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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19651
MAGAININ PHARMACEUTICALS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
DELAWARE 13-3445668
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5110 CAMPUS DRIVE, PLYMOUTH MEETING, PA 19462
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 941-4020
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE N/A
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.002 PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations 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 this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant is approximately $97,843,000. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the National Market System of The Nasdaq Stock Market, on February 22, 1999. For
purposes of this calculation only, the registrant has defined affiliates as
including all directors and executive officers. The number of shares of the
registrant's Common Stock outstanding as of February 22, 1999 was 22,911,616.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Registrant's 1999 Annual
Meeting of Stockholders to be filed within 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K are incorporated by reference
into Part III of this Form 10-K.
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MAGAININ PHARMACEUTICALS INC.
INDEX TO FORM 10-K
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DESCRIPTION PAGE NO.
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PART I Item 1 Business 3
Item 2 Properties 28
Item 3 Legal Proceedings 28
Item 4 Submission of Matters to a Vote of Security Holders 28
PART II Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 29
Item 6 Selected Financial Data 30
Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition 30
Item 7A Quantitative and Qualitative Disclosure About Market Risk 36
Item 8 Financial Statements and Supplementary Data 36
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 36
PART III Item 10 Directors and Executive Officers of the Registrant 37
Item 11 Executive Compensation 37
Item 12 Security Ownership of Certain Beneficial Owners
and Management 37
Item 13 Certain Relationships and Related Transactions 37
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 37
Index to Financial Statements F-1
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ITEM 1. BUSINESS
GENERAL
Magainin Pharmaceuticals Inc. ("Magainin") is a biopharmaceutical company
engaged in the development of medicines for serious diseases. Our development
efforts are focused on anti-infectives, oncology, and pulmonary and allergic
disorders.
Magainin's research and drug development efforts are focused on two
technology platforms:
. Host-Defense Drug Discovery--we isolate and develop therapeutically
active compounds from the host-defense systems of animals. Magainin
peptides represent a new class of antibiotics being developed for the
treatment of infection and cancer. Our second host defense class,
aminosterols, is a new class of pharmaceuticals which we believe may
have multiple applications, including the control of cell
proliferation.
. Asthma Genomics--we employ a range of genomics techniques to
identify genes associated with the pathogenesis of asthma, with the
objective of utilizing the optimal biologic gene targets in the
development of novel therapeutics for asthma and allergy.
MAGAININ PEPTIDES-PEXIGANAN ACETATE
Our most advanced class of compounds under development are magainin
peptides. Discovered in the skin of the African clawed frog, magainins have
demonstrated broad activity against a variety of pathogens in preclinical
studies. These molecules act by puncturing the membrane of the pathogen cell,
resulting in the death of the pathogen.
Pexiganan acetate (formerly called Cytolex), a topical cream antibiotic, is
our lead product development candidate. We have completed two pivotal Phase III
clinical trials of pexiganan acetate for the treatment of infection in diabetic
foot ulcers. These studies were designed as equivalence trials, with the goal of
demonstrating that topically applied pexiganan acetate is comparable to orally
administered ofloxacin, a quinolone antibiotic indicated for the treatment of
infection, including skin and soft tissue infections. In July 1998 we submitted
a New Drug Application ("NDA") to the U.S. Food and Drug Administration (the
"FDA") based on the results of these trials.
In February 1997, we entered into a development, supply and distribution
agreement with SmithKline Beecham ("SmithKline") pursuant to which SmithKline
will market and sell pexiganan acetate in North America. Under this agreement,
SmithKline has paid $10.0 million to us, and may make additional payments of up
to $22.5 million, upon the occurrence of certain product milestones. SmithKline
will also fund a majority of development expenses for any additional indications
for pexiganan acetate.
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AMINOSTEROLS-SQUALAMINE
Squalamine is the lead product development candidate in our aminosterol
program. Squalamine was discovered in the body tissues of the dogfish shark. The
shark was initially examined because of its known resistance to infection and
cancer. Since the discovery of squalamine, we have discovered several other
aminosterol compounds in the shark. In preclinical testing conducted to date,
certain of these compounds have demonstrated an ability to control cell growth,
along with other pharmacological properties. These properties may have
application in the treatment of disease indications characterized by cell
proliferation, such as cancer.
Our initial disease focus for squalamine is solid tumors. The formation of
new blood vessels, or angiogenesis, is believed to be a critical factor in tumor
growth. Squalamine may be of benefit in the treatment of a number of solid
tumors by inhibiting new blood vessel growth required for tumor nourishment.
We are currently conducting Phase I clinical testing of squalamine in
patients with advanced malignancy.
ASTHMA GENOMICS
In 1996, we initiated a research program in the genomics of asthma. These
efforts led to the identification of IL9, a gene which varies in DNA structure
and function in asthmatic and allergic humans and animals. We maintain a
research and development program to identify additional genes in the IL9
biologic pathway. We discovered that IL9 receptor and other genes play a key
role in the IL9 pathway. We continue to investigate the role of these genes in
the allergic inflammatory response, with the objective of utilizing the optimal
biologic gene targets in the development of novel therapeutics for asthma and
allergy.
In December 1998, we entered into a collaborative research and option
agreement with Genentech, Inc. ("Genentech") relating to the development of a
protein therapeutic in asthma.
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Since commencing operations, we have not generated any sales revenue. We
have funded operations primarily from the proceeds of public and private
placements of securities. We have incurred losses in each year since inception,
and we expect to incur substantial additional losses for the next several years.
We currently have no marketable products, and it may be several years, if ever,
until marketable products are developed and approved.
RISK FACTORS RELATED TO MAGAININ'S BUSINESS
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give current expectations or forecasts of
future events. You can identify these statements by the fact that they do not
relate strictly to historical or current facts. They use words such as
"anticipate", "estimate", "expect", "project", "intend", "plan", "believe" and
other words and terms of similar meaning in connection with any discussion of
future operating or
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financial performance. In particular, these include statements relating to
present or anticipated scientific progress, development of potential
pharmaceutical products, future revenues, capital expenditures, research and
development expenditures, future financings and collaborations, personnel,
manufacturing requirements and capabilities, and other statements regarding
matters that are not historical facts or statements of current condition.
Any or all of our forward-looking statements in this report may turn out to
be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Many factors mentioned in the
discussion below will be important in determining future results. Consequently,
no forward-looking statement can be guaranteed. Actual future results may vary
materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our 10-Q, any 8-K or any other reports to the SEC. Also note that we
provide the following cautionary discussion of risks and uncertainties relevant
to our business. These are factors that we think could cause our actual results
to differ materially from expected results. Other factors besides those listed
here could also adversely affect results. The discussion that follows is
provided as permitted by the Private Securities Litigation Reform Act of 1995.
WE DEPEND HEAVILY ON PEXIGANAN ACETATE, WHICH IS STILL IN THE DEVELOPMENT STAGE
AND MAY NEVER BE APPROVED FOR COMMERCIAL USE.
We have submitted a New Drug Application with the FDA for our lead drug
product development candidate, pexiganan acetate. The NDA submission includes
the results of two multi-center, randomized, Phase III clinical equivalence
trials comparing 1% pexiganan acetate cream to ofloxacin, an oral antibiotic
indicated for skin and soft tissue infections. The NDA, as submitted, includes
data analyses for a number of primary endpoints. These include clinical response
of infection, overall microbiological response of infection and therapeutic cure
(a combination of clinical and overall microbiological cures), which were
analyzed over a number of patient cohorts and timepoints. The NDA data package
also includes extensive additional data, including microbiology data for
specific pathogens and wound healing data. Certain of the data favor ofloxacin.
The FDA may reach a different conclusion from that reached by us in our
application or may request that we conduct further studies to support our
application. The guidelines pursuant to which clinicals trials of this nature
are to be conducted have evolved since the commencement of these studies. As a
result, we may not receive FDA approval of pexiganan acetate on a timely basis,
if at all. In addition, the FDA may place certain restrictive conditions on the
approval of pexiganan acetate, which may affect the commercial viability of the
drug.
WE HAVE NEVER BEEN PROFITABLE AND ANTICIPATE THAT WE WILL INCUR CONTINUED LOSSES
FOR THE FORESEEABLE FUTURE.
To date, we have been engaged primarily in the research and development of
drug candidates. We have not generated any revenues from product sales and have
incurred losses in each year since our inception. As of December 31, 1998, we
had an
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accumulated deficit of approximately $132.9 million. Our operations are subject
to various competitive and regulatory risks. As a result, we are unable to
predict when or if we will achieve product revenues. Moreover, we expect to
experience substantial losses in the foreseeable future as we continue our
significant research, development and testing efforts.
WE WILL NEED ADDITIONAL FUNDING, AND WE MAY NOT HAVE ACCESS TO CAPITAL.
We will need to raise substantial additional funds to continue our research
and development programs and to commercialize our potential products. If we are
unable to raise such funds, we may be unable to complete our development
activities for any of our proposed products, including pexiganan acetate.
We regularly explore alternative means of financing our operations and
intend to seek additional funding through various sources, including:
. public and private securities offerings;
. collaborative, licensing and other arrangements with third parties;
and
. debt financing, such as bank loans.
We currently do not have any commitments to obtain additional funds, and
may be unable to obtain sufficient funding in the future on acceptable terms. If
we cannot obtain funding when needed, we may need to delay, scale back or
eliminate research and development programs or enter into collaborations with
third parties to commercialize potential products or technologies that we might
otherwise seek to develop or commercialize ourselves, or seek other
arrangements. This will likely result in lower consideration to the Company upon
commercialization of such products than if no arrangements were entered into, or
if such arrangements were entered into at later stages in the product
development process.
MANUFACTURING UNCERTAINTIES AND DEPENDENCIES MAY RESTRICT OUR ABILITY TO
COMMERCIALIZE PRODUCTS.
We currently have neither the resources, the facilities nor the
capabilities to manufacture any of our proposed products in the quantities and
quality required for commercial sale. We have no current plans to establish a
manufacturing facility. We depend upon contract manufacturers for commercial
scale manufacturing of our proposed products in accordance with regulatory
standards. This dependence may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis. Additionally, the number
of companies that are capable of producing bulk peptides on the scale that we
expect to require to commercialize pexiganan acetate is limited. We may be
unable to maintain arrangements with qualified outside contractors to
manufacture materials at costs which are affordable to us, if at all.
Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a manufacturing
process. In order to engage another manufacturer, we may need to obtain a
license or other technology transfer from the original contract manufacturer.
Even if a license is available from the original contract manufacturer on
acceptable terms, we may be unable to successfully effect the transfer of the
technology to the new contract manufacturer. Any such technology transfer may
also require the transfer of requisite
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data for regulatory purposes, including information contained in a proprietary
drug master file held by a contract manufacturer. We will rely more heavily on a
contract manufacturer that owns the drug master file because our ability to
change contract manufacturers may be limited.
We have been working for a number of years with Abbott Laboratories
("Abbott") in the development of a process to manufacture bulk drug substance
for pexiganan acetate. We currently depend upon Abbott for the production of
bulk drug substance for pexiganan acetate. If Abbott cannot manufacture bulk
drug substance for pexiganan acetate, we will need to secure other manufacturing
arrangements. The process developed by Abbott is proprietary. If we desire to
utilize, or have another party utilize, such process, we would be required to
pay Abbott a license fee.
The production of peptides (such as pexiganan acetate and other magainins)
is expensive relative to the production of traditional antibiotics. We are
pursuing alternative manufacturing sources, including recombinant manufacturing,
in order to improve the gross margins available to us on sales of pexiganan
acetate. These programs, however, are at an early stage and will require
significant expenditures over an extended period of time. Ultimately, we may be
unable to develop a more cost-effective manufacturing process, and even if we
develop a more cost-effective process, the FDA may not approve such a process.
We are also currently working with outside contractors for the chemical
production of squalamine. Production of squalamine and other proposed products
will also require significant expenditure.
WE DEPEND ON THIRD PARTIES FOR MARKETING AND SALES, WHICH MAY RESTRICT OUR
ABILITY TO COMMERCIALIZE PRODUCTS.
We currently do not have our own sales and marketing staff. We believe that
in order to successfully develop and market our products, we must enter into
marketing, distribution, development or other arrangements with third parties.
We have entered into such an arrangement with SmithKline with respect to
pexiganan acetate in North America. We may also be required to delegate the
responsibility for all or a significant portion of the development and
regulatory approval process to our partners. If our collaborators do not develop
an approvable or marketable product or do not market a product successfully, our
business will be adversely affected. We may be unable to enter into successful
sales and marketing arrangements in the future.
We do not have control over the amount and timing of resources to be
devoted to our products by our collaborative partners. In the future, the
interests of our collaborators may not be consistent with our interests.
Collaborators may develop products independently or through third parties which
could compete with our proposed products. With respect to pexiganan acetate,
SmithKline maintains a significant presence in the antibiotic area and currently
sells a topical antibiotic product indicated for the treatment of certain skin
infections. Furthermore, SmithKline may terminate our agreement with them.
As an alternative, we may decide to establish our own sales force to market
and sell our products. Although certain members of our management have
experience in the marketing of pharmaceutical products, we have no experience
with respect to marketing
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our products. If we choose to pursue this alternative, we will need to spend
significant additional funds and devote significant management resources and
time to establish a successful sales force.
OUR PRODUCT CANDIDATES ARE IN THE EARLY STAGE OF DEVELOPMENT AND MAY NEVER BE
COMMERCIALIZED.
Most of our proposed products are in a relatively early developmental stage
and will require significant research, development and testing. We must also
obtain regulatory approvals for all of our proposed products prior to
commercialization of the product. In addition, there has been only limited
research in the area of the use of naturally occurring host-defense compounds
for the treatment of infectious and other diseases.
The success of each of our drug development programs depends upon many
factors and is subject to numerous risks, including the risks that:
. the product candidate is found to be ineffective or unsafe;
. the product candidate later exhibits adverse effects that prevent
widespread use or require withdrawal from the market;
. the product candidate cannot be developed into a commercially viable
product;
. the product candidate is difficult or costly to manufacture;
. third party competitors hold proprietary rights that preclude us from
marketing the product; and
. third party competitors market a more effective, or more cost-effective,
product.
PEXIGANAN ACETATE MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD ADVERSELY
AFFECT OUR BUSINESS.
Even if we receive regulatory approval for pexiganan acetate, we may be
unable to achieve market acceptance of the drug. A number of factors may affect
market acceptance of pexiganan acetate, including:
. the perception by physicians and other members of the health care
community of the safety and efficacy of pexiganan acetate on an absolute
basis or in comparison to other drugs;
. the price of pexiganan acetate relative to other drugs or competing
treatment modalities;
. the availability of third-party reimbursement; and
. the effectiveness of our, or our partners', sales and marketing efforts
relative to the sales and marketing efforts of competitors.
In addition, side effects or unfavorable publicity concerning pexiganan
acetate or comparable drugs on the market may affect our ability to obtain
physician, patient or third-party payer acceptance.
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WE MAY NOT BE ABLE TO OBTAIN THE REGULATORY APPROVALS REQUIRED TO COMMERCIALIZE
ANY OF OUR PRODUCT CANDIDATES.
Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, particularly pexiganan
acetate, could materially affect our business. Even if we receive approval of a
product candidate, it may be conditioned upon certain limitations and
restrictions as to how the drug is used and may be subject to continuous review.
If we fail to comply with any applicable regulatory requirements, we could be
subject to penalties, including:
. warning letters;
. fines;
. withdrawal of regulatory approval;
. product recalls;
. operating restrictions;
. injunctions; and
. criminal prosecution.
The primary regulatory agency overseeing all phases of our drug development
and marketing programs is the FDA. In order to obtain FDA approval, we must
submit extensive preclinical and clinical data providing proof of safety,
efficacy and quality for each of our proposed products. This process is costly
and time consuming. The results of preclinical studies are submitted to the FDA
as part of an Investigational New Drug Application ("IND"). Once the IND is
effective, human clinical trials may be conducted. The results of the clinical
trials are submitted to the FDA as part of a New Drug Application. Following
review of the New Drug Application, the FDA may:
. grant marketing approval;
. require additional testing or information; or
. deny the application.
Detailed manufacturing information is also required to be included in the
New Drug Application for review and approval by the FDA. All manufacturing
facilities and processes must comply with the good manufacturing practice
regulations prescribed by the FDA. All manufacturers must, among other things,
pass an inspection of their plants and detailed manufacturing records and
processes. Among other things, it must be demonstrated that:
. the drug product can be consistently manufactured at the same quality
standard;
. the drug product is stable over time; and
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. the level of chemical impurities in the drug product are under a
designated level.
Peptides are an especially difficult group of compounds to manufacture at
these standards, particularly in the quantities at which we anticipate pexiganan
acetate will be required to be manufactured. Additionally, there have been a
number of changes over time in the manufacture of pexiganan acetate bulk drug
substance and final drug product, including changes in process, scale and
vendors. It is necessary to demonstrate that the product has been consistently
manufactured over time despite such changes.
The FDA's review of manufacturing for pexiganan acetate is on-going. The
FDA did initiate an inspection at the facility operated by one of our drug
product manufacturers; however this inspection was curtailed due to the fact
that we would not be ready for this inspection until a later date. This
inspection, as well as inspections at our facility and at Abbott, must be
successfully conducted and completed prior to any FDA approval of pexiganan
acetate. Failure to pass these inspections would prevent or delay the
commercialization of pexiganan acetate.
We will continue to be subject to regulation by the FDA even after our drug
products have been approved and commercialized. Among other things, the FDA may:
. require additional submissions if there are any modifications to the
drug product, including, for example, any changes in manufacturing
process, labeling, or manufacturing facility;
. require post-marketing testing and surveillance to monitor the effects
of approved drug products; and
. enforce conditional approvals that restrict the commercial applications
of a drug product.
Further, the FDA has numerous requirements governing labeling, promotional
material, storage, record keeping and reporting that may adversely affect our
business.
The Prescription Drug User Fee Act of 1992 imposes substantial fees on a
one-time basis for applications for approval, and on an annual basis for
manufacturing and marketing, of prescription drugs.
We are also subject to regulation by other regulatory authorities,
including the Occupational Safety and Health Administration, the Environmental
Protection Agency, the Nuclear Regulatory Commission, the Drug Enforcement
Agency and the United States Department of Agriculture, and to regulation under
the Toxic Substances Control Act, the Resource Conservation and Recovery Act and
other regulatory statutes. In the future we may be subject to additional
federal, state or local regulations.
Drug product marketing outside the United States is subject to foreign
regulatory requirements which may or may not be influenced by FDA approval.
While the requirements vary widely from country to country, generally, the drug
product must be approved by a foreign regulatory authority comparable to the FDA
prior to marketing
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the product in those countries. The time required to obtain foreign approvals
may be longer than that in the United States.
In the future, we may be subject to additional federal, state or local
regulations or additional fees. Efforts are continually underway to reform
federal regulation of drug products. Although some of these changes could
streamline and otherwise benefit development, marketing and related requirements
for drugs, others could increase regulatory requirements.
WE FACE INTENSE COMPETITION IN THE BIOPHARMACEUTICAL INDUSTRY.
The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
We are aware that research on compounds derived from animal host-defense systems
is being conducted by others. Many companies are also currently involved in
research and development activities focused on the pathogenesis of disease, and
the competition among companies attempting to find genes responsible for disease
is intense. Furthermore, many companies are engaged in the development and sale
of products, such as traditional antibiotics, which may be, or are, competitive
with our proposed products. Most of these entities have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than we have. We will also face competition from companies using different or
advanced techniques that may render our products obsolete.
We expect technological developments in the biopharmaceutical field to
occur at a rapid rate and expect competition to intensify as advances in this
field are made. Accordingly, we must continue to devote substantial resources
and efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that have
significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining regulatory
approvals of such products. Some of these companies may be in advanced phases of
clinical testing of various drugs that may be competitive with our proposed
products.
Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with our technology. In
addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting highly
qualified scientific personnel.
Pexiganan acetate may not be successfully marketed against oral antibiotics
for the treatment of infection in diabetic foot ulcers. These infections have
historically been treated with systemically administered antibiotics, which may
be perceived by some medical professionals as having certain advantages over
pexiganan acetate. In addition, we may be unable to manufacture pexiganan
acetate at a cost which will allow it to be sold at a competitive price relative
to oral antibiotics or other topical antibiotics that may be used for this
indication.
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Many companies are working to develop and market products intended for the
additional disease areas we are targeting, including cancer and asthma. A number
of major pharmaceutical companies have significant franchises in these disease
areas, and can be expected to invest heavily to protect their interests. In the
cancer field, anti-angiogenic agents are under development at a number of
companies. In the asthma field, other biopharmaceutical companies have also
reported the discovery of genes relating to asthma.
WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS, WHICH OFFER ONLY LIMITED PROTECTION
AGAINST POTENTIAL INFRINGEMENT.
Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. We cannot be certain that:
. patents will issue from any of our patent applications;
. our patent rights will be sufficient to protect our technology;
. our patents will not be successfully challenged or circumvented by our
competitors; or
. our patent rights will provide us with any commercial advantages.
The process of obtaining patent rights can be time consuming and expensive.
Even after significant expenditure, a patent may not issue. We can never be
certain that we were the first to develop the technology or that we were the
first to file a patent application for the particular technology because United
States patent applications are maintained in secrecy until a patent issues,
and publications in the scientific or patent literature lag behind actual
discoveries.
Even after we are issued patent rights, we cannot be certain that:
. others will not develop similar technologies;
. others will not design around the patented aspects of the technology;
. we will not be obliged to defend ourselves in court against allegations
of infringement of third-party patents;
. our issued patents will be held valid in court; and
. an adverse outcome in a suit would not subject us to significant
liabilities to third parties, require rights to be licensed from third
parties, or require us to cease using such technology.
The cost of litigation can be substantial, regardless of the outcome.
There may be disputes arising as to the ownership of our technology. Most
of our research and development team previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when the technology was developed, and
assert rights to the technology. These kind of disputes have occurred in the
past. We may not prevail in any such disputes.
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Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There may be a dispute as to the capacity in which consultants
are operating when they make certain discoveries. We may not prevail in any such
disputes.
In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators and sponsored
researchers and other advisors. We may find that these agreements will be
breached, or that our trade secrets have otherwise become known or independently
developed or discovered by our competitors.
Certain of our exclusive rights to patents and patent applications are
governed by contract. Generally, such contracts require that we pay royalties on
sales of any products which are covered by patent claims. If we are unable to
pay the royalties, we may lose our patent rights. Additionally, some of these
agreements also require that we develop the licensed technology under certain
timelines. If we do not adhere to an acceptable schedule of commercialization,
we may lose our patent rights.
WE DEPEND ON KEY PERSONNEL WHO WE MAY NOT BE ABLE TO RECRUIT OR RETAIN.
We depend to a considerable degree on a limited number of key personnel.
Many key responsibilities have been assigned to a relatively small number of
individuals. We do not maintain "key man" insurance on any of our employees. The
loss of certain senior management could adversely affect our business. Our
success will depend upon the successful recruitment and retention of qualified
personnel.
WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS, WHICH COULD ADVERSELY AFFECT OUR
BUSINESS.
We are subject to significant potential product liability risks inherent in
the testing, manufacturing and marketing of human therapeutic products,
including the risk that:
. our proposed products cause some undesirable side effects or injury
during clinical trials;
. our commercialized products cause undesirable side effects or injury; or
. third parties that we have agreed to indemnify incur liability.
While we carry insurance, we may be unable to maintain adequate coverage at
acceptable terms.
WE MAY NOT RECEIVE THIRD-PARTY REIMBURSEMENT FOR ANY OF OUR DRUG CANDIDATES.
Our ability to commercialize our proposed products depends on the extent to
which our customers are eligible for reimbursement from health care
organizations and the government.
In both the United States and elsewhere, prescription pharmaceutical sales
depend in part on the availability of reimbursement from third-party payers,
such as
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government health administration authorities, private health insurers and other
organizations. These organizations are increasingly challenging the prices
charged for medical products and services, particularly where they believe that
there is only an incremental therapeutic benefit which does not justify the
additional cost. Coverage and reimbursement may not be available for our
proposed products or, if available, may not be adequate.
There has been a trend to propose and enact government reforms intended to
contain or reduce the cost of health care. In certain foreign markets, pricing
or profitability of prescription pharmaceuticals is subject to government
control. In the United States, there have been a number of federal and state
proposals to implement similar government control.
We expect this reform trend to continue, but we cannot predict the nature
or extent of any reforms that may result. It is possible that reform could
impact pharmaceutical marketing and pricing. Not only would this affect our
profit margin, it could adversely affect our ability to obtain financing for the
continued development of our proposed products. Furthermore, reforms could have
a broader impact by limiting overall health care spending, such as Medicare and
Medicaid spending, which could also adversely effect our business.
OUR STOCK PRICE IS EXTREMELY VOLATILE DUE TO A NUMBER OF FACTORS, CERTAIN OF
WHICH ARE BEYOND OUR CONTROL.
The market prices for securities of biopharmaceutical and biotechnology
companies, including ours, have historically been highly volatile. Future events
affecting our business or that of our competitors may significantly impact our
stock price, including:
. product testing results;
. technological innovations;
. new commercial products;
. government regulations;
. proprietary rights;
. regulatory actions; and
. litigation.
WE MAY BE SUBJECT TO YEAR 2000 COMPLIANCE RISKS, WHICH COULD ADVERSELY AFFECT
OUR BUSINESS.
We use computers in various aspects of our business, and are therefore
exposed to Year 2000 ("Y2K") problems. In mid-1998, we initiated a compliance
program with the following objectives:
. identifying potentially non-compliant internal systems;
. updating and/or replacing aging hardware;
. upgrading or updating software/network systems;
. assuring company-wide Y2K compliance;
. assessing third-party risks; and
. establishing contingency plans for any third-party risks identified.
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We have identified, through internal testing and discussions with
significant vendors, that some administrative computers and software, as well as
some laboratory systems used for research, are not Y2K compliant. In order to
make these systems compliant, we have elected to replace hardware or upgrade
software systems. We expect to have critical internal systems and computers Y2K
compliant by November 1, 1999 at a cost of less than $100,000. Replacements and
upgrades of certain computers and systems would likely have been considered
independent of Y2K concerns.
We are in the process of contacting significant vendors to determine the
extent of third-party Y2K risks. Most third-parties have advised us that they
will make every effort to be compliant prior to December 31, 1999; however, no
assurances could be given. We have important third-party relationships with
sales and marketing partners, manufacturers and clinical study administrators.
None of our contracts with these vendors address Y2K problems or their
remediation or prevention, and no assurances of compliance can be given by these
parties. We will assess contingency plans if any significant risks are
identified. Necessary contingency plans or remedies could be expensive.
In a worst case scenario, we could experience delays in receiving R&D
supplies, commercial supplies and accessing data on patients enrolled in
clinical studies. These delays could slow commercialization efforts and research
and development programs, or impact our ability to effectively manage and
monitor these programs. Our Y2K compliance program is expected to reduce our
level of uncertainty about internal Y2K problems and, in addition, about the Y2K
compliance and readiness of significant third-parties with which we conduct
business.
THE EXERCISE OF OPTIONS AND WARRANTS AND OTHER ISSUANCES OF SHARES COULD HAVE AN
ADVERSE EFFECT ON OUR STOCK PRICE.
As of December 31, 1998, we had outstanding options to purchase an aggregate
of 3,588,000 shares of common stock at prices ranging from $.002 per share to
$16.75 per share, of which approximately 2,022,000 were exercisable as of such
date. Also outstanding at December 31, 1998 were warrants to purchase 229,739
shares of our Common Stock exercisable at $8 per share, a warrant to purchase
300,000 shares of our Common Stock, exercisable at $7.50 per share, and warrants
to purchase an aggregate of 1,030,905 shares of our Common Stock, exercisable
from $5.99 to $8.31 per share, subject to adjustment. Exercise of options and
warrants at prices below the market price of our Common Stock could adversely
affect the price of our Common Stock. Additional dilution may result from the
issuance of shares in connection with collaborations or manufacturing
arrangements, or in connection with other financing efforts.
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THE COMPANY
Background
Our biopharmaceutical research and development efforts are focused on two
technology platforms: host-defense drug discovery, and a gene-based target and
drug discovery program in asthma. In our host-defense programs, we seek to
isolate and develop therapeutically active compounds from the host-defense
systems of animals for the treatment of human diseases. In our gene-based target
and drug discovery program, we employ a range of genomics techniques to identify
genes associated with the pathogenesis of asthma, with the objective of
utilizing the optimal biologic gene targets in the development of novel
therapeutics for asthma and allergy.
Host-Defense System
We were formed to engage in the research, development and commercialization
of compounds derived from the host-defense systems of animals. The host-defense
system is the complex of natural processes and mechanisms used by the body to
protect itself against infection and certain cancers. This system comprises
physical barriers to infection, such as skin and mucosal membranes and fluids,
as well as more complex chemical and biological components, such as the immune
system. We believe that certain classes of naturally occurring peptides, such as
magainins, and certain small molecules, such as aminosterols, both described
below, are used by the host-defense system to provide a first line of defense
against infection and may have activity against certain cancers.
Our approach to identifying pharmaceutically active compounds in the host-
defense systems of animals involves the extraction of compounds from animal
tissues. The extracts are assayed for activity against selected pathogens, such
as bacteria, fungi, viruses and certain cancers. We then purify the active
compounds and determine the precise chemical structure of the purified molecule.
Once naturally occurring molecules have been isolated, we analyze the
relationship between the molecular structure of the compound and its biological
activity. In general, this requires that we identify the structures in the
compound that are believed to have therapeutic effects and analyze how the
compounds could be modified to improve the desired therapeutic effects. We then
utilize our combinatorial chemistry capabilities to modify the molecules to
alter biological activity or increase stability.
Magainins
Our lead product development candidate, pexiganan acetate, is a synthetic
magainin peptide. While conducting genetic and molecular biological research at
the National Institutes of Health ("NIH") in 1987, Dr. Michael A. Zasloff
(presently our Vice Chairman and Executive Vice President) isolated the first
magainins from the African frog Xenopus laevis. In connection with his research,
Dr. Zasloff was performing surgery on African clawed frogs in his laboratory.
After suturing the frogs and returning them to their aquarium tank, he noticed
that the incisions healed without infection, inflammation or notable scarring,
despite being exposed to the bacteria-filled aquarium water. Dr. Zasloff deduced
that the frogs produced a substance that protected them against infection.
Eventually, he isolated, from the frog's skin, two related peptides, which he
called magainins, and which were later
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shown to kill a variety of pathogens, including bacteria, amoebae, fungi and
parasites.
Magainins are peptides. A peptide is a chain of molecules, known as amino
acids, that are considered to be one of the basic building blocks of the human
body. Chains of two to 50 amino acids are generally referred to as peptides,
while longer chains are referred to as proteins. We have modified natural
peptides by rearranging the order and combination of amino acids and by
substituting and deleting additional amino acids to produce magainins having a
broader spectrum of therapeutic activity and improved potency.
Resistance is an increasing problem in the antibiotic field. Resistance is
the process by which antibiotics lose their effectiveness over time as bacteria,
through mutation, develop the means to produce enzymes capable of diminishing
the antibiotic utility. To date, we have not noted the development of resistance
to magainins. We believe this is because magainins break down pathogen cells
differently than traditional antibiotics. In the presence of a cell membrane
rich in acidic phospholipids and poor in cholesterol, such as bacterial
membranes, magainins twist into two-sided, spiral shaped molecules (helices),
with one side soluble in the fat-like substance that comprise cell membranes and
the other side soluble in water. Individual magainin peptides then aggregate and
form a channel in the membrane of a pathogen. Once formed, this aggregation of
magainin peptides punctures the cell membrane, breaks down the integrity of the
cell and kills the pathogen. By rupturing bacteria and targeting a fundamental
difference in cell membrane composition, magainins target and kill bacteria
differently than traditional antibiotics.
Aminosterols and Angiogenesis
Squalamine is the lead product development candidate in our aminosterol
program. Squalamine was discovered in the body tissues of the dogfish shark. The
shark was initially examined because of its known resistance to infection and
cancer. The chemical structure of squalamine uniquely combines a steroid and a
polyamine, two classes of systemic agents that are generally well-tolerated in
humans. Beyond squalamine, we have discovered several other aminosterol
compounds in the shark. In preclinical testing, some of these compounds have
demonstrated an ability to control cell growth, along with other pharmacologic
properties. These properties may have application in the treatment of a number
of disease indications characterized by cell proliferation, including cancer.
Within the human body, a network of arteries, capillaries and veins, known
as the vasculature, functions to transport blood throughout the body. The basic
network of the vasculature is developed through angiogenesis, a fundamental
process by which new blood vessels are formed. This growth process primarily
occurs during the first three months of embryonic development. Once the general
network of the blood vessels is complete, certain inhibitory factors balance and
stabilize the stimulators of new blood vessel formation. Although angiogenesis
occurs in human embryonic development, wound healing and in certain reproductive
processes in women, angiogenesis is also associated with several diseases,
including diabetic retinopathy and macular degeneration, both of which are major
causes of blindness, and cancer.
Cancer includes many different types of uncontrolled cellular growth.
Clusters of cancer cells, referred to as tumors, may invade and destroy
surrounding organs,
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impair physiological function and lead to death. In order to survive, cancer
cells require oxygen and nutrients, which are received from the body's blood
supply. In order to access this blood supply, cancer cells initiate a
biochemical mechanism that stimulates angiogenesis, which provides the blood
supply that nourishes the tumor. As cancer cells grow and metastasize (spread
from primary sites to secondary sites) they require continuous angiogenesis.
Anti-angiogenic substances are intended to inhibit the growth of new blood
vessels and may therefore be effective in treating certain cancers, with
potentially less serious and fewer adverse side effects than traditional
therapies.
Genomics and Drug Discovery
Advances in genetics and molecular biology have significantly enhanced the
ability of scientists to clone and sequence genes and identify the causes of
disease at the molecular level. Genomics, or the study of the genome, can be
applied to the examination of the genetic influences on human disease.
Functional genomics refers to the determination of the manner in which disease
genes specifically impact the disease process. In contrast to traditional drug
discovery and development, a genetic approach commences by identifying those
genes that are responsible for the initiation or progression of disease.
Analysis of DNA (deoxyribonucleic acid) helps characterize the specific role of
genes in the disease process. The information stored in the DNA of a gene acts
as a set of instructions to living cells of the organism. These instructions
direct the cells to synthesize specific proteins, such as hormones or enzymes
that perform the basic biochemical and physiological functions of the cells.
Disease may occur when a defect (mutation) occurs in a gene or genes, resulting
in incorrect instructions being sent to cells, and disrupting the normal balance
or function of these essential proteins. The ability to detect such a mutation
and to understand how the disruption of normal protein function contributes to
the initiation and progression of the resultant disease are potentially valuable
aids to pharmaceutical discovery and development. To identify an appropriate
molecular target for therapeutic intervention, it may also be necessary to
characterize fully the biochemical pathway in which the disease gene functions.
We employ a functional genomics approach to understand the genetic basis of
disease and to develop potential drug leads. Through these efforts we seek to
identify appropriate targets for pharmaceutical intervention that aim to control
the root cause of human disease. We believe that pharmaceuticals developed for
use against these specific targets have the potential for greater effectiveness
and fewer side effects than pharmaceuticals developed through more traditional
processes.
PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
Pexiganan Acetate--Infected Diabetic Foot Ulcers
Our most advanced development compound is pexiganan acetate, a topical
cream antibiotic. Pexiganan acetate is a 22 amino acid magainin peptide,
formulated as a 1% topical cream. In vitro studies of pexiganan acetate have
shown that it is a broad spectrum anti-infective, effective against gram
negative, gram positive and fungal organisms. Our initial intended use for
pexiganan acetate is for the treatment of infection in diabetic foot ulcers.
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Infected foot ulcers in diabetic patients are a serious complication. A
diabetic patient's vascular and nervous systems are often compromised, creating
conditions conducive to foot ulceration and infection. These infections can lead
to osteomyelitis (bone infection) and limb amputation. Patients with infected
ulcers are typically treated with oral antibiotics. No topical antibiotics are
currently approved specifically for the treatment of infection in diabetic foot
ulcers.
We believe that pexiganan acetate may offer advantages over oral
antibiotics in the treatment of infection in diabetic foot ulcers, including
reduced likelihood of resistance development and side effects. Increased
utilization of oral antibiotics has exacerbated the development of antibiotic
resistance, and resistant organisms are expected to continue to develop.
Additionally, oral antibiotics can cause side effects, including
gastrointestinal distress, headaches and insomnia. We believe that a topical
treatment for diabetic foot ulcers may also improve patient compliance with
their medication and associated wound care.
We have completed two pivotal Phase III clinical trials of pexiganan
acetate for the treatment of infection in diabetic foot ulcers. These trials
were designed as equivalence studies with the goal of demonstrating that
pexiganan acetate topical cream is comparable to orally administered ofloxacin,
a quinolone antibiotic, indicated for the treatment of infection, including skin
and soft tissue infections. In July 1998 we submitted a New Drug Application
with the FDA based on the results of these clinical trials; however, we cannot
be sure that the FDA will approve pexiganan acetate. (See Item 1--Risk Factors:
"We Depend Heavily on Pexiganan Acetate, Which Is Still in the Development Stage
and May Never Be Approved for Commercial Use")
Squalamine--Solid Tumors
Squalamine is the lead product development candidate in our aminosterol
program. Our initial disease focus for squalamine is solid tumors. We are
currently conducting Phase I clinical testing of squalamine in patients with
advanced tumor malignancy.
Cancer is the second most common cause of death in the Western world,
exceeded only by coronary heart disease. Cancer patients are usually treated
with a combination of surgery, radiation therapy and chemotherapy. Surgery and
radiation therapy can be particularly effective in patients in which the disease
has not yet spread to other tissue or organs. Chemotherapy is the principal
treatment for tumors that have metastasized. Chemotherapy involves the
administration of drugs designed to kill cancer cells ("cytotoxic drugs"), or
the administration of hormone analogues to either reduce the production of, or
block the action of, certain hormones, such as estrogens and androgens, which
affect the growth of tumors. Because chemotherapeutic agents generally attack
rapidly dividing cells indiscriminately, damaging both normal and cancerous
cells, chemotherapy patients often suffer serious side effects. Additionally,
resistance to chemotherapy inevitably occurs over time.
With advances in the understanding of the genesis and development of
cancer, there are several new approaches to cancer treatment. One such approach
is the control of angiogenesis, or new blood vessel growth. Angiogenesis is a
key stage in the development of tumor malignancy, and its inhibition may
contribute to the tumor becoming or remaining dormant.
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Squalamine may be of benefit in the treatment of solid tumors by inhibiting
new blood vessel growth required for tumor nourishment. Squalamine has exhibited
anti-angiogenic properties in a number of in vitro and in vivo assays, and in
animal models. Squalamine is believed to inhibit the growth of primitive or
embryonic capillaries associated with tumor growth. Squalamine has the potential
to be used in combination with a number of cytotoxic drugs in the treatment of
solid tumors, and we have observed synergies with certain such cytotoxic
therapies in animal testing.
Asthma Genomics Program
Asthma is characterized clinically by wheezing and shortness of breath due
to reversible bronchospasm. It is a chronic, disabling disorder that appears to
be increasing in prevalence and severity. The complex pathophysiology of asthma
is under intensive scrutiny by scientists and researchers; however, its precise
causes are not well understood. A number of studies suggest asthma may have a
genetic basis, but family studies have been difficult to interpret due to other
influences, including allergens and pollutants. Allergic diseases, including
allergic rhinitis, are often present in individuals with asthma, but are also
individually important diseases. We believe the genetic susceptibility factors
for asthma and allergy will be, at least in part, related to one another.
Current treatment for asthma and allergies principally focusses on controlling
inflammation or treating airway constriction through use of bronchodilators and
steroids.
In 1996, we initiated a research program in the genomics of asthma. Our
research program is primarily focussed on IL9, a gene which varies in DNA
structure and function in asthmatic and allergic humans and animals. We maintain
a comprehensive research and development program to identify additional genes in
the IL9 biologic pathway. The IL9 receptor has been discovered in humans as a
key second gene candidate in the IL9 pathway, and we have also identified other
genes. We continue to investigate the role of these genes in the allergic
inflammatory response, with the objective of utilizing the optimal biologic gene
targets in the development of novel therapeutics for asthma and allergy.
Other Research Programs
We are evaluating additional magainin peptide compounds in a number of
disease indications, including cancer and other infections.
We are also pursuing other research programs with squalamine. Squalamine
may have application in a number of disease conditions characterized by abnormal
blood vessel growth, including rheumatoid arthritis, diabetic retinopathy,
psoriasis and age related macular degeneration of the eye.
We have discovered a number of other aminosterol compounds in the shark,
each differing from squalamine in chemical structure. Each of these compounds is
believed to interact with a different receptor, and, as a consequence, alter the
intracellular metabolism in a manner that disturbs the target cell response to
certain growth factors, hormones and other signals. We are evaluating the role
of aminosterols in altering metabolism as it affects obesity. Other therapeutic
opportunities for these compounds may include various malignancies, inflammatory
diseases, and viral infections.
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We have a number of other early stage research programs. In one such
program, we are engaged in research efforts on defensins. Defensins are
compounds found in animals and humans which have host-defense properties similar
to magainins and aminosterols. We believe that the longer-term evolution of the
host-defense field may lie in the discovery of compounds that regulate
endogenous defensin expression, rather than direct application of the defensin
molecules themselves.
COLLABORATIVE ARRANGEMENTS
Development and Marketing Collaborations. Collaborations may allow us to
leverage our scientific and financial resources and gain access to markets and
technologies that would not otherwise be available to us. In the long term,
development and marketing arrangements with established companies in the markets
in which potential products will compete may allow our products more efficient
access to intended markets and may accordingly conserve our resources. We expect
that we will enter into development and marketing arrangements for most of the
products we may develop. From time to time, we hold discussions with various
potential partners.
In February 1997, we entered into a development, supply and distribution
agreement in North America with SmithKline Beecham for pexiganan acetate.
SmithKline has paid us $10.0 million under this agreement, and they may make
additional payments to us of up to $22.5 million upon the occurrence of certain
product milestones. SmithKline will also fund a percentage of any development
expenses for any additional indications for pexiganan acetate. Upon the
commencement of commercial sales by SmithKline, we will be responsible for the
supply of pexiganan acetate and SmithKline will be responsible for the marketing
and sales of pexiganan acetate. We will receive certain percentages of
SmithKline sales revenues under agreed upon terms. The SmithKline Agreement
gives SmithKline the right to negotiate for rights to another of our product
development candidates, under certain terms and conditions. The SmithKline
Agreement also gives SmithKline the right to terminate the arrangement on a
country-by-country basis if SmithKline determines it is not economical to
distribute pexiganan acetate in those areas.
In December 1998, we entered into a collaborative research and option
agreement with Genentech relating to a protein therapeutic in asthma. Under this
agreement, Genentech will be provided access to a therapeutic target (IL9),
which is in our proprietary asthma gene database, and the companies will conduct
a collaborative program to evaluate the utility of a blocking antibody to IL9 in
suppressing the asthmatic response. Under this collaboration, Genentech made an
initial equity investment in Magainin of $2.0 million, and has an option to
enter into a development and commercialization agreement with us. Any such
development and commercialization agreement could provide for payments to
Magainin of up to $35.0 million, upon terms to be negotiated, and royalty
payments on sales of products developed by Genentech in the field.
Research and License Agreements. We have rights under license agreements to
several patents and patent applications under which we expect to owe royalties
on sales of any products that are covered by issued patent claims. Additionally,
certain of these agreements also provide that if we elect not to pursue the
commercial development of any licensed technology, or do not adhere to an
acceptable schedule of commercialization, then our exclusive rights to such
technology would terminate. We
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also fund research at certain institutions, and these relationships may provide
us with an option to license any results of the research.
MANUFACTURING
We currently have neither the resources, the facilities nor the
capabilities to manufacture any of our proposed products in the quantities and
quality required for commercial sale. We have no current plans to establish a
manufacturing facility. We depend upon contract manufacturers for commercial
scale manufacturing of our proposed products in accordance with regulatory
standards. This dependence may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis. Additionally, the number
of companies that are capable of producing bulk peptides on the scale that we
expect to require to commercialize pexiganan acetate is limited. We may be
unable to maintain arrangements with qualified outside contractors to
manufacture materials at costs which are affordable to us, if at all.
Contract manufacturers may utilize their own technology, our technology, or
technology acquired or licensed from third parties in developing a manufacturing
process. In order to engage another manufacturer, we may need to obtain a
license or other technology transfer from the original contract manufacturer.
Even if a license is available from the original contract manufacturer on
acceptable terms, we may be unable to successfully effect the transfer of the
technology to the new contract manufacturer. Any such technology transfer may
also require the transfer of requisite data for regulatory purposes, including
information contained in a proprietary drug master file held by a contract
manufacturer. We will rely more heavily on a contract manufacturer that owns the
drug master file because our ability to change contract manufacturers may be
limited.
We have been working for a number of years with Abbott Laboratories
("Abbott") in the development of a process to manufacture bulk drug substance
for pexiganan acetate. We currently depend upon Abbott for the production of
bulk drug substance for pexiganan acetate. If Abbott cannot manufacture bulk
drug substance for pexiganan acetate, we will need to secure other manufacturing
arrangements. The process developed by Abbott is proprietary. If we desire to
utilize, or have another party utilize, such process, we would be required to
pay Abbott a license fee.
The production of peptides (such as pexiganan acetate and other magainins)
is expensive relative to the production of traditional antibiotics. We are
pursuing alternative manufacturing sources, including recombinant manufacturing,
in order to improve the gross margins available to us on sales of pexiganan
acetate. These programs, however, are at an early stage and will require
significant expenditures over an extended period of time. Ultimately, we may be
unable to develop a more cost-effective manufacturing process, and even if we
develop a more cost-effective process, the FDA may not approve such a process.
We are also currently working with outside contractors for the chemical
production of squalamine. Production of squalamine and other proposed products
will also require significant expenditure.
GOVERNMENT REGULATION
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Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign governmental
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, particularly pexiganan
acetate, could materially affect our business. Even if we receive approval of a
product candidate, it may be conditioned upon certain limitations and
restrictions as to how the drug is used and may be subject to continuous review.
If we fail to comply with any applicable regulatory requirements, we could be
subject to penalties, including:
. warning letters;
. fines;
. withdrawal of regulatory approval;
. product recalls;
. operating restrictions;
. injunctions; and
. criminal prosecution.
The primary regulatory agency overseeing all phases of our drug development
and marketing programs is the FDA. In order to obtain FDA approval, we must
submit extensive preclinical and clinical data providing proof of safety,
efficacy and quality for each of our proposed products. This process is costly
and time consuming. The results of preclinical studies are submitted to the FDA
as part of an Investigational New Drug Application ("IND"). Once the IND is
effective, human clinical trials may be conducted. The results of the clinical
trials are submitted to the FDA as part of a New Drug Application. Following
review of the New Drug Application, the FDA may:
. grant marketing approval;
. require additional testing or information; or
. deny the application.
Detailed manufacturing information is also required to be included in the
New Drug Application for review and approval by the FDA. All manufacturing
facilities and processes must comply with the good manufacturing practice
regulations prescribed by the FDA. All manufacturers must, among other things,
pass an inspection of their plants and detailed manufacturing records and
processes. Among other things, it must be demonstrated that:
. the drug product can be consistently manufactured at the same quality
standard;
. the drug product is stable over time; and
. the level of chemical impurities in the drug product are under a
designated level.
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Peptides are an especially difficult group of compounds to manufacture at
these standards, particularly in the quantities at which we anticipate pexiganan
acetate will be required to be manufactured. Additionally, there have been a
number of changes over time in the manufacture of pexiganan acetate bulk drug
substance and final drug product, including changes in process, scale and
vendors. It is necessary to demonstrate that the product has been consistently
manufactured over time despite such changes.
The FDA's review of manufacturing for pexiganan acetate is on-going. The
FDA did initiate an inspection at the facility operated by one of our drug
product manufacturers; however this inspection was curtailed due to the fact
that we would not be ready for this inspection until a later date. This
inspection, as well as inspections at our facility and at Abbott, must be
successfully conducted and completed prior to any FDA approval of pexiganan
acetate. Failure to pass these inspections would prevent or delay the
commercialization of pexiganan acetate.
We will continue to be subject to regulation by the FDA even after our drug
products have been approved and commercialized. Among other things, the FDA may:
. require additional submissions if there are any modifications to the
drug product, including, for example, any changes in manufacturing
process, labeling, or manufacturing facility;
. require post-marketing testing and surveillance to monitor the effects
of approved drug products; and
. enforce conditional approvals that restrict the commercial
applications of a drug product.
Further, the FDA has numerous requirements governing labeling, promotional
material, storage, record keeping and reporting that may adversely affect our
business.
The Prescription Drug User Fee Act of 1992 imposes substantial fees on a
one-time basis for applications for approval, and on an annual basis for
manufacturing and marketing, of prescription drugs.
We are also subject to regulation by other regulatory authorities,
including the Occupational Safety and Health Administration, the Environmental
Protection Agency, the Nuclear Regulatory Commission, the Drug Enforcement
Agency and the United States Department of Agriculture, and to regulation under
the Toxic Substances Control Act, the Resource Conservation and Recovery Act and
other regulatory statutes. In the future we may be subject to additional
federal, state or local regulations.
Drug product marketing outside the United States is subject to foreign
regulatory requirements which may or may not be influenced by FDA approval.
While the requirements vary widely from country to country, generally, the drug
product must be approved by a foreign regulatory authority comparable to the FDA
prior to marketing the product in those countries. The time required to obtain
foreign approvals may be longer than that in the United States.
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In the future, we may be subject to additional federal, state or local
regulations or additional fees. Efforts are continually underway to reform
federal regulation of drug products. Although some of these changes could
streamline and otherwise benefit development, marketing and related requirements
for drugs, others could increase regulatory requirements.
PATENT AND PROPRIETARY RIGHTS; LICENSED TECHNOLOGY
Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. We cannot be certain that:
. patents will issue from any of our patent applications;
. our patent rights will be sufficient to protect our technology;
. our patents will not be successfully challenged or circumvented by our
competitors; or
. our patent rights will provide us with any commercial advantages.
The process of obtaining patent rights can be time consuming and expensive.
Even after significant expenditure, a patent may not issue. We can never be
certain that we were the first to develop the technology or that we were the
first to file a patent application for the particular technology because U.S.
patent applications are maintained in secrecy until a patent issues, and
publications in the scientific or patent literature lag behind actual
discoveries.
Even after we are issued patent rights, we cannot be certain that:
. others will not develop similar technologies;
. others will not design around the patented aspects of the technology;
. we will not be obliged to defend ourselves in court against
allegations of infringement of third-party patents;
. our issued patents will be held valid in court; and
. an adverse outcome in a suit would not subject us to significant
liabilities to third parties, require rights to be licensed from third
parties, or require us to cease using such technology.
The cost of litigation can be substantial, regardless of the outcome.
There may be disputes arising as to the ownership of our technology. Most
of our research and development team previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when the technology was developed, and
assert rights to the technology. These kind of disputes have occurred in the
past. We may not prevail in any such disputes.
Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There
25
<PAGE>
may be a dispute as to the capacity in which consultants are operating when they
make certain discoveries. We may not prevail in any such disputes.
In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our corporate partners,
employees, consultants, outside scientific collaborators and sponsored
researchers and other advisors. We may find that these agreements will be
breached, or that our trade secrets have otherwise become known or independently
developed or discovered by our competitors.
Certain of our exclusive rights to patents and patent applications are
governed by contract. Generally, such contracts require that we pay royalties on
sales of any products which are covered by patent claims. If we are unable to
pay the royalties, we may lose our patent rights. Additionally, some of these
agreements also require that we develop the licensed technology under certain
timelines. If we do not adhere to an acceptable schedule of commercialization,
we may lose our patent rights.
COMPETITION
The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in a number of areas similar to our fields of interest.
We are aware that research on compounds derived from animal host-defense systems
is being conducted by others. Many companies are also currently involved in
research and development activities focused on the pathogenesis of disease, and
the competition among companies attempting to find genes responsible for disease
is intense. Furthermore, many companies are engaged in the development and sale
of products, such as traditional antibiotics, which may be, or are, competitive
with our proposed products. Most of these entities have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than we have. We will also face competition from companies using different or
advanced techniques that may render our products obsolete.
We expect technological developments in the biopharmaceutical field to
occur at a rapid rate and expect competition to intensify as advances in this
field are made. Accordingly, we must continue to devote substantial resources
and efforts to research and development activities in order to maintain a
competitive position in this field. Our compounds, products or processes may
become obsolete before we are able to recover a significant portion of our
research and development expenses. We will be competing with companies that have
significantly more experience in undertaking preclinical testing and human
clinical trials of new or improved therapeutic products and obtaining regulatory
approvals of such products. Some of these companies may be in advanced phases of
clinical testing of various drugs that may be competitive with our proposed
products.
Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with our technology. In
addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting highly
qualified scientific personnel.
26
<PAGE>
Pexiganan acetate may not be successfully marketed against oral antibiotics
for the treatment of infection in diabetic foot ulcers. These infections have
historically been treated with systemically administered antibiotics, which may
be perceived by some medical professionals as having certain advantages over
pexiganan acetate. In addition, we may be unable to manufacture pexiganan
acetate at a cost which will allow it to be sold at a competitive price relative
to oral antibiotics or other topical antibiotics that may be used for this
indication.
Many companies are working to develop and market products intended for the
additional disease areas we are targeting, including cancer and asthma. A number
of major pharmaceutical companies have significant franchises in these disease
areas, and can be expected to invest heavily to protect their interests. In the
cancer field, anti-angiogenic agents are under development at a number of
companies. In the asthma field, other biopharmaceutical companies have also
reported the discovery of genes relating to asthma.
EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael R. Dougherty 41 President, Chief Executive Officer and Chief Financial Officer
Roy C. Levitt, M.D. 45 Executive Vice President and Chief Operating Officer
Michael A. Zasloff, M.D., Ph.D. 53 Vice Chairman and Executive Vice President
Thomas J. Bigger 42 Senior Vice President
Kenneth J. Holroyd, M.D. 40 Senior Vice president
</TABLE>
Mr. Dougherty has served as our President and Chief Executive Officer since
August 1998. Mr. Dougherty served as Executive Vice President from March 1995
through August 1998, and as a Director since August 1997. From August 1993, when
he joined us, until March 1995, Mr. Dougherty served as Senior Vice President.
Mr. Dougherty has also served as our Chief Financial Officer since August 1993.
Prior to joining us, Mr. Dougherty served in the following capacities at
Centocor, Inc. (a biopharmaceutical company): Senior Vice President, Chief
Financial Officer and Treasurer, from February 1992 to August 1993, Vice
President Corporate Finance from May 1990 to February 1992 and Treasurer from
June 1986 to May 1990.
Dr. Levitt has served as our Executive Vice President and Chief Operating
Officer since August 1998. Dr. Levitt was appointed our head of Research and
Development, and a Director in August 1997. Dr. Levitt has served as Executive
Vice President since joining us on a full-time basis in January 1996. Prior to
joining, Dr. Levitt served as a consultant to Magainin beginning in 1995. Dr.
Levitt served as a faculty member at Johns Hopkins University in the Department
of Anesthesiology and Critical Care Medicine, from 1986 to 1995, in Neurological
Surgery from 1995 to 1996 and in the Department of Environmental Health Sciences
in the Johns Hopkins School of Public Health and Hygiene from 1988 to 1996.
27
<PAGE>
Dr. Zasloff has served as our Executive Vice President since July 1992. In
July 1996, Dr. Zasloff was appointed Vice Chairman of the Board. From 1988 until
Dr. Zasloff joined us on a full-time basis in July 1992, Dr. Zasloff was our
Chief Scientific Advisor and served as the Charles E.H. Upham Professor,
Department of Pediatrics and Genetics, University of Pennsylvania School of
Medicine, and Chief, Division of Human Genetics and Molecular Biology, The
Children's Hospital of Philadelphia. From 1982 until 1988, Dr. Zasloff was
Chief, Human Genetics Branch, National Institutes of Child Health and Human
Development, National Institutes of Health. Dr. Zasloff currently also serves as
Adjunct Professor, Department of Human Genetics and Orthopedics, University of
Pennsylvania School of Medicine.
Mr. Bigger has served as Senior Vice President, Business Development,
Marketing and Sales since joining us in July 1996. Mr. Bigger served as Senior
Vice President of Advanced Polymer Systems (a drug development company), in 1994
and 1995. From 1979 to 1994, Mr. Bigger held a number of positions of increasing
responsibility at Rhone-Poulenc Rorer ("RPR"), a pharmaceutical company,
including serving as President of Dermik Laboratories, a subsidiary of RPR.
Dr. Holroyd has served as Senior Vice President, Clinical Research and
Regulatory Affairs since June 1998. Dr. Holroyd has held various positions,
including Vice President of Respiratory Discovery Research, Product Development
and Business Development, since joining us in February 1997. Prior to joining
us, Dr. Holroyd was a faculty member and head of respiratory care services at
Johns Hopkins University School of Medicine and Hospital in the Department of
Anesthesiology and Critical Care Medicine. Dr. Holroyd earned his M.D. from
Johns Hopkins in 1984 and completed his residency training at Johns Hopkins
serving as chief resident of the Osler Medical Service and at the National
Heart, Lung and Blood Institute.
Officers are elected or appointed by the Board of Directors to serve until
the appointment or election and qualification of their successors or their
earlier termination or resignation.
EMPLOYEES
As of December 31, 1998, we had 53 full-time employees. No employees are
covered by collective bargaining agreements, and we consider relations with our
employees to be good.
ITEM 2. PROPERTIES
We lease an aggregate of approximately 26,000 square feet of space in
Plymouth Meeting, Pennsylvania for office and laboratory space. Our leases
expire in 2001 and 2002, and provide for minimum annual payments of
approximately $411,000 in 1999 and annual increases thereafter.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Magainin Pharmaceuticals Inc. common stock trades on the Nasdaq Stock
Market under the symbol MAGN. The quarterly range of high and low closing sales
prices of our common stock, as reported on the Nasdaq National Market, are shown
below:
Year Ended December 31, 1998 HIGH LOW
---------------------------- ---- ---
1st Quarter $ 8.75 $ 5.38
2nd Quarter $ 8.19 $ 4.38
3rd Quarter $ 6.00 $ 2.31
4th Quarter $ 3.88 $ 2.38
Year Ended December 31, 1997 HIGH LOW
---------------------------- ---- ---
1st Quarter $10.50 $ 7.88
2nd Quarter $ 8.50 $ 6.63
3rd Quarter $11.81 $ 7.25
4th Quarter $12.13 $ 7.50
DIVIDENDS
We have not paid any cash dividends since our inception, and we do not
anticipate paying any cash dividends in the foreseeable future. It is the
present policy of the Board of Directors to retain all earnings, if any, to
finance the development of our business.
NUMBER OF HOLDERS OF COMMON STOCK
At February 26, 1999, there were approximately 350 stockholders of record
and approximately 4,600 beneficial owners of our common stock.
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data. The
selected financial data is derived from, and is qualified by reference to, our
financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract and government grant $ -- $ 10,088 $ 150 $ 2,056 $ 85
Related party contract -- -- -- 280 326
--------- --------- -------- -------- --------
-- 10,088 150 2,336 411
--------- --------- -------- -------- --------
Costs and expenses:
Research and development 21,456 22,875 22,326 18,160 11,258
General and administrative 3,292 3,246 3,488 3,137 3,468
Charge for stock issuance relating to
royalty buyout -- -- 7,080 -- --
--------- --------- -------- -------- --------
24,748 26,121 32,894 21,297 14,726
--------- --------- -------- -------- --------
Loss from operations (24,748) (16,033) (32,744) (18,961) (14,315)
Interest income 1,640 1,770 2,172 1,778 1,207
Interest expense (196) (118) (48) (32) (48)
--------- --------- -------- -------- --------
Net loss $ (23,304) $ (14,381) $(30,620) $(17,215) $(13,156)
========= ========= ======== ======== ========
Net loss per share--basic and diluted $ (1.05) $ (0.73) $ (1.71) $ (1.17) $ (0.99)
========= ========= ======== ======== ========
Weighted average shares outstanding 22,235 19,679 17,938 14,696 13,301
========= ========= ======== ======== ========
<CAPTION>
December 31, 1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments $ 22,871 $ 39,061 $ 33,340 $ 43,666 $ 25,921
Working capital 11,897 33,073 28,276 30,429 21,750
Total assets 25,891 42,444 36,376 45,727 28,050
Total liabilities 11,211 7,574 6,433 4,534 4,137
Accumulated deficit (132,928) (109,624) (95,243) (64,623) (47,408)
Stockholders' equity 14,680 34,870 29,943 41,193 23,913
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This report contains, in addition to historical information, statements by us
with regard to our expectations as to financial results and other aspects of our
business that involve risks and uncertainties and may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements reflect management's current views and are based on
certain assumptions. Actual results could differ materially from those currently
anticipated as a result of a number of factors, including, but not limited to,
the risks and uncertainties discussed in this report, particularly those
relating to present or anticipated scientific progress, development of pexiganin
acetate or any other potential pharmaceutical products, future revenues, capital
expenditures, manufacturing, sales and marketing requirements and capabilities,
research and pharmaceutical products, regulatory approvals, future revenues,
capital expenditures, research and development, future financings, competition,
protection of patents and proprietary information, collaborations, personnel,
third party reimbursement, Year 2000 readiness and stock price that are
discussed under "Risk Factors" set forth in Item 1 of this report.
30
<PAGE>
GENERAL
We are a biopharmaceutical company engaged in the development of medicines
for serious diseases. Our development efforts are focused on anti-infectives,
oncology, and pulmonary and allergic disorders.
We have submitted a New Drug Application with the United States FDA for our
lead product development candidate, pexiganan acetate, a topical cream
antibiotic intended for the treatment of infection in diabetic foot ulcers. We
are also conducting research on an aminosterol class of compounds. One such
compound, squalamine, is currently being evaluated in Phase I clinical testing
in cancer. We are conducting additional research efforts in the genomics of
asthma.
Since commencing operations in 1988, we have not generated any revenue from
product sales, and we have funded operations primarily from the proceeds of
public and private placements of securities. We have incurred a loss in each
year since our inception, and we expect to incur substantial additional losses
for at least the next several years. We expect that losses will fluctuate from
quarter to quarter, and that such fluctuations may be substantial. As such,
results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years. At December 31, 1998, our
accumulated deficit was approximately $132,928,000.
RESULTS OF OPERATIONS
REVENUES
We have received no revenues from product sales. Revenues recorded to date
have consisted principally of revenues recognized under collaborations with
corporate partners. We recorded revenue of $10,000,000 in 1997 reflecting the
receipt of payments under the SmithKline Agreement entered into in February,
1997 for pexiganan acetate. We do not expect to realize additional milestone
revenues from our arrangement with SmithKline unless, and until, FDA approval of
pexiganan acetate is received. However, we cannot be sure that the FDA will
approve pexiganan acetate. We have no other currently existing collaborations
which will result in the realization of research and development revenues.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased in the year ended December 31,
1998 as compared to the same period a year ago due principally to a reduction in
clinical and preclinical costs associated with pexiganan acetate and squalamine,
as well as a reduction in manufacturing development costs. These decreases have
been partially offset by an increase in personnel expenses.
We have incurred significant expenses associated with the development and
scale-up of the manufacturing process for our products, as well as in the
production of materials for development and possible commercialization. We
contract with third parties for these activities, and such expenses amounted to
$7,652,000, $10,174,000 and $9,557,000 for 1998, 1997 and 1996, respectively.
The level of research and development expenses in future periods will
depend principally upon the progress of our research programs. We expect
expenses relating
31
<PAGE>
to our development of pexiganan acetate to continue to be significant in future
periods principally as a result of our ongoing manufacturing programs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist principally of personnel costs
and professional fees and have remained generally steady from 1996 through 1998.
OTHER INCOME AND EXPENSE
We recorded a non-cash charge to earnings of $7,080,000 in 1996
representing the fair value of 550,000 shares of Common Stock issued by us in a
buyout of royalties which we would otherwise have owed on any sales of pexiganan
acetate.
Interest income decreased during the year ended December 31, 1998 as
compared to the prior year, due to lower investment balances during this period.
The decrease in interest income in the year ended December 31, 1997 as compared
to December 31, 1996 is principally due to decreased investment balances. The
increase in interest expense for the years ended December 31, 1998 and 1997, as
compared to the prior years, is due to higher debt balances.
LOSS
We expect to conduct, over the next several years, significant research,
pre-clinical development, clinical testing and manufacturing activities. We
expect that these activities, together with projected general and administrative
expenses, will result in continued and significant losses.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Cash and investments were $22,871,000 at December 31, 1998 as compared to
$39,061,000 at December 31, 1997. The primary use of cash was to finance our
operations.
Since inception, we have funded our operations primarily from the proceeds
of public and private placements of securities, including:
. $17,080,000 raised from our initial public offering in December 1991;
. $21,469,000 raised from a public offering completed in February 1993;
. $18,023,000 raised from a private placement completed in October 1993;
. $32,627,000 raised from a public offering completed in August 1995;
. $11,932,000 raised from a private placement completed in August 1996;
. $19,172,000 raised from a public offering completed in December 1997;
and
. $ 2,000,000 raised from a private placement completed in December 1998.
In addition to the above, we have funded our operations from contract and
grant revenues, interest income and lease and debt financing.
Capital expenditures amounted to $1,081,000, $1,294,000 and $1,655,000 in
1998,
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<PAGE>
1997 and 1996 respectively, reflecting equipment purchases and expansions to our
leased facilities.
Accounts payable and accrued expenses increased $2,709,000 to $8,653,000 at
December 31, 1998, due principally to accruals made for certain manufacturing
costs related to pexiganan acetate. We expect an increase in accounts payable
and accrued expenses in future periods as we continue to accrue costs for the
purchase of bulk drug substance for pexiganan acetate.
We borrowed an additional $1,000,000 in 1998 under a credit arrangement
with a commercial bank, resulting in an increase in note payable. As of December
31, 1998, we have borrowed $2,500,000 under this credit arrangement at rates
ranging from 8.0% to 8.5%. Any amounts outstanding under this credit arrangement
shall become immediately due and payable under certain circumstances, including
our failure to maintain certain minimum cash and investment balances, as well as
certain financial ratios. Under the terms of the credit arrangement, we make
monthly interest-only payments, with all principal due in May 1999. Our current
intention is to refinance this loan prior to its maturity.
In February 1997, we entered into a development, supply and distribution
agreement in North America with SmithKline for pexiganan acetate. SmithKline has
paid us $10.0 million under this agreement, all of which was received by us in
1997. SmithKline may make additional payments to us of up to $22.5 million upon
the occurrence of certain product milestones. SmithKline will also fund a
percentage of any development expenses for any additional indications for
pexiganan acetate. Upon the commencement of commercial sales by SmithKline, we
will be responsible for the supply of pexiganan acetate and SmithKline will be
responsible for the marketing and sales of pexiganan acetate. We will receive
certain percentages of SmithKline sales revenues under agreed upon terms. The
SmithKline Agreement gives SmithKline the right to negotiate for rights to
another of our product development candidates, under certain terms and
conditions. The SmithKline Agreement also gives SmithKline the right to
terminate the arrangement on a country-by-country basis if SmithKline determines
it is not economical to distribute pexiganan acetate in such areas.
In December 1998, we entered into a collaborative research and option
agreement with Genentech relating to a protein therapeutic in asthma. Under this
agreement, Genentech will be provided access to a therapeutic target (IL9),
which is in our proprietary asthma gene database, and the companies will conduct
a collaborative program to evaluate the utility of a blocking antibody to IL9 in
suppressing the asthmatic response. Under this collaboration, Genentech made an
initial equity investment in Magainin of $2.0 million, and has an option to
enter into a development and commercialization agreement with us. Any such
development and commercialization agreement could provide for payments to
Magainin of up to $35.0 million, upon terms to be negotiated, and royalty
payments on sales of products developed by Genentech in the field.
We have submitted a NDA to the FDA for our lead drug product development
candidate, pexiganan acetate. The NDA submission includes the results of two
multi-center, randomized, Phase III clinical equivalence trials comparing 1%
pexiganan acetate cream to ofloxacin, an oral antibiotic indicated for skin and
soft tissue infections. The NDA, as submitted, includes data analyses for a
number of primary endpoints. These include clinical response of infection,
overall microbiological
33
<PAGE>
response of infection, and therapeutic cure (a combination of clinical and
overall microbiological cures), which were analyzed over a number of patient
cohorts and timepoints. The NDA data package also includes extensive additional
data, including microbiology data for specific pathogens and wound healing data.
Certain of the data favor ofloxacin.
The FDA may reach a different conclusion from that reached by us in our
application or may request that we conduct further studies to support our
application. The guidelines pursuant to which clinicals trials of this nature
are to be conducted have evolved since the commencement of these studies. As a
result, we may not receive FDA approval of pexiganan acetate on a timely basis,
if at all. In addition, the FDA may place certain restrictive conditions on the
approval of pexiganan acetate, which may affect the commercial viability of the
drug.
We will need to raise substantial additional funds to continue our research
and development programs and to commercialize potential products. If we are
unable to raise such funds, we may be unable to complete our development
activities for any of our proposed products, including pexiganan acetate.
We regularly explore alternative means of financing our operations and
intend to seek additional funding through various sources, including:
. Public and private securities offerings;
. Collaborative, licensing and other arrangements with third parties; and
. Debt financing, such as bank loans.
We currently do not have any commitments to obtain additional funds, and
may be unable to obtain sufficient funding in the future on acceptable terms. If
we cannot obtain funding when needed, we may need to delay, scale back or
eliminate research and development programs or enter into collaborations with
third parties to commercialize potential products or technologies that we might
otherwise seek to develop or commercialize ourselves, or seek other
arrangements. This will result in lower consideration to us upon
commercialization of such products than if no arrangements were entered into, or
if such arrangements were entered into at later stages in the product
development process.
We currently have neither the resources, the facilities nor the
capabilities to manufacture any of our proposed products in the quantities and
quality required for commercial sale. We have no current plans to establish a
manufacturing facility. We depend upon contract manufacturers for commercial
scale manufacturing of our proposed products in accordance with regulatory
standards. This dependence may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis. Additionally, the number
of companies that are capable of producing bulk peptides on the scale that we
expect to require to commercialize pexiganan acetate is limited. We may be
unable to maintain arrangements with qualified outside contractors to
manufacture materials at costs which are affordable to us, if at all.
The production of peptides (such as pexiganan acetate and other magainins)
is expensive relative to the production of traditional antibiotics. We are
pursuing alternative manufacturing sources, including recombinant manufacturing,
in order to improve the gross margins available to us on sales of pexiganan
acetate. These programs,
34
<PAGE>
however, are at an early stage and will require significant expenditures over an
extended period of time. Ultimately, we may be unable to develop a more cost-
effective manufacturing process, and even if we develop a more cost-effective
process, the FDA may not approve such a process.
We have an arrangement with Abbott Laboratories initially providing for the
purchase of approximately $10 million of bulk drug substance for pexiganan
acetate. As FDA approval of pexiganan acetate has not occurred, we have recorded
charges to research and development expense relating to this contract. No
amounts have been paid under this arrangement to date, and payments are expected
to be made in 1999 and 2000. Our prior development arrangement with Abbott
provided for our issuance to Abbott of up to 500,000 shares of our Common Stock
and the obligation to pay a royalty on any future sales of pexiganan acetate.
Stock issuances by us to Abbott result in a charge to earnings, representing the
fair value of the shares when issued. As of December 31, 1998, we had issued
250,000 shares of common stock to Abbott, including 125,000 shares issued during
the year ended December 31, 1998. The issuance of such shares resulted in the
recording of an earnings charge of $859,000 in 1998. Future stock issuances are
related to the achievement by Abbott of contractual performance milestones.
Our capital expenditure requirements will depend upon numerous factors,
including the success of pexiganan acetate and the progress of our other
research and development programs, the time and cost required to obtain
regulatory approvals, our ability to enter into additional collaborative
arrangements, the demand for products based on our technology, if and when such
products are approved, and possible acquisitions of products, technologies and
companies. We had no significant capital commitments as of December 31, 1998.
Year 2000
We use computers in various aspects of our business, and are therefore
exposed to Year 2000 ("Y2K") problems. In mid-1998, we initiated a compliance
program with the following objectives:
. identifying potentially non-compliant internal systems;
. updating and/or replacing aging hardware;
. upgrading or updating software/network systems;
. assuring company-wide Y2K compliance;
. assessing third-party risks; and
. establishing contingency plans for any third-party risks identified.
We have identified, through internal testing and discussions with
significant vendors, that some administrative computers and software, as well as
some laboratory systems used for research, are not Y2K compliant. In order to
make these systems compliant, we have elected to replace hardware or upgrade
software systems. We expect to have critical internal systems and computers Y2K
compliant by November 1, 1999 at a cost of less than $100,000. Replacements and
upgrades of certain computers and systems would likely have been considered
independent of Y2K concerns.
We are in the process of contacting significant vendors to determine the
extent of third-party Y2K risks. Most third-parties have advised us that they
will make every
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<PAGE>
effort to be compliant prior to December 31, 1999; however, no assurances could
be given. We have important third-party relationships with sales and marketing
partners, manufacturers and clinical study administrators. None of our contracts
with these vendors address Y2K problems or their remediation or prevention, and
no assurances of compliance can be given by these parties. We will assess
contingency plans if any significant risks are identified. Necessary contingency
plans or remedies could be expensive.
In a worst case scenario, we could experience delays in receiving R&D
supplies, commercial supplies and accessing data on patients enrolled in
clinical studies. These delays could slow commercialization efforts and research
and development programs, or impact our ability to effectively manage and
monitor these programs. Our Y2K compliance program is expected to reduce our
level of uncertainty about internal Y2K problems and, in addition, about the Y2K
compliance and readiness of significant third-parties with which we conduct
business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth beginning on page F-1
hereof in the Table of Contents for PART II--Financial Information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Richard A. Eisner & Company, LLP served as our independent accountants from
our inception in June 1987 through 1998. In January 1999 we replaced Richard A.
Eisner & Company, LLP with KPMG LLP. The replacement of Richard A. Eisner &
Company, LLP and the engagement of KPMG LLP was approved by the Audit Committee
of the Board of Directors. We filed a Current Report on Form 8-K disclosing this
change in January 1999.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item concerning directors is incorporated
herein by reference from our Proxy Statement for the 1999 Annual Meeting of
Shareholders. Set forth in Part I--Item 1 is the information required by this
item concerning executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference from
our Proxy Statement for the 1999 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated herein by reference from
our Proxy Statement for the 1999 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The information required by this item is set forth in the Table of Contents
to Financial Statements on page F-1 hereof.
FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable, or not
required, or the information is shown in the Financial Statements or Notes
thereto.
REPORTS ON FORM 8-K
None.
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<PAGE>
EXHIBITS
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically,
together with a reference to the filing indicated by footnote.
EXHIBIT NO.
- -----------
3.1 Restated Certificate of Incorporation of the Registrant (Exhibit
3.1)(1)
3.2 Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant (Exhibit 3.2)(13)
3.3 By-laws of the Registrant (Exhibit 3.2)(2)
4.1 Specimen copy of stock certificate for shares of Common Stock of the
Registrant (Exhibit 4.1)(3)
10.1# 1990 Stock Option Plan of the Registrant (Exhibit 10.1)(2)
10.2# 1992 Stock Option Plan of the Registrant, as amended (4)
10.3# Stock Option Agreement with Jay Moorin (Exhibit 10.24)(3)
10.4# Amendment to Stock Option Agreement with Jay Moorin (Exhibit 10.4)(1)
10.5# Form of Stock Option Agreement under Stock Option Plans (Exhibit
4.6)(2)
10.6# Employment Agreement with Jay Moorin (Exhibit 10.2)(2)
10.7# Employment Agreement with Michael A. Zasloff, M.D., Ph.D. (Exhibit
10.23)(3)
10.8# Amendment of Employment Agreement with Michael A. Zasloff, M.D.,
Ph.D. (Exhibit 10.9)(3)
10.9# Employment Agreement with Michael R. Dougherty (Exhibit 10.26)(7)
10.10# Employment Agreement with Roy C. Levitt, M.D. (Exhibit 10.24)(5)(9)
10.11# Employment Agreement with Thomas J. Bigger (Exhibit 10.12)(13)
10.12#* Employment Agreement with Kenneth J. Holroyd, M.D.
10.13#* Consulting Agreement with Jay Moorin, dated August 3, 1998
10.14 Lease with respect to Plymouth Meeting, Pennsylvania offices and
laboratories (Exhibit 10.16)(2)
10.15 Lease with respect to Plymouth Meeting, Pennsylvania office (Exhibit
10.13)(14)
38
<PAGE>
10.16* Ammendment to lease with respect to Plymouth Meeting, Pennsylvania
offices and laboratories
10.17 Patent License Agreement and Sponsored Research Agreement with The
Children's Hospital of Philadelphia (Exhibit 10.15)(2)
10.18 License Agreement with Multiple Peptide Systems, Inc. (Exhibit
10.12)(2)
10.19 Second Amendment to License Agreement with Multiple Peptide Systems,
Inc. (Exhibit 10.30)(12)
10.20 Stock Issuance Agreement between Magainin Pharmaceuticals, Inc. and
The Scripps Research Institute (Exhibit 10.2)(11)
10.21 Stock Issuance Agreement between Magainin Pharmaceuticals, Inc. and
Houghten Pharmaceuticals, Inc. (Exhibit 10.1)(11)
10.22 Form of Credit Agreement, including form of Promissory Note and
Warrant (Exhibit 10.22)(2)
10.23 Form of Amendment to Credit Agreement Warrant (Exhibit 10.18)(6)
10.24 Research and Development Agreement with Abbott Laboratories (Exhibit
10.23)(7)
10.25 Warrant Agreement with Abbott Laboratories (Exhibit 10.25)(7)
10.26 Manufacturing Agreement with Abbott Laboratories, dated October 4,
1995 (Exhibit 10.27)(5)(8)
10.27 Stock Issuance Agreement with Abbott Laboratories, dated October 4,
1995 (Exhibit 10.28)(5)(8)
10.28 Assignment Agreement between Magainin Pharmaceuticals Inc., Roy C.
Levitt, M.D. and GeneQuest, Inc. (Exhibit 10.25)(5)(9)
10.29 Form of Purchase Agreement relating to the issuance by Magainin
Pharmaceuticals, Inc. of units consisting of shares of Magainin
Pharmaceuticals, Inc. Common Stock and warrants to purchase shares of
Common Stock (Exhibit 10.1)(10)
10.30 Form of Warrant to purchase shares of Magainin Pharmaceuticals, Inc.
Common Stock (Exhibit 10.2)(10)
10.31 Development, Supply and Distribution Agreement, effective as of
February 12, 1997 with SmithKline Beecham Corporation (Exhibit
10.29)(5)(13)
10.32+ Collaborative Research and Option Agreement with Genentech, Inc.,
effective as of December 30, 1998 (15)
39
<PAGE>
10.33+ Stock Purchase Agreement between Magainin Pharmaceuticals, Inc. and
Genentech Inc., dated December 30, 1998
10.34+ Supply Agreement between Abbott Laboratories Inc. and Magainin
Pharmaceuticals, Inc., effective January 1, 1999
10.35# 1998 Equity Compensation Plan (15)
10.36#* Summary of Oral Agreements with Executive Officers
23* Consent of KPMG LLP
24* Power of Attorney (included on signature page of this Annual Report
on Form 10-K)
27* Financial Data Schedule
Explanation of Footnotes to Listing of Exhibits
* Filed herewith.
# Compensation plans and arrangements for executives and others.
+ To be filed by amendment.
(1) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
June 30, 1992 filed with the Securities and Exchange Commission on
September 24, 1992.
(2) Filed as an Exhibit to Registration Statement (No. 33-43579) on Form S-1
filed with the Securities and Exchange Commission on October 24, 1991.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
Statement (No. 33-43579) on Form S-1 filed with the Securities and Exchange
Commission on November 27, 1991.
(4) Filed as Exhibit A to the Proxy Statement for the 1996 Annual Meeting of
Stockholders.
(5) Portions of this Exhibit were omitted and filed separately with the
Securities and Exchange Commission pursuant to an order granting
confidential treatment.
(6) Filed as an Exhibit to the Transition Report on Form 10-K for the year
ended December 31, 1993 filed with the Securities and Exchange Commission
on March 9, 1994.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1994 filed with the Securities and Exchange Commission on
March 31, 1995.
40
<PAGE>
(8) Filed as an Exhibit to the Form 10-Q for the quarter ended September 30,
1995 filed with the Securities and Exchange Commission on November 9, 1995.
(9) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1995 filed with the Securities and Exchange Commission on
March 29, 1996.
(10) Filed as an Exhibit to Registration Statement (No. 333-09927) on Form S-3
filed with the Securities and Exchange Commission on August 9, 1996.
(11) Filed as an Exhibit to Registration Statement (No. 333-14555) on Form S-3
filed with the Securities and Exchange Commission on October 21, 1996.
(12) Filed as an Exhibit to the Form 10-Q for the quarter ended September 30,
1996 filed with the Securities and Exchange Commission on November 14,
1996.
(13) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1996 filed with the Securities and Exchange Commission on
March 31, 1997.
(14) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1997, filed with the Securities and Exchange Commission on
March 13, 1998.
(15) Filed as Exhibit A to the Proxy Statement for the 1998 Annual Meeting of
Stockholders.
41
<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.
MAGAININ PHARMACEUTICALS INC.
By: /s/ Michael R. Dougherty
-----------------------------------
Michael R. Dougherty
President, Chief Executive Officer,
Chief Financial Officer and Director
Date: March 1, 1999
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 in the capacities and on the dates indicated.
Each person whose signature appears below in so signing also makes,
constitutes and appoints Michael Dougherty, President, Chief Executive Officer
and Chief Financial Officer his true and lawful attorney-in-fact, in his name,
place and stead to execute and cause to be filed with the Securities and
Exchange Commission any or all amendments to this report.
Signature TITLE DATE
--------- ----- ----
/s/ Zola P. Horovitz, Ph.D. Chairman and Director March 1, 1999
- ----------------------------
Zola P. Horovitz, Ph.D.
/s/ Bernard Canavan, M.D. Director March 1, 1999
- ----------------------------
Bernard Canavan, M.D.
/s/ Michael R. Dougherty President, Chief Executive March 1, 1999
- ----------------------------
Michael R. Dougherty Officer, Chief Financial
Officer and Director (Principal
Executive and Financial Officer)
/s/ Roy C. Levitt, M.D. Executive Vice President, Chief March 1, 1999
- ----------------------------
Roy C. Levitt, M.D. Operating Officer and Director
/s/ Charles A. Sanders, M.D. Director March 1, 1999
- ----------------------------
Charles A. Sanders, M.D.
/s/ Robert F. Shapiro Director March 1, 1999
- ----------------------------
Robert F. Shapiro
/s/ James B. Wyngaarden, M.D Director March 1, 1999
- ----------------------------
James B, Wyngaarden, M.D.
/s/ Michael A. Zasloff, M.D. Vice Chairman, Executive Vice March 1, 1999
- ----------------------------
Michael A. Zasloff, M.D., Ph.D. President and Director
42
<PAGE>
MAGAININ PHARMACEUTICALS INC.
TABLE OF CONTENTS
PART II--FINANCIAL INFORMATION
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Changes in Stockholders' Equity and Comprehensive Loss F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Magainin Pharmaceuticals Inc.:
We have audited the accompanying balance sheets of Magainin Pharmaceuticals Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
changes in stockholders' equity and comprehensive loss and cash flows for each
of the years in the three-year period ended December 31, 1998. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Magainin Pharmaceuticals Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Princeton, New Jersey
February 12, 1999
F-2
<PAGE>
MAGAININ PHARMACEUTICALS INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,495 $ 487
Short-term investments 18,376 38,574
Prepaid expenses and other 179 490
--------- ---------
Total current assets 23,050 39,551
Fixed assets, net 2,765 2,824
Other assets 76 69
--------- ---------
Total assets $ 25,891 $ 42,444
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,653 $ 5,944
Current portion of note payable 2,500 500
Current potion of capital lease obligations -- 34
--------- ---------
Total current liabilities 11,153 6,478
Note payable-long-term -- 1,000
Deferred rent 58 96
--------- ---------
Total liabilities 11,211 7,574
--------- ---------
Commitments, contingencies and other matters
Stockholders' equity:
Preferred stock--$.001 par value; shares authorized--9,211;
none issued
Common stock--$.002 par value; shares
authorized--45,000; shares issued and outstanding--
22,910 and 21,980, respectively 46 44
Additional paid-in capital 147,553 144,444
Accumulated other comprehensive income--unrealized gains
on investments 9 6
Accumulated deficit (132,928) (109,624)
--------- ---------
Total stockholders' equity 14,680 34,870
--------- ---------
Total liabilities and stockholders' equity $ 25,891 $ 42,444
========= =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Contract Revenues $ -- $ 10,088 $ 150
Costs and Expenses:
Research and development 21,456 22,875 22,326
General and administrative 3,292 3,246 3,488
Charge for stock issuance relating to
royalty buyout -- -- 7,080
-------- -------- --------
24,748 26,121 32,894
-------- -------- --------
Loss from operations (24,748) (16,033) (32,744)
Interest income 1,640 1,770 2,172
Interest expense (196) (118) (48)
-------- -------- --------
Net loss $(23,304) $(14,381) $(30,620)
-------- ======== ========
Net loss per share--basic and diluted $ (1.05) $ (0.73) $ (1.71)
======== ======== ========
Weighted average shares outstanding 22,235 19,679 17,938
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Additional Compre- Stock-
------------
Number Paid-in hensive Accumulated holders
of Shares Amount Capital Income Deficit Equity
--------- ------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 17,052 $34 $105,662 $ 120 $ (64,623) $ 41,193
Common stock issued pursuant to private
placement 1,557 3 11,929 -- -- 11,932
Fair value of shares issued pursuant to
royalty buyout 550 1 7,059 -- -- 7,060
Common stock issued, exercise of options
and warrants 205 1 484 -- -- 485
Comprehensive loss
Net loss -- -- -- -- (30,620) (30,620)
Carrying value adjustment -- -- -- (107) -- (107)
--------- ------ ---------- ----------- ----------- --------
Total comprehensive loss -- -- -- -- -- (30,727)
--------- ------ ---------- ----------- ----------- --------
Balance at December 31, 1996 19,364 39 125,134 13 (95,243) 29,943
Common stock issued pursuant to public
offering 2,587 5 19,167 -- -- 19,172
Common stock issued, exercise of options
and warrants 29 -- 143 -- -- 143
Comprehensive loss
Net loss -- -- -- -- (14,381) (14,381)
Carrying value adjustment -- -- -- (7) -- (7)
--------- ------ ---------- ----------- ----------- --------
Total comprehensive loss -- -- -- -- -- (14,388)
--------- ------ ---------- ----------- ----------- --------
Balance at December 31, 1997 21,980 44 144,444 6 (109,624) 34,870
Common stock issued pursuant to research
and option agreement 620 1 1,999 -- -- 2,000
Fair value of shares issued to contract
manufacturer 125 -- 859 -- -- 859
Common stock issued by/upon exercise of
options, warrants and stock awards 185 1 251 -- -- 252
Comprehensive loss
Net loss -- -- -- -- (23,304) (23,304)
Carrying value adjustment -- -- -- 3 -- 3
--------- ------ ---------- ----------- ----------- --------
Total comprehensive loss -- -- -- -- -- (23,301)
--------- ------ ---------- ----------- ----------- --------
Balance at December 31, 1998 22,910 $46 $147,553 $ 9 $(132,928) $ 14,680
========= ====== ========== =========== =========== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(23,304) $(14,381) $(30,620)
Adjustments to reconcile loss to net cash
used in operating activities:
Fair value of stock, options and
warrants issued 859 -- 7,060
Depreciation and amortization 1,140 976 625
Amortization of investment discounts/premiums (782) (752) (718)
Compensation expense under stock awards 114 -- --
Changes in operating assets and liabilities:
Prepaid expenses and other 298 (29) 55
Accounts payable and accrued expenses 2,709 799 1,065
Deferred rent (38) (31) (16)
-------- -------- --------
Net cash used in operating activities (19,004) (13,418) (22,549)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (45,317) (72,313) (27,301)
Proceeds from maturities and sales of
investments 66,300 65,752 38,430
Capital expenditures (1,081) (1,294) (1,655)
-------- -------- --------
Net cash provided by (used in) investing
activities 19,902 (7,855) 9,474
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,000 500 1,000
Payments on capitalized equipment leases (28) (127) (150)
Proceeds from sale of stock and exercise of
options and warrants 2,138 19,315 12,417
-------- -------- --------
Net cash provided by financing activities 3,110 19,688 13,267
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 4,008 (1,585) 192
Cash and cash equivalents at beginning of period 487 2,072 1,880
-------- -------- --------
Cash and cash equivalents at end of period $ 4,495 $ 487 $ 2,072
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest $ 185 $ 106 $ 48
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
MAGAININ PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29, 1987.
The Company is a biopharmaceutical company engaged in the development of
medicines for serious diseases. The Company's development efforts are focused on
anti-infectives, oncology, and pulmonary and allergic disorders.
The Company has submitted a New Drug Application ("NDA") with the United States
Food and Drug Administration ("FDA") for its lead product development candidate,
pexiganan acetate (formerly called "Cytolex"), a topical cream antibiotic
intended for the treatment of infection in diabetic foot ulcers. The Company is
also conducting research on an aminosterol class of compounds. One such
compound, squalamine, is currently being evaluated in Phase I clinical testing
in cancer. The Company conducts additional research efforts in the genomics of
asthma.
The Company has not generated any revenues from product sales, and has funded
operations primarily from the proceeds of public and private placements of
securities. Substantial additional financing will be required by the Company to
fund its continuing research and development activities. No assurance can be
given that any such financing will be available when needed or that the
Company's research and development efforts will be successful.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
related notes. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid investment
instruments purchased with a maturity of three months or less to be cash
equivalents.
Investments - Investments purchased with a maturity of more than three months,
and which mature less than twelve months from the balance sheet date, are
classified as short-term investments. Long-term investments are those with
maturities greater than twelve months from the balance sheet date. The Company
generally holds investments to maturity, however, since the Company may, from
time to time, sell securities to meet cash requirements, the Company classifies
its investments as available-for-sale as defined by Statement of Financial
Accounting Standards ("SFAS"), No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Available-for-sale securities are carried at market
value with unrealized gains and losses reported as a separate component of
stockholders' equity. Gross realized gains and losses on the sales of investment
securities are determined on the specific identification method and are included
in interest income.
Fixed Assets and Depreciation - Fixed assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets
F-7
<PAGE>
including: three (3) years for computers/software, five (5) years for laboratory
and office equipment and seven (7) years for furniture and fixtures. Equipment
under capital leases and leasehold improvements are amortized using the
straight-line method over the term of the respective lease, or their estimated
useful lives, whichever is shorter. Expenditures for maintenance and repairs are
charged to expense as incurred.
Revenue Recognition - Any revenues from research and development arrangements
are recognized pursuant to the terms of the related agreements, either as work
is performed, or as milestones are achieved.
Research and Development - Research and development costs are expensed as
incurred.
Patent Costs - Patent-related costs are expensed as incurred.
Lease Expense - Expense related to the facility lease is recorded on a straight-
line basis over the lease term. The difference between rent expense incurred and
the amount paid is recorded as deferred rent and is amortized over the lease
term.
Stock Based Compensation - The Company accounts for stock-based employee
compensation under Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. Effective January
1, 1996, the Company adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation".
Income Taxes - The Company accounts for income taxes using the asset and
liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes".
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits which are
not expected to be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period in which tax rate changes
are enacted.
Loss Per Share - The Company calculates loss per share under the provisions of
SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires a dual presentation of
"basic" and "diluted" loss per share on the face of the income statement. Basic
loss per share is computed by dividing income (loss) by the weighted average
number of shares of common stock outstanding during each period. Diluted loss
per share includes the dilutive effect, if any, from the potential exercise or
conversion of securities, such as stock options and warrants, which would result
in the issuance of shares of common stock. Basic and diluted loss per share
amounts are the same because the Company reported a loss for all periods
presented.
Reclassification - Certain reclassifications have been made to prior years'
financial statements to conform to the current year presentation.
Comprehensive Income - Effective January 1, 1998 the Company adopted SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for
the reporting of comprehensive income and its components. Comprehensive income
consists
F-8
<PAGE>
of reported net income or loss and "other comprehensive income" (i.e. other
gains and losses affecting stockholders' equity that, under generally accepted
accounting principals, are excluded from net income or loss as reported on the
statement of operations). With regard to the Company, other comprehensive income
consists of unrealized gains and losses on marketable securities. The adoption
of SFAS No. 130 affects only the presentation of the Company's balance sheet,
and does not affect the Company's reported results of operations or cash flows.
3. INVESTMENTS
The Company invests in securities of the U.S. Treasury and U.S. Government
agencies. Excess cash is invested on a short-term basis in U.S. government based
money market funds. Unrealized gains at December 31, 1998 and 1997 total $9,000
and $6,000, respectively. The Company has not realized any losses on its
investments.
4. FIXED ASSETS
Fixed assets are stated at cost and are summarized as follows (in thousands):
December 31, December 31,
1998 1997
------------ ------------
Laboratory and office equipment $3,354 $3,147
Leasehold improvements 2,886 2,625
------------ ------------
Total 6,240 5,772
Less accumulated depreciation and amortization (3,475) (2,948)
------------ ------------
$2,765 $2,824
============ ============
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
December 31, December 31,
1998 1997
------------ ------------
Accounts payable $ 179 $ 215
Clinical and regulatory costs 448 1,197
Manufacturing development costs 7,171 3,507
Preclinical costs 117 338
Professional fees 253 258
Other 485 429
------------ ------------
$8,653 $5,944
============ ============
Accrued manufacturing development costs consist primarily of amounts related to
various third-party manufacturing agreements.
6. NOTE PAYABLE
The Company has entered into a credit arrangement with a commercial bank.
Borrowings under this credit arrangement bear interest at rates ranging from
8.0% to 8.5%. As of December 31, 1998, the Company had borrowed $2,500,000 under
this credit
F-9
<PAGE>
arrangement, including $1,000,000 borrowed in 1998. Any amounts outstanding
under this credit arrangement shall become immediately due and payable under
certain circumstances, including the failure by the Company to maintain certain
minimum cash and investment balances, as well as certain financial ratios. Under
the terms of the credit arrangement, the Company makes monthly interest-only
payments with all principal due in May 1999. The Company's current intention is
to refinance this loan prior to its maturity.
7. STOCKHOLDERS' EQUITY
In May 1996, the Company increased the number of its authorized common shares to
45,000,000.
In August 1996, the Company completed a private placement of 1,556,763 shares of
common stock, together with warrants as described below, with proceeds to the
Company (after offering expenses) of approximately $11,932,000.
In September 1996, pursuant to a buyout of a royalty arrangement, the Company
issued 550,000 shares of common stock with a fair value of $12.87 per share. In
connection, therewith, the Company recorded a non-cash charge to earnings of
$7,060,000.
In December 1997, the Company consummated a public offering of 2,587,500 shares
of common stock with proceeds to the Company (after underwriting discounts and
offering expenses) of approximately $19,172,000.
In January 1998, pursuant to an arrangement with a contract manufacturer, the
Company issued to such manufacturer 125,000 shares of common stock with a fair
value of $6.125 per share. In connection therewith, the Company recorded a non-
cash charge to earnings of $859,000.
In December 1998, pursuant to a collaboration, the Company sold 620,540 shares
of common stock to Genentech, Inc. ("Genentech"), with proceeds to the Company
of approximately $2,000,000.
Warrants - Under a 1991 credit agreement with certain stockholders, the Company
granted warrants to the lenders to purchase an aggregate of 250,000 shares of
common stock at $8 per share. These warrants expire in 2001. At December 31,
1998, 229,739 of these warrants are outstanding.
In October 1994, pursuant to an arrangement with a contract manufacturer, the
Company granted to such manufacturer a warrant to purchase 300,000 shares of
common stock at $7.50 per share. The warrant expires in 1999.
In connection with its August 1996 private placement, the Company issued common
stock, together with warrants to purchase 1,011,896 shares of the Company's
common stock. The warrants contain provisions to decrease the exercise price,
and increase shares, under certain circumstances. Such circumstances include the
issuance of shares of common stock by the Company for a consideration per share
less than the exercise price of the warrants, and the issuance by the Company of
securities convertible into shares of common stock for which the exercise or
conversion price is less than the exercise price of the warrants. The warrant
holders also have a
F-10
<PAGE>
one-time right, in the event the average price of the company's common stock in
any month prior to August 1999 falls below a certain level, to reduce the
exercise price of the warrant to 110% of such average price. Warrants to
purchase 1,030,905 shares of common stock at prices ranging from $5.99 to $8.31
per share are currently exerciseable.
Stock option plans - In May 1991, the stockholders approved the 1990 Stock
Option Plan (the "1990 Plan") which provides for the granting of options for the
purchase of up to 160,000 shares of common stock. In May 1996, the stockholders
approved the amended 1992 Stock Option Plan (the "1992 Plan") which provides for
the granting of options for the purchase of up to 2,500,000 shares of common
stock. In May 1998, the stockholders approved the 1998 Equity Compensation Plan
(the "1998 Plan") which provides for the granting of options, and stock awards,
of up to 1,500,000 shares of common stock.
The plans provide for the granting of incentive stock options and nonqualified
stock options and are administered by a committee of the Board of Directors. The
committee has the authority to determine the term during which an option may be
exercised (provided that no option may have a term of more than 10 years), the
exercise price of an option and the rate at which options may be exercised.
Incentive stock options may be granted only to employees of the Company.
Nonqualified stock options may be granted to employees, directors or consultants
of the Company. For nonqualified stock options under the 1992 and 1998 Plans and
incentive stock options, the exercise price can not be less than the fair market
value of the underlying common stock on the date of the grant.
In addition to the shares of common stock issuable upon exercise of options
granted under the Company's stock option plans, 596,625 shares of common stock
are issuable upon exercise of outstanding options granted pursuant to written
agreements. The exercise price for these options was set by the Board of
Directors, or a committee designated by the Board, based upon an evaluation of
the fair market value of the Company's common stock on the date of grant.
A summary of the status of the Company's stock options as of December 31, 1998,
1997 and 1996, and changes during the years ended on those dates, is presented
below (in thousands, except per share data):
F-11
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE PRICE PRICE
- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,974 $ 6.33 2,466 $ 6.07 2,048 $ 3.97
Granted 976 $ 4.29 576 $ 7.51 782 $10.56
Exercised (176) $ 0.78 (29) $ 4.91 (196) $ 2.56
Forfeited (186) $ 8.40 (39) $ 8.46 (168) $ 5.01
----- ----- -----
Outstanding at end of year 3,588 $ 5.94 2,974 $ 6.33 2,466 $ 6.07
Exercisable at end of year 2,022 $ 5.76 1,586 $ 4.29 1,203 $ 3.00
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
------------------------------------------------- ------------------------------
SHARES WEIGHTED AVERAGE WEIGHTED SHARES WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE AT 12/31/98 EXERCISE
PRICE PRICE
<S> <C> <C> <C> <C> <C>
$.002 - $.40 8 2 Years $ 0.35 8 $ 0.35
$2.00 - $3.75 1,523 6 Years $ 2.88 983 $ 2.68
$4.63 - $8.25 1,212 8 Years $ 6.65 499 $ 6.88
$9.13 - $11.63 830 7 Years $10.37 517 $10.30
$16.75 15 5 Years $16.75 15 $16.75
----- -------- ------ ----- ------
$.002 - $16.75 3,588 7 Years $ 5.94 2,022 $ 5.76
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in accounting for
options. Accordingly, no compensation cost has been recognized for employee
stock option grants. Had compensation cost for employee stock option grants been
determined based on the fair value at the grant dates for awards consistent with
the method of SFAS No. 123, the Company's net loss and net loss per share would
have been increased to the pro forma amounts indicated below (in thousands,
except per share data):
1998 1997 1996
-------- -------- --------
Net loss As reported $(23,304) $(14,381) $(30,620)
Pro forma $(26,208) $(16,649) $(31,816)
Net loss per share As reported $ (1.05) $ (0.73) $ (1.71)
- - basic and diluted Pro forma $ (1.18) $ (0.85) $ (1.77)
The resulting effect on pro forma loss and pro forma loss per share disclosed
above is not likely to be representative of the effects on a pro forma basis in
future years, because 1998, 1997 and 1996 pro forma results include the impact
of only
F-12
<PAGE>
four, three and two years, respectively, of grants and related vesting, while
subsequent years will include additional years of grants and vesting. The fair
value of each option grant is estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted-average assumptions:
1998 1997 1996
---- ---- ----
Range of risk free interest rates 4.4% - 5.7% 5.8% - 6.6% 6.1% - 6.8%
Dividend yield 0% 0% 0%
Volatility factor 78% 75% 79%
Expected life of options (in years) 6 6 6
Weighted-average fair value $3.04 $5.31 $7.54
of options granted during the year
The 1998 Plan also provides for the issuance of common stock awards, up to a
maximum of 375,000 shares. Such awards shall be made subject to such performance
requirements, vesting provisions, transfer restrictions or other restrictions
and conditions as the Compensation Committee may determine. A total of 146,000
shares have been awarded under the 1998 Plan, vesting over a four year period
beginning in 1999. The cost of these awards will be recognized as expense over
the vesting period. As of December 31, 1998, no shares have been issued under
this program.
8. INCOME TAXES
As of December 31, 1998 the Company had approximately $116.4 million of net
operating loss ("NOL") carry-forwards for federal income tax purposes (expiring
in years 2003 through 2018). In addition, the Company had NOL carry-forwards for
state income tax purposes of approximately $58.1 million (expiring in years 1999
through 2001). Pennsylvania has a $1 million annual limitation on the
utilization of NOL carry-forwards, thus the Company is not likely to utilize
most of its state NOL carry-forwards. The Company also had approximately $7.4
million of research and development tax credits carryforwards available to
offset future federal income tax liability (expiring in years 2005 through
2018). The NOL carryforward differs from the accumulated deficit principally due
to differences in the recognition of certain expenses between financial and
federal tax reporting.
Under the Tax Reform Act of 1986, the utilization of a corporation's NOL
carryforward and research and development tax credits are limited following a
change in ownership of greater than 50% within a three year period. Due to the
Company's prior equity transactions, the Company's net operating loss and tax
credit carryforwards may be subject to an annual limitation generally determined
by multiplying the market value of the Company on the date of the ownership
change by the federal long-term tax exempt rate. Any amount exceeding the
annual limitation may be carried forward to future years for the balance of the
NOL and tax credit carryforward period.
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
reliability of deferred tax assets, management considers whether it is more
likely than not that some portion or
F-13
<PAGE>
all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon generation of future taxable income during
the periods in which temporary differences representing net future deductible
amounts become deductible. Due to the uncertainty of the Company's ability to
realize the benefit of the deferred tax asset, the deferred tax assets are fully
offset by a valuation allowance at December 31, 1998 and 1997. The net change in
the valuation allowance for deferred tax assets at December 31, 1998 and 1997
was an increase of $12.0 million and an increase of $11.8 million, respectively.
Significant components of the net deferred tax assets as of December 31, 1998
and 1997 consists of the following (in thousands):
Deferred tax assets: 1998 1997
---------- ----------
Net operating losses $ 46,534 $ 37,091
Research credits 7,395 5,675
Capitalized research and development 2,748 2,936
Accrued expenses and other 3,247 2,190
Depreciation 372 414
---------- ----------
60,296 48,306
Valuation allowance $(60,296) $(48,306)
---------- ----------
Deferred tax assets, net $ 0 $ 0
========== ==========
9. COLLABORATIVE AGREEMENTS
In February 1997, the Company entered into a development, supply and
distribution agreement (the "SmithKline Agreement") in North America with
SmithKline Beecham ("SmithKline") for pexiganan acetate. SmithKline has paid the
Company $10.0 million under this agreement, and may make additional payments to
Magainin of up to $22.5 million, upon the occurrence of certain product
milestones. SmithKline will also fund a percentage of any development expenses
for any additional indications for pexiganan acetate. Upon the commencement of
commercial sales by SmithKline, Magainin will be responsible for the supply of
pexiganan acetate and SmithKline will be responsible for the marketing and sale
of pexiganan acetate. Magainin will receive certain percentages of SmithKline
sales revenues under agreed upon terms. The SmithKline Agreement gives
SmithKline the right to negotiate for rights to another Magainin product
development candidate, under certain terms and conditions. The SmithKline
Agreement also gives SmithKline the right to terminate the arrangement on a
country-by-country basis if SmithKline determines it is not economical to
distribute pexiganan acetate in those areas.
In December 1998, the Company entered into a collaborative research and option
agreement with Genentech Inc. relating to a protein therapeutic in asthma. Under
this agreement, Genentech will be provided access to a therapeutic target (IL9),
which is in Magainin's proprietary asthma gene database, and the companies will
conduct a collaborative program to evaluate the utility of a blocking antibody
to IL9 in suppressing the asthmatic response. Under this collaboration,
Genentech made an initial equity investment in Magainin of $2.0 million, and has
an option to enter into a development and commercialization agreement with the
Company. Any such development and commercialization agreement could provide for
payments to the Company
F-14
<PAGE>
of up to $35.0 million, upon terms to be negotiated, and royalty payments on
sales of products developed by Genentech in the field.
In August 1994, the Company entered into a collaboration in the nutritional
field with Abbott Laboratories ("Abbott"). The Company recorded revenue of $0,
$88,000, $150,000 in the years ended December 31, 1998, 1997 and 1996,
respectively, under this arrangement. This agreement has expired.
The Company has rights under license agreements to certain patents and patent
applications under which the Company expects to owe royalties on sales of any
products which are covered by issued patent claims. Additionally, certain of
these agreements also provide that if the Company elects not to pursue the
commercial development of any licensed technology, or does not adhere to an
acceptable schedule of commercialization, then the Company's exclusive rights to
such technology would terminate. We also fund research at certain institutions,
and these relationships may provide us with an option to license any results of
the research.
10. 401(K) PLAN
The Company maintains a 401(k) retirement plan available to all full-time,
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company, at its discretion, may make certain contributions to
the plan. No such contributions have been made through December 31, 1998.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by management,
using available market information and valuation methodologies. Considerable
judgment is necessary to interpret market data and develop estimated fair market
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize on disposition of the
financial instruments. The use of different market assumptions or estimation
methodologies may have an effect on the estimated fair value amounts.
Cash equivalents, accounts payable, accrued expenses and investments are carried
at amounts which reasonably approximate their fair values due to the short term
nature of these instruments. The estimated fair value of the Company's note
payable is estimated to be approximately equal to its carrying value of $2.5
million at December 31, 1998.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1998. Although management
is not aware of any factors that would significantly affect the reasonable fair
value amounts, such amounts have not been comprehensively revalued for the
purposes of these financial statements since December 31, 1998, and current
estimates of fair value may differ from the amounts presented herein.
F-15
<PAGE>
12. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
RENT
- ----
The Company has entered into two operating leases for its laboratory and
corporate office facilities. These leases provide for minimum annual rent
payments through 2002 as follows (in thousands):
Year Ending December 31,
1999 $ 411
2000 427
2001 327
2002 299
------
$1,464
The leases provide for escalations relating to increases in real estate taxes
and certain operating expenses.
Rent expense was approximately $394,000, $295,000 and $310,000, for the years
ended December 31, 1998, 1997 and 1996, respectively.
MANUFACTURING
- -------------
The Company has an arrangement with Abbott initially providing for the purchase
of approximately $10.0 million of bulk drug substance for pexiganan acetate. As
FDA approval of pexiganan acetate has not occurred, the Company has recorded
charges to research and development expense related to this contract. No amounts
have been paid under this arrangement to date, and payments are expected to be
made in 1999 and 2000. The Company's prior development arrangement with Abbott
provided for the issuance to Abbott of up to 500,000 shares of Magainin Common
Stock and the obligation to pay a royalty on any future sales of pexiganan
acetate. Stock issuances by the Company to Abbott result in a charge to
earnings, representing the fair value of the shares when issued. As of December
31, 1998, the Company has issued 250,000 shares of common stock to Abbott,
including 125,000 shares issued during the year ended December 31, 1998. The
issuance of such shares resulted in the recording of an earnings charge of
$859,000 in 1998. Future stock issuances are related to the achievement by
Abbott of contractual performance milestones.
F-16
<PAGE>
EXHIBIT INDEX
The Exhibits that have been filed herewith this Form 10-K are summarized as
follows:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.12 Employment Agreement with Kenneth J. Holroyd, M.D.
10.13 Consulting Agreement with Jay Moorin, dated August 3, 1998
10.16 Ammendment to lease with respect to Plymouth Meeting,
Pennsylvania offices and laboratories
10.36 Summary of Oral Agreements with Executive Officers
23 Consent of KPMG LLP
24 Power of Attorney (included on signature page of this Annual
Report on Form 10-K)
27 Financial Data Schedule
Explanation of Footnotes to Listing of Exhibits
* Portions of the Exhibit have been omitted and have been filed
separately pursuant to an application for confidential treatment
filed with the Securities and Exchange Commission pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
F-17
<PAGE>
[Letterhead Magainin Pharmaceuticals Inc.]
November 25, 1996 Confidential
Via Federal Express
Amended
Kenneth Holroyd, M.D.
1213 Runnymede Lane
Bel Air, MD 21014
Dear Ken:
I am pleased to offer you the position of Vice President, Magainin
Pharmaceuticals Inc., reporting to Dr. Roy Levitt, Executive Vice President,
Magainin Pharmaceuticals Inc. and President, Magainin Institute of Molecular
Medicine, subject to the terms and conditions of this letter. The base salary
for this position will be $12,500 per month ($150,000/year). It is expected that
the Compensation Committee of the Board of Directors will grant to you at its
next meeting options to purchase 50,000 shares of Magainin Common Stock,
exercisable at the fair market value of the underlying Common Stock on the date
you commence employment with the Company. These options will have a term of 10
years and vest at the rate of 25% per year beginning on the first anniversary of
the date of your commencement of employment. As with all Magainin options, the
grant will be subject to execution of a stock option agreement in the form
specified by the Compensation Committee. A copy of our Stock Option Plan is
attached hereto.
If your employment is terminated without cause, as defined in the Stock Option
Plan, you will receive your monthly base salary for six (6) months following the
date of termination, or for such shorter period until you have secured full-time
employment elsewhere.
The following additional provisions will apply to your employment:
(i) You will be eligible for merit increases, cash bonuses, and such
further stock option grants as may be awarded at the annual
discretion of the Company's Board of Directors.
(ii) You will be eligible to participate in Magainin's Employee Benefit
Plans, including health, life, disability, tuition reimbursement and
401k. You will be entitled to four (4) weeks vacation. A summary of
these benefits is available for your review.
Furthermore, we will reimburse you for relocation expenses as provided for in
Attachment A. We request that you manage the relocation process in the most cost
effective manner possible.
Upon the commencement of your employment with the Company, you will execute the
Company's Drug Free Workplace Policy, Proprietary Information Agreement, Policy
Statement on Securities Trading by
<PAGE>
Kenneth Holroyd, M.D.
November 25, 1996
Page 2
Magainin Personnel and Corporate Governance - Conflict of Interest Policy, each
in the form previously provided to you. Magainin may have already provided you
with certain of its confidential business or scientific information which it
expects you to keep confidential and to use only to further Magainin's
legitimate business interests. Just as Magainin expects you to keep confidential
its business or scientific information, Magainin also expects you to honor your
obligations to your former employers with respect to maintaining the
confidentiality of their business or scientific information.
All of the terms and provisions of this Agreement shall be binding upon and
inure to the benefit and be enforceable by the respective heirs,
representatives, successors (including any successor as a result of a merger or
similar reorganization) and assigns of the parties hereto, except that your
duties and responsibilities hereunder are of a personal nature and shall not be
assignable in whole or in part by you.
We look forward to your joining us at Magainin Pharmaceuticals Inc. Please
indicate acceptance of this offer, which is for at will employment, by your
signature below. We have agreed that your starting date for employment with
Magainin will be on a date between January 1, 1997 and March 1, 1997.
If you have any questions, please do not hesitate to call me or Dr. Levitt.
Sincerely yours,
/s/ Michael R. Dougherty
Michael R. Dougherty
Executive Vice President and
Chief Financial Officer
MRD/bl
cc: Jay Moorin
Accepted: /s/ Kenneth Holroyd Date: 12/5/96
----------------------------------------- ----------------
KENNETH HOLROYD
<PAGE>
Attachment A
Moving Cost Reimbursement
Magainin Pharmaceuticals Inc. (MPI) will pay your expenses of moving, that is,
the reasonable, direct, out of pocket costs of transporting yourself, your
family and your household items from your current residence to your new
residence located near MPI. To obtain reimbursement, you must submit for
approval, a detailed estimate of such expenses prior to their incurrence.
House Hunting Trips
MPI will reimburse you for the reasonable expenses of a single two-day
(two-night) visit for you to find suitable housing in the local area. Reasonable
expenses will include the cost of transportation from your current residence,
and the cost of lodging, meals and economy car rental during your stay. MPI has
arrangements with a local hotel for guests, and we will be happy to make these
arrangements for you. At your request, our Human Resources department can
arrange for you to meet a relocation specialist to assist you during your house
hunting trip, including providing you with information prior to your visit and
giving you a tour of the local area.
Closing Costs
MPI will pay the reasonable closing costs of (i) the sale of your current home
and (ii) the purchase of a home in the local area within nine (9) months of your
date of employment.
The following closing (settlement) costs will not be paid by MPI:
. any real estate or other taxes (transfer taxes will be paid)
. any insurance premiums (title insurance will be paid)
. any broker fees or commissions
. any "points" paid
Please submit a detailed estimate of your closing costs to the Human Resources
department for approval prior to your closing date. After closing, please submit
a copy of your settlement sheet to the Human Resources department in order to
obtain reimbursement.
Temporary Living Expense
We have agreed that you may forgo temporary living expenses in return for a
payment of $1,500 per month, for a period of nine (9) months.
Loss on Current Residence
To the extent that the sale price for your current residence is less than your
purchase price, MPI will reimburse you for such loss, up to a maximum of
$15,000.
Out-of-Pocket Costs
To offset certain out-of-pocket relocation costs, you will receive a payment of
$7,500.
<PAGE>
CONFIDENTIAL
EXECUTION COPY
CONSULTING AGREEMENT
This consulting agreement (the "Agreement") is made as of August 3,
1998, by and between Magainin Pharmaceuticals Inc., a Delaware corporation (the
"Company"), and Jay Moorin ("Consultant").
WHEREAS, Consultant has served as the Chairman, President and Chief
Executive Officer of the Company;
WHEREAS, by mutual consent Consultant's employment with the Company
as Chairman, President and Chief Executive Officer will be terminated as of 5:00
p.m., Philadelphia time, on August 3, 1998 (the "Effective Date");
WHEREAS, the parties hereto desire to enter into this Agreement on
the date hereof to set forth their agreement with respect to said termination of
employment and to provide for the retention by the Company of Consultant after
the Effective Date as a consultant to the Company and for certain other matters
in connection therewith upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the covenants and conditions set
forth in this Agreement, the parties, intending to be legally bound, agree as
follows:
1. Termination of Employment. Consultant hereby voluntarily and
irrevocably resigns as a director, officer and employee of the Company and as a
director, officer and employee of each subsidiary and affiliate of the Company
of which he is a director, officer or employee, in each case as of the Effective
Date. The Company and Consultant acknowledge and agree that all rights and
obligations of any nature of the Company and Consultant with respect to such
employment or positions shall be duly and effectively terminated on the
Effective Date, except as expressly provided below. Consultant further
acknowledges and agrees that payments made or to be made and benefits provided
or to be provided hereunder are in lieu of any and all compensation and benefits
of any nature whatsoever due to Consultant under the terms of any agreement,
arrangement or understanding (whether written or oral) binding upon the Company
and Consultant.
2. Consulting Arrangement. The Company hereby retains Consultant as
a consultant to the Company to perform the consulting services in accordance
with the terms and conditions hereinafter set forth.
2.1 Term. The period during which consulting services shall be
provided under this Agreement (the "Consulting Term") shall begin on the
Effective Date and end on the first anniversary thereof, subject to the
provisions for earlier termination thereof set forth in Section 5 of this
Agreement.
<PAGE>
2.2 Duties and Responsibilities as a Consultant. During the
Consulting Term, Consultant shall provide consulting services to the Company as
an independent contractor and not as an employee of the Company. Consultant
shall at all times during the Consulting Term act as an independent contractor
and during such period nothing hereunder shall create or imply a relationship of
employer-employee between the Company and Consultant. Consultant shall provide
such consulting and advisory services to the Company as may be reasonably
requested from time to time by the chief executive officer of the Company.
2.3 Extent of Service as a Consultant. During the Consulting Term,
Consultant agrees to devote such time, attention and energy as is necessary to
fulfill his duties and responsibilities as a consultant under Section 2.2
hereof, but in no event shall Consultant be required to spend more than one day
in any week or more than a total of 52 days during the Consulting Term in such
consulting activities.
2.4 Compensation for Consulting Services.
(a) During the Consulting Term, the Company shall pay
Consultant compensation at the annual rate of $343,355, payable in twelve (12)
equal monthly installments, for all services rendered by Consultant to the
Company pursuant to this Agreement, payable at such times as the Company pays
its senior executive officers.
(b) Consultant acknowledges that the period within which the
Company must make available the purchase of health insurance under COBRA will
commence as of the Effective Date. The Company will pay Consultant an amount in
cash equal to the cost of health insurance purchased by him under COBRA for a
period of twelve (12) months from the Effective Date, or until Consultant
obtains new health insurance coverage, whichever is earlier. Except as expressly
stated above, Consultant shall not be entitled to any benefits provided to
employees of the Company during the Consulting Term, and, Consultant
specifically acknowledges that he is not entitled to participate in any of the
Company's benefit plans, including, without limitation, the Company's health and
life insurance, disability insurance or 401(k) plans.
(c) Consultant alone, and not the Company will be solely
responsible for payment of all federal, state and local taxes in respects of the
payments to be made and benefits to be provided to him under this Agreement.
Consultant hereby acknowledges that the Company is responsible for the
withholding of income, FICA and FUTA taxes in connection with all payments in
excess of $50,000 per year, and the Company is authorized to make such
withholdings.
2.5 Stock Options. The Company has previously granted Consultant
options to acquire a total of 938,612 shares of the Company's common stock (the
"Stock Options") as set forth on Attachment A hereto pursuant to various stock
option agreements (the "Option Agreements"). The Company and Consultant hereby
acknowledge and agree that (i) the provisions of the Option Agreements will
continue to apply to the Company and Consultant
-2-
<PAGE>
during the Consulting Term, (ii) during the Consulting Term, Consultant may
exercise the Stock Options as such options have vested, or will vest during the
Consulting Term, in accordance with the terms of the Option Agreements, and
(iii) all provisions of the Option Agreements relating to the period of
employment of Consultant by the Company or its subsidiaries shall instead refer
to the period of Consultant's services as a consultant to the Company during the
Consulting Term.
2.6 Return of Company Property. As soon as possible after the
Effective Date, Consultant will return to the Company all lists, books, records,
documents, credit cards and other materials or property in his possession,
custody or control which are or were owned by the Company or any of its
subsidiaries or affiliates, or which are or were used by Consultant or any other
officers, employees or agents of the Company or any of its subsidiaries or
affiliates in connection with the conduct of the business of the Company or any
of its subsidiaries or affiliates, and Consultant will not retain or deliver to
any other persons or entities copies thereof or permit any copies thereof to be
made by any other person or entity.
3. General Release. In consideration of the foregoing, (including
without limitation the promises and payments as described in Section 2 above,
which are in excess of that to which Consultant would have otherwise been
entitled upon termination of employment), Consultant hereby knowingly, willingly
and voluntarily remises, waives, releases and forever discharges the Company and
its subsidiaries and affiliates, the directors, officers, employees, advisors
and agents of the Company and its subsidiaries and affiliates, and the heirs,
executors, administrators, successors and assigns of such parties (collectively
referred to as the "Releases") of and from any and all manner of actions and
causes of action, suits, debts, dues, accounts, bonds, covenants, contracts,
agreements, judgments, claims and demands whatsoever by law or equity which
Consultant, his heirs, executors, administrators or assigns has, had or may
hereafter have against the Releases or any of them from or by reason of any
cause, matter or thing whatsoever from the beginning of his employment with the
Company to the Effective Date, excepting only claims against the Company
relating to its obligations under Section 2 of this Agreement and including,
without in any way limiting the generality of the foregoing, any and all matters
relating to his employment by the Company and the termination thereof, any and
all claims under any federal, state or local law, any common law claims and all
claims for counsel fees and costs. Consultant covenants and agrees never to
commence, aid in any way, prosecute or permit to be commenced against the
Releases any action or other proceeding based upon any matters which are the
subject of or covered by the foregoing. Nothing in this Section 3 shall affect
or modify in any manner (i) the rights of Consultant and the obligations of the
Company to indemnify Consultant for acts or matters occurring prior to the
Effective Date, if and to the extent required pursuant to the Company's By-Laws
or the Delaware General Corporation Law, in each case as in effect on or prior
to the Effective Date, and (ii) the rights, if any, of Consultant under any
directors and officers insurance policy purchased by the Company and in effect
on or prior to the Effective Date.
-3-
<PAGE>
4. Developments and Confidential Information, etc.
(a) Consultant acknowledges that, upon, and as a condition of,
first becoming an employee of the Company in 1991, he executed and delivered to
the Company the Company's standard form of proprietary information agreement,
the current version of which is attached as Attachment B hereto (the "Employee
Agreement"). In consideration of the provisions of this Agreement, Consultant
(i) is executing the Employee Agreement contemporaneously with the execution of
the Agreement, thereby confirming that he is and shall be legally bound by its
terms, and (ii) acknowledges that terms of the Employee Agreement are valid,
binding and enforceable, and that he is and shall remain legally bound thereby
at all times after the Effective Date regardless of termination of his
employment by the Company or termination of the Consulting Term.
(b) Consultant recognizes that the Company has received, and
prior to the Effective Date and during the Consulting Term may continue to
receive, from third parties their confidential or proprietary information
subject to a duty on the Company's part to maintain the confidentiality of such
information and to use it only for certain limited purposes. Consultant shall
hold all such confidential or proprietary information in the strictest
confidence and shall not disclose it to any person or entity or use it except as
consistent with the Company's agreements with such third parties.
(c) Consultant agrees that he will provide, and that the
Company may similarly provide, a copy of the Employee Agreement to any business
or enterprise (i) which he may directly or indirectly own, manage, advise,
operate, finance, join, control or participate in the ownership, management,
operation, financing, or control of or (ii) with which he may be connected with
as an officer, director, advisor, employee, partner, principal, agent,
representative, consultant or otherwise, or in connection with which he may use
or permit his name to be used.
5. Early Termination of the Consulting Term. The Consulting Term
shall terminate prior to the first anniversary of the Effective Date upon the
occurrence of any one of the following events:
(a) Death. In the event that Consultant dies during the
Consulting Term, the Consulting Term shall terminate, but the Company shall
continue to pay to his executors, legal representatives or administrators the
unpaid portions of the cash compensation set forth in Sections 2.4(a).
(b) Breach by Consultant. In the event Consultant violates any
of his obligations under this Agreement or the Employee Agreement, the Company
may, upon 7 days prior notice to Consultant, terminate the Consulting Term;
provided, however, that Consultant shall have a reasonable opportunity to cure
any breach of his obligations under Sections 2.2, 2.3 or 2.6 of this Agreement
during such 7 days' notice period. In the event of a termination
-4-
<PAGE>
pursuant to this Section 5(b), all payment obligations of the Company set forth
in this Agreement shall terminate, and Consultant shall not be entitled to
receive any unpaid portion of the cash payments set forth in Sections 2.4(a) and
(b) of this Agreement.
6. Survival. Notwithstanding the termination of the Consulting Term
under Section 5(b) hereof or for any other reason, Consultant's obligations
under the Employee Agreement shall survive and remain in full force and effect
for the periods therein provided, and the provisions of Sections 1, 2.6, 3, 4,
and 6-13 of this Agreement shall survive and remain in full force and effect.
7. Governing Law. This Agreement shall be governed by and
interpreted under the laws of the Commonwealth of Pennsylvania, without giving
effect to the principles of conflicts of law thereof.
8. Notices. All notices and other communications required or
permitted hereunder or necessary or convenient in connection herewith shall be
in writing and shall be deemed to have been given when hand delivered or mailed
by registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to the Company, to:
Magainin Pharmaceuticals Inc.
5110 Campus Drive
Plymouth Meeting, PA 19462
Attention: President and Chief Executive Officer
With a required copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
Attention: David R. King, Esquire
If to Consultant, to:
Jay Moorin
31 Hereford Drive
Princeton Junction, NJ 08550
or to such other names or addresses as the Company or Consultant, as the case
may be, shall designate by notice to each other person entitled to receive
notices in the manner specified in this Section.
-5-
<PAGE>
9. Contents of Agreement; Amendment and Assignment.
(a) This Agreement supersedes all prior agreements and sets
forth the entire understanding among the parties hereto with respect to the
subject matter hereof, except that this Agreement shall not supersede and shall
be in addition to the Employee Agreement any other agreements between Consultant
and the Company with respect to confidentiality or other intellectual property
rights. This Agreement and the Employee Agreement may not be changed, modified,
extended or terminated except upon written amendment executed by Consultant and
approved by the board of directors of the Company and executed on behalf of the
Company by a duly authorized officer. Without limitation of the foregoing,
Consultant and the Company acknowledge that the effect of this provision is that
no oral modifications of any nature whatsoever to this Agreement or the Employee
Agreement shall be permitted.
(b) All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors and assigns
of the parties hereto, except that the duties and responsibilities of Consultant
hereunder are of a personal nature and shall not be assignable or delegable in
whole or in part by Consultant and the Company may not transfer or convey its
rights hereunder to any third party other than an affiliate of the Company
without the prior express written consent of Consultant.
10. Severability. If any provision of this Agreement or the Employee
Agreement, or the application thereof to any person or circumstance, is held
invalid or unenforceable in any jurisdiction, the remainder of this Agreement or
the Employee Agreement, and the application of such provision to such person or
circumstance in any other jurisdiction or to other persons or circumstances in
any jurisdiction, shall not be affected thereby.
11. Remedies Cumulative; No Waiver. No remedy conferred upon the
Company by this Agreement or the Employee Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by the Company in exercising
any right, remedy or power hereunder or existing at law or in equity shall be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by the Company from time to time and as often as may be deemed
expedient or necessary by the Company in its sole discretion.
12. Miscellaneous. All section headings are for convenience only.
This Agreement may be executed in counterparts, each of which is an original. It
shall not be necessary in making proof of this Agreement or any counterpart
hereof to produce or account for any of the other counterparts.
-6-
<PAGE>
13. Consultation with Legal Counsel, Etc. Consultant and Company
acknowledge that no promise or inducement for this Agreement has been made
excepts as set forth herein. Consultant acknowledges that this Agreement is
executed without Consultant's reliance upon any statement or representation by
or on behalf of the Company; that Consultant has had an opportunity to discuss
this Agreement with his attorney; and that Consultant is legally competent to
and does voluntarily execute this Agreement and accept full responsibility
therefor.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound,
have executed this Agreement as of the date first above written.
MAGAININ PHARMACEUTICALS INC.
By: /s/ Michael R. Dougherty
-------------------------------------
Michael R. Dougherty
President and Chief Executive Officer
CONSULTANT
/s/ Jay Moorin
-----------------------------------------
Jay Moorin
-7-
<PAGE>
ATTACHMENT A
Plan Legend
---------------------------------------------
A Options granted "Outside-the-Plans"
Magainin Pharmaceuticals Inc. B Options Granted under the 1990 Plan
Option Detail x Person C Options Granted under the 1992 Plan
D Options Granted under the 1998 plan
---------------------------------------------
<TABLE>
<CAPTION>
==============================================================================================================================
1994 Option
Exchange
Program
Original Number Revised
Exercise Options Options Options
Item Count Plan Grant Date Price Granted Granted Granted Exercised
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
--------- 1 A 22-Apr-91 $2.000 595,612 0 595,612 0
Employee => J. Moorin 2 C 22-Jul-93 $3.750 100,000 (10,000) 90,000 0
CEO 3 C 20-Jun-94 $3.750 33,000 33,000 0
--------- 4 C 21-Jul-95 $7.130 45,000 45,000 0
5 C 28-Jun-96 $10.500 50,000 50,000 0
6 C 28-Jun-96 $10.500 55,000 55,000 0
7 C 9-Jul-97 $7.380 70,000 70,000 0
0 0
------------------------
938,612 0
------------------------
==============================================================================================================================
<CAPTION>
==============================================================================================================================
--------------------------------------
As Of" Date = 6/30/98 # Vesting Periods
-------------------------------------- -----------------
Options
Item Count Terminated Outstanding Vested Unvested Total Earned
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
--------- 1 0 595,612 595,612 0 OK 1 1
Employee => J. Moorin 2 0 90,000 90,000 0 OK 4 4
CEO 3 0 33,000 33,000 0 OK 4 4
--------- 4 0 45,000 22,500 22,500 OK 4 2
5 0 50,000 25,000 25,000 OK 4 2
6 0 55,000 22,000 33,000 OK 5 2
7 0 70,000 0 70.000 OK 4 0
0 0 N/A N/A 0 0
-------------------------------------------------
0 938,612 788,112 150,000 OK
-------------------------------------------------
==============================================================================================================================
</TABLE>
Confidential
Do Not Disclose Outside MAGN Page 1 of 2
-8-
<PAGE>
ATTACHMENT B
MAGAININ PHARMACEUTICALS INC.
PROPRIETARY INFORMATION AGREEMENT
________________, 1998
In consideration of my employment and/or continued employment, as the case may
be, with Magainin Pharmaceuticals Inc., a Delaware corporation (together with
its affiliates and subsidiaries, if any, the "Company"), and the compensation
received by me from the Company from time to time, I _________________________,
hereby agree with the Company as follows:
1. Definitions
(a) "Invention" shall mean any Technical Information created, discovered,
developed, made, conceived of, reduced to practice or learned by, or which
otherwise became known to, me, either alone or jointly with others, which
is not generally known to the public (other than by reason of my breach of
this Agreement).
(b) "Proprietary Information" shall mean (i) Technical Information (A)
that has been created, discovered, developed, made, conceived of, reduced
to practice or learned by, or otherwise become known to, the Company, (B)
that constitutes an Invention that arose during the period of my
employment with the Company, resulted from tasks assigned to me by the
Company or resulted from the use of premises or property (including,
without limitation, computer systems and engineering facilities) owned,
leased or contracted for by the Company, or (C) in which property rights
have been or may be assigned or otherwise conveyed to the Company, which
Technical Information is not generally known to the public (other than by
reason of my breach of this Agreement) and which provides or may provide a
competitive advantage to the Company; and (ii) all Trade Information which
is related to the business of the Company;
(c) "Technical Information" shall mean systems, processes, formulas, data,
functional specifications, computer programs, blueprints, know-how,
improvements, discoveries, developments, designs, inventions, techniques,
new products and licenses, whether or not patentable, registrable or
otherwise protectable under patent, copyright, trademark or similar
statutes.
(d) "Trade Information" shall mean strategies, forecasts, unpublished
financial statements, budgets, projections, prices, costs, and licensor,
licensee, joint venture, partner, client, customer and supplier lists.
2. Acknowledgements. I have been advised and understand and acknowledge
that:
-9-
<PAGE>
(a) the Company is engaged in a continuous program of research, design,
development, production, marketing and servicing with respect to the
business of the Company.
(b) my employment creates a relationship of confidence and trust between
me and the Company with respect to certain information, however learned,
which directly or indirectly relates to the business of the Company;
(c) during my employment with the Company, I will have access to
Proprietary Information which is, and must continue to be, confidential
and which is not readily accessible to competitors of the Company;
(d) as used herein, the period of my employment includes any time during
which I may be retained by the Company as an employee.
3. Ownership of Proprietary Information. Nondisclosure. All Proprietary
Information (including, without limitation, Inventions which constitute
Proprietary Information) shall be the sole property of the Company and the
Company shall be the sole owner of all patents, copyrights, trademarks and other
rights and protections in connection therewith. I hereby assign to the Company
all rights and protections I may have or acquire in any Proprietary Information.
At all times, both during the term of my employment with the Company and after
its termination, I will keep in strictest confidence and trust all Proprietary
information and information which the Company receives from third parties which
the Company treats as confidential and I will not use or disclose any
Proprietary Information without the written consent of the Company except (i) as
may be necessary in the ordinary course of performing my duties as an employee
of the Company and (ii) such Proprietary Information which is in the public
domain other than by reason of my breach of this Agreement.
4. Documentation: Upon the termination of my employment with the Company
for any reason whatsoever, whether voluntary or involuntary, I will deliver to
the Company all Proprietary Information that is embodied in a tangible medium of
expression, including, without limitation, documents, notes, drawings, software
and other materials, and will not retain or take any of the foregoing or any
reproduction of any of the foregoing.
5. No-solicitation. I will not at any time either during the term of my
employment or after the cessation of my employment with the Company for whatever
reason, either on my own account or for any other person, firm or company,
solicit, interfere with or endeavor to entice away from the Company other
employees of the Company.
6. Disclosure of Inventions. I will promptly disclose to the Secretary or
Assistant Secretary of the Company all Inventions which (i) may reasonably be
deemed to constitute Proprietary Information or (ii) arise during the period of
my employment. The Company agrees to receive all such disclosures in confidence
pending determination of whether such inventions constitute Proprietary
Information.
-10-
<PAGE>
7. Enforcement Assistance. I shall assist the Company (at the Company's
expense) in every proper way as to all inventions which constitute Proprietary
Information to obtain and from time to time to enforce patents, copyrights,
trademarks and other rights and protections relating to such Inventions in any
and all countries, and to that end I will execute all documents for use in
applying for, prosecuting or enforcing such patents, copyrights, trademarks and
other rights and protections on such Inventions as the Company may desire,
together with any assignments thereof to the Company or persons designated by
it. My obligation so to assist the Company shall continue indefinitely after the
termination of my employment with the Company, but the Company shall compensate
me at a reasonable rate after my termination for time actually spent by me at
the Company's request on such assistance. In the event the Company is unable for
any reason whatsoever, after reasonable effort, to secure my signature on any
documents for use in applying for, prosecuting or enforcing any patent,
copyright, trademark or other right, I designate and appoint the Company and its
duly authorized officers and agents as my agent and attorney-in-fact to act for
and on my behalf to execute and file any such documents and to do all other
lawfully permitted acts to further the prosecution, issuance and enforcement of
patents, copyrights, trademarks or other rights or protections thereon with the
same legal force and effect as if executed by me, and I hereby ratify, affirm
and approve all such acts accordingly.
8. No Conflicting Agreements. I represent and warrant that my engagement
by the Company and my execution and delivery of this Agreement and compliance
with all the terms of this Agreement do not and will not breach any written or
oral agreement I have entered into relating to intellectual property,
noncompetition or otherwise. I shall not enter into any written or oral
agreement in conflict with this Agreement. For so long as I shall be an employee
of the Company, I will not, without the Company's prior written consent, engage
in any employment or business which requires substantial efforts on my part,
other than for the Company.
9. Use of Confidential Information of Other Persons. I represent and
warrant that I have not brought and will not bring with me to the Company, or
use at the Company, any Technical Information or Trade Information which is
proprietary to another person (natural or otherwise) and not generally available
to the public, unless express written authorization from such other person for
the possession and use of such Technical Information or Trade Information has
been obtained.
10. Remedies. I acknowledge that a remedy at law for any breach or
threatened breach of the provisions of this Agreement would be inadequate and
therefore agree that the Company may be entitled to injunctive and other
equitable relief in addition to any other available rights and remedies in case
of any such breach or threatened breach; provided, however, that nothing
contained in this Agreement shall be construed as prohibiting the Company from
or limiting the Company in pursuing any other remedies available for any such
breach or threatened breach.
-11-
<PAGE>
11. Assignment. This Agreement and the rights and obligations of the
parties shall bind and inure to the benefit of any successors or assigns of the
Company. Neither this Agreement nor any rights or obligations under this
Agreement may be assigned by me.
12. Interpretation. It is the desire and intent of the parties that the
provisions of this Agreement be enforced to the fullest extent permissible under
the law and public policies applied in each jurisdiction in which enforcement is
sought. Accordingly, if any particular provision of this Agreement shall be
adjudicated to be invalid or unenforceable, such provision shall be deemed
amended to delete therefrom the portion thus adjudicated to be invalid or
unenforceable, such deletion to apply only with respect to the operation of such
provision in the particular jurisdiction in which such adjudication is made. In
addition, if any particular provision contained in this Agreement shall for any
reason be held to be excessively broad as to duration, activity or subject, it
shall be construed by limiting and reducing such provision as to such
characteristic so that the provision is enforceable to the fullest extent
compatible with the applicable law as it shall then appear.
13. Notices. Any notice which a party is required or may desire to give
pursuant to this Agreement shall be given in writing by personal delivery, by
telex. telegram or telecopy, by registered or certified mail, return receipt
requested, postage prepaid, or by overnight courier, addressed to the employee
at his address of record with the Company and addressed to the Company at its
principal office, or at such other place as either party may from time to time
designate in writing. Any notice personally delivered or given by telex,
telegram or telecopy shall be deemed received on the date thereof, any notice
given by overnight courier shall be deemed received on the next business day and
any notice mailed shall be deemed received on the third business day thereafter.
14. Waivers. If either party shall waive any breach of any provision of
this Agreement, such party shall not thereby be deemed to have waived any other
provision or any preceding or succeeding breach of the same provision of this
Agreement.
15. Headings. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute a part nor to affect
the meaning of this Agreement.
16. Governing Law, Jurisdiction. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the Commonwealth of
Pennsylvania without giving effect to the principles of conflicts of laws
thereof. In any suit, action or proceeding arising out of or relating to this
Agreement, I hereby submit to the jurisdiction of any court or agency in which
or with whom the Company commences such suit, action or proceeding, and waive
any and all objections to jurisdiction that I may have under relevant law.
17. No Employment Agreement. I acknowledge that this agreement does not
constitute an employment agreement, and I further acknowledge that my term with
the Company may be terminated at will either by me or by the Company. I agree
that this
-12-
<PAGE>
proprietary information agreement shall be binding upon me whether or not my
consulting shall continue for any length of time after this agreement is
executed, and whether or not my consulting is terminated by me or by the Company
for any reason whatsoever, whether voluntarily or involuntarily.
18. Complete Agreement Amendments; Prior Agreements. This Agreement is the
entire agreement of the parties with respect to its subject matter and may not
be amended, supplemented, cancelled or discharged, nor may any provision be
waived, except by written instrument executed by both parties.
This agreement supersedes any and all prior agreements between the parties with
respect to the matters covered.
Signature: /s/ Jay Moorin
-----------------
Date: Aug 3, 1998
-----------------
Accepted and agreed to
as of the date first
above written:
By: /s/ M.R. Dougherty
------------------
Name:
-----------------
Title:
----------------
-13-
<PAGE>
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE (this "Amendment") is made as of the 25 day
of November, 1998, by and between MAGAININ PHARMACEUTICALS, INC., a Delaware
corporation, formerly known as Magainin Sciences, Inc., a Delaware corporation
("Tenant"), and ARE-5100/5110 CAMPUS DRIVE, LP, a Delaware limited partnership
("Landlord").
A. Landlord's predecessor-in-interest, Whitemarsh Business Associates, a
Pennsylvania general partnership, and Tenant have previously entered into that
certain Whitemarsh Business Center Lease, dated as of February 10,1989 (the
"Lease"), of that certain building located in Whitemarsh Business Center, 5110
Campus Drive, Plymouth Meeting, Pennsylvania, and more particularly described in
the Lease. All capitalized terms used but not otherwise defined herein shall
have the meanings given them in the Lease.
B. The parties desire to amend the Lease as set forth below.
NOW, THEREFORE, in consideration of the foregoing Recitals, which
are incorporated herein by this reference, the mutual promises and conditions
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:
1. TERM. The Term of the Lease shall be extended through and
including November 30, 2002.
2. RENT. Base Rent through November 30, 1999 shall continue as
provided in Section 1 of the Lease. Thereafter, Base Rent shall be paid as
follows:
<TABLE>
<CAPTION>
Annual Monthly
Period Base Rent Base Rent
------ --------- ---------
<S> <C> <C>
December 1,1999 - November 30, 2000 $307,319.00 $25,609.92
December 1,2000 - November 30, 2001 $316,442.00 $26,370.17
December 1,2001 - November 30, 2002 $326,004.00 $27,167.00
</TABLE>
3. MISCELLANEOUS.
3.1 This Amendment is the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior and
contemporaneous oral and written agreements and discussions. This Amendment may
be amended only by an agreement in writing, signed by the parties hereto.
3.2 This Amendment is binding upon and shall inure to the
benefit of the parties hereto, their respective agents, employees,
representatives, officers, directors, divisions, subsidiaries, affiliates,
assigns, heirs, successors in interest and shareholders.
3.3 This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which when
taken together shall constitute one and the same instrument. The signature page
of any counterpart may be detached therefrom without impairing the legal effect
of the signature(s) thereon provided such signature page is attached to any
other counterpart identical thereto except having additional signature pages
executed by other parties to this Amendment attached thereto.
3.4 Except as amended and/or modified by this Amendment, the
Lease is hereby ratified and confirmed and all other terms of the Lease shall
remain in full force and effect, unaltered and unchanged by this Amendment. In
the event of any conflict between the provisions of this Amendment and
<PAGE>
the provisions of the Lease, the provisions of this Amendment shall prevail.
Whether or not specifically amended by this Amendment, all of the terms and
provisions of the Lease are hereby amended to the extent necessary to give
effect to the purpose and intent of this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
"Tenant"
MAGAININ PHARMACEUTICALS, INC.,
a Delaware corporation
By: /s/ M.R. Dougherty
-----------------------------------------------
Its: Pres, CEO
----------------------------------------------
"Landlord"
ARE-5100/5110 CAMPUS DRIVE, LP,
a Delaware limited partnership
By: AREE-HOLDINGS, L.P.,
a Delaware limited partnership, general partner
By: ARE-GP HOLDINGS QRS CORP.,
a Delaware corporation, general partner
By: /s/ Lynn Anne Shapiro
-------------------------------------
Its: General Counsel
------------------------------------
<PAGE>
SUMMARY OF ORAL AGREEMENTS WITH EXECUTIVE OFFICERS
On August 11, 1998, Magainin orally agreed to grant shares of common stock to
each of the executive officers listed in the table below, in the amounts and on
the dates listed in the table below, provided that such executive officer
remained an employee of Magainin in good standing, as determined by the Board of
Directors in their sole discretion, as of such date. The shares of common stock
will be issued under the 1998 Equity Compensation Plan, and will be subject to
the terms and conditions of such Plan.
- --------------------------------------------------------------------------------
Name of Executive Officer Date on Which Shares Number of Shares
Will Be Granted to be Granted
- --------------------------------------------------------------------------------
Michael R. Dougherty August 11, 1999 12,500
August 11, 2000 12,500
August 11, 2001 12,500
August 11, 2002 12,500
- --------------------------------------------------------------------------------
Roy C. Levitt, M.D. August 11, 1999 9,000
August 11, 2000 9,000
August 11, 2001 9,000
August 11, 2002 9,000
- --------------------------------------------------------------------------------
Michael A. Zasloff, M.D., Ph.D. August 11, 1999 5,000
August 11, 2000 5,000
August 11, 2001 5,000
August 11, 2002 5,000
- --------------------------------------------------------------------------------
Thomas J. Bigger August 11, 1999 5,000
August 11, 2000 5,000
August 11, 2001 5,000
August 11, 2002 5,000
- --------------------------------------------------------------------------------
Kenneth J. Holroyd, M.D. August 11, 1999 5,000
August 11, 2000 5,000
August 11, 2001 5,000
August 11, 2002 5,000
- --------------------------------------------------------------------------------
<PAGE>
Consent of Independent Auditors
The Board of Directors
Magainin Pharmaceuticals Inc:
We consent to incorporation be reference in the registration statement Nos.
33-52882, 33-61530, 33-71984, 33-82196, 33-96426, 333-10889 and 333-62073 on
Form S-8 and registration statement Nos. 33-69544, 33-99528, 333-09927,
333-14555, 333-38271 and 333-49681 on Form S-3 and registration statement Nos.
33-69544, 33-99528, 333-09927, 333-14555, 333-38271 and 333-49681 on Form S-3 of
Magainin Pharmaceuticals Inc. of our report dated February 12, 1999, relating to
the balance sheets of Magainin Pharmaceuticals Inc. as of December 31, 1998 and
1997, and the related statements of operations, stockholders' equity and
comprehensive loss and cash flows for each of the years in the three-year period
ended December 31, 1998, which report appears in the December 31, 1998 annual
report on Form 10-K of Magainin Pharmaceuticals Inc.
KPMG LLP
Princeton, New Jersey
March 1, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MAGAININ
PHARMACEUTICALS, INC. FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 4,495 487
<SECURITIES> 18,376 38,574
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 23,050 39,551
<PP&E> 6,240 5,772
<DEPRECIATION> 3,475 2,948
<TOTAL-ASSETS> 25,891 42,444
<CURRENT-LIABILITIES> 11,153 6,478
<BONDS> 0 0
0 0
0 0
<COMMON> 46 44
<OTHER-SE> 14,634 34,826
<TOTAL-LIABILITY-AND-EQUITY> 25,891 42,444
<SALES> 0 0
<TOTAL-REVENUES> 0 10,088
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 24,748 26,121
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 196 118
<INCOME-PRETAX> (23,304) (14,381)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (23,304) (14,381)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (23,304) (14,381)
<EPS-PRIMARY> (1.05) (0.73)
<EPS-DILUTED> (1.05) (0.73)
</TABLE>
