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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 March 31, 1998 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, 94063
REDWOOD CITY, CALIFORNIA (Zip Code)
(Address of principal executive offices)
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 March 31, 1998, Registrant had outstanding 18,851,000 shares of Common Stock.
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ANERGEN, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
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ITEM 1. Financial Statements
Condensed balance sheets - March 31, 1998
and December 31, 1997 ......................................... 3
Condensed statements of operations - three months
ended March 31, 1998 and 1997 ................................. 4
Condensed statements of cash flows - three months
ended March 31, 1998 and 1997 ................................. 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>
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PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ANERGEN, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
-------- --------
(UNAUDITED)
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Current assets:
Cash and cash equivalents ................................... $ 1,119 $ 1,412
Short-term investments ...................................... 5,631 6,991
Contract receivables ........................................ 60 836
Prepaid expenses ............................................ 57 78
-------- --------
Total current assets ............................. 6,867 9.317
Property and equipment, net ..................................... 1,506 1,703
Other assets .................................................... 36 36
-------- --------
$ 8,409 $ 11,056
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ................... $ 761 $ 1,281
Deferred revenue ............................................ 625 502
Current portion of capital lease obligations and debt ....... 550 616
-------- --------
Total current liabilities ........................ 1,936 2,399
Long-term portion of capital lease obligations and debt ......... 761 870
Commitments
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized;
none issued and outstanding ............................ -- --
Common stock, no par value; 40,000,000 shares authorized;
18,851,000 shares issued and outstanding (18,846,264 at
December 31, 1997) ..................................... 57,670 57,670
Additional paid-in-capital .................................. 659 659
Accumulated other comprehensive income ...................... (3) (6)
Accumulated deficit ......................................... (52,614) (50,536)
-------- --------
Total shareholders' equity ....................... 5,712 7,787
-------- --------
$ 8,409 $ 11,056
======== ========
Note: The actual balance sheet at March 31, 1998 is derived from unaudited
financial statements. The December 31, 1997 information is derived from
audited financial statements.
See accompanying notes.
</TABLE>
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ANERGEN, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
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Revenues:
Contract revenues ...................... $ 1,167 $ 1,808
Interest income ........................ 115 182
-------- --------
1,282 1,990
-------- --------
Expenses:
Research and development ............... 2,482 2,887
General and administrative ............. 837 884
Interest expense ....................... 41 43
-------- --------
3,360 3,814
-------- --------
Net loss ................................... $ (2,078) $ (1,824)
======== ========
Basic and diluted net loss per share ....... $ (0.11) $ (0.10)
======== ========
Shares used in calculating basic and diluted
per share data ........................... 18,851 18,781
======== ========
</TABLE>
See accompanying notes.
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<TABLE>
<CAPTION>
ANERGEN, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows used in operating activities:
Net loss ........................................... $ (2,078) $ (1,824)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................... 227 199
Changes in operating assets and liabilities:
Contract receivables ............................. 776 (995)
Prepaid expenses ................................. 21 23
Accounts payable and accrued liabilities ......... (520) 674
Deferred revenue ................................. 123 --
-------- --------
Net cash used in operating activities ................ (1,451) (1,923)
Cash flows provided by investing activities:
Purchase of investments available-for-sale ......... (1,458) (9,887)
Sale of investments available-for-sale ............. 2,821 11,259
Purchase of property and equipment ................. (30) (333)
-------- --------
Net cash provided by investing activities ............ 1,333 1,039
Cash flows provided by (used in) financing activities:
Proceeds from facility and equipment debt financing -- 224
Repayments of capital lease obligations and debt ... (175) (230)
Issuance of common stock, net ...................... -- 30
-------- --------
Net cash provided by (used in) financing activities .. (175) 24
-------- --------
Net decrease in cash and equivalents ................. (293) (860)
Cash and equivalents at beginning of period ......... 1,412 3,963
-------- --------
Cash and equivalents at end of period ............... 1,119 3,103
Short-term investments at end of period .............. 5,631 11,050
-------- --------
Cash and equivalents and short-term investments
at end of period ................................. $ 6,750 $ 14,153
======== ========
</TABLE>
See accompanying notes.
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ANERGEN, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
(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. The Company devotes its
efforts to research and development on its own behalf and also on behalf
of its corporate partners.
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, 1997. 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 No. 128, Earnings per Share, which the Company adopted in the
period ended December 31, 1997. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock
options and other common stock equivalents is excluded. The impact of
Statement 128 results in no change to the Company's net loss per share,
as stock options and other common stock equivalents have been excluded
from the current computation as they are antidilutive.
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of SFAS 130 had no impact on the
Company's net loss or shareholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in shareholders' equity, to
be included in other comprehensive income (loss).
For the three months ended March 31, 1998 and 1997, total comprehensive
loss amounted to $2,081,000 and $1,839,000, respectively.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current years presentation.
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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 including but not limited to the adequacy of capital
resources, the nature of the Company's capital requirements, the availability
and timing of financing, the effect of year 2000 problems, if any. 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, 1997.
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 March
31, 1998 were approximately $6.8 million. Accounts payable and accrued
liabilities decreased to $761,000 at March 31, 1998 from $1,281,000 at
December 31, 1997. Long-term debt decreased from $870,000 at December
31, 1997 to $760,000 at March 31, 1998 due to repayment of the loans.
The Company had shareholders' equity at March 31, 1998 of approximately
$5.7 million which decreased from $10.6 million at December 31, 1997 due
to the net loss from operations.
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 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"), AnergiX(TM) for Multiple Sclerosis
("MS"), AnergiX for the treatment of RA, and continued research and
development of DiavaX for Type I Diabetes, as well as key mechanism
studies. 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 these and other autoimmune
diseases. These foregoing forward-looking statements regarding the
Company's requirements 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 in
1998 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
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itself. The Company's liquidity will be reduced as amounts are expended
for continuing research and development.
RESULTS OF OPERATIONS
The Company's net loss increased by 14% to $2,078,000 in the fiscal
quarter ended March 31, 1998 compared to a $1,824,000 loss in the
corresponding period in the previous year. The increase was due to
revenues that decreased 36% to $1,282,000 in the fiscal quarter ended
March 31, 1998 compared to $1,990,000 in the corresponding period in the
previous year partially offset by a decrease in expenses of 12% to
$3,360,000 in the fiscal quarter ended March 31, 1998 compared to
$3,814,000 in the corresponding period in the previous year. The
decrease in revenues was primarily due to revenues recorded in the first
quarter related to the Company's previous collaborative agreement with
Novo Nordisk, which reflects the Company nearing completion of the Phase
I clinical trial of AnergiX for the treatment of multiple sclerosis. On
February 26, 1998, Novo Nordisk paid the Company $1,000,000, the
estimated costs to complete the Phase I study. As a result of the
termination of the agreement with Novo Nordisk, if the Company elects to
continue with Phase II clinical trials of AnergiX, the Company would no
longer receive reimbursement of expenses from Novo Nordisk. Research and
development expenses decreased 14% to $2,482,000 for the quarter ended
March 31, 1998 from $2,887,000 in the corresponding period in the
previous year. This is primarily due to conclusion of the AnervaX Phase
IIa study in rheumatoid arthritis. The Company expects total operating
expenses to increase as it increases research and development efforts.
General and administrative expenses decreased 5% to $837,000 for the
quarter ended March 31, 1998 compared to $884,000 in the corresponding
period in the previous year.
Interest income decreased to $115,000 for the quarter ended March 31,
1998 as compared to $182,000 in the corresponding period in the previous
year due to lower average cash balances in 1998. Interest income is
expected to decline gradually over future periods as invested capital is
used for operating activities. Interest expense remained almost flat at
$41,000 for the quarter ended March 31, 1998 as compared to $43,000 in
the corresponding period in the previous year due to lower debt
balances.
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
IMPACT OF YEAR 2000
The Company is in the process of performing its assessment of the impact
of year 2000 on its operations. Management is in the process of
formalizing its assessment procedures and developing a plan to address
identified issues. The Company has evaluated its financial and
accounting systems and concluded that they are not materially affected
by the year 2000. It is unknown the extent, if any, of the impact of the
year 2000 on other systems and equipment. There can be no assurance that
all third parties will address the year 2000 issue in a timely fashion
if at all. Any year 2000 compliance problems of either the Company, its
suppliers, its clinical research organizations, or its collaborative
partners could have a material adverse effect on the Company's business,
operating results and financial conditions.
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
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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.
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 March 31, 1998 and
1997 were approximately $2.1 million and $1.8 million, respectively, and
the Company had an accumulated deficit of approximately $52.6 million as
of March 31, 1998. 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 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, AnergiX for MS, AnergiX for RA and continued research and
development and preparation for clinical testing of DiavaX for the
treatment of Type I diabetes. The balance of such resources will be used
to fund continued limited research on these and 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. 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
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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.
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
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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 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. 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. In February, the Company announced that it and Novo Nordisk had
agreed to terminate the collaboration in AnergiX for MS, MG and IDDM
effective February 9, 1998 with all rights returning to the Company.
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 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
11
<PAGE> 12
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 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
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.
12
<PAGE> 13
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 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
13
<PAGE> 14
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.
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.
14
<PAGE> 15
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.
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 intends to seek such insurance
related 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
15
<PAGE> 16
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 48% 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
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
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
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
</TABLE>
(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 March 31, 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: May 13, 1998 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
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,119
<SECURITIES> 5,631
<RECEIVABLES> 60
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,867
<PP&E> 7,120
<DEPRECIATION> (5,614)
<TOTAL-ASSETS> 8,409
<CURRENT-LIABILITIES> 1,936
<BONDS> 761
0
0
<COMMON> 57,670
<OTHER-SE> (51,958)
<TOTAL-LIABILITY-AND-EQUITY> 8,409
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