additionally, the Amended RPR U.S. License Agreement provides for a super
royalty of 43.5% 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 U.S. 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 U.S. 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 U.S. License Agreement and interest expense. Super royalties will
be paid to the
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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, 1999 and 1998. The royalty advance
will be reduced as base royalties are recognized under the agreement.
The Amended RPR U.S. 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 U.S. License Agreement revert to
Enzon. A separate supply agreement with RPR requires RPR to purchase from Enzon
all Product requirements for sales in North America.
The Company and RPR are currently in discussions related to a disagreement
over the purchase price of ONCASPAR under the supply agreement between the two
companies. RPR has asserted that the Company has overcharged RPR under the
supply agreement in the amount of $2,329,000. The Company believes its costing
and pricing of ONCASPAR to RPR complies with the supply agreement. RPR has also
asserted that the Company should be responsible for its lost profits while
ONCASPAR is under the temporary labeling and distribution modifications. RPR
contends that its lost profits through June 30, 1999 were $2,968,000. The
Company does not agree with RPR's claims. The Company does not believe the
ultimate resolution of either matter will have a materially adverse effect on
the Company's financial position or results of operations.
Under a separate license, RPR has exclusive rights 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.
The Company also has a license agreement with RPR for the Pacific Rim
region, specifically, Australia, New Zealand, Japan, Hong Kong, Korea, China,
Taiwan, Philippines, Indonesia, Malaysia, Singapore, Thailand and Viet Nam, (the
"Pacific Rim"). The agreement provides for RPR to purchase ONCASPAR for the
Pacific Rim from the Company at certain established prices, which increase over
the ten year term of the agreement. Under the agreement, RPR is responsible for
obtaining additional approvals and indications in the licensed territories. The
agreement also provides for minimum purchase requirements for the first four
years of the agreement.
MEDAC Agreement
The Company has also granted an exclusive license 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.
Under the agreement, MEDAC is required to meet certain minimum purchase
requirements.
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, 1999, 1998 and 1997 were approximately $6,836,000, $8,654,000 and
$8,520,000, respectively.
The Company's research and development activities during fiscal 1999
concentrated primarily on preclinical work on PROTHECAN, 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
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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 and patented proprietary know-how, collectively
referred to as Second Generation PEG 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
Technologies is to permanently attach PEG to the unmodified protein. The PEG
modified version of Schering-Plough's INTRON A, which is in several Phase III
clinical trials in the U.S. and Europe, utilizes the Company's Second Generation
PEG Technology. 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
temporarily inactivate the compound, and then 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 and anti-fungals. One such compound, PROTHECAN, a PEG
modified version of camptothecin, a topo-1 inhibitor, is in a Phase I clinical
trial. 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 preferentially 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
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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 several patent applications relating to its Pro
Drug/Transport Technology that have been allowed or are under review. See
"Patents".
Single-Chain Antigen-Binding (SCA) Proteins
Enzon's proprietary SCA proteins are genetically engineered proteins
designed to expand on the therapeutic and diagnostic applications possible with
monoclonal antibodies. SCA proteins have the binding specificity and affinity of
monoclonal antibodies, and Enzon believes that human SCA proteins offer at least
five additional benefits that expand the utility of antigen-binding proteins:
(i) greater tissue penetration for both diagnostic imaging and therapy, (ii)
more specific localization to target sites in the body, (iii) a significant
decrease in immunogenic problems when compared with mouse-based antibodies, (iv)
easier and more cost effective scale-up for manufacturing when compared with
monoclonal antibodies and (v) enhanced screening capabilities which allow for
the more rapid assessment of SCA proteins of desired specificity using high
throughput screening methods. In addition to these benefits, fully-human SCA
proteins can be isolated directly from human SCA libraries without the need for
costly and time consuming "humanization" procedures. SCA proteins are also
readily produced through intracellular expression (inside cells) allowing for
their use in gene therapy applications where SCA molecules act as specific
inhibitors of cell function.
Beyond these established benefits we anticipate the future of antibody
derived therapeutics will employ "designer antibodies" exhibiting tailored
affinity, valency, effector and pharmacological properties. The simplicity of
the single gene, single polypeptide SCA designs may form the basis for the next
generation of immunotherapy drugs.
Enzon and numerous other academic and industrial laboratories have
demonstrated the binding specificity of SCA proteins through the preparation and
in vitro testing of dozens of different SCA proteins. The Company, in
collaboration with Dr. Jeffrey Schlom of the Laboratory of Tumor Immunology and
Biology at the National Cancer Institute ("NCI"), has convincingly shown in
published preclinical studies that SCA proteins localize to specific tumors and
rapidly penetrate the tumors.
Currently, there are eleven SCA proteins that have either completed or are
in Phase I or II clinical trials by various organizations, including licensees
of the Company and academic institutions. Some of the areas being explored are
cancer therapy, cardiovascular indications and AIDS. The Company believes that
those organizations that have not yet licensed this technology will need a
license from Enzon to commercialize these products, but there can be no
assurance that this will prove to be the case. The following are some examples
of research being conducted in the SCA area:
The Company's licensee, Alexion Pharmaceuticals, Inc. ("Alexion") has
developed a humanized SCA protein, 5G-1.1SC, directed against complement
protein C5. Complement protein C5 is a component of the body's normal
defense against foreign pathogens. Inappropriate complement activation
during cardiopulmonary bypass and myocardial infarction can lead to
clinical problems. Phase I trials of 5G-1.1SC during cardiopulmonary bypass
have demonstrated clinically significant improvements in cardiac and
neurological function as well as reduced blood loss. Alexion in conjunction
with its partner Procter & Gamble is evaluating 5G-1.1SC in a Phase IIb
study of 1,000 subjects undergoing cardiopulmonary bypass surgery. Alexion
and Procter & Gamble are also planning to study 5G-1.1SC in two Phase II
acute myocardial infarction trials later in 1999.
Another application of the Company's SCA technology is in the area of
"T-Bodies". T-Body technology involves the expression of an SCA protein in
a T-Cell that has been removed from the body. T-Cells, a type of lymphocyte
cell, represent an important component of the immune system responsible for
cell-mediated immunity and represent one of the body's natural defenses
against foreign materials such as cancer cells and infectious organisms.
Using SCA technology T-Cells can be modified through molecular biology
methods to express an SCA on the cell surface that can then recognize and
bind to a specific
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antigen, thereby targeting the T-Cell to a specific location. Cell Genesys,
an Enzon licensee, has had success in applying T-Bodies in preclinical
studies with the CC49 SCA protein targeted to the TAG-72 cancer antigen. In
its recently completed Phase I/II trial Cell Genesys reported that the
treatment could be safely administered in an outpatient setting although no
antitumor activity was observed.
SCA proteins are also being used in antibody engineering, through the
use of phage display library technology, for the isolation of high
specificity antibody binding regions. Using phage display technology, it is
possible to conveniently isolate a fully human high-affinity SCA protein
specific to virtually any target antigen, including anti-self targets.
Cambridge Antibody Technology Ltd. ("CAT"), an Enzon licensee, is a pioneer
in the development of combinatorial antibody libraries (the "Phage Antibody
System"). CAT currently has several licensing agreements with global
pharmaceutical and biotechnology companies to apply their library to the
identification and isolation of high specificity antibody proteins. Any
companies working with CAT will be required to negotiate a license with
Enzon for any SCA protein that they might wish to commercialize.
Scientists at the Dana-Farber Cancer Institute and the University of
Alabama are conducting research utilizing SCA proteins called intrabodies.
These are SCA proteins produced in an intracellular environment (inside the
cell) via gene therapy. The Dana Farber Cancer Institute is studying the
use of a very specific intrabody for HIV/AIDS while the University of
Alabama is studying a separate intrabody for ovarian cancer targeted to the
erbB-2 receptor. Animal data generated from these studies have revealed
that SCA proteins produced through intracellular expression can provide an
important therapeutic response. The University of Alabama has completed a
Phase I trial and the Dana-Farber Cancer Institute expects to initiate
its trial shortly.
The Company believes it has a dominant patent position in SCA protein
technology and has received numerous patents encompassing basic SCA designs and
applications, the most recent of which expires in 2016 (see "Patents"). The
Company is developing several new technology platforms combining its proprietary
SCA and PEG technologies. These platforms are expected to further expand the
utility of SCA proteins in particular by allowing for the development of highly
specific SCA proteins that have a circulating half-life matching the therapeutic
indication. Enzon is also evaluating the feasibility of licensing in SCA
proteins for internal development, in addition to licensing the basic SCA
technology to other companies for use in discovery and therapeutic product
programs. To date, the Company has granted SCA product licenses to more than
fifteen companies, including Bristol-Myers Squibb, Baxter Healthcare, Eli Lilly
and RPR Gencell. These product licenses generally provide for upfront payments,
milestone payments and royalties on sales of commercialized products. See
"Strategic Alliances and License Agreements".
Products Under Development
The Company currently has two products that utilize its PEG technology in
clinical trials as well as several in preclinical trials. The first is
PEG-Intron, a PEG modified version of Schering-Plough's product, INTRON A
(interferon alfa 2b), a genetically-engineered anticancer-antiviral drug, for
which Schering-Plough is currently conducting several Phase III clinical trials
for use in the treatment of hepatitis C and cancer. The second product under
development is PROTHECAN, a PEG-modified version of camptothecin, a potent
topoisomerase-1 inhibitor, for use in certain cancers, which is currently in
Phase I clinical trials being conducted by Enzon. During 1998, Enzon completed a
Phase Ib clinical trial for PEG-hemoglobin, a proprietary bovine
hemoglobin-based oxygen-carrier being developed for the radiosensitization of
solid hypoxic tumors. The Company has ceased development of this product until a
partner can be identified to fund Phase II clinical trials.
PEG-Intron
PEG-Intron was developed by the Company in conjunction with Schering-Plough
to potentially have longer lasting activity, an enhanced safety profile and
better efficacy compared to the currently marketed form of Schering-Plough's
INTRON A. It is expected that PEG-Intron will be administered once per week,
compared to the current regimen for unmodified INTRON A of three or more times
per week. Currently, some patients on unmodified INTRON A experience
debilitating flu-like symptoms.
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Schering-Plough's combined sales of INTRON A and REBETOL (REBETRON
Combination Therapy) were approximately $719 million in 1998 for all approved
indications. The worldwide market for alpha interferon products is estimated to
be in excess of $1.5 billion for all approved indications.
Schering-Plough is currently developing PEG-Intron for hepatitis C as a
monotherapy and as a combination therapy with an antiviral compound, REBETOL
(REBETRON Combination Therapy). Both indications are in Phase III clinical
trials. Schering's unmodified INTRON A is currently approved as a monotherapy
and in combination with ribavirin, marketed as REBETOL. It is expected that
PEG-Intron will be administered once per week, as compared to the current
regimen of three times per week; the side effect profile will be improved and
the product may be potentially more efficacious then unmodified INTRON A. It is
estimated that roughly one half of Schering-Plough's sales of INTRON A are for
hepatitis indications.
An estimated ten million people worldwide are infected with the hepatitis C
virus, including nearly four million in the U.S. The majority of people in the
United States are thought to have contracted the virus through blood
transfusions. Prior to 1992 the blood supply was not screened for the hepatitis
C virus. The majority of people infected with the virus are thought to be
unaware of the infection because the hepatitis C virus can exist for up to ten
years before patients become symptomatic. Today it is estimated that roughly
only 50,000 patients are currently being treated in the U.S. for hepatitis C.
Because of the side effect profile of INTRON A and the other competing therapy,
patients who have been diagnosed with the hepatitis C virus are sometimes
reluctant to take the product.
Schering-Plough is also developing PEG-Intron for use in cancer. PEG-Intron
is in Phase III clinical trials for chronic myelogenous leukemia and malignant
melanoma, as well as earlier stage clinical trials for various solid tumors and
other leukemias. Due to the potential for improved side effects it is
anticipated that higher doses of PEG-Intron will be used, as compared to the
current unmodified INTRON A, which could lead to increased efficacy and
additional indications or usage. PEG-Intron is expected to be administered once
per week, as opposed to up to five times per week for current cancer regimens
with unmodified INTRON A. Published Phase I clinical data has shown that some
patients who previously did not respond to unmodified INTRON A treatment did
respond to PEG-Intron.
The Company's Second Generation PEG Technology patents that have been
licensed to Schering-Plough should provide extended patent life for Intron A.
PROTHECAN
PROTHECAN or PEG-camptothecin is the first product to utilize the Company's
Third Generation-Pro/Drug Transport Technology. The compound, a PEG modified
version of camptothecin, a topo-1 inhibitor, is being developed as an oncolytic,
anticancer compound. Camptothecin, which was originally developed at the NIH and
is now off patent is believed be the most potent of the topo-1 inhibitors.
For many years camptothecin 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 efficacy rate on the
compounds is relatively low. The Company believes that its Pro Drug/Transport
Technology has additional delivery advantages and increased therapeutic value
over the compounds on the market.
The Company believes that by adjusting the way PEG is covalently attached
to camptothecin, PEG attachment can be used to inactivate the compound's toxic
mechanism, while allowing it 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 Third Generation PEG-modified
compounds preferentially accumulate in tumors. The covalent bond used in the
camptothecin to attach PEG to the drug is designed to deteriorate over time,
resulting in the PEG falling off and allowing the compound to resume its
activity.
The Company is currently conducting a Phase I clinical trial on the
compound.
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Hemoglobin-Based Oxygen-Carrier
In 1998, the Company concluded a Phase Ib clinical trial for a
hemoglobin-based oxygen-carrier, PEG-hemoglobin, for use as a radiosensitizer,
in conjunction with radiation treatment of solid hypoxic tumors. The Company has
halted the development of its hemoglobin-based oxygen-carrier pending the
identification of a partner to fund Phase II clinical trials. To date, no such
agreement has been concluded and there can be no assurance that any such
agreement will be consummated. Furthermore, there can be no assurance of market
acceptability of a hemoglobin-based oxygen-carrier produced from bovine
hemoglobin.
Single-Chain Antigen-Binding (SCA) Proteins
The Company is currently evaluating the feasibility of licensing in, for
internal development, several SCA compounds currently under development.
Currently, there are eleven SCA proteins that have either completed or are
in Phase I or II clinical trials conducted by various corporations and
institutions, including a product developed by one of the Company's licensees,
Alexion, which is in a Phase IIb clinical trial. Some of the areas being
explored with SCAs 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 late stages of the approval progress;
PEG-Intron and Human Serum Albumin, as well as several SCA compounds in Phase I
and Phase II clinical trials.
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 four large scale Phase III clinical trials in the
United States, Europe and Japan for hepatitis C and cancer as well as earlier
stage trials for various solid tumors and leukemias. The trials call for
administration of PEG-Intron once per week as compared to the current regimen
for unmodified INTRON A of three times per week. PEG-Intron 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, AIDS-related Kaposi's sarcoma, venereal warts,
hairy cell leukemia and malignant melanoma. It is approved for use in 82
countries for 16 disease indications. Schering-Plough reported 1998 combined
sales of INTRON A and REBETOL (REBETRON Combination Therapy) of $719 million
worldwide.
Under the license agreement, which was amended in 1995 and 1999, the
Company will receive royalties on worldwide sales of PEG-Intron, if any.
Schering is responsible for conducting and funding the clinical studies,
obtaining regulatory approval and marketing the product worldwide on an
exclusive basis. During 1999, the Company and Schering amended the agreement
that resulted in an increase in the effective royalty rate in return for the
elimination of Enzon's exclusive U.S. manufacturing rights for the product and a
license under one of the Company's Second Generation PEG patents for Branched or
U-PEG. The license for Branched PEG gives Schering the ability to sublicense the
patent to any party developing a competing interferon product.
Enzon is entitled to an additional $3,000,000 in payments from Schering,
subject to the achievement of certain milestones in the development of
PEG-Intron. The Schering Agreement terminates, on a country-by-country
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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. Revenue will not be recognized on these payments until the product is
deemed to meet specification.
Green Cross Agreement
The Company has a license agreement with Green Cross Corporation ("Green
Cross") (which was acquired by Yoshitomi Pharmaceutical, Inc.) for the
development of a recombinant Human Serum Albumin (rHSA), as a blood volume
expander. Green Cross has reported that it filed for approval of this product in
Japan in November 1997. 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 in binding arbitration to resolve
a dispute regarding the royalty rate called for in the agreement. Green Cross
has filed papers in the arbitration taking the position that no royalty will be
due to Enzon. Enzon disputes such a position and is vigorously pursuing its
claim in the arbitration for the royalty stated in the agreement. There can be
no assurance that Enzon will prevail in the arbitration.
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 more than 15
non-exclusive SCA protein licenses. The following is a partial list of the
Company's SCA protein licenses.
<TABLE>
<CAPTION>
Corporate Partner Agreement Date Product Disease or Indication Program Status
- ----------------- -------------- --------- --------------------- --------------
<S> <C> <C> <C> <C>
Alexion Pharmaceuticals, Inc. May 1996 Complement Cardiopulmonary Phase IIb
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 Research
Seattle Genetics September 1998* BR96 Cancer Phase I
Cambridge Antibody Technology Ltd. September 1996 Phage Display Library All Therapeutics Research
Cell Genesys Inc. November 1993 SCA/Receptor Technology Colon Cancer Phase I/II
Eli Lilly and Co. December 1992 SCA proteins Undetermined Research
Gencell Division of RPR December 1995 SCA proteins Gene Therapy Research
</TABLE>
*Bristol-Myers Squibb sublicensed BR96 SCI to Seattle Genetics. This is the only
compound that is sublicensed under the Bristol Agreement.
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
(i) RPR for North America and the Pacific Rim, (ii) MEDAC for Europe and Russia
and (iii) Tzamal Pharma Ltd. for Israel, pursuant to the agreements described in
"Products on the Market - ONCASPAR".
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<PAGE>
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, the Company's facility was inspected by two branches of the FDA,
the Center for Drug Evaluation and Research and the Center for Biologics
Evaluation and Research, for compliance with the FDA's current Good
Manufacturing Practices. These inspections continue on a periodic basis after
FDA marketing approval. The facility has also been inspected by the Canadian
Health Protection Branch and the German Federal Institute for Drugs and Medical
Devices, the equivalent of the FDA in those countries. The manufacturing
facility was granted an establishment license by the FDA in February 1994.
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's supply contract for the L-asparaginase used in the
production of product for the North American market expires in December 1999.
The Company is currently in discussions to extend this agreement. The Company
purchases the unmodified L-asparaginase used in the production of ONCASPAR for
the European market from a different supplier than that used for the U.S.
market.
Delays in obtaining or an inability to obtain any unmodified compound,
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
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<PAGE>
models to assess the drug's efficacy and to identify potential safety problems.
The results of these studies are submitted to the FDA as a part of the
Investigational New Drug Application ("IND"), which is filed to obtain approval
to begin human clinical testing. The human clinical testing program may involve
up to three phases. Data from human trials are submitted to the FDA in a New
Drug Application ("NDA") or Biologic License Application ("BLA"). Preparing an
NDA or BLA 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. and Germany in 1994 and in Canada in December 1997 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. 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.
The current market for Intron A, Schering Plough's interferon alpha 2b
product, is a highly competitive
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<PAGE>
market with Schering, Hoffmann-LaRoche, Inc. ("Hoffman-LaRoche) and Amgen, Inc.
as well as several other companies selling similar products. The Company
believes that PEG-Intron will have several potential advantages over the
interferon products currently on the market, principally once per week dosing
versus the current three times per week dosing, with an improved side effect
profile and increased efficacy. It has also been reported that Hoffmann-LaRoche
also has a potentially longer lasting version of its interferon product,
Roferon(R)-A, in Phase III clinical trials, called Pegasys(TM). The Company
believes that this product infringes a patent which covers one of the Company's
Second Generation PEG Technologies, called Branched PEG. The Company has
initiated patent infringement litigation against the supplier of the PEG
technology used in Hoffmann-LaRoche's PEGASYS(TM), Shearwater Polymers Inc.,
which seeks to block this product from entering the market. (see "Patents").
Several companies are actively pursuing the development of agents to
increase the oxygen level in solid tumors and thereby enhance the efficacy of
radiation and/or chemotherapy that could compete with PEG-hemoglobin. Some of
these agents are also being tested in clinical trials. In addition, many
conventional cytotoxic agents are currently used in combination with each other
and/or with radiation to give additive or synergistic anti-cancer effects.
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 likely 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. In certain cases, the Company has obtained
opinions of patent counsel that certain of such patents, including patents
relevant to PEG-hemoglobin held by Biopure Inc. and patents relevant to
PEG-Intron held by Hoffman-LaRoche, are not infringed by the products of the
Company or its collaborators or would not be held to be valid if litigated. Such
opinions have been relied upon by the Company and its collaborators in
continuing to pursue development of the subject product. Such opinions are not
binding on any court and there can be no assurance that such opinions will prove
to be correct and that a court would find any of the claims of such patents to
be invalid or that the product developed by the Company or its collaborator does
not infringe such patents.
The Company also believes that there are PEG modified products being
developed that infringe on one or more of the Company's Second Generation PEG
Technology patents. During fiscal 1999 the Company filed a patent infringement
suit against Shearwater Polymers Inc., a company that reportedly has developed a
PEG modified version of ROFERON-A, Hoffmann-La-Roche's version of alpha
interferon, called Pegasys. According to published reports, Pegasys utilizes a
type of PEG called Branched or U-PEG for which Enzon has been granted a patent
in the U.S. and has a similar patent pending in Europe. While the Company
believes its patent which covers Branched PEG
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<PAGE>
will be held valid and could prevent this product from being introduced into the
market, there can be no assurance that the Company will be successful in this
area.
The Company expects that there may be significant litigation in the
industry regarding patents and other proprietary rights and, if Enzon were to
become involved in such litigation, it could consume a substantial amount of the
Company's resources. In addition, the Company relies heavily on its proprietary
technologies for which pending patent applications have been filed and on
unpatented know-how developed by the Company. Insofar as the Company relies on
trade secrets and unpatented know-how to maintain its competitive technological
position, there can be no assurance that others may not independently develop
the same or similar technologies. Although the Company has taken steps to
protect its trade secrets and unpatented know-how, third-parties nonetheless may
gain access to such information.
The original PEG Process patent which was licensed from Research
Technologies Corp. expired in December 1996. The Company has made significant
improvements to the original PEG Process called Second Generation PEG Technology
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 (BABSO) 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, 1999, Enzon employed 83 persons, of whom 36 were engaged in
research and development activities, 26 were engaged in manufacturing, and 21
were engaged in administration and management. As of June 30, 1999, the Company
had 15 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.
17
<PAGE>
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
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.
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 and believes the ultimate resolution of this
matter will not have a material adverse effect on the financial position of the
Company.
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.
18
<PAGE>
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, 1999 and 1998, 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, 1999
First Quarter 7.13 3.97
Second Quarter 13.94 5.13
Third Quarter 16.69 13.25
Fourth Quarter 20.56 11.50
Year Ended June 30, 1998
First Quarter 5.19 2.00
Second Quarter 7.25 4.75
Third Quarter 7.19 5.13
Fourth Quarter 6.88 4.56
As of September 17, 1999 there were 2,232 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, 1999.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended June 30
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $13,158,207 $14,644,032 $12,727,052 $12,681,281 $15,826,437
Net Loss $(4,919,208) 3,617,133) (457,025) (5,175,279) (6,291,491)
Net Loss per Share $ (0.14) $ (0.12) (0.16) $ (.20) $ (.26)
Dividends on
Common Stock None None None None None
</TABLE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $34,916,315 $13,741,378 $16,005,278 $21,963,856 $19,184,042
Long-Term Obligations $ -- $ -- $ -- $ 1,728 $ 4,076
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Fiscal Years Ended June 30, 1999, 1998 and 1997
Revenues. Revenues for the year ended June 30, 1999 decreased to
$13,158,000 as compared to $14,644,000 for fiscal 1998 due to a decrease in
contract revenue. 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 4% to $12,856,000 for the year ended
June 30, 1999 as compared to $12,313,000 for the prior year. The increase was
due to an increase in ADAGEN sales of approximately 11%, resulting from an
increase in patients receiving ADAGEN treatment. Net sales of ADAGEN, which is
marketed by Enzon, for the years ended June 30, 1999 and 1998 were $11,246,000
and $10,107,000, respectively. The Company markets its other approved product,
ONCASPAR, through marketing agreements in the U.S. and Canada with RPR and in
Europe with MEDAC. ONCASPAR revenues under the Company's Amended RPR U.S.
License Agreement are comprised of manufacturing revenues, as well as royalties
on sales of ONCASPAR by RPR. ONCASPAR revenues for fiscal 1999 decreased due to
a decline in manufacturing and royalty revenues resulting from difficulties
encountered in the Company's manufacturing process and the resulting changes in
labeling and distribution described below.
During 1998 the Company began to experience manufacturing problems with
ONCASPAR. The problems were due to an increase in the levels of particulates in
batches of ONCASPAR which resulted in an increased rejection rate for this
product. During fiscal 1999, as a result of these manufacturing problems the
Company and the FDA agreed to temporary labeling and distribution modifications
for ONCASPAR. The Company, rather then RPR, took over distribution of ONCASPAR
directly to patients on an as-needed basis and instituted additional inspection
and labeling procedures prior to distribution. In addition during May 1999, the
FDA required the Company to limit distribution of the product to only those
patients who are hypersensitive to native L-asparaginase.
The Company has been able to manufacture several batches of ONCASPAR which
contain acceptable levels of particulates and anticipates a final resolution of
the problem during fiscal 2000. It is expected that RPR will resume distribution
of ONCASPAR at that time. There can be no assurance that this solution will be
acceptable
20
<PAGE>
to the FDA. If the Company is unable to resolve this problem it is possible that
the FDA may not permit the Company to continue to distribute this product. An
extended disruption in the marketing and distribution of ONCASPAR could have a
material adverse impact on future ONCASPAR sales.
The Company expects sales of ADAGEN to increase at rates comparable to
those achieved during the last two years as additional patients are treated. The
Company also anticipates ONCASPAR sales will remain at reduced levels until the
manufacturing problem is resolved and RPR resumes normal distribution of the
product. There can be no assurance that any particular sales levels of ADAGEN or
ONCASPAR will be achieved or maintained.
Contract revenue for the year ended June 30, 1999 decreased to $302,000, as
compared to $2,331,000 for fiscal 1998. The decrease was principally due to the
fact that the Company received milestone payments in 1998 under the Company's
licensing agreement for PEG-Intron with Schering-Plough and no such payments
were received in 1999. During the year ended June 30, 1998, the Company
recognized $2,200,000 in milestone payments received as a result of
Schering-Plough advancing PEG-Intron into a Phase III clinical trial. PEG-Intron
is a modified form of Schering-Plough's INTRON A (interferon alfa-2b,
recombinant), developed by Enzon to have longer-acting properties. INTRON A is a
genetically engineered anticancer and antiviral agent, developed and marketed
worldwide by Schering-Plough. Combined sales of INTRON A and REBETOL by
Schering-Plough were $719 million in 1998. The worldwide market for alpha
interferon is estimated to be in excess of $1.5 billion for all approved
indications. Under the Company's licensing agreement with Schering-Plough, Enzon
will be entitled to royalties of PEG-Intron sales and additional milestone
payments.
During the years ended June 30, 1999 and 1998, the Company had export sales
of $3,075,000 and $2,641,000, respectively. Of these amounts, sales in Europe
were $2,559,000 and $2,117,000 for the years ended June 30, 1999 and 1998,
respectively.
Revenues for the year ended June 30, 1998 increased to $14,644,000 as
compared to $12,727,000 for fiscal 1997. Sales increased by 6% to $12,313,000
for the year ended June 30, 1998 as compared to $11,596,000 for the prior year.
The increase was due to an increase in ADAGEN sales of approximately 13%,
resulting from an increase in patients receiving ADAGEN treatment. Net sales of
ADAGEN, which is marketed by Enzon, for the years ended June 30, 1998 and 1997
were $10,107,000 and $8,935,000, respectively. ONCASPAR revenues in 1998
decreased due to a decline in manufacturing revenue resulting from difficulties
encountered in the Company's manufacturing process, previously discussed. The
decrease in manufacturing revenue was partially offset by increased royalties
due to an increase in sales of ONCASPAR by RPR.
Contract revenue for the year ended June 30, 1998 increased to $2,331,000,
as compared to $1,131,000 for fiscal 1997. The increase was principally due to
an increase in milestone payments received under the Company's licensing
agreement for PEG-Intron with Schering-Plough. During the year ended June 30,
1998, the Company recognized $2,200,000 in milestone payments received as a
result of Schering-Plough advancing PEG-Intron into a Phase III clinical trial.
During the prior year, the Company received a $1,000,000 milestone payment under
the same licensing agreement with Schering-Plough.
During the years ended June 30, 1998 and 1997, the Company had export sales
of $2,641,000 and $2,377,000, respectively. Sales in Europe were $2,117,000 and
$1,937,000 for the years ended June 30, 1998 and 1997, respectively.
Cost of Sales. Cost of sales, as a percentage of sales, increased to 34%
for the year ended June 30, 1999 as compared to 30% in 1998. The increase was
primarily due to a charge taken in the first quarter 1999 related to a write-off
of ONCASPAR finished goods on hand and in the distribution pipeline, as well as
increased ONCASPAR production costs. The increased write-off of ONCASPAR
finished goods was attributable to the manufacturing problems previously
discussed.
Cost of sales, as a percentage of sales, decreased to 30% for the year
ended June 30, 1998 as compared to
21
<PAGE>
33% for fiscal 1997. The decrease was primarily due to the prior year's expense
of excess ONCASPAR raw material and purchase commitments related to the
Company's supply agreement for this material. During the fiscal year ended June
1998, the Company amended its supply agreement for this material which extended
the period available for the Company to accept delivery of its remaining
purchase commitment through 1999, in exchange for a $1,300,000 advance payment
of the remaining purchase commitment. (See Note 10 to the Consolidated Financial
Statements).
Research and Development. Research and development expenses for the year
ended June 30, 1999 decreased by 21% to $6,836,000 from $8,654,000 last year.
The decrease in research and development expenses resulted from (i) a decrease
in facility costs resulting from the elimination of a leased facility and the
consolidation of research and development operations and (ii) a decline in
clinical trial costs. The decrease in clinical trial costs, was a result of the
completion of a Phase Ib clinical trial for PEG-hemoglobin in 1998. Research and
development expenses are expected to increase to previous levels as a result of
the commencement of Phase I clinical trials for PEG-camptothecin.
Research and development expenses for the year ended June 30, 1998 remained
relatively unchanged at $8,654,000 as compared to $8,520,000 for the same period
in 1997. The Company's research and development efforts were focused on the
continued development of its Third Generation Pro Drug/Transport Technology,
which included preclinical activities for PROTHECAN (PEG-camptothecin), as well
as clinical trial costs for PEG hemoglobin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended June 30, 1999 increased by 27% to
$8,133,000, as compared to $6,426,000 in 1998. The increase was primarily due to
an increase in marketing and distribution costs for ONCASPAR. Due to the changes
in distribution previously discussed, the Company is responsible for all
marketing and distribution for this product. During the prior year these costs
were the responsibility of RPR.
Selling, general and administrative expenses for the year ended June 30,
1998 increased by 16% to $6,426,000 as compared to $5,528,000 for the year ended
June 30, 1997. The increase was due to (i) increased investor and public
relations activities, as well as (ii) consulting fees related to the development
of a strategic business plan for the Company's SCA protein technology.
Other Income/Expense. Other income/expense increased by $737,000 to
$1,201,000 for the year ended June 30, 1999, as compared to $464,000 for last
year. The increase was attributable to an increase in interest income due to an
increase in interest bearing investments.
Other income/expense decreased by $141,000 to $464,000 for the year ended
June 30, 1998 as compared to $605,000 for the year ended June 30, 1997. The
decrease was due principally to a decline in interest income due to a decrease
in interest bearing investments.
Liquidity and Capital Resources
Total cash reserves, including cash and cash equivalents as of June 30,
1999 were $24,674,000, as compared to $6,478,000 in the previous year. The
increase in total cash reserves was due to the completion of a private placement
during July 1998, in which the Company sold 3,983,000 shares of Common Stock to
a small group of investors resulting in net proceeds of approximately
$17,600,000. The Company invests its excess cash in a portfolio of high-grade
marketable securities and United States government-backed securities.
The Company's Amended RPR License Agreement for ONCASPAR provided 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 to be reduced as royalties are recognized under the agreement.
Through June 30, 1999, an aggregate of $4,380,000 in royalties
22
<PAGE>
payable by RPR has been offset against the original credit.
As of June 30, 1999, 942,808 shares of Series A Preferred Shares had been
converted into 3,097,955 shares of Common Stock. Accrued dividends on the
converted Series A Preferred Shares in the aggregate of $1,824,000 were settled
by the issuance of 235,231 shares of Common Stock. The Company does not
presently intend to pay cash dividends on the Series A Preferred Shares. As of
June 30, 1999, there were accrued and unpaid dividends totaling $1,984,000 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 $214,000 per year.
The Company and RPR are currently in discussions related to a disagreement
over the purchase price of ONCASPAR under the supply agreement between the two
companies. RPR has asserted that the Company has overcharged RPR under the
supply agreement in the amount of $2,329,000. The Company believes its costing
and pricing of ONCASPAR to RPR complies with the supply agreement. RPR has also
asserted that the Company should be responsible for its lost profits while
ONCASPAR is under the temporary labeling and distribution modifications. RPR
contends that its lost profits through June 30, 1999 were $2,968,000. The
Company does not agree with RPR's claims. The Company does not believe the
ultimate resolution of either matter will have a materially adverse effect on
the Company's financial position.
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 and believes the ultimate resolution of this
matter will not have a material adverse effect on the financial position of the
Company.
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. Based upon its currently
planned research and development activities and related costs and its current
sources of liquidity, the Company anticipates its current cash reserves will be
sufficient to meet its capital and operational requirements for the foreseeable
future.
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.
Year 2000
The Company has completed a review of its business systems, including its
computer systems and manufacturing equipment, and has queried its customers and
vendors as to their progress in identifying and addressing problems that their
systems may face in correctly interrelating and processing date information as
the year 2000 approaches and is reached. Based on this review, the Company has
implemented a plan to achieve year 2000 compliance. The Company believes that it
will achieve year 2000 compliance in a manner which will be non-disruptive to
its operations. In addition, the Company has prepared various types of
contingency planning to address
23
<PAGE>
potential problem areas with internal systems and with suppliers and other third
parties. Year 2000 compliance should not have a material adverse effect on the
Company, including the Company's financial condition, results of operations or
cash flow.
However, the Company may encounter problems with suppliers and or revenue
sources which could adversely affect the Company's financial condition, results
of operations or cash flow. The Company cannot accurately predict the occurrence
and or outcome of any such problems, nor can the dollar amount of any such
problem be estimated.
Risk Factors
Accumulated Deficit and Uncertainty of Future Profitability. 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 its FDA approved products, ADAGEN(R) and
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, 1999, the Company had an accumulated deficit of approximately
$121,761,000. The Company expects to incur operating losses for the foreseeable
future. To date, ADAGEN and ONCASPAR are the only products of the Company which
have been approved for marketing in the United States by the FDA, having been
approved in March 1990 and February 1994, respectively. In addition, ONCASPAR
has been approved for marketing in Canada, Germany and Russia.
During 1998 the Company began to experience manufacturing problems with
ONCASPAR. The problems were due to an increase in the levels of particulates in
batches of ONCASPAR which resulted in an increased rejection rate for this
product. During fiscal 1999, as a result of these manufacturing problems the
Company and the FDA agreed to temporary labeling and distribution modifications
for ONCASPAR. The Company, rather then RPR, took over distribution of ONCASPAR
directly to patients on an as-needed basis and instituted additional inspection
and labeling procedures prior to distribution. In addition during May 1999 the
FDA required the Company to limit distribution of the product to only those
patients who are hypersensitive to native L-asparaginase.
The Company has been able to manufacture several batches of ONCASPAR which
contain acceptable levels of particulates and anticipates a final resolution of
the problem during fiscal 2000. It is expected that RPR will resume distribution
of ONCASPAR at that time. There can be no assurance that this solution will be
acceptable to the FDA. If the Company is unable to resolve this problem it is
possible that the FDA may not permit the Company to continue to distribute this
product. An extended disruption in the marketing and distribution of ONCASPAR
could have a material adverse impact on future ONCASPAR sales.
In order to achieve profitable operations on a continuing basis, the
Company, either alone or through its partners, must successfully manufacture,
market and sell its ADAGEN and ONCASPAR products and develop, manufacture and
market the Company's products which are under development. These products are in
various stages of development, and the period necessary to achieve regulatory
approval and market acceptance of any individual product is uncertain and
typically lengthy, if achievable at all. 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 achieve profitability.
Raw Materials and Dependence Upon Suppliers. The Company purchases the
unmodified compounds utilized in its approved products and products under
development from outside suppliers. The Company may be required to enter into
supply contracts with outside suppliers for certain unmodified compounds. The
Company does not produce the unmodified adenosine deaminase used in the
manufacture of ADAGEN, the unmodified forms of L-asparaginase used in the
manufacture of ONCASPAR and the unmodified camptothecin used in the Company's
PROTHECAN(R) product which is under development and has a supply contract with
an outside supplier for the supply of each of these unmodified
24
<PAGE>
compounds. Delays in obtaining or an inability to obtain any unmodified
compound, including unmodified adenosine deaminase, unmodified L-asparaginase,
or unmodified camptothecin on reasonable terms, or at all, could have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event the Company is required to obtain an alternate source
for an unmodified compound utilized in a product which is being sold
commercially or which is in clinical development, the FDA and relevant foreign
regulatory agencies will likely require the Company to perform additional
testing, which would cause delays and additional expenses, to demonstrate that
the alternate material is biologically and chemically equivalent to the
unmodified compound previously used. Such evaluations could include chemical,
pre-clinical and clinical studies and could delay development of a product which
is in clinical trials, limit commercial sales of an approved product and cause
the Company to incur significant additional expenses. If such alternate material
is not demonstrated to be chemically and biologically equivalent to the
previously used unmodified compound, the Company will likely be required to
repeat some or all of the pre-clinical and clinical trials conducted for such
compound. The marketing of an FDA approved drug could be disrupted while such
tests are conducted. Even if the alternate material is shown to be chemically
and biologically equivalent to the previously used compound, the FDA or relevant
foreign regulatory agency 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 certain protection from
competition, 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 scope of patent claims for biotechnological
inventions is uncertain and the Company's patents and patent applications are
subject to this uncertainty. The Company is aware of certain issued patents and
patent applications belonging to third parties, and there may be other patents
and patent 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 patents and patent applications will be available on
acceptable terms or at all. If the Company does not obtain such licenses, it or
its partners could encounter delays in product market introductions while it
attempts to design around such patents or could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed. If
the Company does obtain such licenses it will in all likelihood be required to
make royalty and other payments to the licensers, thus reducing the profits
realized by the Company from the products covered by such licenses. The Company
is aware that certain organizations are engaging in activities that infringe
certain of the Company's PEG technology and SCA patents. There can be no
assurance that the Company will be able to enforce its patent and other rights
against such organizations. 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 Company has
two research and license agreements with The Green Cross Corporation ("Green
Cross") regarding rHSA. The Company and Yoshitomi Pharmaceutical Industries,
Ltd. ("Yoshitomi"), the successor to Green Cross' business, are currently in
arbitration to resolve the amount of royalties that will be due the Company, if
any. In April 1998, Yoshitomi filed documents in such arbitration seeking a
declaratory judgment that under its agreement with the Company no royalties are
payable. Any adverse decision from such an arbitration proceeding could result
in a material adverse effect to the Company's future business, financial
condition and results of operations. Research Corporation Technologies, Inc.
("Research Corporation") held the original patent upon which the PEG Process is
based and had granted the Company a license under such patent. Research
Corporation's patent for the PEG Process in the United States and its
corresponding foreign patents have expired. Although the Company has obtained
several improvement patents in connection with the PEG Process, 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
25
<PAGE>
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
and other compounds. Based upon the expiration of the Research Corporation
patent, other parties will be permitted to make, use, or sell products covered
by the claims of the Research Corporation patent, subject to other patents,
including those held by the Company. There can be no assurance that the
expiration of the Research Corporation patent will not have a material adverse
effect on the business, financial condition and results of operations of the
Company.
Limited Sales and Marketing Experience; 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 significant sales
and marketing experience. 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 in North America and the Pacific Rim to RPR. The
Company has also granted exclusive marketing rights in Europe and Russia to
Medac Gmbh and in Israel to Tzamal Pharma Ltd.. The Company expects to retain
marketing partners to market ONCASPAR in other foreign markets, principally
South America. There can be no assurance that such efforts 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 licensees or marketing partners may have all or a
significant portion of the development and regulatory approval responsibilities.
There can be no assurance that the Company will be able to control the amount
and timing of resources that any licensee or marketing partner may devote to the
Company's products or prevent any licensee or marketing partner from pursuing
alternative technologies or products that could result in the development of
products that compete with the Company's products and the withdrawal of support
for the Company's products. 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, financial condition and results of operations 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 agreements and abandon the applicable products 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. Government and other third-party payors are
increasingly sensitive to the containment of health care costs and are limiting
both coverage and levels of reimbursement for new therapeutic products approved
for marketing, and are refusing, in some cases, to provide any coverage for
indications for which the FDA and other national health regulatory authorities
have not granted marketing approval. There can be no assurance that such
third-party payor 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. Lack of or inadequate reimbursement by government and
other third party payors for the Company's products would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Government Regulation. The manufacturing and marketing of pharmaceutical
products in the United States and abroad 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
26
<PAGE>
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, in Germany in November
1994 and in Canada in 1997 in each case for patients with acute lymphoblastic
leukemia who are hypersensitive to native forms of L-asparaginase. ONCASPAR was
approved in Russia 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. In addition, any approved products are subject to continuing
regulation, and noncompliance by the Company with applicable requirements can
result in criminal penalties, civil penalties, fines, recall or seizure,
injunctions requiring suspension of production, orders requiring ongoing
supervision by the FDA or refusal by the government to approve marketing or
export applications or to allow the Company to enter into supply contracts.
Failure to obtain or maintain requisite governmental approvals or failure to
obtain or maintain 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 business, financial condition and results of
operations.
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
the Company's and may develop products or technologies which compete with those
of the Company. The Company is aware that other companies are engaged in
utilizing PEG technology in developing drug products. There can be no assurance
that the Company's competitors will not successfully develop, manufacture and
market competing products utilizing PEG technology or otherwise. 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.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that such competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations. 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. The Company's success, in large part,
depends upon developing and maintaining a competitive position in the
development of products and technologies in its area of focus. There can be no
assurance that the Company's competitors will not succeed in developing
technologies or products that are more effective than any which are being sold
or developed by the Company or which would render the Company's technologies or
products obsolete or noncompetitive. The Company's failure to develop and
maintain a competitive position with respect to its products and/or technologies
would have a material adverse effect on its business, financial condition and
results of operations.
Uncertainty of Market Acceptance. The Company's products, ONCASPAR and
ADAGEN, have been approved by the FDA to treat patients with acute lymphoblastic
leukemia and a rare form of severe combined immunodeficiency disease,
respectively. Neither product has become widely used due to the small patient
population and limited indications approved by the FDA. The Company's current
research and development efforts are focused on applying its proprietary
technologies to compounds of known therapeutic efficacy in order to enhance the
performance of these compounds. Assuming that the Company is able to develop
such compounds and secure the requisite FDA approvals, the market acceptance of
any such products will depend upon the acceptance by the medical community of
the use of such technologies. There can be no assurance that any additional
products will be approved by the FDA or that, if approved, the medical community
will use them. In addition, the use of any such new products will depend upon
the extent of third party medical reimbursement, increased awareness of the
effectiveness of such technologies and sales efforts by the Company or any
marketing partner. The Company's proprietary PEG technology has received only
limited market acceptance to date. Failure of the Company to develop new FDA
approved products and to achieve market acceptance for such products would have
a material adverse effect on the Company's business, financial condition and
results of operation.
Potential Product Liability. The use of the Company's products during
testing or after regulatory approval
27
<PAGE>
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 million 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. 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 or
that a product liability claim would not have a material adverse effect on the
Company's business, financial condition or results of operations.
Future Capital Needs; Uncertainty of Additional Financing. The Company's
current sources of liquidity are its cash reserves, and interest earned on such
cash reserves, sales of ADAGEN and 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 licensing agreements. Total cash reserves, including short term
investments, as of June 30, 1999, were approximately $24,674,000. Based upon its
currently planned research and development activities and related costs and its
current sources of liquidity, the Company anticipates its current cash reserves
will be sufficient to meet its capital and operational requirements for the
foreseeable future. The Company's future needs and the adequacy of available
funds will depend on numerous factors, including without limitation, the
successful commercialization of its products, progress in its product
development efforts, the magnitude and scope of such efforts, progress with
preclinical studies and clinical trials, progress with regulatory affairs
activities, the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, and the development of strategic alliances for the
marketing of its products. There can be no assurance that the Company will not
require additional financing for its currently planned capital and operational
requirements. In addition, the Company may seek to acquire additional
technology, enter into strategic alliances and engage in additional research and
development programs, which may require additional financing. The Company does
not have any committed sources of additional financing, and there can be no
assurance that additional funding, if necessary, will be available on acceptable
terms, if at all. To the extent the Company is unable to obtain financing, 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. If adequate funds are
not available, the Company's business, financial condition and results of
operations will be materially and adversely affected.
Dividend Policy and Restrictions. 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 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. Historically, 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. In
addition, due to one or more of the foregoing factors, in one or more future
quarters, the Company's results of operations may fall below the expectations of
securities analysts and investors. In that event, the market price of the
Company's Common Stock could be materially and adversely affected.
Anti-takeover Considerations. The Company has the authority to issue up to
3,000,000 shares of Preferred Stock of the Company in one or more series and to
fix the powers, designations, preferences and relative rights thereof without
any further vote of shareholders. The issuance of such Preferred Stock could
dilute the voting powers of holders of Common Stock and could have the effect of
delaying, deferring or preventing a change in control of the Company. Certain
provisions of the Company's Articles of Incorporation and By-laws, including
those providing for
28
<PAGE>
a staggered Board of Directors, as well as Delaware law, may operate in a manner
that could discourage or render more difficult a takeover of the Company or the
removal of management or may limit the price certain investors may be willing to
pay for shares of Common Stock.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities, and
time deposits. All such instruments are classified as securities available for
sale. We do not invest in portfolio equity securities or commodities or use
financial derivatives for trading purposes. Our debt security portfolio
represents funds held temporarily pending use in our business and operations. We
manage these funds accordingly. We seek reasonable assuredness of the safety of
principal and market liquidity by investing in rated fixed income securities
while at the same time seeking to achieve a favorable rate or return. Our market
risk exposure consists principally of exposure to changes in interest rates. Our
holdings are also exposed to the risks of changes in the credit quality of
issuers. We typically invest in the shorter-end of the maturity spectrum, and at
June 30, 1999 all of our holdings were in instruments maturing in one year or
less.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report
commencing on Page F-1.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
Not applicable.
29
<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 7, 1999.
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(iv) Amendment to Certificate of Incorporation dated January 5, 1998 ##3(iv)
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 ^^(10.15)
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C>
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)
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)
10.27 Common Stock Purchase Agreement dated June 25, 1998 ^^^(10.27)
10.28 Placement Agent Agreement dated June 25, 1998 with SBC Warburg
Dillon Read, Inc. ^^^^(10.28)
21.0 Subsidiaries of Registrant o
23.0 Consent of KPMG LLP o
27.0 Financial Data Schedule 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 Quarterly Report on Form
10-Q for the quarter ended December 31, 1994 and incorporated herein by
reference thereto.
31
<PAGE>
(b) Reports on Form 8-K.
On April 5, 1999, the Company filed with the Commission a Current Report on
Form 8-K dated April 1, 1999, related to its filing of an Investigational
New Drug ("IND") application with the Food and Drug Administration ("FDA")
for PEG-camptothecin ("PROTHECAN(R)").
32
<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 28, 1999 by: 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 28, 1999
- ------------------------------- Officer and Director
Peter G. Tombros (Principal Executive Officer)
/S/ Kenneth J. Zuerblis Vice President, Finance September 28, 1999
- ------------------------------- and Chief Financial Officer
Kenneth J. Zuerblis (Principal Financial and
Accounting Officer)
/S/ Randy H. Thurman Chairman of the Board September 28, 1999
- -------------------------------
Randy H. Thurman
/S/ David S. Barlow Director September 28, 1999
- -------------------------------
David S. Barlow
/S/ Rolf A. Classon Director September 28, 1999
- -------------------------------
Rolf A. Classon
/S/ Rosina B. Dixon Director September 28, 1999
- -------------------------------
Rosina B. Dixon
/S/ David W. Golde Director September 28, 1999
- -------------------------------
David W. Golde
/S/ Robert LeBuhn Director September 28, 1999
- -------------------------------
Robert LeBuhn
/S/ A.M. "Don" MacKinnon Director September 28, 1999
- -------------------------------
A.M. "Don" MacKinnon
</TABLE>
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Index
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - June 30, 1999 and 1998 F-3
Consolidated Statements of Operations - Years ended
June 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity -
Years ended June 30, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows - Years ended
June 30, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements - Years
ended June 30, 1999, 1998 and 1997 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Short Hills, New Jersey
September 8, 1999
F-2
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 24,673,636 $ 6,478,459
Accounts receivable 4,604,847 2,300,046
Inventories 1,326,601 1,022,530
Prepaid expenses and other current assets 1,034,327 447,952
------------- -------------
Total current assets 31,639,411 10,248,987
------------- -------------
Property and equipment 12,054,505 15,134,075
Less accumulated depreciation and amortization 10,649,661 13,368,330
------------- -------------
1,404,844 1,765,745
Other assets:
Investments 68,823 69,002
Deposits and deferred charges 753,683 464,747
Patents, net 1,049,554 1,192,897
------------- -------------
1,872,060 1,726,646
------------- -------------
Total assets $ 34,916,315 $ 13,741,378
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,716,089 $ 1,711,856
Accrued expenses 6,261,640 4,375,822
------------- -------------
Total current liabilities
7,977,729 6,087,678
------------- -------------
Accrued rent 634,390 727,160
Royalty advance - RPR 728,977 --
------------- -------------
1,363,637 727,160
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock-$.01 par value, authorized 3,000,000 shares;
Issued and outstanding 107,000 shares in 1999 and 1998
(liquidation preference aggregating $4,659,000 in 1999
and $4,445,000 in 1998) 1,070 1,070
Common stock-$.01 par value, authorized 60,000,000 shares;
issued and outstanding 36,488,684 shares in 1999 and
31,341,353 shares in 1998 364,886 313,414
Additional paid-in capital 146,970,289 123,453,874
Accumulated deficit (121,761,026) (116,841,818)
------------- -------------
Total stockholders' equity 25,575,219 6,926,540
------------- -------------
Total liabilities and stockholders' equity $ 34,916,315 $ 13,741,378
============= =============
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Sales $ 12,855,995 $ 12,312,730 $ 11,595,985
Contract revenue 302,212 2,331,302 1,131,067
------------ ------------ ------------
Total revenues 13,158,207 14,644,032 12,727,052
------------ ------------ ------------
Costs and expenses:
Cost of sales 4,309,956 3,645,281 3,840,198
Research and development expenses 6,835,521 8,653,567 8,520,366
Selling, general and administrative expenses 8,133,366 6,426,241 5,528,174
------------ ------------ ------------
Total costs and expenses 19,278,843 18,725,089 17,888,738
------------ ------------ ------------
Operating loss (6,120,636) (4,081,057) (5,161,686)
------------ ------------ ------------
Other income (expense):
Interest and dividend income 1,145,009 460,922 584,384
Interest expense (8,348) (13,923) (14,891)
Other 64,767 16,925 35,168
------------ ------------ ------------
1,201,428 463,924 604,661
------------ ------------ ------------
Net loss ($ 4,919,208) ($ 3,617,133) ($ 4,557,025)
============ ============ ============
Basic and diluted net loss per common share ($0.14) ($0.12) ($0.16)
============ ============ ============
Weighted average number of common
shares outstanding 35,699,133 31,092,369 29,045,605
============ ============ ============
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Preferred stock Common stock
----------------------------- ------------------------------- Additional
Amount Number of Par Amount Number of Par paid-in
per share Shares Value per share Shares Value capital
--------- --------- ----- --------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 169,000 $1,690 27,706,396 $277,064 $121,272,024
Common stock issued for exercise of
non-qualified stock options -- -- -- 2.36 11,219 112 26,499
Common stock issued for Independent
Directors' Stock Plan -- -- -- 2.97 25,903 259 76,598
Consulting expense for issuance of stock
options -- -- -- -- -- -- 80,984
Common stock issued on conversion of
Series B Preferred Stock $ 1.95 (40,000) (400) 1.95 2,038,989 20,390 (19,993)
Common stock issued on conversion of
Series D Preferred Stock 1.97 (20,000) (200) 1.97 1,015,228 10,152 (9,953)
Net Loss -- -- -- -- -- -- --
------- ------ ---------- ------ ------------
Balance, June 30, 1997 109,000 $1,090 $30,797,735 $307,977 $121,426,159
Common stock issued for exercise of non-
qualified stock options -- -- -- 2.23 505,072 5,051 1,653,557
Common stock issued on conversion of
Series A Preferred Stock 25.00 (2,000) (20) 11.00 4,544 45 (42)
Dividends issued on Series A Preferred Stock -- -- -- 11.00 2,848 29 31,300
Common stock issued for Independent
Directors' Stock Plan -- -- -- 4.11 16,904 169 69,231
Common stock issued for consulting services -- -- -- 4.77 14,250 143 67,854
Consulting expense for issuance of stock
options -- -- -- -- -- -- 205,815
Net Loss -- -- -- -- -- -- --
------- ------ ---------- -------- ------------
Balance, June 30, 1998, carried forward 107,000 $1,070 31,341,353 $313,414 $123,453,874
<CAPTION>
Accumulated
Deficit Total
------- -----
<S> <C> <C>
Balance, July 1, 1996 ($108,636,320) $12,914,458
Common stock issued for exercise of
non-qualified stock options -- 26,611
Common stock issued for Independent
Directors' Stock Plan -- 76,857
Consulting expense for issuance of stock
Options -- 80,984
Common stock issued on conversion of
Series B Preferred Stock -- (3)
Common stock issued on conversion of
Series D Preferred Stock -- (1)
Net Loss (4,557,025) (4,557,025)
------------- -----------
Balance, June 30, 1997 ($113,193,345) $8,541,881
Common stock issued for exercise of non-
Qualified stock options -- 1,658,608
Common stock issued on conversion of
Series A Preferred Stock -- (17)
Dividends issued on Series A Preferred Stock (31,340) (11)
Common stock issued for Independent
Directors' Stock Plan -- 69,400
Common stock issued for consulting services -- 67,997
Consulting expense for issuance of stock
Options -- 205,815
Net Loss (3,617,133) (3,617,133)
----------- ----------
Balance, June 30, 1998, carried forward ($116,841,818) $6,926,540
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Years ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Preferred stock Common stock
----------------------------- ------------------------------- Additional
Amount Number of Par Amount Number of Par paid-in
per share Shares Value per share Shares Value capital
--------- --------- ----- --------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30,1998, brought forward 107,000 $1,070 31,341,353 $313,414 $123,453,874
Common stock issued for exercise of
non-qualified stock-options -- -- -- 4.40 1,000,919 10,009 4,396,477
Common stock issued on exercise of
common stock warrants -- -- -- 2.50 150,000 1,500 373,500
Net proceeds from Private Placement, July 1998 -- -- -- 4.75 3,983,000 39,830 17,510,265
Common stock issued for Independent
Directors' Stock Plan -- -- -- 8.88 8,514 84 75,539
Common stock options and warrants issued for
consulting services -- -- -- -- -- -- 1,130,683
Common stock issued for consulting services -- -- -- 6.13 4,898 49 29,951
Net loss -- -- -- -- -- -- --
------- ------ ---------- -------- ------------
Balance, June 30, 1999 107,000 $1,070 36,488,684 $364,886 $146,970,289
======= ====== ========== ======== ============
<CAPTION>
Accumulated
Deficit Total
------- -----
<S> <C> <C>
Balance, June 30,1998, brought forward ($116,841,818) $6,926,540
Common stock issued for exercise of
non-qualified stock-options -- 4,406,486
Common stock issued on exercise of
common stock warrants -- 375,000
Net proceeds from Private Placement, July 1998 -- 17,550,095
Common stock issued for Independent
Directors' Stock Plan -- 75,623
Common stock options and warrants issued for
consulting services -- 1,130,683
Common stock issued for consulting services -- 30,000
Net loss (4,919,208) (4,919,208)
------------ -----------
Balance, June 30, 1999 ($121,761,026) $25,575,219
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ENZON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($ 4,919,208) ($ 3,617,133) ($ 4,557,025)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 835,503 1,217,423 1,653,331
(Gain) loss on retirement of assets (38,521) 97,037 (35,168)
Non-cash expense for issuance of common stock, warrants, stock
and options 1,236,306 343,212 157,841
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (2,304,801) 133,716 (310,071)
(Increase) decrease in inventories (304,071) (162,657) 125,505
(Increase) decrease in prepaid expenses and other current
assets (586,375) (360,220) 346,586
(Increase) decrease in other assets (288,936) (430,172) 21,370
Increase (decrease) in accounts payable 4,233 (198,881) (168,187)
Increase (decrease) in accrued expenses 2,691,353 796,403 (522,761)
Decrease in accrued rent (92,770) (142,852) (110,896)
Decrease in royalty advance - RPR (76,558) (1,101,501) (780,081)
Decrease in other liabilities -- -- (1,728)
---------- ----------- -----------
Net cash used in operating activities (3,843,845) (3,425,625) (4,181,284)
---------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (424,670) (160,940) (873,754)
Proceeds from sale of equipment 131,932 83,129 680,481
Decrease in investments 179 9,291 --
---------- ----------- -----------
Net cash used in investing activities (292,559) (68,520) (193,273)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, preferred stock
and warrants 22,331,581 1,658,580 26,607
Principal payments of obligations under capital leases -- (1,728) (2,348)
---------- ----------- -----------
Net cash provided by financing activities 22,331,581 1,656,852 24,259
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 18,195,177 (1,837,293) (4,350,298)
Cash and cash equivalents at beginning of period 6,478,459 8,315,752 12,666,050
---------- ----------- -----------
Cash and cash equivalents at end of period $24,673,636 $6,478,459 $8,315,752
========== =========== ===========
</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, 1999, 1998 and 1997
(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(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. 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, 1999 and 1998.
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 SCA Ventures, 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 8 to 17 years. Accumulated amortization as of June 30,
1999 and 1998 was $1,099,000 and $956,000, 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
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.
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 agreements with third parties
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. Stock options
issued to employees are granted with an exercise price equal to the market
price and in accordance with APB No. 25, compensation expense is not
recognized.
Cash Flow Information
The Company considers all highly liquid securities with original
maturities of three months or less to be cash equivalents.
During the year ended June 30, 1998, 2,000 shares of Series A
Cumulative Convertible Preferred Stock ("Series A Preferred Stock" or
"Series A Preferred Shares") were converted to 4,544 shares of Common
Stock. Accrued dividends of $31,000 on the Series A Preferred Shares that
were converted were settled by issuing 2,848 shares of Common Stock and
cash payments totaling $28 for fractional shares. There were no conversions
of Series A Preferred Stock for the years ended June 30, 1999 and 1997.
Cash payments for interest were approximately $8,000, $14,000 and
$15,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
There were no income tax payments made for the years ended June 30, 1999,
1998 and 1997.
Net Loss Per Common Share
Basic and diluted loss per common share is based on the net loss for
the relevant period, adjusted for cumulative, undeclared Series A Preferred
Stock dividends of $214,000, $216,000 and $218,000 for the years ended June
30, 1999, 1998 and 1997, respectively, divided by the weighted average
number of shares issued and outstanding during the period. For purposes of
the diluted loss per share calculation, the exercise or conversion of all
dilutive potential common shares is not included, due to the net loss
recorded for the years ended June 30, 1999, 1998 and 1997. As of June 30,
1999, the Company had approximately 5,857,000 dilutive potential common
shares outstanding that could potentially dilute future earnings per share
calculations.
F-10
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Comprehensive Income
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of SFAS 130 had no
impact on the Company's results of operations for the years ended June 30,
1999, 1998 and 1997. The net loss is equal to the comprehensive loss for
those periods.
(3) Inventories
Inventories consist of the following:
June 30,
-------------------------
1999 1998
---- ----
Raw materials $503,000 $510,000
Work in process 548,000 398,000
Finished goods 276,000 115,000
---------- ----------
$1,327,000 $1,023,000
========== ==========
(4) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------------- Estimated
1999 1998 useful lives
---- ---- ------------
<S> <C> <C> <C>
Equipment $8,024,000 $8,647,000 3-7 years
Furniture and fixtures 1,438,000 1,501,000 7 years
Vehicles 24,000 29,000 3 years
Leasehold improvements 2,569,000 4,957,000 3-15 years
----------- -----------
$12,055,000 $15,134,000
=========== ===========
</TABLE>
During the year ended June 30, 1999, the Company's fixed asset
disposals were approximately $3,504,000. The disposals were primarily
attributable to the Company's consolidation of research operations and the
elimination of its leased facility at 40 Cragwood Road. Depreciation and
amortization charged to operations, relating to property and equipment,
totaled $692,000, $1,063,000 and $1,499,000 for the years ended June 30,
1999, 1998 and 1997, respectively.
(5) Stockholders' Equity
During the year ended June 30, 1999, the Company sold 3,983,000 shares
of Common Stock in a private placement to a small group of investors. The
private placement resulted in gross proceeds of approximately $18,919,000
and net proceeds of approximately $17,550,000.
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.
F-11
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
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, 1999 and 1998, undeclared accrued dividends in
arrears were $1,984,000 or $18.54 per share and $1,770,000 or $16.54 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.
During the year ended June 30, 1998, 2,000 shares of Series A
Preferred Shares were converted to 4,544 shares of Common Stock. Accrued
dividends of $31,000 were settled by issuing 2,848 shares of Common Stock
and cash payments totaling $16 for fractional shares. There were no
conversions of Series A Preferred Shares during the years ended June 30,
1999 or 1997.
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, 1999, the Company has reserved its common shares for
special purposes as detailed below:
Shares issuable upon conversion of
Series A Preferred Shares 424,000
Shares issuable upon exercise of outstanding warrants 1,089,000
Non-Qualified Stock Option Plan 4,344,000
---------
5,857,000
Common Stock Warrants
During the year ended June 30, 1999, 150,000 warrants were exercised
to purchase 150,000 shares of the Company's Common Stock at $2.50 per
share. These warrants were issued during the year ended June 30, 1996, as
part of the commission due to a real estate broker in connection with the
termination of the Company's former lease at 40 Kingsbridge Road.
F-12
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During the year ended June 30, 1999, the Company issued 200,000
five-year warrants to purchase Enzon Common Stock at $6.50 per share, the
closing price of the Common Stock on the date of grant. The warrants are
consideration for consulting services to be rendered through February 2002.
The estimated fair value of the warrants of approximately $917,000 is being
amortized over the service period of three years. The unamortized portion
is included as a component of other assets with the corresponding current
portion included in other current assets on the consolidated balance sheet
as of June 30, 1999.
Series B and C Preferred Stock Warrants
As of June 30, 1999 and 1998, 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.
(6) 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 non executive, 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 years ended June 30,
1999, 1998 and 1997, the Company issued 8,514, 16,904 and 25,903 shares of
Common Stock, respectively, to independent directors, pursuant to the
Independent Directors' Stock Plan.
(7) 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 upon adoption of the Company's Stock Option
Plan was 6,200,000. As of June 30, 1999, 4,344,000 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.
F-13
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported ($4,919,000) ($3,617,000) ($4,557,000)
Net loss - pro forma ($7,289,000) ($5,638,000) ($5,927,000)
Loss per share - as reported ($0.14) ($0.12) ($0.16)
Loss per share - pro forma ($0.21) ($0.19) ($0.21)
</TABLE>
The pro forma effect on the loss for the three years ended June 30,
1999 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 three years ended June 30,
1999 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 86%,
84%, and 82%, and (iv) a risk-free interest rate of 5.06%, 5.57%, and 6.45%
for the years ended June 30, 1999, 1998, and 1997, respectively. The
weighted average fair value at the date of grant for options granted during
the years ended June 30, 1999, 1998 and 1997 was $9.68, $5.85 and $2.78 per
share, respectively.
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, 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 equaled 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
Canceled 822,000) 6.26 $2.00 to $14.25
----------
Outstanding at June 30, 1997 4,197,000 3.77 $1.88 to $14.88
Granted at exercise prices which equaled the
fair market value on the date of grant 719,000 5.85 $2.03 to $6.56
Exercised (305,000) 2.73 $2.06 to $5.13
Canceled (189,000) 6.69 $2.09 to $14.88
----------
Outstanding at June 30, 1998 4,422,000 4.06 $1.88 to $10.88
Granted at exercise prices which equaled
the fair market value on the date of grant 455,000 9.68 $4.88 to $15.75
Exercised (1,001,000) 4.40 $2.00 to $9.88
Canceled (172,000) 7.25 $2.81 to $14.50
----------
Outstanding at June 30, 1999 3,704,000 4.51 $1.88 to $15.75
==========
</TABLE>
F-14
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
As of June 30, 1999, 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 $2.63 535,000 6.22 $2.34 535,000 $2.34
$2.69 to $2.81 793,000 6.95 $2.75 793,000 $2.75
$2.88 to $3.50 582,000 6.79 $3.19 482,000 $3.24
$3.56 to $4.50 576,000 5.40 $4.25 576,000 $4.25
$4.56 to $6.00 669,000 7.89 $5.76 427,000 $5.68
$6.13 to $15.75 549,000 8.71 $9.29 78,000 $8.28
--------- ---------
$1.88 to $15.75 3,704,000 7.01 $4.51 2,891,000 $3.64
========= =========
</TABLE>
(8) 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, 1999 and 1998, the tax effects of temporary differences
that give rise to the deferred tax assets and deferred tax liabilities are
as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Inventories $272,000 $111,000
Investment valuation reserve 86,000 86,000
Contribution carryover 20,000 19,000
Compensated absences 127,000 115,000
Excess of financial statement over tax depreciation 1,031,000 827,000
Royalty advance - RPR 371,000 402,000
Non-deductible expenses 1,497,000 543,000
Federal and state net operating loss carryforwards 44,531,000 2,133,000
Research and development and investment tax credit carryforwards 8,176,000 7,447,000
----------- -----------
Total gross deferred tax assets 56,111,000 51,683,000
Less valuation allowance (55,405,000) (50,977,000)
----------- -----------
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-15
<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,
1999 and 1998 was an increase of $4,428,000 and $2,221,000, respectively.
The tax benefit assumed using the Federal statutory tax rate of 34% has
been reduced to an actual benefit of zero due principally to the
aforementioned valuation allowance. Subsequently recognized tax benefits as
of June 30, 1999 of $1,677,000 relating to the valuation allowance for
deferred tax assets will be allocated to additional paid-in capital.
At June 30, 1999, the Company had federal net operating loss
carryforwards of approximately $114,639,000 for tax reporting purposes,
which expire in the years 2000 to 2019. The Company also has investment tax
credit carryforwards of approximately $1,900 and research and development
tax credit carryforwards of approximately $6,696,000 for tax reporting
purposes which expire in the years 2000 to 2019.
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, 1999, the Company had a total of $55,731,000 of acquired Enzon Labs net
operating loss carryforwards, which expire between December 31, 1999 and
October 31, 2006. As a result of the change in ownership, the utilization
of these carryforwards is limited to $613,000 per year.
(9) Significant Agreements
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(R)A (interferon alfa 2b), a
genetically-engineered anticancer and antiviral drug with longer activity.
A PEG-modified version of INTRON A ("PEG-Intron(TM)") is currently in four
large scale Phase III clinical trials in the United States, Europe and
Japan for hepatitis C and cancer as well as earlier stage trials for cancer
and certain leukemias. The trials call for administration of PEG-Intron
once per week as compared to the current regimen for unmodified INTRON A of
three times per week. PEG-Intron utilizes the Company's Second Generation
PEG Technology.
Under the license agreement, which was amended in 1995 and 1999, the
Company will receive royalties on worldwide sales of PEG-Intron, if any.
Schering is responsible for conducting and funding the clinical studies,
obtaining regulatory approval and marketing the product worldwide on an
exclusive basis. During 1999, the Company and Schering amended the
agreement that resulted in an increase in the effective royalty rate in
return for Enzon's exclusive U.S. manufacturing rights for the product and
a license under one of the Company's Second Generation PEG patents for
Branched or U-PEG. The license for Branched PEG gives Schering the ability
to sublicense the patent for a competing interferon product.
F-16
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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. Revenue will not be recognized on these
payments until the product is deemed to meet specification.
Rhone-Poulenc Rorer Agreement
Under the Company's Amended RPR U.S. License Agreement, Enzon granted
an exclusive license to RPR to sell ONCASPAR in the U.S. Enzon has received
licensing payments totaling $6,000,000 and is entitled to a base royalty of
23.5% until 2008, on net sales of ONCASPAR up to agreed upon amounts.
Additionally, the Amended RPR U.S. License Agreement provides for a super
royalty of 43.5% 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 U.S.
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 U.S.
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 U.S. 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, 1999 and 1998. The royalty advance will be reduced as base
royalties are recognized under the agreement.
The Amended RPR U.S. 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 U.S. License
Agreement revert to Enzon. A separate supply agreement with RPR requires
RPR to purchase from Enzon all ONCASPAR requirements for sales in North
America.
The Company and RPR are currently in discussions related to a
disagreement over the purchase price of ONCASPAR under the supply agreement
between the two companies. RPR has asserted that the Company has
overcharged RPR under the supply agreement in the amount of $2,329,000. The
Company believes its costing and pricing of ONCASPAR to RPR complies with
the terms of the supply agreement. RPR has also asserted that the Company
should be responsible for its lost profits while ONCASPAR is under the
temporary labeling and distribution modifications agreed to by the Company
and the FDA. RPR contends that its lost profits due to this matter, through
June 30, 1999 were $2,968,000. The Company does not agree with RPR's claim.
Under a separate license, RPR has exclusive rights 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.
F-17
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company also has a license agreement with RPR for the Pacific Rim
region, specifically, Australia, New Zealand, Japan, Hong Kong, Korea,
China, Taiwan, Philippines, Indonesia, Malaysia, Singapore, Thailand and
Viet Nam, (the "Pacific Rim"). The agreement provides for RPR to purchase
ONCASPAR for the Pacific Rim from the Company at certain established prices
which increase over the ten year term of the agreement. Under the
agreement, RPR is responsible for obtaining additional approvals and
indications in the licensed territories. The agreement also provides for
minimum purchase requirements for the first four years of the agreement.
MEDAC Agreement
The Company has also granted an exclusive license to 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. Under the agreement, MEDAC is required to meet
certain minimum purchase requirements.
(10) Commitments and Contingencies
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 claims it 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 approximately
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 and
believes the ultimate resolution of this matter will not have a material
adverse effect on the financial position of the Company.
In the course of normal operations, the Company is subject to the
marketing and manufacturing regulations as established by the Food and Drug
Administration ("FDA"). During the year ended June 30, 1999, the Company
and the FDA agreed to temporary labeling and distribution modifications for
ONCASPAR due to increased levels of particulates in certain batches of
ONCASPAR, which were manufactured by the Company. The Company, rather than
its marketing partner, Rhone-Poulenc Rorer ("RPR"), will temporarily
distribute ONCASPAR directly to patients, on an as needed basis, and will
conduct the additional inspection and labeling procedures prior to
distribution. During May 1999, the FDA placed additional restrictions on
ONCASPAR, which specified ONCASPAR was to be distributed only to those
patients who are hypersensitive to native L-asparaginase.
The Company has been able to manufacture several batches of ONCASPAR
which contain acceptable levels of particulates and anticipates a final
resolution of the problem during fiscal 2000. It is expected that RPR will
resume distribution of ONCASPAR at that time. There can be no assurance
that this solution will be acceptable to the FDA. If the Company is unable
to resolve this problem it is possible that the FDA may not permit the
Company to continue to distribute this product. An extended disruption in
the marketing and distribution of ONCASPAR could have a material adverse
impact on future ONCASPAR sales.
F-18
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company maintains a separate supply agreement with RPR, under
which RPR purchases from Enzon all of RPR's requirements for ONCASPAR at a
price defined in the supply agreement. The Company and RPR are currently in
discussions related to a disagreement over the purchase price of ONCASPAR
under the supply agreement between the two companies. RPR has asserted that
the Company has overcharged RPR under the supply agreement in the amount of
$2,329,000. The Company believes its costing and pricing of ONCASPAR to RPR
complies with the supply agreement.
RPR has also asserted that the Company should be responsible for its
lost profits while ONCASPAR is under the temporary labeling and
distribution modifications. RPR contends that its lost profits through June
30, 1999 were $2,968,000. The Company does not agree with RPR's claim for
these two issues. The Company does not believe the ultimate resolution of
these matters will have a material adverse effect on the financial results
or operations of the Company.
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.
(11) Leases
The Company has several leases for office, warehouse, production and
research facilities and equipment.
Future minimum lease payments, net of subleases, for noncancelable
operating leases with initial or remaining lease terms in excess of one
year as of June 30, 1999 are:
Year ending Operating
June 30, leases
---------- --------
2000 979,000
2001 952,000
2002 819,000
2003 765,000
2004 765,000
Later years, through 2007 2,752,000
----------
Total minimum lease payments $7,032,000
==========
Rent expense amounted to $1,394,000, $1,768,000 and $1,608,000 for the
years ended June 30, 1999, 1998 and 1997, respectively.
For the years ended June 30, 1999, 1998 and 1997, rent expense is net
of subrental income of $110,000, $221,000 and $233,000, respectively. As of
June 30, 1999, the Company no longer subleases a portion of its facilities.
(12) 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. 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, 1999, 1998 and 1997 were $115,000, $100,000 and $105,000,
respectively.
F-19
<PAGE>
ENZON, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Accrued Expenses
Accrued expenses consist of:
June 30,
---------------------------
1999 1998
---- ----
Accrued wages and vacation $1,074,000 $695,000
Accrued Medicaid rebates 1,114,000 1,083,000
Current portion of royalty
Advance - RPR 200,000 1,006,000
Contract and legal accrual 3,328,000 1,000,000
Other 546,000 592,000
---------- ----------
$6,262,000 $4,376,000
========== ==========
(14) Business and Geographical Segments
Effective July 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The Company
manages its business in one business segment in one location.
During the years ended June 30, 1999, 1998 and 1997, the Company had
export sales of $3,075,000, $2,641,000 and $2,377,000 respectively. Of
these amounts, sales to Europe represented $2,559,000, $2,117,000 and
$1,937,000 during the years ended June 30, 1999, 1998 and 1997,
respectively. Included as a component of European sales are sales to France
which were $1,108,000, $994,000 and $663,000; and sales to Italy which were
$1,201,000, $879,000 and $441,000 for the years ended June 30, 1999, 1998
and 1997.
ADAGEN sales represent approximately 90% of the Company's total net
sales for the year ended June 30, 1999. 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 49%, 48% and 54% of the
Company's ADAGEN sales for the years ended June 30, 1999, 1998 and 1997,
respectively, were made to Medicaid patients.
F-20
<PAGE>
EXHIBIT INDEX
Exhibit Page
Numbers Description Number
- ------- ----------- ------
21.0 Subsidiaries of Registrant E1
23.0 Consent of KPMG LLP E2
27.0 Financial Data Schedule E3
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.
SCA Ventures Inc., (formerly Enzon Labs Inc.) is a wholly-owned subsidiary of
the Registrant incorporated in the State of Delaware. SCA Ventures 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.
E-1
EXHIBIT 23.0
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Enzon, Inc.:
We consent to incorporation by reference in the Registration Statement Nos.
333-18051 and 33-50904 on Form S-8 and Registration Statement Nos. 333-58269,
333-46117, 333-32093 and 333-1535 on Form S-3 of Enzon, Inc. of our report dated
September 8, 1999, relating to the consolidated balance sheets of Enzon, Inc.
and subsidiaries as of June 30, 1999 and 1998, 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, 1999, which report appears in the
June 30, 1999 annual report on Form 10-K of Enzon, Inc.
/s/ KPMG LLP
KPMG LLP
Short Hills, New Jersey
September 28, 1999
E-2
<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, 1999 and the
Consolidated Statement of Operations for the year ended June 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 24,673,636
<SECURITIES> 0
<RECEIVABLES> 4,604,847
<ALLOWANCES> 0
<INVENTORY> 1,326,601
<CURRENT-ASSETS> 31,639,411
<PP&E> 12,054,505
<DEPRECIATION> 10,649,661
<TOTAL-ASSETS> 34,916,315
<CURRENT-LIABILITIES> 7,977,729
<BONDS> 0
0
1,070
<COMMON> 364,886
<OTHER-SE> 25,209,263
<TOTAL-LIABILITY-AND-EQUITY> 25,575,219
<SALES> 12,855,995
<TOTAL-REVENUES> 13,158,207
<CGS> 4,309,956
<TOTAL-COSTS> 19,278,843
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,348
<INCOME-PRETAX> (4,919,208)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,919,208)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,919,208)
<EPS-BASIC> (0.14)
<EPS-DILUTED> 0
</TABLE>
