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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 March 31, 2000
OR
[ ] 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 0-19267
ALKERMES, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2472830
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
64 Sidney Street, Cambridge, MA 02139-4234
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 494-0171
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share ("Common Stock")
$3.25 Convertible Exchangeable Preferred Stock
3-3/4% Convertible Subordinated Notes due 2007
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(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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) 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]
Based upon the last sale price of the Registrant's Common Stock on June
7, 2000, the aggregate market value of the 50,425,462 outstanding shares of
voting and non-voting common equity held by non-affiliates of the Registrant was
$2,332,177,618.
As of June 7, 2000, 53,957,148 shares of the Registrant's Common Stock
were issued and outstanding, and 382,632 shares of the Registrant's Non-Voting
Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
this Report on Form 10-K:
1) Definitive Proxy Statement to be filed within 120 days after
March 31, 2000 for the Registrant's Annual Shareholders'
Meeting to be held on July 25, 2000 (Part III).
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PART I
ITEM 1. BUSINESS
The following Business section contains forward-looking statements
which involve risks and uncertainties. The Registrant's actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors. See "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Statements."
GENERAL
Alkermes, Inc. (together with its subsidiaries, referred to as "we",
"us" or the "Registrant"), a Pennsylvania corporation organized in 1987, is
applying the tools of biotechnology to the development of sophisticated
proprietary drug delivery systems. We are developing product candidates, with
partners and on our own, based on our independent drug delivery technologies in
several areas of focus: (i) controlled, sustained release of injectable drugs
lasting several days to several weeks, utilizing our ProLease(R) and Medisorb(R)
technologies; (ii) the development of pharmaceutical products based on
proprietary pulmonary drug delivery technologies utilizing our Advanced
Inhalation Research ("AIR(TM)") technology; (iii) the delivery of drugs into the
brain past the blood-brain barrier utilizing our Cereport(R) technology; and
(iv) oral delivery of drugs utilizing our RingCap(TM) technology and dose
sipping technology ("DST"). We currently have one product approved by the United
States Food and Drug Administration ("FDA") and are in various stages of
preclinical and clinical development of several product candidates utilizing
these drug delivery systems.
OVERVIEW OF DRUG DELIVERY
Drug delivery technologies can improve the way a drug is administered.
Products utilizing drug delivery technologies are generally novel,
cost-effective dosage forms that provide any of several benefits including
control of drug concentration in the blood, improved safety and efficacy,
improved patient compliance and ease of use and expanded indications. Drug
delivery technologies can provide pharmaceutical companies with a means of
developing new products, as well as expanding existing drug franchises. In
addition, drug delivery companies can apply their technologies to off-patent or
proprietary products to develop drugs for their own account.
The drug delivery industry emerged to address the opportunities for
improved delivery of traditional pharmaceutical compounds. These compounds are
generally stable, small molecules manufactured by conventional synthetic
methods, for which oral or transdermal (through the skin) delivery could be
enabled or enhanced by drug delivery technologies. Technologies such as passive
transdermal systems (patches) and improved tablets and capsules have been
developed and successfully applied to a range of pharmaceutical products. In
addition, certain traditional small molecule pharmaceuticals are delivered by
means of encapsulation in polymeric microspheres.
With the advent of biotechnology, new opportunities in drug delivery
have arisen. Advances in biotechnology have facilitated the development of a new
generation of biopharmaceutical products based on proteins, peptides and nucleic
acids. At the same time, the scientific tools of biotechnology have enabled new
approaches to drug delivery based on exploiting particular biological phenomena,
for example utilizing the lung for systemic delivery of proteins and peptides.
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Proteins and peptides present drug delivery challenges because they are
often large molecules which degrade rapidly in the bloodstream, have limited
ability to cross cell membranes and generally cannot be delivered orally. As a
result, many biopharmaceuticals must be administered by injection, often
multiple times per day or per week. Consequently, the methods of administration
of biopharmaceuticals can limit their clinical applications to certain disease
states that warrant the expense and inconvenience of frequent injection.
Delivery of drugs via the lungs or by oral administration also presents
challenges. The effectiveness of pulmonary dosage forms is often limited by the
poor efficiency of pulmonary devices and the difficulty of administering high
doses of certain drugs. In addition, drugs that act systemically require
deposition in the deep lung, which can lead to the use of complicated and
expensive devices. For certain oral medications, high doses of the drug are
often necessary, requiring patients to swallow numerous large pills. In
addition, many patients have difficulty swallowing pills. Often it is necessary
to take a number of doses per day, which lowers patient compliance and may cause
certain side effects associated with high drug concentrations in the blood.
Drug delivery to the central nervous system is complicated by the
existence of the blood-brain barrier, the layer of tightly joined endothelial
cells which comprise the walls of the capillaries of the brain and limit the
free flow of many blood constituents into the brain. Many drugs cannot easily
cross the blood-brain barrier, and therefore must be administered in relatively
high doses that may result in systemic toxicity or high cost. Drugs with limited
ability to cross the blood-brain barrier include many water soluble
chemotherapeutic and anti-infective agents that are frequently used in the
treatment of diseases outside of the central nervous system.
BUSINESS STRATEGY
Our business strategy is to develop and acquire drug delivery systems
to address significant new drug delivery opportunities arising in the
pharmaceutical industry. There are five key elements to our strategy:
Develop and acquire broadly applicable drug delivery systems and apply
them to multiple pharmaceutical products. We develop or acquire drug delivery
systems that have the potential to be applied to multiple proteins, peptides and
small molecule pharmaceutical compounds to create new product opportunities. For
example, we are developing the Cereport technology independently and acquired
the ProLease, Medisorb, AIR, DST and RingCap technologies. We currently have
several product candidates utilizing these technologies in development.
Collaborate to develop and finance product candidates. In addition to
conducting product development activities on our own, we have entered into
collaborations with pharmaceutical and biotechnology companies and others to
develop product candidates incorporating our technologies, to provide funding
for product development independent of capital markets and to share development
risk. Currently, we are collaborating with major pharmaceutical and
biotechnology companies, including ALZA Corporation ("ALZA"), Amylin
Pharmaceuticals, Inc. ("Amylin"), Ares-Serono International S.A.
("Ares-Serono"), Eli Lilly and Company Limited ("Eli Lilly"), Genentech, Inc.
("Genentech"), Glaxo Group Limited ("Glaxo Wellcome"), Janssen Pharmaceutica
International ("Janssen"), and MedImmune, Inc. ("MedImmune").
Apply drug delivery systems to both approved drugs and drugs in
development. We are applying our drug delivery technologies to novel
applications and formulations of pharmaceutical products that have already been
approved by the FDA or other regulatory authorities. In such cases, we and our
partners can develop a novel dosage form or application with the knowledge of a
drug's safety and efficacy profile and a body of clinical experience from which
to draw information for the design of clinical trials and for
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regulatory submissions. We are also applying our technologies to pharmaceuticals
in development that could benefit from one of our delivery systems.
Establish independent product development capabilities. We have
assembled our own product development organization to enable us to develop
product candidates for ourselves and our collaborators based on our drug
delivery technologies. This capability gives us flexibility in structuring
development programs and the ability to conduct both feasibility studies and
clinical development programs for ourselves and our collaborators. For example,
we are developing naltrexone and AlbuLast(TM) independently and are conducting
all of the clinical trials of Nutropin Depot(TM) (ProLease rhGH) for Genentech.
Develop proprietary product candidates. We are beginning to develop
products for our own account by applying our drug delivery technologies to
certain off-patent pharmaceuticals. In addition, we may in-license or acquire
certain compounds to develop on our own. For example, we are developing a
Medisorb formulation of naltrexone for the treatment of alcoholism and a
long-acting formulation of albuterol using our AIR technology.
DRUG DELIVERY TECHNOLOGY
Our current focus is on the development of broadly applicable drug
delivery technologies addressing several important drug delivery opportunities,
including injectable sustained release of proteins, peptides and small molecule
pharmaceutical compounds, the pulmonary delivery of both small molecules and
proteins and peptides, drug delivery to the brain across the blood-brain
barrier and oral drug delivery systems. We are applying delivery technologies
to develop programs for our collaborators and for our own account.
ProLease: injectable sustained release of fragile proteins and peptides
ProLease is our proprietary technology for the stabilization and
encapsulation of fragile proteins and peptides in microspheres made of common
medical polymers. Our proprietary expertise in this field lies in our ability to
preserve the biological activity of fragile drugs over an extended period of
time and to manufacture these formulations using components and processes
believed to be suitable for human pharmaceutical use. ProLease is designed to
enable novel formulations of proteins and peptides by replacing frequent
injections with controlled, sustained release over time. We believe ProLease
formulations have the potential to improve patient compliance and ease of use by
reducing the need for frequent self-injection, to lower costs by reducing the
need for frequent office visits and to improve safety and efficacy by reducing
both the variability in drug levels inherent in frequent injections and the
aggregate amount of drug given over the course of therapy. In addition, ProLease
may provide access to important new markets currently inaccessible to drugs that
require frequent injections or are administered orally.
The ProLease formulation process has been designed to assure stability
of fragile compounds during the manufacturing process, during storage and
throughout the release phase in the body. The formulation and manufacturing
process consists of two basic steps. First, the drug is formulated with
stabilizing agents and dried to create a fine powder. Second, the powder is
microencapsulated at very low temperatures. Incorporation of the drug substance
as a stabilized solid under very low temperatures is critical to protecting
fragile molecules from degradation during the manufacturing process and is a key
element of the ProLease technology. The microspheres are suspended in a small
volume of liquid prior to administration to a patient by injection under the
skin or into a muscle. We believe drug release from the ProLease drug delivery
system can be controlled to last from a few days to several months.
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Drug release from the microsphere is controlled by diffusion of the
drug through the microsphere and by biodegradation of the polymer. These
processes can be modulated through a number of formulation and fabrication
variables, including drug substance and microsphere particle sizing and choice
of polymers and excipients.
Our experience with the application of ProLease to a wide range of
proteins and peptides has shown that high incorporation efficiencies and high
drug loads can be achieved. Proteins and peptides incorporated into ProLease
microspheres have maintained their integrity, stability and biological activity
for up to 30 days in in vitro experiments conducted on formulations manufactured
at the preclinical, clinical trial and commercial scale.
Medisorb: injectable sustained release of traditional small molecule
pharmaceuticals
Medisorb is our proprietary technology for encapsulating traditional
small molecule pharmaceuticals in microspheres made of common medical polymers.
Like ProLease, Medisorb is designed to enable novel formulations of
pharmaceuticals by providing controlled, sustained release over time. We believe
Medisorb is suitable for encapsulating stable, small molecule pharmaceuticals at
a large scale. We believe that Medisorb formulations may have superior features
of safety, efficacy, compliance and ease of use for drugs currently administered
by frequent injection or administered orally. Drug release from the microsphere
is controlled by diffusion of the pharmaceutical through the microsphere and by
biodegradation of the polymer. These processes can be modulated through a number
of formulation and fabrication variables, including drug substance and
microsphere particle sizing and choice of polymers and excipients.
The Medisorb drug delivery system uses manufacturing processes
different from the ProLease manufacturing process. The formulation and
manufacturing process consists of three basic steps. First, the drug is combined
with a polymer solution. Second, the drug/polymer solution is mixed in water to
form liquid microspheres (an emulsion). Third, the liquid microspheres are dried
to produce finished product. The microspheres are suspended in a small volume of
liquid prior to administration to a patient by injection under the skin or into
a muscle. We believe drug release from the Medisorb system can be controlled to
last from a few days to several months.
AIR: pulmonary drug delivery
The AIR technology is our proprietary pulmonary delivery system that
enables the delivery of both small molecules and macromolecules to the lungs.
Our proprietary technology allows us to formulate drugs into dry powders made up
of highly porous particles with low mass density. These particles can be
efficiently delivered to the deep lung by a small, simple inhaler. The AIR
technology is useful for small molecules, proteins or peptides and allows for
both local delivery to the lungs and systemic delivery via the lungs.
AIR particles can be aerosolized and inhaled efficiently with simple
inhaler devices because low forces of cohesion allow the particles to
deaggregate easily. AIR is developing a family of relatively inexpensive,
compact, easy to use inhalers. The AIR devices are breath activated and made
from injection molded plastic. The powders are designed to quickly discharge
from the device over a range of inhalation flow rates, which may lead to low
patient-to-patient variability and high lung deposition of the inhaled dose. By
varying the ratio and type of excipients used in the formulation, we believe we
can deliver a range of drugs from the device that may provide both immediate and
sustained release.
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Cereport: drug delivery across the blood-brain barrier
Cereport is a nine amino acid peptide based on bradykinin, a compound
occurring naturally in the body and known to affect vascular permeability.
Cereport is a proprietary, synthetic analog of bradykinin developed by us to
increase transiently the permeability of the blood-brain barrier. Following
injection, Cereport increases permeability by triggering a brief relaxation of
the tight cellular junctions of the blood-brain barrier. During the time the
tight junctions are relaxed, permeability is increased and drug molecules in the
bloodstream can diffuse into the brain in concentrations greater than can
usually be achieved without Cereport. Preclinical and clinical data also suggest
that Cereport increases the uptake of pharmaceuticals in the region of brain
tumor and other pathology.
Cereport exerts a pharmacologic effect on the vasculature of the brain
and does not itself bind to or serve as a carrier for the drug of which it is
facilitating delivery. We are developing Cereport to be manufactured, packaged
and dispensed as a standalone product. In the clinical setting, Cereport is
administered in conjunction with the therapeutic or diagnostic agent. Timing of
Cereport administration relative to that of the therapeutic or diagnostic agent
is determined on a drug-by-drug basis to optimize barrier permeability during
the time of peak drug plasma concentrations.
Cereport is intended to be marketed as an independent agent to increase
the utility of other therapeutic and diagnostic compounds given with it. We
believe Cereport may be administered along with cancer chemotherapeutic and
anti-infective agents not currently used in the treatment of central nervous
system disorders because of their limited ability to penetrate the blood-brain
barrier.
DST (Dose Sipping Technology) and RingCap: oral drug delivery systems
Dose Sipping Technology. DST provides a convenient, simple way to
administer medication to patients who have difficulty swallowing tablets or
capsules, such as children and the elderly. This proprietary system works by
putting a granulated form of a drug in a specially designed straw. As the
patient draws fluid through the disposable straw, the drug mixes with the fluid
and the patient receives a precise dose of the drug. The system can be used with
a wide variety of drugs in a granulated form. We manufacture the DST system
using specially designed machinery and granulated drug provided by our
collaborative partners.
RingCap. RingCap is a controlled release tablet dosage form which is
designed to reduce the number of times per day that oral drugs must be taken.
The RingCap system is unlike currently available controlled release tablets,
which generally release decreasing amounts of a drug over time. Instead, RingCap
is designed to deliver the total dose evenly over an extended period. The system
works by imprinting the tablet with a series of insoluble rings made of
polymers, which then control the erosion rate of a drug tablet in the
gastrointestinal tract. By varying the number, width and placement of the bands
on the tablets, we can change the release profile of the drug. We believe
RingCap may provide a cost-effective way to manufacture controlled release
tablets.
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PRODUCT CANDIDATES IN DEVELOPMENT
The following table summarizes the primary indications, delivery
method, development status and collaborative partner for each of our product
candidates. This table is qualified in its entirety by reference to the more
detailed descriptions appearing elsewhere in this Form 10-K. The results from
preclinical testing and early clinical trials may not be predictive of results
obtained in subsequent clinical trials and there can be no assurance that our or
our collaborators' clinical trials will demonstrate the safety and efficacy of
any product candidates necessary to obtain regulatory approval.
<TABLE>
<CAPTION>
PRODUCT COLLABORATIVE
CANDIDATE INDICATION DELIVERY METHOD STATUS(1) PARTNER
--------- ---------- --------------- --------- -------------
<S> <C> <C> <C> <C>
PROLEASE
rhGH Growth Hormone SR Injection(2) Marketed Genentech
Deficiency in Children
Growth Hormone SR Injection Phase I Genentech
Deficiency in Adults
Undisclosed Undisclosed SR Injection Preclinical Ares-Serono
Others Various SR Injection Preclinical Undisclosed
MEDISORB
RISPERDAL(TM) Schizophrenia SR Injection Phase III Janssen
Naltrexone Alcoholism SR Injection Preclinical Alkermes
Exendin-4 Type 2 Diabetes SR Injection Preclinical Amylin
Others Various SR Injection Preclinical Undisclosed
AIR
AlbuLast Asthma Pulmonary Phase I/II Alkermes(3)
Undisclosed Respiratory Disease Pulmonary Preclinical Glaxo Wellcome
rhGH Growth Hormone Pulmonary Preclinical Eli Lilly
Deficiency
Monoclonal Antibody RSV Pulmonary Preclinical MedImmune
Insulin Diabetes Pulmonary Preclinical Alkermes
Others Various Pulmonary Preclinical Undisclosed
CEREPORT(4)
Cereport and
Carboplatin Metastatic Brain Tumor Intravenous Phase II Alkermes Clinical
Partners, L.P.
("Clinical Partners")
Recurrent Malignant Intravenous Phase II Clinical Partners
Glioma Intra-arterial
Pediatric Brain Intravenous Phase I/II(5) Clinical Partners
Tumor
DST
Undisclosed Various Oral Preclinical Undisclosed
RINGCAP
Undisclosed Various Oral Controlled Preclinical Undisclosed
Release
</TABLE>
------------
(1) See "Government Regulation" for definitions of "Phase I," "Phase II"
and "Phase III" clinical trials. "Phase I/II" clinical trials indicates
that the compound is being tested in humans for safety and preliminary
indications of biological activity in a limited patient population.
"Preclinical" indicates that we or our partners are conducting
formulation, efficacy, pharmacology and/or toxicology testing of a
compound in animal models or biochemical assays.
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(2) Sustained release injection.
(3) An undisclosed pharmaceutical company has an option to develop
AlbuLast.
(4) ALZA has an option to obtain co-development and worldwide marketing
rights to Cereport pursuant to an agreement entered into as of
September 1997.
(5) This clinical trial is being sponsored and conducted by the Pediatric
Branch of the National Cancer Institute.
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PROLEASE
Product development strategy. Our strategy is to generate multiple
partnered and proprietary product opportunities by applying ProLease technology
to the development of superior formulations of proteins and peptides that we
believe address significant market opportunities. We believe these formulations
have the potential to expand the utilization of these products and improve the
competitive advantage to us and our collaborators in major markets.
The product development plan for individual ProLease formulations is
expected to proceed in several stages. First, we, either on our own or pursuant
to a collaboration, conduct initial feasibility work to test various ProLease
formulations for a particular drug in vitro and in vivo. Second, following the
successful completion of the feasibility stage, preclinical development and
manufacturing scale-up activities directed toward the initiation of clinical
trials of the ProLease formulation would be conducted in collaboration with a
partner or on our own. See "Collaborative Arrangements."
ProLease recombinant human growth hormone. We have developed a ProLease
formulation of Genentech's rhGH, known as Nutropin Depot, in collaboration with
Genentech. On December 23, 1999, the FDA approved Nutropin Depot for use in
growth hormone-deficient children. This new formulation requires only one or two
doses a month (which may require more than one injection per dose) compared to
current growth hormone therapies, that require multiple doses per week
(frequently daily). Growth hormone deficiency ("GHD") results in short stature
and potentially other developmental defects. Genentech is the leading supplier
of rhGH in the United States. rhGH is approved for use in the treatment of
children with growth hormone deficiency, Turner's syndrome, chronic renal
insufficiency and other indications and is being tested in additional
indications in adults. rhGH is currently administered frequently, often daily,
by subcutaneous injection.
Nutropin Depot was launched on June 28, 2000. Genentech will market
Nutropin Depot in the United States and has licensed the marketing rights for
Nutropin Depot to Schwarz Pharma AG in Europe and Sumitomo Pharmaceuticals
Company, Limited in Japan. We will perform the manufacturing operations that
convert Genentech's Nutropin bulk product into the long-acting dosage form.
The GHD market is highly competitive and we cannot assure you that the
launch of Nutropin Depot will be successful or that it will gain market share.
Additionally, we cannot assure you that we will be able to manufacture Nutropin
Depot on a commercial scale or economically, nor that we will be able to derive
significant revenues from sales of Nutropin Depot. If the launch of Nutropin
Depot is not successful, if we cannot manufacture it on a commercial scale or
economically or if we do not derive significant revenues from Nutropin Depot,
these events could have a material adverse effect on our business and financial
position.
Undisclosed protein. We are developing a ProLease formulation of an
undisclosed protein with Ares-Serono. The product development program for this
product candidate was announced in January 2000 after the completion of a
feasibility study. Ares-Serono will conduct clinical studies for this program
and will be responsible for further clinical development, if any.
Additional ProLease formulations. We continue to develop ProLease
formulations of other undisclosed compounds pursuant to feasibility agreements
with several pharmaceutical and biotechnology companies and for our own
account.
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MEDISORB
Product development strategy. Our strategy is to generate multiple
product opportunities by applying Medisorb technology to the development of
superior formulations of small molecule pharmaceutical products. We believe
these formulations have the potential to expand the utilization of these
products and improve the competitive advantage of our collaborators in major
markets.
The product development plan for individual Medisorb formulations is
expected to proceed in several stages. First, we, either on our own or pursuant
to a collaboration, conduct initial feasibility work to test various Medisorb
formulations for a particular drug in vitro and in vivo. Following the
successful completion of the feasibility stage, preclinical development and
manufacturing scale-up activities directed toward the initiation of clinical
trials of the Medisorb formulation would be conducted in collaboration with a
partner or on our own. See "Collaborative Arrangements."
RISPERDAL. We are developing and manufacturing a Medisorb sustained
release formulation of Janssen's anti-psychotic drug RISPERDAL. Janssen is an
affiliate of Johnson & Johnson. In April 1999, Janssen announced its intention
to proceed with two Phase III clinical trials of RISPERDAL Depot, after
completing Phase I and Phase II clinical trials. In addition, we have completed
scale-up and Phase III manufacturing activities at the expected commercial
scale. We will manufacture the Medisorb formulation of RISPERDAL for both the
clinical trials and commercial sales, if any. Janssen is responsible for
conducting all clinical trials.
Naltrexone. We are developing and manufacturing a Medisorb formulation
of naltrexone, a generic drug approved for use in the treatment of alcoholism
and drug abuse. Our Medisorb formulation of naltrexone is currently in the
preclinical stage of development. We will manufacture the Medisorb formulation
of naltrexone for both clinical trials and commercial sales, if any.
Exendin-4. In May 2000, we signed a development and license agreement
with Amylin for the development of a Medisorb formulation of exendin-4, a drug
being developed for use in the treatment of type 2 diabetes. Our Medisorb
formulation of exendin-4 is currently in the preclinical stage of development.
We will manufacture the Medisorb formulation of exendin-4 for both clinical
trials and commercial sales, if any.
Additional Medisorb formulations. We continue to develop Medisorb
formulations of other undisclosed compounds pursuant to feasibility agreements
with pharmaceutical and biotechnology companies and for our own account.
AIR
Product development strategy. Our strategy is to generate multiple
product opportunities by applying the AIR technology to the development of
superior pulmonary formulations of small molecules and proteins and peptides. We
believe these formulations have the potential to expand the utilization of these
products and improve the competitive advantage of our collaborators in major
markets.
The product development plan for individual AIR formulations is
expected to proceed in several stages. First, we, either on our own or pursuant
to a collaboration, conduct initial feasibility work to test various AIR
formulations for a particular drug in vitro and in vivo. Following the
successful completion of the feasibility stage, preclinical development and
manufacturing scale-up activities directed toward the initiation of clinical
trials of the AIR formulation would be conducted in collaboration with a partner
or on our own.
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AlbuLast. We have formulated and have conducted Phase I clinical trials
and are currently conducting Phase I/II clinical trials for an AIR formulation
of AlbuLast, our proprietary formulation of albuterol sulfate, which is designed
to provide both immediate and long-term relief from asthma symptoms. An
undisclosed pharmaceutical company has an option to develop AlbuLast with AIR in
exchange for certain development funding as well as milestones and royalties.
Glaxo Wellcome. In May 2000, we signed a development and license
agreement with Glaxo Wellcome to develop certain product candidates for the
treatment of four designated fields of respiratory diseases based on our AIR
pulmonary drug delivery technology. The agreement is subject to compliance with
the notification requirements under the Hart-Scott-Rodino Antitrust Act of 1976.
This agreement followed the completion of a 12 month feasibility program with
Glaxo Wellcome. We are currently in the preclinical stage of development. We and
Glaxo Wellcome each have certain rights and obligations with regard to
manufacturing any formulations for commercial sales.
Eli Lilly. In February 2000, we signed a development and license
agreement with Eli Lilly to develop an inhaled formulation of human growth
hormone based on our AIR pulmonary drug delivery technology. The agreement
followed the completion of a nine-month feasibility program conducted by the two
companies. The formulation is currently in the preclinical stage of development.
We will manufacture the formulation of human growth hormone for both clinical
trials and commercial sales, if any.
MedImmune. In June 2000, we signed a development and license agreement
with MedImmune to develop an AIR formulation of a monoclonal antibody for the
treatment of respiratory syncytial virus ("RSV"). The formulation is currently
in the preclinical stage of development. We will manufacture the formulation of
the monoclonal antibody for both clinical trials and commercial sales, if any.
Additional AIR formulations. We continue to develop AIR formulations of
other undisclosed compounds pursuant to feasibility agreements with undisclosed
partners and for our own account.
CEREPORT
Product development strategy. Our strategy to date has been to advance
Cereport through clinical trials while establishing its safety, permeability
effects in humans and efficacy when used in combination with other drugs. To
support the clinical development of Cereport, we formed and transferred
substantially all of our rights to Cereport technology to Clinical Partners,
which completed a $46.0 million unit offering in April 1992. We have the option
to purchase all of the limited partnership interests in Clinical Partners. As of
September 30, 1997, we entered into an agreement with ALZA relating to the
development and commercialization of Cereport. Under the terms of the agreement,
ALZA made an upfront payment of $10.0 million to Alkermes to fund clinical
development in return for an option to obtain exclusive worldwide
commercialization rights to Cereport, subject to the rights of Clinical
Partners. See "Collaborative Arrangements -- Clinical Partners" and
"Collaborative Arrangements -- ALZA."
Cereport has the potential to be used in combination with a variety of
agents in various disease settings. Our goal is to expand the applications of
Cereport through our own development activities and, when appropriate,
collaborations with pharmaceutical companies, subject to any commercialization
rights of ALZA. We may collaborate with companies having drugs whose uses could
be expanded to include central nervous system indications. In such cases, we and
our partner could collaborate in the clinical development of the combination
without any exchange of product rights.
Metastatic brain tumor. We are conducting a Phase II clinical trial of
Cereport and carboplatin in patients with metastatic brain tumors, or tumors
that have spread to the brain from other sites in the body. The study also
includes a dose escalation component in which progressively larger doses of
Cereport are
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being investigated in this patient population. The clinical trial phase of this
study was completed in 1999. The results are expected to provide information
useful for determining whether to proceed with further clinical trials in this
indication.
Recurrent malignant glioma. We have completed a Phase II clinical trial
of Cereport and carboplatin in patients with recurrent malignant glioma.
Pediatric brain tumor. The Pediatric Branch of the National Cancer
Institute has conducted two separate studies of Cereport and carboplatin in
pediatric patients with primary brain tumors. The first study began in August
1996. The study is a non-controlled, open label Phase I/II clinical trial of
intravenous Cereport and carboplatin in pediatric brain tumor patients who have
failed other therapies. The second study began in June 1998, and is a Phase II
multi-center study in pediatric brain tumor patients.
ORAL TECHNOLOGIES
The RingCap and DST technologies, licensed from ALZA in April 1998, are
both in the preclinical stage of development.
COLLABORATIVE ARRANGEMENTS
Our business strategy includes forming collaborations to provide
technological, financial, marketing, manufacturing and other resources. We have
entered into several corporate collaborations.
GENENTECH
In November 1996, Genentech exercised its option to enter into a
license agreement and obtained from us a license for a ProLease formulation of
rhGH. In April 1999, Alkermes and Genentech amended and restated the license
agreement to expand our collaboration for Nutropin Depot, an injectable
long-acting formulation of Genentech's recombinant human growth hormone based
upon our ProLease drug delivery system. Under the agreement, we and Genentech
have been conducting expanded development activities, including clinical trials
in an additional indication, process and formulation development and
manufacturing. We will be responsible for conducting additional clinical trials
and manufacturing for Nutropin Depot and are to receive manufacturing revenues
and royalties on product sales, if any.
Genentech has the right to terminate the agreement for any reason upon
six months' written notice. In addition, either party may terminate the
agreement upon the other party's material default which is not cured within 90
days of written notice, or upon the other party's insolvency or bankruptcy.
In connection with the expanded collaboration in April 1999, Genentech
purchased 3,500 shares of our 1999 redeemable convertible exchangeable preferred
stock for an aggregate purchase price of $35 million. The proceeds from the sale
of our 1999 preferred stock are used to fund our expanded rhGH program for
calendar years 1999 and 2000. In February 2000, Genentech exercised its option
to convert the 1999 convertible preferred stock together with accrued and paid
dividends into 322,376 shares of our common stock and 382,632 shares of our
non-voting common stock.
To fund our activities during the initial phase of the collaboration,
Genentech loaned us the aggregate amount of $3.5 million pursuant to a
convertible note in January 1995 (the "Note"). The outstanding principal amount
of the Note and accrued but unpaid interest thereon was due and payable in
January 2000. Pursuant to the terms of the Note, in January 2000, we converted
the principal and accrued interest of the Note in an amount of approximately
$5.2 million into 215,476 shares of our common stock.
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JANSSEN
Pursuant to a development agreement, we are collaborating with Janssen,
an affiliate of Johnson & Johnson, in the development of a sustained release
formulation of RISPERDAL utilizing the Medisorb technology. In October 1996, we
announced the expansion of the development agreement. Under the development
agreement, we are responsible for production of RISPERDAL Depot for clinical
trials. Janssen is responsible for conducting clinical trials of RISPERDAL Depot
and securing all necessary regulatory approvals. Janssen provides development
funding to us, assuming RISPERDAL Depot continues in clinical development. We
will manufacture any such products for commercial sale and are to receive
manufacturing revenues and royalties on sales, if any.
Under related license agreements, Janssen and an affiliate have
exclusive worldwide licenses from us to manufacture, use and sell the Medisorb
formulation of RISPERDAL. If Janssen decides to employ third-party suppliers of
RISPERDAL Depot, we have a right of first refusal for the manufacture and supply
of such product and component bio-absorbable polymers thereof. Under the license
agreements, Janssen is required to pay us certain royalties with respect to all
Medisorb formulations of RISPERDAL sold to customers. Janssen can terminate the
development agreement or the license agreements upon 30 days' prior written
notice.
ARES-SERONO
Pursuant to a development agreement entered into in January 2000, we
are collaborating with Ares-Serono for the development of a ProLease formulation
of an undisclosed therapeutic protein. Ares-Serono is to provide us with
research and development funding and milestone payments. We are responsible for
formulation and preclinical testing and Ares-Serono will be responsible for
conducting clinical trials, if any, and securing regulatory approvals and,
together with its affiliates, for the marketing of any products that result from
the collaboration. We will manufacture any such products for clinical trials and
commercial sale and are to receive manufacturing revenues and royalties on
sales, if any.
Ares-Serono may terminate the development agreement for any reason,
upon 90 days' written notice if such termination notice occurs prior to the
first commercial launch of a product under the development agreement, or upon
six months' written notice if such notice occurs subsequent to such event. In
addition, either party may terminate the development agreement and the related
supply agreement upon a material breach by the other party of such agreement
which is not cured within 60 days' notice.
ELI LILLY
In February 2000, we entered into a development and license agreement
with Eli Lilly for the development of an inhaled formulation of human growth
hormone based on our AIR pulmonary drug delivery technology. Pursuant to the
agreement we are responsible for formulation and preclinical testing as well as
development of a device to use in connection with any products. Eli Lilly has
paid or will pay to us certain initial fees, research funding and milestone
payments upon achieving certain development and commercialization goals and will
also receive royalty payments based on product sales, if any. Eli Lilly has
exclusive worldwide rights to make, use and sell products resulting from such
development. Eli Lilly will be responsible for obtaining all regulatory
approvals and marketing any products. We will manufacture any such products for
clinical trials and commercial sales and receive manufacturing revenues and
royalties.
Eli Lilly has the right to terminate the agreement upon 90 days'
written notice at any time prior to the first commercial launch of a product, or
upon six months' written notice at any time after such first
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<PAGE> 14
commercial launch. In addition, either party may terminate the agreement upon a
material breach or default by the other party which is not cured within 90 days'
notice.
GLAXO WELLCOME
In February 2000, following a 12 month feasibility study, Glaxo
Wellcome exercised its option to obtain a license to our AIR technology for use
in the development of multiple product candidates for four respiratory disease
categories. A definitive license agreement was signed in May 2000 and is subject
to compliance with the notification requirements under the Hart-Scott-Rodino
Antitrust Act of 1976. Under the agreement, Glaxo Wellcome will have exclusive
worldwide rights to products resulting from the collaboration in exchange for
development funding, milestones and royalties. Glaxo Wellcome will be
responsible for conducting clinical trials, if any, obtaining regulatory
approvals and marketing any resulting products on a worldwide basis. We each
have manufacturing rights for commercial sale and we will receive certain
manufacturing revenues and royalties on product sales, if any.
Glaxo Wellcome has the right to terminate the agreement at any time
with 60-days' written notice to AIR. In addition, either party may terminate the
agreement upon a material breach or default by the other party which is not
cured within 90 days' notice.
AMYLIN
In May 2000, we entered into a development and license agreement with
Amylin for the development of a Medisorb formulation of exendin-4 for the
treatment of type 2 diabetes.
Pursuant to the development agreement, Amylin obtained an exclusive,
worldwide license to the Medisorb formulation technology for the development and
commercialization of injectable sustained release formulations of exendins and
other related compounds that Amylin may develop. We will receive funding for
research and development and milestone payments comprised of cash and warrants
for Amylin common stock upon achieving certain development and commercialization
goals and will also receive a combination of royalty payments and manufacturing
fees based on any future product sales. We are initially responsible for
developing and testing several formulations, manufacturing for clinical trials,
if any, and commercialization of any products as a result of the agreement, and
Amylin is responsible for conducting clinical trials, if any, securing
regulatory approvals and marketing any products resulting from the collaboration
on a worldwide basis.
Amylin may terminate the development agreement for any reason on 90
days' written notice if such termination occurs before filing a New Drug
Application ("NDA") with the FDA or 180 days' notice after such event. In
addition, either party may terminate the development agreement upon a material
default or breach by the other party which is not cured within 90 days' notice.
MEDIMMUNE
In June 2000, we entered into a development, license and supply
agreement with MedImmune for the development of an AIR formulation of a
monoclonal antibody for the treatment of RSV.
Pursuant to the agreement, MedImmune obtained an exclusive license to
any products produced under the agreement. We will receive certain initial fees,
development funding and milestone payments upon achieving certain development
and commercialization goals, and will also receive manufacturing fees and
royalties on product sales, if any. We will be responsible for product
formulation, pulmonary delivery device development and manufacturing. MedImmune
will be responsible
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for clinical trials, if any, regulatory approval and worldwide marketing of any
products resulting from the collaboration.
MedImmune may terminate the development agreement for any reason upon
90 days' written notice if such termination occurs prior to the filing of a
Biologics License Application ("BLA") or NDA with the FDA or 180 days' written
notice after such event. In addition, either party may terminate the development
agreement upon a material default or breach by the other party which is not
cured within a certain cure period ranging from 30 to 120 days.
CLINICAL PARTNERS
In April 1992, units consisting of limited partnership interests in
Clinical Partners and warrants to purchase our common stock were sold to
investors in a private placement. The proceeds of the $46.0 million private
placement were used to fund the further development and clinical testing of
Cereport for human pharmaceutical use in the United States, Canada and Europe.
Such funding was not sufficient to complete clinical trials and seek regulatory
approval of Cereport. Since the completion of funding from Clinical Partners,
which ended during the quarter ended June 30, 1996, we have used, and intend to
continue to use, our own resources to develop Cereport, but may seek alternative
sources of funding, including additional collaborators.
Pursuant to a product development agreement, dated March 6, 1992, we
transferred substantially all of our rights to the RMP technology, including
Cereport, to Clinical Partners. We have an option to purchase all of the limited
partnership interests in Clinical Partners and thereby reacquire the transferred
technology. We are required to fund the development of Cereport to maintain our
purchase option.
Clinical Partners may terminate the research program for any or all
products upon the affirmative vote of 75% of the directors of the general
partner of Clinical Partners, Alkermes Development Corporation II ("ADC II"),
one of our wholly owned subsidiaries, that such research is not feasible or is
uneconomic. Clinical Partners may terminate the marketing program for any or all
products upon the affirmative vote of 75% of the directors of ADC II based on
the directors' good faith business judgment. Clinical Partners may also
terminate the research or marketing program if we have materially breached the
agreement and not cured such breach within 30 days' written notice. Both parties
may terminate the research or marketing program upon mutual consent or upon the
insolvency or bankruptcy of the other party.
Clinical Partners has granted us an exclusive interim license to
manufacture and market Cereport for human pharmaceutical use in the United
States and Canada. Upon the first marketing approval of Cereport by the FDA, we
are obligated to make a payment to Clinical Partners equal to 20% of the
aggregate capital contributions of all limited partners. Additionally, we will
pay to Clinical Partners a 12% royalty on revenues from any sales of Cereport in
the United States and Canada and, in certain circumstances, a 10% royalty on
revenues from any sales of Cereport in Europe. The interim license will
terminate if we do not exercise the purchase option. We can exercise our
purchase option by making a payment to Clinical Partners equal to 80% of the
aggregate capital contributions of all limited partners in addition to paying
certain royalty payments.
The general partner of Clinical Partners is ADC II. Fifty percent of
the members of the board of directors of ADC II are persons not affiliated with
us. Such non-affiliated persons were nominated by the sales agent for the
private placement. The sales agent will continue to have the right to nominate
at least half of the members of ADC II's board of directors until ADC II or some
other affiliate of Alkermes ceases to be the general partner of Clinical
Partners, Clinical Partners terminates in accordance with the terms of
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<PAGE> 16
the limited partnership agreement or the sales agent's venture capital
investment partnership ceases to be a limited partner of Clinical Partners.
ALZA
In October 1997, we, along with ALZA, announced that we had entered
into an agreement relating to the development and commercialization of Cereport.
Under the terms of the agreement, ALZA made a $10.0 million upfront payment to
us to fund clinical development; in return, ALZA has the option to acquire
exclusive, worldwide, commercialization rights to Cereport, subject to the
rights and obligations of Clinical Partners. If ALZA chooses to exercise its
option, ALZA will make additional payments to cover costs associated with
advanced clinical development. If Cereport is commercialized successfully by
ALZA, ALZA will pay us certain milestone payments. We would be responsible for
the manufacturing of Cereport and we would share approximately equally in
profits from sales of the product.
MANUFACTURING
We currently have manufacturing facilities in Cambridge, Massachusetts
and Wilmington, Ohio. The manufacture of our product candidates for clinical
trials and commercial purposes is subject to current good manufacturing
practices ("GMP") and other federal regulations. Prior to Nutropin Depot, we
have never operated an FDA-approved commercial manufacturing facility, but there
can be no assurance that we will maintain the necessary approvals for commercial
manufacturing or obtain approvals for any additional facilities.
If we are not able to develop and maintain manufacturing capacity and
experience, or to continue to contract for manufacturing capabilities on
acceptable terms, our ability to conduct commercial sales, clinical trials and
preclinical testing will be compromised. In addition, delays in obtaining
regulatory approvals might result, as well as delays of commercial sales if
approvals are not obtained on a timely basis. Such delays could materially
adversely affect our competitive position and our business, financial condition
and results of operations.
PROLEASE
ProLease manufacturing involves microencapsulation of drug substances
provided to us by our collaborators in small polymeric microspheres using
extremely cold processing conditions suitable for fragile molecules. The
ProLease manufacturing process consists of two basic steps. First, the drug is
formulated with stabilizing agents and dried to create a fine powder. Second,
the powder is microencapsulated at very low temperatures. Pursuant to agreements
with certain of our collaborators, we have the right to manufacture ProLease
products for commercial sale.
In October 1998, we completed the construction of a new commercial
scale ProLease manufacturing facility of approximately 32,000 square feet in
Cambridge, Massachusetts. The facility includes two manufacturing suites, one of
which is dedicated to the production of Nutropin Depot for commercial scale. The
facility has had a successful pre-approval inspection by the FDA for the
manufacture of Nutropin Depot and we are currently manufacturing Nutropin Depot
for commercial sale.
We also have an in-house clinical production facility that we have
validated for manufacturing in accordance with current GMP. The facility is
being used to manufacture product candidates incorporating our ProLease
sustained release delivery system for use in clinical trials.
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MEDISORB
The Medisorb manufacturing process is significantly different from the
ProLease process and is based on a method of encapsulating small molecule drugs
in polymers using a large-scale emulsification. The Medisorb manufacturing
process consists of three basic steps. First, the drug is combined with a
polymer solution. Second, the drug/polymer solution is mixed in water to form
liquid microspheres (an emulsion). Third, the liquid microspheres are dried to
produce finished product.
We operate a 35,000 square foot GMP manufacturing facility for
commercial scale Medisorb manufacturing in Wilmington, Ohio. We are
manufacturing the Medisorb formulation of RISPERDAL for use by Janssen in
clinical trials at this facility. The facility has not been inspected by the
FDA.
AIR
The AIR manufacturing process uses spray drying. We take drugs provided
by our partners or purchased from generic manufacturers, combine the drugs with
certain excipients commonly used in other aerosol formulations and spray dry the
solution in commercial spray dryers. During the manufacturing process, solutions
of drugs and excipients are spray dried to form a free flowing powder and the
powder is filled and packaged into final dosage units. AIR has a manufacturing
facility which is part of our 46,000 square foot facility which AIR leases in
Cambridge, Massachusetts, where powders and final dosage units are prepared
under current GMP for use in clinical trials. Our current manufacturing facility
and equipment have the capacity to produce commercial scale quantities of
certain product candidates. AIR's inhalation devices are produced under current
GMP at a contract manufacturer in the United States.
CEREPORT
Cereport is a small peptide manufactured using standard synthetic
techniques. We rely on an independent European pharmaceutical company for the
manufacture and supply of Cereport. Scale-up of the Cereport manufacturing
process to support international clinical trials and commercial launch has been
completed. Other companies have been identified which could manufacture and
supply our requirements for Cereport.
DST AND RINGCAP
We currently manufacture DST product candidates in our facility in Blue
Ash, Ohio. The DST manufacturing process uses customized machinery which we have
installed and which we currently operate at a scale capable of producing
products for development and market research studies.
The RingCap system combines conventional matrix tablet technology and
capsule banding processes which permit large-scale production. We believe
RingCap can provide a cost-effective way to manufacture controlled release
tablets.
MARKETING
We intend to market the majority of our ProLease, Medisorb, AIR, DST
and RingCap products through corporate partners. We have entered into
development agreements, which include sales and marketing arrangements, for
ProLease product candidates with Genentech and Ares-Serono, for Medisorb product
candidates with Janssen and Amylin, for AIR product candidates with Eli Lilly,
Glaxo Wellcome and MedImmune. We have retained marketing rights to certain
products in feasibility and development stages, and will determine whether to
partner those products as we gain more clinical data.
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In October 1997, we entered into an agreement with ALZA pursuant to
which ALZA made an upfront payment of $10.0 million to fund clinical development
in exchange for an exclusive option to enter into a worldwide exclusive
commercialization agreement for Cereport. If Cereport is successfully
commercialized by ALZA, ALZA will pay us certain milestone payments. Under the
terms of the agreement, we are responsible for the manufacture of Cereport, and
we will share approximately equally in profits from the sale of the product.
We currently have no experience in marketing or selling pharmaceutical
products. In order to achieve commercial success for any product candidate
approved by the FDA, we must either develop a marketing and sales force or enter
into arrangements with third parties to market and sell our products. There can
be no assurance that we will successfully develop such experience or that we
will be able to enter into marketing and sales agreements with others on
acceptable terms, if at all. If we develop our own marketing and sales
capability, we will compete with other companies that currently have experienced
and well-funded marketing and sales operations. To the extent we enter into
co-promotion or other sales and marketing arrangements with other companies, any
revenues received by us will be dependent on the efforts of others, and there
can be no assurance that such efforts will be successful.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid
and substantial technological change. We face, and will continue to face,
intense competition in the development, manufacturing, marketing and
commercialization of our product candidates from academic institutions,
government agencies, research institutions, biotechnology and pharmaceutical
companies, including our collaborators, and drug delivery companies. There can
be no assurance that developments by others will not render our product
candidates or technologies obsolete or noncompetitive, or that our collaborators
will not choose to use competing drug delivery methods. At the present time, we
have no sales force or marketing or commercial manufacturing experience. In
addition, many of our competitors and potential competitors have substantially
greater capital resources, manufacturing and marketing experience, research and
development resources and production facilities than we do. Many of these
competitors also have significantly greater experience than we in undertaking
preclinical testing and clinical trials of new pharmaceutical products and
obtaining FDA and other regulatory approvals.
With respect to Cereport, we believe that there are currently no
products approved by the FDA for increasing the permeability of the blood-brain
barrier. There are, however, many novel experimental therapies for the treatment
of brain tumors and central nervous system infections being tested in the United
States and Europe.
With respect to ProLease and Medisorb, we are aware that there are
other companies developing sustained release delivery systems for pharmaceutical
products. With respect to AIR, we are aware that there are other companies
marketing or developing pulmonary delivery systems for pharmaceutical products.
There are also numerous companies marketing or developing oral technologies
which will compete with DST and RingCap. In addition, other companies are
developing new chemical entities or improved formulations of existing products
which, if developed successfully, could compete against our formulations of the
products we have developed or those of our collaborators. These chemical
entities are being designed to have different mechanisms of action or improved
safety and efficacy. In addition, our collaborators may develop, either alone or
with others, products that compete with the development and marketing of our
product candidates.
There can be no assurance that we will be able to compete successfully
with such companies. The existence of products developed by our competitors, or
other products or treatments of which we are not
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aware, or products or treatments that may be developed in the future, may
adversely affect the marketability of products developed by us.
PATENTS AND PROPRIETARY RIGHTS
Our success will be dependent, in part, on our ability to obtain patent
protection for our product candidates and those of our collaborators,
maintaining trade secret protection and operating without infringing upon the
proprietary rights of others.
We have a proprietary portfolio of patent rights and exclusive licenses
to patents and patent applications. We have filed numerous United States and
international patent applications directed to composition of matter as well as
processes of preparation and methods of use, including applications relating to
permeabilizers, certain rights to which have been licensed to Clinical Partners
and to each of our delivery technologies. We own approximately 50 issued United
States patents. No United States patent issued to us that is currently material
to our business will expire prior to 2009. In the future, we plan to file
further United States and foreign patent applications directed to new or
improved products and processes. We intend to file additional patent
applications when appropriate and intend to defend our patent position
aggressively.
We have exclusive rights through licensing agreements with third
parties to approximately 28 issued United States patents, a number of United
States patent applications and corresponding foreign patents and patent
applications in many countries, subject in certain instances to the rights of
the United States government to use the technology covered by such patents and
patent applications. No issued United States patent to which we have licensed
rights and which is currently material to our business will expire prior to
2016. Under certain licensing agreements, we currently pay annual license fees
and/or minimum annual royalties. During the fiscal year ended March 31, 2000,
the fees totaled $165,000. In addition, under all licensing agreements, we are
obligated to pay royalties on future sales of products, if any, covered by the
licensed patents.
We know of several United States patents issued to other parties that
relate to our product candidates. One of those parties has asked us to compare
our Medisorb technology to that party's patented technology. The manufacture,
use, offer for sale, sale or importing of these product candidates might
infringe on the claims of these patents. A party might file an infringement
action against us. Our cost of defending such an action is likely to be high and
we might not receive a favorable ruling.
We also know of patent applications filed by other parties in the
United States and various foreign countries that may relate to some of our
product candidates if issued in their present form. If patents are issued to any
of these applicants, we may not be able to manufacture, use, offer for sale, or
sell some of our product candidates without first getting a license from the
patent holder. The patent holder may not grant us a license on reasonable terms
or it may refuse to grant us a license at all. This could delay or prevent us
from developing, manufacturing or selling those of our product candidates that
would require the license.
We try to protect our proprietary position by filing United States and
foreign patent applications related to our proprietary technology, inventions
and improvements that are important to the development of our business. Because
the patent position of biopharmaceutical companies involves complex legal and
factual questions, enforceability of patents cannot be predicted with certainty.
Patents, if issued, may be challenged, invalidated or circumvented. Thus, any
patents that we own or license from others may not provide any protection
against competitors. Our pending patent applications, those we may file in the
future, or those we may license from third parties, may not result in patents
being issued. And, if issued, they may not provide us with proprietary
protection or competitive advantages against competitors with similar
technology. Furthermore, others may independently develop similar technologies
or duplicate any
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technology that we have developed. The laws of certain foreign countries do not
protect our intellectual property rights to the same extent as do the laws of
the United States.
We also rely on trade secrets, know-how and technology, which are not
protected by patents, to maintain our competitive position. We try to protect
this information by entering into confidentiality agreements with parties that
have access to it, such as our corporate partners, collaborators, employees and
consultants. Any of these parties may breach the agreements and disclose our
confidential information or our competitors might learn of the information in
some other way. If any trade secret, know-how or other technology not protected
by a patent were to be disclosed to or independently developed by a competitor,
our business and financial condition could be adversely affected.
GOVERNMENT REGULATION
The manufacture and marketing of pharmaceutical products in the United
States require the approval of the FDA under the Federal Food, Drug and Cosmetic
Act. Similar approvals by comparable agencies are required in most foreign
countries. The FDA has established mandatory procedures and safety standards
which apply to the preclinical testing and clinical trials, manufacture and
marketing of pharmaceutical products. Pharmaceutical manufacturing facilities
are also regulated by state, local and other authorities.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animal models to assess the drug's efficacy
and to identify potential safety problems. The results of these studies must be
submitted to the FDA as part of an Investigational New Drug application ("IND"),
which must be reviewed by the FDA before proposed clinical testing can begin.
Typically, clinical testing involves a three-phase process. Phase I trials are
conducted with a small number of subjects and are designed to provide
information about both product safety and the expected dose of the drug. Phase
II trials are designed to provide additional information on dosing and
preliminary evidence of product efficacy. Phase III trials are large scale
studies designed to provide statistical evidence of efficacy and safety in
humans. The results of the preclinical testing and clinical trials of a
pharmaceutical product are then submitted to the FDA in the form of an NDA, or
for a biological product in the form of a Product License Application ("PLA"),
for approval to commence commercial sales. Preparing such applications involves
considerable data collection, verification, analysis and expense. In responding
to an NDA or PLA, the FDA may grant marketing approval, request additional
information or deny the application if it determines that the application does
not satisfy its regulatory approval criteria.
Prior to marketing, any product developed by us or our collaborators
must undergo an extensive regulatory approval process, which includes
preclinical testing and clinical trials of such product candidate to demonstrate
safety and efficacy. This regulatory process can require many years and the
expenditure of substantial resources. Data obtained from preclinical testing and
clinical trials are subject to varying interpretations, which can delay, limit
or prevent FDA approval. In addition, changes in FDA approval policies or
requirements may occur or new regulations may be promulgated which may result in
delay or failure to receive FDA approval. Similar delays or failures may be
encountered in foreign countries. Delays and costs in obtaining regulatory
approvals would have a material adverse effect on our business, financial
condition and results of operations.
Among the conditions for NDA or PLA approval is the requirement that
the prospective manufacturer's quality control and manufacturing procedures
conform on an ongoing basis with GMP. Before approval of an NDA or PLA, the FDA
will perform a prelicensing inspection of the facility to determine its
compliance with GMP and other rules and regulations. In complying with GMP,
manufacturers must continue to expend time, money and effort in the area of
production and quality
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control to ensure full technical compliance. After the establishment is
licensed, it is subject to periodic inspections by the FDA.
The requirements which we must satisfy to obtain regulatory approval by
governmental agencies in other countries prior to commercialization of its
products in such countries can be as rigorous and costly as those described
above.
We are also subject to various laws and regulations relating to safe
working conditions, laboratory and manufacturing practices, experimental use of
animals and use and disposal of hazardous or potentially hazardous substances,
including radioactive compounds and infectious disease agents, used in
connection with our research. Compliance with laws and regulations relating to
the protection of the environment has not had a material effect on capital
expenditures, earnings or our competitive position. However, the extent of
government regulation which might result from any legislative or administrative
action cannot be accurately predicted.
EMPLOYEES
As of June 7, 2000, we had approximately 345 employees. A significant
number of our management and professional employees have had prior experience
with pharmaceutical, biotechnology or medical product companies. We believe that
we have been successful in attracting skilled and experienced scientific
personnel; however, competition for such personnel is intense. None of our
employees are covered by a collective bargaining agreement. We consider our
relations with employees to be good.
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MANAGEMENT
The following sets forth certain information with respect to the
executive officers of Alkermes as of June 7, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, who are elected to serve at the pleasure of the
Board of Directors, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard F. Pops 38 Chief Executive Officer and Director
Robert A. Breyer 56 President, Chief Operating Officer and Director
Raymond T. Bartus 53 Senior Vice President, Preclinical Research and
Development
James M. Frates 32 Vice President, Chief Financial Officer and Treasurer
Michael J. Landine 46 Vice President, Corporate Development
</TABLE>
Mr. Pops has been Chief Executive Officer and a Director since February
1991. Mr. Pops currently serves on the Board of Directors of Neurocrine
Biosciences, Inc., the Biotechnology Industry Organization (BIO), the
Massachusetts Biotechnology Council (MBC) and The Brain Tumor Society (a
non-profit organization).
Mr. Breyer has been President and Chief Operating Officer and a
Director since July 1994. From August 1991 to December 1993, Mr. Breyer was
President and General Manager of Eli Lilly Italy, a subsidiary of Eli Lilly &
Co.
Dr. Bartus has been Senior Vice President, Preclinical Research and
Development since December 1996. From November 1992 to December 1996, Dr. Bartus
served as our Senior Vice President, Neurobiology. He holds an M.S. in
Experimental Psychology and a Ph.D. in Physiological Psychology from North
Carolina State University.
Mr. Frates has been Vice President, Chief Financial Officer and
Treasurer since July 1998. From June 1996 to July 1998, he was employed at
Robertson, Stephens & Company, most recently as a Vice President in Investment
Banking. Prior to that time he was employed at Robertson, Stephens & Company and
at Morgan Stanley & Co. In June 1996, he obtained his M.B.A. from Harvard
University.
Mr. Landine has been Vice President, Corporate Development since March
1999. From March 1988 until June 1998, he was Chief Financial Officer and
Treasurer of Alkermes. Mr. Landine is currently an advisor to Walker Magnetics
Group, an international manufacturer of industrial equipment.
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RISK FACTORS
OUR DELIVERY TECHNOLOGIES MAY NOT PRODUCE SAFE, EFFICACIOUS OR COMMERCIALLY
VIABLE PRODUCTS
Each of our product candidates, except Nutropin Depot, needs
significant additional research and development and requires FDA approval before
it can be marketed. Nutropin Depot has received FDA approval and was
commercially launched on June 28, 2000. To be profitable, we must develop,
manufacture and market our products, either alone or by collaborating with
others. It can take several years for a product to be approved and we may not be
successful in bringing other product candidates to the market. A new drug may
appear promising at an early stage of development or after clinical trials and
never reach the market, or it may reach the market and not sell, for a variety
of reasons. The drug may:
- be shown to be ineffective or to cause harmful side effects
during preclinical testing or clinical trials;
- fail to receive regulatory approval on a timely basis or at
all;
- be hard to manufacture on a large scale;
- be uneconomical;
- not be prescribed by doctors or accepted by patients;
- fail to receive a sufficient level of reimbursement from
government or third-party payors; or
- infringe on proprietary rights of another party.
If our technology fails to generate product candidates that lead to the
successful development and commercialization of products, or if our partners
decide not to pursue one of our product candidates, our business and financial
condition will be materially adversely affected.
NUTROPIN DEPOT MAY NOT PRODUCE SIGNIFICANT REVENUES
Our first product, Nutropin Depot, was approved by the FDA on December
23, 1999 and was commercially launched on June 28, 2000. Genentech is
responsible for marketing the product, which will face significant competition
from the currently approved products that treat growth hormone deficiency. In
addition, Genentech has a number of daily injection formulations on the market,
which may affect its efforts related to Nutropin Depot. The revenues we receive
from the sale of Nutropin Depot may not be significant and depend on numerous
factors outside of our control, including Genentech's decisions on pricing and
discounting, Genentech's reliance on third-party marketing partners outside the
United States, the ability to obtain reimbursement from third-party payors, the
market size for the product and the reaction of companies that market
competitive products, as well as general market conditions. In addition, our
costs to manufacture Nutropin Depot may be higher than we anticipate.
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If Nutropin Depot does not produce significant revenues or if our manufacturing
costs are higher than we anticipate, our business and financial condition could
be materially adversely affected.
OUR MANUFACTURING EXPERIENCE IS LIMITED AND WE HAVE NO EXPERIENCE MANUFACTURING
COMMERCIAL PRODUCTS
We currently manufacture each of our product candidates, except for
Cereport. The manufacture of drugs for clinical trials and for commercial sale
is subject to regulation by the FDA under current GMP regulations and by other
regulators under other laws and regulations. We have manufactured product
candidates for use in clinical trials but we do not have experience
manufacturing commercial products. We cannot assure you that we can successfully
manufacture Nutropin Depot or other future products under current GMP
regulations or other laws and regulations in sufficient quantities for
commercial sale, or in a timely or economical manner.
In October 1998, we completed construction of a new commercial
manufacturing plant for Nutropin Depot and future ProLease product candidates.
In June 1998, we completed an expansion of our existing Medisorb manufacturing
facility. The only manufacturing facility that the FDA has inspected and
approved is for the manufacture of Nutropin Depot. We cannot guarantee that the
FDA will approve any of our other facilities or, once they are approved, that we
will remain in compliance with current GMP.
We rely on an unrelated party to manufacture Cereport for use in
clinical trials. We expect to rely on the same party to manufacture Cereport for
commercial sale if Cereport receives FDA approval. If we are unable to do so, or
the manufacturer fails to perform as required, we may be unable to secure an
alternative manufacturer on reasonable terms or in a timely manner.
If more of our product candidates progress to late stage development,
we will incur significant expenses in the expansion or construction of
manufacturing facilities and increases in personnel in order to manufacture
product candidates. The development of a commercial scale manufacturing process
is complex and expensive. We cannot assure you that we will be able to develop
this manufacturing infrastructure in a timely or economical manner, or at all.
If we fail to develop manufacturing capacity and experience, fail to
continue to contract for manufacturing on acceptable terms, or fail to
manufacture our product candidates economically on a commercial scale or in
accordance with current GMP, our development programs will be materially
adversely affected. This may result in delays in receiving FDA approval for one
or more of our product candidates or delays in the commercial production of a
product that has already been approved. Any such delays could materially
adversely affect our business and financial condition.
AS NUTROPIN DEPOT IS USED COMMERCIALLY, UNINTENDED SIDE EFFECTS, ADVERSE
REACTIONS OR INCIDENTS OF MISUSE MAY APPEAR
Until recently, the use of Nutropin Depot has been limited to clinical
trial patients under controlled conditions and under the care of physicians. We
cannot predict whether the widespread commercial use of Nutropin Depot will
produce undesirable or unintended side effects that have not been evident in our
clinical trials to date. Additionally, incidents of product misuse may occur.
These events, among others, could result in additional regulatory controls.
CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES ARE EXPENSIVE AND THEIR OUTCOME IS
UNCERTAIN
Conducting clinical trials is a lengthy, time-consuming and expensive
process. Before obtaining regulatory approvals for the commercial sale of any
products, we or our partners must demonstrate through
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preclinical testing and clinical trials that our product candidates are safe and
effective for use in humans. We have incurred and will continue to incur
substantial expense for, and devote a significant amount of time to, preclinical
testing and clinical trials.
Historically, the results from preclinical testing and early clinical
trials have often not predicted results of later clinical trials. A number of
new drugs have shown promising results in clinical trials, but subsequently
failed to establish sufficient safety and efficacy data to obtain necessary
regulatory approvals. Data obtained from preclinical and clinical activities are
susceptible to varying interpretations, which may delay, limit or prevent
regulatory approval. In addition, regulatory delays or rejections may be
encountered as a result of many factors, including changes in regulatory policy
during the period of product development.
Clinical trials conducted by us, by our collaborators or by third
parties on our behalf may not demonstrate sufficient safety and efficacy to
obtain the requisite regulatory approvals for our product candidates. Regulatory
authorities may not permit us to undertake any additional clinical trials for
our product candidates.
Clinical trials of each of our product candidates involve a drug
delivery technology and a drug, either as a single formulation or, as in the
case of Cereport, as two products administered in conjunction with each other.
This makes testing more complex because the outcome of the trials depends on the
performance of our technology in combination with a drug.
We have other product candidates in preclinical development. We have
not submitted investigational new drug applications or begun clinical trials for
these product candidates. Our preclinical and clinical development efforts may
not be successfully completed. We may not file further investigational new drug
applications. We or our collaborators may not begin clinical trials as planned.
Completion of clinical trials may take several years or more. The
length of time can vary substantially with the type, complexity, novelty and
intended use of the product candidate. Our commencement and rate of completion
of clinical trials may be delayed by many factors, including:
- our inability to recruit patients at the expected rate;
- the failure of clinical trials to demonstrate a product
candidate's efficacy;
- our inability to follow patients adequately after treatment;
- our inability to predict unforeseen safety issues;
- our inability to manufacture sufficient quantities of
materials used for clinical trials; and
- the potential for unforeseen governmental or regulatory
delays.
If a product candidate fails to demonstrate safety and efficacy in
clinical trials, this failure may delay development of other product candidates
and hinder our ability to conduct related preclinical testing and clinical
trials. As a result of these failures, we may also be unable to find additional
collaborators or to obtain additional financing. Our business and financial
condition may be materially adversely affected by any delays in, or termination
of, our clinical trials.
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THE FDA MAY NOT APPROVE OUR PRODUCT CANDIDATES
Approval from the FDA is required to manufacture and market
pharmaceutical products in the United States. Other countries have similar
requirements. The process that pharmaceutical products must undergo to get this
approval is extensive and includes preclinical testing and clinical trials to
demonstrate safety and efficacy and a review of the manufacturing process to
ensure compliance with current GMP. This process can last many years and be very
costly and still be unsuccessful. FDA approval can be delayed, limited or not
granted at all for many reasons, including:
- a product candidate may not be safe or effective;
- data from preclinical testing and clinical trials can be
interpreted by FDA officials in different ways than we
interpret it;
- the FDA might not approve our manufacturing processes or
facilities;
- the FDA may change its approval policies or adopt new
regulations; and
- a product candidate may not be approved for all the
indications we requested.
The process of getting approvals in foreign countries is subject to delay and
failure for similar reasons. Any delay in, or failure to receive, approval of a
product candidate for commercial sale will have a material adverse effect on our
business and financial condition.
Most of our product candidates are drug delivery systems combined with
a drug in a single formulation to treat a specific condition. In most cases, the
FDA has already approved the drug used in these product candidates for treating
the condition targeted by the product candidate. Cereport is a separate
formulation from the drug it is intended to be used with but must be tested with
that drug. We are conducting clinical trials on Cereport with carboplatin, which
is a chemotherapeutic agent, in patients with certain types of brain tumor. If
the FDA approves Cereport based on these trials, the approval will be for
Cereport's use in conjunction with carboplatin for the treatment of that type of
brain tumor. Unlike the drugs used with many of our product candidates, the FDA
has not approved carboplatin for treating the type of tumor that we are
targeting, and this could result in the FDA requiring additional clinical
trials. However, the FDA has approved carboplatin for the treatment of other
types of cancerous tumors. Any delay in the approval process for any of our
product candidates will result in increased costs that could materially and
adversely affect our business and financial condition.
Regulatory approval of a product candidate is limited to specific
therapeutic uses for which the product has demonstrated safety and efficacy in
clinical testing. Approval of a product candidate could also be contingent on
post-marketing studies. In addition, any marketed drug and its manufacturer
continue to be subject to strict regulation after approval. Any unforeseen
problems with an approved drug or any violation of regulations could result in
restrictions on the drug, including its withdrawal from the market.
WE ANTICIPATE WE WILL INCUR CONTINUED LOSSES FOR THE FORESEEABLE FUTURE
We have had net operating losses since being founded in 1987. At March
31, 2000, our accumulated deficit was $258.4 million. These losses principally
consist of the costs of research and development, the costs of acquiring rights
to research and development performed by others and general and administrative
expenses. The majority of revenues that we have received have come from
collaboration and development agreements and interest income. We expect to incur
substantial additional
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expenses over the next several years as our research and development activities,
including clinical trials, accelerate and as we begin to manufacture Nutropin
Depot or other future products for commercial sale. Because we do not expect to
generate significant revenues from the sale of products, if any, for several
years, we anticipate that additional expenses will result in losses.
Our future profitability depends, in part, on:
- obtaining regulatory approval for additional product
candidates;
- entering into agreements to develop and commercialize
products;
- developing the capacity to manufacture and market products or
entering into agreements with others to do so;
- market acceptance of our products;
- the ability to obtain additional research and development
funding from collaborative partners; and
- the ability to achieve certain product development milestones.
We may not achieve any or all of these goals and, thus, cannot provide
assurances that we will ever achieve significant revenues or profits. Even if we
do receive regulatory approval for additional products, we may not achieve
significant commercial success.
Our recently completed manufacturing facilities in Cambridge,
Massachusetts and Wilmington, Ohio require specialized personnel and are
expensive to operate and maintain. Any delay in the approval or market launch of
future product candidates to be manufactured in these facilities will require us
to continue to operate these expensive facilities and retain the specialized
personnel, which may increase our expected losses.
WE NEED TO SPEND SUBSTANTIAL FUNDS TO BECOME PROFITABLE
We believe that our liquid assets, anticipated funding from our
collaborators, and interest income will satisfy our capital and operating
requirements for the foreseeable future, but we cannot guarantee that this will
be the case. We will need to spend substantial amounts of money before we can be
profitable, if ever. The amount we will spend, and when we will spend it, will
depend, in part, on:
- how our research and development programs, including clinical
trials, progress;
- how much time and expense will be required to receive FDA
approval for our product candidates;
- the cost of building, operating and maintaining manufacturing
facilities;
- how many product candidates we pursue;
- how much time and money we need to prosecute and enforce
patent rights;
- how competing technological and market developments affect our
product candidates;
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- the cost of possible acquisitions of drug delivery
technologies, compounds or companies;
- the cost of obtaining licenses to use technology owned by
others; and
- whether and how we choose to exercise our option to purchase
the limited partnership interests in Clinical Partners.
If we require additional funds to complete any of our programs, we may
seek funds through arrangements with collaborators, by issuing securities or
through debt financing. If we can only raise additional funds on terms that are
not favorable to us, we may have to cut back significantly on one or more of our
programs, give up some of our rights to our technologies or product candidates
or agree to reduced royalty rates from collaborators.
WE RELY HEAVILY ON COLLABORATORS
Our arrangements with collaborators and licensors are critical to our
success in bringing our product candidates to the market. In some cases, we
depend on these parties to conduct preclinical testing and clinical trials and
to provide funding for our development programs. Most of our collaborators can
terminate their agreements with us for no reason and on limited notice. We
cannot guarantee that any of these relationships will continue. Failure to make
or maintain these arrangements or a delay in a collaborator's performance may
materially adversely affect our business and financial condition.
We cannot control our collaborators' performance or the resources they
devote to our programs. If a collaborator fails to perform, the research,
development or commercialization program on which it is working will be delayed.
If this happens, we may have to use funds, personnel, laboratories and other
resources that we have not budgeted, and we may not be able to continue the
program. The failure of a collaborator to perform or a loss of a collaborator
may materially adversely affect our business and financial condition.
Disputes may arise between us and a collaborator and may involve the
issue of which of us owns the technology that is developed during a
collaboration. Such a dispute could delay the program on which the collaborator
or we are working. It could also result in expensive arbitration or litigation,
which may not be resolved in our favor.
A collaborator may choose to use its own or other technology to develop
a way to deliver its drug and withdraw its support of our product candidate.
Our collaborators could merge with or be acquired by another company or
experience financial or other setbacks unrelated to our collaboration that
could, nevertheless, adversely affect us.
None of our drug delivery systems can be commercialized as stand-alone
products but must be combined with a drug. To develop any new product candidate
using one of these drug delivery systems, we must obtain the drug from another
party. We cannot assure you that we will be able to obtain any such drugs on
reasonable terms.
WE MAY NOT BE SUCCESSFUL IN THE DEVELOPMENT OF PRODUCTS FOR OUR OWN ACCOUNT
In addition to our development work with collaborators, we are
developing proprietary product candidates for our own account and applying our
drug delivery technologies to off-patent drugs. Because of the lack of external
funding for such development programs, there is a risk that we may not be able
to continue to fund all such programs to completion or to provide the support
necessary to perform the
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clinical trials, obtain regulatory approvals or market any approved products on
a worldwide basis. We expect the development of products for our own account to
consume more resources than our programs with collaborators. If we are able to
develop commercial products on our own, the risks associated with these programs
may be greater than those with our programs with collaborators.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS AND WE MAY NOT BE ABLE TO
OBTAIN REGULATORY APPROVALS
Our product candidates are subject to extensive and rigorous domestic
government regulation. The FDA regulates, among other things, the development,
testing, manufacture, safety, efficacy, record-keeping, labeling, storage,
approval, advertising, promotion, sale and distribution of pharmaceutical
products. If our products are marketed abroad, they will also be subject to
extensive regulation by foreign governments. Certain material changes to an
approved product, such as manufacturing changes or additional labeling claims,
are subject to further FDA review and approval. Any required approvals, once
obtained, may be withdrawn. Further, if we fail to comply with FDA and other
regulatory requirements at any stage during the regulatory process, we may be
subject to sanctions, including:
- delays, warning letters and fines;
- product recalls or seizures and injunctions on sales;
- refusal of the FDA to review pending market approval
applications or supplements to approval applications;
- total or partial suspension of production;
- withdrawals of previously approved marketing applications; and
- civil penalties and criminal prosecutions.
We are also subject to federal, state and local government regulation
in the conduct of our business, including regulations on employee safety and our
handling and disposal of hazardous and radioactive materials. Any new regulation
or change to an existing regulation could require us to implement costly capital
or operating improvements for which we have not budgeted. We cannot assure you
that these regulations will remain the same or that we will maintain compliance
with these regulations.
We and our contract manufacturer of Cereport also are required to
comply with the FDA current GMP regulations. GMP regulations include
requirements relating to quality control, quality assurance and maintenance of
records and documentation. Manufacturing facilities are subject to inspection by
the FDA and must be approved before we can use them in commercial manufacturing
of our products. We or our contract manufacturer may be unable to comply with
current GMP requirements and other FDA regulatory requirements. If we or our
contract manufacturer fail to comply, our business and financial condition will
be materially adversely affected.
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS
We may be exposed to liability claims arising from the use of our
product candidates in clinical trials and the commercial sale of any products.
These claims may be brought by consumers, our collaborators or parties selling
the products. We currently carry liability insurance for claims arising from the
use of our product candidates during clinical trials and the commercial sale of
our products in the amount of up to $10 million per occurrence and $10 million
in the aggregate. However, we cannot provide
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any assurance that this coverage will be sufficient to satisfy any liabilities
that may arise. As our development activities progress and we begin commercial
sales, this coverage may be inadequate; and we may be unable to get adequate
coverage at an acceptable cost or we may be unable to get adequate coverage at
all. This could prevent or limit our commercialization of our product
candidates. Even if we are able to continue to carry insurance that we believe
is adequate, our financial condition may be materially adversely affected by a
product liability claim.
COMPETITION IN THE BIOTECHNOLOGY INDUSTRY
We can provide no assurance that we will be able to compete
successfully against the competitive forces discussed below in developing,
marketing or selling our products.
We face intense competition
We face intense competition from academic institutions, government
agencies, research institutions and biotechnology and pharmaceutical companies,
including other drug delivery companies. Some of these competitors are also our
collaborators. These competitors are working to develop and market other drug
delivery systems, vaccines and other methods of preventing or reducing disease,
and new small-molecule and other classes of drugs that can be used without a
drug delivery system.
There are other companies developing sustained release drug delivery
systems, pulmonary delivery systems and oral delivery systems. In addition, we
know of new chemical entities that are being developed that, if successful,
could compete against our product candidates. These chemical entities are being
designed to work differently than our product candidates and may turn out to be
safer or to work better than our product candidates. Among the many experimental
therapies being tested in the United States and Europe, there may be some that
we do not now know of that may compete with our drug delivery systems or product
candidates. Our collaborators could choose a competing drug delivery system to
use with their drugs instead of one of our drug delivery systems.
Many of our competitors have much greater capital resources,
manufacturing and marketing experience, research and development resources and
production facilities than we do. Many of them also have much more experience
than we do in preclinical testing and clinical trials of new drugs and in
obtaining FDA and foreign approvals. In addition, they may succeed in obtaining
patents that would make it difficult or impossible for us to compete with their
products.
Rapid technological change could render our drug delivery systems obsolete or
noncompetitive
Major technological changes can happen quickly in the biotechnology and
pharmaceutical industries; and the development by competitors of technologically
improved or different products may make our product candidates obsolete or
noncompetitive.
The competitive nature of our industry could adversely affect market acceptance
of our products
Our product candidates may not gain market acceptance among physicians,
patients, healthcare payors and the medical community. The degree of market
acceptance of any product candidates that we develop will depend on a number of
factors, including:
- demonstration of their clinical efficacy and safety;
- their cost-effectiveness;
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- their potential advantage over alternative treatment methods;
- the marketing and distribution support they receive; and
- reimbursement policies of government and third-party payors.
Our product candidates, if successfully developed, will compete with a
number of drugs and therapies currently manufactured and marketed by major
pharmaceutical and other biotechnology companies. Our products may also compete
with new products currently under development by others or with products which
may cost less than our products. Physicians, patients, third-party payors and
the medical community may not accept or utilize our products. If our products do
not achieve significant market acceptance, our business and financial condition
will be materially adversely affected.
PATENT PROTECTION FOR OUR PRODUCTS IS IMPORTANT AND UNCERTAIN
The following factors are important to our success:
- receiving patent protection for our product candidates and
those of our collaborators;
- maintaining our trade secrets;
- not infringing on the proprietary rights of others; and
- preventing others from infringing our proprietary rights.
We will be able to protect our proprietary rights from unauthorized use
by third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
We know of several United States patents issued to other parties that
relate to our product candidates. One of those parties has asked us to compare
our Medisorb technology to that party's patented technology. The manufacture,
use, offer for sale, sale or importing of these product candidates might
infringe on the claims of these patents. A party might file an infringement
action against us. Our cost of defending such an action is likely to be high and
we might not receive a favorable ruling.
We also know of patent applications filed by other parties in the
United States and various foreign countries that may relate to some of our
product candidates if issued in their present form. If patents are issued to any
of these applicants, we may not be able to manufacture, use, offer for sale, or
sell some of our product candidates without first getting a license from the
patent holder. The patent holder may not grant us a license on reasonable terms
or it may refuse to grant us a license at all. This could delay or prevent us
from developing, manufacturing or selling those of our product candidates that
would require the license.
We try to protect our proprietary position by filing United States and
foreign patent applications related to our proprietary technology, inventions
and improvements that are important to the development of our business. Because
the patent position of biopharmaceutical companies involves complex legal and
factual questions, enforceability of patents cannot be predicted with certainty.
Patents, if issued, may be challenged, invalidated or circumvented. Thus, any
patents that we own or license from others may not provide any protection
against competitors. Our pending patent applications, those we may file in the
future, or those we may license from third parties, may not result in patents
being issued. And, if issued, they may not provide us with proprietary
protection or competitive advantages against competitors with
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similar technology. Furthermore, others may independently develop similar
technologies or duplicate any technology that we have developed. The laws of
certain foreign countries do not protect our intellectual property rights to the
same extent as do the laws of the United States.
We also rely on trade secrets, know-how and technology, which are not
protected by patents, to maintain our competitive position. We try to protect
this information by entering into confidentiality agreements with parties that
have access to it, such as our corporate partners, collaborators, employees and
consultants. Any of these parties may breach the agreements and disclose our
confidential information or our competitors might learn of the information in
some other way. If any trade secret, know-how or other technology not protected
by a patent were to be disclosed to or independently developed by a competitor,
our business and financial condition could be materially adversely affected.
WE HAVE ONLY LIMITED RIGHTS TO CEREPORT
We transferred to Clinical Partners substantially all of our rights to
certain technology that includes Cereport and then entered into an agreement
with Clinical Partners under which we perform research and development of
Cereport. Clinical Partners issued securities and used the proceeds from the
sale of those securities to fund our research and development of Cereport.
Funding provided by Clinical Partners was insufficient to complete clinical
trials and apply for FDA approval. Since June 1996, we have used our or ALZA's
funds to develop Cereport. So long as we continue this funding, we have an
option to purchase the limited partnership interests in Clinical Partners for
cash or our common stock. If this purchase option terminates, we will have no
rights to Cereport or the related technology in the United States or Canada.
If we exercise this purchase option, we must make a substantial cash
payment or issue a large number of shares of common stock. The exercise of the
option may require us to record significant charges to earnings for the purchase
of in-process research and development. If we acquire rights to the Cereport
technology under the option, we will still be obligated to pay royalties to the
limited partners.
WE HAVE NO MARKETING OR SALES EXPERIENCE
We currently have no experience in marketing or selling pharmaceutical
products. To achieve commercial success for any product that may be approved by
the FDA, particularly products developed for our own account, we must either
develop a marketing and sales force or contract with another party (including
collaborators) to perform these services for us. In either case, we will be
competing with companies that have experienced and well-funded marketing and
sales operations. We may not be successful in developing a marketing and sales
force or in contracting with a third party on acceptable terms to sell our
products.
EFFORTS TO KEEP DOWN THE COST OF HEALTHCARE MAY THREATEN OUR PROFITABILITY
Third-party payors, which include governments and private health
insurers, are increasingly challenging the prices charged for medical products
and services. In their attempts to reduce healthcare costs, they have also been
limiting their coverage and reimbursement levels for new drugs. In some cases,
they are refusing to cover the costs of drugs that are not new but are being
used for newly approved purposes. Patients who use a product that we may develop
might not be reimbursed for its cost. If third-party payors do not provide
adequate coverage and reimbursement for our products, if and when they reach the
market, doctors may not prescribe them or patients may not use them.
The federal government and various state governments have considered
proposals to regulate the prices of prescription drugs, as is done in certain
foreign countries. We expect that there will be more
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proposals like these. If any of these proposals are enacted, we may receive a
lower price for our products, if and when they reach the market, than we
currently estimate. Lack of adequate reimbursement or the enactment of price
controls would have a material adverse effect on our business and financial
condition.
WE MAY NOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND RESEARCH AND DEVELOPMENT
PERSONNEL
Our success depends on the services of key employees in executive and
research and development positions. The loss of the services of one or more of
these employees could have a material adverse effect on our business.
WE MAY ENCOUNTER DIFFICULTIES INTEGRATING FUTURE ACQUISITIONS
As part of our business strategy we may acquire novel technologies or
compounds through acquisitions. Although no current acquisition is planned, we
cannot assure you that any such future acquisition will be successfully
integrated with our current businesses, will achieve revenues or will be
profitable. We may have difficulty assimilating the operations, technology and
personnel of any acquired businesses.
If we make significant acquisitions for stock consideration, our common
stock may be significantly diluted. If we make significant acquisitions for cash
consideration, we may be required to use a substantial portion of our available
cash.
WE DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK
We have not paid cash dividends on our common stock and do not expect
to do so in the foreseeable future. As of March 31, 2000, we had outstanding
2,299,000 shares of convertible preferred stock. We must pay cash dividends to
the holders of the convertible preferred stock, and any dividends that we do not
pay will accrue and remain owing to the holders of the convertible preferred
stock but will not bear interest. We must pay the accumulated, unpaid dividends
on the shares of the convertible preferred stock before we can declare or pay
cash dividends on the common stock.
WE MAY ISSUE MORE COMMON STOCK
As discussed above under "We need to spend substantial funds to become
profitable," we may issue additional equity securities to raise funds, thus
reducing the ownership share of the current holders of our common stock, which
may adversely affect the market price of the common stock. In addition, we must
issue common stock to certain security holders and other parties under the
circumstances described below. Any of these parties could sell all or a large
number of its shares, which could adversely affect the market price of our
common stock. Even if none of these sales happen, the perception by investors
that sales might occur could adversely affect the market price of our common
stock.
Convertible preferred stock
We may exchange our $3.25 convertible exchangeable preferred stock (the
"$3.25 preferred stock") in whole for debentures, but have no current plans to
do so. Any holder of shares of our $3.25 preferred stock, or the debentures for
which they may have been exchanged, may convert its shares or debentures into
shares of common stock. We have already registered for resale shares of our
common stock issuable upon conversion under the Securities Act of 1933. Each
share of our $3.25 preferred stock is currently convertible into 3.3756 shares
of common stock for a total of 7,760,504 shares of common stock. We are
currently considering various alternatives designed to effect an early
conversion of our
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$3.25 preferred stock into common stock. We have not reached any conclusions on
whether we will proceed with any of these alternatives.
3-3/4% Convertible Subordinated Notes due 2007
In February 2000, we issued and sold $200 million aggregate principal
amount of 3-3/4% convertible subordinated notes due 2007 (the "3-3/4% notes").
The 3-3/4% notes carry certain redemption provisions and each holder may convert
its 3-3/4% notes into shares of common stock at any time prior to maturity. We
have already registered for resale shares of our common stock issuable on
conversion under the Securities Act of 1933. Currently, $1,000 in principal
amount of the 3-3/4% notes is convertible into 14.76 shares of common stock.
Convertible note held by Schering
In October 1998, we issued a promissory note in the principal amount of
approximately $6.0 million to Schering Corporation. We have the option to pay in
cash or convert the amount due on this note into our common stock. If we convert
the amount due into common stock, we may need to register the common stock under
the Securities Act of 1933. This note is due in October 2001.
Stock options and awards; warrants
At March 31, 2000, we were obligated to issue the following shares of
common stock under the circumstances described:
- 7,706,790 shares upon the exercise of stock options and
vesting of stock awards; and
- 1,800 shares upon the exercise of warrants. (All of such
warrants either expired or were exercised in April 2000).
OUR COMMON STOCK PRICE IS HIGHLY VOLATILE
The realization of any of the risks described in these "Risk Factors"
or other unforeseen risks could have a dramatic and adverse effect on the market
price of our common stock. Additionally, market prices for securities of
biotechnology and pharmaceutical companies, including ours, have historically
been very volatile. The market for these securities has from time to time
experienced significant price and volume fluctuations for reasons that were
unrelated to the operating performance of any one company. In particular and in
addition to circumstances described elsewhere under "Risk Factors," the
following factors can adversely affect the market price of our common stock:
- announcements of technological innovations or new therapeutic
products by us or others;
- public concern as to the safety of drugs developed by us or
others;
- general market conditions;
- success of research and development programs;
- changes in government regulations or patent decisions; and
- developments of our corporate partners.
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<PAGE> 35
ANTI-TAKEOVER PROVISIONS MAY NOT BENEFIT SHAREHOLDERS
We are a Pennsylvania corporation. Anti-takeover provisions of
Pennsylvania law could make it more difficult for a person or group to acquire
control of us, even if the change in control would be beneficial to
shareholders. Our articles of incorporation and bylaws also contain certain
provisions that could have a similar effect. The articles provide that our board
of directors may issue, without shareholder approval, preferred stock having
such voting rights, preferences and special rights as the board of directors may
determine. The issuance of such preferred stock could make it more difficult for
a third party to acquire us.
ITEM 2. PROPERTIES
We lease and occupy approximately 151,000 square feet of laboratory,
manufacturing and office space in Cambridge, Massachusetts under twelve leases
expiring in the years 2001 to 2008. Several of the leases contain provisions
permitting us to extend the term of such leases for up to ten years. We have a
GMP clinical suite at one of our Massachusetts facilities, which is for the
manufacture of product candidates incorporating the ProLease delivery system. We
operate a GMP manufacturing facility for our AIR technology at another of our
Massachusetts facilities. In addition, we completed construction of a 32,000
square foot commercial scale ProLease manufacturing facility in Cambridge,
Massachusetts in October 1998. We believe that our Massachusetts facilities are
adequate for our preclinical, clinical and commercial operations.
We do not manufacture and do not expect to manufacture Cereport for
clinical trials. We have engaged a third party to manufacture clinical and
commercial supplies of Cereport.
Alkermes Europe, Ltd., one of our wholly owned subsidiaries, leases and
occupies approximately 4,600 square feet of office space in Cambridge, England
under a lease expiring in the year 2002.
We own and occupy approximately 35,000 square feet of manufacturing,
office and laboratory space in Wilmington, Ohio. The facility contains a
state-of-the-art GMP sterile production facility specifically designed for the
production of Medisorb microspheres. Construction of a 20,000 square foot
addition and renovation of this facility to support commercial scale manufacture
of Medisorb product candidates was completed in June of 1998. We believe that
our Wilmington facility is adequate for its preclinical, clinical and commercial
operations.
We also lease and occupy approximately 30,000 square feet of laboratory
and office space in Blue Ash, Ohio under a lease expiring in 2001. We operate
clinical scale manufacturing for our DST and RingCap technologies at this
facility. We believe that the Blue Ash facility is adequate for our operations.
ITEM 3. LEGAL PROCEEDINGS Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held on Friday, April 28, 2000
for the purpose of considering a proposal to adopt an amendment to our Second
Amended and Restated Articles of Incorporation, as amended, to effect a
two-for-one split of our common stock and increase the total number of our
authorized shares from 85,000,000 to 165,000,000, including an increase in the
number of authorized shares of our common stock from 80,000,000 to 160,000,000.
This proposal was approved by our shareholders. With respect to the proposal,
23,366,072 shares were cast in favor of the proposal, 196,585 shares were cast
against the proposal and there were 14,823 abstentions.
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<PAGE> 36
PART II
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
All share amounts and per share information in this report on Form 10-K
has been adjusted to reflect the two-for-one stock split effected April 28,
2000.
Our common stock is traded on the Nasdaq National Market under the
symbol ALKS. We have 382,632 shares of our non-voting common stock issued and
outstanding. There is no established public trading market for our non-voting
common stock. Set forth below for the indicated periods are the high and low
sale prices for our common stock.
<TABLE>
<CAPTION>
Fiscal 2000 Fiscal 1999
----------- -----------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter $ 15 1/16 $ 10 13/16 $ 13 3/16 $ 8 3/8
2nd Quarter 19 15/16 11 3/8 10 15/16 5 1/16
3rd Quarter 28 3/4 14 3/16 11 15/16 5 1/2
4th Quarter 98 1/2 23 3/4 16 3/4 11 1/16
</TABLE>
There were 590 shareholders of record for our common stock and one
shareholder of record for our non-voting common stock on June 7, 2000. No
dividends have been paid on the common stock to date and we do not expect to pay
cash dividends thereon in the foreseeable future.
3-3/4% Convertible Subordinated Notes due 2007
In February 2000, we issued and sold $200 million aggregate principal
amount of 3-3/4% Convertible Subordinated Notes due 2007 (the "3-3/4% Notes") to
Robertson Stephens, Adams, Harkness & Hill, Inc., ING Barings, J.P. Morgan &
Co., PaineWebber Incorporated, SG Cowen and U.S. Bancorp Piper Jaffray (the
"3-3/4% Notes Initial Purchasers"). The underwriting commissions and discounts
totaled $6 million. The maturity date of the 3-3/4% Notes is February 15, 2007.
We are obligated to pay interest at a rate of 3-3/4% per year on each of
February 15 and August 15, beginning August 15, 2000.
The 3-3/4% Notes were issued and sold in transactions exempt from
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), to persons reasonably believed by the 3-3/4% Notes Initial
Purchasers to be "qualified institutional buyers" ("QIBs") as defined in Rule
144A under the Securities Act or institutional accredited investors or
sophisticated investors.
The 3-3/4% Notes are convertible into our common stock, at the option
of the holder, at a price of $67.75 per share, subject to adjustment upon
certain events.
The 3-3/4% Notes are redeemable by us in cash at any time prior to
February 19, 2003 if our stock price exceeds $135.50 per share for at least 20
of the 30 trading days immediately prior to our delivery of the redemption
notice. If we redeem all or some of the 3-3/4% Notes prior to February 15, 2001,
we will make an additional payment to holders equal to one year of interest per
$1,000 note, minus the amount of any interest we have actually paid on the note.
The 3-3/4% Notes are also redeemable at any time on or after February 19, 2003
at redemption prices of 102.14%, 101.61%, 101.07% and 100.54% for each of the
years 2003, 2004, 2005 and 2006, respectively.
In certain circumstances, at the option of the holders, we may be
required to repurchase the 3-3/4% Notes. The required repurchase may be in cash
or, at our option, in common stock at 105% of the principal amount of the 3-3/4%
Notes, plus accrued and unpaid interest.
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<PAGE> 37
On February 29, 2000, we filed a registration statement on Form S-3 to
register the 3-3/4% Notes and the shares of common stock issuable upon
conversion thereof, which was declared effective on March 6, 2000.
1999 Preferred Stock
On April 14, 1999, we issued and sold 3,500 shares of 1999 Redeemable
Convertible Exchangeable Preferred Stock, par value $.01 per share (the "1999
Preferred Stock"), to Genentech, Inc. for an aggregate purchase price of
$35,000,000.
The 1999 Preferred Stock was issued and sold in a transaction exempt
from the registration requirements of the Securities Act pursuant to Rule 506 of
Regulation D promulgated under the Securities Act. We reasonably believed that
Genentech, Inc. was and is an accredited investor, based on representations made
to us by Genentech and by our review of Genentech's filings with the SEC under
the Securities Exchange Act of 1934, as amended.
The 1999 Preferred Stock was convertible at Genentech's option. In
February 2000, Genentech exercised its option to convert the 1999 Preferred
Stock together with accrued and unpaid dividends into 322,376 shares of common
stock and 382,632 shares of non-voting common stock.
On April 13, 2000, we filed a registration statement on Form S-3 to
register for resale the 705,008 shares of common stock issued upon conversion of
the 1999 Preferred Stock or is issuable upon conversion of the non-voting common
stock, which was declared effective on April 25, 2000.
AIR Transaction
As of February 1, 1999, we issued 7,361,016 shares of our common stock
(the "AIR Shares") to the stockholders of Advanced Inhalation Research, Inc.
("AIR") in connection with the merger of one of our wholly owned subsidiaries
with and into AIR. Each share of the common stock of AIR was converted into
2.3659508 shares of our common stock on the effective date of the merger. As of
March 31, 2000, approximately 1,470,000 of the AIR Shares are restricted under
various restricted stock purchase agreements and cannot be resold until such
shares vest over a four year period at different amounts for each shareholder.
The AIR Shares were issued in a transaction exempt from the
registration requirements of the Securities Act pursuant to Rule 506 of
Regulation D promulgated under the Securities Act to persons reasonably believed
to be accredited investors or investors who, alone or with their purchaser
representatives had such knowledge and experience in financial and business
matters that he or she was capable of evaluating the merits and risks of the
investment. The AIR Shares were issued to 34 purchasers.
On April 2, 1999, we filed a registration statement on Form S-3 to
register for resale the AIR Shares, which was declared effective on May 13,
1999.
Also in February 1999 and in connection with the merger, we assumed
stock options previously granted to certain persons by AIR. On April 2, 1999, we
filed a registration statement on Form S-3 to register 238,908 shares of our
common stock issuable upon exercise of such stock options, which was also
declared effective on May 13, 1999.
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<PAGE> 38
$3.25 Preferred Stock
In March 1998, we issued and sold 2,300,000 shares of $3.25 Convertible
Exchangeable Preferred Stock, par value $.01 per share (the "$3.25 Preferred
Stock"), to BancAmerica Robertson Stephens, NationsBanc Montgomery Securities
LLC, Cowen & Company, Credit Suisse First Boston Corporation, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., PaineWebber
Incorporated and Smith Barney Inc. (the "$3.25 Initial Purchasers"). The
aggregate purchase price was $115,000,000, of which $4,025,000 constituted the
underwriting discounts and commissions.
The $3.25 Preferred Stock was issued and sold in transactions exempt
from the registration requirements of the Securities Act to persons reasonably
believed by the managers who placed the $3.25 Preferred Stock, the $3.25 Initial
Purchasers, to be QIBs or institutional accredited investors or sophisticated
investors.
Dividends on the 2,300,000 shares of the $3.25 Preferred Stock are
cumulative from the date of original issue and are payable quarterly each March
1, June 1, September 1 and December 1, at the annual rate of $3.25 per share of
$3.25 Preferred Stock and commenced June 1, 1998. Prior to March 6, 2001, the
$3.25 Preferred Stock is not redeemable at our option. Thereafter the $3.25
Preferred Stock is redeemable at our option, in whole or in part, at declining
redemption prices, together with accrued dividends. The $3.25 Preferred Stock
has a liquidation preference of $50 per share, plus accrued and unpaid
dividends.
The $3.25 Preferred Stock is exchangeable, in whole but not in part, at
our option on any dividend payment date beginning March 1, 1999 (the "Exchange
Date") for its 6-1/2% Convertible Subordinated Debentures (the "Debentures") at
the rate of $50 principal amount of Debentures for each share of $3.25 Preferred
Stock. The Debentures, if issued, will mature on the tenth anniversary of the
Exchange Date. The Debentures, if issued, will contain conversion and optional
redemption provisions substantially identical to those of the $3.25 Preferred
Stock.
Holders of the $3.25 Preferred Stock are entitled at any time, subject
to prior redemption or repurchase, to convert any of the $3.25 Preferred Stock
or portions thereof into common stock, at an adjusted conversion rate of 3.3756
shares of common stock for each share of $3.25 Preferred Stock, subject to
certain further adjustments.
On April 15, 1998, we filed a registration statement on Form S-3 to
register the 2,300,000 shares of the $3.25 Preferred Stock, $115,000,000
principal amount of Debentures and 7,763,880 shares of common stock, issuable
upon conversion of the $3.25 Preferred Stock or upon conversion of the
Debentures, if the Preferred Stock is exchanged for Debentures. The effective
date of such registration statement was April 29, 1998.
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<PAGE> 39
ITEM 6. SELECTED FINANCIAL DATA
ALKERMES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues (1) $ 34,459 $ 43,716 $ 31,367 $ 19,827 $ 15,919
------------------------------------------------------------------------
Research and development expenses 54,483 48,457 31,762 29,554 21,586
------------------------------------------------------------------------
Total expenses (2) (3) 102,506 84,772 43,949 38,625 29,666
------------------------------------------------------------------------
Net loss (2) (3) $ (68,047) $(41,056) $(12,582) $(18,798) $(13,747)
------------------------------------------------------------------------
Basic and diluted loss per common share $ (1.52) $ (0.99) $ (0.27) $ (0.51) $ (0.47)
------------------------------------------------------------------------
Weighted average number of common shares outstanding 51,015 49,115 46,038 36,577 29,549
------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments $ 337,367 $163,419 $194,257 $ 85,297 $ 32,374
------------------------------------------------------------------------
Total assets 413,961 213,452 220,977 104,697 45,752
------------------------------------------------------------------------
Long-term obligations 222,792 28,417 12,933 10,914 9,876
------------------------------------------------------------------------
Shareholders' equity 167,967 156,206 181,455 79,151 23,513
------------------------------------------------------------------------
</TABLE>
(1) Total revenues include research and development revenue under collaborative
arrangements and interest and other income.
(2) Includes noncash compensation charges of $29,493, $16,239, $2,183, $173
and $179, respectively, and interest expense.
(3) Includes a $3,221 nonrecurring charge in fiscal 1999 for RingCap and DST
technologies licensed from ALZA Corporation.
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<PAGE> 40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION RESULTS OF
OPERATION
INTRODUCTION
Alkermes, Inc. (together with our subsidiaries, "we" or "us") is
developing innovative pharmaceutical products based on sophisticated drug
delivery systems. We have several areas of focus: (i) controlled, sustained
release of injectable drugs lasting several days to several weeks, utilizing our
ProLease(R) and Medisorb(R) technologies; (ii) the development of pharmaceutical
products based on proprietary pulmonary drug delivery technologies utilizing our
Advanced Inhalation Research, Inc. ("AIR(TM)") technology; (iii) the delivery of
drugs into the brain past the blood-brain barrier utilizing our Cereport(R)
technology; and (iv) oral delivery of drugs using our RingCap(TM) and dose
sipping technologies ("DST"). Since our inception in 1987, we have devoted
substantially all of our resources to research and development programs. We have
not received any revenue from the sale of products. We have been unprofitable
since inception and expect to incur substantial additional operating losses over
the next few years. At March 31, 2000, we had an accumulated deficit of $258.4
million.
We have funded our operations primarily through public offerings and
private placements of debt and equity securities, bank loans and payments under
research and development agreements with collaborators, including Alkermes
Clinical Partners, L.P. ("Clinical Partners"), a research and development
limited partnership whose operations commenced in April 1992 and whose funding
ended during June 1996. We generally develop our product candidates in
collaboration with others on whom we rely for funding, development,
manufacturing and/or marketing.
FORWARD-LOOKING STATEMENTS
Any statements set forth below or otherwise made in writing or orally
by us with regard to our expectations as to financial results and other aspects
of our business may constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements relate to
our future plans, objectives, expectations and intentions and may be identified
by words like "believe," "expect," "may," "will," "should," "seek," or
"anticipate," and similar expressions.
Although we believe that our expectations are based on reasonable
assumptions within the bounds of our knowledge of our business and operations,
our business is subject to significant risks and there can be no assurance that
actual results of our development and manufacturing activities and our results
of operations will not differ materially from our expectations. Factors which
could cause actual results to differ from expectations include, among others:
(i) we may be unable to manufacture our first product, Nutropin Depot(TM) or
future products on a commercial scale or economically; (ii) Nutropin Depot may
not produce significant revenues and, in commercial use, may have unintended
side effects, adverse reactions or incidents of misuse; (iii) our collaborators
could elect to terminate or delay programs at any time; (iv) we and our
collaborators may not be permitted by regulatory authorities to undertake
clinical trials for RingCap or DST or to undertake additional clinical trials
for ProLease, Cereport, Medisorb or AIR product candidates or clinical trials
could be delayed; (v) our product candidates could be ineffective or unsafe
during clinical trials; (vi) even if clinical trials are completed and the data
is submitted to the Food and Drug Administration ("FDA") as a New Drug
Application ("NDA") for marketing approval and to other health authorities as a
marketing authorization application, the NDA or marketing authorization
application could fail to be accepted, or could fail to receive approval on a
timely basis, if at all; (vii) disputes with collaborators, termination of
collaborations or failure to negotiate acceptable new collaborative arrangements
for ProLease, Medisorb, AIR, RingCap or DST technologies, or for Cereport, could
occur; (viii) even if our product candidates appear promising at an early stage
of development, product candidates could fail to receive necessary regulatory
approvals, be difficult to manufacture on a large scale, be uneconomical, fail
to achieve market acceptance, be precluded from commercialization by proprietary
rights of third parties or experience substantial competition in the
40
<PAGE> 41
marketplace; (ix) technological change in the biotechnology or pharmaceutical
industries could render our product candidates obsolete or noncompetitive; (x)
difficulties or set-backs in obtaining and enforcing our patents and
difficulties with the patent rights of others could occur; (xi) we could incur
difficulties or set-backs in obtaining the substantial additional funding
required to continue research and development programs and clinical trials; and
(xii) disputes with Clinical Partners over rights to Cereport and related
technology could occur.
RESULTS OF OPERATIONS
Our research and development revenue under collaborative arrangements
was $22.9 million, $33.9 million and $25.6 million for the fiscal years ended in
2000, 1999 and 1998, respectively. The decrease in such revenue for fiscal 2000
as compared to fiscal 1999 was mainly the result of decreased funding earned
under collaborative agreements related to our ProLease and Medisorb
technologies. In addition, the research and development funding from Genentech,
Inc. ("Genentech") decreased as a result of the expanded license agreement and
the sale of our convertible exchangeable preferred stock (the "1999 Preferred
Stock") to Genentech in April 1999 (see Note 5 to the consolidated financial
statements) at a purchase price of $35 million. We are using the proceeds from
the issuance of the 1999 Preferred Stock to conduct expanded development
activities for Nutropin Depot, an injectable long-acting formulation of
Genentech's recombinant human growth hormone based on our ProLease drug delivery
system, and may be reimbursed for those expenses if a milestone is achieved. The
increase in such revenue for fiscal 1999 as compared to fiscal 1998 was mainly a
result of the increased funding and milestones earned under collaborative
agreements related to our ProLease technology.
Total operating expenses were $98.9 million for the fiscal year ended
in 2000 compared to $82.5 million and $42.3 million for the fiscal years ended
in 1999 and 1998, respectively. The increase for fiscal 2000 as compared to
fiscal 1999 and for fiscal 1999 as compared to fiscal 1998 is primarily related
to an increase in noncash compensation charges as well as an increase in
research and development expenses, which are discussed below. In addition, we
incurred a $3.2 million nonrecurring charge during fiscal 1999 for RingCap and
DST technologies licensed from ALZA Corporation which are not yet commercially
viable.
Research and development expenses were $54.5 million for the fiscal
year ended in 2000 compared to $48.5 million and $31.8 million for the fiscal
years ended in 1999 and 1998, respectively. The increase for fiscal 2000 as
compared to fiscal 1999 and for fiscal 1999 as compared to fiscal 1998 was
primarily the result of an increase in salary and related benefits and other
costs associated with an increase in personnel as we advance our product
candidates through development and clinical trials and prepare for commercial
scale manufacturing. In addition, we had an increase in occupancy costs and
depreciation and amortization expense related to our expanded Medisorb
manufacturing facility in Wilmington, Ohio and our ProLease manufacturing
facility in Cambridge, Massachusetts. The increase in research and development
expenses in fiscal 2000 as compared to fiscal 1999 was partially offset by a
decrease in clinical trial costs as we completed the Phase III clinical trial
for Nutropin Depot during fiscal 1999 and discontinued the Phase III clinical
trial of Cereport in April 1999. The increase for fiscal 1999 as compared to
fiscal 1998 was also a result of expanded clinical and manufacturing work
performed.
General and administrative expenses were $14.9 million, $14.6 million
and $8.4 million for the fiscal years ended in 2000, 1999 and 1998,
respectively. The increase for fiscal 2000 as compared to fiscal 1999 and for
fiscal 1999 as compared to fiscal 1998 was the result of increased salary,
benefits and other costs relating primarily to an increase in personnel. In
addition, in fiscal 1999 we recorded one-time merger costs of $1.3 million in
connection with the acquisition of our subsidiary, AIR, which was accounted for
as a pooling of interests.
Noncash compensation expense was $29.5 million, $16.2 million and $2.2
million for fiscal years
41
<PAGE> 42
ended 2000, 1999 and 1998, respectively. Noncash compensation charges primarily
relate to common stock issued and stock options granted to certain employees,
consultants and other individuals associated with our subsidiary, AIR.
Fluctuations in amounts are primarily a result of changes in the market value of
our common stock, partially offset by a reduction in the number of shares of
common stock subject to future vesting.
Interest and other income was $11.5 million, $9.8 million and $5.8
million for the fiscal years ended in 2000, 1999 and 1998, respectively. The
increase for fiscal 2000 as compared to fiscal 1999 was primarily the result of
the interest income earned on the increase in average cash and investment
balances as a result of the sale of the 1999 Preferred Stock and the sale of
$200 million principal amount of our 3-3/4% Convertible Subordinated Notes due
2007 (the "3-3/4% Notes"). The increase for fiscal 1999 as compared to fiscal
1998 was primarily a result of the interest income earned on the net proceeds of
$110.5 million from the sale of 2.3 million shares of our $3.25 convertible
exchangeable preferred stock (the "$3.25 Preferred Stock") in March 1998.
Interest expense was $3.7 million for the fiscal year ended in 2000
compared to $2.3 million and $1.6 million for the fiscal years ended in 1999 and
1998, respectively. The increase for fiscal 2000 as compared to fiscal 1999 and
for fiscal 1999 as compared to fiscal 1998 was primarily the result of an
increase in interest costs related to an increase in indebtedness.
We do not believe that inflation and changing prices have had a
material impact on our results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments were approximately
$337.4 million at March 31, 2000 as compared to $163.4 million at March 31,
1999. The increase in cash and cash equivalents and short-term investments was
primarily the result of the sale of $200 million principal amount of our 3-3/4%
Notes in February 2000, the sale of the 1999 Preferred Stock in April 1999 and
the proceeds from the exercise of stock options and warrants. The increase was
partially offset by cash used to finance our operations and capital
expenditures, to pay preferred stock dividends and to pay interest on our
indebtedness.
In addition, Long-Term Investments include $18.4 million principal
amount of high-grade corporate notes with maturities ranging from 13 to 16
months. We invest in cash equivalents, U.S. Government obligations, high-grade
corporate notes and commercial paper. Our investment objectives for all of our
investments taken as a whole are, first, to assure conservation of capital and
liquidity, and second, to obtain investment income.
In April 1999, we amended our license agreement with Genentech to
expand our collaboration for Nutropin Depot, an injectable long-acting
formulation of Genentech's recombinant human growth hormone based on our
ProLease drug delivery system. Under the agreement, we and Genentech have been
conducting expanded development activities, including clinical trials in an
additional indication, process and formulation development, and manufacturing.
The expanded agreement includes potential milestone payments, which milestones,
if achieved, would reimburse us for our past research expenditures incurred
(approximately $18 million at March 31, 2000), further research expenditures
through December 31, 2000 plus an additional $5 million. The terms of the
collaboration included the purchase by Genentech of the 1999 Preferred Stock for
a purchase price of $35 million. In February 2000, Genentech exercised its
option to convert the 1999 Preferred Stock together with accrued and unpaid
dividends into 322,376 shares of voting and 382,632 shares of non-voting common
stock. Dividends on the 1999 Preferred Stock were paid quarterly through March
2000, at a floating three-month LIBOR rate. In December 1999, Nutropin Depot
received approval from the FDA for pediatric growth hormone deficiency ("GHD")
after being granted a six-month priority review. From this collaboration we
anticipate earning royalties and manufacturing fees from the sales of Nutropin
Depot, if any.
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<PAGE> 43
In January of 2000, we entered into an agreement with Ares-Serono
International S.A. ("Ares-Serono") to develop a ProLease sustained release
formulation of one of Ares-Serono's as yet undisclosed therapeutic proteins. In
exchange for exclusive worldwide rights to products resulting from this
collaboration, Ares-Serono will provide us with development funding and
milestone payments which could exceed $30 million over the next several years
and will pay us a royalty based on sales of ProLease products, if any. We are
expected to manufacture the ProLease formulations of products commercialized
under the agreement. Ares-Serono will be responsible for conducting clinical
trials, securing regulatory approvals and marketing products on a worldwide
basis.
In February 2000, Glaxo Wellcome elected to obtain a broad license to
our AIR pulmonary drug delivery technology for use in the development of
multiple product candidates in four specified therapeutic categories in the
field of respiratory disease. Glaxo Wellcome's decision followed the completion
of a 12-month feasibility program conducted by the two companies. A definitive
license agreement was entered into in May 2000, subject to compliance with the
notification requirements under the Hart-Scott-Rodino Antitrust Act of 1976. In
exchange for exclusive worldwide rights to products resulting from the
collaboration, Glaxo Wellcome will provide us with development funding and
milestone payments and will pay us a royalty based on sales of such products, if
any. We and Glaxo Wellcome will each have manufacturing rights and obligations,
and Glaxo Wellcome will be responsible for conducting clinical trials, securing
regulatory approvals and marketing products on a worldwide basis. The total
economic value of the collaboration is dependent upon the number of products
successfully commercialized, if any.
In February 2000, we entered into an agreement with Eli Lilly and
Company Limited ("Eli Lilly") to develop an inhaled formulation of human growth
hormone based on our AIR pulmonary drug delivery system. This agreement followed
the successful completion of a nine-month feasibility program conducted by the
two companies. Under the terms of the agreement we will receive certain initial
fees and funding for research and milestone payments. We will also receive
royalty payments based on product sales, if any. In exchange, Eli Lilly will
receive exclusive worldwide rights to products resulting from the collaboration,
if any. We will be responsible for manufacturing products commercialized as a
result of the agreement, while Eli Lilly will be responsible for conducting
clinical trials, securing regulatory approvals and marketing products on a
worldwide basis.
In February 2000, we issued $200 million principal amount of our 3-3/4%
Notes which mature in February 2007. The 3-3/4% Notes are convertible into our
common stock, at the option of the holder, at a price of $67.75 per share,
subject to adjustment upon certain events. The 3-3/4% Notes bear interest at
3-3/4% payable semi-annually, commencing on August 15, 2000. The 3-3/4% Notes
are redeemable by us at any time prior to February 19, 2003 if our common stock
price exceeds $135.50 per share for at least 20 of the 30 trading days
immediately prior to our delivery of a redemption notice. If we redeem all or
some of the 3-3/4% Notes prior to February 15, 2001, we will make an additional
payment to holders equal to one year of interest per $1,000 note, minus the
amount of any interest we have actually paid on the note. The 3-3/4% Notes are
also redeemable at any time on or after February 19, 2003 at certain declining
redemption prices. In certain circumstances we may be required to repurchase the
3-3/4% Notes. The required repurchase may be in cash or, at our option, in
common stock at 105% of the principal amount of the 3-3/4% Notes, plus accrued
and unpaid interest. As a part of the sale of the 3-3/4% Notes, during fiscal
2000, we incurred approximately $6.5 million of offering costs which were
recorded as other assets and are being amortized over seven years, the term of
the 3-3/4% Notes. The net proceeds to us after such offering costs were
approximately $193.5 million and are being used to fund research, development
and clinical trial activities and for manufacturing facilities and equipment, as
well as for working capital and general corporate purposes. In addition, we may
use a portion of the net proceeds for potential acquisitions of companies,
additional technologies and compounds, none of which are currently planned.
43
<PAGE> 44
Our research and development costs to date have been financed primarily
by sales of debt and equity securities and payments under research and
development collaborative arrangements. We expect to incur significant
additional research and development and other costs, including costs related to
preclinical studies, clinical trials and facilities expansion. Therefore, we
expect that our costs, including research and development costs for all of our
product candidates, will exceed revenues significantly for the next few years,
which will result in continuing losses from operations.
Capital expenditures were approximately $5.8 million for the year ended
March 31, 2000, principally reflecting equipment purchases. Our capital
expenditures for equipment, facilities and building improvements have been
financed to date primarily with proceeds from bank loans and the sales of debt
and equity securities. Under the provisions of the existing loans, Fleet
National Bank has a security interest in certain of our assets which secure the
outstanding obligations under the loans.
We will continue to pursue opportunities to obtain additional financing
in the future. Such financing may be sought through various sources, including
debt and equity offerings, corporate collaborations, bank borrowings, lease
arrangements relating to fixed assets or other financing methods. The source,
timing and availability of any financings will depend on market conditions,
interest rates and other factors. Our future capital requirements will also
depend on many factors, including continued scientific progress in our research
and development programs, the magnitude of these programs, progress with
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments, the
establishment of additional collaborative arrangements, the cost of
manufacturing facilities and of commercialization activities and arrangements
and the cost of product in-licensing and any possible acquisitions.
We believe that our current cash and cash equivalents and short-term
investments, combined with anticipated interest income and research and
development revenues under collaborative arrangements, will be sufficient to
meet our anticipated capital requirements through at least March 31, 2002.
We may need to raise substantial additional funds for longer-term
product development, regulatory approvals and manufacturing or marketing
activities that we might undertake in the future. There can be no assurance that
additional funds will be available on favorable terms, if at all. If adequate
funds are not available, we may be required to curtail significantly one or more
of our research and development programs and/or obtain funds through
arrangements with collaborative partners or others that may require us to
relinquish rights to certain of our technologies, product candidates or future
products.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an Amendment of FASB Statement No. 133," which we
are required to adopt in fiscal year 2002. SFAS No. 133 provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. We have not yet assessed the impact of SFAS No. 133 on our
financial position and results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective in the
quarter ended June 30, 2000, and requires companies to report any changes in
revenue recognition as a cumulative change in accounting principle at the time
of implementation in accordance with Accounting Principles Board Opinion No. 20,
"Accounting Changes." We are currently assessing the impact of SAB 101 on our
financial position and results of operations.
44
<PAGE> 45
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We own financial instruments that are sensitive to market risks as part
of our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations, including our research and
development activities. Our Short-Term Investments and Investments consist of
U.S. Treasuries and other government securities, commercial and corporate paper
and corporate notes. Substantially all investments mature within one year, are
not callable by the issuer and have fixed interest rates. All of our Short-Term
Investments and Investments are currently held-to-maturity. These investments
are subject to interest rate risk, and could decline in value if interest rates
fluctuate. Due to the conservative nature of our Short-Term Investments and
Investments we do not believe that we have a material exposure to interest rate
risk.
Our "available-for-sale" marketable equity securities and the 3-3/4%
Notes are sensitive to changes in interest rates. Interest rate changes would
result in a change in the fair value of these financial instruments due to the
difference between the market interest rate and the rate at the date of purchase
of the financial instrument. A 10% decrease in year-end market interest rates
would result in no material impact on the net fair value of such
interest-sensitive financial instruments.
Our 3-3/4% Notes are sensitive to fluctuations in the price of our
common stock into which the 3-3/4% Notes are convertible. Changes in equity
prices would result in changes in the fair value of the Company's 3-3/4% Notes
due to the difference between the current market price and the market price at
the date of issuance of the 3-3/4% Notes. A 10% increase in the year-end market
price of the 3-3/4% Notes would result in an increase of approximately $12
million on the net fair value of the 3-3/4% Notes.
45
<PAGE> 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2000 AND 1999
AND FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED MARCH 31, 2000 AND INDEPENDENT AUDITORS' REPORT
46
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
The Board of Directors of Alkermes, Inc.:
We have audited the accompanying consolidated balance sheets of Alkermes, Inc.
and subsidiaries as of March 31, 2000 and 1999, and the related consolidated
statements of operations, comprehensive loss, shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Alkermes, Inc. and subsidiaries as
of March 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
May 26, 2000
Boston, Massachusetts
47
<PAGE> 48
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,100,643 $ 9,115,432
Short-term investments 331,266,720 154,303,220
Prepaid expenses and other current assets 8,474,083 5,745,047
------------- -------------
Total current assets 345,841,446 169,163,699
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land 235,000 235,000
Building 3,538,935 3,483,862
Furniture, fixtures and equipment 35,845,461 31,302,274
Leasehold improvements 13,804,269 12,635,756
------------- -------------
53,423,665 47,656,892
Less accumulated depreciation and amortization (20,554,182) (14,292,146)
------------- -------------
32,869,483 33,364,746
------------- -------------
INVESTMENTS 20,094,438 8,436,067
------------- -------------
OTHER ASSETS 15,155,738 2,487,757
------------- -------------
TOTAL ASSETS $ 413,961,105 $ 213,452,269
============= =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,207,394 $ 8,212,206
Deferred revenue 8,655,062 9,587,933
Long-term obligations - current portion 5,625,000 10,700,000
------------- -------------
Total current liabilities 22,487,456 28,500,139
------------- -------------
LONG-TERM OBLIGATIONS 22,791,625 28,416,625
------------- -------------
CONVERTIBLE SUBORDINATED NOTES 200,000,000 --
------------- -------------
OTHER LONG-TERM LIABILITIES 715,029 329,614
------------- -------------
COMMITMENTS (Note 11)
SHAREHOLDERS' EQUITY:
Capital stock, par value $.01 per share:
authorized, 2,250,000 shares; none issued
Convertible exchangeable preferred stock,
par value $.01 per share: authorized and
issued, 2,300,000 shares; outstanding, 2,299,000
and 2,300,000 shares at March 31, 2000 and 1999,
respectively (liquidation preference of $114,950,000) 22,990 23,000
Common stock, par value $.01 per share:
authorized, 160,000,000 shares; issued, 53,953,996 and
49,964,918 shares at March 31, 2000 and 1999, respectively 539,540 499,649
Non-voting common stock, par value $.01 per share:
authorized, 450,000 shares; issued, 382,632 and
0 shares at March 31, 2000 and 1999, respectively 3,826 --
Additional paid-in capital 427,577,936 346,599,608
Deferred compensation (8,545,926) (9,932,199)
Accumulated other comprehensive income (loss) 6,742,064 (46,873)
Accumulated deficit (258,373,435) (180,937,294)
------------- -------------
Total shareholders' equity 167,966,995 156,205,891
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 413,961,105 $ 213,452,269
============= =============
</TABLE>
See notes to consolidated financial statements.
48
<PAGE> 49
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS 2000 1999 1998
OF OPERATIONS
<S> <C> <C> <C>
REVENUES:
Research and development revenue under
collaborative arrangements $ 22,920,357 $ 33,892,107 $ 25,585,058
------------ ------------ ------------
EXPENSES:
Research and development 54,482,672 48,456,824 31,761,541
General and administrative 14,878,753 14,556,102 8,374,931
Noncash compensation expense 29,492,656 16,239,311 2,183,373
Purchase of in-process research and development -- 3,221,253 --
------------ ------------ ------------
Total expenses 98,854,081 82,473,490 42,319,845
------------ ------------ ------------
NET OPERATING LOSS (75,933,724) (48,581,383) (16,734,787)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 11,538,884 9,823,479 5,781,511
Interest expense (3,652,498) (2,298,466) (1,628,925)
------------ ------------ ------------
Total other income (expense) 7,886,386 7,525,013 4,152,586
------------ ------------ ------------
NET LOSS (68,047,338) (41,056,370) (12,582,201)
PREFERRED STOCK DIVIDENDS 9,388,803 7,454,300 --
------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $(77,436,141) $(48,510,670) $(12,582,201)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (1.52) $ (0.99) $ (0.27)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 51,014,956 49,115,000 46,037,752
============ ============ ============
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
NET LOSS: $(68,047,338) $(41,056,370) $(12,582,201)
Cumulative foreign currency translation adjustments (17,813) (36,235) 6,231
Carrying value adjustments -- 37,500 --
Unrealized gain (loss) on marketable securities 6,806,750 -- (108,750)
------------ ------------ ------------
COMPREHENSIVE LOSS $(61,258,401) $(41,055,105) $(12,684,720)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
49
<PAGE> 50
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
$3.25 CONVERTIBLE 1999 CONVERTIBLE
EXCHANGEABLE EXCHANGEABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1997 -- $ -- -- $-- 41,437,580 $ 414,376
Issuance of common stock -- -- -- -- 6,618,372 66,184
Issuance of $3.25 convertible exchangeable
preferred stock, net of issuance costs of $441,043 2,300,000 23,000 -- -- -- --
Noncash compensation -- -- -- -- -- --
Amortization of noncash compensation -- -- -- -- -- --
Cumulative foreign currency translation
adjustments -- -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- -- --
Net loss for year -- -- -- -- -- --
--------- ----------- ------- -------- ----------- -----------
BALANCE, MARCH 31, 1998 2,300,000 23,000 -- -- 48,055,952 480,560
Issuance of common stock -- -- -- -- 1,908,966 19,089
Noncash compensation -- -- -- -- -- --
Amortization of noncash compensation -- -- -- -- -- --
Cumulative foreign currency translation
adjustments -- -- -- -- -- --
Carrying value adjustments -- -- -- -- -- --
Net loss for year -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
--------- ----------- ------- -------- ----------- -----------
BALANCE, MARCH 31, 1999 2,300,000 23,000 -- -- 49,964,918 499,649
</TABLE>
<TABLE>
<CAPTION>
NON-VOTING ADDITIONAL
COMMON STOCK PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
<S> <C> <C> <C> <C>
BALANCE, APRIL 1, 1997 -- $ -- $ 198,637,003 $ (109,901)
Issuance of common stock -- -- 2,197,118 --
Issuance of $3.25 convertible exchangeable
preferred stock, net of issuance costs of $441,043 -- -- 110,510,956 --
Noncash compensation -- -- 5,007,552 (5,007,552)
Amortization of noncash compensation -- -- -- 2,190,969
Cumulative foreign currency translation
adjustments -- -- -- --
Unrealized loss on marketable securities -- -- -- --
Net loss for year -- -- -- --
-------- ------ ----------- -------------
BALANCE, MARCH 31, 1998 -- -- 316,352,629 (2,926,484)
Issuance of common stock -- -- 7,001,953 --
Noncash compensation -- -- 23,245,026 (23,245,026)
Amortization of noncash compensation -- -- -- 16,239,311
Cumulative foreign currency translation
adjustments -- -- -- --
Carrying value adjustments -- -- -- --
Net loss for year -- -- -- --
Preferred stock dividends -- -- -- --
-------- ------ ----------- -------------
BALANCE, MARCH 31, 1999 -- -- 346,599,608 (9,932,199)
</TABLE>
<TABLE>
<CAPTION>
OTHER COMPREHENSIVE
INCOME (LOSS)
----------------------------------
FOREIGN UNREALIZED
CURRENCY GAIN (LOSS) ON
TRANSLATION MARKETABLE ACCUMULATED
ADJUSTMENTS SECURITIES DEFICIT TOTAL
<S> <C> <C> <C> <C>
BALANCE, APRIL 1, 1997 $ (16,869) $ 71,250 $(119,844,423) $ 79,151,436
Issuance of common stock -- -- -- 2,263,302
Issuance of $3.25 convertible exchangeable
preferred stock, net of issuance costs of $441,043 -- -- -- 110,533,956
Noncash compensation -- -- -- --
Amortization of noncash compensation -- -- -- 2,190,969
Cumulative foreign currency translation
adjustments 6,231 -- -- 6,231
Unrealized loss on marketable securities -- (108,750) -- (108,750)
Net loss for year -- -- (12,582,201) (12,582,201)
------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1998 (10,638) (37,500) (132,426,624) 181,454,943
Issuance of common stock -- -- -- 7,021,042
Noncash compensation -- -- -- --
Amortization of noncash compensation -- -- -- 16,239,311
Cumulative foreign currency translation
adjustments (36,235) -- -- (36,235)
Carrying value adjustments -- 37,500 -- 37,500
Net loss for year -- -- (41,056,370) (41,056,370)
Preferred stock dividends -- -- (7,454,300) (7,454,300)
------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1999 (46,873) -- (180,937,294) 156,205,891
</TABLE>
(Continued)
See notes to consolidated financial statements.
50
<PAGE> 51
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
$3.25 CONVERTIBLE 1999 CONVERTIBLE
EXCHANGEABLE EXCHANGEABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1999
(CARRIED FORWARD) 2,300,000 23,000 -- -- 49,964,918 499,649
Issuance of common stock, net -- -- -- -- 1,692,850 16,928
Issuance of common stock in connection with
warrants exercised -- -- -- -- 1,755,002 17,550
Issuance of 1999 convertible exchangeable
preferred stock -- -- 3,500 35 -- --
Conversion of $3.25 convertible
exchangeable preferred stock (1,000) (10) -- -- 3,374 34
Conversion of 1999 convertible
exchangeable preferred stock -- -- (3,500) (35) 322,376 3,224
Conversion of note payable to corporate partner -- -- -- -- 215,476 2,155
Options and restricted awards canceled -- -- -- -- -- --
Noncash compensation -- -- -- -- -- --
Amortization of noncash compensation -- -- -- -- -- --
Cumulative foreign currency translation
adjustments -- -- -- -- -- --
Unrealized gain on marketable securities -- -- -- -- -- --
Net loss for year -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
--------- ---------- ------ ------- ---------- ----------
BALANCE, MARCH 31, 2000 2,299,000 $ 22,990 -- $ -- 53,953,996 $ 539,540
========= ========== ====== ======= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NON-VOTING ADDITIONAL
COMMON STOCK PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1999
(CARRIED FORWARD) -- -- 346,599,608 (9,932,199)
Issuance of common stock, net -- -- 6,249,901 --
Issuance of common stock in connection with
warrants exercised -- -- 6,217,628 --
Issuance of 1999 convertible exchangeable
preferred stock -- -- 34,999,965 --
Conversion of $3.25 convertible
exchangeable preferred stock -- -- (24) --
Conversion of 1999 convertible
exchangeable preferred stock 382,632 3,826 157,445 --
Conversion of note payable to corporate partner -- -- 5,247,030 --
Options and restricted awards canceled -- -- (754,849) 754,849
Noncash compensation -- -- 28,861,232 (28,861,232)
Amortization of noncash compensation -- -- -- 29,492,656
Cumulative foreign currency translation
adjustments -- -- -- --
Unrealized gain on marketable securities -- -- -- --
Net loss for year -- -- -- --
Preferred stock dividends -- -- -- --
------ -------- ------------- -------------
BALANCE, MARCH 31, 2000 382,632 $ 3,826 $ 427,577,936 $ (8,545,926)
====== ======== ============= =============
</TABLE>
<TABLE>
<CAPTION>
OTHER COMPREHENSIVE
INCOME (LOSS)
-------------------------------
FOREIGN UNREALIZED
CURRENCY GAIN (LOSS) ON
TRANSLATION MARKETABLE ACCUMULATED
ADJUSTMENTS SECURITIES DEFICIT TOTAL
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1999
(CARRIED FORWARD) (46,873) -- (180,937,294) 156,205,891
Issuance of common stock, net -- -- -- 6,266,829
Issuance of common stock in connection with
warrants exercised -- -- -- 6,235,178
Issuance of 1999 convertible exchangeable
preferred stock -- -- -- 35,000,000
Conversion of $3.25 convertible
exchangeable preferred stock -- -- -- --
Conversion of 1999 convertible
exchangeable preferred stock -- -- -- 164,460
Conversion of note payable to corporate partner -- -- -- 5,249,185
Options and restricted awards canceled -- -- -- --
Noncash compensation -- -- -- --
Amortization of noncash compensation -- -- -- 29,492,656
Cumulative foreign currency translation
adjustments (17,813) -- -- (17,813)
Unrealized gain on marketable securities -- 6,806,750 -- 6,806,750
Net loss for year -- -- (68,047,338) (68,047,338)
Preferred stock dividends -- -- (9,388,803) (9,388,803)
------------- ------------- ------------- -------------
BALANCE, MARCH 31, 2000 $ (64,686) $ 6,806,750 $(258,373,435) $ 167,966,995
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements. (Concluded)
51
<PAGE> 52
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (68,047,338) $ (41,056,370) $ (12,582,201)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 6,430,934 5,385,404 2,601,793
Noncash interest expense 776,347 758,126 672,958
Compensation relating to issuance of common stock and
grant of stock options and awards made 29,492,656 16,239,311 2,190,969
Adjustments to other assets (304,917) 250,500 60,026
Gain on sale of equipment -- (5,375) (567,623)
Changes in assets and liabilities:
Prepaid expenses and other current assets (1,794,651) 2,820,972 (3,992,733)
Accounts payable and accrued expenses 1,429,472 386,319 2,785,413
Deferred revenue (932,871) 2,109,453 7,478,480
Other long-term liabilities (79,591) (1,137,682) (31,578)
------------- ------------- -------------
Net cash used by operating activities (33,029,959) (14,249,342) (1,384,496)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,756,987) (24,064,521) (8,544,168)
Disposals of equipment -- 5,375 1,080,815
(Purchases) maturities of short-term investments, net (176,963,500) 36,253,678 (108,058,959)
(Purchases) maturities of long-term investments, net (11,658,371) (5,013,341) 1,943,565
Increase in other assets (131,823) (2,638,025) (17,320)
------------- ------------- -------------
Net cash (used by) provided by investing activities (194,510,681) 4,543,166 (113,596,067)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of $3.25 convertible exchangeable preferred stock, net -- -- 110,533,956
Proceeds from issuance of 1999 convertible exchangeable preferred stock 35,000,000 -- --
Proceeds from issuance of common stock, net 12,502,007 7,021,042 2,263,302
Proceeds from the issuance of convertible subordinated notes 200,000,000 -- --
Proceeds from issuance of long-term debt -- 20,000,000 7,000,000
Payment of preferred stock dividends (9,224,343) (7,454,300) --
Payment of long-term obligations (7,200,000) (4,404,648) (3,923,366)
Payment of financing costs in connection with convertible subordinated notes (6,532,740) -- --
------------- ------------- -------------
Net cash provided by financing activities 224,544,924 15,162,094 115,873,892
------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (19,073) (40,436) 7,609
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,014,789) 5,415,482 900,938
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,115,432 3,699,950 2,799,012
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,100,643 $ 9,115,432 $ 3,699,950
============= ============= =============
SUPPLEMENTARY INFORMATION:
Cash paid for interest $ 2,029,011 $ 1,755,082 $ 242,850
============= ============= =============
Noncash activities:
Note payable and accrued interest converted to common stock $ 5,249,185 $ -- $ --
============= ============= =============
1999 preferred stock dividends exchanged for common stock $ 164,460 $ -- $ --
============= ============= =============
Deferred revenue and accrued interest converted to long-term obligations $ -- $ 5,983,292 $ --
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
52
<PAGE> 53
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
1. FORMATION OF THE COMPANY
Alkermes, Inc. (the "Company") was incorporated in July 1987 and is a
leader in the development of products based on sophisticated drug delivery
technologies. The Company has several areas of focus: (i) controlled,
sustained release of injectable drugs lasting several days to several
weeks, utilizing its ProLease(R) and Medisorb(R) technologies; (ii) the
development of pharmaceutical products based on proprietary pulmonary drug
delivery technologies utilizing its Advanced Inhalation Research, Inc.
("AIR(TM)") technology; (iii) the delivery of drugs into the brain past
the blood-brain barrier utilizing its Cereport(R) technology; and (iv)
oral delivery of drugs using its RingCap(TM) and dose sipping technologies
("DST").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Alkermes, Inc. and its wholly owned subsidiaries,
Alkermes Controlled Therapeutics, Inc. ("ACTI"), Alkermes Controlled
Therapeutics Inc. II ("ACT II"), Alkermes Investments, Inc., Alkermes
Development Corporation II ("ADC II"), Alkermes Europe, Ltd. and AIR. ADC
II serves as the one percent general partner of Alkermes Clinical
Partners, L.P. ("Clinical Partners"), a limited partnership engaged in a
research and development project with the Company (see Note 9). ADC II's
investment in Clinical Partners is accounted for under the equity method
of accounting. Such carrying value was zero at March 31, 2000 and 1999
(see Note 9). All significant intercompany balances and transactions have
been eliminated.
STOCK SPLIT - On April 28, 2000, the shareholders of the Company approved
an increase in the authorized shares of common stock from 80,000,000 to
160,000,000 and a two-for-one split of the Company's common stock, par
value $.01 per share. The two-for-one stock split and the increase in the
authorized shares of the Company's common stock became effective on April
28, 2000. As a result of the two-for-one stock split, shareholders
received one additional share of the Company's common stock for every
share of the Company's common stock they held on April 28, 2000. All share
and per share amounts for all years presented have been restated to
reflect the split.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial
Instruments," requires disclosure of the fair value of certain financial
instruments. The carrying amounts of cash, cash equivalents, accounts
payable and accrued expenses approximate fair value because of their
short-term nature. Marketable equity securities have been designated as
"available-for-sale" and are recorded as other assets in the consolidated
financial statements at fair value with any unrealized holding gains or
losses included as a component of shareholders' equity. The carrying
amounts of the Company's debt instruments with its bank and corporate
partner approximate fair value. The carrying amount of the Company's
3-3/4% Convertible Subordinated Notes due 2007 (the "3-3/4% Notes") was
$200,000,000. The fair value of the 3-3/4% Notes was $122,140,000 at March
31, 2000. The fair value of the 3-3/4% Notes was determined from a quoted
market source.
53
<PAGE> 54
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE - Basic and diluted net loss per share are computed
using the weighted average number of common shares outstanding during the
period. Net loss per share for all years presented herein has been
retroactively restated to reflect the stock split which became effective
on April 28, 2000.
The Company accounts for earnings per share in accordance with the
provisions of SFAS No. 128, "Earnings per Share." Basic earnings per share
exclude any dilutive effect from stock options, warrants, convertible
exchangeable preferred stock and convertible subordinated notes. The
Company continues to be in a net loss position, and therefore, diluted
earnings per share is the same amount as basic earnings per share. Certain
securities were not included in the computation of diluted earnings per
share for the years ended March 31, 2000, 1999 and 1998 because they would
have an antidilutive effect due to net losses for such periods. These
securities include (i) options and awards to purchase 7,706,790, 6,684,432
and 4,316,396 shares of common stock with the purchase price of zero to
$96.88 per share, zero to $15.92 per share and zero to $14.38 per share
for fiscal 2000, 1999 and 1998, respectively; (ii) warrants to purchase
1,800, 911,844 and 1,070,264 shares of common stock with a purchase price
of $3.54 per share for fiscal 2000 and $3.54 to $20.03 per share for
fiscal 1999 and 1998, respectively; (iii) 7,760,504 and 7,763,880 shares
of common stock for conversion of the $3.25 convertible exchangeable
preferred stock for fiscal 2000 and 1999, respectively; (iv) 2,952,030
shares of common stock for issuance upon conversion of the 3-3/4% Notes
for fiscal 2000.
REVENUE RECOGNITION - Research and development contract revenues consist
of non-refundable research and development funding under collaborative
agreements with various corporate partners. Research and development
funding generally compensates the Company for formulation, preclinical and
clinical testing related to the collaborative research programs, and is
recognized as revenue at the time the research and development activities
are performed under the terms of the related agreements, when the
corporate partner is obligated to pay and when no future performance
obligations exist.
Fees for the licensing of product rights on initiation of collaborative
arrangements are recorded as deferred revenue upon receipt and recognized
as income on a systematic basis (based upon the timing and level of work
performed or on a straight-line basis if not otherwise determinable) over
the period that the related products or services are delivered or
obligations as defined in the agreement are performed. Revenue from
milestone or other upfront payments is recognized as earned in accordance
with the terms of the related agreements. These agreements may require
deferral of revenue recognition to future periods.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses
are charged to operations as incurred.
NONCASH COMPENSATION EXPENSE - Noncash compensation expense primarily
relates to equity transactions at the Company's subsidiary, AIR. Noncash
compensation expense has been recorded in accordance with the
intrinsic-value method prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," for common
stock issued and stock options and awards granted to employees. Stock or
other equity-based compensation for nonemployees must be accounted for
under the fair value-based method as required by SFAS No. 123, "Accounting
for Stock-Based Compensation," and Emerging Issues Task Force ("EITF") No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." Under this method, the equity-based instrument is measured at
the fair value of the equity instrument on the date of vesting. The
measurement date is generally the issuance date for employees and others
and the vesting date for consultants. The resulting noncash charge has
been recorded in the statements of operations upon issuance or over the
vesting period of the common stock, stock option or award.
54
<PAGE> 55
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES - The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires the recognition of
deferred tax assets and liabilities relating to the expected future tax
consequences of events that have been recognized in our consolidated
financial statements and tax returns (see Note 8).
CASH EQUIVALENTS - Cash equivalents, with purchased maturities of three
months or less, consist of money market accounts, mutual funds and an
overnight repurchase agreement. The repurchase agreement is fully
collateralized by U.S. Government securities.
INVESTMENTS - Debt securities that the Company has the positive intent and
ability to hold to maturity are reported at amortized cost and are
classified as "held-to-maturity."
All Short-Term Investments and Investments consist of U.S. Treasury and
other government securities, commercial paper and corporate notes and are
classified as "held-to-maturity" and reported at amortized cost.
Short-Term Investments have maturity dates within one year of the balance
sheet date. Investments classified as long-term have maturity dates up to
16 months from March 31, 2000 and include securities totaling $1,688,000
held as collateral under certain letters of credit, lease and loan
agreements. The carrying value of all Short-Term Investments and
Investments, individually and in the aggregate, approximated market value
at March 31, 2000 and 1999.
Short-Term Investments and Investments consist of the following
"held-to-maturity" investments at:
<TABLE>
<CAPTION>
AMORTIZED COST NET CARRYING GROSS UNREALIZED AGGREGATE
UNDER 1 YEAR 1 - 2 YEARS AMOUNT GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 2000:
U.S. Government
obligations $108,127,995 $ 7,759,114 $115,887,109 $ 270,728 $ (35,989) $116,121,848
Corporate debt
securities 223,138,725 12,335,324 235,474,049 1,407,865 (278,033) 236,603,881
------------ ------------ ------------ ------------ ------------ ------------
Total $331,266,720 $ 20,094,438 $351,361,158 $ 1,678,593 $ (314,022) $352,725,729
============ ============ ============ ============ ============ ============
March 31, 1999:
U.S. Government
obligations $ 69,158,864 $ 1,378,797 $ 70,537,661 $ 2,600,446 $ (2,338,636) $ 70,799,471
Corporate debt
securities 85,144,356 7,057,270 92,201,626 1,902,066 (1,603,940) 92,499,752
------------ ------------ ------------ ------------ ------------ ------------
Total $154,303,220 $ 8,436,067 $162,739,287 $ 4,502,512 $ (3,942,576) $163,299,223
============ ============ ============ ============ ============ ============
</TABLE>
The Company also has investments in marketable equity securities which are
currently classified as "available-for-sale" securities under the caption
"other assets." This caption also includes non-marketable warrants to
purchase securities. The warrants are recorded at the lower of cost or
market. Unrealized gains (losses) are included in accumulated other
comprehensive income in shareholders' equity.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded
at cost. Depreciation and amortization are provided using the
straight-line method over the following estimated useful lives of the
assets: buildings - 25 years; furniture, fixtures and equipment - 3 to 7
years; or, in the case of leasehold improvements, over the lease terms - 1
to 15 years.
55
<PAGE> 56
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS - Other assets consist primarily of unamortized debt offering
costs and purchased patents, which are being amortized over 7 and 5 years,
respectively, and certain equity securities (see discussion in
"Investments" above).
DEFERRED REVENUE - SHORT-TERM - During fiscal 1998, the Company received a
$10,000,000 upfront payment from ALZA Corporation ("ALZA") to fund
clinical development of Cereport. This amount has been recorded as
deferred revenue and is being amortized based on actual costs incurred for
the clinical development of Cereport. In addition, the Company received
prepayments for research and development costs under collaborative
research projects with other corporate partners which are being amortized
over the estimated term of the agreements using the straight-line method.
The Company also has received cash milestone payments which are creditable
against future royalty payments which will be recognized upon product
sales.
DEFERRED COMPENSATION - Deferred compensation is related to awards under
the Company's 1991 Restricted Common Stock Award Plan, compensatory stock
options and common stock and is amortized over vesting periods ranging
from one to five years.
401(k) PLAN - The Company's 401(k) Retirement Savings Plan (the "401(k)
Plan") covers substantially all of its employees. Eligible employees may
contribute up to 17% of their eligible compensation, subject to certain
Internal Revenue Service limitations. The Company began matching a portion
of employee contributions on April 1, 1998. The match is equal to 50% of
the first 6% of deferrals and is fully vested when made. During fiscal
2000 and 1999, the Company expensed approximately $505,000 and $307,000,
respectively, to match employee deferrals under the 401(k) Plan.
RECLASSIFICATIONS - Certain reclassifications have been made in fiscal
1999 and 1998 to conform to the presentation used in fiscal 2000.
COMPREHENSIVE INCOME - Comprehensive income is composed of net income and
other comprehensive income. Other comprehensive income includes certain
changes in equity of the Company that are excluded from the net loss.
Specifically, other comprehensive income includes unrealized holding gains
and losses on the Company's available-for-sale securities and changes in
the cumulative foreign currency translation adjustments.
SEGMENTS - The Company's operations are treated as one operating segment
reporting to the chief operating decision-makers of the Company.
Accordingly, the segment disclosures contemplated by SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," are
not presented.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1999, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133 - an amendment of FASB Statement No. 133," which is
required to be adopted by the Company in fiscal year 2002. SFAS No. 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. Management of the
Company has not yet assessed the impact of SFAS No. 133 on its financial
position and results of operations.
56
<PAGE> 57
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED) - In December 1999, the
Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements," ("SAB 101"),
which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective in
the quarter ended June 30, 2000, and requires companies to report any
changes in revenue recognition as a cumulative change in accounting
principle at the time of implementation in accordance with APB No. 20,
"Accounting Changes." Management of the Company is currently assessing the
impact of SAB 101 on its financial position and results of operations.
3. ALZA AGREEMENT
In April 1998, Alkermes entered into an exclusive license agreement with
ALZA, a pharmaceutical and drug delivery company, for two of ALZA's oral
drug delivery technologies: RingCap and DST. The Company also acquired
equipment to be used in the development of the technologies. A
nonrecurring charge of approximately $3,221,000 for technology licensed
but not yet commercially viable was recorded by the Company at the
acquisition date. This charge represents that portion of the acquisition
price of the acquired technology that was allocated to in-process research
and development.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at March
31:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Accounts payable $2,896,018 $2,971,351
Accrued compensation 1,263,926 1,129,721
Accrued interest 979,497 1,570,201
Accrued other 3,067,953 2,540,933
---------- ----------
$8,207,394 $8,212,206
========== ==========
</TABLE>
5. SHAREHOLDERS' EQUITY
RESTRICTED STOCK PURCHASE AGREEMENTS/COMMON STOCK - During fiscal 1999,
the Company issued 7,361,016 shares of its common stock in conjunction
with its acquisition of AIR. Of these shares, 4,802,230 shares of common
stock were issued to key employees and consultants of AIR and are subject
to restricted stock purchase agreements. The Company assumed these
restricted stock purchase agreements entered into by AIR. The restricted
stock vests quarterly over a four-year period at different amounts for
each shareholder. At March 31, 2000 and 1999, approximately 3,332,000 and
2,120,000 shares of restricted stock, respectively, had vested. The
agreements state that if the consulting or employment relationship
terminates within four years of issuance, the Company shall have the
right, but not the obligation, to repurchase the non-vested shares from
the shareholder at the share price initially paid by the shareholder.
During fiscal 2000, the Company exercised its right to repurchase 83,602
shares of non-vested restricted stock.
57
<PAGE> 58
5. SHAREHOLDERS' EQUITY (CONTINUED)
$3.25 PREFERRED STOCK - In March 1998, the Company completed a private
placement of 2,300,000 shares of its convertible exchangeable preferred
stock (the "$3.25 Preferred Stock") at $50.00 per share. Net proceeds to
the Company were approximately $110,500,000.
The $3.25 Preferred Stock is convertible at the option of the holder at
any time, unless previously redeemed or exchanged, into the Company's
common stock at a conversion rate of 3.3756 shares of common stock for
each share of $3.25 Preferred Stock. The conversion rate is subject to
adjustment in certain events. The Company has reserved 7,760,504 shares of
its common stock for future issuance upon such conversion.
Dividends on the $3.25 Preferred Stock are cumulative from the date of
original issue and have been paid quarterly, commencing June 1, 1998 and
are payable each September 1, December 1, March 1 and June 1 thereafter,
at the annual rate of $3.25 per share. Prior to March 6, 2001, the $3.25
Preferred Stock is not redeemable at the option of the Company.
Thereafter, the $3.25 Preferred Stock is redeemable at the option of the
Company, in whole or in part, at declining redemption prices, together
with accrued and unpaid dividends. If redeemed during the 12-month period
beginning March 1 (beginning March 6, 2001 and ending on February 28,
2002, in the case of the first such period), the per share redemption
prices are $52.275 in 2001, $51.950 in 2002, $51.625 in 2003, $51.300 in
2004, $50.975 in 2005, $50.650 in 2006, $50.325 in 2007 and $50 at March
1, 2008 and thereafter. The $3.25 Preferred Stock has a liquidation
preference of $50 per share, plus accrued and unpaid dividends.
The $3.25 Preferred Stock is exchangeable, in whole but not in part, at
the option of the Company on any dividend payment date beginning March 1,
1999 (the "Exchange Date") for the Company's 6-1/2% Convertible
Subordinated Debentures (the "Debentures") at the rate of $50 principal
amount of Debentures for each share of Preferred Stock. The Debentures, if
issued, will mature on the tenth anniversary of the Exchange Date and will
contain conversion and optional redemption provisions substantially
identical to those of the $3.25 Preferred Stock.
At March 31, 2000, 1,000 shares of $3.25 Preferred Stock had been
converted into 3,374 shares of common stock.
1999 PREFERRED STOCK - In April 1999, the Company amended its license
agreement with Genentech, Inc. ("Genentech") to expand its collaboration
for Nutropin Depot, an injectable long-acting formulation of Genentech's
recombinant human growth hormone based on Alkermes' ProLease drug delivery
system. Under the agreement, the companies have been conducting expanded
development activities, including clinical trials in an additional
indication, process and formulation development and manufacturing. The
agreement includes potential milestone payments, which milestones, if
achieved, would reimburse the Company for its past research expenditures
incurred (approximately $18 million at March 31, 2000), further research
expenditures through December 31, 2000 plus an additional $5 million.
The terms of the collaboration included the purchase by Genentech of $35
million (3,500 shares) of newly issued redeemable convertible exchangeable
preferred stock of the Company (the "1999 Preferred Stock"). The 1999
Preferred Stock was convertible at Genentech's option into shares of
common stock and non-voting common stock during any period after September
1, 1999 that the closing price of the Company's common stock was above
$22.50 per share for at least 10 consecutive trading days. In February
2000, Genentech exercised its option to convert the 1999 Preferred Stock
together with accrued and unpaid dividends into 322,376 shares of voting
and 382,632 shares of non-voting common stock.
Dividends on the 1999 Preferred Stock were paid quarterly through March
2000 at a floating three-month LIBOR rate.
58
<PAGE> 59
6. LONG-TERM OBLIGATIONS
Long-term obligations at March 31 consist of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Notes payable to a bank bearing interest at fixed rates (6.97%-8.58%), payable
in monthly or quarterly installments, maturing in fiscal 2001 through 2004 $22,433,333 $28,133,333
Note payable to a corporate partner bearing interest (7.78% at March 31, 2000),
at 2.5% above the one-year LIBOR, maturing in fiscal 2002 5,983,292 5,983,292
Note payable to a bank bearing interest at a fixed rate (7.96%), payable in
quarterly installments of $375,000 -- 1,500,000
Note payable to a corporate partner bearing interest at the prime rate,
converted to common stock in fiscal 2000 -- 3,500,000
----------- -----------
28,416,625 39,116,625
Less current portion 5,625,000 10,700,000
----------- -----------
$22,791,625 $28,416,625
=========== ===========
</TABLE>
The first bank note listed above is secured by a building and real
property pursuant to a mortgage and certain of the Company's equipment
pursuant to security agreements. The loan is also secured by cash
collateral (included in long-term investments at March 31, 2000) having a
minimum market value of the lesser of $1,000,000 or the outstanding
principal amount of the loan. Under the terms of the loan agreement, the
Company is required to maintain a minimum unencumbered balance of cash and
permitted investments and a minimum ratio of unencumbered cash and net
quick assets to total liabilities as well as a minimum consolidated
capital base.
In October 1998, the Company converted a prepayment of royalties from a
former corporate partner, plus accrued interest, to a promissory note in
the principal amount of $5,983,292 as a result of the discontinuation of a
collaboration. The principal amount of the note, together with interest,
is payable in the Company's common stock or cash, at the Company's option.
In January 1995, the Company borrowed $3,500,000 from a corporate partner.
The principal amount of the loan, together with interest, was payable in
the Company's common stock or cash, at the Company's option. In January
2000, the Company exercised its option to repay the principal amount of
the note, plus accrued and unpaid interest, in the Company's common stock
and thereby issued 215,476 shares of common stock to the corporate
partner.
59
<PAGE> 60
6. LONG-TERM OBLIGATIONS (CONTINUED)
At March 31, 2000, the maturities of the long-term obligations are as
follows:
<TABLE>
<CAPTION>
NOTES PAYABLE
AND OTHER
-------------
<S> <C>
2001 $ 5,625,000
2002 10,966,625
2003 4,025,000
2004 7,800,000
-----------
$28,416,625
===========
</TABLE>
7. 3-3/4% CONVERTIBLE SUBORDINATED NOTES
In February 2000, the Company issued the 3-3/4% Notes. The 3-3/4% Notes
are convertible into the Company's common stock, at the option of the
holder, at a price of $67.75 per share, subject to adjustment upon certain
events. The 3-3/4% Notes bear interest at 3-3/4% payable semi-annually,
commencing on August 15, 2000. The 3-3/4% Notes are redeemable by the
Company in cash at any time prior to February 19, 2003 if the Company's
stock price exceeds $135.50 per share for at least 20 of the 30 trading
days immediately prior to the Company's delivery of the redemption notice.
If the Company redeems all or some of the notes prior to February 15,
2001, the Company will make an additional payment to the holders equal to
one year of interest per $1,000 note, minus the amount of any interest the
Company has actually paid on the note. The 3-3/4% Notes are also
redeemable at any time on or after February 19, 2003 at certain declining
redemption prices. In certain circumstances, at the option of the holders,
the Company may be required to repurchase the 3-3/4% Notes. The required
repurchase may be in cash or, at the option of the Company, in common
stock, at 105% of the principal amount of the 3-3/4% Notes, plus accrued
and unpaid interest. As a part of the sale of the 3-3/4% Notes, during
fiscal 2000, the Company incurred approximately $6,530,000 of offering
costs which were recorded as other assets and are being amortized over
seven years, the term of the 3-3/4% Notes. The net proceeds to the
Company after offering costs were approximately $193,470,000. The Company
has reserved 2,952,030 shares of its common stock for issuance upon
conversion of the 3-3/4% Notes.
8. INCOME TAXES
At March 31, 2000, the Company has approximately $161,137,000 of net
operating loss ("NOL") carryforwards for U.S. federal income tax purposes
and approximately $10,700,000 of research and development tax credits
available to offset future federal income tax, subject to limitations for
alternative minimum tax. The NOL and research and development credit
carryforwards are subject to examination by the tax authorities and expire
in various years from 2001 through 2020.
60
<PAGE> 61
8. INCOME TAXES (CONTINUED)
The components of the net deferred income tax assets at March 31 are as
follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
NOL carryforwards, federal and state $ 46,049,000 $ 29,898,000
Tax benefits from stock options 17,721,000 222,000
Tax credit carryforwards 14,670,000 11,220,000
Capitalized research and development
expenses, net of amortization 10,310,000 11,750,000
Alkermes Europe NOL carryforward 5,040,000 4,120,000
Other 1,952,000 5,154,000
Less valuation allowance (95,742,000) (62,364,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
Tax benefits from stock options will be credited to additional paid-in
capital when realized.
The valuation allowance has been provided because of the uncertainty of
realizing the future benefits of the net deferred income tax assets. The
valuation allowance increased by $12,429,000 from March 31, 1998 to March
31, 1999.
9. RELATED-PARTY TRANSACTIONS
On April 10, 1992, the Company and Clinical Partners, a limited
partnership of which ADC II is the general partner, sold in a private
placement (i) 920 Class A units, each unit (a "Class A Unit") consisting
of one Class A limited partnership interest in Clinical Partners and
warrants to purchase shares of the Company's common stock; and (ii) one
Class B unit (the "Class B Unit"), consisting of one Class B limited
partnership interest in Clinical Partners and warrants to purchase shares
of the Company's common stock. At March 31, 2000, all warrants were either
exercised or expired except for warrants to purchase 1,800 shares of the
Company's common stock. The remaining warrants are exercisable at a price
of $3.54 per share and expire on April 14, 2000.
The net proceeds of the offering were used primarily to fund the further
development and clinical testing of a family of molecules designated by
the Company as Receptor-Mediated Permeabilizers(TM) ("RMPs(TM)"),
including Cereport, for human pharmaceutical use in the United States and
Canada. Pursuant to the Product Development Agreement entered into in
March 1992, the Company licensed to Clinical Partners certain of its
technology relating to RMPs. Research and development of RMPs is being
conducted by the Company for Clinical Partners pursuant to the Product
Development Agreement. Since the funding was not sufficient to complete
clinical trials and seek regulatory approval of Cereport, Alkermes has
used its own resources, and intends to continue to use its own resources,
to develop Cereport. Alkermes has obtained and intends to continue to
obtain such resources through equity offerings, bank borrowings and
collaborative arrangements. The Company is required to fund the
development of Cereport to maintain its Purchase Option, as defined below,
with the limited partners.
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<PAGE> 62
9. RELATED-PARTY TRANSACTIONS (CONTINUED)
Clinical Partners has granted the Company an exclusive interim license to
manufacture and market RMPs for human pharmaceutical use in the United
States and Canada. Upon the first marketing approval of an RMP product by
the United States Food and Drug Administration, the Company is obligated
to make a payment (approximately $8,300,000) to Clinical Partners equal to
20% of the aggregate capital contributions of all partners (the "milestone
payment"). Additionally, the Company will make royalty payments to
Clinical Partners equal to 12% of United States and Canadian revenues and
10% of European revenues, in certain circumstances, from any sales of RMPs
by the Company. The interim license will terminate if the Company does not
exercise the Purchase Option.
The warrants were issued by the Company in consideration of the grant by
each limited partner to the Company of an option to purchase (the
"Purchase Option"), under certain circumstances, the limited partnership
interests in Clinical Partners held by such limited partner. Upon exercise
of such Purchase Option, each Class A limited partner will be entitled to
receive an initial payment, at the Company's option, of $40,000 in cash or
approximately $42,100 in the Company's common stock, as well as certain
additional royalty payments ranging from 4% to 12% of the Company's net
revenues (subject to certain limitations).
10. RESEARCH AND DEVELOPMENT ARRANGEMENTS
The Company has entered into several collaborative agreements with
corporate partners (the "Partners") to provide research and development
activities relating to the Partners' products. In connection with these
agreements, the Company has granted certain licenses or the right to
obtain certain licenses to technology developed by the Company. In return
for such grants, the Company will receive certain payments upon the
achievement of certain milestones and will receive royalties on sales of
products developed under the terms of the agreements. Additionally, the
Company has or may obtain the right to manufacture and supply products
developed under certain of these agreements.
During fiscal 2000, 1999 and 1998, research and development revenue under
collaborative arrangements from Genentech amounted to 18%, 42% and 37%,
Johnson & Johnson amounted to 41%, 37% and 44%, and ALZA amounted to 3%,
4% and 11%, respectively, of research and development revenues.
11. COMMITMENTS
LEASE COMMITMENTS - The Company leases certain of its offices, research
laboratories and manufacturing facilities under operating leases with
initial terms of two to ten years expiring between 2001 and 2008. Several
of the leases contain provisions for extensions for up to ten years. Total
annual future minimum lease payments are as follows:
<TABLE>
<S> <C>
2001 $4,377,000
2002 4,645,000
2003 3,582,000
2004 3,714,000
2005 3,274,000
Thereafter 1,672,000
</TABLE>
Rent expense charged to operations was approximately $5,223,000,
$4,237,000 and $3,618,000 for the years ended March 31, 2000, 1999 and
1998, respectively.
62
<PAGE> 63
11. COMMITMENTS (CONTINUED)
LICENSE AND ROYALTY COMMITMENTS - The Company has entered into license
agreements with certain corporations and universities which require the
Company to pay annual license fees and royalties based on a percentage of
revenues from sales of certain products and royalties from sublicenses
granted by the Company. Amounts paid under these agreements were
approximately $165,000, $127,000 and $112,000 for the years ended March
31, 2000, 1999 and 1998, respectively.
12. STOCK OPTIONS AND AWARDS
All share and per share amounts have been retroactively restated, where
appropriate, to give effect to the two-for-one stock split (see Note 2).
The Company's Stock Option Plans (the "Plans") include the Amended and
Restated 1989 Non-Qualified Stock Option Plan (the "1989 Plan"), the
Amended and Restated 1990 Omnibus Stock Option Plan, as amended (the "1990
Plan"), the 1992 Non-Qualified Stock Option Plan (the "1992 Plan"), the
1998 Equity Incentive Plan (the "1998 Plan") and the 1999 Stock Option
Plan (the "1999 Plan") which provide for the granting of stock options to
employees, officers and directors of, and consultants to, the Company. In
addition, the Stock Option Plan for Non-Employee Directors (the "Director
Plan") provides for the granting of stock options to nonemployee directors
of the Company. Non-qualified options to purchase up to 450,000 shares of
the Company's common stock may be granted under the 1989 Plan,
non-qualified and incentive options to purchase up to 6,500,000 shares of
the Company's common stock may be granted under the 1990 Plan,
non-qualified options to purchase up to 2,000,000 shares of the Company's
common stock may be granted under the 1992 Plan, non-qualified and
incentive stock options and restricted stock to purchase up to 1,182,974
shares may be granted under the 1998 Plan, non-qualified and incentive
options to purchase up to 5,000,000 shares may be granted under the 1999
Plan and non-qualified options to purchase up to 300,000 shares of the
Company's common stock may be granted under the Director Plan. The 1989
Plan terminated on July 18, 1999. Unless sooner terminated, the 1990 Plan
will terminate on September 19, 2000, the 1992 Plan will terminate on
November 11, 2002, the 1998 Plan will terminate on April 1, 2008, the 1999
Plan will terminate on June 2, 2009 and the Director Plan will terminate
on March 18, 2006. The Company has reserved a total of 11,615,152 shares
of common stock for issuance upon exercise of options which have been or
may be granted under the Plans.
The Compensation Committee of the Board of Directors administers the Plans
and determines who is to receive options and the exercise price and terms
of such options. The Compensation Committee has delegated its authority to
the Compensation Sub-Committee to make grants and awards under the Plans
to "officers." The Board of Directors administers the Director Plan. The
option exercise price of stock options granted under the 1989 Plan, the
1990 Plan, the 1998 Plan, the 1999 Plan and the Director Plan may not be
less than 100% of the fair market value of the common stock on the date of
grant. Under the terms of the 1992 Plan, the option exercise price may be
below the fair market value, but not below par value, of the underlying
stock at the time the option is granted.
The 1989 Plan, the 1990 Plan and the 1992 Plan also provide that the
Compensation Committee may grant Limited Stock Appreciation Rights
("LSARs") with respect to all or any portion of the shares covered by
stock options granted to directors and executive officers. LSARs may be
granted with the grant of a non-qualified stock option or at any time
during the term of such option but may only be granted with the grant of
an incentive stock option. The grant of LSARs will not be effective until
six months after their date of grant. Upon the occurrence of certain
triggering events, including a change of control, the options with respect
to which LSARs have been granted shall become immediately exercisable and
the persons who have received LSARs will automatically receive a cash
payment in lieu of shares. At March 31, 2000, there are 352,500 LSARs
outstanding which have been granted under the 1990 Plan. No LSARs were
granted during fiscal 2000, 1999 and 1998.
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<PAGE> 64
12. STOCK OPTIONS AND AWARDS (CONTINUED)
The Company has also adopted the 1991 Restricted Common Stock Award Plan
(the "Award Plan"). The Award Plan provides for the award to certain
eligible employees, officers and directors of, and consultants to, the
Company of up to a maximum of 500,000 shares of common stock. The Award
Plan is administered by the Compensation Committee. Awards generally vest
over five years. During fiscal 2000, 1999 and 1998, 7,000, zero and zero
shares of common stock, respectively, were awarded under the Award Plan
and 8,200, 5,700 and 4,800 shares, respectively, ceased to be subject to
forfeiture and were issued. In addition, zero, 4,000 and 3,600 shares were
canceled during the years ended March 31, 2000, 1999 and 1998,
respectively. At March 31, 2000, 1999 and 1998 there were 59,600, 60,800
and 70,500 awards outstanding under the Award Plan, respectively. The
Award Plan will terminate on November 15, 2001, unless sooner terminated
by the Board of Directors.
The Company has elected to continue to follow APB No. 25 for accounting
for its employee stock options. Under APB No. 25, no compensation expense
is recognized with respect to the grant of any stock options to employees
if the exercise price of the Company's employee stock options equals the
fair market price of the underlying stock on the date the option is
granted.
Pro forma information regarding net loss and basic and diluted loss per
common share in fiscal 2000, 1999 and 1998 has been determined as if the
Company had accounted for its employee stock options under the fair value
method prescribed by SFAS No. 123. The resulting effect on pro forma net
loss and basic and diluted loss per common share is not necessarily likely
to be representative of the effects on net loss and basic and diluted loss
per common share on a pro forma basis in future years, due to (i) grants
made prior to fiscal 1996 being excluded from the calculation and (ii) the
uncertainty regarding the magnitude of future grants. The fair value of
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions: risk-free
interest rates ranging from 5.81% - 6.50% for fiscal 2000, 4.79% - 5.68%
for fiscal 1999 and 5.56% - 5.90% for fiscal 1998; dividend yields of 0%
in fiscal 2000, 1999 and 1998; volatility factors of the expected market
price of the Company's common stock of 67% in fiscal years 2000 and 1999
and 65% in fiscal 1998; and a weighted average expected life of 4 years in
fiscal years 2000 and 1999 and 5 years in fiscal year 1998. Using the
Black-Scholes option pricing model, the weighted average fair value of
options granted in fiscal 2000, 1999 and 1998 was $9.38, $3.95 and $5.20,
respectively.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the vesting period of the option.
Pro forma information for the years ended March 31 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net loss - as reported $(77,436,141) $(48,510,670) $(12,582,201)
Net loss - pro forma (87,469,415) (53,654,009) (15,112,287)
Basic and diluted loss per common share -
as reported (1.52) (0.99) (0.27)
Basic and diluted loss per common share -
pro forma (1.71) (1.09) (0.33)
</TABLE>
64
<PAGE> 65
12. STOCK OPTIONS AND AWARDS (CONTINUED)
A summary of option activity under the 1989, 1990, 1992, 1998, 1999 and
Director Plans is as follows:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
NUMBER PRICE AVERAGE
OF PER EXERCISE
SHARES SHARE PRICE
---------- ---------------- --------
<S> <C> <C> <C>
Balance, April 1, 1997 3,944,818 $0.28 - $14.38 $ 3.11
Granted 975,600 6.41 - 13.47 8.67
Exercised (367,296) 0.28 - 7.38 2.51
Canceled (307,226) 1.07 - 14.38 6.79
---------- ---------------- ------
Balance, March 31, 1998 4,245,896 0.28 - 14.38 4.17
Granted 2,663,934 0.30 - 15.92 7.42
Exercised (136,816) 0.28 - 11.50 2.13
Canceled (149,382) 0.30 - 12.63 9.11
---------- ---------------- ------
Balance, March 31, 1999 6,623,632 0.28 - 15.92 5.41
Granted 3,214,700 11.61 - 96.88 17.29
Exercised (1,768,252) 0.28 - 5.50 3.56
Canceled (422,890) 1.66 - 17.27 8.79
---------- ---------------- ------
Balance, March 31, 2000 7,647,190 $0.30 - $96.88 $10.60
========== ================ ======
</TABLE>
Options granted generally vest over four years, except options granted
under the Director Plan which vest after six months.
The following table summarizes information concerning outstanding and
exercisable options at March 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.30 - $ 5.94 2,842,162 6.68 $ 3.82 1,603,491 $ 2.64
5.96 - 13.21 1,798,478 7.66 8.79 680,895 7.91
13.25 - 16.69 2,714,650 9.57 16.63 30,825 15.16
16.94 - 96.88 291,900 9.70 27.20 -- --
--------------- --------- ---- ------ --------- ------
$ 0.30 - $96.88 7,647,190 8.05 $10.60 2,315,211 $ 4.35
=============== ========= ==== ====== ========= ======
</TABLE>
* * * * * *
65
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors. The information with respect to directors required by
this item is incorporated herein by reference to pages 2, 3, 13, 19 and 20 of
our Proxy Statement for our annual shareholders' meeting to be held on July 25,
2000 (the "2000 Proxy Statement").
(b) Executive Officers. The information with respect to executive
officers required by this item is set forth in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to pages 10 through 18 of the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to pages 19 and 20 of the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to page 21 of the 2000 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of the Report:
(1) Consolidated Financial Statements of the
Registrant and Independent Auditors' Report
thereon:
Consolidated Balance Sheets, March 31, 2000
and 1999.
Consolidated Statements of Operations and
Comprehensive Loss for the Years Ended March
31, 2000, 1999 and 1998.
Consolidated Statements of Shareholders'
Equity for the Years Ended March 31, 2000,
1999 and 1998.
Consolidated Statements of Cash Flows for
the Years Ended March 31, 2000, 1999 and
1998.
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<PAGE> 67
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules:
Schedules have been omitted because of the
absence of conditions under which they are
required or because the required information
is included in the financial statements or
the notes thereto.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
3.1(a) Second Amended and Restated Articles of Incorporation of
Alkermes, Inc. effective July 23, 1991. (Incorporated by
reference to Exhibit 4.1(a) to the Registrant's Report on
Form 10-Q for the quarter ended June 30, 1991.)
3.1(b) Statement of Change of Registered Office of Alkermes, Inc.
effective July 23, 1991. (Incorporated by reference
to Exhibit 4.1(b) to the Registrant's Report on Form 10-Q
for the quarter ended June 30, 1991.)
3.1(c) Amendment to Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of
State on November 1, 1991. (Incorporated by reference to
Exhibit 4.1(c) to the Registrant's Report on Form 10-Q for
the quarter ended September 30, 1991.)
3.1(d) Amendment to the Second Amended and Restated Articles of
Incorporation, as amended, as filed with the Pennsylvania
Secretary of State on February 12, 1993. (Incorporated by
reference to Exhibit 4.1(d) to the Registrant's Report on
Form 10-Q for the quarter ended December 31, 1992.)
3.1(e) Amendment to the Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of
State on February 26, 1998. (Incorporated by reference to
Exhibit 4.6 to the Registrant's Registration Statement on
Form S-3, as amended (File No. 333-50157).)
3.1(f) Amendment to Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of
State on April 12, 1999 (Non-Voting Common Stock Terms).
(Incorporated by reference to Exhibit 3.1(g) to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1999.)
3.1(g) Amendment to Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of
State on April 28, 2000 (effecting 2-for-1 stock split and
increase in authorized shares).
3.1(h) Amendment to Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of
State on June 27, 2000.
3.2 Amended and Restated By-Laws of Alkermes, Inc., effective
as of June 2, 1999. (Incorporated by reference to Exhibit
3.2 to the Registrant's Report on Form 10-K for the fiscal
year ended March 31, 1999.)
</TABLE>
67
<PAGE> 68
<TABLE>
<S> <C>
4.1 Specimen of Common Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on Form S-1, as amended (File
No. 33-40250).)
4.2 Specimen of Preferred Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-3, as amended
(File No. 333-50157).)
4.3 Specimen of Non-Voting Common Stock Certificate of
Alkermes, Inc. (Incorporated by reference to Exhibit 4.4 to
the Registrant's Report on Form 10-K for the fiscal year
ended March 31, 1999.)
4.4 Indenture, dated as of March 1, 1998, between Alkermes,
Inc. and State Street Bank and Trust Company, as Trustee.
(Incorporated by reference to Exhibit 4.7 to the
Registrant's Registration Statement on Form S-3, as amended
(File No. 333-50157).)
10.1 Amended and Restated 1989 Non-Qualified Stock Option Plan,
as amended. (Incorporated by reference to Exhibit 4.2(c)
to the Registrant's Registration Statement on Form S-8
(File No. 33-44752).)+
10.2 Amended and Restated 1990 Omnibus Stock Option Plan, as
amended. (Incorporated by reference to Exhibit 10.2 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1998.) +
10.3 1991 Restricted Common Stock Award Plan. (Incorporated by
reference to Exhibit 4.2(a) to the Registrant's
Registration Statement on Form S-8 (File No. 33-58330).)+
10.4 1992 Non-Qualified Stock Option Plan. (Incorporated by
reference to Exhibit 10.26 to the Registrant's Registration
Statement on Form S-4, as amended (File No. 33-54932).)+
10.5 Stock Option Plan for Non-Employee Directors. (Incorporated
by reference to Exhibit 10.5 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1996.)+
10.6 Alkermes, Inc. 1998 Equity Incentive Plan. (Incorporated
by reference to Exhibit 10.6 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1999.)
10.7 1999 Stock Option Plan. (Incorporated by reference to
Exhibit 10.7 to the Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1999.)+
10.8 Lease, dated as of September 18, 1991, between Forest City
64 Sidney Street, Inc. and the Registrant. (Incorporated by
reference to Exhibit 10.19 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1992.)
10.8(a) First Amendment of Lease, dated September 18, 1992, between
Forest City 64 Sidney Street, Inc. and the Registrant.
(Incorporated by reference to Exhibit 10.24 to the
Registrant's Registration Statement on Form S-4, as amended
(File No. 33-54932).)
</TABLE>
68
<PAGE> 69
<TABLE>
<S> <C>
10.9 Lease, dated as of March 16, 1990, between Forest City 64
Sidney Street, Inc. and Enzytech, Inc. (Incorporated by
reference to Exhibit 10.25 to the Registrant's Registration
Statement on Form S-4, as amended (File No. 33-54932).)
10.10 Lease, dated July 26, 1993, between the Massachusetts
Institute of Technology and Alkermes, Inc. (Incorporated by
reference to Exhibit 10.8 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1997.)
10.10(a) First Amendment of Lease, dated June 9, 1997, between the
Massachusetts Institute of Technology and Alkermes, Inc.
(Incorporated by reference to Exhibit 10.8(a) to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1997.)
10.11 Product Development Agreement, dated as of March 6, 1992,
between the Partnership and the Registrant. (Incorporated
by reference to Exhibit 10.21 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1992.)
10.12 Purchase Agreement, dated as of March 6, 1992, by and among
the Registrant and each of the Limited Partners, from time
to time, of the Partnership. (Incorporated by reference to
Exhibit 10.22 to the Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1992.)
10.13 Alkermes Clinical Partners, L.P. Agreement of Limited Partnership,
dated as of February 7, 1992. (Incorporated by
reference to Exhibit 10.23 to the Registrant's Report on Form
10-K for the fiscal year ended March 31, 1992.)
10.13(a) Amendment No. 1 to Alkermes Clinical Partners, L.P. Agreement
of Limited Partnership, dated as of September 29, 1992.
(Incorporated by reference to Exhibit 10.22(a) to the Registrant's
Registration Statement on Form S-4, as amended
(File No. 33-54932).)
10.13(b) Amendment No. 2 to Alkermes Clinical Partners, L.P. Agreement
of Limited Partnership, dated as of March 30, 1993.
(Incorporated by reference to Exhibit 10.22(b) to the Registrant's
Registration Statement on Form S-3, as amended
(File No. 33-64964).)
10.14 Class A Note of Alkermes Development Corporation II, dated
April 10, 1992, to PaineWebber Development Corporation in
the amount of $100.00. (Incorporated by reference to
Exhibit 10.24 to the Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1992.)
10.15 License Agreement, dated as of April 14, 1999, by and between
Genentech, Inc. and Alkermes Controlled Therapeutics,
Inc. (Incorporated by reference to Exhibit 10.18 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1999.)*
10.16 Patent License Agreement, dated as of August 11, 1997,
between Massachusetts Institute of Technology and Advanced
Inhalation Research, Inc., as amended. (Incorporated by
reference to Exhibit 10.25 to the Registrant's Report on Form
10-K for the fiscal year ended March 31, 1999.)*
10.17 Letter Agreement, dated September 27, 1996, by and among
Fleet National Bank, Alkermes Controlled Therapeutics, Inc.,
Alkermes Controlled Therapeutic Inc. II and
</TABLE>
69
<PAGE> 70
<TABLE>
<S> <C>
the Registrant. (Incorporated by reference to Exhibit 10.3
to the Registrant's Report on Form 10-Q for the quarter
ended September 30, 1996.)
10.17(a) Loan Supplement and Modification Agreement, dated as of
June 2, 1997, by and among Fleet National Bank, Alkermes
Controlled Therapeutics, Inc., Alkermes Controlled
Therapeutics Inc. II and the Registrant. (Incorporated by
reference to Exhibit 10.27(a) to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1997.)
10.17(b) Second Loan Supplement and Modification Agreement, dated as
of March 19, 1998, by and among Fleet National Bank,
Alkermes Controlled Therapeutics, Inc., Alkermes Controlled
Therapeutics Inc. II and the Registrant. (Incorporated by
reference to Exhibit 10.29(b) to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1998.)
10.17(c) Third Loan Supplement and Modification Agreement, dated as
of September 24, 1998, by and among Fleet National Bank,
Alkermes Controlled Therapeutics, Inc., Alkermes Controlled
Therapeutics Inc. II and the Registrant. (Incorporated by
reference to Exhibit 10.1 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1998.)
10.18 Security Agreement, dated as of September 27, 1996, from
the Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutic Inc. II to Fleet National
Bank. (Incorporated by reference to Exhibit 10.4 to the
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1996.)
10.19 Pledge Agreement, dated as of September 27, 1996, from the
Registrant to Fleet National Bank. (Incorporated by
reference to Exhibit 10.5 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1996.)
10.20 Mortgage and Security Agreement, dated as of September 27,
1996, from Alkermes Controlled Therapeutics Inc. II to
Fleet National Bank. (Incorporated by reference to Exhibit
10.6 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1996.)
10.21 Environmental Indemnity Agreement, dated as of September
27, 1996, from the Registrant and Alkermes Controlled
Therapeutics Inc. II to Fleet National Bank. (Incorporated
by reference to Exhibit 10.7 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1996.)
10.22 Promissory Note of the Registrant, dated December 23, 1994,
to Fleet Bank of Massachusetts, N.A. (Incorporated by
reference to Exhibit 10.20 to the Registrant's Report on
Form 10-Q for the quarter ended December 31, 1994.)
10.22(a) Allonge to Promissory Note, dated as of September 27, 1996,
executed by Fleet National Bank, Alkermes Controlled
Therapeutics, Inc. and the Registrant. (Incorporated by
reference to Exhibit 10.1 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1996.)
</TABLE>
70
<PAGE> 71
<TABLE>
<S> <C>
10.23 Promissory Note, dated December 19, 1995, by Registrant to
Fleet Bank of Massachusetts, N.A. (Incorporated by
reference to Exhibit 10.2 to the Registrant's Report on
Form 10-Q for the quarter ended December 31, 1995.)
10.23(a) Allonge to Promissory Note, dated as of September 27, 1996,
executed by Fleet National Bank, Alkermes Controlled
Therapeutics, Inc. and the Registrant. (Incorporated by
reference to Exhibit 10.2 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1996.)
10.24 Promissory Note, dated September 27, 1996, from the
Registrant and Alkermes Controlled Therapeutics Inc. II to
Fleet National Bank. (Incorporated by reference to Exhibit
10.8 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1996.)
10.25 Promissory Note, dated June 2, 1997, from the Registrant,
Alkermes Controlled Therapeutics, Inc. and Alkermes
Controlled Therapeutics Inc. II to Fleet National Bank.
(Incorporated by reference to Exhibit 10.35 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1997.)
10.26 Promissory Note, dated March 19, 1998, from the Registrant,
Alkermes Controlled Therapeutics, Inc. and Alkermes
Controlled Therapeutics Inc. II to Fleet National Bank.
(Incorporated by reference to Exhibit 10.38 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1998.)
10.27 Promissory Note, dated September 24, 1998, from the
Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutics Inc. II to Fleet National
Bank ($11,000,000). (Incorporated by reference to Exhibit
10.2 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1998.)
10.28 Promissory Note, dated September 24, 1998, from the
Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutics Inc. II to Fleet National
Bank ($9,000,000). (Incorporated by reference to Exhibit
10.3 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1998.)
10.29 Employment Agreement, entered into as of February 7, 1991,
between Richard F. Pops and the Registrant. (Incorporated
by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1, as amended (File No.
33-40250).)+
10.30 Employment Agreement, entered into as of June 13, 1994, by
and between Robert A. Breyer and the Registrant.
(Incorporated by reference to Exhibit 10.28 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1994.)+
10.31 Incentive Loan Program. (Incorporated by reference to
Exhibit 10.42 to the Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1999.)+
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
71
<PAGE> 72
* Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted August 19, 1999. Such provisions
have been filed separately with the Commission.
+ Constitutes a management contract or compensatory plan required to be
filed as an Exhibit to this Report pursuant to Item 14(c) of Form 10-K.
(b) Since the beginning of the quarter ended March 31,
2000, the Registrant filed reports on Form 8-K dated
February 8, 2000 and March 30, 2000. After March 31,
2000, the Registrant filed reports on Form 8-K dated
April 28, 2000 and June 12, 2000.
UNDERTAKING
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned Registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference into Registrant's Registration Statements on Form
S-8, Nos. 33-44752, 33-58330, 33-97468, 333-13283, 333-50357 and 333-71011 and
on Form S-3, Nos. 333-31354, 333-34702, 333-75645, 333-75649 and 333-50157.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
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<PAGE> 73
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.
ALKERMES, INC.
June 29, 2000 By: /s/ Richard F. Pops
------------------------
Richard F. Pops
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael A. Wall Director and Chairman of the June 29, 2000
---------------------------------------- Board
Michael A. Wall
/s/ Richard F. Pops Director and Chief Executive Officer June 29, 2000
---------------------------------------- (Principal Executive Officer)
Richard F. Pops
/s/ James M. Frates Vice President, Chief June 29, 2000
---------------------------------------- Financial Officer and
James M. Frates Treasurer (Principal
Financial and Accounting
Officer)
/s/ Floyd E. Bloom Director June 29, 2000
----------------------------------------
Floyd E. Bloom
/s/ Robert A. Breyer President and Chief Operating June 29, 2000
---------------------------------------- Officer and Director
Robert A. Breyer
/s/ John K. Clarke Director June 29, 2000
----------------------------------------
John K. Clarke
/s/ Alexander Rich Director June 29, 2000
----------------------------------------
Alexander Rich
/s/ Paul Schimmel Director June 29, 2000
----------------------------------------
Paul Schimmel
</TABLE>
73
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1(a) Second Amended and Restated Articles of Incorporation of
Alkermes, Inc. effective July 23, 1991. (Incorporated by
reference to Exhibit 4.1(a) to the Registrant's Report on
Form 10-Q for the quarter ended June 30, 1991.)
3.1(b) Statement of Change of Registered Office of Alkermes, Inc.
effective July 23, 1991. (Incorporated by reference
to Exhibit 4.1(b) to the Registrant's Report on Form 10-Q
for the quarter ended June 30, 1991.)
3.1(c) Amendment to Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of
State on November 1, 1991. (Incorporated by reference to
Exhibit 4.1(c) to the Registrant's Report on Form 10-Q for
the quarter ended September 30, 1991.)
3.1(d) Amendment to the Second Amended and Restated Articles of
Incorporation, as amended, as filed with the Pennsylvania
Secretary of State on February 12, 1993. (Incorporated by
reference to Exhibit 4.1(d) to the Registrant's Report on
Form 10-Q for the quarter ended December 31, 1992.)
3.1(e) Amendment to the Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of
State on February 26, 1998. (Incorporated by reference to
Exhibit 4.6 to the Registrant's Registration Statement on
Form S-3, as amended (File No. 333-50157).)
3.1(f) Amendment to Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of
State on April 12, 1999 (Non-Voting Common Stock Terms).
(Incorporated by reference to Exhibit 3.1(g) to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1999.)
3.1(g) Amendment to Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of
State on April 28, 2000 (effecting 2-for-1 stock split and
increase in authorized shares).
3.1(h) Amendment to Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of
State on June 27, 2000.
3.2 Amended and Restated By-Laws of Alkermes, Inc., effective
as of June 2, 1999. (Incorporated by reference to Exhibit
3.2 to the Registrant's Report on Form 10-K for the fiscal
year ended March 31, 1999.)
4.1 Specimen of Common Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on Form S-1, as amended (File
No. 33-40250).)
4.2 Specimen of Preferred Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-3, as amended
(File No. 333-50157).)
</TABLE>
<PAGE> 75
<TABLE>
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4.3 Specimen of Non-Voting Common Stock Certificate of
Alkermes, Inc. (Incorporated by reference to Exhibit 4.4
to the Registrant's Report on Form 10-K for the fiscal year
ended March 31, 1999.)
4.4 Indenture, dated as of March 1, 1998, between Alkermes,
Inc. and State Street Bank and Trust Company, as Trustee.
(Incorporated by reference to Exhibit 4.7 to the
Registrant's Registration Statement on Form S-3, as amended
(File No. 333-50157).)
10.1 Amended and Restated 1989 Non-Qualified Stock Option Plan,
as amended. (Incorporated by reference to Exhibit 4.2(c)
to the Registrant's Registration Statement on Form S-8
(File No. 33-44752).)+
10.2 Amended and Restated 1990 Omnibus Stock Option Plan, as
amended. (Incorporated by reference to Exhibit 10.2 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1998.) +
10.3 1991 Restricted Common Stock Award Plan. (Incorporated by
reference to Exhibit 4.2(a) to the Registrant's
Registration Statement on Form S-8 (File No. 33-58330).)+
10.4 1992 Non-Qualified Stock Option Plan. (Incorporated by
reference to Exhibit 10.26 to the Registrant's Registration
Statement on Form S-4, as amended (File No. 33-54932).)+
10.5 Stock Option Plan for Non-Employee Directors. (Incorporated
by reference to Exhibit 10.5 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1996.)
10.6 Alkermes, Inc. 1998 Equity Incentive Plan. (Incorporated
by reference to Exhibit 10.6 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1999.)
10.7 1999 Stock Option Plan. (Incorporated by reference to
Exhibit 10.7 to the Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1999.)
10.8 Lease, dated as of September 18, 1991, between Forest City
64 Sidney Street, Inc. and the Registrant. (Incorporated by
reference to Exhibit 10.19 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1992.)
10.8(a) First Amendment of Lease, dated September 18, 1992, between
Forest City 64 Sidney Street, Inc. and the Registrant.
(Incorporated by reference to Exhibit 10.24 to the
Registrant's Registration Statement on Form S-4, as amended
(File No. 33-54932).)
10.9 Lease, dated as of March 16, 1990, between Forest City 64
Sidney Street, Inc. and Enzytech, Inc. (Incorporated by
reference to Exhibit 10.25 to the Registrant's Registration
Statement on Form S-4, as amended (File No. 33-54932).)
10.10 Lease, dated July 26, 1993, between the Massachusetts
Institute of Technology and Alkermes, Inc. (Incorporated by
reference to Exhibit 10.8 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1997.)
</TABLE>
<PAGE> 76
<TABLE>
<S> <C>
10.10(a) First Amendment of Lease, dated June 9, 1997, between the
Massachusetts Institute of Technology and Alkermes, Inc.
(Incorporated by reference to Exhibit 10.8(a) to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1997.)
10.11 Product Development Agreement, dated as of March 6, 1992,
between the Partnership and the Registrant. (Incorporated
by reference to Exhibit 10.21 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1992.)
10.12 Purchase Agreement, dated as of March 6, 1992, by and among
the Registrant and each of the Limited Partners, from time
to time, of the Partnership. (Incorporated by reference to
Exhibit 10.22 to the Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1992.)
10.13 Alkermes Clinical Partners, L.P. Agreement of Limited
Partnership, dated as of February 7, 1992. (Incorporated
by reference to Exhibit 10.23 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1992.)
10.13(a) Amendment No. 1 to Alkermes Clinical Partners, L.P.
Agreement of Limited Partnership, dated as of September 29,
1992. (Incorporated by reference to Exhibit 10.22(a) to the
Registrant's Registration Statement on Form S-4, as amended
(File No. 33-54932).)
10.13(b) Amendment No. 2 to Alkermes Clinical Partners, L.P.
Agreement of Limited Partnership, dated as of March 30,
1993. (Incorporated by reference to Exhibit 10.22(b) to the
Registrant's Registration Statement on Form S-3, as amended
(File No. 33-64964).)
10.14 Class A Note of Alkermes Development Corporation II, dated
April 10, 1992, to PaineWebber Development Corporation in
the amount of $100.00. (Incorporated by reference to
Exhibit 10.24 to the Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1992.)
10.15 License Agreement, dated as of April 14, 1999, by and
between Genentech, Inc. and Alkermes Controlled
Therapeutics, Inc. (Incorporated by reference to Exhibit
10.18 to the Registrant's Report on Form 10-K for the
fiscal year ended March 31, 1999.)*
10.16 Patent License Agreement, dated as of August 11, 1997,
between Massachusetts Institute of Technology and Advanced
Inhalation Research, Inc., as amended. (Incorporated by
reference to Exhibit 10.25 to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1999.)*
10.17 Letter Agreement, dated September 27, 1996, by and among
Fleet National Bank, Alkermes Controlled Therapeutics,
Inc., Alkermes Controlled Therapeutic Inc. II and
the Registrant. (Incorporated by reference to Exhibit 10.3
to the Registrant's Report on Form 10-Q for the quarter
ended September 30, 1996.)
10.17(a) Loan Supplement and Modification Agreement, dated as of
June 2, 1997, by and among Fleet National Bank, Alkermes
Controlled Therapeutics, Inc., Alkermes Controlled
Therapeutics Inc. II and the Registrant. (Incorporated by
reference to Exhibit 10.27(a) to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1997.)
</TABLE>
<PAGE> 77
<TABLE>
<S> <C>
10.17(b) Second Loan Supplement and Modification Agreement, dated as
of March 19, 1998, by and among Fleet National Bank,
Alkermes Controlled Therapeutics, Inc., Alkermes Controlled
Therapeutics Inc. II and the Registrant. (Incorporated by
reference to Exhibit 10.29(b) to the Registrant's Report on
Form 10-K for the fiscal year ended March 31, 1998.)
10.17(c) Third Loan Supplement and Modification Agreement, dated as
of September 24, 1998, by and among Fleet National Bank,
Alkermes Controlled Therapeutics, Inc., Alkermes Controlled
Therapeutics Inc. II and the Registrant. (Incorporated by
reference to Exhibit 10.1 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1998.)
10.18 Security Agreement, dated as of September 27, 1996, from
the Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutic Inc. II to Fleet National
Bank. (Incorporated by reference to Exhibit 10.4 to the
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1996.)
10.19 Pledge Agreement, dated as of September 27, 1996, from the
Registrant to Fleet National Bank. (Incorporated by
reference to Exhibit 10.5 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1996.)
10.20 Mortgage and Security Agreement, dated as of September 27,
1996, from Alkermes Controlled Therapeutics Inc. II to
Fleet National Bank. (Incorporated by reference to Exhibit
10.6 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1996.)
10.21 Environmental Indemnity Agreement, dated as of September
27, 1996, from the Registrant and Alkermes Controlled
Therapeutics Inc. II to Fleet National Bank. (Incorporated
by reference to Exhibit 10.7 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1996.)
10.22 Promissory Note of the Registrant, dated December 23, 1994,
to Fleet Bank of Massachusetts, N.A. (Incorporated by
reference to Exhibit 10.20 to the Registrant's Report on
Form 10-Q for the quarter ended December 31, 1994.)
10.22(a) Allonge to Promissory Note, dated as of September 27, 1996,
executed by Fleet National Bank, Alkermes Controlled
Therapeutics, Inc. and the Registrant. (Incorporated by
reference to Exhibit 10.1 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1996.)
10.23 Promissory Note, dated December 19, 1995, by Registrant to
Fleet Bank of Massachusetts, N.A. (Incorporated by
reference to Exhibit 10.2 to the Registrant's Report on
Form 10-Q for the quarter ended December 31, 1995.)
10.23(a) Allonge to Promissory Note, dated as of September 27, 1996,
executed by Fleet National Bank, Alkermes Controlled
Therapeutics, Inc. and the Registrant. (Incorporated by
reference to Exhibit 10.2 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1996.)
</TABLE>
<PAGE> 78
<TABLE>
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10.24 Promissory Note, dated September 27, 1996, from the
Registrant and Alkermes Controlled Therapeutics Inc. II to
Fleet National Bank. (Incorporated by reference to Exhibit
10.8 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1996.)
10.25 Promissory Note, dated June 2, 1997, from the Registrant,
Alkermes Controlled Therapeutics, Inc. and Alkermes
Controlled Therapeutics Inc. II to Fleet National Bank.
(Incorporated by reference to Exhibit 10.35 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1997.)
10.26 Promissory Note, dated March 19, 1998, from the Registrant,
Alkermes Controlled Therapeutics, Inc. and Alkermes
Controlled Therapeutics Inc. II to Fleet National Bank.
(Incorporated by reference to Exhibit 10.38 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1998.)
10.27 Promissory Note, dated September 24, 1998, from the
Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutics Inc. II to Fleet National
Bank ($11,000,000). (Incorporated by reference to Exhibit
10.2 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1998.)
10.28 Promissory Note, dated September 24, 1998, from the
Registrant, Alkermes Controlled Therapeutics, Inc. and
Alkermes Controlled Therapeutics Inc. II to Fleet National
Bank ($9,000,000). (Incorporated by reference to Exhibit
10.3 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1998.)
10.29 Employment Agreement, entered into as of February 7, 1991,
between Richard F. Pops and the Registrant. (Incorporated
by reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1, as amended (File No.
33-40250).)+
10.30 Employment Agreement, entered into as of June 13, 1994, by
and between Robert A. Breyer and the Registrant.
(Incorporated by reference to Exhibit 10.28 to the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1994.)+
10.31 Incentive Loan Program. (Incorporated by reference to
Exhibit 10.42 to the Registrant's Report on Form 10-K for
the fiscal year ended March 31, 1999.)+
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
* Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted August 19, 1999. Such provisions
have been filed separately with the Commission.
+ Constitutes a management contract or compensatory plan required to be
filed as an Exhibit to this Report pursuant to Item 14(c) of Form 10-K.
