<PAGE> 1
UNITED STATES
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 September 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: (650) 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 September 30, 1997, Registrant had outstanding 18,819,773 shares of Common
Stock.
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ANERGEN, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
ITEM 1. Financial Statements
Condensed balance sheets - September 30, 1997
and December 31, 1996 ......................................... 3
Condensed statements of operations - three and nine months
ended September 30, 1997 and 1996 ............................. 4
Condensed statements of cash flows - nine months
ended September 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
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................ $ 5,309 $ 3,963
Short-term investments ............................... 4,219 12,437
Contract receivables - including related party ....... 1,209 320
Prepaid expenses...................................... 90 208
--------- ---------
Total current assets ...................... 10,827 16,928
Property and equipment, net............................... 1,847 1,459
Other assets.............................................. 36 36
--------- ---------
$ 12,710 $ 18,423
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............. $ 1,308 $ 1,326
Current portion of capital lease obligations and debt. 471 728
--------- ---------
Total current liabilities.................. 1,779 2,054
Long-term portion of capital lease obligations and debt... 830 366
Commitments
Shareholders' equity:
Preferred stock, no par value; none issued and
outstanding ........................................... - -
Common stock, no par value; 40,000,000 shares
authorized; 18,819,773 issued and outstanding
(18,780,697 at December 31, 1996) ............... 57,586 57,484
Additional paid-in-capital............................ 659 659
Unrealized gain (loss) on investments................. 3 (34)
Accumulated deficit................................... (48,147) (42,106)
--------- ---------
Total shareholders' equity................. 10,101 16,003
--------- ---------
$ 12,710 $ 18,423
========= =========
</TABLE>
Note: The balance sheet at September 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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ANERGEN, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------
1997 1996 1997 1996
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Contract revenues, including related
parties $1,302 $864 $4,464 $2,286
License fee -- 2,000 -- 2,000
Interest income 161 167 460 426
-------- ------ ------- -------
1,463 3,031 4,924 4,712
Expenses:
Research and development 2,902 2,389 8,611 6,229
General and administrative 587 716 2,180 1,775
Interest expense 70 38 174 137
-------- ------ ------- -------
3,559 3,143 10,965 8,141
-------- ------ ------- -------
Net loss $ (2,096) $ (112) $(6,041) $(3,429)
======== ====== ====== =======
Net loss per share $ (0.11) $(0.01) $(0.32) $ (0.22)
======== ====== ====== =======
Shares used in calculating per share data 18,820 17,077 18,807 15,714
======== ====== ====== =======
</TABLE>
See accompanying notes.
4
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ANERGEN, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
-------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss $(6,041) $(3,429)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 633 824
Changes in operating assets and liabilities:
Contract receivables - related party (889) (178)
Prepaid expenses 118 (43)
Accounts payable and accrued liabilities (18) 68
-------- --------
Net cash used in operating activities (6,197) (2,758)
Cash flows provided by (used in) investing activities:
Purchase of investments available-for-sale (20,946) (21,985)
Sale of investments available-for-sale 29,201 15,565
Purchase of property and equipment (1,021) (451)
-------- --------
Net cash provided by (used in) investing
activities 7,234 (6,871)
-------- --------
Cash flows provided by (used in) financing activities:
Proceeds from facility and equipment debt
financing 659 --
Repayments of capital lease obligations and debt (452) (704)
Issuance of common stock, net 102 10,003
-------- --------
Net cash provided by (used in) financing activities 309 9,299
Net increase (decrease) in cash 1,346 (330)
Cash and cash equivalents at beginning of period 3,963 468
-------- --------
Cash and cash equivalents at end of period 5,309 138
Short-term investments at end of period 4,219 17,387
-------- --------
Cash, cash equivalents and short-term
investments at end of period $9,528 $17,525
======== ========
</TABLE>
See accompanying notes.
5
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ANERGEN, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 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
underwritersi exercise of the over-allotment option in September 1996.
The Company's cash, cash equivalents and short-term investments at
September 30, 1997 were approximately $9.5 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 decreased
to $1,308,000 at September 30, 1997 from $1,326,000 at December 31,
1996. Long-term debt increased from $366,000 at December 31, 1996 to
$830,000 at September 30, 1997 due to the debt financing of equipment
purchases. The Company had shareholders' equity at June 30, 1997 of
approximately $10.1 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 ("MG"). The balance of such resources will be used to
fund research on other autoimmune diseases ("IDDM") 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 1,771% to $2,096,000 in the fiscal
quarter ended September 30, 1997 compared to a $112,000 loss in the
corresponding period in the previous year. The increase was due to the
lack of license fee revenue recognized in 1997 compared to a $2.0
million license fee received in the previous year. Expenses increased
13% to $3,559,000 in the fiscal quarter ended September 30, 1997
compared to $3,143,000 in the corresponding period in the previous year,
along with a net increase in contract revenues of 51% to $1,302,000 in
the fiscal quarter ended September 30, 1997 compared to $864,000 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 21% to $2,902,000 for the quarter ended
September 30, 1997 from $2,389,000 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 over time to increase as it increases research and development
efforts.
General and administrative expenses decreased 18% to $587,000 for the
quarter ended September 30, 1997 compared to $716,000 in the
corresponding period in the previous year primarily due to fewer costs
associated with management transition and recruitment efforts.
The increase in revenues was primarily due to revenues recorded in the
current fiscal quarter related to the Company's collaborative agreement
with N. V. Organon. Interest income decreased slightly to $161,000 for
the quarter ended September 30, 1997 as compared to $167,000 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 $70,000 for the
quarter ended September 30, 1997 as compared to $38,000 in the
corresponding period in the previous year due to higher debt balances as
the Company financed capital purchases in 1997.
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 is not
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 September 30, 1997
and 1996 were approximately $2.1 million and $0.1 million, respectively,
and the Company had an accumulated deficit of approximately $48.1
million as of September 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 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 few
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
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.
9
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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.
10
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Sales of pharmaceutical products outside the United States are subject
to foreign regulatory requirements that 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's current collaborative agreement with Novo Nordisk (Novo),
which is focused on AnergiX MS, expires on August 31, 1998. The Company
expects that Novo will fully fund the program until the conclusion of
the current agreement. Novo has publicly disclosed a de-emphasis on
research and development on drugs for central nervous system diseases.
Novo and the Company have begun discussions on the future of the
collaboration between the two companies. In the event of a decision by
Novo to end the relationship, the Company's current intention would be
to continue development of the AnergiX MS program with a new partner.
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
11
<PAGE> 12
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 or severely limit certain development
programs. There also can be no assurance that disputes will 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 OperationsoLiquidity 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
12
<PAGE> 13
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 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
13
<PAGE> 14
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.
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
14
<PAGE> 15
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.
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
15
<PAGE> 16
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
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 and Use of Proceeds
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 September 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: November 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
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,309
<SECURITIES> 4,219
<RECEIVABLES> 1,209
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,827
<PP&E> 6,994
<DEPRECIATION> (5,147)
<TOTAL-ASSETS> 12,710
<CURRENT-LIABILITIES> 1,779
<BONDS> 830
0
0
<COMMON> 57,586
<OTHER-SE> (47,485)
<TOTAL-LIABILITY-AND-EQUITY> 12,710
<SALES> 0
<TOTAL-REVENUES> 1,463
<CGS> 0
<TOTAL-COSTS> 3,489
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,096
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> (2,096)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,096)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,096)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0
</TABLE>
