<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED: 0-19871
MARCH 31, 1997 ----------------------
COMMISSION FILE NUMBER
CYTOTHERAPEUTICS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3078125
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No)
TWO RICHMOND SQUARE
PROVIDENCE, RI 02906
-----------------------------------------------------------
(Address of principal executive offices including zip code)
(401) 272-3310
----------------------------------------------------
(Registrant's telephone number, including area code)
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 twelve months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
At April 30, 1997, there were 16,496,332 shares of Common Stock, $.01 par value,
issued and outstanding. There were no issued and outstanding shares of Preferred
Stock.
Page 1 of 15
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CYTOTHERAPEUTICS, INC.
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations (unaudited)
Three months ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
Page 2 of 15
<PAGE> 3
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
(UNAUDITED) (AUDITED)
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,542,789 $ 19,921,584
Marketable securities 22,832,604 22,685,855
Receivables from collaborative agreement 166,824 70,681
Other current assets 898,516 1,074,091
------------- -------------
Total current assets 38,440,733 43,752,211
Property, plant and equipment, net 12,055,283 10,732,102
Other assets 4,285,563 3,912,430
------------- -------------
Total assets $ 54,781,579 $ 58,396,743
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,690,106 $ 4,159,769
Deferred revenue 3,109,092 1,859,092
Current maturities of capitalized lease obligations 508,076 553,557
Current maturities of long term debt 789,982 695,570
------------- -------------
Total current liabilities 8,097,256 7,267,988
Capitalized lease obligations, less current maturities 3,858,934 3,971,594
Long term debt, less current maturities 3,913,605 4,251,008
Redeemable stock 7,494,935 8,158,798
Stockholders' equity
Common stock 157,374 156,144
Additional paid in capital 108,582,600 107,649,659
Accumulated deficit (77,134,283) (72,922,674)
Deferred compensation (47,466) (90,118)
Unrealized currency loss (104,529) (60,416)
Unrealized gain (loss) on marketable securities (36,847) 14,760
------------- -------------
Total stockholders' equity 31,416,849 34,747,355
------------- -------------
Total liabilities and stockholders' equity $ 54,781,579 $ 58,396,743
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 4
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(unaudited) THREE MONTHS ENDED
MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenue from collaborative arrangements $ 1,856,622 $ 1,664,217
Operating expenses:
Research and development 4,649,500 3,905,159
General and administrative 1,796,430 1,234,048
----------- -----------
6,445,930 5,139,207
----------- -----------
Loss from operations (4,589,308) (3,474,990)
Other income (expense):
Investment income 648,630 634,525
Interest expense (175,511) (155,595)
Foreign currency loss (95,420) -
----------- -----------
377,699 478,930
----------- -----------
Net loss $(4,211,609) $(2,996,060)
=========== ===========
Net earnings loss per share $ (0.26) $ (0.20)
=========== ===========
Shares used in calculation 16,471,203 15,273,969
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
THREE MONTHS ENDED
(unaudited) MARCH 31,
1997 1996
------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,211,609) $ (2,996,060)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 476,337 384,222
Foreign currency loss 95,049 -
Compensation expense relating to the grant
of stock options 15,311 15,531
Changes in operating assets and liabilities 843,865 (1,797,256)
------------ ------------
Net cash used in operating activities (2,781,047) (4,393,563)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 4,801,463 3,608,160
Purchases of marketable securities (4,999,820) (3,083,620)
Purchase of property, plant and equipment (1,772,590) (821,390)
Acquisition of other assets (430,973) 140,459
------------ ------------
Net cash used in investing activities (2,401,920) (156,391)
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 297,651 788,010
Proceeds from financing transactions - 80,472
Principal payments under capitalized lease obligations
and mortgage payable (282,503) (293,296)
------------ ------------
Net cash provided by financing activities 15,148 575,186
Effect of exchange rate on cash and cash equivalents (210,976) -
------------ ------------
Decrease in cash and cash equivalents (5,378,795) (3,974,768)
Cash and cash equivalents, January 1 19,921,584 9,548,579
------------ ------------
Cash and cash equivalents, March 31 $ 14,542,789 $ 5,573,811
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE> 6
PART I - ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997 AND 1996
NOTE 1. BASIS OF PRESENTATION
The accompanying, unaudited, condensed consolidated financial
statements have been prepared by the Company in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the
accompanying financial statements include all adjustments, consisting
of normal recurring accruals considered necessary for a fair
presentation of the financial position, results of operations and cash
flows for the periods presented. Results of operations for the three
months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the entire fiscal year ended December
31, 1997.
For further information, refer to the audited financial statements and
footnotes thereto as of December 31, 1996 included in the Company's
Annual Report to Stockholders and the Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
NOTE 2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock
options and warrants are excluded as their effect is antidilutive.
NOTE 3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Accounting Standards No. 128,
Earnings per Share (EPS) which is effective for both interim and annual
financial statements for periods ended after December 15, 1997. Under
Statement 128, primary EPS computed in accordance with Opinion 15 will
be replaced with a simpler calculation called basic EPS. Basic EPS will
be calculated by dividing income available to common stockholders by
the weighted average common shares outstanding. Fully dilutive EPS will
not change significantly, but has been renamed diluted EPS. The
adoption of Statement 128 is not expected to have any effect on the
Company's financial statements since in the past common equivalent
shares from stock options and warrants have been excluded as their
effect is antidilutive.
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<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company for the three months ended March 31, 1997 and 1996 should be read in
conjunction with the accompanying unaudited condensed consolidated financial
statements and the related footnotes thereto.
This report may contain certain forward-looking statements regarding, among
other things, the Company's expected results of operations, the progress of the
Company's product development and clinical programs, the need for, and timing
of, additional capital and capital expenditures, partnering prospects, the need
for additional intellectual property rights, the need for additional facilities
and potential market opportunities. The Company's actual results may vary
materially from those contained in such forward-looking statements because of
risks to which the Company is subject such as risks of delays in research,
development and clinical testing programs, obsolescence of the Company's
technology, lack of available funding, competition from third parties, failure
of the Company's collaborators to perform, regulatory constraints, litigation
and other risks to which the Company is subject. See "Cautionary Factors
Relevant to Forward-looking-Information" filed herewith as Exhibit 99 and
incorporated herein by reference.
OVERVIEW
Since its inception in August 1988, the Company has been primarily engaged in
research and development of human therapeutic products. No revenues have been
derived from the sale of any products, and the Company does not expect to
receive revenues from product sales for at least several years. The Company
expects that its research and development expenditures will increase
substantially in future years as research and product development efforts
accelerate and clinical trials are initiated or broadened. The Company has
incurred annual operating losses since inception and expects to incur
substantial operating losses in the future. As a result, the Company is
dependent upon external financing from equity and debt offerings and revenues
from collaborative research arrangements with corporate sponsors to finance its
operations. The Company's results of operations have varied significantly from
year to year and quarter to quarter and may vary significantly in the future due
to the occurrence of material, nonrecurring events, including without
limitation, the receipt of one-time, nonrecurring licensing payments.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
For the quarter ended March 31, 1997 and 1996 revenues from collaborative
agreements totaled $1,857,000 and $1,664,000. The revenues were earned solely
from a Development, Marketing and License Agreement with Astra AB, which was
signed in March 1995.
Research and development expenses totaled $4,650,000 for the three months ended
March 31, 1997, compared with $3,905,000 for the same period in 1996.
Page 7 of 15
<PAGE> 8
The increase of $745,000, or 19%, from 1996 to 1997 is principally due to
increases in the number of scientists, increased spending for research
agreements and the addition of Modex, a 50% owned subsidiary, which contributed
$358,000 to the increase.
General and administrative expenses were $1,796,000 for the three months ended
March 31, 1997, compared with $1,234,000 for the same period in 1996. The
increase of $562,000, or 46%, from 1996 to 1997 was primarily attributable to
legal expenses incurred related to arbitration proceedings with NeuroSpheres,
the increase in patent expenses, and the addition of Modex, a 50% owned
subsidiary, which contributed $75,000 to the increase.
Interest income for the three months ended March 31, 1997 and 1996 was $649,000
and $635,000, respectively. The average investment balances were $40,393,000 and
$41,986,000 in the first quarter of 1997 and 1996, respectively. The increase in
interest income in 1996 is primarily attributable to higher interest rates.
Interest expense was $176,000 for the three months ended March 31, 1997,
compared with $156,000 for the same period in 1996. The increase from 1996 to
1997 was attributable to additional collateralized loan obligations recorded in
connection with equipment financings offset, in part, by decreasing balances of
existing capital leases.
Net loss for the three months ended March 31, 1997 was $4,212,000 or $0.26 per
share, as compared to net earnings of $2,996,000, or $0.20 per share, for the
comparable period in 1996. 1997 results include a $431,000 net loss attributable
to Modex, the Company's 50% owned subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through the sale of
common and preferred stock, the issuance of long-term debt and capitalized lease
obligations, revenues from collaborative agreements, research grants and
interest income.
The Company had unrestricted cash, cash equivalents and marketable securities
totaling $37,375,000 at March 31, 1997. Cash equivalents and marketable
securities are invested in agencies of the U.S. government, investment grade
corporate bonds and money market funds.
The Company currently occupies all of its laboratory and administrative office
space, other than that at its pilot manufacturing site, under the terms
Page 8 of 15
<PAGE> 9
of operating leases subject to termination upon nine months notice by the
Company. As a result of an anticipated increase in the number of employees, the
Company's current facilities will not be sufficient to accommodate the Company's
needs past the end of 1997. The Company has purchased land and a building and
began construction of a new headquarters and laboratory facility in the fourth
quarter of 1996. The total cost of the project is estimated to be $7,600,000.
In October 1996, the Company obtained financing of $5,500,000 from a bank,
secured by a mortgage on the new facility. The Company had borrowed $1,450,000
under this agreement as of March 31, 1997. Any unused commitment expires October
31, 1997. Quarterly principal payments of 1/40 of the loan balance commence
September 30, 1997 with the balance due at maturity, October 2001. The loan
agreement requires the Company provide full cash collateral if the Company's
unencumbered cash balance falls below $18,000,000 and to comply with certain
financial covenants.
In May 1996, the Company secured an equipment loan facility with a bank in the
amount of $2,000,000. The Company has borrowed $741,000 under this agreement as
of March 31, 1997. The loan requires interest payments only for the first year;
principal payments are payable over a three-year period beginning May 1997. Any
unused commitment expires on May 15, 1997. The loan is secured by equipment
purchased with the proceeds of the credit facility.
In February 1997, CytoTherapeutics and Cognetix, Inc. entered into a
Collaboration and Development Agreement to screen selected peptides isolated by
Cognetix for possible development into therapeutic products aimed at a broad
range of human disease states using CytoTherapeutics' cell-based delivery
technology. Based on in vitro data, a screening committee comprised of an equal
number of representatives from each of CytoTherapeutics and Cognetix will
determine which compounds to select for in vivo studies and possible clinical
trials. The companies will generally share expenses associated with the
development of any specific product candidate and any resulting revenues, except
as otherwise determined on a product-by-product basis. As part of the agreement
with Cognetix, CytoTherapeutics has purchased $250,000 of Cognetix preferred
stock and subject to certain milestones, is obligated to purchase up to a total
of $1,750,000 of Cognetix stock over the next year.
In November 1996, the Company signed collaborative development and licensing
agreements with Genentech, Inc. relating to the development of products using
the Company's technology to deliver certain of Genentech's proprietary growth
factors to treat Parkinson's disease, Huntington's disease and amyotrophic
lateral sclerosis ("ALS").
Page 9 of 15
<PAGE> 10
Under the terms of the agreement for Parkinson's disease, Genentech
purchased 829,171 shares of common stock for $8,300,000 to fund development of
products to treat Parkinson's disease. Additional equity purchases and other
funding by Genentech is available for future clinical development as determined
by the parties. If the Parkinson's program is terminated and the funds the
Company received from the sale of stock to Genentech pursuant to the Parkinson's
agreement exceed the expenses incurred by the Company in connection with such
studies by more than $1 million, Genentech has the right to require the Company
to repurchase from Genentech shares of Company Common Stock having a value equal
to the amount of the overfunding, based upon the share price paid by Genentech.
As such, the Common Stock purchased by Genentech is classified as Redeemable
Common Stock until such time as the related funds are expended on the program.
Upon commercialization, Genentech and the Company will share profits in the U.S.
at an agreed upon percentage, and Genentech will pay the Company a royalty based
upon deals outside the U.S. The Company retains manufacturing rights and will be
paid manufacturing costs for products sold.
The Company also licensed certain growth factors for the treatment of both
Huntington's disease and amyotrophic lateral sclerosis ("ALS"). Under the terms
of the agreements, the Company is responsible for conducting and funding all
preclincal and clinical development, subject to specified rights of Genentech to
participate in the development and marketing of the proposed products. Should
Genentech share in the development cost of the proposed products, the companies
will share profits at a negotiated percentage upon commercialization. Should
Genentech elect not to participate in the development, upon commercialization,
the Company will pay Genentech an agreed upon royalty based upon sales. These
agreements supersede the Development Collaboration and License Agreement between
the Company and Genentech entered into in March 1994.
In July 1996, the Company invested $2 million in Modex, a 50% owned Swiss
subsidiary, to pursue extensions of the Company's encapsulated-cell technology
for specific applications outside the central nervous system, with a commitment
to invest an additional Sfr 2.4 million on the second anniversary of the
agreement if Modex has, prior to that time, achieved one or more specified
scientific milestones. An investment fund, managed by a Swiss private bank, has
invested $2 million in Modex, with a commitment to invest an additional Sfr 1.2
million on the second anniversary of the agreement, in exchange for a 15% stake
in the company. The remaining 35% of Modex is owned by the scientific founders
of Modex. The Company has granted to Modex an exclusive, royalty-bearing license
to the Company's proprietary encapsulated-cell technology for three applications
outside the central nervous system: diabetes, obesity and anemia. Modex granted
the
Page 10 of 15
<PAGE> 11
Company an exclusive royalty-bearing license to any technology developed
or obtained by Modex for application to diseases, conditions and disorders which
affect the central nervous system. In addition to its royalty obligations, the
Company is also obligated to issue to Modex up to 300,000 shares of the
Company's Common Stock on the achievement by Modex of certain scientific
milestones. Substantially all of these shares are expected to be awarded by
Modex as incentive compensation to Modex' founding scientists and other
researchers upon achievement of such milestones.
Under the terms of its agreement with the investment fund, during the first two
years following closing, the Company has the right to acquire the fund's
interest in Modex for the greater of a 30% annual return or Sfr 3.6 million.
Following this two-year period, the Company has the right to purchase the fund's
interest at 110% of fair market value. Following the second anniversary of the
agreement and prior to the tenth anniversary of the agreement, if no public
market exists for the common stock of Modex, the fund has the right to require
the Company to purchase the fund's interest in Modex for 90% of the fair market
value of such interest. Any purchase made by the Company under any of the
circumstances described in this paragraph may be made at the Company's option in
cash or shares of the Company's Common Stock valued at the market price at the
time of purchase. The Company also has the right to acquire, and the founders
have the right to require the Company to acquire, the founders' initial equity
interest in Modex in exchange for the issuance of an aggregate of approximately
92,000 shares of the Company's Common Stock.
In March 1995, the Company signed a collaborative research and development
agreement with Astra for the development and marketing of certain
encapsulated-cell products to treat pain. Astra made an initial, nonrefundable
payment of $5,000,000, a milestone payment of $3,000,000 in the first quarter of
1997 which will be recognized in the second quarter of 1997 and may make up to
$13,000,000 in additional payments subject to the achievement of certain
development milestones. Under the agreement, the Company is obligated to conduct
certain research and development pursuant to a four-year research plan agreed
upon by the parties. Over the term of the research plan, the Company expects to
receive annual research payments from Astra of $5 million to $7 million, which
the Company expects should approximate the research and development costs
incurred by the Company under the plan. Subject to the successful development of
such products and obtaining necessary regulatory approvals, Astra is obligated
to conduct all clinical trials of products arising from the collaboration and to
seek approval for their sale and use. Astra has the exclusive worldwide right to
market products covered by the agreement. Until the later of either the last to
expire of all patents included in the licensed technology or a specified fixed
term, the Company is entitled to a royalty on the worldwide net sales of such
products in return for the license granted to Astra and the Company's obligation
to manufacture and supply products. Astra has the right to terminate the
agreement after April 1, 1998.
Page 11 of 15
<PAGE> 12
In March 1994, the Company entered into a contract research and license
agreement with NeuroSpheres, Ltd. Under the agreement, the Company obtained from
NeuroSpheres an exclusive worldwide royalty-bearing license for the commercial
development and use of certain neural stem cells for transplantation to treat
human disease. Terms of the agreement provide future research funding of up to
$250,000 through February 1998 based upon performance of certain obligations by
NeuroSpheres. Upon the achievement of certain milestones, the Company will make
payments to NeuroSpheres totaling a maximum of $3,750,000, payable at
NeuroSpheres' option, in cash or in shares of the Company's common stock at a
price of $12.50 per share. Upon commercial sale of a product utilizing the
licensed technology, the Company is obligated to pay a range of royalties based
on product revenues and market share, subject to certain minimum royalties. In
order to maintain exclusivity, the Company is also obligated to expend
additional amounts to support research related to development of products under
the agreement.
The Company has instituted an arbitration proceeding in Alberta, Canada, against
NeuroSpheres, Ltd. pursuant to the dispute settlement provisions of the Research
Agreement between the Company and NeuroSpheres. The Company is seeking a
determination of the definition of cells to which CytoTherapeutics has rights
under the agreement. In addition, the Company has filed a complaint and request
for injunctive relief to prevent NeuroSpheres from licensing to third parties
rights it has licensed exclusively to CytoTherapeutics. This action was filed in
the United States District Court for the District of Rhode Island.
CytoTherapeutics believes that NeuroSpheres proposed interpretation of the
definition of the cells licensed is legally and scientifically without merit.
The parties are working to resolve the dispute.
Substantial additional funds will be required to support the Company's research
and development programs, for acquisition of technologies and intellectual
property rights, for preclinical and clinical testing of its anticipated
products, pursuit of regulatory approvals, acquisition of capital equipment,
expansion of laboratory and office facilities, establishment of production
capabilities and for general and administrative expenses. Until the Company's
operations generate significant revenues from product sales, cash reserves and
proceeds from equity and debt offerings, and funding from collaborative
arrangements will be used to fund operations.
The Company intends to pursue opportunities to obtain additional financing in
the future through equity and debt financings, lease agreements related to
capital equipment, grants and collaborative research arrangements. The source,
timing and availability of any future financing will depend principally upon
equity market conditions, interest rates and, more specifically, on the
Company's continued progress in its exploratory, preclinical and clinical
development
Page 12 of 15
<PAGE> 13
programs. There can be no assurance that such funds will be available on
favorable terms, if at all.
The Company expects that its existing capital resources, revenues from
collaborative agreements and income earned on invested capital will be
sufficient to fund its operations into the first half of 1999. The Company's
cash requirements may vary, however, depending on numerous factors. Lack of
necessary funds may require the Company to delay, scale back or eliminate some
or all of its research and product development programs and/or its capital
expenditures or to license its potential products or technologies to third
parties.
Page 13 of 15
<PAGE> 14
PART II - ITEM 1
LEGAL PROCEEDINGS
Previously reported.
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 99 - Cautionary Factors Relevant to
Forward-Looking-Information.
(b) REPORTS ON FORM 8-K
None.
Page 14 of 15
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTOTHERAPEUTICS, INC.
-----------------------------------
(Name of Registrant)
MAY 14, 1997 /s/ FREDERIC A. EUSTIS, III
- ---------------- -----------------------------------
(Date) Acting Chief Financial Officer and
Treasurer
(principal financial officer)
/s/ SUZANNE L. FLEMING
-----------------------------------
Controller
(principal accounting officer)
Page 15 of 15
<PAGE> 1
EXHIBIT 99
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
CytoTherapeutics, Inc. (the "Company") wishes to caution readers that the
following important factors, among others, in some cases have affected and in
the future could affect the Company's results and could cause actual results and
needs of the Company to vary materially from forward-looking statements made by
the Company on the basis of management's current expectations. The business in
which the Company is engaged is rapidly changing, extremely competitive and
involves a high degree of risk, and accuracy with respect to forward-looking
projections is difficult. Cross-references in this Exhibit refer to the sections
of the Company's Annual Report on Form 10-K.
EARLY STAGE DEVELOPMENT; HISTORY OF OPERATING LOSSES -- Substantially all of the
Company's revenues to date have been derived, and for the foreseeable future
substantially all of the Company's revenues will be derived, from collaborative
agreements, research grants and income earned on invested funds. The Company
will incur substantial operating losses in the future as the Company conducts
its research, development, clinical trial and manufacturing activities. There
can be no assurance that the Company will achieve revenues from product sales or
become profitable.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING -- The development of
the Company's products will require the commitment of substantial resources to
conduct the time-consuming research, preclinical development and clinical trials
that are necessary for regulatory approvals and to establish production and
marketing capabilities if such approvals are obtained. The Company will need to
raise substantial additional funds to continue its product development efforts
and intends to seek such additional funds through partnership, collaborative or
other arrangements with corporate sponsors, public or private equity or debt
financings, or from other sources. Future cash requirements may vary from
projections based on changes in the Company's research and development programs,
progress in preclinical and clinical testing, the Company's ability to enter
into, and perform successfully under, collaborative agreements, competitive and
technological advances, the need to obtain proprietary rights owned by third
parties, facilities requirements, regulatory approvals and other factors. Lack
of necessary funds may require the Company to delay, reduce or eliminate some or
all of its research and product development programs or to license its potential
products or technologies to third parties. No assurance can be given that
funding will be available when needed, if at all, or on terms acceptable to the
Company.
UNCERTAINTIES OF CLINICAL DEVELOPMENT AND NEW MODE OF THERAPY -- None of the
Company's proposed products has been approved for commercial sale or entered
Phase II or III clinical trials. Even if the Company's proposed products appear
to be promising at an early stage of research or development such products may
later prove to be ineffective, have adverse side effects, fail to receive
necessary regulatory approvals, be difficult or uneconomical to manufacture or
market on a commercial scale, may be precluded from development by new
regulations, be adversely affected by government price controls or limitations
on reimbursement, be precluded from commercialization by proprietary rights of
third parties or be subject to significant competition from other products.
There can be no assurance that the Company will be able to demonstrate, as
required, that its implants, on a consistent basis and on a commercial scale,
among other things: (i) successfully isolate transplanted cells from the
recipient's immune system; (ii) remain biocompatible with the tissue into which
they are implanted, including, for certain implants, brain tissue; (iii)
adequately maintain the viability of cells contained within the membrane; (iv)
safely permit the therapeutic substances produced by the cells within the
membrane to pass through the membrane into the patient in controlled doses for
extended periods; and (v) are sufficiently durable for the intended indication.
GOVERNMENT REGULATION -- The Company's research, preclinical development and
clinical trials, as well as the manufacturing and marketing of its potential
products, are subject to extensive regulation by governmental authorities in the
United States and other countries. The process of obtaining FDA and other
required regulatory approvals is lengthy, expensive and uncertain. There can be
no assurance that the Company or its collaborators will be able to obtain the
necessary approvals to commence or continue clinical testing or to manufacture
or market its potential products in anticipated time frames, if at all. In
addition, several legislative proposals have been made to reform the FDA. If
such proposals are enacted they may result in significant changes in the
regulatory environment the Company faces. These changes could result in
different, more costly or more time-consuming approval requirements for the
Company's products, in the dilution of FDA resources available to review the
Company's products or in other unpredictable consequences. See "Government
Regulation."
There has been increasing regulatory concern about the risks of cell
transplantation. Concern has focused on cells derived from cows (such as are
used in the Company's pain program) and cells from primates and pigs. The United
Kingdom has adopted a moratorium on xenotransplantation pending further research
and discussion and the EC Commission has introduced a ban on the use of
"high-risk material" from cattle and sheep in the Member States of the European
Union in the manufacture of pharmaceuticals (this ban would apparently include
cells used in the Company's pain program). In addition, the FDA has recently
proposed guidelines which impose significant constraints on the conduct of
clinical trials utilizing xenotransplantation. Furthermore, the FDA has
published a "Proposed Approach to Regulation of Cellular and Tissue-Based
Products" which relates to use of human cells. The Company cannot presently
determine the effects of such actions nor what other actions may be taken.
Restrictions on the testing or use of cells (whether nonhuman or human) as human
therapeutics could materially adversely affect the Company's product development
programs and the Company itself. See "Government Regulation."
<PAGE> 2
DEPENDENCE ON OUTSIDE PARTIES -- The Company's strategy for the research,
development, commercialization and marketing of its products contemplates that
the Company will enter into various arrangements with corporate sponsors,
pharmaceutical companies, universities, research groups and others. There is no
assurance that the Company will be able to enter into any additional
arrangements on terms acceptable to the Company, or successfully perform its
obligations under its existing or any additional arrangements. If any of the
Company's collaborators fails to perform its obligations in a timely manner or
terminates its agreement with the Company, the development or commercialization
of the Company's product candidate or research program under such collaborative
agreement may be adversely affected.
NEED FOR AND UNCERTAINTY OF OBTAINING PATENT PROTECTION -- Patent protection for
products such as those the Company proposes to develop is highly uncertain and
involves complex factual and evolving legal questions. No assurance can be given
that any patents issued or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted under such patents will
provide competitive advantages to the Company.
EXISTENCE OF THIRD-PARTY PATENTS AND PROPRIETARY RIGHTS; NEED TO OBTAIN LICENSES
- -- There are pending patent applications or issued patents held by others
relating to the Company's proposed products or the technology to be utilized by
the Company in the development of its proposed products. If such patents or
other patents are determined by the Company or a court to be valid and
infringed, the Company may be required to alter its products or processes, pay
licensing fees or royalties or cease certain activities. In particular, the
Company is aware of one issued patent claiming certain methods for treating
defective, diseased or damaged cells in the mammalian CNS by grafting
genetically modified donor cells from the same mammalian species. In addition,
each of the neurotrophic factors which the Company is currently investigating
for use in its proposed products is the subject of one or more claims in patents
or patent applications of third parties, and certain other neurotrophic factors
are the subject of third-party patent applications. The Company may also be
required to seek licenses in regard to other cell lines, the techniques used in
creating or obtaining such cell lines, the materials used in the manufacture of
its implants or otherwise. There can be no assurance that the Company will be
able to establish collaborative arrangements or obtain licenses to the foregoing
technology or to other necessary or desirable technology on acceptable terms, if
at all, or that the patents underlying any such licenses will be valid and
enforceable. See "Patents, Proprietary Rights and Licenses."
SOURCES OF CELLS AND OTHER MATERIALS -- The Company's potential products require
genetically engineered cell lines or living cells harvested from animal or human
sources. There can be no assurance that the Company will successfully identify
or develop sources of the cells required for its potenti al products and obtain
such cells in quantities sufficient to satisfy the commercial requirements of
its potential products. These supply limitations may apply, in particular, to
primary cells which must be drawn directly from animal or human sources, such as
the bovine adrenal chromaffin cells currently used in the Company's product for
the treatment of pain. As an alternative to primary cells, the Company is
developing products based on the use of genetically altered cells. Intellectual
property rights to important genetic constructs used in developing such cells,
including the constructs used to develop cells producing neurotrophic factors,
are or may be claimed by one or more companies, which could prevent the Company
from using such cells.
MANUFACTURING UNCERTAINTIES -- The Company's pilot manufacturing plant may not
have sufficient capacity to permit the Company to produce all the products for
all of the clinical trials it anticipates developing. In addition, the Company
has not developed the capability to commercially manufacture any of its proposed
products and is unaware of any other company which has manufactured any
membrane-encapsulated cell product on a commercial scale. There can be no
assurance that the Company will be able to develop the capability of
manufacturing any of its proposed products at a cost, consistency or in the
quantities necessary to make a commercially viable product, if at all.
COMPETITION -- Competitors of the Company are numerous and include major
pharmaceutical and chemical companies, biotechnology companies, universities and
other research institutions. Currently, several of these competitors market and
sell therapeutic products for the treatment of chronic pain, Parkinson's disease
and other CNS conditions. In addition, most of the Company's competitors have
substantially greater capital resources, experience in obtaining regulatory
approvals and, in the case of commercial entities, experience in manufacturing
and marketing pharmaceutical products, than the Company. A number of other
companies are attempting to develop methods of delivering therapeutic substances
within or across the blood brain barrier. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective than those being developed by the Company or that would
render the Company's technology and products obsolete or noncompetitive. See
"Competition."
DEPENDENCE ON KEY PERSONNEL -- The Company is highly dependent on the principal
members of its management and scientific staff and certain of its outside
consultants. Vacancies have occurred and are likely to occur from time to time
amoung the Company's senior management and scientific staff. Loss of the
services of any of the Company's key employees or consultants or the continued
existence of such vacancies could have a material adverse effect on the
Company's operations. In addition, the Company's operations are dependent upon
its ability to attract and retain additional qualified scientific and management
personnel. There can be no assurance the Company will be able to attract and
retain such personnel on acceptable terms given the competition among
pharmaceutical, biotechnology and healthcare companies, universities and
research institutions for experienced personnel.
REIMBURSEMENT AND HEALTHCARE REFORM -- In both domestic and foreign markets,
sales of the Company's potential products will depend in part upon the
availability and amounts of reimbursement from third-party healthcare payor
organizations, including government agencies, private healthcare insurers and
other healthcare payors such as health maintenance organizations and
self-insured employee plans. There is considerable pressure to reduce the cost
of therapeutic products. There can be no assurance that reimbursement will be
provided by such payors at all or without substantial delay, or, if such
reimbursement is provided, that the approved reimbursement amounts will provide
sufficient funds to enable the Company to sell its products on a profitable
basis. See "Reimbursement and Healthcare Cost Control."
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