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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 1997
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _______________ to ________________.
Commission file number 0-27976
GalaGen Inc.
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(Exact name of registrant as specified in its charter)
Delaware 41-1719104
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4001 Lexington Avenue North
Arden Hills, Minnesota 55126
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(Address of principal executive offices) (Zip code)
(612) 481-2105
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, par value $.01 per share
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. / /
The aggregate market value of the Common Stock held by
non-affiliates of the registrant as of March 19, 1998 was $10,179,947
based on the closing sale price for the Common Stock on that date as
reported by The Nasdaq Stock Market. For purposes of determining such
aggregate market value, all officers, and directors of the registrant
are considered to be affiliates of the registrant, as well as
stockholders holding 10% or more of the outstanding Common Stock as
reflected on Schedules 13D or 13G filed with the registrant. This
number is provided only for the purpose of this report on Form 10-K and
does not represent an admission by either the registrant or any such
person as to the status of such person.
As of March 19, 1998 the registrant had 7,962,198 shares of Common
Stock issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement dated March 30,
1998 for the annual meeting of stockholders to be held on May 13, 1998 and the
Annual Report to Stockholders for the year ended December 31, 1997 are
incorporated by reference in Parts II, III and IV.
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report on Form 10-K under the
headings "Item 1. Business" and "Item 2. Properties" and incorporated by
reference under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements
within the meaning of the safe harbor provisions of Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Risk Factors" below
beginning on page 16 of this Annual Report on Form 10-K, that could cause
actual results to differ materially from those projected. Because actual
results may differ, readers are cautioned not to place undue reliance on
these forward-looking statements. Certain forward-looking statements are
indicated below by an asterisk.
INTRODUCTION
GalaGen Inc. ("GalaGen" or the "Company"), which was incorporated in
1992 as a successor to a company incorporated in 1987, has expertise in
obtaining and processing polyclonal antibodies, as follows:
ACCESS TO COLOSTRUM. The Company has agreements with Land O'Lakes
which provide the Company with access to the Land O'Lakes dairy system.
This dairy system has approximately 400,000 cows, from which the Company
receives its supply of colostrum, which is milk collected in the first
few milkings of a dairy cow after its calf is born. From this
colostrum, the Company obtains its antibodies, which are food proteins.
These cows are located primarily in the upper Midwest and both the East
and West coasts.
PROPRIETARY TECHNOLOGY. Using its proprietary immunization
technologies, including the use of immune system stimulating adjuvants,
the Company can produce antibodies in the cow that target specific
pathogens infecting the human gastrointestinal ("GI") tract, including
bacteria and their toxins, parasites, fungi and viruses. This technology
increases by many fold a dairy cow's natural production of
pathogen-specific antibodies in its colostrum.
PROPRIETARY MANUFACTURING. The Company has patented, proprietary
manufacturing processes that are used to concentrate antibodies from the
colostrum. Standard dairy processing techniques destroy the activity of
most of the antibodies present in milk and colostrum, whereas the
Company's processing retains the antibody activity.
The Company is utilizing this expertise to develop a portfolio of
proprietary nutritional products, including dietary supplements, which will
incorporate its Proventra-TM- Brand Natural Immune Components ("Proventra").
These products will target needs of both consumers and healthcare
professionals.* GalaGen is also developing oral pharmaceuticals that target
life threatening and emerging pathogens.
In December 1997, the Company introduced Basics Plus-TM-, a dietary
supplement product, in conjunction with its marketing and manufacturing
partner, Lifeway Foods, Inc. Basics Plus is the first product to emerge from
the collaboration with Lifeway Foods, Inc. It contains active kefir
cultures, which are cultures that contain
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beneficial bacteria strains, and GalaGen's Proventra. Basics Plus is the
first dairy-based dietary supplement sold in the United States in the
refrigerated section of health food stores and grocery stores, and is
currently in test markets in Chicago, New York City and Milwaukee. The
product was featured in the February 1998 issue of DAIRY FOODS MAGAZINE.
Diffistat-G, the Company's lead pharmaceutical product in development,
is being developed for the treatment and prevention of antibiotic-associated
diarrhea, a disease that annually affects more than 400,000 patients in the
United States.
Because the Company's antibodies, including Proventra, are derived from
cows' milk, they do not represent new chemical compounds with uncertain
toxicity, but rather their components are commonly found in dairy foods that
are already widely consumed. Antibodies for incorporation into multiple
nutritional and pharmaceutical products can be manufactured using a single,
proprietary manufacturing process and facility, and as a result, the Company
believes that additional products will not require significant separate
investments in manufacturing facilities or process techniques.*
BACKGROUND
GENERAL
Passive immunity consists of using antibodies produced by one individual
or animal to treat, prevent or protect against infection in another. Such
antibodies can be administered orally for GI infections. Breast feeding is
the most common example of passive immunity delivered to the GI tract, with
the mother providing natural protective antibodies to her infant through her
milk. Similarly, dairy cows provide antibodies to calves through the
colostrum, which is the milk produced during the first several days of
lactation. The concentration of antibodies in colostrum is many times higher
than the normal concentration in milk. Through their natural exposure to the
environment, cows have developed antibodies that recognize and bind to many
human pathogens.
NUTRITIONAL PRODUCTS
According to Frost & Sullivan, a competitive-market analysis firm, the
market for nutraceutical or functional food beverages now exceeds $20
billion. The Company believes that this significant market size is due to a
number of factors, including (i) increased interest in healthier lifestyles,
(ii) the publication of research findings supporting the positive health
effects of certain nutritional supplements and (iii) the aging of the "Baby
Boom" generation combined with the tendency of consumers to purchase more
nutritional supplements as they age.*
The Company believes that the inclusion of antibodies in nutritional
products, along with including other components such as active cultures and
dietary soluble fiber, provide important benefits and competitive advantages,
including (i) a unique immune-enhancing system, (ii) a fit with consumer
needs, and (iii) a safe, proven means to fight pathogens.*
PHARMACEUTICALS
Antibiotics and vaccines (active immunizations) are currently the most
common therapies for the treatment and prevention of infections.
Unfortunately, both have significant limitations for the management of
infections. Pathogens are increasingly resistant to antibiotics. Overuse of
antibiotics may result in selection for additional resistant strains and,
occasionally, results in the onset of serious secondary infections. Vaccines
are not immediately effective and usually require repeated vaccinations to
raise the concentration of antibodies in the body to levels high enough to
prevent or counteract disease. This delay may be unacceptable because it may
permit progression of the disease to severe or even fatal stages. Active
immunization of the GI tract is also difficult. For these reasons, new
therapeutic approaches for treating and preventing GI infections are needed.
One
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alternative to antibiotics and vaccines is passive immunity. As a result of
these advantages, passive immunity can be used in pharmaceutical applications
for both acute treatment and long-term prevention of disease.
Advantages of passive immunity for treating or preventing GI tract
infections are numerous. Orally-delivered antibodies provide immediate
treatment of existing infections and provide for rapid temporary protection
against developing infection. They may be delivered in high concentrations
directly to the site of infection in the GI tract rather than through the
blood-stream. They are polyclonal, meaning that they bind to many different
surface features of a pathogen and are thus less likely to permit the
development of resistant pathogens. They do not disrupt the GI tract's
natural bacterial flora, which is necessary for normal digestion and
intestinal function.
THE COMPANY'S CORE ANTIBODY TECHNOLOGY AND PRODUCT BENEFITS
The Company's products contain polyclonal antibodies derived from bovine
colostrum, which is the first milk from a cow after her calf is born. The
antibodies are orally administered to humans and provide passive immunity
within the GI tract. The Company's goal is to provide passive immunity for
individuals either through regular use of nutritional products that have
lower concentrations of antibodies over a longer period of time or through
periodic use of pharmaceutical products that have higher concentrations of
antibodies over a shorter period of time.*
The antibodies may block a pathogen's effect by immobilizing it, killing
it, promoting its ingestion and destruction by white blood cells, or
preventing it from attaching to and colonizing the GI tract. In these ways,
the antibodies help to eliminate the pathogen from the infected individual.
The Company's proprietary immunization technologies, through the use of
immune system stimulating adjuvants, increase by many fold a dairy cow's
natural production of pathogen-specific antibodies in its colostrum.
Standard dairy processing techniques destroy the activity of most
antibodies present in milk and colostrum. The Company's proprietary
processes used to concentrate antibodies have been developed through many
years of research and development. This work resulted in a process that uses
several well-tested and efficient dairy manufacturing techniques that have
been modified to preserve the biological activity of the antibodies. The
Company will manufacture its nutritional products in accordance with the
appropriate license issued by Minnesota Department of Agriculture ("MDA").
The Company will manufacture its pharmaceutical products in accordance with
pharmaceutical specifications for oral dosage formulations and will support
its proprietary processing system with a quality control system that
regulates, monitors and reviews the processing system in compliance with
current Good Manufacturing Practices ("GMP") for the manufacture of biologics.
PRODUCTS IN DEVELOPMENT
NUTRITIONAL PRODUCTS
In addition to therapeutic products targeted at GI diseases, the Company
believes that its antibody technology lends itself to the creation of food
products or dietary supplements with health claims, often called "functional
foods" or "nutraceuticals".* These have been defined as foods which provide
benefits beyond their nutritional value. While there is not a regulatory
definition for the terms "functional food" or "nutraceutical", these terms
are widely used in the marketplace. The Company believes that the enactment
by Congress of the Nutrition Labeling and Education Act ("NLEA") in 1990 and
the Dietary Supplement Health and Education Act ("DSHEA") in 1994 enabled the
regulatory process for marketing foods or dietary supplements. DSHEA permits
such products to bear "structure-function" claims related to how the product
affects the structure or function of the body, and such claims do not require
FDA review or approval, but must be supported by scientific evidence. NLEA
permits products to carry more specific health claims, but requires FDA
approval and general scientific consensus to support the claim in question.
The Company believes that the incorporation of Proventra in foods or dietary
supplements would add benefits to these products.*
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As previously described above, the Company currently has one product,
Basics Plus, being sold in test markets through its manufacturing and
marketing partner Lifeway Foods, Inc. The Company is applying its resources
to two other products as described below. The Company does not anticipate
spending significant resources to market the final products, but will seek to
find partners with the appropriate distribution and marketing credentials*:
<TABLE>
<CAPTION>
Product Target Population Stage of Development
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<S> <C> <C>
- Clinical Nutrition Patients in Market research
Beverage hospitals, nursing completed;
homes and elderly clinical evaluation to
population begin in the second
quarter of 1998
- Consumer Nutritional Health-oriented Product formulation
Beverage consumers underway; market
research scheduled to
begin in the second
quarter of 1998
</TABLE>
CLINICAL NUTRITION PRODUCT
The Company is developing a dairy-based nutritional beverage for
patients in hospitals and nursing homes. Based upon market research results,
the Company believes that a need exists for a superior tasting refrigerated
beverage that will provide Proventra and other active components.* The
Company believes that a superior tasting dairy-based beverage, which includes
a combination of these ingredients, will increase consumption compliance, in
turn leading to better nutrition, improved defense against infection and more
regular bowel function.* Clinical evaluation of this product is anticipated
to begin in the second quarter of 1998.*
CONSUMER NUTRITION PRODUCT
GalaGen is developing an enhanced beverage product targeted at
health-oriented consumers. Market trends indicate that consumers,
particularly baby boomers and mature adults, are taking a more proactive role
in managing their health. The Company believes that a superior tasting
beverage containing its proprietary immune-enhancing ingredients, including
Proventra, will be the first product of its kind.* Product development is
underway with market research to begin in the second quarter of 1998.*
PHARMACEUTICALS
The Company believes that its colostrum-derived antibody products in
development may provide many attractive clinical benefits and offer a safe
and effective alternative to antibiotics and other therapeutics.*
WELL-TOLERATED, DAIRY-DERIVED ANTIBODIES. Orally-delivered,
dairy-derived antibodies have been administered in several studies by
the Company and others to over 1,000 individuals with no serious adverse
effects. Antibodies are among the many milk proteins commonly consumed
in everyday dairy products such as milk, yogurt and cheese. Lactose
levels in the Company's product candidates have been reduced to
approximately one-tenth that of milk. The Company believes that the
product should, therefore, be tolerable by all but the most
lactose-intolerant individuals.*
RAPID ONSET OF ACTION AND A SUPPLEMENT TO ACTIVE IMMUNITY. Antibody
products deliver high concentrations of pathogen-specific antibodies to
the site of infection and have a rapid onset of action, while active
immunizations, such as polio or hepatitis B vaccines, may take weeks or
months to provide adequate immune protection. Passive immune protection
may be especially important where there is not
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time for active immunizations to be effective (for example, when there
is exposure to infection or when an infection has become established and
immediate therapy is needed) or where the underlying immune suppression
leaves an individual incapable of responding to the active immunization
(for example, in cancer patients).
AVOID PROBLEMS ASSOCIATED WITH ANTIBIOTIC USE. Antibodies
recognize multiple binding sites on a target pathogen and have multiple
potential mechanisms of action, including the neutralization of toxins.
With appropriate immunization regimens, antibodies can be produced that
recognize different strains of the same pathogen and affect even those
strains that may be resistant to antibiotics. In contrast, other
classes of antiinfectives work by interrupting a single mechanism or by
binding to a single site and are, therefore, more likely to be overcome
by bacterial adaptation. Unlike broad-spectrum antibiotics,
orally-delivered antibody products are selective for specific pathogens
and do not disrupt the GI tract's normal bacterial flora. Broad-spectrum
antibiotics may disrupt the natural and beneficial GI bacterial flora
and foster the subsequent overgrowth of certain disease-causing
pathogens. The selectivity of antibodies should permit their use for
prolonged periods to prevent infections, without promoting the
development of resistant strains.
STABILITY AND EASE OF USE. The Company's product candidates are
stable powder concentrates with a shelf life exceeding two years. These
products can be formulated into a variety of delivery formats, including
tablets, capsules, chewing gum and sterile liquids. The standard dosage
form is a dry powder which, when reconstituted, has the consistency and
flavor of milk.
The Company currently has one product in development under the first
tier of products to which it is applying its resources. The Company does not
anticipate applying significant resources toward the second tier products but
will seek to find partners who will fund the required development and
clinical trials*:
<TABLE>
<CAPTION>
Product Disease Target Stage of Development
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<S> <C> <C>
FIRST TIER:
DIFFISTAT-G Antibiotic associated diarrhea Phase I bioavailability
due to CLOSTRIDIUM DIFFICILE clinical trial completed.
("C. DIFFICILE"). Second Phase I
bioavailability study in
ileostomy patients
completed. Phase II
clinical trial underway.
SECOND TIER:
CANDISTAT-G Oral and esophageal European Phase I/II
candidiasis from the fungus clinical trial in bone
species CANDIDA ("CANDIDA") in marrow transplant
cancer, organ/bone marrow patients completed.
transplant and other
immunocompromised patients.
PYLORIMUNE-G Gastrointestinal ulcers and Preclinical development.
gastritis due to
HELICOBACTER PYLORI
("H. PYLORI").
</TABLE>
DIFFISTAT-G
The Company is developing DIFFISTAT-G for the treatment and prevention
of antibiotic-associated diarrhea. This complication of antibiotic therapy
results when the antibiotics eliminate the GI tract's normal bacterial flora
and foster the subsequent overgrowth of certain disease-causing bacteria,
most often C. DIFFICILE.
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Each year, it is estimated that more than 400,000 patients in hospitals and
long-term health care institutions in the U.S. contract antibiotic-associated
diarrhea due to C. DIFFICILE. The severity of diarrhea resulting from C.
DIFFICILE may vary from a mild diarrhea to a life-threatening condition.
Even the most mild cases in hospitals and long-term health care institutions
warrant treatment due to the contagious nature of the disease.
Currently, the first stage of treatment for antibiotic-associated
diarrhea involves the discontinuation of the causal antibiotic therapy, if
possible, and often the initiation of different antibiotics to treat the C.
DIFFICILE infection. Discontinuation of the causal antibiotic may result in
inadequate treatment of the underlying infection. Often, the serious nature
of the underlying infection makes it impossible to discontinue the causal
antibiotic. Therefore, prophylaxis for high risk patients would be desirable
if there were a product available that avoided the problems presented by
antibiotics.
Metronidazole is the antibiotic of choice to treat antibiotic-associated
diarrhea, with oral vancomycin as a second choice that is generally reserved
for more severe or relapsing diarrhea. The initial response to these
antibiotics usually is rapid and satisfactory. However, relapse can be a
significant problem occurring in 20 to 40 percent of patients. These
relapses can occur multiple times and result in significant disability for
the patient. In addition, the use of oral vancomycin for this indication is
being discouraged to reduce the likelihood that other serious pathogens will
develop resistance to vancomycin. The Company believes that DIFFISTAT-G may
prevent and treat C. DIFFICILE-associated diarrhea without the complications
associated with antibiotic treatment.*
An animal model study of DIFFISTAT-G demonstrating positive prophylactic
results was completed in 1991. When the product was administered to animals
before the introduction of C. DIFFICILE organisms, the animals receiving
DIFFISTAT-G survived longer and had markedly less diarrhea than animals
receiving a placebo. Additional laboratory studies conducted at Boston
University have shown that the product effectively blocks the binding and
action of toxins produced by C. DIFFICILE. Results of these preclinical
efficacy studies for Diffistat-G were published in the February 1996 issue of
ANTIMICROBIAL AGENTS AND CHEMOTHERAPY. A Phase I study was completed in
normal volunteers at Boston University to assess the bioavailability of the
product and to guide the choice of appropriate dosage for a Phase I/II
therapeutic trial. Results of the first Phase I bioavailability trial were
published in ANTIMICROBIAL AGENTS AND CHEMOTHERAPY in February 1997. A
second Phase I bioavailability trial in ileostomy patients was completed in
February 1997 at Beth Israel-Deaconess Medical Center, Harvard Medical School
in Boston and demonstrated higher than anticipated recovery of functional
antibodies in the ileum of these patients. Based on these positive results,
the Company initiated a multi-center Phase II clinical trial in August 1997
to assess safety, efficacy and formulation. Principal investigators in the
study are from Beth Israel-Deaconess Medical Center, Harvard Medical School
in Boston. Additionally, an emergency use compassionate release program was
initiated at the request of the FDA, and the initial pediatric patient
treated under this program had clearing of symptoms and the infection. If
positive results are shown from the Phase II clinical trial, the Company
anticipates that it will need to secure a partner to continue further
clinical development and to market Diffistat-G.*
CANDISTAT-G
The Company is clinically developing an oral antibody product,
CANDISTAT-G, for the prevention/treatment of thrush, or infection of the
throat and oral cavity with the fungus species CANDIDA. This infection
occurs in most immunocompromised patients (cancer, organ/bone marrow
transplant and HIV/AIDS) at some time during their illness. Short-term
therapy with traditional antifungal agents improves symptoms of thrush in
immunocompromised patients but often fails to clear the pathogen, resulting
in a recurrence of symptoms within weeks. Prolonged therapy with these
agents may produce clinical benefits but also has been associated with
increasing reports of drug-resistant fungal strains. The Company believes
that an antibody-based product such as CANDISTAT-G may fulfill such a need,
particularly for the prevention of more severe thrush and blood-borne
infections originating from the GI tract.*
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CANDISTAT-G has been prepared by immunizing cows with several different
antigens thought to be important in the establishment of oral infections with
CANDIDA. These preparations were shown to substantially inhibit the binding
of CANDIDA to human cheek cells in culture. A pilot clinical evaluation for
CANDISTAT-G treated bone marrow transplant recipients and
historically-matched controls in a European Phase I/II dose-ranging clinical
trial at a major teaching hospital in Sweden was completed in the third
quarter of 1997. The results from this clinical trial showed that
CANDISTAT-G provided a reduction in the number of CANDIDA organisms in the
oral cavity of eight out of eleven highly immunocompromised transplant
patients with pre-existing CANDIDA colonization. No product related adverse
events were noted.
PYLORIMUNE-G
The Company is developing a polyclonal antibody product to treat
gastritis and ulcers caused by the bacterium H. PYLORI. Since the discovery
of the relationship between H. PYLORI infection and ulcers, a major trend in
the treatment has been the increased use of antibacterial "triple therapy" (a
combination of several antibiotics, bismuth, and inhibitors of gastric acid
production) instead of or in addition to conventional ulcer therapies. While
most of these antibiotic-based regimens are partially effective, compliance
is difficult and 10 to 20 percent of patients fail therapy in part because of
antibiotic resistance. The Company believes that the limited effectiveness of
currently available therapies and growing antibiotic resistance offer an
opportunity for its antibody product in development, PYLORIMUNE-G.*
Initial laboratory studies with PYLORIMUNE-G have successfully
demonstrated neutralizing antibody activity against a key feature of H.
PYLORI. The Company has access to five key antigens for producing antibodies
to inhibit or eradicate H. PYLORI. The Company is developing cell culture
systems and animal models for screening the efficacy of these proprietary
antibody preparations. In 1995 the Company entered into a strategic alliance
with Chiron Corporation ("Chiron") for the development of colostrum-based
antibody products to treat H. PYLORI. Chiron's participation in the research
and development program included testing of prototype antibody products in
its animal models. See "Chiron Relationship" below.
MANUFACTURING SYSTEM
The Company's manufacturing system can be used for producing antibodies
to be used for both nutritional products and pharmaceuticals and utilizes the
existing milk production infrastructure. The Company's system has been
designed to access very large numbers of cows in commercial milking herds,
organize them into discrete product-specific groups, immunize them with
specific antigens to heighten the natural production of pathogen-specific
antibodies in their colostrum, collect the colostrum and concentrate the
antibodies using a proprietary process. This process preserves the essential
antibody activity while reducing unnecessary components, including microbial
contaminants.
Modern dairy cows, having been bred for high volume milk production,
produce colostrum in quantities far greater than their calves can consume.
This surplus colostrum is not placed into the commercial milk supply and is
ordinarily a waste product. The Company's technology turns the surplus
colostrum into a valuable raw material. With the Company's manufacturing
system, the Company believes that antibodies can be produced from colostrum
at a fraction of the cost of either human serum-derived polyclonal antibodies
or cell culture-derived monoclonal antibodies.* The high cost of producing
monoclonal antibodies, in particular, makes their administration by the oral
route prohibitively costly.
The Company's processing system is the same for the manufacture of all
of the Company's pharmaceutical products. The colostrum for each potential
product is processed to a bulk powder using the same procedures, according to
the same specifications, and on the same equipment. This bulk powder may
undergo final finishing steps, depending on the dosage form that is desired.
The primary point of product differentiation is the antigen/adjuvant
combination (immunogen) used to produce the specific and desired antibody
response in the cow. This antibody specificity is used to define a product
targeting a specific disease and indication.
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Standard dairy processing techniques destroy the activity of most of the
antibodies present in milk and colostrum and render them inactive. The
proprietary process used by the Company to concentrate antibodies has been
developed by the Company through many years of research and development.
This work has resulted in a process that uses well-tested and efficient dairy
manufacturing techniques that have been modified to preserve the biological
activity of the antibodies. The Company has two patents that have been
issued for this process. The process reduces the bioburden to levels
significantly lower than those present in milk or milk products, and in
accordance with pharmaceutical specifications for oral dosage formulations.
The Company is supporting its proprietary antibody processing system with a
quality control system designed to regulate, monitor and review the
processing system in compliance with Good Manufacturing Practices for the
manufacture of biologics.
The Company has developed additional processes for the manufacture of
Proventra Brand Natural Immune Components and final product formulations as
part of its nutritional product development efforts. The Company has
obtained Kosher certification for these natural immune components.
Additionally, the Company has obtained the appropriate license from Minnesota
Department of Agriculture.
Construction of the Company's pilot plant facility within the existing
Land O'Lakes pilot plant complex in Arden Hills, Minnesota was completed in
1996. The Company does not anticipate that it will need to fully validate the
facility for pharmaceutical purposes in 1998.* Land O'Lakes has guaranteed
the equipment leases associated with the pilot plant facility. The Company
believes that the capacity of this facility will be adequate for the
production of nutritional and pharmaceutical products, either for sale or
clinical requirements, in 1998 and believes that contract manufacturers would
be available to increase its production capacity quickly, if required.*
LICENSE AGREEMENTS AND RESEARCH COLLABORATIONS
The Company's research and development strategy is to pursue its own
research programs internally and to complement such programs by establishing
relationships with key external medical, academic, governmental and major
research organizations. Specifically, the Company intends to continue
complementing its extensive current technology base by acquiring access to
additional proprietary technology and patents in the areas of antibodies,
vaccine, molecular biology, and processing and manufacturing technology.*
The Company also may seek collaborative arrangements for commercialization of
its antibody products.*
The Company's antibody technology may be applied to the development of
nutritional and pharmaceutical products in many areas.* To exploit its core
technology as broadly as possible in human applications, the Company's
strategy is to enter into licensing and collaborative relationships with food
and pharmaceutical companies with complementary product lines.* The Company
spent $3.9 million, $5.3 million and $3.7 million for research and
development in fiscal years 1997, 1996 and 1995, respectively.
LAND O'LAKES RELATIONSHIP
The Company believes that the Company's existing relationship with Land
O'Lakes provides it with certain advantages over existing and potential
competitors.* Land O'Lakes made significant advances in the development and
commercialization of antibody products for treating and preventing diseases
in animals. This technology provides the Company with a solid foundation on
which to base its efforts to develop similar products for human use.
Under a supply agreement with Land O'Lakes, the Company agreed to
purchase all of its commercial requirements for colostrum from Land O'Lakes
through May 7, 2002, subject to Land O'Lakes' option to renew the supply
agreement for an additional ten-year period. The Company must provide
program specifications to Land O'Lakes prior to commencing each of its
commercial programs and Land O'Lakes must notify the Company within a
specified period whether it will supply according to the agreement. If Land
O'Lakes does not
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confirm during that period that it will supply colostrum according to the
specifications, then the Company has the right to obtain the colostrum from
alternative sources. Commercial production could be delayed if Land O'Lakes
does not elect to supply according to the supply agreement and the Company is
required to locate an alternate supplier.
When the Company was formed, it signed a letter of intent with Land
O'Lakes to develop strategic relationships focused on the development of
functional food products. In March 1998, the Company and Land O'Lakes signed
an amended and restated license agreement (the "Restated License") in which
the Company has significantly broadened its rights to develop and market
functional foods. Under the Restated License, the Company can use, improve,
exploit, license or share existing Procor technology, Procor technology
improvements and new technologies, as defined, in all areas of functional
foods except under certain "reserved food product" and "first refusal food
product" categories, as defined. If the Company intends to engage in
manufacturing or marketing any "first refusal food product", the Company must
give Land O'Lakes notice of its intent, in which case Land O'Lakes can
negotiate with the Company, in good faith and within a defined period of
time, to undertake any part of the manufacturing or marketing areas. If the
Company intends to engage in manufacturing or marketing any "reserved food
product", the Company must give Land O'Lakes notice of its intent and must
only work with Land O'Lakes to undertake the manufacturing or marketing of
such products. In the original license agreement with Land O'Lakes, the
Company retained rights to pursue the development of infant formula products
containing polyclonal antibody technology.
In March 1997, Land O'Lakes granted the Company a license (the "Kefir
License") to use existing antibody technology and future improvements in the
development, formulation, manufacture, marketing, distribution and sale of
kefir-based products, as defined in the Kefir License. In consideration of
granting the Kefir License, Land O'Lakes will receive a royalty based on food
components or ingredients sold by the Company to be included in any
kefir-based product and on net receipts from any kefir-based finished product
sold by the Company. As mentioned below under "Chiron Relationship", Land
O'Lakes consented to the Company's use of antibody technology for food
applications of an H. PYLORI product.
CHIRON RELATIONSHIP
In March 1995, the Company and Chiron entered into a License and
Collaboration Agreement involving the licensing of Chiron adjuvant technology
to the Company for the development of antibody products processed from bovine
colostrum and the cross-licensing of Chiron proprietary H. PYLORI-associated
technology and Company proprietary H. PYLORI antigens for a collaboration to
research and develop passive immune therapies, using bovine antibodies,
against H. PYLORI.
Under the agreement, Chiron granted the Company an exclusive worldwide
license for the use of a proprietary Chiron adjuvant for the production of
PYLORIMUNE-G. See "Products in Development - Pharmaceuticals - PYLORIMUNE-G"
above. Use of the adjuvant for providing additional polyclonal antibody
products processed from bovine colostrum can be designated under the terms of
the agreement. Except as described below with regard to PYLORIMUNE-G, the
Company's license to the Chiron adjuvant technology expires on the later of
the expiration date of the last to expire of the licensed patents covering
the technology or, within a given country, 10 years after the first
commercial sale of a product making use of the licensed technology within
such country.
In addition, under the agreement Chiron and the Company may collaborate
on the development of antibody products processed from bovine colostrum
targeting infections caused by H. PYLORI, the bacterium associated with
ulcers and gastritis. The research program would, if and when commenced,
focus on producing specific, high potency antibodies directed against several
products of H. PYLORI that the bacterium uses to attach to the stomach
surfaces, and neutralize gastric acidity that would otherwise kill the
bacterium, and inflame the gastric and duodenal surfaces. Chiron has an
option for exclusive worldwide marketing rights for any H. PYLORI product
resulting from the collaboration with profits being shared between Chiron and
the Company according to
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a preset formula. In connection with the agreement, Land O'Lakes consented
to the Company's use of polyclonal antibody technology for food applications
of an H. PYLORI product. The Company's license to the Chiron adjuvant
technology for use in PYLORIMUNE-G is subject to early termination by Chiron
if (i) no PLA has been filed for PYLORIMUNE-G by March 1, 2001, (ii) certain
competitors of Chiron acquire control of the Company or, (iii) by the time of
the first demonstration of efficacy of PYLORIMUNE-G, Chiron has not received
an opinion of independent counsel selected by Chiron that the manufacture,
use or sale of PYLORIMUNE-G does not infringe third party patents.
PROPRIETARY RIGHTS AND PATENTS
The Company's policy is to protect its proprietary technology as trade
secrets and by filing patent applications on technology for which the Company
believes patent protection is available and is in the best interest of the
Company. The Company also relies upon know-how, continuing technological
innovations and licensing opportunities to develop and maintain its
competitive position.
The Company believes that certain of its process improvements are more
valuable as trade secrets than as patented processes, where the process
improvements would have to be publicly disclosed. The Company relies on
trade secrets and proprietary know-how it developed while manufacturing
antibody products for veterinary use. The Company believes that substantial
barriers exist for competitors desiring to commercialize antibody products
derived from milk or colostrum*; however, there can be no assurance that
other companies will not develop production processes or initiate
relationships with other large dairy cooperatives to develop a similar
procurement system. The Company seeks to protect trade secrets and know-how
through confidentiality agreements with employees, consultants and other
parties. These agreements provide that all confidential information
developed or made known during the course of the relationship with the
Company is to be kept confidential and not disclosed to third parties, except
in specific circumstances. No assurance can be given that such agreements
will provide meaningful protection for the Company's unpatented trade secrets
or provide adequate remedies in the event of unauthorized use of such
information. Neither can assurance be given that others will not
independently develop substantially equivalent proprietary information and
technology or otherwise gain access to the Company's trade secrets or
disclose such technology.
The Company has been issued two patents, #5,670,196 and #5,707,678 from
the United States Patent & Trademark Office. The patents cover significant
processes in its core manufacturing technology for antibodies for
microfiltering milk and colostrum that reduces bioburden while improving
yield. The Company also has two United States patent applications pending
and has acquired licenses to a number of patents or patent applications of
others. The Company's two United States patent applications are in the area
of antibody products for humans. The Company believes that useful, new and
unobvious antibody formulations may be patentable.* Furthermore, in some
cases, patent coverage may be available for the vaccines or antigens used to
provoke the immunological response which produces the antibodies. The
Company's strategy is to pursue patent protection for each of its products
where possible, including their components (e.g., antigens, vaccine
compositions), as well as for certain process and formulation improvements,
although the Company may not be successful in achieving broad patent
protection for its technology.
The Company has become aware of several patents that may relate to its
antibody technology. In 1991, the Company became aware of one such issued
patent. Land O'Lakes engaged outside patent counsel to review the patent and
such counsel rendered its written opinion to Land O'Lakes that the patent is
not infringed by the Company's technology. The Company engaged its own
outside patent counsel to review the patent and such counsel rendered its
independent opinion that the patent is not infringed by the Company's
technology and that, in any event, the patent would be invalid if it were
interpreted broadly enough so as to cover the Company's technology. While
the Company does not regard the patent as a threat to its business*, there
can be no assurance that the holder of the patent will not pursue litigation
which could be costly to the Company. In 1993, the Company became aware of
another issued patent relating to the application of colostrum-based passive
immunity technology to an H. PYLORI-specific product. The Company engaged
outside patent counsel to review the patent,
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and a related patent which was subsequently issued, and such counsel rendered
its independent opinion to the Company that neither patent is valid and, in
any event, it is not certain at this time if the Company's technology would
infringe either patent even if valid. While the Company does not regard the
patents as a threat to its business*, there can be no assurance that the
holder of the patents will not pursue litigation which could be costly to the
Company. The Company is aware of a published international patent
application entitled "Urease-Based Vaccine and Treatment of Helicobacter
Infection". To date, no patent on this application has been granted and
therefore the Company cannot meaningfully assess the impact, if any, of this
patent application on its business.
GOVERNMENT REGULATION
NUTRITIONAL PRODUCTS
GENERAL
The formulation, manufacturing, processing, packaging, labeling,
advertising, distribution and sale of nutritional supplements such as those
being developed by the Company are subject to regulation by one or more
federal agencies, principally the FDA and the Federal Trade Commission (the
"FTC"), and to a lesser extent the Consumer Product Safety Commission and the
United States Department of Agriculture. These activities are also regulated
by various governmental agencies for the states and localities in which the
Company's products are sold, as well as by governmental agencies in certain
foreign countries in which the Company's products are sold. Among other
matters, regulation of the Company by the FDA and FTC is concerned with
claims made with respect to a product which refer to the value of the product
in treating or preventing disease or other adverse health conditions.
Federal agencies, primarily the FDA and FTC, have a variety of remedies
and processes available to them, including initiating investigations, issuing
warning letters and cease and desist orders, requiring corrective labels or
advertising, requiring consumer redress (for example, requiring that a
company offer to repurchase products previously sold to consumers), seeking
injunctive relief or product seizure and imposing civil penalties or
commencing criminal prosecution. In addition, certain state agencies have
similar authority, as well as the authority to prohibit or restrict the
manufacture or sale of products within their jurisdiction. These federal and
state agencies have in the past used these remedies in regulating
participants in the nutritional products industry, including the imposition
by federal agencies of civil penalties in the millions of dollars against a
few industry participants. There can be no assurance that the regulatory
environment in which the Company operates will not change or that such
regulatory environment, or any specific action taken against the Company,
will not result in a material adverse effect on the Company's business,
financial condition or results of operations.* In addition, increased sales
and publicity of nutritional supplements may result in increased regulatory
scrutiny of the nutritional supplements industry.
DIETARY SUPPLEMENT HEALTH AND EDUCATION ACT
DSHEA was enacted in October 1994, amending the Food, Drug and Cosmetic
Act. The Company believes this law is generally favorable to the dietary
supplement industry.* DSHEA establishes a new statutory class of "dietary
supplements," which includes vitamins, minerals, herbs, amino acids and other
nutritional supplements for human use to supplement the diet and includes in
such class all dietary ingredients on the market as of October 15, 1994.
Such class of nutritional supplements will not require the submission by the
manufacturer or distributor of evidence of a history of use or other evidence
of safety establishing that the supplement will reasonably be expected to be
safe, but a nutritional supplement which contains a dietary ingredient which
was not on the market as of October 15, 1994 does require such submission of
evidence of a history of use or other evidence of safety. Among other things,
this law prevents the further regulation of dietary ingredients as "food
additives" and allows the use of statements of nutritional support on product
labels.
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PHARMACEUTICAL PRODUCTS
GENERAL
The Company's pharmaceutical products are classified as human biological
drugs and their research, development and marketing are subject to
substantial regulation by the FDA as well as state and local entities. The
Federal Food, Drug and Cosmetic Act, the Public Health Service Act and other
federal statutes govern the testing, manufacture, safety, effectiveness,
approval, storage, recordkeeping, labeling, advertising and promotion of the
Company's products. Noncompliance with applicable statutory and regulatory
requirements may result in fines, recall or seizure of products, refusal to
permit the Company to enter into government supply contracts, refusal to
approve Product Licensing Applications ("PLA"), suspension or revocation of
product licenses and establishment licenses previously granted, criminal
prosecution, and debarment.
The process required by the FDA before the Company's products may be
marketed in the United States generally involves the following: (1)
preclinical laboratory and animal testing; (2) the submission to the FDA of
an application for Investigational New Drug application ("IND") approval to
conduct human clinical trials; (3) adequate and well-controlled human
clinical trials to establish the safety and efficacy of the biologic; (4) the
submission of a PLA for approval of a biologic; and (5) FDA approval of and
issuance of a license pertaining to a PLA prior to any commercial sale or
shipment of the drug or biologic. In addition, drug manufacturing
establishments must be registered with and approved by the FDA.
Manufacturers of biologics must currently also submit and obtain approval of
an Establishment License Application ("ELA") prior to commercial distribution
of an approved biologic. Manufacturing establishments are subject to regular
inspections by the FDA. All manufacturing facilities, production, testing
and packaging operations and recordkeeping practices must substantially
conform to, among other requirements, FDA GMP regulations.
PRECLINICAL STUDIES
Preclinical studies are conducted in the laboratory and in animal models
to gain preliminary information on biochemical and pharmacological properties
of the investigational drug or biologic and to identify any significant
safety problems. The results of these studies are submitted to the FDA as
part of the IND application. Testing of previously unapproved new drugs and
biologics in humans may not commence until the IND becomes effective.
IND APPLICATION
The IND application notifies the FDA of the sponsor's investigational
plan for the drug or biologic and provides brief descriptions of the chemical
structure of the compound, the known pharmacological and toxicological
effects of the compound, and known information relating to the compound's
safety and effectiveness in humans, including possible risks and anticipated
side effects. The IND authorizes a sponsor to conduct human clinical studies
in order to demonstrate relative safety and efficacy of the product in
support of an ELA/PLA. Any time prior to or following the commencement of
clinical trials under an IND, the FDA may determine that human subjects are
or would be exposed to an unreasonable and significant risk of injury by
participating in the trial and may delay initiation of or suspend an ongoing
trial.
CLINICAL STUDIES
Human clinical studies are typically conducted in three phases, which
may overlap, and are designed to collect additional data relating to the
safety, dosing and side effects of the proposed product and to the product's
efficacy in comparison with placebos or any currently accepted therapy.
Phase I clinical studies are generally performed in 10 to 30 healthy human
subjects or, more rarely, selected patients with a targeted disease or
disorder. The goal is to establish an initial data base about tolerance,
safety and dosing of the product in humans. Phase II clinical studies are
generally performed in small numbers of carefully selected patients, usually
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50 to 200. Phase II studies are used to obtain definitive statistical
evidence of the efficacy and safety of the product and dosing regimen. Phase
III consists of expanded large-scale studies of patients (200 to 2,000
patients or more) with the target disease or disorder, to obtain statistical
evidence of the efficacy and safety of the proposed product and dosing
regimen in a broader patient population. These studies may include
investigation of the effects in subpopulations of patients, such as the
elderly, women or certain racial groups.
When patients are studied, Phase I and II studies may be combined. Phase
I/II clinical studies are designed to establish initial data regarding the
tolerance, safety and dosing of the investigational drug or biologic, and to
obtain preliminary efficacy data in patients with the specific disease. The
combination of different phases encourages the use of larger sample sizes and
may result in more reliable statistical results in the earlier phases.
Subsequent to the Phase I and II studies, pivotal studies are carried out
with larger numbers of patients with the target disease or disorder. These
pivotal studies may be either Phase II or Phase III. Additional clinical
trials beyond the pivotal studies are sometimes required for licensing.
PRODUCT LICENSING APPLICATION
Upon successful completion of clinical testing, the Company will file a
PLA and ELA with the FDA.* The regulatory environment is evolving rapidly
and is being closely monitored. The Company will pursue aggressively the
possibility of a streamlined, single filing, if the current procedure is
modified by the FDA.* These applications include, among other things,
details of the manufacturing and testing processes and results of preclinical
studies and clinical trials which, taken together, demonstrate that the drug
or biologic is safe, pure, potent and effective. FDA approval of the
applications is required before the new product may be marketed. There can
be no assurance that the FDA will act favorably or quickly in reviewing
submitted applications, and significant difficulties or costs may be
encountered by the Company in its efforts to obtain FDA approvals for its
novel biological products. The FDA may grant marketing approval, require
additional testing or information or deny the applications. The clinical
studies may take three to five years or more to complete and there are no
assurances that the clinical data obtained will demonstrate to the FDA that
the product is safe and effective. The FDA may require the Company to
perform additional human testing. There can be no assurance that the FDA
will ever accept the Company's data as being sufficient to demonstrate the
product's safety, purity, potency, or efficacy.
FDA policies currently require that the Company's manufacturing facility
or the manufacturing facility of a contract manufacturer be operational and
in full compliance with GMP standards prior to completing pivotal or Phase
III clinical trials. If the Company or its designated contract manufacturer
is unable to make its facility operational before completing pivotal or Phase
III clinical trials on a product, the Company may have to perform additional
clinical testing with the product produced at the new facility.
The Company's clinical trials are at an early stage, and the Company has
not received approval from the FDA or any other government agency for the
manufacturing or marketing of any of its pharmaceutical products.
Consequently, the commencement of manufacturing and marketing of its
pharmaceutical products is, in all likelihood, at least two to three years
away.* Moreover, even after FDA approval of a PLA has been obtained, further
studies will likely be required to provide additional data on safety or to
gain approval for the use of a product as a treatment in clinical indications
other than those for which the product was initially tested. The FDA may
also require post-marketing testing and surveillance programs to monitor the
product's effects. Significant side effects may prevent or limit the further
marketing of the product, or move the FDA to withdraw its approval to market
the product, either temporarily, for example, by ordering a product recall,
or permanently,
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by withdrawing the New Drug Application ("NDA") or PLA approval. Continued
compliance with all FDA requirements and the conditions in an approved
application, including product specification, manufacturing process, labeling
and promotional materials and record keeping and reporting requirements, is
necessary for all products.
OTHER REGULATORY REQUIREMENTS
The Company is also subject to regulation by the Occupational Safety and
Health Administration, the Environmental Protection Agency and the Minnesota
Environmental Quality Board and to regulation under the Toxic Substances
Control Act, the Resource Conservation and Recovery Act, among others, and
other regulations, and may in the future be subject to other federal, state
and local statutes or regulations. The Company is unable to predict whether
any agency will adopt any regulation which would have a material adverse
effect on the Company.
Sales of biologics outside the United States are subject to foreign
regulatory requirements that may vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities of foreign countries must be obtained prior
to the commencement of marketing the products in those countries. The time
required to obtain such approval may be longer or shorter than that required
for FDA approval.
COMPETITION
NUTRITIONAL PRODUCTS
The nutritional products area is highly competitive with many large
nationally known manufacturers and many smaller manufacturers and marketers
of nutritional products. The Company knows of no other company that is
developing or marketing a product that incorporates antibody technology
combined with active cultures and other ingredients. Potential competitors,
however, could be larger than the Company, have greater access to capital and
may be better able to withstand volatile market conditions. Moreover,
because the nutritional products industry generally has low barriers to
entry, additional competitors could enter the market at any time. In that
regard, although the nutritional products industry to date has been
characterized by many relatively small participants, national or
international companies (which may include pharmaceutical companies or other
suppliers to mass merchandisers) may seek to enter or to increase their
presence in this industry, which would have a material adverse effect on the
Company's competitive position.
The Company has assessed the factors that may make it competitive in
this environment and believes that its central strength is that its products
will be unique and distinct in the marketplace by offering direct immune
enhancing benefits that are currently not offered by a single product.*
Other nutritional or dietary supplement products, such as vitamins and herbs,
may help the immune system to function better, but they do not provide
specific immune protection against common pathogens.* The Company believes
that its nutritional beverages will further be distinguished by the fact that
they are fresh, refrigerated products that contain active cultures and
antibodies while maintaining a superior taste to other nutritional beverages.*
PHARMACEUTICAL PRODUCTS
The human pharmaceutical and biotechnology industries are subject to
intense competition as well as rapid and significant technological change.
The Company is aware of companies which are developing products that will
compete for the same disease markets. The Company expects that the
pharmaceutical and biotechnology industries will continue to experience rapid
technological development which may render the Company's processes and
products non-competitive or obsolete.
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The Company is aware of direct competition from companies with products
designed to use immune mechanisms to treat infections and also potential
competition from companies developing new antibiotics and other
anti-infective substances. At least two companies, Biomune Systems, Inc. and
ImmuCell Corp., are developing colostrum-derived or milk-derived antibody
products for treating certain diseases; others are developing vaccines
designed to elicit active immune defenses against H. PYLORI or C. DIFFICILE.
Numerous pharmaceutical, biotechnology and chemical companies, academic
institutions, governmental agencies and other public and private research
organizations are conducting research and development in the area of
infectious diseases, including research and development of new antibiotic
products which will address the same diseases the Company has targeted. Many
of these competitors, either alone or through collaborative arrangements with
large pharmaceutical companies or academic institutions, have significantly
greater financial, human and other resources and greater expertise in
research and development, testing, manufacturing, marketing and distribution
than the Company. Consequently, these competitors may succeed in developing,
obtaining patent protection for, or commercializing technologies and products
that are more effective, easier to use or less expensive than those the
Company is developing. In addition, early entry into the market may have
important advantages in gaining product acceptance and market share. Many of
the Company's competitors, particularly large pharmaceutical companies, have
significantly greater experience than the Company in conducting clinical
trials and in obtaining FDA and other regulatory approvals of products. As a
result, these competitors may succeed in obtaining regulatory approval
earlier than the Company for products with similar indications. Moreover, if
the Company is successful in forming a strategic alliance to commercialize
its products, it may be required to compete with respect to manufacturing
efficiency, an area in which it has no experience.
The Company has assessed the factors that may make it competitive in
this environment and believes that its central strengths are its proprietary
dairy procurement and production processes, as well as its relationship with
Land O'Lakes to provide the raw materials for manufacturing products on a
large commercial scale. While there can be no assurance that other
biopharmaceutical companies will not initiate relationships with other large
dairy cooperatives to develop a similar procurement and production process,
the Company believes that the resources required to duplicate a system of
similar scale in time, dollars and expertise are substantial.
EMPLOYEES
At December 31, 1997, the Company had 17 employees, three of whom have
Ph.D. degrees and two of whom have M.D. degrees (one of which also has a
Ph.D. degree). Nine employees are currently working in research and
development and three employees are working in the clinical regulatory area.
The Company believes its employee relationships are good.
RISK FACTORS
Certain statements made in this Annual Report on Form 10-K, including
those indicated by an asterisk above (some of which are summarized below),
are forward-looking statements that involve risks and uncertainties, and
actual results may differ. Factors that could cause actual results to differ
include those identified below.
GENERAL
The Company's ability to satisfy its anticipated cash requirements
through approximately the first quarter of 1999 for its working capital and
capital requirements will depend upon numerous factors, including the
progress of the Company's research and development programs, clinical trials,
the timing and cost of obtaining regulatory approvals, marketing activities
and its ability to secure strategic alliances. The Company's capital
requirements also will depend on the levels of resources devoted to the
development of manufacturing capabilities, technological advances, the status
of competitive products and the ability of the Company to establish strategic
alliances to provide funding for research, development and marketing. The
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Company's ability to continue funding its planned operations beyond the first
quarter of 1999 is dependent upon its ability to obtain additional funds
through product revenues, equity or debt financing, strategic alliances,
license agreements or from other financing sources. A lack of adequate
funding could eventually result in the insolvency or bankruptcy of the
Company. At a minimum, if adequate funds are not available, the Company may
be required to delay or to eliminate expenditures for certain of its product
development efforts or to license to third parties the rights to
commercialize products or technologies that the Company would otherwise seek
to develop itself. Because of the Company's significant long-term capital
requirements, it may seek to raise funds when conditions are favorable, even
if it does not have an immediate need for such additional capital at such
time. If the Company has not raised funds prior to such time as the
Company's needs for funding become immediate, the Company may be forced to
raise funds when conditions are unfavorable which could result in significant
dilution of the Company's current stockholders.
Although at its inception GalaGen entered into a letter of intent with
Land O'Lakes to enter into discussions regarding a strategic alliance for the
commercialization of functional food products, no such discussions are
currently underway. The Company intends to form additional strategic
alliances that will leverage its technology to bring products to market,
including alliances for marketing, manufacturing and distribution for all of
its products. There are no assurances, however, that the Company will be
able to form such strategic alliances. Without such alliances, the Company
may not have the financial resources necessary to continue the development of
certain, if not all, nutritional and pharmaceutical products.
NUTRITIONAL PRODUCTS
The Company, like any manufacturer of products that are designed to be
ingested, faces an inherent risk of exposure to product liability claims in
the event that the use of its products results in injury. In the event that
the Company does not have adequate insurance or contractual indemnification,
product liability claims could have a material adverse effect on the Company.
The Company is not currently a named defendant in any product liability
lawsuit. The successful assertion or settlement of any uninsured claim, a
significant number of insured claims, or a claim exceeding the Company's
insurance coverage could have a material adverse effect on the Company.
The Company will be highly dependent upon consumers' perception of the
safety and quality of its products as well as similar products distributed by
other companies. Thus, the mere publication of reports asserting that such
products may be harmful could have a material adverse effect on the Company,
regardless of whether such reports are scientifically supported and
regardless of whether the harmful effects would be present at the dosages
recommended for such products.
Although the ingredients in the Company's products have a long history
of human consumption, some of the Company's products may contain innovative
ingredients or combinations of ingredients. Although the Company believes
all of its potential products will be safe when taken as directed by the
Company, there is little long-term experience with human consumption of
certain of these innovative product ingredients or combinations thereof in
concentrated form. Although the Company performs research and/or tests the
formulation and production of its products, it will sponsor only limited
clinical studies or rely on other outside published data.
The nutritional products area is highly competitive with many large
nationally known manufacturers and many smaller manufacturers and marketers
of nutritional products. The Company currently knows of no other company
that is developing or marketing a product that incorporates antibody
technology combined with active cultures and other ingredients. Potential
competitors, however, could be larger than the Company, have greater access
to capital and may be better able to withstand volatile market conditions.
Moreover, because the nutritional products industry generally has low
barriers to entry, additional competitors could enter the market at any time.
In that regard, although the nutritional products industry to date has been
characterized by many relatively small participants, there can be no
assurance that national or international companies (which may include
pharmaceutical companies or other suppliers to mass merchandisers) will not
seek to enter or to increase
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their presence in this industry. Increased competition in the industry could
have a material adverse effect on the Company.
Market and related data (including, without limitation, information as
to the dollar amount of retail sales for the nutritional beverage market)
were obtained from Frost & Sullivan, a competitive-market analysis firm. The
Company has not independently verified the accuracy of such information, and,
in any event, the methodology typically used in compiling market and related
data means that such data is subject to inherent uncertainties and
estimations. As a result, there can be no assurance as to the accuracy or
completeness of the market and other similar information (including
information as to sales) appearing in this Annual Report on Form 10-K.
The Company believes that its pilot plant will meet the anticipated
requirements for the production of nutritional products and believes that
contract manufacturers would be available to increase its production capacity
quickly, if required. However, given the limited manufacturing experience of
the Company in nutritional products, no assurance can be given that the
Company will be successful in producing acceptable product on a commercial
scale and at acceptable costs in its pilot plant facility. The Company's
nutritional products will be regulated by MDA under the appropriate license.
PHARMACEUTICAL PRODUCTS
Diffistat-G will require additional research and development and further
extensive clinical testing and regulatory approval prior to any commercial
sales. There can be no assurance that clinical testing of any of the
Company's products will be completed successfully within any specified time
period, if at all, or that a partner will be found with adequate resources to
fund further clinical testing or research and development if needed. Time
required for completion of trials may be affected by the rate at which
patients meeting trial criteria can be found and enrolled. Moreover, the
Company or the FDA may suspend clinical trials at any time if the subjects or
patients participating in such trials are thought to be exposed to
unacceptable health risks. Although the Company believes that its products
are safe, there can be no assurance that the Company will not encounter
problems in clinical trials which will cause the Company or the FDA to
suspend clinical trials or which will result in delays in the Company's
clinical trials. The Company's human clinical trials were preceded by
preclinical testing in animals, and the Company is continuing to conduct
additional animal studies as part of its development program. Such testing
may not be predictive of the results seen in humans.
The Company believes that certain of its products in development may
face a shorter and less expensive path to regulatory approval than many other
biopharmaceutical products. Factors that the Company believes may result in
a shorter and less expensive path include the favorable safety profile of the
Company's products and that multiple products can be manufactured by the
Company using a single, proprietary manufacturing process and facility, and
as a result will not require separate investments in manufacturing facilities
or process techniques. However, GalaGen is still at an early stage of product
development. The Company does not have the approval of the FDA for the sale
of any products, nor is the Company aware of any other FDA-approved biologic
based on bovine colostrum-derived polyclonal antibody technology for the
human health care market. The Company's products will require significant
laboratory and clinical testing, additional development and investment prior
to commercialization. There can be no assurance that any of the Company's
product development efforts will be successful or that any candidate products
will prove to be safe and effective in clinical trials and receive necessary
regulatory approvals. Even if the Company is able to develop products that
receive required regulatory approvals, there can be no assurance that any
such products will achieve market acceptance and be commercially successful.
The Company believes that its pilot plant will meet the anticipated
requirements for the production of pharmaceutical products, either for sale
or clinical requirements, in 1998 and believes that contract manufacturers
would be available to increase its production capacity quickly, if required.
The Company does not
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anticipate that it will need to fully validate the facility for
pharmaceutical purposes in 1998. To successfully establish commercial
pharmaceutical manufacturing capacity, the Company will have to scale up its
manufacturing processes and demonstrate the ability to consistently
manufacture a clinically safe pharmaceutical product. Given the limited
manufacturing experience of the Company in pharmaceutical products, no
assurance can be given that the Company will be successful in producing
acceptable product on a commercial scale and at acceptable costs in its pilot
plant facility. The Company's pharmaceutical products will be regulated by
FDA as human biologics, respectively, and its manufacturing facility may have
to be operational prior to its potential partner completing required pivotal
clinical trials.
The human pharmaceutical and biotechnology industries are subject to
intense competition as well as rapid and significant technological change.
The Company expects that the human pharmaceutical and biotechnology
industries will continue to experience rapid technological development which
may render the Company's processes and products noncompetitive or obsolete.
GalaGen is also aware of companies which are developing products that will
compete for the same disease markets as several of the Company's products.
Many of these competitors, or potential competitors, either alone or through
collaborative arrangements with large pharmaceutical companies or academic
institutions, have significantly greater financial, human and other resources
and greater expertise in research and development, testing, manufacturing,
marketing and distribution than the Company. Consequently, these competitors
may succeed in developing, obtaining patent protection for, or
commercializing technologies and products that are more effective, easier to
use or less expensive than those GalaGen is developing.
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ITEM 2. PROPERTIES
The Company leases approximately 4,500 square feet of administrative and
laboratory space at the Land O'Lakes corporate office located in Arden Hills,
Minnesota. In addition, the Company leases a portion of the existing Land
O'Lakes pilot plant facility in Arden Hills for its current manufacturing
needs to process antibody products for development, early stage clinical use
and potential commercial use. At the end of 1996, the Company completed its
pilot plant. Management believes that the Company's facilities are suitable
and adequate for current office, research and manufacturing requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM X. EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of the Company are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert A. Hoerr, M.D., Ph.D. 48 President and Chief Executive Officer
John G. Watson 53 Chief Operating Officer
Eileen F. Bostwick, Ph.D. 47 Vice President, Research and
Development
Michael E. Cady 45 Vice President, Manufacturing and
Engineering
Francois Lebel, M.D., FRCPC 46 Vice President, Scientific and
Regulatory Affairs
Gregg A. Waldon 37 Vice President, Chief Financial
Officer, Secretary and Treasurer
</TABLE>
ROBERT A. HOERR, M.D., PH.D., was named President and Chief Operating
Officer of the Company in February 1994 and became President and Chief
Executive Officer in September 1994. He served as Vice President, Medical and
Regulatory Affairs of the Company from January 1993 to December 1993 and
Senior Vice President from December 1993 to February 1994. Dr. Hoerr was
Director of Medical Affairs for Sandoz Nutrition Corporation, a
research-based nutrition company, from March 1990 to January 1993. From 1986
to 1990, Dr. Hoerr was Research Scientist and Assistant Program Director at
the Clinical Research Center, Massachusetts Institute of Technology ("MIT").
Dr. Hoerr received his A.B. in Biology from Indiana University, his M.D. from
Indiana University School of Medicine and his Ph.D. in Nutritional
Biochemistry and Metabolism from MIT.
JOHN G. WATSON has served as Chief Operating Officer of the Company
since September 1996. From February 1992 to August 1996, Mr. Watson was
President of Bioconsult, a consulting company servicing the biotechnology and
pharmaceutical industry. Mr. Watson was Chief Operating Officer at Vestar,
Inc., a pharmaceutical company (now NeXstar Pharmaceuticals, Inc., a
biopharmaceutical company), from October 1988 to January 1992. From January
1982 to September 1988, Mr. Watson held various positions with American
Cyanamid Company Corporation, a pharmaceutical, medical device and
agricultural products company (now American Home Products, a pharmaceutical
and consumer products company), including Director of Pharmaceutical and
Medical Device Operation, Far East and Australia, and Chief Executive Officer
of Northern Europe Operations. From 1980 to December 1982, Mr. Watson was a
Pharmaceutical Product Director at Johnson & Johnson, a manufacturer of
pharmaceuticals and health, baby and other products. Prior to that time he
held various positions with The Dow Chemical Company, a manufacturer of
chemicals, plastics and household pharmaceutical products, in London,
England, Zurich, Switzerland and Midland, Michigan. A
20
<PAGE>
graduate of Cambridge University, England, Mr. Watson earned his MBA as a
Fulbright Scholar at Indiana University, Bloomington in 1973.
EILEEN F. BOSTWICK, PH.D., has served as Manager of Research and
Development since July 1992, Director of Research and Development since
September 1993 and Vice President of Research & Development since March 1997.
Dr. Bostwick joined the Company's predecessor, Procor Technologies, Inc.
("Procor") in 1988 as Immunology Group Leader. Prior thereto, Dr. Bostwick
was a Senior Immunologist in the Biotechnology Section at Minnesota Mining &
Manufacturing. Dr. Bostwick received her B.S. and M.S. degrees from Michigan
State University in Dairy Science, and her Ph.D. in immunology and physiology
from the University of Minnesota.
MICHAEL E. CADY has served as Vice President, Manufacturing and
Engineering of the Company since July 1992. From January 1988 to July 1992,
Mr. Cady served as Director of Operations for Procor. From 1979 to 1988, Mr.
Cady held engineering and planning positions within several operating groups
at Land O'Lakes. Mr. Cady was a member of the Land O'Lakes group that
evaluated and implemented the polyclonal antibody technology used as a basis
for the Company's manufacturing process. Prior to joining Land O'Lakes Mr.
Cady was an engineer at Swift & Company, a food processing company. Mr. Cady
received his B.S. in Engineering from the University of Iowa and earned his
M.B.A. from the University of St. Thomas in 1985.
FRANCOIS LEBEL, M.D., FRCPC has served as Vice President, Scientific and
Regulatory Affairs of the Company since December 1996. From April 1991 to
October 1992, Dr. Lebel was Medical Director of Burroughs Wellcome Inc., a
research-based pharmaceutial company. In October 1992, he was promoted to
Vice President, Scientific Affairs for its Canadian operations and became a
core member of the Research Committee of Burroughs Wellcome Co. (U.S.A.), a
post he held until May 1995. From July 1985 to November 1996, Dr. Lebel
served as an Assistant Professor of Medicine at McGill University and as an
Associate Physician in the Division of Infectious Disease at Montreal General
Hospital, in Canada. Dr. Lebel earned his B.Sc. in Biology and his M.D. at
the University of Ottawa, Canada. He completed his post-graduate and
research training at McGill University and Harvard Medical School.
GREGG A. WALDON served as Controller of the Company from July 1992 to
September 1992, and was elected Treasurer in September 1992, Secretary in
March 1993, Vice President in December 1993 and Chief Financial Officer in
November 1994. From April 1989 to April 1992, Mr. Waldon served as an Audit
Manager with Price Waterhouse LLP, a public accounting firm, in its Middle
Market and Emerging Growth Practice in Minneapolis, Minnesota and from 1986
to 1989 was Senior/Staff accountant with Price Waterhouse.
Officers of the Company are chosen by and serve at the discretion of the
Board of Directors. There are no family relationships among any of the
directors, officers or key employees of the Company.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference is the information appearing under the
heading "Market For Registrant's Common Equity and Related Stockholder
Matters" in the Company's Annual Report to Stockholders for the year ended
December 31, 1997 (the "1997 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference is the information appearing under the
heading "Selected Financial Data" in the 1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference is the information appearing under the
heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference is the information appearing under the
headings "Balance Sheets", "Statements of Operations", "Statement of Changes
in Stockholders' Equity", "Statements of Cash Flows", "Notes to Financial
Statements" and "Report of Independent Auditors" in the 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information appearing under the
headings "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement dated March 30, 1998
(the "Proxy Statement"). See also Part I hereof under the heading "Item X.
Executive Officers of Registrant".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under the
headings "Report of the Compensation Committee", "Executive Compensation" and
"Comparative Stock Performance" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under the
heading "Security Ownership of Principal Stockholders and Management" in the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the
heading "Certain Relationships and Related Transactions" in the Company's
Proxy Statement.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements:
The consolidated financial statements of the Company are
incorporated herein by reference from the information appearing
under the headings "Balance Sheets", "Statements of Operations",
"Statement of Changes in Stockholders' Equity", "Statements of Cash
Flows", "Notes to Financial Statements" and "Report of Independent
Auditors" in the 1997 Annual Report.
2. Financial Statement Schedules:
Financial statement schedules for which provision is made in
the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions
or are inapplicable and therefore have been omitted.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of the year ended December 31, 1997.
(c) Exhibits:
The following exhibits are filed as part of this Annual Report on Form
10-K for the year ended December 31, 1997.
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
3.2 Restated Certificate of Incorporation of the Company.(3) Incorporated By
Reference
3.4 Restated Bylaws of the Company.(1) Incorporated By
Reference
4.1 Specimen Common Stock Certificate.(1) Incorporated By
Reference
4.2 Warrant to purchase 13,541 shares of Common Stock of the Company Incorporated By
issued to Piper Jaffray Inc., dated January 26, 1993.(1) Reference
4.3 Warrant to purchase 20,312 shares of Common Stock of the Company Incorporated By
issued to Gus A. Chafoulias, dated October 12, 1993.(1) Reference
4.4 Warrant to purchase 20,312 shares of Common Stock of the Company Incorporated By
issued to John Pappajohn, dated October 12, 1993.(1) Reference
4.5 Warrant to purchase 9,479 shares of Common Stock of the Company Incorporated By
issued to Cato Holding Company, dated June 21, 1994.(1) Reference
4.6 Form of Common Stock Warrant to purchase shares of Common Stock Incorporated By
of the Company, issued in connection with the sale of Reference
23
<PAGE>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
Convertible Promissory Notes.(1)
4.7 Warrant to purchase 17,144 shares of Series F-1 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.8 Warrant to purchase 42,856 shares of Series F-2 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.9 Warrant to purchase 60,000 shares of Series F-3 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.10 Warrant to purchase 80,000 shares of Series F-3 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.11 Warrant to purchase 18,250 shares of Common Stock of the Company Incorporated By
issued to IAI Investment Funds VI, Inc. (IAI Emerging Growth Reference
Fund), dated January 30, 1996.(1)
4.12 Warrant to purchase 6,250 shares of Common Stock of the Company Incorporated By
issued to IAI Investment Funds IV, Inc. (IAI Regional Fund), Reference
dated January 30, 1996.(1)
4.13 Warrant to purchase 25,000 shares of Common Stock of the Company Incorporated By
issued to John Pappajohn, dated February 2, 1996.(1) Reference
4.14 Warrant to purchase 25,000 shares of Common Stock of the Company Incorporated By
issued to Edgewater Private Equity Fund, L.P., dated February 2, Reference
1996.(1)
4.15 Warrant to purchase 10,000 shares of Common Stock of the Company Incorporated By
issued to Joseph Giamenco, dated February 2, 1996.(1) Reference
4.16 Warrant to purchase 25,000 shares of Common Stock of the Company Incorporated By
issued to Gus A. Chafoulias, dated February 2, 1996.(1) Reference
4.17 Warrant to purchase 25,000 shares of Common Stock of the Company Incorporated By
issued to JIBS Equities, dated February 2, 1996.(1) Reference
4.18 Warrant to purchase 25,000 shares of Common Stock of the Company Incorporated By
issued to Land O Lakes, Inc., dated February 2, 1996.(1) Reference
4.19 6% Convertible Debenture Purchase Agreement dated November 18, Incorporated By
1997 among the Company and the Purchasers named therein.(8) Reference
4.20 Registration Rights Agreement dated November 18, 1997 among the Incorporated By
Company and the Holders named therein.(9) Reference
4.21 6% Convertible Debenture due May 18, 1999 issued to CPR (USA) Incorporated By
Inc. dated November 18, 1997.(10) Reference
24
<PAGE>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
4.22 6% Convertible Debenture due May 18, 1999 issued to Libertyview Incorporated By
Plus Fund dated November 18, 1997.(11) Reference
4.23 6% Convertible Debenture due May 18, 1999 issued to Libertyview Incorporated By
Fund, LLC dated November 18, 1997.(12) Reference
4.24 Stock Purchase Warrant issued to CPR (USA) Inc. dated Incorporated By
November 18, 1997.(13) Reference
4.25 Stock Purchase Warrant issued to Libertyview Plus Fund dated Incorporated By
November 18, 1997.(14) Reference
4.26 Stock Purchase Warrant issued to Libertyview Fund, LLC dated Incorporated By
November 18, 1997.(15) Reference
4.27 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(16) Reference
4.28 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(17) Reference
4.29 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(18) Reference
#10.1 License Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
#10.2 Royalty Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
#10.3 Supply Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
10.4 Master Services Agreement between the Company and Land O'Lakes Incorporated By
dated May 7, 1992.(1) Reference
*10.5 GalaGen Inc. 1992 Stock Plan, as amended.(5) Incorporated By
Reference
10.7 Stock and Warrant Purchase Agreement between the Company and Incorporated By
Chiron Corporation dated March 20, 1995.(1) Reference
#10.8 License and Collaboration Agreement between the Company and Incorporated By
Chiron Corporation dated March 20, 1995.(1) Reference
*10.9 GalaGen Inc. Employee Stock Purchase Plan, as amended.(2) Incorporated By
Reference
10.10 Credit Agreement between the Company and Norwest Bank Minnesota, Incorporated By
N.A., dated as of January 24, 1996.(1) Reference
10.11 Commitment Letter between the Company and Cargill Leasing Incorporated By
Corporation, dated June 5, 1996.(2) Reference
10.12 Master Equipment Lease between the Company and Cargill Leasing Incorporated By
Corporation, dated June 6, 1996.(2) Reference
25
<PAGE>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
10.13 Agreement for Progress Payments between the Company and Cargill Incorporated By
Leasing Corporation, dated June 6, 1996.(2) Reference
10.14 Agreement for Lease between the Company and Land O'Lakes, dated Incorporated By
June 3, 1996.(2) Reference
*10.15 Letter agreement with John G. Watson dated September 14, 1996.(3) Incorporated By
Reference
#10.16 Agreement with Colorado Animal Research Enterprises, Inc. dated Incorporated By
November 1, 1996.(4) Reference
*10.17 Letter agreement with Francois Lebel, M.D., dated December 27, Incorporated By
1996.(4) Reference
*10.18 Consulting agreement with Stanley Falkow, Ph.D., dated Incorporated By
January 15, 1997.(4) Reference
*10.19 GalaGen Inc. Annual Short Term Incentive Cash Compensation Incorporated By
Plan.(4) Reference
*10.20 GalaGen Inc. Annual Long Term Incentive Stock Option Incorporated By
Compensation Plan.(4) Reference
*10.21 GalaGen Inc. 1997 Incentive Plan.(6) Incorporated By
Reference
10.22 Master Loan and Security Agreement with TransAmerica Business Incorporated By
Credit Corporation dated June 8, 1997.(7) Reference
10.23 Amended and Restated License Agreement between the Company and Electronic
Land O'Lakes dated March 11, 1998. Transmission
11.1 Statement re: computation of per share earnings (loss). Electronic
Transmission
13.1 1997 Annual Report to Stockholders Electronic
Transmission
23.1 Consent of Ernst & Young LLP. Electronic
Transmission
27.1 Financial Data Schedule for Year Ended December 31, 1997. Electronic
Transmission
27.2 Restated Financial Data Schedule for Quarter ended March 31, Electronic
1996. Transmission
</TABLE>
-----------------------------------------------
(1) Incorporated herein by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration
No. 333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996 (File No. 0-27976).
26
<PAGE>
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996 (File No. 0-27976).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1996 (File No. 0-27976).
(5) Incorporated herein by reference to the same numbered Exhibit to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997 (File No. 0-27976).
(6) Incorporated herein by reference to Appendix A to the Company's
1997 Definitive Proxy Statement on Schedule 14A (File No. 0-27976).
(7) Incorporated herein by reference to the same numbered Exhibit to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997 (File No. 0-27976).
(8) Incorporated herein by reference to Exhibit No. 4.4 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(9) Incorporated herein by reference to Exhibit No. 4.5 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(10) Incorporated herein by reference to Exhibit No. 4.6 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(11) Incorporated herein by reference to Exhibit No. 4.7 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(12) Incorporated herein by reference to Exhibit No. 4.8 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(13) Incorporated herein by reference to Exhibit No. 4.9 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(14) Incorporated herein by reference to Exhibit No. 4.10 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(15) Incorporated herein by reference to Exhibit No. 4.11 to the
Company's Registration Statement on Form S-3 (Registration No.
333-41151).
(16) Incorporated herein by reference to Exhibit No. 4.12 to Amendment
No. 1 to the Company's Registration Statement on Form S-3
(Registration No. 333-41151).
(17) Incorporated herein by reference to Exhibit No. 4.13 to Amendment
No. 1 to the Company's Registration Statement on Form S-3
(Registration No. 333-41151).
(18) Incorporated herein by reference to Exhibit No. 4.14 to Amendment
No. 1 to the Company's Registration Statement on Form S-3
(Registration No. 333-41151).
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K.
# Contains portions for which confidential treatment has been granted
to the Company.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, on March 30, 1998.
GALAGEN INC.
By /s/ Robert A. Hoerr
--------------------------------------
Robert A. Hoerr, M.D., Ph.D.
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 1998.
/s/ Robert A. Hoerr
--------------------------------------------
Robert A. Hoerr, Chief Executive Officer and
President (Principal Executive Officer)
and Director
/s/ Gregg A. Waldon
--------------------------------------------
Gregg A. Waldon, Vice President, Chief
Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal
Accounting Officer)
/s/ Arthur D. Collins, Jr.
--------------------------------------------
Arthur D. Collins, Jr., Director
/s/ Stanley Falkow
--------------------------------------------
Stanley Falkow, Director
/s/ Ronald O. Ostby
--------------------------------------------
Ronald O. Ostby, Director
/s/ R. David Spreng
--------------------------------------------
R. David Spreng, Director
/s/ Winston R. Wallin
--------------------------------------------
Winston R. Wallin, Director
28
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
3.2 Restated Certificate of Incorporation of the Incorporated By
Company.(3) Reference
3.4 Restated Bylaws of the Company.(1) Incorporated By
Reference
4.1 Specimen common stock Certificate.(1) Incorporated By
Reference
4.2 Warrant to purchase 13,541 shares of common stock Incorporated By
of the Company issued to Piper Jaffray Inc., dated Reference
January 26, 1993.(1)
4.3 Warrant to purchase 20,312 shares of common stock Incorporated By
of the Company issued to Gus A. Chafoulias, dated Reference
October 12, 1993.(1)
4.4 Warrant to purchase 20,312 shares of common stock Incorporated By
of the Company issued to John Pappajohn, dated Reference
October 12, 1993.(1)
4.5 Warrant to purchase 9,479 shares of common stock Incorporated By
of the Company issued to Cato Holding Company, Reference
dated June 21, 1994.(1)
4.6 Form of common stock Warrant to purchase shares of Incorporated By
common stock of the Company, issued in connection Reference
with the sale of Convertible Promissory Notes.(1)
4.7 Warrant to purchase 17,144 shares of Series F-1 Incorporated By
Convertible Preferred Stock of the Company issued Reference
to Chiron Corporation, dated March 29, 1995.(1)
4.8 Warrant to purchase 42,856 shares of Series F-2 Incorporated By
Convertible Preferred Stock of the Company issued Reference
to Chiron Corporation, dated March 29, 1995.(1)
4.9 Warrant to purchase 60,000 shares of Series F-3 Incorporated By
Convertible Preferred Stock of the Company issued Reference
to Chiron Corporation, dated March 29, 1995.(1)
4.10 Warrant to purchase 80,000 shares of Series F-3 Incorporated By
Convertible Preferred Stock of the Company issued Reference
to Chiron Corporation, dated March 29, 1995.(1)
4.11 Warrant to purchase 18,250 shares of common stock Incorporated By
of the Company issued to IAI Investment Funds VI, Reference
Inc. (IAI Emerging Growth Fund), dated January 30,
1996.(1)
4.12 Warrant to purchase 6,250 shares of common stock Incorporated By
of the Company issued to IAI Investment Funds IV, Reference
Inc. (IAI Regional Fund), dated January 30,
1996.(1)
4.13 Warrant to purchase 25,000 shares of common stock Incorporated By
of the Company issued to John Pappajohn, dated Reference
February 2, 1996.(1)
<PAGE>
Exhibit Description Method of Filing
- ------- ----------- ----------------
4.14 Warrant to purchase 25,000 shares of common stock Incorporated By
of the Company issued to Edgewater Private Equity Reference
Fund, L.P., dated February 2, 1996.(1)
4.15 Warrant to purchase 10,000 shares of common stock Incorporated By
of the Company issued to Joseph Giamenco, dated Reference
February 2, 1996.(1)
4.16 Warrant to purchase 25,000 shares of common stock Incorporated By
of the Company issued to Gus A. Chafoulias, dated Reference
February 2, 1996.(1)
4.17 Warrant to purchase 25,000 shares of common stock Incorporated By
of the Company issued to JIBS Equities, dated Reference
February 2, 1996.(1)
4.18 Warrant to purchase 25,000 shares of common stock Incorporated By
of the Company issued to Land O'Lakes, Inc., dated Reference
February 2, 1996.(1)
4.19 6% Convertible Debenture Purchase Agreement dated Incorporated By
November 18, 1997 among the Company and the Reference
Purchasers named therein.(8)
4.20 Registration Rights Agreement dated November 18, Incorporated By
1997 among the Company and the Holders named Reference
therein.(9)
4.21 6% Convertible Debenture due May 18, 1999 issued Incorporated By
to CPR (USA) Inc. dated November 18, 1997.(10) Reference
4.22 6% Convertible Debenture due May 18, 1999 issued Incorporated By
to Libertyview Plus Fund dated November 18, Reference
1997.(11)
4.23 6% Convertible Debenture due May 18, 1999 issued Incorporated By
to Libertyview Fund, LLC dated November 18, Reference
1997.(12)
4.24 Stock Purchase Warrant issued to CPR (USA) Inc. Incorporated By
dated November 18, 1997.(13) Reference
4.25 Stock Purchase Warrant issued to Libertyview Plus Incorporated By
Fund dated November 18, 1997.(14) Reference
4.26 Stock Purchase Warrant issued to Libertyview Fund, Incorporated By
LLC dated November 18, 1997.(15) Reference
4.27 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(16) Reference
4.28 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(17) Reference
4.29 Warrant issued to CLARCO Holdings dated as of Incorporated By
December 1,1997.(18) Reference
#10.1 License Agreement between the Company and Land Incorporated By
O'Lakes dated May 7, 1992.(1) Reference
<PAGE>
Exhibit Description Method of Filing
- ------- ----------- ----------------
#10.2 Royalty Agreement between the Company and Land Incorporated By
O'Lakes dated May 7, 1992.(1) Reference
#10.3 Supply Agreement between the Company and Land Incorporated By
O'Lakes dated May 7, 1992.(1) Reference
10.4 Master Services Agreement between the Company and Incorporated By
Land O'Lakes dated May 7, 1992.(1) Reference
*10.5 GalaGen Inc. 1992 Stock Plan, as amended.(5) Incorporated By
Reference
10.7 Stock and Warrant Purchase Agreement between the Incorporated By
Company and Chiron Corporation dated March 20, Reference
1995.(1)
#10.8 License and Collaboration Agreement between the Incorporated By
Company and Chiron Corporation dated March 20, Reference
1995.(1)
*10.9 GalaGen Inc. Employee Stock Purchase Plan, as Incorporated By
amended.(2) Reference
10.10 Credit Agreement between the Company and Norwest Incorporated By
Bank Minnesota, N.A., dated as of January 24, Reference
1996.(1)
10.11 Commitment Letter between the Company and Cargill Incorporated By
Leasing Corporation, dated June 5, 1996.(2) Reference
10.12 Master Equipment Lease between the Company and Incorporated By
Cargill Leasing Corporation, dated June 6, 1996.(2) Reference
10.13 Agreement for Progress Payments between the Incorporated By
Company and Cargill Leasing Corporation, dated Reference
June 6, 1996.(2)
10.14 Agreement for Lease between the Company and Land Incorporated By
O'Lakes, dated June 3, 1996.(2) Reference
*10.15 Letter agreement with John G. Watson dated Incorporated By
September 14, 1996.(3) Reference
#10.16 Agreement with Colorado Animal Research Incorporated By
Enterprises, Inc. dated November 1, 1996.(4) Reference
*10.17 Letter agreement with Francois Lebel, M.D., dated Incorporated By
December 27, 1996.(4) Reference
*10.18 Consulting agreement with Stanley Falkow, Ph.D., Incorporated By
dated January 15, 1997.(4) Reference
*10.19 GalaGen Inc. Annual Short Term Incentive Cash Incorporated By
Compensation Plan.(4) Reference
*10.20 GalaGen Inc. Annual Long Term Incentive Stock Incorporated By
Option Compensation Plan.(4) Reference
<PAGE>
Exhibit Description Method of Filing
- ------- ----------- ----------------
*10.21 GalaGen Inc. 1997 Incentive Plan.(6) Incorporated By
Reference
10.22 Master Loan and Security Agreement with Incorporated By
TransAmerica Business Credit Corporation dated Reference
June 8, 1997.(7)
10.23 Amended and Restated License Agreement between the Electronic
Company and Land O'Lakes dated March 11, 1998. Transmission
11.1 Statement re: computation of per share earnings Electronic
(loss). Transmission
13.1 1997 Annual Report to Stockholders Electronic
Transmission
23.1 Consent of Ernst & Young LLP. Electronic
Transmission
27.1 Financial Data Schedule for Year ended December Electronic
31, 1997. Transmission
27.2 Restated Financial Data Schedule for Quarter ended Electronic
March 31, 1996. Transmission
</TABLE>
- -----------------------------
(1) Incorporated herein by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No.
333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996 (File No. 0-27976).
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996 (File No. 0-27976).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended December 31,
1996 (File No. 0-27976).
(5) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997 (File No. 0-27976).
(6) Incorporated herein by reference to Appendix A to the Company's 1997
Definitive Proxy Statement on Schedule 14A (File No. 0-27976).
(7) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997 (File No. 0-27976).
(8) Incorporated herein by reference to Exhibit No. 4.4 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(9) Incorporated herein by reference to Exhibit No. 4.5 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(10) Incorporated herein by reference to Exhibit No. 4.6 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
<PAGE>
(11) Incorporated herein by reference to Exhibit No. 4.7 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(12) Incorporated herein by reference to Exhibit No. 4.8 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(13) Incorporated herein by reference to Exhibit No. 4.9 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(14) Incorporated herein by reference to Exhibit No. 4.10 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(15) Incorporated herein by reference to Exhibit No. 4.11 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41151).
(16) Incorporated herein by reference to Exhibit No. 4.12 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(17) Incorporated herein by reference to Exhibit No. 4.13 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
(18) Incorporated herein by reference to Exhibit No. 4.14 to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-41151).
* Management contact or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K.
# Contains portions for which confidential treatment has been granted to
the Company.
<PAGE>
EXHIBIT 10.23
AMENDED AND RESTATED
LICENSE AGREEMENT
AMENDED AND RESTATED LICENSE AGREEMENT, dated as of May 7, 1992, and
amended and restated as of March 11, 1998, by and between GalaGen Inc., a
Delaware corporation ("Licensor") and Land O'Lakes, Inc., a Minnesota
cooperative corporation ("Land O'Lakes").
Licensor and Land O'Lakes are parties to that certain License Agreement
dated as of May 7, 1992 (the "1992 License Agreement") by and between
Licensor's predecessor, Procor Technologies, Inc., a Minnesota corporation,
and Land O'Lakes. Licensor and Land O'Lakes desire to amend and restate the
1992 License Agreement as provided herein.
NOW, THEREFORE, in consideration of the promises and mutual covenants
and agreements herein contained, the parties agree that the 1992 License
Agreement shall be amended and restated in its entirety as set forth herein
and shall be in full force and effect as follows:
1. DEFINITIONS. The following terms shall have the indicated
meanings:
"Animal Products" means any food or Functional Food, drug or
medication for use by any animal.
"Approved Collaborators" means the entities and businesses (and, in
each case, their successors) listed on Schedule A attached hereto, as
well as any others requested by Licensor from time to time and approved
by Land O'Lakes.
"Existing Procor Technology" means information, technology and
skills possessed by Licensor as of the date of this Agreement for
obtaining and processing bovine milk-derived, immunoglobulin (IgG)
-based passive immunity products.
"FDA" means the United States Food and Drug Administration.
"Farm Animals" means all animals of the species which are raised on
farms in the United States for food or food related purposes, such as
cows, pigs, goats, sheep, chickens, turkeys, geese and ducks, and shall
also include horses, dogs and cats. "Farm Animals" does not include
animals that are primarily for laboratory use, such as primates, rats
and mice.
"Functional Foods" means foods, food additives, food components,
food ingredients, dietary foods, chewing gum, snack foods, beverages,
engineered foods, supplements and medical foods, in each case which are
marketed for oral consumption
<PAGE>
and which provide any kind of nutritional, health or medical benefits or
functionality, including the prevention or treatment of disease, but
excluding (i) Infant Formula, (ii) any prescription drug for human use,
or (iii) any over-the-counter drug for human use regulated by the FDA.
"Infant Formula" means a liquid (or powder to be mixed with water)
for oral consumption by human infants and children as a food or
nutritional supplement.
"New Technologies" means information, technology and skills now
possessed or hereafter developed or acquired by Licensor for products or
services that are not bovine milk-derived, immunoglobulin (IgG)-based
passive immunity products or services. Transgenics is an example of a
New Technology.
"Procor Technology Improvements" means information, technology and
skills developed or acquired by Licensor after the date of this License
Agreement and prior to the fifteenth (15th) anniversary of the date of
this License Agreement for obtaining or processing bovine milk-derived,
immunoglobulin (IgG)-based passive immunity products.
"Reserved Food Product" means any food product that (i) is included
within one of the categories listed on Schedule B attached hereto and
(ii) contains bovine milk-derived, immunoglobulin (IgG)-based passive
immunity ingredients.
"First Refusal Food Product" means any food product that (i) is
included within one of the categories listed on Schedule C attached
hereto and (ii) contains bovine milk-derived, immunoglobulin (IgG)-based
passive immunity ingredients.
2. GRANT OF LICENSE; SUBLICENSING. (a) Upon the terms and conditions
herein set forth, Licensor hereby grants Land O'Lakes a perpetual paid-up,
world-wide license to use the Existing Procor Technology, whether patented or
unpatented, for (i) Animal Products, (ii) Functional Foods, and (iii) Infant
Formula.
(b) Land O'Lakes shall have the right to sublicense to others the right
to use the Existing Procor Technology, whether patented or unpatented, for
use in (i) Animal Products and (ii) Functional Foods. Land O'Lakes shall
provide Licensor with 15 days prior written notice of and a copy of any such
sublicense.
(c) Any sublicense granted by Land O'Lakes pursuant to this Section 2
shall require each sublicensee to maintain the confidentiality of
confidential or proprietary Existing Procor Technology and other confidential
or proprietary information of Licensor.
3. RIGHT OF FIRST REFUSAL. In the event Licensor intends to grant any
third party any right to distribute or market (i) any Animal Products for use by
Farm Animals and
-2-
<PAGE>
which are based on New Technologies, or (ii) any Animal Products for use by
animals other than Farm Animals and which are based on Procor Technology
Improvements, then Licensor shall give written notice to Land O'Lakes prior
to any such grant. Such notice shall state the material terms of the
proposed grant, such as a description of the proposed distribution or
marketing activities to be undertaken, the costs or obligations proposed to
be borne by the third party, any quotas or minimums, pricing, commissions or
other compensation, customer or prospect restrictions or requirements, and
territories. Upon receipt of Licensor's written notice, Land O'Lakes shall
have a right of first refusal for a period of ninety (90) days to enter into
an agreement with Licensor to undertake the distribution and marketing
activities described in Licensor's notice on the same terms as described in
such notice. In the event that within such ninety (90) day period Land
O'Lakes does not exercise such right of first refusal, then Licensor shall
have the right for a subsequent ninety (90) day period to conclude its
proposed grant of distribution or marketing rights to the third party on the
terms stated in its notice to Land O'Lakes, free and clear of Land O'Lakes
right of first refusal. If such grant is not completed within such
subsequent ninety (90) day period, then Land O'Lakes right of first refusal
shall again come into effect.
4. ROYALTY. In consideration for the license and rights hereunder
granted, Land O'Lakes shall pay to Licensor a fee of $10,000.00, due and
payable within fifteen (15) days after the date hereof, which amount
constitutes payment for a fully paid license for the rights hereunder
granted. No additional consideration shall be due.
5. DELIVERY OF DOCUMENTATION. Within sixth (60) days after execution
of this Agreement, Licensor shall deliver to Licensee:
(a) such documentation, data and information necessary and appropriate for
the use and commercialization of Land O'Lakes; and
(b) a complete, documented, up-to-date, and correct manufacturing protocol
for all Animal Products which have been manufactured by Licensor to
date.
6. OTHER ACTIVITIES BY LICENSOR. Licensor and Land O'Lakes
acknowledge and agree that Licensor's ability to use, improve, exploit,
license or share Existing Procor Technology, Procor Technology Improvements
and New Technologies shall not be limited or restricted except as
specifically provided herein. By way of example only (and not by way of
limitation), notwithstanding Section 10 below, Licensor has the ability to
compete with respect to any "Functional Food" that is not a "Reserved Food
Product" or "First Refusal Food Product," on its own or with any Approved
Collaborator (as determined from Schedule A hereto as amended from time to
time).
7. REPRESENTATIONS, WARRANTIES AND COVENANTS. Licensor hereby
covenants, represents and warrants that:
-3-
<PAGE>
(a) it has full right and power to grant the license and immunities herein
set forth; and
(b) it has no license or other agreements with or obligations,
commitments, liens or mortgages and encumbrances of any kind which may
diminish, encumber or limit in any manner the right granted to Land
O'Lakes hereunder.
(c) it will not divest itself of any Existing Procor Technology, Procor
Technology Improvements, or New Technology that is subject to Land
O'Lakes' Right of First Refusal under Section 3 above, where the
effect of its doing so may be to diminish, encumber or impair the
rights of Land O'Lakes thereunder.
8. TERM. The term of this Agreement is perpetual.
9. CONFIDENTIALITY. Land O'Lakes and Licensor each agrees that during
the term of this Agreement and thereafter it shall not disclose to any third
party any confidential or proprietary information concerning the other party
or the other party's business which has been or is hereafter obtained by it.
Land O'Lakes and Licensor each further agrees to protect and treat with the
same care it uses in the protection of its own proprietary information all
confidential or proprietary information concerning the other party For
purposes of this agreement "confidential or proprietary information" means
all information concerning a party and its research, products, services,
production techniques, trade secrets, marketing, customers and business
plans, except where such information is or becomes generally known to the
public by means other than a breach of this Agreement.
10. NON-COMPETITION. (a) Licensor shall not directly or indirectly,
without Land O'Lakes prior written consent, prior to the fifteenth
anniversary of the date of this Agreement, anywhere in the world use the
Existing Procor Technology for manufacturing or marketing Animal Products or
Reserved Food Product.
(b) Licensor shall not directly or indirectly, without Land O'Lakes
prior written consent, prior to the fifteenth anniversary of the date of this
Agreement, anywhere in the world use the Procor Technology Improvements for
manufacturing or marketing (i) Animal Products for Farm Animals or (ii)
Reserved Food Product.
(c) Land O'Lakes shall not directly or indirectly, prior to the
fifteenth anniversary of the date of this Agreement, anywhere in the world
engage in manufacturing or marketing (i) prescription drugs for human use, or
(ii) over-the-counter drugs for human use which are regulated by the FDA.
(d) Licensor shall not directly or indirectly, without providing Land
O'Lakes with those rights of first refusal and participation provided in Section
11 below, prior to the fifteenth anniversary of the date of this Agreement,
collaborate with any other person or entity
-4-
<PAGE>
in manufacturing or marketing any First Refusal Food Product. Without
intending to limit the scope of any other activities that would be permitted
hereunder, Land O'Lakes and Licensor specifically acknowledge and agree that
this Section 10(d) shall not limit (i) any research and development
activities or discussions, which may include third parties, conducted as part
of normal business development activities or (ii) Licensor's ability to
purchase ingredients or other supplies from any supplier.
(e) Licensor shall not directly or indirectly, without Land O'Lakes
prior written consent, prior to the fifteenth anniversary of the date of this
Agreement, collaborate with any other person or entity in manufacturing or
marketing any Reserved Food Product. Without intending to limit the scope of
any other activities that would be permitted hereunder, Land O'Lakes and
Licensor specifically acknowledge and agree that this Section 10(e) shall not
limit (i) any research and development activities or discussions, which may
include third parties, conducted as part of normal business development
activities or (ii) Licensor's ability to purchase ingredients or other
supplies from any supplier.
11. RIGHTS OF FIRST REFUSAL AND PARTICIPATION. (a) If Licensor intends
to collaborate with any other person or entity in manufacturing or marketing
any First Refusal Food Product, then Licensor shall give written notice to
Land O'Lakes prior to entering into any definitive agreement relating
thereto. Such notice shall state the material terms of the proposed
activities, such as a description of the proposed manufacturing, distribution
or marketing activities to be undertaken, the costs or obligations proposed
to be borne by each party, any quotas or minimums, pricing, commissions or
other compensation, customer or prospect restrictions or requirements,
specifications and quality parameters, and territories. Upon receipt of
Licensor's written notice, Land O'Lakes shall have a right of first refusal
for a period of thirty (30) days to enter into an agreement with Licensor to
undertake the manufacturing, distribution and marketing activities described
in Licensor's notice on the same terms as described in such notice. Land
O'Lakes shall also have the right during such thirty (30) day period to
negotiate in good faith its undertaking any part of the activities described
in such notice if and to the extent that (i) Land O'Lakes is qualified to
perform such activities as well or better than the other parties specified in
the notice, consistent with the specifications and quality parameters
required by the other participants and by applicable legal regulations and
(ii) Land O'Lakes agrees to perform such activities on terms which are
commercially reasonable and which are no less favorable than would be
negotiated between unrelated parties in an arm's-length transaction. If
within such thirty (30) day period Land O'Lakes does not exercise such rights
of first refusal or participation, then Licensor shall have the right for a
subsequent ninety (90) day period to conclude its proposed agreement relating
to the activities described in its notice to Land O'Lakes on substantially
the terms stated in such notice and thereafter to engage in such activities
without any time limit, free and clear of Land O'Lakes rights of first
refusal and participation. If such grant is not completed within such
subsequent ninety (90) day period, then Land O'Lakes rights of first refusal
and participation shall again come into effect.
-5-
<PAGE>
(b) If Licensor intends to directly engage in manufacturing or
marketing any First Refusal Food Product (as opposed to collaborating with
any other person or entity, which is covered by Section 11(a) above), then
Licensor shall give written notice to Land O'Lakes prior to commencing such
manufacturing or marketing. Such notice shall describe in reasonable detail
the proposed activities. Upon receipt of Licensor's written notice, Licensor
and Land O'Lakes shall negotiate in good faith for a period of sixty (60)
days to have Land O'Lakes undertake any part of the activities described in
such notice if and to the extent that (i) Land O'Lakes desires to and is
qualified to perform such activities consistent with the specifications and
quality parameters required by the proposed activities and by applicable
legal regulations and (ii) Land O'Lakes agrees to perform such activities on
terms which are no less favorable than would be negotiated between unrelated
parties in an arms's-length transaction. If Licensor negotiates with Land
O'Lakes in good faith during such sixty (60) day period, then except to the
extent Licensor and Land O'Lakes agree on Land O'Lakes' participation in the
proposed activities, Licensor shall have the right to proceed with the
activities described in its notice to Land O'Lakes on substantially the terms
stated in such notice and thereafter to engage, without collaborating with
any other person or entity, in such activities without any time limit, free
and clear of any obligation to negotiate with Land O'Lakes regarding Land
O'Lakes' participation in such activities.
12. NO WAIVER. No delay or failure by either party to enforce any
right or claim which it may have hereunder shall constitute a waiver of such
right or claim. Any waiver by a party of any term, provision or condition
hereof or of any default hereunder shall be deemed to be a further or
continuing waiver of such term, provision or condition or of any subsequent
default hereunder.
13. NOTICES. Any notices required hereunder shall be given in writing
and addressed, if to Land O'Lakes, at 4001 Lexington Avenue North, Arden
Hills, Minnesota 55440, attention: President, and if to Purchaser, at 4001
Lexington Avenue North, Arden Hills, Minnesota 55440, Attention: President,
or in each case at such other address as the notifying party may specify in a
notice delivered hereunder to the other party.
14. HEADINGS. The headings in this Agreement are for convenience of
reference only and do not form a part hereof and in no way interpret or
construe this Agreement.
15. INTEGRATION; MODIFICATIONS. This Agreement constitutes the entire
agreement between the parties hereto with respect to the transactions
contemplated hereby, superseding any other understandings or agreements, oral
or written, with respect thereof. By amending and restating this Agreement,
the parties do not intend to and shall not be deemed to have in any way
limited the scope of the waiver and consent provided by that letter agreement
between Land O'Lakes and Licensor dated March 6, 1997 regarding Licensor's
collaboration with Lifeway Foods, Inc. This Agreement shall be amended or
modified only by a written instrument signed by the parties hereto.
-6-
<PAGE>
16. SEVERABILITY. If any term of this Agreement shall be deemed
illegal or unenforceable, the other terms hereof shall not be affected
thereby and shall continue in full force and effect.
17. BINDING EFFECT AND GOVERNING LAW. This Agreement shall be binding
upon and inure to the benefit of the successors and assigns of the respective
parties thereto. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
18. ARBITRATION. (a) All disputes, controversies or claims arising out
of or related to the interpretation or enforcement of this Agreement or any
alleged breach, termination or claim of invalidity of this Agreement shall be
settled finally and without resort to any legal proceedings (except for the
enforcement of the arbitration award) by arbitration conducted in accordance
with the provisions of this Section.
(b) Notwithstanding the foregoing, the remedy at law for any breach of
the provisions of this Section is acknowledged by the parties to be
inadequate, and an aggrieved party seeking relief or remedies for such a
breach shall have the right and is hereby granted the privilege, in addition
to all other remedies at law or in equity, to temporary or permanent
injunctive relief from any court of competent jurisdiction without the
necessity of proving actual damage.
(c) In the event of any dispute of the nature described in paragraph
(a) above (including without limitation any dispute regarding an alleged
breach or non-compliance, or whether a breach or non-compliance has been
cured or cured within the specified period time, or any other aspect of a
breach or cure and the dispute arises under or is related to this Agreement)
either party may submit the dispute to arbitration by delivering a request
for arbitration pursuant to paragraph (d) below. The arbitrator shall be
empowered to require appropriate remedies including, but not limited to,
termination of the obligation to pay amounts otherwise due or any other
rights or obligations hereunder, or any combination thereof. The arbitrator
shall not terminate obligations or rights under this Agreement on the basis
of non-material breaches or unintentional breaches. Neither party shall have
the right to terminate this Agreement or any portion hereof, except insofar
as such termination is effected by arbitration according to the above
guidelines. All arbitration proceedings shall be held in St. Paul, Minnesota
in accordance with paragraph (d) below. Judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction thereof.
Pending final resolution of the dispute, the parties shall continue to
observe the limitations imposed by this Agreement and shall continue to make
payment for amounts due in accordance with the provisions of this Agreement.
(d) If any matter is submitted to arbitration pursuant to this
Agreement, the following procedures will be followed:
-7-
<PAGE>
(i) Either party may initiate arbitration proceedings by delivering
a written request for arbitration to the other party stating with
specificity the nature of the dispute or disputes to be arbitrated.
(ii) Arbitration proceedings will be conducted by one arbitrator who
will be chosen by mutual agreement of the parties. If the parties are
unable to agree upon a single arbitrator within ten business days after
receipt of the request for arbitration, then the arbitration proceedings
will be conducted by three arbitrators, one chosen by each of the
parties and the third chosen by the first two arbitrators. Each party
will notify the other party, in writing, of the name and address of its
arbitrator within 25 business days after receipt of the request for
arbitration. Any party failing to give such written notice will forfeit
the right to name an arbitrator, and the second arbitrator will be
selected by the American Arbitration Association (AAA) in accordance
with the Commercial Arbitration Rules then in effect. The two
arbitrators so selected will choose a third. Unless otherwise agreed by
the parties, no arbitrator will be an employee, officer, director,
counsel, shareholder or consultant for any party to this Agreement.
(iii) Each arbitrator will be paid a reasonable fee for his or her
services and will be reimbursed for reasonable and necessary expenses
upon submission of receipts therefor. The fees and expenses of the
arbitrator(s), as well as all other out-of-pocket costs of arbitration
required under the terms of this provision, will be shared equally by
the parties. Costs resulting from requests not required by this
provision will be borne by the party making the request.
(iv) Discovery will be conducted in accordance with the Federal
Rules of Civil Procedure, except as otherwise agreed by the parties or
as ordered by the arbitrator(s). The arbitrator(s) will determine a
discovery schedule which the parties will comply.
(v) Unless otherwise agreed by the parties and the arbitrator(s),
the arbitrator(s) will fix the date and specific location of the
arbitration hearing and give the parties at least 30 days' advance
notice of the date and location. The hearing will proceed in general in
the manner of a non-jury trial under the Federal Rules of Civil
Procedure and the arbitrator shall apply the Federal Rules of Evidence.
The arbitrator(s) will entertain such presentation of sworn testimony
and other evidence, written briefs, and/or oral argument as the parties
may wish to present; however, no testimony or exhibits will be
admissible unless the adverse party was afforded an opportunity to
examine such witnesses and to inspect and copy such exhibits during the
pre-hearing discovery phase. Any party may be represented by counsel at
the hearing. A qualified court reporter will record and transcribe the
proceeding. The arbitrator(s) will apply the substantive law of the
State of Minnesota.
-8-
<PAGE>
(vi) Upon request of either party, the arbitrator(s) will provide
both parties with written findings of fact and conclusions of law.
(vii) The decision of the arbitrator(s) will be in writing and will
be signed by a majority of the arbitrators. The decision of the
arbitrator(s) shall be binding. If the parties settle their dispute
during the course of the arbitration, the arbitrator(s) will set forth
the terms of the agreed settlement in an award. Such an award may be
referred to as a consent award.
(viii) Any matters not controlled by this provision will be
controlled by the Commercial Arbitration Rules of the AAA in effect at
the time of the arbitration hearing.
IN WITNESS WHEREOF, this Amended and Restated License Agreement has been
executed by the parties hereto as of March 11, 1998.
LAND O'LAKES, INC.
By /s/ Christopher Policinski
--------------------------------
Its VP of Strategy & Development
----------------------------
GALAGEN INC.
By /s/ Robert Hoerr
--------------------------------
Its President & CEO
----------------------------
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<PAGE>
EXHIBIT 11.1
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
For the Year Ended December 31
-------------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
BASIC LOSS PER SHARE:
Weighted average shares outstanding 7,184,722 6,604,902 1,904,059
----------- ------------ -----------
----------- ------------ -----------
Net loss applicable to common stockholders $(5,635,134) $(14,783,591) $(5,474,038)
----------- ------------ -----------
----------- ------------ -----------
Basic net loss per share applicable to common
stockholders $ (.78) $ (2.24) $ (2.87)
----------- ------------ -----------
----------- ------------ -----------
DILUTED LOSS PER SHARE:
Weighted average shares outstanding 7,184,722 6,604,902 1,904,059
Dilutive potential common shares - - -
----------- ------------ -----------
Total 7,184,722 6,604,902 1,904,059
----------- ------------ -----------
----------- ------------ -----------
Net loss applicable to common stockholders $(5,635,134) $(14,783,591) $(5,474,038)
----------- ------------ -----------
----------- ------------ -----------
Diluted net loss per share applicable to common
stockholders $ (.78) $ (2.24) $ (2.87)
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
<PAGE>
EXHIBIT 13.1
GALAGEN INC.
INDEX TO FINANCIAL INFORMATION
1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 1
Balance Sheets...................................................... 5
Statements of Operations............................................ 6
Statement of Changes in Stockholders' Equity........................ 7
Statements of Cash Flows............................................ 13
Notes to Financial Statements....................................... 14
Report of Independent Auditors...................................... 26
Selected Financial Data............................................. 27
Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 29
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report to Stockholders for the
year ended December 31, 1997 (the "Annual Report") contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
statements are subject to risks and uncertainties, including those discussed
below under "Disclosure Regarding Forward-Looking Statements" and in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997
("Form 10-K") under "Risk Factors", that could cause actual results to differ
materially from those projected. Because actual results may differ, readers
are cautioned not to place undue reliance on these forward-looking statements.
GENERAL
GalaGen has broadened its focus to include nutritional products and is
utilizing its expertise in its platform antibody technology to develop a
portfolio of proprietary nutritional products, including dietary supplements,
which incorporate its Proventra-TM- Brand Natural Immune Components. These
products will target needs of both consumers and healthcare professionals.
GalaGen continues to develop oral pharmaceuticals that target life
threatening and emerging pathogens. These antibodies used in nutritional and
pharmaceutical products are food proteins that are derived from the milk
collected in the first few milkings of a dairy cow after its calf is born.
Using its proprietary procedures, the Company has produced antibodies that
target specific pathogens infecting the human gastrointestinal tract,
including bacteria and their toxins, parasites, fungi and viruses. Because
the Company's antibodies are derived from cows' milk, they do not represent
new chemical compounds with uncertain toxicity, but rather their components
are commonly found in dairy foods that are already widely consumed.
In August 1997, the Company announced that it was placing its Sporidin-G
clinical trial on hold due to continuing decline in the patient population
for the product's initial indication, AIDS-related CRYPTOSPORIDIUM PARVUM
infection. The decline was brought about by the effectiveness and increased
use of new AIDS therapies, including protease inhibitors and earlier
administration of combination therapy.
In December 1997, the Company introduced Basics Plus, a dietary
supplement product, in conjunction with its marketing and manufacturing
partner, Lifeway Foods. Basics Plus is the first product to emerge from the
collaboration with Lifeway Foods and contains active beneficial kefir
cultures and GalaGen's Proventra-TM- Brand Natural Immune Components.
Diffistat-G, its pharmaceutical product in Phase II clinical
development, is being developed for the treatment and prevention of
antibiotic-associated diarrhea, a disease which annually affects more than
400,000 patients in the United States.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
GENERAL. The net loss applicable to common stockholders decreased by
$9,148,457, or 61.9%, in 1997 to $5,635,134 from $14,783,591 in 1996 and
increased by $9,309,553, or 170.1%, in 1996 from $5,474,038 in 1995. The
decrease in 1997 and increase in 1996 was due primarily to a one time
non-cash charge to earnings in April 1996 of $7,296,844 for a preferred stock
dividend, as described below, relating to the value of additional shares
issued to holders of certain preferred stock upon conversion into Common
Stock at the closing of the Company's initial public offering (the
"Offering"), which occurred in April 1996. Historical spending levels
1
<PAGE>
may not be indicative of future spending levels. The Company is continuing
its nutritional and pharmaceutical product development activity, which is
planned to include costs relating to research and development activity,
small-scale manufacturing, clinical trial activity and market research. For
these reasons, the Company believes its expenses and losses will increase
before any material product revenues are generated.
RESEARCH AND DEVELOPMENT EXPENSES. Expenses for research and development
decreased $1,321,803, or 25.1%, in 1997 to $3,935,817 from $5,257,620 in 1996
and increased $1,526,543, or 40.9%, in 1996 from $3,731,077 in 1995. The
decrease in 1997 was due primarily to decreased clinical trial expenses
associated with Sporidin-G of approximately $2,000,000 and decreased
personnel and administration expenses of approximately $280,000 offset
primarily by increased manufacturing expenses of approximately $440,000,
increased clinical expenses for Diffistat-G of approximately $320,000 and
increased nutritional products expense of approximately $200,000. The
increase in 1996 as compared to 1995 was due primarily to increased expenses
associated with the Sporidin-G clinical trial as well as increased
development, clinical and personnel expenses for the Company's other
products, offset by a $300,000 license fee paid to Chiron Corporation in 1995
in the form of Company stock.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $76,642 or 4.1% in 1997 to $1,966,001 from $1,889,359 in
1996 and decreased $132,840, or 6.6%, in 1996 from $2,022,199 in 1995. The
increase in 1997 is due primarily to increased public reporting and
shareholder relations expense of approximately $157,000 and increased
insurance costs of approximately $68,000 offset by decreased outside
consulting expense of approximately $83,000 and decreased deferred
compensation expense of approximately $65,000. The decrease in 1996 compared
to 1995 was due primarily to a decrease of $136,200 in deferred compensation
expense (see Note 9 of Notes to Financial Statements).
INTEREST INCOME. Interest income was $448,322 in 1997, $605,548 in 1996
and $30,526 in 1995. The decrease in 1997 is attributable to the decreased
level of investable funds. The increase from 1995 to 1996 was due to the
investment of funds received by the Company from the Offering.
INTEREST EXPENSE. Interest expense was $181,638 in 1997, $945,316 in
1996 and $506,709 in 1995. Interest expense for 1997 consisted primarily of
line of credit interest expense of $91,679 (see Note 7 of Notes to Financial
Statements) and convertible debt interest expense of $82,459 (see Note 8 of
Notes to Financial Statements). Interest expense for 1996 was due primarily
to warrants valued at $768,064 which were issued to guarantors of a line of
credit for the Company and to purchasers of the Company's promissory notes
and to interest over a period of approximately three months on the
convertible promissory notes (the "Convertible Promissory Notes") issued by
the Company. The Convertible Promissory Notes converted into Common Stock
upon the closing of the Offering. Interest expense for 1995 related primarily
to interest on the Convertible Promissory Notes.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT. The extraordinary gain on
extinguishment of debt of $605,421 in 1995 related to certain debt reduction
settlements negotiated in connection with the termination of the Company's
transgenics program (see Note 12 of the Notes to the Financial Statements).
PREFERRED STOCK DIVIDEND. The preferred stock dividend of $7,296,844 in
1996 related to the value of additional Common Stock received by the holders
of Convertible Promissory Notes, Series E and Series F-1 Preferred Stock upon
the conversion of such securities into Common Stock at the closing of the
Offering (the Convertible Promissory Notes converting first into Series D
Preferred Stock which in turn converted immediately into Common Stock at the
closing). The Convertible Promissory Notes and the Series D, Series E and
Series F-1 Preferred Stock provided that their conversion prices be
automatically adjusted to reflect the lower of their currently effective
conversion price or 70% of the Offering price.
2
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company was incorporated in March 1992. On July 24, 1992, Procor, the
Company's predecessor, was merged with and into the Company (the "Procor-GalaGen
Merger"). At the time of the Procor-GalaGen Merger, Procor was a wholly-owned
subsidiary of Land O'Lakes. Since the Company's inception through December 31,
1997, investments in the Company have totaled approximately $53.1 million,
including approximately $7.1 million of inter-company obligations payable to
Land O'Lakes which were forgiven and recorded as contributed capital at the time
of the Procor-GalaGen Merger, $17.9 million from the Offering (after deducting
underwriting discounts and offering expenses) and approximately $28.1 million
from private placements of equity and convertible debt and from conversion of
accrued interest on such debt and the exercise of stock options and warrants.
The Company has invested funds received in the Offering and these private
placements in investment-grade, interest-bearing obligations.
Cash used in operating activities decreased by $83,664, or 1.4%, in 1997
to $6,052,148 from $6,135,812 in 1996 and increased by $2,903,924, or 89.9%,
in 1996 from $3,231,888 in 1995. Cash used in operations went primarily to
fund operating losses and was offset slightly by changes in operating assets
and liabilities.
The Company invested $13,276 in 1997 and $7,498,343 in 1996 in
available-for-sale securities. The Company invested $215,320 in 1997 and
$1,264,342 in 1996 in equipment and tenant improvements related to the
Company's pilot plant manufacturing facility, the majority of which has been
subsequently financed through the line-of-credit (see Note 7 of Notes to the
Financial Statements). The Company invested $63,685 in 1997, $193,012 in 1996
and $36,311 in 1995 in lab equipment, computer equipment and software and
furniture used primarily to support the Company's operations.
The Company's seven-year operating lease for manufacturing equipment is
in effect through 2003 and requires future annual minimum payments of
approximately $140,000. Additionally the Company's five-year lease agreement
with Land O'Lakes for specified manufacturing space is in effect through
June 2001 and requires future annual minimum payments of approximately
$86,000 (see Note 10 of the Notes to the Financial Statements).
The Company anticipates that its existing resources and interest thereon
will be sufficient to satisfy its anticipated cash requirements through
approximately the first quarter of 1999. The Company's working capital and
capital requirements will depend upon numerous factors, including the
progress of the Company's market research, product development and marketing
and distribution for nutritional products in addition to the clinical trials,
research and development programs and the timing of and cost of obtaining
regulatory approvals and marketing activities for pharmaceutical products.
The Company's capital requirements also will depend on the levels of
resources devoted to the development of manufacturing capabilities,
technological advances, the status of competitive products and the ability of
the Company to establish strategic alliances to provide funding to the
Company for research, development and marketing.
The Company expects to incur substantial additional research and
development and other costs, including costs related to clinical studies and
marketing activities for both nutritional and pharmaceutical products.
Capital expenditures may be necessary to obtain licensure of the existing
pilot plant facility and to establish additional commercial scale
manufacturing facilities. The Company will need to raise substantial
additional funds for longer-term product development, manufacturing and
marketing activities that may be required in the future. The Company's
ability to continue funding its planned operations beyond the first quarter
of 1999 is dependent upon its ability to generate product revenues or to
obtain additional funds through equity or debt financing, strategic
alliances, license agreements or from other financing sources. A lack of
adequate revenues or funding could eventually result in the insolvency or
bankruptcy of the Company. At a minimum, if adequate funds are not available,
the Company may be required to delay or to eliminate expenditures for certain
3
<PAGE>
of its product development efforts or to license to third parties the rights
to commercialize products or technologies that the Company would otherwise
seek to develop itself. Because of the Company's significant long-term
capital requirements, it may seek to raise funds when conditions are
favorable, even if it does not have an immediate need for such additional
capital at such time. If the Company has not raised funds prior to such time
as the Company's needs for funding become immediate, the Company may be
forced to raise funds when conditions are unfavorable which could result in
substantial dilution to the Company's current stockholders.
YEAR 2000 ISSUES
Certain of the Company's business systems may require updating to
continue to function properly beyond 1999. The Company believes that it will
have adequate resources for this purpose and does not expect to incur
significant expenditures to address this issue.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report to Stockholders contains certain forward looking
statements within the meaning of Section 21E of the Exchange Act. Such
forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently
available to the Company at the time such statements were made. When used in
this Annual Report, the words "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company, are intended
to identify such forward-looking statements. Although the Company believes
these statements are reasonable, readers of this Annual Report should be
aware that actual results could differ materially from those projected by
such forward-looking statements as a result of the risk factors listed below
and set forth in the Company's Form 10-K under the caption "Risk Factors."
Readers of this Annual Report should consider carefully the factors listed
below and under the caption "Risk Factors" in the Company's Form 10-K, as
well as the other information and data contained in this Annual Report. The
Company cautions the reader, however, that such list of factors under the
caption "Risk Factors" in the Company's Form 10-K and listed below may not be
exhaustive and that those or other factors, many of which are outside of the
Company's control, could have a material adverse effect on the Company and
its results of operations. Factors that could cause actual results to differ
include, without limitation, the Company's ability to generate sufficient
working capital and obtain necessary financing, the Company's ability to form
strategic alliances with marketing and distribution partners, the Company's
exposure to product liability claims, consumers' perception of product safety
and quality, the Company's reliance on flawed market research, potential
competitors that are larger and financially stronger, the Company's ability
to receive regulatory approval for its products and the Company's ability to
manufacture an acceptable product on a commercial scale. All forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the cautionary statements set forth
hereunder and under the caption "Risk Factors" in the Company's Form 10-K.
4
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31
------------------------------
1997 1996
------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................. $ 155,908 $ 3,869,549
Available-for-sale securities .............. 7,511,619 7,498,343
Prepaid expenses ........................... 196,672 87,274
------------- -------------
Total current assets ......................... 7,864,199 11,455,166
Property, plant and equipment ................ 1,869,974 1,687,838
Less accumulated depreciation ............. (363,355) (195,483)
------------- -------------
1,506,619 1,492,355
Deferred expenses ............................ 158,953 11,944
------------- -------------
Total assets ................................. $ 9,529,771 $ 12,959,465
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 559,498 $ 1,486,928
Note payable ............................... 238,250 -
Accrued expenses ........................... 38,129 192,633
------------- -------------
Total current liabilities .................... 835,877 1,679,561
Commitments
Convertible notes, net of discount of
$428,182 in 1997 .......................... 1,071,818 -
Note payable, long term portion .............. 923,998 -
Other long-term liabilities .................. 45,000 45,000
Stockholders' equity:
Preferred Stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - none
in 1997 and 1996 ...................... - -
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 7,234,974
in 1997; 7,163,769 in 1996 ............ 72,350 71,638
Additional paid-in capital ................. 59,669,586 58,926,654
Deficit accumulated during the
development stage ........................ (52,819,054) (47,183,920)
Deferred compensation ...................... (269,804) (579,468)
------------- -------------
Total stockholders' equity ................. 6,653,078 11,234,904
------------- -------------
Total liabilities and stockholders' equity ... $ 9,529,771 $ 12,959,465
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
5
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
November 17, 1987
Year ended December 31 (inception) to
---------------------------------------- December 31,
1997 1996 1995 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales........................................ $ - $ - $ - $ 1,449,593
Product royalties.................................... - - - 62,747
Research and development revenues.................... - - 150,000 396,350
------------ ------------- ------------ -------------
- - 150,000 1,908,690
Operating costs and expenses:
Cost of goods sold................................... - - - 3,468,711
Research and development............................. 3,935,817 5,257,620 3,731,077 27,131,353
General and administrative........................... 1,966,001 1,889,359 2,022,199 16,014,596
------------ ------------- ------------ -------------
5,901,818 7,146,979 5,753,276 46,614,660
------------ ------------- ------------ -------------
Operating loss......................................... (5,901,818) (7,146,979) (5,603,276) (44,705,970)
Interest income........................................ 448,322 605,548 30,526 1,205,674
Interest expense....................................... (181,638) (945,316) (506,709) (2,627,335)
------------ ------------- ------------ -------------
Net loss before extraordinary gain..................... (5,635,134) (7,486,747) (6,079,459) (46,127,631)
Extraordinary gain on extinguishment of debt........... - - 605,421 605,421
------------ ------------- ------------ -------------
Net loss for the period and deficit accumulated during
the development stage................................ (5,635,134) (7,486,747) (5,474,038) (45,522,210)
Less preferred stock dividends......................... - (7,296,844) - (7,296,844)
------------ ------------- ------------ -------------
Net loss applicable to common stockholders............. $(5,635,134) $(14,783,591) $(5,474,038) $(52,819,054)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Net loss per share applicable to common stockholders
Basic and Diluted.................................... $ (.78) $ (2.24) $ (2.87) $ (25.93)
Weighted average number of common shares outstanding
Basic and Diluted.................................... 7,184,722 6,604,902 1,904,059 2,036,959
</TABLE>
See accompanying notes.
6
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
-----------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued to parent on January 1, 1988
at $1.00 per share.....................................
Net loss for the year................................
Balance at December 31, 1988.............................
Net loss for the year................................
Balance at December 31, 1989.............................
Net loss for the year................................
Balance at December 31, 1990.............................
Net loss for the year................................
Balance at December 31, 1991.............................
Sale of 941,148 shares of GalaGen common stock
in May 1992 at $1.23 per share....................
Merger of GalaGen with Procor Technologies, Inc.
Issuance of 812,502 shares of GalaGen
common stock to Land O'Lakes....................
Cancellation of Procor Technologies, Inc.
common stock held by Land O'Lakes...............
Contribution of payable to Land O'Lakes
to capital of GalaGen...........................
Sale of 2,500,000 shares of GalaGen Series A
Preferred Stock in July 1992 at $2.00 per share,
net of offering costs of $42,000.................. 2,500,000 $25,000
Exercise of stock option.............................
Compensation related to stock options/warrants.......
Net loss for the year................................
-----------------------------------------------------------------------
Balance at December 31, 1992............................. 2,500,000 25,000 - - - -
Sale of 1,234,748 shares of GalaGen Series B
Preferred Stock in March 1993 at $3.25 per
share, net of offering costs of $18,460........... 1,234,748 $12,347
Sale of 539,000 shares of GalaGen Series C
Preferred Stock in December 1993 at $5.00 per
share, net of offering costs of $133,316.......... 539,000 $5,390
Exercise of stock option.............................
Compensation related to stock warrants...............
Net loss for the year................................
-----------------------------------------------------------------------
Balance at December 31, 1993............................. 2,500,000 25,000 1,234,748 12,347 539,000 5,390
Sale of 12,000 shares of GalaGen Series C
Preferred Stock in March 1994 at $5.00 per
share, net of offering costs of $5,479............ 12,000 120
Exercise of stock options............................
Common stock issued for services.....................
Warrant valuation for convertible promissory
notes.............................................
Net loss for the year................................
-----------------------------------------------------------------------
Balance at December 31, 1994............................. 2,500,000 $25,000 1,234,748 $12,347 551,000 $5,510
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Series F-1 Series E
Preferred Stock Preferred Stock Common Stock Additional
---------------------------------------------------------- Paid-In
Shares Amount Shares Amount Shares Amount Capital
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued to parent on January 1, 1988
at $1.00 per share..................................... 13,541 $13,541 $ 36,459
Net loss for the year................................
---------------------------------
Balance at December 31, 1988............................. 13,541 13,541 36,459
Net loss for the year................................
---------------------------------
Balance at December 31, 1989............................. 13,541 13,541 36,459
Net loss for the year................................
---------------------------------
Balance at December 31, 1990............................. 13,541 13,541 36,459
Net loss for the year................................
---------------------------------
Balance at December 31, 1991............................. 13,541 13,541 36,459
Sale of 941,148 shares of GalaGen common stock
in May 1992 at $1.23 per share.................... 941,148 9,411 1,148,923
Merger of GalaGen with Procor Technologies, Inc.
Issuance of 812,502 shares of GalaGen
common stock to Land O'Lakes.................... 812,502 8,125 21,875
Cancellation of Procor Technologies, Inc.
common stock held by Land O'Lakes............... (13,541) (13,541) (36,459)
Contribution of payable to Land O'Lakes
to capital of GalaGen........................... 7,127,720
Sale of 2,500,000 shares of GalaGen Series A
Preferred Stock in July 1992 at $2.00 per share,
net of offering costs of $42,000.................. 4,933,000
Exercise of stock option............................. 13,541 135 16,532
Compensation related to stock options/warrants....... 27,000
Net loss for the year................................
------------------------------------------------------------------------
Balance at December 31, 1992............................. - - - - 1,767,191 17,671 13,275,050
Sale of 1,234,748 shares of GalaGen Series B
Preferred Stock in March 1993 at $3.25 per
share, net of offering costs of $18,460........... 3,982,124
Sale of 539,000 shares of GalaGen Series C
Preferred Stock in December 1993 at $5.00 per
share, net of offering costs of $133,316.......... 2,556,294
Exercise of stock option............................. 14,895 149 18,184
Compensation related to stock warrants............... 112,000
Net loss for the year................................
------------------------------------------------------------------------
Balance at December 31, 1993............................. - - - - 1,782,086 17,820 19,943,652
Sale of 12,000 shares of GalaGen Series C
Preferred Stock in March 1994 at $5.00 per
share, net of offering costs of $5,479............ 54,401
Exercise of stock options............................ 100,886 1,009 142,359
Common stock issued for services..................... 5,025 50 55,616
Warrant valuation for convertible promissory
notes............................................. 77,000
Net loss for the year................................
------------------------------------------------------------------------
Balance at December 31, 1994............................. - $ - - $ - 1,887,997 $18,879 $20,273,028
</TABLE>
<TABLE>
Deficit
Accumulated
Deferred During the Receivable
Compen- Development From
sation Stage Officer Total
----------------------------------------------------
<S> <C> <C> <C> <C>
Common stock issued to parent on January 1, 1988
at $1.00 per share..................................... $ 50,000
Net loss for the year................................ $ (1,724,853) (1,724,853)
-------------- -------------
Balance at December 31, 1988............................. (1,724,853) (1,674,853)
Net loss for the year................................ (2,819,808) (2,819,808)
-------------- -------------
Balance at December 31, 1989............................. (4,544,661) (4,494,661)
Net loss for the year................................ (2,863,109) (2,863,109)
-------------- -------------
Balance at December 31, 1990............................. (7,407,770) (7,357,770)
Net loss for the year................................ (3,103,948) (3,103,948)
-------------- -------------
Balance at December 31, 1991............................. (10,511,718) (10,461,718)
Sale of 941,148 shares of GalaGen common stock
in May 1992 at $1.23 per share.................... 1,158,334
Merger of GalaGen with Procor Technologies, Inc.
Issuance of 812,502 shares of GalaGen
common stock to Land O'Lakes.................... 30,000
Cancellation of Procor Technologies, Inc.
common stock held by Land O'Lakes.............. (50,000)
Contribution of payable to Land O'Lakes
to capital of GalaGen........................... 7,127,720
Sale of 2,500,000 shares of GalaGen Series A
Preferred Stock in July 1992 at $2.00 per share,
net of offering costs of $42,000.................. 4,958,000
Exercise of stock option............................. 16,667
Compensation related to stock options/warrants....... 27,000
Net loss for the year................................ (3,497,040) (3,497,040)
-------------------------------------------------------
Balance at December 31, 1992............................. - (14,008,758) - (691,037)
Sale of 1,234,748 shares of GalaGen Series B
Preferred Stock in March 1993 at $3.25 per
share, net of offering costs of $18,460........... 3,994,471
Sale of 539,000 shares of GalaGen Series C
Preferred Stock in December 1993 at $5.00 per
share, net of offering costs of $133,316.......... 2,561,684
Exercise of stock option............................. $ (18,333) -
Compensation related to stock warrants............... 112,000
Net loss for the year................................ (7,523,499) (7,523,499)
----------------------------------------------------
Balance at December 31, 1993............................. - (21,532,257) (18,333) (1,546,381)
Sale of 12,000 shares of GalaGen Series C
Preferred Stock in March 1994 at $5.00 per
share, net of offering costs of $5,479............ 54,521
Exercise of stock options............................ 18,333 161,701
Common stock issued for services..................... 55,666
Warrant valuation for convertible promissory
notes............................................. 77,000
Net loss for the year................................ (5,394,034) (5,394,034)
----------------------------------------------------
Balance at December 31, 1994............................. $ - $(26,926,291) $ - $(6,591,527)
</TABLE>
8
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
-----------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............................ 2,500,000 $ 25,000 1,234,748 $ 12,347 551,000 $ 5,510
Sale of 338,461 shares of GalaGen Series E
Preferred Stock at $3.25 per share in December
1995, net of offering costs of $23,610............
Issuance of Series F-1 Preferred Stock at $17.50
per share to Chiron Corporation in March 1995.....
Warrant valuation for Chiron Corporation
agreement, net of offering costs of $24,803.......
Exercise of stock options ..........................
Common stock issued for services....................
Warrant valuation for convertible promissory
notes ............................................
Deferred compensation related to stock options......
Amortization of deferred compensation...............
Net loss for the year...............................
-----------------------------------------------------------------------
Balance at December 31, 1995............................ 2,500,000 25,000 1,234,748 12,347 551,000 5,510
Sale of Series E Preferred Stock....................
Issuance of Series F-1 Preferred Stock..............
Warrant valuation for line of credit and notes......
Warrant valuation for Convertible Promissory
Notes............................................
Conversion of Series A Preferred Stock.............. (2,500,000) (25,000)
Conversion of Series B Preferred Stock.............. (1,234,748) (12,347)
Conversion of Series C Preferred Stock.............. (551,000) (5,510)
Conversion of Series F-1 Preferred Stock............
Conversion of Series E Preferred Stock..............
Conversion of Convertible Promissory Notes,
net of financing costs of $131,010...............
Initial public offering, net of offering costs of
$2,078,225.......................................
Preferred stock dividend............................
Stock issued through Employee Stock Purchase
Plan.............................................
Amortization of deferred compensation...............
Deferred compensation adjustment, canceled
options..........................................
Exercise of stock options...........................
Net loss for the year...............................
-----------------------------------------------------------------------
Balance at December 31, 1996............................ - $ - - $ - - $ -
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Series F-1 Series E
Preferred Stock Preferred Stock Common Stock Additional
---------------------------------------------------------- Paid-In
Shares Amount Shares Amount Shares Amount Capital
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............................ - $ - - $ - 1,887,997 $18,879 $20,273,028
Sale of 338,461 shares of GalaGen Series E
Preferred Stock at $3.25 per share in December
1995, net of offering costs of $23,610............ 338,461 3,385 1,073,002
Issuance of Series F-1 Preferred Stock at $17.50
per share to Chiron Corporation in March 1995..... 17,143 171 299,829
Warrant valuation for Chiron Corporation
agreement, net of offering costs of $24,803....... 125,197
Exercise of stock options .......................... 36,670 367 45,434
Common stock issued for services.................... 27,585 276 305,282
Warrant valuation for convertible promissory
notes............................................. 33,333
Deferred compensation related to stock options...... 1,657,000
Amortization of deferred compensation...............
Net loss for the year...............................
------------------------------------------------------------------------
Balance at December 31, 1995............................ 17,143 171 338,461 3,385 1,952,252 19,522 23,812,105
Sale of Series E Preferred Stock.................... 46,154 461 149,539
Issuance of Series F-1 Preferred Stock.............. 17,144 171 299,849
Warrant valuation for line of credit and notes...... 768,064
Warrant valuation for Convertible Promissory
Notes............................................ (68,474)
Conversion of Series A Preferred Stock.............. 677,063 6,771 18,229
Conversion of Series B Preferred Stock.............. 543,413 5,434 6,913
Conversion of Series C Preferred Stock.............. 248,758 2,488 3,022
Conversion of Series F-1 Preferred Stock............ (34,287) (342) 85,717 857 (515)
Conversion of Series E Preferred Stock.............. (384,615) (3,846) 178,568 1,786 2060
Conversion of Convertible Promissory Notes,
net of financing costs of $131,010............... 1,434,495 14,345 8,918,954
Initial public offering, net of offering costs of
$2,078,225....................................... 2,000,000 20,000 17,901,775
Preferred stock dividend............................ 7,296,844
Stock issued through Employee Stock Purchase
Plan............................................. 3,642 36 13,512
Amortization of deferred compensation...............
Deferred compensation adjustment, canceled
options.......................................... (261,200)
Exercise of stock options........................... 39,861 399 65,977
Net loss for the year...............................
------------------------------------------------------------------------
Balance at December 31, 1996............................ - $ - - $ - 7,163,769 $71,638 $58,926,654
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Deferred During the Receivable
Compen- Development From
sation Stage Officer Total
----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994............................ $ - $(26,926,291) $ - $(6,591,527)
Sale of 338,461 shares of GalaGen Series E
Preferred Stock at $3.25 per share in December
1995, net of offering costs of $23,610............ 1,076,387
Issuance of Series F-1 Preferred Stock at $17.50
per share to Chiron Corporation in March 1995..... 300,000
Warrant valuation for Chiron Corporation
agreement, net of offering costs of $24,803....... 125,197
Exercise of stock options .......................... 45,801
Common stock issued for services.................... 305,558
Warrant valuation for convertible promissory
notes............................................. 33,333
Deferred compensation related to stock options...... (1,657,000) -
Amortization of deferred compensation............... 476,266 476,266
Net loss for the year............................... (5,474,038) (5,474,038)
----------------------------------------------------
Balance at December 31, 1995............................ (1,180,734) (32,400,329) - (9,703,023)
Sale of Series E Preferred Stock.................... 150,000
Issuance of Series F-1 Preferred Stock.............. 300,020
Warrant valuation for line of credit and notes...... 768,064
Warrant valuation for Convertible Promissory
Notes............................................ (68,474)
Conversion of Series A Preferred Stock.............. -
Conversion of Series B Preferred Stock.............. -
Conversion of Series C Preferred Stock.............. -
Conversion of Series F-1 Preferred Stock............ -
Conversion of Series E Preferred Stock.............. -
Conversion of Convertible Promissory Notes,
net of financing costs of $131,010............... 8,933,299
Initial public offering, net of offering costs of
$2,078,225....................................... 17,921,775
Preferred stock dividend............................ 7,296,844
Stock issued through Employee Stock Purchase
Plan............................................. 13,548
Amortization of deferred compensation............... 340,066 340,066
Deferred compensation adjustment, canceled
options.......................................... 261,200 -
Exercise of stock options........................... 66,376
Net loss for the year............................... (14,783,591) (14,783,591)
----------------------------------------------------
Balance at December 31, 1996............................ $ (579,468) $(47,183,920) $ - $ 11,234,904
</TABLE>
10
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
--------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996......................... - $ - - $ - - $ -
Amortization of deferred compensation............
Deferred compensation adjustment, canceled
options.......................................
Exercise of stock options........................
Common stock issued for services.................
Discount valuation for convertible debentures....
Valuation of issued options & warrants...........
Warrant valuation for note payable...............
Stock issued through Employee Stock Purchase
Plan..........................................
Net loss for the year............................
--------------------------------------------------------------------------
Balance at December 31, 1997......................... - $ - - $ - - $ -
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
See accompanying notes.
11
<PAGE>
<TABLE>
<CAPTION>
Series F-1 Series E
Preferred Stock Preferred Stock Common Stock Additional
---------------------------------------------------------- Paid-In
Shares Amount Shares Amount Shares Amount Capital
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996......................... - $ - - $ - 7,163,769 $71,638 $58,926,654
Amortization of deferred compensation............
Deferred compensation adjustment, canceled
options....................................... (35,800)
Exercise of stock options........................ 64,703 647 79,004
Common stock issued for services................. 1,493 15 14,376
Discount valuation for convertible debentures.... 500,182
Valuation of issued options & warrants........... 98,450
Warrant valuation for note payable............... 78,800
Stock issued through Employee Stock Purchase
Plan.......................................... 5,009 50 7,920
Net loss for the year............................
------------------------------------------------------------------------
Balance at December 31, 1997......................... - $ - - $ - 7,234,974 $72,350 $59,669,586
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
<TABLE>
Deficit
Accumulated
Deferred During the Receivable
Compen- Development From
sation Stage Officer Total
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996......................... $(579,468) $(47,183,920) $ - $ 11,234,904
Amortization of deferred compensation............ 273,864 273,864
Deferred compensation adjustment, canceled
options....................................... 35,800 -
Exercise of stock options........................ 79,651
Common stock issued for services................. 14,391
Discount valuation for convertible debentures.... 500,182
Valuation of issued options & warrants........... 98,450
Warrant valuation for note payable............... 78,800
Stock issued through Employee Stock Purchase
Plan.......................................... 7,970
Net loss for the year............................ (5,635,134) (5,635,134)
-----------------------------------------------------
Balance at December 31, 1997......................... $(269,804) $(52,819,054) $ - $ 6,653,078
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
12
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
November 17,
1987
Year ended December 31 (inception) to
------------------------------------------------ December 31,
1997 1996 1995 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................ $(5,635,134) $(14,783,591) $(5,474,038) $(52,819,054)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization......................... 408,403 68,797 128,966 1,300,561
Deferred compensation amortization.................... 273,864 340,066 476,266 1,090,196
Preferred stock dividend.............................. - 7,296,844 - 7,296,844
Warrants issued, net.................................. - 768,064 - 907,064
Loss on equipment disposal............................ - - 468 221,524
Extraordinary gain on extinguishment of debt.......... - - (605,421) (605,421)
Notes issued for services............................. - - - 1,915,000
Stock issued for services and license agreement....... 14,391 - 1,005,558 1,075,615
Deferred expense...................................... - - - (76,806)
Changes in operating assets and liabilities:
Inventory........................................ - - - (738,636)
Prepaid expenses................................. (31,738) (5,571) (20,961) (108,607)
Other assets..................................... - 123,967 (99,670) (110,528)
Accounts payable and accrued expenses............ (1,081,934) 55,612 887,617 1,510,767
Other long-term liabilities...................... - - 469,327 653,404
----------- ------------ ----------- ------------
Net cash used in operating activities................... (6,052,148) (6,135,812) (3,231,888) (38,488,077)
----------- ------------ ----------- ------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment............... (279,005) (1,457,354) (36,311) (2,942,948)
Purchase of available-for-sale securities, net.......... (13,276) (7,498,343) - (7,511,619)
Purchase of trademark................................... - - - (50,000)
Purchase of equipment from Land O'Lakes................. - - - (729,941)
----------- ------------ ----------- ------------
Net cash used in investing activities................... (292,281) (8,955,697) (36,311) (11,234,508)
----------- ------------ ----------- ------------
FINANCING ACTIVITIES:
Proceeds from Land O'Lakes borrowings................... - - - 12,733,223
Proceeds from sale of stock to Land O'Lakes............. - - - 50,000
Proceeds from sale of common stock, net of offering
costs................................................. - 17,921,775 - 19,096,776
Proceeds from sale of preferred stock................... - 450,020 676,387 12,695,083
Proceeds from common stock options exercised............ 79,651 66,376 45,801 353,529
Proceeds from borrowings from investors................. - 500,000 - 700,000
Proceeds from convertible notes, net of issuance costs.. 1,380,919 - 2,500,000 7,740,919
Net proceeds from note payable.......................... 1,162,248 - - 1,162,248
Payment to Land O'Lakes................................. - - - (4,100,000)
Payment to investors on borrowings...................... - (500,000) - (700,000)
Proceeds from Chiron warrant purchase................... - - 125,197 125,197
Proceeds from Employee Stock Purchase Plan.............. 7,970 13,548 - 21,518
----------- ------------ ----------- ------------
Net cash provided by financing activities............... 2,630,788 18,451,719 3,347,385 49,878,493
----------- ------------ ----------- ------------
Increase (decrease) in cash............................. (3,713,641) 3,360,210 79,186 155,908
Cash and cash equivalents at beginning of period........ 3,869,549 509,339 430,153 -
----------- ------------ ----------- ------------
Cash and cash equivalents at end of period.............. $ 155,908 $ 3,869,549 $ 509,339 $ 155,908
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Discount valuation for convertible debentures........... $ 500,182 $ - $ - $ 500,182
Valuation of issued options & warrants.................. 177,250 - 33,333 287,583
Deferred compensation recognized for employee options... - - 1,657,000 1,657,000
Deferred compensation adjustment, canceled options...... 35,800 261,200 - 297,000
Conversion of convertible promissory notes plus related
accrued interest, net of financing costs.............. - 8,864,825 - 8,864,825
</TABLE>
13
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
GalaGen Inc. is utilizing its expertise in its platform antibody
technology to develop a portfolio of proprietary nutritional products,
including dietary supplements. These products will target needs of both
consumers and healthcare professionals. GalaGen is also developing oral
pharmaceuticals that target life threatening and emerging pathogens. These
antibodies used in nutritional products and pharmaceuticals are derived from
the milk collected in the first few milkings of a dairy cow after its calf is
born. Using its proprietary procedures, the Company has produced antibodies
that target specific pathogens infecting the human gastrointestinal ("GI")
tract, including bacteria and their toxins, parasites, fungi and viruses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents include short-term highly liquid investments purchased
at cost, which approximates market, with remaining maturities of three months
or less.
INVESTMENTS
Investments in debt securities with a remaining maturity of more than
three months at the date of purchase are classified as marketable securities.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance
sheet date. Debt securities are classified as available-for-sale as of
December 31, 1997 and 1996. The book value of the investments approximates
their estimated market value. The estimated market value of investments by
security type as of December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Corporate debt securities $1,939,501 $2,686,131
U.S. Government securities 1,397,838 2,012,987
U.S. Treasury securities 4,174,280 2,602,968
Investment grade debt securities - 196,257
---------- ----------
$7,511,619 $7,498,343
---------- ----------
---------- ----------
</TABLE>
All investments as of December 31, 1997 and 1996 have a contractual
maturity of one year or less.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and depreciated
primarily on a straight-line basis over their estimated useful lives of three
to seven years.
At December 31, 1996, construction in progress consisted of leasehold
improvements and manufacturing equipment in connection with the Company's
pilot plant manufacturing facility. The Company transferred the construction
in progress to its respective asset account and began depreciation in the
third quarter of 1997. At December 31, 1997 and 1996, property, plant and
equipment consisted of the following:
14
<PAGE>
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Furniture, fixtures and equipment $1,869,974 $ 423,496
Construction in progress - 1,264,342
1,869,974 1,687,838
Less accumulated depreciation (363,355) (195,483)
----------- -----------
$1,506,619 $1,492,355
----------- -----------
----------- -----------
</TABLE>
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to operations as incurred.
INCOME TAXES
Income taxes are accounted for using the liability method. Deferred
income taxes are provided for temporary differences between financial
reporting and tax bases of assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. All earnings per share amounts for all periods have
been presented, and where appropriate, restated to conform to Statement 128
requirements.
STOCK BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION ("Statement 123"), but applies Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and
related interpretations in accounting for its stock plans. Under APB 25,
when the exercise price of stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
3. MERGER
In March 1992, GalaGen was incorporated as a wholly-owned subsidiary of
its predecessor, Procor Technologies, Inc.("Procor"), a wholly-owned
subsidiary of Land O'Lakes Inc. ("Land O'Lakes"), and issued 270 shares of
its $.01 par value common stock to Procor for $1.23 per share. In May 1992,
GalaGen sold 941,148 shares of its common stock to certain outside investors
and future officers, directors, and advisors of GalaGen for $1.23 per share.
Effective July 24, 1992, GalaGen was merged with Procor and GalaGen was the
surviving entity. As part of this merger, the 13,541 shares of Procor's
common stock held by Land O'Lakes were converted into 812,502 shares of $.01
par value common stock of GalaGen. Additionally, the 270 shares of common
stock of GalaGen issued to Procor were canceled and $7,127,720 of
inter-company obligations owed to Land O'Lakes were forgiven and recorded as
contributed capital.
15
<PAGE>
4. RELATED PARTY TRANSACTIONS
During 1992, the Company entered into the following agreements with Land
O'Lakes:
PURCHASE AND SALE OF ASSETS AGREEMENT
Land O'Lakes purchased from the Company all equipment, inventory, and
certain other assets and assumed all current liabilities at book value, which
approximated $1,636,000. The purchase price was paid by crediting against
other indebtedness owed by the Company to Land O'Lakes.
ROYALTY AGREEMENT
The Company will pay to Land O'Lakes a royalty on net receipts from any
product, other than infant formula, which is based on existing technology or
technology improvements, as defined by the agreement. The Company will pay
an additional royalty on net receipts from infant formula based on existing
or improved technology and an additional royalty on net receipts from infant
formula based on new technology, as defined by the agreement. This agreement
will continue until terminated by both parties. Royalty payments range from
one to two percent of net receipts.
LICENSE AGREEMENT
The Company has licensed to Land O'Lakes the rights to use the Company's
existing technologies and technology improvements, as defined by the
agreement, for Land O'Lakes' use in animal products, functional foods and
infant formula. The Company received a lump sum license fee. The Company has
agreed not to compete for fifteen years in the area of animal products and
functional foods based on milk and colostrum based immunoglobulin technology.
Land O'Lakes has agreed not to compete for fifteen years in the areas of
prescription drugs and over-the-counter drugs regulated by the Food and Drug
Administration. The term of this agreement is perpetual.
In March 1997, Land O'Lakes granted a five-year license, an amendment to
the license above, in the area of functional foods to use existing technology
and future technology improvements in the development, formulation,
manufacture, marketing, distribution and sale of kefir-based products, as
defined in the granted license. In consideration of granting the Company
this license, Land O'Lakes will receive a royalty of five percent from food
components or ingredients sold by the Company to be included in a kefir-based
product and one percent of net receipts from a kefir-based finished product
sold by the Company.
In March 1998, the Company and Land O'Lakes signed an amended and restated
license agreement in which the Company has significantly broadened its rights to
develop and market functional foods. Under the restated license agreement, the
Company can use, improve, exploit, license or share existing technology,
technology improvements and new technologies, as defined, in all areas except
under certain "reserved food" and "first refusal food product" categories.
SUPPLY AGREEMENT
The Company has entered into an agreement with Land O'Lakes whereby the
Company will purchase and Land O'Lakes will supply, at their option, all of
the Company's commercial requirements for colostrum and milk. As part of this
agreement, Land O'Lakes will provide expertise in dairy herd selection,
on-farm management, membership relations and procurement to the Company for
the manufacture of antibody material. The agreement will last for ten years
and Land O'Lakes, at its sole discretion, has the option to extend the
agreement for an additional ten years.
16
<PAGE>
MASTER SERVICES AGREEMENT
The Company has entered into an agreement with Land O'Lakes whereby the
Company may purchase services from Land O'Lakes for certain administrative
and research and development activities. This agreement will enable the
Company to access expertise, on an as-needed basis, from Land O'Lakes. The
agreement terminated on December 31, 1992, but has been renewed annually and
is currently extended through December 31, 1998. The Company was charged
approximately $442,000, $682,000 and $641,000 in 1997, 1996 and 1995,
respectively, in accordance with the Master Services Agreement.
STRATEGIC ALLIANCE LETTER OF INTENT
The Company and Land O'Lakes have entered into a letter of intent for good
faith discussions designed to lead to a definitive agreement regarding a
strategic alliance to provide research, development, regulatory and product
support, manufacturing, marketing, sales and distribution for certain functional
food products.
PROMISSORY NOTE
The Company issued a promissory note to Land O'Lakes for $4,000,000 as
part of the merger. This note had an interest rate of five percent and was
due December 31, 1992. Payment of $3,000,000 plus accrued interest of $43,333
was made upon the sale of the Series A preferred stock. Land O'Lakes extended
the remaining $1,000,000 note for consideration of $100,000. The $1,000,000,
accrued interest of $50,959 and the $100,000 extension fee were paid in 1993.
Subsequent to 1992, the Company has entered into other related party
agreements as noted below:
In December 1995 and January 1996, Land O'Lakes and certain investment
funds controlled by IAI purchased 169,230 and 76,923 shares, respectively, of
Series E preferred stock at $3.35 per share.
In January 1996, the Company entered into a $2.7 million line of credit
agreement with a commercial bank, which expired with the closing of the
Company's initial public offering (the "Offering"). Loans under this line of
credit were guaranteed by six parties and the guarantee was collateralized by
letters of credit posted by them in the aggregate amount of $2.7 million. In
consideration for the guarantees and letters of credit posted by these
parties, the Company issued warrants to purchase an initial aggregate of
162,011 shares of common stock at $7.00 per share. In connection with this
transaction Land O'Lakes guaranteed $500,000 of the $2.7 million line of
credit, and in exchange received a warrant to purchase 30,002 shares of
common stock at $7.00 per share. See Note 9.
In January 1996, the Company issued two convertible promissory notes for
$375,000 and $125,000 to two investment funds controlled by IAI. The notes
became due on completion of the Offering. The notes were convertible into
Series E preferred stock at the option of the holder. In connection with
these notes, the Company issued warrants to purchase 30,001 shares which are
identical to the line of credit warrants described above. The notes have
been repaid.
In June 1996, the Company entered into a five-year lease agreement with
Land O' Lakes for specified space within the Land O' Lakes facility in
connection with the Company's pilot plant manufacturing facility. See Note
10.
In December 1996, the Company entered into an equipment operating lease
which was guaranteed by Land O'Lakes. See Note 10.
17
<PAGE>
5. REVERSE STOCK SPLIT
On January 19, 1996, the Board approved a reverse stock split of
3.6923-for-1 for the Company's outstanding common stock. The Company's
stockholders approved this reverse stock split in March 1996. Certain
information in the financial statements with respect to the common stock and
to the conversion prices and ratios of the preferred stock have been adjusted
to reflect this change. The reverse stock split had no effect upon the
numbers of shares of preferred stock issued and outstanding (as opposed to
the conversion prices of the preferred stock and the numbers of shares of
common stock into which the preferred stock converted).
6. STOCK
INITIAL PUBLIC OFFERING
GalaGen Inc. consummated the Offering on April 1, 1996, which consisted
of 2,000,000 shares of common stock at a $10 per share price to the public.
All of the Company's preferred stock mandatorily converted into common stock
immediately prior to the closing of the Offering. The 2,500,000 shares of
Series A preferred stock, 1,234,748 shares of Series B preferred stock and
551,000 shares of Series C preferred stock that were outstanding prior to the
Offering were converted into 677,063, 543,413 and 248,758 shares of common
stock, respectively, upon the closing of the Offering. The $8,275,000 of
Convertible Promissory Notes to investors, plus accrued interest, that were
outstanding prior to the Offering converted into shares of Series D preferred
stock and simultaneously into 1,434,495 shares of common stock upon the
closing of the Offering. The 338,461 shares of Series E preferred stock and
34,287 shares of Series F stock outstanding prior to the Offering were
converted into 178,568 and 85,717 shares, respectively, of common stock upon
the closing of the Offering.
PREFERRED STOCK DIVIDEND
The Series D preferred stock, Series E preferred stock and Series F-1
preferred stock converted into common stock at 70% of the Offering price.
These reductions in the conversion prices to 70% of the Offering price were
valued at $7,296,844 and recorded as a non-cash preferred stock dividend to
arrive at the net loss available to holders of common stock in the
calculation of net loss per share.
EMPLOYEE STOCK PURCHASE PLAN
In March 1996, the Company adopted the Employee Stock Purchase Plan
whereby 270,833 shares of common stock have been reserved. All employees who
have met the service eligibility requirements are eligible to participate and
may direct the Company to make payroll deductions of one to 10 percent of
their compensation during a purchase period for the purchase of shares under
the plan. Participants may purchase up to 5,000 shares of common stock for a
given calendar year provided the fair market value of the stock is not more
than $25,000 (determined at the beginning of each purchase period). The plan
provides a participating employee the right, subject to certain limitations,
to purchase the Company's common stock at a price equal to the lower of 85%
of the fair market value of the Company's common stock on the first day, or
the last day, of the applicable purchase period. The first purchase period
commenced on July 1, 1996 and ended on December 31, 1996, of which 3,642
shares of common stock were issued to employees for $13,548. In May 1997, the
Employee Stock Purchase Plan was amended by stockholders to have two six
month purchase periods beginning on January 1 and July 1 of each year. In
1997, 8,279 shares of common stock were purchased of which 5,009 shares were
issued in 1997.
7. LINE-OF-CREDIT
In June 1997, the Company established a $2,000,000 line-of-credit for
fixed assets with Transamerica Business Credit Corporation ("Transamerica")
which extends through June 1998. Terms of the line-of-credit
18
<PAGE>
include monthly payments over four years equal to 2.5837% of each advance
with a final balloon payment of 12.5% at the end of the four-year period. The
line-of-credit is secured by the Company's fixed assets. Transamerica
received a warrant for 40,000 shares of common stock granted at the fair
market value on the date of grant. The warrant was valued at approximately
$79,000 and will be amortized to interest expense over the expected term of
the outstanding line-of-credit. The Company drew approximately $1,319,000 of
the line-of-credit in 1997, of which $1,162,248 is outstanding at December
31, 1997.
8. CONVERTIBLE DEBENTURES
In November 1997, the Company raised $1,500,000 through the private
placement sale of 6% convertible debentures (the "Debentures") to three
institutional investors pursuant to Regulation D under the Securities Act of
1933. The principal and interest of the Debentures can be converted into
shares of the Company's common stock at 82.5% of the lowest closing bid price
of the Company's common stock three days prior to conversion. One-third of
the Debentures can convert to common stock upon the effective date of
registration, one-third after five months from the closing date and the
remaining one third twelve months after the closing date or nine months if
the price of the common stock does not average at least $2.00 per share in
the eighth month after closing. An aggregate maximum of 1,400,000 discounted
shares of common stock (the "Discounted Shares") can be issued upon the
conversion of the Debentures, with each investor owning at any given time a
maximum of 4.99% of the then issued and outstanding shares of common stock.
If there remains any unconverted principal and accrued interest due to all
the Discounted Shares being issued, the Company has the obligation to repay
the investors, in the aggregate, a maximum principal of $500,000. The
Debentures automatically convert into the Discounted Shares eighteen months
from the closing date. Five-year warrants were issued to the investors to
purchase, in the aggregate, 200,000 shares of common stock at 110% of the
market value of the common stock on the closing date. The value of the
warrants plus the value of the discount of the Discounted Shares was
$500,182, which the Company is amortizing over the term of the Debentures. In
1997, $72,000 was amortized and recorded as interest expense. A deferred
expense was recorded for $119,081, which represents costs associated with
closing the Debentures. These deferred expenses are being amortized until the
Debentures are converted into Discounted Shares. In 1997, $9,378 was
amortized and recorded as an expense. In February and March 1998, $499,500
of Debenture principal plus accrued interest was converted into 718,543
shares of common stock. The net carrying value of the Debentures
approximates fair market value. In connection with this private placement,
the Company has reserved 1,129,062 shares of common stock for issuance.
9. OPTIONS AND WARRANTS
STOCK OPTION PLAN
The Company has established a 1992 Stock Plan (the "1992 Plan") and a
1997 Incentive Plan (the "1997 Plan"), under which both incentive and
non-qualified options may be granted, which have reserved 880,210 and
1,250,000 shares of common stock, respectively, for issuance. The Company
uses these plans as an incentive for employees, directors and technical
advisors. Stock awards in the aggregate of 100,000 shares of common stock
may also be granted under the 1997 Plan. Options are granted at fair market
value as determined on the date of grant and normally vest over three to five
years.
19
<PAGE>
The following plan and non-plan options are outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Outside Weighted
1992 Plan 1997 Plan Plans Average
Options Options Options Option
Outstanding Outstanding Outstanding Price
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.......... 353,842 27,082 $4.86
Granted.............................. 272,076 140,830 6.66
Exercised............................ (36,684) - 1.25
Canceled............................. (238,101) (13,541) 6.97
---------- ----------
Balance at December 31, 1995.......... 351,133 154,371 5.67
Granted.............................. 477,476 57,003 4.68
Exercised............................ (39,902) - 1.66
Canceled............................. (118,479) (25,730) 7.36
---------- ----------
Balance at December 31, 1996.......... 670,228 185,644 4.74
Granted.............................. 379,300 3.96
Exercised............................ (51,162) (13,541) 1.23
Canceled............................. (69,335) (60,000) (4,334) 4.51
---------- ----------- ----------
Balance at December 31, 1997.......... 549,731 319,300 167,769 $4.96
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------
Weighted
Weighted-Average Weighted Average
Range of Number Remaining Average Number Exercise
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Price
-------------- ----------- ---------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.23 5,416 LESS THAN 1 year $ 1.23 5,416 $ 1.23
2.50 - 3.25 21,000 10 years 3.21 15,000 3.25
3.69 163,439 LESS THAN 1 year 3.69 114,166 3.69
4.00 510,000 9 years 4.00 122,000 4.00
4.88 50,000 4 years 4.88 16,667 4.88
5.25 - 5.38 45,471 3 years 5.37 14,802 5.37
5.75 128,000 4 years 5.75 25,600 5.75
7.39 16,249 3 years 7.39 2,166 7.39
11.08 97,225 3 years 11.08 39,532 11.08
---------- ---------
$1.23 - 11.08 1,036,800 $ 4.96 355,349 $ 4.86
---------- ---------
---------- ---------
</TABLE>
Options expire in five years and three months to ten years from the
grant date. Fully vested and exercisable options were 355,349, 189,986 and
161,426 as of December 31, 1997, 1996 and 1995, respectively. The weighted
average exercise prices for the fully vested and exercisable options as of
December 31, 1997, 1996 and 1995 were $4.86, $3.80 and $2.63, respectively.
In May 1997, the Company granted options for 20,000 shares of common stock to
two consultants for services provided, of which 15,000 are fully vested. In
August 1997, a consultant was granted a stock award, based upon the value of
the common stock at the date of grant, from the 1997 Plan of 1,493 shares of
common stock in exchange for services provided.
WARRANTS
In January 1993, the Company granted a warrant to purchase 13,541
shares of the Company's common stock at $12.00 per share to an investment
banking firm for financial advisory services. This warrant expires May 1998.
20
<PAGE>
In June 1993, the Company granted a warrant to purchase 9,479 shares of
the Company's common stock at $.18 per share to a contract research
organization for services rendered in 1993. Expense was recorded for the
difference between the exercise price and fair market value of the common
stock, as determined by the Board of Directors. This warrant expires December
1998.
In October 1993, the Company granted a warrant to purchase 20,312 shares
of the Company's common stock at $18.46 per share to each of a board member
and an investor in return for their guarantee for the Company's line of
credit. These warrants expire October 1998.
In connection with the June 1994 to October 1995 Convertible Promissory
Notes (the "Notes") issuance of $8,275,000, each Note holder received a
warrant, exercisable at $11.07 per share, to purchase that number of shares
of common stock equal to 20% of the principal amount of such holder's Note
divided by $11.07. The Company granted warrants to purchase 149,384 shares of
the Company's common stock. These warrants expire five years from the date of
grant, which range from June 1999 to October 2000.
In March 1995, Chiron was issued warrants to purchase 200,000 shares of
the Company's Series F preferred stock for which the Company was paid
$150,000. The Company issued the warrants to purchase 200,000 shares of
Series F preferred stock to Chiron as follows: (i) warrant to purchase 17,144
shares of Series F-1 preferred stock, exercise price of $17.50 per share
(pre-Offering) or $24.00 per share (post-Offering); (ii) warrant to purchase
42,856 shares of Series F-2 preferred stock, exercise price of $18.70 per
share (pre-Offering) or $27.00 per share (post-Offering); (iii) warrant to
purchase 60,000 shares of Series F-3 preferred stock, exercise price of
$25.00 per share (pre-Offering) or $33.00 per share (post-Offering); and (iv)
warrant to purchase 80,000 shares of Series F-3 preferred stock, exercise
price of $25.00 per share (pre-Offering) or $36.00 per share (post-Offering).
If, after the Company's Offering, the market value (as defined in the
purchase agreement for the warrants) of a share of common stock is less than
the stated post-Offering exercise price of any such warrant, the exercise
price is reduced to such per share market value and the number of shares of
common stock covered by the warrant are increased proportionately. Based upon
the warrant agreements, the ceiling price for the warrants described in
clauses (ii), (iii) and (iv) above were set at the closing of the Offering at
$10.11, $9.24 and $10.08, respectively, per share of common stock. Chiron
exercised the warrant described in clause (i) above in March 1996 which
converted into 42,860 shares of common stock at the closing of the Company's
Offering. Assuming the remaining three warrants were exercised in full on
December 31, 1997, 3,117,672 shares of the Company's common stock would have
been issued upon such exercise based upon the twenty day average of the
average of the high and low closing market price, as reported by Nasdaq
National Market, prior to December 31, 1997 of $1.93 per share. The warrants
expire on the earlier of six years from the date of issuance or 120 days
after the warrant holder receives notice from the Company of the occurrence
of certain defined milestone events. See Note 10.
In January 1996, the Company granted warrants to purchase 162,011
shares of common stock at $7.00 per share to six parties, one of which is a
company which has a representative on the Company's Board which received a
warrant to purchase 30,002 shares of common stock, in return for their
guarantee on the Company's $2.7 million line of credit. The Company also
granted warrants to purchase 7,500 and 22,501 shares of the Company's common
stock at $7.00 per share to certain investment funds associated with a
representative on the Company's Board in return for their issuance of two
convertible promissory notes totaling $500,000. These warrants expire
February 2001. The difference between the Offering price and exercise price
of these warrants multiplied by the number of warrants, plus the intrinsic
value of the warrants was $768,064 which was recorded as interest expense in
1996.
In March 1997, the Company issued warrants to purchase 10,000 shares of
common stock, granted at the fair market value on the date of grant, for
certain services to be rendered. The warrant expires in March 2002.
21
<PAGE>
In connection with the line-of-credit, Transamerica received a five-year
warrant for 40,000 shares of common stock granted at the fair market value on
the date of grant. The intrinsic value of the warrant is approximately
$79,000 and is being amortized to interest expense over the expected term of
the outstanding line-of-credit. See Note 7.
In conjunction with the issuance of the Debentures, the Company issued
warrants to purchase 200,000 shares of the Company's common stock at 110% of
the market value of the common stock on the closing date of the Debentures.
The intrinsic value of these warrants is $182,000, which is being amortized
as interest expense. These warrants expire in December 2002. See Note 8.
In December 1997, the Company issued five-year warrants to financial
consultants to purchase 25,000, 40,000 and 75,000 shares of common stock at
$2.50, $3.00 and $6.50, respectively, which was greater than the market value
of the common stock at the date of grant. These warrants have an intrinsic
value of $50,450 which is being amortized over the term of the consulting
relationship. The warrant for 75,000 shares of common stock will vest upon
the Company's common stock trading for ten consecutive days, from the time of
grant until June 30, 1998, at or greater than $6.50 per share.
STOCK OPTION AND WARRANT AGREEMENT REVISIONS
In March 1994, the Company canceled all common stock option and warrant
agreements that were issued in 1993 that had exercise prices of $12.00 per
share and $18.46 per share and issued new stock option and warrant agreements
with the same terms and conditions except that the grant prices were $7.38
per share and $11.07 per share, respectively.
In August 1996, the Company canceled all common stock option
agreements, totaling 57,715 shares of common stock under the Plan and 18,958
shares of common stock outside of the Plan, with the exception of officer and
director options, that were issued with a grant price greater than the fair
market value at the date of re-grant and issued new stock option agreements
with the same terms and conditions except that the grant prices were $5.375
per share.
STOCK-BASED COMPENSATION
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement 123, requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, if the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of Statement 123. The
fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995: risk-free interest rates approximating
6.2%; volatility factor of the expected market price of the Company's common
stock ranging from .3 to .527 and a weighted-average expected life of the
option of 5 years. The weighted average fair value of the options granted in
1997 and 1996 is $2.16 and $2.54 per share, respectively, as computed as
described above.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can
22
<PAGE>
materially affect the fair value estimate, in management's opinion, the
existing models may not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Pro forma amortized expense .......... $ 435,589 $ 165,762 $ 1,763
Pro forma net loss applicable
to common stockholder. ............. $(6,070,723) $(14,949,353) $(5,475,801)
Pro forma net loss per common share,
Basic and Diluted................... $ (0.84) $ (2.26) $ (2.88)
</TABLE>
The pro forma effect on net loss for 1997, 1996 and 1995 is not
representative of the pro forma effect on net loss in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
DEFERRED COMPENSATION
In December 1995, the Company canceled certain stock option agreements
within the Plan and certain stock options that were outside of the Plan that
had grant prices ranging from $7.38 per share to $11.07 per share and issued
new stock option agreements with the same terms and conditions except that
the grant prices were $3.69 per share. The Company recorded $1,657,000 as
deferred compensation for the difference between the new grant price per
share of common stock and the fair market value of the common stock per share
on the date of grant, as determined by the board of directors, multiplied by
the total number of options affected. In December 1997 and 1996, the Company
adjusted the deferred compensation balance by $35,800 and $261,200 to account
for terminated employee options that were not vested. The deferred
compensation is amortized ratably over the vesting period of the options. In
1997, 1996 and 1995, $273,864, $340,066 and $476,266 was amortized,
respectively.
The remaining deferred compensation is expected to be amortized as
follows:
<TABLE>
<S> <C>
1998............................ $185,400
1999............................ 82,400
2000............................ 2,004
--------
$269,804
--------
--------
</TABLE>
10. COMMITMENTS
The Company has commitments under the following agreements:
LICENSE AGREEMENTS
In March 1993, Nestec, an affiliate of Nestle' Ltd., granted a license
to the Company, including the right to grant sublicenses, relating to the
production and use of bovine anti-rotavirus and anti-E. Coli antibodies
derived from milk and colostrum for therapeutic and prophylactic
applications. The license is exclusive in North America and semi-exclusive in
the rest of the world and obligates the Company to pay royalties on products
incorporating the licensed technology.
23
<PAGE>
In September 1993, Institut Pasteur granted the Company an exclusive
worldwide license to certain applications relating to human passive immunity.
Conversely, the Company granted Institut Pasteur an exclusive worldwide
license relating to certain technology regarding active immunity. Both
license agreements expire upon the earlier of ten years from the date of the
first commercial sale arising out of the use of these certain technologies or
upon the expiration of the last to issue licensed patent on a
country-by-country basis.
In March 1995, the Company entered into a License and Collaboration
Agreement with Chiron Corporation involving the licensing of Chiron adjuvant
technology and a collaboration to research and develop passive immune
therapies using bovine antibodies for certain products. Pursuant to this
Agreement, Chiron has granted an exclusive worldwide license for certain of
Chiron's proprietary adjuvant technology to the Company for which the Company
issued 17,143 shares of its Series F-1 preferred stock to Chiron.
Additionally, Chiron has been granted certain rights to exclusively market a
certain product for which the Company was paid $100,000. See Note 9.
In November 1997, the Company entered into a product development
agreement with Taste Technologies, Inc. to collaborate on the creation of
nutritional products containing GalaGen antibodies. Based upon their
contributions Taste Technologies is entitled to receive royalties on certain
net sales.
The royalties on the above agreements range from one-half to five
percent, depending on the volume, of certain net sales.
OTHER AGREEMENTS
A three-year service agreement that began in 1996 for specified raw
material preparation assistance requires minimum payments of approximately
$24,000 in 1998 and $14,000 in 1999.
The Company entered into a clinical service agreement with a contract
research organization in June 1997. This agreement requires payment over the
length of the clinical trial that is anticipated to be completed in 1998.
The agreement requires a minimum payment of approximately $36,000 in 1998.
LEASE COMMITMENTS
The Company leases certain office equipment under an operating lease.
During June 1996, the Company entered into a five-year lease agreement
with Land O'Lakes for specified space within the Land O'Lakes facility in
connection with the Company's pilot plant manufacturing facility. The lease
calls for annual payments of approximately $87,000 and can be extended for
additional one-year periods at the option of the Company.
In December 1996, the Company entered into an operating lease with
Cargill Leasing Corporation for $835,393 of manufacturing equipment for the
Company's pilot plant facility. Lease payments of $10,990 per month plus tax
will continue for a period of seven years with the Company's option to extend
for an additional 12 months. The rental percentage was computed on a
weighted average of the 30-day LIBOR rate and the rate on five-year U.S.
Treasury Notes. The lease is guaranteed by Land O'Lakes.
24
<PAGE>
The total lease expense was $199,808, $3,133 and $9,547, respectively,
for the years ended December 31, 1997, 1996, and 1995. The future minimum
annual lease payments are as follows:
<TABLE>
<S> <C>
1998..................... $ 228,000
1999..................... 228,000
2000..................... 227,000
2001..................... 184,000
2002..................... 140,000
Thereafter............... 140,000
----------
$1,147,000
----------
----------
</TABLE>
11. INCOME TAXES
Prior to the effective date of the merger with Procor, GalaGen's losses
were utilized by Land O'Lakes in its consolidated tax return. Subsequent to
the effective date of the merger and through December 31, 1997, GalaGen has
operating loss carryforwards to offset future taxable income of approximately
$33,500,000 which begin to expire in 2007. No benefit has been recorded for
such loss carryforwards, and utilization in future years may be limited, if
significant ownership changes have occurred.
Components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Loss carryforwards....................... $ 12,403,000 $ 10,270,000 $ 7,500,000
Research and development tax credit
carryforwards.......................... 791,000 566,000 322,000
------------ ------------ -----------
$ 13,194,000 $ 10,836,000 $ 7,822,000
Less valuation allowance................. (13,194,000) (10,836,000) (7,822,000)
------------ ------------ -----------
Net deferred tax assets.................. $ - $ - $ -
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
12. EXTRAORDINARY ITEM
In July 1995, the Company terminated its fund raising efforts for its
wholly owned subsidiary, Altra Bio Inc., and sold the Corporation to a former
officer for the nominal consideration of $1.00. Altra Bio had no book value
at the time of the sale and, accordingly, no gain or loss was recognized in
the transaction. As part of the terminated fund raising efforts, the Company
negotiated debt reduction settlements with certain research collaborators and
a vendor in the aggregate amount of $605,421. The effect on the December 31,
1995 net loss per share was $.32 for basic and diluted net loss per share.
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
GalaGen Inc.
We have audited the accompanying balance sheets of GalaGen Inc. (a
development stage company) as of December 31, 1997, and 1996, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997, and for the
period from November 17, 1987, (inception) to December 31, 1997. These
financial statements are the responsibility of GalaGen'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 GalaGen Inc. at
December 31, 1997 and 1996 and the results of its operations and cash flows
for each of the three years in the period ended December 31, 1997 and for the
period from November 17, 1987, (inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 13, 1998
26
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997
are derived from the financial statements of the Company which have been
audited by Ernst & Young LLP, independent auditors, and are included herein.
The selected financial data as of December 31, 1995, 1994 and 1993 and for
each of the two years in the period ended December 31, 1994 are derived from
audited financial statements which are not included herein. The data set
forth below should be read in conjunction with the financial statements and
notes thereto included in the appendix and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", included above.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(in thousands, except share numbers and per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues..................................... $ - $ - $ 150 $ - $ -
Operating costs and expenses:
Cost of goods sold....................... - - - - -
Research and development................. 3,936 5,258 3,731 3,442 4,659
General and administrative............... 1,966 1,889 2,022 1,720 2,875
Operating loss............................... (5,902) (7,147) (5,603) (5,162) (7,534)
Interest income.............................. 448 605 31 28 49
Interest expense............................. (181) (945) (507) (260) (38)
Net loss before extraordinary gain........... (5,635) (7,487) (6,079) (5,394) (7,523)
Extraordinary gain on extinguishment of
debt(1).................................. - - 605 - -
Net loss for the period...................... (5,635) (7,487) (5,474) (5,394) (7,523)
Preferred stock dividend(2).................. - (7,297) - - -
Net loss applicable to common stockholders... $ (5,635) $ (14,784) $ (5,474) $ (5,394) $ (7,523)
Net loss per share applicable to common
stockholders
Basic and Diluted........................ $ (.78) $ (2.24) $ (2.87) $ (2.89) $ (4.26)
Weighted average number of common shares
outstanding
Basic and Diluted........................ 7,184,722 6,604,902 1,904,059 1,866,561 1,767,272
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 156 $ 3,870 $ 509 $ 430 $ 1,926
Available-for-sale securities(3)............. 7,512 7,498 - - -
Working capital (deficiency)................. 7,028 9,776 (1,033) (846) (1,501)
Total assets................................. 9,530 12,959 818 686 2,196
Note payable(4).............................. 1,162 - - - 1,000
Accrued expenses payable to Land O'Lakes..... - - 225 26 727
Convertible notes(5)......................... 1,072 - 8,199 5,707 -
Total liabilities............................ 2,877 1,724 10,521 7,278 3,742
Stockholders' equity (deficiency)............ 6,653 11,235 (9,703) (6,592) (1,546)
</TABLE>
- ----------------
Net loss per share applicable to common stockholders has been restated to
comply with the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE. See Note 2 of the Notes to the Financial Statements
for further discussion.
27
<PAGE>
(1) See Note 12 of Notes to Financial Statements for an explanation of the
extraordinary item.
(2) See Note 6 of Notes to Financial Statements for an explanation of the
preferred stock dividend.
(3) See Note 2 of Notes to Financial Statements for an explanation of the
available-for-sale securities.
(4) See Note 7 of Notes to Financial Statements for an explanation of the
note.
(5) See Note 6 and Note 8 of Notes to Financial Statements for an explanation
of convertible notes.
28
<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, par value $.01 per share ("Common Stock"),
has been publicly traded since the closing of the Company's initial public
offering on April 1, 1996 (the "Offering"). The Common Stock trades on the
Nasdaq National Market tier of The Nasdaq Stock Market under the symbol GGEN.
At March 19, 1998, the number of holders of the Common Stock was approximately
1,385, consisting of 179 record holders and 1,206 stockholders whose stock is
being held by a bank, broker or other nominee. On March 19, 1998, the
closing sale price of a share of the Common Stock was $1.688.
The high and low sale prices per share of the Common Stock for the four
quarters during the years ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
High Low High Low
------ ------ ------- ------
<S> <C> <C> <C> <C>
First Quarter $4.625 $1.750 $ - $ -
Second Quarter $3.250 $2.000 $10.375 $7.125
Third Quarter $2.750 $2.000 $ 7.500 $3.813
Fourth Quarter $2.375 $1.500 $ 6.125 $4.000
</TABLE>
The Company has never paid cash dividends on the Common Stock. The
Board of Directors does not anticipate paying cash dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended December 31, 1997, the Company has sold the
following equity securities pursuant to exemptions from registration under
the Securities Act of 1933, as amended (the "Securities Act"). All such
sales were made in reliance upon the exemptions from registration provided
under Sections 3(b) and 4(2) of the Securities Act.
1. In March 1997, the Company issued warrants to purchase 10,000
shares of Common Stock, granted at the fair market value on the date of
grant, for certain investor relations services to be rendered by CTC, Inc.
The warrant is exercisable one year from the date of grant and expires in
March 2002.
2. In June 1997, the Company established a $2,000,000 line of
credit with Transamerica Business Credit Corporation ("Transamerica") which
extends through June 1998. In connection with this transaction, Transamerica
received a warrant for 40,000 shares of Common Stock granted at the fair
market value on the date of grant. The warrant was valued at approximately
$79,000 and will be amortized to interest expense over the expected term of
the outstanding line of credit. The warrant is immediately exerciseable and
expires in June 2002.
3. In November 1997, the Company raised $1,500,000 through the
private placement sale of 6% convertible debentures (the "Debentures") to CPR
(USA) INC., Libertyview Plus Fund and Libertyview Fund, LLC, all
institutional investors. The Malachi Group, Inc. acted as an agent in this
transaction The principal and interest of the Debentures can be converted
into shares of the Company's Common Stock at 82.5% of the lowest closing bid
price of the Company's Common Stock three days prior to conversion.
One-third of the Debentures can convert to Common Stock upon the effective
date of registration, one-third after five months from the closing date and
the remaining one third twelve months after the closing date or nine months
if the price of the Common Stock does not average at least $2.00 per share in
the eighth month after closing. An aggregate maximum of 1,400,000 discounted
shares of Common Stock (the "Discounted Shares") can be issued upon the
conversion of the Debentures, with each investor owning at any given time a
maximum of 4.99% of the then issued and outstanding shares of Common Stock.
If there remains any unconverted principal and accrued interest due to all
the Discounted Shares being issued, the Company has the obligation to repay
the investors, in the aggregate, a maximum principal of $500,000. The
Debentures automatically convert into the Discounted Shares eighteen months
from the closing date. Five-year warrants were issued to the investors to
purchase, in the aggregate, 200,000 shares of Common Stock at 110% of the
market value of the Common Stock on the closing date. The value of the
warrants plus the value of the discount of the Discounted Shares was
$500,182, which the Company is amortizing over the term of the Debentures.
In February and March 1998, $499,500 of Debenture principal plus accrued
interest was converted into 718,543 shares of Common Stock. In connection
with this private placement, the Company has reserved 1,129,062 shares
of Common Stock for issuance. These warrants expire in December 2002.
4. In December 1997, the Company issued five-year warrants to
CLARCO Holdings, which is associated with the Malachi Group, Inc., for
financial services rendered, to purchase 25,000, 40,000 and 75,000 shares of
Common Stock at $2.50, $3.00 and $6.50, respectively, each of which was
greater than the market value of the Common Stock at the date of grant. A
portion of the warrant for 40,000 shares was issued as partial payment for
services rendered in connection with the private placement of the Debentures.
These warrants have an intrinsic value of $50,450 which is being amortized
over the term of the consulting relationship. The warrants for 25,000 and
40,000 shares of Common Stock are immediately exercisable. The warrant for
75,000 shares of Common Stock will vest upon the Company's Common Stock
trading for ten consecutive days, from the time of grant until June 30, 1998,
at or greater than $6.50 per share. These warrants expire in December 2002.
29
<PAGE>
EXHIBIT 23.1
Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-05415, 333-05417, 333-27031 and 333-33351)
pertaining to the GalaGen Inc. 1992 Stock Plan, Employee Stock Purchase Plan,
Non-Statutory Stock Option Agreements and 1997 Incentive Plan of our report
dated February 13, 1998 with respect to the financial statements of GalaGen
Inc. incorporated by reference in this annual report (Form 10-K) for the year
ended December 31, 1997.
Ernst & Young LLP
Minneapolis, Minnesota
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM YEAR
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 155,908
<SECURITIES> 7,511,619
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,864,199
<PP&E> 1,869,974
<DEPRECIATION> 363,355
<TOTAL-ASSETS> 9,529,771
<CURRENT-LIABILITIES> 835,877
<BONDS> 0
0
0
<COMMON> 72,350
<OTHER-SE> 6,580,728
<TOTAL-LIABILITY-AND-EQUITY> 9,529,771
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,901,818
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 181,638
<INCOME-PRETAX> (5,635,134)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,635,134)
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