UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
AMENDMENT NO. 2 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 0-20139
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)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class
Common Stock, $.01 par value
Common Stock Purchase Warrants
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant (based on the closing price of the Common Stock
on February 10, 1998) was $88,686,769.
As of February 10, 1998, 13,269,131 shares of the
registrant's Common Stock were outstanding.
<PAGE>
PART I
This Annual Report on Form 10-K contains forward-looking statements,
including information with respect to planned timetables for the completion of
ongoing Phase 1 clinical trials and commencement of Phase 2 clinical trials for
NeuroCell(TM)-PD and NeuroCell(TM)-HD, planned timetables for the completion of
ongoing Phase 1 clinical trials for NeuroCell(TM)-FE, the planned timetables and
duration of any planned future clinical or preclinical trials for any of the
Company's other product candidates, development funding expected to be received
in connection with the Diacrin/Genzyme joint venture and the expected sources of
porcine cells used in the Company's products. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause actual events or the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results" included under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II of this Annual Report on Form 10-K.
Item 1. Business
- -----------------
Diacrin 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. Products under
development for the treatment of neurological disorders include:
NeuroCell(TM)-PD for Parkinson's disease and NeuroCell(TM)-HD for Huntington's
disease, both of which are being developed in a joint venture with Genzyme
Corporation ("Genzyme"), NeuroCell(TM)-FE for focal epilepsy, porcine neural
cells for stroke and intractable pain and spinal cord cells for spinal cord
injury. Also under development are hepatocytes for alcoholic hepatitis and
cirrhosis, myoblasts for cardiac disease and retinal epithelial cells for
macular degeneration.
In March 1995, the United States Food and Drug Administration ("FDA")
cleared the Company to conduct the first ever clinical trial of transplanted
porcine cells in humans and in April 1995 the Company initiated a Phase 1
clinical trial to evaluate NeuroCell(TM)-PD for the treatment of Parkinson's
disease. Enrollment in this 12-patient Phase 1 clinical trial was completed in
October 1996 and patient recruitment in a 36-patient pivotal Phase 2 clinical
trial of NeuroCell(TM)-PD was recently initiated. In May 1996, the Company
initiated a Phase 1 clinical trial to evaluate NeuroCell(TM)-HD for the
treatment of Huntington's disease. In March 1997 enrollment of all 12 patients
in the trial was completed. In January 1998, the Company initiated a Phase 1
clinical trial to evaluate NeuroCell(TM)-FE for the treatment of complex partial
epileptic seizures in patients whose disease is not well-controlled with drug
therapy.
While the feasibility of cell transplantation has been demonstrated
clinically, widespread use of cell transplantation in clinical applications has
been hampered by the lack of an adequate supply of human donor cells. To
overcome this constraint, Diacrin has pioneered the use of porcine cells for
clinical transplantation. The Company believes that pigs will be a reliable
source of a wide range of cell types suitable for transplantation into humans.
The Company has shown in preclinical studies and early clinical trials that,
under standard immunosuppressive regimens, transplanted porcine cells appear
capable of addressing the functional deficits caused by cell damage or cell
death.
In addition, Diacrin is developing a proprietary immunomodulation
technology
<PAGE>
which is exclusively licensed to the Company from the Massachusetts
General Hospital ("MGH"). This technology involves the selective treatment of
major histocompatibility complex ("MHC") class I antigens on cell populations
prior to transplantation to prevent the patient's immune system from rejecting
the transplanted cells. The Company's approach would obviate the need for
standard immunosuppressive regimens, which may leave the patient vulnerable to a
wide range of undesirable side effects, including susceptibility to infectious
agents and cancer. Preclinical studies in animal models, including primates,
have demonstrated the ability of the Company's immunomodulation technology to
prevent rejection of transplanted porcine cells without compromising the ability
of the immune system to protect the recipient in its normal fashion. Neurons,
hepatocytes and cardiac myocytes treated with Diacrin's proprietary
immunomodulation technology have been successfully transplanted into animals
without immunosuppression. This technology is presently being evaluated in
Parkinson's disease, Huntington's disease and focal epilepsy patients as part of
Phase 1 clinical trials of NeuroCell(TM)-PD, NeuroCell(TM)-HD and
NeuroCell(TM)-FE, respectively. Phase 1 clinical trial results suggest that
NeuroCell(TM)-PD treated with the Company's immunomodulation technology may be
effective without the use of standard immunosuppression.
The FDA has granted orphan drug designation for NeuroCell(TM)-PD for
advanced Parkinson's disease and NeuroCell(TM)-HD for Huntington's disease. Each
received a designation for use of the product with Diacrin's immunomodulation
technology to prevent rejection and a designation for use without this
technology. Under current law, the first developer to receive FDA marketing
approval for a designated orphan drug is generally entitled to a seven-year
exclusive marketing period in the United States.
In September 1996, the Company and Genzyme formed Diacrin/Genzyme LLC
(the "Joint Venture"), a joint venture to develop and commercialize
NeuroCell(TM)-PD and NeuroCell(TM)-HD (the "Joint Venture Products"). Under the
terms, and subject to certain conditions, of the joint venture agreement, which
was effective October 1, 1996, Genzyme has agreed to provide 100% of the first
$10 million in funding and 75% of the following $40 million in funding for the
development and commercialization of the Joint Venture Products. The Company
agreed to provide the remaining 25% of the following $40 million in funding. All
costs incurred in excess of $50 million are to be shared equally between Genzyme
and the Company in accordance with the terms of the agreement. Any profits of
the Joint Venture are to be shared equally by the two parties. The Joint Venture
plans that Diacrin and Genzyme will perform, on behalf of the Joint Venture, the
development activities in connection with the Joint Venture Products and that
Genzyme will market and sell the Joint Venture Products on a cost reimbursement
basis on behalf of the Joint Venture.
In addition to NeuroCell(TM)-PD, NeuroCell(TM)-HD and NeuroCell(TM)-FE,
Diacrin has seven other products in various stages of preclinical development:
(i) porcine hepatocytes for alcoholic hepatitis; (ii) human hepatocytes for
cirrhosis; (iii) human myoblasts for cardiac disease; (iv) neural cells for
stroke; (v) neural cells for intractable pain; (vi) spinal cord cells for spinal
cord injury and (vii) retinal epithelial cells for macular degeneration.
Diacrin's Transplantation Technology
While the feasibility of cell transplantation has been demonstrated
clinically, widespread use of cell transplantation in clinical applications has
been hampered by the lack of an adequate supply of human donor cells. To
overcome this constraint, Diacrin has pioneered the use of porcine cells for
clinical transplantation and in March 1995 received the first FDA clearance to
transplant porcine cells into humans. Each step of Diacrin's production process
has been carefully designed and is tightly controlled in order to obtain
<PAGE>
cells
suitable for human transplantation. The Company has developed procedures to
screen pigs thoroughly for infectious agents and then isolate donor pigs in
specially-filtered rooms. In the case of NeuroCell(TM)-PD, NeuroCell(TM)-HD and
NeuroCell(TM)-FE, where fetal cells are required, Diacrin harvests tissue of
appropriate fetal age and type under current good manufacturing practices
("cGMPs"). Specific cell populations from the harvested tissue are then isolated
and prepared at either Diacrin's or the Joint Venture's facilities. The Company
has filed patent applications to protect its proprietary donor pig qualification
and cell harvesting processes and related products.
Diacrin's screening procedures are performed in accordance with
proposed FDA guidelines covering xenotransplantation. The Company has worked
closely with the FDA to provide input in the development of these guidelines.
The implementation of these guidelines is necessary to avoid contamination of
transplanted cellular products with infectious agents. The Company is aware of
recent scientific publications by others which demonstrate, under laboratory
conditions, that porcine endogenous retroviruses ("PERV") have the potential to
infect human cells. In response to these findings, the FDA in October 1997
instructed all sponsors of human clinical trials involving porcine tissue,
including the Company, to test for the presence of infectious PERV in porcine
cells and for evidence of PERV in patient blood samples prior to the
transplantation of any additional patients in clinical trials. The Company,
together with an outside contractor, tested porcine cells and patients for PERV.
Given the satisfactory results of those tests, the FDA cleared the Company to
proceed with its planned clinical trials in NeuroCell(TM)-PD and
NeuroCell(TM)-FE in December 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Factors That May Affect
Future Results - Reliance on Cell Transplantation Technology; No Currently
Approved Xenotransplantation-Based Product; PERV Testing."
Current transplantation technology generally requires the recipient to
be immunosuppressed in order to avoid graft rejection. T cells, the main cells
involved in directing the body's immune response, recognize and bind to MHC
class I antigens. Binding of foreign MHC class I antigens triggers a cascade of
events which results in destruction of the engrafted cells that display these
antigens. Cyclosporine, a standard immunosuppressive agent, prevents this
rejection process. Using cyclosporine, Diacrin has demonstrated survival of
transplanted porcine cells in a variety of preclinical animal models and has
histologically documented survival of transplanted porcine neurons in a deceased
patient who had received NeuroCell(TM)-PD.
Diacrin is also developing proprietary immunomodulation technology
which involves the treatment of isolated cell populations prior to
transplantation with antibody fragments directed against MHC class I antigens in
order to obviate the need for generalized immunosuppression using agents such as
cyclosporine. Chronic generalized immunosuppression may result in complications
such as increased susceptibility to infectious diseases and cancer. Preclinical
studies performed by Diacrin scientists and academic collaborators have shown
that neural cells, hepatocytes and cardiac myocytes that have been pretreated
using Diacrin's immunomodulation technology prior to transplantation survived in
several animal models without immunosuppression. Since the antibody fragments
would not be expected to remain permanently bound to the engrafted cells, the
long-term survival of the engrafted cells seen in these studies suggests that
the graft recipient's immune system has "learned" to accept the graft. Thus, the
Company believes that treatment of cells with antibody fragments prior to
transplantation will induce a state of graft-specific immunological tolerance,
which would allow continued survival of the transplanted cells.
<PAGE>
In connection with its ongoing Phase 1 clinical trials, six Parkinson's
disease patients, six Huntington's disease patients and one focal epilepsy
patient have been transplanted with antibody pretreated NeuroCell(TM)-PD,
NeuroCell(TM)-HD and NeuroCell(TM)-FE, respectively, using no immunosuppression.
Preliminary indications from the Phase 1 NeuroCell(TM)-PD clinical trial suggest
that improvement in Parkinson's disease symptoms have occurred in patients
transplanted with pre-treated NeuroCell(TM)-PD. However, the Company believes
that, given the severity of advanced Parkinson's disease and Huntington's
disease, both NeuroCell(TM)-PD and NeuroCell(TM)-HD could be useful products
even if they require the use of chronic immunosuppression.
Product Development Programs
Diacrin is focusing its research and development activities on the
production and transplantation of cells for use in the treatment of human
diseases characterized by cell dysfunction or cell death. The Company is
developing products to address important medical needs which represent a
broad-based application of Diacrin's technologies for cell production and
transplantation. The following table illustrates Diacrin's product development
programs in cell transplantation and each product's stage of development:
<TABLE>
<CAPTION>
Diacrin Product Development Programs
- ------------------------------------------------------------------------------------------------------------------------
U.S. Targeted Patient
Product Candidate Disease Indication Defect Population Development Stage
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NeuroCell(TM)-PD * Parkinson's disease Death of dopaminergic 115,000 - 155,000 Phase 2
neurons in specific
brain regions
- ------------------------------------------------------------------------------------------------------------------------
NeuroCell(TM)-HD * Huntington's disease Death of GABAergic 25,000 Phase 1 accrual
neurons in specific completed
brain regions
- ------------------------------------------------------------------------------------------------------------------------
NeuroCell(TM)-FE Focal epilepsy Inappropriate neuronal 200,000 Phase 1
firing
- ------------------------------------------------------------------------------------------------------------------------
Porcine LGE cells Stroke Ischemic death of 160,000 Preclinical
neurons
- ------------------------------------------------------------------------------------------------------------------------
Porcine LGE cells Chronic intractable Impaired inhibitory 2,000,000 Preclinical
pain neurotransmission
- ------------------------------------------------------------------------------------------------------------------------
Porcine spinal cord Spinal cord injury Traumatic loss of 200,000 Preclinical
cells spinal cord function
- ------------------------------------------------------------------------------------------------------------------------
Porcine hepatocytes Alcoholic hepatitis Hepatocyte death 45,000 IND Filed
- ------------------------------------------------------------------------------------------------------------------------
Human hepatocytes Cirrhosis Loss of liver function 1,100,000 Preclinical
- ------------------------------------------------------------------------------------------------------------------------
Human myoblasts Cardiac disease Diseased or damaged 200,000 Preclinical
myocardium
- ------------------------------------------------------------------------------------------------------------------------
Porcine retinal Macular degeneration Loss of central vision 1,400,000 Preclinical
epithelial cells
- ------------------------------------------------------------------------------------------------------------------------
* Being developed by Diacrin / Genzyme LLC.
</TABLE>
<PAGE>
NeuroCell(TM)-PD for Parkinson's Disease
Parkinson's disease is a neurodegenerative disease that results from
the loss of dopamine-producing neurons within an area of the brain called the
substantia nigra, causing the loss of coordinated muscular activity. The disease
is generally characterized by progressively worsening physical conditions
including difficulty in movement, muscular rigidity, tremors and postural
instability. The majority of Parkinson's disease patients are first diagnosed
between the ages of 45 and 65. In addition to a decreased quality of life,
Parkinson's disease may also result in premature death. In the United States,
there are approximately 500,000 people afflicted with Parkinson's disease. These
patients can be classified according to the severity of their disease by Hoehn
and Yahr staging, from stage 1 early in the disease process to stage 5 when the
disease has progressed to result in the patient being bedridden or
wheelchair-bound. NeuroCell(TM)-PD will be directed to the treatment of patients
in stage 4 and stage 5, which the Company estimates to be between 115,000 and
155,000 patients in the United States. With the increasing average age of the
population, the prevalence of Parkinson's disease is expected to increase. The
Company has received orphan drug designation for NeuroCell(TM)-PD. See
"Government Regulation."
Current therapies consist of administration of levodopa ("L-dopa"), a
precursor of dopamine, and dopamine analogues. However, L-dopa is only effective
for a limited period of time, with most patients experiencing a progressive
reduction in drug efficacy over a 10 to 15 year period, due to the cumulative
loss of viable neurons and tolerance to L-dopa. In addition, L-dopa therapy can
result in severe side-effects including dyskinesias and hallucinations. No
currently available therapy prevents progression of the neurological deficits
caused by Parkinson's disease.
Clinical researchers have shown that transplantation of human fetal
neural cells into Parkinsonian patients is effective in treating the disease.
For example, Swedish researchers have demonstrated survival and function of
transplanted human fetal cells in Parkinson's disease patients in an ongoing
study commenced in 1989. This study has shown cells surviving for at least eight
years and improvements in the patients' condition. However, widespread clinical
application is limited by the lack of availability of human fetal neural cells
and ethical concerns regarding the use of human fetal tissue. Moreover, even
when available, the quality of human fetal cells is variable, which may limit
the clinical effectiveness of such treatment.
Diacrin's approach to the treatment of Parkinson's disease is to
produce and transplant NeuroCell(TM)-PD to replace the function of those neurons
damaged by the disease. The Company and its collaborators have shown in animal
models that these transplanted cells become integrated into the surrounding
brain tissue and correct functional defects. While NeuroCell(TM)-PD is not a
cure for Parkinson's disease, the goal of this treatment is to significantly
improve the clinical condition of patients with severe Parkinson's disease
sufficiently to allow them to function independently.
Diacrin harvests fetal porcine midbrain cells under cGMPs for
transplantation. These cells are functionally indistinguishable from human fetal
neural cells. The porcine tissue source has been developed by Diacrin in
conjunction with Tufts University School of Veterinary Medicine ("Tufts"). The
cell isolation and testing has been done in conjunction with the Company's
academic collaborators at Harvard Medical School. Company scientists, in
conjunction with academic collaborators, have shown reversal of functional
deficits in a rodent model of Parkinson's disease transplanted with
NeuroCell(TM)-PD. Under a Diacrin-sponsored research program, a non-human
primate model for Parkinson's disease was transplanted with NeuroCell(TM)-PD.
Results confirmed the presence of viable
<PAGE>
cells in the transplantation site at the conclusion of this 17-month study.
In October 1996, enrollment in a Phase 1 clinical trial of
NeuroCell(TM)-PD in patients with severe Parkinson's disease was completed. This
trial, which was initiated by the Company in April 1995 and, since October 1996,
has been conducted by Diacrin on behalf of the Joint Venture, was the first
FDA-authorized trial involving transplantation of porcine cells into humans.
Although the study was designed to evaluate the safety of NeuroCell(TM)-PD, its
effects on the Parkinson's disease symptoms of the transplant recipients are
also being evaluated. The NeuroCell(TM)-PD clinical trial is being conducted at
the Lahey Hitchcock Clinic in Burlington, Massachusetts and at Boston University
School of Medicine under an IND application.
All twelve patients were transplanted unilaterally (one side of the
brain) with approximately 12 million cells using standard stereotactic surgical
techniques. Eleven patients continue to be evaluated as part of the clinical
trial. In January 1996, the twelfth patient, a 69-year old male who had
undergone NeuroCell(TM)-PD transplant surgery in May 1995, died of a pulmonary
embolism. An autopsy determined that this patient's death was unrelated to the
transplant. A histological study of this patient published in the March 1997
issue of Nature Medicine demonstrated that fetal pig neural cells survived and
matured in his brain. This study marked the first published documentation of
survival of cells transplanted from another species into the human brain and the
appropriate growth of the non-human neurons in a Parkinsonian brain.
It is expected that any clinical improvement of Parkinson's disease
patients after transplantation will occur gradually as the fetal pig neurons
mature. All eleven Parkinson's disease patients in the Phase 1 clinical study
have been evaluated at twelve months post-transplantation. The patients continue
to demonstrate statistically significant clinical improvement one year after
transplantation (p-value of 0.01) as measured by the Unified Parkinson's Disease
Rating Scale.
The Joint Venture plans to initiate three clinical trials of
NeuroCell(TM)-PD in 1998. It is anticipated that all transplanted patients in
these trials will receive approximately 48 million cells transplanted
bilaterally (both sides of the brain). Patient recruitment has commenced in a
36-patient pivotal Phase 2 clinical trial involving the transplantation of
NeuroCell(TM)-PD in conjunction with cyclosporine immunosuppression versus a
control group. A planned second pivotal Phase 2 clinical trial will involve the
transplantation of NeuroCell(TM)-PD using the Company's immunomodulation
technology versus a control group. A third open-label clinical trial is planned
to transplant NeuroCell(TM)-PD into two groups of patients, one with
cyclosporine immunosuppression and the other using the Company's
immunomodulation technology, to confirm the results of the pivotal Phase 2
clinical trials. Assuming successful completion of these trials, the Company
believes that sufficient clinical evidence will be produced to: (i) determine
the superiority of the Company's immunomodulation technology versus cyclosporine
immunosuppression used in conjunction with NeuroCell(TM)-PD; and (ii) support a
Product License Application for NeuroCell(TM)-PD used in conjunction with either
cyclosporine immunosuppression or the Company's immunomodulation technology.
NeuroCell(TM)-HD for Huntington's Disease
Huntington's disease is a genetically transmitted disease which is
caused by a loss of the specific type of neurons which produce the
neurotransmitter gamma aminobutyric acid ("GABA"). The loss of these GABAergic
cells results in a progressive deterioration marked by discordant movement,
intellectual impairment and a spectrum of psychiatric and behavioral
disturbances. The majority of cases of Huntington's disease first present
<PAGE>
between 40 and 50 years of age. There are approximately 25,000 people diagnosed
with Huntington's disease in the United States. Currently there is no effective
therapy for Huntington's disease. Treatment is palliative with tranquilizers and
anti-psychotic drugs being the only options. The Company has received orphan
drug designation for NeuroCell(TM)-HD. See "Government Regulation."
Diacrin's approach to treating this disease consists of producing and
transplanting NeuroCell(TM)-HD to replace the function of neurons damaged by
Huntington's disease. Fetal porcine neurons from an area of the brain called the
lateral ganglionic eminence are harvested under cGMPs for transplantation into
the striatum of the graft recipient's brain. Diacrin and its scientific
collaborators have tested NeuroCell(TM)-HD in a non-human primate model of
Huntington's disease. Results indicate that NeuroCell(TM)-HD has significantly
improved the behavioral defect in this model. This study demonstrated that the
transplanted neural cells become integrated into the brain tissue and assumed
the function of GABAergic neurons which have been destroyed in this model.
The Company, on behalf of the Joint Venture, has completed enrollment
in an FDA monitored 12-patient Phase 1 clinical trial with NeuroCell(TM)-HD
transplanted unilaterally. The Company is not aware of any other potential
treatment of Huntington's disease cleared by the FDA for clinical trials in the
United States. The Phase 1 clinical trial is being conducted at the Boston
University School of Medicine, Lahey Hitchcock Clinic, and Brigham and Women's
Hospital in Massachusetts and at Rush-Presbyterian-St. Luke's Medical Center in
Chicago. As with neural cell transplantation for Parkinson's disease, it is
expected that any clinical improvement would occur gradually over a period of
months. As of October 1997, all 12 patients treated have been evaluated at least
six months post-transplantation. The Huntington's disease patients that have
been transplanted with NeuroCell(TM)-HD have tolerated the procedure well and
the preliminary clinical data suggests that the product is safe. Efficacy data
is currently being evaluated. The Joint Venture plans to initiate a clinical
trial in 1998 to determine the effect of NeuroCell(TM)-HD transplanted
bilaterally.
NeuroCell(TM)-FE for Focal Epilepsy
Epilepsy is a chronic, recurrent disorder characterized by excessive
neuronal discharge in the brain, causing muscle spasms or convulsions. Epileptic
seizures are usually associated with some alteration of consciousness. The
seizures are of many different types and arise as a result of diverse
pathologies. Epilepsy is one of the most common neurological disorders and is
estimated to affect 1.8 million people in the United States.
Epileptic seizure classification is important clinically since it
determines the drug therapy used for seizure control. Clinical diagnosis of
seizures includes differentiation by onset and whether or not consciousness is
lost. Seizures can be classified into three broad categories based on onset:
generalized seizures, partial seizures and unclassified seizures. Generalized
seizures exhibit no focus of onset, cause loss of consciousness and may or may
not cause convulsions. They comprise approximately 40% of all epileptic
seizures. Partial seizures have a focal onset and may cause loss of
consciousness (complex partial seizures) or may not cause loss of consciousness
(simple partial seizures). Partial seizures comprise approximately 57% of all
epileptic seizures. The remaining 3% of seizures are unclassified.
The anti-epileptic drugs currently used fail to control seizure
activity in a significant number of patients and frequently cause side effects
that range in severity from minimal impairment of the central nervous system to
death from aplastic anemia or hepatic failure.
<PAGE>
In 1993, the market for
anti-epileptic agents was approximately $525 million in the United States.
Diacrin's initial therapeutic focus in this area is in the treatment of
patients with complex partial seizures. By several estimates, approximately
200,000 patients with complex partial epilepsy have seizures that are not
well-controlled with currently available drug therapy. The only other therapy
available to these refractory patients is surgical removal of portions of the
temporal lobe, amygdala and hippocampus. However, the Company believes that
transplantation of cells will be preferable to removal of brain tissue if
NeuroCell(TM)-FE is shown to be safe and efficacious.
Because focal epilepsy is characterized by excessive electrical
activity in a localized area and the spread of this activity through the brain,
Diacrin's approach to therapy is to apply its proprietary technology to the
production and transplantation of NeuroCell(TM)-FE in order to exert an
inhibitory effect on the hyperexcitable brain region. The source of inhibitory
neurons being evaluated for NeuroCell(TM)-FE is the lateral ganglionic eminence
("LGE") within the fetal porcine striatum. Diacrin has demonstrated survival and
safety of transplanted NeuroCell(TM)-FE in a preclinical animal model when
transplanted into the hippocampus.
In January 1998, the Company initiated under IND a Phase 1 clinical
trial of NeuroCell(TM)-FE at Beth Israel Deaconess Medical Center in Boston. The
Company anticipates transplanting up to six patients previously scheduled for
surgical removal of the portion of the brain causing the seizure activity. Upon
surgical removal of that portion of the brain at six months post-transplant, the
Company will be afforded the opportunity to histologically analyze the graft and
graft site for the presence of viable pre-treated GABAergic porcine neural
cells. In addition, the trial will generate safety data necessary to initiate a
Phase 2 clinical trial of NeuroCell(TM)-FE.
Porcine Neural Cells for Stroke
Stroke is the third leading cause of death in the United States,
ranking behind coronary artery disease and cancer. It is also the leading cause
of long-term disability in the U.S. Approximately 500,000 people suffer a stroke
each year in the U.S.
Thrombolytic stroke (cerebral infarction) represents nearly 80% of all
cases of stroke each year and is caused primarily by thrombus formation in a
blood vessel which effectively blocks blood flow to a region of the brain,
causing neuronal cell death.
Current therapies include surgical management to remove a clearly
defined clot or anticoagulant therapy to "break up" the clot formation. While
such therapies increase the likelihood of surviving a stroke, the neuronal
damage caused by the initial trauma remains.
The Company believes disabled patients who have survived thrombolytic
stroke may benefit from porcine fetal neural cell transplantation for the repair
of the damaged neuronal circuitry caused by stroke. Several animal studies
conducted by others utilizing allografts have demonstrated the feasibility of
repairing and restoring function to the stroke damaged brain. The Company has
initiated studies in a well-defined animal model of stroke to determine whether
fetal porcine neural cells derived from the LGE will engraft and repair the
damage, leading to improved mobility and function. This cell population is
expected to be most useful in treating striatal and cortical thrombolytic
strokes, which occur at a rate of over 160,000 annually in the U.S. Assuming
successful completion of these animal studies, the Company plans to seek FDA
clearance to initiate human clinical trials.
<PAGE>
Porcine Neural Cells for Chronic Intractable Pain
Chronic pain can be caused by neuropathologic processes in tissues and
organs, or by prolonged dysfunction of peripheral or central nervous system
pathways. Peripheral neuropathies including diabetic neuropathy, cervical
radiculopathy, neuralgic amyotrophy, HIV neuropathy and post herpetic neuralgia
can result in persistent intractable pain. It is estimated that 400,000
individuals suffer from unrelieved chronic pain as a result of these peripheral
neuropathies in the United States. Moreover, intractable chronic pain is a
common component of many end-stage disease syndromes. Pain affects most patients
with malignant disease and the prevalence of severe pain in cancer patients
increases as the disease progresses to the advanced stages. There are an
estimated 1.6 million cancer patients that experience chronic intractable pain
in the United States.
The severity of pain can be debilitating and significantly interfere
with an individual's productivity and quality of life. Existing therapies for
chronic pain are often inadequate and characterized by the tendency to become
ineffective with time. Potent opiates are part of analgesic regimens, however,
dose-limiting side effects, tolerance and potential for dependence limit their
widespread use.
The persistence of pain following damage to or prolonged dysfunction of
the nervous system involves a cascade of pathological neurochemical events that
lead to abnormal sensory hyperexcitability and excitotoxicity. The altered
spinal neurochemical environment results in an impairment of neural inhibitory
function. Specifically, inhibitory GABAergic interneurons are susceptible to
excessive excitatory amino acid release.
Diacrin's therapeutic approach for the management of chronic
pathological pain is to inhibit the hyperexcitability cascade by transplanting
fetal neural GABA-releasing cells in the spinal dorsal horn (the section of the
spine mediating pain perception). By using this approach, alleviation of chronic
pain may be achieved by repopulating inhibitory interneurons to recover
appropriate neurotransmission in the spinal cord. Preclinical studies are in
progress to evaluate the safety and survival of fetal porcine LGE
(GABA-releasing) cells transplanted into the dorsal horn of the spinal cord of
an animal model. Assuming the successful completion of these animal studies, the
Company plans to seek FDA clearance to initiate human clinical trials.
Porcine Spinal Cord Cells for Spinal Cord Injury
The U.S. prevalence of Spinal Cord Injury ("SCI") is approximately
200,000 with 13,000 additional SCI's annually. Nearly 80% of the injured
patients are males in their late twenties to early thirties. Greater than 95% of
these SCI's are compression injuries, the remainder are cases in which the cord
is severed. The cervical spine is vulnerable to injury because of its extreme
mobility. Approximately 20% of SCI occur in the thoracic region which is more
stable due to extra support supplied by the ribs. Loss of sensorimotor neuron
function due to injury requires lengthy hospitalization after the initial
accident as well as extensive rehabilitative care. Further, all victims of SCI
face a lifelong series of acute and chronic non-neurological complications that
can be life-threatening.
The primary objective of current therapies available for SCI is to
prevent further injury by physically stabilizing the spine and by
pharmacologically attenuating the endogenous injury response. These strategies
attempt to establish optimal conditions for functional recovery and improve
patients' rehabilitative potential. Surgery is designed to protect the patient
from further injury through immobilization, spinal cord realignment and
stabilization, and decompression. To date there is no pharmacotherapy available
for spinal cord injury except palliative therapies employing methylprednisolone
(corticosteroid)
<PAGE>
therapy to reduce inflammation of the initial traumatized area,
and standard medical practice for complications arising from chronic
denervation, (for example, pneumonia, pulmonary embolism, decubitus ulcers,
urinary tract infections, renal failure, deep vein thrombosis and heterotopic
ossification of bone) and, if required, medical therapy for psychiatric
disorders.
Diacrin believes that its porcine spinal cord cell product candidate
transplanted into the site of injury of a human severed spinal cord may have the
potential to partially reestablish sensorimotor neuronal pathways. The
transplantation of this product into a recently injured cord may prevent
secondary neuronal and muscular atrophy known to occur in these patients.
Partial or full recovery of limb movement, and other motor neuron pathways may
reduce the overall time spent in the hospital, decrease the secondary equipment
required for care, and reduce severe and life threatening complications arising
from the injury. Further, the ability to deliver fetal neurons to a site of
injury in a severed spinal cord may have broader technical and clinical
applications. Once proof of principle is realized in the severed SCI, the fetal
porcine cell product will be delivered to sites in the spinal cord where
compression fractures have occurred. The Company has initiated studies in animal
models of spinal cord injury to determine whether fetal porcine spinal cord
cells transplanted into the damaged spinal cord region will engraft and repair
the damage, leading to improved mobility and function. Assuming successful
completion of the Company's ongoing studies, the Company plans to seek FDA
clearance to initiate human clinical trials.
Porcine Hepatocytes for Alcoholic Hepatitis
Alcoholic hepatitis is an acute form of alcoholic liver disease
resulting from excessive alcohol intake immediately preceding hospitalization.
The disease accounts for 45,000 hospitalizations annually. Alcoholic liver
injury is predominantly from direct hepatotoxicity of ethanol and severe
inflammation of the liver. The clinical spectrum of disease can include
abdominal pain, fever and manifestations of liver failure (ascites, jaundice and
encephalopathy). The mortality of alcoholic hepatitis can be as high as 70% with
patients dying from infection, GI bleeding or hepatorenal failure. Alcoholic
hepatitis can produce irreversible liver damage in patients that survive. In a
recent study of 280 alcoholics, deaths occurred in 50% of those with cirrhosis
and 66% of those with cirrhosis and alcoholic hepatitis within 4 years. In some
urban areas, alcoholic liver disease is the 4th leading cause of death for
patients aged 25-64.
There is currently no established treatment for alcoholic hepatitis.
Multiple treatments have been proposed including dietary supplementation and the
use of high dose steroids but efficacy has not been demonstrated. Liver
transplantation is an effective treatment, but a minimum period of 6 months of
abstinence is required before a patient can be considered a transplant
candidate.
In extensive studies of hepatocyte transplantation for the treatment of
metabolic disease in animal models, Diacrin scientists have shown that porcine
hepatocytes can be isolated and infused into the recipient liver where they
lodge and continue to function. Long-term survival and function of these cells
has been demonstrated. Hepatocytes are able to pass through the lining of liver
capillaries and integrate into the liver where they can function alongside the
host cells. Therefore, the Company believes hepatocyte transplantation could
become a viable alternative to whole liver transplantation for the treatment of
acute liver disease. This approach would be preferable to transplantation of a
whole liver due to the difficulty of obtaining livers for transplantation
(currently over 5,000 individuals await liver transplants in the United States
and about 4,000 liver transplants are performed per year for all indications) as
well as the expense and invasiveness of the procedure.
<PAGE>
Diacrin has submitted an IND application to the FDA for a Phase 1
clinical trial to test transplantation of porcine hepatocytes for the treatment
of alcoholic hepatitis. All patients in this planned trial will have been
diagnosed with alcoholic hepatitis on admission to the hospital and will have
received best medical care for at least 7 days without significant improvement.
The patients selected for this trial, which is planned to commence at Boston
University Medical Center in the first half of 1998, will have failed all other
available medical therapy. This subgroup of patients would have an expected
in-hospital mortality of approximately 70% and is thus an appropriate group for
the evaluation of liver function after hepatocyte transplantation. Porcine
hepatocytes will be infused into the spleen of these patients by interventional
radiology, thus avoiding a surgical procedure for these critically ill patients.
In addition to the high level of quality control that can be maintained over the
production of porcine hepatocytes, these cells also have the advantage of being
resistant to infection by human hepatitis B and C viruses. Since many of the
patients enrolled in this study are likely to carry these viruses, the Company
believes the resistance of the porcine cells to infection may prevent infection
of the transplanted hepatocytes providing a further advantage over human liver
transplantation in which hepatitis B and C reinfect donor livers.
Human Hepatocytes for Cirrhosis
Cirrhosis of the liver is a common affliction in the United States,
affecting an estimated 1.5 million individuals and leading to approximately
50,000 deaths annually. In cirrhosis, liver tissue is progressively lost to
accumulation of fibrous tissue and scarring, and liver function is compromised
due to the degenerative changes. The most common causes of cirrhosis are viral
hepatitis B and C infections and alcoholic liver disease. In the initial stages
of the disease the patient may experience jaundice and disorientation as the
detoxifying functions of the liver are lost. With more serious disease, the
patient will develop ascites and will be hospitalized with increasing central
nervous system effects (encephalopathy) that lead to coma. The tremendous
reserve of liver tissue allows the continued function of the organ despite loss
of up to 90% of the normal complement of hepatocytes. In advanced cirrhosis,
little normal liver tissue remains.
The only known therapy for advanced cirrhosis is liver transplantation.
However, the United Network of Organ Sharing has documented a national lack of
donor livers for transplantation, resulting in a waiting period of over 2 years
for the average patient requiring liver transplantation. Recently, artificial
extra-corporeal liver assist devices ("ELAD") using porcine hepatocytes or human
hepatoma cell lines attached to a dialysis cartridge have been used in an
attempt to treat liver failure in advanced cirrhosis. Studies to date suggest
that ELAD may improve some biochemical parameters such as ammonia levels but the
devices have not resulted in increased survival. Allogeneic human hepatocyte
transplantation has also been used in both acute and chronic liver failure. Both
transplantation into the liver via the portal vein and ectopic transplantation
into the spleen have been used in these studies. In pilot studies by others,
liver and splenic hepatocyte transplantation has been shown to be both safe and
potentially effective in humans as a bridge to orthotopic transplantation.
Immunosuppression is required in all patients receiving allogeneic human
hepatocyte transplantation.
For chronic liver disease, Diacrin and others have shown in animal
models that hepatocyte integration is possible when hepatocytes are injected
into the liver via the portal vein or into the splenic pulp. The spleen appears
to be the preferred site in this situation due to the fibrosis and loss of blood
supply to the liver. In animal models, hepatization of the spleen is a well
described phenomenon and results in replacement of the splenic pulp with cords
of functioning hepatocytes that perform hepatic functions including synthesis of
albumin and clotting factors, detoxification of ammonia and oxidative
metabolism.
<PAGE>
Diacrin plans to file an IND application to initiate a Phase 1 clinical
trial of human hepatocyte transplantation in 1998 for the treatment of cirrhosis
in a group of patients that have been listed for organ transplantation but are
likely to wait at least two years before receiving a transplant. The Company
believes these patients may benefit from the growth of transplanted hepatocytes
in their spleen leading to an increase in liver function. In addition, expansion
of the cells may allow sufficient improvement to render a liver transplant
unnecessary unlike the case of an ELAD which is used only as a bridge to
transplantation. As part of the planned trial, conventional immunosuppression
will be compared to the use of Diacrin's immunomodulation technology to
determine whether graft protection is achieved by this technique. This study is
planned to be conducted in collaboration with Massachusetts General Hospital.
Additional Hepatocyte Applications
Successful delivery of hepatocytes to patients with alcoholic hepatitis
or cirrhosis may open the possibility of applying this technology to a variety
of other diseases. The preparation of the cells and their delivery by radiologic
procedures should be the same in each of these applications, thus providing a
platform that may be used in multiple applications.
Additional applications include the use of hepatocytes for the
treatment of metabolic diseases resulting from genetic mutations. Familial
hypercholesterolemia is a disease caused by a defective receptor gene for low
density lipoprotein ("LDL") that leads to elevated levels of LDL cholesterol and
coronary disease at an early age. By transplantation of hepatocytes into a
rabbit model of this disease, Diacrin scientists have shown that porcine cells
provide the animal with functional receptors that reduce serum LDL levels.
Familial hypercholesterolemia afflicts approximately 500,000 patients in the
United States. Currently available drugs do not sufficiently lower circulating
LDL cholesterol levels in approximately 20% of these patients, who may thus
benefit from hepatocyte transplantation. Additional metabolic disorders that may
be candidates for treatment by hepatocyte transplantation include hemophilia,
phenylketonuria, carbamoyl phosphate synthetase deficiency, ornithine
transcarbamolyase deficiency, Crigler-Najjar syndrome, and disorders of glycogen
metabolism. Approximately 30,000 patients in the United States suffer from these
metabolic disorders.
Acute liver failure unrelated to cirrhosis is another potential
application of hepatocyte transplantation. Over 2,000 patients die of fulminant
hepatic failure each year. Although liver transplantation is performed for these
patients when possible, the shortage of human livers leaves many patients
without this therapeutic option. Hepatocyte transplantation has been shown to be
effective in animal models of acute liver failure and may support liver function
both acutely and for the long term. In addition, hepatocyte transplantation
could be used to support patients who undergo resection of liver tumors. If the
tumor grows to a certain size, liver failure can develop and support of liver
function would allow survival and recovery as liver mass increased.
Human Myoblasts for Cardiac Disease
Coronary heart disease is the leading cause of death in the United
States, responsible for 1 of every 4.8 deaths or close to 500,000 deaths each
year. The disease is caused by the accumulation of atherosclerotic plaque,
consisting of lipid deposits, macrophages and fibrous tissue, on the walls of
vessels supplying heart muscle. Rupture of unstable plaques exposes substances
that promote platelet aggregation and thrombus formation. The thrombus is
composed of platelets, blood cells and fibrin that can block
<PAGE>
one or more of the
coronary vessels, resulting in an inadequate supply of oxygen to the heart
muscle. This highly active muscle is quickly damaged and the lesions are
irreversible because cardiomyocytes, the specialized muscle cells of the heart,
are not capable of cell division. The end result is an infarct, a damaged area
of heart muscle in which necrotic cardiomyocytes are replaced by scar tissue and
fibrosis, weakening the contractility and function of the heart. According to
the American Heart Association, approximately 1,000,000 heart attacks occur
annually in the U.S. Of the 800,000 patients who survive, approximately 200,000
will die within a year.
Treatments to prevent ischemic damage after a myocardial infarction
include thrombolytic drugs that break down fibrin clots and open up occluded
arteries. These drugs have greatly influenced morbidity and mortality from
occlusive events, but must be administered within a short interval after a
myocardial infarction to be effective. Even with current medical management,
over one third of acute myocardial infarctions are fatal. Cardiac
catheterization and angioplasty to dislodge the thrombus and open the occluded
vessel has proved effective in restoring perfusion but cannot reverse
preexisting ischemic damage.
While cardiac myocytes do not have the capacity to divide and repair
damaged myocardium, skeletal muscle contains cells called myoblasts that divide
when called upon to repair damaged muscle. Diacrin scientists have isolated and
expanded myoblasts from human tissue and are studying the use of these cells for
transplantation into damaged heart muscle. The Company believes that patients
suffering from myocardial infarctions would benefit greatly if these myoblasts
could repair their damaged myocardium. These cells would be isolated from a
muscle biopsy of a patient who had suffered a myocardial infarction and would
thus allow transplantation of a patient's own myoblasts into their heart,
thereby avoiding any immunological barriers. Preclinical studies conducted by
Diacrin have demonstrated that myoblasts integrate into rodent heart muscle. In
a large animal model of myocardial infarction, Diacrin has demonstrated that
myoblasts can be delivered to the site of an infarct by infusion via the
coronary vessels (allowing use of the radiological procedures currently
practiced for angioplasty). These cells survive and infiltrate the myocardium in
and around the infarct zone. These studies are now being extended to determine
whether the myoblasts infused into infarcted myocardium repair the damaged,
ischemic tissue. Any improvement will be measured by increased myocardial
contractility and cardiac output. Assuming successful completion of these animal
studies, the Company plans to seek FDA clearance to initiate human clinical
trials.
Retinal Epithelial Cells for Macular Degeneration
Age related macular degeneration ("AMD") is a disease of the retina
characterized by the loss of vision due to the atrophy of photoreceptors in the
central part of the retina, the macula lutea. The macula is the most important
part of the eye for central vision and for high resolution vision such as that
used in reading and driving. Retinal pigment epithelial (RPE) cells that lie
beneath the light-sensing cells responsible for vision provide support for the
retinal photoreceptors and digest the discarded outer segments of the neural
retina.
In AMD, abnormal accumulation of metabolic debris results from reduced
activity of the RPE and leads to gradual loss of photoreceptors. The RPE cells
become dysfunctional and metabolic by-products damage photoreceptors, thus
compromising visual acuity. As this layer of cells does not readily replicate in
the adult, damage to the RPE can be irreversible and lead to loss of
photoreceptors with concomitant decreased visual acuity. Macular degeneration is
a common disease, affecting 13 million people in the United States. It is
primarily a disease of the elderly, with 19.4% of 65-74 year olds and 36.8% of
individuals over 75 having vision loss. Approximately 85%-90% of
<PAGE>
AMD patients
have the "dry " form of the disease in which the RPE layer degenerates without
new blood vessel growth and 10-15% have the "wet" form. Effective therapies for
AMD are not currently available.
Diacrin's approach is to repopulate the dysfunctional RPE cell layer by
transplanting RPE cells into the correct anatomical space below the retinal
photoreceptors. This therapeutic approach has the potential to reestablish
function in the macula, prevent further loss of vision and to improve visual
acuity in patients presenting with the dry form of the disease. In patients with
the wet form of AMD, this therapy could be used in conjunction with surgery to
remove choroidal neovascular membranes. Because of its key role in maintaining
the integrity of the photoreceptors and its lack of regenerative capacity, the
idea of replacing defective RPE by transplantation is an attractive one.
Recently, RPE transplantation has been performed by others in the clinic using
human fetal RPE cells. The Company plans to use porcine fetal tissue, thus
avoiding the ethical and practical problems of obtaining aborted human tissue.
Preclinical studies are in progress to demonstrate the efficacy of fetal porcine
RPE cells for the repair of damaged RPE in animal models. The Company will also
test its proprietary immunomodulation technology to prevent rejection of the
graft. Assuming successful completion of preclinical studies, the Company plans
to seek FDA clearance to initiate human clinical trials.
Manufacturing
The manufacture of the Company's products will require the continuous
availability of porcine tissue harvested under cGMPs from pigs tested to be free
of infectious agents. The Company's current source of pig facilities and
services is obtained under contracts from Tufts and Charles River Pharmservices,
Inc. The Company has also qualified several pig producers to provide pigs for
the Company's production processes. The Company's current long-range plan is to
establish contractual relationships with pig producers for the supply of
qualified pigs.
For the Phase 1 clinical trials of the Joint Venture Products, the
Company isolated and prepared populations of porcine tissue in its own clinical
production facilities. The Joint Venture is finalizing a five-year sublease
agreement with Genzyme's Tissue Repair Division for approximately 15,000 square
feet of clinical production and support space for the production of the Joint
Venture Products needed in conjunction with planned clinical trials. This
facility is also believed to be capable of satisfying projected initial demand
for commercial quantities of the Joint Venture Products. This arrangement will
enable the Company to utilize its existing clinical production facilities for
the clinical supply of other product candidates and to postpone the need for
significant additional investment in such facilities.
The antibody fragment used in Diacrin's immunomodulation technology is
currently obtained from a contract manufacturer. The Company will evaluate on an
ongoing basis the cost effectiveness and other relevant factors necessary to
determine whether the Company should continue to obtain the antibody fragment
from a contract manufacturer or produce the antibody fragment on its own.
The Company's long-range plan is to establish certain of its own
internal manufacturing capabilities, including the facilities necessary to test,
isolate and package an adequate supply of finished cell products in order to
meet its long-term clinical and commercial manufacturing needs.
<PAGE>
Patents and Licenses
The Company intends to aggressively seek patent protection for any
products it develops. The Company also intends to seek patent protection or rely
upon trade secrets to protect certain of its technologies which will be used in
discovering and evaluating new products. The Company has 5 issued U.S. patents
and 19 patent applications pending with the United States Patent and Trademark
Office. Foreign counterparts have also been filed in a number of selected
countries. These applications seek composition-of-matter and use protection for
the various products the Company has in development. Applications are on file
for neurons, hepatocytes, cardiac myocytes and expansions of the Company's
technology base.
On February 1, 1994, MGH was awarded a patent in the United States
covering the basic immunomodulation technology used by Diacrin. Foreign
counterparts of this patent have been filed. Under an agreement with MGH, the
Company has an exclusive, worldwide license to the technology and the inventions
described in the patent, and all foreign counterparts, including any
continuations, reissues or substitutions as well as any patents and equivalents
which may mature from such patent, subject to the payment of royalties. Unless
sooner terminated, the Company's rights will continue, on a country by country
basis, until the last to expire of the patents, at which time the Company will
have a fully paid-up license. Either party may terminate the agreement, upon
notice, in the event the other party defaults in its material obligations and
has failed to cure such default within 60 days of receipt of such notice.
In September 1996, the Company and Genzyme entered into an agreement to
form a joint venture to develop and commercialize the Joint Venture Products. In
connection with that agreement, the Company granted to the Joint Venture the
exclusive, worldwide, irrevocable (during the term of the Joint Venture
agreement), royalty-free right and license under the Company's existing patent
rights and technology to develop, make, have made, use, offer for sale, sell,
have sold, import and export the Joint Venture Products. The license granted by
the Company is limited to the treatment of Parkinson's disease and Huntington's
disease in humans using porcine fetal cells (the "Field"). In the event that
either the Company or Genzyme develops or acquires additional technology or
patent rights that are useful in the Field, the party owning such technology or
patent rights is obligated to offer a license to the Joint Venture, as described
above, to such technology or patent rights. The immunomodulation technology
licensed to the Company from MGH has been non-exclusively sublicensed to the
Joint Venture for use exclusively in the Field.
To protect its trade secrets and other proprietary information, the
Company requires all employees, consultants, advisors and collaborators to enter
into confidentiality agreements with Diacrin.
Sales and Marketing
Under the terms of the Joint Venture agreement, Genzyme, which has an
established sales force and experience in the sales and marketing of
biopharmaceutical and surgical products, is authorized to market and sell the
Joint Venture Products on an exclusive basis as agent for and on behalf of the
Joint Venture.
With regard to the Company's other product candidates, the Company has
not yet developed sales and marketing capabilities. The Company may form
strategic alliances with established pharmaceutical or biotechnology companies
in order to finance the development of certain of its products and, assuming
successful development, to market
<PAGE>
such products. Such alliances may enable the
Company to expand or accelerate its product development efforts and also may
provide the Company with access to established marketing organizations.
Government Regulation
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the development, manufacture and marketing
of the Company's product candidates and in its ongoing research and product
development activities. All of the Company's products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous testing and approval
procedures by the FDA and similar authorities in foreign countries. Various
federal statutes and regulations govern the preclinical and clinical testing,
manufacturing, labeling, distribution, advertising and sale of such products.
The process of obtaining these approvals and the subsequent compliance with
applicable federal statutes and regulations require the expenditure of
substantial time and financial and other resources.
Preclinical testing is generally conducted in the laboratory on animals
to evaluate the potential efficacy and the safety of a product. The results of
these studies are submitted to the FDA as part of an IND application, which must
become effective before human clinical testing can begin. Typically, clinical
evaluation involves a three-phase process. In Phase 1, clinical trials are
conducted with a small number of healthy human subjects to determine the early
safety profile. In Phase 2, clinical trials are conducted with groups of
patients afflicted with the specific disease in order to determine preliminary
efficacy, optimal treatment regimens and expanded evidence of safety. In Phase
3, large scale, multi-center, comparative clinical trials are conducted with
patients afflicted with a target disease in order to provide enough data for the
statistical proof of safety and efficacy as required by the FDA and others. In
addition, the FDA may request post-marketing (Phase 4) monitoring of the
approved product, during which clinical data are collected on selected groups of
patients to monitor longer-term safety.
Upon completion of Phase 3, for products regulated by the FDA's Center
for Biologic Evaluation and Research ("CBER"), the results of preclinical and
clinical testing are submitted to the FDA in the form of an Establishment
License Application ("ELA") and a Product License Application ("PLA") or
Biologics License Application ("BLA") (an integration of the PLA and ELA) for
approval to manufacture and commence commercial sales. In responding to these
applications, the FDA may grant marketing approval, request additional
information or deny the application if the FDA determines that the application
does not satisfy its regulatory approval criteria. The Joint Venture Products
and all of the Company's other products are expected to be regulated by CBER.
The Company will also be subject to widely varying foreign regulations governing
clinical trials and sales of its products. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained prior to the commencement of marketing of the
product in those countries. The approval process varies from country to country
and the time may be longer or shorter than that necessary for FDA approval. The
Company may rely on licensees to obtain regulatory approval for marketing
certain of its products in certain foreign countries.
The Company intends to take advantage of the regulatory pathways which
may provide accelerated marketing approval of its cell transplantation products
and allow limited cost recovery during the clinical research phase. These
include: (i) marketing exclusivity for products which qualify for orphan drug
status; (ii) approval for limited cost recovery during clinical testing under
treatment IND status; and (iii) accelerated marketing approval for more
effective or better tolerated therapies for serious conditions.
<PAGE>
The Orphan Drug Act of 1983 generally provides incentives to
manufacturers to undertake development and marketing of products to treat
relatively rare diseases or diseases where fewer than 200,000 persons in the
United States would be likely to receive the treatment. A drug that receives
orphan drug designation by the FDA and is the first product to receive FDA
marketing approval for its product claim is entitled to a seven-year exclusive
marketing period in the United States for that product claim. Orphan drug
designation can be terminated by the FDA for a number of reasons, including if
the manufacturer of the orphan drug product cannot provide an adequate supply of
the product. Furthermore, a drug that is considered by the FDA to be different
than a particular orphan drug is not barred from sale in the United States
during such seven-year exclusive marketing period. Legislation has previously
been introduced in Congress to limit the marketing exclusivity provided for
certain orphan drugs. Although the outcome of that legislation, if reintroduced,
is uncertain, there remains a possibility that future legislation will limit the
incentives currently afforded to the developers of orphan drugs.
Diacrin has assigned to the Joint Venture the orphan drug designation
it has received from the FDA for NeuroCell(TM)-PD for the treatment of Hoehn and
Yahr stage 4 and stage 5 Parkinson's disease patients and for NeuroCell(TM)-HD.
Diacrin's NeuroCell(TM)-FE, and spinal cord cells for spinal cord injury are
also targeted to populations of less than 200,000 and, therefore, will be
pursued as orphan drugs.
Treatment IND is a mechanism established by the FDA in 1987 which
allows a company to distribute promising investigational therapies to patients
outside of the established clinical trials and to charge a reasonable fee for
such therapy. The disease must be serious or life- threatening and there must
not be satisfactory alternative treatments. Treatment IND status has been
applied to a variety of diseases including cancer, AIDS, Parkinson's disease,
Alzheimer's disease and multiple sclerosis and to several anti-infectives for
renal transplant patients. Diacrin intends to pursue this designation, where
appropriate.
In 1988, the FDA issued a rule to expedite the testing and approval
process for therapies which can treat life-threatening and severely debilitating
diseases. Recently, the FDA published a rule which expands this concept to
patients with chronic illnesses that are generally well managed by available
therapy but may have serious outcomes in some or all phases of the disease. The
Company believes that many of its potential therapies may be covered under this
rule, which accelerates the FDA approval process by reducing or eliminating the
need to conduct large, expanded (Phase 3) clinical studies prior to applying for
a marketing license (Subpart E regulation) and allowing the use of "surrogate
endpoints" in clinical trials (Subpart H regulation).
The Company is also 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, infectious disease agents and recombinant DNA materials used in
connection with the Company's research work.
Competition
The Company believes that its ability to compete successfully will be
based on its ability to create and maintain scientifically advanced technology,
develop proprietary products, attract and retain qualified scientific personnel,
obtain adequate financing, obtain patents, orphan drug designation or other
protection for its products, obtain required
<PAGE>
regulatory approvals and
manufacture and successfully market its products both independently and through
collaborators.
The biopharmaceutical 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.
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 the testing of pharmaceutical and other therapeutic products and
obtaining FDA and other regulatory approvals of products for use in health care.
Accordingly, the Company's competitors may succeed in obtaining FDA approval for
products more rapidly than the Company. If the Company commences significant
commercial sales of its products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has
limited or no experience.
The Company's products under development will compete with products and
therapies which are either currently available or currently under development.
Competition will be based, among other things, on efficacy, safety, reliability,
price, availability of reimbursement and patent position. The Company is aware
of other companies which are pursuing research and development of alternative
products or technologies addressing the same disease categories as Diacrin's
development programs.
Employees
As of January 31, 1998, the Company had 52 full-time employees, 39 of
whom were engaged in research, development, clinical and quality
assurance/quality control activities. No Company employees are represented by a
labor union or covered by a collective bargaining agreement.
Item 2. Properties
The Company leases a facility which contains approximately 28,000
square feet of space in Charlestown, Massachusetts. The lease has a ten-year
term ending in 2001, providing for a base rental rate of approximately $60,000
per month, plus applicable property taxes and insurance. The Company's
facilities are equipped with laboratory and cell culture capabilities sufficient
to satisfy the Company's research and development requirements for the
foreseeable future and cell isolation capabilities sufficient to satisfy the
clinical production requirements of several of its product candidates. To the
extent that additional similar facilities may be required, the Company will be
required to secure additional facilities or seek outside contractors to provide
such capabilities.
The Joint Venture is finalizing a sublease agreement ending in 2002
with Genzyme's Tissue Repair Division for approximately 15,000 square feet of
clinical production and support space for the production of the Joint Venture
Products. The sublease agreement provides for a minimum gross rental rate of
approximately $81,000 per month to be paid by the Joint Venture. These
facilities are equipped with cell isolation facilities which Diacrin believes
are sufficient to satisfy the clinical and initial commercial production
requirements of the Joint Venture Products. To the extent that additional
facilities are required for commercial production of the Joint Venture Products,
the Joint Venture will be required to secure additional facilities to provide
such capabilities.
<PAGE>
Item 3. Legal Proceedings
- --------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
fiscal year ended December 31, 1997.
Directors, Executive Officers and other Key Employees of the Registrant
The following table sets forth the names, ages and positions of the
directors, executive officers and other key employees of the Company as of March
31, 1998:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Thomas H. Fraser, Ph.D. (1) 50 President and Chief Executive Officer; Director
E. Michael Egan 45 Senior Vice President, Corporate Development
Mark J. Fitzpatrick 35 Vice President of Finance and Administration;
Chief Financial Officer and Treasurer
Albert S. B. Edge, Ph.D. 45 Senior Director of Molecular and Cellular
Biology
Jonathan H. Dinsmore, Ph.D. 36 Director of Cell Transplantation Research
Roger J. Gay, Ph.D. 44 Director of Process Development
Abdellah Sentissi, Ph.D. 48 Director of Quality Control and Quality
Assurance
Zola P. Horovitz, Ph.D. (1) 63 Director
John W. Littlechild (2) 46 Director
Stelios Papadopoulos, Ph.D. (1) (2) 49 Director
Joshua Ruch 48 Director
Henri A. Termeer (2) 52 Director
Christopher T. Walsh, Ph.D. 54 Director
- -------------------------------------------
(1) Member of Audit and Finance Committee
(2) Member of Compensation Committee
</TABLE>
<PAGE>
Thomas H. Fraser, Ph.D., has been President and Chief Executive Officer
and a member of the Board of Directors of the Company since 1990. He was
previously Executive Vice President, Corporate Development, for Repligen
Corporation ("Repligen"), a biopharmaceutical company. Dr. Fraser was the
founding Vice President for Research and Development at Repligen in 1981 and
served as Executive Vice President from 1982 through 1990 as well as Chief
Technical Officer from 1982 through 1988. Prior to joining Repligen, Dr. Fraser
headed the recombinant DNA research group in Pharmaceutical Research and
Development at The Upjohn Company, a pharmaceutical company. Dr. Fraser received
his Ph.D. in biochemistry from the Massachusetts Institute of Technology and was
a Damon Runyon-Walter Winchell Cancer Fund Postdoctoral Fellow at The University
of Colorado.
E. Michael Egan has been Senior Vice President, Corporate Development,
of the Company since June 1993. Mr. Egan joined Diacrin from Repligen, where he
was employed from 1983 to 1993, and since 1989 had been Vice President of
Business Development. He was also a member of the Board of Directors of Repligen
Clinical Partners, L.P., and the Secretary/Treasurer of Repligen Sandoz Research
Corporation. Mr. Egan's previous positions at Repligen include Director of
Business Development and Manager of Business Development. Prior to joining
Repligen in 1983, Mr. Egan was a laboratory supervisor at Dana-Farber Cancer
Institute, Division of Medicine. He received a B.S. in biology from Boston
College and a Certificate of Special Studies in Administration and Management
from Harvard University in 1986.
Mark J. Fitzpatrick has been Vice President of Finance and
Administration and Chief Financial Officer since November 1996, Director of
Finance and Administration from September 1992 to November 1996, Treasurer since
February 1992 and joined Diacrin as Controller in July 1991. From 1987 to 1991,
he was employed at Repligen, first as Accounting Manager and then as Manager of
Financial Analysis and Planning. From 1984 to 1987, he was a member of the
professional staff of Arthur Andersen & Co. Mr. Fitzpatrick received a B.S.
degree in accounting from Boston College and was awarded a CPA certificate from
the Commonwealth of Massachusetts in 1987.
Albert S.B. Edge, Ph.D., has been Senior Director of Molecular and
Cellular Biology since October 1994. He joined Diacrin in 1992 as Director of
Protein Chemistry and in 1993 became Director of Molecular and Cellular Biology.
Dr. Edge was previously Assistant Professor of Medicine at Harvard Medical
School and Investigator at the Joslin Diabetes Center. He has been Principal
Investigator on several grants from the NIH and was the recipient of a Career
Development Award from the Juvenile Diabetes Foundation from 1987 to 1990. He
was Mary K. Iacocca Fellow of the Joslin Diabetes Center in 1984 and after
appointment to the faculty was selected as Capps Scholar in Diabetes of Harvard
Medical School from 1985 to 1987. While a Postdoctoral Fellow in the Department
of Biological Chemistry at Harvard Medical School, Dr. Edge was awarded
Fellowships from the American Cancer Society and the NIH. He received his Ph.D.
in biochemistry from Albany Medical College where he was a Predoctoral Research
Fellow of the United States Public Health Service.
Jonathan H. Dinsmore, Ph.D., has been Director of Cell Transplantation
Research since December 1994. He joined Diacrin in 1992 as a Research Scientist
and was subsequently promoted to Principal Investigator. Dr. Dinsmore was
previously a Postdoctoral Fellow of the American Cancer Society in the Biology
department at the Massachusetts Institute of Technology from 1988 to 1992. He
received a Ph.D. in biology from Dartmouth College, where he was a Presidential
Scholar and recipient of a Kramer Fellowship. Dr. Dinsmore has worked on
National Science Foundation-sponsored
<PAGE>
research projects at the Marine Biological
Laboratories in Woods Hole, Massachusetts and at a United States research base
in Antarctica.
Roger J. Gay, Ph.D., has been Director of Process Development since
November 1993. From 1986 through 1993, he was Director of Product Development at
Organogenesis, Inc. Dr. Gay's previous positions were Manager of a Contract
Research and Cytotoxicity Testing Laboratory and Director of Product Development
at Bioassay Systems Research Corporation from 1982 to 1986. He received a B.A.
in chemistry from the College of the Holy Cross in 1975 and a Ph.D. in
biochemistry from the University of Rochester in 1981. From 1981 through 1983,
he was a postdoctoral research fellow in the Department of Microbiology and
Molecular Genetics at Harvard Medical School.
Abdellah Sentissi, Ph.D., has been Director of Quality Control and
Quality Assurance since October 1995. Prior to joining Diacrin, from 1992 to
1995, he served as the Director of QC/QA and Technical Affairs at Endocon, Inc.
From 1985 through 1992, he was the Chief of Quality Control at Massachusetts
Biologics Laboratories. He received a pharmacy degree in 1973 and a biology
degree in 1976 from the University of Paul Sabatier, Toulouse, France, and a
Ph.D. in biomedical sciences from Northeastern University in 1984. From 1984
through 1985, he was a postdoctoral research fellow in the Department of
Clinical Chemistry at Northeastern University. He has been a lecturer in
pharmaceutical biotechnology at the School of Pharmacy at Northeastern
University since 1990.
Zola P. Horovitz, Ph.D., has served as a Director of the Company since
May 1994. He was Vice President, Business Development and Planning at
Bristol-Myers Squibb Pharmaceutical Group from August 1991 until 1994 and was
Vice President, Licensing from 1989 to August 1991. Prior to 1989, Dr. Horovitz
spent 30 years as a member of the Squibb Institute for Medical Research, most
recently as Vice President, Research Planning. He is also director of Avigen
Inc., BioCryst Pharmaceuticals, Clinicor, Magainin Pharmaceuticals, Procept,
Inc., Roberts Pharmaceuticals and Synaptic Pharmaceuticals, Inc., biotechnology
companies. Dr. Horovitz received his Ph.D. from the University of Pittsburgh.
John W. Littlechild has been a Director of the Company since April 1992.
Mr. Littlechild is a general partner of HealthCare Partners II, L.P. ("HCPII"),
HealthCare Partners III, L.P. ("HCPIII") and HealthCare Partners IV, L.P.
("HCPIV"), the general partner, respectively, of HealthCare Ventures II, L.P.
("HCVII"), HealthCare Ventures III, L.P. ("HCVIII") and HealthCare Ventures IV,
L.P. ("HCVIV"), and a Vice Chairman of HealthCare Ventures LLC ("HCV"), a
venture management company that, among other things, provides management
services to HCVII, HCVIII and HCVIV. HCVII, HCVIII and HCVIV are principal
stockholders of the Company. From 1984 to 1991, Mr. Littlechild was a Senior
Vice President of Advent International Corporation, a venture capital company
("Advent") in Boston and London. Prior to working at Advent in Boston, Mr.
Littlechild was involved in establishing Advent in the United Kingdom. From 1980
to 1982, Mr. Littlechild served as Assistant Vice President for Citicorp Venture
Corporation, a venture capital company, in London, prior to which he worked with
ICI Ltd., an agro-chemical company, and Rank Xerox, an office equipment company,
in marketing and financial management. He holds a B.Sc. from the University of
Manchester and an MBA from Manchester Business School. Mr. Littlechild serves on
the boards of directors of various health care and biotechnology companies,
including Orthofix International N.V., a medical devices company, and LeukoSite,
Inc. and Virus Research Institute, Inc., biotechnology companies.
<PAGE>
Stelios Papadopoulos, Ph.D., has been a Director of the Company since
November 1991. He is a Managing Director and Head of the Health Care Investment
Banking Group at PaineWebber Incorporated ("PaineWebber"), which is engaged in
investment banking and securities brokerage. From 1986 until joining PaineWebber
in April 1987, Dr. Papadopoulos was a Vice President in equity research at
Drexel Burnham Lambert Incorporated, an investment banking firm. From 1985 to
1986, Dr. Papadopoulos was a biomedical technology analyst at Donaldson, Lufkin
and Jenrette Securities Corporation. Prior to that, Dr. Papadopoulos was a
member of the faculty of the Department of Cell Biology at New York University
Medical Center. Dr. Papadopoulos holds a Ph.D. in biophysics and an MBA in
finance, both from New York University.
Joshua Ruch has been a Director of the Company since March 1998. He is the
Chairman and Chief Executive Officer of Rho Management Company, Inc., which he
co-founded in 1981. Rho is an international investment management firm which
manages the capital of a number of very high net worth individuals. Prior to
founding Rho, Mr. Ruch was employed in investment banking at Salomon Brothers
and Bache Halsey Stuart, Inc. in New York City. Mr. Ruch received a B.Sc. degree
in electrical engineering from the Israel Institute of Technology (Technion) and
an M.B.A. from the Harvard Business School.
Henri A. Termeer has been a Director of the Company since December
1996. He has served as President and a Director of Genzyme since October 1983,
as Chief Executive Officer since December 1985 and as Chairman of the Board
since May 1988. For ten years prior to joining Genzyme, Mr. Termeer held various
management positions at Baxter Travenol Laboratories, Inc., a manufacturer of
human health care products. Mr. Termeer also serves on the boards of directors
of Abiomed, Inc., AutoImmune Inc., GelTex Pharmaceuticals Inc., Genzyme
Transgenics Corporation, all biotechnology companies and is a trustee of
Hambrecht & Quist Healthcare Investors and Hambrecht & Quist Life Sciences
Investors.
Christopher T. Walsh, Ph.D. has been a Director of the Company since April
1997. From 1992 to 1995, he served as President of the Dana-Farber Cancer
Institute. Since 1991, Dr. Walsh has served as Hamilton Kuhn Professor of
Biological Chemistry and Molecular Pharmacology at Harvard Medical School. From
1987 to 1995, he was Chairman of the Harvard Medical School Biological Chemistry
and Molecular Pharmacology Department. Dr. Walsh received his A.B. from Harvard
University and his Ph.D. in Life Sciences from Rockefeller University. He is
also director of LeukoSite, Inc., a biotechnology company.
Directors are elected annually by the stockholders of the Company and
hold office until the next annual meeting of stockholders or until their
resignation or removal. Executive officers of the Company are elected by the
Board of Directors on an annual basis and serve at the discretion of the Board
of Directors. There are no family relationships among any of the executive
officers or directors of the Company.
<PAGE>
Scientific Advisory Board
The Company's scientific advisory board (the "Scientific Advisory
Board") is a multi-disciplinary assemblage of scientists and physicians in the
fields of transplantation, immunology, endocrinology, neurophysiology and
neuromuscular physiology, transplantation biology and surgery. The Scientific
Advisory Board meets regularly to review and evaluate the Company's research
programs and advise the Company with respect to technical matters. The members
of the Scientific Advisory Board are as follows:
<TABLE>
<CAPTION>
Member
Name Since Position
<S> <C> <C>
Hugh Auchincloss, Jr., M.D. 1992 Associate Professor of Surgery, Harvard
Medical School; Director, Pancreas
Transplantation and Associate Visiting
Surgeon, Massachusetts General Hospital
Jay A. Berzofsky, M.D., Ph.D. 1992 Chief, Molecular Immunogenetics and Vaccine
Research Section, Metabolism Branch, NCI
Robert H. Brown, Jr., M.D., D.Phil. 1992 Director of Cecil B. Day Laboratory for
Muscular Research, Associate in Neurology,
Massachusetts General Hospital; Associate
Professor of Neurology, Harvard Medical School
Laurie H. Glimcher, M.D. 1993 Professor of Immunology, Department of Cancer
Biology, Harvard School of Public Health and
Professor of Medicine, Harvard Medical School
Ronald D. McKay, Ph.D. 1998 Chief, Laboratory of Molecular Biology,
National Institute of Neurological Disorders
and Stroke, National Institute of Health
David H. Sachs, M.D. 1990 Director, Transplantation Biology Research
Center, Massachusetts General Hospital; Paul
S. Russell/Warner-Lambert Professor of
Surgery (Immunology), Harvard Medical School
</TABLE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
- -----------------------------------------------------------------------------
The Company's Common Stock and Warrants have been traded on the
National Market tier of The Nasdaq Stock Market under the symbols DCRN and
DCRNW, respectively, since August 12, 1996. From February 13, 1996 (the date of
the Company's initial public offering) until August 12, 1996 (the date on which
the securities included in
<PAGE>
the Units, issued in the IPO, became separately
transferable), the Company's Units, which consisted of one share of Common Stock
and one Warrant to purchase one share of Common Stock traded on the National
Market tier of The Nasdaq Stock Market under the symbol DCRNZ. Prior to February
13, 1996, there was no established public trading market for any of the
Company's equity securities. The following table sets forth for the periods
indicated the high and low sale prices for the Units, Common Stock and Warrants
during 1996 and 1997 as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
--------------------------- --------------------------
<S> <C> <C>
Fiscal Year 1996
Units
First Quarter (from February 13, 1996) 12 1/2 8
Second Quarter 14 3/4 10
Third Quarter (until August 12, 1996) 12 5/8 9 1/4
Common Stock:
Third Quarter (from August 12, 1996) 10 1/2 7 1/4
Fourth Quarter 10 1/4 7 5/8
Warrants:
Third Quarter (from August 12, 1996) 3 1
Fourth Quarter 2 7/8 1 3/4
Fiscal Year 1997
Common Stock:
First Quarter 16 3/4 9 7/8
Second Quarter 14 8 1/2
Third Quarter 12 3/4 9
Fourth Quarter 14 8 3/4
Warrants
First Quarter 6 1/2 1 7/8
Second Quarter 5 1/4 2 1/4
Third Quarter 4 1/8 2 1/2
Fourth Quarter 3 7/8 1 3/4
</TABLE>
<PAGE>
As of February 4, 1998, there were approximately 3,100 holders of
record of the Company's Common Stock.
The Company has never declared or paid cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, for use in its
business and does not anticipate declaring or paying any cash dividends in the
foreseeable future.
The Company did not sell any equity securities during the quarter ended
December 31, 1997 that were not registered under the Securities Act.
The following information updates and supplements the information
regarding use of proceeds originally 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 December
31, 1997, the Company has used approximately $3,267,000 of the total net
proceeds from its initial public offering of $20,911,755. Of the $3,267,000
used, approximately $221,000 was used for the purchase of machinery and
equipment; approximately $189,000 was used for repayment of indebtedness; and
approximately $2,857,000 was used for working capital. The unused proceeds of
approximately $17,645,000 are in temporary investments consisting of corporate
notes, a U.S. government agency obligation, a money market mutual fund,
commercial paper and certificates of deposit. All proceeds used or invested were
direct or indirect payments to others.
Item 6. Selected Financial Data
The selected financial data set forth below as of December 31, 1996 and
1997 and for the three years in the period ended December 31, 1997 are derived
from the Company's financial statements which have been audited by Arthur
Andersen LLP, independent public accountants, and which are included elsewhere
in this Annual Report on Form 10-K. The selected financial data set forth below
as of December 31, 1993, 1994 and 1995 and for the years ended December 31, 1993
and 1994 are derived from the Company's financial statements which have been
audited by Arthur Andersen LLP and are not included herein. The data set forth
below should be read in conjunction with the Company's financial statements,
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Annual Report on
Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
REVENUES:
Research and development $ $ 152 $ 45 $ 1,144 $ 4,763
Interest income 371 203 245 1,100 1,302
---------- ---------- ---------- ---------- ----------
Total revenues 371 355 290 2,244 6,065
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Research and development 5,883 4,912 4,478 5,767 6,863
General and administrative 1,041 1,281 1,128 1,304 1,460
Interest expense 15 12 397 158 93
---------- ---------- ---------- ---------- ----------
Total operating expenses 6,939 6,205 6,003 7,229 8,416
---------- ---------- ---------- ---------- ----------
Net loss $ (6,568) $ (5,850) $ (5,713) $ (4,985) $ (2,351)
========== ========== ========== ========== ==========
Net loss per common share:
Basic and diluted (1) $ (21.51) $ (16.15) $ (15.07) $ (.44) $ (.18)
========== ========== ========== ========= =========
Pro forma (2) $ (.94) $ (.83) $ (.66) $ (.40)
========== ========== ========== =========
Shares used in computing net
loss per common share:
Basic and diluted (1) 305,392 362,161 379,131 11,389,823 13,235,286
========== ========= ========= ========== ==========
Pro forma (2) 6,998,513 7,055,282 8,721,567 12,479,198
========== ========= ========= ==========
<CAPTION>
December 31,
-----------------------------------------------------------------------
Balance Sheet Data: 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents
and investments $ 8,204 $ 2,752 $ 4,115 $ 23,482 $ 21,347
Working capital 7,285 1,603 2,753 12,413 9,551
Total assets 9,023 3,658 5,160 24,275 22,780
Long-term debt 303 493 7,550 370 672
Stockholders' equity (deficit) 7,687 1,840 (3,864) 22,437 20,204
- ---------------------------------------
(1) Computed as described in Note 2 (e) of Notes to Financial Statements.
(2) Pro forma net loss per common share assumes all series of convertible
preferred stock and convertible notes payable had been converted to common
stock as of the original issuance dates using the as-converted method.
</TABLE>
Item 7. 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, since October 1, 1996, the Company has
received funding from the Joint Venture with Genzyme in support of the
NeuroCell(TM)-PD and NeuroCell(TM)-HD product
<PAGE>
development programs. 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 increasing operating losses for at least the
next several years. At December 31, 1997, the Company had an accumulated deficit
of $34.7 million.
In September 1996, the Company and Genzyme formed the Joint Venture to
develop and commercialize NeuroCell(TM)-PD and NeuroCell(TM)-HD. In connection
with the formation of the Joint Venture, the Company granted an exclusive right
and license to the patent rights and technology relating to the Joint Venture
Products. This right and license was considered to be the Company's initial
capital contribution to the Joint Venture. The Company has a 50% ownership
interest in the Joint Venture. Under the terms, and subject to certain
conditions, of the joint venture agreement, which was effective October 1, 1996,
Genzyme has agreed to provide 100% of the first $10 million in funding and 75%
of the following $40 million in funding for the development and
commercialization of the Joint Venture Products. The Company agreed to provide
the remaining 25% of the following $40 million in funding. All costs incurred in
excess of $50 million are to be shared equally between Genzyme and the Company
in accordance with the terms of the agreement. The Joint Venture plans that
Diacrin and Genzyme will perform, on behalf of the Joint Venuture, the
development activities in connection with the Joint Venture Products and that
Genzyme will market and sell the Joint Venture Products on a cost reimbursement
basis on behalf of the Joint Venture.
The Joint Venture is governed by a six-member Steering Committee comprised
of Dr. Fraser and Messrs. Egan and Fitzpatrick, executive officers of the
Company, and three employees of Genzyme. The Steering Committee meets regularly
and makes all of the decisions with respect to the Joint Venture's work plans
and budgets. The Steering Committee has appointed a program manager from each
organization to execute the agreed upon product development work plans. The
Joint Venture has no employees. All product development work is performed on its
behalf by Genzyme and the Company as approved by the Steering Committee.
For 1996 and 1997, the Company expensed all research and development costs
related to the Joint Venture Products incurred by it on behalf of the Joint
Venture and recognized an equal amount of research and development revenue due
to the fact that costs incurred were funded by the Joint Venture exclusively out
of contributions made to it by Genzyme. Through December 31, 1997, Genzyme made
100% of the total cash contributions to the Joint Venture on a monthly basis, in
advance. Beginning in the first quarter of 1998, the Company will be required,
in accordance with the terms of the joint venture agreement, to begin making
cash contributions to the Joint Venture equal to 25% of the Joint Venture's
funding requirements on a monthly basis, in advance. The Joint Venture's funding
requirements are determined on a monthly basis by the Company and Genzyme and
are met through monthly contributions from both parties in percentages
prescribed by the terms of the joint venture agreement. To the extent the
Company's contributed funds are used to fund expenses incurred by Genzyme on
behalf of the Joint Venture, the Company will recognize an expense in its
statement of operations captioned "equity in operations of the Joint Venture."
Furthermore, to the extent the Company's contributed funds are used to fund
expenses incurred by the Company on behalf of the Joint Venture, the Company
will reduce the research and development revenue recognized by it from the Joint
Venture by an amount equal to the Company-funded portion of such expenses.
Any profits of the Joint Venture are to be shared equally by Genzyme and
the Company. Losses of the Joint Venture are allocated to each party in
proportion to the funding provided by each party. Through December 31, 1997 all
Joint Venture losses were allocated to Genzyme as it provided 100% of the Joint
Venture funding.
Results of Operations
Year Ended December 31, 1997 Versus Year Ended December 31, 1996
Research and development revenues were approximately $4.8
million for the year ended December 31, 1997 and were comprised entirely of
revenue from the Joint Venture. Research and development revenues of $1.1
million for the year ended December 31, 1996 were comprised of $1.0 million in
revenue received from the Joint Venture and $100,000 received under a research
grant.
Interest income was $1.3 million for the year ended December 31, 1997
versus $1.1 million for the year ended December 31, 1996. The 18% increase was
primarily due to additional interest income realized on higher cash balances
available for investment.
Research and development expenses were $6.9 million for the year ended
December 31, 1997 versus $5.8 million for the year ended December 31, 1996.
Almost half of the 19% increase in research and development expenses was due to
increases in staffing. The increase in staffing was primarily due to additional
clinical affairs personnel necessary to support the clinical trials of the Joint
Venture Products and, to a lesser extent, to additional quality
control/assurance personnel necessary to support expanded clinical production
facilities completed during 1997. Research personnel was also increased to
expand the Company's preclinical research program efforts. A smaller portion of
the
<PAGE>
increase in research and development expenses between years was due to costs
incurred in 1997 in the validation and operation of clinical production
facilities completed during 1997. In addition, the Company expensed
approximately $230,000 during 1997 for the development and conduct of PERV
tests.
General and administrative expenses were $1.5 million for the year
ended December 31, 1997 versus $1.3 million for the year ended December 31,
1996. The 12% increase was primarily due to an increase in administrative
personnel as well as increased costs of shareholder relations.
Interest expense was $93,000 for the year ended December 31, 1997
versus $158,000 for the year ended December 31, 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 $2.4 million for the
year ended December 31, 1997 versus a net loss of approximately $5.0 million for
the year ended December 31, 1996.
Year Ended December 31, 1996 Versus Year Ended December 31, 1995
Research and development revenues were $1.1 million for the year ended
December 31, 1996 versus $45,000 for the year ended December 31, 1995. The 1996
increase was due to approximately $1.0 million of revenue earned in the fourth
quarter of 1996 under the Joint Venture agreement with Genzyme.
Interest income was $1.1 million for the year ended December 31, 1996
versus $245,000 for the year ended December 31, 1995. The increase was primarily
due to additional interest income earned on substantially higher cash balances
available for investment primarily as a result of the Company's initial public
offering.
Research and development expenses were $5.8 million for the year ended
December 31, 1996 versus $4.5 million for the year ended December 31, 1995.
Approximately two thirds of the 29% increase in research and development
expenses was due to an increase in the external costs of conducting Phase 1
human clinical trials of the NeuroCell(TM)-PD and NeuroCell(TM)-HD product
candidates. To a lesser extent, the increase in research and development
expenses between years was due to additional quality control and clinical
affairs staffing necessary to support these trials.
General and administrative expenses were $1.3 million for the year
ended December 31, 1996 versus $1.1 million for the year ended December 31,
1995. The 16% increase was primarily due to increased costs of shareholder
relations, professional fees and insurance expense since the Company completed
its initial public offering in February 1996, as well as professional fees
incurred in 1996 in connection with establishing the Joint Venture between the
Company and Genzyme.
Interest expense was $158,000 for the year ended December 31, 1996
versus $397,000 for the year ended December 31, 1995. The 60% decrease was
primarily attributable to the conversion of the Company's $7.0 million of
Convertible Notes, issued in May 1995, to common stock upon the closing of the
Company's initial public offering.
The Company incurred a net loss of approximately $5.0 million for the
year ended December 31, 1996 versus a net loss of approximately $5.7 million for
the year ended
<PAGE>
December 31, 1995.
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; with the net proceeds of approximately $9.45 million from
the Company's private placement of common stock completed in February 1998; and
with the interest earned thereon. In addition, the Company has recorded
approximately $5.8 million of revenue from the Joint Venture since it commenced
on October 1, 1996. At December 31, 1997, the Company had cash and cash
equivalents, short-term investments and long-term investments aggregating
approximately $21.3 million.
The Company purchased approximately $2.2 million of capital equipment since
inception. In November 1997, the Company borrowed $650,000 at the Prime Rate
+.5% under an unsecured five-year term loan with a bank to finance production
equipment acquired during 1997. 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 December 31, 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 developed by the Joint Venture. Both Genzyme and Diacrin are responsible
for funding the Joint Venture in accordance with the terms, and subject to the
conditions, of the joint venture agreement. Genzyme agreed to fund 100% of the
first $10 million of development and commercialization costs incurred after
October 1, 1996, 75% of the next $40 million and 50% of all remaining
development and commercialization costs in excess of $50 million. 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 December 31, 1997, Genzyme has contributed
approximately $8.7 million to the Joint Venture. The Company's obligation to
fund 25% of the program costs will commence in the first quarter of 1998. The
Company expects that the Joint Venture's 1998 product development plans together
with the Company's commencement of funding of the Joint Venture will
significantly increase the Company's net loss and cash and investments used in
1998 as compared with 1997.
The Company believes that its existing funds, together with expected
future funding under the Joint Venture agreement with Genzyme, will be
sufficient to fund its operating expenses and capital requirements as currently
planned through at least mid-2000. 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.
The Company expects to incur substantial additional costs, including
costs related
<PAGE>
to ongoing research and development activities, preclinical
studies, clinical trials, establish-ing 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.
The Company is in the process of completing its assessment of Year 2000
issues and their potential impact on its information systems and computer
technologies. Based on its assessment to date, expenses related to Year 2000
issues are expected to be immaterial. Year 2000 issues are not expected to have
a significant impact on the Company's ongoing results of operations.
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 Annual Report on Form 10-K 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.
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.
<PAGE>
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."
Reliance on Cell Transplantation Technology; No Currently Approved
Xenotransplantation-Based Products; PERV Testing
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.
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 may be unintentionally transmitted to a human patient.
The Company has been required by the FDA to perform certain tests to determine
whether PERV is present in patients that have received porcine cells. These
tests have been performed on samples from patients who have received
NeuroCell(TM)-PD and no PERV was detected in these samples. The Company has also
been required by the FDA to perform additional tests on porcine neural cells to
determine if infectious PERV is present. These tests have been performed and no
PERV was detected. The Company has been required by the FDA to develop an
additional test for the detection of PERV and has been instructed to routinely
monitor patient blood samples for the presence of PERV. If PERV is detected in
this test or samples, additional tests may be required to assess the risk to
patients of PERV infection. If such additional tests are required, trials of the
Company's porcine cell products may be delayed. While PERV has not been shown to
cause any disease in pigs, it is not known what effect, if any, PERV may have on
human beings. The Company's porcine cell product development programs would be
negatively impacted by the detection of infectious PERV in porcine cells or
clinical trial subjects. An inability to proceed with further trials or a
substantial delay in the clinical trials would 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 payers or that the degree of acceptance will not limit
the size of the market for such products.
<PAGE>
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 December
31, 1997 of approximately $34.7 million, and losses are continuing. The Company
expects to incur substantial operating losses for the foreseeable future. The
Company expects that the Joint Venture's 1998 product development plans together
with the Company's commencement of funding of the Joint Venture will
significantly increase the Company's net loss in 1998 as compared with 1997. 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.
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.
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, NeuroCell(TM)-HD
and NeuroCell(TM)-FE to an aggregate of 25 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
<PAGE>
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 or BLA 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 product is obtained, such approval may be
conditioned upon limitations and restrictions on the product use. In addition,
any marketed product 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 civil 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.
<PAGE>
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,
<PAGE>
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.
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 payers 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
<PAGE>
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.
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.
Item 8. Financial Statements
- ----------------------------
All financial statements required to be filed hereunder are filed as an
exhibit hereto, are listed under item 14(a)(1) and are incorporated herein by
reference.
<PAGE>
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
- ----------------------------------------------------------------------------
There have been no disagreements on accounting and financial
disclosure matters.
PART III
Item 10. Directors and Executive Officers of the Registrant
A. Directors
Information regarding directors of the Company is furnished in Part I
of this Annual Report on Form 10-K under the heading, "Executive Officers of the
Registrant."
B. Executive Officers of the Company
Information regarding executive officers of the Company is furnished in
Part I of this Annual Report on Form 10-K under the heading, "Executive Officers
of the Registrant."
C. Section 16(a) Benefical Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and persons who own more
than ten percent of a registered class of the Company's equity securities to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company. Officers, directors and greater than ten percent beneficial
owners are required to furnish the Company with copies of all Section 16(a)
forms that they file.
To the Company's knowledge, based on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to the
Company's officers, directors and greater than ten percent beneficial owners
with respect to the fiscal year ended December 31, 1997 were complied with.
<PAGE>
Item 11. Executive Compensation
A. Summary Compensation Table
The following table sets forth certain information with respect to the annual
and long-term compensation for each of the last three fiscal years of the
Company's Chief Executive Officer and the three other persons who served as
executive officers of the Company during 1997 (the "Named Officers"):
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation (1)
Awards
----------------------- ------------------------
Name and Securities Underlying
Principal Position Year Salary($)(2) Bonus($)(3) Options/SARS(#)
<S> <C> <C> <C> <C>
Thomas H. Fraser 1997 $ 240,000 $ 45,000 50,000(4)
President and Chief 1996 230,400 55,000 -
Executive Officer 1995 220,500 50,000 25,000
E. Michael Egan 1997 170,000 30,000 20,000
Senior Vice President 1996 150,000 36,000 20,000
of Corporate Development 1995 140,000 28,000 30,000
Mark J. Fitzpatrick (5) 1997 100,000 11,000 15,000
Vice President of Finance 1996 89,183 15,000 15,000
and Administration and
Chief Financial Officer
J. Stephen Fink (6) 1997 157,668 9,000 -
Former Vice President and 1996 111,103 32,000(7) 100,000
Clinical Research Director
- -----------------------------
(1) The Company does not have a long-term compensation program that
includes long-term incentive payouts. No restricted stock awards or
stock appreciation rights were granted to any of the Named Officers
during fiscal 1997.
(2) Amounts shown include cash compensation earned and received by the Named Officers as well as amounts earned but
deferred at the election of these officers to the Company's 401(k) Plan.
(3) Amounts in this column represent bonuses paid or accrued under the annual management bonus plan.
(4) Amount includes 20,000 options granted in 1997 in recognition of fiscal 1996 performance.
(5) Mr. Fitzpatrick became an executive officer of the Company in November 1996.
(6) Dr. Fink served as an executive officer from April 1996 until November 1997.
(7) Includes a signing bonus of $15,000 and an annual management bonus of $17,000.
</TABLE>
<PAGE>
B. Option Grants Table
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1997 to the Named Officers:
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------
Number of
Securities Percent of Potential Realizable Value
Underlying Total Options at Assumed Annual Rates of
Options Granted to Exercise or Stock Price Appreciation for
Granted (#) Employees in Base Price Expiration Option Term (2)
------------------------------
Name (1) Fiscal Year ($/Sh) Date 5% ($) 10% ($)_
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Fraser 20,000 10% $ 12.00 3/17/07 $150,934 $382,498
30,000 15% 10.75 12/17/07 202,818 513,982
E. Michael Egan 20,000 10% 10.75 12/17/07 135,212 342,655
Mark J. Fitzpatrick 15,000 8% 10.75 12/17/07 101,409 256,991
J. Stephen Fink 0 - - - - -
(1) No stock appreciation rights were granted during fiscal 1997. Options
granted in 1997 become exercisable in four equal annual installments,
commencing 12 months after the date of grant.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. Actual gains, if any, on stock option exercises will
depend on the future performance of the Common Stock and the date on which
the options are exercised.
</TABLE>
C. Aggregated Option Exercises and Year-End Option Table
The following table sets forth certain information regarding aggregate
option excercises during the fiscal year ended December 31, 1997 and the number
and value of unexercised stock options held as of December 31, 1997 by the Named
Officers:
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options at
at FY-End (#) FY-End ($) (2)
---
----------------------- ----------------------------
Shares Value Exercisable/ Exercisable/
Name Acquired on --------------- Unexercisable Unexercisable
Exercise (#) Realized ($)(1)
- --------------------- ---------------- ----------------------- ----------------------------
<S> <C> <C> <C> <C>
Thomas H. Fraser - $ - 105,293 / 57,500 $839,215 / $109,062
E. Michael Egan - - 102,495 / 50,000 850,519 / 159,000
Mark J. Fitzpatrick 15,200 185,381 20,917 / 32,500 154,214 / 75,624
J. Stephen Fink - - 25,000 / 0 15,625 / 0
(1) Represents the difference between the exercise price and the value of the
Common Stock on the date of exercise.
(2) Based on the value of the Common Stock on December 31, 1997 ($10.125 per
share), less the option exercise price.
</TABLE>
D. Employment Agreement
Dr. Fraser has entered into an employment agreement with the Company,
dated February 6, 1990, providing for an annual salary plus bonus as determined
by the Board of
<PAGE>
Directors. The Company has agreed with Dr. Fraser to continue to
pay his then current salary for a period of six months if his employment is
terminated without cause by the Company. Dr. Fraser has also agreed not to
compete with the Company for one year following termination of his employment.
At the Company's election, this non-competition provision can be extended for an
additional two-year period upon the payment of additional consideration.
E. Directors' Compensation
Drs. Horovitz and Walsh each receive $2,000 plus expenses per board
meeting attended plus an additional $4,000 annually for consultative work
performed. No other directors receive any cash compensation for services on the
Board of Directors.
In 1994, the Board of Directors of the Company adopted, and the
stockholders approved, the 1994 Directors' Stock Option Plan (the "Director
Plan"), authorizing the grant of options to purchase up to 30,000 shares of
Common Stock. The Director Plan, as amended to date, provides for the grant to
certain non-employee directors of the Company, upon his or her initial election
as a director, of an option to purchase shares of Common Stock at an exercise
price equal to the fair market value on the date of grant. Each option granted
under the Director Plan may be exercised on a cumulative basis as to 25% of the
shares on the first anniversary of the date of grant and an additional 25% at
the end of each one-year period thereafter.
On April 17, 1997, Dr. Walsh was granted an option to purchase 13,125
shares of Common Stock under the Director Plan and an option to purchase 1,875
shares of Common Stock under the 1990 Stock Option Plan, each at an exercise
price of $11.375 per share. Both option grants may be exercised on a cumulative
basis as to 25% of the shares on the first anniversary of the date of grant and
an additional 25% at the end of each one-year period thereafter.
No additional option grants are expected to be made under the Director
Plan.
<PAGE>
Item 12. Security Ownership of Certain Benefical Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of March 31, 1998 by (i) each director
or nominee for director of the Company, (ii) each executive officer of the
Company named in the Summary Compensation Table set forth under the caption
"Executive Compensation" below, (iii) all current directors and executive
officers as a group and (iv) each person known to the Company to be the
beneficial owner of more than 5% of the shares outstanding.
<TABLE>
<CAPTION>
Number of Shares Percentage of Outstanding
Beneficially Shares (2)
Name and Address Owned (1)
<S> <C> <C>
HealthCare Ventures II, L.P. 3,196,385(3) 22.4%
44 Nassau Street
Princeton, NJ 08542
HealthCare Ventures III, L.P. 994,078(3) 7.0%
44 Nassau Street
Princeton, NJ 08542
HealthCare Ventures IV, L.P. 291,922(3) 2.0%
44 Nassau Street
Princeton, NJ 08542
Rho Management Trust II 1,612,887(4) 11.3%
c/o Rho Management Company, Inc.
767 Fifth Avenue
New York, NY 10153
Hudson Trust 1,342,680 (5) 9.4%
c/o Summit Asset Management Co., Inc.
666 Plainsboro Road
Suite 445
Plainsboro, NJ 08536
State of Wisconsin Investment Board 1,285,000(6) 8.6%
P. O. Box 7842
Madison, WI 53707
Thomas H. Fraser, Ph.D. 583,988(7) 4.1%
Zola P. Horovitz, Ph.D. 13,375(8) *
John W. Littlechild 4,482,385(3) 31.3%
Stelios Papadopoulos, Ph.D. 54,500 *
Joshua Ruch 1,667,387(9) 11.7%
Henri A. Termeer 29,000(10) *
Christopher T. Walsh, Ph.D. 3,750(11) *
E. Michael Egan 106,664(12) *
Mark J. Fitzpatrick 23,117(13) *
All directors and executive 6,964,166(14) 47.8%
officers as a group (9 persons)
- ----------------------------------------------------------
- ----------------------------------------------------------
* Less than 1%
<PAGE>
(1) The inclusion herein of any shares as beneficially owned does not
constitute an admission of beneficial ownership of those shares. Unless
otherwise indicated below, the persons in the above table have sole voting
and investment power with respect to all shares beneficially owned by them.
(2) Number of shares deemed outstanding for purposes of calculating these
percentages includes 14,298,908 shares outstanding as of March 31, 1998,
plus any shares subject to options or warrants held by the person or entity
in question that are currently exercisable or exercisable within 60 days
after March 31, 1998.
(3) John W. Littlechild is a general partner of HealthCare Partners II, L.P.
("HCPII"), HealthCare Partners III, L.P. ("HCPIII") and HealthCare Partners
IV, L.P. ("HCPIV"), the general partner of HealthCare Ventures II, L.P.
("HCVII"), HealthCare Ventures III, L.P. ("HCVIII") and HealthCare Ventures
IV, L.P. ("HCVIV"), respectively. Mr. Littlechild, together with James H.
Cavanaugh, Harold R. Werner and William Crouse, the other general partners
of HCPII, share voting and investment control with respect to shares owned
by HCVII. Mr. Littlechild, together with Dr. Cavanaugh, Messrs. Werner and
Crouse and Mark Leschly, the other general partners of HCPIII and HCPIV,
share voting and investment control with respect to shares owned by HCVIII
and HCVIV, respectively. Mr. Littlechild does not own any shares of the
Company's capital stock in his individual capacity.
(4) Rho Management Partners L.P. may be deemed the beneficial owner of such
shares pursuant to an investment advisory agreement that confers sole
voting and investment control over such shares to Rho Management Partners
L.P.
(5) Mr. B. Diethelm Honer may be deemed to (i) beneficially own the shares held
by Hudson Trust ("Hudson"), (ii) retain voting and dispositive rights for
these shares, and (iii) retain the right to revoke these shares from
Hudson.
(6) Includes Common Stock Purchase Warrants originally issued on February 12,
1996 ("Public Offering Warrants") to purchase 650,000 shares of Common
Stock.
(7) Includes 105,293 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of March 31, 1998.
Includes Public Offering Warrants to purchase 12,500 shares of Common
Stock.
(8) Includes 9,375 shares of Common Stock issuable upon exercise of outstanding
stock options exercisable within 60 days of March 31, 1998.
(9) Mr. Ruch is a controlling person of Rho Management Partners, L.P. and may
be deemed the beneficial owner of the shares held by Rho Management Trust
II. In addition, Mr. Ruch exercises investment and voting authority over
54,500 shares directly for his own account or for the account of family
members.
(10) Includes 16,250 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of March 31, 1998.
Includes Public Offering Warrants to purchase 5,000 shares of Common Stock.
(11) Includes 3,750 shares of Common Stock issuable upon exercise of outstanding
stock options exercisable within 60 days of March 31, 1998.
(12) Includes 102,495 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of March 31, 1998.
<PAGE>
(13) Includes 20,917 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of March 31, 1998.
Includes Public Offering Warrants to purchase 2,000 shares of Common Stock.
(14) Includes 258,080 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days of March 31, 1998.
Includes Public Offering Warrants to purchase 19,500 shares of Common
Stock.
</TABLE>
Item 13. Certain Relationships and Related Transactions
HCVII, HCVIII and HCVIV owned 22.4%, 7.0% and 2.0% of the outstanding
capital stock of the Company as of March 31, 1998, respectively. HCVII, HCVIII
and HCVIV are limited partnerships which were formed to provide capital to
companies in the health care fields. HCPII, HCPIII and HCPIV are limited
partnerships which serve as the general partner of HCVII, HCVIII and HCVIV,
respectively. John Littlechild, a director of the Company, is a general partner
of HCPII, HCPIII and HCPIV and is Vice Chairman of HealthCare Ventures LLC, the
management company for HCVII, HCVIII and HCVIV. Mr. Littlechild is an officer of
HCV. See "Security Ownership of Certain Beneficial Owners and Management."
Rho Management Trust II ("Rho") which owned 11.3% of the outstanding
capital stock of the Company as of March 31, 1998, also holds approximately
18.9% and 54.3% of the outstanding limited partnership interests in HCVII and
HCVIV, respectively. An affiliate of Rho is also a limited partner of HCPII,
HCPIII and HCPIV. Joshua Ruch, director of the Company, is a controlling person
of Rho. See "Security Ownership of Certain Beneficial Owners and Management."
Hudson, which owned 9.4% of the outstanding capital stock of the
Company as of March 31, 1998, also holds approximately 6.0% and 11.9% of the
outstanding limited partnership interests in HCVII and HCVIV, respectively.
Hudson is also a limited partner of HCPII.
In February 1998, the Company completed a private placement of 1,027,027
shares of its common stock at $9.25 per share to three investors, including Rho
and Hudson.
In September 1996, the Company and Genzyme Corporation formed a joint
venture to develop and commercialize the Company's NeuroCell(TM)-PD and
NeuroCell(TM)-HD products for transplantation into patients with advanced
Parkinson's disease and Huntington's disease, respectively. Under the terms, and
subject to certain conditions, of the joint venture agreement, which was
effective October 1, 1996, Genzyme has agreed to provide 100% of the first $10
million in funding and 75% of the following $40 million in funding for the
development and commercialization of the two products. All costs incurred in
excess of $50 million are to be shared equally between Genzyme and the Company
in accordance with the terms of the agreement. Any profits of the joint venture
will be shared equally by the two parties. Mr. Termeer, a director of the
Company, is the President, Chief Executive Officer and Chairman of the Board of
Genzyme. During 1997, the Company recognized revenues of approximately
$4,763,000 from the joint venture, constituting all of the Company's research
and development revenues. Revenues recognized from the joint venture and funded
by Genzyme in accordance with the terms of the joint venture agreement are
currently expected to represent a substantial majority of the Company's revenues
in 1998.
<PAGE>
45
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a) (1) Index to Financial Statements
<TABLE>
<CAPTION>
The following Financial Statements are included in this Annual Report on
Form 10-K.
Financial Statements: Page
<S> <C>
1. Report of Independent Public Accountants F-1
2. Balance Sheets as of December 31, 1996 and 1997 F-2
3. Statements of Operations for the three years in the period ended
December 31, 1997 F-3
4. Statements of Stockholders' Equity (Deficit) for the three
years in the period ended December 31, 1997 F-4
5. Statements of Cash Flow for the three years in the period ended December
31, 1997 F-5
6. Notes to Financial Statements F-6
(2) Exhibits
<CAPTION>
The following is a list of exhibits filed as part of this Annual Report
on Form 10-K:
Exhibit No. Title Page
- ----------------- --- ------------------------------------------------------------------------ -------------
<S> <C> <C>
3.1 - Amended and Restated Certificate of Incorporation of the Company as
amended to date (7)
3.2 - Amended and Restated By-laws of the Company (6)
+10.1 - Research and License Agreement effective as of October 1, 1989 by and
among the Company and The General Hospital Corporation, as amended
effective as of February 1, 1991 (2)
++10.2 - Employment Agreement dated February 6, 1990 by and between the Company
and Dr. Thomas H. Fraser (2)
10.3 - Rights Agreement dated July 29, 1991 by and among the Company and the
holders of the preferred stock as amended on September 27, 1991 (2)
10.3(a) - Consent and Agreement to Amend dated April 26, 1995 by and among the
Registrant and certain investors named therein (1)
<PAGE>
Exhibit No. Title Page
- ----------------- --- ------------------------------------------------------------------------ -------------
10.3(b) - Consent and Agreement to Amend dated as of January 4, 1996 by and
among the Registrant and certain investors named therein (6)
10.4 - Warrant Agreement dated November 14, 1991 by and between Diacrin, Inc.
and American Stock Transfer & Trust Company, as Warrant Agent (2)
10.4(a) - Supplement No. 1 to Warrant Agreement dated November 14, 1991, dated
April 24, 1995, by and between the Registrant and American Stock
Transfer & Trust Company, as Warrant Agent (1)
++10.5 - 1990 Stock Option Plan, as amended (3)
10.6 - Sublease dated January 24, 1991 by and among the Company and Building
79 Associated Limited Partnership and Building 96 Associates Limited
Partnership (2)
+10.7 - Letter Agreement dated December 10, 1993 between the Company and The
General Hospital Corporation (4)
++10.8 - 1994 Directors' Stock Option Plan, as amended (9)
10.9 - Master Lease Agreement, dated December 22, 1994, between the Company
and Aberlyn Capital Management Limited Partnership (5)
10.10 - Agreement to Issue Warrant between the Company and Aberlyn Capital
Management Limited Partnership dated December 22, 1994, including
Common Stock Purchase Warrant and Registration Rights Agreement (5)
10.10(a) - Waiver and Consent Agreement dated April 24, 1995 by and
between the Registrant and Aberlyn Capital Management
Limited Partnership (1)
10.11 - Registration Rights Agreements dated May 31, 1995 by and among the
Registrant and the investors listed on Schedules I and II attached
thereto (1)
10.11(a) - Amendment No. 1 to Registration Rights Agreement dated as of January
4, 1996 by and among the Registrant and certain investors named therein (6)
10.12 - Unit and Warrant Agreement dated February 12, 1996 by
and between the Registrant and American Stock Transfer &
Trust Company (7)
<PAGE>
Exhibit No. Title Page
- ----------------- --- ------------------------------------------------------------------------ -------------
+10.13 - Collaboration Agreement among Diacrin, Inc., Genzyme Corporation and
Diacrin/Genzyme, LLC dated as of October 1, 1996 (8)
+10.14 - Operating Agreement of Diacrin/Genzyme LLC (8)
++10.15 - 1997 Stock Option Plan (10)
10.16 - $650,000 Promissory Note dated November 25, 1997 made by the
Registrant to the order of Fleet National Bank *
10.16(a) - Letter Agreement dated November 25, 1997 by and between the Registrant
and Fleet National Bank *
21 - Subsidiaries - None *
23 - Consent of Arthur Andersen LLP **
27.1 - Financial Data Schedule for the year ended December 31, 1997 *
27.2 - Financial Data Schedule for the year ended December 31, 1996 *
</TABLE>
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed by the Company during the
last quarter of the period covered by this report.
(c) Description of Exhibits.
See Item 14 (a)
<PAGE>
(d) Description of Financial Statement Schedules.
None.
- --------------------------------------------------------------------------------
* Previously Filed
** Filed herewith
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File
No. 0-20139) for the quarter ended June 30, 1995 and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's Form 10, as amended (File No.
0-20139), on April 29, 1992, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File
No. 0-20139) for the quarter ended September 30, 1994 and incorporated
herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-20139) for the fiscal year ended December 31, 1993 and incorporated
herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-20139), for the fiscal year ended December 31, 1994 and incorporated
herein by reference.
(6) Filed as an exhibit to the Company's Registration Statement on Form S-2, as
amended (Registration No. 33-80773) on December 22, 1995, and incorporated
herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-20139) for the fiscal year ended December 31, 1995 and incorporated
herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q, as
amended on Form 10-Q/A (File No. 0-20139) for the quarter ended September
30, 1996 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-20139) for the fiscal year ended December 31, 1996 and incorporated
herein by reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File
No. 0-20139) for the quarter ended June 30, 1997 and incorporated herein by
reference.
+Confidential treatment granted as to certain portions of this exhibit.
++Management contract or compensatory plan or arrangement filed as an exhibit to
this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Form 10-K/A to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIACRIN, INC.
By: /s/ Thomas H. Fraser
Thomas H. Fraser
President and
Chief Executive Officer
Date: May 8, 1998
<PAGE>
F-1
Report of Independent Public Accountants
To Diacrin, Inc.:
We have audited the accompanying balance sheets of Diacrin, Inc. (a
Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Diacrin, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 14, 1998
<PAGE>
DIACRIN, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,308,710 $ 5,015,777
Short-term investments 6,255,507 6,000,098
Interest receivable and other current assets 316,107 438,756
------------ ------------
Total current assets 13,880,324 11,454,631
------------ ------------
Property and equipment, at cost:
Laboratory and manufacturing equipment 101,738 839,856
Equipment under capital leases 675,262 675,262
Furniture and office equipment 224,920 277,109
Leasehold improvements 51,424 55,557
------------ ------------
1,053,344 1,847,784
Less - Accumulated depreciation and amortization 576,725 853,911
------------ ------------
476,619 993,873
------------ ------------
Long-term investments 9,917,875 10,331,289
------------ ------------
$ 24,274,818 $ 22,779,793
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 162,058 $ 185,306
Accrued expenses 506,949 994,166
Deferred revenue 618,844 387,056
Current portion of long-term debt 179,452 337,171
------------ ------------
Total current liabilities 1,467,303 1,903,699
------------ ------------
Long-term debt 370,431 672,426
------------ ------------
Commitments (Notes 7 and 11)
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 and
13,268,256 shares at December 31, 1996 and 1997,
respectively 131,896 132,683
Additional paid-in capital 54,613,512 54,730,773
Accumulated deficit (32,308,324) (34,659,788)
------------ ------------
Total stockholders' equity 22,437,084 20,203,668
------------ ------------
$ 24,274,818 $ 22,779,793
============ ============
See Accompanying Notes to Financial Statements
</TABLE>
F-2
<PAGE>
DIACRIN, INC.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Research and development $ 44,832 $ 1,143,787 $ 4,763,270
Interest income 245,648 1,099,828 1,301,477
------------ ------------ ------------
Total revenues 290,480 2,243,615 6,064,747
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 4,478,114 5,766,528 6,862,528
General and administrative 1,128,359 1,303,731 1,460,403
Interest expense 396,724 158,155 93,280
------------ ------------ ------------
Total operating expenses 6,003,197 7,228,414 8,416,211
------------ ------------ ------------
NET LOSS $ (5,712,717) $ (4,984,799) $ (2,351,464)
============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (15.07) $ (.44) $ (.18)
============ ============ ============
SHARES USED IN COMPUTING BASIC
AND DILUTED NET LOSS PER COMMON SHARE 379,131 11,389,823 13,235,286
============ =========== ============
</TABLE>
F - 3
See Accompanying Notes to Financial Statements
<PAGE>
DIACRIN, INC.
Statement of Stockholders' Equity (Deficit)
<TABLE>
Convertible Preferred Stock
----------------------------------------------------------
Series A Series B Series C Common Stock
---------------------------------------------------------- -----------------
Number $.01 Number $.01 Number $.01 Number $.01
of Par of Par of Par of Par
Shares Value Shares Value Shares Value Shares Value
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 6,484,331 $64,843 2,446,917 $24,469 4,455,000 $44,550 372,149 $3,722
Exercise of stock options - - - - - - 9,703 97
Net loss - - - - - - - -
------------------------------------------------------------------------------
BALANCE, December 31, 1995 6,484,331 64,843 2,446,917 24,469 4,455,000 44,550 381,852 3,819
Proceeds from initial public
offering of units, net of
$2,096,640 financing costs - - - - - - 2,875,000 28,750
Conversion of notes payable
and accrued interest thereon
into common stock, net of
financing costs - - - - - - 2,799,999 28,000
Conversion of preferred
stock into common stock (6,484,331) (64,843)(2,446,917) (24,469)(4,455,000) (44,550) 6,693,121 66,931
Exercise of stock options - - - - - - 12,146 122
Exercise of private placement
warrants - - - - - - 427,441 4,274
Net loss - - - - - - - -
------------------------------------------------------------------------------
BALANCE, December 31, 1996 - - - - - - 13,189,559 131,896
Exercise of stock options - - - - - - 78,697 787
Net loss - - - - - - - -
------------------------------------------------------------------------------
BALANCE, December 31, 1997 - $ - - $ - - $ - 13,268,256 $132,683
==============================================================================
Total
Additional Stockholders'
Paid-in Accumulated Equity
Capital Deficit (Deficit)
---------------------------------------------
<S> <C> <C> <C>
BALANCE, December 31, 1994 23,313,132 $(21,610,808) $1,839,908
Exercise of stock options 9,174 - 9,271
Net loss (5,712,717) (5,712,717)
---------------------------------------------
BALANCE, December 31, 1995 23,322,306 (27,323,525) (3,863,538)
Proceeds from initial public
offering of units, net of
$2,096,640 financing costs 20,874,610 - 20,903,360
Conversion of notes payable
and accrued interest thereon
into common stock, net of
financing costs 7,268,308 - 7,296,308
Conversion of preferred
stock into common stock 66,931 - -
Exercise of stock options 15,037 - 15,159
Exercise of private placement
warrants 3,066,320 - 3,070,594
Net loss - (4,984,799) (4,984,799)
---------------------------------------------
BALANCE, December 31, 1996 54,613,512 (32,308,324) 22,437,084
Exercise of stock options 117,261 - 118,048
Net loss - (2,351,464) (2,351,464)
---------------------------------------------
BALANCE, December 31, 1997 $ 54,730,773 $ (34,659,788) $ 20,203,668
=============================================
</TABLE>
See Accompaning Notes to Financial Statements
F-4
<PAGE>
DIACRIN, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,712,717) $ (4,984,799) $ (2,351,464)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 214,506 220,371 277,186
Changes in current assets and liabilities-
Interest receivable and other current assets 26,750 (204,100) (122,649)
Accounts payable (116,784) (28,956) 23,248
Accrued expenses 269,905 (241,643) 487,217
Deferred revenue - 618,844 (231,788)
------------ ------------ ------------
Net cash used in operating activities (5,318,340) (4,620,283) (1,918,250)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments - (6,255,507) 255,409
Purchases of property and equipment, net (107,988) (60,794) (794,440)
Decrease in note receivable from officer 37,500 - -
Increase in long-term investments - (9,917,875) (413,414)
------------ ------------ ------------
Net cash used in investing activities (70,488) (16,234,176) (952,445)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock and warrants 9,271 23,989,113 118,048
Proceeds from term loan - - 650,000
Principal payments on long-term debt (173,880) (156,448) (190,286)
Proceeds from sale leaseback of equipment 226,895 - -
Proceeds from sale of 7.5% convertible notes 7,000,000 - -
(Increase) decrease in deferred financing costs (310,831) 215,684 -
------------ ------------ ------------
Net cash provided by financing activities 6,751,455 24,048,349 577,762
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,362,627 3,193,890 (2,292,933)
CASH AND CASH EQUIVALENTS, beginning of year 2,752,193 4,114,820 7,308,710
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 4,114,820 $ 7,308,710 $ 5,015,777
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Equipment acquired under capital lease obligations $ 226,895 $ - $ -
============ ============ ============
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 $ 82,987 $ 90,885 $ 71,943
============ ============ ============
See Accompanying Notes to Financial Statements
</TABLE>
F-5
<PAGE>
DIACRIN, INC.
Notes to Financial Statements
(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 that are
characterized by cell dysfunction or cell death and for which current therapies
are either inadequate or nonexistent.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying statements of operations and cash flows for the years
ended December 31, 1995 and 1996 include the accounts of the Company and its
wholly-owned subsidiary, Diacrin Securities Corporation. All material
intercompany accounts and transactions were eliminated in consolidation. This
subsidiary was dissolved on June 13, 1996.
(b) Depreciation and Amortization
The Company provides for depreciation using the straight-line method by
charges to operations in amounts estimated to allocate the cost of these assets
over a five-year life. Amortization of equipment under capital leases and
leasehold improvements is computed using the straight-line method over the
shorter of the estimated useful life of the asset or the lease term.
(c) Research and Development
Collaborative revenue under the joint venture agreement with Genzyme
Corporation (see Note 4) and revenues from research grants are recognized as
work is performed. Collaborative revenue under the Joint Venture agreement is
recognized as revenue to the extent that the Comany's research and development
costs are funded by Genzyme through the Joint Venture. The Company receives
non-refundable monthly advances from the Joint Venture. Deferred revenue
represents amounts received prior to recognition of revenue. Research and
development costs are expensed as incurred.
(d) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
At December 31, 1997, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $33,212,000. The difference from
losses reported for financial reporting purposes relates primarily to expenses
reflected in the financial statements not yet deductible for tax purposes. The
net operating loss carryforwards expire commencing in the year 2005 and are
subject to review and possible adjustment by the Internal Revenue Service. Net
operating loss and tax credit carryforwards may be limited in the event of
certain changes in the ownership interests of significant shareholders. The
Company believes issuance of the convertible notes payable in May 1995, as well
as the initial public offering in February 1996, caused a change in ownership,
as defined by the Tax Reform Act of 1986. The Company does not believe that such
ownership changes will significantly impact the Company's ability to utilize the
net operating loss and tax credit carryforwards as of the date of such ownership
changes. Ownership changes in future periods may limit the Company's ability to
utilize net operating loss and tax credit carryforwards.
F - 6
<PAGE>
DIACRIN, INC.
Notes to Financial Statements (continued)
The components of the net deferred tax assets are approximately as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Loss carryforwards $ 12,099,000 $ 13,285,000
Start-up costs 484,000 242,000
Credit carryforwards 1,896,000 2,569,000
Other temporary differences 7,000 4,000
------------------- ------------------------
Total deferred tax assets 14,486,000 16,100,000
Less - valuation allowance (14,486,000) (16,100,000)
------------------- ------------------------
Net deferred tax asset $ - $ -
=================== ========================
</TABLE>
A valuation allowance has been provided as it is uncertain if the
Company will realize the deferred tax assets. The change in the total valuation
allowance during the year ended December 31, 1997 was an increase of
approximately $1,614,000 and relates to the increase in the deferred tax asset
as a result of the net operating loss and tax credits generated during 1997.
(e) Net Loss per Common Share
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". Basic net
loss per common share is based on the weighted average number of common shares
outstanding. Diluted net loss per common share is the same as basic net loss per
common share as the inclusion of shares of stock issuable pursuant to stock
options and warrants would be antidilutive.
(f) 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 reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
(g) Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
(3) Initial Public Offering
On February 12, 1996, the Company completed an initial public offering
of 2,500,000 units, each unit consisting of one share of common stock and one
redeemable warrant to purchase one share of common stock for $16.00 per share,
for net proceeds of approximately $18.2 million. In addition, all outstanding
shares of Series A, B and C convertible preferred stock were automatically
converted into an aggregate of 6,693,121 shares of common stock and the
outstanding $7,000,000 of convertible notes payable were automatically converted
into an aggregate of 2,799,999 shares of common stock upon the closing of the
initial public offering. On March 7, 1996, the underwriters of the offering
exercised their over-allotment option to purchase an additional 375,000 units,
resulting in additional net proceeds of approximately $2.8 million to
F - 7
<PAGE>
the
Company. On August 12, 1996, the common stock and warrants underlying the units
began to trade separately.
(4) Joint Venture Agreement
In September 1996, the Company and Genzyme Corporation ("Genzyme") formed a
joint venture to develop and commercialize the Company's NeuroCell(TM)-PD and
NeuroCell(TM)-HD products for transplantation into people with advanced
Parkinson's disease and Huntington's disease, respectively. Under the terms of
the Joint Venture agreement, which was effective October 1, 1996, Genzyme agreed
to provide 100% of the first $10 million in funding and 75% of the following $40
million in funding for the two products. All costs incurred in excess of $50
million will be shared equally between Genzyme and the Company in accordance
with the terms of the agreement. All product development work is performed by
Genzyme and the Company, on behalf of the Joint Venture, at cost. Any profits of
the Joint Venture will be shared equally by the two parties. Losses of the Joint
Venture are allocated to each party in proportion to the funding provided by
each party. Through December 31, 1997 Genzyme has provided all of the funding
for the Joint Venture.
During the year ended December 31, 1996, the Company received
$1,662,631 under the agreement, of which $1,043,787 was recognized as revenue
and $618,844 was deferred until the work was performed in 1997. During the year
ended December 31, 1997, the Company received $4,557,252 under the agreement and
$4,763,270 was recognized as revenue. In addition, $25,770 of capital equipment
was acquired on behalf of the Joint Venture for which the Company was
reimbursed. At December 31, 1997, $387,056 of total amounts received have been
recorded as deferred revenue.
The Company accounts for its investment in the Joint Venture on the
equity method. Through December 31, 1997, the Company has not made any capital
contributions to the Joint Venture. The Company has performed research and
development on behalf of the Joint Venture and has recognized revenues to the
extent these costs were funded by Genzyme. Genzyme's President and Chief
Executive Officer is a director of the Company.
F - 8
<PAGE>
(5) 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 1997 consisted of the following:
1996 1997
----------- -----------
Cash and cash equivalents-
Cash $ 421 $ 381
Money market mutual fund 1,898,920 2,513,759
Commercial paper 2,292,335 2,501,637
Corporate notes 3,117,034 -
----------- -----------
$ 7,308,710 $ 5,015,777
=========== ===========
Short-term investments-
Commercial paper (avg. maturity of 4 months) $ 984,710 $ -
Corporate notes (avg. maturity of 8 and
12 months, respectively) 5,270,797 3,000,429
Certificate of deposit (maturity of 12 months) - 999,669
US government agency obligation (maturity
of 12 months) - 2,000,000
----------- -----------
$ 6,255,507 $ 6,000,098
=========== ===========
Long-term investments-
Corporate notes (avg. maturity of 14 months) $ 9,917,875 $10,331,289
=========== ===========
(6) Accrued Expenses
Accrued expenses consisted of the following at December 31, 1996 and
1997:
1996 1997
---- ----
Accrued clinical trials costs $ 177,052 $ 466,268
Accrued professional fees 118,445 129,625
Accrued payroll 5,383 159,214
Accrued other 206,069 239,059
----------- -----------
Total $ 506,949 $ 994,166
=========== ===========
(7) Long-term Debt and Obligations Under Capital Leases
(a) Term Loan
In November 1997, the Company entered into an unsecured term loan
agreement with a bank whereby the bank loaned the Company $650,000 to construct
a pilot manufacturing facility. Interest accrues at the Prime Rate (8.5% at
December 31, 1997) plus one-half of one percent and is payable monthly in
arrears. The loan is payable in sixty principal installments of $10,833
commencing December 1, 1997 and may be prepaid without penalty. The Company is
required to maintain certain covenants, including certain financial ratios and
unencumbered cash balances of not less than $1 million. As of December 31, 1997,
the Company was in compliance with all covenants.
F - 9
<PAGE>
(b) Capital Leases
On December 22, 1994, the Company sold certain laboratory equipment,
with an original cost of approximately $805,000, for $600,000. In connection
with this transaction, the Company entered into a capital lease under a master
lease agreement to lease the equipment back for payments of approximately
$15,000 per month for 48 months. Upon completion of the lease term, the Company
is required to purchase all of the equipment for $90,000 or extend the lease
term for an additional six months at approximately $15,000 per month, at which
time title to the equipment reverts back to the Company. On July 1 and December
22, 1995, the Company sold additional equipment at its original cost of
approximately $142,000 and $85,000, respectively, and entered into capital
leases under the aforementioned master lease to lease the equipment back for 48
monthly payments of approximately $3,500 commencing July 1, 1995 and $2,100
commencing January 1, 1996. Upon completion of each lease term, the Company is
required to purchase all of the equipment for 15% of the amount financed or
extend each lease term for an additional six months, at which times title to the
equipment reverts back to the Company. The sale of the equipment in 1994 and
1995 generated gains of approximately $139,000 and $13,000, respectively, which
have been offset against the cost of the assets and are being amortized over the
life of the leases in accordance with SFAS No. 13 "Accounting for Leases".
The future minimum payments under all capital lease agreements as of
December 31, 1997 are as follows:
1998 $ 247,333
1999 173,332
---------------------
Total minimum lease payments 420,665
Less-Amount representing interest 50,235
---------------------
Present value of minimum lease payments 370,430
Less-Current obligation under capital lease 207,171
---------------------
$ 163,259
=====================
(8) Convertible Notes Payable
On May 31, 1995, the Company completed the sale of $7,000,000 of
convertible notes. Upon completion of the Company's initial public offering
discussed in Note 3, the outstanding principal amount of convertible notes
automatically converted into an aggregate of 2,799,999 shares of the Company's
common stock.
(9) Stockholders' Equity (Deficit)
(a) Reverse Stock Split and Amendment to Charter
On January 25, 1996, the Company's stockholders approved a 1-for-2
reverse stock split of the common stock. In connection with the approved reverse
stock split, the Company filed a Certificate of Amendment to the Company's
Certificate of Incorporation. Accordingly, all share and per share amounts of
common stock for all periods before the reverse stock split have been
retroactively adjusted to reflect the reverse stock split.
F - 10
<PAGE>
(b) Preferred Stock
The outstanding Series A, Series B and Series C preferred stock
automatically converted into an aggregate of 6,693,121 shares of the Company's
common stock upon the closing of the Company's initial public offering discussed
in Note 3. In addition, all designated series of convertible preferred stock
were eliminated effective upon the closing of the Company's initial public
offering.
As of December 31, 1997, the Company has an authorized class of
undesignated preferred stock consisting of 5,000,000 shares. The Company's Board
of Directors is authorized, subject to any limitations prescribed by law and
without further stockholder approval, to issue from time to time up to 5,000,000
shares of preferred stock in one or more series. Each such series of preferred
stock shall have such number of shares, designations, preferences, voting
powers, qualifications and rights or privileges as shall be determined by the
Board of Directors.
(c) Warrants
In November 1991, in connection with the sale of Series C convertible
preferred stock, the Company issued warrants to purchase 465,853 shares of
common stock exercisable at $7.20 per share. The warrants were exercisable
commencing August 9, 1996 and expired on November 14, 1996. Warrants to purchase
427,441 shares of common stock were exercised during 1996 for net proceeds to
the Company of approximately $3,071,000.
In December 1994, the Company issued a warrant for the purchase of
common stock in connection with a master lease agreement as discussed in Note
7(b). The warrant is exercisable for 12,474 shares of common stock at an
exercise price of $7.92 per share. The warrant expires in December 1999.
As discussed in Note 3, the Company issued redeemable warrants in
connection with the Company's initial public offering to purchase 2,875,000
shares of common stock at an exercise price of $16 per share, subject to certain
adjustments. The warrants may be exercised commencing August 12, 1996 and expire
on the earlier to occur of redemption of the warrant by the Company, which
option the Company may exercise (at a price of $.01 per warrant) if the average
closing price of the common stock for any 20 consecutive trading day period
exceeds 150% of the exercise price of the warrants, or December 31, 2000.
(10) Common Stock Options
The Company has adopted the 1990 Stock Option Plan (the "1990 Plan")
under which the Board of Directors is authorized to grant incentive stock
options, non-qualified stock options and stock appreciation rights to employees,
directors and consultants of the Company for up to 800,000 shares of the
Company's common stock. All options granted have 10-year terms, and the majority
vest in equal annual installments of 25% over four years of continued service
from the date of hire or grant. As of December 31, 1997, there were options to
purchase 58,295 shares of common stock available for future grant under the 1990
Plan.
In December 1993, the Company granted non-qualified options, not
included in the 1990 Plan, to purchase 214,105 shares of common stock at a price
of $2.50 per share and 57,500 shares of common stock at a price of $4.00 per
share to certain advisors to the Company. These options have 10-year terms and
were fully vested upon the date of grant. In June 1994, the Company granted
non-qualified options, not included in the 1990 Plan, to purchase 45,000 shares
of common stock at a price of $8.50 per share to certain advisors to the
Company. In April 1996, the Company granted non-qualified options, not included
in the 1990 Plan, to purchase 25,000 shares of common stock at a price of $9.50
per share to an executive of the Company as an inducement to
F - 11
<PAGE>
his employment. The
options granted in 1994 and 1996 have 10-year terms and vest in equal annual
installments of 25% over four years of continued service from the date of grant.
In July 1994, the stockholders approved the 1994 Directors' Stock
Option Plan (the "Director Plan") which automatically grants an option to each
eligible outside director of the Company for the purchase of 7,500 shares of
common stock at an exercise price of the then fair market value. Each option
granted under the Director Plan has a 10-year term and may be exercised on a
cumulative basis as to 25% of the shares on the first anniversary of the date of
grant and an additional 25% at the end of each one-year period thereafter. In
December 1996, the Board of Directors amended the Director Plan to automatically
grant 15,000 options to each new eligible outside director. The Company has
reserved 30,000 shares for issuance under this plan. As of December 31, 1997,
there were 28,125 options outstanding under the Director Plan at a weighted
average exercise price of $10.38 per share. As of December 31, 1997, there were
no options available for grant under the Director Plan.
In June 1997, the stockholders approved the 1997 Stock Option Plan (the
"1997 Plan") under which the Board of Directors is authorized to grant incentive
stock options and non-qualified stock options to employees, directors and
consultants of the Company for up to 1,200,000 shares of the Company's common
stock. All options granted have 10-year terms, and vest in equal annual
installments of 25% over four years of continued service from the date of hire
or grant. As of December 31, 1997, options to purchase 1,058,500 shares of
common stock were available for future grant under the 1997 Plan.
The following table summarizes incentive and non-qualified stock option
activity, exclusive of the warrants discussed in Note 9(c):
Number of Weighted average
options exercise price
Balance, December 31, 1994 758,158 $ 1.90
Options granted 153,000 1.50
Options exercised (9,703) .96
Options canceled (107,125) 1.41
------------
Balance, December 31, 1995 794,330 1.90
Options granted 208,000 9.11
Options exercised (12,146) 1.25
Options canceled (15,689) 1.85
------------
Balance, December 31, 1996 974,495 3.44
Options granted 209,250 11.01
Options exercised (78,697) 1.50
Options canceled (78,250) 9.33
------------
Balance, December 31, 1997 1,026,798 4.69
============
Exercisable, December 31, 1997 672,220 2.77
============
All options have been granted at the fair market value of the Company's
common stock on the date of grant.
F - 12
<PAGE>
The following table summarizes certain information about options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding
-----------------------------------------------------------------------------------
Weighted average
Range of exercise prices Number outstanding at remaining contractual Weighted average exercise
December 31, 1997 life price
- --------------------------- -------------------------- ----------------------- ---------------------------
<S> <C> <C> <C>
$.02 to $2.50 685,548 6.2 $ 1.95
$7.50 to $12.00 341,250 9.3 $10.22
--------------------------
Total 1,026,798
==========================
<CAPTION>
Options exercisable
- ------------------------------------------------------------------------------------------------------
Number exercisable Weighted average
Range of exercise prices at December 31, 1997 exercise price
- --------------------------------- ----------------------------- ------------------------------
<S> <C> <C>
$.02 to $2.50 603,845 $ 2.00
$7.50 to $12.00 68,375 $ 9.58
-----------------------------
Total 672,220
=============================
</TABLE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 requires the measurement of the fair value of stock
options to be included in the statement of operations or disclosed in the notes
to financial statements. As permitted by SFAS No. 123, the Company has
determined that it will continue to account for stock-based compensation for
employees under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and elected the disclosure-only alternative under
SFAS No. 123. Stock-based compensation to non-employees is accounted for at fair
value under SFAS No. 123.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair-value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 1995, 1996
and 1997, respectively: risk-free interest rates of 6.5%, 6.5% and 5.5%;
dividend yield of 0% for all years; volatility factor of the expected market
price of the Company's common stock of 70% for all years; and a weighted-average
expected life of the options of 7.5 years for all years.
F - 13
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The aggregate
fair value of options granted in 1995, 1996 and 1997 was approximately $170,000,
$1,400,000 and $1,689,000, respectively. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C> <C>
Net loss As reported $(5,712,717) $(4,984,799) $(2,351,464)
Pro forma (5,712,717) (5,071,094) (2,833,712)
Basic net loss per As reported (15.07) (.44) (.18)
share: Pro forma (15.07) (.45) (.21)
</TABLE>
(11) Facility Lease
During 1991, the Company entered into a ten-year operating lease for a
facility. Minimum rental payments under the lease are as follows:
Rental
Commitment
1998 $ 710,000
1999 710,000
2000 710,000
2001 533,000
------------------------
$ 2,663,000
========================
Total rent expense for the years ended December 31, 1995, 1996 and 1997
was approximately $639,000, $700,000 and $761,000, respectively. The amounts for
the 1995 and 1996 periods are net of sublease revenue received from subtenants
of $133,000 and $58,000, respectively.
F - 14
<PAGE>
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed Registration Statement File Nos. 33-80773, 333-19571,
333-19573, 333-19615 and 333-31541.
Arthur Andersen LLP
Boston, Massachusetts
May 7, 1998
