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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-14732
ADVANCED MAGNETICS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-2742593
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
61 MOONEY STREET 02138
CAMBRIDGE, MASSACHUSETTS (Zip Code)
(Address of principal executive
offices)
</TABLE>
(Registrant's telephone number, including area code) (617) 497-2070
Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE, AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [/X/]
As of December 12, 2000, there were 6,773,932 shares of the registrant's
Common Stock, $.01 par value per share, outstanding. The aggregate market value
of the registrant's voting stock held by nonaffiliates as of December 12, 2000
was approximately $15,418,525.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders, scheduled to be held on February 6, 2001, are incorporated by
reference in Part III hereof.
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PART I
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. ADVANCED MAGNETICS, INC. MAKES SUCH
FORWARD-LOOKING STATEMENTS UNDER THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. IN THIS ANNUAL REPORT ON FORM 10-K,
WORDS SUCH AS "MAY," "WILL," "EXPECTS," "INTENDS," AND SIMILAR EXPRESSIONS (AS
WELL AS OTHER WORDS OR EXPRESSIONS REFERENCING FUTURE EVENTS, CONDITIONS OR
CIRCUMSTANCES) ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER MATERIALLY
FROM THE RESULTS DISCUSSED, PROJECTED, ANTICIPATED OR INDICATED IN ANY
FORWARD-LOOKING STATEMENTS. ANY FORWARD-LOOKING STATEMENT SHOULD BE CONSIDERED
IN LIGHT OF FACTORS DISCUSSED IN ITEM 7 UNDER "CERTAIN FACTORS THAT MAY EFFECT
FUTURE RESULTS." THE COMPANY CAUTIONS READERS NOT TO PLACE UNDUE RELIANCE ON ANY
SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THEY ARE MADE.
THE COMPANY DISCLAIMS ANY OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY SUCH
STATEMENTS TO REFLECT ANY CHANGE IN COMPANY EXPECTATIONS OR IN EVENTS,
CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENTS MAY BE BASED, OR THAT
MAY AFFECT THE LIKELIHOOD THAT ACTUAL RESULTS WILL DIFFER FROM THOSE SET FORTH
IN THE FORWARD-LOOKING STATEMENTS.
ITEM 1. BUSINESS:
COMPANY OVERVIEW
Advanced Magnetics, Inc., a Delaware corporation ("Advanced Magnetics" or
the "Company"), develops, manufactures and markets organ-specific contrast
agents to improve the diagnostic capabilities of soft tissue magnetic resonance
imaging ("MRI") scans. The Company's liver contrast agent, Feridex
I.V.-Registered Trademark-, is approved and marketed in Europe, Japan, the
United States, Argentina, South Korea, China and Israel. The Company's oral
contrast agent, GastroMARK-Registered Trademark-, used for delineating the bowel
in MRI procedures, is approved and marketed in Europe and the United States. The
Company has received an approvable letter, subject to certain conditions, from
the U.S. Food and Drug Administration ("FDA") for
Combidex-Registered Trademark-, the Company's contrast agent for the diagnosis
of lymph node disease. Code 7228, the Company's lead MRI contrast agent in the
development pipeline, is currently in Phase II clinical studies. The product is
being evaluated for MRI applications in both cardiology and oncology.
MRI is a diagnostic imaging technique that is used to visualize internal
abnormalities and changes in structure. Contrast agents increase the usefulness
of MRI by allowing radiologists to differentiate structures and organs with
greater diagnostic confidence. Currently, the primary use of MRI is for studies
of the central nervous system, abdominal structures and joints, such as the knee
and shoulder. The Company believes that the development of effective contrast
agents would allow MRI to be used for a wider range of applications, such as the
diagnosis and staging of cancer, and should increase the use of MRI as a
diagnostic imaging technique, in turn generating additional demand for MRI
contrast agents.
The liver and the lymphatic system are among the principal sites where
metastases of many common cancers (including colon, prostate and breast cancer)
are discovered. The Company believes that MRI exams of the liver produced with
contrast agents provide more diagnostic information and permit the
identification of smaller abnormalities than images produced by MRI studies
without contrast agents or images produced by contrast enhanced computed
tomography ("CECT"). Additionally, the Company believes that MRI exams of lymph
nodes using a contrast agent provide increased confidence in the diagnosis of
metastatic disease. As a result, MRI contrast agents can allow for more accurate
diagnosis and monitoring of treatment results and may be a cost-effective way to
assess medical treatments and to improve patient outcomes.
CECT is currently the primary imaging technique used to confirm a
preliminary or suspected diagnosis of liver cancer. FERIDEX I.V. is the first
organ-specific MRI contrast agent designed specifically
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for the liver and is marketed in the United States, Europe, Japan, Argentina,
South Korea, China and Israel. With respect to the lymphatic system, there are
no contrast agents currently available. An MRI contrast agent that localizes to
and causes contrast enhancement of the lymph nodes, such as COMBIDEX, could
allow for more accurate disease diagnosis and monitoring of treatment results.
To facilitate the marketing and distribution of its contrast agents, the
Company has entered into strategic relationships with certain established
pharmaceutical companies. These marketing and distribution partners, both in the
United States and abroad, include: (i) Guerbet S.A. ("Guerbet"), a leading
European producer of contrast agents, in Western Europe and Brazil; (ii) Eiken
Chemical Co., Ltd., ("Eiken"), one of Japan's leading medical diagnostics
manufacturers, in Japan; (iii) Berlex Laboratories, Inc. ("Berlex"), the leading
U.S. marketer of MRI contrast agents, in the United States; (iv) Cytogen Corp.
("Cytogen") a U.S. marketer of oncology products, in the United States; and
(v) Mallinckrodt Inc. ("Mallinckrodt"), a unit of Tyco, Inc. and a leading
manufacturer of contrast agents, in the United States.
The Company was incorporated in Delaware in November 1981. The Company's
principal offices are located at 61 Mooney Street, Cambridge, Massachusetts
02138, and its telephone number is (617) 497-2070.
MRI CONTRAST AGENTS
DIAGNOSTIC IMAGING. Diagnostic imaging is generally a non-invasive method
to visualize internal structures, abnormalities or anatomical changes in order
to diagnose disease and injury. Today, the most widely accepted imaging
techniques include x-rays, ultrasound, nuclear medicine, Computed Tomography
("CT") and MRI. Since the introduction of x-rays, doctors have sought
increasingly accurate and detailed non-invasive visualization of soft tissue for
diagnostic purposes. Diagnostic imaging is frequently used to determine whether
a cancer has metastasized or recurred and where it is located, as well as to
assist physicians in determining whether a treated cancer has shrunk. In
addition, diagnostic imaging is used in the diagnosis of disease affecting the
cardiovascular and central nervous systems as well as the diagnosis of broken
bones and injuries in certain joints, such as the knee and shoulder. The choice
of diagnostic imaging technique to be used in any particular circumstance
depends upon a variety of factors, including the particular disease or condition
to be studied, image quality, availability of imaging machines, availability of
contrast agents, cost and managed health care policies. There is no imaging
technique that is considered superior to all others for most or all
applications.
MAGNETIC RESONANCE IMAGING. Introduced in the 1980's, MRI is the diagnostic
imaging technique of choice for the central nervous system and is widely used
for the imaging of ligaments and tendons. MRI provides high-quality spatial
resolution and does not use radiation. In MRI procedures, the patient is placed
within the core of a large magnet where radio frequency signals are transmitted
into the patient's body. The interaction of the radio frequency signal with the
patient's body produces signals that are processed by a computer to create
cross-sectional images.
CONTRAST AGENTS. Contrast agents play a significant role in improving the
quality of diagnostic images by increasing the contrast between different
internal structures or types of tissues in various disease states and medical
conditions of interest. Consequently, contrast agents, which are administered
intravenously or orally, are widely used when available. MRI contrast agents
currently marketed in the United States are used primarily in imaging the
central nervous system. The availability of effective contrast agents often
determines the choice of imaging technique for a particular procedure. Currently
available imaging techniques can be of limited usefulness in visualizing certain
soft-tissue structures. For example, diagnostic imaging of lymph nodes, a common
site of metastasis for some frequently occurring cancers such as breast cancer
and prostate cancer, is currently limited because, the Company believes, there
are no effective contrast agents for differentiating diseased tissue from normal
nodes.
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TECHNOLOGY
Advanced Magnetics' core imaging agent technology is based on the
characteristic properties of extremely small, polysaccharide-coated
superparamagnetic iron oxide particles. The Company's core competencies are the
ability to design such particles for particular applications and manufacture the
particles in controlled sizes. The superparamagnetic particles range in size
from approximately one-thousandth to one-twentieth the size of a normal red
blood cell. When placed in a magnetic field, superparamagnetic iron oxide
particles become strongly magnetic, but lose their magnetism once the field is
removed. Once inside the targeted organ or area of study, the powerful magnetic
properties of the Company's iron oxide particles result in images that show
greater soft tissue contrast and thus increase the information available to the
reviewing physicians. The Company's technology and expertise enable it to
synthesize, sterilize and stabilize superparamagnetic particles in a manner
necessary for their use in pharmaceutical products such as MRI contrast agents
to aid in the diagnosis of cancer and other diseases. The Company's rights to
its contrast agent technology are derived from and protected by license
agreements, patents, patent applications and trade secrets. See "Patents and
Trade Secrets."
PRODUCTS
The following table summarizes applications and potential applications,
marketing partners and current U.S. and foreign status for each of the Company's
products.
ADVANCED MAGNETICS' PRODUCTS
<TABLE>
<CAPTION>
PRODUCT APPLICATIONS MARKETING PARTNERS U.S. STATUS FOREIGN STATUS
--------------------- -------------------- ----------------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
COMBIDEX Diagnosis of lymph Cytogen (United States) Approvable EU Dossier filed
node disease. Guerbet (western Europe Letter received December 1999.
and Brazil). June 2000,
subject to
certain
conditions.
FERIDEX I.V. Diagnosis of liver Berlex (United States), Approved and Approved and marketed
lesions. Eiken (Japan), Guerbet marketed. in Japan and in most
(western Europe and EU countries.
Brazil).
GASTROMARK Marking of the bowel Guerbet (western Europe Approved and Approved and marketed
in abdominal and Brazil), marketed. in several EU
imaging. Mallinckrodt (United countries, including
States). France.
CODE 7228 Magnetic Resonance Cytogen for oncology Phase II European protocols in
Angiography, primary applications (United clinical trials development.
and secondary tumor States) scheduled to
imaging, lymph node Guerbet (western Europe begin January
imaging. and Brazil). 2001.
</TABLE>
"Phase I clinical trials" refers to the first phase of human pharmaceutical
clinical trials in which testing for the safety and tolerance of the product is
conducted on a small group of normal subjects. "Phase II clinical trials" and
"Phase III clinical trials" are the second and third phases of human clinical
trials, where preliminary dosing and efficacy studies are conducted and where
additional testing for efficacy and safety is conducted on an expanded patient
group. "NDA" is a New Drug Application that is filed with the U.S. Food and Drug
Administration ("FDA") when seeking marketing approval for a product in the
United States. "Dossier" is the EU equivalent of an NDA and is filed with the
Committee for Proprietary Medicinal Products, the EU equivalent of the FDA. For
a further
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description of the substantial regulatory requirements subsequent to the
completion of preclinical testing, see "Government Regulation and
Reimbursement."
COMBIDEX. The Company believes that COMBIDEX will be useful in the
diagnostic imaging of lymph nodes. Lymph nodes are frequently the site for
metastases of different types of cancer, particularly breast cancer and prostate
cancer. Effective imaging of lymph nodes could play a role in determining
appropriate patient management. There are currently no available non-invasive
methods for distinguishing between lymph nodes enlarged by the infiltration of
cancerous cells as opposed to inflammation. Since CT, the only imaging modality
currently used for imaging lymph nodes, cannot distinguish between inflamed
nodes and cancerous nodes, the current practice is to assume that enlarged nodes
are cancerous and to perform a biopsy to establish their true status. Nodes less
than ten millimeters in size are often assumed to be normal. The Company
believes that COMBIDEX will enable doctors using MRI to have improved diagnostic
confidence in differentiating between normal and diseased lymph nodes,
irrespective of node size, because COMBIDEX only accumulates in normal lymph
node tissue and can therefore facilitate differentiation between tumorous nodes
and inflamed nodes.
The Company has granted exclusive rights to market and sell COMBIDEX in the
United States to Cytogen and in western Europe and Brazil to Guerbet. See
"Licensing and Marketing Arrangements."
FERIDEX I.V. The liver is a principal site for metastasis of primary cancer
originating in other parts of the body, particularly colon cancer, a common
cancer in the United States. Identification of metastatic tumors in the liver
has a significant impact on physicians' treatment plans for cancer because
proper staging of disease affects treatment plans. Diagnosis of metastases at an
early stage can be difficult because small tumors are frequently not accompanied
by detectable physical symptoms. The Company believes that contrast-enhanced MRI
exams using FERIDEX I.V. allow for the ability to image liver tumors that may
not be visible with CT scanning or ultrasound, the most widely used techniques
for liver imaging, and that liver scans may now be done using contrast-enhanced
MRI instead of, or in addition to, CT scanning and ultrasound.
Marketing of FERIDEX I.V. began in October 1996 by Berlex Laboratories
("Berlex") in the United States. Berlex is the Company's exclusive marketing
partner for FERIDEX I.V. in the United States. FERIDEX I.V. was approved in
August 1994 by the European Union's (the "EU") Committee for Proprietary
Medicinal Products and most of the member states of the EU have since issued
local approvals to market the product. Guerbet began marketing the product in
Europe in late 1994. Eiken received approval for marketing the product in Japan
in July 1997 and received pricing approval in September 1997. FERIDEX I.V. was
launched in Japan in September 1997 through Eiken's affiliate Tanabe
Seiyaku, Ltd. See "Licensing and Marketing Arrangements."
GASTROMARK. MRI imaging of organs and tissues in the abdomen without
contrast agents is difficult because these organs and tissues cannot be easily
distinguished from the loops of the bowel. GASTROMARK, the Company's oral
contrast agent for marking of the bowel, when ingested, flows through and
darkens the bowel. By more clearly identifying the intestinal loops, GASTROMARK
improves visualization of adjacent abdominal tissues, such as the pancreas.
In April 1997, the Company's marketing partner, Mallinckrodt, launched
GASTROMARK in the United States. The Company has licensed the marketing rights
to GASTROMARK on an exclusive basis to Guerbet in Western Europe and Brazil.
During fiscal 1993, Guerbet received marketing approval for the product in
several European countries including France, and marketing of the product in
Europe began. See "Licensing and Marketing Arrangements".
CODE 7228. Code 7228 is a blood pool agent, an agent that stays in the
blood stream for an extended period of time, that may be useful as a contrast
agent for Magnetic Resonance Angiography ("MRA") as well as cardiac perfusion.
In addition, Code 7228 may be useful for the detection of
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metastatic and primary tumors, including breast cancer, and may also improve
tumor border delineation. The product is currently entering Phase II clinical
studies.
The Company has granted exclusive rights to market Code 7228 for oncology
applications in the United States to Cytogen and exclusive rights to market and
sell Code 7228 in western Europe and Brazil to Guerbet. See "Licensing and
Marketing Arrangements".
LICENSING AND MARKETING ARRANGEMENTS
BERLEX. In February 1995, the Company entered into a license and marketing
agreement and a supply agreement with Berlex, granting Berlex exclusive
marketing rights to FERIDEX I.V. in the United States. Under the terms of the
agreements, Berlex paid a $5,000,000 license fee upon execution of the
agreements and paid an additional $5,000,000 license fee in October 1996 upon
the Company's delivery of FDA-approved product to Berlex. In addition, Berlex
pays the Company for manufacturing the agent and royalties on sales of the
agent. Under the terms of the license and marketing agreement, Berlex pays for
60% of ongoing development expenses associated with FERIDEX I.V. These
agreements expire in 2010 but can be terminated earlier upon the occurrence of
certain specified events. Under the terms of the license and marketing
agreement, the Company has the right to terminate the exclusive marketing rights
based on the failure of Berlex to achieve minimum sales targets, but has not
exercised that right at this time.
CYTOGEN. In August 2000, the Company entered into a license and marketing
agreement and a supply agreement with Cytogen Corporation ("Cytogen"). The
Company granted Cytogen the exclusive right to market and sell COMBIDEX and CODE
7228 for oncology applications in the United States and agreed to grant to
Cytogen the exclusive right to market and sell FERIDEX I.V. in the United States
if the Company's existing marketing agreement for FERIDEX I.V. terminates for
any reason. Upon signing of the agreements, the Company received 1,500,000
shares of Cytogen common stock as a non-refundable license fee. An additional
500,000 shares of Cytogen common stock were placed in escrow and will be
released to the Company upon satisfaction of certain milestones under the
agreements. Cytogen has agreed to pay the Company for manufacturing and
supplying the products and royalties on sales. These agreements have an initial
ten-year term with automatic five year extensions, but can be terminated earlier
upon the occurrence of certain specified events.
EIKEN. In 1988, the Company entered into a manufacturing and distribution
agreement with Eiken, granting Eiken the exclusive right to manufacture and
distribute FERIDEX I.V. in Japan. Eiken was responsible for conducting clinical
trials and securing the necessary regulatory approval in Japan. Under the terms
of the agreement, Eiken paid the Company a license fee of $1,500,000. In
addition, Eiken pays royalties based upon sales. The agreement terminates on the
later of (i) the expiration of the last to expire technology patent or (ii) ten
years after the date all necessary approvals were obtained.
In 1990, the Company entered into a manufacturing and distribution agreement
with Eiken, granting Eiken the exclusive right to manufacture and distribute
GASTROMARK and COMBIDEX in Japan. In addition, for a period of 180 days after
the Company files an IND for any future Advanced Magnetics' MRI contrast agents,
Eiken has the right of first refusal to manufacture and distribute such product
in Japan. Upon execution of this agreement, Eiken paid the Company a license fee
of $1,000,000. Additionally, Eiken agreed to pay the Company royalties on sales
of all products sold by Eiken under the agreement. The agreement is perpetual
but terminable upon certain specified events. Due to market conditions in Japan,
Eiken has decided not to market GASTROMARK or COMBIDEX and rights to these
products in Japan have reverted back to the Company. Additionally, Eiken has
decided not to exercise its option to develop Code 7228 in Japan.
GUERBET. In 1987, the Company entered into a supply and distribution
agreement with Guerbet. Under this agreement, Guerbet has been appointed the
exclusive distributor of FERIDEX I.V. in
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western Europe (under the tradename Endorem-TM-) and Brazil. Guerbet is
responsible for conducting clinical trials and securing the necessary regulatory
approvals in the countries in its territory. Guerbet paid the Company license
fees and has agreed to pay royalties based on sales. The Company is entitled to
receive an additional percentage of Guerbet's sales in return for selling to
Guerbet its requirements for the active ingredient used in ENDOREM. The
agreement terminates on the later of (i) the expiration of the last to expire
technology patent or (ii) ten years after the date all necessary approvals were
obtained in France.
In 1989, the Company entered into a second supply and distribution agreement
with Guerbet granting Guerbet an exclusive right in western Europe and Brazil to
manufacture and sell GASTROMARK (under the tradename Lumirem-TM-) and any future
Advanced Magnetics MRI contrast agents that Guerbet decides to market. Guerbet
has taken the rights to COMBIDEX (under the tradename Sinerem-TM-) and Code
7228. Under the terms of this second distribution agreement, Guerbet paid the
Company a license fee in 1989. In addition, Guerbet has agreed to pay the
Company both royalties and a percentage of net sales as the purchase price for
the active ingredient of the licensed products. The Company is required to sell
to Guerbet its requirements for the active ingredient used in the contrast
agents. The agreement is perpetual but terminable upon certain specified events.
MALLINCKRODT. In 1990, the Company entered into a manufacturing and
distribution agreement for GASTROMARK with Mallinckrodt Inc. ("Mallinckrodt").
Under this agreement, Mallinckrodt received the exclusive right to manufacture
and co-market GASTROMARK in the United States, Canada and Mexico. Under this
agreement, Advanced Magnetics reserved the right to sell the product through its
own direct sales personnel. Mallinckrodt paid $1,350,000 in license fees and a
$500,000 non-refundable milestone payment upon FDA approval of GASTROMARK.
Additionally, the Company receives royalties based on Mallinckrodt's GASTROMARK
sales as well as a percentage of sales for supplying the active ingredient. The
agreement is perpetual but terminable upon certain specified events.
SQUIBB DIAGNOSTICS. Under an agreement with Squibb Diagnostics, a division
of Bristol-Myers Squibb Co., the Company is obligated to pay up to a maximum of
$2,750,000 in royalties in connection with product sales of COMBIDEX.
MANUFACTURING AND SUPPLY ARRANGEMENTS
The Company's Cambridge, Massachusetts facility is registered with the FDA
and is subject to "current Good Manufacturing Practices" ("cGMP") as prescribed
by the FDA. The Company currently manufactures FERIDEX I.V. bulk product for
sale to Guerbet, manufactures FERIDEX I.V. finished product for sale to Berlex
and manufactures GASTROMARK bulk product for sale to Guerbet and Mallinckrodt.
The Company intends to manufacture COMBIDEX formulated drug product for
commercial use, subject to FDA approval, and Code 7228 finished product for
clinical use. The Company intends to use a contract manufacturer for final
manufacturing of COMBIDEX.
PATENTS AND TRADE SECRETS
The Company considers the protection of its technology to be material to its
business. The Company's policy is to aggressively protect its competitive
technology position by a variety of means, including applying for patents in the
United States and in appropriate foreign countries. The Company has been granted
28 U.S. patents, has several patent applications pending, and has filed
counterpart patent applications in several foreign countries. The Company has
assigned three of its U.S. patents to another company. In addition, the Company
is a party to various license agreements, including nonexclusive cross-licensing
arrangements covering MRI technology with Nycomed Imaging A.S. of Oslo, Norway
("Nycomed") and Schering AG ("Schering") of Berlin, Germany. The Company's
proprietary position depends in part on these licenses, and termination of the
licenses for any reason
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could have a material adverse effect on the Company by limiting or prohibiting
the commercial sale of its products. Although the Company believes that further
patents will be issued on pending applications, no assurance to this effect can
be given.
The patent positions of pharmaceutical and biopharmaceutical firms,
including Advanced Magnetics, are generally uncertain and involve complex legal
and factual questions. The claims which are included in pending or future patent
applications may not be issued, any issued patents may not provide the Company
with competitive advantages or may be challenged by others, and the existing or
future patents of third parties may have an adverse effect on the ability of the
Company to commercialize its products.
The Company also intends to rely on its trade secrets, know-how, continuing
technological innovations and licensing opportunities to maintain and develop
its competitive position. Although the Company seeks to protect its proprietary
information, others might independently develop the same or similar information,
design around its patents, obtain unauthorized access to the Company's
proprietary information or misuse information to which the Company has granted
access. Litigation may be necessary to enforce any patents issued to the Company
or to determine the scope of other person's proprietary rights in court or
administrative proceedings. Any litigation or administrative proceeding could
result in substantial costs to the Company and distraction of the Company's
management. An adverse ruling in any litigation or administrative proceeding
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
The pharmaceutical and biopharmaceutical industries are subject to intense
competition and rapid technological change. Certain companies, including the
Company's collaborators, which have greater human and financial resources
dedicated to product development and clinical testing than the Company, are
developing MRI contrast agents. The Company's collaborators are not restricted
from developing and marketing competing products and, as a result of certain
cross license agreements among the Company and certain of its competitors
(including one of its collaborators), the Company's competitors will be able to
utilize certain of the Company's technology in the development of competing
products. The Company may not be able to compete successfully with these
companies. In addition, further product and technological developments may make
other imaging modalities more compelling than MRI and adversely impact sales of
the Company's products.
The Company believes that its ability to compete successfully in the MRI
contrast agent market will depend on a number of factors including the
implementation of effective marketing campaigns by the Company and/or its
marketing and distribution partners, development of efficacious products, timely
receipt of regulatory approvals and product manufacturing at commercially
acceptable costs. In addition, market acceptance of both MRI as an appropriate
technique for imaging certain organs, especially the liver and the lymphatic
system, and the use of the Company's products as part of such imaging is
critical to the success of its contrast agent products. Although the Company
believes that its contrast agents offer advantages over competing MRI, CT or
X-ray contrast agents, competing contrast agents might receive greater
acceptance. In addition, to the extent that other diagnostic techniques such as
CT and X-ray may be perceived as providing greater value than MRI, any
corresponding decrease in the use of MRI could have an adverse effect on the
demand for the Company's contrast agent products. The Company may not be able to
successfully market its products alone or with its partners, develop efficacious
products, obtain timely regulatory approvals, manufacture products at
commercially acceptable costs, gain satisfactory market acceptance or otherwise
successfully compete in the future.
There are several MRI contrast agents for imaging lesions of the liver on
the market and in various phases of clinical testing in the United States and
abroad. Schering has two products, Resovist, a carboxydextran superparamagnetic
iron oxide formulation, and Eovist, a chelated gadolinium
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compound. The Company believes that Schering has filed for European and Japanese
approval of Resovist; clinical trials are proceeding in the United States.
Eovist is believed to be in Phase III trials in Europe. Nycomed has received
marketing approval in the United States and Europe for its MnDPDP product,
Teslascan, for MRI of liver lesions. Bracco S.p.A. has received marketing
approval in Europe for Gadolinium BOPTA (MultiHance), a chelated gadolinium
compound for MR imaging of liver lesions and we believe they may have filed for
approval in the United States as well. To the Company's knowledge, there are no
approved products or drug candidates in human clinical development for the
contrast-enhanced imaging of lymph nodes other than COMBIDEX and Code 7228.
Although the Company is unaware of any such products, those products may exist
and could have a material adverse effect on the marketing of the Company's
products.
In the area of oral contrast agents, Pharmacyclics, Inc. filed an NDA in
late 1995 for GADOLITE, its gadolinium-based product candidate which is
currently not approved by the FDA. Bracco S.p.A received marketing approval in
December 1997 in the United States for Lumenhance, its liposomal encapsulated
oral manganese compound, but it is not being marketed at this time. In
October 1997, the FDA approved Ferriseltz, an oral MRI agent from
Oncomembrane Inc. It is not known how, or if, Bracco and Oncomembrane are
planning to market these products.
These competitive products or other products developed by the Company's
competitors my be more effective than any products developed by the Company or
render the Company's technology obsolete. In addition, further technological and
product developments may make other imaging modalities more competitive.
Many of these companies, as well as other imaging companies, have
substantially greater capital, research and development, manufacturing and
marketing resources and experience than the Company and represent significant
competition for Advanced Magnetics. Such companies may succeed in developing
technologies and products that are more effective or less costly than any that
may be developed by the Company and may also prove to be more successful than
the Company in production and marketing. Furthermore, products developed by the
Company's competitors may be more effective than any products developed by the
Company or render the Company's technology obsolete.
GOVERNMENT REGULATION AND REIMBURSEMENT
The production and marketing of the Company's products and its ongoing
research and development activities are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United States
and other countries. Pharmaceutical products intended for therapeutic use or for
intravenous or oral administration in humans are principally governed by FDA
regulations in the United States and by comparable government regulations in
foreign countries. Various federal, state and local statutes and regulations
also govern or influence the research and development, manufacturing, safety,
labeling, storage, record-keeping, distribution and marketing of such products.
The process of completing pre-clinical and clinical testing and obtaining the
approval of the FDA and similar health authorities in foreign countries to
market a new drug product requires a significant number of years and the
expenditure of substantial resources. Failure to obtain requisite governmental
approvals, failure to obtain approvals of the scope requested or withdrawal or
suspension by the FDA or foreign authorities of any approvals will delay or
preclude the Company or its licensees or collaborators from marketing the
Company's products or limit the commercial use of the products and will have a
material adverse effect on the Company's business, financial condition and
results of operations.
The steps required by the FDA before a new human pharmaceutical product
(including a contrast agent) may be marketed in the United States include:
(a) pre-clinical laboratory tests, in vivo pre-clinical studies and formulation
studies; (b) the submission to the FDA of a request for authorization to conduct
clinical trials subject to an Investigational New Drug ("IND") exemption, to
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which the FDA must not object, before human clinical trials may commence;
(c) adequate and well-controlled human-clinical trials to establish the safety
and efficacy of the drug for its intended use; (d) submission to the FDA of an
NDA; (e) approval and validation of manufacturing facilities used in production
of the pharmaceutical product; and (f) review and approval of the NDA by the FDA
before the drug product may be shipped or sold commercially.
Pre-clinical tests include the laboratory evaluation of product chemistry
and formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Pre-clinical test results are submitted to the FDA as a
part of the IND. Clinical trials are typically conducted in three sequential
phases, although the phases may overlap. Phase I involves the initial
administration of the drug to a small group of humans, either healthy volunteers
or patients, to test for safety, dosage tolerance, absorption, distribution,
metabolism, excretion and clinical pharmacology and, if possible, early
indications of effectiveness. Phase II involves studies in a small sample of the
actual intended patient population to assess the preliminary efficacy of the
investigational drug for a specific clinical indication, to ascertain dose
tolerance and the optimal dose range and to collect additional clinical
information relating to safety and potential adverse effects. Once an
investigational drug is found to have some efficacy and an acceptable clinical
safety profile in the targeted patient population, Phase III studies can be
initiated to further establish safety and efficacy of the investigational drug
in a broader sample of the target patient population. The results of the
clinical trials together with the results of the pre-clinical tests and complete
manufacturing information are submitted in an NDA to the FDA for approval. The
FDA may suspend clinical trials at any point in this process if it concludes
that patients are being exposed to an unacceptable health risk.
Both before and after approval is obtained, a product, its manufacturer, and
the holder of the NDA for the product are subject to comprehensive regulatory
oversight. Violations of regulatory requirements at any stage, including the
pre-clinical and clinical testing process, the approval process, or thereafter
(including after approval) may result in various adverse consequences, including
the FDA's delay in approving or refusal to approve a product, withdrawal of an
approved product from the market, and/or the imposition of criminal penalties
against the manufacturer and/or NDA holder. In addition, later discovery of
previously unknown problems may result in restrictions on such product,
manufacturer, or NDA holder, including withdrawal of the product from the
market. Also, new government requirements may be established that could delay or
prevent regulatory approval of the Company's products under development.
If an NDA is submitted to the FDA, the application may not be reviewed and
approved by the FDA in a timely manner, if at all. Among the conditions for NDA
approval is the requirement that a prospective manufacturer's manufacturing
procedures conform to cGMP requirements, which must be followed at all times. In
complying with those requirements, manufacturers (including a drug sponsor's
third-party contract manufacturers) must continue to expend time, money and
effort in the area of production and quality control to ensure compliance. Once
the FDA determines that a product is approvable, it will issue an action letter
indicating if any additional information must be provided or if any additional
conditions must be met prior to final approval. The labeling of the product must
also be approved by the FDA prior to final approval of the product. Even after
initial FDA approval has been obtained, further studies, including post-market
studies, may be required to provide additional information. Results of such
post-market programs may limit or expand the further marketing of the product.
Even if initial marketing approval is granted, such approval may entail
limitations on the indicated uses for which a product may be used and impose
labeling requirements which may adversely impact the Company's ability to market
its products. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing.
Domestic manufacturing establishments are subject to periodic inspections by
the FDA in order to assess, among other things, cGMP compliance. To supply
product for use in the United States, foreign manufacturing establishments must
comply with cGMP and are subject to periodic inspection by the
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FDA or by regulatory authorities in certain of such countries under reciprocal
agreements with the FDA. Failure to maintain compliance with cGMP regulations
and other applicable manufacturing requirements of various regulatory agencies
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is also subject to foreign regulatory requirements governing
development, manufacturing and sales of pharmaceutical products that vary widely
from country to country. Approval of a drug by applicable regulatory agencies of
foreign countries must be secured prior to the marketing of such drug in those
countries. The regulatory approval process may be more or less rigorous from
country to country and the time required for approval may be longer or shorter
than that required in the United States.
The Company is subject to regulation under local, state and federal law
regarding occupational safety, laboratory practices, handling of chemicals,
environmental protection and hazardous substances control. The Company possesses
a Byproduct Materials License from the Commonwealth of Massachusetts for
receipt, possession, manufacturing and distribution of radioactive materials.
The Company holds Registration Certificates from the United States Drug
Enforcement Administration and the Commonwealth of Massachusetts Department of
Public Health for handling controlled substances. The Company is registered with
the United States Environmental Protection Agency ("EPA") as a generator of
hazardous waste. All hazardous waste disposal must be made in accordance with
EPA and Commonwealth of Massachusetts requirements. The Company is subject to
the regulations of the Occupational Safety and Health Act and has in effect a
safety program to assure compliance with these regulations.
In both the United States and foreign markets, the Company's ability to
commercialize its products successfully also depends in part on the extent to
which reimbursement for the costs of such products and related treatments will
be available from government health administration authorities, private health
insurers and other third-party payors. Significant uncertainty exists as to the
reimbursement status of newly approved health care products and products used
for indications not approved by the FDA. If adequate reimbursement levels are
not maintained by government and other third-party payors for the Company's
products and related treatments, the Company's business, financial condition and
results of operations may be materially adversely affected.
MAJOR CUSTOMERS
Two companies, Berlex and Guerbet, accounted for approximately 27% and 22%
respectively, of the Company's revenues in fiscal 2000. No other customer
accounted for more than 10% of total revenues in fiscal 2000.
EMPLOYEES
As of December 12, 2000, the Company had approximately 24 full-time
employees, 16 of whom were engaged in research and development. The Company's
success depends in part on its ability to recruit and retain talented and
trained scientific personnel. The Company has been successful to date in
obtaining such personnel, but may not be so in the future.
None of the Company's employees is represented by a labor union, and the
Company considers its relations with its employees to be excellent.
FOREIGN OPERATIONS
The Company has no foreign operations. Revenues in fiscal 2000, 1999 and
1998 from customers and licensees outside of the United States, principally in
Europe and Japan, amounted to 35%, 19% and 26% respectively, of the Company's
total revenues.
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PRODUCT LIABILITY INSURANCE
The use of any of the Company's potential products in clinical trials and
the sale of any approved products may expose the Company to liability claims
resulting from the use of products or product candidates. These claims might be
made by customers (including corporate partners), clinical trial subjects,
patients, pharmaceutical companies or others. The Company maintains product
liability insurance coverage for claims arising from the use of its products
whether in clinical trials or approved commercial usage. However, coverage is
becoming increasingly expensive and the Company may not be able to maintain
insurance at a reasonable cost. The Company's insurance may not provide
sufficient amounts to protect the Company against liability that could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company may not be able to obtain commercially
reasonable product liability insurance for any product approved for marketing in
the future or that insurance coverage and the resources of the Company would be
sufficient to satisfy any liability resulting from product liability claims. A
product liability claim or series of claims brought against the Company could
have a material adverse effect on its business, financial condition and results
of operations, whether or not the plaintiffs in such claims ultimately prevail.
RESEARCH AND DEVELOPMENT
The Company is committed to internal research and development as a method of
producing new products, improving existing products and growing revenues. The
Company spent $4,623,468, $7,952,331 and $8,961,796 in each of the last three
fiscal years respectively on research and development.
ITEM 2. PROPERTIES:
The Company's principal operations are located in a modern, Company-owned
building of approximately 25,000 square feet in Cambridge Massachusetts. The
Company believes this facility is adequate for its current and anticipated
short-term needs and that it will be able to lease comparable space, if
necessary. However, the acquisition and required regulatory approvals for
additional pharmaceutical manufacturing space can be time consuming and
expensive. If the Company desired to expand its manufacturing capacity it might
not be able to do so on a timely basis, if at all. Additionally, the Company
leases premises of approximately 5,200 square feet in Princeton, New Jersey that
was previously used for the Company's clinical development group. This lease
expires on September 30, 2003.
ITEM 3. LEGAL PROCEEDINGS:
The Company and certain of its officers were sued in an action entitled
DAVID D. STARK, M.D. V. ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V.
GROMAN AND LEE JOSEPHSON, Civil Action No. 92-12157-WGY, in the United States
District Court for the District of Massachusetts on September 3, 1992. The
plaintiff, a former consultant to the Company, claims that he was incorrectly
omitted as an inventor or joint inventor on certain of the Company's patents and
on pending applications, and seeks injunctive relief and unspecified damages. In
addition, the complaint also alleges state law claims for breach of contract,
breach of good faith and fair dealing, breach of implied contract,
misappropriation of trade secrets, conversion, negligent misrepresentation,
misrepresentation, unjust enrichment and unfair trade practices. The District
Court has stayed this federal action pending resolution of an appeal in the
State Court of summary judgment in the Company's favor as well as resolution of
a jurisdictional issue. As noted below, the Massachusetts Appeals Court has
decided the appeal, but the federal action remains stayed as of this date. While
the outcome of the action cannot be determined, the Company believes the action
is without merit and intends to defend the action vigorously. The Company may
not be able to successfully defend this action and the failure by the Company to
prevail for any reason could have an adverse effect on it's future business,
financial condition and results of operations.
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The Company and certain of its officers were sued in DAVID D. STARK, M.D. V.
ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V. GROMAN AND LEE JOSEPHSON,
Civil Action No. 93-02846-C, in the Superior Court Department of the
Massachusetts Trial Court for Middlesex County. This case involves claims of
breach of contract, breach of good faith and fair dealing, breach of implied
contract, unjust enrichment and unfair trade practices that were originally
dismissed by, but later remanded to, the Federal Court in the above-mentioned
action, as well as a new count alleging tortious interference with contractual
or advantageous relations. The Superior Court granted partial summary judgment
in the Company's favor and dismissed the unfair trade practices and tort counts.
The plaintiff's contract claims have been dismissed with prejudice and final
judgment was entered against the plaintiff. The plaintiff filed an appeal in
DAVID D. STARK, M.D. V. ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V.
GROMAN AND LEE JOSEPHSON, Appeal No. 98-P-1749, in the Massachusetts Appeals
Court, on January 25, 1999. On October 13, 2000, the Massachusetts Appeals Court
reversed the grant of partial summary judgment in the Company's favor and
ordered that the unfair trade practice and tort claims be reinstated. The
Superior Court has redocketed the claims as directed by the Appeals Court, and
it is anticipated that the litigation in state court will now move forward.
While the outcome of the action cannot be determined, the Company believes the
action is without merit and intends to defend the action vigorously. The Company
may not be able to successfully defend this action and the failure by the
Company to prevail for any reason could have an adverse effect on its future
business, financial condition and results of operations.
The Company filed suit on October 7, 1997 against Sanofi
Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA
(collectively, the "Defendants") in the Superior Court of the Commonwealth of
Massachusetts. The action is entitled ADVANCED MAGNETICS, INC. V. SANOFI
PHARMACEUTICALS, INC. AND SANOFI SA, Civil Action No. 97-5222B. The Company
claims that the Defendants tortiously interfered with a license, supply and
marketing agreement (the "Agreement"), and seeks unspecified monetary damages.
In addition, the Company seeks a declaration that the Defendants do not have any
rights under the Agreement and that the Company has not breached the Agreement.
Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on
February 4, 1998 seeking compensatory damages of $11,500,000 and multiple
damages as a result of the Company's alleged breach of the Agreement. On
November 13, 1998 the Company filed an amended complaint adding claims for
unfair competition and breach of contract against the Defendants. On
November 23, 1998, the Defendants answered the Company's amended complaint, and
Sanofi Pharmaceuticals, Inc. served a new set of counterclaims seeking
compensatory damages of $15,000,000 and multiple damages as a result of the
Company's alleged conduct. On June 15, 1999, the court granted partial summary
judgment in favor of the Company and against the Defendants, declared that the
Company did not breach the Agreement, was not unjustly enriched, and did not
violate Mass. Gen. Laws ch. 93A, and dismissed Sanofi Pharmaceuticals, Inc.'s
counterclaims for breach of contract, unjust enrichment, conversion, account
annexed and violation of Mass. Gen. Laws ch. 93A. On October 29, 1999, the
Company served a second motion for partial summary judgment which, among other
things, requests judgment in its favor on Sanofi Pharmaceuticals, Inc.'s
remaining counterclaims against the Company and for judgment in its favor on the
Company's breach of contract claim against Defendants. Also on October 29, 1999,
Defendants served a motion for partial summary judgment which, among other
things, requests judgment in its favor on the Company's remaining claims. On
October 4, 2000, the Court granted the Company's motion and entered judgment on
all remaining claims brought by Sanofi Pharmaceuticals, Inc. In addition, the
Court granted in part and denied in part Defendants' motion for summary
judgment. Only the Company's breach of contract claim against Sanofi SA remains
in the case. On November 21, 2000, Sanofi SA and Sanofi Pharmaceuticals, Inc.
served a Motion for Entry of Separate and Final Judgment, seeking to have the
Court certify final judgment on all issues decided on summary judgment except
for the Company's breach of contract claim against Sanofi SA. Sanofi SA and
Sanofi Pharmaceuticals seek final judgment certification in order to obtain an
immediate appeal on the summary judgment decisions. On December 1, 2000, the
Company served a memorandum in
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opposition to the motion for final and separate judgment. On December 5, 2000,
the Court set a trial date for March 19, 2001 on the Company's remaining claim.
While the final outcome of this litigation cannot be determined, the Company
intends to pursue its remaining claim. In the event that the judgments in the
Company's favor are reversed on appeal, the Company intends to defend those
claims vigorously. However, in such an event, the Company may not be able to
successfully defend those claims and the failure of the Company to prevail for
any reason could impair the Company's financial resources and disrupt the
Company's future operating plans.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of the company's security holders during
the quarter ended September 30, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT:
JEROME GOLDSTEIN, 61, is a founder of the Company and has been Chief
Executive Officer, Chairman of the Board of Directors and Treasurer since the
Company's organization in November 1981. Mr. Goldstein was a co-founder of
Clinical Assays, Inc., serving from 1972 to 1980 as Vice President and then as
President. Mr. Goldstein is the husband of Marlene Kaplan Goldstein, Secretary
of the Company.
LEONARD M. BAUM, 47, joined the Company in October 1994 as Senior Vice
President and has been President and Chief Operating Officer since May 1997.
From 1986 to 1994, Mr. Baum was employed as Senior Director, Worldwide
Regulatory Affairs/Drug Safety by Squibb Diagnostics. Mr. Baum is also a member
of the Board of Directors.
PAULA M. JACOBS, 56, joined the Company in January 1986 as Vice
President--Development. From 1981 to 1986, Dr. Jacobs was employed at
Seragen, Inc., first as Production Manager and later as General Manager of the
Research Products Division.
DENNIS LAWLER, 46, joined the Company in February 1989 as Director of
Quality Control and has been Vice President--Quality Control since
January 1997. Prior to February 1989, Mr. Lawler was employed at CIS-US, first
as Senior Quality Control Analyst, then as a Production Manager and then as a
Plant Manager.
JEROME M. LEWIS, 51, joined the Company in April 1986 as a Senior Scientist
and has been Vice President--Scientific Operations since February 1991. Prior to
April 1986, Dr. Lewis was employed as a senior scientist by Petroferm Ltd., a
biotechnology company.
JAMES A. MATHESON, 56, joined the Company in May 1996 as Vice
President--Finance. Prior to May, 1996, Mr. Matheson was Controller of Diatech
Diagnostics, Inc.
MARK C. ROESSEL, 50, joined the Company in January 1982 as Director of
Regulatory Affairs and has been Vice President--Regulatory Affairs since
January 1995. Prior to January 1982, Mr. Roessel was Compliance Manager of the
Clinical Assay Division of Baxter International, Inc.
MARLENE KAPLAN GOLDSTEIN is a founder of the Company and has been Secretary
of the Company since the Company's organization in November 1981.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
The Company's common stock is listed on the American Stock Exchange under
the symbol AVM.
The table below sets forth the high and low sales price of the Company's
common stock on the American Stock Exchange for the fiscal quarters of 2000 and
1999.
<TABLE>
<CAPTION>
FISCAL QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
2000 High........................................ 4 11/16 10 3/4 8 7/8 8 1/8
Low.......................................... 3 3 13/16 6 1/8 3 1/4
1999 High........................................ 11 3/8 7 3/4 5 5/8 5 1/4
Low.......................................... 5 3 1/2 3 7/16 3 1/8
</TABLE>
On December 12, 2000 there were approximately 280 stockholders of record.
The Company believes that the number of beneficial holders of Common Stock is
approximately 2,200. The last reported sale price of the Common Stock on
December 12, 2000 was $2.50 per share. The Company has never declared or paid a
cash dividend on its capital stock.
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ITEM 6. SELECTED FINANCIAL DATA:
The selected financial data set forth below has been derived from the
audited financial statements of the Company. This information should be read in
conjunction with the financial statements and notes thereto set forth elsewhere
herein.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
License fees......................................... $ 1,124,049 $ -- $ -- $ 5,500,000 $ --
Royalties............................................ 825,000 680,000 980,542 363,445 50,000
Product sales........................................ 1,253,537 1,966,059 1,399,871 1,580,357 12,762
Contract research and development.................... 106,003 581,429 399,897 62,920 6,810
Interest, dividends and net gains and losses on sales
of securities...................................... 765,330 4,202,568 3,623,836 3,495,049 1,761,450
------------ ----------- ----------- ----------- -------------
Total revenues..................................... 4,073,919 7,430,056 6,404,146 11,001,771 1,831,022
Costs and Expenses:
Cost of product sales................................ 239,228 454,642 237,945 311,678 2,550
Contract research and development expenses........... 3,195 37,056 6,514 8,815 --
Company-sponsored research and development
expenses........................................... 4,623,468 7,952,331 8,961,796 9,304,327 9,671,897
Selling, general and administrative expenses......... 3,013,796 3,694,038 3,701,410 1,437,599 1,871,568
------------ ----------- ----------- ----------- -------------
Total costs and expenses........................... 7,879,687 12,138,067 12,907,665 11,062,419 11,546,015
Other Income:
Other income....................................... -- 265,593 -- 264,800 --
------------ ----------- ----------- ----------- -------------
Income (loss) before provision for income taxes,
minority interest in subsidiary, and cumulative
effect of accounting change.......................... (3,805,768) (4,442,418) (6,503,519) 204,152 (9,714,993)
Minority interest in subsidiary........................ -- -- (194,178) -- --
Income tax (benefit) provision......................... -- -- -- (379,022) --
------------ ----------- ----------- ----------- -------------
Income (loss) before cumulative effect of accounting
change............................................... (3,805,768) (4,442,418) (6,309,341) 583,174 (9,714,993)
Cumulative effect of accounting change*................ (7,457,717) -- -- -- --
------------ ----------- ----------- ----------- -------------
Net income (loss)...................................... $(11,263,485) $(4,442,418) $(6,309,341) $ 583,174 $ (9,714,993)
============ =========== =========== =========== =============
Basic and diluted income (loss) before cumulative
effect of accounting change per share................ $ (0.56) $ (0.66) $ (0.93) $ 0.09 $ (1.44)
Cumulative effect of accounting change per share*...... (1.11) -- -- -- --
------------ ----------- ----------- ----------- -------------
Basic and diluted net income (loss) per share.......... $ (1.67) $ (0.66) $ (0.93) $ 0.09 $ (1.44)
------------ ----------- ----------- ----------- -------------
Weighted average shares outstanding:
Basic................................................ 6,758,825 6,766,934 6,752,863 6,744,946 6,762,748
Diluted.............................................. 6,758,825 6,766,934 6,752,863 6,813,984 6,762,748
------------ ----------- ----------- ----------- -------------
</TABLE>
* In fiscal 2000, the Company changed its method of accounting for revenue
from license agreements.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Working capital........................................ $ 25,706,905 $22,020,107 $27,278,502 $37,422,235 $ 33,605,818
------------ ----------- ----------- ----------- -------------
Total assets........................................... $ 35,667,591 $27,816,359 $34,114,708 $44,976,181 $ 41,066,373
------------ ----------- ----------- ----------- -------------
Stockholders' equity................................... $ 14,305,632 $27,054,709 $32,919,398 $43,423,058 $ 40,132,545
------------ ----------- ----------- ----------- -------------
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
OVERVIEW
Since its inception in November 1981, Advanced Magnetics, Inc., (the
"Company") has focused its efforts on developing its core superparamagnetic iron
oxide particle technology to develop magnetic resonance imaging ("MRI") contrast
agents. The Company has funded its operations with cash from license fees from
corporate partners, royalties, sales of its products, fees from contract
research performed for third parties, the proceeds of financings and income
earned on invested cash. The Company's success in the market for diagnostic
products will depend, in part, on the Company's ability to successfully develop,
test, produce and market its products; obtain necessary governmental approvals
in a timely manner; attract and retain key employees; and successfully respond
to technological and other changes in the marketplace.
The Company's operating results may continue to vary significantly from
quarter to quarter or from year to year depending on a number of factors,
including: the timing of payments from corporate partners and research grants;
the introduction of new products by the Company; the timing and size of orders
from the Company's customers; and the acceptance of the Company's products. The
Company's current planned expense levels are based in part upon expectations as
to future revenue. Consequently, profits may vary significantly from quarter to
quarter or year to year based on the timing of revenue. Revenue or profits in
any period will not necessarily be indicative of results in subsequent periods
and the Company may not achieve profitability or grow revenue in the future.
A substantial portion of the Company's expenses consist of research and
development expenses. In an effort to reduce expenditures and improve
efficiency, the Company closed its Princeton, New Jersey office and reduced the
number of employees engaged in clinical development activities. All of the
Company's operating activities have been consolidated into the Cambridge office
in order to improve managerial oversight and inter-departmental coordination and
cooperation. The Company may rely to a greater degree on contract research and
development providers in the future and expects that research and development
expenses will continue to be a significant portion of the Company's total
expenses.
In fiscal 2000, the Company adopted Securities and Exchange Commission
("SEC") Staff Accounting Bulleting No. 101 ("SAB 101"). The effect of applying
this change in accounting principle is a cumulative charge of $7,457,717, or
$1.11 per share, in the first quarter. This cumulative change in accounting
principle reflects the reversal of license fees and milestone payments that had
been recognized in prior years. Recognition of these deferred payments is
expected to occur over the remaining life of the related agreement.
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
REVENUES
Total revenues for the fiscal year ended September 30, 2000 were $4,073,919
compared to $7,430,056 for the fiscal year ended September 30, 1999.
License fee revenues for the fiscal year ended September 30, 2000 were
$1,124,049, consisting of $735,575 in revenue associated with the license and
marketing agreement with Berlex Laboratories, Inc. ("Berlex"), of which $727,582
was included in the cumulative effect of accounting change adjustment described
below, and $388,474 of license fee revenue from Cytogen Corporation ("Cytogen")
related to a license and marketing agreement. There were no license fee revenues
for the fiscal year ended September 30, 1999.
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<PAGE>
In August 2000, the Company entered into a License and Marketing Agreement
with Cytogen Corporation, which covers COMBIDEX and Code 7228 for oncology
imaging. At the time of signing that Agreement, the Company received shares of
common stock of Cytogen with a market value of $13,546,875 as a non-refundable
licensing fee. Approximately $388,000 of that fee was recognized as revenue in
fiscal 2000. Recognition of the remainder of the fee as revenue has been
deferred and is expected to be recognized as future expenses related to the
development of COMBIDEX and Code 7228 are incurred.
Royalties for the fiscal year ended September 30, 2000 were $825,000 as
compared to $680,000 in fiscal 1999. The increase in royalties is primarily the
result of increases in sales by the Company's Japanese partner.
Product sales for the fiscal year ended September 30, 2000 were $1,253,537
compared to $1,966,059 for the fiscal year ended September 30, 1999. Product
sales in fiscal 1999 included sales of $918,402 at the Company's former
subsidiary, Kalisto Biologicals ("Kalisto"), for the nine months that Kalisto's
sales were consolidated. There was an increase of $207,634 in sales of contrast
agent products by the Company in fiscal 2000.
Contract research and development revenues were $106,003 during the fiscal
year ended September 30, 2000 compared to $581,429 in the fiscal year ended
September 30, 1999. The decrease reflects the completion of certain development
activities, the costs of which were reimbursed under an agreement with Guerbet
S.A. ("Guerbet") and the completion of work under a grant from the National
Institutes of Health ("NIH").
Interest, dividends and gains and losses on sales of securities resulted in
revenues of $765,330 for the fiscal year ended September 30, 2000 compared to
$4,202,568 for the fiscal year ended September 30, 1999. The decrease was
primarily due to a net loss on sales of securities of $62,450 during the fiscal
year ended September 30, 2000 compared to a net gain of $3,555,957 for the
fiscal year ended September 30, 1999. Interest income for the fiscal year ended
September 30, 2000 was $729,805 compared to $534,733 for the fiscal year ended
September 30, 1999 due to an increase in interest-bearing cash equivalents.
Dividend income of $97,975 for the year ended September 30, 2000 was $13,903
less than the $111,878 for the fiscal year ended September 30, 1999. This
decrease is due to reduced holdings of dividend earning securities during the
year.
COSTS AND EXPENSES
The cost of product sales for the fiscal year ended September 30, 2000 was
$239,228 compared to $454,642 for the fiscal year ended September 30, 1999. Cost
of product sales in fiscal 1999 included $326,666 at the Company's former
subsidiary, Kalisto, for the nine months that results from Kalisto were
consolidated. The cost of product sales for fiscal 2000 was 19% of product sales
and for fiscal 1999 was 23% of product sales. This decrease on an absolute and
percentage basis is attributable to deconsolidation of Kalisto. Kalisto product
sales had a higher cost of sales than the Company's products. Contract sponsored
research and development costs of $3,195 were incurred during fiscal 2000,
compared to $37,056 in fiscal 1999, and relate to costs incurred providing
development services to Guerbet. The decrease in costs reflects the completion
of such services during fiscal 2000.
Research and development expenses for the fiscal year ended September 30,
2000 were $4,623,468, a decrease of $3,328,863 compared to $7,952,331 for the
fiscal year ended September 30, 1999. The decrease was primarily attributable to
a reduction in direct, company-sponsored research and development programs
related to the clinical development of COMBIDEX.
Selling, general and administrative expenses for the fiscal year ended
September 30, 2000 were $3,013,796 compared to expenses of $3,694,038 for the
fiscal year ended September 30, 1999. Selling, general and administrative
expenses during the fiscal year ended September 30, 2000 included one-time
17
<PAGE>
charges of approximately $815,750 related to the termination of a proposed
merger with Cytogen and the subsequent signing of a License and Marketing
Agreement, and approximately $326,630 in expenses and accruals related to the
closing of the clinical development office in Princeton, New Jersey. The Company
expects that selling, general and administrative expenses for fiscal 2001 will
continue to decrease.
INCOME TAXES
There was no income tax provision or benefit for the fiscal years ended
September 30, 2000 and 1999.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In fiscal 2000, the Company adopted SEC Staff Accounting Bulleting No. 101
("SAB 101"). The effect of applying this change in accounting principle is a
cumulative charge of $7,457,717, or $1.11 per share. This cumulative change in
accounting principle reflects the reversal of license fees and milestone
payments that had been recognized in prior years. Previously, the Company had
recognized license fee revenue when the fees were non-refundable, a technology
transfer occurred, no explicit commitment or obligation for scientific
achievement existed, and the other portions of the agreement, principally supply
and royalty, were priced at fair value. Under the new accounting method applied
retroactive to October 1, 1999, these payments are recorded as deferred revenue
to be recognized over the remaining term of the related agreement. For the year
ended September 30, 2000, the Company recognized $727,582 in revenue that was
included in the cumulative effect adjustment as of October 1, 1999.
EARNINGS
In the fiscal year ended September 30, 2000, the Company recorded a net loss
from operations of ($3,805,768), or ($0.56) per share, together with a charge
related to the cumulative effect of a change in accounting principle of
($7,457,717), or ($1.11) per share, for a total net loss of ($11,263,485), or
($1.67) per share. In the fiscal year ended September 30, 1999, the Company
recorded a net loss of ($4,442,418), or ($0.66) per share.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES
Total revenues for the fiscal year ended September 30, 1999 were $7,430,056
compared to $6,404,146 for the fiscal year ended September 30, 1998.
There were no license fee revenues for the fiscal years ended September 30,
1999 and 1998.
Royalties for the fiscal year ended September 30, 1999 were $680,000 as
compared to $980,542 in fiscal 1998. The decrease in royalties is associated
with the product launch of FERIDEX I.V. in Japan that occurred during the year
ended September 30, 1998.
Product sales for the fiscal year ended September 30, 1999 were $1,966,059
compared to $1,399,871 for the fiscal year ended September 30, 1998. Product
sales in fiscal 1999 included an increase in sales of $697,548 at the Company's
former subsidiary, Kalisto, for the nine months that Kalisto's sales were
consolidated, offset by a decrease in product sales by the Company of $131,360.
Contract research and development revenues were $581,429 during the fiscal
year ended September 30, 1999 compared with $399,897 in the fiscal year ended
September 30, 1998. The increase in fiscal year 1999 reflects the reimbursement
of certain development costs of approximately $473,000 under an agreement with
Berlex and approximately $108,000 under an agreement with Guerbet.
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<PAGE>
Interest, dividends and gains and losses on sales of securities resulted in
revenues of $4,202,568 for the fiscal year ended September 30, 1999 compared to
$3,623,836 for the fiscal year ended September 30, 1998. The increase was
primarily due to a net gain on sales of securities of $3,555,957 for the fiscal
year ended September 30, 1999 compared to a net gain of $2,473,826 for the
fiscal year ended September 30, 1998. Interest income for the fiscal year ended
September 30, 1999 was $534,733 compared to $978,546 for the fiscal year ended
September 30, 1998 due to a decrease in interest-bearing securities. Dividend
income of $111,878 for the year ended September 30, 1999 was $59,587 less than
the $171,464 for the fiscal year ended September 30, 1998.
COSTS AND EXPENSES
The cost of product sales for the fiscal year ended September 30, 1999 was
$454,642 compared to $237,945 for the fiscal year ended September 30, 1998. The
cost of product sales for fiscal 1999 was 23% of product sales and for fiscal
1998 was 17% of product sales. This change is attributable to the increased
proportion of Kalisto product sales relative to sales of the Company's products
(prior to July 1, 1999) which have a higher cost of sales than the Company's
products. Contract sponsored research and development costs of $37,056 were
incurred during fiscal 1999, compared to $6,514 in fiscal 1998, and relate to
costs incurred providing development services to Guerbet.
Research and development expenses for the fiscal year ended September 30,
1999 were $7,952,331, a decrease of $1,009,465 compared to $8,961,796 for the
fiscal year ended September 30, 1998. The decrease was primarily attributable to
a reduction in direct, company-sponsored research and development programs.
Kalisto's expenditures for the nine-month period also decreased during the
fiscal year ended September 30, 1999.
Selling, general and administrative expenses for the fiscal year ended
September 30, 1999 were $3,694,038, compared to expenses of $3,701,410 for the
fiscal year ended September 30, 1998. Selling, general and administrative
expenses during the fiscal year ended September 30, 1999 included payments
related to reductions in the Company's workforce.
INCOME TAXES
There was no income tax provision or benefit for the fiscal years ended
September 30, 1999 and 1998.
EARNINGS
In the fiscal year ended September 30, 1999, the Company recorded a net loss
of ($4,442,418), or ($0.66) per share. In the fiscal year ended September 30,
1998, the Company recorded a net loss of ($6,309,341), or ($0.93) per share.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company's cash and cash equivalents totaled
$16,120,738, compared with $17,052,636 at September 30, 1999. In addition, the
Company had marketable securities of $14,051,850 at September 30, 2000,
including shares of Cytogen common stock received in payment for license fees,
as compared to $4,804,785 on September 30, 1999. Net cash used in operating
activities was $3,587,508 in the fiscal year ended September 30, 2000 compared
to net cash used in operating activities of $6,733,531 in the fiscal year ended
September 30, 1999. The decrease in cash used in operating activities was due
primarily to a decrease of $4,745,316 in payments to suppliers and employees as
a result of a substantial reduction in costs and expenses. Cash provided by
investing activities was $2,593,642 for the fiscal year ended September 30, 2000
compared to $16,154,403 provided by investing activities in the fiscal year
ended September 30, 1999. Cash provided by investing activities in the fiscal
year ended September 30, 2000 included proceeds from the sale of marketable
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<PAGE>
securities of $4,433,874 offset by the purchase of marketable securities of
$1,744,075. Cash provided by investing activities for the fiscal year ended
September 30, 1999 included proceeds from maturing United States treasury notes
of $7,500,000 and proceeds from the sale of marketable securities of $11,305,551
offset by the purchase of marketable securities of $2,291,869. In
November 2000, the Board of Directors authorized the purchase of up to 1,000,000
shares of the Company's common stock on the open market at prevailing market
prices.
Capital expenditures in the fiscal year ended September 30, 2000 were
$36,333 compared to $280,891 in the fiscal year ended September 30, 1999. The
decrease in expenditures reflects the Company's focus on controlling costs. The
capital expenditures in both years related to laboratory, production and
computer equipment. The Company has no current commitment for any significant
expenditures on property, plant and equipment.
Management believes that funds for future needs can be generated from
existing cash balances, cash generated from investing activities and cash
generated from operations. In addition, the Company will consider from time to
time various financing alternatives and may seek to raise additional capital
through equity or debt financing or to enter into corporate partnering
arrangements. Funding may not be available on terms acceptable to the Company,
if at all.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities" which is effective for fiscal
years beginning after June 15, 2000. The statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability, measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Adoption of this standard will increase or decrease the recorded value of
options the Company may, in the future, acquire, and result in gains or losses
being included in net income.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED OR PROJECTED IN ANY FORWARD-LOOKING STATEMENTS, AS A RESULT OF
CERTAIN FACTORS, INCLUDING WITHOUT LIMITATION, THOSE SET FORTH IN THE FOLLOWING
SECTION AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. IN ADDITION TO THE
OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K, THE FOLLOWING STATEMENTS
SHOULD BE CAREFULLY CONSIDERED IN EVALUATING ADVANCED MAGNETICS AND ITS
BUSINESS.
NO ASSURANCE OF REGULATORY APPROVAL. Prior to marketing, every product
candidate must undergo an extensive regulatory approval process in the United
States and in every other country in which the Company intends to test and
market its product candidates and products. This regulatory process includes
testing and clinical trials of product candidates to demonstrate safety and
efficacy and can require many years and the expenditure of substantial
resources. Data obtained from preclinical testing and clinical trials are
subject to varying interpretations, which can delay, limit or prevent FDA or
foreign regulatory approval. In addition, changes in FDA or foreign regulatory
approval policies or requirements may occur or new regulations may be
promulgated which may result in delay or failure to receive FDA or foreign
regulatory approval. Delays and related costs in obtaining regulatory approvals
could delay product commercialization and revenue and consume the Company's
resources, both financial and managerial. Regulatory approvals may not be
obtained for COMBIDEX and Code 7228 or any other products developed by the
Company. Although the Company has received an approvable letter from the FDA for
COMBIDEX for lymph node indications, final approval remains subject to the
satisfaction of certain conditions imposed by the FDA and labeling must be
resolved. Failure to obtain
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<PAGE>
requisite governmental approvals or failure to obtain approvals of the scope
requested could delay and may preclude the Company or its licensees or other
collaborators from marketing the Company's products or limit the commercial use
of the products.
Regulatory approvals may entail limitations on the indicated uses of the
Company's products and impose labeling requirements which may adversely impact
the Company's ability to market its products. Even if regulatory approval is
obtained, a marketed product and its manufacturer are subject to continuing
regulatory review. Noncompliance with the regulatory requirements of the
approval process at any stage may result in various adverse consequences,
including the FDA's delay in approving or its refusal to approve a product,
withdrawal of an approved product from the market or, under certain
circumstances, the imposition of criminal penalties. Any such adverse
consequences could seriously harm the Company's business, financial condition
and results of operations.
LACK OF MARKETING AND SALES HISTORY. Advanced Magnetics has limited
experience in marketing and selling its products and product candidates and
relies on its corporate partners to market and sell FERIDEX I.V. and GASTROMARK
and has agreed to do so for COMBIDEX and Code 7228 for oncology applications,
pending FDA approval. In order to achieve commercial success for any product
candidate approved by the FDA for which the Company does not have a marketing
partner, the Company may have to develop a marketing and sales force or enter
into arrangements with others to market and sell its products. Advanced
Magnetics may not be successful in attracting and retaining qualified marketing
and sales personnel and may not be able to enter into marketing and sales
agreements with others on acceptable terms, if at all. Furthermore, Advanced
Magnetics or its corporate partners may not be successful in marketing and
selling the Company's products.
UNCERTAINTY OF PRODUCT ADOPTION AND DEVELOPMENT. The Company has not
generated significant revenues on royalties from the sale of its products by its
marketing partners. Although on the market since 1996 and 1997 respectively,
FERIDEX I.V. and GASTROMARK still represent a new technology platform for
physicians to adopt. If the Company's approved products are not adopted by
physicians, revenues will be delayed or fail to materialize. While the Company
has filed an NDA for COMBIDEX and received an "approvable" letter in June 2000
for its principal indication, the diagnosis of lymph node disease, significant
additional development efforts, including human clinical testing, may be
required prior to approval for commercial sale. Code 7228 and any other product
candidates will require significant additional research and development efforts
before commercialization. The development of new pharmaceutical products is
highly uncertain and the Company's development programs may not be completed
successfully, and products, including COMBIDEX, FERIDEX I.V., or GASTROMARK, may
not be widely adopted or commercially successful.
DEPENDENCE ON COLLABORATIVE RELATIONSHIPS. The Company's strategy for the
development, commercialization and marketing of its product candidates has been
to enter into strategic alliances with various corporate partners, licensees,
and other collaborators. The Company relies on its marketing and distribution
partners to market and sell its approved products, FERIDEX I.V. and GASTROMARK,
both in the U.S. and in foreign countries. In some cases, the Company has
granted exclusive rights to these partners. If these partners are not successful
in marketing the Company's products, the Company's ability to generate revenue
would be harmed. In addition, the Company might incur additional costs in an
attempt to enforce its contractual rights, renegotiate agreements, find new
partners or market its own products. In some cases, the Company is dependent
upon some of its collaborators to conduct preclinical and clinical testing, to
obtain FDA and foreign regulatory approvals and to manufacture and market
products. The Company may not derive any revenues or profits from these
arrangements and the Company may not be able to enter into future collaborative
relationships even if it desires to do so. If any of the Company's collaborators
breaches its agreement with the Company or otherwise fails to perform, such
event could impair the Company's revenue and impose additional costs.
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UNCERTAINTIES RELATING TO CLINICAL TRIALS. Before obtaining regulatory
approvals for the commercial sale of any of its product candidates, the Company
must demonstrate through extensive preclinical testing and human clinical trials
that the product is safe and efficacious. The results from preclinical testing
and early clinical trials of products under development by the Company may not
be predictive of results obtained in subsequent clinical trials. Clinical trials
are often conducted with patients in the most advanced stages of disease. During
the course of treatment, these patients can die or suffer adverse medical
effects for reasons that may not be related to the product being tested, but
which can nevertheless adversely affect clinical trial results or approvals by
the FDA. Clinical testing of pharmaceutical products is itself subject to
approvals by various governmental regulatory authorities. Advanced Magnetics may
not be permitted by regulatory authorities to commence or continue clinical
trials. Any delays in or termination of the Company's clinical trial efforts
could negatively effect the Company's future prospects and stock price.
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. In both the United States and
foreign markets, the Company's ability to commercialize its products may depend
in part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payors. In the United
States, there has been, and the Company expects that there will continue to be,
a number of federal and state proposals to reform the health care system.
Significant uncertainty exists as to the reimbursement status of both
newly-approved health care products and products used for indications not
approved by the FDA. If adequate reimbursement levels are not instituted by
government and other third-party payors for the Company's products and related
treatments, the adoption and sale of the Company's products may be limited and
its ability to generate revenue may be materially adversely affected.
NEED FOR FUTURE FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL. The Company has
expended and will continue to expend substantial funds to complete the research,
development, clinical trials, regulatory approvals and other activities through
final commercialization of its products. It is possible that the Company may
need additional financing to satisfy its capital and operating requirements
relating to the development, manufacturing and marketing of its products. The
Company may seek such financing through arrangements with collaborative partners
and through public or private sales of the Company's securities, including
equity securities. The Company may not be able to obtain financing on acceptable
terms, if at all. Any additional equity financings could be dilutive to the
Company's stockholders. If adequate additional funds are not available, the
Company may be required to curtail significantly one or more of its research and
development programs or obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its products and product candidates on terms that it might otherwise find
unacceptable.
COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. The pharmaceutical and
biopharmaceutical industries are subject to intense competition and rapid
technological change. The Company has many competitors, many of which have
substantially greater capital and other resources than the Company and represent
significant competition for Advanced Magnetics. These companies may succeed in
developing technologies and products that are more effective or less costly than
any that may be developed by the Company, and may be more successful than the
Company in developing, manufacturing and marketing products. Developments by
others may render the Company's products or product candidates or technologies
obsolete or noncompetitive. The Company's collaborators or customers may choose
to use competing technologies or products.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS. The patent positions
of pharmaceutical and biopharmaceutical firms, including Advanced Magnetics, are
generally uncertain and involve complex legal and factual questions. Because of
the substantial length of time and expense associated with bringing new products
through development and regulatory approval to the marketplace, the
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pharmaceutical and biopharmaceutical industries place considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. The Company may not be successful or timely in obtaining any patents
for which it submits applications. The breadth of the claims obtained may not
provide any significant protection of the Company's technology. The degree of
protection afforded by patents for licensed technologies or for future
discoveries may not be adequate to protect the Company's proprietary technology.
Moreover, patents issued to Advanced Magnetics may be contested, invalidated or
circumvented. Future patent interference proceedings involving patents of either
the Company or its licensors may have a material adverse effect on the Company's
business. Claims of infringement or violation of the proprietary rights of
others may be asserted against the Company. If Advanced Magnetics is required to
defend against such claims or to protect its own proprietary rights against
others, the Company may incur substantial costs.
In the future, Advanced Magnetics may be required to obtain additional
licenses to patents or other proprietary rights of others. Such licenses may not
be available on acceptable terms, if at all. The failure to obtain such licenses
could result in delays in marketing the Company's products or the inability to
proceed with the development, manufacturing or sale of its products and product
candidates requiring such licenses. In addition, the termination of any of the
Company's existing licensing arrangements could impair the Company's revenues
and impose additional costs.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators, employees
and consultants. These agreements, however, may be breached. The Company may not
have adequate remedies for any such breach, and the Company's trade secrets
might otherwise become known or be independently discovered by its competitors.
In addition, the Company cannot be certain that others will not independently
develop substantially equivalent or superseding proprietary technology, or that
an equivalent product will not be marketed in competition with the Company's
products, thereby substantially reducing the value of the Company's proprietary
rights.
UNCERTAINTIES IN MANUFACTURING. The Company manufactures bulk FERIDEX I.V.
and GASTROMARK as well as FERIDEX I.V. finished product for sale by its
marketing partners and intends to, pending FDA approval, manufacture COMBIDEX
finished product in its Massachusetts facilities. These facilities are subject
to current Good Manufacturing Practices ("cGMP") regulations prescribed by the
FDA. The Company may not be able to continue to operate at commercial scale in
compliance with the cGMP regulations. Failure to operate in compliance with cGMP
regulations and other applicable manufacturing requirements of various
regulatory agencies could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company is dependent on contract manufacturers for the final production of
COMBIDEX. In the event that the Company is unable to obtain or retain
manufacturing for this product, it will not be able to develop and commercialize
it as planned. The Company may not be able to enter into agreements for the
manufacture of future products with manufacturers whose facilities and
procedures comply with cGMP and other regulatory requirements or that such
manufacturers will be able to deliver required quantities of product that
conform to specifications in a timely manner.
POTENTIAL PRODUCT LIABILITY; UNCERTAINTIES RELATED TO INSURANCE. The
Company maintains product liability insurance coverage for claims arising from
the use of its products in clinical trials and commercial use. However, coverage
is becoming increasingly expensive and the Company may not be able to maintain
insurance at a reasonable cost. Furthermore, the Company's insurance may not
provide sufficient coverage amounts to protect the Company against liability
that could have a material adverse effect on the Company's business, financial
condition and results of operations. Insurance coverage may not be sufficient to
satisfy any liability or cover costs resulting from product liability claims, so
that a product liability claim could reduce or eliminate the Company's
resources, whether or not the plaintiff in such claim ultimately prevailed.
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ATTRACTION AND RETENTION OF KEY EMPLOYEES. Because of the specialized
nature of its business, Advanced Magnetics is highly dependent on its ability to
attract and retain qualified scientific and technical personnel for the research
and development activities conducted or sponsored by the Company. Furthermore,
the Company's possible expansion into areas and activities requiring additional
expertise, such as product distribution and marketing and sales, may require the
addition of new management personnel and the development of additional expertise
by existing management personnel. There is intense competition for qualified
personnel in the areas of the Company's activities, and the Company may not be
able to continue to attract and retain the qualified personnel necessary for the
development of its business. The failure to attract and retain such personnel or
to develop such expertise could impose limits on the Company's business
operations.
VOLATILITY OF COMMON STOCK PRICE. The market prices for securities of
biopharmaceutical and pharmaceutical companies, including the Company, have
historically been highly volatile. Fluctuations in operating results may cause
the market price of the Company's Common Stock to be volatile. In addition, the
market prices for securities of biopharmaceutical and pharmaceutical companies
have from time to time experienced significant price and volume fluctuations
that are unrelated to the operating performance of such companies. Various
factors and events, including announcements by the Company or its competitors
concerning technological innovations, new products, clinical trial results,
agreements with collaborators, governmental regulations, developments in patent
or other proprietary rights, public concern regarding the safety of products
developed by the Company or others, may have a significant impact on the market
price of the Company's Common Stock and dividend policy.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company owns financial instruments that are sensitive to market risks as
part of its investment portfolio. The investment portfolio is used to preserve
the Company's capital until it is required to fund operations, including the
Company's research and development activities and includes shares of Cytogen
common stock received as a license fee. None of these market-risk sensitive
instruments are held for trading purposes. The investment portfolio contains
instruments that are subject to a decline in equity markets.
Equity Market Risk--The Company's investment portfolio includes
publicly-traded stocks of domestic issuers. Assuming a decline of 10% in the
market for domestic stocks generally, the Company's equity investments may be
expected to decline a corresponding 10%, resulting in a hypothetical reduction
of the value of the net assets of the Company (as of September 30, 2000) of
approximately 4% as compared to a hypothetical reduction of the value of the net
assets of the Company (as of September 30, 1999) of less than 2%. This change is
due to the increase of the Company's holdings of marketable securities primarily
as a result of the acceptance by the Company of 1,500,000 shares of Cytogen
common stock as an up-front licensing fee as part of a license and marketing
agreement. The Company retained approximately 1,200,000 of those shares at
September 30, 2000. The use of a 10% estimate in the decline of equity
securities is strictly for estimation and evaluation purposes only. The value of
the Company's assets may rise or fall by a greater amount depending on actual
general market performances and the value of individual securities owned by the
Company.
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ITEM 8. FINANCIAL STATEMENTS:
The Company's Financial Statements and related Report of Independent
Accountants are presented in the following pages. The financial statements
included in this Item 8 are as follows:
Report of Independent Accountants
Financial Statements:
Balance Sheets--September 30, 2000 and 1999
Statements of Operations--for the years ended September 30, 2000, 1999 and
1998
Statements of Comprehensive Income--for the years ended September 30,
2000, 1999 and 1998
Statements of Stockholders' Equity--for the years ended September 30,
2000, 1999 and 1998
Statements of Cash Flows--for the years ended September 30, 2000, 1999 and
1998
Reconciliation of Net Income (Loss) to Net Cash Used in Operating
Activities--for the years ended September 30, 2000, 1999 and 1998
Notes to Financial Statements
25
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... 27
Balance Sheets--September 30, 2000 and 1999................. 28
Statements of Operations--for the years ended September 30,
2000, 1999 and 1998....................................... 29
Statements of Comprehensive Income--for the years ended
September 30, 2000, 1999 and 1998......................... 30
Statements of Stockholders' Equity--for the years ended
September 30, 2000, 1999 and 1998......................... 31
Statements of Cash Flow--for the years ended September 30,
2000, 1999 and 1998....................................... 32
Reconciliation of Net Income (Loss) to Net Cash Used in
Operating Activities--for the years ended September 30,
2000, 1999 and 1998....................................... 33
Notes to Financial Statements............................... 34
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Advanced Magnetics, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, comprehensive income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Advanced
Magnetics, Inc. at September 30, 2000 and September 30, 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended September 30, 2000 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note B to the financial statements, in fiscal 2000 the
Company changed its method of accounting for revenue from license agreements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 8, 2000
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ADVANCED MAGNETICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
2000 1999
ASSETS ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 16,120,738 $ 17,052,636
Marketable securities....................................... 14,051,850 4,804,785
Accounts receivable......................................... 639,740 648,201
Inventories................................................. 91,456 80,480
Prepaid expenses............................................ 187,481 195,655
------------ ------------
Total current assets.................................... 31,091,265 22,781,757
Property, plant and equipment:
Land........................................................ 360,000 360,000
Buildings................................................... 4,618,296 4,610,827
Laboratory equipment........................................ 8,013,973 8,007,095
Furniture and fixtures...................................... 782,525 760,538
------------ ------------
13,774,794 13,738,460
Less--accumulated depreciation and amortization............. (9,620,094) (9,065,660)
------------ ------------
Net property, plant and equipment........................... 4,154,700 4,672,800
Other assets................................................ 421,626 361,802
------------ ------------
Total assets............................................ $ 35,667,591 $ 27,816,359
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 611,891 $ 118,465
Accrued expenses............................................ 786,832 581,534
Income taxes payable........................................ 61,651 61,651
Deferred revenues........................................... 3,923,986 --
------------ ------------
Total current liabilities............................... 5,384,360 761,650
Deferred revenues........................................... 15,977,599 --
------------ ------------
Total liabilities....................................... 21,361,959 761,650
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, authorized
2,000,000 shares; none issued............................. -- --
Common stock, par value $.01 per share, authorized
15,000,000 shares; issued and outstanding 6,773,932 shares
as of September 30, 2000 and 6,752,027 shares as of
September 30, 1999........................................ 67,739 67,521
Additional paid-in capital.................................. 44,267,120 44,205,370
Retained earnings (deficit)................................. (28,110,546) (16,847,061)
Accumulated other comprehensive income...................... (1,918,681) (371,121)
------------ ------------
Total stockholders' equity................................ 14,305,632 27,054,709
------------ ------------
Total liabilities and stockholders' equity.............. $ 35,667,591 $ 27,816,359
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
ADVANCED MAGNETICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
License fees.......................................... $ 1,124,049 $ -- $ --
Royalties............................................. 825,000 680,000 980,542
Product sales......................................... 1,253,537 1,966,059 1,399,871
Contract research and development..................... 106,003 581,429 399,897
Interest, dividends and net gains and losses on sales
of securities....................................... 765,330 4,202,568 3,623,836
------------ ----------- -----------
Total revenues.................................... 4,073,919 7,430,056 6,404,146
Costs and expenses:
Cost of product sales................................. 239,228 454,642 237,945
Contract research and development expenses............ 3,195 37,056 6,514
Company-sponsored research and development expenses... 4,623,468 7,952,331 8,961,796
Selling, general and administrative expenses.......... 3,013,796 3,694,038 3,701,410
------------ ----------- -----------
Total costs and expenses.......................... 7,879,687 12,138,067 12,907,665
Other income:
Other income........................................ -- 265,593 --
Minority interest in subsidiary....................... -- -- (194,178)
------------ ----------- -----------
Loss before cumulative effect of accounting change.... (3,805,768) (4,442,418) (6,309,341)
Cumulative effect of accounting change (Note B)....... (7,457,717) -- --
------------ ----------- -----------
Net income (loss)..................................... $(11,263,485) $(4,442,418) $(6,309,341)
============ =========== ===========
Basic and diluted loss before cumulative effect of
accounting change per share......................... $ (0.56) $ (0.66) $ (0.93)
Cumulative effect of accounting change per share...... (1.11) -- --
------------ ----------- -----------
Basic and diluted net loss per share.................. $ (1.67) $ (0.66) $ (0.93)
============ =========== ===========
Weighted average shares outstanding:
Basic............................................... 6,758,825 6,766,934 6,752,863
------------ ----------- -----------
Diluted............................................. 6,758,825 6,766,934 6,752,863
------------ ----------- -----------
Pro forma amounts assuming accounting change is
applied retroactively:
Net loss.............................................. $ (3,805,768) $(4,039,639) $(5,861,228)
Basic and diluted net loss per share.................. (0.56) (0.60) (0.87)
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
ADVANCED MAGNETICS, INC.
STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
------------ ----------- ------------
<S> <C> <C> <C>
Net loss............................................. $(11,263,485) $(4,442,418) $ (6,309,341)
Other comprehensive income:
Unrealized gains (losses) on securities............ (1,610,010) 2,206,167 (1,753,901)
Reclassification adjustment for (gains) losses
included in net income........................... 62,450 (3,555,957) (2,473,826)
------------ ----------- ------------
Other comprehensive loss............................. (1,547,560) (1,349,790) (4,227,727)
------------ ----------- ------------
Comprehensive loss................................... $(12,811,045) $(5,792,208) $(10,537,068)
============ =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
ADVANCED MAGNETICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000
---------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER TOTAL
-------------------- PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) INCOME EQUITY
--------- -------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997....... 6,740,626 $67,406 $44,244,558 $ (6,095,302) $ 5,206,396 $43,423,058
========= ======= =========== ============ =========== ===========
Shares issued in connection with the
exercise of stock options......... 39,846 399 163,456 -- -- 163,855
Shares surrendered in connection
with the exercise of stock
options........................... (2,190) (22) (28,722) -- -- (28,744)
Shares issued in connection with
employee stock purchase plan...... 5,876 59 54,587 -- -- 54,646
Common shares repurchased........... (16,800) (168) (156,181) -- -- (156,349)
Other comprehensive income (loss)... -- -- -- -- (4,227,727) (4,227,727)
Net loss............................ -- -- -- (6,309,341) -- (6,309,341)
--------- ------- ----------- ------------ ----------- -----------
Balance at September 30, 1998....... 6,767,358 $67,674 $44,277,698 $(12,404,643) $ 978,669 $32,919,398
========= ======= =========== ============ =========== ===========
Shares issued in connection with the
exercise of stock options......... 1,329 13 10,397 -- -- 10,410
Shares surrendered in connection
with the exercise of stock
options........................... (1,027) (10) (10,388) -- -- (10,398)
Shares issued in connection with
employee stock purchase plan...... 2,267 23 7,435 -- -- 7,458
Common shares repurchased........... (17,900) (179) (79,772) -- -- (79,951)
Other comprehensive income (loss)... -- -- -- -- (1,349,790) (1,349,790)
Net loss............................ -- -- -- (4,442,418) -- (4,442,418)
--------- ------- ----------- ------------ ----------- -----------
Balance at September 30, 1999....... 6,752,027 $67,521 $44,205,370 $(16,847,061) $ (371,121) $27,054,709
========= ======= =========== ============ =========== ===========
Shares issued in connection with the
exercise of stock options......... 5,250 52 20,956 -- -- 21,008
Shares surrendered in connection
with the exercise of stock
options........................... (2,488) (25) (17,967) -- -- (17,992)
Shares issued in connection with
employee stock purchase plan...... 19,143 191 58,761 -- -- 58,952
Other comprehensive income (loss)... -- -- -- -- (1,547,560) (1,547,560)
Net loss............................ -- -- -- (11,263,485) -- (11,263,485)
--------- ------- ----------- ------------ ----------- -----------
Balance at September 30, 2000....... 6,773,932 $67,739 $44,267,120 $(28,110,546) $(1,918,681) $14,305,632
========= ======= =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
ADVANCED MAGNETICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers........................... $ 1,615,566 $ 2,834,912 $ 1,637,449
Cash paid to suppliers and employees................... (6,624,397) (11,369,713) (12,686,577)
Dividends and interest received........................ 827,782 670,440 1,139,685
Royalties received..................................... 593,541 699,269 925,817
Net proceeds from insurance settlement................. -- 371,561 --
Income taxes paid...................................... -- -- (2,500)
Income tax refund...................................... -- 60,000 4,422
----------- ----------- -----------
Net cash used in operating activities.................. (3,587,508) (6,733,531) (8,981,704)
Cash flows from investing activities:
Proceeds from sales of marketable securities........... 4,433,874 11,305,551 8,993,685
Proceeds from notes and bonds maturing................. -- 7,500,000 5,000,000
Purchase of marketable securities...................... (1,744,075) (2,291,869) (7,426,189)
Capital expenditures................................... (36,333) (280,891) (584,360)
(Increase) decrease in other assets.................... (59,824) (57,565) (55,335)
Cash sold in sale of Kalisto........................... -- (20,823) --
----------- ----------- -----------
Net cash provided by investing activities.............. 2,593,642 16,154,403 5,927,801
Cash flows from financing activities:
Proceeds from issuances of common stock, net........... 61,968 7,470 189,757
Purchase of treasury stock............................. -- (79,951) (156,349)
----------- ----------- -----------
Net cash (used in) provided by financing activities.... 61,968 (72,481) 33,408
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents... (931,898) 9,348,391 (3,020,495)
Cash and cash equivalents at beginning of year......... 17,052,636 7,704,245 10,724,740
----------- ----------- -----------
Cash and cash equivalents at end of year............... $16,120,738 $17,052,636 $ 7,704,245
=========== =========== ===========
Supplemental data:
Non-cash operating activites:
Marketable securities received in license and marketing
agreement............................................ $13,546,875 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
ADVANCED MAGNETICS, INC.
RECONCILIATION OF NET LOSS
TO NET CASH USED IN OPERATING ACTIVITIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net loss.............................................. $(11,263,485) $(4,442,418) $(6,309,341)
------------ ----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash reduction in value of investment in
subsidiary.......................................... -- 155,967 --
Non-cash reduction in value of minority interest in
subsidiary.......................................... -- -- 194,178
Minority interest in subsidiary....................... -- -- (194,178)
Non-cash license fee revenue.......................... (1,116,056) -- --
Cumulative effect of accounting change................ 7,457,717 -- --
Depreciation.......................................... 554,434 817,299 999,622
Accretion of U. S. Treasury Notes discount............ -- (15,358) (52,574)
(Increase) decrease in accounts receivable............ 8,462 339,116 (448,203)
(Increase) decrease in inventories.................... (10,976) 368,150 (335,452)
(Increase) decrease in prepaid expenses............... 8,174 33,330 (4,117)
Increase (decrease) in accounts payable and accrued
expenses............................................ 698,724 (443,260) (359,736)
Increase (decrease) in deferred revenues.............. 13,048 -- --
Increase (decrease) in income taxes payable........... -- 9,600 1,923
Net realized (gains) losses on sales of marketable
securities.......................................... 62,450 (3,555,957) (2,473,826)
------------ ----------- -----------
Total adjustments..................................... 7,675,977 (2,291,113) (2,672,363)
------------ ----------- -----------
Net cash used in operating activities................. $ (3,587,508) $(6,733,531) $(8,981,704)
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. SUMMARY OF ACCOUNTING POLICIES:
BUSINESS
Founded in November 1981, Advanced Magnetics, Inc., a Delaware Corporation
(the "Company") is a biopharmaceutical company engaged in the development and
manufacture of compounds utilizing the Company's core proprietary colloidal
superparamagnetic particle technology and core polysaccharide technology for
magnetic resonance imaging ("MRI"). The initial products developed by the
Company are diagnostic imaging agents for use in conjunction with MRI to aid in
the diagnosis of cancer and other diseases.
The Company is subject to risks common to companies in the industry
including, but not limited to, development by the Company or its competitors of
new technological innovations, uncertainty of product development and
commercialization, lack of marketing and sales history, dependence on key
personnel, market acceptance of products, product liability, protection of
proprietary technology, and compliance with FDA government regulations.
CONSOLIDATION POLICY
The Company consolidated its majority-owned subsidiary until the date of
divesture in July 1999. All intercompany transactions until that time have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make certain estimates and assumptions that effect 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
revenue and expenses during the reported period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, money market funds and
marketable securities having a maturity of less than three months at the date
acquired. Substantially all of the cash and cash equivalents at September 30,
2000 and 1999 were held in a money market account.
MARKETABLE SECURITIES
The Company's current portfolio consists of securities classified as
available-for-sale which are recorded at fair market value. The fair values of
marketable securities are based on quoted market prices. Net unrealized gains
and losses on marketable securities are recorded as a separate component of
stockholders' equity entitled accumulated other comprehensive income. Interest
income is accrued as earned. Dividend income is accrued on the ex-dividend date,
and net realized gains and losses are computed on the basis of average cost and
are recognized when realized.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The cost of additions and
improvements is charged to the property accounts while maintenance and repairs
are expensed as incurred. Upon sale
34
<PAGE>
or other disposition of property and equipment, the cost and related
depreciation are removed from the accounts and any resulting gain or loss is
reflected in income.
DEPRECIATION
Depreciation is recorded by the straight line method based on rates
sufficient to provide for retirement over estimated useful lives as follows:
buildings--40 years; laboratory equipment and furniture and fixtures--5 years;
and leasehold improvements--over the life of the lease.
REVENUE RECOGNITION
Product revenue is recognized upon shipment to the customer and satisfaction
of all obligations. Royalty revenue is recognized as the related product sales
are recognized. The Company enters into product development agreements with
collaborative partners. The terms of the agreements may include non-refundable
license fees, payments based on the achievement of certain milestones and
royalties on any product sales derived from collaborations. Non-refundable
license fees, with respect to product development agreements and collaborations,
are recognized over the term of the agreement as earned or, in cases where
project costs are estimable, recognized on a percentage of completion basis as
related costs are incurred. Milestone payments, which are not refundable, are
recognized as revenue on a retrospective basis. Accordingly, upon achievement of
the milestone, a portion of the milestone payment equal to the percentage of
collaboration completed through that date would be recognized. The remainder
would be recognized as services are performed over the remaining term of the
collaboration.
INCOME TAXES
The provision (benefit) for income taxes includes federal and state income
taxes currently payable and deferred income taxes arising from the recognition
of certain income and expenses in different periods for financial and tax
reporting purposes.
INCOME (LOSS) PER SHARE
The weighted average common and common equivalent shares used in the
computation of basic and diluted earnings per share is presented below.
Aggregate options of 479,506 (weighted average exercise price of $8.97), 473,833
options (weighted average exercise price of $9.47) and 408,649 options (weighted
average exercise price of $11.30) for 2000, 1999 and 1998, respectively, have
not been included in the calculation of weighted average shares since their
effect would be anti-dilutive, given the net loss in these years.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30
----------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss)..................................... $(11,263,485) $(4,442,418) $(6,309,341)
============ =========== ===========
Denominator:
Weighted average number of common shares issued and
outstanding......................................... 6,758,825 6,766,934 6,752,863
Assumed exercise of options reduced by the number of
shares which could have been purchased with the
proceeds of those options........................... -- -- --
------------ ----------- -----------
Weighted average common and common equivalent
shares.............................................. 6,758,825 6,766,934 6,752,863
Basic and diluted net income (loss) per share......... $ (1.67) $ (0.66) $ (0.93)
</TABLE>
35
<PAGE>
RECLASSIFICATIONS
Certain amounts from the prior year have been reclassified to conform to the
current year's presentation.
B. CUMULATIVE EFFECT OF ACCOUNTING CHANGE:
In fiscal 2000, the Company adopted SEC Staff Accounting Bulleting No. 101
("SAB 101"). The effect of applying this change in accounting principle is a
cumulative charge of $7,457,717, or $1.11 per share. This cumulative change in
accounting principle reflects the reversal of license fees and milestone
payments that had been recognized in prior years. Previously, the Company had
recognized license fee revenue when the fees were non-refundable, a technology
transfer occurred, no explicit commitment or obligation for scientific
achievement existed, and the other portions of the agreement, principally supply
and royalty, were priced at fair value. Under the new accounting method applied
retroactively to October 1, 1999, these payments are recorded as deferred
revenue to be recognized over the remaining term of the related agreement. For
the year ended September 30, 2000, the Company recognized $727,582 in revenue
that was included in the cumulative effect adjustment as of October 1, 1999.
C. MARKETABLE SECURITIES:
The cost and fair value of the marketable securities portfolio at
September 30 are as follows:
<TABLE>
<CAPTION>
2000 2000 1999 1999
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Common stock................................ $15,970,531 $14,051,850 $5,175,906 $4,804,785
----------- ----------- ---------- ----------
$15,970,531 $14,051,850 $5,175,906 $4,804,785
=========== =========== ========== ==========
</TABLE>
At September 30, 2000, gross unrealized holding losses were $1,918,681. At
September 30, 1999, gross unrealized holding losses were $371,121. For the
fiscal years ended September 30, 2000 and 1999, the net unrealized holding
losses have been recorded as a separate component of stockholders' equity,
entitled accumulated other comprehensive income.
During the year ended September 30, 2000, gross realized gains and gross
realized losses on the sale of marketable securities were $101,325 and $163,775,
respectively, resulting in a net realized loss of $62,450. During the year ended
September 30, 1999, gross realized gains and gross realized losses on the sale
of marketable securities were $4,796,165 and $1,240,208, respectively, resulting
in a net realized gain of $3,555,957. During the year ended September 30, 1998,
gross realized gains on the sale of marketable securities were $2,473,826.
Proceeds from U.S. treasury notes maturing were $7,500,000, and $5,000,000 in
1999 and 1998 respectively.
Interest, dividends and net gains (losses) on sales of securities consist of
the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------
2000 1999 1998
-------- ---------- ----------
<S> <C> <C> <C>
Interest income............................................ $729,805 $ 534,733 $ 978,546
Dividend income............................................ 97,975 111,878 171,464
Net gains (losses) on sales of securities.................. (62,450) 3,555,957 2,473,826
-------- ---------- ----------
Totals..................................................... $765,330 $4,202,568 $3,623,836
======== ========== ==========
</TABLE>
In August 2000, in exchange for license and marketing rights, the Company
received 1,500,000 shares of common stock of Cytogen Corporation of which
1,200,000 shares were restricted from resale. The restrictions lapse in 300,000
share increments on September 25, October 25, November 25 and December 25, 2000.
As of September 30, 2000, the Company retained approximately 1,200,000 of these
36
<PAGE>
shares, of which 900,000 shares were restricted from resale until the specified
dates. The cost basis of these marketable securities is the quoted market price
on the date of receipt. As of September 30, 2000, the fair market value of the
Cytogen shares held, including the restricted shares, was $7,572,000.
D. INVENTORIES:
The Company's inventories consisted entirely of raw materials of $91,456 on
September 30, 2000 and $80,480 on September 30, 1999.
E. COMMITMENTS:
The Company leases laboratory, office and warehouse space under various
agreements. Rental expense for the years ended September 30, 2000, 1999 and 1998
amounted to $326,347, $411,245 and $572,729, respectively. Future minimum lease
payments for fiscal 2001, 2002, 2003 and 2004 amount to $336,472, $301,823,
$164,010 and $37,964, respectively.
F. ACCRUED EXPENSES:
Accrued expenses consist of the following at September 30:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Salaries and other compensation............................. $223,367 $208,149
License and royalty fees.................................... 33,952 20,000
Clinical trials............................................. 85,000 116,649
Professional fees........................................... 188,000 164,000
Other....................................................... 256,513 72,736
-------- --------
Totals...................................................... $786,832 $581,534
======== ========
</TABLE>
G. INCOME TAXES:
Deferred tax assets and deferred tax liabilities are recognized based on
temporary differences between the financial reporting and tax basis of assets
and liabilities using statutory rates. A valuation allowance is recorded against
deferred tax assets if it is more likely than not that some or all of the
deferred tax assets will not be realized.
There was no income tax provision or benefit for the years ended
September 30, 2000, 1999 and 1998.
The provisions for income taxes were at different rates than the U.S.
statutory rates for the following reasons:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate................. 34.0% 34.0% 34.0%
State taxes, net of federal benefit.................... 6.3% 6.3% 6.3%
Permanent items........................................ 0.2% (0.3)% 0.0%
Other.................................................. (1.7)% (1.0)% 0.9%
Valuation allowance.................................... (38.8)% (39.0)% (41.2)%
----- ----- -----
(0.0)% (0.0)% (0.0)%
----- ----- -----
</TABLE>
37
<PAGE>
The components of the deferred tax assets and liabilities at September 30,
were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Assets
Net operating loss carryforwards..................... $ 4,649,480 $ 9,397,988 $ 7,645,130
Research and experimentation tax credit
carryforward....................................... 3,041,904 3,004,518 2,511,022
Deductible intangibles............................... 90,116 102,016 111,370
Deferred revenue..................................... 8,014,368 -- --
Other................................................ 403,165 316,120 248,310
Liabilities
Property, plant and equipment depreciation........... (135,586) (200,415) (246,347)
Other................................................ (85,842) (70,142) (77,245)
----------- ----------- -----------
15,977,605 12,550,085 10,192,240
Valuation allowance.................................... (15,977,605) (12,550,085) (10,192,240)
----------- ----------- -----------
Net deferred taxes..................................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets. Realization of
favorable tax attributes is, therefore, reflected as a tax benefit in the
provision for income taxes.
At September 30, 2000, the Company had unused net operating loss (NOL)
carryforwards for federal income tax purposes of approximately $11,839,280 which
expire in fiscal 2008. The Company also has unused state net operating loss
carryforwards of approximately $9,959,146 which begin to expire in fiscal 2001.
The Company also has federal research and experimentation credits of
approximately $2,689,798 which expire in fiscal 2004.
H. STOCK PLANS:
The Company's 1993 Stock Plan (the "1993 Stock Plan") provides for the grant
of options to the Company's directors, officers, employees and consultants to
purchase up to an aggregate of 700,000 shares of common stock at a price equal
to the fair market value of the stock at the date of the grant. The maximum term
of the options under the 1993 Stock Plan is ten years. The number of shares
available for future grants at September 30, 2000 was 249,425. On November 8,
2000, the Company adopted, subject to the approval of its stockholders, the 2000
Stock Plan which would, if approved, provide for the grant of options to the
Company's directors, officers, employees and consultants to purchase up to an
aggregate of 1,000,000 shares of common stock.
The Company's 1983 Stock Option Plan (the "1983 Plan") does not allow for
option grants after June 1993. The 1983 Plan provided for the grant of options
to purchase up to 900,000 shares of common stock at a price equal to the fair
market value of the stock at the date of grant to the Company's employees and
mandatory grants to outside directors upon initial election to the Board of
Directors. The maximum terms of incentive stock options and non-statutory
options under the 1983 Plan are ten years and ten years plus thirty days,
respectively.
On November 5, 1991, the Company's Board of Directors adopted the 1992
Non-Employee Director Stock Option Plan (the "1992 Plan") which the shareholders
approved. This plan provides for the grant to each non-employee director on
November 5, 1991, and each fifth anniversary thereafter, of an option to
purchase 5,000 shares of common stock up to an aggregate of 100,000 shares at a
price equal to the fair market value of the stock at the date of the grant,
vesting over a five year period. Under this plan, options to purchase 30,000
shares of common stock at a price of $21.00 per share and
38
<PAGE>
30,000 shares of common stock at a price of $15.25 per share were granted on
November 5, 1991 and 1996, respectively. The 1992 Plan also provided for the
grant of options for 5,000 shares to new members of the Board of Directors. A
total of 10,000 stock options were granted to new directors during fiscal year
1997 under the 1992 Plan. No grants may be made under this plan after
November 4, 2001.
On November 10, 1992, the Company's Board of Directors adopted the 1993
Non-Employee Director Stock Option Plan (the "1993 Plan") which the shareholders
approved. This plan provides for the grant to each non-employee director on
November 10, 1992, and each sixth anniversary thereafter an option to purchase
5,000 shares of common stock up to an aggregate of 100,000 shares at a price
equal to the fair market value of the stock at the date of the grant, vesting
over a five year period. Under this plan, options to purchase 30,000 shares of
common stock at a price of $14.50 per share and 25,000 shares of common stock at
a price of $9.625 per share were granted on November 10, 1992 and November 10,
1998, respectively. The 1993 Plan also provided for the grant of options for
5,000 shares to new members of the Board of Directors. A total of 10,000 stock
options were granted to new directors during fiscal year 1997 under the 1993
Plan. No grants may be made under this plan after November 10, 2002.
The Company uses the disclosure provision of SFAS 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") and has applied APB Opinion No. 25
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its Plans.
Stock option activity for the years ended September 30, 2000, 1999 and 1998
is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.............. 473,833 $9.47 408,649 $11.30 460,195 $10.73
Granted....................................... 47,500 $3.50 144,000 $ 5.04 13,500 $11.88
Exercised..................................... (5,250) $4.00 (1,329) $ 7.83 (39,846) $ 4.11
Canceled...................................... (36,577) $9.12 (77,487) $10.28 (25,200) $12.58
------- ----- ------- ------ ------- ------
Outstanding at end of year.................... 479,506 $8.97 473,833 $ 9.57 408,649 $11.30
======= ===== ======= ====== ======= ======
Options exercisable at year-end............... 288,411 $9.65 169,620 $11.33 135,392 $11.04
======= ===== ======= ====== ======= ======
Weighted average fair value of options granted
during the year............................. $ 1.90 $ 2.38 $ 6.16
------- ------- -------
</TABLE>
The fair value of each option granted during 2000, 1999 and 1998 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: (1) expected life of 5.0 years in
2000 and 1999, and 7.1 years in 1998 (2) expected volatility of 55.2% in 2000,
47.6% in 1999, and 37.5% in 1998 (3) risk-free interest rate of 6.12% in 2000,
5.38% and 4.74% in 1999, and 6.34% in 1998 and (4) no dividend yield.
39
<PAGE>
The following table summarizes information about stock options outstanding
and exercisable at September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ----------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ---------------- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ 3.50-$5.25 152,000 8.0 $ 3.90 66,125 $ 3.73
$ 5.26-$7.88 1,356 0.1 $ 6.50 1,356 $ 6.50
$ 7.89-$11.81 262,047 6.7 $11.15 169,534 $11.25
$ 11.82-$12.24 64,103 3.1 $12.09 51,396 $12.09
------- --- ------ ------- ------
$ 3.50-$12.24 479,506 6.6 $ 8.97 288,411 $ 9.65
======= === ====== ======= ======
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN:
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan")
provides for the issuance of up to 150,000 shares of common stock to employees
of the Company. Under the terms of the Purchase Plan, eligible employees may
purchase shares in five annual offerings ending in 2002, through payroll
deductions of up to a maximum of 10% of the employee's earnings, at a price
equal to the lower of 85% of the fair market value of the stock on the
applicable annual offering commencement date of June 1 or termination date of
May 31. The first offering under the Purchase Plan ended on May 31, 1998 and
5,876 shares of common stock were purchased by eligible employees at a price of
approximately $9.30 per share. The second offering under the Purchase Plan ended
on May 31, 1999 and 2,267 shares of common stock were purchased by eligible
employees at a price of approximately $3.29 per share. The third offering under
the Purchase Plan ended on May 31, 2000 and 19,143 shares of common stock were
purchased by eligible employees at a price of approximately $3.08 per share. As
of September 30, 2000, 27,286 shares have been issued under this plan.
Had the Company adopted SFAS 123, the weighted average fair value for each
purchase right granted during fiscal 2000, 1999 and 1998 would have been $1.56,
$1.57, and $3.45, respectively.
PRO FORMA DISCLOSURES
Had compensation cost for the Company's 2000, 1999 and 1998 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income (loss) and net income (loss) per share would approximate
the pro forma amounts below:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss)....................... As reported $(11,263,485) $ (4,442,418) $(6,309,341)
Pro forma $(11,840,095) $ (4,902,679) $(6,933,323)
Net income (loss) per share............. As reported $ (1.67) $ (0.66) $ (0.93)
Pro forma $ (1.75) $ (0.72) $ (1.03)
</TABLE>
The effects of applying SFAS 123 in this pro-forma disclosure are not
indicative of future amounts. Additional awards in future years are anticipated.
40
<PAGE>
I. EMPLOYEE'S SAVING PLAN:
The Company provides a 401(k) Plan to employees of the Company by which they
may defer compensation for income tax purposes under Section 401(k) of the
Internal Revenue Code. Each employee may elect to defer a percentage of his or
her salary on a pre-tax basis up to a specified maximum percentage. The Company
matches every dollar each employee contributes to the 401(k) Plan up to six
percent of each employee's salary to a maximum of $2,000 annually per employee.
Salary deferred by employees and contributions by the Company to the 401(k) Plan
are not taxable to employees until withdrawn from the 401(k) Plan and
contributions are deductible by the Company when made. The amount of the
Company's matching contribution for the 401(k) Plan was $64,524, $95,753, and
$99,710 for 2000, 1999, and 1998, respectively.
J. COMMON STOCK TRANSACTIONS:
In November 1997, the Board of Directors extended the authorization granted
in May 1996 to purchase 250,000 shares of the Company's common stock in the
aggregate on the open market. Through September 30, 2000, the Company purchased
122,200 shares for $1,574,244 and the shares have been retired. In
November 2000, the Board of Directors authorized the purchase of up to 1,000,000
shares, including the number previously authorized, of the Company's common
stock on the open market at prevailing market prices.
K. PREFERRED STOCK:
The preferred stock may be issued from time to time in one or more series.
The rights, preferences, restrictions, qualifications and limitations of such
stock shall be determined by the Board of Directors.
L. BUSINESS CUSTOMERS:
The Company's operations are located solely within the United States. The
Company is focused principally on developing and manufacturing contrast agents.
Since July 1999, the Company's revenues are attributable to one principal
business segment. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. Two customers accounted for
58.6% and 24.6% respectively, of the Company's product sales in fiscal 2000,
70.1% and 25.3% respectively, of the Company's product sales in fiscal 1999, and
56% and 19% respectively, of the Company's product sales in fiscal 1998.
In fiscal 2000, 1999 and 1998, revenues from customers and licensees outside
of the United States, principally in Europe and Japan, amounted to 35%, 19% and
26%, respectively, of the Company's total revenues.
M. BUSINESS SEGMENTS:
During fiscal 1999, the Company adopted FASB Statement No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". Prior to the deconsolidation of Kalisto, the Company had two
business segments under the "management approach" as defined in SFAS 131, the
original business and the majority-owned subsidiary.
41
<PAGE>
Information concerning the operations in these reportable segments is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Advanced Magnetics, Inc............................. $ 4,073,919 $ 6,511,654 $ 6,177,048
Kalisto Biologicals Inc............................. -- 918,402 227,098
------------ ------------ ------------
Total............................................. $ 4,073,919 $ 7,430,056 $ 6,404,146
DEPRECIATION EXPENSE:
Advanced Magnetics, Inc............................. $ 554,434 $ 764,861 $ 968,683
Kalisto Biologicals Inc............................. -- 52,438 30,939
------------ ------------ ------------
Total............................................. $ 554,434 $ 817,299 $ 999,622
NET INCOME (LOSS):
Advanced Magnetics, Inc............................. $(11,263,485) $ (3,476,742) $ (5,120,713)
Kalisto Biologicals Inc............................. -- (965,676) (1,382,806)
Eliminations and adjustments........................ -- -- 194,178
------------ ------------ ------------
Total............................................. $(11,263,485) $ (4,442,418) $ (6,309,341)
SEGMENT ASSETS:
Advanced Magnetics, Inc............................. $ 35,667,591 $ 27,816,359 $ 35,230,857
Kalisto Biologicals Inc............................. -- -- 688,512
Eliminations and adjustments........................ -- -- (1,804,661)
------------ ------------ ------------
Total............................................. $ 35,667,591 $ 27,816,359 $ 34,114,708
</TABLE>
N. LEGAL PROCEEDINGS:
The Company and certain of its officers were sued in an action entitled
DAVID D. STARK, M.D. V. ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V.
GROMAN AND LEE JOSEPHSON, Civil Action No. 92-12157-WGY, in the United States
District Court for the District of Massachusetts on September 3, 1992. The
plaintiff, a former consultant to the Company, claims that he was incorrectly
omitted as an inventor or joint inventor on certain of the Company's patents and
on pending applications, and seeks injunctive relief and unspecified damages. In
addition, the complaint also alleges state law claims for breach of contract,
breach of good faith and fair dealing, breach of implied contract,
misappropriation of trade secrets, conversion, negligent misrepresentation,
misrepresentation, unjust enrichment and unfair trade practices. The District
Court has stayed this federal action pending resolution of an appeal in the
State Court of summary judgment in the Company's favor as well as resolution of
a jurisdictional issue. As noted below, the Massachusetts Appeals Court has
decided the appeal, but the federal action remains stayed as of this date. While
the outcome of the action cannot be determined, the Company believes the action
is without merit and intends to defend the action vigorously. The Company may
not be able to successfully defend this action and the failure by the Company to
prevail for any reason could have an adverse effect on it's future business,
financial condition and results of operations.
The Company and certain of its officers were sued in DAVID D. STARK, M.D. V.
ADVANCED MAGNETICS, INC., JEROME GOLDSTEIN, ERNEST V. GROMAN AND LEE JOSEPHSON,
Civil Action No. 93-02846-C, in the Superior Court Department of the
Massachusetts Trial Court for Middlesex County. This case involves claims of
breach of contract, breach of good faith and fair dealing, breach of implied
contract, unjust enrichment and unfair trade practices that were originally
dismissed by, but later remanded to, the Federal Court in the above-mentioned
action, as well as a new count alleging tortious interference
42
<PAGE>
with contractual or advantageous relations. The Superior Court granted partial
summary judgment in the Company's favor and dismissed the unfair trade practices
and tort counts. The plaintiff's contract claims have been dismissed with
prejudice and final judgment was entered against the plaintiff. The plaintiff
filed an appeal in DAVID D. STARK, M.D. V. ADVANCED MAGNETICS, INC., JEROME
GOLDSTEIN, ERNEST V. GROMAN AND LEE JOSEPHSON, Appeal No. 98-P-1749, in the
Massachusetts Appeals Court, on January 25, 1999. On October 13, 2000, the
Massachusetts Appeals Court reversed the grant of partial summary judgment in
the Company's favor and ordered that the unfair trade practice and tort claims
be reinstated. The Superior Court has redocketed the claims as directed by the
Appeals Court, and it is anticipated that the litigation in state court will now
move forward. While the outcome of the action cannot be determined, the Company
believes the action is without merit and intends to defend the action
vigorously. The Company may not be able to successfully defend this action and
the failure by the Company to prevail for any reason could have an adverse
effect on its future business, financial condition and results of operations.
The Company filed suit on October 7, 1997 against Sanofi
Pharmaceuticals, Inc. (formerly known as Sanofi Winthrop, Inc.) and Sanofi SA
(collectively, the "Defendants") in the Superior Court of the Commonwealth of
Massachusetts. The action is entitled ADVANCED MAGNETICS, INC. V. SANOFI
PHARMACEUTICALS, INC. AND SANOFI SA, Civil Action No. 97-5222B. The Company
claims that the Defendants tortiously interfered with a license, supply and
marketing agreement (the "Agreement"), and seeks unspecified monetary damages.
In addition, the Company seeks a declaration that the Defendants do not have any
rights under the Agreement and that the Company has not breached the Agreement.
Sanofi Pharmaceuticals, Inc., filed counterclaims against the Company on
February 4, 1998 seeking compensatory damages of $11,500,000 and multiple
damages as a result of the Company's alleged breach of the Agreement. On
November 13, 1998 the Company filed an amended complaint adding claims for
unfair competition and breach of contract against the Defendants. On
November 23, 1998, the Defendants answered the Company's amended complaint, and
Sanofi Pharmaceuticals, Inc. served a new set of counterclaims seeking
compensatory damages of $15,000,000 and multiple damages as a result of the
Company's alleged conduct. On June 15, 1999, the court granted partial summary
judgment in favor of the Company and against the Defendants, declared that the
Company did not breach the Agreement, was not unjustly enriched, and did not
violate Mass. Gen. Laws ch. 93A, and dismissed Sanofi Pharmaceuticals, Inc.'s
counterclaims for breach of contract, unjust enrichment, conversion, account
annexed and violation of Mass. Gen. Laws ch. 93A. On October 29, 1999, the
Company served a second motion for partial summary judgment which, among other
things, requests judgment in its favor on Sanofi Pharmaceuticals, Inc.'s
remaining counterclaims against the Company and for judgment in its favor on the
Company's breach of contract claim against Defendants. Also on October 29, 1999,
Defendants served a motion for partial summary judgment which, among other
things, requests judgment in its favor on the Company's remaining claims. On
October 4, 2000, the Court granted the Company's motion and entered judgment on
all remaining claims brought by Sanofi Pharmaceuticals, Inc. In addition, the
Court granted in part and denied in part Defendants' motion for summary
judgment. Only the Company's breach of contract claim against Sanofi SA remains
in the case. On November 21, 2000, Sanofi SA and Sanofi Pharmaceuticals, Inc.
served a Motion for Entry of Separate and Final Judgment, seeking to have the
Court certify final judgment on all issues decided on summary judgment except
for the Company's breach of contract claim against Sanofi SA. Sanofi SA and
Sanofi Pharmaceuticals seek final judgment certification in order to obtain an
immediate appeal on the summary judgment decisions. On December 1, 2000, the
Company served a memorandum in opposition to the motion for final and separate
judgment. On December 5, 2000, the Court set a trial date for March 19, 2001 on
the Company's remaining claim. While the final outcome of this litigation cannot
be determined, the Company intends to pursue its remaining claim. In the event
that the judgments in the Company's favor are reversed on appeal, the Company
intends to defend those claims vigorously. However, in such an event, the
Company may not be able to successfully defend those
43
<PAGE>
claims and the failure of the Company to prevail for any reason could impair the
Company's financial resources and disrupt the Company's future operating plans.
O. AGREEMENTS:
To facilitate the marketing and distribution of its contrast agents, the
Company has entered into strategic relationships with certain established
pharmaceutical companies. These companies, both in the United States and abroad,
include: (i) Guerbet S.A. ("Guerbet"), a leading European producer of contrast
agents, in Western Europe and Brazil; (ii) Eiken Chemical Co., Ltd. ("Eiken"),
one of Japan's leading medical diagnostics manufacturers, in Japan;
(iii) Berlex Laboratories, Inc. ("Berlex"), the leading marketer of MRI contrast
agents, in the United States; (iv) Cytogen Corporation ("Cytogen"), a U.S.
marketer of oncology products, in the United States and (v) Mallinckrodt Inc.
("Mallinckrodt"), a unit of Tyco Inc. and a leading manufacturer of contrast
agents, in the United States, Canada and Mexico.
In August 2000, the Company entered into a license and marketing agreement
and a supply agreement with Cytogen Corporation ("Cytogen"). The Company granted
Cytogen the exclusive right to market and sell COMBIDEX and CODE 7228 for
oncology applications in the United States and agreed to grant to Cytogen the
exclusive right to market and sell FERIDEX I.V. in the United States if the
Company's existing marketing agreement for FERIDEX I.V. terminates for any
reason. Upon signing of the agreements, the Company received 1,500,000 shares of
Cytogen common stock as a non-refundable license fee. An additional 500,000
shares of Cytogen common stock were placed in escrow and will be released to the
Company upon satisfaction of certain milestones under the agreements. Cytogen
has agreed to pay the Company for manufacturing and supplying the products and
royalties on sales. These agreements have an initial ten-year term with
automatic five year extensions, but can be terminated earlier upon the
occurrence of certain specified events.
On February 1, 1995, the Company entered into an agreement with Berlex
granting Berlex a product license and exclusive marketing rights to Feridex I.V.
in the United States and Canada. Under the terms of the agreement, Berlex paid a
$5,000,000 non-refundable license fee in fiscal 1995. An additional $5,000,000
license fee was received in October 1996 as a result of the FDA's marketing
approval and Berlex's market launch of Feridex I.V. in the United States. In
addition, the company receives payments for manufacturing the product and
royalties on sales. Under the terms of the agreement, Berlex pays for 60% of
ongoing development expenses related to FERIDEX I.V. These agreements expire in
2010 with earlier termination upon certain events.
Under an agreement with Squibb Diagnostics, a division of Bristol-Myers
Squibb Co., the Company is obligated to pay up to a maximum of $2,750,000 in
royalties in connection with product sales of COMBIDEX.
In 1990, the Company entered into a manufacturing and distribution agreement
with Mallinckrodt granting Mallinckrodt a product license and co-marketing
rights to GastroMARK-Registered Trademark- in the United States, Canada and
Mexico. Under the terms of the agreement, Mallinckrodt paid a $500,000
non-refundable license fee in fiscal 1997 as a result of the FDA's marketing
approval of Feridex I.V. in the United States. In addition, the company receives
payments for manufacturing the product and royalties on sales.
The Company is the licensee of certain technologies under agreements with
third parties which require the Company to make payments in accordance with
these license agreements and upon the attainment of particular milestones. The
Company is also required to pay royalties on a percentage of certain product
sales, if any. There were no milestone payments in fiscal years 1998, 1999 or
2000. Future milestone payments are not to exceed $400,000.
44
<PAGE>
P. RELATED PARTY TRANSACTIONS:
During the fiscal years ended September 30, 2000, 1999, and 1998, the
Company paid approximately $16,600, $33,329, and $58,410, respectively, to
Fahnestock & Co. Inc. as commissions on transactions involving its investments
in securities. Mr. Leslie Goldstein, a shareholder and the brother of Jerome
Goldstein, Chairman of the Board and CEO of the Company, is employed by SRG
Associates, a division of Fahnestock & Co. Inc., as an investment analyst and
advisor.
Q. CONSOLIDATED QUARTERLY FINANCIAL DATA--UNAUDITED:
The following table provides quarterly data for the fiscal years ended
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
FISCAL 2000 QUARTERS ENDED (AS PREVIOUSLY FILED IN FORM 10-Q)
---------------------------------------------------------------
JUNE 30 MARCH 31 DEC. 31, 1999
------------------- ------------------- -------------------
<S> <C> <C> <C>
License fees............................ $ -- $ -- $ --
Royalties............................... 200,000 260,000 163,246
Product sales........................... 616,911 161,530 --
Research and development services....... -- 105,393 10,995
Interest, dividends and net gains and
losses on sales of securities......... 197,122 168,588 235,845
----------- ----------- -----------
Total revenues........................ 1,014,033 695,511 410,086
Cost of product sales................... 43,195 62,954 --
Cost of contract research............... -- -- 3,195
Operating expenses...................... 1,553,488 1,664,705 1,838,531
----------- ----------- -----------
Net income (loss)....................... $ (582,650) $(1,032,148) $(1,431,640)
=========== =========== ===========
Net income (loss) per share........... $ (0.09) $ (0.15) $ (0.21)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 2000 QUARTERS ENDED (AS AMENDED*)
--------------------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DEC. 31, 1999
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
License fees............................... $ 572,367 $ 183,894 $ 183,894 $ 183,894
Royalties.................................. 201,754 200,000 260,000 163,246
Product sales.............................. 475,096 616,911 161,530 --
Research and development services.......... -- -- 95,008 10,995
Interest, dividends and net gains and
losses on sales of securities............ 163,775 197,122 168,588 235,845
----------- ----------- ----------- -----------
Total revenues........................... 1,412,992 1,197,927 869,020 593,980
Cost of product sales...................... 133,079 43,195 62,954 --
Cost of contract research.................. -- -- -- 3,195
Operating expenses......................... 2,580,540 1,553,488 1,664,705 1,838,531
Cumulative effect of accounting change
(loss)................................... -- -- -- (7,457,717)
----------- ----------- ----------- -----------
Net income (loss).......................... $(1,300,627) $ (398,756) $ (858,639) $(8,705,463)
=========== =========== =========== ===========
Net income (loss) per share................ $ (0.19) $ (0.06) $ (0.13) $ (1.29)
</TABLE>
------------------------
* to reflect cumulative effect of accounting change (see Note B)
45
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1999 QUARTERS ENDED
--------------------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DEC. 31, 1998
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
License fees............................... $ -- $ -- $ -- $ --
Royalties.................................. 220,000 100,000 200,000 160,000
Product sales.............................. 383,866 264,113 1,001,239 316,841
Research and development services.......... 106,241 85,430 144,856 244,902
Interest, dividends and net gains and
losses on sales of securities............ 2,671,172 400,982 937,638 192,776
---------- ----------- ----------- -----------
Total revenues........................... 3,381,279 850,525 2,283,733 914,519
Cost of product sales...................... 90,954 95,604 155,903 112,181
Cost of contract research.................. 17,138 4,103 15,815 --
Operating expenses......................... 1,817,524 3,088,904 3,327,433 3,412,508
Other (income) expenses.................... 155,968 -- (421,561) --
---------- ----------- ----------- -----------
Net income (loss).......................... $1,299,695 $(2,338,086) $ (793,857) $(2,610,170)
========== =========== =========== ===========
Net income (loss) per share................ $ 0.19 $ (0.35) $ (0.12) $ (0.39)
</TABLE>
R. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1998, the FASB issued Statement No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities" which is effective for fiscal
years beginning after June 15, 2000. The statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability, measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Adoption of this standard will increase or decrease the recorded value of
options the Company may, in the future, acquire, and result in gains or losses
being included in net income.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
46
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information required by this item, other than with respect to the
executive officers of the registrant, is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders to be held on February 6, 2001, filed with the Commission on or
about December 21, 2000, under the caption "Election of Directors."
The information required by this item, with respect to executive officers of
the registrant, can be found in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders to be held on February 6, 2001, filed with the Commission on or
about December 21, 2000, under the captions "Compensation of Directors" and
"Compensation and Other Information Concerning Directors and Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders to be held on February 6, 2001 filed with the Commission on or
about December 21, 2000, in the table under the caption "Principal
Stockholders".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Not applicable.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. FINANCIAL STATEMENTS. The financial statements included in Item 8 of
Part II of this Annual Report on Form 10-K.
2. Financial Statement Schedules. Financial statement schedules have
been omitted because the required information is not present or not
present in amounts sufficient to require submission of the schedule,
or because the information required is included in the financial
statements or the notes thereto.
3. The exhibits listed in the Exhibit Index immediately preceding the
Exhibits are filed as a part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the fiscal
quarter ended September 30, 2000:
1. Report on Form 8-K filed July 10, 2000 (Item 5: Other Event).
2. Report on Form 8-K filed August 24, 2000 (Item 5: Other Event).
No financial statements were filed with these reports.
48
<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.
<TABLE>
<S> <C> <C>
ADVANCED MAGNETICS, INC.
By: /s/ JEROME GOLDSTEIN
-----------------------------------------
Jerome Goldstein
CHAIRMAN OF THE BOARD OF DIRECTORS,
CHIEF EXECUTIVE OFFICER AND TREASURER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
Chairman of the Board of
/s/ JEROME GOLDSTEIN Directors, Chief Executive
-------------------------------------- Officer and Treasurer December 18, 2000
Jerome Goldstein (principal executive and
financial officer)
/s/ JAMES MATHESON
-------------------------------------- Vice President-Finance December 18, 2000
James Matheson (principal accounting officer)
/s/ LEONARD M. BAUM
-------------------------------------- Director December 18, 2000
Leonard M. Baum
/s/ JOSEPH B. LASSITER III
-------------------------------------- Director December 18, 2000
Joseph B. Lassiter III, Ph.D.
/s/ MICHAEL D. LOBERG
-------------------------------------- Director December 18, 2000
Michael D. Loberg, Ph.D.
/s/ EDWARD B. ROBERTS
-------------------------------------- Director December 18, 2000
Edward B. Roberts, Ph.D.
/s/ GEORGE M. WHITESIDES
-------------------------------------- Director December 18, 2000
George M. Whitesides, Ph.D.
</TABLE>
49
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
--------------------- ------------------------------------------------------------ ------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Company, as amended.
3.2 By-Laws of the Company, as amended.
10.1 (1) 1983 Stock Option Plan of the Company, as amended on
November 13, 1990.
10.2 (1) 1992 Non-Employee Director Stock Option Plan.
10.3 (2) 1993 Stock Plan, as amended on February 2, 1999.
10.4 (2) 1993 Non-Employee Director Stock Option Plan.
10.5 (3) 1997 Employee Stock Purchase Plan
10.6 (4) Clinical Testing, Supply and Marketing Agreement between the
Company and Guerbet S.A. dated May 22, 1987 (confidential
treatment previously granted).
10.7 (5) Clinical Testing, Supply and Marketing Agreement between the
Company and Eiken Chemical Co., Ltd. dated August 30, 1988
(confidential treatment previously granted).
10.8 (6) Contrast Agent Agreement between the Company and Guerbet
S.A. dated September 29, 1989 (confidential treatment
previously granted).
10.9 (7) Contrast Agent Agreement between the Company and Eiken
Chemical Co., Ltd. dated March 27, 1990 (confidential
treatment previously granted).
10.10 (7) Amendment to Clinical Testing, Supply and Marketing
Agreement between the Company and Eiken Chemical Co., Ltd.
dated September 29, 1990 (confidential treatment previously
granted).
10.11 (7) License, Supply and Marketing Agreement between the Company
and Mallinckrodt Medical, Inc. dated June 28, 1990
(confidential treatment previously granted).
10.12 (1) Technology License Agreement between the Company and Squibb
Diagnostics, dated February 5, 1991 (confidential treatment
previously granted).
10.13 (1) Agreement of Amendment to Clinical Testing, Supply and
Marketing Agreement between the Company and Guerbet, S.A.,
dated August 13, 1990.
10.14 (8) Termination Agreement dated August 30, 1994 between the
Company and Bristol-Myers Squibb Co.
10.15 (9) License and Marketing Agreement between the Company and
Berlex Laboratories, Inc. dated as of February 1, 1995.
10.16 (9) Supply Agreement between the Company and Berlex
Laboratories, Inc. dated as of February 1, 1995.
10.17 (10) Lease and Lease Agreement between the Company and Carnegie
Center Associates dated September 6, 1994.
10.18 (11) Promissory Note dated February 10, 1998 issued to the
Company by Leonard Baum.
10.19 + License and Marketing Agreement dated August 25, 2000
between the Company and Cytogen Corporation.
10.20 + Supply Agreement dated August 25, 2000 between the Company
and Cytogen Corporation.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
27 Financial Data Schedule
</TABLE>
+ Confidential treatment requested as to certain portions, which portions have
been omitted and separately filed with the Securities and Exchange
Commission pursuant to a Confidential Treatment Request.
50
<PAGE>
(1) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1991.
(2) Incorporated herein by reference to the exhibits to the Company's definitive
proxy statement for the fiscal year ended September 30, 1992.
(3) Incorporated herein by reference to the exhibits to the Company's definitive
proxy statement for the fiscal year ended September 30, 1996.
(4) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1987.
(5) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1988.
(6) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1989.
(7) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1990.
(8) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, for the fiscal year ended September 30, 1994.
(9) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, as amended, for the fiscal quarter ended December 31,
1994.
(10) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K, for the fiscal year ended September 30, 1997.
(11) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q, for the fiscal quarter ended March 31, 1998.
51
