UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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, 1999) was $37,997,334.
As of February 10, 1999, 14,355,493 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
Phase 1 and Phase 2 clinical trials for NeuroCell(TM)-PD and NeuroCell(TM)-HD,
planned timetables for the initiation of Phase 3 clinical trials for
NeuroCell(TM)-PD, planned timetables for the completion of an ongoing Phase 1
clinical trials for NeuroCell(TM)-FE, Porcine Neural Cells for Stroke and Human
Hepatocytes for Cirrhosis, 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 acute liver failure and for
cirrhosis, myoblasts for cardiac disease and retinal epithelial cells for
macular degeneration.
In 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 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 1996. Also in 1996, the
Company initiated a Phase 1 clinical trial to evaluate NeuroCell(TM)-HD for the
treatment of Huntington's disease and enrollment of all 12 patients in the trial
was completed in 1997. In 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.
Based on encouraging results from the Neurocell(TM)-PD Phase 1 clinical trial,
the joint venture initiated a Phase 2 clinical trial in 1998. In 1999, the
Company initiated Phase 1 clinical trials to test neural cell transplantation
for stroke and hepatocyte transplantation for cirrhosis.
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
<PAGE>
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 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 development: (i) porcine
hepatocytes for acute liver failure; (ii) human hepatocytes for cirrhosis; (iii)
human myoblasts for cardiac disease; (iv) porcine neural cells for stroke; (v)
porcine neural cells for intractable pain; (vi) porcine spinal
<PAGE>
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 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
<PAGE>
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.
In connection with its Phase 1 clinical trials, six Parkinson's disease
patients, six Huntington's disease patients and three focal epilepsy patients
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:
<PAGE>
<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 Phase 1
neurons
- - ------------------------------------------------------------------------------------------------------------------------
Porcine LGE cells Chronic intractable Impaired inhibitory 2,000,000 IND Filed
pain neurotransmission
- - ------------------------------------------------------------------------------------------------------------------------
Porcine spinal cord Spinal cord injury Traumatic loss of 200,000 Preclinical
cells spinal cord function
- - ------------------------------------------------------------------------------------------------------------------------
Porcine hepatocytes Acute liver failure Hepatocyte death 45,000 IND Approved
- - ------------------------------------------------------------------------------------------------------------------------
Human hepatocytes Cirrhosis Loss of liver function 1,100,000 Phase 1
- - ------------------------------------------------------------------------------------------------------------------------
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>
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
<PAGE>
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 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
<PAGE>
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.
In 1999, the Joint Venture plans to continue to accrue patients into a
Phase 2 clinical trial involving the transplantation of NeuroCell(TM)-PD in
conjunction with cyclosporine immunosuppression versus a control group. A
planned second Phase 2 clinical trial, that the Joint Venture expects to be
initiated in the second quarter of 1999, will involve the transplantation of
NeuroCell(TM)-PD using the Company's proprietary immunomodulation technology. It
is anticipated that all transplanted patients in these trials will receive
approximately 48 million cells transplanted bilaterally (both sides of the
brain). Assuming successful completion of these trials, the Joint Venture plans
to conduct two Phase 3 clinical trials beginning in early 2000.
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
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 a 12-patient Phase 1 clinical trial with NeuroCell(TM)-HD transplanted
unilaterally. The Company is not aware of
<PAGE>
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 1998, all 12 patients treated have been evaluated at least eighteen
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. Assuming satisfactory results, the Joint Venture
plans to initiate a Phase 2 clinical trial in 1999 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. 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
<PAGE>
porcine striatum. Diacrin has demonstrated survival and
safety of transplanted NeuroCell(TM)-FE in a preclinical animal model when
transplanted into the hippocampus.
In 1998, the Company initiated a Phase 1 clinical trial of
NeuroCell(TM)-FE at Beth Israel Deaconess Medical Center in Boston. The Company
has transplanted three patients to date and anticipates transplanting a total of
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 determine whether 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. 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.
The Company has completed preclinical animal studies and an IND has been filed
and cleared by the FDA. In 1999, the Company initiated a six patient Phase 1
clinical trial at Beth Israel Deaconess Medical Center in Boston.
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.
<PAGE>
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 animal studies
have demonstrated a favorable safety profile and survival of fetal porcine LGE
(GABA-releasing) cells transplanted into the dorsal horn of the spinal cord. The
Company has filed an IND and plans to initiate a Phase 1 clinical trial in 1999.
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) 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
<PAGE>
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 Acute Liver Failure
Acute liver failure is a severe life-threatenting disease that can
result from alcohol consumption, viral infections (hepatitis B and C) and
hepatotoxic drugs or toxins. The clinical spectrum of acute liver disease can
vary from an asymptomatic patient with hepatomegaly to the manifestations of
severe liver failure (ascites, jaundice and encephalopathy). The mortality from
acute liver failure can be as high as 70%, with patients dying from infection GI
bleeding, and hepatorenal or multi-organ failure. Acute liver failure results in
approximately 63,000 deaths annually in the U.S.
There is currently no universal therapy that is beneficial for all
patients with acute liver failure. The best available therapy for acute liver
failure is orthotopic liver transplantation. However, many patients are unable
to be listed as candidates for liver transplantation due to multi-organ failure
or active alcohol consumption. Current therapy attempts to treat complications
arising from the acute condition, i.e. cerebral edema, infections, and
circulatory collapse. Treatment of the acute phase of liver failure with hepatic
support can result in partial normalization of clinical parameters and limited
restoration of a functional liver, but the likelihood of survival remains low.
An alternative approach to the treatment of acute liver failure is to
support the patient by hepatocyte transplantation in order to provide liver
function while allowing the patient's own liver to recover.
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>
The Company's IND application to the FDA for a Phase 1 clinical trial
to test transplantation of porcine hepatocytes for the treatment of liver
failure has been cleared. Patients in this planned trial will not be candidates
for orthotopic liver transplantation and will have been diagnosed with acute
liver failure. The patients selected for this trial, which is planned to
commence at Massachusetts General Hospital in the first half of 1999, 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 or liver 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 due to the fibrosis and loss of blood supply to the
liver. In animal models, hepatization of the spleen is a well described
<PAGE>
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.
In 1999, the Company initiated a Phase 1 clinical trial of human
hepatocyte transplantation for the treatment of cirrhosis in a group of patients
that have been listed for organ transplantation but are likely to wait at least
one year 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 being 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.
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 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,
<PAGE>
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 AMD patients
have the "dry " form
<PAGE>
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 has finalized a three-year sublease
agreement with Genzyme's Tissue Repair Division for approximately 12,000 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 7 issued U.S. patents
and 22 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.
MGH has been awarded two patents in the United States covering the
basic immunomodulation technology used by Diacrin. Foreign counterparts of these
patents 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.
<PAGE>
Sales and Marketing
Under the terms of the Joint Venture agreement, Genzyme, which has an
established sales force, experienced 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 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 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
<PAGE>
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.
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
<PAGE>
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 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, 1999, the Company had 46 full-time employees, 36 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
<PAGE>
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 has finalized a sublease agreement ending in 2001
with Genzyme's Tissue Repair Division for approximately 12,000 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 $30,000 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, 1998.
Executive Officers 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:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Thomas H. Fraser, Ph.D. (1) 51 President and Chief Executive Officer; Director
E. Michael Egan 46 Senior Vice President, Corporate Development
Kevin Kerrigan 28 Controller
Albert S. B. Edge, Ph.D. 46 Senior Director of Molecular and Cellular
Biology
Jonathan H. Dinsmore, Ph.D. 37 Director of Cell Transplantation Research
Roger J. Gay, Ph.D. 45 Director of Process Development
Abdellah Sentissi, Ph.D. 49 Director of Quality Control and Quality
Assurance
Zola P. Horovitz, Ph.D. (1) 64 Director
John W. Littlechild (2) 47 Director
Stelios Papadopoulos, Ph.D. (1) (2) 50 Director
Joshua Ruch 49 Director
Henri A. Termeer (2) 53 Director
Christopher T. Walsh, Ph.D. 55 Director
- - ----------------------
<PAGE>
(1) Member of Audit and Finance Committee
(2) Member of Compensation Committee
</TABLE>
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.
Kevin Kerrigan has been Controller of the Company since November 1998. He
joined the Company in 1997 as Accounting Manager. From 1993 to 1997 he was a
member of the professional staff of Price Waterhouse LLP. Mr. Kerrigan received
a B.S. degree in accounting from Merrimack College and was awarded a CPA
certificate from the Commonwealth of Massachusetts in 1993.
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.
<PAGE>
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 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
<PAGE>
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 Avant
Immunotherapeutics, Inc., a biotechnology company.
Stelios Papadopoulos, Ph.D., has been a Director of the Company since
November 1991. He is Chairman of PaineWebber Development Corporation, a
subsidiary of 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., an
international investment management firm which he co-founded in 1981. 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>
<PAGE>
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. The following table sets forth for
the periods indicated the high and low sale prices for the Common Stock and
Warrants during 1997 and 1998 as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
Fiscal Year 1997
<S> <C> <C>
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
Fiscal Year 1998
Common Stock:
First Quarter 11 1/2 9 1/8
Second Quarter 10 5 3/8
Third Quarter 7 3/8 4 1/2
Fourth Quarter 8 1/8 4 1/4
Warrants:
First Quarter 2 3/4 1 7/8
Second Quarter 2 5/16 15/16
<PAGE>
Third Quarter 1 1/16 3/8
Fourth Quarter 7/8 3/16
</TABLE>
As of March 5, 1999 there were approximately 3,000 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, 1998 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, 1998, the Company has used approximately $7,777,000 of the total net
proceeds from its initial public offering of $20,911,755. Of the $7,777,000
used, approximately $265,000 was used for the purchase of machinery and
equipment; approximately $582,000 was used for repayment of indebtedness; and
approximately $6,930,000 was used for working capital. The unused proceeds of
approximately $13,134,000 are in temporary investments consisting of corporate
notes and a money market mutual fund. 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, 1997 and
1998 and for each of the three years in the period ended December 31, 1998 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, 1994, 1995 and 1996 and for the years ended
December 31, 1994 and 1995 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,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except share and per share data)
REVENUES:
<S> <C> <C> <C> <C> <C>
Research and development $ 152 $ 45 $ 1,144 $ 4,763 $ 3,623
Interest income 203 245 1,100 1,302 1,576
-------- ------ -------- ------- ----------
Total revenues 355 290 2,244 6,065 5,199
-------- ------ -------- ------- ----------
OPERATING EXPENSES:
Research and development 4,912 4,478 5,767 6,863 7,372
General and administrative 1,281 1,128 1,304 1,460 1,484
Interest expense 12 397 158 93 89
-------- ------ ------- ------- ----------
Total operating expenses 6,205 6,003 7,229 8,416 8,945
-------- ------ ------- ------- ----------
Equity in operations
of joint venture - - - - (1,084)
======== ====== ======= ======= ==========
Net loss $ (5,850) $ (5,713) $(4,985) $ (2,351) $ (4,830)
======== ====== ======= ======== =========
Net loss per common share:
Basic and diluted $ (16.15) $ (15.07) $ (.44) $ (.18) $ (.34)
======== ====== ======= ======== =======
Weighted average shares
outstanding(1):
Basic and diluted 362,161 379,131 11,389,823 13,235,286 14,156,179
======== ======= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
Balance Sheet Data: 1994 1995 1996 1997 1998
--- ----- --- ----- --- ----- --- ----- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents
and investments $ 2,752 $ 4,115 $ 23,482 $ 21,347 $ 26,270
Working capital 1,603 2,753 12,413 9,551 21,812
Total assets 3,658 5,160 24,275 22,780 27,484
Long-term debt 493 7,550 370 672 392
Stockholders' equity (deficit) 1,840 (3,864) 22,437 20,204 24,845
- - ------------------
(1) Computed as described in Note 2 (e) of Notes to Financial Statements.
</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, commencing 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 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
<PAGE>
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, 1998, the Company had an accumulated deficit
of $39.5 million.
In September 1996, the Company and Genzyme formed the Joint
Venture to develop and commercialize NeuroCell(TM)-PD and NeuroCell(TM)-HD. The
Joint Venture is governed by a six-member Steering Committee comprised of Dr.
Fraser, Mr. Egan and Dr. Dinsmore, two executive officers and one employee 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.
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.
During the first quarter of 1998, the Company began making cash contributions to
the Joint Venture equal to 25% of the Joint Venture's funding requirements. To
the extent the Company's contributed funds were used to fund expenses incurred
by Genzyme on behalf of the Joint Venture, the Company has recognized an expense
in its statement of operations captioned "equity in operations of Joint
Venture." Furthermore, to the extent the Company's contributed funds were used
to fund expenses incurred by the Company on behalf of the Joint Venture, the
Company has reduced the research and development revenue recognized by it from
the Joint Venture by an amount equal to the Company-funded portion of such
expenses.
Results of Operations
Year Ended December 31, 1998 Versus Year Ended December 31, 1997
Research and development revenues were approximately $3.6 and
$4.8 million for the years ended December 31, 1998 and 1997, respectively, and
were comprised entirely of revenue from the Joint Venture. The reduction in
research and development revenues is attributable to the reduction in the
percentage of funding from Genzyme that took effect in the first quarter of
1998.
Interest income was $1.6 million for the year ended December 31, 1998
versus $1.3 million for the year ended December 31, 1997. The 21% increase was
primarily due to additional interest income realized on higher cash balances
available for investment.
Research and development expenses were $7.4 million for the year ended
December 31, 1998 versus $6.9 million for the year ended December 31, 1997. The
7% increase was primarily due to the production costs of clinical grade antibody
produced during the current year period for use in the Company's clinical trials
and preclinical research. The increase was, to a lesser extent, due to increased
costs related to the operation of clinical production facilities completed in
the second half of 1997.
<PAGE>
General and administrative expenses of $1.5 million for the years ended
December 31, 1997 and 1998 were relatively unchanged.
Interest expense was $89,000 and $93,000 for the years ended December
31, 1998 and 1997, respectively. An increase in interest expense as a result of
the $650,000 term loan obtained by the Company in November 1997 is offset by a
decrease in capital lease debt between the periods.
For the twelve months ended December 31, 1998, the Company recorded a
$1.1 million charge related to its equity in operations of the Joint Venture.
This expense is due to funds contributed by the Company to the Joint Venture
that were used to fund expenses incurred by Genzyme on behalf of the Joint
Venture. This expense did not occur in the prior year as the Company was not
required to make contributions to the Joint Venture until the quarter ended
March 31, 1998.
The Company incurred a net loss of approximately $4.8 million for the
year ended December 31, 1998 versus a net loss of approximately $2.4 million for
the year ended December 31, 1997.
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 Joint Venture's clinical
trials 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 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
<PAGE>
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.
Liquidity and Capital Resources
The Company has financed its activities primarily with the net proceeds
from its pre-1998 equity offerings aggregating $53.6 million, with the net
proceeds of approximately $9.4 million from the Company's private placement of
common stock completed in February 1998, and with interest earned thereon. In
addition, the Company has recorded approximately $9.4 million in revenue from
the Joint Venture since it commenced October 1, 1996. At December 31, 1998, the
Company had cash and cash equivalents, short-term investments and long-term
investments aggregating approximately $26.3 million.
The Company has purchased approximately $2.3 million of capital
equipment since inception. In November 1997, the Company borrowed $650,000 at
the Prime Rate +.5% (8.25% at December 31, 1998) 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, 1998.
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, 1998, Genzyme has contributed
approximately $15.7 million to the Joint Venture. The Company's obligation to
fund 25% of the program costs commenced in the first quarter of 1998. The
Company expects that the Joint Venture's 1999 product development plans,
together with the Company's continued funding of the Joint Venture, will
significantly increase the Company's net loss and cash and investments used in
1999 as compared with 1998.
<PAGE>
Genzyme agreed to make financing available to Diacrin from and after
the date that Genzyme provides the initial $10.0 million of funding to the Joint
Venture. Genzyme agreed to make available to Diacrin an unsecured, subordinated
line of credit (the "Line") of up to an aggregate amount of $10.0 million.
Diacrin may draw on the Line only in the event that Diacrin's cash and cash
equivalents are insufficient to fund Diacrin's budgeted operations for a
specified period of time, and the funds may be used by Diacrin only to fund
capital contributions to the Joint Venture. The Line will be available through
the date five years after the date Diacrin first draws on the Line, and all
outstanding principal and interest will be due on that fifth anniversary.
Advances will be interest-bearing, evidenced by a promissory note and subject to
other considerations; and the aggregate amount of draws in any calendar year may
not exceed $5.0 million. Diacrin did not make any draws on the Line during the
year ended December 31, 1998.
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 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 to ongoing research and development activities, preclinical
studies, clinical trials, establishing pig production capabilities and the
expansion of its laboratory and administrative activities. Therefore, in order
to achieve commercialization of its potential products, the Company will need
substantial additional funds. There can be no assurance that the Company will be
able to obtain the additional funding that it will require on acceptable terms,
if at all.
Impact of the Year 2000 Issue
The Company is in the process of completing its assessment of Year 2000
issues and their potential impact on its information systems and business.
Generally, the Company has potential Year 2000 exposure in four areas: (i)
financial and management operating computer systems used to manage the Company's
business, (ii) operating computer systems used in the Company's research and
product development laboratories, (iii) microprocessors and other electronic
equipment used by the Company ("embedded chips") and (iv) computer systems used
by third parties, in particular financial institutions and suppliers of the
Company.
At December 31, 1998, the Company had completed its assessment of its
financial and management operating computer systems and has identified software
that is not Year 2000 compliant. The Company estimates the cost to update this
software, through the purchase of an off-the-shelf software package, together
with hardware and network server software, will be approximately $8,000. At
December 31, 1998, the Company had spent approximately $5,000 in this effort.
The Company is substantially complete with its update of the systems that are
not Year 2000 compliant.
<PAGE>
At December 31, 1998, the Company had also completed its assessment of
its Year 2000 exposure to operating computer systems used in the Company's
research and development laboratories and embedded chips in its facilities and
equipment used in its facilities. The Company has not identified any
non-compliant systems that play a significant role in the Company's research,
product development or facilities management.
The Company continues to interview financial institutions and vendors
to determine their exposure to year 2000 issues, their anticipated risks and
responses to those risks. To date, the Company has not obtained information
suggesting any critical vendors or financial institutions will not be able to
service or supply the Company on or after January 1, 2000.
If the Company is unsuccessful in completing remediation of
non-compliant systems, or if any of the Company's third party suppliers and
partners do not timely complete their remediation programs, additional costs may
be incurred to develop alternative methods of managing the effected aspects of
the Company's business. In addition, the Company's clinical and preclinical
trials for all of its product candidates could be delayed. Based on the
information currently available to the Company, Year 2000 issues are not
expected to have a significant impact on the Company's ongoing results of
operations. Accordingly, the Company has not developed a contingency plan but
will do so in the future if necessary.
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 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.
<PAGE>
In addition, under certain circumstances, Genzyme has the right to
terminate the joint venture agreement following an unremedied breach by Diacrin
of any material term of the agreement. In the event of such termination, Genzyme
has the option to obtain an exclusive, worldwide, royalty-bearing license to
certain Diacrin technology required to manufacture and market the Joint Venture
Products. If Genzyme exercised its option, the Company would be entitled to
receive a royalty on the net sales of the Joint Venture Products, which royalty
may be significantly less than amounts the Company would be entitled to receive
under the 50%/50% profit split agreed to as part of the joint venture agreement.
Any termination of the joint venture agreement, whether by Genzyme or
Diacrin, could have a material adverse effect on the Company's business, results
of operations or financial position. In addition, there can be no assurance that
the economic and other interests of the Company and Genzyme will coincide during
the term of the joint venture agreement or that disagreements will not occur
between the Company and Genzyme during the term of the agreement, either of
which could have a material adverse effect on the Company's business, results of
operations or financial position. See "Dependence on Others."
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, NeuroCell(TM)-HD and NeuroCell(TM)-FE 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 humans. The Company's porcine
cell product development programs would be negatively impacted by the detection
of infectious PERV in porcine cells or
<PAGE>
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.
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, 1998 of approximately $39.5 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 1999 product development plans together
with the Company's continued funding of the Joint Venture will significantly
increase the Company's net loss and cash and investments used in 1999 as
compared with 1998. 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.
<PAGE>
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, approximately 37 patients have been enrolled in clinical trials
of NeuroCell(TM)-PD, NeuroCell(TM)-HD and NeuroCell(TM)-FE. Results of initial
preclinical and clinical testing of products under development by the Company
are not necessarily predictive of results that will be obtained from subsequent
or more extensive preclinical and clinical testing. Furthermore, there can be no
assurance that clinical trials of products under development will demonstrate
the safety and efficacy of such products at all or to the extent necessary to
obtain regulatory approvals. Companies in the biotechnology industry have
suffered significant setbacks in advanced clinical trials, even after promising
results in earlier trials. The failure to adequately demonstrate the safety and
efficacy of a therapeutic product under development could delay or prevent
regulatory approval of the product and would have a material adverse effect on
the Company.
The rate of completion of clinical trials is dependent upon, among
other factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in the
Company's current clinical trial or future clinical trials may result in
increased costs, program delays or both, which could have a material adverse
effect on the Company.
No Assurance of FDA Approval; Government Regulation
The FDA and comparable government agencies in foreign countries impose
substantial regulations on the manufacture and marketing of pharmaceutical
products through lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
Satisfaction of these regulations typically takes several years or more and
varies substantially based upon the type, complexity and novelty of the proposed
product. The Company cannot yet accurately predict when it might first submit
any PLA 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.
<PAGE>
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.
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
<PAGE>
The Company has not yet invested significantly in regulatory,
manufacturing, marketing, distribution or product sales resources. To date, the
Company has relied on others for the supply and production of pigs for its
clinical programs. Although the Company intends to develop regulatory,
manufacturing, marketing, distribution and sales resources in the future, there
can be no assurance that the Company will be able to develop such resources
successfully.
Uncertain Ability to Protect Proprietary Technology; Reliance Upon Licenses
The biotechnology and pharmaceutical industries place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. The Company's success will depend, in part, on its
ability to obtain patent protection for its products, preserve its trade secrets
and operate without infringing the proprietary rights of others. The Company has
ongoing research efforts and expects to seek additional patents covering this
research in the future. There can be no assurance of its success or timeliness
in obtaining any patents, or of the breadth or degree of protection that any
such patents will afford the Company.
The patent position of biotechnology products is often highly uncertain
and usually involves complex legal and factual questions. There can be no
assurance that patent applications relating to the Company's potential products
or technology will result in additional patents being issued or that, if issued,
such patents will afford adequate protection to the Company or not be
challenged, invalidated or infringed. Furthermore, there can be no assurance
that others will not independently develop similar products and processes,
duplicate any of the Company's products or, if patents are issued to the
Company, design around such patents. In addition, the Company could incur
substantial costs in defending itself in suits brought against it or in suits in
which it may assert its patents against others. If the outcome of any such
litigation is unfavorable, the Company's business could be adversely affected.
To determine the priority of inventions, the Company may also have to
participate in interference proceedings declared by the United States Patent and
Trademark Office, which could result in substantial cost to the Company.
Much of the Company's know-how and technology is not patentable. To
protect its rights, the Company requires 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.
<PAGE>
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 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
<PAGE>
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 7A.Quantitative and Qualitative Disclosures About Market Risk
The Company owns financial instruments that are sensitive to market
risks as part of its investment portfolio. The investment portfolio is used to
preserve the Company's capital until it is required to fund operations,
including the Company's research and development activities. None of these
market-risk sensitive instruments are held for trading purposes. The Company
does not own derivative financial instruments in its investment portfolio. The
investment portfolio contains instruments that are subject to the risk of a
decline in interest rates.
Interest Rate Risk--The Company's investment portfolio includes
investment grade debt instruments. These bonds are subject to interest rate
risk, and could decline in value if interest rates fluctuate. Due to the short
duration and conservative nature of these instruments, the Company does not
believe that it has a material exposure to interest rate risk.
Item 8. Financial Statements
The 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.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
There have been no disagreements on accounting and financial disclosure
matters.
<PAGE>
PART III
Item 10 - 13.
The information required for Part III of this Annual Report on Form
10-K is hereby incorporated by reference from portions of the Company's
definitive proxy statement relating to the 1999 annual meeting of stockholders
of the Company, which statement will be filed with the Commission not later than
120 days after the end of the Company's 1998 fiscal year. Such information will
be contained in the sections of such proxy statement captioned "Election of
Directors," "Meetings of Board of Directors and Committees," "Executive
Compensation," "Certain Relationships and Related Transactions," "Section 16(a)
Beneficial Ownership Reporting Compliance," "Compensation Committee Interlocks
and Insider Participation," and "Principal Stockholders." 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."
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a) (1) Index to Financial Statements
The following Financial Statements are included in this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
Financial Statements: Page
(a.) Diacrin, Inc.
<S> <C> <C>
1. Report of Independent Public Accountants F-1
2. Balance Sheets as of December 31, 1997 and 1998 F-2
3. Statements of Operations for each of the three years in the period
ended December 31, 1998 F-3
4. Statements of Stockholders' Equity (Deficit) for each
of the three years in the period ended December 31,
1998 F-4
5. Statements of Cash Flow for each of the three years in the period
ended December 31, 1998 F-5
6. Notes to Financial Statements F-6
(b.) Diacrin/Genzyme LLC (A Development Stage Enterprise)
1. Report of Independent Public Accountants F-17
2. Balance Sheet as of December 31, 1998 F-18
3. Statements of Operations for the year ended December 31, 1998 and
for the period from October 1, 1996 (date of inception) to December F-19
31, 1998
4. Statements of Cash Flows for the year ended December
31, 1998 and for the period from October 1, 1996 (date
of inception) to December 31, 1998 F-20
5. Statements of Change in Venturers' Capital (deficit)
for the period from October 1, 1996 (date of
inception) to December 31, 1998 F-21
6. Notes to Financial Statements F-22
</TABLE>
<PAGE>
(2) Exhibits
The following is a list of exhibits filed as part of this Annual Report
on Form 10-K:
<TABLE>
<CAPTION>
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)
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)
<PAGE>
Exhibit No. Title Page
- - ----------------- --- ------------------------------------------------------------------------ -------------
++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)
+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 (11)
10.16(a) - Letter Agreement dated November 25, 1997 by and between the Registrant
and Fleet National Bank (11)
21 - Subsidiaries *
23.1 - Consent of Arthur Andersen LLP *
23.2 - Consent of PricewaterhouseCoopers LLP *
27 - Financial Data Schedule *
</TABLE>
<PAGE>
(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)
(d) Description of Financial Statement Schedules.
None.
<PAGE>
* 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.
(11) 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, 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 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:
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Date Title
/s/ Thomas H. Fraser 3/31/99
- - ------------------------ President, Chief Executive
Thomas H. Fraser Officer and Director
(Principal Executive Officer)
/s/ Kevin Kerrigan 3/31/99
- - ------------------------ Controller
Kevin Kerrigan (Principal Financial and
Accounting Officer)
/s/ Zola P. Horovitz 3/31/99
- - ------------------------ Director
Zola P. Horovitz
/s/ John W. Littlechild 3/31/99
- - ------------------------ Director
John W. Littlechild
/s/ Stelios Papadopoulos 3/31/99
- - ------------------------ Director
Stelios Papadopoulos
- - ------------------------ Director
Henri A. Termeer
/s/ Christopher T. Walsh 3/31/99
- - ------------------------ Director
Christopher T. Walsh
/s/ Joshua Ruch 3/31/99
- - ------------------------ Director
Joshua Ruch
<PAGE>
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, 1997 and 1998, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Diacrin, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 8, 1999
- F-1 -
<PAGE>
DIACRIN, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,015,777 $ 4,995,054
Short-term investments 6,000,098 18,670,392
Interest receivable and other current assets 438,756 394,413
----------------- -----------------
Total current assets 11,454,631 24,059,859
----------------- -----------------
Property and equipment, at cost:
Laboratory and manufacturing equipment 839,856 878,208
Equipment under capital leases 675,262 675,262
Furniture and office equipment 277,109 293,873
Leasehold improvements 55,557 76,827
----------------- -----------------
1,847,784 1,924,170
Less - Accumulated depreciation and amortization 853,911 1,199,673
----------------- -----------------
993,873 724,497
----------------- -----------------
Long-term investments 10,331,289 2,605,010
Investment in joint venture - 94,508
----------------- -----------------
10,331,289 2,699,518
----------------- -----------------
$ 22,779,793 $ 27,483,874
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 185,306 $ 268,002
Accrued expenses 994,166 1,359,982
Deferred revenue 387,056 338,855
Current portion of long-term debt 337,171 280,724
----------------- -----------------
Total current liabilities 1,903,699 2,247,563
----------------- -----------------
Long-term debt
672,426 391,702
----------------- -----------------
Commitments (Notes 8 and 12)
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-- 13,268,256 and 14,327,218 shares at
December 31, 1997 and 1998, respectively 132,683 143,272
Additional paid-in capital 54,730,773 64,191,075
Accumulated deficit (34,659,788) (39,489,738)
----------------- -----------------
Total stockholders' equity 20,203,668 24,844,609
----------------- -----------------
$ 22,779,793 $ 27,483,874
================= =================
</TABLE>
See Accompanying Notes to Financial Statements
- F-2 -
<PAGE>
DIACRIN, INC.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996 1997 1998
----------------- -- ----------------- ---- ----------------
<S> <C> <C> <C>
REVENUES:
Research and development $ 1,143,787 $ 4,763,270 $ 3,623,249
Interest income 1,099,828 1,301,477 1,575,998
----------------- ----------------- ----------------
Total revenues 2,243,615 6,064,747 5,199,247
----------------- ----------------- ----------------
OPERATING EXPENSES:
Research and development 5,766,528 6,862,528 7,371,385
General and administrative 1,303,731 1,460,403 1,484,319
Interest expense 158,155 93,280 89,135
----------------- ----------------- ----------------
Total operating expenses 7,228,414 8,416,211 8,944,839
----------------- ----------------- ----------------
EQUITY IN OPERATIONS OF JOINT
VENTURE - - (1,084,358)
----------------- ----------------- ----------------
NET LOSS $ (4,984,799) $ (2,351,464) $ (4,829,950)
================= ================= ================
NET LOSS PER COMMON SHARE:
Basic and diluted $ (.44) $ (.18) $ (.34)
================= ================= ================
WEIGHTED AVERAGE
SHARES OUTSTANDING:
Basic and diluted 11,389,823 13,235,286 14,156,179
================= ================= ================
</TABLE>
See Accompanying Notes to Financial Statements
- F-3 -
<PAGE>
DIACRIN, INC.
Statement of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Convertible Preferred Stock
Series A Series B Series C
Number $.01 Number $.01 Number $.01
of Par of Par of Par
Shares Value Shares Value Shares Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 6,484,331 $ 64,843 2,446,917 $ 24,469 4,455,000 $ 44,550
Proceeds from initial
public offering of units,
net of $2,096,640
financing costs - - - - - -
Conversion of notes payable
and accrued interest thereon
into common stock, net of
financing costs - - - - - -
Conversion of preferred
stock into common stock (6,484,331) (64,843) (2,446,917) (24,469) (4,455,000) (44,550)
Exercise of stock options - - - - - -
Exercise of private
placement warrants - - - - - -
Net loss - - - - - -
-------------------------------------------------------------------
BALANCE, December 31, 1996 - - - - - -
Exercise of stock options - - - - - -
Net loss - - - - - -
-------------------------------------------------------------------
BALANCE, December 31, 1997 - - - - - -
Proceeds from private
placement of stock, net
of $58,080 financing costs - - - - - -
Exercise of stock options
Net loss - - - - - -
-------------------------------------------------------------------
BALANCE, December 31, 1998 - $ - - $ - - $ -
===================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Stock Total
Number $.01 Additional Stockholders'
of Par Paid-in Accumulated Equity
Shares Value Capital Deficit (Deficit)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 381,852 $ 3,819 $ 23,322,306 $ (27,323,525) $ (3,863,538)
Proceeds from initial
public offering of units,
net of $2,096,640
financing costs 2,875,000 28,750 20,874,610 - 20,903,360
Conversion of notes payable
and accrued interest thereon
into common stock, net of
financing costs 2,799,999 28,000 7,268,308 - 7,296,308
Conversion of preferred
stock into common stock 6,693,121 66,931 66,931 - -
Exercise of stock options 12,146 122 15,037 - 15,159
Exercise of private
placement warrants 427,441 4,274 3,066,320 - 3,070,594
Net loss - - - (4,984,799) (4,984,799)
-----------------------------------------------------------------------
BALANCE, December 31, 1996 13,189,559 131,896 54,613,512 (32,308,324) 22,437,084
Exercise of stock options 78,697 787 117,261 - 118,048
Net loss - - - (2,351,464) (2,351,464)
-----------------------------------------------------------------------
BALANCE, December 31, 1997 13,268,256 132,683 54,730,773 (34,659,788) 20,203,668
Proceeds from private
placement of stock, net
of $58,080 financing costs 1,027,027 10,270 9,431,650 - 9,441,920
Exercise of stock options 31,935 319 28,652 - 28,971
Net loss - - - (4,829,950) (4,829,950)
------------------------------------------------------------------------
BALANCE, December 31, 1998 14,327,218 $ 143,272 $ 64,191,075 $(39,489,738) $ 24,844,609
========================================================================
</TABLE>
See Accompanying Notes to Financial Statements
- F-4 -
<PAGE>
DIACRIN, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,984,799) $ (2,351,464) $ (4,829,950)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 220,371 277,186 345,762
Equity in operations of joint venture - - 1,084,358
Changes in current assets and liabilities-
Interest receivable and other current assets (204,100) (122,649) 44,343
Accounts payable (28,956) 23,248 82,696
Accrued expenses (241,643) 487,217 185,322
Deferred revenue 618,844 (231,788) (48,201)
------------------ ---------------- ------------------
Net cash used in operating activities (4,620,283) (1,918,250) (3,135,670)
------------------ ---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments (6,255,507) 255,409 (12,670,294)
Purchases of property and equipment, net (60,794) (794,440) (76,386)
(Increase) decrease in long-term investments (9,917,875) (413,414) 7,726,279
Investment in joint venture - - (1,911,216)
Return of capital for services provided on behalf - - 912,843
------------------ ---------------- ------------------
Net cash used in investing activities (16,234,176) (952,445) (6,018,774)
------------------ ---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock and warrants 23,989,113 118,048 9,470,891
Proceeds from term loan - 650,000 -
Principal payments on long-term debt (156,448) (190,286) (337,170)
Decrease in deferred financing costs 215,684 - -
------------------ ---------------- ------------------
Net cash provided by financing activities 24,048,349 577,762 9,133,721
------------------ ---------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,193,890 (2,292,933) (20,723)
CASH AND CASH EQUIVALENTS, beginning of year 4,114,820 7,308,710 5,015,777
------------------ ---------------- ------------------
CASH AND CASH EQUIVALENTS, end of year $ 7,308,710 $ 5,015,777 $ 4,995,054
================== ================ ==================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Conversion of notes and accrued interest
into common stock, net of financing costs $ 7,296,308 $ - $ -
================== ================ ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 90,885 $ 71,943 $ 111,405
================== ================ ==================
</TABLE>
See Accompanying Notes to Financial Statements
- 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 statement of operations and cash flows for the year
ended December 31, 1996 includes 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 5) 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.
- F-6 -
<PAGE>
DIACRIN, INC.
Notes to Financial Statements (continued)
(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, 1998, the Company has a net operating loss carryforward for federal
income tax purposes of approximately $39,000,000. 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.
The components of the net deferred tax assets are approximately as follows:
1997 1998
---- ----
Loss carryforwards $ 13,285,000 $ 15,546,000
Start-up costs 242,000 -
Credit carryforwards 2,569,000 2,684,000
Other temporary differences 4,000 15,000
--------------- --------------
Total deferred tax assets 16,100,000 18,245,000
Less - valuation allowance (16,100,000) (18,245,000)
--------------- --------------
Net deferred tax asset - -
=============== ==============
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, 1998 was an increase of
approximately $2,145,000 and relates to the increase in the deferred tax asset
as a result of the net operating loss and tax credits generated during 1998.
(e) Net Loss per Common Share
In accordance with Statement of SFAS No. 128, Earnings per Share, basic
and diluted net loss per share is calculated by dividing the net loss applicable
to common stockholders by the weighted average number of common shares
outstanding for all periods presented. Basic and diluted net loss per share is
calculated by dividing net loss by the weighted average number of vested shares
of common stock and preferred stock, on an as-converted basis, outstanding
during 1996. Diluted weighted average shares outstanding for all periods
presented exclude the
- F-7 -
<PAGE>
potential common shares from stock options and warrants of
430,832 at December 31, 1998 because to include such shares would have been
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.
(h) New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure
of all components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in stockholders' equity (deficit)
of a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. The Company's comprehensive income (loss)
is the same as presented for all periods.
The Company has adopted SFAS No. 131 Disclosures about Segments of an
Enterprise and Related Information, in the fiscal year ended December 31, 1998.
SFAS No. 131 requires certain financial and supplementary information to be
disclosed on an annual and interim basis for each reportable segment of an
enterprise. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
discrete financial information is evaluated regularly by the chief operating
decision maker or decision making group, in deciding how to allocate resources
and assess performance. Unless impracticable, companies are required to restate
prior period information upon adoption. To date, the Company has viewed its
operations and managed its business as principally one segment. As a result, the
financial information disclosed herein, materially represents all of the
financial information related to the Company's principal operating segment.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-5, Reporting on the Costs
of Start-Up Activities, which requires that all nongovernmental entities expense
the costs of start-up activities, including organizational costs, as those costs
are incurred. The Company has historically recorded all such costs as expenses,
in the period incurred.
- F-8 -
<PAGE>
In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires certain computer software costs associated with internal-use software
to be expensed as incurred until certain capitalization criteria are met. The
Company will adopt SOP No. 98-1 prospectively beginning January 1, 1999.
Adoption of this statement is not expected to have a material impact on the
Company's consolidated financial position or results of operations.
(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 the
Company. On August 12, 1996, the common stock and warrants underlying the units
began to trade separately.
(4) Private Placement of Common Stock
In February 1998, the Company completed a private placement of
1,027,027 shares of its common stock for $9.25 per share for net proceeds of
approximately $9.44 million.
(5) 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. Any profits of the Joint Venture
will be shared equally by the two parties.
Genzyme agreed to make financing available to Diacrin from and after
the date that Genzyme provides the initial $10.0 million of funding to the Joint
Venture. Genzyme agreed to make available to Diacrin an unsecured, subordinated
line of credit
- F-9 -
<PAGE>
(the "Line") of up to an aggregate amount of $10.0 million.
Diacrin may draw on the Line only in the event that Diacrin's cash and cash
equivalents are insufficient to fund Diacrin's budgeted operations for a
specified period of time, and the funds may be used by Diacrin only to fund
capital contributions to the Joint Venture. The Line will be available through
the date five years after the date Diacrin first draws on the Line, and all
outstanding principal and interest will be due on that fifth anniversary.
Advances will be interest-bearing, evidenced by a promissory note and subject to
other considerations; and the aggregate amount of draws in any calendar year may
not exceed $5.0 million. Diacrin did not make any draws on the Line during the
year ended December 31, 1998.
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 were
recorded as deferred revenue. During the year ended December 31, 1998, the
Company received $4,499,000, of which $3,623,249 was recognized as revenue,
$11,110 reimbursed the Company for capital equipment acquired on behalf of the
Joint Venture and $338,855 has been recorded as deferred revenue. In addition,
the Company made $1,911,216 in contributions to the Joint Venture, of which
$912,843 was returned to the Company for services provided on behalf of the
Joint Venture, and at December 31, 1998, the Company had accrued $180,493 in
costs incurred by Genzyme on behalf of the Joint Venture that will be funded in
1999.
The Company accounts for its investment in the joint venture on the
equity method. Through December 31, 1997, the Company had not made any capital
contributions to the Joint Venture. During 1998, the Company began recognizing
an expense related to costs incurred by Genzyme on behalf of the Joint Venture
that are funded by the Company. 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-10 -
<PAGE>
(6) 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, 1997 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------------------ ------------------
<S> <C> <C>
Cash and cash equivalents-
Cash $ 381 $ 576
Money market mutual fund 2,513,759 4,994,478
Commercial paper 2,501,637 -
------------------ ------------------
$ 5,015,777 $ 4,995,054
================== ==================
Short-term investments-
Corporate notes (remaining avg. maturity of 7 mos. at December 31, 1998) $ 3,000,429 $ 18,670,392
Certificate of deposit 999,669 -
US government agency obligation 2,000,000 -
------------------- -------------------
$ 6,000,098 $ 18,670,392
=================== ===================
Long-term investments-
Corporate notes (remaining avg. maturity of 14 mos. at December 31, 1998) $ 10,331,289 $ 2,605,010
=================== ===================
</TABLE>
(7) Accrued Expenses
Accrued expenses consisted of the following at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Accrued clinical trials costs $ 316,007 $ 595,030
Accrued contract research costs 150,261 239,034
Accrued professional fees 129,625 131,805
Accrued payroll 159,214 164,574
Accrued other 239,059 229,539
---------------------- ---------------------
Total $ 994,166 $ 1,359,982
====================== =====================
</TABLE>
(8) 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 plus one-half
of one percent (8.25% at December 31, 1998) and is payable monthly in arrears.
The loan is payable in sixty principal installments of $10,833 commencing
December 1, 1997 and may be
- F-11 -
<PAGE>
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, 1998, the Company
was in compliance with all covenants.
(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 original lease term, the
Company extended 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, 1998 are as follows:
1999 $ 161,310
2000 12,649
---------------------
Total minimum lease payments 173,959
Less-Amount representing interest 10,700
---------------------
Present value of minimum lease payments 163,259
Less-Current obligation under capital lease 150,724
---------------------
$ 12,535
=====================
(9) Stockholders' Equity (Deficit)
(a) Preferred Stock
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,
- F-12 -
<PAGE>
designations, preferences, voting
powers, qualifications and rights or privileges as shall be determined by the
Board of Directors.
(b) 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-day trading period
exceeds 150% of the exercise price of the warrants, or December 31, 2000. All
2,875,000 warrants were outstanding at December 31, 1998.
(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, 1998, there were options to
purchase 75,420 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 his
- F-13 -
<PAGE>
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, 1998,
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, 1998, 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, 1998, options to purchase 904,250 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(b):
<TABLE>
<CAPTION>
Number of Weighted average
options Exercise price
<S> <C> <C>
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
Options granted 189,250 6.43
Options exercised (31,935) .91
Options canceled (58,375) 9.18
------------------------
Balance, December 31, 1998 1,125,738 4.87
========================
Exercisable, December 31, 1998 735,609 3.31
========================
</TABLE>
All options have been granted at the fair market value of the Company's
common stock on the date of grant.
- F-14 -
<PAGE>
The following table summarizes certain information about options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding
-----------------------------------------------------------------------------------
Weighted average
Range of exercise prices Number outstanding at remaining contractual Weighted average exercise
December 31, 1998 life price
- - --------------------------- ---------------------------- ----------------------- ---------------------------
<S> <C> <C>
$ .02 to $ 2.50 650,238 5.3 $ 2.01
$ 5.25 to $ 9.50 280,000 9.1 $ 7.15
$ 10.00 to $12.00 195,500 8.7 $ 11.11
----------------------------
1,125,738
============================
</TABLE>
<TABLE>
<CAPTION>
Options exercisable
-----------------------------------------------------------------------------------
Number exercisable Weighted average
Range of exercise prices at December 31, 1998 exercise price
- - --------------------------------------- -------------------------------- --------------------------------------
<S> <C> <C>
$ .02 to $ 2.50 617,738 $ 2.03
$ 7.50 to $ 9.50 60,250 $ 8.82
$ 10.00 to $ 12.00 57,621 $ 11.28
--------------------------------
735,609
================================
</TABLE>
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company has continued to account
for employee stock options in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and has included the
proforma disclosure required by SFAS No. 123 for all periods presented.
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 1996, 1997
and 1998: risk-free interest rates of 6.5%, 5.5% and 5.5%, respectively;
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-15 -
<PAGE>
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The aggregate
fair value of options granted in 1996, 1997 and 1998 was approximately
$1,400,000, $1,689,000 and $886,000, respectively. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net loss As reported $(4,984,799) $(2,351,464) $(4,829,950)
Pro forma (5,071,094) (2,833,712) (5,644,899)
Basic and As reported (.44) (.18) (.34)
diluted net loss
per share: Pro forma (.45) (.21) (.40)
</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
1999 $ 710,000
2000 710,000
2001 533,000
------------------
$ 1,953,000
==================
Total rent expense for the years ended December 31, 1996, 1997 and 1998
was approximately $700,000, $761,000 and $771,000, respectively. The 1996 period
is net of sublease revenue received from subtenants of $58,000
- F-16 -
<PAGE>
Report of Independent Accountants
To the Venturers of
Diacrin/Genzyme LLC
(A Development Stage Enterprise):
In our opinion, the accompanying balance sheet and the related statements of
operations, changes in venturers' capital (deficit) and cash flows present
fairly, in all material respects, the financial position of Diacrin/Genzyme LLC
(A Development Stage Enterprise) (the "Joint Venture") at December 31, 1998, and
the results of its operations and its cash flows for the year ended December 31,
1998 and for the period from October 1, 1996 (date of inception) to December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Joint Venture's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Boston, Massachusetts
February 12, 1999, except as to the information presented in Note E, for which
the date is March 4, 1999
- F-17 -
<PAGE>
DIACRIN/GENZYME LLC
(A Development Stage Enterprise)
BALANCE SHEET
December 31, 1998
ASSETS
Cash $ 4,908
Prepaid to Diacrin, Inc. (Note C) 346,925
Other current assets 11,899
-----------------
Total current assets 363,732
Property and equipment, net (Note D) 220,164
-----------------
Total assets $ 583,896
=================
LIABILITIES AND VENTURERS' CAPITAL (DEFICIT)
Payable to Genzyme Tissue Repair (Note C) $ 885,161
-----------------
Total liabilities 885,161
-----------------
Commitments and contingencies (Notes C and E)
Venturers' capital (deficit) (including deficit accumulated during the
development stage of $17,946,732)
Genzyme Corporation (223,823)
Diacrin, Inc. (77,442)
-----------------
Total venturers' capital (deficit) (301,265)
-----------------
Total liabilities and venturers'
capital (deficit) $ 583,896
=================
The accompanying notes are an integral part of these financial statements.
- F-18 -
<PAGE>
DIACRIN/GENZYME LLC
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
for the period
from
October 1, 1996
for the year (date of
ended inception) to
December 31, December, 31
1998 1998
------------------ -----------------------
<S> <C> <C>
Operating costs and expenses
Research and development - Diacrin, Inc. $ 4,549,000 $ 10,349,398
Research and development - Genzyme Tissue Repair 4,985,391 7,489,071
General and administrative expenses 60,955 108,263
------------------ -----------------------
Net loss $ (9,595,346) $ (17,946,732)
================== =======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- F-19 -
<PAGE>
DIACRIN/GENZYME LLC
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
for the period
from
October 1, 1996
for the year (date of
ended inception) to
December 31, December, 31
1998 1998
------------------ -------------------
<S> <C> <C>
Operating activities:
Net loss $ (9,595,346) $ (17,946,732)
Reconciliation of net loss to net cash used by operating activities:
Depreciation 37,625 59,218
Increase (decrease) in cash from working
capital changes:
Prepaid to Diacrin, Inc. 50,000 (346,925)
Payable to Genzyme Tissue Repair 667,505 885,161
Other current assets (649) (11,899)
------------------ -------------------
Net cash used by operating activities (8,840,865) (17,361,177)
------------------ -------------------
Investing activities:
Acquisition of property and equipment (78,191) (279,382)
Financing activities:
Capital contributed by Genzyme Tissue Repair 7,004,722 15,736,226
Capital contributed by Diacrin, Inc. 1,909,241 1,909,241
------------------ -------------------
Net cash provided by financing activities 8,913,963 17,645,467
------------------ -------------------
(Decrease) increase in cash (5,093) 4,908
Cash at beginning of period 10,001 -
------------------ -------------------
Cash at end of period $ 4,908 $ 4,908
================== ===================
There were no non-cash transactions and no interest or taxes were paid.
</TABLE>
The accompanying notes are an integral part of these financial
- F-20 -
<PAGE>
DIACRIN/GENZYME LLC
(A Development Stage Enterprise)
STATEMENT OF CHANGES IN VENTURERS' CAPITAL (DEFICIT)
for the period from October 1, 1996 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
Total
Genzyme Venturers'
Corporation Diacrin, Inc. Capital (Deficit)
---------------- --------------- ---------------------
<S> <C> <C> <C>
1996 capital contributions $ 1,911,968 $ 1,911,968
1996 net loss (1,542,374) (1,542,374)
---------------- ---------------------
Balance at December 31, 1996 369,594 369,594
1997 capital contributions 6,819,536 6,819,536
1997 net loss (6,809,012) (6,809,012)
---------------- ---------------------
Balance at December 31, 1997 380,118 380,118
1998 capital contributions 7,004,722 $ 1,909,241 8,913,963
1998 net loss (7,608,663) (1,986,683) (9,595,346)
---------------- --------------- ---------------------
Balance at December 31, 1998 $ (223,823) $ (77,442) $ (301,265)
================ =============== =====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- F-21 -
<PAGE>
DIACRIN/GENZYME LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
A. Organization:
On October 1, 1996, Diacrin/Genzyme LLC ("the Joint Venture") was
established as a joint venture between Genzyme Corporation ("Genzyme")
and Diacrin, Inc. ("Diacrin") (collectively, the "Venturers"), to develop
and commercialize products and processes for use in the treatment of
Parkinson's disease and Huntington's disease in humans using porcine
fetal cells. Genzyme allocated the JV to the Genzyme Tissue Repair
Division ("GTR"). Under the terms of the Collaboration Agreement among
Diacrin, Genzyme and the Joint Venture (the "Collaboration Agreement"),
all funding is provided by the Venturers, and all payments for work
performed are made to the Venturers. GTR provided the initial $10.0
million of the funding requirements, and the next $40.0 million of the
funding requirements will be provided 75% by GTR and 25% by Diacrin.
After $50.0 million has been funded, additional funding will be provided
equally by the Venturers. Funding is provided on a monthly basis. Losses
from the Joint Venture will be shared in proportion to the capital
contributions of each Venturer. Profits from the Joint Venture will be
shared equally by the Venturers. The amounts funded to the Joint Venture
by the Venturers are paid by the Joint Venture to the Venturers based
upon the dollar amount of work, at defined cost, that each Venturer
performs toward the Joint Venture. All general and administrative
expenses recorded on the statements of operations are for costs incurred
by and reimbursed to, the Venturers. See also Note C.
The Steering Committee of the Joint Venture is comprised of
representatives of each Venturer. The Steering Committee is responsible
for approving the budget of the Joint Venture and monitoring the
scientific progress of the Joint Venture.
The intangible assets or technological know-how contributed by Diacrin to
the Joint Venture is not included as an asset in these financial
statements because generally accepted accounting principles require that
assets be recorded at their book value. The book value of these assets is
$0.
B. Accounting Policies:
Accounting Method
The financial statements have been prepared under the accrual method
of accounting in conformity with generally accepted accounting
principles.
- F-22 -
<PAGE>
DIACRIN/GENZYME LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Fiscal Year-End
Genzyme and Diacrin, as Venturers, have determined that the fiscal
year-end of the Joint Venture is December 31.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that effect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
Property and Equipment
Depreciation expense is computed on a straight-line basis over the
useful life of the property and equipment (3 to 7 years), and over the
lesser of the life of the lease or the life of the leasehold
improvement. When assets are retired or otherwise disposed of, the
assets and the related accumulated depreciation are removed from the
accounts and any resulting gains or losses are included in the results
of operations.
Research and Development Expenses
Research and development costs are expensed as incurred. The research
and development efforts are currently being conducted by the
Venturers. The costs incurred by these related parties, which are
subject to an annual budget as approved by the Joint Venture's
Steering Committee, are then charged to the Joint Venture, at defined
cost, or at amounts agreed to by the Venturers.
Income Taxes
The Joint Venture is organized as a pass-through entity; accordingly,
the financial statements do not include a provision for income taxes.
Taxes, if any, are the liability of Genzyme and Diacrin, as venturers.
Uncertainties
The Joint Venture is subject to risks common to companies in the
biotechnology industry, including but not limited to, development by
its competitors of new technological innovations, protection of
proprietary technology, health care cost containment initiatives,
product liability and compliance with government regulations,
including those of the United States Department of Health and Human
Services and the United States Food and Drug Administration.
- F-23 -
<PAGE>
DIACRIN/GENZYME LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
C. Agreements with Venturers:
Funding
Genzyme agreed to make financing available to Diacrin from and after
the date that Genzyme provides the initial $10.0 million of funding to
the Joint Venture. Genzyme agreed to make available to Diacrin an
unsecured, subordinated line of credit (the "Line") of up to an
aggregate amount of $10.0 million. Diacrin may draw on the Line only
in the event that Diacrin's cash and cash equivalents are insufficient
to fund Diacrin's budgeted operations for a specified period of time,
and the funds may be used by Diacrin only to fund capital
contributions to the Joint Venture. The Line will be available through
the date five years after the date Diacrin first draws on the Line,
and all outstanding principal and interest will be due on that fifth
anniversary. Advances will be interest-bearing, evidenced by a
promissory note and subject to other considerations; and the aggregate
amount of draws in any calendar year may not exceed $5.0 million.
Diacrin did not make any draws on the Line during the year ended
December 31, 1998.
During the year ended December 31, 1998, the amount of funding Genzyme
provided to the Joint Venture exceeded the initial $10.0 million of
funding to the Joint Venture; and, therefore, Genzyme and Diacrin
funded 75% and 25%, respectively, thereafter.
Other Agreements
The amount payable to GTR for research and development will be settled
by cash payment and represents costs incurred by GTR that are
reimbursable under the Collaboration Agreement. The amount prepaid to
Diacrin is based upon Diacrin's estimate of the work they will perform
in the next month.
According to the terms of the Operating Agreement between Diacrin and
Genzyme (the "Operating Agreement"), in no event shall net losses of
the Joint Venture be allocated to a Venturer if such allocation would
cause or increase a negative balance in such Venturer's capital
account. However, both Venturers had negative capital balances at
December 31, 1998 in violation of the Operating Agreement.
Accordingly, these negative equity balances represent receivables from
the Venturers; the Venturers provided additional funding in 1999 to
pay these amounts.
The Joint Venture leases space for research and development from
Genzyme. The current lease agreement is for the three-year period that
commenced on July 1, 1998, and terminates on June 30, 2001, for an
annual amount of $364,164.
- F-24 -
<PAGE>
DIACRIN/GENZYME LLC
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Joint Venture incurred $610,392 of rent expense for the year ended
December 31, 1998, and expects to incur $364,164, $364,164 and
$151,735 in the years ending December 31, 1999, 2000, and 2001,
respectively.
D. Property and Equipment:
Property and equipment is stated at cost. At December 31, 1998, property
and equipment consisted of the following:
Lab equipment $ 166,820
Computer equipment 71,991
Leasehold improvements 27,608
Furniture and fixtures 12,963
--------------------
279,382
Less: accumulated depreciation (59,218)
--------------------
Property and equipment, net $ 220,164
====================
Depreciation expense was $37,625 and $59,218, for the year ended December
31, 1998 and the period from October 1, 1996 (date of inception) to
December 31, 1998, respectively.
E. Subsequent Event:
In March 1999, Genzyme announced plans to reallocate its interest in the
Joint Venture from GTR to the Genzyme General Division. The transfer of
the interest is subject to the approval of GTR shareholders.
- F-25 -
Exhibit 21
Subsidiaries of the Registrant
JURISDICTION OF
NAME OWNERSHIP INCORPORATION
---------------- ----------- ---------------
Diacrin/Genzyme LLC 50% Massachusetts
Exhibit 23.1
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,
333-31541 and 333-47825.
Arthur Andersen LLP
Boston, Massachusetts
March 26, 1999
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Diacrin, Inc. on Form S-8 (File Nos. 333-19571, 333-19573, 333-19615 and
333-31541) and on Form S-3 (33-80773 and 333-47825) of our report, dated
February 12, 1999, except as to the information presented in Note E, for which
the date is March 4, 1999, on our audit of the financial statements of
Diacrin/Genzyme LLC, as of December 31, 1998, and for the period from October 1,
1996 (date of inception) to December 31, 1998, which report is included in this
Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,995,054
<SECURITIES> 18,670,392
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,059,859
<PP&E> 1,924,170
<DEPRECIATION> 1,199,673
<TOTAL-ASSETS> 27,483,874
<CURRENT-LIABILITIES> 2,247,563
<BONDS> 391,702
0
0
<COMMON> 143,272
<OTHER-SE> 24,701,337
<TOTAL-LIABILITY-AND-EQUITY> 27,483,874
<SALES> 0
<TOTAL-REVENUES> 3,623,249
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,371,385
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,135
<INCOME-PRETAX> (4,829,950)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,829,950)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
