<PAGE>
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended September 30, 1997
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission File No. 000-20139
Diacrin, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3016912
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Building 96 13th Street, Charlestown Navy Yard, Charlestown, MA 02129
(Address of principal executive offices, including zip code)
(617) 242-9100
(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 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of October 29, 1997, 13,258,756 shares of the registrant's Common Stock
were outstanding.
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Diacrin, Inc.
Index
Page
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of
December 31, 1996 and September 30, 1997..................... 3
Statements of Operations for the Three and Nine Month
Periods Ended September 30, 1996 and 1997.................... 4
Statements of Cash Flows for the Nine Month Periods
Ended September 30, 1996 and 1997............................ 5
Notes to Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8
PART II.- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................... 17
SIGNATURES............................................................... 18
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<TABLE>
Diacrin, Inc.
Balance Sheets
(Unaudited)
<CAPTION>
December 31, September 30,
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,308,710 $ 4,620,820
Short-term investments 6,255,507 8,017,604
Interest receivable and other current assets 316,107 400,931
____________ ____________
Total current assets 13,880,324 13,039,355
____________ ____________
Property and equipment, at cost:
Equipment under capital leases 675,262 675,262
Furniture and office equipment 224,920 274,269
Laboratory and manufacturing equipment 101,738 834,433
Leasehold improvements 51,424 55,557
____________ ____________
1,053,344 1,839,521
Less- Accumulated depreciation
and amortization 576,725 762,826
____________ ____________
476,619 1,076,695
____________ ____________
Long-term investments 9,917,875 9,385,630
____________ ____________
$ 24,274,818 $ 23,501,680
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 162,058 $ 227,123
Accrued expenses 506,949 1,545,528
Deferred revenue 618,844 432,928
Current obligations under capital leases 179,452 199,864
____________ ____________
Total current liabilities 1,467,303 2,405,443
Long-term obligation under capital leases 370,431 217,874
Stockholders' equity:
Preferred stock, $.01 par value, Authorized--
5,000,000 shares; none issued and outstanding - -
Common stock, $.01 par value; Authorized-- 30,000,000
shares; issued and outstanding-- 13,189,559 shares
and 13,255,006 shares at December 31, 1996
and September 30, 1997, respectively 131,896 132,550
Additional paid-in capital 54,613,512 54,703,097
Accumulated deficit (32,308,324) (33,957,284)
____________ ____________
Total stockholders' equity 22,437,084 20,878,363
____________ ____________
$ 24,274,818 $ 23,501,680
See Accompanying Notes to Financial Statements
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</TABLE>
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Diacrin, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
REVENUES:
Research and development $ 63,105 $ 1,150,402 $ 85,471 $ 3,597,488
Interest income 300,212 322,535 780,178 984,192
__________ __________ _________ _________
Total revenues 363,317 1,472,937 865,649 4,581,680
__________ __________ _________ _________
OPERATING EXPENSES:
Research and development 1,504,842 1,706,813 4,247,122 5,010,305
General and administrative 342,838 353,579 998,542 1,159,946
Interest expense 21,825 24,270 137,793 60,389
__________ __________ _________ __________
Total operating expenses 1,869,505 2,084,662 5,383,457 6,230,640
__________ __________ _________ __________
NET LOSS $ (1,506,188) $ (611,725) $ (4,517,808) $ (1,648,960)
NET LOSS PER COMMON SHARE $ (.12) $ (.05) $ (.37) $ (.12)
SHARES USED IN COMPUTING
NET LOSS PER COMMON SHARE 12,767,042 13,253,465 12,312,929 13,226,621
</TABLE>
See Accompanying Notes to Financial Statements
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Diacrin, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,517,808) $ (1,648,960)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 166,448 186,101
Changes in assets and liabilities-
Interest receivable and other current assets (307,936) (84,824)
Accounts payable (27,030) 65,065
Accrued expenses 44,990 1,038,579
Deferred revenue - (185,916)
___________ ___________
Net cash used in operating activities (4,641,336) (629,955)
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments (8,568,280) (1,762,097)
Purchases of property and equipment, net (45,077) (786,177)
(Increase) decrease in long-term investments (4,600,534) 532,245
___________ ___________
Net cash used in investing activities (13,213,891) (2,016,029)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock and warrants 21,134,442 90,239
Principal payments under capital leases (115,470) (132,145)
Decrease in deferred financing costs 215,684 -
___________ ___________
Net cash provided by (used in) financing activities 21,234,656 (41,906)
___________ ___________
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,379,429 (2,687,890)
CASH AND CASH EQUIVALENTS, beginning of period 4,114,820 7,308,710
___________ ___________
CASH AND CASH EQUIVALENTS, end of period $ 7,494,249 $ 4,620,820
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Conversion of notes and accrued interest
into common stock, net of financing costs $ 7,296,308 $ -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 69,095 $ 51,764
</TABLE>
See Accompanying Notes to Financial Statements
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6
Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
1. Operations and Basis of Presentation
- ---------------------------------------------
Diacrin, Inc. (the Company) was incorporated on October 10, 1989 and is
developing transplantable cells for the treatment of human diseases which are
characterized by cell dysfunction or cell death and for which current therapies
are either inadequate or nonexistent.
The unaudited financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and include, in the opinion of management,
all adjustments, consisting of normal, recurring adjustments, necessary for a
fair presentation of interim period results. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that its
disclosures are adequate to make the information presented not misleading. The
results for the interim periods presented are not necessarily indicative of
results to be expected for the full fiscal year. These financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's latest Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
2. Summary of Significant Accounting Policies
- ---------------------------------------------------
(a) Research and Development
Collaborative revenue under the joint venture agreement with Genzyme
Corporation and revenues from research grants are recognized as work is
performed and costs are incurred. Deferred revenue represents amounts received
prior to recognition of revenue. Research and development costs are expensed as
incurred.
(b) Net Loss per Common Share
Net loss per common share is based on the weighted average number of common
shares outstanding. For the nine months ended September 30, 1996, the weighted
average number of common shares outstanding assumed the automatic conversion of
all outstanding shares of Series A, B and C convertible preferred stock into
6,693,121 shares of common stock and the automatic conversion of the outstanding
$7,000,000 convertible notes payable into 2,799,999 shares of common stock, both
of which occurred upon the closing of the Company's initial public offering on
February 16, 1996. Common stock issued after December 1, 1994 and common stock
issuable pursuant to stock options or warrants granted after December 1, 1994
have been reflected as outstanding for the period from January 1, 1996 through
the effective date of the Company's initial public offering using the treasury
stock method as required by the Securities and Exchange Commission. Other shares
of stock issuable pursuant to stock options and warrants have not been included
as their effect would be antidilutive.
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Diacrin, Inc.
Notes to Financial Statements
(Unaudited)
3. New Accounting Standard
- --------------------------------
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. This statement is
effective for fiscal years ending after December 15, 1997 and early adoption is
not permitted. When adopted, this statement will require restatement of prior
years' earnings per share. The Company will adopt this statement for its fiscal
year ended December 31, 1997. The Company believes that the adoption of SFAS 128
will not have a material effect on its previously reported net loss per common
share.
4. Cash Equivalents and Investments
- -----------------------------------------
The Company's cash equivalents and investments are classified as
held-to-maturity and are carried at amortized cost, which approximates market
value. Cash equivalents, short-term investments and long-term investments have
maturities of less than three months, less than one year and greater than one
year, respectively. Cash and cash equivalents, short-term investments and
long-term investments at December 31, 1996 and September 30, 1997 consisted of
the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
____________ ___________
<S> <C> <C>
Cash and cash equivalents-
Cash $ 421 $ 323,030
Money market mutual fund 1,898,920 4,297,790
Commercial paper 2,292,335 -
Corporate notes 3,117,034 -
______________ _______________
$ 7,308,710 $ 4,620,820
Short-term investments-
Commercial paper (wtd. avg. maturity of 4 months) $ 984,710 $ -
Corporate notes (wtd. avg. mat. of 8 and 9 mos., respectively) 5,270,797 5,018,056
Certificate of deposit (maturity of 12 months) - 999,548
U.S. government agency obligation (maturity of 12 months) - 2,000,000
_ _ _________ __ _________
$ 6,255,507 $ 8,017,604
Long-term investments-
Corporate notes (wtd. avg. maturity of 14 months) $ 9,917,875 $ 9,385,630
</TABLE>
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Diacrin, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
- --------
Since its inception, the Company has principally focused its efforts and
resources on research and development of cell transplantation products to treat
neurodegenerative and other human diseases. The Company's primary source of
working capital to fund such activities has been proceeds from the sale of
equity and debt securities. In addition, commencing October 1, 1996, the Company
has received funding from its joint venture with Genzyme Corporation (the "Joint
Venture") in support of the NeuroCell(TM)-PD for Parkinson's disease and
NeuroCell(TM)-HD for Huntington's disease product development programs (the
"Joint Venture Products"). The Company has not received any revenues from the
sale of products to date and does not expect to generate product revenues for at
least the next several years. The Company has experienced fluctuating operating
losses since its inception and expects that the additional activities required
to develop and commercialize the Company's products will result in further
fluctuating operating losses for at least the next several years. At September
30, 1997, the Company had an accumulated deficit of $34.0 million.
Results of Operations
- ---------------------
Three Months Ended September 30, 1997 Versus Three Months Ended
- ---------------------------------------------------------------
September 30, 1996
- ------------------
Research and development revenues were approximately $1.2 million for the
three months ended September 30, 1997 versus $63,000 for the three months ended
September 30, 1996. The significant increase in revenues during the three months
ended September 30, 1997 was due to revenues received from the Joint Venture.
Interest income of $323,000 and $300,000 for the three month periods ended
September 30, 1997 and 1996, respectively, was relatively unchanged as a result
of similar cash balances available for investment during each period.
Research and development expenses were $1.7 million for the three months
ended September 30, 1997, which includes expenses of approximately $1.2 million
incurred on behalf of and reimbursed by the Joint Venture, versus $1.5 million
for the three months ended September 30, 1996. The 13% increase was primarily
due to an increase in clinical affairs staffing necessary to support the
clinical trials of the Joint Venture Products, an increase in quality
control/assurance staffing to support expanded clinical production facilities
completed by the Joint Venture during 1997 and an increase in research
personnel.
General and administrative expenses of $354,000 for the three months ended
September 30, 1997 versus $343,000 for the three months ended September 30, 1996
were relatively unchanged between periods.
Interest expense of $24,000 and $22,000 for the three months ended
September 30, 1997 and 1996, respectively, was relatively unchanged between
periods.
The Company incurred a net loss of approximately $612,000 for the three
months ended September 30, 1997 versus approximately $1.5 million for the three
months ended September 30, 1996.
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9
Nine Months Ended September 30, 1997 Versus Nine Months Ended September 30, 1996
- --------------------------------------------------------------------------------
Research and development revenues were approximately $3.6 million for the
nine months ended September 30, 1997 versus $85,000 for the nine months ended
September 30, 1996. The significant increase in revenues during the nine months
ended September 30, 1997 was due to revenues received from the Joint Venture.
Interest income was $984,000 for the nine months ended September 30, 1997
versus $780,000 for the nine months ended September 30, 1996. The 26% increase
was primarily due to additional interest income realized on higher cash balances
available for investment.
Research and development expenses were $5.0 million for the nine months
ended September 30, 1997 versus $4.2 million for the nine months ended September
30, 1996. The 18% increase was primarily due to an increase in clinical affairs
staffing necessary to support the clinical trials of the Joint Venture Products,
an increase in quality control/assurance staffing to support expanded clinical
production facilities completed by the Joint Venture during 1997 and an increase
in research personnel. Furthermore, additional costs were incurred in the
current year to validate the Joint Venture production facilities.
General and administrative expenses were $1.2 million for the nine months
ended September 30, 1997 versus $999,000 for the nine months ended September 30,
1996. The 16% increase was primarily due to an increase in administrative
personnel as well as increased costs of shareholder relations.
Interest expense was $60,000 for the nine months ended September 30, 1997
versus $138,000 for the nine months ended September 30, 1996. The decrease was
primarily attributable to interest expense recognized during the 1996 period on
the Company's $7.0 million of Convertible Notes which were issued in May 1995
and converted to common stock upon the closing of the Company's initial public
offering.
The Company incurred a net loss of approximately $1.6 million for the nine
months ended September 30, 1997 versus a net loss of approximately $4.5 million
for the nine months ended September 30, 1996.
Liquidity and Capital Resources
- -------------------------------
The Company has financed its activities primarily with the net proceeds
from private sales of preferred stock, which in the aggregate have totaled
approximately $22.6 million; with the issuance of $7.0 million of convertible
notes payable; with the net proceeds of $20.9 million from the Company's initial
public offering; with the net proceeds of approximately $3.1 million from the
exercise of warrants originally issued in 1991 in connection with a private sale
of preferred stock; and with interest earned thereon. In addition, the Company
has recorded approximately $4.6 million in revenue from the Joint Venture since
it commenced October 1, 1996. At September 30, 1997, the Company had cash and
cash equivalents, short-term investments and long-term investments aggregating
approximately $22.0 million.
The Company has purchased approximately $2.2 million of capital equipment
since inception, of which approximately $717,000 was purchased during the
quarter ended September 30, 1997. The Company plans to finance approximately
$675,000 of such equipment purchased during the quarter over a five-year term.
In December 1994, approximately $805,000 of capital equipment was sold for
proceeds of $600,000 and subsequently leased back over a four-year term. In
addition, approximately $227,000 of capital equipment was sold in 1995 for its
original cost and subsequently leased back over a four-year term. The Company
had no material commitments for capital expenditures as of September 30, 1997
Under the joint venture agreement with Genzyme, the Company's two lead
product development programs, NeuroCell(TM)-PD for the treatment of Parkinson's
disease and NeuroCell(TM)-HD for the treatment of Huntington's disease, are
being funded by the Joint Venture. Both Genzyme and Diacrin are responsible for
funding the Joint Venture. Genzyme is responsible for funding 100% of the first
$10 million, 75% of the next $40 million and 50% of all remaining development
and commercialization costs in excess of $50 million from October 1, 1996 until
such products achieve commercialization. After Genzyme funds the first $10
million, the Company is responsible for funding 25% of the next $40 million and
50% of all development and commercialization costs in excess of $50 million. As
of September 30, 1997, Genzyme has contributed approximately $7.0 million to the
Joint Venture. The Company believes that its obligation to fund 25% of the
program costs will not commence until the beginning of 1998.
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10
The Company believes that its existing funds, together with projected
future funding from the Joint Venture, will be sufficient to fund its operating
expenses and capital requirements as currently planned through at least mid
1999. However, the Company's cash requirements may vary materially from those
now planned because of results of research and development, the scope and
results of preclinical and clinical testing, any termination of the Joint
Venture, relationships with strategic partners, changes in the focus and
direction of the Company's research and development programs, competitive and
technological advances, the FDA's regulatory process, the market acceptance of
any approved Company products and other factors. For a more detailed discussion
of these and other factors that may affect the Company's future operating
results, see "Certain Factors That May Affect Future Results" below.
The Company expects to incur substantial additional costs, including costs
related to ongoing research and development activities, preclinical studies,
clinical trials, establishing pig production capabilities and the expansion of
its laboratory and administrative activities. Therefore, in order to achieve
commercialization of its potential products, the Company will need substantial
additional funds. There can be no assurance that the Company will be able to
obtain the additional funding that it will require on acceptable terms, if at
all.
Certain Factors That May Affect Future Results
- ----------------------------------------------
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Quarterly Report on Form 10-Q or presented elsewhere by management from
time to time. Note that, except where the context otherwise requires, all
references to the Company's products are inclusive of the Joint Venture Products
being developed in the Joint Venture.
Reliance on Joint Venture with Genzyme Corporation
- --------------------------------------------------
The Company and Genzyme are parties to a joint venture agreement relating
to the development and commercialization of NeuroCell(TM)-PD and
NeuroCell(TM)-HD, the Company's most advanced product candidates. Under the
agreement, Genzyme has agreed to provide the first $10 million of product
development and commercialization funding required after October 1, 1996 for the
Joint Venture Products, 75% of the next $40 million of funding and 50% of
funding thereafter. In addition, Genzyme has agreed to market and sell the Joint
Venture Products on behalf of the Joint Venture. Furthermore, the Joint Venture
plans to manufacture the Joint Venture Products in facilities controlled by
Genzyme's Tissue Repair Division.
Genzyme has the right, at any time after it has contributed $10 million of
funding, to terminate the joint venture agreement, without cause, upon 180 days
notice to Diacrin. In the event of such termination, the Company (i) would lose
a significant source of funding for the NeuroCell(TM)-PD and the
NeuroCell(TM)-HD product development programs, (ii) would lose access to
Genzyme's experienced sales, marketing, development and manufacturing
organizations, and (iii) would need to establish clinical production facilities
for the production of the Joint Venture Products. There can be no assurance that
the Company would be able to complete development or commercialization of
NeuroCell(TM)-PD and NeuroCell(TM)-HD if Genzyme terminated the joint venture
agreement.
In addition, under certain circumstances, Genzyme has the right to
terminate the joint venture agreement following an unremedied breach by Diacrin
of any material term of the agreement. In the event of such termination, Genzyme
has the option to obtain an exclusive, worldwide, royalty-bearing license to
certain Diacrin technology required to manufacture and market the Joint Venture
Products. If Genzyme exercised its option, the Company would be entitled to
receive a royalty on the net sales of the Joint Venture Products, which royalty
may be significantly less than amounts the Company would be entitled to receive
under the 50%/50% profit split agreed to as part of the joint venture agreement.
Any termination of the joint venture agreement, whether by Genzyme or
Diacrin, could have a material adverse effect on the Company's business, results
of operations or financial position. In addition, there can be no assurance that
the economic and other interests of the Company and Genzyme will coincide during
the term of the joint venture agreement or that disagreements will not occur
between the Company and Genzyme during the term of the agreement, either of
which could have a material adverse effect on the Company's business, results of
operations or financial position. See "Dependence on Others."
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11
History of Operating Losses; No Assurance of Revenue or Operating Profit
- ------------------------------------------------------------------------
The Company has generated no revenue from product sales to date. Diacrin
has accumulated net losses from its inception in 1989 through September 30, 1997
of approximately $34.0 million, and losses are continuing. The Company expects
to incur substantial operating losses for the foreseeable future. The Company
currently has no material sources of revenue from product sales or license fees,
and there can be no assurance that it will be able to develop such revenue
sources or that its operations will become profitable, even if it is able to
commercialize any products.
Lack of Commercial Products; No Assurance of Successful Product Development
- ---------------------------------------------------------------------------
The Company has no products available for sale and does not expect to have
any therapeutic products commercially available for at least the next several
years, if at all. The Company's potential products will require significant
additional development, preclinical and clinical testing, regulatory approval
and additional investment prior to commercialization. The Company's potential
therapeutic products are at early stages of research and development and the
Company's growth will depend on the successful development and commercialization
of its products. There can be no assurance that any such potential products will
be successfully developed, prove to be safe and efficacious in clinical trials,
meet applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs or be successfully marketed.
Reliance on Cell Transplantation Technology; No Currently Approved
- ------------------------------------------------------------------
Xenotransplantation-Based Products
- ----------------------------------
Diacrin has concentrated its efforts and therapeutic product research on
its cell transplantation technology and will be dependent on the successful
development of the technology. Cell transplantation technology is an emerging
technology with, as yet, limited clinical applications. There can be no
assurance that the Company's cell transplantation technology will result in the
development of any therapeutic products. If it does not, the Company may be
required to change dramatically the scope and direction of its product
development activities.
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12
The Company's approach involves xenotransplantation -- the transplantation
of cells from one species into another. Although several companies are focusing
on this area, xenotransplantation-based products represent a novel therapeutic
approach that has not yet been subject to extensive clinical testing.
Xenotransplantation also poses a risk that viruses or other animal pathogens
will be unintentionally transmitted to a human patient. The Company has been
required by the FDA to perform certain assays to determine whether porcine
retrovirus is present in patients that have received porcine cells. These assays
have been performed on samples from all patients who have received
NeuroCell(TM)-PD and no porcine retrovirus was detected in these samples. The
Company has also been required by the FDA to perform additional assays on its
NeuroCell(TM)-PD, NeuroCell(TM)-HD and NeuroCell(TM)-FE products to determine if
active porcine retroviruses are present. These assays are in progress and
preliminary results indicate that active porcine retroviruses are not present.
The FDA has advised the Company that clinical trials of the NeuroCell(TM)
products may not proceed until data from these assays has been reviewed by the
FDA. If active retrovirus is detected in these assays, additional assays may be
required to assess the risk to patients of retroviral infection. If such
additional assays are required, commencement of the planned trials of the
Company's porcine cell products may be delayed. Although the Company expects
that the FDA will allow it to proceed with its planned clinical trials without
delay, there can be no assurance that this will be the case. An inability to
proceed with further trials or a substantial delay in the commencement of
clinical trials will have a material adverse effect on the Company.
No xenotransplantation-based therapeutic product has been approved for sale
by the FDA. The FDA has not yet established definitive regulatory guidelines for
xenotransplantation, but has proposed guidelines in an attempt to reduce the
risk of contamination of transplanted cellular products with infectious agents.
Diacrin has provided the FDA with a written response to the proposed guidelines,
however, there can be no assurance that such guidelines will be issued, or that
Diacrin will be able to comply with final guidelines that may be issued.
Furthermore, there can be no assurance that any products developed and tested by
Diacrin will be approved by the FDA or regulatory authorities in other
countries, or that xenotransplantation-based products, including the Company's
product candidates, will be accepted by the medical community or third-party
payors or that the degree of acceptance will not limit the size of the market
for such products.
Need for Substantial Additional Funds
- -------------------------------------
The Company will require substantial additional funding for its research
and product development programs and operating expenses, and for pursuing
regulatory clearances and building production capabilities. Adequate funds for
these purposes, whether obtained through equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms acceptable to the Company.
Insufficient funds may require the Company to delay, scale back or eliminate
certain of its product development programs or to license others to
commercialize products or technologies that the Company would otherwise seek to
develop and commercialize itself, any of which would have a material adverse
effect on the Company.
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13
Uncertainty Associated with Preclinical and Clinical Testing
- ------------------------------------------------------------
Before obtaining regulatory approvals for the commercial sale of any of the
Company's potential products, the products will be subjected to extensive
preclinical and clinical testing to demonstrate their safety and efficacy in
humans. To date, the Company has administered NeuroCell(TM)-PD and
NeuroCell(TM)-HD to an aggregate of 24 patients in Phase 1 human clinical
trials. Results of initial preclinical and clinical testing of products under
development by the Company are not necessarily predictive of results that will
be obtained from subsequent or more extensive preclinical and clinical testing.
Furthermore, there can be no assurance that clinical trials of products under
development will demonstrate the safety and efficacy of such products at all or
to the extent necessary to obtain regulatory approvals. Companies in the
biotechnology industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. The failure to
adequately demonstrate the safety and efficacy of a therapeutic product under
development could delay or prevent regulatory approval of the product and would
have a material adverse effect on the Company.
The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in the
Company's current clinical trial or future clinical trials may result in
increased costs, program delays or both, which could have a material adverse
effect on the Company.
No Assurance of FDA Approval; Government Regulation
- ---------------------------------------------------
The FDA and comparable government agencies in foreign countries impose
substantial regulations on the manufacture and marketing of pharmaceutical
products through lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
Satisfaction of these regulations typically takes several years or more and
varies substantially based upon the type, complexity and novelty of the proposed
product. The Company cannot yet accurately predict when it might first submit
any PLA for FDA or other regulatory approval.
The effect of government regulation may be to delay marketing of new
products for a considerable or indefinite period of time, to impose costly
procedures upon the Company's activities or to diminish or eliminate any
competitive advantage the Company may enjoy. There can be no assurance that FDA
or other regulatory approval for any products developed by the Company will be
granted on a timely basis, if at all. Any such delay in obtaining, or failure to
obtain, such approvals could adversely affect the marketing of the Company's
products and the ability to generate product revenue. The extent of potentially
adverse government regulation which might arise from future legislation or
administrative action cannot be predicted.
If regulatory approval of a drug is obtained, such approval may be
conditioned upon limitations and restrictions on the drug's use. In addition,
any marketed drug and its manufacturer are subject to continuing governmental
review and any subsequent discovery of previously unrecognized problems could
result in restrictions on the product or manufacturer, including, without
limitation, withdrawal of the product from the market. Failure of the Company to
comply with applicable regulatory requirements can, among other things, result
in fines, suspension of regulatory approvals, product recalls, seizure of
products, operating restrictions or criminal prosecution.
Additionally, the Company is or may become subject to various federal,
state and local laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with the Company's research and development work. The Company is
unable to predict the extent of restrictions that might arise from any
governmental or administrative action. There can also be no assurance that the
Company will not be required to incur significant costs to comply with
environmental laws and regulations, or any assurance that the operations,
business or assets of the Company will not be materially adversely affected by
current or future environmental laws or regulations.
- 13 -
<PAGE>
14
Rapid Technological Changes; Competition
- ----------------------------------------
The Company is engaged in activities in the biopharmaceutical field, which
is characterized by extensive research efforts and rapid technological progress.
There can be no assurance that research and discoveries by other biotechnology
or pharmaceutical companies will not render the Company's programs or products
uneconomical, result in therapies superior to any therapy developed by the
Company or that any products developed by the Company will be preferred to any
existing or newly-developed technologies.
The biotechnology and pharmaceutical industries are characterized by
intense competition. The Company competes against numerous companies, many of
which have substantially greater financial and other resources than the Company.
Several such enterprises have initiated cell transplantation research programs
and/or efforts to treat the same diseases targeted by the Company through
alternate technologies. These competitive enterprises have devoted, and will
continue to devote, substantial resources to the development of cell
transplantation or other products to treat such diseases. Private and public
academic and research institutions also compete with Diacrin in the research and
development of human therapeutic products.
In addition, many of the Company's competitors have significantly greater
experience than the Company in preclinical testing and human clinical trials of
biotechnology and pharmaceutical products and in obtaining FDA and other
regulatory approvals of products. Accordingly, the Company's competitors may
succeed in obtaining FDA approval for products more rapidly or effectively than
the Company. If the Company commences significant commercial sales of its
products, it will also be competing with respect to manufacturing efficiency and
sales and marketing capabilities, areas in which it has no experience.
Limited Regulatory, Manufacturing, Marketing and Sales Capabilities
- -------------------------------------------------------------------
The Company has not yet invested significantly in regulatory,
manufacturing, marketing, distribution or product sales resources. To date, the
Company has relied on others for the supply and production of pigs for its
clinical programs. Although the Company intends to develop regulatory,
manufacturing, marketing, distribution and sales resources in the future, there
can be no assurance that the Company will be able to develop such resources
successfully.
Uncertain Ability to Protect Proprietary Technology; Reliance Upon Licenses
- ---------------------------------------------------------------------------
The biotechnology and pharmaceutical industries place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. The Company's success will depend, in part, on its
ability to obtain patent protection for its products, preserve its trade secrets
and operate without infringing the proprietary rights of others. The Company has
ongoing research efforts and expects to seek additional patents covering this
research in the future. There can be no assurance of its success or timeliness
in obtaining any patents, or of the breadth or degree of protection that any
such patents will afford the Company.
The patent position of biotechnology products is often highly uncertain and
usually involves complex legal and factual questions. There can be no assurance
that patent applications relating to the Company's potential products or
technology will result in additional patents being issued or that, if issued,
such patents will afford adequate protection to the Company or not be
challenged, invalidated or infringed. Furthermore, there can be no assurance
that others will not independently develop similar products and processes,
duplicate any of the Company's products or, if patents are issued to the
Company, design around such patents. In addition, the Company could incur
substantial costs in defending itself in suits brought against it or in suits in
which it may assert its patents against others. If the outcome of any such
litigation is unfavorable, the Company's business could be adversely affected.
To determine the priority of inventions, the Company may also have to
participate in interference proceedings declared by the United States Patent and
Trademark Office, which could result in substantial cost to the Company.
Much of the Company's know-how and technology is not patentable. To protect
its rights, the Company requires all employees, consultants, advisors and
collaborators to enter into confidentiality agreements with Diacrin. There can
be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure. Further, in the
absence of patent protection, the Company's business may be adversely affected
by competitors who independently develop substantially equivalent technology.
- 14 -
<PAGE>
15
Uncertain Availability of Third-Party Reimbursement and Product Pricing
- -----------------------------------------------------------------------
The Company's ability to commercialize products successfully will depend
substantially on reimbursement of the costs of such products and related
treatments at acceptable levels from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). There can be no assurance that reimbursement in the United States or
foreign countries will be available for any products the Company may develop or,
if available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products, thereby
adversely affecting the Company's business.
Third-party payors are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed health care in the
United States and the concurrent growth of organizations, such as HMOs, which
can control or significantly influence the purchase of health care services and
products, as well as legislative proposals to reform health care or reduce
government insurance programs, may result in lower prices for therapeutic
products. The cost containment measures that health care providers are
instituting, including practice protocols and guidelines and clinical pathways,
and the effect of any health care reform, could materially adversely affect the
Company's ability to sell its products if successfully developed and approved.
Moreover, the Company is unable to predict what additional legislation or
regulation, if any, relating to the health care industry or third-party coverage
and reimbursement may be enacted in the future or what effect such legislation
or regulation would have on the Company's business.
Dependence on Key Personnel
- ---------------------------
Because of the specialized nature of its business, the Company is highly
dependent on its ability to attract and retain qualified scientific and
technical personnel for the research and development activities conducted or
sponsored by the Company. The loss of certain key executive officers could be
significantly detrimental to the Company. Recruiting and retaining qualified
scientific personnel to perform research and development work is critical to the
Company's success. In addition, the Company's anticipated growth and expansion
into areas and activities requiring additional expertise, such as clinical
testing, regulatory compliance, manufacturing and marketing, will require the
addition of new management personnel and the development of additional expertise
by existing management personnel. There is intense competition for qualified
personnel in the areas of the Company's activities, and there can be no
assurance that the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its business. The failure
to attract and retain such personnel or to develop such expertise would
adversely affect the Company's business.
Dependence on Others
- --------------------
The Company's strategy for development and commercialization of its product
candidates entails entering into arrangements with corporate partners,
collaborators, licensees and others and upon the subsequent success of these
third parties in performing their obligations, including, as the case may be,
any or all of preclinical and clinical testing, obtaining regulatory approvals,
manufacturing and marketing. There can be no assurance that the Company will be
able to maintain its existing arrangements or establish additional collaborative
arrangements on favorable terms, if at all. If the Company is able to enter into
any additional arrangements, such arrangements may require the Company to
transfer certain material rights to third parties.
There can be no assurance that any such corporate partners, collaborators,
licensees or others will perform their obligations as expected or that the
Company will derive any revenue or profit from any existing or future
arrangements. While the Company believes its partners, collaborators, licensees
and others will have an economic motivation to succeed in performing their
contractual responsibilities, the amount and timing of resources to be devoted
by such parties is not within the control of the Company. Furthermore, there can
be no assurance that the interest of the Company will coincide with those of
such other parties or that disagreements over rights to technology or other
proprietary information or other matters will not occur. In addition, it is
possible that such other parties will be independently involved in the
development of products that may be competitive with the products they are
developing in collaboration with the Company. If any of the Company's partners,
collaborators, licensees or others breaches or terminates its agreement with the
Company or otherwise fails to conduct its required activities in a timely
manner, the development or commercialization of the product candidate under such
collaborative agreement may be delayed, the Company may be required to undertake
unforeseen additional responsibilities or devote unforeseen additional resources
to such development or commercialization or such development or
commercialization could be terminated. Any such event could adversely effect the
Company's business, results of operations or financial position.
- 15 -
<PAGE>
16
Potential Product Liability; Limited Product Liability Insurance
- ----------------------------------------------------------------
The testing, marketing and sale of human health care products entail an
inherent risk of product liability claims, and there can be no assurance that
substantial product liability claims will not be asserted against the Company.
The Company has limited product liability insurance and may need to increase its
coverage as it expands human clinical trials and if and when it begins to market
products. There can be no assurance that adequate insurance coverage will be
available on acceptable terms, if at all, or that a product liability claim
would not materially adversely affect the business or financial condition of the
Company.
- 16 -
<PAGE>
17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) The Company did not sell any equity securities during the quarter ended
September 30, 1997 that were not registered under the Securities Act.
(d) The following information updates and supplements the information
regarding use of proceeds orginally filed by Diacrin on Form SR for the period
ended May 12, 1996, as amended to date and relates to securities sold by the
Company pursuant to the Registration Statement on Form S-2 (Registration No:
33-80773) which was declared effective on February 12, 1996: Through September
30, 1997, the Company has used approximately $2,580,000 of the total net
proceeds from its initial public offering of $20,911,755. Of the $2,580,000
used, approximately $186,000 was used for the purchase of machinery and
equipment; approximately $131,000 was used for repayment of indebtedness; and
approximately $2,263,000 was used for working capital. The unused proceeds of
approximately $18,331,755 are in temporary investments consisting of corporate
notes, a U.S. government agency obligation, a money market mutual fund and a
bank certificate of deposit. All proceeds used or invested were direct or
indirect payments to others.
<PAGE>
18
SIGNATURES
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.
Diacrin, Inc.
October 29, 1997 /s/ Thomas H. Fraser
--------------------------
Thomas H. Fraser
President and Chief
Executive Officer
/s/ Mark J. Fitzpatrick
---------------------------
Mark J. Fitzpatrick
Vice President of Finance
and Administration;
CFO & Treasurer
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