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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 0-19910
CREATIVE BIOMOLECULES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2786743
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
45 SOUTH STREET, HOPKINTON, MA 01748
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 782-1100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on February 27, 1998 was
approximately $234 million, based on the last sale price as reported on The
Nasdaq Stock Market.
As of February 27, 1998, the registrant had 33,475,582 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into
the following parts of this Form 10-K: Certain information required in Part III
of this Annual Report on Form 10-K is incorporated from the Registrant's Proxy
Statement for the 1998 Annual Meeting of Stockholders. With the exception of the
portions of the 1997 Proxy Statement expressly incorporated into this Form 10-K
by reference, such document shall not be deemed filed as part of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Creative BioMolecules, Inc. ("Creative BioMolecules" or the "Company")
is developing products for the regeneration and restoration of human tissues and
organs based on morphogenic proteins identified and characterized by the
Company. The Company's lead morphogenic protein, OP-1, has been shown to induce
formation or repair of several types of tissues including bone, cartilage,
kidney, tooth and brain. For orthopaedic and dental applications of OP-1, the
Company's corporate partner is Stryker Corporation ("Stryker"), a leading
surgical and medical products company. Stryker has completed a pivotal trial to
evaluate the use of an OP-1 device as a bone graft substitute for severe
fractures. Stryker is conducting additional clinical trials in orthopaedic
applications of OP-1 devices, as well as preclinical studies in cartilage
regeneration. The Company's corporate partner in development of renal disease
therapies is Biogen, Inc. ("Biogen"), a leading biopharmaceutical company with
expertise in development and commercialization of protein therapies. Creative
BioMolecules and Biogen are developing OP-1 products to treat acute and chronic
renal failure. In addition to the Stryker and Biogen programs, Creative
BioMolecules has proprietary programs in place to develop OP-1 product
candidates for neurological disorders and osteoporosis.
The Company has discovered a family of morphogenic proteins that
initiate the cascade of cellular events responsible for tissue formation. One
member of this family is OP-1, a naturally occurring morphogenic protein
produced primarily in the kidney. OP-1 has the capacity to trigger the formation
or repair of a variety of tissues by activating cells to respond to their
specific environment. The activated cells then differentiate and form the type
of tissue dictated by their environment. The Company believes that as a result
of such action, OP-1 may be helpful in the treatment of defects and diseases
involving a number of different types of human tissues and organs. OP-1 was
first isolated and characterized by Creative BioMolecules' scientists and is the
subject of issued patents covering the protein itself as well as OP-1 based
products for certain applications.
The Company's agreement with Stryker grants Stryker the exclusive right
to develop, market and sell OP-1 based products for use in the repair or
replacement of bone and joint tissue ("orthopaedic reconstruction") and for use
as dental therapeutics. This agreement provides for the payment of royalties to
the Company on such sales, grants the Company the exclusive right to supply
Stryker's worldwide commercial requirements for such products and provides for
research funding to the Company. The Company's agreement with Biogen grants
Biogen the exclusive right to develop, manufacture, market and sell OP-1 based
products for use in the treatment of renal disease. This agreement provides for
payment of royalties to the Company on such sales and provides for milestone
payments and research funding to the Company. The Company has retained
commercial rights to OP-1 based products for all indications other than
orthopaedic reconstruction, dental therapeutics and kidney disorders. The
Company's retained applications include neurological disorders such as stroke
and metabolic bone diseases such as osteoporosis.
ORTHOPAEDIC RECONSTRUCTION AND DENTAL THERAPEUTICS. The availability of
a bone graft material which can induce bone formation is important to successful
repair in many orthopaedic applications including open fracture reductions of
acute or non-healing fractures, spinal fusions, maxillofacial reconstructions,
prosthetic fixations and gap filling procedures. Stryker has completed a pivotal
study of an OP-1 bone regeneration product designed to induce new bone
formation. This trial was conducted in 122 patients with non-union fractures of
the tibia, the major bone of the lower leg. The objective of this trial was to
demonstrate that treatment with the OP-1 device could repair non-union fractures
of the tibia comparably to autograft, a procedure which involves removal of bone
from the hip and implanting that bone at the fracture site to induce healing.
The results of the trial, presented in March 1998, demonstrated that the OP-1
bone regeneration product had comparable clinical success to the autograft group
without the need for a second invasive
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procedure to harvest autograft bone. Based on the results of the trial, other
clinical and preclinical data, and the Company's development of a commercial
scale manufacturing process, Stryker is preparing the Pre-Market Approval
("PMA") application for this OP-1 bone regeneration product. The PMA application
is Stryker's formal request to the United States Food and Drug Administration
("FDA") for approval to market the product.
In addition to the pivotal trial in non-union fractures, the Company's
corporate partner, Stryker, has initiated clinical studies in other bone graft
indications, including a 200 patient clinical trial to evaluate use of the OP-1
device to treat acute fractures. Stryker and the company are also evaluating the
possible role of OP-1 in the treatment of cartilage defects.
The Company and Stryker are also developing an OP-1 product for the
treatment of periodontal disease. Based on completed preclinical studies, the
Company believes that an OP-1 product may restore the periodontal tissues
necessary to maintain tooth attachment when used in conjunction with standard
surgical treatments of periodontal disease. Stryker plans to initiate a pilot
clinical trial to treat periodontal disease with an OP-1 device in 1998.
KIDNEY DISORDERS. Acute renal failure involves the rapid loss of kidney
function and is associated with a high mortality rate. Chronic renal failure, in
contrast, is the slow progressive loss of kidney function ultimately resulting
in the need for kidney transplantation or dialysis. The high risk of acute renal
failure and the substantial costs associated with dialysis therapy represent
areas of significant unmet medical and economic healthcare needs. Creative
BioMolecules and its partner, Biogen, are developing OP-1 product candidates to
treat both acute and chronic renal failure. The Company believes that there is a
substantial commercial opportunity for renal therapies that could delay or
eliminate the need for costly dialysis treatments. Preclinical studies have
shown that OP-1 administration improves kidney function in animal models of both
acute and chronic renal failure.
NEUROLOGICAL DISORDERS. Creative BioMolecules is developing OP-1
product candidates for use in the treatment of stroke and other neurological
disorders. Preclinical studies have shown that OP-1 enhances survival of neurons
and can promote the establishment of new neuronal connections which aid recovery
from brain injury or disease. In several preclinical studies presented in 1997,
the Company demonstrated the ability of OP-1 to improve the recovery rate of
motor function in an animal model of stroke.
OTHER PROGRAMS. In addition to its work with the OP-1 protein, the
Company has a program underway to develop small molecules that can stimulate the
same regeneration results induced by morphogenic proteins via activation of
various steps in the tissue formation cascade. Such small molecule agents may
provide appropriate therapies for chronic renal failure, osteoporosis and
chronic neurological diseases. The Company is also investigating the role in
tissue formation of other related morphogenic proteins in its proprietary
portfolio.
The Company's principal offices are located at 45 South Street,
Hopkinton, Massachusetts 01748, and its telephone number is (508) 782-1100. The
Company is the successor to a California corporation of the same name organized
in 1981. In 1987, the Company completed a corporate reorganization and became a
Delaware corporation.
RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT AND COMMERCIALIZATION
This Form 10-K contains forward-looking statements which are based on
management's current expectations and which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. The Company cautions investors that there can
be no assurance that the actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking statements
as a result of various factors, including, but not limited to the following:
uncertainty as to timing of and the Company's ability to commercialize its
products; the Company's reliance on its lead product candidate and the Company's
lack of control over the clinical progress of several applications of its
products, which are controlled by the Company's collaborative partners; the
Company's reliance on current and prospective collaborative partners to supply
funds for research and development and to commercialize its products; intense
competition related to the research and development of morphogenic and other
proteins for various applications and therapies and the possibility that others
may discover or develop, and the Company may not be able to gain rights with
respect to, the technology necessary to commercialize its products; the
Company's lack of experience in commercial manufacturing and unproven ability to
manufacture products on a large scale; the Company's lack of marketing and sales
experience and the risk that any products that the Company develops may not be
able to be marketed at acceptable prices or receive commercial acceptance in the
markets that the Company expects to target; uncertainty as to whether there will
exist adequate reimbursement for the Company's products from government, private
health insurers and other organizations; and uncertainties as to the extent of
future government regulation of the Company's business. As a result, the
Company's future development and commercialization efforts involve a high degree
of risk.
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SCIENTIFIC BACKGROUND
As humans age, the body's capacity to form or regenerate tissue after
injury diminishes substantially. Tissue formation begins when an activated stem
cell responds to the program of cues produced in that cell's location and
becomes committed to a cell type consistent with that particular set of
information. Stem cells are found throughout the body in people of all ages and
are the precursor cells from which all tissues and organs are derived. Once a
stem cell is activated, its interactions with its surroundings determine the
particular cell type (e.g., bone, cartilage, kidney, tooth and brain) into which
it will differentiate. For example, an activated stem cell in a bone defect will
produce bone because the information available to that cell from neighboring
cells and the extracellular environment specifies a unique program of signal and
response that results in that cell becoming a bone-forming cell.
This process of cell interaction depends on morphogenic proteins which
can activate stem cells to begin the process of differentiation and commitment,
leading to tissue and organ formation. Diminished capacity to produce
morphogenic proteins, due to aging or disease, is believed to be associated with
reduced ability to form tissue in response to injury. The ability to reinitiate
tissue formation processes with morphogenic proteins may provide the basis for
novel therapeutics to treat tissue disorders.
THE COMPANY'S TECHNOLOGY
Creative BioMolecules has played a significant role in advancing
scientific understanding of the process of tissue regeneration. The Company has
established a technology platform based on the molecular and cellular events
responsible for tissue and organ development. This platform provides the basis
for development of the Company's proprietary therapeutic products.
Creative BioMolecules was the first to identify and characterize
certain morphogenic proteins that are key regulators of tissue and organ
formation in humans. The Company's lead morphogenic protein, OP-1, is a
naturally occurring substance produced primarily in the kidney. OP-1's role
early in the cascade of events that leads to tissue and organ formation, prior
to commitment of a stem cell to a particular cell type, has led the Company to
believe that OP-1 is capable of inducing the formation or repair of many
different types of tissues. Preclinical studies conducted by the Company have
indicated a prominent role for OP-1 in the formation of bone, cartilage, kidney,
tooth and brain.
The illustration below depicts the cascade of molecular and cellular
events involved in the tissue formation process.
[GRAPHIC DEPICTING MORPHOGEN INDUCED TISSUE AND ORGAN FORMATION.]
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In addition to identifying and characterizing the OP-1 protein and
other morphogenic proteins, Creative BioMolecules also has identified the DNA
sequences which regulate the expression of OP-1, has identified the cellular
receptors to which OP-1 binds and through which it acts, and has determined the
three-dimensional structure of OP-1. These discoveries have enabled Creative
BioMolecules to initiate a small molecule program, the goal of which is to
identify second generation, orally-active drug compounds that either promote
morphogenic protein expression or mimic the biological activities of morphogenic
proteins.
BUSINESS STRATEGY
Creative BioMolecules' objective is to lead the discovery and
development of therapeutics for tissue regeneration. Key elements of the
Company's continuing business strategy include:
SECURING MARKETING APPROVAL FOR OP-1 IN ORTHOPAEDIC RECONSTRUCTION. The
Company is supporting Stryker in obtaining marketing approval of the OP-1 bone
regeneration product for use in the United States and foreign markets. The
Company has focused its manufacturing, quality control and quality assurance
efforts on generating the manufacturing related data for the PMA application to
be filed by Stryker, and preparing the Company's manufacturing facility for FDA
inspection and approval. Stryker is conducting clinical trials of the OP-1 bone
regeneration product and will be responsible for worldwide marketing of this
product if approved by regulatory authorities. There can be no assurance that
such regulatory approvals will be obtained.
DEVELOPING OP-1 AS A THERAPY FOR RENAL DISEASE. In late 1996, the
Company established a worldwide partnership with Biogen to develop OP-1 as a
therapy for acute and chronic renal disease. Preclinical results have
demonstrated the promise of this molecule in protecting against kidney damage in
acute conditions and in slowing kidney function decline in chronic disease. The
Company and Biogen are working closely together in the development of a renal
disease therapy based on these findings. The Company is conducting preclinical
studies and supplying OP-1 for the initial development stages and Biogen is also
conducting preclinical studies with the goal of conducting clinical trials of
this therapy.
GENERATING A BREADTH OF PRODUCT PROGRAMS. The Company has targeted a
number of initial indications for its OP-1 products, including the treatment of
bone, cartilage, kidney, tooth and brain disorders. The Company believes the
potential for expansion of its product pipeline is extensive. In addition, the
Company is investigating the role in tissue formation of related morphogenic
proteins in its proprietary portfolio.
ESTABLISHING CORPORATE COLLABORATIONS. The Company's strategy is to
seek collaborations for several of its discovery and development programs.
Through collaborations, the Company augments its financial resources and
leverages its equity capital. Collaborations also allow the Company to broaden
its pipeline of programs, to access complementary technologies and to gain
significant development, manufacturing and commercialization expertise.
DEVELOPING A SMALL MOLECULE PROGRAM. The Company believes it may be
able to stimulate the same biological response induced by morphogenic proteins
via activation of various steps in the cascade of tissue formation with small,
orally-active compounds. The Company has been able to develop biochemical and
cell-based screens that mimic discrete points within the tissue formation
cascade to enable the identification of small molecule candidates. In connection
with establishment of a partnership to develop a renal disease therapy, Biogen
extended to the Company a $15 million line of credit to fund research in a small
molecule discovery program.
ACCESSING NEW TECHNOLOGIES/ESTABLISHING ACADEMIC COLLABORATIONS. The
Company has utilized a large network of academic collaborators to gain knowledge
of new technologies, to identify additional uses for
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morphogenic proteins and to extend research on existing indications. These
collaborators, who are located around the world, help leverage the Company's
resources.
CAPITALIZING ON PROCESS DEVELOPMENT AND MANUFACTURING CAPABILITIES. The
Company has significant capabilities in process development and in manufacturing
OP-1 for use in both the ongoing clinical trials and for future OP-1
indications. In addition, the Company's process development and protein
manufacturing capabilities are transferable to the production of other proteins,
enabling the Company to fill existing plant capacity and to generate additional
revenues in the near-term. The manufacture of products in-house also allows the
Company to increase its participation in corporate partnerships by deriving
revenues from manufacturing as well as product sales.
PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
The Company is developing therapeutic products based on OP-1 for use in
orthopaedic reconstruction, dental therapeutics, kidney disorders, neurological
disorders and osteoporosis. The following table sets forth these programs:
OP-1 PRODUCTS UNDER DEVELOPMENT
<TABLE>
<CAPTION>
Commercial U.S. Regulatory
Potential Application Rights Classification(1) Status(2)
- --------------------- ---------- ----------------- ---------
<S> <C> <C> <C>
ORTHOPAEDIC RECONSTRUCTION: Stryker Device
Non-Union Fractures - Tibia U.S. Pivotal Trial
Completed
Non-Union Fractures -- All long bones U.S. Treatment Study
Other Bone Indications (3) European and Canadian
Clinical Studies
Cartilage Regeneration Preclinical Studies
DENTAL THERAPEUTICS: Stryker Device
Periodontal Disease Pilot Clinical Trial
to be Initiated in 1998
Dentin Regeneration Pilot Clinical Trial
Completed
KIDNEY DISORDERS: Biogen Biologic
Acute Renal Failure Preclinical Studies
Chronic Renal Failure Preclinical Studies
NEUROLOGICAL DISORDERS: Company Biologic
Stroke Preclinical Studies
Other Neurological Disorders Preclinical Studies
OSTEOPOROSIS Company Drug Research
</TABLE>
- ------------
(1) "Device" refers to products which will be reviewed by the FDA's Center for
Devices and Radiological Health; "Biologic" refers to products which will be
reviewed by the FDA's Center for Biologics Evaluation and Research; "Drug"
refers to products which will be reviewed by the FDA's Center for Drug
Evaluation and Research. The indicated regulatory classifications are either
current (orthopaedic reconstruction and dentin regeneration) or anticipated
(kidney disorders, periodontal disease, neurological disorders and
osteoporosis). These regulatory classifications may be subject to change, as the
FDA has the authority to regulate the Company's products under more than one
regulatory classification.
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(2) "Pivotal Clinical Trials" are investigations conducted under an
Investigational Device Exemption ("IDE"), intended to be used as the primary
supporting documentation for regulatory approval of a new medical device.
"Treatment Study" denotes an open label study pursuant to a supplement to an
IDE. "European Clinical Studies" are physician sponsored feasibility
investigations conducted among a small number of patients. "Pilot Clinical
Trials" are feasibility investigations conducted under an IDE, that are intended
to assess the initial safety and/or efficacy of a new medical device.
"Preclinical Studies" denotes the collection and analysis of data from multiple
studies in animals relating to toxicity and/or efficacy in preparation for an
Investigational New Drug ("IND") or IDE application filing. "Research" denotes
all investigative activities with respect to product candidates prior to
initiation of Preclinical Studies. See "- Regulatory Issues."
(3) Stryker has indicated that it has initiated clinical studies for multiple
orthopaedic reconstruction applications of OP-1.
ORTHOPAEDIC RECONSTRUCTION PROGRAMS
Creative BioMolecules believes there is a significant commercial
opportunity for the use of OP-1 products to regenerate bone and cartilage tissue
in orthopaedic reconstruction. The number of procedures for which the Company
believes an OP-1 bone regeneration product could have been utilized exceeded 1.6
million in 1995 in the United States. These procedures included non-healing
fractures (170,000), open fracture reductions (440,000), spinal fusions
(200,000), maxillofacial reconstructions (220,000), prosthetic fixations
(540,000), and gap fillings (30,000). In addition, in 1995 there were 570,000
cartilage-related injuries in the United States. For orthopaedic reconstruction
applications, the Company's corporate partner is Stryker, a leader in surgical
and medical products for orthopaedic reconstruction.
The Company has also licensed to Stryker rights to OP-1 therapies for
dental and periodontal repair.
Pursuant to its agreement with Stryker, the Company receives funding to
support research and development in orthopaedic reconstruction and dental
therapeutics, has an exclusive right to supply OP-1 bone and cartilage
regeneration products for Stryker's applications, and upon marketing, will also
receive royalties on any sales of such OP-1 bone and cartilage regeneration
products. See "- Collaborative and Licensing Agreements - Stryker Corporation."
BONE. The Company has amassed a large body of evidence that OP-1 is a
potent stimulator of cartilage and bone formation. The natural conversion of
stem cells into cartilage is activated by morphogenic proteins such as OP-1. In
a bone environment, cartilage tissue becomes permeated by blood vessels and
mineralizes to become bone. Numerous studies in six different animal species
have demonstrated that OP-1 is capable of inducing bone regeneration at a wide
array of sites within the body in which bone is normally present. Bone formed in
response to OP-1 is biochemically and biomechanically identical to normal bone.
The most widely employed reconstruction procedure for the replacement
of lost or damaged bone is bone grafting. Grafting involves surgical
transplantation of bone or bone chips to the site of the defect facilitating new
bone formation. Autograft, the currently preferred grafting approach, involves
two surgical steps: one step to harvest the graft and a second step to implant
the graft at the site of the defect or injury. In addition to the pain and cost
associated with this two-step procedure, an estimated twenty-five percent of
patients experience complications resulting from the graft harvesting step.
Allograft procedures, a second approach, utilize bone grafts or demineralized
bone powder taken from cadavers. The Company believes that its OP-1 bone
regeneration product applied locally to the site of the defect could be used as
an alternative to many bone graft procedures, providing more reliable healing,
accelerating the rate of healing and obviating the need for graft harvesting
with its associated complications.
Stryker has completed a pivotal clinical trial under an IDE to evaluate
the use of an OP-1 bone regeneration product as a bone graft substitute. The
randomized prospective study included 122 patients at 18 different centers
throughout the United States. Patients included in the study had tibial
non-union fractures for
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at least nine months following initial injury without demonstrating progress
toward union for the previous three months. These fractures are usually caused
by high-energy trauma, do not heal well, and generally require repeated surgical
interventions. The study was designed to evaluate whether treatment with the
OP-1 bone regeneration product is equivalent to autograft, the current standard
of treatment. The OP-1 bone regeneration product used in this study consisted of
a paste-like formulation that was applied locally at the site of injury.
The results of the trial, presented in March 1998 at the American
Academy of Orthopaedic Surgeons, demonstrated that the OP-1 bone regeneration
product had comparable clinical success to the autograft group without the need
for a second invasive procedure to harvest autograft bone from the hip. Based on
the results of the trial, other clinical and preclinical data, and the Company's
development of a commercial scale manufacturing process, Stryker is preparing
the PMA application for this OP-1 bone regeneration product.
The analysis of the data in this trial showed statistical equivalence
between OP-1 and autograft with respect to the clinically important areas of
weight-bearing and pain, and that there were comparable rates of re-operation
for the two groups of patients. Eleven of the 61 autograft patients and ten of
the 61 OP-1 patients have required re-operation to date. There was a significant
reduction in blood loss for the OP-1 patients as compared to the autograft
patients and the use of OP-1 eliminated other complications associated with the
harvest of autograft. Radiographic evidence of healing did not meet the
predicted target for either group and was approximately 10% higher for the
autograft group during the long-term follow-up period. The Company and Stryker
believe that the clinical evidence of weight-bearing, pain and re-operation
rates demonstrates comparable overall clinical outcomes with autograft and the
OP-1 bone regeneration device.
In October 1995, the FDA approved a supplemental treatment arm (an
"Open-Label Trial") of the pivotal trial, allowing Stryker to expand the study
to test the OP-1 bone regeneration product for the treatment of all long bone
non-union fractures. Stryker has completed accruing patients in this Open-Label
Trial.
In addition to the U.S. pivotal trial and its supplemental treatment
arm, Stryker recently initiated a clinical study in Canada to evaluate the use
of the OP-1 bone regeneration product for the treatment of acute fractures.
Stryker has also initiated clinical studies in several European countries under
physician sponsorship. Stryker is expected to initiate further clinical testing
of OP-1 bone regeneration products in a number of countries for an increasing
array of orthopaedic reconstruction indications. The Company believes that
Stryker's goal is to market OP-1 bone regeneration products for a number of
orthopaedic reconstruction indications in major markets around the world.
CARTILAGE. Creative BioMolecules and Stryker are also engaged in
research on the regeneration of cartilage. Cartilage tissue is found in
different parts of the body and serves various purposes. The focus of the
Company's collaboration is articular cartilage, a thin layer of tough opaque
tissue that lines the opposing bone surfaces of all moving joints to provide
almost frictionless movement. When articular cartilage tissue in a joint suffers
more than superficial damage, it does not regenerate and may further deteriorate
over time. In an initial series of animal experiments, Creative BioMolecules
demonstrated that an OP-1 product induced the formation of articular cartilage
in cartilage defect sites.
Current techniques to repair cartilage damage are limited. Arthroscopic
surgery is used to relieve pain and lessen the chance of further tissue damage
but cannot repair defects or stop degeneration. Many patients need to undergo
more than one treatment and often never achieve lasting pain relief. Another
procedure has been used to treat patients with articular cartilage defects in
the knee. In this procedure, a small portion of the patient's healthy knee
cartilage tissue is surgically removed. The cells within the extracted tissue
sample are multiplied over several weeks using cell culture techniques and then
those cells are reimplanted in the patient's knee. This process is costly, time
consuming and involves several surgical procedures at different times.
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The Company believes that OP-1 can be used to stimulate the
regeneration of articular cartilage. Initial animal studies show that OP-1
induces cartilage formation in surgically prepared defects. The Company and
Stryker are expanding the preclinical program to evaluate locally applied OP-1
in the treatment of both cartilage defects and combination bone-cartilage
defects in animal studies.
KIDNEY DISORDERS
Kidney disorders, particularly various types of renal failure, are a
large and growing health care problem. Billions of dollars are spent annually in
the United States on the treatment of renal failure patients. Despite these
expenditures, mortality rates remain high and quality of life low. Recent
research has indicated that kidneys which recover from acute renal failure may
be doing so by repeating some of those morphogenic processes that were initially
involved in kidney development. Studies conducted by the Company's scientists
and its collaborators have shown that OP-1 is a key morphogenic signal that
initiates kidney formation at the earliest stages of kidney development. The
Company's corporate partner in development of a renal disease therapy is Biogen,
a leading biopharmaceutical company with expertise in development and
commercialization of protein based therapeutics. Creative BioMolecules and its
partner, Biogen, are developing an OP-1 product to moderate or halt the
progression of renal failure. See "- Collaborative and Licensing Agreements -
Biogen, Inc."
ACUTE RENAL FAILURE. Acute renal failure is the rapid and sudden loss
of the kidneys' ability to perform their essential functions and is often
associated with multiple organ failure and a high mortality rate. The primary
causes of acute renal failure are interruptions of blood flow (often as a result
of certain surgical procedures or cardiac arrest), trauma and certain
medications with toxic side effects to the kidneys. Based on data from the
National Center for Health Statistics and other sources, Creative BioMolecules
estimates that there were 250,000 diagnosed cases of acute renal failure in the
United States in 1995. Currently, therapies that prevent, improve recovery or
reduce the extent of kidney injury from acute renal failure are limited. The
Company believes that there is a substantial commercial opportunity for a
therapy that could prevent, facilitate recovery or reduce the extent of kidney
injury in acute renal failure.
Animal studies have been conducted by the Company and its academic
collaborators to determine if the rapid onset of acute renal failure injury can
be moderated by systemic administration of OP-1. Results of these studies
indicate that an OP-1 product can reduce the extent of injury to the kidneys in
an animal model of acute renal failure. The Company and its partner, Biogen,
currently have additional preclinical studies underway with the goal of
initiating human clinical investigation of an OP-1 product for the treatment of
acute renal failure.
CHRONIC RENAL FAILURE. Unlike acute renal failure with its sudden and
rapid onset, chronic renal failure is characterized by a gradual and progressive
loss of kidney function. Chronic renal failure may take several years to
manifest symptoms and to require therapeutic intervention. The most common
conditions associated with onset of chronic renal failure are diabetes and high
blood pressure. Chronic renal failure eventually results in end stage renal
disease, a condition which requires dialysis or kidney transplantation. Aside
from the substantial economic costs associated with dialysis, there are
significant side effects and the average life expectancy of patients on dialysis
is substantially diminished. Based on reports from the United States Renal Data
System and epidemiology studies, Creative BioMolecules estimates that in 1995
there were more than 300,000 patients on dialysis and that the numbers are
rising by 10% each year. In addition, the Company estimates that there were more
than 700,000 patients with some degree of chronic renal failure in the United
States in 1995. The Company believes that there is a significant commercial
opportunity for a therapy that could reduce, delay or prevent the need for
dialysis or that could halt the progression of chronic renal failure.
The Company and Biogen have initiated a series of studies to
investigate the potential of OP-1 to moderate the progression of chronic renal
failure. Results indicate that systemic administration of OP-1 can retard the
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progressive loss of kidney function in an animal model of chronic renal failure.
The Company and Biogen are conducting additional preclinical studies with the
goal of initiating human clinical investigation of an OP-1 product for the
treatment of chronic renal failure.
DENTAL THERAPEUTICS
Dental medicine has few therapeutics to treat the hard and soft
tissues which comprise the tooth and its associated attachment structures.
Creative BioMolecules, in partnership with Stryker, is developing regenerative
therapies to treat these tissues. The primary current focus of the dental
therapeutics research is on development of an OP-1 device for periodontal
tissue repair.
PERIODONTAL TISSUE REPAIR. Periodontal disease is a bacterially induced
inflammatory disorder that results in the progressive destruction of the
periodontal tissues that hold teeth in place. Reliable and effective restoration
of periodontal tissue damaged or lost as a result of periodontal disease is not
possible with current therapies. The Company estimates based on data from the
most recent American Dental Association Survey of Services Rendered ("ADA
Survey") that in 1995 approximately four million patients underwent periodontal
surgery in the United States for severe periodontal disease. The Company
believes that most of these procedures would have been candidates for treatment
with an OP-1 periodontal product. Stryker plans to initiate a pilot clinical
trial to treat periodontal disease with an OP-1 device in 1998.
DENTIN REGENERATION. Dentin is a hard, mineralized tissue that lies
immediately beneath the enamel of the tooth, surrounding the dental pulp which
contains the tooth's nerve and blood vessels. Dentin acts as a protective layer
to the dental pulp. A pulp exposure occurs when a defect in the tooth penetrates
through the enamel and dentin into the pulp chamber. Completed pilot clinical
trials showed encouraging evidence of dentin formation upon treatment with an
OP-1 product. The trials were conducted under an IDE and involved placement of
an OP-1 product onto an exposed pulp which was then sealed with standard dental
filling material.
NEUROLOGICAL DISORDERS
A number of neurological disorders, including stroke, Parkinson's
Disease, brain trauma, Alzheimer's Disease, and Amyotrophic Lateral Sclerosis
(Lou Gehrig's Disease), are characterized by the acute or progressive death of
neurons. A major advance in neuroscience was the discovery of naturally
occurring proteins that promote the survival of neurons. It is generally
believed that application of such proteins to neurons could slow or halt
neuronal degeneration and hence slow disease progression. Studies conducted by
Creative BioMolecules and its academic collaborators have indicated that OP-1
can promote neuron survival. Addition of OP-1 to neurons in culture also
produces a specific effect of enhanced dendrite formation on those neurons.
Based on these effects, the Company has initiated preclinical investigation of
OP-1 as a treatment for certain neurological disorders.
STROKE. Strokes occur when blood flow to the brain is interrupted by a
clogged or burst artery. The interruption deprives the brain of oxygen and
nutrients, and causes neurons to die. Stroke is the third leading cause of death
in the United States and the number one cause of adult disability. The National
Stroke Association estimates that there are 550,000 strokes every year in the
United States and that three million Americans are permanently disabled because
of stroke. Therapeutics currently available to aid the recovery from stroke are
limited. The Company believes that there is a substantial commercial opportunity
for a therapeutic that could promote enhanced recovery from stroke.
Recent research by Creative BioMolecules' academic collaborators has
indicated that OP-1 can promote the development of dendrites on neurons and
thereby enhance the ability of neurons to establish
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connections with adjacent neurons. The Company therefore believes that treatment
with OP-1 has the potential to enhance recovery after brain injury caused by
stroke. In preclinical studies in an animal model of stroke conducted by one of
the Company's collaborators, OP-1 treated animals showed a statistically
significant improvement in the recovery of motor skills compared to untreated
animals. Creative BioMolecules is continuing these studies with the goal of
initiating human clinical investigation of OP-1 as a treatment to enhance
recovery from stroke.
OSTEOPOROSIS
Creative BioMolecules is engaged in a research program to develop
therapeutic products for use in osteoporosis and other metabolic bone diseases.
Osteoporosis is a term used to describe a variety of disorders that are
characterized by a reduction in the mass of bone per unit volume. Current
therapies for osteoporosis are thought to work by inhibiting further loss of
bone tissue rather than stimulating the formation of new bone. The Company
believes that treatments that would stimulate bone formation may provide
therapeutic advantages in some osteoporosis patients. The Company believes an
OP-1 product, or a small molecule that triggers OP-1 production or mimics its
action, may cause the body to rebuild the bone mass lost to osteoporosis or
other metabolic bone diseases.
SMALL MOLECULE PROGRAM
In addition to identifying and characterizing the OP-1 protein,
Creative BioMolecules also has identified the DNA sequences which regulate the
expression of OP-1, has identified the cellular receptors to which OP-1 binds
and through which it acts and has determined the three-dimensional structure of
OP-1. The Company is seeking to use these recent discoveries to identify
orally-active drug compounds that either promote endogenous morphogenic protein
expression or mimic morphogenic protein biological activities. For instance, the
DNA sequences that regulate OP-1 expression and the receptors which bind OP-1
are being formatted into assays to screen and identify small molecules that
increase OP-1 synthesis or mimic OP-1 action. In addition, the information that
relates to the three-dimensional structure of OP-1 can be used to aid the
rational design or modification of small molecule drug candidates. These assays
and information have enabled the Company to develop a small molecule program
that seeks to identify the next generation of drug development candidates based
on morphogenic protein biology. The Company may fund this small molecule
research program in part through a $15 million line of credit from Biogen. This
credit facility was established by the Company and Biogen in connection with the
December 1996 partnership agreement for renal disease therapy. If the Company
successfully identifies one or more small molecule candidates for clinical
development, Biogen has a right to license such compounds for its renal disease
program.
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COLLABORATIVE AND LICENSING AGREEMENTS
STRYKER CORPORATION. Creative BioMolecules entered into a collaboration
with Stryker in 1985 to identify and develop bone-inducing proteins. OP-1 was
first isolated and characterized by the Company's scientists through research
funded by Stryker. The Company will receive royalty payments based on Stryker's
worldwide commercial sales of OP-1 products for use in orthopaedic
reconstruction and dental therapeutics, and manufacturing revenue for supply of
Stryker's product requirements for such sales. The Company is currently
supplying OP-1 bone regeneration products to Stryker for use in clinical trials
as part of the research program. The Company is conducting research on
additional indications for OP-1 in orthopaedic reconstruction including
cartilage regeneration. In 1996, the Company and Stryker extended their
collaboration to include dental therapeutics incorporating OP-1. The Company's
agreement with Stryker provides for research funding to the Company for this
work. The current work plan establishes research objectives and funding through
April 30, 1998 at which time the two companies will negotiate whether and to
what extent Stryker will continue to provide financial support for research
collaborations.
Stryker has exclusive rights to develop, market and sell products
incorporating bone and cartilage-inducing proteins developed under the research
program, including OP-1, for use in the field of orthopaedic reconstruction and
dental therapeutics. The Company has also agreed not to undertake research to
develop bone and cartilage-inducing proteins for use in orthopaedic
reconstruction and dental therapeutics, on its own behalf or for third parties,
for five years after conclusion of the research program. The Company has the
exclusive and irrevocable right to develop, market and sell products
incorporating morphogenic proteins developed under the research program,
including OP-1, for all uses and applications other than orthopaedic and dental
reconstruction such as renal failure, neurological diseases, metabolic bone
disorders, and others. Both the Company and Stryker have the right to grant
licenses to third parties in their respective fields, and each is obligated to
pay royalties to the other on its sales of such products and to share royalties
received from licensees. The Company has been responsible for preclinical
studies of OP-1 products, and Stryker and the Company are each responsible for
clinical studies in their respective fields. The Company has the exclusive right
to supply OP-1 products to Stryker for worldwide commercial sales in the field
of orthopaedic and dental reconstruction. See "-Patents and Proprietary Rights."
BIOGEN, INC. In December 1996, the Company entered into a Research
Collaboration and License Agreement with Biogen to collaborate on the
development of novel therapeutics based on OP-1 for the treatment of renal
disorders. The initial focus of the collaboration is on advancing the
development of OP-1 for the treatment of acute and chronic renal failure. Under
the agreement, the Company granted to Biogen exclusive worldwide rights to
manufacture, market and sell OP-1 and OP-1 products developed through the
collaboration for the treatment of renal disease. Biogen paid the Company a
$10,000,000 license fee in 1996 and made an $18,000,000 equity investment in the
Company. These financial transactions were recorded in the quarter ended
December 31, 1996. In addition, the agreement provides for $10,500,000 in
research funding over a three year period ending December 31, 1999. Biogen also
will pay up to an additional $69,000,000 upon the attainment of certain
milestones, and will make available a $15,000,000 line of credit. The agreement
further provides for the payment of royalties to the Company based on product
sales.
The Company may draw upon the $15,000,000 line of credit over a three
year period ending December 31, 1999 to fund the research and development of
small molecule products based on OP-1. Biogen has an option to obtain an
exclusive, worldwide license to OP-1 protein small molecule products for the
treatment of renal disorders. In the event Biogen exercises its option, Biogen
will forgive the lesser of $10,000,000 or the principal amount outstanding under
the line of credit. The remaining principle, together with all accrued and
unpaid interest, is due and payable five years from the date of the first
advance and may be repaid, at the Company's option, in either cash, common stock
or reduction of royalties due the Company from Biogen.
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In September 1994, the Company signed a three year manufacturing
contract with Biogen to produce in the Company's manufacturing facility in
Lebanon, New Hampshire several of Biogen's protein-based therapeutic candidates
for use in Biogen's clinical trials. The contract covered the period from
January 1995 through December 1997. As part of the research collaboration, the
two companies agreed to extend the manufacturing contract for two years through
December 31, 1999, with Biogen having the option, but not the obligation, to use
the manufacturing facility for a mutually agreeable number of months in one of
the two extension years. To enable the Company to meet its obligations under the
manufacturing contract, Biogen financed the construction of a 7,000 square foot
addition to the present facility for production under current Good Manufacturing
Practices as mandated by the FDA ("cGMP") using bacterial fermentation at an
estimated total cost of $2,900,000. The Company agreed to reimburse Biogen for
the construction costs and leasehold improvements at the end of the contract
term, including the extension, at an amount equal to Biogen's construction costs
less $300,000 and less all accumulated depreciation. The reimbursement to Biogen
is estimated to be no more than $2,100,000. Biogen also agreed to lease
equipment to the Company for the operation of such portion of the facility and
for cGMP production using bacterial fermentation by the Company at an estimated
total cost of $2,400,000, as provided in an equipment lease agreement. The
Company has the option to purchase the equipment at the end of the extended
lease term for an amount equal to its then fair market value or for such other
amount as is negotiated by the two parties.
GENETICS INSTITUTE. In July 1996 Creative BioMolecules, Stryker and
Genetics Institute, Inc., now a wholly-owned subsidiary of American Home
Products, ("Genetics Institute") cross-licensed their worldwide patent rights,
royalty-free, in the bone morphogenetic/osteogenic protein family. The agreement
allows the companies to commercialize their respective lead compounds, which are
now in clinical trials for bone repair and regeneration, free of the risk of
patent litigation among the parties. Under the agreement, which covers both
issued patents and pending patent applications, Creative BioMolecules and
Stryker have exclusive rights to OP-1, their lead compound under both their own
and Genetics Institute's patents. Genetics Institute and Yamanouchi
Pharmaceutical Company, Ltd., its partner in the worldwide development of
Genetics Institute's bone growth factors, have exclusive rights to BMP-2, their
lead compound under both their own and Creative BioMolecules/Stryker patents. In
addition, the companies have granted each other royalty-free, non-exclusive
cross-licenses to patents and patent applications covering certain other related
morphogenic proteins.
ACADEMIC COLLABORATIONS. The Company has relationships with a number of
academic investigators which are focused on testing morphogenic proteins in
tissue regeneration and restoration applications. In its collaborations, the
Company seeks to expand the scientific knowledge concerning tissue formation as
well as the activities and characteristics of various proteins under development
by the Company. The academic collaborators are not employees of Creative
BioMolecules. Hence, the Company has limited control over their activities and
limited amounts of their time are dedicated to the Company's projects. The
Company's collaborators may have relationships with other commercial entities,
some of which compete with the Company. Although the precise nature of each
relationship varies, the collaborators and their primary affiliated institutions
generally sign agreements that provide for confidentiality of the Company's
proprietary technology and results of studies. The Company seeks to obtain
exclusive rights to license developments that may result from these studies.
ENZON CROSS-LICENSING AGREEMENT. The Company owns a number of issued
U.S. and foreign patents with broad claims on the composition of BABS(TM)
(Biosynthetic Antibody Binding Sites) proteins and their interdomain linkers.
BABS(TM) represents a separate technology developed by the Company, as to which
the Company has retained rights, but is not currently being utilized in its OP-1
development programs. One important European patent in this family has been
opposed. The opposition proceeding is in its early stages, and it is too early
to predict its outcome. There can be no assurance that this European patent will
not be narrowed or lost in the opposition. Some of the Company's BABS(TM)
technology is also covered by patents held by Enzon Corporation ("Enzon"). In
December 1993, the Company and Enzon signed cross-licensing and collaboration
agreements which consolidate the two companies' intellectual property rights and
know-how covering BABS(TM) proteins. The agreements allow each company, on a
royalty-free basis, to develop and
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manufacture products based on the combined technology. Each party is also free
to market products based on the combined technology in collaboration with a
limited number of third parties, subject to the payment of a royalty by such
third party. The parties have also agreed to outlicense the technology to third
parties on a non-exclusive basis in exchange for license, milestone and royalty
payments. Enzon has been designated the exclusive marketing agent for such
licenses. The Company believes that consolidation of the companies' respective
positions relating to BABS(TM) proteins has created a strong position in the use
and manufacture of these novel proteins.
MANUFACTURING
The Company has significant manufacturing experience in the scale-up
and production of recombinant proteins, including its own OP-1 protein. This
manufacturing experience prepares the Company to move forward with its OP-1
product programs. The Company has produced a number of protein candidates by
bacterial fermentation as well as by mammalian cell culture techniques in the
laboratory. The Company has scaled-up both of these production processes and has
produced clinical grade recombinant proteins using each of them. In March 1993,
the Company acquired a 47,000 square foot manufacturing facility in Lebanon, New
Hampshire from Verax Corporation ("Verax") to scale-up the production of its
proteins. The facility was designed to enable production for clinical research
and commercial use in accordance with cGMPs.
In September 1994, the Company signed a three year manufacturing
contract with Biogen to produce several of Biogen's protein-based therapeutic
candidates for Biogen's use in its clinical trials. To enable the Company to
meet its obligations under the manufacturing contract, Biogen financed the
construction of a 7,000 square foot addition to the facility in Lebanon, New
Hampshire, to use large scale bacterial fermentation equipment and agreed to
lease equipment to the Company for the operation of such portion of the
facility. See "- Collaborative and Licensing Agreements - Biogen, Inc." The
Company believes that the acquisition and expansion of this manufacturing
facility will significantly enhance its ability to produce qualified products
for clinical trials and commercialization of OP-1.
COMPETITION
The potential therapeutic products which Creative BioMolecules is
developing will compete with existing and new products being developed by others
for treatment of the same indications. Competition in the development of human
therapeutics is particularly intense and includes many large pharmaceutical and
biopharmaceutical companies, specialized biotechnology firms, universities and
other research institutions. Certain of these companies have extensive
financial, marketing and human resources which may result in significant
competition. Many pharmaceutical companies have extensive experience in
undertaking clinical trials, in obtaining regulatory approval to market products
and in manufacturing on a large scale. Other biopharmaceutical companies may
also have more resources and experience in these areas than the Company. Several
pharmaceutical companies have entered or expanded their presence in the
biotechnology field by acquiring specialized biotechnology companies, thus
providing additional resources to the acquired companies which may allow them to
become more competitive.
The technology underlying the development of human therapeutic products
is expected to continue to undergo rapid and significant advancement and change.
In the future, the Company's technological and commercial success will be based
on its ability to develop proprietary positions in key scientific areas and
efficiently evaluate potential product opportunities.
A number of companies are engaged in the research and development of
morphogenic proteins for the repair of bone and cartilage. The Company is aware
that Genetics Institute, acquired in 1997 by American Home Products, and its
collaborative partners are pursuing the development of bone morphogenetic
proteins and have initiated human clinical trials of a recombinant bone
morphogenetic protein for the repair of orthopaedic and other skeletal defects.
Genetics Institute has entered into relationships with Yamanouchi
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Pharmaceuticals Co., Ltd. and Sofamor Danek Group, Inc. covering development and
marketing of bone morphogenetic proteins. Other companies may attempt to develop
products incorporating proteins purified from bone, which may include bone
morphogenetic proteins, for orthopaedic applications. In addition, the Company
believes that a number of biopharmaceutical companies are developing other
recombinant human proteins, primarily growth factors, for use in the repair of
bone and cartilage defects and in other indications. A number of other companies
are pursuing traditional therapies, including autografts, allografts and
electrical stimulation devices, as well as cell therapies for the repair of bone
and cartilage defects that may compete with the Company's products.
The Company's potential products for dental indications through its
collaboration with Stryker will compete primarily with traditional therapies.
The Company is aware that Genetics Institute is pursuing the development of bone
morphogenetic proteins for the repair of periodontal tissue.
The Company is aware of several biotechnology companies that are
developing recombinant protein based products for the treatment of renal and
neurological disorders. In the field of renal failure two different products
are being evaluated in human clinical studies for acute renal failure and one
of those products is also being evaluated preclinically for chronic renal
failure. Creative BioMolecules is not aware of any companies developing
morphogenic protein based products for either acute or chronic renal failure.
In the field of neurological disorders, particularly in the area of recovery
from stroke, there are several companies engaged in preclinical and clinical
studies with recombinant protein based and more traditional small molecule
products.
A number of biotechnology and pharmaceutical companies are pursuing the
development of other recombinant growth factors and hormones for the treatment
of osteoporosis. The Company believes that only a limited number of companies
are seeking to develop morphogenic proteins for the treatment of osteoporosis.
However, many major pharmaceutical companies are pursuing the development of
traditional drug therapies for the treatment of osteoporosis. Certain therapies
approved or in development for osteoporosis have demonstrated efficacy at
slowing the loss of bone mineral density and improving clinical outcomes for
patients. Such therapies provide alternatives to the treatment of osteoporosis
that would compete with any osteoporosis products developed by the company.
In addition to competing with pharmaceutical and biotechnology
companies, the Company's products and technologies will also compete with those
developed by academic institutions, government agencies and other public
organizations conducting research that may discover new therapies, seek patent
protection or establish collaborative arrangements for product research.
The Company believes that in addition to a product's patent position,
efficacy and price, the timing of a product's introduction may be a major factor
in determining eventual commercial success and profitability. Early entry may
have important advantages in gaining product acceptance and market share.
Accordingly, the relative speed with which the Company can complete preclinical
and clinical testing, obtain regulatory approvals, and supply commercial
quantities of the product is expected to have an important impact on the
Company's competitive position, both in the United States and abroad. Other
companies may succeed in developing similar products that are introduced
earlier, are more effective, or are produced and marketed more effectively.
There can be no assurance that research and development by others will not
render any of the Company's products obsolete or noncompetitive.
PATENTS AND PROPRIETARY RIGHTS
Creative BioMolecules pursues a policy of obtaining patent protection
for patentable subject matter in its proprietary technology. As of March 14,
1998, the Company owned or had rights to 55 issued patents and
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87 pending patent applications in the United States. The Company also owned or
had rights to 51 issued foreign patents and 143 foreign patent applications
pending in Australia, Canada, Europe, Japan and certain other countries.
Many of these applications were filed through the Patent Cooperation
Treaty and the European Patent Office seeking to preserve for the Company the
right to file applications in various countries. Certain patents and patent
applications relating to morphogenic proteins, including OP-1, are owned by
Stryker and have been licensed exclusively to the Company for use in all
indications other than orthopaedic reconstruction. See "- Collaborative and
Licensing Agreements - Stryker Corporation." Certain other patents and patent
applications are owned jointly with other collaborators. There can be no
assurance, however, that any such patent applications will issue as patents, or
that any patent now issued, or to be issued, will provide a preferred position
with respect to the technology or products it covers.
MORPHOGENIC PROTEIN TECHNOLOGY. Within the Company's patent estate, the
Company owns or has rights to 30 issued U.S. patents, 30 granted foreign
patents, 72 U.S. pending applications and 114 pending foreign applications. Of
these, 20 U.S. patents, 21 foreign patents, 18 U.S. pending applications and 37
foreign applications pertain to composition of matter; 5 U.S. patents, 1 U.S.
pending application, and 8 foreign applications pertain to methods of
production; 1 U.S. patent, 1 foreign patent, 18 U.S. applications and 31 foreign
applications pertain to the Company's small molecule program and 4 U.S. patents,
8 foreign patents, 35 U.S. pending applications and 38 foreign applications
pertain to particular tissue applications, including renal, neural, bone, liver,
periodontal, dentin, gastrointestinal tract and immune cell-mediated tissue
applications.
On July 15, 1996, Creative BioMolecules, Stryker and Genetics Institute
entered into a cross-license agreement in which the parties granted world-wide,
royalty-free, cross licenses to each other in the bone
morphogenetic/osteogenetic protein family (see "- Collaborative and Licensing
Agreements - Genetics Institute"). This cross-license, covering both issued
patents and pending applications in the field of bone morphogenic proteins,
eliminates the risk of patent litigation between the parties relating to the
Companys individual and joint efforts with Stryker to commercialize OP-1.
OTHER TECHNOLOGY. Within the Company's patent estate, the Company owns
or has rights to 8 U.S. patents, 6 foreign patents, 8 U.S. applications and 17
foreign applications related to its BABS(TM) and interdomain linker technology.
The Company also has patents issued in the United States and certain foreign
countries, and applications pending in the United States and certain foreign
countries on compositions of matter, methods of use and methods of production
relating to other proprietary technology.
The Company's success will depend in part on its ability to obtain
marketing exclusivity for its products for a period of time sufficient to
establish a market position and achieve an adequate return on its investment in
product development. The Company believes that protection of its products and
technology under United States and international patent laws and other
intellectual property laws is an important factor in securing such market
exclusivity. U.S. patents issued from applications filed prior to June 8, 1995
have a term of the longer of 17 years from patent grant or 20 years from the
earliest filing date to which the application is entitled benefit. U.S. patents
issued from applications filed on or after June 8, 1995 have a term of 20 years
from the earliest filing date to which the application is entitled benefit.
Patents in most foreign countries have a term of 20 years from the date of the
filing of the patent application. In the United States and certain foreign
countries, the exclusivity period provided by patents covering pharmaceutical
products may be extended by a portion of the time required to obtain regulatory
approval for a product. The Company's issued U.S. patents begin expiring in
2005, and issued foreign patents begin expiring in 2006.
Although the Company pursues patent protection, significant legal
issues remain as to the extent to which patent protection may be afforded in the
field of biotechnology, in both the United States and foreign countries.
Furthermore, the scope of protection has not yet been broadly tested. Therefore,
the Company also relies upon trade secrets, know-how and continuing
technological advancement to develop and maintain its
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competitive position. Disclosure of the Company's know-how is generally
protected under confidentiality agreements. There can be no assurance, however,
that all confidentiality agreements will be honored, that third parties will not
develop equivalent technology independently, that disputes will not arise as to
the ownership of technical information or that wrongful disclosure of the
Company's trade secrets will not occur.
Certain products and processes important to Creative BioMolecules may
be subject in the future to patent protection obtained by others. Biotechnology
is developing rapidly. Because many patent applications have been filed in this
field in recent years, the scope that courts will give to the claims of patents
issued from such applications and the nature of these claims cannot be
predicted. Several patent applications based on work done years ago have been
issued to others with broad claims directed to the use of basic recombinant DNA
technology. It is premature to predict what general trend, if any, will emerge
as to the breadth of allowed claims for biotechnology products and related uses.
The allowance of broader claims may increase the incidence and cost of
interference proceedings at the United States Patent and Trademark Office and
the risk of infringement litigation. A policy of allowing narrower claims,
conversely, could limit the value of the Company's proprietary rights under its
patents. It is possible that Patent and Trademark Office interference
proceedings will occur with respect to a number of the Company's patent
applications or issued patents. It is also likely that subject matter patented
by others will be required by the Company to research, develop, or commercialize
at least some of the Company's products. No assurance can be given that licenses
under any such patent rights of others will be made available on acceptable
terms.
REGULATORY ISSUES
Regulation by governmental agencies in the United States and other
countries is a significant factor in the clinical evaluation and licensing of
the Company's potential products as well as in the development and research of
new products. All of the Company's products currently under development will
require regulatory approval by the FDA under the Food, Drug, and Cosmetic Act
("FD&C Act"), as a drug or device, or under the Public Health Service Act as a
biological, to be marketed in the United States. Regardless of the
classification assigned to the Company's products, all human diagnostic and
therapeutic products are subject to rigorous testing. Generally, considerable
time and expense are required to clinically evaluate the safety and efficacy of
a new product. Moreover, even after extensive preclinical testing, unanticipated
side effects can arise during clinical trials that can halt or delay the
regulatory process at any point. The Company believes that seeking and obtaining
regulatory approval for a new therapeutic or diagnostic product is likely to
take several years and require the expenditure of substantial resources.
Products developed through genetic engineering, such as the Company's
products, are relatively new, and state and local regulation may increase as
genetically engineered products become more common. The federal government
oversees certain recombinant DNA research activity through the National
Institutes of Health Guidelines for Research Involving Recombinant DNA Molecules
(the "NIH Guidelines"). The Company believes it complies with the NIH
Guidelines, which prohibit or restrict certain recombinant experiments, set
forth levels of biological and physical containment of recombinant DNA molecules
to be met for various types of research, and require that institutional
biosafety committees approve certain experiments before they are initiated.
Compliance with the NIH Guidelines has not had, and the Company does not foresee
that it will have, a material effect on the competitive position or cash flow of
the Company. Discussions have been underway since 1996 between NIH and FDA
regarding alternative models for regulation of recombinant DNA research and the
products resulting from such research, and the appropriateness of any continued
NIH role. It is not possible to predict the effect of such potential regulatory
changes on the Company or its potential competitors.
On November 21, 1997, the FDA Modernization Act of 1997 ("FDAMA") was
enacted into law. In addition to reauthorizing the collection of user fees for
prescription drugs, FDAMA changed the FD&C Act in numerous ways. Because some
provisions of FDAMA require the FDA to develop further regulations, or are
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unclear, it is not possible for the Company to predict the overall effect of
FDAMA on the Company or its potential competitors.
PHARMACEUTICAL AND BIOLOGICAL PRODUCTS. The Company expects that
certain of its potential products will be regulated by the FDA as
pharmaceuticals or biologicals. The regulatory approval of pharmaceutical and
biological products in the United States intended for therapeutic use in humans
involves many steps. The initial phase of the FDA approval process involves
preclinical testing to demonstrate that the product would not be an unreasonable
hazard in clinical studies with human subjects. Preclinical tests must typically
meet the FDA's good laboratory practices regulations if they are to be used for
the purpose of an application to the agency. Upon completion of preclinical
testing, an IND application must be filed with the FDA. The application includes
(i) information on the composition of the product including pharmacology and
toxicology, (ii) chemistry, manufacturing, and control information, (iii)
results of all the preclinical safety and efficacy investigations including in
vivo and in vitro studies, (iv) information on any previous human experience
with the product, (v) a clinical design and protocol, (vi) information on the
investigators, (vii) the necessary agreements among parties involved in the
testing and (viii) approval of an Institutional Review Board at the center(s)
conducting the study or studies. If the application has not been denied or if
additional information has not been requested by the FDA within 30 days of
filing, the applicant may then begin clinical studies.
Clinical testing usually occurs in three phases to demonstrate safety
and efficacy of the product. Phase I clinical trials consist of testing for the
safety and tolerance of the product with a small group of subjects and may also
yield preliminary information about the efficacy and dosage levels of the
product. Phase II clinical trials involve testing for efficacy, determination of
optimal dosage and identification of possible side effects in a larger patient
group. Phase III clinical trials consist of additional testing for efficacy and
safety with an expanded patient group. Currently, FDA requires the filing of new
information for each distinct clinical study. After product approval, FDA may
request or require an additional phase (Phase IV) of clinical studies to provide
additional information on safety and efficacy.
Upon successful completion of Phase III testing, either a New Drug
Application ("NDA") or Biologics License Application ("BLA") can be filed,
depending upon whether the product is designated as a drug or a biological,
respectively. The FDA normally requires at least two adequate and
well-controlled clinical trials for product approval. All approval types require
a detailed review of all data collected from clinical studies, the composition
of the drug or biological, non-clinical pharmacology and toxicology data,
environmental impact data, human pharmacokinetics and bioavailability data,
patent information, certain case report data and forms, the labeling that will
be used, information on chemistry, manufacturing, and controls, and samples of
the product. After the FDA completes its review of the application, the product
is typically reviewed by a panel of medical experts, and the applicant is
required to answer questions on its safety and efficacy. The FDA considers the
recommendation of the panel, and may in its own discretion approve an NDA or
BLA. If so approved, the product may then be marketed.
DEVICES. The Company expects that certain of its potential products
will be regulated by the FDA as Class III devices. Preclinical evaluations of
Class III devices are similar to those of pharmaceuticals and biologicals, with
additional emphasis on implant persistence, implant sensitization, and carrier
characterization and specifications. Upon completion of preclinical testing, an
IDE application is filed with the Center for Devices and Radiological Health in
the FDA. This application consists of (i) identifying information on the
sponsor, (ii) complete reports of prior investigations of the device, (iii) a
summary of the investigational plan (or the complete plan), (iv) a description
of the methods, facilities, and controls used for manufacturing, processing,
packing, storage, and installation of the device, (v) example investigator
agreements, (vi) a list of investigators, (vii) certifications concerning
investigators and Investigational Review Boards, (viii) copies of labeling and
(ix) materials relating to environmental impact and informed consent. If the
application has not been denied by the FDA within 30 days of filing, the
applicant may then begin clinical studies. The FDA may approve the IDE before
the end of the 30 day period, in which case the applicant may begin clinical
studies immediately.
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<PAGE> 19
The clinical testing of a device may consist of a preliminary
feasibility study leading to a much larger pivotal safety and effectiveness
study, or it may consist of only one or more larger pivotal safety and
effectiveness studies. Upon successful completion of the clinical testing and
compilation of the data, a PMA application can be filed. This application
consists of (i) indications for use, (ii) product description, (iii) discussion
of alternatives to use of the device, (iv) marketing history (worldwide), (v)
review of clinical studies and results, (vi) methods, facilities and controls
(as in an IDE), (vii) non-clinical data, (viii) if only one clinical study is
used, a justification of that approach, (ix) identification and bibliography of
any information relevant to the safety and effectiveness of the device, (x)
product samples, (xi) product labeling and (xii) certain environmental
information. The FDA is required to respond to the PMA submission within 180
days, although the FDA may not adhere to this schedule and further review may
take additional time. After the FDA completes its review of the application, the
product is typically reviewed by a panel of medical experts, and the applicant
is required to answer questions on its safety and effectiveness. At the
recommendation of the panel, a PMA may be granted, and the product may then be
marketed.
TREATMENT IND STATUS. Before the completion of clinical trials for
products, a company may file for Treatment IND status under provisions of the
IND regulations. These regulations apply to products for patients with serious
or life-threatening diseases and are intended to facilitate the availability of
new products to desperately ill patients after clinical trials have shown
convincing evidence of efficacy, but before general marketing approval has been
granted by the FDA. Under these regulations, it may be possible for the Company
to recover some of the costs of research, development and manufacture of its
products before commercial marketing begins. The Company may seek Treatment IND
status for qualified products, although the decision whether to grant such
status lies with the FDA.
FDAMA codifies many of the FDA's previous treatment IND regulations. In
addition, it creates new authority for expanded access to investigational
therapies for serious diseases, if the request is performed through a physician,
the product shows sufficient evidence of safety and efficacy, and provision of
the product would not interfere with ongoing clinical research.
The FDA has also adopted regulations intending to accelerate the
approval of therapeutic products for serious and life threatening diseases under
certain circumstances. The Company may seek to utilize these regulations for
qualified products. Approvals under these regulations may be conditioned on
further studies by the Company, may include restrictions on marketing, may
require prior submission of promotional materials, and may be subject to
expedited withdrawal of approval.
In addition to existing FDA regulations, FDAMA added new "fast track"
authority allowing FDA to expedite the approval of drugs for serious or
life-threatening conditions. Requirements for fast track drugs are similar to
those for accelerated approving, including FDA authority to require
post-clinical studies, presubmission of promotional materials, and enhanced NDA
withdrawal authority.
USER FEES. FDAMA amended existing laws to continue FDA authorization to
charge user fees for prescription drug products. The purpose of the user fee
provisions of FDAMA is to reduce the time that FDA takes to act on completed
applications. Under an informal letter arrangement, FDA has committed to act on
priority applications within 6 months, regular applications within 12 months
(reducing to 10 months over the next 5 years), manufacturing supplements within
6 months (reducing to 4 months over the next 5 years), and resubmissions with
relatively minor new information within 6 months (reducing to 2 months over the
next 5 years). The user fee provisions of FDAMA contemplate that the fees will
be used to fund additional resources at FDA to enable it to meet these informal
review deadlines. However, the law itself does not impose an affirmative
obligation on FDA to meet these deadlines or any overall approval goals. Some
companies may receive an exemption from users fees, either because they qualify
as small businesses, because their products are used for rare diseases or
conditions, or because they meet other technical exceptions contained in the
law. FDAMA continues FDA authority to grant waivers to protect the public
health, if fees would exceed costs, on equitable grounds, or for small
businesses. Because FDAMA changed the existing waiver provisions of the
18
<PAGE> 20
previous user fee law, it is not clear whether existing FDA draft guidances on
waiver criteria apply or will have to be redrafted. The Company may seek
exceptions or waivers for its products as appropriate, although given the
current uncertainty of the law there can be no assurance such exceptions or
waivers will be granted. At present, the user fee provisions of the FD&C Act, as
modified by FDAMA, do not apply to medical devices.
FACILITIES INSPECTION. In addition to product approval prior to
marketing, the Company must also obtain FDA approval of the facility in which
its products will be manufactured. In the case of a pharmaceutical or a device,
the Company must be in compliance with cGMP requirements; inspection of the
Company's facilities to determine such compliance would be conducted as part of
the overall NDA, BLA, or PMA approval. Since any NDA, BLA or PMA approved by the
FDA is both site and process specific, any material change by the Company in its
manufacturing process, equipment or location would necessitate additional FDA
review and approval. Recently, the FDA promulgated new regulations concerning
cGMPs for medical devices. These new regulations include elements drawn from
existing international standards and a new emphasis on design of medical devices
(in addition to the existing focus on manufacturing). Until these new
regulations are better understood by industry, compliance with medical device
cGMPs may prove more difficult than in the past, and may require the use of
additional resources or even the redesign of some existing devices or
facilities.
FOREIGN REGULATIONS. Regulations concerning the marketing of human
therapeutic and diagnostic products are generally imposed by foreign governments
and may have an impact on the Company's anticipated operations. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement levels vary widely from country to country. The Company attempts
to conduct its development activities in a manner that would also support
regulatory filings in selected foreign countries.
OTHER. Amendments to the federal laws have loosened export restrictions
on therapeutic products, including amendments permitting the export of products
not yet approved in the United States but approved in certain foreign countries.
The Company may choose to conduct such exports of its products prior to
obtaining FDA marketing approval in the United States.
In addition, the Company is subject to regulation under the
Occupational Safety and Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Research Conservation and Recovery Act, regulations
administered by the Nuclear Regulatory Commission, national restrictions on
technology transfer, import, export and customs regulations and other present or
possible future local, state or federal regulation. From time to time, other
federal agencies and congressional committees have indicated an interest in
implementing further regulation of biotechnology applications. The Company is
not able to predict whether any such regulations will be adopted or whether, if
adopted, such regulations will adversely affect the Company's business.
EMPLOYEES
As of February 27, 1998, the Company had 212 full-time employees, 32 of
whom hold Ph.D., D.V.M., or M.D. degrees. The Company considers its relations
with its employees to be good and has experienced a low rate of employee
turnover. None of the Company's employees is covered by a collective bargaining
agreement. The Company has entered into confidentiality agreements with all of
its employees.
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<PAGE> 21
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases an aggregate of 69,000 square feet in two
facilities in Hopkinton, Massachusetts. The location is approximately 30 miles
west of Cambridge and Boston and 20 miles east of Worcester, all of which are
major research centers in health care and biotechnology in Massachusetts. The
Company's larger facility, encompassing 54,000 square feet of space, houses
research and development laboratories and small scale production suites. The
research and development laboratories are fully equipped for recombinant DNA
synthesis, protein engineering, analytical chemistry, cell biology, and process
development activities. The production suites are designed and equipped to
produce clinical grade protein products. The smaller facility, with 15,000
square feet of space, houses its corporate offices. Both leases expire in 2001.
The Company purchased a leasehold interest in, and an option to
purchase, a 47,000 square foot manufacturing facility in Lebanon, New Hampshire
on March 15, 1993. The location is approximately 130 miles north by northwest of
Boston, Massachusetts and 90 miles southeast of Burlington, Vermont. This
facility houses two cGMP production suites, quality assurance/quality control
laboratories and support offices. The facility is fully equipped for cGMP
production of recombinant proteins from mammalian cell culture and monoclonal
antibodies from Hybridoma cultures. The lease expires in 2008. The Company has
room for expansion within the site.
The Company currently leases 9,000 square feet of office space in
Boston, Massachusetts for administrative offices. The lease expires in 2002.
In September 1994, the Company signed a three year manufacturing
contract with Biogen to produce for clinical trials several of Biogen's
protein-based therapeutic candidates in the manufacturing facility in Lebanon,
New Hampshire. To enable the Company to meet its obligations under the
manufacturing contract, Biogen financed the construction of a 7,000 square foot
addition to the present facility for cGMP production using bacterial
fermentation and agreed to lease equipment to the Company for the operation of
such portion of the facility and for the cGMP production of bacterial
fermentation products by the Company.
The Company believes that its existing facilities are adequate for its
near term needs. The Company expects that additional facilities may be required
to meet the Company's future needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or of which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1997 to a vote of the Company's security holders.
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<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's common stock is traded on The Nasdaq Stock Market under
the symbol CBMI. The following table presents quarterly information on the price
range of the Company's common stock, indicating the high and low sale prices
reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997
4th Quarter............................ $11.63 $6.63
3rd Quarter............................ 11.13 5.88
2nd Quarter............................ 10.13 6.88
1st Quarter............................ 13.38 7.50
1996
4th Quarter............................ 12.75 6.50
3rd Quarter............................ 8.50 5.13
2nd Quarter............................ 10.88 7.56
1st Quarter............................ 13.00 6.88
</TABLE>
STOCKHOLDERS
As of February 27, 1998, there were approximately 352 stockholders of
record of the Company's common stock.
DIVIDENDS
The Company has not paid any dividends on its common stock since its
inception and does not intend to pay any dividends on its common stock in the
foreseeable future. The Company intends to retain its earnings, if any, for the
development of its business.
RECENT SALES OF UNREGISTERED SECURITIES
In October 1997, the Company issued a total of 78,685 shares of common
stock to institutional investors, pursuant to the cashless exercise of warrants
to purchase 100,628 shares of common stock at an exercise price of $2.385 per
share.
In November 1997, the Company issued a total of 17,600 shares of common
stock to an equipment lessor, pursuant to the exercise of a warrant at an
exercise price of $5.00 per share, for an aggregate purchase price of $88,000.
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<PAGE> 23
The Company issued these securities without registration in reliance
upon the exemption provided by Section 4(2) of the Securities Act of 1933, since
no public offering was involved. No underwriters were involved in the offer and
sale of the securities.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect
to the Company's consolidated statements of operations for the years ended
December 31, 1997 and 1996, the three months ended December 31, 1995 and for the
year ended September 30, 1995, and with respect to the consolidated balance
sheets as of December 31, 1997 and 1996, are derived from the consolidated
financial statements that have been audited by Deloitte & Touche LLP,
independent auditors, which are included elsewhere in this Form 10-K. The
consolidated statements of operations data for the years ended September 30,
1994 and 1993, and the consolidated balance sheets data as of December 31, 1995,
September 30, 1995, 1994 and 1993, are derived from audited consolidated
financial statements not included herein. The data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related Notes included herein.
<TABLE>
<CAPTION>
THREE
YEARS ENDED MONTHS YEARS ENDED
DECEMBER 31, ENDED SEPTEMBER 30,
----------------- DECEMBER ------------------------------
1997 1996 31, 1995(1) 1995 1994 1993
---- ---- ----------- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Research and development contracts ..... $ 12,693 $ 5,548 $ 971 $ 5,824 $ 3,652 $ 1,576
Manufacturing contracts ................ 394 4,486 770 6,159 1,411 461
License fees and royalties ............. 11,122 2 544 7 30
Product sales .......................... 16 35
Interest ............................... 2,331 1,174 261 649 580 549
Other ................................. 15 22 53 141 3
-------- -------- -------- -------- -------- --------
Total revenues ...................... 15,433 22,352 2,004 13,229 5,807 2,654
-------- -------- -------- -------- -------- --------
Costs and expenses:
Research and development .............. 25,122 15,651 3,194 11,688 17,680 12,898
Cost of manufacturing contracts ....... 274 3,823 715 5,330 1,389 439
Cost of product sales ................. 3 6
General and administrative ............ 6,473 4,901 1,254 3,604 4,794 3,121
Interest .............................. 216 217 61 229 200 209
-------- -------- -------- -------- -------- --------
Total costs and expenses ............ 32,085 24,592 5,224 20,851 24,066 16,673
-------- -------- -------- -------- -------- --------
Net loss ................................ $(16,652) $ (2,240) $ (3,220) $ (7,622) $(18,259) $(14,019)
======== ======== ======== ======== ======== ========
Basic and diluted loss per share(2) ..... $ (0.50) $ (0.07) $ (0.11) $ (0.37) $ (0.95) $ (0.94)
======== ======== ======== ======== ======== ========
Shares for basic and diluted(2) ......... 33,078 30,062 28,120 20,431 19,212 14,855
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------- --------------------------------
1997 1996 1995 1995 1994 1993
---- ---- ---- ---- ---- ----
CONSOLIDATED BALANCE SHEET DATA: (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents
and marketable securities ....................... $ 30,598 $ 50,075 $ 20,002 $ 10,486 $ 5,423 $ 25,255
Working capital .................................. 32,381 48,174 21,743 11,651 4,927 23,940
Total assets ..................................... 59,038 73,819 41,341 32,192 27,470 45,326
Capital lease obligations, less current portion . 2,005 1,651 1,711 1,713 1,750 1,798
Accumulated deficit .............................. (88,090) (71,438) (69,198) (65,978) (58,356) (40,098)
Total stockholders' equity ....................... 52,709 67,261 37,829 28,269 22,807 40,675
</TABLE>
- --------------------
(1) In January 1996, the Company changed its fiscal year end from September
30 to December 31, effective with the three month period ended December
31, 1995.
(2) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the computation of basic and diluted loss per common
share.
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<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
To date, most of the Company's revenues have been derived from research
and development payments and license fees under agreements with collaborative
partners. In 1996 and 1995, a significant portion of the Company's revenues also
were derived from contract manufacturing. The Company anticipates that over the
next several years its revenues will be derived primarily from agreements with
collaborative partners. The Company has been unprofitable since its inception
and expects to incur additional operating losses over the next several years.
The Company's research agreements with collaborative partners have
typically provided for the partial or complete funding of research and
development for specified projects and royalties payable to the Company in
exchange for licenses to market the resulting products. The Company is
presently a party to major research collaborations with Stryker to develop
products for orthopedic reconstruction and with Biogen to develop products for
the treatment of renal disorders. Under the research portion of the
collaboration with Stryker, the Company supplies OP-1 products to Stryker for
clinical trials and other uses, provides clinical support and performs research
work pursuant to work plans established periodically by the two companies. The
current work plan establishes research objectives and funding through April
1998. In December 1996, the Company signed a Research Collaboration and License
Agreement with Biogen (the "Biogen Research Agreement"). Under the research
collaboration, the Company performs research work through December 31, 1999
pursuant to work plans established periodically by the two companies, and
supplies OP-1 to Biogen for preclinical and clinical uses. Although the Company
is seeking and in the future may seek to enter into collaborative arrangements
with respect to certain other projects, there can be no assurance that the
Company will be able to obtain such agreements on acceptable terms or that the
costs required to complete the projects will not exceed the funding available
for such projects from the collaborative partners.
The Company's manufacturing contracts provide for technical
collaboration and manufacturing for third parties at the Company's manufacturing
facility in Lebanon, New Hampshire and at the Company's research facility in
Hopkinton, Massachusetts. The Company is presently a party to a manufacturing
contract with Biogen (the "Manufacturing Contract") to produce several of
Biogen's protein-based therapeutic candidates. The companies agreed that the
supply of OP-1 to Biogen pursuant to the Biogen Research Agreement during 1997
satisfied Biogen's 1997 obligation under the Manufacturing Contract. The
companies also agreed to extend the Manufacturing Contract for two years through
1999, with Biogen having the option, but not the obligation, to use the
manufacturing facility for a mutually agreeable number of months in one of the
two years. Although the Company is seeking additional manufacturing contracts
for available cell culture and bacterial fermentation capacity, there can be no
assurance that the Company will be able to obtain such contracts on acceptable
terms.
Revenue is earned and recognized based upon work performed, upon the
sale or licensing of product rights, upon shipment of product for use in
preclinical and clinical testing or upon attainment of benchmarks specified in
collaborative agreements. The Company's results of operations vary significantly
from year to year and quarter to quarter and depend on, among other factors, the
timing of contract manufacturing activities and the timing of payments made by
collaborative partners. The timing of the Company's contract revenues may not
match the timing of the Company's associated product development expenses. As a
result, research and development expenses may exceed contract revenues in any
particular period. Furthermore, aggregate research and development contract
revenues for any product may not offset all of the Company's development
expenses for such product.
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<PAGE> 25
In January 1996, the Board of Directors voted to change the Company's
fiscal year end from September 30 to December 31, effective with the three month
period ended December 31, 1995.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995. The
Company's revenues in the fiscal years ended December 31, 1997, December 31,
1996 and September 30, 1995 were $15,433,000, $22,352,000 and $13,229,000,
respectively. Research and development contract revenues decreased 5% from
$5,824,000 in the year ended September 30, 1995 to $5,548,000 in the year ended
December 31, 1996 and increased 129% to $12,693,000 in the year ended December
31, 1997. The decrease in research and development contract revenues from the
year ended September 30, 1995 to the year ended December 31, 1996 primarily is
due to fluctuations in research funding from Stryker. The increase in research
and development contract revenues from the year ended December 31, 1996 to the
year ended December 31, 1997 primarily is a result of research activity under
the research collaboration with Biogen.
Manufacturing contract revenues for the years ended December 31, 1996
and September 30, 1995 reflect manufacturing for Biogen, under the Manufacturing
Contract, conducted at the Company's manufacturing facility in Lebanon, New
Hampshire. Manufacturing contract revenues for the year ended December 31, 1997
reflect manufacturing for Biogen, under a Service Agreement separate from the
Biogen Research Agreement and Manufacturing Contract, conducted at the Company's
research facility in Hopkinton, Massachusetts. The Company does not anticipate
significant manufacturing contract revenues during the year ending December 31,
1998.
License fees and royalties revenues for the year ended December 31,
1996 include a $10,000,000 license fee from Biogen as part of the research
collaboration with the Company to develop products for the treatment of renal
disorders, $500,000 from Stryker for the Company's licensing to Stryker of
patent rights and know-how in the dental field and $622,000 received for
licensing patent rights and know-how associated with certain protein technology
which is not central to the Company's business. License fees and royalties
revenues for the year ended September 30, 1995 include revenue from licensing
patent rights and know-how associated with certain protein technology which is
not central to the Company's business.
Interest revenues increased 81% from $649,000 in the year ended
September 30, 1995 to $1,174,000 in the year ended December 31, 1996 and
increased 99% to $2,331,000 in the year ended December 31, 1997. The increases
are due to increases in the average funds of the Company available for
investment. In July 1996, the Company completed an underwritten public offering
of the Company's common stock. In December 1996, under the Biogen Research
Agreement and a Restricted Stock Purchase Agreement, discussed further below,
Biogen paid to the Company a $10,000,000 license fee and made an $18,000,000
equity investment in the Company's common stock.
The Company's total costs and expenses, consisting primarily of
research and development expenses, increased 18% from $20,851,000 in the year
ended September 30, 1995 to $24,592,000 in the year ended December 31, 1996 and
increased 30% to $32,085,000 in the year ended December 31, 1997.
Research and development expenses increased 34% from $11,688,000 in the
year ended September 30, 1995 to $15,651,000 in the year ended December 31, 1996
and increased 61% to $25,122,000 in the year ended December 31, 1997. The
increase in research and development expenses from the year ended September 30,
1995 to the year ended December 31, 1996 is due in part to an increase in
development activities by the Company at the manufacturing facility in Lebanon,
New Hampshire. The facility operating costs related to such development
activities are reported as research and development expenses for such periods.
Also contributing to the increase were staff increases and a corresponding
increase in purchases of laboratory supplies, services, recruiting and
relocation expenses, and increased expenditures on academic collaborations and
subcontracted research related to product and technology development. The
increase in research and development expenses from the year ended December 31,
1996 to the year ended December 31, 1997 is due to expanded research and
24
<PAGE> 26
development activities, including work in preparation for the planned filing of
a PMA application by Stryker for the bone graft substitute product, renal
disease therapy as part of the Biogen collaboration and research into
neurological disease therapies and other indications proprietary to the
Company. The Company used the manufacturing facility in Lebanon, New Hampshire
for the year ended December 31, 1997 for the production of OP-1 for use by
Stryker, Biogen and the Company. Costs associated with the production of OP-1
for use by Stryker, Biogen and the Company are reported as research and
development expenses. The Company anticipates that research and development
expenses will increase in the year ending December 31, 1998 from the year ended
December 31, 1997 due to expanded research and development activities,
including work in preparation for the planned filing of a PMA application by
Stryker for the bone graft substitute product and research into neurological
disease therapies and other indications proprietary to the Company.
Cost of manufacturing contracts consists of the costs associated with
the manufacturing for Biogen, discussed under manufacturing contract revenues
above.
General and administrative expenses increased 36% from $3,604,000 in
the year ended September 30, 1995 to $4,901,000 in the year ended December 31,
1996 and increased 32% to $6,473,000 in the year ended December 31, 1997. The
increase from the year ended September 30, 1995 to the year ended December 31,
1996 is due to increases in executive staff and recruiting and relocation costs,
along with additional costs associated with the Biogen transaction. The increase
from the year ended December 31, 1996 to the year ended December 31, 1997 is due
to increases in executive staff and recruiting and relocation costs.
Interest expense decreased 5% from $229,000 in the year ended September
30, 1995 to $217,000 in the year ended December 31, 1996 and decreased less than
1% to $216,000 in the year ended December 31, 1997. These decreases are due to
the repayment of obligations under capital leases. The Company anticipates that
interest expense will increase in the year ended December 31, 1998 due to an
increase in obligations under capital leases. In October 1997, the Company
entered into a master lease agreement for the sale and leaseback or lease of up
to $2,000,000 of laboratory and office equipment, of which $1,518,000 is
available at December 31, 1997. See discussion under "Liquity and Capital
Resources" below.
As a result of the foregoing, the Company incurred a net loss of
$16,652,000 in the year ended December 31, 1997 compared to a net loss of
$2,240,000 in the year ended December 31, 1996 and a net loss of $7,622,000 in
the year ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company's principal sources of liquidity
consisted of cash, cash equivalents and marketable securities of $30,598,000, a
$15,000,000 unsecured line of credit from Biogen and a $1,518,000 equipment
lease line, as discussed further below. The Company has financed its operations
primarily through placements of equity securities, revenues received under
agreements with collaborative partners, and more recently, manufacturing
contracts. Since inception, sales of equity securities have raised approximately
$133,879,000 in gross proceeds and the Company has recorded approximately
$95,093,000 in gross revenues.
The Company increased its investment in property, plant and equipment
to $31,378,000 at December 31, 1997 from $28,458,000 at December 31, 1996. The
Company currently plans to spend approximately $7,000,000 in the year ended
December 31, 1998 in leasehold improvements, equipment purchases and validation
expenses required to obtain FDA approval of the manufacturing facility and to
expand the Company's research, development and manufacturing capabilities. In
October 1997, the Company entered into a master lease agreement for the sale and
leaseback or lease of up to $2,000,000 of laboratory and office equipment. At
December 31, 1997, $1,518,000 is available under this lease commitment.
The Company's collaborative agreements with Stryker provide for
research payments to the Company and royalty payments to the nonseller from
sales of any OP-1 products. The Company also has the exclusive right to supply
Stryker's worldwide commercial requirements for OP-1 products for use in
orthopedic reconstruction. Under the research portion of the collaboration, the
Company supplies OP-1 products to
25
<PAGE> 27
Stryker for clinical trials and other uses and provides clinical support and
performs research work pursuant to work plans established periodically by the
two companies. The current work plan establishes research objectives and funding
through April 1998 at which time the two companies will negotiate whether and to
what extent Stryker will continue to provide financial support for research
collaborations.
In December 1996, the Company signed the Biogen Research Agreement to
collaborate on the development of the Company's morphogenic protein, OP-1, for
the treatment of renal disorders. Under the agreement, the Company granted to
Biogen exclusive worldwide rights to manufacture, market and sell OP-1 for the
treatment of renal disease. Biogen paid a $10,000,000 license fee in 1996 and
made an $18,000,000 equity investment in common stock at a premium over the
then-current market price per share. In addition, the agreement provides for
$10,500,000 in research funding over a three year period ending December 31,
1999, of which $4,000,000 has been recognized through December 31, 1997. Biogen
also will pay up to an additional $69,000,000 upon the attainment of certain
milestones and make available a $15,000,000 line of credit. The Biogen Research
Agreement further provides for the payment of royalties to the Company based on
product sales. The Company may draw upon the $15,000,000 line of credit over the
next two years to fund the research and development of small molecule products
based on OP-1. Advances are limited to $10,000,000 in 1998 and the remaining
balance in 1999. In exchange for the line of credit, Biogen received an
exclusive option to obtain an exclusive, worldwide license to OP-1 based small
molecule products for the treatment of renal disorders. In the event Biogen
exercises its option, Biogen will forgive the lesser of $10,000,000 or the
principal amount outstanding under the line of credit. The remaining principal,
together with all accrued and unpaid interest is due and payable five years from
the date of the first advance and may be repaid, at the Company's option, in
either cash, common stock or reduction of royalties due the Company from Biogen.
In September 1994, the Company signed a three year manufacturing
contract with Biogen to produce in the Company's manufacturing facility in
Lebanon, New Hampshire several of Biogen's protein-based therapeutic candidates
for use in Biogen's clinical trials. The contract covered the period from
January 1995 through December 1997. As part of the research collaboration, the
two companies agreed to extend the Manufacturing Contract for two years through
December 31, 1999, with Biogen having the option, but not the obligation, to use
the manufacturing facility for a mutually agreeable number of months in one of
the two extension years. To enable the Company to meet its obligations under the
Manufacturing Contract, Biogen financed the construction of a 7,000 square foot
addition to the present facility for cGMP production using bacterial
fermentation at an estimated total cost of $2,900,000. The Company agreed to
reimburse Biogen for the construction costs and leasehold improvements at the
end of the contract term, including the extension, at an amount equal to
Biogen's construction costs less $300,000 and less all accumulated depreciation.
The reimbursement to Biogen is estimated to be no more than $2,100,000. Biogen
also agreed to lease equipment to the Company for the operation of such portion
of the facility and for cGMP production using bacterial fermentation by the
Company at an estimated total cost of $2,400,000, as provided in an equipment
lease agreement. The Company has the option to purchase the equipment at the end
of the extended lease term for an amount equal to its then fair market value or
for such other amount as is negotiated by the two parties.
The Company anticipates that its existing capital resources should
enable it to maintain its current and planned operations through 1999. The
Company expects to incur substantial additional research and development and
other costs, including costs related to preclinical studies and clinical trials.
The Company's ability to continue funding its planned operations beyond 1999 is
dependent upon its ability to generate sufficient cash flow from collaborative
arrangements and manufacturing contracts, and to obtain additional funds through
equity or debt financings, or from other sources of financing, as may be
required. The Company is seeking additional collaborative arrangements and also
expects to raise funds through one or more financing transactions, as conditions
permit. Over the longer term, because of the Company's significant long-term
capital requirements, the Company intends to raise funds when conditions are
favorable, even if it does not have an immediate need for additional capital at
such time. If substantial additional funding is not available, the Company's
business will be materially and adversely affected.
26
<PAGE> 28
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("SFAS 130"), effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general-purposes financial statements. SFAS 130 requires reclassification of
earlier periods presented. The Company does not expect that the adoption of SFAS
130 will have a significant effect on the Company's business, results of
operations or financial position for the year ending December 31, 1998.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), effective for fiscal years beginning after December
15, 1997. SFAS 131 establishes standards for reporting information about
operating segments in annual financial statements and selected information about
operating segments in interim financial reports issued to stockholders. The
Company does not expect that the adoption of SFAS 131 will have a significant
effect on the Company's financial statement disclosures.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.
The Company has conducted a review of its computer systems to identify
those areas that could be affected by the Year 2000 issue. The Company will
complete implementation of new financial accounting software in the first
quarter of 1998 which has been designed by the vendor to properly process
transactions which could be impacted by the Year 2000 problem. The Company
presently believes that, with routine upgrades to other existing hardware and
software systems, the Year 2000 problem will not pose significant operational
problems and costs to complete this process are not material to its financial
position or results of operations in any one year. The Company expects to
complete these upgrades by mid-1999.
The Company is in the process of contacting its major suppliers to
determine the extent to which the Company may be vulnerable to those parties'
failure to timely correct their own Year 2000 problems. To date, the Company is
unaware of any situations of noncompliance that would materially adversely
affect its operations or financial condition. There can be no assurance,
however, that instances of noncompliance which could have a material adverse
effect on the Company's operations or financial condition will be identified;
that the systems of other companies with which the Company transacts business
will be corrected on a timely basis; or that a failure by such entities to
correct a Year 2000 problem or a correction which is incompatible with the
Company's information systems would not have a material adverse effect on the
Company's operations or financial condition.
CAUTIONARY FACTORS WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements which are based on
management's current expectations and which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. The Company cautions investors that there can be
no assurance that the actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking statements
as a result of various factors, including, but not limited to the following:
uncertainty as to timing of and the Company's ability to commercialize its
products; the Company's
27
<PAGE> 29
reliance on its lead product candidate and the Company's lack of control over
the clinical progress of several applications of its products, which are
controlled by the Company's collaborative partners; the Company's reliance on
current and prospective collaborative partners to supply funds for research and
development and to commercialize its products; intense competition related to
the research and development of morphogenic and other proteins for various
applications and therapies and the possibility that others may discover or
develop, and the Company may not be able to gain rights with respect to, the
technology necessary to commercialize its products; the Company's lack of
experience in commercial manufacturing and unproven ability to manufacture
products on a large scale; the Company's lack of marketing and sales experience
and the risk that any products that the Company develops may not be able to be
marketed at acceptable prices or receive commercial acceptance in the markets
that the Company expects to target; uncertainty as to whether there will exist
adequate reimbursement for the Company's products from government, private
health insurers and other organizations; and uncertainties as to the extent of
future government regulation of the Company's business. As a result, the
Company's future development and commercialization efforts involve a high degree
of risk.
28
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Index to Consolidated Financial Statements Number
- ------------------------------------------ ------
Creative BioMolecules, Inc. and Subsidiary:
Financial Statements:
Independent Auditors' Report................................. 30
Consolidated Balance Sheets.................................. 31
Consolidated Statements of Operations........................ 32
Consolidated Statements of Stockholders' Equity.............. 33
Consolidated Statements of Cash Flows........................ 34
Notes to Consolidated Financial Statements................... 35
29
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Creative BioMolecules, Inc.
We have audited the accompanying consolidated balance sheets of Creative
BioMolecules, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1997 and 1996, the three month period
ended December 31, 1995 and the year ended September 30, 1995. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts used and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiary at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for the years ended December 31, 1997 and 1996, the three month period
ended December 31, 1995 and the year ended September 30, 1995 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 5, 1998
30
<PAGE> 32
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,158,909 $ 38,248,988
Marketable securities 28,438,841 11,826,266
Accounts receivable 4,572,518 1,454,696
Inventory 1,249,330 1,341,914
Prepaid expenses and other 284,649 208,886
------------- -------------
Total current assets 36,704,247 53,080,750
------------- -------------
PROPERTY, PLANT AND EQUIPMENT - net 17,245,338 16,224,376
------------- -------------
OTHER ASSETS:
Notes receivable - officers 273,334 350,000
Patents and licensed technology - net 417,070 401,629
Deferred patent application costs - net 4,220,080 3,471,169
Deposits and other 177,930 290,950
------------- -------------
Total other assets 5,088,414 4,513,748
------------- -------------
TOTAL $ 59,037,999 $ 73,818,874
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lease obligations - current portion $ 124,575 $ 53,532
Accounts payable 2,311,710 2,830,356
Accrued liabilities 575,171 561,562
Accrued compensation 1,312,274 1,460,856
------------- -------------
Total current liabilities 4,323,730 4,906,306
------------- -------------
LEASE OBLIGATIONS 2,004,927 1,651,493
------------- -------------
COMMITMENTS (Notes 6, 7 and 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued
Common stock, $.01 par value, 50,000,000 shares authorized,
33,392,582 shares and 32,769,553 shares issued and
outstanding at December 31, 1997 and 1996, respectively 333,926 327,696
Additional paid-in capital 140,465,512 138,371,802
Accumulated deficit (88,090,096) (71,438,423)
------------- -------------
Total stockholders' equity 52,709,342 67,261,075
------------- -------------
TOTAL $ 59,037,999 $ 73,818,874
============= =============
</TABLE>
See notes to consolidated financial statements
31
<PAGE> 33
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Years Ended December 31, Ended Year Ended
------------------------ December 31, September 30,
1997 1996 1995 1995
---- ---- ------------ -------------
<S> <C> <C> <C> <C>
REVENUES:
Research and development contracts $ 12,692,475 $ 5,547,976 $ 970,806 $ 5,824,344
Manufacturing contracts 393,926 4,485,531 770,133 6,158,574
License fees and royalties 11,122,584 2,157 544,000
Interest 2,330,743 1,174,219 260,953 648,602
Other 15,615 21,900 349 53,470
------------ ------------ ------------ ------------
Total revenues 15,432,759 22,352,210 2,004,398 13,228,990
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Research and development 25,122,039 15,650,986 3,193,979 11,687,847
Cost of manufacturing contracts 273,757 3,823,442 715,171 5,329,779
General and administrative 6,472,821 4,900,823 1,254,566 3,603,954
Interest 215,815 216,906 60,784 229,477
------------ ------------ ------------ ------------
Total costs and expenses 32,084,432 24,592,157 5,224,500 20,851,057
------------ ------------ ------------ ------------
NET LOSS $(16,651,673) $ (2,239,947) $ (3,220,102) $ (7,622,067)
============ ============ ============ ============
BASIC AND DILUTED
LOSS PER SHARE $ (0.50) $ (0.07) $ (0.11) $ (0.37)
============ ============ ============ ============
SHARES FOR BASIC AND DILUTED 33,078,120 30,062,334 28,120,190 20,430,900
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 34
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
------ ------ ----- ------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 0 $ 0 19,534,818 $ 195,348
Forgiveness of notes receivable
Issuance of common stock for note receivable 66,271 663
Repayment of notes receivable
Issuance of Series 1994/A Preferred Stock in connection
with private placement (net of costs $269,064) 1,130,000 11,300
Issuance of common stock in connection with asset purchase 394,890 3,949
Conversion of Series 1994/A Preferred Stock into
common stock (1,130,000) (11,300) 5,650,000 56,500
Other issuances of common stock 186,675 1,867
Net loss
----------- ------------ ----------- ------------
BALANCE, SEPTEMBER 30, 1995 0 0 25,832,654 258,327
Issuance of common stock in connection with self-managed
public offering of common stock (net of costs of $108,026) 3,000,000 30,000
Other issuances of common stock 62,342 623
Net loss
----------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 1995 0 0 28,894,996 288,950
Reclassification of equity consideration in connection with asset purchase
Issuance of common stock in connection with underwritten
public offering of common stock (net of costs of $1,283,236) 2,000,000 20,000
Issuance of common stock in connection with research collaboration 1,542,680 15,427
Stock based compensation
Other issuances of common stock 331,877 3,319
Net loss
----------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 1996 0 0 32,769,553 327,696
Stock based compensation
Other issuances of common stock 623,029 6,230
Net loss
----------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 1997 0 $ 0 33,392,582 $ 333,926
=========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
Common Additional
Stock Paid-In Accumulated
Payable Capital Deficit
------- ---------- ------------
<S> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 $ 1,736,586 $ 81,038,434 $(58,356,307)
Forgiveness of notes receivable
Issuance of common stock for note receivable 69,358
Repayment of notes receivable
Issuance of Series 1994/A Preferred Stock in connection
with private placement (net of costs $269,064) 10,949,011
Issuance of common stock in connection with asset purchase (3,949)
Conversion of Series 1994/A Preferred Stock into
common stock (45,200)
Other issuances of common stock 245,097
Net loss (7,622,067)
----------- ------------ ------------
BALANCE, SEPTEMBER 30, 1995 1,736,586 92,252,751 (65,978,374)
Issuance of common stock in connection with self-managed
public offering of common stock (net of costs of $108,026) 12,611,974
Other issuances of common stock 136,900
Net loss (3,220,102)
----------- ------------ ------------
BALANCE, DECEMBER 31, 1995 1,736,586 105,001,625 (69,198,476)
Reclassification of equity consideration in connection with asset purchase (1,736,586) 1,736,586
Issuance of common stock in connection with underwritten
public offering of common stock (net of costs of $1,283,236) 12,696,744
Issuance of common stock in connection with research collaboration 17,984,573
Stock based compensation 17,000
Other issuances of common stock 935,274
Net loss (2,239,947)
----------- ------------ ------------
BALANCE, DECEMBER 31, 1996 0 138,371,802 (71,438,423)
Stock based compensation 254,350
Other issuances of common stock 1,839,360
Net loss (16,651,673)
----------- ------------ ------------
BALANCE, DECEMBER 31, 1997 $ 0 $140,465,512 $(88,090,096)
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Stockholders'
Notes
Receivable Total
------------- -----
<S> <C> <C>
BALANCE, OCTOBER 1, 1994 $(1,807,440) $22,806,621
Forgiveness of notes receivable 44,154 44,154
Issuance of common stock for note receivable (70,021)
Repayment of notes receivable 1,833,307 1,833,307
Issuance of Series 1994/A Preferred Stock in connection
with private placement (net of costs $269,064) 10,960,311
Issuance of common stock in connection with asset purchase
Conversion of Series 1994/A Preferred Stock into
common stock
Other issuances of common stock 246,964
Net loss (7,622,067)
----------- -----------
BALANCE, SEPTEMBER 30, 1995 0 28,269,290
Issuance of common stock in connection with self-managed
public offering of common stock (net of costs of $108,026) 12,641,974
Other issuances of common stock 137,523
Net loss (3,220,102)
----------- -----------
BALANCE, DECEMBER 31, 1995 0 37,828,685
Reclassification of equity consideration in connection with asset purchase
Issuance of common stock in connection with underwritten
public offering of common stock (net of costs of $1,283,236) 12,716,744
Issuance of common stock in connection with research collaboration 18,000,000
Stock based compensation 17,000
Other issuances of common stock 938,593
Net loss (2,239,947)
----------- -----------
BALANCE, DECEMBER 31, 1996 0 67,261,075
Stock based compensation 254,350
Other issuances of common stock 1,845,590
Net loss (16,651,673)
----------- -----------
BALANCE, DECEMBER 31, 1997 $ 0 $52,709,342
=========== ===========
</TABLE>
See notes to consolidated financial statements
33
<PAGE> 35
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Years Ended December 31, Ended Year Ended
------------------------ December September 30,
1997 1996 31, 1995 1995
---- ---- -------- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,651,673) $ (2,239,947) $ (3,220,102) $ (7,622,067)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to net cash used:
Depreciation and amortization 2,103,906 2,423,002 758,544 2,471,184
Compensation expense 254,350 35,249 29,750 107,002
Deferred patent and application costs 188,055 92,426
Increase (decrease) in cash from:
Accounts receivable (3,117,822) 1,345,673 (255,691) (1,101,169)
Inventory and prepaid expenses 16,821 (839,405) 87,655 142,375
Accounts payable and accrued liabilities (653,619) 3,151,969 (417,120) (477,274)
Deferred contract revenue (147,920)
------------ ------------ ------------ ------------
Total adjustments (1,208,309) 6,116,488 203,138 1,086,624
------------ ------------ ------------ ------------
Net cash provided by (used for) operating activities (17,859,982) 3,876,541 (3,016,964) (6,535,443)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (28,254,756) (17,362,723) (4,735,565) (12,701,607)
Sale of marketable securities 11,642,181 13,620,727 2,710,190 9,407,869
Expenditures for property, plant and equipment (2,810,611) (3,778,278) (47,495) (445,082)
Expenditures for patents (1,131,303) (1,191,591) (175,902) (832,552)
Note receivable from officer (40,000) (350,000)
Repayment of note receivable from officer 116,666
Decrease (increase) in deposits and other 113,020 (32,477) (27,679)
------------ ------------ ------------ ------------
Net cash used for investing activities (20,364,803) (9,094,342) (2,248,772) (4,599,051)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of equity:
Public placement of common stock 14,000,000 12,750,000
Private placement of common stock 18,000,000
Series 1994/A Preferred Stock 11,229,375
Common stock - other 1,880,590 880,698 137,523 239,465
Costs of raising equity (35,000) (1,283,236) (108,026) (269,064)
Decrease in stockholders' notes receivable 1,833,307
Increase in obligations under capital leases 346,766
Repayments of obligations under capital leases (57,650) (48,452) (23,211) (128,776)
------------ ------------ ------------ ------------
Net cash provided by financing activities 2,134,706 31,549,010 12,756,286 12,904,307
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (36,090,079) 26,331,209 7,490,550 1,769,813
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 38,248,988 11,917,779 4,427,229 2,657,416
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,158,909 $ 38,248,988 $ 11,917,779 $ 4,427,229
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Property and equipment
purchased under capital lease obligations $ 135,361
============
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 36
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Creative BioMolecules, Inc. is a discovery and
development company focused on proprietary protein-based therapeutics
for human tissue regeneration and restoration. The Company's
therapeutics are based on proteins that act as signals in initiating
and regulating the cellular events involved in tissue regeneration and
organ formation.
Change in Year End - In January 1996, the Board of Directors voted to
change the Company's fiscal year end from September 30 to December 31,
effective with the three month period ended December 31, 1995.
Use of Estimates - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts and disclosure of certain assets and
liabilities at the balance sheet date. Actual results may differ from
such estimates.
Consolidation - The accompanying consolidated financial statements
include the Company and its wholly owned subsidiary, California
Medicinal Chemistry Corporation (the "Subsidiary"). Intercompany
balances are eliminated in consolidation. The Subsidiary has been
inactive since 1985.
Revenue Recognition - The Company's research agreements with
collaborative partners have typically provided for the partial or
complete funding of research and development for specified projects and
royalties payable to the Company in exchange for licenses to market
resulting products. In certain of these agreements, the Company retains
the right to manufacture and supply the active ingredient. Revenue is
earned and recognized based upon work performed, upon the sale or
licensing of product rights, upon shipment of product for use in
preclinical and clinical testing or upon attainment of benchmarks
specified in the related agreements.
The Company's manufacturing contracts provide for technical
collaboration and manufacturing for third parties. Revenue is earned
and recognized based upon work performed.
During the years ended December 31, 1997 and 1996, the three months
ended December 31, 1995 and the year ended September 30, 1995, total
revenues from major customers as a percent of total revenues of the
Company were as follows:
<TABLE>
<CAPTION>
Years Ended Three Months
December 31, Ended Year Ended
------------- December September 30,
Customer 1997 1996 31, 1995 1995
-------- ---- ---- ------------ -------------
<S> <C> <C> <C> <C>
Biogen, Inc. 50% 65% 37% 46%
Stryker Corporation 34% 27% 48% 35%
</TABLE>
Research and Development - Research and development costs are charged
to operations as incurred. Certain research and development projects
are partially funded with research and development contracts, and the
expenses related to these activities are included in research and
development costs.
35
<PAGE> 37
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Cash Equivalents and Marketable Securities - Cash equivalents consist
of short-term, highly liquid investments purchased with remaining
maturities of three months or less. All other liquid investments are
classified as marketable securities. Marketable securities are stated
at market value which approximates amortized cost plus accrued
interest.
As of December 31, 1997 and 1996, the Company classified its marketable
securities as available-for-sale and had approximately $3,024,000 and
$5,678,000 in United States government and agency instruments,
respectively, and $25,415,000 and $6,148,000 in corporate bonds and
notes, respectively, all with maturities ranging from one to
twenty-nine months.
For the years ended December 31, 1997 and 1996, the three months ended
December 31, 1995 and the year ended September 30, 1995, gross realized
gains and losses were not material. In computing realized gains and
losses, the Company computes the cost of its investments on a specific
identification basis. Such cost includes the direct costs to acquire
the securities, adjusted for the amortization of any discount or
premium. At December 31, 1997 and 1996, gross unrealized gains and
losses were not material.
Fair Value of Financial Instruments - The estimated fair value of
financial instruments has been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting data to
develop the estimates of fair value.
The estimated fair value of cash, accounts receivable and accounts
payable approximates fair value due to the short-term nature of these
instruments. The fair value of marketable securities is based on
current market values. The carrying amounts of the Company's lease
obligations approximate fair value (Note 6).
Inventory - Inventory consists principally of raw materials and
laboratory supplies. Inventories are stated at the lower of cost or
market.
Property, Plant and Equipment - Purchased property, plant and equipment
is recorded at cost. Leased property, plant and equipment is recorded
at the lesser of cost or the present value of the minimum lease
payments. Depreciation and amortization are provided on the
straight-line method over the estimated useful lives of the related
assets (three to twenty-five years) or the remaining terms of the
leases. Effective January 1, 1997, the Company revised its estimate
of the useful life of its manufacturing facility in Lebanon, New
Hampshire from sixteen years to twenty-five years. The effect of this
change in estimate was a $320,000 reduction in amortization expense for
the year ended December 31, 1997. The Company believes that the
revised life more closely reflects the number of years of economic
benefit expected to be received from this facility.
36
<PAGE> 38
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Patents and Licensed Technology - The Company has filed applications
for United States and foreign patents covering aspects of its
technology. Costs related to pending patent applications have been
deferred. Costs related to successful patent applications and costs
related to pending applications from which the Company is currently
deriving economic benefit, are amortized over the estimated useful life
of the patent, generally 16 to 20 years, using the straight-line
method. Costs related to licensed technology also have been deferred
and are amortized over the estimated useful life of the underlying
technology, generally 10 to 17 years, using the straight-line method.
Accumulated amortization was approximately $493,000 and $358,000 at
December 31, 1997 and 1996, respectively.
Accumulated costs related to issued patents, pending patent
applications and licensed technology are evaluated periodically and, if
considered to have limited future value, are charged to expense.
Basic and Diluted Loss Per Common Share - In December 1997, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128"). SFAS 128 supersedes Accounting Principles
Board Opinion No. 15 ("APB 15") and replaces "primary" and "fully
diluted" earnings per share ("EPS") under ABP 15 with "basic" and
"diluted" EPS. Unlike primary EPS, basic EPS excludes the dilutive
effects of options, warrants and other convertible securities. Diluted
EPS reflects the potential dilution of securities that could share in
the earnings of the Company, similar to fully diluted EPS. The adoption
of SFAS 128 did not have any effect on the Company's net loss per
common share for the prior years presented. Options and warrants are
excluded from the computation as their effect is antidilutive.
Stock-Based Compensation - The Company's stock options and purchase
plans are accounted for under APB No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees" (Note 8).
New Accounting Standards - In June 1997, the FASB issued SFAS 130,
"Reporting Comprehensive Income" and SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 130
establishes standards for reporting comprehensive income and its
components in the consolidated financial statements. SFAS 131
establishes standards for reporting information on operating segments
in interim and annual financial statements. SFAS 130 and SFAS 131 will
become effective for the Company beginning in 1998. The Company does
not expect that the adoption of SFAS 130 will have a significant effect
on the Company's business, results of operations or financial position
for the year ended December 31, 1998 or that SFAS 131 will have a
significant effect on the Company's financial statement disclosures.
37
<PAGE> 39
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT
In December 1996, the Company entered into a Research Collaboration and
License Agreement with Biogen to collaborate on the development of
novel therapeutics based on OP-1 for the treatment of renal disorders.
The initial focus of the collaboration is on advancing the development
of the Company's morphogenic protein, OP-1, for the treatment of acute
and chronic renal failure. Under the agreement, the Company granted to
Biogen exclusive worldwide rights to manufacture, market and sell OP-1
and OP-1 products developed through the collaboration for the treatment
of renal disease. Biogen paid the Company a $10,000,000 license fee in
1996 and made an $18,000,000 equity investment (Note 9) which were
recorded in the quarter ended December 31, 1996. The agreement provides
for $10,500,000 in research funding over a three year period ending
December 31, 1999, of which $4,000,000 has been recognized through
December 31, 1997. Biogen also will pay up to an additional $69,000,000
upon the attainment of certain milestones and will make available a
$15,000,000 line of credit. The agreement further provides for the
payment of royalties to the Company based on product sales.
The Company may draw upon the $15,000,000 line of credit over a three
year period ending December 31, 1999 to fund the research and
development of small molecule products based on OP-1. Advances are
limited to up to $10,000,000 in 1998 and the balance in 1999. As of
December 31, 1997 the Company has not drawn any amounts under the line
of credit. In exchange for the line of credit, Biogen received an
exclusive option to obtain an exclusive, worldwide license to OP-1
based small molecule products for the treatment of renal disorders. In
the event Biogen exercises its option, Biogen will forgive the lesser
of $10,000,000 or the principal amount outstanding under the line of
credit. The remaining principal, together with all accrued and unpaid
interest, is due and payable five years from the date of the first
advance and may be repaid, at the Company's option, in either cash,
common stock or reduction of royalties due the Company from Biogen.
3. NOTES RECEIVABLE - OFFICERS
In July 1997, the Company loaned $40,000 to an officer of the Company.
The loan is evidenced by a fully secured promissory note bearing
interest at the annual rate of 6.65%. Twenty-five percent of the
principal and accrued interest will be forgiven on February 7, 1998,
and then an equal portion of the principal sum and accrued interest
will be forgiven monthly over a remaining term of thirty-six months,
provided the officer is employed by the Company.
In September 1996, the Company loaned $350,000 to an officer of the
Company. The loan is evidenced by a fully secured promissory note
bearing interest at the annual rate of 6.02% and payable in three equal
annual installments, plus accrued interest.
4. ACQUISITION OF ASSETS
On March 15, 1993, the Company acquired certain assets of Verax
consisting principally of a leased manufacturing facility and
equipment. The total purchase price of approximately $13,700,000
consisted of approximately $3,100,000 in cash, assumption of certain
liabilities of Verax totaling approximately $2,000,000, acquisition
costs of approximately $160,000 and an equity consideration valued at
$8,500,000. The equity consideration consisted of 1,184,670 shares of
the Company's common stock issued in annual installments from March
1993 through March 1995.
38
<PAGE> 40
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
Land $ 352,000 $ 352,000
Building 1,500,000 1,500,000
Laboratory equipment and furniture 8,978,922 7,684,195
Leasehold improvements 17,553,847 16,403,420
Office furniture and equipment 2,992,847 2,495,095
Construction in progress 23,760
------------ ------------
Total 31,377,616 28,458,470
Less accumulated depreciation and amortization (14,132,278) (12,234,094)
------------ ------------
Total $ 17,245,338 $ 16,224,376
============ ============
</TABLE>
Amounts included in property, plant and equipment applicable to capital
leases were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
---- ----
<S> <C> <C>
Land $ 352,000 $ 352,000
Building 1,500,000 1,500,000
Laboratory equipment and furniture 393,767 47,000
Office furniture and equipment 135,361
----------- -----------
Total 2,381,128 1,899,000
Less accumulated amortization (506,671) (397,960)
----------- -----------
Total $ 1,874,457 $ 1,501,040
=========== ===========
</TABLE>
6. LEASE OBLIGATIONS
As part of the acquisition of certain assets of Verax (Note 4), the
Company assumed certain liabilities consisting principally of
obligations under capital leases totaling $1,852,000. These obligations
bear interest at variable rates based on the prime rate ranging from
9.75% to 10% at December 31, 1997 and are due monthly through the year
2008.
In October 1997, the Company entered into a master lease agreement for
the sale and leaseback or lease of up to $2,000,000 of laboratory and
office equipment. At December 31, 1997, approximately $1,518,000 is
available under this lease commitment.
39
<PAGE> 41
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LEASE OBLIGATIONS (CONTINUED)
The Company has noncancelable operating lease agreements for office and
laboratory space and certain office and laboratory equipment. Rent
expense for all operating leases was approximately $775,000, $566,000,
$150,000 and $597,000 for the years ended December 31, 1997 and 1996,
the three months ended December 31, 1995 and the year ended September
30, 1995, respectively.
Future minimum lease obligations at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Year Ending December 31 Capital Operating
----------------------- ------- ---------
<S> <C> <C> <C>
1998 $ 390,269 $ 919,308
1999 386,904 921,390
2000 386,904 912,526
2001 386,904 627,343
2002 357,602 242,443
Thereafter 2,148,027
---------- ----------
Total minimum lease payments 4,056,610 $3,623,010
==========
Less amount representing interest 1,927,108
----------
Present value of net minimum lease payments 2,129,502
Less current portion 124,575
----------
Long-term obligations under capital leases $2,004,927
==========
</TABLE>
Under a security requirement of a lease agreement with a leasing
company, the Company purchased and pledged as collateral a letter of
credit totaling $31,152, which expired on February 27, 1998.
7. COMMITMENTS
In September 1994, the Company signed a three year manufacturing
contract with Biogen to produce in the Company's manufacturing facility
in Lebanon, New Hampshire several of Biogen's protein-based therapeutic
candidates for use in Biogen's clinical trials. The contract covered
the period from January 1995 through December 1997. As part of the
research collaboration (Note 2), the companies agreed to extend the
Manufacturing Contract for two years through December 31, 1999, with
Biogen having the option, but not the obligation, to use the
manufacturing facility for a mutually agreeable number of months in one
of the two years. To enable the Company to meet its obligations under
the Manufacturing Contract, Biogen financed the construction of a 7,000
square foot addition to the present facility for cGMP production using
bacterial fermentation at an estimated total cost of $2,900,000. The
Company agreed to reimburse Biogen for the construction costs and
leasehold improvements at the end of the contract term at an amount
equal to Biogen's construction costs less $300,000 and less all
accumulated depreciation. The reimbursement to Biogen is expected to be
no more than $2,100,000. Biogen also agreed to lease equipment to the
Company for the operation of such portion of the facility and for cGMP
production using bacterial fermentation by the Company at an estimated
total cost of $2,400,000, as provided in an equipment lease agreement.
The Company has the option to purchase the equipment at the end of the
extended lease term for an amount equal to its then fair market value
or for such other amount as negotiated by the parties.
40
<PAGE> 42
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS (CONTINUED)
As security for its obligations under the Manufacturing Contract and
the equipment lease agreement, the Company granted to Biogen a security
interest in the manufacturing facility and certain of its equipment and
furniture at the manufacturing facility and any applicable inventory or
other assets related to the operation of the manufacturing facility
with a total net book value at December 31, 1997 of $13,315,000.
8. STOCK PLANS
Stock Option Plans - In May 1987, the Company established the 1987
Stock Plan ("1987 Plan") and terminated the 1983 Incentive Stock Option
Plan ("1983 Plan") such that no further grants of options could be made
thereunder. The 1987 Plan was subsequently amended to increase the
number of shares of common stock authorized for issuance thereunder. A
total of 6,800,000 shares of common stock have been reserved for
issuance under the 1987 Plan upon the exercise of options or in
connection with awards or direct purchases of stock.
The 1987 Plan permits the granting of incentive and nonqualified stock
options to consultants, employees or officers of the Company and its
subsidiaries at prices determined by the Board of Directors. All
options granted in the years ended December 31, 1997 and 1996, the
three months ended December 31, 1995 and the year ended September 30,
1995 were granted at fair market value. Awards of stock may be made to
consultants, employees or officers of the Company and its subsidiaries,
and direct purchases of stock may be made by such individuals also at
prices determined by the Board of Directors. Options become exercisable
as determined by the Board of Directors and expire up to ten years from
the date of grant.
41
<PAGE> 43
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK PLANS (CONTINUED)
Activity under the plans is summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Exercise Price
of Shares Per Share
--------- ----------------
<S> <C> <C>
Outstanding, October 1, 1994 1,357,879 $ 4.25
Granted 2,816,441 2.42
Exercised (106,471) .90
Canceled (320,086) 4.04
---------
Outstanding, September 30, 1995 3,747,763 2.99
(1,014,897 exercisable at a weighted average price of $2.89 per share)
Granted 13,000 6.00
Exercised (9,477) .82
Canceled (37,129) 4.28
---------
Outstanding, December 31, 1995 3,714,157 3.00
(1,431,824 exercisable at a weighted average price of $3.11 per share)
Granted 1,063,700 7.86
Exercised (276,178) 2.12
Canceled (139,535) 4.43
---------
Outstanding, December 31, 1996 4,362,144 4.16
(1,904,110 exercisable at a weighted average price of $3.47 per share)
Granted 889,500 8.69
Exercised (293,676) 3.29
Canceled (136,384) 6.60
---------
Outstanding, December 31, 1997 4,821,584 $ 5.00
(2,520,030 exercisable at a weighted average price of $3.92 per share) =========
</TABLE>
The table below summarizes options outstanding and exercisable at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- -----------------------------
Weighted
Average Weighted Exercisable Weighted
Remaining Average As of Average
Range of Number of Contractual Exercise December 31, Exercise
Exercise Price Options Life Price 1997 Price
-------------- ---------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$0.00 - $2.25 1,322,952 5.6 $1.84 1,057,795 $1.80
$2.26 - $4.50 1,325,538 7.4 $2.86 774,465 $2.85
$4.51 - $6.75 452,750 8.0 $5.53 124,696 $5.43
$6.76 - $9.00 641,094 8.4 $7.94 129,719 $7.43
Over $9.00 1,079,250 8.2 $9.52 433,355 $9.56
--------- ----- ----- --------- -----
Total 4,821,584 7.3 $5.00 2,520,030 $3.92
========= ===== ===== ========= =====
</TABLE>
In May 1997, the Company's stockholders approved an increase
in the number of shares of common stock authorized for issuance under
the 1987 Plan from 5,150,000 to 6,800,000. At December 31, 1997,
981,908 shares were available for grant under the 1987 Plan.
Employee Stock Purchase Plan - The Employee Stock Purchase Plan permits
eligible employees to purchase common stock of the Company up to an
aggregate of 500,000 shares. During the year ended December 31, 1997,
62,950 shares were issued under this Plan at prices of $6.08 and $5.84
per share; during the year ended December 31, 1996, 45,049 shares were
issued under this Plan at prices of $6.11 and $7.01 per share; during
the three months ended December 31, 1995, 55,515 shares were issued
under this Plan at a price of $2.34 per share and during the year ended
September 30, 1995, 143,475 shares were issued under this Plan at a
price of $1.49 per share.
42
<PAGE> 44
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK PLANS (CONTINUED)
Director Plan - The 1992 Non-Employee Director Non-Qualified Stock
Option Plan provides for the granting of options to purchase up to an
aggregate of 300,000 shares of common stock to non-employee directors.
During the year ended December 31, 1997, options to purchase 55,000
shares were granted at a weighted average exercise price of $8.76 per
share; during the year ended December 31, 1996, options to purchase
70,000 shares were granted at a price of $9.34 per share; during the
three months ended December 31, 1995 no options were granted and during
the year ended September 30, 1995, options to purchase 20,000 shares
were granted at a weighted average exercise price of $2.75 per share.
During the year ended December 31, 1997, options to purchase 7,500
shares were exercised at an exercise price of $8.50 per share.
During the year ended December 31, 1996, options to purchase 12,500
shares were canceled at a weighted average exercise price of $9.18 per
share. At December 31, 1997, options to purchase 65,000 shares were
exercisable at a weighted average exercise price of $7.66 per share.
Stock-Based Compensation - As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic
value method in accordance with APB 25 and its related
interpretations. Accordingly, no compensation expense has been
recognized in the consolidated financial statements for employee stock
arrangements.
SFAS 123, "Accounting for Stock-Based Compensation", requires the
disclosure of pro forma net income and earnings per share had the
Company adopted the fair value method as of January 1, 1995. Under SFAS
123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility
and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes
option pricing model with the following assumptions: expected life, six
months following total vesting; stock volatility, 71% in 1997, 84% in
1996 and 82% in 1995; risk free interest rates, 5.4% in 1997 and 5% in
1996 and 1995; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and
forfeitures for broad-based grants are estimated at 2% per year and
adjusted to actual as they occur. Forfeitures for grants to executives
are recognized as they occur. If the computed fair values of the 1997,
1996 and 1995 awards had been amortized to expense over the vesting
period of the awards, pro forma net loss would have been $19,892,000 or
a net loss of $0.60 per share (Basic and Diluted) for the year ended
December 31, 1997, $3,811,000 or a net loss of $0.13 per share (Basic
and Diluted) for the year ended December 31, 1996, $3,378,000 or a net
loss of $0.12 per share (Basic and Diluted) for the three months ended
December 31, 1995, and $7,822,000 or a net loss of $0.38 per share
(Basic and Diluted) for the year ended September 30, 1995. Because the
SFAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
43
<PAGE> 45
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK PLANS (CONTINUED)
These amounts are based on calculated values for options awards in
1997, 1996 and 1995 aggregating $12,574,000. Had the assumptions
regarding expected term and volatility been reduced by six months and
10% or increased by six months and 10%, total calculated value would
have decreased by $1,644,000 or increased by $1,491,000, respectively.
The Company also granted stock options to non-employee consultants in
1997 and 1996. These options were valued based on the fair value of the
services received. Total compensation expense recognized related to
these options was $254,000 and $17,000 in 1997 and 1996, respectively.
9. STOCKHOLDERS' EQUITY
In December 1994, the Board of Directors designated a series of
preferred stock of the Company consisting of 1,500,000 shares of the
authorized and unissued preferred stock, as Series 1994/A Convertible
Preferred Stock (the "Series Preferred Stock"). Each share of the
Series Preferred Stock was convertible, at the option of the holder,
into five shares of common stock. Each share of the Series Preferred
Stock automatically converted into five shares of common stock after
twenty consecutive trading days on which the closing price of the
Company's common stock exceeded $3.975 per share.
In December 1994 and January 1995, the Company sold in a private
placement, 1,130,000 units (the "Units"), consisting of one share of
Series Preferred Stock and one warrant to purchase one share of the
Company's common stock. Each warrant is exercisable for a period of
five years from the date of issuance at an exercise price of $2.385.
Net proceeds to the Company, after deducting fees and other expenses of
the offering, were approximately $11,000,000. In June 1995, holders of
30,000 shares of Series Preferred Stock elected to convert their Series
Preferred Stock into 150,000 shares of common stock. In August 1995,
holders of 40,251 shares of Series Preferred Stock elected to convert
their Series Preferred Stock into 201,255 shares of common stock. On
August 31, 1995, after twenty consecutive trading days on which the
closing price of the Company's common stock exceeded $3.975 per share,
the remaining 1,059,749 shares of Series Preferred Stock automatically
converted into 5,298,745 shares of common stock. At December 31, 1997,
warrants to purchase 866,753 shares of common stock are outstanding.
In October 1995, the Company sold in a self-managed public offering
3,000,000 shares of common stock at a price of $4.25 per share. Net
proceeds to the Company, after deducting fees and other expenses of the
offering, were approximately $12,650,000.
In July 1996, the Company sold 2,000,000 shares of common stock in a
public offering at a price of $7.00 per share. Net proceeds to the
Company, after deducting fees and other expenses of the offering, were
approximately $12,717,000.
In December 1996, as part of a research collaboration (Note 2), the
Company sold to Biogen 1,542,680 shares of common stock at a premium to
the then-current market price of the common stock. Proceeds to the
Company were $18,000,000.
44
<PAGE> 46
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY (CONTINUED)
Stockholders' Notes Receivable - In connection with a research and
development contract, the Company in 1986 sold to a partnership, for a
purchase price of $25,100, warrants for the purchase of 467,715 shares
of common stock at an initial exercise price of $5.00 per share
(subsequently adjusted to $3.78 per share). The warrants were exercised
on December 22, 1993 by payment of $4,677 in cash and delivery of a
secured full recourse promissory note for $1,763,286 bearing interest
at prime plus 1%. The note was repaid in full in February 1995.
10. INCOME TAXES
No income tax provision or benefit has been provided for federal income
tax purposes as the Company has incurred losses since inception. As of
December 31, 1997, the Company had available net operating loss
carryforwards of approximately $79,800,000 for income tax purposes. In
addition, the Company had approximately $1,500,000 of unused investment
and research and development tax credits. These net operating loss and
tax credit carryforwards will expire at various dates between 1998 and
2013.
Because of the change in ownership, as defined in the Internal Revenue
Code, which occurred in July 1989, the net operating loss and tax
credit carryforwards are subject to annual limitations regarding their
utilization.
The components of deferred income taxes at December 31, 1997 and 1996
were primarily deferred tax assets of approximately $27,100,000 and
$21,900,000, respectively, of net operating loss carryforwards and
approximately $1,500,000 at both dates of investment and research and
development tax credits. The Company has not yet achieved profitable
operations. Accordingly, management believes that the tax benefits as
of December 31, 1997 and 1996 do not satisfy the realization criteria
set forth in SFAS 109 and has recorded a valuation allowance for the
entire net asset.
11. ROYALTY AGREEMENTS
The Company has entered into various license agreements which require
the Company to pay royalties based upon a set percentage of certain
product sales and license fee revenue subject, in some cases, to
certain minimum amounts. Total royalty expense approximated $37,000,
$25,000, $5,000 and $21,000 for the years ended December 31, 1997 and
1996, the three months ended December 31, 1995 and the year ended
September 30, 1995, respectively.
12. RETIREMENT SAVINGS PLAN
The Company has a 401(k) retirement savings plan covering substantially
all of the Company's employees. Matching Company contributions are at
the discretion of the Board of Directors. The Board of Directors
authorized matching contributions up to 3% of participants' salaries
amounting to approximately $250,000, $202,000, $53,000 and $180,000 for
the years ended December 31, 1997 and 1996, the three months ended
December 31, 1995 and the year ended September 30, 1995, respectively.
45
<PAGE> 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The response to this item is incorporated by reference from the
discussions responsive thereto under the captions "Information Concerning
Current Directors, Nominees and Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement
relating to the 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the
discussion responsive thereto under the caption "Compensation of Directors and
Executive Officers" in the Company's Proxy Statement relating to the 1998 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement relating to
the 1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the captions "Certain Transactions" and
"Compensation of Directors and Executive Officers -- Employment Agreements" in
the Company's Proxy Statement relating to the 1998 Annual Meeting of
Stockholders.
46
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14(a) The following documents are filed as part of this Annual Report
on Form 10-K.
14(a)(1) Financial Statements
See "Index to Consolidated Financial Statements" at Item 8 in
this Annual Report on Form 10-K.
14(a)(2) Financial Statement Schedules and Other Financial Statements -
See 14(d) below.
14(a)(3) Exhibits - See 14 (c) below.
Item 14(b) Reports on Form 8-K
Current report on Form 8-K filed October 10, 1997. In
connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Registrant filed
cautionary statements identifying important factors that could
cause the Registrant's actual results to differ materially
from those projected in forward-looking statements of the
Registrant made by or on behalf of the Registrant.
Item 14 (c) Exhibits
The following is a list of exhibits filed as part of this
Annual Report on Form 10-K:
3.1 Restated Certificate of Incorporation, as amended, of
the Registrant. (Filed as Exhibit 3.1 to Registrant's
Annual Report on Form 10-K for the period ended
September 30, 1995 (File No. 0-19910), and incorporated
herein by reference.)
3.2 Restated By-Laws of the Registrant. (Filed as Exhibit
3.4 to Form S-1 Registration Statement (Registration No.
33-46200), or amendments thereto, and incorporated
herein by reference.)
4.1 Article FOURTH of the Restated Certificate of
Incorporation of the Registrant, as amended (see Exhibit
3.1).
10.1 Second Amended and Restated Registration Rights
Agreement, dated as of January 31, 1992. (Filed as
Exhibit 10.4 to Form S-1 Registration Statement
(Registration No. 33-46200), or amendments thereto, and
incorporated herein by reference.)
47
<PAGE> 49
10.2 Amendment No. 1 to Second Amended and Restated
Registration Rights Agreement, dated as of December 23,
1994, by and between the Registrant and certain of its
Stockholders, and Instruments of Adherence to the Second
Amended and Restated Registration Rights Agreement.
(Filed as Exhibit 10.51 to Registrant's Quarterly Report
on Form 10-Q for the Period Ended December 31, 1994
(File No. 0-19910), and incorporated herein by
reference.)
10.3 Amendment No. 2 to Second Amended and Restated
Registration Rights Agreement, dated as of May 24, 1996,
by and between the Registrant and certain of its
Stockholders. (Filed as Exhibit 10.1 to Form S-3
Registration Statement (Registration No. 333-5477), and
incorporated herein by reference.)
10.4 Amendment No. 3 to Second Amended and Restated
Registration Rights Agreement, dated as of December 9,
1996, by and between the Registrant and certain of its
Stockholders. (Filed as Exhibit 10.4 to Registrant's
Annual Report on Form 10-K for the period ended
December 31, 1996 (File No. 0-19910), and incorporated
herein by reference.)
#10.5 Second Amended and Restated Research, Development and
Supply Agreement, As Amended, dated as of May 17, 1991,
between Stryker Corporation and the Registrant ("Stryker
Development Agreement"). (Filed as Exhibit 10.5 to Form
S-1 Registration Statement (Registration No. 33-42159),
or amendments thereto, and incorporated herein by
reference.)
#10.6 Amendment Agreement, dated October 23, 1991, between the
Registrant and Stryker Corporation. (Filed as Exhibit
10.6 to Form S-1 Registration Statement (Registration
No. 33-46200), or amendments thereto, and incorporated
herein by reference.)
10.7 Amendment Agreement, dated May 13, 1994, between the
Registrant and Stryker Corporation. (Filed as Exhibit
99.2 to Registrant's Report on Form 8-K for the May 9,
1996 Event (File No. 0-19910), and incorporated herein
by reference.)
10.8 Amendment Agreement, dated April 30, 1996, between the
Registrant and Stryker Corporation. (Filed as Exhibit
99.3 to Registrant's Report on Form 8-K for the May 9,
1996 Event (File No. 0-19910), and incorporated herein
by reference.)
#10.9 Amendment Agreement, dated October 31, 1996, between the
Registrant and Stryker Corporation. (Filed as Exhibit
10.11 to Registrant's Annual Report on Form 10-K for the
period ended December 31, 1996 (File No. 0-19910), and
incorporated herein by reference.)
10.10 Irrevocable License Agreement, dated May 17, 1991,
between Stryker Corporation and the Registrant. (Filed
as Exhibit 10.7 to Form S-1 Registration Statement
(Registration No. 33-42159), or amendments thereto, and
incorporated herein by reference.)
48
<PAGE> 50
10.11 Common Stock Purchase Warrant, dated June 1, 1987,
issued by the Registrant to Phoenix Leasing
Incorporated. (Filed as Exhibit 10.24 to Form S-1
Registration Statement (Registration No. 33-42159), or
amendments thereto, and incorporated herein by
reference.)
10.12 Real Estate Standard Form Industrial Lease, dated as of
October 24, 1988, as amended September 17, 1991, between
WRC Properties, Inc. and the Registrant. (Filed as
Exhibit 10.26 to Form S-1 Registration Statement
(Registration No. 33-42159), or amendments thereto, and
incorporated herein by reference.)
10.13 Second Amendment, dated January 28, 1994, to Standard
Form Industrial Lease dated October 24, 1988, as amended
September 17, 1991, by and between the Registrant and
WRC Properties, Inc. (Filed as Exhibit 10.15 to
Registrant's Annual Report on Form 10-K for the period
Ended September 30, 1994 (File No. 0-19910), and
incorporated herein by reference.)
10.14 Third Amendment, dated September 20, 1994, to Standard
Form Industrial Lease dated October 24, 1988, as amended
September 17, 1991 and January 28, 1994, by and between
the Registrant and WRC Properties, Inc. (Filed as
Exhibit 10.16 to Registrant's Annual Report on Form 10-K
for the period Ended September 30, 1994 (File No.
0-19910), and incorporated herein by reference.)
10.15 Fourth Amendment, dated April 10, 1997, to Standard Form
Industrial Lease dated October 24, 1998, as amended
September 17, 1991, January 28, 1994 and September 20,
1994, by and between the Registrant and WRC Properties,
Inc. (Filed as Exhibit 10.53 to Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1997
(File No. 0-19910), and incorporated herein by
reference.)
10.16 Standard Form Industrial Lease, dated February 25, 1992,
by and between the Registrant and WRC Properties, Inc.
(Filed as Exhibit 10.52 to Form S-1 Registration
Statement (Registration No. 33-46200), or amendments
thereto, and incorporated herein by reference.)
10.17 First Amendment, dated February 28, 1994, to Standard
Form Industrial Lease dated February 25, 1992 by and
between the Registrant and WRC Properties, Inc. (Filed
as Exhibit 10.32 to Registrant's Annual Report on Form
10-K for the period ended September 30, 1995 (File No.
0-19910), and incorporated herein by reference.)
10.18 Second Amendment, dated September 20, 1994, to Standard
Form Industrial Lease dated February 25, 1992, as
amended February 28, 1994, by and between the Registrant
and WRC Properties, Inc. (Filed as Exhibit 10.33 to
Registrant's Annual Report on Form 10-K for the period
ended September 30, 1995 (File No. 0-19910), and
incorporated herein by reference.)
49
<PAGE> 51
10.19 Third Amendment, dated April 10, 1997, to Standard Form
Industrial Lease dated February 25, 1992, as amended
February 28, 1994 and September 20, 1994, by and between
the Registrant and WRC Properties, Inc. (Filed as
Exhibit 10.54 to Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1997 (File No.
0-19910), and incorporated herein by reference.)
10.20 Asset Purchase Agreement, dated March 4, 1993, by and
between the Registrant and Verax Corporation (the "Asset
Purchase Agreement"), including Exhibits thereto and
List of Schedules to Asset Purchase Agreement and to
Exhibit A thereto. Any of such Schedules will be
supplied upon request by the Commission. (Filed as
Exhibit 2.1 and 2.2 to the Registrant's Report on Form
8-K for March 15, 1993 Event (File No. 0-19910), and
incorporated herein by reference.)
10.21 Assumption Agreement, dated March 15, 1993, by and
between the Registrant and Verax Corporation including
Exhibits hereto. (Filed as Exhibit 10.56 to the
Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 1993 (File No. 0-19910), and
incorporated herein by reference.)
10.22 Indenture of Lease between Wilton L. Buskey and Carol
Buskey and Verax Corporation, dated September 7, 1988 as
amended through September 25, 1992, (assumed by
Registrant pursuant to Assumption Agreement, dated March
15, 1993, by and between the Registrant and Verax
Corporation -- see Exhibit 10.23 above). (Filed as
Exhibit 10.57 to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1993 (File No.
0-19910), and incorporated herein by reference.)
10.23 Non-Disturbance and Attornment Agreement, dated as of
September 7, 1988, by and between Verax Corporation and
First NH Bank [successor to First NH Bank of Lebanon]
(assumed by Registrant pursuant to Assumption Agreement,
dated March 15, 1993, by and between the registrant and
Verax Corporation -- see Exhibit 10.23 above.) (Filed as
Exhibit 10.58 to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1993 (File No.
0-19910), and incorporated herein by reference.)
10.24 Loan Agreement, dated as of September 7, 1988, by and
between Verax Corporation and First NH Bank [successor
to First NH Bank of Lebanon] (assumed by Registrant
pursuant to Assumption Agreement, dated March 15, 1993,
by and between the Registrant and Verax Corporation --
see Exhibit 10.23 above.) (Filed as Exhibit 10.59 to the
Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 1993 (File No. 0-19910), and
incorporated herein by reference.)
#10.25 CBM Cross-License Agreement, dated as of November 26,
1993, between Enzon, Inc. and the Registrant. (Filed as
Exhibit 10.42 to Registrant's Quarterly Report on Form
10-Q for the period ended December 31, 1993 (File No.
0-19910), and incorporated herein by reference.)
#10.26 Enzon Cross-License Agreement, dated as of November 26,
1993, between Enzon, Inc. and the Registrant. (Filed as
Exhibit 10.43 to Registrant's Quarterly Report on Form
10-Q for the period ended December 31, 1993 (File No.
0-19910), and incorporated herein by reference.)
50
<PAGE> 52
#10.27 Exclusive Marketing Agreement, dated as of November 26,
1993, between Enzon, Inc. and the Registrant. (Filed as
Exhibit 10.44 to Registrant's Quarterly Report on Form
10-Q for the period ended December 31, 1993 (Filed No.
0-19910), and incorporated herein by reference.)
#10.28 Manufacturing Agreement, dated as of September 28, 1994,
between Biogen, Inc. and the Registrant. (Filed as
Exhibit 99.1 to Registrant's Report on Form 8-K for the
September 30, 1994 Event (File No. 0-19910), and
incorporated herein by reference.)
#10.29 Equipment Lease Agreement, dated as of September 28,
1994, between Biogen, Inc. and the Registrant. (Filed as
Exhibit 99.2 to Registrant's Report on Form 8-K for the
September 30, 1994 Event (File No. 0-19910), and
incorporated herein by reference.)
10.30 Security Agreement, dated as of September 28, 1994,
between Biogen, Inc. and the Registrant. (Filed as
Exhibit 99.3 to Registrant's Report on Form 8-K for the
September 30, 1994 Event (File No. 0-19910), and
incorporated herein by reference.)
10.31 Form of Preferred Stock and Warrant Purchase Agreement,
with Exhibits thereto, signed by the Registrant and the
persons listed on the Schedule attached at the end of
the Form of Preferred Stock and Warrant Purchase
Agreement. (Filed as Exhibit 10.52 to Registrant's
Quarterly Report on Form 10-Q for the Period Ended
December 31, 1994 (File No. 0-19910), and incorporated
herein by reference.)
10.32 Form of Warrant issued by the Registrant to the persons
listed on the Schedule attached at the end of the Form
of Warrant on various dates between December 23, 1994
and January 25, 1995. (Filed as Exhibit 10.53 to
Registrant's Quarterly Report on Form 10-Q for the
Period Ended December 31, 1994 (File No. 0-19910), and
incorporated herein by reference.)
#10.33 Cross-License Agreement, dated as of July 15, 1996,
between the Registrant, Genetics Institute, Inc. and
Stryker Corporation. (Filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 of Genetics Institute, Inc. (File
No.0-14587), filed with the Securities and Exchange
Commission on November 6, 1996 and incorporated herein
by reference.)
10.34 Underwriting Agreement dated July 2, 1996 between the
Registrant and Hambrecht & Quist LLP and Cowen &
Company. (Filed as Exhibit 1.1 to Form S-3 Registration
Statement (Registration No. 333-5477), or amendments
thereto, and incorporated herein by reference.)
#10.35 Research Collaboration and License Agreement, dated
December 9, 1996, between the Registrant and Biogen,
Inc. (Filed as Exhibit 10.37 to Registrant's Annual
Report on Form 10-K for the period ended December 31,
1996 (File No. 0-19910), and incorporated herein
by reference.)
10.36 Restricted Stock Purchase Agreement, dated December 9,
1996, between the Registrant and Biogen, Inc. (Filed as
Exhibit 10.38 to Registrant's Annual Report on Form
10-K for the period ended December 31, 1996 (File
No. 0-19910), and incorporated herein by reference.)
10.37 Lease, dated April 10, 1997, by and between the
Registrant and The Prudential Insurance Company of
America. (Filed as Exhibit 10.55 to Registrant's
Quarterly Report on Form 10-Q for the period ended June
30, 1997 (File No. 0-19910), and incorporated herein by
reference.)
51
<PAGE> 53
10.38 Master Lease Agreement, dated October 6, 1997, by and
between the Registrant and FINOVA Technology Finance,
Inc.
*10.39 1983 Incentive Stock Option Plan, amended as of
September 11, 1984. (Filed as Exhibit 10.34 to Form S-1
Registration Statement (Registration No. 33-42159), or
amendments thereto, and incorporated herein by
reference.)
*10.40 1987 Stock Plan, as amended on May 20, 1997. (Filed as
Exhibit to Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 1997 (File No. 0-19910),
and incorporated herein by reference.)
*10.41 Employee Stock Purchase Plan, as amended on December 7,
1994. (Filed as Exhibit to Registrant's Preliminary
Proxy Statement for 1995 Annual Meeting of Stockholders
(File No. 0-19910), and incorporated herein by
reference.)
*10.42 1992 Non-Employee Director Non-Qualified Stock Option
Plan, as amended on March 20, 1996. (Filed as Exhibit
10.25 to Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 1996 (File No. 0-19910), and
incorporated herein by reference.)
*10.43 Form of Employment Agreement with confidentiality
provisions. (Filed as Exhibit 10.31 to Form S-1
Registration Statement (Registration No. 33-42159), or
amendments thereto, and incorporated herein by
reference.)
*10.44 Employment Agreement, dated as of January 2, 1992,
between Charles Cohen, Ph.D. and the Registrant. (Filed
as Exhibit 10.47 to Form S-1 Registration Statement
(Registration No. 33-46200), or amendments thereto, and
incorporated herein by reference.)
*10.45 Employment Agreement, dated February 25, 1992, between
Wayne E. Mayhew III and the Registrant. (Filed as
Exhibit 10.51 to Form S-1 Registration Statement
(Registration No. 33-46200), or amendments thereto, and
incorporated herein by reference.)
*10.46 Executive Severance Agreement, dated December 1, 1993,
between Gregory Liposky and the Registrant (assumed as
part of the Registrant's acquisition of the
manufacturing facility from Verax Corporation). (Filed
as Exhibit 10.51 to Registrant's Annual Report on Form
10-K for the period ended September 30, 1995 (File No.
0-19910), and incorporated herein by reference.)
*10.47 Employment Agreement, dated July 17, 1995, between
Michael M. Tarnow and the Registrant. (Filed as Exhibit
99.1 to Registrant's Report on Form 8-K for the August
31, 1995 Event (File No. 0-19910), and incorporated
herein by reference.)
*10.48 Employment Agreement, dated May 21, 1996, between Thomas
J. Facklam, Ph.D. and the Registrant. (Filed as Exhibit
99.2 to Registrant's Report on Form 8-K for the June 3,
1996 Event (File No. 0-19910), and incorporated herein
by reference.)
52
<PAGE> 54
*10.49 $350,000 Promissory Note, dated September 6, 1996, from
Michael Tarnow to the Registrant. (Filed as Exhibit
10.56 to Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1997 (File No. 0-19910),
and incorporated herein by reference.)
*10.50 Employment Agreement, dated January 13, 1997, between
Cheryl K. Lawton and the Registrant. (Filed as Exhibit
10.50 to Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 1997 (File No. 0-19910), and
incorporated herein by reference.)
*10.51 Employment Agreement, dated February 18, 1997, between
Steven L. Basta and the Registrant. (Filed as Exhibit
10.51 to Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 1997 (File No. 0-19910), and
incorporated herein by reference.)
*10.52 $40,000 Promissory Note, dated July 11, 1997, from
Gregory F. Liposky to the Registrant.
*10.53 Employment Agreement, dated September 17, 1997 between
Carl M. Cohen, Ph.D., and the Registrant.
21 Subsidiaries of the Registrant. (Filed as Exhibit 22 to
Form S-1 Registration Statement (Registration No.
33-42159), or amendments thereto, and incorporated
herein by reference.)
23.1 Independent Auditors' Consent.
27 Financial Data Schedule.
The Registrant will supply the Commission, upon request, with copies of all
exhibits and schedules to exhibits listed above, as to which such exhibits and
schedules have not been included herein.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K.
# Documents with certain confidential information deleted.
Item 14(d) Financial Statement Schedules and Other Financial Statements
Financial statement schedules have not been included because
they are not applicable or the information is included in the
financial statements or notes thereto.
53
<PAGE> 55
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, in Hopkinton,
Massachusetts, on March 30, 1998.
CREATIVE BIOMOLECULES, INC.
By: /s/ Wayne E. Mayhew III
-----------------------------------------------
Wayne E. Mayhew III
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities indicated
below on date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Brian H. Dovey Chairman of the Board and Director March 30, 1998
- ---------------------------------
Brian H. Dovey
/s/ Michael M. Tarnow President and Chief Executive Officer March 30, 1998
- --------------------------------- and Director (principal executive officer)
Michael M. Tarnow
/s/ Charles Cohen, Ph.D. Chief Scientific Officer and Director March 30, 1998
- ---------------------------------
Charles Cohen, Ph.D.
/s/ Wayne E. Mayhew III Vice President and Chief Financial Officer, March 30, 1998
- --------------------------------- Treasurer and Secretary (principal financial officer)
Wayne E. Mayhew III
/s/ Susan B. Blanton Controller (principal accounting officer) March 30, 1998
- ---------------------------------
Susan B. Blanton
/s/ Jeremy L. Curnock Cook Director March 30, 1998
- ---------------------------------
Jeremy L. Curnock Cook
/s/ Martyn D. Greenacre Director March 30, 1998
- ---------------------------------
Martyn D. Greenacre
/s/ Arthur J. Hale, M.D. Director March 30, 1998
- ---------------------------------
Arthur J. Hale, M.D.
/s/ Suzanne D. Jaffe Director March 30, 1998
- ---------------------------------
Suzanne D. Jaffe
/s/ Michael Rosenblatt, M.D. Director March 30, 1998
- ---------------------------------
Michael Rosenblatt, M.D.
/s/ James R. Tobin Director March 30, 1998
- ---------------------------------
James R. Tobin
</TABLE>
<PAGE> 1
Exhibit 10.38
FINOVA TECHNOLOGY FINANCE, INC.
MASTER LEASE AGREEMENT
DATED OCTOBER 6, 1997
Lessor: FINOVA Technology Finance, Inc. Lessee: Creative BioMolecules, Inc.
10 Waterside Drive 45 South Street
Farmington, CT 06032 Hopkinton, MA 01748
1. LEASE. Lessor agrees to lease to Lessee and Lessee agrees to lease
from Lessor the personal property including intangibles (the "Equipment")
described in one or more Rental Schedules (herein called "Schedule(s)") to this
Master Lease Agreement. Each such Schedule incorporates by this reference, the
terms and conditions set forth in this Master Lease Agreement and constitutes a
separate lease (the "Lease"). The lease of Equipment under each Lease shall be
for such term and such rents as may be agreed to by execution of the Schedules
and this Master Lease Agreement shall control and be effective as to all such
Schedules, the same as though set forth herein unless expressly amended or
modified in writing for particular Schedules. The term "Equipment" as used in
this Master Lease Agreement shall refer to items leased under all Schedules and
the terms hereof, unless expressly amended or modified in writing, shall apply
equally to all such Equipment.
2. TERM AND RENT. The Initial Term for each item of Equipment shall
be for the period specified in the Schedules, and Lessee shall pay Lessor,
throughout the Initial Term for the use of the Equipment, the Rent specified in
the Schedules. The Initial Term and Rent with respect to each item of Equipment
shall commence as set out in the applicable Schedule.
3. LATE CHARGES. Time is of the essence in this Lease. If any Rent or
other amount due hereunder are not paid within five (5) days after the due date
thereof, Lessor shall have the right to add and collect and Lessee agrees to pay
(a) a late charge on, and in addition to, such unpaid Rent or other charges,
equal to five percent (5%) of such unpaid Rent or a lesser amount if established
by any state of federal statute applicable thereto, (b) interest on such Rent or
other charges from, the due date until paid at the highest contract rate
enforceable against Lessee under applicable law, (c) a collection fee of $500
for additional administrative costs.
4. DISCLAIMER OF WARRANTIES. Lessee acknowledges that Lessor is not
the manufacturer of the Equipment, nor manufacturer's agent, and Lessee
represents that Lessee has selected the Equipment leased hereunder based upon
Lessee's judgment prior to having requested Lessor to purchase the same for
leasing to Lessee, and Lessee agrees that as between Lessor and Lessee, the
Equipment leased hereunder is of a design, size, fitness and capacity selected
by Lessee and that Lessee is satisfied that the same is suitable and fit for its
intended purposes. LESSEE FURTHER AGREES THAT LESSOR HAS MADE AND MAKES NO
REPRESENTATIONS OR WARRANTIES OF WHATSOEVER NATURE, DIRECTLY OR INDIRECTLY,
EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY REPRESENTATIONS OR
WARRANTIES WITH RESPECT TO SUITABILITY, DURABILITY, FITNESS FOR USE AND
MERCHANTABILITY OF ANY SUCH EQUIPMENT, THE PURPOSES AND USES OF THE LESSEE THE
CHARACTERIZATION OF THE LEASE FOR TAX, ACCOUNTING OR OTHER PURPOSES, COMPLIANCE
OF THE EQUIPMENT WITH APPLICABLE GOVERNMENTAL REQUIREMENTS, OR OTHERWISE. Lessee
specifically waives all rights to make claim against Lessor herein for breach of
any warranty of any kind whatsoever. Notwithstanding the foregoing, Lessee shall
be entitled to the benefit of any applicable manufacturer's warranties received
by Lessor and to the extent assignable, such warranties are hereby assigned by
Lessor to Lessee for the term of the applicable Schedules. Lessor shall not be
liable to Lessee for any loss, damage or expense of any kind or nature caused
directly or indirectly by any Equipment leased hereunder or for the use or
maintenance thereof, or for the failure of operations thereof, or for the
repairs, service or adjustment thereto, or by any delay or failure to provide
any thereof, or by any interruption of service or loss of use thereof or for any
loss of business or any other damage
1
<PAGE> 2
whatsoever and howsoever caused. No defect or unfitness of the Equipment shall
relieve Lessee of the obligation to pay Rent, or to perform any other obligation
under this Lease.
5. USE, OPERATION AND MAINTENANCE. Lessee shall use the Equipment in
the manner for which it was designed and intended, solely for Lessee's business
purposes, in accordance with all manufacturer manuals and instructions and in
compliance with all applicable laws, regulations and orders. Lessee, at Lessee's
own cost and expense, shall keep the Equipment in good repair, condition and
working order, ordinary wear and tear excepted, and shall furnish all parts,
mechanisms, devices and servicing required therefor and necessary to comply with
all applicable health and safety standards. If commercially available, Lessee
shall maintain in force a maintenance agreement with respect to the Equipment
with the manufacturer thereof or such other party as may be acceptable to
Lessor, and the Equipment, upon return to Lessor, shall qualify for such program
without additional expense. All replacement parts and repairs at any time made
to or placed upon the Equipment shall become the property of Lessor. Lessee may,
with Lessor's prior written consent, make such alterations, modifications or
additions to the Equipment as Lessee may deem desirable in the conduct of its
business; provided the same shall not diminish the value or utility of the
Equipment, or cause the loss of any warranty thereon or any certification
necessary for the maintenance thereof, and shall be readily removable without
causing damage to the Equipment. Upon return to Lessor the Equipment as to which
such alterations, modifications or additions have been made, Lessee, if
requested to do so by Lessor, shall remove the same and restore the Equipment to
its original condition, reasonable wear and tear only being excepted, and, if
not so removed, title thereto shall automatically vest in Lessor.
Lessee shall keep the Equipment free and clear from all liens, charges,
encumbrances, legal process and claims. Lessee shall not assign, sublet,
hypothecate, sell, transfer or part with possession of the Equipment or any
interest in this Lease, and any attempt to do so shall be null and void and
shall constitute a default hereunder. Lessee shall not move the Equipment from
the location noted in the Schedules without the prior written consent of Lessor,
which consent shall not be unreasonably withheld. Neither this Lease nor any
interest in the Equipment is assignable or transferable by Lessee by operation
of law. Lessee agrees not to waive its right to use and possess the Equipment in
favor of any party other than Lessor and further agrees not to abandon the
Equipment to any party other than Lessor. So long as Lessee faithfully performs
and meets each and every term and condition to be performed or met by Lessee
under this Lease, Lessee's quiet and peaceful possession of the Equipment will
not be disturbed by Lessor or anyone claiming by, through or on behalf of
Lessor.
6. TITLE. The Equipment is and at all times shall remain the sole and
exclusive personal property of Lessor (subject to Section 18 hereof). No right,
title or interest in the Equipment shall pass to Lessee other than the right to
maintain possession and use of the Equipment for the full lease term,
conditioned upon Lessee's compliance with the terms and conditions of this
Lease. If requested by Lessor, Lessee shall affix to or place on the Equipment
plates or markings indicating Lessor's ownership. Lessee covenants and agrees
that the Equipment is, and will at all times, remain the personal property of
Lessor (subject to Section 18 hereof). If requested by Lessor, Lessee will
obtain a waiver, in recordable form, from all persons with a real property
interest in the premises wherein the Equipment may be located, waiving any claim
with respect thereto. Lessor shall have the right from time to time during
normal business hours to enter upon Lessee's premises or elsewhere for the
purpose of confirming the existence, condition, and proper maintenance of the
Equipment or for any other reasonable business purpose.
7. RENT ADJUSTMENT. The Effective Lease Rate will remain fixed for
the duration of the Initial Term. Prior to the funding date, the date that
Lessor pays the Purchase Price of the Equipment as set forth in the Schedule,
Lessor may adjust the Rent in order to maintain its originally anticipated rate
of return if; (i) there is a change in the yield on the U.S. Treasury
Securities, as quoted in The Wall Street Journal, from the current defined Base
Yield specified in the Schedules; (ii) the Rental Commencement Date as set forth
in the Schedules, is not on or before the Commitment Expiration Date specified
on the Schedules; (iii) Lessee fails to deliver documentation as requested by
Lessor; or (iv) the Equipment cannot be acquired by Lessor at a cost equal to
the invoice cost specified on the Schedules.
2
<PAGE> 3
8. TAXES. Lessee shall promptly reimburse Lessor for, or shall pay
directly if so requested by Lessor, as additional Rent, all taxes, charges and
fees which may now or hereafter be imposed or levied by any governmental body or
agency upon or in connection with the purchase, ownership, lease, possession,
use or location of the Equipment or otherwise in connection with the
transactions contemplated by the Lease, excluding, however, all taxes on or
measured by the net income of Lessor, and shall keep the Equipment free and
clear of all levies, liens or encumbrances arising therefrom. Lessor shall file,
as owner and party responsible for payment of tax, personal property tax return
relating to the Equipment unless otherwise provided in writing. Lessee shall
promptly reimburse Lessor for all property taxes levied on or assessed against
the Equipment during the Initial Term and all renewals or extensions, without
any proration whatsoever. Failure of Lessee to promptly pay amounts due
hereunder shall be the same as failure to pay any installment of Rent. If Lessee
is requested by Lessor to file any returns or remit payments directly to any
governmental body or agency as provided for hereunder, Lessee shall provide
proof of said filing or payment to Lessor upon request.
9. LOSS OR DAMAGE OF EQUIPMENT. Lessee hereby assumes and shall bear
the risk of loss for destruction of or damage to the Equipment from any and
every cause whatsoever, whether or not insured, until the Equipment is returned
to Lessor. No such loss or damage shall impair any obligation of Lessee under
this Lease which shall continue in full force and effect. In event of damage to
or theft, loss or destruction of the Equipment (or any item thereof), Lessee
shall promptly notify Lessor in writing of such fact and of all details with
respect thereto, and shall, within thirty (30) days of such event, at Lessor's
option, (a) place the same in good repair, condition and working order or, (b)
replace the Equipment (or any item thereof) with like personal property in good
repair, condition and working order and transfer clear title to such replacement
property to Lessor whereupon such property shall be subject to this Lease and be
deemed the Equipment for purposes hereof; or, (c) pay Lessor an amount equal to
the sum of (i) all Rent accrued to the date of such payment, plus (ii) the
"Stipulated Loss Value" as set forth in the Schedules, whereupon this Lease
shall terminate, except for Lessee's duties under Section 11 hereof, solely with
respect to the Equipment (or any item thereof) for which such payment is
received by Lessor. Upon payment of the amount set forth in (c), the Rent for
such Schedules shall be reduced proportionately. Any insurance proceeds received
with respect to the Equipment (or any item thereof) shall be applied, in the
event option (c) is elected, in reduction of the then unpaid obligations,
including the Stipulated Loss Value, of Lessee to Lessor, if not already paid by
Lessee, or, if already paid by Lessee, to reimburse Lessee for such payment, or,
in the event option (a) or (b) is elected, to reimburse Lessee for the costs of
repairing, restoring or replacing the Equipment (or any item thereof) upon
receipt by Lessor of evidence, satisfactory to Lessor, that such repair,
restoration or replacement has been completed, and an invoice therefor.
10. INSURANCE. Lessee shall keep the Equipment insured against theft
and all risks of loss or damage from every cause whatsoever for not less than
the greater of the replacement cost, new, or the Stipulated Loss Value of the
Equipment and shall carry public liability insurance, both personal injury and
property damage, covering the Equipment and Lessee shall be liable for all
deductible portions of all required insurance. All said insurance shall be in
form and amount and with companies satisfactory to Lessor. All insurance for
theft, loss or damage shall provide that losses, if any, shall be payable to
Lessor, and all such liability insurance shall name Lessor (or Lessor's assignee
as appropriate) as additional insured and shall be endorsed to state that it
shall be primary insurance as to Lessor. Any other insurance obtained by or
available to Lessor shall be secondary insurance. Lessee shall pay the premiums
therefor and deliver to Lessor a certificate of insurance or other evidence
satisfactory to Lessor that such insurance coverage is in effect; provided,
however, that Lessor shall be under no duty either to ascertain the existence of
or to examine such insurance policies or to advise Lessee in the event such
insurance coverage shall not comply with the requirements hereof. Each insurer
shall agree by endorsement upon the policy or policies issued by it or by
independent instrument furnished to Lessor, that it will give Lessor thirty (30)
days written notice prior to the effective date of any alteration or
cancellation of such policy. The proceeds of such insurance payable as a result
of loss of or damage to the Equipment shall be applied as set out in Section 9
hereof. Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-fact
to make claim for, receive payment of, and execute and endorse all documents,
checks or drafts received in payment for loss or damage under any said insurance
policies.
3
<PAGE> 4
In case of the failure of Lessee to procure or maintain said insurance or to
comply with any other provision of this Lease, Lessor shall have the right but
shall not be obligated, to effect such insurance or compliance on behalf of
Lessee. In that event, all monies spent by and expenses of Lessor in effecting
such insurance or compliance shall be deemed to be additional Rent, and shall be
paid by Lessee to Lessor upon demand.
11. LESSEE INDEMNITY. Lessee assumes liability for and shall
indemnify, save, hold harmless (and, if requested by Lessor, defend) Lessor,
it's officers, directors, employees, agents or assignees from and against any
and all claims, actions, suites or proceedings of any kind and nature
whatsoever, including all damages, liabilities, penalties, costs, expenses and
legal fees (hereinafter "Claim(s)") based on, arising out of, connected with or
resulting from this Lease of the Equipment, including without limitation the
manufacture, selection, purchase, delivery, acceptance, rejection, possession,
use, operation, ownership, return or disposition of the Equipment, and including
without limitation Claims arising in contract or tort (including negligence,
strict liability or otherwise), arising out of latent defects (regardless of
whether the same are discoverable by Lessor or Lessee) or arising out of any
trademark, patent or copyright infringement. If any Claim is made against Lessee
or Lessor, the party receiving notice of such Claim shall promptly notify the
other, but the failure of such person receiving notice so to notify the other
shall not relieve Lessee of any obligation hereunder.
12. TAX INDEMNITY. Lessee acknowledges that (1) Lessor intends to
claim and take the accelerated cost recovery deductions available in the manner
and as provided by section 168 and related sections of the Internal Revenue Code
of 1986, as amended, and regulations adopted thereunder (the "Code") as in
effect on the date hereof (such deductions being referred to hereinafter as "Tax
Benefits") and (2) the Rent payable hereunder has been computed upon the
assumption that such Tax Benefits shall be available to Lessor. Lessee
represents and warrants to Lessor that Lessor shall be entitled to take such Tax
Benefits and that all of the Equipment is, at and after the time of delivery of
the Equipment to the location set forth in the Schedules, new, unless designated
otherwise on the Schedules. Lessee further represents and warrants that it has
not, and will not, at any time from such delivery through the term of this Lease
take any action or omit to take any action (whether or not the same is permitted
or required hereunder) which will result in the loss by Lessor of all or any
part of the Tax Benefits. If as a result of any act, omission or
misrepresentation of Lessee, the Tax Benefits are lost, disallowed, eliminated,
reduced, recaptured, compromised or are otherwise unavailable to Lessor (any of
the foregoing being a "Loss"), Lessee shall promptly pay to Lessor on demand, as
additional Rent, an amount which will, after deduction therefrom of all taxes
required to be paid in respect of the receipt thereof, enable Lessor to receive
the same rate of return that Lessor would have realized had such Loss not
occurred, together with any interest, penalties or additions to tax. Upon
payment of such amount by Lessee, such act, omission or misrepresentation of
Lessee which resulted in a Loss shall not be deemed a default hereunder. Any
event which by the term of this Lease requires payment by Lessee to Lessor of
the Stipulated Loss Value of the Equipment, shall not constitute the act,
omission or misrepresentation of Lessee for purposes of the foregoing sentence.
Lessor hereby agrees to exercise in good faith its best efforts (determined in
the sole discretion of Tax Counsel of Lessor to be reasonable, proper and
consistent with the overall tax interest of Lessor) to avoid requiring Lessee to
pay the tax indemnity referred to in this Section 12; provided, however, Lessor
shall have the sole discretion to determine whether or not to undertake judicial
or administrative proceedings beyond the level of an Internal Revenue Service
auditing agent; and provided further, that Lessor shall not be required to take
any action pursuant to this sentence unless and until Lessee shall have agreed
to indemnify Lessor for any and all expenses (including attorney's fees),
liabilities or losses which Lessor may incur as a result of taking such action.
For purposes of this Section 12, the term "Lessor" shall include the entity or
entities, if any, with which Lessor consolidates its tax return.
13. RETURN OF EQUIPMENT. Upon termination pursuant to the terms of
this Lease or Section 15 of this Lease, Lessee shall immediately return the
Equipment and all related accessories, to such place within the continental
United States as is designated by Lessor. The Equipment shall, at Lessee's sole
expense, be crated and shipped in accordance with the manufacturer's
specifications, freight prepaid and properly insured. If the Equipment, upon its
return, is not in good repair, condition and working order, ordinary wear and
tear excepted, and has not been maintained in accordance with Section
4
<PAGE> 5
5 hereof, Lessee shall promptly reimburse Lessor for all reasonable costs
incurred to place the Equipment in such condition.
14. Section left intentionally blank.
15. DEFAULT AND REMEDIES. (a) Lessee shall be in default hereunder if
(i) Lessee fails to pay Rent or any other payment required hereunder within five
(5) days of the due date thereof, (ii) Lessee fails to observe, keep or perform
any other term or condition of this Lease and such failure continues for twenty
(20) days following receipt of written notice thereof from Lessor, (iii) any
representation or warranty made by Lessee herein or in any document delivered to
Lessor in connection herewith shall prove to be false or misleading, (iv) Lessee
defaults under any other obligation to Lessor, or (v) at any time there shall
occur under (A) any lease between Lessee and a party other than Lessor as lessor
or (B) under any lease wholly or partially guaranteed by Lessee, the exercise by
the lessor of its possessory remedies or commencement of legal proceedings by
the lessor for default under the lease; provided that the aggregate future
payments remaining to be made or guaranteed by Lessee exceed $25,000, and that
under a lease described in (B) above within ten days of notice to Lessee of such
exercise of remedies and demand for payment by Lessee any such amount guaranteed
by Lessee remains unpaid. (b) If Lessee is in default, Lessor shall have the
right to take any one or more of the following actions: (i) proceed by
appropriate court action or actions at law or in equity to enforce performance
by Lessee of the term and conditions of this Lease and/or recover damages for
the breach thereof; and/or (ii) by written notice to Lessee, which notice shall
apply to all Schedules hereunder except as specifically excluded therefrom by
Lessor, declare due and payable, and Lessee shall without further demand,
forthwith pay to Lessor an amount equal to any unpaid Rent then due as of the
date of such notice plus, as liquidated damages or loss of the bargain and not
as a penalty, an amount equal to the Stipulated Loss Value as set forth in the
Schedules, and Lessee shall return the Equipment to Lessor as provided in
Section 13. Should Lessee fail to return the Equipment within five (5) days of
receipt of such notice, Lessor may, personally, or by its agents, and with or
without notice of legal process, enter upon the premises where the Equipment is
located, without liability for trespass or other damages, and repossess the
Equipment free from all claims by Lessee. Return or repossession of the
Equipment shall not constitute a termination of this Lease unless Lessor so
notifies Lessee in writing. With respect to Equipment returned to or repossessed
by Lessor, if Lessor has not terminated this Lease, Lessor will, in such manner
and upon such terms as Lessor may determine in its sole discretion, either sell
such Equipment at one of more public or private sales or re-lease the Equipment.
The proceeds of sale or re-lease shall be applied in the following order or
priority: (i) to pay all Lessor's fees, costs and expenses for which Lessee is
obligated pursuant to (c), below; (ii) to the extent not previously paid by
Lessee, to pay Lessor its liquidated damages hereunder and all other sums then
remaining unpaid hereunder; and (iii) to reimburse Lessee for any sums
previously paid by Lessee to Lessor as liquidated damages; and (iv) any surplus
shall be retained by Lessor. In the event the proceeds of sale or re-lease are
less than the sum of the amounts payable under (i) and (ii), Lessee shall pay
Lessor such deficiency, forthwith. The Proceeds of a credit sale or re-lease
shall be discounted to their present value at the prime rate in effect at the
inception of the Schedules plus four hundred (400) basis points (4%). (c) Lessee
shall be liable for all legal and collection fees, costs and expenses arising
from Lessee's default and the exercise of Lessor's remedies hereunder, including
costs of repossessions, storage, repairs, reconditioning and sale or re-leasing
of the Equipment. (d) In the event that any court of competent jurisdiction
determines that any provision of this Section 15 is invalid or unenforceable in
whole or in part, such determination shall not prohibit Lessor from establishing
its damages sustained as a result of any breach of this Lease in any action or
proceeding in which Lessor seeks to recover such damages. Any repossession of
sale or re-lease of the Equipment shall not bar an action for damages for breach
of this Lease, as hereinabove provided, and the bringing of an action or the
entry of judgment against Lessee shall not bar Lessor's right to repossess the
Equipment. No express or implied waiver by Lessor of any default shall in any
way be, or be construed to be, a continuing waiver or a waiver of any future or
subsequent default.
16. FURTHER ASSURANCES. Lessee agrees, at the request of Lessor, to
execute and deliver to Lessor any financing statements, fixture filings or other
instruments necessary for expedient filing, recording or perfecting the interest
and title of Lessor in this Lease and the Equipment, agrees that a copy of this
Lease and any Schedule may be so filed, and agrees that all
5
<PAGE> 6
costs incurred in connection therewith (including, without limitation, filing
fees and taxes) shall be paid by Lessee, and agrees to promptly, at Lessee's
expense, deliver such other documents and assurances, and take such further
action as Lessor may request, in order to effectively carry out the intent and
purpose of this Lease and Schedules. Additionally, Lessee agrees that where
permitted by law, a copy of the financing statement may be filed in lieu of the
original. Lessee shall, as soon as practicable, deliver to Lessor, Lessee's
future quarterly and annual reports of financial condition, prepared in
accordance with generally accepted accounting principles, in a manner
consistently applied; which reports Lessee represents and warrants shall fully
and fairly present the true financial condition of Lessee. Lessee's covenants,
representations, warranties and indemnities contained in Section 8, 11, 12 and
19 are made for the benefit of Lessor and shall survive, remain in full force
and effect and be enforceable after the expiration or termination of this Lease
for any reason.
17. ACCEPTANCE OF EQUIPMENT: NON CANCELLABLE. Lessee's acceptance of
the Equipment shall be conclusively and irrevocably evidenced by Lessee signing
the Certificate of Acceptance in the form of Annex A to the Schedules and upon
acceptance, the Schedules shall be noncancelable for the Initial Term thereof.
If Lessee cancels or terminates the Schedules after its execution and prior to
delivery of the Equipment or if Lessee fails or refuses to sign the Certificate
of Acceptance as to all or any part of the Equipment within a reasonable time,
not to exceed five (5) days, after the Equipment has been delivered, in which
event Lessee will be deemed to have canceled the Schedule, Lessee shall
automatically assume all of Lessor's purchase obligations for the Equipment and
Lessee agrees to indemnify and defend Lessor from any claims, including any
demand for payment of the purchase price for the Equipment, by the manufacturer
or seller of the Equipment. In addition thereto, Lessee shall pay Lessor (a) all
of Lessor's out-of-pocket expenses and (b) a sum equal to one percent (1%) of
the total rents for the lease term as liquidated damages, the exact sum of which
would be extremely difficult to determine and is reasonably estimated hereby, to
reasonably compensate Lessor for credit review, document preparation, ordering
equipment and other administrative expenses. Lessor may apply any advance Rent
payments to sums due from Lessee under (a) and (b) above.
18. ASSIGNMENT. Lessee acknowledges and agrees that Lessor may, at any
time, without notice to or consent of Lessee, assign its rights but not its
obligations under this Lease and/or mortgage, or pledge or sell the Equipment.
Such assignee or mortgagee may re-assign this Lease and/or mortgage without
notice to Lessee. Any such assignee or mortgagee shall have and be entitled to
exercise any and all rights and powers of Lessor under this Lease, but such
assignee or mortgagee shall not be obligated to perform any of the obligations
of Lessor hereunder other than Lessor's obligation not to disturb Lessee' quiet
and peaceful possession of the Equipment and unrestricted use thereof for its
intended purpose during the term thereof and for as long as Lessee is not in
default of any of the provisions hereof.
Without limiting the foregoing, Lessee further acknowledges and agrees
that in the event Lessee receives written notice of an assignment from Lessor,
Lessee will pay all Rent and any and all other amounts payable by Lessee under
any Schedule to such assignee or mortgagee or as instructed by Lessor,
notwithstanding any defense or claim of whatever nature, whether by reason of
breach of such Schedule or otherwise which it may now or hereafter have as
against Lessor (Lessee reserving its right to make claims directly against
Lessor). Lessee agrees to confirm in writing receipt of notice of assignment as
may be reasonably requested by assignee or mortgagee.
19. REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants to
Lessor that: (i) the making of this Lease and any Schedule thereto executed by
Lessee are duly authorized on the part of Lessee and upon execution thereof by
Lessee and Lessor they shall constitute valid obligations binding upon, and
enforceable against, Lessee ; (ii) neither the making of this Lease or such
Schedule, nor the due performance thereof by Lessee, including the commitment
and payment of the Rent, shall result in any breach of, or constitute a default
under, or violation of, Lessee's certificate of incorporation, by-laws, or any
agreement to which Lessee is a party or by which Lessee is bound; (iii) Lessee
is in good standing in its state of incorporation and in any jurisdiction where
the Equipment is located, and is entitled to own properties and to carry on
business therein; and (iv) no approval, consent or withholding of objection is
required from any governmental authority or entity with respect to the entering
into, or performance of this Lease or such Schedules by Lessee.
6
<PAGE> 7
Lessee shall provide Lessor a Certified Copy of it's Corporate Resolutions and
Certificate of Incumbency substantially in the form of Annex B hereto.
20. NOTICES. Any notice required or given hereunder shall be deemed
properly given (i) three (3) business days after mailed first class, or
certified mail, return receipt requested, postage prepaid, addressed to the
designated recipient at its address set forth at the heading hereof or such
other address as such party may advise by notice given in accordance with this
provision or (ii) upon receipt by the party to whom addressed if given in
writing by personal delivery, commercial courier service, telecopy or other
means which provides a permanent record of the delivery of such notice.
21. LESSEE'S OBLIGATIONS UNCONDITIONAL: NO OFFSET. This Lease is a net
lease and except as expressly provided for herein, the Lessee shall not be
entitled to any abatement or reduction of rent and Lessee hereby agrees that
Lessee's obligation to pay all rent and other amounts hereunder shall be
absolute and unconditional under all circumstances.
22. COUNTERPARTS. Each Schedule may be executed in one or more
counterparts, each of which shall be deemed an original as between the parties
thereto, but there shall be a single executed original of each Schedule which
shall be marked "Counterpart No. 1"; all other counterparts shall be marked with
other counterpart numbers. To the extent, if any, that a Lease constitutes
chattel paper (as such term is defined in the Uniform Commercial Code)
no-security interest in the Schedule may be created through the transfer or
possession of any counterpart other than Counterpart No. 1. The Master Lease
Agreement is incorporated by reference in each of the Schedules and shall not be
chattel paper by itself.
23. SPECIAL TERMS. Lessee agrees that if Lessee hereafter desires to
lease additional equipment and receives a bona fide commitment to lease such
equipment from a third party, then Lessor shall have the right in its sole
discretion, to lease such equipment to Lessee upon the same terms and conditions
as are contained in such commitment.
24. GOVERNING LAW. This Lease and any Schedules thereto are entered
into, under and shall be construed in accordance with, and governed by, the laws
of the State of Arizona without giving effect to its conflicts of laws
principles. The State of Arizona shall have exclusive jurisdiction over any
action or proceeding brought to enforce or interpret this Lease or otherwise in
connection therewith.
25. WAIVER OF JURY. LESSOR AND LESSEE EACH HEREBY WAIVES THE RIGHT TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY
WAY RELATED TO, THIS LEASE, THE SCHEDULES THERETO OR ANY CONDUCT, ACTS OR
OMISSIONS BY LESSOR OR LESSEE OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS OR ATTORNEYS; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING
IN CONTRACT OR TORT OR OTHERWISE.
26. PURCHASE OBLIGATION. Lessee shall be obligated to purchase all
items of the Equipment then subject to a Schedule at the expiration of the
Initial Term for such items of the Equipment for a purchase price, payable in
immediately available funds, equal to the Fair Market Value of such items which
Fair Market Value shall be equal to 10% of the original Purchase Price of the
Equipment, plus any applicable sales, excise or other taxes imposed as a result
of such sale (other than net income taxes attributable to such sale). Lessor's
sale of any items of Equipment shall be on an "as is", "where-is" basis, without
any representation or warranty by or recourse to Lessor, as provided by the
provisions of the Lease on disclaimer of warranties, and shall be subject to
such additional terms and conditions as may be specified in the Schedule.
27. MISCELLANEOUS. For purposes of this Lease, the term "Rent" as used
herein shall mean and include all amounts payable by Lessee to Lessor hereunder.
The captions of this Lease are for convenience only and shall not be read to
define or limit the intent of the provision which follows such captions. This
Lease contains the entire agreement and understanding between Lessor and Lessee
relating to the subject matter hereof. Any variation or modification hereof and
any waiver of any of the provisions or conditions hereof shall not be valid
unless in writing signed by an authorized representative of the
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<PAGE> 8
parties hereto. Any provision of this Lease which is unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. Lessor's failure at any time to require strict performance
by Lessee or any of the provisions hereof shall not waive or diminish Lessor's
right thereafter to demand strict compliance therewith or with any other
provision. The term "Lessee" as used herein shall mean and include any and all
Lessees who have signed this Lease, each of whom shall be jointly and severally
bound thereby.
THIS LEASE IS A NON-CANCELLABLE LEASE. THIS LEASE IS SUBJECT TO THE TERMS AND
CONDITIONS WRITTEN ABOVE WHICH LESSEE ACKNOWLEDGES HAVING READ. THIS LEASE SHALL
BE EFFECTIVE UPON EXECUTION BY LESSEE AND LESSOR.
LESSOR: LESSEE:
FINOVA Technology Finance, Inc. Creative BioMolecules, Inc.
By: /s/Linda A. Moschitto By: /s/Wayne E. Mayhew III
-------------------------------- -----------------------------------
Title: Director, Contract Admin. Title: VP & Chief Financial Officer
----------------------------- --------------------------------
Date Accepted: 10/31/97 Date Accepted: 10/22/97
--------------------- ------------------------
8
<PAGE> 1
Exhibit 10.52
PROMISSORY NOTE
HOPKINTON, MASSACHUSETTS JULY 11, 1997
FOR VALUE RECEIVED, I, Gregory F. Liposky (the "Borrower"),
unconditionally promise to pay to Creative BioMolecules, Inc., a Delaware
corporation, having offices at 45 South Street, Hopkinton, Massachusetts (the
"Lender"), or order, the Principal Sum of Forty Thousand Dollars ($40,000.00),
with interest at the rate of 6.65% per annum ("Interest"), payable in arrears,
as follows:
(a) Provided Borrower is employed by the Lender or its affiliates,
an equal portion of the Principal Sum and accrued Interest shall be forgiven
annually over the first period of twelve (12) months, commencing on February 7,
1997, and then an equal portion of the Principal Sum and accrued Interest shall
be forgiven monthly over the remaining term of thirty-six (36) months commencing
on February 7, 1998, provided Borrower is employed by the Lender or its
affiliates.
(b) Following the date of termination for any reason whatsoever of
Borrower's employment, any unpaid balance of the Principal Sum, shall be due and
payable with all unpaid or unforgiven Interest as hereinabove set forth, on or
before the date twenty-four (24) months after the date of termination for any
reason whatsoever of the Borrower's employment with the Lender and its
affiliates. For purposes hereof, an "affiliate" means Creative BioMolecules,
Inc. and any of its 100% owned subsidiaries and any of its or their successors
in business.
The undersigned agrees to pay all costs and expenses, including an
attorney fee, for the collection of this note upon default, and to pay interest
on all amounts not paid when due (pursuant to the terms hereof, by acceleration,
or otherwise) at the rate of one and one-half (1 1/2%) percent per month until
paid in full. The undersigned further agrees that if this note is not paid in
full when due, the balance due, including interest, may be offset against and
withheld from any amounts, including salary, due to the undersigned from the
holder. All payments shall be made at the office of the holder at 45 South
Street, Hopkinton, Massachusetts, or at such other place as the holder hereof
may from time to time designate in writing.
At the option of the holder, this note shall become immediately due and
payable without notice or demand upon the occurrence at any time of any of the
following events: (1) default in any payment of principal or interest due
hereunder or in the performance or observance if the terms of conditions of any
mortgage, security agreement, or other instrument or agreement (including
amendments and extensions thereof) securing this note;
<PAGE> 2
(2) default in the payment or performance of any other liability or obligation
of the undersigned or of any endorser or guarantor of any liability or
obligation of the undersigned to holder; or (3) if any party liable hereon,
whether as maker, endorser, guarantor, surety or otherwise shall die, make an
assignment for benefit of creditors, or if a receiver of any such party's
property shall be appointed, or if a petition in bankruptcy or other similar
proceeding under any law for relief of debtors shall be filed by or against any
such party.
Each and every party liable hereon, either as maker, endorser,
guarantor, surety or otherwise, hereby (1) waives presentment, demand, protest
and notice of every kind and description, and all suretyship defenses and
defenses in the nature thereof; (2) waives any defenses based upon, and
specifically assents to, any and all extensions and postponements of the time of
payment and all other indulgences and forbearances which may be granted by the
holder to any party hereon; (3) agrees to any substitution, exchange, release,
surrender or other delivery of any collateral held hereunder and to the addition
or release of any other party or person primarily or secondarily liable; and (4)
agrees to be bound by all the terms contained in this note and agrees that the
obligations and agreements of all such parties shall be joint and several.
No delay or omission on the part of the holder in exercising any right
hereunder shall operate as waiver of such right or of any other right of such
holder, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the alteration or modification of the terms of this note and
only to the extent therein set forth.
Any default under the note or in the performance and observance of the
provisions of any mortgage, security agreement or other agreement pertaining
thereto shall be deemed a default on all other notes, obligations and
liabilities of all parties liable hereon to the holder, whether now existing or
hereafter arising, and any default on any other note, obligation or liability of
any party liable hereon to the holder, whether now existing or hereafter
arising, shall also be deemed a default under this note.
No single or partial exercise of any power hereunder or under any
mortgage or security agreement securing this note shall preclude other or future
exercise thereof or the exercise of any other power. The holder thereof shall at
all times have the right to proceed against any portion of the security held
herefore in such order and in such manner as the holder may see fit, without
waiving any rights with respect to any other security.
All times of payment of principal, interest or any other monies due
under or in respect of this note shall be of the strict essence, provided,
however, that all indebtedness evidenced by this note may be prepaid in whole or
in part at any time without penalty.
<PAGE> 3
If any term or provision of this note, or any portion of any such term
or provision, shall be held invalid or against public policy, or if the
application of the same to any person or circumstance is held invalid or against
public policy, then the remainder of this note (or the remainder of such term or
provision) and the application thereof to other persons or circumstances shall
not be affected thereby and shall remain valid and in full force and effect to
the fullest extent permitted by the law.
All rights and obligations hereunder shall be governed by the laws of
the Commonwealth of Massachusetts and this note is executed as and shall have
the effect of a sealed instrument. Notwithstanding any provision herein or in
any instrument now or hereafter securing this note, the total liability for
payments in the nature of interest shall not exceed the limitations now imposed
by the applicable laws of the state whose laws are controlling on the subject as
shall be determined by final order of a court of competent jurisdiction.
EXECUTED as an instrument under seal as of MARCH 3, 1998 , and the
instrument shall be effective as of July 11, 1997.
Signed in the presence of:
/s/Cheryl K. Lawton /s/Gregory F. Liposky
- ---------------------------- --------------------------------
Gregory F. Liposky
<PAGE> 1
Exhibit 10.53
September 17, 1997
Carl M. Cohen, Ph.D.
15 Magnolia Avenue
Newton, MA 02158
Dear Carl,
It is with pleasure that I extend to you an offer to join Creative BioMolecules,
Inc. The terms of this offer are summarized below.
Title and Duties: Vice President of Research, reporting to President and
CEO. Your duties will be determined by the President,
consistent with your position.
Term: Commencing on November 3, 1997, and continuing
thereafter until terminated by either you or the Company
under the provisions of this letter agreement.
Salary: Base salary of $14,666.67 per month, which is an
annualized salary of $176,000.00 payable in accordance
with the Company's standard payroll practices. You will
be eligible for your first merit increase in January
1999 for the fourteen month period November 1997 -
December 1998.
Sign-on Bonus: You will be eligible for a $10,000 sign-on bonus,
payable after the completion of 30 days starting with
your commencement of employment ("Commencement Date").
Bonus: You will be eligible for a first year bonus up to 20% of
your base salary. The payment of a bonus will reflect
substantial completion of reasonable goals and
objectives which we will mutually determine. A bonus
will not be paid even if objectives have been achieved,
if the Company decides not to pay Company bonuses in a
given year. Future bonus arrangements will be determined
on an annual basis by mutual agreement.
<PAGE> 2
Carl M. Cohen, Ph. D.
September 17, 1997
Page Two
Equity Participation: Subject to the approval of the Board of Directors, you
will be granted stock options under the Company's 1987
Stock Plan to purchase an aggregate of 100,000 shares of
Common Stock, with the exercise price to be the fair
market value of the Common Stock on the date of grant as
determined by the Board of Directors. The options will
vest annually over a four year period and will be
subject to the other terms and conditions of the option
agreement(s) to be entered into between you and the
Company. Such agreement(s) will include a provision
permitting exercise of the options with payment made by
you through a loan from the Company. The agreement(s)
will also include a provision for acceleration of the
vesting of the options, substantially as follows:
"In case of (i) any consolidation or merger of the
Company with or into any other corporation or
corporations (other than a merger with a wholly-owned
subsidiary or a merger in which stockholders of the
Company have beneficial ownership of more than 50% of
the share capital of the surviving company, (ii) a sale
of all or substantially all of the assets of the Company
or (iii) the acquisition by a third party (together with
its affiliates or persons acting in concert with) of
beneficial ownership of more than fifty percent (50%) of
the share capital of the Company, then immediately prior
to the consummation of any such transaction this option
shall become fully exercisable."
Benefits: Benefits to include:
-group health and dental insurance
-group life and AD&D insurance
-group short and long term disability insurance
-401(k) savings plan
-3 weeks vacation, under the Company's standard policy
<PAGE> 3
Carl M. Cohen, Ph. D.
September 17, 1997
Page Three
The Company will also reimburse you for any reasonable
out-of-pocket business expenses you incur in the course
of your employment, subject to documentation in
accordance with Company policies.
Severance Package: If your employment with the Company is terminated at any
time during the 12-month period after the Commencement
Date, for any reason other than your resignation or
termination by the Company for "cause" (as defined
below), the Company will continue to pay your base
salary and provide you with health, dental, and life
insurance benefits for 6 months after the effective date
of such employment termination. As used in this letter
agreement, "cause" shall mean (i) illegal, dishonest or
negligent conduct which constitutes a breach of your
obligations under this agreement, or which involves an
improper use of the funds or assets of the Company, or
(ii) any conduct which is likely to have a material
adverse impact on the goodwill, reputation or business
of the Company.
In addition, upon acceleration of the vesting of your
stock options as set forth in this letter agreement, the
Company will pay you a severance package which is
consistent with severance paid to other officers of the
Company.
Confidentiality and
Inventions Assignment: You agree to be bound by the terms of the Company's
confidentiality and inventions assignment provisions,
pursuant to a separate agreement to be signed by the
Company prior to the Commencement Date. You also hereby
represent and warrant that you have no commitments or
obligations inconsistent with this agreement, including
such confidentiality and inventions assignment
provisions, and you hereby agree to indemnify and hold
the Company harmless against any claim based upon
circumstances alleged to be inconsistent with such
representation and warranty.
<PAGE> 4
Carl M. Cohen, Ph. D.
September 17, 1997
Page Four
Governing Law and
Miscellaneous
Provisions: This agreement shall be governed by and construed under
the laws of the Commonwealth of Massachusetts, without
application of the conflicts of law provisions thereof.
This agreement, including the above-referenced stock
option agreement and the confidentiality and inventions
assignment agreement, embodies the entire agreement and
understanding between you and the Company regarding the
subject matter hereof. This agreement shall not be
modified or amended except by an instrument in writing
signed by you and the Company. The Company may assign
its rights and obligations under this agreement to any
person or entity who succeeds to all of the Company's
business or that aspect of the Company's business in
which you are principally involved. Your rights and
obligations under this agreement may not be assigned
without the prior written consent of the Company.
Subject to the foregoing, this agreement shall be
binding upon and inure of the benefit of the Company and
any parent, subsidiary or other affiliate, and their
respective successors and assigns and shall be binding
upon and inure to the benefit of you and your heirs,
executors, administrators and assigns. This agreement
may be executed in one or more counterparts each of
which shall be deemed to be an original, but all of
which together shall constitute one and the same
instrument.
Should you wish to discuss any aspect of this employment offer, please feel free
to contact me. If the terms of employment are acceptable, please sign this
letter (a copy for your files is enclosed) and return it to me by Monday,
September 22, 1997.
We believe that Creative BioMolecules will provide an exciting and stimulating
work environment, and look forward to your arrival.
Sincerely,
Agreed to:
/s/ Michael Tarnow
Michael M. Tarnow /s/ Carl M. Cohen
- ------------------------------- -------------------------------
President & CEO Carl M. Cohen, Ph. D.
Enclosure
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-68084, 33-83276 and 33-91150 on Form S-3 and Registration Statement Nos.
33-56706, 33-61884, 33-80945, 333-36171 and 333-36175 on Form S-8 of Creative
BioMolecules, Inc. of our report dated March 5, 1998, appearing in the Annual
Report on Form 10-K of Creative BioMolecules, Inc. for the year ended December
31, 1997.
/s/ Deloitte & Touche LLP
Boston, Massachsuetts
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND FOR THE
YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<CASH> 2,158,909
<SECURITIES> 28,438,841
<RECEIVABLES> 4,572,518
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<INVENTORY> 1,249,330
<CURRENT-ASSETS> 36,704,247
<PP&E> 31,377,616
<DEPRECIATION> (14,132,278)
<TOTAL-ASSETS> 59,037,999
<CURRENT-LIABILITIES> 4,323,730
<BONDS> 2,004,927
0
0
<COMMON> 333,926
<OTHER-SE> 52,375,416
<TOTAL-LIABILITY-AND-EQUITY> 59,037,999
<SALES> 0
<TOTAL-REVENUES> 15,432,759
<CGS> 0
<TOTAL-COSTS> 273,757
<OTHER-EXPENSES> 25,122,039
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<INTEREST-EXPENSE> 215,815
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