<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 for the quarterly period ended June 30, 1997 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
COMMISSION FILE NUMBER: 0-19454
ANERGEN, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0183594
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 PENOBSCOT DRIVE
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices) (Zip Code)
Telephone number: (415) 361-8901
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
----- -----
At June 30, 1997, Registrant had outstanding 18,818,597 shares of Common Stock.
<PAGE> 2
ANERGEN, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
ITEM 1. Financial Statements
Condensed balance sheets - June 30, 1997
and December 31, 1996 ....................................................... 3
Condensed statements of operations - three and six months
ended June 30, 1997 and 1996 ................................................ 4
Condensed statements of cash flows - six months
ended June 30, 1997 and 1996 ................................................ 5
Notes to condensed financial statements ....................................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................... 7
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K .............................................. 17
Signatures .................................................................... 18
</TABLE>
2
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Part I: Financial Information
ANERGEN, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, 1997 DECEMBER 31, 1996
(UNAUDITED)
-------- --------
<S> <C> <C>
Current assets:
Cash and equivalents .......................................... $ 5,970 $ 3,963
Short-term investments ........................................ 5,463 12,437
Contract receivables - related party .......................... 1,902 320
Prepaid expenses .............................................. 98 208
-------- --------
Total current assets ............................. 13,433 16,928
Property and equipment, net ........................................ 1,845 1,459
Other assets ....................................................... 36 36
-------- --------
$ 15,314 $ 18,423
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ..................... $ 1,814 $ 1,326
Current portion of capital lease obligations and debt ......... 617 728
-------- --------
Total current liabilities ........................ 2,431 2,054
Long-term portion of capital lease obligations and debt ............ 723 366
Commitments
Shareholders' equity:
Preferred stock, no par value; none issued and outstanding ... -- --
Common stock, no par value; 40,000,000 shares authorized;
18,818,597 issued and outstanding (18,780,697 at December
31, 1996) ............................................... 57,583 57,484
Additional paid-in-capital .................................... 659 659
Unrealized gain (loss) on investments ......................... (31) (34)
Accumulated deficit ........................................... (46,051) (42,106)
-------- --------
Total shareholders' equity ....................... 12,160 16,003
-------- --------
$ 15,314 $ 18,423
======== ========
</TABLE>
Note: The balance sheet at June 30, 1997 is derived from unaudited financial
statements. The December 31, 1996 information is derived from audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
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W
ANERGEN, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Contract revenues ................... $ 1,354 $ 639 $ 3,162 $ 1,422
Interest income ..................... 117 120 299 259
-------- -------- -------- --------
1,471 759 3,461 1,681
Expenses:
Research and development ............ 2,822 1,945 5,709 3,840
General and administrative .......... 709 556 1,593 1,059
Interest expense .................... 61 44 104 99
-------- -------- -------- --------
3,592 2,545 7,406 4,998
-------- -------- -------- --------
Net loss ................................. $ (2,121) $ (1,786) $ (3,945) $ (3,317)
======== ======== ======== ========
Net loss per share ....................... $ (0.11) $ (0.12) $ (0.21) $ (0.22)
======== ======== ======== ========
Shares used in calculating per share data 18,819 15,064 18,819 15,024
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
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ANERGEN, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss ............................................ $ (3,945) $ (3,317)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ..................... 409 539
Deferred compensation amortization ................ -- 11
Changes in operating assets and liabilities:
Contract receivables - related party .............. (1,582) 151
Prepaid expenses .................................. 110 (218)
Other assets ...................................... -- --
Accounts payable and accrued liabilities .......... 488 (289)
-------- --------
Net cash used in operating activities .................. (4,520) (3,123)
Cash flows provided by (used in) investing activities:
Purchase of investments available-for-sale .......... (15,899) (3,078)
Sale of investments available-for-sale .............. 22,876 6,472
Purchase of property and equipment .................. (795) (238)
-------- --------
Net cash provided by investing activities .............. 6,182 3,156
-------- --------
Cash flows provided by (used in) financing activities:
Proceeds from facility and equipment debt financing 545 --
Repayments of capital lease obligations and debt .... (299) (525)
Issuance of common stock, net ....................... 99 122
-------- --------
Net cash provided by (used in) financing activities .... 345 (403)
Net increase (decrease) in cash ........................ 2,007 (370)
Cash and equivalents at beginning of period ........... 3,963 468
-------- --------
Cash and equivalents at end of period ................. 5,970 98
Short-term investments at end of period ................ 5,463 7,574
-------- --------
Cash and short-term investments at end of period ....... $ 11,433 $ 7,672
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
ANERGEN, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. NATURE OF BUSINESS
Anergen, Inc. (the "Company") was incorporated on April 26, 1988 for
the purpose of developing therapies using biopharmaceutical compounds
for the treatment of autoimmune diseases.
2. BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by
the Company and have not been audited, pursuant to the rules and
regulations promulgated by the Securities and Exchange Commission (the
"Commission"). Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted pursuant to
Commission rules and regulations; nevertheless, the Company believes
that the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in
conjunction with the audited financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the financial position of the Company (subject to year-end
adjustments) with respect to the interim financial statements, and of
the results of its operations and cash flows for the interim periods
then ended, have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the
full year.
Net Loss Per Share
Net loss per share is computed using the weighted average number of
shares of common stock outstanding. In February 1997, the Financial
Accounting Standards Board issued Statement 128, Earnings per Share,
which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute
loss per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive
effect of stock options will be excluded. The Company currently
excludes common equivalent shares from outstanding stock options and
warrants from the computation as their effect is anti-dilutive. The
Company does not expect there to be a material impact on the net loss
per share calculation upon adoption of Statement 128.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
factors set forth hereunder and in the Company's Annual Report as filed on Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through
private placements of its equity securities with venture capitalists
(which raised an aggregate of approximately $7.6 million in net
proceeds), through the sale of its Common Stock to Novo Nordisk A/S
(which raised approximately $8 million in net proceeds), through the
issuance of its Common Stock and Warrants to purchase shares of Common
Stock through a private placement in exchange for $1.5 million in
proceeds, and through public offerings of its Common Stock which have
raised an aggregate of $38.8 million in net proceeds, including $9.4
million in net proceeds from the sale of 3.5 million shares of Common
Stock to the public in August 1996 and approximately $500,000 from the
underwriters' exercise of the over-allotment option in September 1996.
The Company's cash, cash equivalents and short-term investments at June
30, 1997 were approximately $11.4 million, a decrease from $16.4
million due to cash used in operations and timing of receipts of
contract receivables. Accounts payable and accrued liabilities
increased to $1,814,000 at June 30, 1997 from $1,326,000 at December
31, 1996 primarily due to timing of payments related to clinical
trials. Long-term debt increased from $366,000 at December 31, 1996 to
$723,000 at June 30, 1997 due to the debt financing of equipment
purchases. The Company had shareholders' equity at June 30, 1997 of
approximately $12.2 million.
The Company anticipates that its current cash, cash equivalents,
short-term investments and expected revenues under its collaborative
agreements will be sufficient to fund its operations through
approximately 1998. Thereafter, the Company will require substantial
additional funds to continue its operations. The Company anticipates
that its current resources will be primarily used to fund clinical
testing of AnervaX(TM) for Rheumatoid Arthritis ("RA"), manufacturing
of GMP grade material for the Phase I clinical trial of the Company's
AnergiX(TM) for Multiple Sclerosis ("MS") and the conduct of such trial
and continued research and development and preparation for clinical
testing of AnergiX for the treatment of RA, Type I Diabetes and
Myasthenia Gravis. The balance of such resources will be used to fund
continued limited research on other autoimmune diseases and general and
administrative activities, including those associated with seeking
collaborative arrangements to enable the Company to increase its
research and development activities in other autoimmune diseases. These
foregoing forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially. In particular,
the Company's capital requirements will vary depending on numerous
factors many of which are outside the Company's control. These factors
include the progress of the Company's research and development
programs, manufacturing activities, the progress of the Company's
clinical programs, the results of laboratory testing, the time and cost
required to seek regulatory approvals to commence clinical trials for
the Company's initial products, the need to obtain licenses to other
proprietary rights, any required adjustments to the Company's operating
plan to respond to competitive pressures or technological advances,
developments with respect to the Company's existing or future
collaborative arrangements, and the availability of various methods of
financing. The Company expects to seek to raise additional capital
through equity or debt financing, research and development
collaborations with other pharmaceutical companies or through other
sources. Any additional equity financing may be dilutive to
shareholders, and debt financing, if available, may involve
restrictions on stock dividends and other restrictions on the Company.
Adequate funds for the Company's operations, whether from equity or
debt, collaborative or other arrangements with corporate partners or
from other sources, may not be available when needed or on terms
attractive to the Company. Insufficient funds may require the Company
to delay, scale back or eliminate some or all of its research and
product development programs or to license third parties to
commercialize products or technologies that the Company would otherwise
seek to develop itself. The Company's liquidity will be reduced as
amounts are expended for continuing research and development.
7
<PAGE> 8
RESULTS OF OPERATIONS
The Company's net loss increased by 19% to $2,121,000 in the fiscal
quarter ended June 30, 1997 compared to a $1,786,000 loss in the
corresponding period in the previous year. The increase was due to
expenses that increased 41% to $3,592,000 in the fiscal quarter ended
June 30, 1997 compared to $2,545,000 in the corresponding period in the
previous year partially offset by an increase in revenues of 94% to
$1,471,000 in the fiscal quarter ended June 30, 1997 compared to
$759,000 in the corresponding period in the previous year. Total
expenses increased primarily due to increased expenses for research and
development related to clinical trials and development activities
associated with the Company's collaborative arrangement with N. V.
Organon. Research and development expenses increased 45% to $2,822,000
for the quarter ended June 30, 1997 from $1,945,000 in the
corresponding period in the previous year due to an increase in
clinical activities related to the Company's ongoing Phase IIa clinical
trial of AnervaX for RA and an increase in manufacturing activities
related to the Company's development of AnergiX for RA. The Company
expects total operating expenses to increase as it increases research
and development efforts.
General and administrative expenses increased 28% to $709,000 for the
quarter ended June 30, 1997 compared to $556,000 in the corresponding
period in the previous year primarily due to costs associated with an
expanded management team, recruitment efforts and increased corporate
development activities.
The increase in revenues was primarily due to revenues recorded in the
second quarter related to the Company's collaborative agreement with N.
V. Organon. Interest income decreased slightly to $117,000 for the
quarter ended June 30, 1997 as compared to $120,000 in the
corresponding period in the previous year. Interest income is expected
to decline gradually over future periods as invested capital is used
for operating activities. Interest expense increased to $61,000 for the
quarter ended June 30, 1997 as compared to $44,000 in the corresponding
period in the previous year due to higher debt balances as the Company
financed capital purchases.
The Company expects to incur substantial and increasing operating
losses for at least the next several years. The Company's losses on a
quarter-by-quarter basis may vary depending upon a variety of factors,
any of which may fluctuate, including the level of research activities,
the timing of hiring of additional scientific and management personnel,
the retention of consultants, the purchase or leasing of laboratory
equipment, the licensing of any required technology and other factors.
Accordingly, the Company believes that quarter-by-quarter losses will
not be a useful indicator of the performance of the Company.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
EARLY STAGE OF PRODUCT DEVELOPMENT; LACK OF COMMERCIAL PRODUCTS; NO ASSURANCE OF
SUCCESSFUL PRODUCT DEVELOPMENT
The Company was founded in 1988 to discover and develop
biopharmaceutical compounds for the treatment of autoimmune diseases.
To achieve profitable operations, the Company, alone or with others,
must successfully develop, obtain regulatory approval for, manufacture
and market products. The Company does not have any products available
for sale nor does it expect to have any products commercially available
for at least several years, if at all. The Company's potential products
are at the early stages of research and development, with only limited
human testing of certain of the Company's products undertaken to date.
The products currently under development by the Company will require
significant additional research, laboratory testing and clinical trials
and investment of capital prior to their commercialization. There can
be no assurance that any potential products will be successfully
developed, prove to be safe and efficacious in clinical trials, meet
applicable regulatory standards, be capable of being produced in
commercial quantities at acceptable costs or be successfully marketed.
8
<PAGE> 9
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company has experienced significant net losses every year since its
inception in 1988. Net losses for the quarters ended June 30, 1997 and
1996 were approximately $2.1 million and $1.8 million, respectively,
and the Company had an accumulated deficit of approximately $46.1
million as of June 30, 1997. The Company expects to incur substantial
and increasing operating losses for at least the next several years.
The amount of net losses and the time required by the Company to reach
profitability are highly uncertain. There can be no assurance that the
Company will ever be able to generate product revenue or achieve
profitability on a substantial basis or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
FUTURE REQUIREMENT FOR SIGNIFICANT ADDITIONAL CAPITAL
The Company anticipates that its current cash, cash equivalents,
short-term investments and expected revenues under its collaborative
agreements will be sufficient to fund its operations through
approximately 1998. Thereafter, the Company will require substantial
additional funds to continue its operations. The Company anticipates
that its current resources will be primarily used to fund clinical
testing of AnervaX for RA and AnergiX for MS, and continued research
and development and preparation for clinical testing of AnergiX for the
treatment of RA, IDDM and MG. The balance of such resources will be
used to fund continued limited research on other autoimmune diseases
and general and administrative activities, including those associated
with seeking collaborative arrangements to enable the Company to
increase its research and development activities in current and or
other autoimmune diseases. The Company's working capital requirements
over the next two years may vary depending upon numerous factors,
including the progress of the Company's research and development
programs, manufacturing activities, the progress of the Company's
clinical programs, the results of laboratory testing, the time and cost
required to seek regulatory approvals to commence clinical trials for
the Company's initial products, the need to obtain licenses to other
proprietary rights, any required adjustments to the Company's operating
plan to respond to competitive pressures or technological advances,
developments with respect to existing or future collaborative
arrangements and the availability of various methods of financing. The
Company expects to seek to raise additional capital through equity or
debt financing, research and development collaborations with corporate
partners or through other sources. Any additional equity financing may
be dilutive to shareholders, and debt financing, if available, may
involve restrictions on stock dividends and other restrictions on the
Company. Adequate funds for the Company's operations, whether from
equity or debt financings, collaborative or other arrangements with
corporate partners or from other sources, may not be available when
needed or on terms attractive to the Company. Insufficient funds may
require the Company to delay, scale back or eliminate some or all of
its research and product development programs or to license third
parties to commercialize products or technologies that the Company
would otherwise seek to develop itself. The Company's liquidity will be
reduced as amounts are expended for continuing research and
development. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources."
UNCERTAINTIES RELATED TO PRECLINICAL AND CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of
its products under development, the Company must demonstrate through
preclinical studies and clinical trials that the product is safe and
efficacious for use in each target indication. The results from
preclinical studies and early clinical trials may not be predictive of
results that will be obtained in large-scale testing, and there can be
no assurance that the Company's clinical trials will demonstrate the
safety and efficacy of any products or will result in any marketable
products. A number of companies in the biotechnology industry have
suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials. The failure to adequately
demonstrate the safety and efficacy of a therapeutic product under
development could delay or prevent regulatory approval of the product
and could have a material adverse effect on the Company.
The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the FDA's willingness to allow Anergen to
proceed; the results of Anergen's continued research and development,
including test results and success in producing the epitopes and HLA
molecules for each AnergiX compound; the number of skilled scientists,
clinicians, and consultants the Company is able to employ in its
efforts and the general interest in the medical community in a
therapeutic using the Company's approach for treatment of the diseases
targeted by the Company. Currently, the Company does not anticipate
establishing its own clinical trials facility. The rate of completion
of clinical trials is also dependent on patient enrollment, which is a
function of many
9
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factors, including the size of the patient population, the proximity of
patients to clinical sites and the existence of competitive trials. If
the Company is unable to successfully complete its clinical trials, its
business, financial condition and results of operations could be
materially and adversely affected.
UNCERTAINTY OF MARKET ACCEPTANCE
Even if the requisite regulatory approvals are obtained for the
Company's potential products or for products developed in collaboration
with the Company, uncertainty exists as to whether such products will
be accepted by the market. A number of factors also may limit the
market acceptance of a product which may be developed by, or discovered
through collaboration with, the Company, including the rate of adoption
by health care practitioners, the indications for which the product is
approved, the rate of the product's acceptance by the target
population, the timing of market entry relative to competitive
products, the availability of alternative therapies, the price of the
Company's product relative to alternative therapies, the availability
of third-party reimbursement and the extent of marketing efforts by the
Company and third-party distributors or agents retained by the Company.
Side effects or unfavorable publicity concerning a Company product or
any similar product could have an adverse effect on the Company's
ability to obtain physician, patient or third-party payor acceptance
and on efforts to sell that product. There can be no assurance of the
Company's ability, or the length of time required, to achieve
commercialization of the Company's products or that physicians,
patients or third party payors will accept any of the Company's
products as readily as alternative therapies, or at all.
GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING PRODUCT APPROVALS
The Company's research and development activities are subject to
regulation by numerous governmental authorities in the United States
and other countries. Further, the future production and marketing of
any products developed by the Company would also be regulated,
particularly as to safety and efficacy. In the United States, vaccines,
drugs and biologics are subject to rigorous FDA review. The Federal
Food, Drug, and Cosmetic Act, the Public Health Service Act and other
federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, approval,
advertising and promotion of such products. Noncompliance with
applicable requirements can result in fines, recall or seizure of
products, clinical study holds, total or partial suspension of
production, refusal of the government to approve NDAs, PLAs, ELAs or
allow the Company to enter into supply contracts and criminal
prosecution. The FDA also has the authority to revoke PLAs and ELAs
previously granted.
In order to obtain FDA approval of a new biological product, the
Company must submit proof of safety, purity, potency and efficacy. In
most cases such proof entails extensive pre-clinical, laboratory, and
clinical tests. The testing, preparation of necessary marketing
applications and processing of those applications by the FDA is
expensive and time consuming, can vary based on the type of product,
and may take several years to complete. There is no assurance that the
FDA will act favorably or quickly in making such reviews, and
significant difficulties or costs may be encountered by the Company in
its efforts to obtain FDA approvals that could delay or preclude the
Company from marketing any products it may develop or furnish an
advantage to competitors. The FDA may also require post-marketing
testing and surveillance to monitor the effects of approved products or
place conditions on any approvals that could restrict the commercial
applications of such products. Product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems
occur following initial marketing. In addition, delays imposed by the
governmental approval process may materially reduce the period during
which the Company may have the exclusive right to exploit patented
products or technologies.
The FDA approval process for a new biological drug involves completion
of pre-clinical studies which include laboratory tests and animal
studies to assess safety and effectiveness of the drug. Among other
things, the results of these studies as well as how the product will be
manufactured, are submitted to the FDA in an IND and, unless the FDA
objects, the IND becomes effective 30 days following receipt by the
FDA. FDA cleared human clinical trials may then be conducted. The
results of the clinical trials are submitted to the FDA as part of a
PLA. In addition to obtaining FDA approval for each AnergiX indication,
an ELA must be filed and the FDA must approve the manufacturing
facilities for the product. Product sales may commence only if the PLA
and ELA are approved. Regulatory requirements for obtaining such FDA
approvals are rigorous and there can be no assurance that such
approvals will be obtained on a timely basis or at all.
Sales of pharmaceutical products outside the United States are subject
to foreign regulatory requirements that
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<PAGE> 11
vary widely from country to country. The time required to obtain
approvals required by foreign countries may be longer or shorter than
that required for FDA approval, and requirements for licensing may
differ from FDA requirements.
If approval is obtained, the Company will be subject to continuing FDA
obligations. When manufacturing biologics, the Company will be required
to adhere to regulations setting forth current Good Manufacturing
Practices ("GMP"), which require that the Company manufacture its
products and maintain its records in a prescribed manner with respect
to manufacturing, testing and quality control activities. Further, the
Company must pass a preapproval inspection of its manufacturing
facilities by the FDA before obtaining approval.
Satisfaction of these FDA requirements, or similar requirements by
foreign regulatory agencies, typically takes several years and the time
needed to satisfy them may vary substantially, based upon the type,
complexity and novelty of the pharmaceutical product. The effect of
government regulation may be to delay or to prevent marketing of
potential products for a considerable period of time and to impose
costly procedures upon the Company's activities. There can be no
assurance that the FDA or any other regulatory agency will grant
approval for any products or indications being developed by the Company
on a timely basis, or at all. Success in preclinical or early stage
clinical trials does not assure success in later stage clinical trials.
Data obtained from preclinical and clinical activities are susceptible
to varying interpretations which could delay, limit or prevent
regulatory approval. If regulatory approval of a product is granted,
such approval may impose limitations on the indicated uses for which a
product may be marketed. Further, even if regulatory approval is
obtained, later discovery of previously unknown problems with a product
may result in restrictions on the product, including withdrawal of the
product from the market. Delay in obtaining or failure to obtain
regulatory approvals would have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON COLLABORATIVE PARTNERS
The Company's strategy for the development, clinical trials,
manufacturing and commercialization of its products includes
maintaining and entering into various collaborations with corporate
partners, licensors, licensees and others. To date, the Company has
entered into collaborative arrangements with Novo Nordisk with respect
to the Company's AnergiX compounds for the treatment of MS, MG and
IDDM, and with Organon with respect to an AnergiX compound for the
treatment of RA. There can be no assurance that the interests and
motivations of the Company's collaborators are, or will remain, aligned
with those of the Company or that such collaborators will successfully
perform their development, regulatory compliance, manufacturing or
marketing functions or that such collaborations in whole or in part
will continue. There can also be no assurance that the Company will be
able to negotiate additional collaborative arrangements in the future
on acceptable terms, if at all, or that any such collaborative
arrangements will be successful. To the extent that the Company is not
able to maintain or establish such arrangements, the Company would be
required to undertake such activities at its own expense, which would
significantly increase the Company's capital requirements and limit the
programs the Company is able to pursue. In addition, the Company may
encounter significant delays in introducing its products into certain
markets or find that the development, manufacture or sale of its
products in such markets is adversely affected by the absence of such
collaborative agreements.
The Company cannot control the amount and timing of resources which its
collaborative partners devote to the Company's program or potential
products, which can vary because of factors unrelated to the potential
product. Collaborator participation will depend not only on the
achievement of research and development objectives by the Company and
its collaborators, which cannot be assured, but also on each
collaborator's own financial, competitive, marketing and strategic
considerations, which are outside the Company's control. Such strategic
considerations may include the relative advantages of alternative
products being marketed or developed by others, including relevant
patent and proprietary positions. The Company's collaborative partners
may develop, either alone or with others, products that compete with
the development and marketing of the Company's products. Competing
products, either developed by the collaborative partners or to which
the collaborative partners have rights, may result in their withdrawal
of support with respect to all or a portion of the Company's
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations. If Novo
Nordisk, Organon or any future collaborative partner breaches or
terminates their agreements with the Company or otherwise fails to
conduct their collaborative activities in a timely manner, the
preclinical or clinical development or commercialization of product
candidates or research programs will be delayed, and the Company will
be required to devote additional resources to product development and
commercialization or terminate certain development programs. There also
can be no assurance that disputes will
11
<PAGE> 12
not arise in the future with respect to the ownership of rights to any
technology developed with third parties. These and other possible
disagreements between collaborators and the Company could lead to
delays in the collaborative research, development and commercialization
of certain product candidates or could require or result in litigation
or arbitration, which would be time consuming and expensive, and would
have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources".
UNCERTAINTY RELATING TO PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in significant part on its ability to
maintain patent protection for its therapeutic approach and for any
developed products, to preserve its trade secrets and to operate
without infringing the proprietary rights of third parties. Although
the Company has obtained patents covering certain aspects of its
technology, no assurance can be given that additional patents will be
issued or, if issued, that the scope of any patent protection will be
significant, or that the patents will be held valid if subsequently
challenged. Moreover, the Company cannot ascertain with certainty that
no patent conflict will exist with other products or processes which
could compete with the Company's approaches.
Because of the length of time and expense associated with bringing new
products through development and to the marketplace, and the length of
time required for the governmental approval process, the pharmaceutical
industry has traditionally placed considerable importance on obtaining
and maintaining patent and trade secret protection for significant new
technologies, products and processes. The Company and other
biotechnology and pharmaceutical firms have applied, and are applying,
for patents for their products and certain aspects of their
technologies. The enforceability of patents issued to biotechnology and
pharmaceutical firms is highly uncertain. Federal court decisions
indicating legal considerations surrounding the validity of patents in
the field are in transition, and there can be no assurance that the
historical legal standards surrounding questions of validity will
continue to be applied or that current defenses as to issued patents in
the field will offer protection in the future. In addition, there can
be no assurance as to the degree and range of protection any patents
will afford, whether patents will issue or the extent to which the
Company will be successful in not infringing patents granted to others.
While the Company pursues patent protection for products and processes
where appropriate, it also relies on trade secrets, know-how and
continuing technological advancement to develop and maintain its
competitive position. The Company's policy is to have each employee
enter into an agreement that contains provisions prohibiting the
disclosure of confidential information to anyone outside the Company.
Research and development contracts and relationships between the
Company and its scientific consultants provide access to aspects of the
Company's know-how that is protected generally under confidentiality
agreements with the parties involved. There can be no assurance,
however, that these confidentiality agreements will be honored or that
the Company can effectively protect its rights to its unpatented trade
secrets. Moreover, there can be no assurance that others will not
independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to the Company's trade secrets.
The Company may be required to obtain licenses to patents or other
proprietary rights from third parties. There can be no assurance that
any licenses required under any patents or proprietary rights will be
made available on terms acceptable to the Company, if at all. If the
Company does not obtain required licenses, it could encounter delays in
product development while it attempts to redesign products or methods
or it could find that the development, manufacture or sale of products
requiring such licenses could be foreclosed.
The Company is aware of a European patent and corresponding U.S. and
Australian patents which contain claims that relate to certain of the
Company's proposed products and their uses. In accordance with European
Patent Office ("EPO") procedures, third parties can oppose an EPO
patent grant by presenting information which they believe justifies
narrowing or revoking the grant of the patent. The Company is opposing
the aforementioned grant in the EPO. There can, however, be no
assurance that the granted EPO claims will be revoked or significantly
narrowed in scope as a result of the opposition proceeding. If valid
claims in these patents are found to be infringed by the Company's
products, the Company's ability to make, use, offer to sell, or sell,
such products could be materially and adversely affected.
In addition, the Company could incur substantial costs in defending any
patent litigation brought against it or in asserting the Company's
patent rights, including those licensed to the Company by others, in a
suit against
12
<PAGE> 13
another party. The United States Patent and Trademark Office (the
"USPTO") could institute interference proceedings in connection with
one or more of the Company's patents or patent applications which
proceedings could result in an adverse decision as to priority of an
invention. The USPTO also could institute reexamination proceedings in
connection with one or more of the Company's patents or patent
applications, which could result in an adverse decision as to the
patents' validity or scope.
NEED TO DEVELOP MANUFACTURING CAPABILITIES
The Company has no volume manufacturing capacity or experience in
volume manufacturing of pharmaceutical or other biological products.
Establishing its own volume manufacturing capabilities would require
significant scale-up expenses and additions to facilities and
personnel. In addition, the Company must successfully develop the
process required for volume manufacturing. The pharmaceutical products
under development by the Company have never been manufactured on a
commercial scale and there can be no assurance that such products can
be manufactured at a cost or in quantities to make them commercially
viable. The Company will be required to establish arrangements with
contract manufacturers to supply a portion of its compounds for
subsequent clinical trials as well as the manufacture, packaging,
labeling and distribution of finished products. If the Company is
unable to contract for sufficient supply of a portion of its compounds
on acceptable terms, and it is unable to develop the capability to
produce the epitopes internally, the Company's human clinical testing
schedule would be delayed, resulting in the delay of submission of
products for regulatory approval and initiation of new development
programs, which would have a material adverse effect on the Company. If
the Company should encounter delays or difficulties in establishing
relationships with manufacturers to produce, package and distribute its
finished products, market introduction and subsequent sales of such
products would be adversely affected. Moreover, contract manufacturers
that the Company may use must adhere to current GMP regulations
enforced by the FDA through its facilities inspection program. If these
facilities cannot pass a pre-approval plant inspection, the FDA
pre-market approval of the products will be adversely affected.
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
The Company currently has no sales, marketing or distribution
capability. The Company intends to rely on relationships with one or
more pharmaceutical companies with established distribution systems and
direct sales forces to market its products. In the event that the
Company is unable to reach agreement with one or more pharmaceutical
companies to market its products, it may be required to market its
products directly and to develop a marketing and sales force with
technical expertise and supporting distribution capability. There can
be no assurance that the Company will be able to establish in-house
sales and distribution capabilities or relationships with third
parties, or that it will be successful in gaining market acceptance for
its products. To the extent that the Company decides to utilize
existing or future co-promotion or other licensing arrangements, the
Company must develop its own sales, marketing or distribution
capability, and there can be no assurance that such efforts will be
successful.
COMPETITION AND TECHNOLOGICAL CHANGE
The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. The Company's
competitors include major pharmaceutical, chemical and specialized
biotechnology companies, most of which have financial, technical,
research and development, manufacturing, clinical and marketing
resources significantly greater than those of the Company. The Company
believes that these other entities recognize the need for effective
therapies for the autoimmune diseases targeted by the Company and are
highly motivated to develop such therapies. In addition, many
specialized biotechnology companies have formed collaborations with
large, established companies to support research, development and
commercialization of products that may be competitive with those of the
Company. Academic institutions, governmental agencies and other public
and private research organizations are also conducting research
activities and seeking patent protection and may commercialize products
on their own or through joint ventures. The Company is aware of certain
products in development by competitors that are intended to be used for
the prevention or treatment of certain diseases the Company has
targeted for product development.
The existence of these products, or other products or treatments of
which the Company is not aware, or products or treatments that may be
developed in the future which may be more effective, may adversely
affect the commercialization or marketability of products which may be
developed by the Company or potentially render the Company's technology
obsolete or non-competitive.
13
<PAGE> 14
The Company's competitive position will depend on its ability to
attract and retain qualified scientific and other personnel, develop
effective proprietary products, implement production and marketing
plans, obtain patent protection and secure adequate capital resources.
In addition, the first pharmaceutical product to reach the market in a
therapeutic or preventive area is often at a significant competitive
advantage relative to later entrants to the market. The Company expects
its products, if approved for sale, to compete primarily on the basis
of product efficacy, safety, patent position, reliability, price and
patient convenience.
UNCERTAINTY RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Initiatives
to reduce the federal deficit and to reform health care delivery are
increasing these cost containment efforts. The Company anticipates that
Congress, state legislatures and the private sector will continue to
review and assess alternative benefits, controls on health care
spending through limitations on the growth of private health insurance
premiums and Medicare and Medicaid spending, the creation of large
insurance purchasing groups, price controls on pharmaceuticals and
other fundamental changes to the health care delivery system. Any such
proposed or actual changes could cause existing and potential partners
of the Company to limit or eliminate spending on collaborative
development projects. Legislative debate is expected to continue in the
future, market forces are expected to demand reduced costs and Anergen
cannot predict what impact the adoption of any federal or state health
care reform measures or future private sector reforms may have on its
business.
In both domestic and foreign markets, sales of the Company's proposed
products will depend in part upon the availability of reimbursement
from third-party payors, such as government health administration
authorities, private health insurers and other organizations. In
addition, other third-party payors are increasingly challenging the
price and cost effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products. There can be no assurance that the
Company's potential products or products discovered in collaboration
with the Company will be considered cost-effective or that adequate
third-party reimbursement will be available to enable Anergen to
maintain price levels sufficient to realize an appropriate return on
its significant investment in product research and development.
Legislation and regulations affecting the pricing of pharmaceuticals
may change before the Company's proposed products are approved for
marketing. Adoption of such legislation could further limit
reimbursement for medical products. If adequate coverage and
reimbursement levels are not provided by the government and third-party
payors for the Company's products, the market acceptance of these
products would be adversely affected, which would have a material
adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON AND NEED FOR ADDITIONAL KEY PERSONNEL; RELIANCE ON ACADEMIC
COLLABORATORS
The success of the Company and of its business strategy is dependent in
large part on the ability of the Company to attract and retain key
management and operating personnel. Such persons are in high demand and
are often subject to competing offers. The Company will need to develop
expertise and add skilled employees or retain consultants in such areas
as research and development, clinical testing, government approvals,
marketing and manufacturing in the future. There can be no assurance
that the Company will be able to attract and retain the qualified
personnel or develop the expertise needed for its business. The loss of
the services of one or more of the Company's officers or other members
of the research or management group or the inability to hire additional
personnel and develop expertise as needed would have a material adverse
effect on the Company.
A significant portion of the Company's research and development and
clinical trials is conducted under sponsored research programs with
several universities. The Company depends on the availability of the
principal investigator for each such program, and the Company cannot
assure that these individuals or their research staffs will be
available to conduct research and development or clinical trials. The
Company's academic collaborators are not employees of the Company. As a
result, the Company has limited control over their activities and can
expect that only limited amounts of their time will be dedicated to
Company activities. In addition, the Company's academic collaborators
are employed by major institutions which have collaborative
relationships with other parties, some of which may be competitors of
the Company. Accordingly, there can be no assurance that research and
development, preclinical and clinical testing performed by these
collaborators will be completed in a timely manner, if at all, and any
inability to do so could have a material adverse effect on the Company.
14
<PAGE> 15
POTENTIAL PRODUCT LIABILITY
The testing, marketing and sale of human health care products entail an
inherent risk of exposure to product liability claims in the event that
the use of the Company's technology or prospective products is alleged
to have resulted in adverse effects. While the Company has taken, and
will continue to take, what it believes are appropriate precautions to
minimize exposure to product liability, there can be no assurance that
it will avoid significant liability. The Company possesses limited
general liability and product liability insurance related to its
clinical trials of AnervaX for RA and to its clinical trials of AnergiX
for MS and certain other types of insurance customarily obtained by
business organizations. There can be no assurance that the existing
insurance coverage is adequate or that it will avoid liability. The
Company intends to seek insurance against product liability risks
associated with the testing, manufacturing or marketing of its
products. However, there can be no assurance that it will be able to
obtain such insurance in the future, or that if obtained, such
insurance will be sufficient in amount. Consequently, a product
liability claim or other claims with respect to uninsured liabilities
or in excess of insured liabilities could have a material adverse
effect on the business or financial condition of the Company.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company is subject to regulation by the Occupational Safety and
Health Administration ("OSHA") and the Environmental Protection Agency
("EPA") and to regulation under the Toxic Substances Control Act, the
Resource Conservation and Recovery Act and other regulatory statutes,
and may in the future be subject to other federal, state or local
regulations. Although the Company believes that it has complied with
these laws, regulations and policies in all material respects and has
not been required to take any significant action to correct any
material noncompliance, there can be no assurance that the Company will
not be required to incur significant costs to comply with environmental
and health and safety regulations in the future. The Company's research
and development involves the controlled use of hazardous materials,
including but not limited to certain hazardous chemicals and
radioactive materials. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, the Company could be held
liable for any damages that result and any such liability could exceed
the resources of the Company. In addition, regulations may be
promulgated governing biotechnology that may affect the Company's
research and development programs. The Company is unable to predict
whether any agency will adopt any regulation which would have a
material adverse effect on the Company's business, financial condition
and results of operations.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock, similar to the
securities of other biotechnology companies, has been and is likely to
continue to be highly volatile. Announcements regarding the results of
regulatory approval filings, clinical trials or other testing,
technological innovations or new commercial products by the Company or
its competitors, patents and intellectual property rights by the
Company or its competitors, developments as to current or future
collaborations by the Company or its competitors, government
regulations, the status of health care reform initiatives, fluctuations
in operating results, changes in recommendations by financial analysts,
and general market conditions for biotechnology stocks could have a
significant impact on the future price of the Common Stock. Trading
volume of the Company's Common Stock has been relatively limited and
sales of substantial amounts of Common Stock could have an adverse
effect on the price of the Common Stock.
CONTROL BY EXISTING STOCKHOLDERS
The Company's officers, directors and principal shareholders, namely
Warburg, Pincus Ventures, L.P. ("Warburg"), International Biotechnology
Trust PLC ("IBT"), and Novo Nordisk, collectively beneficially own
approximately 50% of the Company's outstanding Common Stock. Under a
March 1995 common stock purchase agreement with Warburg and IBT
("Warburg/IBT Purchase Agreement"), the Company is currently obligated
to include in the slate of nominees recommended by the Company's Board
of Directors and management, at each election of directors, two
candidates selected by Warburg, one candidate selected by IBT and one
candidate mutually agreed to by IBT and Warburg. Additionally, while
not obligated to do so, since 1993, the Company has included a
representative of Novo Nordisk in its slate of nominees for the Board
of
15
<PAGE> 16
Directors. The ownership of the Company's Common Stock, and the ability
to designate candidates for the Company's recommended slate of nominees
for the Board of Directors, of Warburg, IBT and Novo Nordisk will
enable such shareholders to have significant influence over major
corporate transactions as well as the election of directors of the
Company and control over board decisions and could have the effect of
delaying, deterring or preventing a change in control of the Company.
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK OR ACCELERATION
OF OPTION VESTING
The Board of Directors has authority, without further action by
shareholders, to issue up to 10,000,000 shares of Preferred Stock with
rights, preferences and privileges designated by the Board of
Directors. This Preferred Stock could be issued quickly with terms
calculated to delay or prevent a change in control of the Company or to
make removal of management more difficult. In certain circumstances,
such issuance could have the effect of decreasing the market price of
the Common Stock or of delaying, deterring or preventing a change in
control of the Company. The Company has no present plan to issue any
shares of Preferred Stock. Further, pursuant to the Company's option
plans, in the event of certain mergers of the Company with other
entities, transfers of voting control of the Company's capital stock or
sale of all or substantially all of the Company's assets, the Company's
Board of Directors has the right under certain circumstances to cause
all outstanding options to become fully vested prior to the event
causing such acceleration and all unexercised options will terminate
upon completion of such event.
16
<PAGE> 17
ANERGEN, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
a) Exhibits
Exhibit Description
3.1(1) Restated and Amended Articles of Incorporation.
3.2(1) Bylaws, as amended.
4.1(1) Form of Common Stock Certificate.
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with
Registrant's Registration Statement on Form S-1 (No.
33-42107), as amended.
b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended June 30, 1997.
17
<PAGE> 18
SIGNATURE
Pursuant to the requirements 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.
ANERGEN, INC.
Date: August 11, 1997 By: /s/ DAVID V. SMITH
--------------------------------
David V. Smith
Vice President, Finance and Chief
Financial Officer on behalf of the
Company and as principal financial
and chief accounting officer
18
<PAGE> 19
Exhibit Index
Exhibit Description
3.1(1) Restated and Amended Articles of Incorporation.
3.2(1) Bylaws, as amended.
4.1(1) Form of Common Stock certificate
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1 (No. 33-42107), as amended.
(b) Reports on Form 8K. No reports on Form 8-K were filed by the Company
during the quarter ended June 30, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FILED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH AUDITED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> APR-01-1997 APR-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 5,970 98
<SECURITIES> 5,463 7,574
<RECEIVABLES> 1,902 664
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 13,433 8,656
<PP&E> 6,768 5,666
<DEPRECIATION> 4,923 3,957
<TOTAL-ASSETS> 15,314 10,401
<CURRENT-LIABILITIES> 2,431 1,473
<BONDS> 1,340 1,176
0 0
0 0
<COMMON> 58,242 48,140
<OTHER-SE> (46,081) (39,666)
<TOTAL-LIABILITY-AND-EQUITY> 12,160 8,474
<SALES> 0 0
<TOTAL-REVENUES> 1,471 759
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<TOTAL-COSTS> 3,531 2,501
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<INTEREST-EXPENSE> 61 44
<INCOME-PRETAX> (2,121) (1,786)
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<INCOME-CONTINUING> (2,121) (1,786)
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