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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1997
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________________ to _____________________
Commission File No. 000-28324
BioTransplant Incorporated
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(Exact Name of registrant as Specified in its Charter)
Delaware 04-3119555
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Charlestown Navy Yard, Bldg. 75, Third Avenue, Charlestown, MA 02129
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(Address of Principal Executive Offices)(Zip Code)
Registrant's telephone number, including area code: (617) 241-5200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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Title of each class
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [X]
The aggregate market value of voting Common Stock held by non-affiliates of
the registrant was $24,145,980, based on the last reported sale price of the
Common Stock on the Nasdaq consolidated transaction reporting system on
March 19, 1998.
Number of shares outstanding of the registrant's class of Common Stock as
of March 19, 1998: 8,578,743.
Documents incorporated by reference:
Annual Report to Stockholders for fiscal year ended December 31, 1997 - Part II
Proxy Statement for the 1998 Annual Meeting of Stockholders - Part III
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PART I
ITEM 1. BUSINESS
THE COMPANY
BioTransplant Incorporated, a Delaware corporation organized in 1990
("BioTransplant" or the "Company") is developing proprietary pharmaceuticals
and organ transplantation systems which represent a comprehensive approach to
inducing functional tolerance in humans. This tolerance,
ImmunoCognance-TM-, would allow a transplant recipient to accept a donor
organ as self, while maintaining the remainder of the recipient's immune
defenses. The Company's product candidates are intended to reduce or
eliminate the need for lifelong immunosuppressive therapy, minimize
infections and complications associated with organ transplantation, reduce
the cost of treating end-stage organ disease, and increase the supply of
transplantable organs.
Organ transplantation is an established therapy for end-stage organ
disease. Over 30,000 kidney, liver, heart and lung transplants were performed
in the United States and Western Europe in 1996. There is a critical
shortage of organs worldwide, and large, growing waiting lists have been
established for potential organ transplant recipients. The Company estimates
that over $5.0 billion is spent annually on organ transplantation in the
United States alone. However, the success of these procedures is frequently
limited by the rejection of the transplanted organ by the recipient's immune
system. To prevent rejection of the transplanted organ, recipients must
maintain a lifelong regimen of immunosuppressive therapy. Over half of the
costs of organ transplantation are attributable to care subsequent to the
transplant, including lifelong immunosuppressive therapy, hospitalization due
to complications resulting from the chronic use of immunosuppressive drugs,
infections and transplant rejections.
BioTransplant and MedImmune Inc. ("MedImmune") entered into an agreement
in October 1995 relating to products to treat and prevent organ rejection
derived from BioTransplant's BTI-322 and MedImmune's MEDI-500 rodent
antibodies. BTI-322 and its humanized derivative, MEDI-507, are novel and
proprietary monoclonal antibodies being developed as stand-alone
anti-rejection products and as an important component in the Company's
AlloMune and XenoMune Systems for organ transplantation. The Company has
retained exclusive rights to the use of BTI-322/MEDI-507 in its AlloMune and
XenoMune Systems.
A monoclonal antibody is a single antibody which reacts with a specific
molecule, called an antigen, which triggers a response from the immune system.
By selectively inhibiting T cells in an antigen specific manner, in vitro
studies suggest that BTI-322/MEDI-507 leaves the remainder of the immune system
competent to respond to pathogens (foreign organisms that cause disease)
subsequent to BTI-322/MEDI-507 administration. MEDI-507 is being evaluated
clinically in organ rejection,
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Graft-versus-Host Disease ("GvHD") and pilot autoimmune disease trials.
MEDI-500 is a monoclonal antibody that suppresses most T cells. MEDI-500 is
currently in an NIH-sponsored Phase III trial for ex vivo depletion of T cells
in bone marrow which will be transplanted into cancer patients
The AlloMune System is designed to reduce or eliminate the need for
lifelong immunosuppressive therapy in human-to-human organ transplantation by
inducing functional tolerance through the creation of mixed bone marrow
chimerism between the donor and the recipient. Mixed bone marrow chimerism
re-educates the recipient's immune system to recognize the donor organ as self,
while maintaining the remainder of the recipient's immune defenses. The Company
is currently conducting preclinical studies in which kidneys of intentionally
mismatched donor monkeys are being transplanted into monkey recipients which
have undergone conditioning and bone marrow infusion to produce mixed chimeras.
To date, 9 out of 11 recipient monkeys have achieved mixed bone marrow chimerism
and functional tolerance with normal kidney function for periods ranging from 6
to 48 months without the need for chronic immunosuppressive therapy. The
Company and its collaborators at the Massachusetts General Hospital ("MGH") have
begun a pilot trial in patients with a prototype of the AlloMune System for
re-educating the patient's immune system. The pilot trial is being conducted
under a protocol approved by MGH's Institutional Review Board. The Company is
seeking to optimize the AlloMune System through additional preclinical testing
in primates in addition to filing an investigational new drug application
("IND") with the United States Food and Drug Administration ("FDA") for
human clinical trials.
With the XenoMune System, BioTransplant hopes to build upon the Company's
proprietary knowledge and technology developed with the AlloMune System. The
XenoMune System is designed to expand the pool of donor organs by using organs
derived from proprietary miniswine for transplantation into humans. The Company
is working to achieve mixed bone marrow chimerism between cross-species donors
and recipients. The Company has established miniswine-to-primate mixed bone
marrow chimerism for more than 300 days and has had preliminary success with
miniswine-to-primate kidney transplant survival for up to 15 days, without
evidence of hyperacute rejection (rejection that begins immediately upon
transplantation and is the consequence of the recipient having preformed
antibodies against donor antigens). In addition, the Company is actively
pursuing the genetic manipulation of the recipient's bone marrow with an MHC
(major histocompatibility complex) gene from the miniswine donor ("gene
transduction") as an alternate means for inducing long-term specific tolerance.
The Company has entered into a strategic alliance with Novartis Pharma AG
("Novartis") to develop xenotransplantation (transplantation of organs between
different species) products utilizing gene transduction and mixed bone marrow
chimerism. Pursuant to the Company's
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agreement with Novartis for products utilizing gene transduction, BioTransplant
is entitled to receive research funding and license fees of $30.0 million, all
of which had been received as of December 31, 1997. Pursuant to the Company's
agreement with Novartis for products utilizing mixed bone marrow chimerism,
which began in October 1997, BioTransplant may receive research funding, license
fees and milestone payments of up to $36.0 million, of which $5.5 million had
been received as of December 31, 1997. Additionally, the Company has entered
into an exclusive supply agreement with Charles River Laboratories ("CRL") for
the supply of miniswine cells and organs.
OVERVIEW OF ORGAN TRANSPLANTATION
Organ Transplant Market
During the last two decades organ transplantation has become an established
therapy for end-stage organ disease. This is due in part to the significant
progress that has been made since the introduction of cyclosporine by Novartis
in 1983. In 1996, over 30,000 organ transplants were performed in patients
suffering from end-stage kidney, liver, heart and lung disease in the United
States and Western Europe. The Company estimates that over $5.0 billion is
spent annually in the United States on organ transplantation. However, the
success of these procedures is frequently limited by the rejection of the
transplanted organ by the recipient's immune system. To prevent rejection of
the transplanted organ, recipients must maintain a lifelong regimen of
immunosuppressive therapy. Over half of the costs of organ transplantation, on
a patient by patient basis, are attributable to care subsequent to the
transplant, including lifelong immunosuppressive therapy, hospitalizations due
to complications resulting from the chronic use of immunosuppressive drugs,
infections and transplant rejections. Other treatments for end-stage organ
disease, such as kidney dialysis, are even more expensive and many non-kidney
transplant patients die while waiting for organs. Accordingly, improvements in
transplantation technology that reduce the wait for suitable organs and minimize
infections and other complications, including retransplantation and the
toxicities of chronic immunosuppressive drugs, can be expected to lower the
overall cost of treating end-stage organ disease.
There is a critical shortage of organs worldwide and waiting lists have
been established for potential organ transplant recipients. Over 50,000
patients in the United States suffering from end-stage organ disease were on
waiting lists for a lifesaving organ transplant in 1997, based on data provided
by the United Network for Organ Sharing ("UNOS"). This number has more than
tripled since 1988, and the number of deaths of people on the waiting list has
increased proportionately. If an adequate supply of transplant organs were
available and the complications of transplantation minimized, the Company
estimates that an additional 100,000 critically ill patients annually could
benefit from organ transplantation as a replacement for disease-damaged organs
and as an alternative to artificial devices.
Efforts to ease this organ shortage through public campaigns and
advertisements to enlarge the pool of potential organ donors have been only
moderately successful.
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Increased automotive safety has adversely affected the donation rate. In
addition, the quality of organs available for transplant has been declining,
which the Company believes may impact organ graft half-lives and increase the
number of organs needed for retransplantations. The potential for
allotransplantation (transplantation of organs between different individuals of
the same species) to spread infectious disease has also limited the potential
donor pool. While the number of cadaveric donors has increased in the last ten
years, the demand for organs has increased more rapidly. Advances have been
made in obtaining multiple organs from a single donor and in organ preservation
techniques, but a severe shortage of organs still exists and the backlog of
patients awaiting transplantation continues to grow. The shortage of donor
organs restricts the number of transplant procedures performed and forces many
patients to undergo costly and less effective alternatives to transplantation
for as long as possible. This delay renders transplant candidates much sicker
than they would have been if the organ transplant had been possible sooner.
Transplantation Biology
The immune system is one of the major biological defense mechanisms
protecting the individual against disease and invasion by pathogens. It can
distinguish self from specific foreign substances (known as antigens) and
produce a specific biological response to clear and destroy the source of the
foreign ("non-self") antigen.
When an individual receives an organ transplant, the recipient's immune
system generally recognizes the transplanted tissue as foreign and initiates an
immune response against the organ, resulting in organ rejection. The immune
response results from the recognition by the immune system of foreign antigens
(histocompatibility antigens) on the surface of the cells of the donor which are
different from those of the recipient. If, as in the case of identical twins,
the histocompatibility antigens of the donor and the recipient are identical, no
rejection response occurs. In all other cases, antigenic differences can
provide sufficient stimulus to cause an immune response and, consequently,
rejection of the organ.
The biological specificity of the immune response is controlled by a subset
of white blood cells known as T cells. Throughout an individual's life, the
immune system reacts to foreign antigens and develops T cells capable of
recognizing and responding to specific foreign antigens, including specific T
cells capable of recognizing and reacting to specific foreign histocompatibility
antigens. T cells learn to distinguish self from non-self when they mature in
the thymus, and this maturation step induces tolerance to the individual's own
antigens. When mature antigen specific T cells recognize histocompatibility
antigens in transplanted tissue, they become activated and initiate a cascade of
events, including the proliferation of T cells and B cells (another subset of
white blood cells). Certain activated T cells can kill cells bearing foreign
antigens; and B cells are capable of producing antigen specific proteins called
antibodies. Antibodies
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can bind to foreign cells or proteins and lead to their destruction or clearance
from the body.
The two earliest types of immune response to transplanted foreign tissue
are hyperacute and acute rejection. Hyperacute rejection begins immediately
upon transplantation and results from the reactivity of preexisting antibodies
with antigens presented by the donor tissue. In hyperacute rejection, the donor
organ is destroyed within minutes to hours. No treatment is currently available
for hyperacute rejection. Acute rejection occurs after transplantation of an
organ when T cells recognize the histocompatibility antigens of the donor as
foreign, become activated and, over a period of days or weeks, initiate a
rejection response which may lead to the ultimate loss of the organ. The
current approach to preventing acute organ rejection in transplant patients is
to administer a combination of immunosuppressive medications which
non-specifically suppress the ability of T cells to recognize and respond to
antigens. These medications, however, not only inhibit T cells from recognizing
histocompatibility antigens of donor organs, but also block the patient's T
cells from recognizing other foreign antigens. As a result, the transplant
recipient is rendered vulnerable to viral, bacterial and fungal infections. In
addition, long-term use of these immunosuppressive drugs can lead to
cardiovascular disease, kidney and liver damage, as well as an increased
incidence of certain types of cancer such as skin and lip cancer and lymphomas.
Most importantly, despite the administration of various immunosuppressive
medications, instances of organ rejection still may occur and may necessitate
increased doses of immunosuppressive drugs or inclusion of other anti-rejection
therapies, thus compounding unwanted side effects and complications. If the
rejection cannot be controlled, the rejected organ must be removed and another
transplant will be required, or in the case of heart, liver or lung
transplantation, the patient may die.
Current Transplantation Procedures
A patient with end-stage failure of a major organ (kidney, liver, heart or
lung) or a patient in need of a bone marrow transplant must undergo a long
process of treatment prior to and after transplantation. For solid organ
transplantation, an attending physician must decide that the patient's organ is
irreversibly damaged and unable to sustain life and that the patient is able to
undergo the surgical and medical procedures associated with transplantation and
post-transplantation therapy. Then, the patient must undergo tests to determine
his or her histocompatibility antigens, a process referred to as tissue typing.
Once the patient's tissue type is known, a suitable donor organ or bone marrow
must be located. During the waiting period, samples are taken from the
potential recipient and tested for the presence of antibodies to a panel of
histocompatibility antigens representative of the population of prospective
donors. This procedure is known as the Panel Reactivity Antibody test and is
used to determine the potential for acute rejection of a transplant by an
individual recipient.
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Once a potential donor is found, a cross-match test is performed in order
to determine whether a potential recipient is likely to experience hyperacute
rejection of the organ. The cross-match is designed to determine whether the
patient has circulating antibodies to the foreign tissue of the potential donor,
or related antigens developed in response to transfusion, pregnancy or prior
transplantation which may react with the donor cells and thus the donor organ.
The search for a reasonable tissue match based on histocompatibility antigens
can prolong the time spent on the organ transplant waiting list for a donor
organ. In the event that an organ is found with characteristics that suggest
the likelihood of a good outcome, the organ transplant is performed.
Neither tissue typing nor cross-match technology result in a perfectly
matched organ. Therefore, foreign antigens will always be found on a donor
organ, except in the case of transplants from an identical twin. The
differences in donor and recipient antigens will cause the recipient's immune
system to maintain a continuous response against the donor organ until rejection
occurs, unless the immune response is suppressed. Following the transplantation
procedure, the challenge in patient management is to prevent acute rejection of
the organ by inhibiting T cell activation. The success of the transplant is
dependent on the immunosuppressive regimen which is initiated on the day of
surgery and is continued daily for the rest of the patient's life. Lifelong
immunosuppressive therapy usually consists of the administration of a
combination of immunosuppressants such as Sandimmune-Registered Trademark- or
Neoral-Registered Trademark- (also known as cyclosporin A), prednisone (a
steroid), Imuran-Registered Trademark- (an anti-metabolite, also known as
azathioprine) or CellCept-Registered Trademark- (also known as mycophenolate
mofetil). Chronic immunosuppressant medications have a narrow therapeutic
window; that is, the administration of dosages which are too low results in
organ rejection, while the administration of dosages which are too high can
result in unacceptable toxicity, and increased risks of cancer and infection.
Because these medications also block the patient's T cells from recognizing
foreign antigens, they render the patient susceptible to infections and tumors.
In addition, patient noncompliance with the prescribed immunosuppressive therapy
is a significant clinical problem due to the fact that if these drugs are
stopped, rejection, sometimes irreversible, will occur.
All patients receive chronic systemic immunosuppressants at the time of
transplantation in order to reduce the probability of subsequent rejection of
the organ. Some patients also receive an anti-T cell antibody such as OKT3 or
ATGAM in an attempt to further decrease the probability of rejection (called
"induction therapy"). The efficacy of OKT3 or ATGAM for use in induction
therapy has not been established, and neither of these drugs, has been approved
at the present time by the FDA for use in induction therapy. Zenapax-Registered
Trademark-, a humanized anti-T cell antibody, has recently been approved for
this indication.
Approximately 20-40% of transplant patients will experience an acute
rejection episode in the first year after transplantation. Additional
intermittent episodes of acute rejection also occur, often requiring
rehospitalization for a course of more intensive
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immunosuppression and may result in graft loss. Acute rejection episodes are
treated with a short course of high dose steroids, anti-thymocyte globulin (such
as ATGAM), or OKT3. In many cases these treatments are successful in reversing
the acute rejection response. If these treatments are successful in reversing
the acute rejection response, the recipient resumes chronic immunosuppressive
drug maintenance therapy. However, the treatment of these rejection episodes is
associated with increased complications due to the additional immunosuppression.
Patients treated with antibody-based therapies (ATGAM or OKT3) sometimes respond
by producing antibodies specific to the therapeutic antibody. This response can
limit the ability of the physician to use these agents more than once in a given
patient. All of the immunosuppressive drugs used to suppress the rejection
response are toxic to the recipient and carry a variety of potentially serious
side effects, including complications such as fever, shortness of breath,
headaches, diarrhea, seizures or life-threatening cardiac reactions as well as
increased infection and a higher incidence of cancer. Long-term use can cause
liver and kidney damage and bone marrow depletion. Even with chronic
immunosuppression, the donor organ can be slowly rejected over a period of
years, a process which is called chronic rejection.
An additional problem occurs in bone marrow transplantation. T cells from
the donor are present in the marrow to be transplanted into the recipient.
These T cells can respond to the recipient's cells and cause graft versus host
disease (GvHD), which is a rejection of the recipient by the T cells in the
donor bone marrow. The therapies for GvHD are similar to solid organ rejection.
However, a significant number of GvHD patients that do not respond to steroids
will also fail to respond to any other currently available antilymphocytic
agents and will die as a result of the GvHD.
PRODUCTS UNDER DEVELOPMENT
In order to address the problems of organ transplantation described
above, BioTransplant is developing a portfolio of proprietary pharmaceuticals
and organ transplant systems with the goal of inducing functional tolerance
in humans. The Company is developing methods of selectively inhibiting T
cells responsible for organ rejection and modifying a patient's immune system
to accept foreign organs as if they were self by combining components of the
donor's immune system with the recipient's immune system.
In October 1995, the Company and MedImmune formed a collaboration to
develop and commercialize products to treat and prevent organ transplant
rejection. The collaboration is based upon the development of products derived
from BTI-322 and MEDI-500. Under the terms of the collaboration agreement
between MedImmune and the Company, MedImmune is required to pay royalties to the
Company on sales of BTI-322, MEDI-507 and MEDI-500. MEDI-500 is a murine
monoclonal antibody which has been in-licensed to MedImmune by the University of
Kentucky. MEDI-500 suppresses most T cells by binding to a protein (the
alpha-beta receptor) on the cell surface.
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MEDI-507
MEDI-507, a humanized antibody derived from BTI-322, is a novel and
proprietary monoclonal antibody therapeutic candidate being developed as a
stand-alone anti-rejection product and as an important component in the
Company's AlloMune and XenoMune Systems. By selectively inhibiting T cells in
an antigen specific manner in vitro, the Company believes that BTI-322/MEDI-507
leaves the remainder of the immune system competent to respond to pathogens
subsequent to BTI-322/MEDI-507 administration. The Company believes that
MEDI-507 offers unique advantages when administered at the time of
transplantation, as an agent for the prevention of acute organ rejection and in
inhibiting GvHD following bone marrow transplantation.
MEDI-507 is a monoclonal antibody that binds to CD2, an important
therapeutic target on the surface of T cells. The Company believes that
MEDI-507 interferes with signaling through CD2, thereby preventing T cell
activation. Other therapies used for the treatment of acute rejection only
inhibit T cell activation around the time of the treatment period. However,
based on in vitro experiments, the Company expects that MEDI-507 will have a
lasting effect even after administration and will continue to selectively
suppress T cell responsiveness to the donor antigens. If the mechanism of
action is substantiated by further data, the Company believes that MEDI-507 may
be effective against T cell mediated diseases (such as psoriasis, inflammatory
bowel disease, Crohn's disease and rheumatoid arthritis). BTI-322, the rodent
form of MEDI-507, (originally known as LO-CD2a) was discovered in the
Experimental Immunology Unit of the Catholic University of Louvain, Belgium, by
Drs. Herve Bazin and Dominique Latinne. The Company obtained exclusive rights
to develop and commercialize this antibody in early 1993.
Clinical Development. Early clinical results and research data suggest
BTI-322/MEDI-507 has the potential to be a safe and effective agent for the
prevention and treatment of allograft (intra-species transplants) and xenograft
(inter-species transplants) rejection and GvHD. Prior to the grant of an
exclusive license to BTI-322 to the Company in 1993, four patients had been
treated for either acute kidney rejection or GvHD under a compassionate use
protocol approved by the Catholic University of Louvain hospital ethical
committee.
In 1994, the Company conducted a physician-sponsored safety trial with
BTI-322 for the treatment of acute rejection of renal transplants in two centers
in Belgium under a protocol approved by the hospital ethical committees.
Twenty-four patients were treated. One patient withdrew from the study. A
total of 13 patients completed treatment for their first rejection episode, 12
of whom responded to the treatment. A second group of 10 patients who had
experienced multiple rejections, or had failed to respond to conventional
treatment (including steroids and OKT3), were also treated. Seven of these
patients responded to treatment. The majority of patients received the antibody
without the steroid pre-treatment typically used to reduce side effects
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associated with T cell specific antibodies, and the therapy was well tolerated.
Non-life-threatening side effects of limited duration were observed, mainly
during the first of ten daily doses administered to each patient. These side
effects were less severe than those generally observed in similar patients
treated with steroid pre-treatment and OKT3 or ATGAM. The results of this study
were submitted to the FDA as part of an IND in early 1995. The Company and
MedImmune have conducted a Phase I/II trial of BTI-322 at MGH under this IND for
the treatment of acute renal rejection with steroid coverage for the first dose.
The Company supported a physician-sponsored Phase I/II clinical trial at
the Catholic University of Louvain, for the use of BTI-322 as a component of
induction therapy in renal allograft transplantation. Induction therapy is a
clinical protocol used at the time of transplantation to reduce the probability
of subsequent organ rejection by the recipient. Forty patients were randomized
equally, to receive either conventional therapy or BTI-322 and conventional
therapy. The last patient was enrolled in February 1996. The rate of acute
rejection after the administration of induction therapy with BTI-322 is
significantly lower than that of the control group of twenty patients who
received only conventional therapy. This difference in rejection rates between
the two groups is still significant at an 18-month follow-up. A
physician-sponsored Phase I/II clinical trial of BTI-322 for induction therapy
for liver allograft transplantation has been approved by the Catholic University
of Louvain hospital ethical committee and is currently enrolling patients.
Under a compassionate use protocol, BTI-322 has also been used to treat
steroid-resistant GvHD. Six patients have been treated with BTI-322 and five
patients demonstrated reversal of certain of their symptoms during the course of
treatment with BTI-322. Two patients have shown no relapse of symptoms in the
absence of chronic steroid treatment for six and seven months, respectively,
after the antibody therapy. The other four patients suffered relapse of their
GvHD after completion of BTI-322 administration and subsequently died due to the
consequences of their disease. The Company believes that BTI-322 administered
at the onset of GvHD symptoms has a greater probability of long-term clinical
success. A physician-sponsored Phase I/II trial for the early treatment of
steroid-resistant GvHD using BTI-322 recently commenced in Europe and MedImmune
began a Phase I/II clinical trial in the United States in late 1996.
Although the Company believes the rodent antibody, BTI-322, is acceptable
in the prevention and treatment of allograft organ rejection, it may not be
appropriate for diseases which require multiple courses of the drug, such as T
cell mediated chronic diseases (including psoriasis, inflammatory bowel disease,
Crohn's disease and rheumatoid arthritis). Therefore, the Company has developed
MEDI-507, a humanized form of BTI-322, by incorporating the specificity of
BTI-322 on the backbone of a human antibody molecule. In experiments done to
date by the Company, the humanized form of the antibody has similar functional
effects to those of the rodent antibody. Clinical
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testing of MEDI-507 began in 1997 in alliance with MedImmune. INDs were filed
for prevention of renal allograft rejection and for the treatment of steroid
resistant GvHD and psoriasis. See "-- Patents and Proprietary Rights."
MEDI-500
Clinical Development. MEDI-500 has been evaluated in several
transplantation clinical trials involving approximately 400 individuals. A Phase
II clinical trial comparing MEDI-500 with OKT3, the then only commercially
available monoclonal antibody for treatment of acute rejection, suggested that
MEDI-500 may have a similar efficacy profile to OKT3 but with reduced side
effects. MEDI-500 is currently being evaluated for prevention of GvHD by ex vivo
T cell depletion in a Phase III clinical trial sponsored by the National Heart,
Lung and Blood Institute ("NHLBI").
The AlloMune System
The Company's AlloMune System is designed to allow the transplantation of
mismatched organs from human donors, so as to reduce or eliminate the need for
lifelong systemic immunosuppressive therapy. The proposed AlloMune System
incorporates several components into a proprietary and integrated system to
create mixed bone marrow chimerism leading to functional tolerance.
The AlloMune System is being designed to achieve functional tolerance to
the mismatched organ through the creation of mixed bone marrow chimerism.
Chimeric bone marrow contains the cells of both the donor and the recipient.
The creation of the mixed chimeric state will cause the recipient's newly
differentiated T cells to become specifically tolerant to the donor antigens
and regard them as self. The advantage of the induction of donor functional
tolerance is that the recipient will retain its ability to respond to the
antigens of foreign pathogens without responding to the donor antigens on the
organ transplant. This tolerance will reduce or eliminate the need for
lifelong immunosuppressive therapy. The Company has exclusive rights to
patent applications directed towards producing mixed bone marrow chimerism.
Prior to transplantation of the donor bone marrow, the recipient is
given injections of an anti-T cell antibody in order to block the recipient's
immune response to the new foreign antigens from the donor and to deplete the
recipient's mature T cells. Concurrent with the administration of the anti-T
cell antibody, the recipient receives doses of radiation to make space in the
recipient's bone marrow and allow the transplanted bone marrow to "seed" the
newly created space. A splenectomy is performed at the time of organ
transplantation, and bone marrow from the donor is then injected into the
recipient. The organ is then transplanted and a short course (expected to
last approximately one month) of cyclosporine is administered.
The Company is currently conducting preclinical studies in which kidneys of
intentionally fully mismatched donor monkeys are being transplanted into
recipient
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monkeys which have undergone the bone marrow chimerism procedure. One of the
first recipients has achieved mixed bone marrow chimerism with normal kidney
function for over 1,400 days, without chronic systemic immunosuppressive
therapy. In addition, one recipient has demonstrated tolerance to a skin
graft from the donor monkey, in the absence of immunosuppressive drugs.
However, the recipient monkey has rejected skin grafts transplanted from
another monkey (third party donor), indicating that the monkey is
specifically tolerant to the antigens of the donor and thus has a normal
ability to respond to foreign antigens. The Company has analyzed the ability
of T cells from the chimeric monkeys to respond to cells from the donor and
other monkeys. The Company has demonstrated that the T cells from some
chimeric monkeys do not become activated by donor cells in culture but will
respond to cells from other monkeys (third party donors).
To date, the creation of mixed bone marrow chimerism and normal kidney
function has been replicated in eight out of ten additional monkeys for periods
from 6 to 48 months.
The Company is continuing to evaluate modifications to the conditioning
regimen in rodent and large animal models. Recent evidence from the Company's
rodent models has demonstrated the ability to eliminate or greatly reduce the
level of irradiation needed to establish a state of mixed bone marrow chimerism,
and the Company intends to evaluate this approach in large animal models.
The Company intends to continue to optimize the AlloMune System through
additional preclinical trials in primates in addition to filing an IND with the
FDA for clinical trials. The Company's academic collaborators have initiated an
institutional review board ("IRB") approved clinical trial of a pilot proof of
principle evaluation of the prototype AlloMune System in humans.
The XenoMune System
Xenotransplantation is designed to address the issue of limited human organ
availability. With the XenoMune System, BioTransplant hopes to build upon the
Company's proprietary knowledge and technology developed with the AlloMune
System to achieve transplantation of organs from animals into humans, using
organs derived from miniswine. Many of the components of the proposed AlloMune
System are also part of the proposed XenoMune System. However, there are
additional unique components in the XenoMune System.
The proposed XenoMune System is expected to include miniswine kidneys,
hearts, lungs and other organs for transplantation. Pursuant to a
collaboration agreement with CRL, the Company has obtained exclusive rights
to miniswine which are being specifically developed by CRL for use in
xenotransplantation. These miniswine are an appropriate donor choice for
xenotransplantation because of their size, physiology,
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inbreeding at swine histocompatibility genes, long-term documented medical
history and breeding capacity. However, although the Company uses these
miniswine as a potential donor of xenogeneic organs because the animals offer
advantages over the use of other species, recent scientific publications by
others have demonstrated, under laboratory conditons, that certain porcine
viruses, called porcine endogenous retroviruses ("PERV") have the
potential to infect human cells.
Untreated swine-to-primate organ transplants normally result in hyperacute
organ rejection within hours of the transplant. One of the significant
challenges in xenotransplantation is overcoming hyperacute rejection, which is
mediated by pre-existing antibodies in the recipient which react with the donor
tissue ("natural antibodies"). To avoid the hyperacute rejection of a miniswine
organ, BioTransplant is using a proprietary absorption technique, licensed from
a third party, to absorb natural antibodies from the recipient's blood prior to
the transplant of miniswine organs into monkeys.
To prevent acute rejection of the transplanted miniswine organ, the Company
is working to achieve mixed bone marrow chimerism between cross-species donors
and recipients. As one alternative method of inducing specific tolerance, the
Company is actively pursuing a gene transduction approach.
Research and Preclinical Development. To avoid hyperacute rejection of
miniswine kidneys by baboons and cynomolgus monkeys the Company has used its
absorption technique. Up to 15 day survival of the miniswine kidneys has been
achieved without pathological signs of hyperacute rejection. Based on
preliminary data, the Company believes that this technique will also remove
natural antibodies from human blood.
The Company has achieved mixed bone marrow chimerism and long-term
xenograft tolerance between rat and mouse. The Company has also demonstrated
chimerism and long-term acceptance of miniswine skin grafts on immunocompetent
rodents. In addition, the Company has established mixed bone marrow chimerism
in the miniswine-to-primate model. The Company has developed a proprietary
method to promote the engraftment of swine bone marrow in primates and has
thereby achieved miniswine-to-primate bone marrow chimerism engraftment for 300
days. The use of this technique in a protocol similar to the AlloMune System
has produced long-term xeno-chimerism in three out of three primates and has
resulted in a diminished miniswine-specific T cell response from the chimeric
monkeys. Lack of priming and diversification of the humoral response was also
demonstrated. These results represent progress towards the generation of
functional tolerance to miniswine antigens.
The Company's collaborators at MGH have published the first successful
demonstration in a pig-to-mouse model of tolerance to permanently re-educate the
immune system to accept transplanted tissue from a different species in the
absence of immunosuppressive drugs.
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A gene transduction approach to xenotransplantation is also being
developed. The Company has demonstrated that gene transfer of a single
histocompatibility complex gene from one inbred line of miniswine to another
fully-mismatched inbred line by retroviral gene transfer into the recipient's
own bone marrow cells can induce functional tolerance to a donor kidney without
chronic immunosuppressive therapy. Based on this observation, the Company has
performed miniswine to primate experiments using similar gene transduction
techniques. In these experiments, multilineage expression of the miniswine MHC
gene was demonstrated for eight months in the initial primate recipient. The
primate recipients of gene transduced bone marrow have been demonstrated to have
a diminished immune response to pig antigens. Additionally, recent data using a
mouse model testing the ability to use gene therapy to deplete the antibodies
responsible for hyperacute rejection have shown encouraging results. This
protocol is currently being tested in primates. The Company has entered into a
strategic alliance with Novartis for the development of xenotransplantation
products utilizing gene transduction and mixed bone marrow chimerism and with
CRL for the supply of miniswine. See "Collaborations and Agreements - Novartis"
and "- Charles River Laboratories."
COLLABORATIONS AND AGREEMENTS
As part of its strategy, the Company has established alliances with
pharmaceutical and other biotechnology companies, academic institutions and
scientists and government laboratories. Currently, its principal strategic
alliances are the following:
Dr. David H. Sachs/The Massachusetts General Hospital
In January 1991, the Company entered into a ten-year agreement with MGH
under which BioTransplant funds a portion of the research of Dr. Sachs and other
MGH personnel, including Drs. A. Benedict Cosimi, Megan Sykes, Christian LeGuern
and Jay Fishman in the area of transplantation of organs and tissues and, in
particular, xenograft transplantation involving primates, mice and miniswine.
In exchange for such research funding, MGH has granted the Company exclusive
worldwide rights to technology and inventions developed in the course of the
Company funded research, subject to a royalty to be paid to MGH and subject to
the usual retention rights of the United States Government. BioTransplant also
has a right of first refusal in connection with any additional research
proposals in the field of tissue and organ transplantation to be submitted by
Dr. Sachs and his colleagues (who are funded by BioTransplant) to other
commercial sponsors.
Novartis Pharma
In April 1993, the Company entered into a five-year collaboration agreement
with Novartis, the world's leading supplier of transplantation therapeutics,
which was amended and restated in September 1995 (the "Novartis Gene
Transduction Agreement"),
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to develop and commercialize xenotransplantation products utilizing gene
transduction. Pursuant to the Novartis Gene Transduction Agreement, the Company
has received research funding of $20.0 million and license fees of $10.0 million
in connection with the research by the Company of certain xenotransplantation
products. In October 1997, the Company entered into a collaboration and license
agreement with Novartis to develop and commercialize transplantation products
utilizing the Company's proprietary mixed bone marrow chimerism technology (the
"Novartis Bone Marrow Agreement"). Pursuant to the Novartis Bone Marrow
Agreement, the Company may receive research funding, license fees and milestone
payments of up to $36 million. As of December 31, 1997, research funding of
$3.5 million and license fees of $2.0 million had been received. In addition,
in 1992 Novartis purchased $5.0 million of the Company's Series B Convertible
Preferred Stock ("Series B Stock"), which converted into 532,125 shares of
Common Stock upon consummation of the Company's initial public offering. In
1997, revenues from the Company's collaboration agreements with Novartis
accounted for 82% of the Company's total revenues.
Pursuant to the terms of both Novartis Agreements, Novartis is obliged to
fund the development costs associated with certain xenotransplantation products
developed by the Company subject to reimbursement of a portion thereof by the
Company, if the Company elects to co-promote such products. Under certain
conditions, the Company has the right to co-promote such products solely in
North America and to receive an agreed upon share of profits, if any, derived
from North American sales. The Company is entitled to receive royalties on the
sale of such licensed products by Novartis outside of North America and, to the
extent that the Company elects not to co-promote in North America, on sales in
North America as well. Royalties and profits from any licensed products
developed will depend, in part, upon the efforts of Novartis to perform clinical
testing, obtain regulatory approvals and market and sell such products both
within and outside of the United States. The amount and timing of the resources
devoted to these activities by Novartis will be controlled by Novartis. Under
certain circumstances, Novartis may develop or market products competitive with
the Company's xenotransplantation products utilizing the gene transduction or
mixed bone marrow chimerism approaches. Pursuant to the Novartis Agreements,
Novartis has an option under certain circumstances to obtain an exclusive
license to inventions developed in the course of BioTransplant research funded
by Novartis for use outside the field of xenotransplantation.
MedImmune
In October 1995, the Company and MedImmune formed a collaborative agreement
for the development and commercialization of products to treat and prevent organ
transplant rejection. The collaboration is based upon the development of
products derived from BTI-322, MEDI-507, MEDI-500 and future generations of
products derived from these molecules. Pursuant to the collaboration, the
Company granted MedImmune an exclusive worldwide license to develop and
commercialize BTI-322 and MEDI-507 and any products based on BTI-322 or
MEDI-507, other than the use of BTI-322 or MEDI-507 in kits or systems for
xenotransplantation or allotransplantation. MedImmune paid
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BioTransplant a $2.0 million license fee at the time of formation of the
collaboration, and agreed to fund and assume responsibility for clinical testing
and commercialization of any resulting products. MedImmune has agreed to provide
research support and make milestone payments which could total up to an
additional $14.0 million, up to $12.0 million of which is repayable from
royalties on BTI-322, MEDI-507 or MEDI-500, as well as to pay royalties on any
sales of BTI-322, MEDI-507, MEDI-500 and future generations of products, if any.
Royalties will depend, in part, upon the efforts of MedImmune to perform
clinical testing, obtain regulatory approvals and market and sell BTI-322,
MEDI-507 and MEDI-500. The amount and timing of the resources devoted to these
activities by MedImmune will be controlled by MedImmune.
Charles River Laboratories
In March 1991, BioTransplant entered into an exclusive research and supply
agreement with CRL, a wholly-owned subsidiary of Bausch & Lomb, Inc., which
assigned its rights in the agreement to an affiliate, Wilmington Partners L.P.,
in 1993. CRL is a leading company in providing genetically-defined and
"pathogen-free" animals to the biomedical community. Pursuant to the agreement,
CRL is the exclusive supplier of miniswine and/or miniswine organs to be
delivered by the Company as part of the XenoMune System. To date, CRL has
assumed all of the costs of maintaining, expanding and improving the miniswine
herd, including extensive research and development costs associated with
achieving "specific pathogen-free" status for the herd in support of the
delivery of transplantable organs. The Company and CRL are currently
negotiating the terms of a new agreement pursuant to which the Company will
assume the costs of maintaining the miniswine herd and, upon commencement of
commercial sales of miniswine organs, the Company and CRL will seek to enter
into a definitive supply agreement for the ongoing supply of miniswine.
Stem Cell Sciences
The Company has entered into a strategic alliance with Stem Cell Sciences
Pty Ltd. ("Stem Cell Sciences") for the purpose of genetically engineering
miniswine. BioTransplant has been granted worldwide, exclusive rights, subject
to the payment of a royalty, to technology, products and processes for the
derivation and manipulation of porcine embryonic stem cells developed during the
research term and useful in xenotransplantation in humans. In addition, Stem
Cell Sciences will be creating relevant transgenic miniswine for the Company.
BioTransplant has made equity investments in Stem Cell Sciences, which
represent 30% of the outstanding shares of that company. At least half of the
consideration received by Stem Cell Sciences from the Company's equity
investment will be used to fund research in the development of germ line
competent porcine embryonic stem cells and, in particular, the development of
technology, products and processes useful for xenotransplantation in humans.
BioTransplant made additional
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investments in Stem Cell Sciences in 1996 and 1997 to maintain its 30%
ownership position and support additional research through December 31, 1998.
The Company has the option to make a further equity investment in 1998 to
maintain its ownership percentage. If the Company does not make such further
investment then its rights become nonexclusive.
Other Arrangements
Catholic University of Louvain (Belgium). BioTransplant is funding
research at the Experimental Immunology Unit of the Catholic University of
Louvain, Belgium (Drs. Herve Bazin and Dominique Latinne), for the development
of monoclonal antibodies. The Company has exclusive worldwide commercialization
rights to discoveries, including BTI-322, made in laboratories under the
Company's sponsorship, subject to a royalty.
Alberta Research Council (Canada). BioTransplant has entered into a
worldwide license (subject to a royalty) with the Alberta Research Council for
specified patents and patent applications covering technology potentially useful
for removal of natural antibodies against xenografts. The license is exclusive,
except for one patent application directed to the removal of natural antibodies
against xenografts which is co-owned by one of the inventors and was assigned to
a competitor. The Alberta Research Council has also granted to BioTransplant a
non-exclusive, worldwide license to use any of its information, data, formulas
or processing information which pertain to the manufacture, development or use
of any products resulting from the licensed patents in the field of
xenotransplantation.
MANUFACTURING AND SUPPLY
The Company currently has no manufacturing facilities or staff for clinical
or commercial production of any compounds or systems under consideration as
product candidates. The Company plans to rely on third parties initially to
manufacture certain of its product candidates for research, preclinical testing,
clinical trials and commercialization, if any, with a long-term objective to
develop internal manufacturing capability where appropriate. There is no
assurance that the Company will be able to develop or contract for manufacturing
capabilities of any of its products or systems on acceptable terms.
Materials for preclinical studies and ongoing and planned clinical trials
with the rodent BTI-322 were manufactured by a contractor in Europe. Supplies of
MEDI-507 required for preclinical studies, clinical trials and commercial
products are being manufactured by MedImmune using its own manufacturing
facilities.
The manufacture of the Company's AlloMune and XenoMune Systems may require
the production of cytokines, monoclonal antibodies and gene transfer vectors.
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The Company has the capacity to produce these materials in sufficient quantity
and of sufficient quality to support preclinical studies. Materials of the
quality suitable for clinical trials will have to be produced by third party
manufacturers. In addition, the Company has entered into an agreement with
Dendreon, formerly Activated Cell Therapy, to provide a system for handling,
transferring and purifying donor bone marrow. CRL has agreed to supply
miniswine and miniswine organs exclusively for BioTransplant in connection with
xenotransplantation.
SALES AND MARKETING
MedImmune has exclusive worldwide marketing rights to its proprietary
product, MEDI-500, as well as to BTI-322, MEDI-507 and future generations of
these products, if any. MedImmune has disclosed that it has a sales and
marketing organization of over 70 people. Five regional business directors,
each with 15 or more years of sales, marketing or managed care experience,
manage the regional business units established by MedImmune. MedImmune has
disclosed that it has over 45 sales and managed care representatives covering
approximately 500 hospitals and clinics in the United States which specialize in
transplantation and/or pediatric/neonatal intensive care for the promotion of
their products. MedImmune began marketing its product for transplantation
medicine, CytoGam-Registered Trademark-, in 1993 with its own 14 person sales
force. The sales and marketing teams were expanded in January 1996 to its
current 70 person level with the approval for marketing by the FDA of
MedImmune's second product, RespiGam-Registered Trademark-.
BioTransplant currently holds all marketing rights to the AlloMune System,
although the Company may seek a corporate partner to support the development and
commercialization of the AlloMune System. In the United States, the Company
currently intends to market the AlloMune System and related products and systems
to organ transplant centers (estimated at approximately 275), which the Company
believes will allow significant market coverage with relatively few sales
personnel. To implement this marketing strategy, the Company intends to hire a
limited number of sales and marketing personnel. In foreign markets, the
Company expects to use local pharmaceutical companies to market its products and
systems due to the complexities of foreign regulations and medical practices.
Pursuant to the collaboration agreement between BioTransplant and Novartis,
Novartis has been granted exclusive worldwide rights to market
xenotransplantation products based on gene transduction or mixed bone marrow
chimerism, subject to the Company's right to co-promote in North America under
certain conditions. The Company currently intends to exercise this co-promotion
right at such time as Novartis has submitted an application for regulatory
approval of the XenoMune System to the FDA. To the extent the Company develops
a xenotransplantation product that does not utilize technology which has already
been licensed, the Company may seek to collaborate with a third party or may
seek to market such product on its own.
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Due to the early stage of the Company's development efforts, the Company
has no marketing or sales personnel. There can be no assurance that the Company
will be able to successfully develop an effective marketing and sales
organization or enter into acceptable collaborative agreements with third
parties for the marketing of those products for which the Company has retained
marketing rights.
RESEARCH AND DEVELOPMENT
The Company's total research and development expenses were $9.5 million,
$12.3 million and $14.0 million for 1995, 1996 and 1997, respectively.
Collaborative research and development revenues totalled $9.9 million, $7.8
million and $12.1 million in 1995, 1996 and 1997, respectively.
PATENTS AND PROPRIETARY RIGHTS
As of March 24, 1998, there were 15 patents issued and 37 patent
applications pending in the United States Patent and Trademark Office owned by
or licensed to BioTransplant. The Company has also filed corresponding patent
applications in selected foreign countries for certain of these U.S. patent
applications. BioTransplant believes that its proprietary rights in its
technology are important to its ability to develop and commercialize products
and to profit from its research.
The Company's strategy is to pursue aggressively a strong patent portfolio.
There can be no assurance that patent applications owned by or licensed to the
Company will issue or that, if issued, they will provide the Company with
significant protection against competitors. There can be no assurance that
BioTransplant will not need to acquire licenses under patents belonging to
others for technology potentially useful or necessary to BioTransplant, and the
cost and availability of such licenses are currently unknown. Moreover, there
can be no assurance that any patents issued to or licensed by the Company will
not be challenged, invalidated, infringed upon or designed around by others or
that others will not hold patent rights that prevent the Company from
commercializing the patented invention.
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The Company is aware of granted patents which claim monoclonal
antibodies which bind to T cells and the therapeutic use thereof. These
patents are owned by Johnson & Johnson, which manufactures and sells OKT3, a
T cell binding monoclonal antibody. Although BTI-322 is also a monoclonal
antibody which binds to T cells, the Company believes that BTI-322 is
distinguishable from the monoclonal antibodies claimed in such patents, and
does not infringe such patents either literally or under the doctrine of
equivalents. Notwithstanding such belief, there is a risk that the patent
owner could initiate patent infringement litigation to prevent the
manufacture, sale and use of BTI-322. If the patentee should prevail in such
litigation, the Company could be required to pay damages and reimburse the
patentee for the cost of such litigation. In addition, if the patentee was
not prepared to grant a license to the Company, an injunction could issue
which would prevent the manufacture, sale and use of BTI-322. In addition,
MEDI-500 is a monoclonal antibody which binds to T cells, and may be subject
to similar risks as BTI-322. If the manufacture, sale or use of MEDI-500
infringes these patents, the royalties, if any, relating to MEDI-500 may be
reduced or eliminated.
The Company has reviewed issued patents which include claims relating to
the process for producing humanized rodent monoclonal antibodies. These patents
are held by biotechnology companies and an academic institution. While BTI-322
is a rodent antibody, the Company and MedImmune intend to commercialize
MEDI-507, a humanized version of BTI-322. The Company and MedImmune have
obtained a license from Protein Design Laboratories Inc. under their patents.
However, there can be no assurance that the Company will be able to obtain
additional such licenses on acceptable terms, if at all. Failure to obtain such
licenses could require the Company to suspend or modify MEDI-507 and would limit
the use of BTI-322 to indications not requiring repeated multiple
administrations.
The Company is also aware of a granted United States patent directed to the
production of transgenic animals by the use of a microinjection technique which
is licensed to a competitor. Such patent could have an adverse impact on the
Company's ability to produce transgenic animals by microinjection. In addition,
the Company is aware of a United States patent which is directed to embryonic
stem cells. Such patent may have an adverse impact on the Company's program for
producing transgenic swine by the use of embryonic stem cells.
Pursuant to a collaboration with CRL, the Company has obtained exclusive
rights to a herd of miniswine maintained by CRL. There are no United States or
foreign patents or patent applications relating to such miniswine. See
"Collaborations and Agreements - Charles River Laboratories."
Some of the Company's know-how and technology is not patentable. To
protect its rights, the Company requires all employees, consultants, advisors
and collaborators to enter into confidentiality agreements with BioTransplant.
There can be no assurance,
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however, that these agreements will provide meaningful protection for the
Company's trade secrets, know-how or other proprietary information in the event
of any unauthorized use or disclosure. Further, in the absence of patent
protection, the Company's business may be adversely affected by competitors who
independently develop substantially equivalent technology.
COMPETITION
The products being developed by the Company compete with existing and new
products being created by pharmaceutical, biopharmaceutical, biotechnology
companies and universities. Many of these entities have significantly greater
research and development capabilities, as well as substantial marketing,
manufacturing, financial and managerial resources and represent significant
competition for the Company. There can be no assurance that developments by
others will not render the Company's products or technologies obsolete or
noncompetitive or that the Company will be able to keep pace with technological
developments. Many of the competitors have developed or are in the process of
developing technologies that are, or in the future may be, the basis for
competitive products. Some of these products may have an entirely different
approach than products being developed by the Company and may be more effective
and less costly. In addition, many of these competitors have significantly
greater experience than the Company in undertaking preclinical testing and human
clinical trials of products and obtaining FDA and other regulatory approvals of
such products. Accordingly, the Company's competitors may succeed in
commercializing products more rapidly than the Company. In addition, colleges,
universities, government agencies and other public and private research
organizations conduct research and may market commercial products on their own
or through joint ventures. These institutions are becoming more active in
seeking patent protection and licensing arrangements to collect royalties for
use of technology that they have developed. These institutions also compete
with the Company in recruiting and retaining highly qualified scientific
personnel.
In particular, there are several commercially available anti-rejection
drugs that will compete with BTI-322 and MEDI-500 products, including OKT3 and
ATGAM. To the extent that these therapeutics address the problems associated
with transplantation on which the Company has focused, they may represent
significant competition. In addition, Roche (Protein Design Laboratories, Inc.)
and Novartis have conducted clinical trials with potentially competitive
compounds. Roche has received regulatory approval with one such compound,
Zenapax, and Roche and Novartis are seeking regulatory approval with respect to
other compounds.
In addition, the Company is aware of other biotechnology companies
attempting xenotransplants, including Imutran Ltd., a wholly-owned subsidiary of
Novartis, Nextran Inc., a wholly owned subsidiary of Baxter HealthCare, Alexion
Pharmaceuticals, Inc. and SangStat Medical Corp. Some of the Company's
competitors are using organs derived from genetically modified transgenic donors
which are designed to eliminate hyperacute
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rejection in humans. Despite the Company's progress in creating tolerance
for transplantation, there can be no assurance that others will not be
successful in inducing tolerance. In addition, the development of superior
immunosuppressant therapeutics, mechanical organ systems and other
improvements in therapies for end stage organ disease could adversely affect
the size of the Company's available markets.
GOVERNMENT REGULATION
The development and commercialization of the Company's products will be
subject to regulation in the United States by the FDA and by comparable
regulatory authorities in foreign countries.
Based upon initial discussions with the FDA, the Company believes that
BTI-322 will be classified as a "biologic" and regulated under the Public Health
Service Act and the Federal Food, Drug and Cosmetic Act. The Company expects
the AlloMune and XenoMune Systems to be classified as a Combination Product,
with the Center for Biologics Evaluation and Research ("CBER") assuming
principal responsibilities for the review, assisted by the Center for Devices
and Radiologic Health. Development of a therapeutic product for human use under
either act is a multi-step process. First, in vitro or animal testing must
establish the potential safety and efficacy of the experimental product in a
given disease. Once the product has been found to be reasonably safe and
potentially efficacious in animals, suggesting that human testing would be
appropriate, an IND must be submitted to the FDA as a precondition to human
clinical trials.
Clinical trials typically involve three phases, although those phases
can overlap. Phase I is conducted to evaluate the safety and
pharmacokinetics of the experimental product in humans, and if possible, to
gain early indications of efficacy. Phase I studies may also evaluate
various routes, dosages and schedules of product administration. If
acceptable product safety is demonstrated, Phase II studies are initiated.
Phase II trials are designed to evaluate the effectiveness of the product in
the treatment of a given indication and typically involve a relatively small
number of patients. The optimal routes, dosages and schedules of
administration are confirmed in these studies. If Phase II trials indicate
safety and efficacy, Phase III studies will be commenced. Phase III studies
further test for product safety and efficacy in an expanded patient
population in order to evaluate the overall risk/benefit relationship of the
product and to provide an adequate basis for physician labeling. These
studies also may compare the safety and efficacy of the product with
currently available products. It is not possible to estimate the time in
which Phase I, II and III studies will be completed with respect to a given
product, although the time period may last as long as several years.
Following completion of these clinical investigations, the preclinical
and clinical evidence that has been accumulated, together with manufacturing
data, is submitted to the FDA in a Biologics License Application ("BLA")
which is an integration of the Product License Application ("PLA") and
Establishment License Application ("ELA") for a well-characterized biologic
drug in the United States.
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Approval of the BLA is necessary before a company may market the
product. The approval process can be very lengthy and depends upon the time
it takes to review the submitted data, the FDA's comments on the application
and the time required for the Company to provide satisfactory answers or
additional clinical data when requested. The FDA has ongoing adverse
experience reporting requirements once the BLA is approved.
The results of all preclinical, development/manufacturing and Phase I, II
and III clinical study data generated in Europe or the United States may also be
submitted to the European Medicines Evaluation Agency ("EMEA"), the counterpart
of the FDA, for approval as a Marketing Approval Application ("MAA"), which is
the equivalent of a PLA or BLA. The application procedure is known as the
"Centralized" procedure. The MAA is assigned to a "rapporteur," who coordinates
the assessment of the application by a team of "experts" in the preclinical,
product manufacturing and clinical areas. An overview of the results of the
assessment are then presented to the Committee on Proprietary Medicinal Products
("CPMP"). The CPMP, which is comprised of two members from each Member State of
the European Union, evaluates both the MAA and the rapporteur's recommendations
and forms an opinion on the approval or rejection of the MAA. This opinion is
then referred to the European Commission, and the European Council if
appropriate, for a final decision. Approval of the MAA permits product
marketing within all countries of the European Union. This MAA procedure takes
a minimum of 300 days, excluding the time taken by the applicant to respond to
questions raised by the CPMP.
The manufacture of xenograft products for human transplantation can be
expected to present novel questions concerning both the safety of the
products produced thereby and compliance with current good manufacturing
practices in the production of biologics. The BLA will not be approved
unless manufacturing procedures and facilities comply with strict FDA
requirements concerning good manufacturing practices as well as any special
requirements imposed as a part of the BLA approval. A portion of the Phase
III clinical trials of a biological product must use material produced by
such procedures and in such facilities. Continued compliance with current
good manufacturing practice is required to be eligible to continue to market
the products once they are approved.
The Orphan Drug Act of 1983 generally provides incentives to manufacturers
to undertake development and marketing of products to treat relatively rare
diseases, those where fewer than 200,000 persons in the United States at the
time of application for orphan drug designation would be likely to receive the
treatment. BioTransplant intends
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to pursue this designation with respect to any of its products intended for
patient populations in the United States of less than 200,000.
A product that receives orphan drug designation by the FDA and is the first
product to receive FDA marketing approval for its indication is entitled to a
seven-year exclusive marketing period in the United States for that indication.
A product that is considered by the FDA to be different from a particular orphan
drug or is approved for different indications is not barred from sale in the
United States during the seven-year exclusive marketing period. In the European
Union, although there are some minor orphan drug provisions in some countries,
there is, as yet, no equivalent overall process to that followed in the United
States.
REIMBURSEMENT
Major health insurance programs in the United States, including Blue Cross
and Blue Shield and other managed care plans which cover more than 125 million
Americans, pay for most non-kidney transplantation costs for their members.
Kidney transplants (and dialysis) are funded by Medicare, a federally supported
program which pays for over 65% of the costs associated with end-stage renal
disease. The Company expects that private health insurance and the Medicare
program will continue to reimburse transplant expenses at current levels in the
majority of cases. The Company plans to design its clinical trials to
demonstrate lower overall treatment costs for end-stage organ disease compared
to alternative therapies. Since some of the Company's organ transplantation
systems are designed to allow rescue from life-threatening disease for which
there are no alternative treatments, the Company believes that those products
will receive reimbursement commensurate with current practices. However,
pending or future health care reform proposals could result in significant
changes in the United States reimbursement climate.
FACTORS THAT MAY AFFECT RESULTS
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects,"
"intends," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those
set forth below and elsewhere in this Annual Report on Form 10-K.
Lack of Commercial Products; No Assurance of Successful Product
Development. The Company is in the early development stage and has been
engaged, to date, primarily in organizational and research and development
activities. The Company has not yet completed the development of, or conducted
significant human testing with respect to,
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any product. The Company has no products available for sale and does not expect
to have any of its potential products available for at least the next several
years, if at all. The Company's potential products will require significant
additional development, preclinical and clinical testing, regulatory approval
and additional investment prior to commercialization. The Company's potential
products are subject to the risks of failure inherent in the development of
products based on new technologies. There can be no assurance that any of the
Company's products will be successfully developed, prove to be safe and
efficacious in clinical trials, meet applicable regulatory standards, obtain
required regulatory approvals, be capable of being produced in commercial
quantities at reasonable costs or be successfully marketed.
History of Losses and Accumulated Deficit; No Assurance of Revenue or
Operating Profit. The Company has generated no revenues from product sales and
has experienced significant operating losses since inception. As of December
31, 1997, the Company's accumulated deficit was approximately $39.3 million.
The Company expects to incur substantial additional costs, resulting in
significant and increasing losses for at least the next several years.
Revenues, if any, that the Company may receive in the next few years will be
limited to payments under the Company's agreements with Novartis and MedImmune,
and any other research or product development relationships that the Company may
hereafter establish, and interest income. The Company's ability to achieve
significant revenue or profitability is dependent on successfully completing the
development of its products, obtaining required technology licenses and
regulatory approvals, and manufacturing and marketing its products. There can
be no assurance, however, that the Company will successfully develop,
commercialize, manufacture or market any of its potential products, obtain
regulatory approvals, patents or third-party licenses to technology or ever
achieve profitability.
Need for Substantial Additional Funds. The Company will need substantial
additional funds before it can expect to realize significant product revenue.
The Company's working capital needs and additional funding requirements will
depend upon numerous factors, including the progress of the Company's research
and development programs and the external research and development programs
being supported by the Company, the timing and results of preclinical and
clinical testing, the timing and costs of obtaining regulatory approvals, the
level of resources that the Company commits to the development of manufacturing,
marketing and sales capabilities, the ability of the Company to maintain
existing and establish new collaborative arrangements with other companies to
provide funding to the Company, the technological advances and activities of
competitors, and other factors. The Company believes that it has sufficient
funds to fund its operating expenses and capital requirements as currently
planned at least through mid-1999. Substantial additional funds will be
required to support the Company's operations. The Company anticipates that
these funds will be obtained from external sources and intends to seek
additional equity, debt or lease financing to fund future operations. The
Company also expects to seek additional collaborative arrangements with
corporate partners in order to fund its
26
<PAGE>
research and development programs. There can be no assurance, however, that the
Company will be able to negotiate such arrangements or obtain the additional
funding that it will require on acceptable terms, if at all.
Reliance upon Third Parties. The Company's strategy for development and
commercialization of its products entails entering into arrangements with
corporate, government and academic collaborators, such as Novartis and
MedImmune, as well as third party manufacturers, licensors, licensees and
others. There can be no assurance that the Company will be able to maintain
its existing arrangements or establish additional collaborative arrangements
or license agreements that the Company deems necessary or acceptable to
develop and commercialize its potential pharmaceutical products or that such
collaborative arrangements or license agreements will be successful or that
current or potential collaborators will not seek alternative means of
developing the products. In 1997, revenues from the Company's collaborative
agreements with Novartis accounted for approximately 82% of the Company's
total revenues. A loss of a strategic alliance partner such as Novartis could
have an adverse effect on the Company's business, financial condition and
results of operations. In addition, both of the Company's corporate
collaborators are independently developing products that may be competitive
with products they are developing in collaboration with BioTransplant. In
addition, the Company is entitled to receive royalties on MEDI-500, a product
proprietary to MedImmune, and any such royalties are wholly dependent on the
efforts of MedImmune to develop and market such product.
Novel Therapeutic Approach; Technological Uncertainties. While the
Company's BTI-322 antibody has the ability to induce antigen specific
hyporesponsiveness in vitro, the Company has not proven that this activity can
be induced clinically. BTI-322/MEDI-507 has been tested in relatively few
patients. There can be no assurance that the clinical activity already seen
will continue to be encouraging. Furthermore, the Company's AlloMune and
XenoMune Systems are based on creating long-term functional tolerance by
introducing mixed bone marrow chimerism or gene transduction. These approaches
are novel and, to the Company's knowledge, have never been achieved in humans,
including by the Company. There can be no assurance that the Company will be
successful in achieving long-term functional tolerance, that the AlloMune and
XenoMune Systems will be useful clinically or that physicians will adopt such
novel therapeutic approaches.
Uncertainties Associated with Preclinical and Clinical Testing. Before
obtaining regulatory approvals for the commercial sale of any of the Company's
potential products, the products will be subjected to extensive preclinical and
clinical testing to demonstrate their safety and efficacy in humans. 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 would have a material adverse effect on the Company. Furthermore,
the Company has limited experience in conducting clinical trials. The Company
is dependent on MedImmune to conduct clinical trials for MEDI-507, Novartis to
conduct clinical trials for the development of xenotransplantation products
utilizing gene transduction or mixed bone marrow chimerism and may become
dependent on other third parties to conduct future clinical trials of its
AlloMune System and any other products.
27
<PAGE>
Uncertainties Regarding Patents and Proprietary Rights; Potential Third
Party Claims. The Company's success depends, in part, on its ability to obtain
patent protection for its products. The Company has filed, or has licensed
exclusively, patents and patent applications in connection with various aspects
of its products under development. There can be no assurance that patent
applications relating to the Company's products or technology will result in
patents being issued or that, if issued, the patents will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. In addition, patents may have been
granted, or may be granted, covering products or processes that are necessary
for or useful to the development of the Company's products. Holders of these
patents could prevent the Company from commercializing its products or require
the Company to obtain licenses to develop, manufacture or market its products.
There can be no assurance that the Company will be able to obtain such licenses
on commercially reasonable terms, if at all, or that the patents underlying the
licenses will be valid and enforceable. There has been significant litigation
in the industry regarding patents and other proprietary rights. If the Company
became involved in litigation regarding its intellectual property rights, the
cost of such litigation could be substantial.
In addition, some of the Company's know-how and technology is not
patentable. For example, there are no patents or patent applications covering
the miniswine supplied by Charles River Laboratories. To protect its rights,
the Company requires all employees, consultants, advisors and collaborators to
enter into confidentiality agreements with BioTransplant. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. Further, in the absence of patent
protection, the Company's business may be adversely affected by competitors who
independently develop substantially equivalent technology. See "-- Patents and
Proprietary Rights."
No Assurance of FDA Approval; Comprehensive and Evolving Government
Regulation; Limited Regulatory Precedent. The Company's research, development
and clinical programs, as well as its manufacturing operations, are subject to
extensive regulation by numerous government authorities in the United States and
other countries. All of the Company's products require governmental approvals
for commercialization, none of which have yet been obtained. Preclinical and
clinical trials and manufacturing of many of the Company's products will be
subject to the rigorous testing and approval processes of the FDA and
corresponding foreign regulatory authorities. There is presently limited
regulatory precedent for approval of products based on monoclonal antibodies.
The FDA has not yet established definitive regulatory guidelines for
xenotransplantation and for assessing the risks of animal pathogens, but has
drafted guidelines in an attempt to reduce the risk of contamination of
transplanted organs with infectious agents.
28
<PAGE>
In particular, in October 1997 the FDA instructed all sponsors of human
clinical trials involving porcine tissue to test for the presence of
infection with PERV in porcine cells and for evidence of PERV in patient
blood samples prior to the transplantation of any additional patients in
clinical trials. There can be no assurance that the FDA will not require
additional extensive testing for PERV or that the FDA will establish
definitive guidelines for xenotransplantation. Even if the FDA establishes
definitive guidelines for xenotransplantation, there can be no assurance that
the Company will be able to comply with such guidelines. Any inability to
comply with FDA guidelines, once developed, could have a material adverse
effect on the Company's business.
The regulatory process, which includes preclinical, clinical and
post-clinical testing of the Company's products to establish their safety and
efficacy, requires many years to complete and the expenditure of substantial
resources. Delays in obtaining approvals could adversely affect the marketing
of products under development by the Company and the Company's ability to
generate commercial product revenues. There can be no assurance that requisite
regulatory approvals will be obtained within a reasonable period of time, if at
all. Moreover, if regulatory approval of a product is granted, such approval
may impose limitations on the indicated uses for which such product may be
marketed. Further, even if such regulatory approval is obtained, a marketed
product, its manufacturer and its manufacturing facilities are subject to
continual review and periodic inspections, and later discovery of previously
unknown problems with a product, such as the presence of PERV in porcine cells
or clinical trial subjects, or with a manufacturer or facility may result in
restrictions on such product or manufacturer, including withdrawal of the
product from the market. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
Intense Competition. The products being developed by the Company
compete with existing and new products being created by pharmaceutical,
biopharmaceutical and biotechnology companies, as well as universities and
other research institutions. Many of these entities have significantly
greater research and development capabilities, as well as substantial
marketing, manufacturing, financial and managerial resources, and represent
significant competition for the Company. There can be no assurance that
developments by others will not render the Company's products or technologies
obsolete or noncompetitive or that the Company will be able to keep pace with
technological developments. Many of the competitors have developed or are in
the process of developing technologies that are, or in the future may be, the
basis for competitive products. Some of these products may have an entirely
different approach than products being developed by the Company and may be
more effective and less costly. In addition, many of these competitors have
significantly greater experience than the Company in undertaking preclinical
testing and human clinical trials of products and obtaining FDA and other
regulatory approvals of such products. Accordingly, the Company's
competitors may succeed in commercializing products more rapidly than the
29
<PAGE>
Company. In addition, colleges, universities, government agencies and other
public and private research organizations conduct research and may market
commercial products on their own or through joint ventures. These
institutions are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they
have developed. These institutions also compete with the Company in
recruiting and retaining highly qualified scientific personnel.
Dependence on Key Personnel. The Company depends to a considerable
degree on a limited number of key personnel. During the Company's limited
operating history, many key responsibilities within the Company have been
assigned to a relatively small number of individuals. The Company does not
maintain "key man" insurance on any of its employees. The loss of certain
senior management could adversely affect the business of the Company.
Limited Manufacturing and Marketing Capabilities. Because of the
relatively early stage of the Company's research and development programs, the
Company has not yet invested significantly in manufacturing, marketing,
distribution or product sales resources. The Company currently does not have
the capacity to manufacture its potential products, and is dependent on contract
manufacturers or collaborative partners for the production of its potential
products for preclinical research and clinical trial purposes and may be
dependent on such manufacturers or collaborative partners for commercial
production. There can be no assurance that the Company will be able to enter
into arrangements with third parties for such purposes. In the event that the
Company is unable to establish its own manufacturing facilities or obtain
contract manufacturing on commercially acceptable terms, it may not be able to
commercialize its products as planned. The Company has no experience in
manufacturing pharmaceutical or other products or in conducting manufacturing
testing programs or in the clinical evaluations required to obtain FDA and other
regulatory approvals.
Uncertainty Relating to Third-Party Reimbursement and Product Pricing. The
successful commercialization of the Company's products will depend substantially
on reimbursement of the costs of such products and related treatments at
acceptable levels from government authorities, private health insurers and other
organizations, such as health maintenance organizations ("HMOs"). There can be
no assurance that reimbursement in the United States or foreign countries will
be available for any products the Company may develop or, if available, will not
be decreased in the future, or that reimbursement amounts will not reduce the
demand for, or the price of, the Company's products, thereby adversely affecting
the Company's business. Currently, no reimbursement plan exists for the costs
associated with the Company's AlloMune and XenoMune Systems.
Potential Product Liability; Limited Product Liability Insurance. The
Company's business exposes it to potential product liability risks which are
inherent in the testing, manufacturing, marketing and sale of human therapeutic
products, and there can be no
30
<PAGE>
assurance that the Company will be able to avoid significant product liability
exposure. Product liability insurance for the biopharmaceutical industry is
generally expensive, if available at all. The Company currently has limited
product liability insurance covering its clinical trials. However, there can be
no assurance that it will be able to maintain such insurance on acceptable
terms, that such insurance will provide adequate protection against potential
liabilities or that the Company will be able to obtain product liability
insurance for the use of its potential commercial products. Any inability to
obtain sufficient insurance coverage at an acceptable cost or otherwise to
protect against potential product liability claims could prevent or limit the
commercialization of products developed by the Company. Furthermore, a product
liability claim, and any related adverse publicity, could have a material
adverse effect on the business or financial condition of the Company.
EMPLOYEES
As of March 19, 1998, the Company had 63 full time employees.
ITEM 2. PROPERTIES
Since October 1994, the Company has occupied a 27,000 square foot
facility containing office and laboratory space located in the Charlestown
Navy Yard in Charlestown, Massachusetts, pursuant to a 10-year lease which
expires in 2004. The Company has the option to extend the lease for an
additional five-year term. The Company believes that these leased facilities
are adequate to meet the Company's purposes for at least the next three years.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C>
Elliot Lebowitz, Ph.D. 56 President and Chief Executive
Officer, Director
James Hope, Ph.D. 46 Senior Vice President of Development
Julia L. Greenstein, Ph.D. 41 Senior Vice President of Research and
Chief Scientific Officer
Mary White-Scharf, Ph.D. 47 Vice President of Research
Robert S. Kauffman, M.D., Ph.D. 49 Vice President of Clinical Affairs
Richard V. Capasso, C.P.A. 36 Vice President, Finance and
Treasurer
</TABLE>
Dr. Lebowitz has served as President and Chief Executive Officer and as a
member of the Board of Directors of the Company since April 1991. From 1985 to
1991, he served as Vice President for Research and Development at C.R. Bard,
Inc., directing internal and collaborative research and development programs for
Bard's Vascular Systems, Cardiosurgery and Cardiopulmonary Divisions. From 1981
until 1985, Dr. Lebowitz served as Director of Long Range Research and
Development at DuPont Corporation, developing immunopharmaceuticals. From 1977
until 1981, he served as Division Manager of the Medical Products Division of
New England Nuclear Corporation which developed, manufactured and sold
radiopharmaceuticals for in vivo diagnosis. Earlier in his career, Dr. Lebowitz
served at Brookhaven National Laboratories, where he developed Thallium-201, a
radiopharmaceutical for the diagnosis of coronary artery disease. Dr. Lebowitz
was a founder of Diagnostic Isotopes, Inc., a radiopharmaceutical company which
was subsequently acquired by Hoffmann-La Roche Inc., a pharmaceutical company.
He was also a founder of Procept, Inc., a biopharmaceutical company which
focuses on rational drug design. He holds a B.A. from Columbia College and a
Ph.D. from Columbia University.
Dr. Hope has served as Senior Vice President of Development of the Company
since December 1995. From August 1992 until December 1995, he served as Vice
President of Development of the Company. From 1990 until 1992, he served as
Executive Director of Operations Technical Support of Serono Laboratories, Inc.
where he directed the transfer, scale-up and validation of biopharmaceutical
manufacturing processes. From 1986 until 1990, he served as the Director of
Bioprocess Development and Production at Invitron Corp., a contract manufacturer
for the development and scale-up of mammalian, cell-based biopharmaceutical
manufacturing processes. Dr. Hope received a B.S. in microbiology and chemistry
from the University of Reading (U.K.) and a Ph.D. in biochemistry from the
University of London (U.K.).
32
<PAGE>
Dr. Greenstein has served as Senior Vice President of Research and Chief
Scientific Officer of the Company since December 1995. From February 1994 until
December 1995, she served as Vice President of Research of the Company. From
1992 until 1994, she served as Vice President, Discovery Research, and from 1991
until 1992, as Director of Immunology, at ImmuLogic Pharmaceutical Corporation,
a biotechnology company which she joined in 1987 and worked on a T cell mediated
approach to allergy desensitization. From 1986 until 1987, Dr. Greenstein was
an Assistant Professor of Pathology at Harvard Medical School and the Dana
Farber Cancer Institute. She received her B.A. from Russell Sage College and
her Ph.D. in microbiology from the University of Rochester Medical School.
Dr. White-Scharf has served as Vice President of Research of the Company
since December 1995. From September 1991 until December 1995 she served as
Director of Monoclonal Antibody Development of the Company where she directed
the BTI-322 program and the Company's hybridoma discovery, scale-up, antibody
purification and antibody engineering. From 1989 to 1991, she served as a
Research Scientist at Repligen Corporation, a biotechnology company, where she
directed its efforts to generate a broadly neutralizing monoclonal antibody to
HIV-1. Dr. White-Scharf received her B.S. in biology from Southern Methodist
University, her M.A. in physiology from the University of Texas Medical Branch
and her Ph.D. in medical microbiology from Stanford University School of
Medicine.
Dr. Kauffman has served as Vice President of Clinical Affairs of the
Company since June 1996. From April 1995 until June 1996, he served as Medical
Director of Serono Laboratories, a biotechnology company where he participated
in the development program for recombinant human growth hormone for treatment of
AIDS-associated wasting. From 1993 to 1995, he served as Executive Director,
Medical Research at Syntex Research, a pharmaceutical company, where he was
leader of the clinical development team that implemented the three Phase III
studies leading to U.S., European and Canadian marketing approval of CellCept
(mycophenolate mofetil) for prevention of renal allograft rejection. From 1989
to 1993 he served as Associate Medical Director at Syntex Research. Dr.
Kauffman received his B.A. in biology from Temple University, and his M.D. and
Ph.D. in microbiology from the University of Pennsylvania School of Medicine.
Mr. Capasso has served as Vice President, Finance and Treasurer of the
Company since May 1997. From December 1994 until May 1997 he served as Director
of Finance of the Company and from December 1991 until December 1994 he served
as Controller of the Company. From 1988 to 1991, Mr. Capasso served as Manager
of Financial Reporting and Controller at Softbridge, Inc., a computer software
development company. From 1984 to 1988, he served as a member of the
professional staff of the Enterprise Group of Arthur Andersen LLP, an
international public accounting firm. Mr. Capasso received his B.S. from
Northeastern University with a major in accounting and received his C.P.A. in
1987.
33
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Price of and Dividends on the Registrant's Common Stock and
Related Stockholder Matters.
The Common Stock of BioTransplant Incorporated has been traded on the
Nasdaq National Market under the symbol BTRN since May 8, 1996. Prior to May 8,
1996, the Company's Common Stock was not publicly traded. The following table
sets forth for the periods indicated the high and low sales prices per share of
the Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1996
----------------
High Low
------ ------
<S> <C> <C>
Second Quarter................................... $11.00 $ 8.13
(May 8 through June 30, 1996)
Third Quarter.................................... $ 8.50 $ 5.63
Fourth Quarter................................... $ 7.00 $ 5.00
</TABLE>
<TABLE>
<CAPTION>
1997
----------------
High Low
------ ------
<S> <C> <C>
First Quarter.................................... $ 8.13 $ 5.75
Second Quarter................................... $ 7.50 $ 6.25
Third Quarter.................................... $ 6.63 $ 4.25
Fourth Quarter................................... $ 7.50 $ 5.00
</TABLE>
On March 19, 1998, the Company had approximately 500 stockholders of
record. On March 19, 1998, the closing price of the Company's Common Stock on
the Nasdaq National Market was $4.03. The Company has never declared or paid
any dividends on its Common Stock. The Company does not expect to pay cash
dividends in the foreseeable future.
(b) Use of Proceeds.
34
<PAGE>
The following information is provided pursuant to Rule 463 under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Company's first registration statement filed pursuant to the Securities
Act:
On May 7, 1996, the Securities and Exchange Commission declared effective a
registration statement on Form S-1 (333-2144) (the "Registration Statement")
registering 3,220,000 shares (the "Shares") of the Company's common stock, $.01
par value per share ("Common Stock"). An offering of such Shares (the
"Offering") commenced on the same date. UBS Securities LLC and Pacific Growth
Equities, Inc. were the managing underwriters for the Offering. The Offering
terminated after the sale of all of the Shares. All of the Shares were sold on
behalf of the Company and the aggregate offering price of the Shares was
$30,590,000.
The following is a statement of the amount of expenses incurred for the
Company's account in connection with the issuance and distribution of the
securities registered for each of the following:
<TABLE>
<S> <C>
Underwriting discounts and commissions: $ 2,141,300
Other expenses: $ 484,917
Total expenses: $ 2,626,217
Net offering proceeds to the Company after
deducting total expenses: $27,963,783
</TABLE>
None of the foregoing expenses were direct or indirect payments to
directors, officers, general partners of the Company or their associates;
persons owning 10 percent (10%) or more of any class of equity securities of
the issuer; or affiliates of the Company.
Set forth below is the amount of net offering proceeds to the Company
used for each of the following:
<TABLE>
<S> <C>
Construction of plant, building and facilities $ 0
Purchase and installation of machinery and equipment: $ 424,000
Purchases of real estate $ 0
Acquisitions of other businesses $ 0
Repayment of indebtedness: $ 728,000
Working capital: $ 8,044,000
Temporary investments: $18,768,000
</TABLE>
Temporary investments include United States Treasury and agency,
securities, corporate bonds and commercial paper.
None of such uses of the net offering proceeds were direct or indirect
payments to directors, officers, general partners of the Company or their
associates; persons
35
<PAGE>
owning 10 percent (10%) or more of any class of equity securities of the issuer;
or affiliates of the Company. Such payments did not represent a material change
in the use of proceeds described in the prospectus contained in the Registration
Statement.
ITEM 6 . SELECTED CONSOLIDATED FINANCIAL DATA
Incorporated by reference from the Company's 1997 Annual Report to
Stockholders under the heading "Selected Consolidated Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated by reference from the Company's 1997 Annual Report to
Stockholders under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are listed under Item 14 below and are incorporated by
reference from the Company's 1997 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent accountants
on accounting and financial matters.
PART III
ITEMS 10-13.
The information required for Part III in this Annual Report on Form 10-K is
incorporated by reference from the Company's definitive proxy statement for the
Company's 1998 Annual Meeting of Stockholders. Such information will be
contained in the sections of such proxy statement captioned "Stock Ownership of
Certain Beneficial Owners and Management", "Election of Directors", "Board and
Committee Meetings", "Compensation for Directors", "Compensation of Executive
Officers", and "Certain Relationships and Related Transactions". Information
regarding executive officers of the Company is also furnished in Part I of this
Annual Report on Form 10-K under the heading "Executive Officers of the
Registrant."
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are included as part of this Annual Report on
Form 10-K or are incorporated by reference from the Company's 1997 Annual Report
to Stockholders.
<TABLE>
<CAPTION>
Page
<S> <C>
1. The following financial statements (and related notes) of the
Company are incorporated by reference from the Company's 1997
Annual Report to Stockholders
Report of Independent Public Accountants F-5*
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-6*
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 and for the period
from inception (March 20, 1990) to December 31, 1997 F-7*
Consolidated Statements of Stockholders' Equity (Deficit) for
the period from inception (March 20, 1990) to December 31, 1997 F-8*
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and for the period
from inception (March 20, 1990) to December 31, 1997 F-9*
Notes to Consolidated Financial Statements F-10*
*Refers to page number of 1997 Annual Report
</TABLE>
2. All schedules are omitted as the information required is inapplicable or
the information is presented in the consolidated financial statements or
the related notes.
3. The Exhibits listed in the Exhibit Index immediately preceding the Exhibits
are filed as part of this Annual Report on Form 10-K.
(b) No Current Reports on Form 8-K were filed by the Company during
the last quarter of the period covered by this Report.
------------------------------
37
<PAGE>
The following trademarks are mentioned in this Annual Report on Form 10-K:
BioTransplant-TM-
AlloMune-TM-
BTI-322-TM-
XenoMune-TM-
ImmunoCognance-TM-
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 25th day
of March, 1998.
BIOTRANSPLANT INCORPORATED
By:/s/ Elliot Lebowitz, Ph.D.
---------------------------
Elliot Lebowitz, Ph.D.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Elliot Lebowitz, Ph.D. President, Chief Executive March 25, 1998
- -------------------------- Officer and Director
Elliot Lebowitz, Ph.D. (Principal Executive Officer)
/s/ Richard V. Capasso Vice President, Finance and March 25, 1998
- -------------------------- Treasurer (Principal Financial
Richard V. Capasso and Accounting Officer)
/s/ William W. Crouse Director March 25, 1998
- --------------------------
William W. Crouse
/s/ James C. Foster Director March 25, 1998
- --------------------------
James C. Foster
/s/ Daniel O. Hauser Director March 25, 1998
- --------------------------
Daniel O. Hauser
39
<PAGE>
/s/ Robert A. Vukovich Director March 25, 1998
- --------------------------
Robert A. Vukovich
/s/ Daniel P. Kearney Director March 25, 1998
- --------------------------
Daniel P. Kearney
/s/ Donald R. Conklin Director March 25, 1998
- --------------------------
Donald R. Conklin
40
<PAGE>
Exhibit Index
The following exhibits are filed as part of this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
**3.1 Restated Certificate of Incorporation.
**3.2 By-laws, as amended to date.
*4.1 Specimen certificate for shares of Common Stock.
*+10.1 Research and License Agreement between the Company and The
General Hospital Corporation, dated January 1, 1991 as amended
by Agreements dated November 10, 1993, June 28, 1995, November 1,
1995, December 19, 1995, December 22, 1995 and January 31, 1996
(the "1991 MGH Agreement").
*+10.2 Research and License Agreement between the Company and The
General Hospital Corporation dated December 8, 1992.
*+10.3 Research and License Agreement between the Company and The
General Hospital Corporation dated August 1, 1994.
*+10.4 Alliance Agreement between the Company and MedImmune, Inc., dated
October 2, 1995.
*+10.5 Research and Supply Agreement between the Company and Charles
River Laboratories, Inc. dated March 1, 1991, as supplemented by
letter dated April 10, 1992.
*+10.6 Amended and Restated Collaboration Agreement between the Company
and Novartis Pharma, Inc. dated September 7, 1995.
*+10.7 Shareholders' Agreement by and among the Company, Castella
Research, Secure Sciences and Stem Cell Sciences Pty. Ltd. dated
April 5, 1994, as amended.
*+10.8 Research and License Agreement between the Company and Stem Cell
Sciences Pty Ltd. dated April 5, 1994 as amended.
*10.9 Form of Common Stock Warrant issued to certain investors in 1993
and January 1994 and Schedule of Warrantholders.
*10.10 Form of Common Stock Warrant issued to affiliates of BioLease,
Inc. in June 1994 and Schedule of Warrantholders.
</TABLE>
41
<PAGE>
<TABLE>
<S> <C>
*10.11 Common Stock Warrant issued to Aberlyn Holding Company dated
June 16, 1993.
*10.12 Common Stock Warrant issued to Aberlyn Capital Management dated
June 16, 1993.
*10.13 Common Stock Warrant issued to Aberlyn Capital Management Limited
Partnership dated November 18, 1994.
*10.14 Common Stock Warrant issued to Aberlyn Capital Management Limited
Partnership dated November 18, 1994.
*10.15 Form of Common Stock Warrant issued to certain investors in
August 1994 and Schedule of Warrantholders.
*10.16 Form of Common Stock Warrant issued to certain investors in
October 1994 and Schedule of Warrantholders.
*10.17 Form of Common Stock Warrant issued to certain investors in
August 1995 and Schedule of Warrantholders.
*10.18 Convertible Promissory Note and Warrant Purchase Agreement by
and among the Company, HealthCare Ventures II, L.P. and Everest
Trust dated December 20, 1991.
*10.19 Preferred Stock Warrant Agreement between the Company and
Comdisco, Inc., dated December 12, 1991, as clarified by a Letter
Agreement dated May 15, 1992.
*10.20 Convertible Promissory Note and Warrant Purchase Agreement by and
among the Company and the parties signatory thereto dated
October 31, 1994.
*10.21 Third Amended and Restated Stockholders Agreement by and among
the Company and the parties signatory thereto; as amended by a
Consent, Waiver and Amendment dated January 23, 1996.
*10.22 Form of Consent, Waiver and Amendment Agreement to Third Amended
and Restated Stockholders' Agreement by and among the Company and
the parties signatory thereto.
(1)*10.23 Amended 1991 Stock Option Plan.
(1)*10.24 1994 Directors' Equity Plan.
</TABLE>
42
<PAGE>
<TABLE>
<S> <C>
*10.25 Consulting Agreement between the Company and Dr. David H. Sachs
dated January 1, 1991 as amended by an Agreement dated
January 1, 1998.
*10.26 Master Lease Agreement between the Company and Aberlyn Capital
Management Limited Partnership dated May 12, 1993.
*10.27 Master Lease Agreement between the Company and Comdisco, Inc.,
dated December 12, 1991.
*10.28 Lease between the Company and BioLease, Inc. dated March 17, 1994.
**+10.29 Development and Supply Agreement between BioTransplant
Incorporated and Activated Cell Therapy, dated August 22, 1996.
**+10.30 Supply Agreement between BioTransplant Incorporated and Neose
Technologies, Inc., dated September 20, 1996.
***+10.31 Agreement to further vary Shareholder's Agreement between
BioTransplant Incorporated and C.R., S.S. and Stem Cell
Sciences Pty., Ltd., dated December 20, 1996.
***+10.32 Agreement to further vary Shareholder's Agreement between
BioTransplant Incorporated and C.R., S.S. and Stem Cell
Sciences Pty., Ltd., dated March 16, 1997, as amended.
****+10.33 Collaboration and License Agreement between the Company and
Novartis Pharma AG, dated October 6, 1997.
****10.34 Promissory Note and Security Agreement between the Company and
Fleet National Bank, dated September 5, 1997.
13 1997 Annual Report to Stockholders (which shall be deemed filed
only with respect to those portions specifically incorporated by
reference herein).
23 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule - Year Ended December 31, 1997.
27.2 Restated Financial Data Schedule - Year Ended December 31, 1996
and for the quarters ended September 30, 1996, June 30, 1996
and March 31, 1996.
</TABLE>
- -------------------
(1) Management contract or compensatory plan or arrangement filed as an exhibit
to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
43
<PAGE>
* Incorporated herein by reference to the Company's Registration Statement on
Form S-1, as amended (File No. 333-2144).
** Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended September 30, 1996.
*** Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended March 31, 1997.
**** Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended September 30, 1997.
+ Confidential treatment requested as to certain portions.
44
<PAGE>
BIOTRANSPLANT INCORPORATED
ANNUAL REPORT TO SHAREHOLDERS
1997
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, INCEPTION
---------------------------------------------------------------- (MARCH 20, 1990) TO
1993 1994 1995 1996 1997 DECEMBER 31, 1997
---------- ---------- ------------ ------------ ------------ --------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
License fees...................... $ 1,500 $ 1,500 $ 4,000 $ 2,000 $ 5,000 $ 14,000
Research and development.......... 1,125 1,500 5,875 5,750 7,125 21,375
Interest income................... 66 163 168 1,296 1,731 3,553
---------- ---------- ------------ ------------ ------------ --------
Total Revenues.................. 2,691 3,163 10,043 9,046 13,856 38,928
---------- ---------- ------------ ------------ ------------ --------
Expenses:
Research and development.......... 8,218 11,767 9,460 12,268 13,988 62,531
General and administrative........ 1,680 2,518 1,939 2,680 2,963 13,909
Interest.......................... 542 146 731 135 59 1,750
---------- ---------- ------------ ------------ ------------ --------
Total expenses.................. 10,440 14,431 12,131 15,083 17,010 78,190
---------- ---------- ------------ ------------ ------------ --------
Net loss........................ $ (7,749) $ (11,268) $ (2,087) $ (6,037) $ (3,154) $ (39,262)
---------- ---------- ------------ ------------ ------------ --------
---------- ---------- ------------ ------------ ------------ --------
Net loss per common share:
Basic............................. $ (16.78) $ (1.08) $ (0.37)
------------ ------------ ------------
------------ ------------ ------------
Pro Forma......................... $ (0.60) $ (0.84)
------------ ------------
------------ ------------
Weighted average common shares
outstanding (1):
Basic............................. 124,373 5,582,055 8,568,709
------------ ------------ ------------
------------ ------------ ------------
Pro Forma......................... 3,487,868 7,153,608
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
---------- ---------- ------------ ------------ ------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 6,880 $ 2,343 $ 2,849 $ 6,564 $ 9,784
Marketable securities.................................. -- -- -- 13,001 19,863
Working capital........................................ 6,225 148 86 17,788 24,111
Long-term investments.................................. -- -- -- 10,311 1,015
Total assets........................................... 8,500 4,801 5,372 32,316 32,939
Long-term obligation under capital leases, net of
current portion...................................... 334 1,066 615 189 10
Redeemable convertible preferred stock................. 23,029 23,772 29,241 -- --
Stockholders' equity (deficit)......................... (16,108) (27,030) (28,840) 29,262 26,154
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2(a) of Notes to Consolidated
Financial Statements
F-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since commencement of operations in 1990, the Company has been engaged
primarily in the research and development of proprietary pharmaceuticals and
organ transplantation systems, which represent a comprehensive approach to
inducing functional tolerance in humans. The major sources of the Company's
working capital have been the proceeds from sales of equity securities,
sponsored research funding and license fees and capital lease financings. The
Company has not generated any revenues from the sale of products to date, and
does not expect to receive any product revenues for several years, if ever.
The Company will be required to conduct significant additional research,
development, testing and regulatory compliance activities that, together with
general and administrative expenses, are expected to result in significant
and increasing operating losses for at least the next several years.
In 1993, and as amended and restated in September 1995, the Company and
Novartis entered into a collaboration agreement for the development and
commercialization of xenotransplantation products utilizing gene transduction.
Under the agreement, Novartis committed research funding through March 1998 of
$20.0 million, all of which had been received as of December 31, 1997, and
agreed to pay license fees of $10.0 million, all of which had been received as
of December 31, 1997. Novartis has also agreed to fund certain development and
premarketing costs of such products, portions of which, under certain
circumstances, may be repayable from the Company's operating profits from sales
of such products.
In October 1997, the Company and Novartis expanded their relationship by
entering into a collaboration and license agreement with Novartis to develop and
commercialize xenotransplantation products utilizing the Company's proprietary
mixed bone marrow chimerism technology. Under the agreement, the Company may
receive from Novartis research funding, license fees, and milestone payments of
up to $36 million. As of December 31, 1997, research funding of $3.5 million and
license fees of $2.0 million had been received. In addition to research funding,
Novartis will also fund certain development and premarketing costs of such
products. Portions of these costs may be repayable under certain circumstances.
In October 1995, the Company and MedImmune entered into a collaborative
research agreement for the development of products to treat and prevent organ
rejection. MedImmune paid the Company a $2.0 million license fee at the time of
execution of the agreement, and agreed to fund and assume responsibility for
clinical testing and commercialization of BTI-322 and other related products.
MedImmune has agreed to provide research support and make milestone payments
which could total up to an additional $14.0 million, up to $12.0 million of
which is repayable from royalties on such products.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues increased to $13.9 million in 1997 from $9.0 million in 1996. The
increase in revenues was primarily due to $11.4 million in sponsored research
and license revenue from the Novartis agreements in 1997, compared to $6.8
million in sponsored research and license revenue from Novartis during 1996.
Additionally, interest income increased to $1.7 million in 1997 compared to $1.3
million in 1996. The increase was due to higher average cash balances available
for investment as a result of the initial public offering of the Company's
common stock, completed in May 1996, and the funding received from the Novartis
agreements.
Research and development expenses increased to $14.0 million in 1997 from
$12.3 million in 1996. This increase was primarily due to additional external
research support combined with increases in research and development staff and
associated increases in supplies and support services.
General and administrative expenses increased to $3.0 million in 1997 from
$2.7 million in 1996. This increase was primarily due to increased
administrative costs as a publicly-traded company including increases in general
and administrative staff and related costs.
Interest expense decreased to $59,000 in 1997 from $135,000 in 1996. This
decrease was primarily due to decreasing balances on existing obligations under
capital leases.
As a result of the above factors, the Company incurred a net loss for 1997
of $3.2 million compared to a net loss of $6.0 million for 1996.
F-2
<PAGE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues decreased to $9.0 million in 1996 from $10.0 million in 1995.
The anticipated decrease in revenues was primarily due to the timing of $7.6
million in sponsored research and license revenue from Novartis as a result
of the amendment and restatement of the collaboration agreement in September
1995 and $2.3 million in license and sponsored research revenue from
MedImmune during 1995, compared to $6.8 million in revenue from Novartis and
$1.0 million in revenue from MedImmune during 1996. Additionally, interest
income increased to $1,296,000 in 1996 compared to $168,000 in 1995. The
increase was due to higher cash balances available for investment as a result
of the initial public offering of the Company's common stock, completed in
May 1996.
Research and development expenses increased to $12.3 million in 1996 from
$9.5 million in 1995. This increase was primarily due to additional external
research support, including $924,000 in payments to Stem Cell Sciences, combined
with increases in research and development staff together with the associated
increases in supplies and support services. This increase was partially offset
by decreased expenditures related to the human clinical safety trials for
BTI-322.
General and administrative expenses increased to $2.7 million in 1996 from
$1.9 million in 1995. This increase was primarily due to increases in outside
professional services in connection with market research and business
development.
Interest expense decreased to $135,000 in 1996 from $731,000 in 1995. This
decrease was primarily due to the conversion of $4.4 million and $1.0 million of
convertible notes payable to stockholders, and the accrued interest thereon into
redeemable convertible preferred stock in October 1995 and February 1996,
respectively. The redeemable convertible preferred stock was automatically
converted to shares of common stock upon the closing of the Company's initial
public offering. The decrease was also attributable in part to decreasing
balances on existing obligations under capital leases.
As a result of the above factors, the Company incurred a net loss for 1996
of $6.0 million compared to a net loss of $2.1 million for 1995.
LIQUIDITY AND CAPITAL RESOURCES
In May 1996, the Company completed an initial public offering of 3,220,000
shares of common stock at a price of $9.50 per share, and received net proceeds
of approximately $28.0 million. In addition, all outstanding shares of
redeemable convertible preferred stock were automatically converted into
5,202,154 shares of common stock upon the closing of the initial public
offering.
Since its inception and prior to the completion of the Company's initial
public offering, the Company's operations have been funded principally through
the net proceeds of an aggregate of $36.2 million from private placements of
equity securities. The Company has also received $35.5 million from research and
development and collaboration agreements with Novartis, $4.0 million from an
alliance agreement with MedImmune and $2.2 million in equipment lease financing.
The proceeds of the private placements, notes payable and capital leases and
cash generated from the corporate collaborations with Novartis and MedImmune
have been used to fund operating losses of approximately $39.3 million and the
investment of approximately $4.0 million in equipment and leasehold improvements
through December 31, 1997. In September 1997, the Company entered into a term
note with a bank, whereby the Company may borrow up to $500,000 for certain
equipment and fixtures. There were no borrowings outstanding under this term
note at December 31, 1997. The Company had no significant commitments as of
December 31, 1997 for capital expenditures.
The Company has entered into sponsored research and consulting agreements
with certain hospitals, academic institutions and consultants, requiring
periodic payments by the Company. Aggregate minimum funding obligations under
these agreements, which include certain cancellation provisions, total
approximately $5.9 million, which includes approximately $4.0 million in 1998.
The Company had cash and cash equivalents and investments of $30.7 million
as of December 31, 1997.
The Company anticipates that its existing funds, including the proceeds from
its initial public offering and interest earned thereon, should be sufficient to
fund its operating and capital requirements as currently planned through at
least June 30, 1999. However, the Company's cash requirements may vary
materially from those now planned, due to many factors, including, but not
limited to, the progress of the Company's research and development programs, the
scope and
F-3
<PAGE>
results of preclinical and clinical testing, changes in existing and
potential relationships with corporate collaborators, the time and cost in
obtaining regulatory approvals, the costs involved in obtaining and enforcing
patents, proprietary rights and any necessary licenses, the ability of the
Company to establish development and commercialization capacities or
relationships, the costs of manufacturing and other factors.
The Company expects to incur substantial additional costs, including costs
related to research and development activities, preclinical studies, clinical
trials, obtaining regulatory approvals, manufacturing and the expansion of its
facilities. The Company will need to raise substantial additional funds, through
additional financings including public or private equity offerings and
collaborative arrangements with corporate partners. There can be no assurance
that funds will be available on terms acceptable to the Company, if at all. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate certain of its product development programs or to license to
others the right to commercialize products or technologies that the Company
would otherwise seek to develop and commercialize itself, any of which would
have a material and adverse effect on the Company.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Annual Report to Stockholders contains forward-looking statements. This
Annual Report on Form 10-k contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends,"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth below and
elsewhere in this Annual Report to Stockholders and in the Section titled
"Business--Factors That May Affect Results" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, as filed with the Securities and
Exchange Commission, which Section is incorporated herein by reference.
The Company is in the early development stage and has been engaged, to date,
primarily in organizational and research and development activities. The Company
has not yet completed the development of, or conducted significant human testing
with respect to, any product. In particular, the Company's AllomuneTM and
XenomuneTM Systems are based upon approaches which are novel and, to the
Company's knowledge, have never been achieved in humans, including by the
Company. There can be no assurance that any of the Company's products will be
successfully developed, prove to be safe and efficacious in clinical trials,
meet applicable regulatory standards, obtain required regulatory approvals, be
capable of being produced in commercial quantities at reasonable costs or be
successfully marketed.
The Company has a substantial accumulated deficit. The Company expects to
incur losses for at least the next several years and that such losses will
increase as the Company expands its research and development activities. The
Company will require substantial additional funds for its research and product
development programs, operating expenses, the pursuit of regulatory approvals
and expansion of its production, sales and marketing capabilities. Adequate
funds for these purposes, whether through equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms acceptable to the Company.
Insufficient funds could require the Company to delay, scale back or eliminate
certain of its research and product development programs or to license to third
parties to commercialize products or technologies that the Company would
otherwise develop or commercialize itself.
The Company's strategy for development and commercialization of its products
entails entering into arrangements with third parties. There can be no assurance
that the Company will be able to maintain its existing arrangements or establish
additional arrangements that the Company deems necessary or acceptable to
develop and commercialize its potential pharmaceutical products or that such
arrangements will be successful. In addition, the Company is entitled to receive
royalties on MEDI-500, a product proprietary to MedImmune, and any such
royalties are wholly dependent on the efforts of MedImmune to develop and
market such product. If any of the Company's strategic partners were to breach
or terminate its agreement with the Company or otherwise fail to conduct its
collaborative activities successfully in a timely manner, such delay or
termination could have a material adverse effect on the Company's business,
financial condition and results of operations.
Proprietary rights relating to the products of BioTransplant will be
protected from unauthorized use by third parties only to the extent that they
are covered by valid and enforceable patents or are maintained in confidence as
trade secrets. There may be pending or issued third-party patents relating to
the products of BioTransplant and BioTransplant may need to acquire licenses to,
or to contest the validity of, any such patents. It is likely that significant
funds would be required to defend any claim that BioTransplant infringes a
third-party patent. There can be no assurance that any license required under
any such patent would be made available.
Other factors that may affect the Company's future operating results include
the inherent risk of product liability claims which may result from the testing,
marketing and sale of human therapeutic products, the Company's fluctuations in
quarterly operating results, the Company's ability to continue to attract and
retain qualified management and scientific staff, risks associated with the
regulatory approval process, and its ability to anticipate or respond adequately
to rapid and significant technological changes that may develop in the field of
human therapeutic products.
F-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BioTransplant Incorporated:
We have audited the accompanying consolidated balance sheets of
BioTransplant Incorporated (a Delaware corporation in the development stage) and
subsidiary as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1997 and for the period from
inception (March 20, 1990) to December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
BioTransplant Incorporated and subsidiary as of December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 and for the period from inception (March
20, 1990) to December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 10, 1998
F-5
<PAGE>
BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
Assets
Current assets:
Cash and cash equivalents........................................................ $ 6,563,957 $ 9,784,229
Short-term investments........................................................... 13,001,472 19,862,617
Prepaid expenses and other current assets........................................ 1,087,516 1,238,500
------------- -------------
Total current assets......................................................... 20,652,945 30,885,346
------------- -------------
Property and equipment, at cost:
Equipment under capital leases................................................... 2,210,170 2,210,170
Laboratory equipment............................................................. 736,681 961,220
Leasehold improvements........................................................... 619,584 628,217
Office equipment................................................................. 198,461 266,182
------------- -------------
3,764,896 4,065,789
Less -- Accumulated depreciation................................................. 2,479,361 3,062,540
------------- -------------
1,285,535 1,003,249
------------- -------------
Long-term investments.............................................................. 10,310,778 1,015,202
------------- -------------
Other assets....................................................................... 66,377 34,727
------------- -------------
$ 32,315,635 $ 32,938,524
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Current obligation under capital leases.......................................... $ 425,986 $ 177,667
Accounts payable................................................................. 126,003 289,535
Accrued expenses................................................................. 1,312,964 2,182,216
Deferred revenue................................................................. 1,000,000 4,125,000
------------- -------------
Total current liabilities.................................................... 2,864,953 6,774,418
------------- -------------
Long-term obligation under capital leases.......................................... 188,974 10,042
------------- -------------
Commitments (Notes 12 and 13)
Stockholders' equity:
Preferred stock, $.01 par value --
Authorized -- 2,000,000 shares
Issued and outstanding -- no shares............................................ -- --
Common stock, $.01 par value --
Authorized -- 25,000,000 shares
Issued and outstanding -- 8,558,902 shares in 1996, and 8,575,390 shares in
1997......................................................................... 85,589 85,754
Additional paid-in capital......................................................... 65,285,038 65,330,483
Deficit accumulated during the development stage................................... (36,108,919) (39,262,173)
------------- -------------
Total stockholders' equity................................................... 29,261,708 26,154,064
------------- -------------
$ 32,315,635 $ 32,938,524
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, CUMULATIVE
------------------------------------- SINCE
1995 1996 1997 INCEPTION
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues:
License fees................................................... $ 4,000,000 $ 2,000,000 $ 5,000,000 $ 14,000,000
Research and development....................................... 5,875,000 5,750,000 7,125,000 21,375,000
Interest income................................................ 168,475 1,296,143 1,731,258 3,552,878
----------- ----------- ----------- -------------
Total revenues............................................. 10,043,475 9,046,143 13,856,258 38,927,878
----------- ----------- ----------- -------------
Expenses:
Research and development....................................... 9,460,522 12,268,263 13,987,982 62,531,452
General and administrative..................................... 1,938,901 2,680,380 2,962,644 13,908,623
Interest....................................................... 731,291 134,608 58,886 1,749,976
----------- ----------- ----------- -------------
Total expenses............................................. 12,130,714 15,083,251 17,009,512 78,190,051
----------- ----------- ----------- -------------
Net loss................................................... $(2,087,239) $(6,037,108) $(3,153,254) $(39,262,173)
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Net loss per common share:
Basic $ (16.78) $ (1.08) $ (.37)
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Pro forma...................................................... $ (.60) $ (.84)
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Weighted average common shares outstanding:
Basic.......................................................... 124,373 5,582,055 8,568,709
----------- --------- ----------- -------------
----------- --------- ----------- -------------
Pro forma...................................................... 3,487,868 7,153,608
----------- --------- ----------- -------------
----------- --------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED TOTAL
------------------------ ADDITIONAL DURING THE STOCKHOLDERS'
NUMBER $.01 PAID-IN DEVELOPMENT EQUITY
OF SHARES PAR VALUE CAPITAL STAGE (DEFICIT)
----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Inception, March 20, 1990......................... -- $ -- $ -- $ -- $ --
Net loss........................................ -- -- -- (142,353) (142,353)
----------- ----------- ---------- ------------ ------------
Balance, December 31, 1990........................ -- -- -- (142,353) (142,353)
Sale of common stock............................ 102,572 1,026 3,077 -- 4,103
Issuance of warrants............................ -- -- 22,000 -- 22,000
Net loss........................................ -- -- -- (2,637,206) (2,637,206)
----------- ----------- ---------- ------------ ------------
Balance, December 31, 1991........................ 102,572 1,026 25,077 (2,779,559) (2,753,456)
Net loss........................................ -- -- -- (6,188,344) (6,188,344)
----------- ----------- ---------- ------------ ------------
Balance, December 31, 1992........................ 102,572 1,026 25,077 (8,967,903) (8,941,800)
Issuance of warrants............................ -- -- 476,800 -- 476,800
Exercise of stock options....................... 63 1 46 -- 47
Deferred compensation on stock options.......... -- -- 105,546 -- 105,546
Net loss........................................ -- -- -- (7,748,627) (7,748,627)
----------- ----------- ---------- ------------ ------------
Balance, December 31, 1993........................ 102,635 1,027 607,469 (16,716,530) (16,108,034)
Exercise of stock options....................... 17,406 174 1,448 -- 1,622
Restricted stock sold to directors.............. 1,250 12 8,738 -- 8,750
Issuance of warrants............................ -- -- 165,937 -- 165,937
Deferred compensation on stock options.......... -- -- 170,225 -- 170,225
Net loss........................................ -- -- -- (11,268,042) (11,268,042)
----------- ----------- ---------- ------------ ------------
Balance, December 31, 1994........................ 121,291 1,213 953,817 (27,984,572) (27,029,542)
Issuance of warrants............................ -- -- 99,000 -- 99,000
Exercise of stock options....................... 5,303 53 7,301 -- 7,354
Deferred compensation on stock options.......... -- -- 170,225 -- 170,225
Net loss........................................ -- -- -- (2,087,239) (2,087,239)
----------- ----------- ---------- ------------ ------------
Balance, December 31, 1995........................ 126,594 1,266 1,230,343 (30,071,811) (28,840,202)
Conversion of preferred stock into common
stock......................................... 4,770,430 47,704 36,154,586 -- 36,202,290
Issuance of common stock in initial public
offering, net of issuance costs of
$2,681,920.................................... 3,220,000 32,200 27,875,880 -- 27,908,080
Issuance of common stock pursuant to
antidilution rights........................... 431,724 4,317 (4,317) -- --
Exercise of stock options....................... 10,154 102 28,546 -- 28,648
Net loss........................................ -- -- -- (6,037,108) (6,037,108)
----------- ----------- ---------- ------------ ------------
Balance, December 31, 1996........................ 8,558,902 85,589 65,285,038 (36,108,919) 29,261,708
Exercise of stock options....................... 15,238 153 45,407 -- 45,560
Restricted stock sold to directors.............. 1,250 12 38 -- 50
Net loss........................................ -- -- -- (3,153,254) (3,153,254)
----------- ----------- ---------- ------------ ------------
Balance, December 31, 1997........................ 8,575,390 $ 85,754 $65,330,483 ($39,262,173) $26,154,064
----------- ----------- ---------- ------------ ------------
----------- ----------- ---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, CUMULATIVE
----------------------------------- SINCE
1995 1996 1997 INCEPTION
------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(2,087,239) $(6,037,108) $(3,153,254) $(39,262,173)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization............................. 846,608 667,820 581,641 3,126,228
Noncash interest expense on convertible notes payable to
stockholders............................................ 449,894 15,583 -- 465,477
Noncash expenses related to options and warrants.......... 269,225 33,187 33,188 1,152,058
Changes in current assets and liabilities-
Accounts receivable..................................... (250,000) 250,000 -- --
Prepaid expenses and other current assets............... 53,751 (744,213) (150,984) (1,238,500)
Accounts payable........................................ (165,625) (61,222) 163,532 289,535
Accrued expenses........................................ (351,292) 345,534 869,252 2,182,216
Deferred revenue........................................ 1,375,000 (750,000) 3,125,000 4,125,000
--------- ---------- ---------- --------------
Net cash provided by (used in) operating activities... 140,322 (6,280,419) 1,468,375 (29,160,159)
--------- ---------- ---------- --------------
Cash flows from investing activities:
Purchases of property and equipment....................... (96,290) (123,135) (300,893) (3,506,281)
Disposal of property and equipment, net................... -- -- -- 28,040
Purchases of investments.................................. -- (38,200,692) (19,050,026) (57,250,718)
Proceeds from investments................................. -- 14,888,441 21,484,458 36,372,899
--------- ---------- ---------- --------------
Net cash provided by (used in) investing activities... (96,290)(23,435,386) 2,133,539 (24,356,060)
--------- ---------- ---------- --------------
Cash flows from financing activities:
Proceeds from convertible notes payable to stockholders... 1,000,000 -- -- 9,400,000
Payments of obligations under capital leases.............. (545,963) (450,748) (427,252) (2,006,502)
Proceeds from sale/leaseback of equipment................. -- -- -- 771,968
Proceeds from equipment leases............................ -- -- -- 1,422,240
Net proceeds from sale of redeemable convertible preferred
stock................................................... -- 5,889,530 -- 25,661,526
Proceeds from sale of common stock, net................... 7,354 27,992,431 45,610 28,051,216
--------- ---------- ---------- --------------
Net cash provided by (used in) financing activities... 461,391 33,431,213 (381,642) 63,300,448
--------- ---------- ---------- --------------
Net increase in cash and cash equivalents................. 505,423 3,715,408 3,220,272 9,784,229
Cash and cash equivalents, beginning of period............ 2,343,126 2,848,549 6,563,957 --
--------- ---------- ---------- --------------
Cash and cash equivalents, end of period.................... $2,848,549 $6,563,957 $9,784,229 $ 9,784,229
--------- ---------- ---------- --------------
--------- ---------- ---------- --------------
Supplemental disclosure of noncash transactions:
Increase in equipment under capital leases................ $ -- $ -- $ -- $ (2,210,170)
--------- ---------- ---------- --------------
--------- ---------- ---------- --------------
Conversion of convertible notes payable to stockholders
and accrued interest into redeemable convertible
preferred stock......................................... $4,849,894 $ 1,055,816 $ -- $ 9,905,710
Conversion of preferred stock into common stock........... $ -- $36,202,290 $ -- $ 36,202,290
--------- ---------- ---------- --------------
--------- ---------- ---------- --------------
Issuance of warrants...................................... $ 99,000 $ -- $ -- $ 741,737
--------- ---------- ---------- --------------
--------- ---------- ---------- --------------
Leasehold improvements acquired through issuance of
redeemable convertible preferred stock.................. $ 619,584 $ -- $ -- $ 619,584
--------- ---------- ---------- --------------
--------- ---------- ---------- --------------
Supplemental disclosure of cash flow information:
Interest paid during the period........................... $ 261,397 $ 118,900 $ 53,542 $ 1,387,371
--------- ---------- ---------- --------------
--------- ---------- ---------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
BioTransplant Incorporated (the "Company") was incorporated on March 20,
1990. The Company is developing proprietary pharmaceuticals and organ
transplantation systems, which represent a comprehensive approach to inducing
functional tolerance in humans.
The Company is in the development stage and is devoting substantially all of
its efforts toward product research and development and raising capital. The
Company is subject to a number of risks similar to those of other development
stage companies, including its dependence on key individuals and collaborative
research partners, competition from substitute products and larger companies, no
assurance that the Company will be able to develop and market commercially
usable products or obtain regulatory approval for its products under
development, and the need to obtain adequate additional financing necessary to
adequately fund the development of its products.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies described below and elsewhere in the notes to
consolidated financial statements.
(a) Net Loss per Common Share
In 1997, the Company adopted Financial Accounting Standards Board Statement
No. 128, "Earnings Per Share", ("FAS 128"), effective December 15, 1997. FAS 128
establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
The Company has applied the provisions of FAS 128 retroactively to all periods
presented. Diluted weighted average shares has not been presented because to do
so would have been antidilutive. Pro forma net loss per common share assumes
that all series of redeemable convertible preferred stock had been converted to
common stock as of the original issuance dates.
Calculations of basic and pro forma net loss per common share are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss .................................................................. $(2,087,239) $(6,037,108) $(3,153,254)
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding................................. 124,373 5,582,055 8,568,709
-----------
-----------
Pro forma conversion of redeemable convertible preferred stock............. 3,363,495 1,571,553
----------- -----------
Pro forma weighted average shares outstanding.............................. 3,487,868 7,153,608
----------- -----------
----------- -----------
Basic net loss per common share $ (16.78) $ (1.08) $ (.37)
----------- ----------- -----------
----------- ----------- -----------
Pro forma net loss per common share $ (.60) $ (.84)
----------- -----------
----------- -----------
</TABLE>
(b) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All material intercompany accounts
and transactions have been eliminated in consolidation.
F-10
<PAGE>
(c) Cash Equivalents and Investments
Cash equivalents include short-term, highly liquid investments with original
maturities of less than three months from the date of purchase. Short-term
investments consist primarily of corporate notes and securities issued by the
United States Treasury or other United States government agencies with
maturities of less than one year from the date of purchase. Long-term
investments consist primarily of corporate notes with maturities of more than
one year. In accordance with Financial Accounting Standards Board Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities",
the Company's investments are classified as held-to-maturity and are stated
at amortized cost, which approximates market value. At December 31, 1997 the
weighted average maturity of all investments was four months.
The Company held the following investments at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Short-term:
United Treasury and Agency Securities (average maturity of 2 months) .............. $ - $ 2,000,000
Corporate Bonds (average maturity of 6 months and 4 months)........................ 12,015,442 16,862,948
Commercial Paper (average maturity of 3 months and 8 months)....................... 986,030 999,669
------------- -------------
13,001,472 19,862,617
------------- -------------
Long-term:
Corporate Bonds (average maturity of 15 months and 16 months)...................... 10,310,778 1,015,202
------------- -------------
Total investments.................................................................. $ 23,312,250 $ 20,877,819
------------- -------------
------------- -------------
</TABLE>
There were no realized gains or losses in the years ended December 31, 1996
and 1997.
(d) Depreciation and Amortization
The Company provides for depreciation using the straight-line method by
charges to operations in amounts estimated to allocate the cost of these assets
over a five-year life. Amortization of equipment under capital lease and
leasehold improvements is computed using the straight-line method over the
shorter of the estimated useful life of the asset or the lease term.
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(f) Revenue Recognition
Substantially all of the Company's license and research and development
revenues are derived from three collaborative research arrangements (see Note
10). Annual research and development payments are recognized on a straight-line
basis over the period of the contract, which approximates when work is performed
and costs are incurred. License fee revenue represents technology transfer fees
received for rights to certain technology of the Company. License fees are
recognized as revenue is earned. Deferred revenue represents amounts received in
advance for research and development. Research and development expenses in the
accompanying consolidated statements of operations include funded and unfunded
expenses.
F-11
<PAGE>
(3) Capital Leases
The Company has capital lease commitments related to certain property and
equipment. In conjunction with these leases, the Company has issued warrants to
purchase common and preferred stock (see Note 9).
Future minimum payments under these capital lease agreements as of December
31, 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Year Ending December 31,
1998................................................................................................ $ 186,694
1999................................................................................................ 10,755
----------
Total minimum payments............................................................................. 197,449
Less -- Amount representing interest.................................................................. 9,740
----------
Present value of minimum lease payments......................................................... 187,709
Less -- Current obligation under capital leases....................................................... 177,667
----------
$ 10,042
----------
----------
</TABLE>
Equipment under capital leases collateralize these lease obligations.
(4) TERM NOTE
In September 1997, the Company entered into a term note with a bank, whereby
the Company may borrow up to $500,000 for certain equipment and fixtures during
a specified drawdown period, after which time the outstanding balance will
become payable in 36 equal monthly principal installments plus interest. This
term note bears annual floating interest at the Bank's Prime Rate (8.50% at
December 31, 1997) during the drawdown period with an option to convert during
the repayment period to an annual fixed rate at the three-month London Interbank
Offered Rate ("LIBOR") (5.81% at December 31, 1997) plus 2.25%. This term note
is secured by equipment and fixtures purchased under these borrowings. There
were no borrowings outstanding under this term note at December 31, 1997
(5) CONVERTIBLE NOTES PAYABLE TO STOCKHOLDERS
In August 1995, the Company borrowed $1,000,000 from certain preferred
stockholders under convertible promissory notes bearing interest at the prime
rate, as defined, plus 1% per annum. In connection with the issuance of these
notes, the Company issued warrants to purchase 24,999 shares of common stock at
an exercise price of $.04 per share. The Company recorded $99,000 of interest
expense in 1995, which represented the estimated fair value of the warrants. The
notes and accrued interest thereon were converted into 527,909 shares of Series
D redeemable convertible preferred stock at $2.00 per share in February 1996.
(6) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Consulting and contract research...................................................... $ 534,871 $ 723,254
Payroll and payroll related........................................................... 55,000 342,930
Professional fees..................................................................... 165,117 374,070
Other................................................................................. 557,976 741,962
------------ ------------
$ 1,312,964 $ 2,182,216
------------ ------------
------------ ------------
</TABLE>
F-12
<PAGE>
(7) REDEEMABLE CONVERTIBLE PREFERRED STOCK
Upon the closing of the Company's initial public offering in 1996, all of
the then outstanding shares of redeemable convertible preferred stock converted
into 4,770,430 shares of common stock. In addition, the Company issued an
additional 431,724 shares of common stock to Novartis upon the Company's initial
public offering as a result of antidilution rights.
Redeemable convertible preferred stock activity since inception is as
follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES D SERIES E
------------------------- ----------------------- ---------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NUMBER CARRYING NUMBER CARRYING NUMBER CARRYING NUMBER CARRYING
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE OF SHARESS VALUE
----------- ------------ ---------- ----------- ------------- ------------- ----------- ----------
Sale of Series A,
net of issuance
costs of
$51,973......... 3,300,000 $ 3,248,027 -- $ -- -- $ -- -- $ --
----------- ------------ ---------- ----------- ------------- ------------- ----------- ----------
Balance, December
31, 1991........ 3,300,000 3,248,027 -- -- -- -- -- --
Sale of Series
A............... 700,000 700,000 -- -- -- -- -- --
Conversion of
notes payable
into Series A... 1,000,000 1,000,000 -- -- -- -- -- --
Sale of Series A,
net of issuance
costs of
$18,612......... 1,000,000 981,388 -- -- -- -- -- --
Sale of Series B,
net of issuance
costs of
$11,500......... -- -- 401,606 4,988,500 -- -- -- --
----------- ------------ ---------- ----------- ------------- ------------- ----------- ----------
Balance, December
31, 1992........ 6,000,000 5,929,415 401,606 4,988,500 -- -- -- --
Sale of Series D,
net of issuance
costs of
$188,846........ -- -- -- -- 6,150,000 12,111,155 -- --
----------- ------------ ---------- ----------- ------------- ------------- ----------- ----------
Balance, December
31, 1993........ 6,000,000 5,929,415 401,606 4,988,500 6,150,000 12,111,155 -- --
Sale of Series E,
net of issuance
costs of
$67,074......... -- -- -- -- -- -- 300,000 742,926
----------- ------------ ---------- ----------- ------------- ------------- ----------- ----------
Balance, December
31, 1994........ 6,000,000 5,929,415 401,606 4,988,500 6,150,000 12,111,155 300,000 742,926
Conversion of
notes payable
and accrued
interest into
Series D........ -- -- -- -- 2,424,947 4,849,894 -- --
Issuance of Series
D for leasehold
improvements.... -- -- -- -- 309,792 619,584 -- --
----------- ------------ ---------- ----------- ------------- ------------- ----------- ----------
Balance, December
31, 1995........ 6,000,000 5,929,415 401,606 4,988,500 8,884,739 17,580,633 300,000 742,926
Sale of Series D,
net of issuance
costs of
$30,000......... -- -- -- -- 2,967,500 5,905,000 -- --
Conversion of
notes payable
and accrued
interest into
Series D........ -- -- -- -- 527,909 1,055,816 -- --
Conversion of
redeemable
convertible
preferred stock
into common
stock........... (6,000,000) (5,929,415) (401,606) (4,988,500) (12,380,148) (24,541,449) (300,000) (742,926)
----------- ------------ ---------- ----------- ------------- ------------- ----------- ----------
Balance, December
31, 1996........ -- $ -- -- $ -- -- $ -- -- $ --
----------- ------------ ---------- ----------- ------------- ------------- ----------- ----------
----------- ------------ ---------- ----------- ------------- ------------- ----------- ----------
</TABLE>
(8) STOCKHOLDERS' EQUITY
(a) Reverse Stock Split
On May 6, 1996, the Company consummated a one-for-four reverse stock split
of its common stock. All share and per share amounts of common stock for all
periods presented have been retroactively adjusted to reflect the reverse stock
split. The Company is authorized to issue 25,000,000 shares of common stock,
$.01 par value, and 2,000,000 shares of undesignated preferred stock, $.01 par
value.
(b) Common Stock
As of December 31, 1996 and 1997, the Company has reserved the following
shares of common stock for issuance:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
1991 Stock Option Plan.................................................................. 717,072 702,459
1994 Directors' Equity Plan............................................................. 13,750 49,375
1997 Stock Option Plan.................................................................. -- 750,000
Outstanding warrants.................................................................... 377,135 377,135
---------- ----------
1,107,957 1,878,969
---------- ----------
---------- ----------
</TABLE>
F-13
<PAGE>
(9) OPTIONS AND WARRANTS
(a) Common Stock Plans
In May 1997, the stockholders approved the 1997 Stock Incentive Plan (the
"1997 Plan") intended to replace Company's Amended 1991 Stock Incentive Plan
(the "1991 Plan"), under which it may grant incentive stock options,
nonqualified stock options and stock appreciation rights. The Company has
reserved 750,000 shares of common stock for issuance under the 1997 Plan. These
options generally vest ratably over a four- to five-year period.
In May 1997, the stockholders approved an amendment to the Company's 1994
Directors' Equity Plan (the "Directors' Plan"). The amendment increased from
15,000 to 50,000 the number of shares of common stock reserved for issuance
under the Director's Plan. The Directors' Plan automatically grants an option to
each eligible outside director of the Company for the purchase of 3,125 shares
of common stock at the then fair market value upon such eligible outside
directors' election to the Board of Directors. In addition, each eligible
outside director concurrently receives an award to purchase 625 shares of
restricted common stock at $.04 per share. These options vest ratably over a
five-year period. At December 31, 1997, 1,719 restricted common shares were
unvested.
The following table summarizes the employee and director stock option
activity under the plans discussed above:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF OPTIONS EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Outstanding, December 31, 1993..................................................... 249,901 $ 2.28
Granted.......................................................................... 105,628 4.00
Exercised........................................................................ (17,406) 0.09
Canceled......................................................................... (52,859) 1.90
---------- -----
Outstanding, December 31, 1994..................................................... 285,264 3.09
Granted.......................................................................... 200,237 4.00
Exercised........................................................................ (5,303) 1.39
Canceled......................................................................... (156,623) 3.83
---------- -----
Outstanding, December 31, 1995..................................................... 323,575 3.26
Granted.......................................................................... 396,648 6.39
Exercised........................................................................ (10,154) 2.82
Canceled......................................................................... (41,767) 4.87
---------- -----
Outstanding, December 31, 1996..................................................... 668,302 5.02
Granted.......................................................................... 404,964 6.63
Exercised........................................................................ (15,238) 2.46
Canceled......................................................................... (43,603) 6.36
---------- -----
Outstanding, December 31, 1997..................................................... 1,014,425 $ 5.65
---------- -----
---------- -----
Exercisable, December 31, 1997..................................................... 311,338 $ 4.06
---------- -----
---------- -----
</TABLE>
The following tables summarize certain information about options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
RANGE OF WEIGHTED AVERAGE
EXERCISE OPTIONS REMAINING CONTRACTUAL
PRICES OUTSTANDING LIFE IN YEARS
-------------- --------------- -----------------------
<S> <C> <C> <C>
$ 0.04 -- 4.00 269,860 5.81 $ 3.27
4.02 -- 6.63 464,846 8.95 6.10
6.75 -- 10.50 279,719 9.18 7.18
- ---------------- --------- ---- ---------
$ 0.04 -- 10.50 1,014,425 8.18 $ 5.65
- ---------------- --------- ---- ---------
- ---------------- --------- ---- ---------
</TABLE>
The following tables summarize certain information about options exercisable
at December 31, 1997:
<TABLE>
<CAPTION>
RANGE OF OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- ---------------- ----------- -----------------
<S> <C> <C>
$ 0.04 -- 4.00 221,707 $ 3.12
$ 4.02 -- 6.63 71,735 5.95
$ 6.75 -- 10.50 17,896 8.19
- ---------------- ---------- ---------
$ 0.04 -- 10.50 311,338 $ 4.06
- ---------------- ---------- ---------
</TABLE>
During 1993 and 1994, the Company granted stock options with exercise prices
below the estimated fair value of the common stock as determined for financial
reporting purposes. Compensation expense was recognized over the vesting period
of the options. The Company recognized compensation expense of $170,225 and
$170,225 during 1994 and 1995, respectively, relating to these option grants.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee and director stock options,
because the alternative fair value accounting provided for under Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), requires the use of option valuation models that were
developed for use in valuing options traded on an exchange, not employee stock
options, which can not be traded. Under APB 25, if the exercise price of the
Company's stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
F-14
<PAGE>
Pro forma information regarding net loss and loss per share is required
by FAS 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions for 1995, 1996 and 1997,
respectively: risk-free interest rates of 6.32%, 6.32% and 5.53%; expected
common stock volatility factors of 65%, 65% and 68%; and a weighted-average
expected life of the stock options of seven years. The Company does not
currently pay any dividends, and does not expect to pay cash dividends in the
foreseeable future, therefore; dividend yields for 1995, 1996 and 1997 are
assumed to be 0%. The weighted average fair value of options granted in 1995,
1996 and 1997 was $4.00, $6.39 and $6.63, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss......................... As reported $ (2,087,239) $ (6,037,108) $ (3,153,254)
Pro forma (2,118,030) (6,271,780) (3,795,662)
Basic net loss per common
share.......................... As reported $ (16.78) $ (1.08) $ (.37)
Pro forma (17.03) (1.12) (.44)
Pro forma net loss per common
share.......................... As reported $ (.60) $ (.84)
Pro forma (.61) (.88)
</TABLE>
(b) Warrants
The Company has the following warrants outstanding for the purchase of
common stock:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
OF WARRANTS PER SHARE
----------- ---------------
<S> <C> <C>
Outstanding, December 31, 1993................................................. 105,448 $ .04 -- 49.80
Granted........................................................................ 239,497 3.00 -- 10.80
------- ---------------
Outstanding, December 31, 1994................................................. 344,945 .04 -- 49.80
Granted........................................................................ 24,999 .04
------- ---------------
Outstanding, December 31, 1995................................................. 369,944 .04 -- 49.80
Granted........................................................................ -- --
------- ---------------
Outstanding, December 31, 1996................................................. 369,944 .04 -- 49.80
Granted........................................................................ -- --
------- ---------------
Outstanding, December 31, 1997................................................. 369,944 $ .04 -- 49.80
------- ---------------
------- ---------------
Exercisable, December 31, 1997................................................. 369,944 $ .04 -- 49.80
------- ---------------
------- ---------------
</TABLE>
The warrants expire during the years 1999 to 2005.
In June 1993, the Company issued warrants for the purchase of 452 shares of
common stock at $49.80 per share in connection with an equipment lease
agreement. The warrants are currently exercisable and expire on May 12, 2000.
In June 1993, the Company issued warrants for the purchase of 4,998 shares
of common stock at $.04 per share in connection with a financing agreement with
stockholders. The warrants are all currently exercisable and expire on June 16,
2003. The Company recorded interest expense of $29,800 during 1993, which
represented the estimated fair value of the warrants.
In September 1993, the Company issued warrants for the purchase of 74,999
shares of common stock at $.04 per share in connection with the issuance of
convertible notes payable to stockholders. The warrants are currently
exercisable and expire on September 24, 2003. The Company recorded interest
expense of $447,000 during 1993, which represented the estimated fair value of
the warrants.
In January 1994, the Company issued warrants for the purchase of 13,500
shares of common stock at $10.80 per share in connection with the sale of Series
E redeemable convertible preferred stock. The warrants are currently exercisable
and expire on January 15, 1999.
In March 1994, the Company issued warrants to purchase 41,483 shares of
common stock at $3.00 per share in connection with the facility lease discussed
in Note 12(b). The warrants vest over a five-year period, commencing in March
1994. The Company recorded $165,937 of deferred rent, which represented the
estimated fair value of the warrants. This amount is being amortized as rent
expense over the life of the lease.
F-15
<PAGE>
In September 1994, the Company granted warrants to purchase 59,998 shares
of common stock at an exercise price of $4.00 per share in connection with a
financing commitment letter. These warrants are currently exercisable and
expire on August 14, 2004.
In October 1994, the Company granted warrants to purchase 109,999 shares of
common stock at an exercise price of $4.00 per share. These warrants were issued
in connection with convertible notes payable to stockholders. These warrants are
currently exercisable and expire on October 31, 2004.
In November 1994, the Company issued warrants to purchase 14,517 shares of
common stock at $10.80 per share. These warrants were issued in connection with
an equipment lease agreement. The warrants are currently exercisable and expire
on November 18, 2001.
In August 1995, the Company issued warrants to purchase 24,999 shares of
common stock at $.04 per share. The warrants were issued in connection with the
issuance of convertible notes payable to stockholders. The Company recorded
interest expense of $99,000 during 1995, which represented the estimated fair
value of the warrants. These warrants are currently exercisable and expire on
August 18, 2005.
(10) COLLABORATIVE RESEARCH AGREEMENTS
(a) Novartis.
In April 1993, as amended and restated in September 1995, the Company
entered into a five-year collaboration agreement with Novartis to develop and
commercialize xenotransplantation technology utilizing gene transduction.
Pursuant to this agreement, all committed research funding of $20.0 million and
all committed license fees of $10.0 million had been received as of December 31,
1997. In October 1997, the Company and Novartis expanded their relationship in
xenotransplantation by entering into a collaboration and license agreement for
the development and commercialization of xenotransplantation products utilizing
the Company's proprietary mixed bone marrow chimerism technology. Under this
agreement, Novartis has committed up to $36.0 million in research funding,
license fees and milestone payments. As of December 31, 1997, $3.5 million of
research funding and $2.0 million of license fees had been received. Pursuant
to the terms of these agreements, Novartis is obliged to fund the development
costs associated with certain xenotransplantation products developed by the
Company, subject to reimbursement of a portion thereof by the Company, if the
Company elects, under certain circumstances, to co-promote such products. The
Company has the right to co-promote solely in North America and to receive an
agreed upon share of profits, if any, derived from North American sales. The
Company is entitled to receive royalties on the sale of xenotransplantation
products by Novartis outside of North America and, to the extent that the
Company elects not to co-promote in North America, on sales in North America
as well.
As of December 31, 1997, the Company had deferred revenue of $4,125,000
pursuant to the Novartis agreements, which represents annual research and
development payments received prior to revenue recognition.
In addition to these agreements, Novartis purchased $5.0 million of the
Company's Series B convertible preferred stock in 1992, which converted into
532,125 shares of common stock upon the Company's initial public offering.
(b) MedImmune, Inc.
In October 1995, the Company and MedImmune, Inc. ("MedImmune") formed a
collaborative agreement for the development and commercialization of products to
treat and prevent organ transplant rejection. The collaboration is based upon
the development of products derived from BTI-322, MEDI-500 and future
generations of products derived from these two molecules (including MEDI-507,
the humanized version of BTI-322). Pursuant to the collaboration, the Company
granted MedImmune an exclusive worldwide license to develop and commercialize
BTI-322 and any products based on BTI-322, other than the use of BTI-322 in kits
or systems for xenotransplantation or allotransplantation. MedImmune paid the
Company a $2.0 million license fee at the time of formation of the
collaboration, and agreed to fund and assume responsibility for clinical testing
and commercialization of any resulting products. MedImmune has agreed to provide
research support and make milestone payments that could total up to an
additional $14.0 million, up to $12.0 million of which is repayable from
royalties on BTI-322/MEDI-507 or MEDI-500, as well as to pay royalties on any
sales of BTI-322/MEDI-507, MEDI-500 and future generations of products, if any.
As of December 31, 1997, $2.0 million of research support had been recognized.
MedImmune is entitled to a credit against royalty payments for certain milestone
payments that it makes.
F-16
<PAGE>
(11) INCOME TAXES
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes". At
December 31, 1997, the Company had net operating loss carryforwards for income
tax purposes of approximately $35,636,000. The Company also has available tax
credit carryforwards of $1,592,000 at December 31, 1997 to reduce future federal
income taxes, if any. The net operating loss carryforwards and tax credit
carryforwards expire commencing in the year 2006, and are subject to review and
possible adjustment by the Internal Revenue Service. Net operating loss
carryforwards and tax credit carryforwards may be limited in the event of
certain changes in the ownership interests of significant stockholders.
The components of the deferred tax asset as of December 31, 1996 and 1997
are approximately as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Operating loss carryforwards....................................................... $ 13,300,000 $ 14,145,000
Tax credit carryforwards........................................................... 1,130,000 1,592,000
Start-up costs..................................................................... 251,000 50,000
Other temporary differences........................................................ 892,000 1,338,000
------------- -------------
15,573,000 17,125,000
Less -- Valuation allowance........................................................ 15,573,000 17,125,000
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
Due to the history of operating losses, a valuation allowance has been
provided for the entire deferred tax asset since it is uncertain if the Company
will realize the benefit of the deferred tax asset.
(12) COMMITMENTS
(a) Research and License Agreements
The Company has entered into several research and license agreements with a
hospital whereby the Company obtained the rights to the hospital's research
pertaining to the transplantation of organs and tissues and other related
technologies. The Company also obtained an exclusive license to commercially
develop, manufacture, use and distribute worldwide any products developed
pursuant to the agreements in exchange for research funding and royalties on any
future sales. These agreements have initial terms of one to ten years; however,
either party may terminate the agreements at various times, as defined, with
written notice. The Company had agreed to reimburse the hospital for the cost of
leasing up to $1,050,000 of research equipment over a five-year lease period
that concluded in December 1997. As of December 31, 1997, the end of the lease
term, the Company had reimbursed the hospital for leased equipment with an
approximate cost of $859,000.
The Company has entered into research and license agreements with four
universities whereby the Company funded research and development. The Company
also obtained exclusive, worldwide licenses for certain patents, patent rights
and research information and rights to develop, manufacture, use and sell any
product developed pursuant to the licensed technology in exchange for royalties
on any future sales, as defined.
During 1991, the Company entered into a research and supply agreement with a
breeding laboratory and was granted exclusive, worldwide licenses for the
acquisition and sale of specified organs or animals utilized in the licensed
technology. Pursuant to this agreement, the Company has agreed to pay specified
royalties on future net product sales, as defined in the agreement.
Commitments as of December 31, 1997, pursuant to these research and license
agreements and subject to cancellation clauses, are as follows:
<TABLE>
<CAPTION>
HOSPITAL CONSULTANTS OTHER TOTAL
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Year Ending December 31,
1998...................................................... $ 2,549,000 $ 651,000 $ 812,000 $ 4,012,000
1999...................................................... 625,000 -- 150,000 775,000
2000...................................................... 625,000 -- 150,000 775,000
2001...................................................... -- -- 150,000 150,000
2002...................................................... -- -- 150,000 150,000
------------ ----------- ------------ ------------
$ 3,799,000 $ 651,000 $ 1,412,000 $ 5,862,000
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
F-17
<PAGE>
(b) Operating Lease Commitments
The Company leases its facility under an operating lease that expires in
2004. In addition, the Company is responsible for the real estate taxes and
operating expenses related to this facility. Minimum annual rental payments
under this lease agreement are as follows:
<TABLE>
<S> <C>
1998............................................................................ $1,013,464
1999............................................................................ 1,014,714
2000............................................................................ 1,018,464
2001............................................................................ 1,018,464
2002............................................................................ 1,018,464
Thereafter...................................................................... 1,782,312
---------
$6,865,882
---------
---------
</TABLE>
Rental expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $1,183,000, $1,197,000 and $1,196,000, respectively.
(13) Investment in Stem Cell Sciences Pty. Ltd.
In April 1994, the Company entered into a shareholders' agreement and a
research and license agreement (the "Agreements") with Stem Cell Sciences Pty.
Ltd. ("Stem Cell"). Under the Agreements, the Company paid $1,000,000 for 30% of
the outstanding shares of Stem Cell, an exclusive license to certain technology
and other intellectual property and support of certain research in the field of
animal genetic engineering. The Company recorded the $1,000,000 as research and
development expense during the 12 months ended December 31, 1994.
In 1997, the Company paid an additional $1,376,000 for research support and
to maintain its pro rata ownership of Stem Cell. These payments consist of
$676,000 for research support recorded as research and development expense for
the year ended December 31, 1997, and $700,000 for research support for the year
ending December 31, 1998 which the Company will recognize as research and
development expense on a straight-line basis over the 12 months ending December
31, 1998. The Company has an option to purchase additional shares of stock to
maintain its pro rata ownership in Stem Cell. The option is exercisable at any
time prior to December 31, 1998.
F-18
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously
filed Registration Statement File Nos. 333-15251, 333-15249, 333-29055
and 333-29057.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed balance sheet of December 31, 1997 and the condensed consolidated
statement of operations for the year ended December 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,784,229
<SECURITIES> 19,862,617
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,885,346
<PP&E> 4,065,789
<DEPRECIATION> 3,062,540
<TOTAL-ASSETS> 32,938,524
<CURRENT-LIABILITIES> 6,774,418
<BONDS> 0
0
0
<COMMON> 85,754
<OTHER-SE> 65,330,483
<TOTAL-LIABILITY-AND-EQUITY> 32,938,524
<SALES> 0
<TOTAL-REVENUES> 13,856,256
<CGS> 0
<TOTAL-COSTS> 17,009,512
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,888
<INCOME-PRETAX> (3,153,254)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,153,254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,153,254)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed balance sheets of March 31, 1996, June 30, 1996,
September 30, 1996, and December 31, 1996 and the condensed consolidated
statements of operations for the three months, six months, nine months and
year then ended.
</LEGEND>
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 6,167,920 36,697,960 15,896,560 6,563,957
<SECURITIES> 0 0 17,632,073 13,001,472
<RECEIVABLES> 24,168 0 150,841 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 6,565,609 37,649,304 34,438,493 20,652,945
<PP&E> 3,670,891 3,709,803 3,737,861 3,764,896
<DEPRECIATION> 1,986,592 2,153,520 2,315,701 2,479,361
<TOTAL-ASSETS> 8,407,384 39,288,557 35,935,326 32,315,635
<CURRENT-LIABILITIES> 1,542,264 4,759,792 3,836,185 2,864,953
<BONDS> 0 0 0 0
36,186,820 0 0 0
0 0 0 0
<COMMON> 1,266 85,487 85,489 85,589
<OTHER-SE> 1,230,343 65,256,492 65,256,995 65,285,038
<TOTAL-LIABILITY-AND-EQUITY> 8,407,384 39,288,557 35,935,326 32,315,635
<SALES> 0 0 0 0
<TOTAL-REVENUES> 2,075,697 5,631,012 7,374,345 9,046,143
<CGS> 0 0 0 0
<TOTAL-COSTS> 3,063,644 6,777,397 10,844,444 15,083,251
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 51,208 82,781 110,557 134,608
<INCOME-PRETAX> (987,947) (1,146,385) (3,470,099) (6,037,108)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (984,947) (1,146,385) (3,470,099) (6,037,108)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (987,947) (1,146,385) (3,470,099) (6,037,108)
<EPS-PRIMARY> (7.80) (0.44) (0.76) (1.08)
<EPS-DILUTED> (7.80) (0.44) (0.76) (1.08)
</TABLE>
