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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the fiscal year ended July 31, 1998
or
- ----- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934:
For the transition period from to .
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Commission file number: 0-27756.
Alexion Pharmaceuticals, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3648318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Science Park, Suite 360, New Haven, Connecticut 06511
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(Address of principal executive offices) (Zip Code)
203-776-1790
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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 $0.0001
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, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation (NASDAQ) National
Market System on October 22, 1998, was approximately $78,587,000.
The number of shares of Common Stock outstanding as of October 22, 1998 was
11,226,812.
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DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Portions of the registrant's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with solicitations of proxies for the
Registrant's 1998 Annual Meeting of Stockholders on December 4, 1998 are
incorporated by reference in Part III, Item 11 of this Form 10-K.
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PART I.
THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD
LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS
ABOUT THE COMPANY'S INDUSTRY, MANAGEMENT'S BELIEFS, AND CERTAIN ASSUMPTIONS MADE
BY THE COMPANY'S MANAGEMENT, WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS,"
"PLANS," "BELIEVES," "SEEKS," ESTIMATES," VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE,
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY
SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE
NOT LIMITED TO, THOSE SET FORTH HEREIN UNDER "IMPORTANT FACTORS REGARDING
FORWARD-LOOKING STATEMENTS," ATTACHED HERETO AS EXHIBIT 99, AS WELL AS THOSE
NOTED IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. UNLESS REQUIRED BY LAW,
THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
HOWEVER, READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN OTHER
REPORTS OR DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND
EXCHANGE COMMISSION.
Item 1. BUSINESS
GENERAL
Alexion Pharmaceuticals, Inc. ("Alexion" or the "Company"), a Delaware
corporation incorporated in 1992, is a biopharmaceutical company engaged in the
research and development of proprietary immunoregulatory compounds for the
treatment of autoimmune and cardiovascular diseases. The Company is developing
C5 Complement Inhibitors and Apogens, two classes of potential therapeutic
compounds designed to selectively target specific disease-causing segments of
the immune system. The Company believes that its C5 Complement Inhibitors and
Apogens, which are based upon distinct immunoregulatory technologies, may have
the advantage of achieving a higher level of efficacy with the potential for
reduced side effects when compared to existing therapeutic approaches. The
Company will need to undertake and complete further tests in order to confirm
its belief, and there can be no assurance as to the results of any such tests.
Primary therapeutic targets for the C5 Complement Inhibitor product candidates
are acute coronary syndromes including cardiopulmonary bypass ("CPB"), acute
myocardial infarction, coronary angioplasty, and unstable angina, and autoimmune
disorders including systemic lupus and rheumatoid arthritis. The Company is
currently conducting clinical trials in CPB, rheumatoid arthritis, and systemic
lupus patients. Key disease targets for the Apogen program include the
autoimmune disorders multiple sclerosis and diabetes mellitus.
As an outgrowth of its core technologies, the Company is developing, in
collaboration with United States Surgical Corporation ("US Surgical"), non-human
cell and UniGraft organ products
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designed for transplantation into humans, or xenotransplantation. The Company
has also developed proprietary immunoprotected retroviral-based vector particles
and producer cells for use in gene therapy.
ALEXION'S DRUG DEVELOPMENT STRATEGY
Alexion's strategy is to develop novel immunoregulatory therapeutics
for disease states, disorders and clinical indications for which the Company
believes treatment options are either non-existent or inadequate.
Currently available therapies for certain autoimmune, cardiovascular
and neurologic diseases, in which the immune system attacks the patient's own
tissue, broadly suppress the entire immune system, thus causing potentially
severe side effects. In contrast, Alexion's proprietary compounds are designed
to be more effective with reduced side effects when compared to currently
available therapies by generally targeting only the specific disease-causing
segments of the immune system, leaving the remaining segments of the immune
system intact to perform their normal protective functions. The Company is
developing two classes of potential therapeutic compounds, C5 Complement
Inhibitors ("C5 Inhibitors") and Apogens. C5 Inhibitors are designed to
specifically block the formation of disease-causing complement proteins, while
Apogens are designed to selectively eliminate disease-causing T-cells. In the
longer term, as an outgrowth of its core technologies, the Company is developing
non-human cell, tissue, and UniGraft organ products which are designed for
transplantation into humans, or xenotransplantation, without clinical rejection.
ALEXION DRUG DEVELOPMENT PROGRAMS
The Human Immune System
The role of the human immune system is to defend the body from attack
or invasion by infectious agents or pathogens. This is accomplished through a
complex system of proteins and cells, primarily complement proteins, antibodies
and various types of white blood cells, each with a specialized function. Under
normal circumstances, complement proteins, together with antibodies and white
blood cells, act beneficially to protect the body by removing pathogenic
microorganisms, cells containing antigens (foreign proteins), and
disease-causing immune complexes (combinations of antigens and antibodies).
However, any number of stimuli, including antibodies, pathogenic microorganisms,
injured tissue, normal tissue, proteases (inflammatory enzymes) and artificial
surfaces can locally activate complement proteins in a cascade of enzymatic and
biochemical reactions (the "complement cascade") to form inflammatory byproducts
leading, for example, in the case of cardiovascular disorders such as myocardial
infarction (death of heart tissue), to additional significant damage to the
heart tissue and, in the case of rheumatoid arthritis, to severe joint
inflammation. T-cells, a type of white blood cell, play a critical role in the
normal immune response by recognizing cells containing antigens, initiating the
immune response, attacking the antigen-containing tissue and directing the
production of antibodies targeting the antigens, all of which lead to the
elimination of the antigen-bearing foreign organism. When a T-cell mistakenly
attacks host tissue, the T-cell may cause an inflammatory response resulting in
tissue destruction and severe autoimmune disease leading, for example, in the
case of multiple sclerosis, to severe and crippling destruction of nerve fibers
in the brain.
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C5 Complement Inhibitor Immunotherapeutics
Alexion is developing specific and potent biopharmaceutical C5
Inhibitors which are designed to intervene in the complement cascade at what the
Company believes to be the optimal point so that the disease-causing actions of
complement proteins generally are inhibited while the normal disease-preventing
functions of complement proteins generally remain intact. In laboratory and
animal models of human disease, Alexion has shown that C5 Inhibitors are
effective in substantially preventing inflammation during CPB, reducing tissue
damage during myocardial infarction, reducing the incidence and severity of
inflammation and joint damage in rheumatoid arthritis, enhancing survival in
lupus, and preserving kidney function in nephritis (kidney inflammation). The
Company is developing two C5 Inhibitors: (i) a short-acting humanized
(compatible for human use) single chain antibody (5G1.1-SC) designed for
treating patients with acute coronary syndromes including CPB procedures and
myocardial infarction and (ii) a long acting humanized monoclonal antibody
(5G1.1) designed for treating chronic disorders such as lupus and rheumatoid
arthritis.
Cardiopulmonary Bypass Surgery
In performing certain complex cardiac surgical procedures, it is
necessary to divert blood from the patient's heart and lungs to a
cardiopulmonary (heart-lung) bypass machine in the operating room which
artificially adds oxygen to the blood and then circulates the oxygenated blood
to the organs in the patient's body. The Company believes that tissue damage
during and after surgery and excessive bleeding during and after surgery, both
significant complications of CPB, may be the result of an inflammatory process
that begins when CPB is initiated. The CPB-related inflammatory response is
associated with the rapid activation of the complement cascade caused when the
patient's blood is perfused through the CPB machine and comes into contact with
artificial surfaces. The inflammation is also characterized by activation of
leukocytes (neutrophils, a type of white blood cell) and platelets (cells
responsible for clotting). The Company believes that neutrophil activation is
associated with impaired lung, heart, brain and kidney function and that
platelet activation and subsequent platelet dysfunction during CPB impair the
patient's ability to arrest the bleeding that occurs after extensive surgery.
The short-acting humanized single chain antibody C5 Inhibitor
(5G1.1-SC) is designed to inhibit complement activation in patients immediately
before and during CPB in order to prevent the cardiovascular damage and bleeding
complications associated with CPB. Those effects might reduce the incidence of
post-operative complications, the time spent by patients in the intensive care
unit, the scope of required treatments associated with CPB, and the need for
blood transfusions. Preclinical studies by the Company indicated that the
Company's C5 Inhibitor can substantially prevent activation of platelets and
neutrophils and the subsequent inflammatory process that occurs during
circulation of human blood in a closed-loop CPB circuit.
An Investigational New Drug application ("IND") was filed with the U.S.
Food and Drug Administration ("FDA") in March 1996 for the C5 Inhibitor,
5G1.1-SC and, after receiving FDA authorization, a Phase I clinical trial in
healthy male volunteers began in June 1996. Results of the Phase I trial
indicated that a single dose administration of 5G1.1-SC was safe and
well-tolerated in the study population. In September 1996, the Company received
FDA authorization for its second clinical trial and in October 1996 commenced a
Phase I/II study of 5G1.1-SC in patients undergoing CPB.
In July 1997, preliminary results from this Phase I/II clinical study
of 17 patients undergoing CPB were released. Treatment with 5G1.1-SC reduced the
more than ten-fold increase in the level of activated complement byproducts
experienced by patients on placebo during
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CPB in a dose-dependent manner. With FDA approval, the Company initiated a Phase
IIa CPB clinical study including an additional 18 patients. In October 1997,
additional preliminary results indicated that 5G1.1-SC significantly reduced
leukocyte activation (inflammation) as compared to placebo. In April 1998,
clinical results from the Phase I/II and Phase IIa CPB studies indicated that
5G1.1-SC significantly reduced cardiac damage, new cognitive (brain) deficits,
and blood loss in patients undergoing coronary artery bypass graft surgery.
The Company expects to commence Phase IIb studies with 5G1.1-SC later
this year. There can be no guarantees that clinical trials of the Company's
product candidates will be commenced or completed in a timely manner or will
demonstrate sufficient safety and efficacy to obtain the requisite regulatory
approvals or will result in marketable products.
The American Heart Association ("AHA") estimates that almost 500,000
CPB operations are performed in the United States each year.
Myocardial Infarction
Myocardial infarction (heart attack) is an acute cardiovascular
disorder where the coronary arteries (the arteries feeding the heart muscle) are
blocked to such an extent that the flow of blood is insufficient to supply
enough oxygen and nutrients to keep the heart muscle alive. With insufficient
supply of blood, oxygen, and nutrients, the underperfused heart muscle may
subsequently infarct (die). Myocardial infarction most often occurs due to a
blockage in a coronary artery caused by atherosclerosis. Upon the reduction in
flow in the coronary artery, a complicated cascade of inflammatory events
commences within the blood vessel involving platelets and leukocytes and their
secreted factors, complement proteins, and endothelial cells. This severe
inflammatory response targeting the area of the underperfused cardiac muscle is
associated with subsequent infarction of the heart muscle. Restoration of blood
flow is also associated with an additional inflammatory reaction. In addition to
the high incidence of sudden cardiac death at the onset, severe complications
associated with the initial survival of an acute myocardial infarction include
congestive heart failure, stroke, and death.
The Company is developing the C5 Inhibitor, 5G1.1-SC (currently being
applied to the treatment of patients undergoing CPB, as discussed above) to
inhibit complement activation in patients suffering an acute myocardial
infarction in order to reduce the extent of infarcted myocardium. The Company
and its collaborators have performed preliminary preclinical studies in rodents
which have demonstrated that administration of a C5 Inhibitor, during myocardial
ischemia (insufficient supply of blood to the heart muscle) and prior to
reperfusion, significantly reduced the extent of subsequent myocardial
infarction compared to control studies. There can be no assurance that the
results from preclinical studies will be predictive of results that may be
obtained in clinical trials. Further, such preclinical results do not
necessarily predict or prove safety or efficacy in humans. .
As a result of positive results in preclinical studies, the Company
plans to file an IND using 5G1.1-SC in another clinical indication for the
treatment of acute myocardial infarction (heart attack) near the end of this
year or the beginning of next year. There can be no assurance that an IND will
be filed on a timely basis, if at all, that the Company will be permitted to
commence clinical trials on a timely basis, if at all, or that the results from
preclinical studies will be predictive of results that may be obtained in
clinical trials. Preclinical results obtained from such studies may not
necessarily predict or prove safety or efficacy in humans.
The AHA estimates that approximately 1,000,000 Americans survived a
heart attack in 1994 and thus are potentially eligible for such drug treatment.
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Rheumatoid Arthritis
Rheumatoid arthritis is an autoimmune disease directed at various organ
and tissue linings, including the lining of the joints, causing inflammation and
tissue destruction. Clinical signs and symptoms of the disease include weight
loss, joint pain, morning stiffness and fatigue. Further, the joint destruction
can progress to redness, swelling and pain with frequent, severe joint
deformity. Rheumatoid arthritis is generally believed to be due to T-cells which
both directly attack the patient's joints and also activate B-cells (a type of
white blood cell) to produce antibodies which deleteriously activate complement
proteins in the joint, leading to inflammation, with subsequent tissue and joint
destruction.
Alexion is developing a long acting humanized recombinant monoclonal
antibody (5G1.1), a C5 Inhibitor which is designed to inhibit complement
activation and thereby reduce the severity and frequency of flares of joint
inflammation and arrest progressive tissue damage in joints caused by complement
activation. The Company has performed preclinical studies in rodent models of
rheumatoid arthritis. In these preclinical studies, treatment with the Company's
specific C5 Inhibitor substantially prevented the onset of inflammation and
pathology in the joints, the onset of clinical signs of rheumatoid arthritis, as
well as ameliorated established disease.
An IND was filed with the FDA in December 1997 for 5G1.1 in the
treatment of rheumatoid arthritis in patients and, after receiving FDA
authorization, a Phase I/II multi-center clinical trial in rheumatoid arthritis
patients began in July 1998. There can be no guarantees that clinical trials of
the Company's product candidates will be completed in a timely manner or will
demonstrate sufficient safety and efficacy to obtain the requisite regulatory
approvals or will result in marketable products.
In the United States, approximately 2,500,000 patients receive
treatment from a physician for rheumatoid arthritis.
Lupus Nephritis
The kidneys are responsible for filtering blood to remove toxic
metabolites and maintain the blood minerals that are required for normal
metabolism. Each kidney consists of millions of individual filtering units, each
filtering unit called a glomerulus. When glomeruli are damaged, the kidney can
no longer adequately maintain its normal filtering function. Clinically severe
nephritis, found in many patients suffering from systemic lupus erythematosus
("lupus" or "SLE") and other autoimmune diseases, occurs when more than 90% of
the kidney is destroyed by disease. Kidney failure is frequently associated with
hypertension, strokes, infections, anemia, heart, lung and joint inflammation,
coma and death. Most forms of damage to the glomerulus are mediated by the
immune system and particularly by antibodies and activated complement proteins.
Alexion is developing the C5 Inhibitor 5G1.1 (also being applied to the
treatment of rheumatoid arthritis, as discussed above) for the prevention and
treatment of inflammation in lupus patients. The Company has performed
preclinical studies in a rodent model of acute nephritis. In this model, the
Company's specific C5 Inhibitor substantially prevented inflammation in the
kidney tissue. Further, in a separate chronic rodent model that spontaneously
develops a disease similar to lupus with concomitant nephritis, substantially
more animals treated with the Company's specific C5 Inhibitor survived as
compared to untreated control animals.
An IND was filed with the FDA in late December 1997 for 5G1.1 in a
second clinical indication, the treatment of patients suffering from Systemic
Lupus Erythematosus ("SLE") and,
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after receiving FDA authorization, a Phase I/II clinical trial in lupus patients
began in July 1998. There can be no guarantees that clinical trials of the
Company's product candidates will be completed in a timely manner or will
demonstrate sufficient safety and efficacy to obtain the requisite regulatory
approvals or will result in marketable products.
Alexion's proposed product to treat and prevent nephritis is directed
at a patient population which includes SLE as well as diseases with lower
prevalence such as Goodpastures disease and others. According to the Lupus
Foundation, approximately 1.4 million, or 1 out of every 185 Americans, suffer
from Lupus-related complications. Further, an estimated 70% of individuals
afflicted with Lupus suffer nephritis. Although Lupus may affect people of
either sex, women are 10-15 times more likely to suffer from the disease than
men.
Apogen Immunotherapeutics
The Company's Apogen compounds are based upon discoveries at the
National Institutes of Health ("NIH") which are exclusively licensed to Alexion
and upon further discoveries by Alexion. The highly specific recombinant Apogens
under development by the Company are designed to selectively eliminate
disease-causing T-cells in patients with certain autoimmune diseases including
multiple sclerosis and diabetes mellitus. The Company has demonstrated that its
lead proprietary Apogen, MP4, is effective at preventing neurologic disease in
animal models of multiple sclerosis.
Multiple Sclerosis
Multiple Sclerosis ("MS") is an autoimmune disease of the central
nervous system which hinders the ability of the brain and spinal cord to control
movement, speech and vision. MS can be severely debilitating with long term
disability a common outcome. In severe cases, the reduced motor strength may
confine the patient to a wheelchair. MS is widely believed to be due to the
attack of a patient's antigen-specific T-cells on the protective myelin sheath
surrounding nerve cells in the central nervous system.
Preclinical animal studies performed by Alexion in the experimental
autoimmune encephalomyelitis ("EAE") mouse model of MS, have demonstrated that
administration of the Company's proprietary Apogen MS product candidate, MP4, at
the time of disease induction, effectively prevents the development of severe
neurologic disease and administration of MP4 after the onset of disease
ameliorates established disease. In April 1997, the Company and its
collaborators at the NIH disclosed preliminary results of testing of MP4 in a
non-human primate model of MS. MP4 therapy substantially reduced the severity
and incidence of neurologic symptoms in these preclinical studies. In in vitro
studies, Alexion and NIH scientists have observed that MP4 is also capable of
eliminating antigen-specific human T-cells from patients with MS.
In February 1998, an IND was filed with the FDA for MP4 for the
treatment of patients suffering from MS. After completion of additional
preclinical studies and amendment of the clinical protocol in line with the
preferred route of administration, a Phase I/II clinical trial in MS patients is
expected to be initiated. There can be no guarantee that the results from
preclinical studies are predictive of results that may be obtained in clinical
trials, that the Company will be permitted to commence clinical trials on a
timely basis, if at all, or that clinical trials of the Company's product
candidates will be completed in a timely manner or will demonstrate sufficient
safety and efficacy to obtain the requisite regulatory approvals or will result
in marketable products.
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According to the National Multiple Sclerosis Society, there are
approximately 250,000 reported cases of MS in the United States alone. But it is
estimated that the actual number of Americans with MS may be closer to 500,000
because many people with mild symptoms never seek medical attention (LJ Rosner,
S Ross. Multiple Sclerosis. Simon & Schuster, New York; 1992).
Diabetes Mellitus
Type I Diabetes Mellitus, or Insulin Dependent Diabetes Mellitus
("IDDM"), is the most severe form of diabetes and is generally believed to be
caused by an autoimmune T-cell attack and destruction of the insulin-producing
cells in the pancreas. This process, which usually begins in childhood, causes
reduced production of insulin, which is responsible for the breakdown of
glucose, resulting in uncontrolled elevations in the patient's blood sugar.
Without treatment, IDDM can be fatal.
Alexion is currently developing Apogen DM which is designed to prevent
and treat IDDM by eliminating antigen-specific T-cells which are responsible for
the pancreatic B-cell destruction. Alexion has established animal models of
diabetes and has commenced initial preclinical studies with Apogen DM
prototypes. In June 1998 at the American Diabetes Association's 58th Annual
Scientific Sessions, the Company presented preclinical data indicating that a
new drug candidate, IG2, was highly effective in suppressing the development of
IDDM in two different animal models. There can be no assurance that the results
from preclinical studies will be predictive of results that may be obtained in
clinical trials and do not necessarily predict or prove safety or efficacy in
humans.
According to the American Diabetes Association, up to 800,000 Americans
are insulin-dependent diabetics. The Company intends to design its potential
product as a preventative for individuals at high risk of developing the disease
and as a therapy for patients who still have a population of insulin producing
cells, in order to arrest progression of the disease and the subsequent
development of longer term complications.
The UniGraft Program and Gene Transfer Systems
Organ and Tissue Transplantation
As an outgrowth of its core technologies, the Company is also
developing, in collaboration with US Surgical, non-human cell and organ UniGraft
products which are designed for transplantation, or xenotransplantation, into
humans without clinical rejection. Rejection of non-human tissue by patients is
generally believed to occur in two stages, a very rapid hyperacute phase
extending from minutes to hours and a somewhat less rapid acute phase, extending
from days to months. Hyperacute rejection is generally believed to be mediated
by naturally-occurring antibodies in the patient, most of which target a
carbohydrate antigen uniquely present on the surface of non-human tissue (but
not on the patient's own tissue). After binding to the foreign tissue, these
antibodies activate the cascade of complement proteins on the surface of the
donor tissue with subsequent destruction of the donor tissue. Subsequently,
acute rejection of xenografts (tissue from different species) is generally
believed to be mediated by T-cells, many of which are specific to the
transplanted tissue.
UniGraft products are being designed to resist both
complement/antibody-mediated hyperacute rejection and T-cell-mediated acute
rejection. Alexion has commenced studies employing the UniGraft technologies
during preclinical transplantation of genetically engineered and proprietary
porcine cells and organs. Currently, pigs are a preferred source of organ supply
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because the anatomy, size, and physiology of their hearts and other organs are
similar to human organs. The Company has genetically engineered porcine cells
that are resistant to lysis (break-up) and activation by human complement
proteins. Alexion has also discovered and designed porcine-specific antibodies
which have been demonstrated to selectively and significantly block the human
T-cell response to porcine tissue in in vitro studies. Alexion is currently
employing its immunoregulatory and molecular engineering technologies in order
to develop UniGraft hearts, lungs, livers, pancreases and kidneys. There can be
no assurance that the Company's organ, tissue, and cell transplantation
technology will result in the development of any therapeutic products, if at
all. Although several companies are focusing on xenotransplantation-based
products, this area represents a novel therapeutic approach that has not yet
been subject to extensive clinical testing.
Xenotransplantation also poses a risk that viruses or other animal
pathogens may be unintentionally transmitted not only to a human patient
recipient, but there is also a possibility that such viruses or other animal
pathogens could be transmitted to all humans. The Company is aware of recent
scientific publications by others which demonstrate, under laboratory
conditions, that porcine endogenous retroviruses ("PERV") have the potential to
infect human cells. While PERV has not been shown to cause any disease in pigs
or humans, it is not known what effect, if any, PERV may have on human beings.
The Company's porcine organ, tissue and cell product development programs would
be negatively impacted by the detection of infectious PERV in porcine cells in
the Company's preclinical development program or at other companies focusing in
this area.
There can be no guarantees that the results from preclinical studies
are predictive of results that may be obtained in clinical trials, that the
Company will be permitted to commence clinical trials with a xenotransplant
product on a timely basis, if at all, or that clinical trials of the Company's
product candidates will be completed in a timely manner or will demonstrate
sufficient safety and efficacy to obtain the requisite regulatory approvals or
will result in marketable products. No xenotransplantation-based therapeutic
product has been approved for sale by the FDA. The FDA has not yet established
definitive regulatory guidelines for xenotransplantation, but has proposed
interim guidelines in an attempt to reduce the risk of contamination of
transplanted organ and cellular products with infectious agents. There can be no
assurance that definitive guidelines will be issued, if at all, or that the
Company will be able to comply with final definitive guidelines that may be
issued. Furthermore, there can be no assurance that any products developed by
the Company will be approved by the FDA or regulatory authorities in other
countries in a timely manner, if at all, or that xenotransplantation-based
products (including products developed by the Company) will be accepted by the
medical community or third-party payors or that the degree of acceptance will
not limit the size of the market for such products.
According to the United Network of Organ Sharing, there are
approximately 20,000 organ transplants performed annually in the U.S. and there
are more than 50,000 patients on waiting lists for transplant organs. The
Company believes that the availability and viability of xenograft organs for
transplantation could increase the transplant market significantly.
Gene Transfer Systems
As an outgrowth of its core technologies, the Company applied its
research in and knowledge of the body's rejection response to engineer
retroviral vector producer cells and particles which, when employed in gene
transfer products, would be able to survive and function in vivo following
implantation or direct injection, respectively. The Company has developed
proprietary retroviral-based gene transfer vectors, producer cells, and
particles which survive in human blood ex vivo.
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STRATEGIC ALLIANCES, COLLABORATIONS AND LICENSES
The Company's plan is to develop and commercialize on its own those
product candidates for which the clinical trial and marketing requirements can
realistically be managed by the Company. For certain of the Company's C5
Inhibitor and Apogen products for which greater resource commitments will be
required, a key element of Alexion's strategy is the formation of corporate
partnerships with major pharmaceutical companies for product development and
commercialization. Alexion has entered into a strategic alliance with US
Surgical with respect to transplantation applications of the Company's UniGraft
program. The Company intends to develop additional strategic alliances with
major pharmaceutical companies for certain of its other technologies. There can
be no assurance that the Company will enter into additional strategic alliances,
or, if entered into, what the terms of any strategic alliance will be, or how
long any strategic alliance would continue.
United States Surgical Corporation
In July 1995, the Company and US Surgical entered into the Joint
Development Agreement, pursuant to which the Company and US Surgical agreed to
collaborate to jointly develop and commercialize the Company's UniGraft
technology for organ transplantation. Pursuant to the Joint Development
Agreement, Alexion has primary responsibility for preclinical development,
clinical trials and regulatory submissions relating to the UniGraft program, and
US Surgical has primary responsibility for production, sales, marketing and
distribution of UniGraft products to the extent developed and approved for
commercialization. Further, US Surgical has committed to exclusively develop
with the Company xenotransplantation products.
In the July 1995 Joint Development Agreement, US Surgical agreed to
fund preclinical development of UniGraft products by paying to Alexion up to
$7.5 million. This preclinical funding represented $4.0 million of the cost of
preclinical development in four semi-annual installments of approximately $1.0
million (the first installment of which was paid in July 1995) and $3.5 million
upon achieving certain milestones involving development of a genetically
engineered pig and the transplantation of non-primate tissue into primates (the
"Primate Milestone"). If the Primate Milestone is achieved, US Surgical is to
advise the Company whether it intends to exercise its priority right to provide
all clinical funding for the UniGraft product, and the Company and US Surgical
are to agree upon milestone payments to be made by US Surgical to the Company
for the first three UniGraft products. Unless and until US Surgical determines
to terminate clinical funding for a UniGraft product, US Surgical shall have the
exclusive worldwide marketing, sales and distribution rights with respect to
such UniGraft product, including market introduction decisions and control of
marketing, sales and distribution decisions. In furtherance of the joint
collaboration, US Surgical also purchased $4.0 million of Common Stock of the
Company, at a price of $8.75 per share. Through July 31, 1997, the Company had
received $4.0 million in research and development support under its
collaboration with US Surgical. US Surgical also purchased approximately ten
percent of the shares of Common Stock offered at the Company's initial public
offering.
In September 1997, US Surgical and the Company modified the July 1995
Joint Development Agreement. As part of the modification, US Surgical made an
additional $6.5 million payment to the Company for equity, exclusive licensing
rights, and certain xenograft manufacturing assets. Under the modified
agreement, the additional $6.5 million payment comprised: (i) a $3 million
equity investment in the Company through the purchase of 166,945 shares of the
Company's Common Stock at a price of $17.97 per share, which represented a 25%
11
<PAGE>
premium over the market price on the day prior to the date of closing and (ii) a
$3.5 million payment to acquire technology and certain xenograft manufacturing
assets. Further, as part of the amended agreement, US Surgical and the Company
agreed that the preclinical milestone payments in the original agreement are
considered to have been satisfied. As of July 31, 1998, the Company had received
all of the preclinical funding under this agreement. At October 1, 1998, US
Surgical beneficially owned an aggregate of 824,087 shares of Common Stock or
approximately 7.3% of the Company's outstanding shares.
For inventions made by the Company during the performance of the
preclinical or clinical programs outlined in the Joint Development Agreement,
the Company will own the inventions and US Surgical is granted (i) a worldwide
exclusive license to sell transplant products derived from the Company's
xenotransplantation technology; (ii) a worldwide exclusive license to sell
products (a) in the fields related to businesses in which US Surgical is engaged
and (b) not in the fields in which the Company is currently developing its
products (i.e., anti-inflammatories and gene therapy systems); and (iii) an
option to an exclusive license to sell products in fields outside those related
to businesses which US Surgical is engaged but excluding fields which the
Company is currently developing its products (e.g., anti-inflammatories and gene
therapy systems). US Surgical has agreed to pay to the Company royalties on net
sales of products. The Company has retained full rights to inventions in fields
of gene therapy systems and anti-inflammatories as well as to inventions in
fields for which US Surgical does not exercise its option.
The Joint Development Agreement may be terminated by US Surgical for
any or no reason, effective January 1, 1998, if notice is given by US Surgical
at least six months prior thereto. In the event of a termination by US Surgical,
all rights licensed by Alexion shall revert to Alexion. On October 1, 1998, US
Surgical completed a merger with a subsidiary of Tyco International Ltd.
Genetic Therapy, Inc.
In December 1996, Alexion and Genetic Therapy, Inc. ("GTI/Novartis"), a
subsidiary of Novartis, Inc., entered into a License and Collaborative Research
Agreement with respect to the Company's gene transfer technology. Under the
Agreement, GTI/Novartis has been granted a worldwide exclusive license to use
the Alexion technology in its gene therapy products.
GTI/Novartis paid Alexion an initial upfront payment of $850,000 which
consisted of a one-time license fee of $750,000 and a $100,000 research and
development support payment. GTI/Novartis also agreed to fund a minimum of
$400,000 per year for two years for research and development support by Alexion,
make payments to Alexion upon achievement of certain product development
milestones for gene therapy products utilizing the Alexion technology and pay
royalties on net sales, if any. In October 1998, in view of Alexion's increased
focus on the advanced clinical development of its anti-inflammatory drug
candidates and GTI/Novartis's recently announced restructuring and
reorganization, the Company and GTI/Novartis agreed to discontinue the
collaborative gene therapy program. Through September 1998, Alexion has received
approximately $1.6 million in license and research payments due from
GTI/Novartis with respect to GTI/Novartis's development of immune protected
viral gene therapy products.
Licenses and Other Sponsored Research
The Company has obtained licenses with respect to certain issued
patents and patent applications, to supplement the research of its own
scientists. The Company has agreed to pay to its licensors royalties on sales of
certain products based on the licensed technologies, as well as, in some
instances, minimum royalty and milestone payments, and patent filing and
prosecution costs. The Company has also agreed to indemnify its licensors and,
in certain instances, the inventors,
12
<PAGE>
against certain liabilities, including liabilities arising out of product
liability claims and, in certain instances, under the securities laws. Because
research leading to inventions licensed from domestic licensors are generally
supported by the United States Government, the Government has retained certain
statutory rights, including a non-exclusive, royalty-free license to use the
licensed inventions, and to manufacture and distribute products based thereon,
for Government use only. A summary of certain of such licenses, as well as the
Company's other material licenses and sponsored research, is presented below.
Yale University and Oklahoma Medical Research Foundation ("OMRF")
The Company has obtained exclusive, worldwide licenses to certain
issued patents and patent applications and related technology from Yale and OMRF
with respect to complement inhibitors and UniGraft technology. Since obtaining
the patent licenses, the Company has made further discoveries relating to
complement inhibitors and the UniGraft technology, resulting in the filing by
the Company of numerous additional U.S. patent applications. In addition, the
Company has provided funding for separate sponsored research by certain of these
inventors and, to the extent that an invention would not be covered by an
existing license from OMRF to the Company, the Company has the first and prior
right to license any inventions in the field arising from the research.
National Institutes of Health ("NIH")
The Company has obtained an exclusive, worldwide license from NIH for
rights to two patent applications related to the work performed at NIH on
antigen-specific elimination of disease-causing T-cells in patients with certain
inflammatory disorders.
In further support of the Company's Apogen program, the Company and the
National Institute of Allergy and Infectious Diseases ("NIAID") have entered
into a Cooperative Research and Development Agreement (the "NIH CRADA"). The
subject matter of the NIH CRADA included preclinical and clinical development
based upon discoveries by NIAID regarding the antigen-specific elimination of
disease-causing T-cells in patients with certain inflammatory disorders. The
principal investigator of the NIH CRADA is the principal inventor of the
inventions licensed to the Company by NIH. The NIH is part of the United States
Department of Health and Human Services. NIAID has granted the Company the first
and prior right to an exclusive commercialization license for any and all
inventions or products developed pursuant to the NIH CRADA. Pursuant to the NIH
CRADA, the Company paid approximately $159,000 per year, aggregating $477,000,
for the three-year period through July 31, 1997. In February 1997, the NIH CRADA
was amended to extend the term to December 1997 and the Company paid
approximately $170,000 under this amendment. In March 1998, the NIH CRADA was
amended to extend the term to August 10, 1998 and the Company committed to pay
$98,000 under this amendment. Through July 31, 1998, the Company has paid
$98,000 under this amendment. In August 1998, the NIH CRADA was further amended
to extend the term of the last amendment to November 1998 with no additional
funding obligation by the Company.
Biotechnology Research and Development Corporation
The Company has entered into a license agreement with the Biotechnology
Research and Development Corporation ("BRDC"), under which the Company has
become the worldwide, exclusive licensee of the porcine embryonic stem cell
technology developed at the University of Illinois and sponsored by BRDC, and
related patent applications for xenotransplantation purposes. The Company
believes that this technology may assist it in its UniGraft organ
transplantation program.
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<PAGE>
In connection with the license agreement with BRDC, the Company became
a common shareholder of BRDC, which is a research management corporation. At the
present time, the Company, Agricultural Research and Development Corporation,
American Home Products Corporation, Dalgety, plc., The Dow Chemical Company,
Mallinckrodt Inc., McDonald's Corporation, Schering-Plough Animal Health
Corporation, and Seminis Vegetable Seeds, Inc. are common shareholders of BRDC.
BRDC is currently funding numerous research projects in biotechnology, and each
of the common shareholders, including the Company, retains the right to license
for commercial development the technologies resulting from substantially all of
these research programs. The Company paid $50,000 for the purchase of its common
stock of BRDC and has committed to an annual research contribution to the
consortium for four years. For the four-year period through July 31, 1997, the
Company paid approximately $633,000 under the agreement. However, minimum annual
royalty payments under the license agreement with BRDC have been waived so long
as the Company remains a shareholder of BRDC.
Advanced Technology Program ("ATP") and National Institute of Standards
and Technology ("NIST") Grants
In August 1995, the Company was awarded cost-shared funding from the
Commerce Department's National Institute of Standards and Technology under its
Advanced Technology Program. Through the ATP, the Company may receive up to
approximately $2.0 million over three years to support the Company's UniGraft
program in universal donor organs for transplantation. Through July 31, 1998,
the Company has received approximately $1.5 million under this award. In
September 1998, the three year period was amended to extend to September 1999.
In November 1997, the Company and US Surgical were awarded a three-year
$2.0 million Cooperative Agreement from NIST under its ATP for funding a joint
xenotransplantation project. Through July 31, 1998, the Company and US Surgical
have received approximately $48,000 under this award.
Medical Research Council License
In March 1996, the Company entered into a license agreement with the
Medical Research Council under which the Company has become the worldwide
non-exclusive licensee of certain patents related to the humanization and
production of monoclonal antibodies.
Enzon License
In May 1996, the Company licensed from Enzon, Inc. on a worldwide
non-exclusive basis certain patents related to single chain antibodies.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent applications
to protect technology, inventions and improvements to its technologies that are
considered important to the development of its business. The Company also relies
upon trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position.
The Company has filed several U.S. patent applications and
international (Patent Cooperation Treaty) counterparts of certain of these
applications. In addition, the Company has
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exclusively licensed several additional U.S. patents and patent applications. Of
the Company's owned and exclusively licensed patents and patent applications as
of July 31, 1998, approximately 28% relate to technologies or products in the C5
Inhibitor program, 16% relate to the Apogen program, 12% relate to the Gene
Transfer program and 44% relate to the UniGraft program.
The Company's success will depend in part on its ability to obtain
United States and foreign patent protection for its products, to preserve its
trade secrets and proprietary rights, and to operate without infringing on the
proprietary rights of third parties or having third parties circumvent the
Company's rights. Because of the length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the health care industry has traditionally placed considerable
importance on obtaining patent and trade secret protection for significant new
technologies, products and processes. There can be no assurance that any patents
will issue from any of the patent applications owned by or licensed to the
Company. Further, even if patents are issued, there can be no assurance that
such patents would provide the Company with significant protection against
competitive products or otherwise be commercially valuable. In addition, patent
law relating to certain of the Company's fields of interest, particularly as to
the scope of claims in issued patents, is still developing and it is unclear how
this uncertainty will affect the Company's patent rights. Litigation, which
could be costly and time consuming, may be necessary to enforce patents issued
to the Company and/or to determine the scope and validity of others' proprietary
rights, in either case in judicial or administrative proceedings. The Company's
competitive position is also dependent upon unpatented trade secrets which
generally are difficult to protect. There can be no assurance that others will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets, that the
Company's trade secrets will not be disclosed or that the Company can
effectively protect its rights to unpatented trade secrets. As the biotechnology
industry expands and more patents are issued, the risk increases that the
Company's potential products may give rise to claims that they infringe the
patents of others. Any such infringement litigation would be costly and time
consuming to the Company.
The Company is aware of broad patents owned by third parties relating
to the manufacture, use, and sale of recombinant humanized antibodies,
recombinant humanized single chain antibodies and genetically engineered
animals. The Company has received notice from certain of these parties regarding
the existence of certain of these patents which the owners claim may be relevant
to the development and commercialization of certain of the Company's proposed
products. With respect to certain of these patents which it believes are
relevant for the expeditious development and commercialization of certain of its
products as currently contemplated, the Company has acquired licenses. With
regard to certain other patents, the Company has either determined in its
judgment that its products do not infringe the patents or has identified and is
testing various approaches which it believes should not infringe the patents and
which should permit commercialization of its products. There can be no assurance
that the owner of these patents will not seek to enforce the patent against the
Company's so-modified commercial products or against the development activities
related to the non-modified products.
Although the Company believes that it can obtain licenses to the
patents necessary for its contemplated commercial products, there can be no
assurance that the Company will be able to obtain licenses on commercially
reasonable terms, if at all. If the Company does not obtain necessary licenses,
it could encounter delays in product market introductions while it attempts to
design around such patents, or could find that the development, manufacture or
sale of products requiring such licenses could be foreclosed. Further, there can
be no assurance that owners of patents that the Company does not believe are
relevant to the Company's product development and commercialization will not
seek to enforce their patents against the Company. Such action could result in
litigation which would be costly and time consuming. There can be no assurance
that the
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<PAGE>
Company would be successful in such litigations. The Company is currently
unaware of any such threatened action.
Certain of the licenses by which the Company obtained its rights in and
to certain technologies require the Company to diligently commercialize or
attempt to commercialize such technologies. There can be no assurance that the
Company will meet such requirements, and failure to do so for a particular
technology could result in the Company losing its rights to that technology.
Currently, the Company has not sought to register its potential
trademarks and there can be no assurance that the Company will be able to obtain
registration for such trademarks.
It is the Company's policy to require its employees, consultants,
members of its scientific advisory board, and parties to collaborative
agreements to execute confidentiality agreements upon the commencement of
employment or consulting relationships or a collaboration with the Company.
These agreements provide that all confidential information developed or made
known during the course of relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that all
inventions resulting from work performed for the Company, utilizing property of
the Company or relating to the Company's business and conceived or completed by
the individual during employment shall be the exclusive property of the Company
to the extent permitted by applicable law. There can be no assurance, however,
that these agreements will provide meaningful protection of the Company's trade
secrets or adequate remedies in the event of unauthorized use or disclosure of
such information.
GOVERNMENT REGULATION
The preclinical and clinical testing, manufacture, labeling, storage,
record keeping, advertising, promotion, export, and marketing, among other
things, of the Company's proposed products are subject to extensive regulation
by governmental authorities in the United States and other countries. In the
United States, pharmaceutical products are regulated by the FDA under the
Federal Food, Drug, and Cosmetic Act and other laws, including, in the case of
biologics, the Public Health Service Act. At the present time, the Company
believes that its products will be regulated by the FDA as biologics.
The steps required before a novel biologic may be approved for
marketing in the United States generally include (i) preclinical laboratory
tests and in vivo preclinical studies, (ii) the submission to the FDA of an IND
for human clinical testing, which must become effective before human clinical
trials may commence, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the product, (iv) the submission to the FDA
of a Biologics License Application ("BLA") and (v) FDA review and approval of
the BLA. The testing and approval process requires substantial time, effort and
financial resources and there can be no assurance that any approval will be
granted on a timely basis, if at all. Following approval, if granted, the
establishment or establishments where the product is manufactured are subject to
inspection by the FDA and must comply with current good manufacturing practice
("cGMP") regulations, enforced by the FDA through its facilities inspection
program. Manufacturers of biologics also may be subject to state regulation.
Preclinical tests include laboratory evaluation of the product, as well
as animal studies to assess the potential safety and efficacy of the product.
Compounds must be produced according to applicable cGMP regulations and
preclinical safety tests must be conducted in compliance with
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FDA regulations regarding Good Laboratory Practices. The results of the
preclinical tests, together with manufacturing information and analytical data,
are submitted to the FDA as part of an IND, which must become effective before
human clinical trials may be commenced. The IND will automatically become
effective 30 days after receipt by the FDA, unless the FDA before that time
requests an extension to review or raises concerns or questions about the
conduct of the trials as outlined in the IND. In such latter case, the IND
sponsor and the FDA must resolve any outstanding concerns before clinical trials
can proceed. There can be no assurance that submission of an IND will result in
FDA authorization to commence clinical trials.
Clinical trials involve the administration of the investigational
product to healthy volunteers or to patients, under the supervision of a
qualified principal investigator. Clinical trials are conducted in accordance
with protocols that detail, inter alia, the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be reviewed and approved by an independent
Institutional Review Board, prior to the recruitment of subjects.
Clinical trials typically are conducted in three sequential phases, but
the phases may overlap. In Phase I, the initial introduction of the drug into
human subjects, the drug is tested for safety (adverse effects) and, as
appropriate, for absorption, metabolism, distribution, excretion,
pharmacodynamics and pharmacokinetics. Phase II usually involves studies in a
limited patient population to (i) evaluate preliminarily the efficacy of the
drug for specific, targeted indications, (ii) determine dosage tolerance and
optimal dosage and (iii) identify possible adverse effects and safety risks.
Phase III trials are undertaken to further evaluate clinical efficacy and to
test further for safety within an expanded patient population at geographically
dispersed clinical study sites. There can be no assurance that Phase I, Phase
II, or Phase III testing will be completed successfully within any specific time
period, if at all, with respect to any of the Company's product candidates.
Furthermore, the FDA may suspend clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk.
The results of the preclinical studies and clinical studies, together
with detailed information on the manufacture and composition of the product, are
submitted to the FDA in the form of a BLA requesting approval for the
manufacture, marketing and commercial shipment of the product. The FDA may deny
a BLA if applicable regulatory criteria are not satisfied, require additional
testing or information, or require postmarketing testing and surveillance to
monitor the safety or efficacy of a product. There can be no assurance that FDA
approval of any BLA submitted by the Company will be granted on a timely basis
or at all. Moreover, if regulatory approval of a product is granted, such
approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Among the conditions for BLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMP regulations, which must be followed at all times in the manufacture of
the approved product. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, monies and effort in
the area of production and quality control to ensure full compliance.
Both before and after approval is obtained, a product, its
manufacturer, and the holder or the holders of the BLA for the product are
subject to comprehensive regulatory oversight. Violations of regulatory
requirements at any stage, including the preclinical and clinical testing
process, the review process, or thereafter (including after approval) may result
in various adverse consequences, including the FDA's delay in approving or
refusal to approve a product, withdrawal of an approved product from the market,
and/or the imposition of criminal penalties against the manufacturer and/or BLA
holder. In addition, later discovery of previously unknown problems
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may result in restrictions on a product, manufacturer, or BLA holder, including
withdrawal of the product from the market. Also, new government requirements may
be established that could delay or prevent regulatory approval of the Company's
products under development.
For clinical investigation and marketing outside the United States, the
Company is also subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. The foreign regulatory
approval process includes all of the risks associated with FDA approval set
forth above as well as country-specific regulations.
No xenotransplantation-based therapeutic product has been approved for
sale by the FDA. The FDA has not yet established definitive regulatory
guidelines for xenotransplantation, but has proposed interim guidelines in an
attempt to reduce the risk of contamination of transplanted organ and cellular
products with infectious agents. There can be no assurance that definitive
guidelines will be issued, if at all, or that the Company will be able to comply
with final definitive guidelines that may be issued. Furthermore, there can be
no assurance that any products developed by the Company will be approved by the
FDA or regulatory authorities in other countries in a timely manner, if at all,
or that xenotransplantation-based products, including products developed by the
Company, will be accepted by the medical community or third-party payers or that
the degree of acceptance will not limit the size of the market for such
products.
COMPETITION
The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies, including
major pharmaceutical and chemical companies, as well as specialized
biotechnology companies, are engaged in activities similar to those of the
Company. Certain of these companies have substantially greater financial and
other resources, larger research and development staffs, and more extensive
marketing and manufacturing organizations than the Company. Many of these
companies have significant experience in preclinical testing, human clinical
trials, product manufacturing, marketing and distribution and other regulatory
approval procedures. In addition, colleges, universities, governmental agencies
and other public and private research organizations conduct research and may
market commercial products on their own or through joint ventures. These
institutions are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technology that they have
developed. These institutions also compete with the Company in recruiting and
retaining highly qualified scientific personnel.
The Company competes with large pharmaceutical companies that produce
and market synthetic compounds and with specialized biotechnology firms in the
United States, Europe and elsewhere, as well as a growing number of large
pharmaceutical companies that are applying biotechnology to their operations.
Many biotechnology companies have focused their developmental efforts in the
human therapeutics area, and many major pharmaceutical companies have developed
or acquired internal biotechnology capabilities or have made commercial
arrangements with other biotechnology companies. A number of biotechnology and
pharmaceutical companies are developing new products for the treatment of the
same diseases being targeted by the Company; in some instances such products
have already entered clinical trials. Other companies are engaged in research
and development based on complement proteins, T-cell therapeutics, gene therapy
and xenotransplantation.
T-Cell Sciences, Inc. ("T-Cell Sciences"), Chiron Corporation, Abbott
Laboratories, Gliatech, and Biocryst Pharmaceuticals have each publicly
announced intentions to develop complement inhibitors to treat diseases related
to trauma, inflammation, or neurodegenerative
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indications and the Company is aware that SmithKline Beecham PLC, Merck & Co.,
Inc. and CytoMed Inc. are attempting to develop similar therapies. T-Cell
Sciences has initiated clinical trials for a proposed complement inhibitor to
treat acute respiratory distress syndrome ("ARDS"), myocardial infarction, and
lung transplantation. The Company believes that its potential C5 Inhibitors
differ substantially from those of its competitors due to the Company's
compounds' demonstrated ability to specifically intervene in the complement
cascade at what the Company believes to be the optimal point so that the
disease-causing actions of complement proteins generally are inhibited while the
normal disease-preventing functions of complement proteins generally remain
intact as do other aspects of immune function.
The Company further believes that, under conditions of inflammation, a
complement inhibitor compound which only indirectly addresses the harmful
activity of complement may be bypassed by pathologic mechanisms present in the
inflamed tissue. Each of Bayer, Immunex Corporation, Pharmacia & Upjohn and
Rhone-Poulenc Rorer Inc. sells a product which is used clinically to reduce
surgical bleeding during CPB, but have little effect on other significant
inflammatory morbidities associated with CPB. The Company believes that each of
these drugs does not significantly prevent complement activation and subsequent
inflammation that lead to organ damage and blood loss during CPB surgery, but
instead each drug attempts to reduce blood loss by shifting the normal blood
thinning/blood clotting balance in the blood towards enhanced blood clotting.
The Company is also aware of announced and ongoing clinical trials of
certain companies, including Autoimmune, Inc., Immune Response Corporation,
Neurocrine Biosciences, Inc., and Anergen, Inc. employing T-cell specific
tolerance technologies and addressing patients with multiple sclerosis or
diabetes mellitus. Baxter Healthcare Corporation and Novartis, Inc., in
collaboration with Biotransplant Inc., have publicly announced intentions to
commercially develop xenograft organs and the Company is aware that Diacrin Inc.
and Genzyme Tissue Repair, Inc. are also working in this field.
MANUFACTURING, MARKETING, SALES, CLINICAL TESTING AND REGULATORY COMPLIANCE
Alexion manufactures its requirements for preclinical and clinical
development using both internal and contract manufacturing resources. The
Company has pilot manufacturing facilities suitable for the fermentation and
purification of certain of its recombinant compounds for clinical studies. The
Company's pilot plant has the capacity to manufacture under cGMP regulations.
The Company has secured the production of initial clinical supplies of certain
other recombinant products through third party manufacturers. In each case, the
Company has contracted product finishing, vial filling, and packaging through
third parties.
In the longer term, the Company may contract the manufacture of its
products for commercial sale or may develop large-scale manufacturing
capabilities for the commercialization of some of its products. The key factors
which will be given consideration when making the determination of which
products will be manufactured internally and which through contractual
arrangements will include the availability and expense of contracting this
activity, control issues and the expertise and level of resources required for
the Company to manufacture products.
The Company has not invested in the development of commercial
manufacturing, marketing, distribution or sales capabilities. Although the
Company has established a pilot manufacturing facility for the production of
material for clinical trials for certain of its potential products, it has
insufficient capacity to manufacture more than one product candidate at a time
or to
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manufacture its product candidates for later stage clinical development or
commercialization. If the Company is unable to develop or contract for
additional manufacturing capabilities on acceptable terms, the Company's ability
to conduct human clinical testing will be materially adversely affected,
resulting in delays in the submission of products for regulatory approval and in
the initiation of new development programs, which could have a material adverse
effect on the Company's competitive position and the Company's prospects for
achieving profitability. In addition, as the Company's product development
efforts progress, the Company will need to hire additional personnel skilled in
clinical testing, regulatory compliance, and, if the Company develops products
with commercial potential, marketing and sales. There can be no assurance that
the Company will be able to acquire, or establish third-party relationships to
provide, any or all of these resources on a timely basis, if at all, or be able
to obtain required personnel and resources to manufacture, or perform testing or
engage in marketing, distribution and sales on its own.
HUMAN RESOURCES
As of September 30, 1998, the Company had 69 full-time employees, of
which 60 were engaged in research, development, manufacturing, and clinical
development, and 9 in administration and finance. Doctorates are held by 24 of
the Company's employees. Each of the Company's employees has signed a
confidentiality agreement.
Item 2. PROPERTIES
The Company's headquarters, research and development facility, and
pilot manufacturing facility are located in New Haven, Connecticut, within close
proximity to Yale University. At this facility, the Company leases and occupies
a total of approximately 39,000 square feet of space, which includes
approximately 27,000 square feet of research laboratories and 5,200 square feet
of space dedicated to the pilot manufacturing facility. The Company leases its
facilities under three operating leases expiring in December 1997, June 1998,
and March 1999, each with an option for up to an additional three years. The
Company is currently continuing the leases which expired in December 1997 and
June 1998 on a month-to-month basis while lease extensions are under discussion.
Current monthly rental on the facilities is approximately $35,000. The Company's
pilot manufacturing plant is currently being utilized for producing compounds
for the Company's current clinical trials (See "Item 1. Business --
Manufacturing, Marketing, Sales, Clinical Testing and Regulatory Compliance.").
The Company believes the laboratory space will be adequate for its existing
research and development activities.
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.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") National Market System
under the symbol ALXN. The following table sets forth the range of high and low
sales prices for the Common Stock on the Nasdaq National Market System for the
periods indicated since August 1, 1996.
<TABLE>
<CAPTION>
Fiscal 1997 High Low
----------- ---- ---
<S> <C> <C>
First Quarter
(August 1, 1996 - October 31, 1996) $10.50 $ 6.00
Second Quarter
(November 1, 1996 - January 31, 1997) $13.00 $ 8.38
Third Quarter
(February 1, 1997 - April 30, 1997) $12.50 $ 8.38
Fourth Quarter
(May 1, 1997 - July 31, 1997) $11.63 $ 7.69
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 High Low
----------- ---- ---
<S> <C> <C>
First Quarter
(August 1, 1997 - October 31, 1997) $16.00 $ 9.25
Second Quarter
(November 1, 1997 - January 31, 1998) $14.88 $ 9.88
Third Quarter
(February 1, 1998 - April 30, 1998) $15.00 $ 12.13
Fourth Quarter
(May 1, 1998 - July 31, 1998) $13.75 $ 8.00
</TABLE>
As of October 22, 1998, the Company had 169 stockholders of record of
the Company's Common Stock and an estimated 2,200 beneficial owners. The closing
sale price of the Company's Common Stock on October 22, 1998 was $7.00 per
share.
RECENT SALES OF UNREGISTERED SECURITIES
On September 8, 1997, the Company completed the private placement of
400,000 shares of Series B Preferred Stock for aggregate consideration of $10.0
million to a single institutional investor, BB Biotech. The aggregate proceeds
to the Company was approximately $9.5 million, net of issuance costs, including
a $400,000 fee paid by the Company to Robertson, Stephens & Company LLC who
served as an advisor to the Company in connection with this transaction. The
Series B Preferred Stock was automatically convertible into 935,782 shares of
Common Stock on March 4, 1998 or at anytime prior thereto at the election of the
holder. The conversion price of $10.686 per share represented a 3% premium to
the closing bid of price ($10.375) on the day of pricing. The Series B Preferred
Stock carried an obligation to pay a dividend of $2.25 per share on March 4,
1998, payable in cash or the Company's Common Stock at the discretion of the
Company. The Company relied on the exemption afforded by Section 4(2) of, and
Regulation D promulgated under, the Act.
21
<PAGE>
On September 30, 1997, the Company sold 166,945 shares of its Common
Stock, par value $0.0001, to United States Surgical Corporation ("US Surgical")
for aggregate consideration of $3.0 million which represents a price of $17.97
per share (representing a 25% premium over the market price on the day prior to
the date of closing). The sale of Common Stock was made in connection with the
modification of a joint development agreement by and between the Company and US
Surgical. No entity acted as placement agent or an advisor in connection with
this sale. The Company relied on the exemption afforded by Section 4(2) under
the Act.
In connection with its private placements in fiscal 1993 and 1994, the
Company had issued warrants to purchase Common Stock. These warrants were
exercisable at any time prior to the close of business on December 4, 1997. All
such warrants had expired or were exercised. Warrants were exercised for the
purchase of 551,719 shares of the Company's Common Stock, par value $0.0001,
aggregating approximately $4.14 million of proceeds to the Company. The Company
relied on the exemption afforded by Section 4(2) under the Act.
On March 4, 1998, the Company's Series B Convertible Preferred Stock
was automatically converted into 935,782 shares of the Company's Common Stock,
par value $0.0001. The Company satisfied its dividend payment obligation,
aggregating $900,000, by delivery of 70,831 shares of the Company's Common Stock
to BB Biotech. In addition, on March 17, 1998, the Company completed a private
placement of 670,000 shares of its Common Stock, par value $0.0001, to the same
institutional investor, BB Biotech. The aggregate offering price for the Common
Stock sold was approximately $8.82 million, or $13.175 per share, and the
aggregate proceeds to the Company was $8.78 million net of issuance costs of
$46,000. The Company relied on the exemption afforded by Section 4(2) of, and
Regulation D promulgated under, the Act.
DIVIDEND POLICY
The Company has never paid cash dividends. The Company does not expect
to declare or pay any dividends on the Company's Common Stock in the foreseeable
future, but instead intends to retain all earnings, if any, to invest in the
Company's operations. The payment of future dividends is within the discretion
of the Board of Directors and will depend upon the Company's future earnings, if
any, its capital requirements, financial condition and other relevant factors.
22
<PAGE>
Item 6. SELECTED FINANCIAL DATA
Amounts in thousands, except per share data
<TABLE>
<CAPTION>
For the Fiscal Years Ended July 31
Statements of --------------------------------------------------------------------------
Operations Data: 1998 1997 1996 1995 1994
- ---------------------------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Contract research revenues $5,037 $3,811 $2,640 $136 $ -
----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development 12,323 9,079 6,629 5,637 5,519
General and administrative 2,666 2,827 1,843 1,592 1,861
----------- ----------- ----------- ----------- -----------
Total operating expenses 14,989 11,906 8,472 7,229 7,380
------------ ------------ ----------- ----------- -----------
Operating loss (9,952) (8,095) (5,832) (7,093) (7,380)
Other income (expense), net 2,087 843 397 (29) 94
------------ ------------ ------------ ------------ ------------
Net loss $(7,865) $(7,252) $(5,435) $(7,122) $(7,286)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net loss per common share -
basic and diluted (1) $(.87) $(.97) $(1.02) $(2.02) $(2.19)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Shares used in computing
net loss per Common Share (1) 10,056 7,451 5,351 3,528 3,329
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
July 31, July 31, July 31, July 31, July 31,
Balance Sheet Data: 1998 1997 1996 1995 1994
- ---------------------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents,
and marketable securities $37,494 $22,749 $18,598 $5,701 $4,209
Working capital 35,777 20,567 17,032 3,559 3,014
Total assets 42,085 24,260 20,454 7,927 6,983
Accumulated deficit (40,592) (31,827) (24,575) (19,140) (12,018)
Stockholders' equity 39,190 21,846 18,285 5,119 4,700
</TABLE>
- -------------
(1) Net Loss per Common Share has been restated in accordance with SFAS No.128
and SAB No.98 as described in Note 2 of Notes to Financial Statements.
23
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements which involve risks and
uncertainties. Such statements are subject to certain factors which may cause
the Company's plans and results to differ significantly from plans and results
discussed in forward-looking statements. Factors that might cause or contribute
to such differences include, but are not limited to, those discussed in
"Important Factors Regarding Forward-Looking Statements" attached hereto as
Exhibit 99.
Overview
Since its inception in January 1992, Alexion has devoted substantially
all of its resources to its drug discovery, research and product development
programs. To date, Alexion has not received any revenues from the sale of
products. The Company has been unprofitable since inception, and expects to
incur substantial and increasing operating losses for the next several years due
to expenses associated with product research and development, preclinical and
clinical testing, regulatory activities and manufacturing development and
scale-up. As of July 31, 1998, the Company has an accumulated deficit of $40.6
million.
The Company's plan is to develop and commercialize on its own those
product candidates for which the clinical trial and marketing requirements can
be funded by the Company. For certain of the Company's C5 Inhibitor and Apogen
products for which greater resources will be required, Alexion's strategy is to
form corporate partnerships with major pharmaceutical companies for product
development and commercialization. Alexion has entered into a strategic alliance
with US Surgical with respect to the Company's UniGraft program and intends to
seek additional strategic alliances with major pharmaceutical companies although
no assurances can be given that such alliances will be successfully entered
into.
The Company recognizes research and development revenues when the
development expenses are incurred and the related work is performed under the
terms of the contracts. Any revenue contingent upon future expenditures by the
Company is deferred and recognized as the expenditures are incurred. Any
revenues contingent upon the achievement of milestones will be recognized when
the milestones are achieved.
RESULTS OF OPERATIONS
Years Ended July 31, 1998, 1997, and 1996
The Company earned grant, license, and contract research revenues of
$5.0 million, $3.8 million, and $2.6 million for the fiscal years ended July 31,
1998, 1997, and 1996, respectively. The increase in fiscal 1998 was primarily
due to revenues the Company received from US Surgical of $3.5 million which
represented a one-time license fee in connection with the companies'
collaborative research and development agreement. The increase in fiscal 1997
revenues as compared to fiscal 1996 resulted principally from Company's revenues
received from GTI/Novartis of $1.1 million which represented a one-time upfront
license fee of $750,000 and contract research and development revenues of
$350,000. The revenues in fiscal 1996 resulted from the receipt of funds from US
Surgical of approximately $2.0 million from a collaborative research and
development agreement and the $246,000 in funding received from the NIST's ATP
grant. See "Item 1. Business--Strategic Alliances, Collaborations and Licenses."
24
<PAGE>
During the fiscal years ended July 31, 1998, 1997, and 1996, the
Company expended $12.3 million, $9.1 million, and $6.6 million, respectively, on
research and development activities. Increases in research and development
spending were primarily attributable to the Company's clinical trials of the
Company's lead C5 inhibitor product candidate and expanded preclinical
development of the company's research programs which included the manufacturing
product development for the Company's C5 Inhibitor and Apogen product
candidates. See Item 1. "Business--Alexion's Drug Development Programs,
Cardiopulmonary Bypass Surgery".
The Company's general and administrative expenses were $2.7 million,
$2.8 million, and $1.8 million for the fiscal years ended July 31, 1998, 1997
and 1996, respectively. The decrease in general and administrative expenses in
fiscal 1998 was primarily related to lower legal and patent costs in fiscal 1998
as compared to fiscal 1997. The increase in general and administrative expenses
in fiscal 1997 as compared to fiscal 1996 consisted of $523,000 related to
increased expenses related to facilities' expansion, other employee benefits,
and increased travel and administrative costs attributable to increased
clinical, regulatory, and scientific conference activities. The remaining
balance $477,000 of the increase was related to increased costs for outside
professional services and insurance related to business development, recruiting,
patent and legal activities as a public company.
Other income (expense), net, representing primarily net investment
income, was $2.1 million, $843,000, and $397,000 for the fiscal years ended July
31, 1998, 1997, and 1996, respectively. The increase over the past three years
was due primarily to greater investment income from higher cash balances
available for investment during fiscal year 1998 as compared to the prior two
fiscal years.
As a result of the above factors, the Company had incurred net losses
of $7.9 million, $7.3 million, and $5.4 million for the fiscal years ended July
31, 1998, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through July 31, 1998, the Company has financed its
operations and capital expenditures primarily through its private placements and
initial public offering of equity securities resulting in approximately $77.6
million of aggregate net proceeds. The Company has financed the purchase of
certain equipment through $1.2 million of secured notes payable to a financing
institution and $378,000 of capital lease obligations. Through July 31, 1998,
the Company has also received approximately $9.1 million in research and
development support under its collaborations with US Surgical and GTI/Novartis.
The Company has also received $1.1 million from its SBIR grants from the NIH and
$1.5 million under the ATP grant from NIST. In addition, the Company and US
Surgical were awarded in November 1997, a three-year $2.0 million Cooperative
Agreement under another ATP grant from NIST.
All of the foregoing proceeds have been used to fund operating
activities of approximately $34.5 million and investments of approximately $5.0
million and $980,000 in equipment and licensed technology rights and patents,
respectively, through July 31, 1998. As of July 31, 1998, the Company had
working capital of approximately $35.8 million and total cash, cash equivalents,
and marketable securities amounted to approximately $37.5 million.
At July 31, 1998, approximately $31.5 million of cash is held in
short-term highly liquid investments with original maturities of less than three
months. The Company increased its cash and cash equivalents by $14.8 million
during the twelve months ended July 31, 1998. This
25
<PAGE>
increase resulted principally from cash flows provided by financing activities
which provided $25.2 million from the net proceeds received from the issuance of
common stock offset by $130,000 in repayments of notes payable, capital
equipment purchases of approximately $2.1 million, and the $8.0 million cash
outflow used in operating activities primarily as a result of $7.9 million of
operating losses.
The Company leases its administrative and research and development
facilities under three operating leases expiring in December 1997, June 1998,
and March 1999. The Company is currently continuing the leases which expired in
December 1997 and June 1998 on a month-to-month basis while discussions for
lease extensions are on going.
The Company is obligated to make payments pursuant to certain of its
licensing and research and development agreements. The Company is scheduled to
pay $265,000, $254,000 and $249,000 (assuming no termination of these
agreements) during the fiscal years ending July 31, 1999, 2000 and 2001,
respectively. In addition, the Company is obligated to make certain future
milestone payments to certain of its licensors, contingent upon receiving
regulatory approval on certain patent issuances as well as on certain of the
Company's possible product PLAs, if and when approved. See "Item 1.
Business--Strategic Alliances, Collaborations and Licenses."
The Company anticipates that its existing available capital resources
and interest earned on available cash and marketable securities should be
sufficient to fund its operating expenses and capital requirements as currently
planned for at least the next eighteen months. While the Company currently has
no material commitments for capital expenditures, the Company's future capital
requirements will depend on many factors, including the progress of the
Company's research and development programs, progress in clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
obtaining and enforcing patents and any necessary licenses, the ability of the
Company to establish development and commercialization relationships, and the
costs of manufacturing scale-up. See "Item 1. Business -- Alexion's Drug
Development Strategy."
The Company expects to incur substantial additional costs, including
costs associated with research, preclinical and clinical testing, manufacturing
process development, and additional capital expenditures associated with
facility expansion and manufacturing requirements in order to commercialize its
products currently under development. The Company will need to raise substantial
additional funds through additional financings including public or private
equity offerings and collaborative research and development arrangements with
corporate partners. There can be no assurance that funds will be available on
terms acceptable to the Company, if at all, or that discussions with potential
collaborative partners will result in any agreements on a timely basis, if at
all. The unavailability of additional financing could require the Company to
delay, scale back or eliminate certain of its research and product development
programs or to license third parties to commercialize products or technologies
that the Company would otherwise undertake itself, any of which could have a
material adverse effect on the Company.
As of July 31, 1998, the Company had approximately $37.5 million and
$1.4 million of net operating loss and tax credit carryforwards for tax
reporting purposes, respectively, which expire commencing in fiscal 2008. The
Tax Reform Act of 1986 (the "Tax Act") contains certain provisions that may
limit the Company's ability to utilize net operating loss and tax credit
carryforwards in any given year if certain events occur, including cumulative
changes in ownership interests in excess of 50% over a three-year period. There
can be no assurance that ownership changes in future periods will not
significantly limit the Company's use of its existing net operating loss and tax
credit carryforwards.
26
<PAGE>
YEAR 2000
The "Year 2000" (or "Y2K") issue affects computer and information
technology ("IT") systems, as well as non-IT systems which include embedded
technology such as micro-processors and micro-controllers (or micro-chips) that
have date sensitive programs that may not properly recognize the year 2000.
Systems that do not properly recognize such information could generate
inaccurate data or cause a system to fail, resulting in business interruption.
The Company is currently developing a plan to provide measured assurances that
its computer and IT-systems, non-IT systems, including embedded systems such as
HVAC (heating, ventilation and air conditioning) systems and other analytical
instruments and equipment, and those of third parties which have a material
relationship with the Company are or will be Y2K compliant.
The Company expects to complete in November 1998 a comprehensive
inventory and assessment of its existing IT and non-IT systems and those of
third parties, as well as planned and anticipated systems, and third parties'
services which the Company may purchase or use. Assessment will include
identifying critical systems --internal and external (including third parties)
- -- in order to formulate a remediation and verification plan. The Company
currently believes that remediation and verification, which include obtaining
written assurances from key vendors and suppliers, as well as testing, will be
complete by July 1999.
The Company believes, based on preliminary information, that the costs
associated with remediation and verification to become Y2K compliant will not
have a material adverse impact on the Company's financial position, results of
operations, or cash flow. In the event that the Company's Y2K compliance plan is
not successfully implemented, the Company may experience temporary disruptions
of the Company's clinical trial sites as well as external contract manufacturing
of the Company's therapeutic products -- presuming broad Y2K compliance by
general service providers such as utilities, telephone, data transfer, and other
government and private entities. While the Company has not yet developed
contingency plans for such event, the Company expects to prepare such plans by
August 1999.
Although the Company has taken steps to address the Y2K problem, there
can be no assurance that the failure of the Company and/or its material third
parties to timely attain Y2K compliance or that the failures and/or the impacts
of broader compliance failures by telephone, mail, data transfer or other
utility or general service providers or government or private entities will not
have a material adverse effect on the Company. Further, there can be no
assurance that the costs associated with achieving such compliance or any
failure to become Y2K compliant will not be material to the Company's financial
position, its results of operations, or its cash flow.
27
<PAGE>
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the
Company required in this item are set forth at the pages indicated in Item
14(a)(1).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
28
<PAGE>
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND KEY EMPLOYEES
<TABLE>
<CAPTION>
Name Age Position
- -------- ------ ------------
<S> <C> <C>
John H. Fried, Ph.D. 69 Chairman of the Board of Directors
Leonard Bell, M.D. 40 President, Chief Executive Officer,
Secretary, Treasurer, Director
David W. Keiser 47 Executive Vice President, Chief
Operating Officer
Timothy F. Howe 40 Director
Max Link, Ph.D. 58 Director
Joseph A. Madri, Ph.D., M.D. 52 Director
Leonard Marks, Jr., Ph.D. 77 Director
Eileen M. More 52 Director
Louis A. Matis, M.D. 48 Senior Vice President, Chief Scientific
Officer
Stephen P. Squinto, Ph.D. 42 Senior Vice President, Chief Technology
Officer
Barry P. Luke 40 Vice President of Finance and
Administration, Assistant Secretary
James A. Wilkins, Ph.D. 46 Vice President of Process Sciences and
Manufacturing
Christopher F. Mojcik, M.D., Ph.D. 39 Senior Director of Clinical Development
</TABLE>
John H. Fried, Ph.D. has been the Chairman of the Board of Directors of
the Company since April 1992. Since 1992, Dr. Fried has been President of Fried
& Co., Inc., a health technology venture firm. Dr. Fried was a director of
Syntex Corp. ("Syntex"), a life sciences and health care company, from 1982 to
1994 and he served as Vice Chairman of Syntex from 1985 to January 1993 and
President of the Syntex Research Division from 1976 to 1992. Dr. Fried has
originated more than 200 U.S. Patents and has authored more than 80 scientific
publications. Dr. Fried is also the Chairman of the Board of Directors of Corvas
International Incorporated, a development stage company principally engaged in
research in the field of cardiovascular therapeutics. Dr. Fried received his
B.S. in Chemistry and Ph.D. in Organic Chemistry from Cornell University.
Leonard Bell, M.D. is the principal founder of the Company, and has
been a Director of the Company since February 1992 and the Company's President
and Chief Executive Officer, Secretary and Treasurer since January 1992. From
1991 to 1992, Dr. Bell was an Assistant Professor of Medicine and Pathology and
co-Director of the Program in Vascular Biology at the Yale University School of
Medicine. From 1990 to 1992, Dr. Bell was an attending physician at the Yale-New
Haven Hospital and an Assistant Professor in the Department of Internal Medicine
at the Yale University School of Medicine. Dr. Bell was the recipient of the
Physician Scientist Award from the National Institutes of Health and
Grant-in-Aid from the American Heart Association as well as various honors and
awards from academic and professional organizations. His work has resulted in
more than 20 scientific publications and three patent applications. Dr. Bell is
a director of the Connecticut Technology Council and Connecticut United for
Reseach Excellence, Inc. ("CURE"). He also served as a director of the
Biotechnology Research and
29
<PAGE>
Development Corporation ("BRDC") from 1993 to 1997. Dr. Bell received his A.B.
from Brown University and M.D. from Yale University School of Medicine. Dr. Bell
is currently an Adjunct Assistant Professor of Medicine and Pathology at Yale
University School of Medicine.
David W. Keiser has been Executive Vice President and Chief Operating
Officer of the Company since July 1992. From 1990 to 1992, Mr. Keiser was Senior
Director of Asia Pacific Operations for G.D. Searle & Company Limited
("Searle"), a manufacturer of pharmaceutical products. From 1986 to 1990, Mr.
Keiser was successively Licensing Manager, Director of Product Licensing and
Senior Director of Product Licensing for Searle. From 1984 to 1985, Mr. Keiser
was New Business Opportunities Manager for Mundipharma AG, a manufacturer of
pharmaceutical products, in Basel, Switzerland where he headed pharmaceutical
licensing and business development activities in Europe and the Far East. From
1978 to 1983, he was Area Manager for F. Hoffmann La Roche Ltd., a manufacturer
of pharmaceutical products, in Basel, Switzerland. Mr. Keiser received his B.A.
from Gettysburg College.
Timothy F. Howe has been a Director of the Company since April 1995.
Mr. Howe is a principal of Collinson Howe Venture Partners, Inc. ("CHVP") where
he has been a Vice President since 1990. CHVP is a venture capital management
firm specializing in life sciences investments and as a result of the stock
ownership of certain funds advised by it, CHVP is a principal stockholder of the
Company. From 1985 to 1990, Mr. Howe was employed by Schroders Incorporated
specializing in venture capital investing. Mr. Howe received his B.A. from
Columbia College and M.B.A. from Columbia Graduate School of Business.
Max Link, Ph.D. has been a Director of the Company since April 1992.
From May 1993 to June 1994, Dr. Link was Chief Executive Officer of Corange
(Bermuda), the parent company of Boehringer Mannheim Therapeutics, Boehringer
Mannheim Diagnostics and DePuy Orthopedics. From 1992 to 1993, Dr. Link was
Chairman of the Board of Sandoz Pharma, Ltd. ("Sandoz"), a manufacturer of
pharmaceutical products. From 1987 to 1992, Dr. Link was the Chief Executive
Officer of Sandoz Pharma and a member of the Executive Board of Sandoz, Ltd.,
Basel. Prior to 1987, Dr. Link served in various capacities with the United
States operations of Sandoz, including as President and Chief Executive Officer.
Dr. Link is also a director of Protein Design Labs, Inc., Cell Therapeutics,
Inc., and Procept, Inc., each a publicly held pharmaceutical company, as well as
Human Genome Sciences Inc., a genomics company.
Joseph A. Madri, Ph.D., M.D. is a founder of the Company and has been a
Director of the Company since February 1992. Since 1980, Dr. Madri has been on
the faculty of the Yale University School of Medicine and is currently a
Professor of Pathology. Dr. Madri serves on the editorial boards of numerous
scientific journals and he is the author of over 160 scientific publications.
Dr. Madri works in the areas of regulation of angiogenesis, vascular cell-matrix
interactions, cell-cell interactions, lymphocyte-endothelial cell interactions
and endothelial and smooth muscle cell biology. Dr. Madri received his B.S. and
M.S. in Biology from St. John's University and M.D. and Ph.D. in Biological
Chemistry from Indiana University.
Leonard Marks, Jr., Ph.D. has been a Director of the Company since
April 1992. Since 1985 Dr. Marks has served as an independent corporate director
and management consultant. Dr. Marks served as a director of Airlease Management
Services, an aircraft leasing company (a subsidiary of Bank America Leasing &
Capital Corporation), from 1986 to March 1998, and Northern Trust Bank of
Arizona, a commercial and trust bank subsidiary of Northern Trust of Chicago,
from 1985 to March 1998. Prior to 1985, Dr. Marks held various positions in
academia and in the corporate sector including Executive Vice President, Castle
& Cooke, Inc. from 1972 to 1985. Dr. Marks received his B.A. in Economics from
Drew University and an M.B.A. and Doctorate in Business Administration from
Harvard University.
30
<PAGE>
Eileen M. More has been a Director of the Company since December 1993.
Ms. More has been associated since 1978 with Oak Investment Partners ("Oak") and
has been a General Partner of Oak since 1980. Oak is a venture capital firm and
a principal stockholder of the Company. Ms. More is currently a director of
several private high technology and biotechnology firms including Instream
Corporation, OraPharma, Inc., Femme Pharma, Halox Technologies, and Teloquent
Communication Corporation. Ms. More studied mathematics at the University of
Bridgeport and is a Chartered Financial Analyst.
Louis A. Matis, M.D. has been the Senior Vice President and Chief
Scientific Officer since March 1998 and Vice President of Research,
Immunobiology, of the Company from August 1994 to March 1998. From January 1993
to July 1994, Dr. Matis served as the Director of the Company's Program in
Immunobiology. Prior to joining the Company, from 1977 to 1992, Dr. Matis held
various appointments at the NIH and the FDA. From 1990 to 1992, Dr. Matis was a
Senior Investigator in the Laboratory of Immunoregulation at the National Cancer
Institute and from 1987 to 1990 he was a Senior Staff Fellow in the Molecular
Immunology Laboratory at the Center for Biologics Evaluation and Research
associated with the FDA. Dr. Matis is the author of more than 100 scientific
papers in the fields of T-cell biology. Dr. Matis has received numerous awards
including the NIH Award of Merit. Dr. Matis received his B.A. from Amherst
College and M.D. from the University of Pennsylvania Medical School.
Stephen P. Squinto, Ph.D. is a founder of the Company and has held the
positions of Senior Vice President and Chief Technical Officer since March 1998,
Vice President of Research, Molecular Sciences, from August 1994 to March 1998,
Senior Director of Molecular Sciences from July 1993 to July 1994 and Director
of Molecular Development from April 1992 to July 1993. From 1989 to 1992, Dr.
Squinto held various positions at Regeneron Pharmaceuticals, Inc., most recently
serving as Senior Scientist and Assistant Head of the Discovery Group. From 1986
to 1989, Dr. Squinto was an Assistant Professor of Biochemistry and Molecular
Biology at Louisiana State University Medical Center. Dr. Squinto's work has led
to over 70 scientific papers in the fields of gene regulation, growth factor
biology and gene transfer. Dr. Squinto's work is primarily in the fields of
regulation of eukaryotic gene expression, mammalian gene expression systems and
growth receptor and signal transduction biology. Dr. Squinto also serves as a
Director of the BRDC since 1997. Dr. Squinto received his B.A. in Chemistry and
Ph.D. in Biochemistry and Biophysics from Loyola University of Chicago.
Barry P. Luke has been Vice President of Finance and Administration
since September 1998 and Senior Director of Finance and Administration of the
Company from August 1995 to September 1998 and prior thereto was Director of
Finance and Accounting of the Company from May 1993. From 1989 to 1993, Mr. Luke
was Chief Financial Officer, Secretary and Vice President--Finance and
Administration at Comtex Scientific Corporation, a publicly held distributor of
electronic news and business information. From 1985 to 1989, he was Controller
and Treasurer of Softstrip, Inc., a manufacturer of computer peripherals and
software. From 1980 to 1985, Mr. Luke was employed by the General Electric
Company ("GE") where he held positions at GE's Corporate Audit Staff after
completing GE's Financial Management Program. Mr. Luke received a B.A. in
Economics from Yale University and an M.B.A. in management and marketing from
the University of Connecticut.
James A. Wilkins, Ph.D. has been Vice President of Process Sciences and
Manufacturing of the Company since September 1998 and has held the positions of
Senior Director of Process Sciences from August 1996 to September 1998, Senior
Director of Process Development from August 1995 to August 1996, and Director of
Process Development from September 1993 to August 1995. From 1989 to 1993, Dr.
Wilkins was Group Leader of the Protein Chemistry
31
<PAGE>
Department at Otsuka America Pharmaceutical, Inc. From 1987 to 1989, Dr. Wilkins
was a Scientist in Recovery Process Development at Genentech, Inc. and from 1982
to 1987, he was an Associate Research Scientist in the Thomas C. Jenkins
Department of Biophysics at Johns Hopkins University. He is the author of more
than 25 presentations and scientific articles in the fields of protein refolding
and protein biochemistry. Dr. Wilkins received a B.A. in Biology from University
of Texas and a Ph.D. in Biochemistry from University of Tennessee.
Christopher F. Mojcik, M.D., Ph.D., has been Senior Director of
Clinical Development since joining the Company in July 1998. From 1996 until
July 1998, he was an Associate Director in the Metabolics/Rheumatics Department
at Bayer Corporation's Pharmaceuticals Division. Dr. Mojcik was responsible for
Phase II and III development of a matrix metalloproteinase inhibitor for
osteoarthritis, and oversaw the Phase IV program for Trasylol[r], which is used
in cardiopulmonary bypass as a hemostatic agent. From 1993 to 1996, he was a
Senior Staff Fellow in the Cellular Immunology Section of the Laboratory of
Immunology in the NIAID at the NIH. From 1991 to 1993, he completed his
Fellowship in Rheumatology in the National Institute of Arthritis and
Musculoskeletal and Skin Diseases at the NIH. He received his B.A. from
Washington University in St. Louis, MO, and his M.D. and Ph.D. from the
University of Connecticut.
The Company and each of the executive officers are parties to
employment agreements.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the information under the caption "Compensation of Executive Officers and
Directors" contained in the Proxy Statement.
32
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 1,
1998 (except as otherwise noted in the footnotes) regarding the beneficial
ownership (as defined by the Securities and Exchange Commission (the "SEC")) of
the Company's Common Stock of: (i) each person known by the Company to own
beneficially more than five percent of the Company's outstanding Common Stock;
(ii) each director and each named executive officer; and (iii) all directors and
named executive officers of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address Beneficially Outstanding Shares
of Beneficial Owner (1) Owned (2) of Common Stock
- ------------------- ----- ---------------
<S> <C> <C>
BB Biotech AG
Vordergrasse 3
8200 Schaffhausen
CH/Switzerland (3) .................................. 1,824,113 16.2%
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, NY 10154 (4) ............................. 911,000 8.1%
United States Surgical Corporation
150 Glover Avenue
Norwalk, Connecticut 06856 (5) ..................... 824,087 7.3%
OrbiMed Advisors, LLC (formerly
Mehta and Isaly Asset Management, Inc.)
767 Third Avenue, Sixth Floor
New York, NY 10017 (6) ............................. 773,500 6.9%
Eileen M. More (7) ....................................... 520,984 4.6%
Timothy F. Howe (8) ...................................... 454,129 4.0%
Leonard Bell, M.D. (9) ................................... 449,600 3.9%
Stephen P. Squinto, Ph.D. (10) ........................... 143,575 1.3%
David W. Keiser (11) ..................................... 126,050 1.1%
Louis A. Matis, M.D. (12) ................................ 111,025 1.0%
John H. Fried, Ph.D. (13) ................................ 88,636 *
Joseph A. Madri, Ph.D., M.D. (14) ........................ 55,100 *
Max Link, Ph.D. (15) ..................................... 23,123 *
Leonard Marks, Jr., Ph.D. (16) ........................... 13,600 *
Directors and Executive Officers
as a group (10 persons) (17) ......................... 1,985,822 16.8%
</TABLE>
- ---------------------
* Less than one percent
33
<PAGE>
(1) Unless otherwise indicated, the address of all persons is 25 Science
Park, Suite 360, New Haven, Connecticut 06511.
(2) To the Company's knowledge, except as set forth below, the persons named
in the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable and the information contained
in the footnotes in this table.
(3) This figure is based upon information set forth in Amendment No. 3 to
Schedule 13D dated May 27, 1998, filed jointly by BB Biotech AG and
Biotech Target, S.A.. Biotech Target, S.A., a Panamanian corporation, is
a wholly-owned subsidiary of BB Biotech AG. BB Biotech AG is a holding
company incorporated in Switzerland.
(4) This figure is based upon a Report on Form 13F for the quarter ended
June 30, 1998, filed by Scudder Kemper Investments, Inc. ("SKII") with
the Securities and Exchange Commission on August 14, 1998. Of these
shares, SKII claims sole voting authority for 207,900 shares, shared
voting authority for 572,900 shares, and no voting authority for 130,200
shares.
(5) This figure is based upon information set forth in Amendment No. 2 to
Schedule 13D dated December 12, 1997. United States Surgical Corporation
completed a merger with a subsidiary of Tyco International Ltd. on
October 1,1998.
(6) This figure is based upon information set forth in Amendment No. 1 to
Schedule 13D dated July 25, 1997, filed by a group consisting of Samuel
D. Isaly, Viren Mehta and certain entities affiliated with these
individuals including Pharma/Health, M and I Investors, Inc., Caduceus
Capital, L.P., Caduceus Capital Management, Inc. and Worldwide Health
Services Portfolio.
(7) Includes 25,100 shares of Common Stock which may be acquired upon the
exercise of options within 60 days of October 1, 1998 granted to Eileen
More. Also includes 484,977 shares owned by Oak Investment V Partners
and 10,907 shares owned by Oak Investment V Affiliates, two affiliated
limited partnerships (collectively, "Oak Investments"). Ms. More is a
General Partner at Oak Investments. Excludes 3,700 shares obtainable
through the exercise of options granted to Ms.
More which are not exercisable within 60 days of October 1, 1998.
(8) Includes shares of Common Stock beneficially owned by Collinson Howe
Venture Partners, Inc. ("CHVP") (see paragraph below). Includes 5,100
shares which may be acquired upon the exercise of options within 60 days
of October 1, 1998 granted to Mr. Howe. Excludes 3,700 shares obtainable
through the exercise of options granted to Mr. Howe which are not
exercisable within 60 days of October 1, 1998. Mr. Howe disclaims
beneficial ownership of shares held or beneficially owned by CHVP.
CHVP is a venture capital investment management firm which is the
managing member of Biotechnology Investment Group, L.L.C. ("BIG"), and
Schroders, Inc.. As such, CHVP shares beneficial ownership of 417,575
shares and 28,864 shares of Common Stock owned by BIG and Schroders,
Inc., respectively. Mr. Howe, a director of the Company, is the Vice
President and a minority stockholder of CHVP. As such, he has shared
investment and voting power over the shares beneficially owned by CHVP.
(9) Includes 290,000 shares of Common Stock that may be acquired upon the
exercise of options within 60 days of October 1, 1998 and 300 shares, in
aggregate, held in the names of Dr. Bell's three minor children.
Excludes 195,000 shares obtainable through the exercise of options
granted to Dr. Bell which are not exercisable within 60 days of October
1, 1998 and 90,000 shares held in
34
<PAGE>
trust for Dr. Bell's children of which Dr. Bell disclaims beneficial
ownership. Also excludes 60,000 shares obtainable through the exercise
of options granted to Dr. Bell which are not exercisable within 60 days
of October 1, 1998 and are subject to shareholders' approval to
increase the authorized number of shares in the Company's 1992 Stock
Option Plan. Dr. Bell disclaims beneficial ownership of the shares held
in the name of his minor children.
(10) Includes 86,875 shares of Common Stock which may be acquired upon the
exercise of options granted to Dr. Squinto within 60 days of October 1,
1998 and 6,200 shares, in aggregate, held in the names of Dr. Squinto's
two minor children of which 6,000 shares are in two trusts managed by
his wife. Excludes 53,125 shares obtainable through the exercise of
options granted to Dr. Squinto which are not exercisable within 60 days
of October 1, 1998. Also excludes 25,000 shares obtainable through the
exercise of options granted to Dr. Squinto which are not exercisable
within 60 days of October 1, 1998 and are subject to shareholders'
approval to increase the authorized number of shares in the Company's
1992 Stock Option Plan. Dr. Squinto disclaims beneficial ownership of
the shares held in the name of his minor children and the foregoing
trusts.
(11) Includes 83,750 shares of Common Stock which may be acquired upon the
exercise of options within 60 days of October 1, 1998 and 300 shares, in
aggregate, held in the names of Mr. Keiser's three minor children.
Excludes 66,250 shares obtainable through the exercise of options
granted to Mr. Keiser, which are not exercisable within 60 days of
October 1, 1998. Also excludes 25,000 shares obtainable through the
exercise of options granted to Mr. Keiser which are not exercisable
within 60 days of October 1, 1998 and are subject to shareholders'
approval to increase the authorized number of shares in the Company's
1992 Stock Option Plan. Mr. Keiser disclaims beneficial ownership of the
shares held in the name of his minor children.
(12) Includes 96,875 shares of Common Stock which may be acquired upon the
exercise of options granted to Dr. Matis within 60 days of October 1,
1998 and 150 shares, in aggregate, held in the names of Dr. Matis' three
minor children. Excludes 53,125 shares obtainable through the exercise
of options, granted to Dr. Matis, which are not exercisable within 60
days of October 1, 1998. Also excludes 25,000 shares obtainable through
the exercise of options granted to Dr. Matis which are not exercisable
within 60 days of October 1, 1998 and are subject to shareholders'
approval to increase the authorized number of shares in the Company's
1992 Stock Option Plan. Dr. Matis disclaims beneficial ownership of the
shares held in the name of his minor children.
(13) Includes 12,600 shares of Common Stock that may be acquired on the
exercise of options that are exercisable within 60 days of October 1,
1998. Excludes 3,700 shares obtainable through the exercise of options
granted to Dr. Fried which are not exercisable within 60 days of October
1, 1998.
(14) Includes 10,100 shares of Common Stock that may be acquired upon the
exercise of options within 60 days of October 1, 1998. Excludes 3,700
shares obtainable through the exercise of options granted to Dr. Madri
which are not exercisable within 60 days of October 1, 1998.
(15) Excludes 2,000 shares obtainable through the exercise of options,
granted to Dr. Link, which are not exercisable within 60 days of October
1, 1998.
(16) Includes 12,600 shares of Common Stock which may be acquired upon the
exercise of options within 60 days of October 1, 1998. Excludes 3,700
shares obtainable through the exercise of options granted to Dr. Marks,
which are not exercisable within 60 days of October 1, 1998.
(17) Consists of shares beneficially owned by Drs. Bell, Fried, Link, Madri,
Marks, Matis and Squinto and Mr. Keiser, Mr. Howe and Ms. More. Includes
623,000 shares of Common Stock which may
35
<PAGE>
be acquired upon the exercise of options within 60 days of October 1,
1998. Excludes shares beneficially owned by Dr. Bernadette Alford, a
named executive officer, who resigned from the Company in September
1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1998, BB Biotech, a single institutional investor, purchased
670,000 shares of the Company's Common Stock, par value $0.0001, in a private
placement at $13.175 per share, aggregating $8.827 million. At October 1, 1998,
BB Biotech beneficially owned 1,824,113 shares of Common Stock, or approximately
16.2%, of the Company's outstanding shares of common stock.
In September 1997, US Surgical and the Company modified the July 1995
Joint Development Agreement (described below). As part of the modification, US
Surgical made an additional $6.5 million payment to the Company for equity,
exclusive licensing rights, and certain manufacturing assets. Under the modified
agreement, the additional $6.5 million payment comprised: (i) a $3 million
equity investment in the Company through the purchase of 166,945 shares of the
Company's Common Stock at a price of $17.97 per share, which represented a 25%
premium over the market price on the day prior to the date of closing and (ii) a
$3.5 million payment to acquire technology and certain xenograft manufacturing
assets. Further, as part of the amended agreement, US Surgical and the Company
agreed that the preclinical milestone payments in the original agreement are
considered to have been satisfied. At October 1, 1998, US Surgical beneficially
owned an aggregate of 824,087 shares of Common Stock or approximately 7.3% of
the Company's outstanding shares of common stock.
In September 1997, BB Biotech, a single institutional investor,
purchased 400,000 shares of Series B Preferred Stock at $25.00 per share,
convertible automatically in six months, or at the election of the holder at any
time after the date of issuance, into 935,782 shares of common stock at $10.686
per share. The conversion price represented a 3% premium to the closing bid of
$10.375 on the day of pricing. The Series B Preferred Stock would pay a dividend
of $2.25 per share of Series B Preferred Stock on March 4, 1998, payable in cash
or the Company's Common Stock at the discretion of the Company. In March 1998,
the Series B Preferred Stock was converted to 935,782 shares of the Company's
Common Stock, par value $0.0001, and the Company elected to pay the dividend on
the preferred stock in shares of common stock, aggregating 70,831 shares.
In July 1995, the Company entered into a series of agreements with US
Surgical relating to a collaboration for the development of non-human UniGraft
organ products designed for transplantation into humans. In furtherance of the
joint collaboration, US Surgical also purchased $4.0 million of the Company's
Common Stock, at a price of $8.75 per share and agreed to fund up to $7.5
million for the completion of preclinical research and development of the
UniGraft program, a portion of which is dependent on the achievement of
development milestones. US Surgical, a principal stockholder of the Company,
purchased approximately ten percent of the shares of Common Stock offered at the
Company's initial public offering. Through July 31, 1997, the Company has
received $4.0 million in research and development support under its
collaboration with US Surgical.
In June and October 1992, the Company entered into certain patent
licensing agreements with Oklahoma Medical Research Foundation ("OMRF") and Yale
University ("Yale"). The agreements provide that the Company agreed to pay such
institutions royalties based on sales of
36
<PAGE>
products incorporating technology licensed thereunder and also license
initiation fees, including annual minimum royalties that increase in amount
based on the status of product development and the passage of time. Under
policies of OMRF and Yale, the individual inventors of patents are entitled to
receive a percentage of the royalties and other license fees received by the
licensing institution. Certain founders of and scientific advisors to the
Company are inventors under such patent and patent applications (including Drs.
Bell and Madri, directors of the Company, and Dr. Squinto, the Senior Vice
President and Chief Technology Officer of the Company, with respect to patent
applications licensed from Yale) and, therefore, entitled to receive a portion
of such royalties and other fees payable by the Company.
37
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
(2) Financial Statement Schedules
Schedules have been omitted because of the absence of conditions under
which they are required or because the required information is included in the
financial statements or notes thereto.
(3) Exhibits:
3.1 Certificate of Incorporation, as amended.*(1)
3.2 Bylaws.*(1)
4.1 Specimen Common Stock Certificate.*(1)
10.1 Employment Agreement, dated April 1, 1997, between the Company and Dr.
Leonard Bell.(2)
10.2 Employment Agreement, dated October 22, 1997, between the Company and
David W. Keiser.*(4)
10.3 Employment Agreement, dated October 22, 1997, between the Company and
Dr. Stephen P. Squinto.*(4)
10.4 Employment Agreement, dated October 22, 1997, between the Company and
Dr. Louis A. Matis.*(4)
10.5 Employment Agreement, dated July 1993, between the Company and Dr.
James A. Wilkins, as amended.*(1)
10.6 Employment Agreement, dated July 1994, between the Company and Dr.
Bernadette L. Alford, as amended.*(1)
10.7 Administrative Facility Lease, dated August 23, 1995, between the
Company and Science Park Development Corporation.*(1)
10.8 Research and Development Facility Lease, dated August 23, 1995, between
the Company and Science Park Development Corporation.*(1)
10.9 Option Agreement, dated April 1, 1992 between the Company and Dr.
Leonard Bell.*(1)
38
<PAGE>
10.10 Company's 1992 Stock Option Plan, as amended.*(1)
10.11 Company's 1992 Outside Directors Stock Option Plan, as amended.*(1)
10.12 Registration Agreement, dated December 4, 1992, by the Company for the
benefit of certain individuals listed on schedules thereto, as
amended.*(1)
10.13 Amendment to Registration Agreement, dated July 31, 1995, between the
Company and United States Surgical Corporation.*(1)
10.14 Agreement, dated June 15, 1993, by the Company for the benefit of
certain individuals listed on schedules thereto, as amended.*(1)
10.15 Form of Investor Rights Agreement, dated December 23, 1994, between the
Company and the purchasers of the Company's Series A Preferred Stock,
as amended.*(1)
10.16 Stock Purchase Agreement, dated July 31, 1995, between the Company and
United States Surgical Corporation.*(1)
10.17 Form of Warrant to purchase shares of the Company's Common Stock issued
pursuant to certain of the Company's private placements.*(1)
10.18 Form of Warrant to purchase shares of the Company's Common Stock issued
to the Placement Agent of certain of the Company's private
placements.*(1)
10.19 Form of Warrant to purchase shares of the Company's Common Stock issued
to certain warrantholders of the Company in connection with a Warrant
Exchange.*(1)
10.20 License Agreement dated as of May 27, 1992 between the Company and Yale
University, as amended September 23, 1992.*(1)+
10.21 Exclusive License Agreement dated as of June 19, 1992 among the
Company, Yale University and Oklahoma Medical Research Foundation.**(2)
10.22 Research & Development Agreement dated as of June 19, 1992 between the
Company and Oklahoma Medical Research Foundation.*(1)+
10.23 License Agreement dated as of September 30, 1992 between the Company
and Yale University, as amended July 2, 1993.*(1)+
10.24 License Agreement dated as of August 1, 1993 between the Company and
Biotechnology Research and Development Corporation ("BRDC"), as amended
as of July 1, 1995.*(1)+
10.25 Cooperative Research and Development Agreement dated December 10, 1993
between the Company and the National Institutes of Health.*(1)+
10.26 License Agreement dated January 25, 1994 between the Company and The
Austin Research Institute.*(1)+
39
<PAGE>
10.27 Exclusive Patent License Agreement dated April 21, 1994 between the
Company and the National Institutes of Health.*+
10.28 License Agreement dated July 22, 1994 between the Company and The
Austin Research Institute.*+
10.29 License Agreement dated as of January 10, 1995 between the Company and
Yale University.*+
10.30 Joint Development Agreement dated as of July 31, 1995 between the
Company and United States Surgical Corporation.*(1)+
10.31 Advanced Technology Program ("ATP"), Cooperative Agreement 70NANB5H,
National Institute of Standards and Technology, entitled "Universal
Donor Organs for Transplantation," dated September 15, 1995.*(1)+
10.32 U.S. Department of Health and Human Services, National Heart, Lung and
Book Institute, Small Business Research Program, Phase II Grant
Application, entitled "Role of Complement Activation in Cardiopulmonary
Bypass," dated December 14, 1994; and Notice of Grant Award dated
September 21, 1995.*(1)+
10.33 Research Subcontract Agreement dated as of October 1, 1995 between the
Company and Tufts University.*(1)+
10.34 Agreement to be Bound by Shareholders Agreement dated as of August 1,
1993 between the Company and BRDC.*(1)
10.35 Agreement to be Bound by Master Agreement dated as of August 1, 1993
between the Company and BRDC.*(1)
10.36 Research and Development Facility Lease, dated April 1, 1996, between
the Company and Science Park Development Corporation.**(2)
10.37 License Agreement dated March 27, 1996 between the Company and Medical
Research Council.**(2)+
10.38 License Agreement dated May 8, 1996 between the Company and Enzon,
Inc.**(2)+
10.39 License and Collaborative Research Agreement between Alexion
Pharmaceuticals, Inc. and Genetic Therapy, Inc.*(2)+
10.40 Amended Joint Development Agreement as of September 4, 1997 between the
Company and United States Surgical Corporation.*(4)++
10.41 Stock Purchase Agreement dated September 8, 1997 by and between the
Company and Biotech Target S.A. *(4)++
10.42 Stock Purchase Agreement dated March 4, 1998 by and between the Company
and Biotech Target S.A. *(8)++
40
<PAGE>
23.1 Consent of Arthur Andersen LLP
99 Risk Factors
- --------------------
* Previously filed
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 333-00202).
(2) Incorporated by reference to the Company's Amendment No. 1 to
Registration Statement on Form S-1 (Reg. No. 333-19905) filed on April
4, 1997.
(3) Incorporated by reference to the Company's Annual report on Form 10-K
for the fiscal year ended July 31, 1996.
(4) Incorporated by reference to the Company's Annual report on Form 10-K
for the fiscal year ended July 31, 1997.
(5) Incorporated by reference to the Company's Registration Statement on
Amendment No. 1 to Form S-3 (Reg. No. 333-29617) filed on July 7, 1997.
(6) Incorporated by reference to the Company's Registration Statement on
Post Effective Amendment to Form S-1 (Reg. No. 333-19905) filed on July
18, 1997.
(7) Incorporated by reference to the Company's Registration Statement on
Form S-3 (Reg. No. 333-41397) filed on December 11, 1997.
(8) Incorporated by reference to the Company's Registration Statement on
Form S-3 (Reg. No. 333-47645) filed on March 17, 1998.
+ Confidential treatment was granted for portions of such document.
++ A request for confidential treatment was granted for portions of such
document, Confidential Portions have been omitted and filed separately
with the Commission as required by Rule 24b-2.
41
<PAGE>
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 7, 1998 relating to the Company's
commencement of dosing in Rheumatoid Arthritis patients in a Phase
I/II clinical trial of its anti-inflammatory complement inhibitor
drug candidate, 5G1.1.
Current Report on Form 8-K dated October 8, 1998 relating to the
Company's Fourth Quarter and Year End Results.
(c) Exhibits.
See (a) (3) above
(d) Financial Statement Schedules
See (a) (2) above
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ALEXION PHARMACEUTICALS, INC.
/s/ LEONARD BELL
--------------------------------
By: Leonard Bell, M.D.
President, Chief Executive Officer,
Secretary and Treasurer
/s/ DAVID W. KEISER
--------------------------------
By: David W. Keiser
Executive Vice President and
Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1934 this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ LEONARD BELL President, Chief Executive Officer, October 22, 1998
- ---------------- Secretary, Treasurer and Director
Leonard Bell, M.D (principal executive officer)
/s/ DAVID W. KEISER Executive Vice President and October 22, 1998
- ------------------- Chief Operating Officer
David W. Keiser (principal financial officer)
/s/ BARRY P. LUKE Vice President of Finance October 22, 1998
- ------------------ and Administration (principal
Barry P. Luke accounting officer)
/s/ JOHN H. FRIED Chairman of the Board of October 22, 1998
- -----------------
John H. Fried, Ph.D. Directors
/s/ TIMOTHY F. HOWE Director October 22, 1998
- -------------------
Timothy F. Howe
/s/ MAX LINK Director October 22, 1998
- ------------
Max Link, Ph.D.
/s/ JOSEPH A. MADRI Director October 22, 1998
- -------------------
Joseph A. Madri, Ph.D., M.D.
/s/ LEONARD MARKS Director October 22, 1998
- -----------------
Leonard Marks, Jr., Ph.D.
/s/ EILEEN M. MORE Director October 22, 1998
- ------------------
Eileen M. More
</TABLE>
43
<PAGE>
ALEXION PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of July 31, 1998 and 1997................................................................ F-3
Statements of Operations for the Years Ended July 31, 1998, 1997 and 1996.................................. F-4
Statements of Stockholders' Equity for the Years Ended July 31, 1998, 1997, and 1996....................... F-5
Statements of Cash Flows for the Years Ended July 31, 1998, 1997 and 1996.................................. F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Alexion Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Alexion Pharmaceuticals,
Inc. (a Delaware corporation) as of July 31, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended July 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alexion Pharmaceuticals,
Inc. as of July 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended July 31, 1998, in
conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
Hartford, Connecticut
August 28, 1998
F-2
<PAGE>
ALEXION PHARMACEUTICALS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 31,509 $ 16,743
Marketable securities..................................................................... 5,985 6,006
Prepaid expenses.......................................................................... 209 232
Other current assets...................................................................... 137 --
--------- ---------
Total current assets.................................................................... 37,840 22,981
--------- ---------
EQUIPMENT, net.............................................................................. 2,357 786
--------- ---------
OTHER ASSETS:
Licensed technology rights, net........................................................... 154 242
Patent application costs, net............................................................. 149 169
Security deposits and other............................................................... 1,585 82
--------- ---------
Total other assets...................................................................... 1,888 493
--------- ---------
Total assets............................................................................ $ 42,085 $ 24,260
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.......................................................... $ 368 $ 138
Accounts payable.......................................................................... 810 728
Accrued expenses.......................................................................... 818 1,202
Deferred revenue.......................................................................... 67 346
--------- ---------
Total current liabilities............................................................... 2,063 2,414
--------- ---------
NOTES PAYABLE, less current portion included above.......................................... 832 --
--------- ---------
COMMITMENTS AND CONTINGENCIES
(Notes 1, 8, 10 and 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; none issued at July 31,
1998 and 1997 -- --
Common stock $.0001 par value; 25,000,000 shares authorized; 11,236,987 and 8,858,012
shares issued at July 31, 1998 and 1997, respectively................................... 1 1
Additional paid-in capital................................................................ 79,781 53,672
Accumulated deficit....................................................................... (40,592) (31,827)
Treasury stock, at cost, 11,875 shares.................................................... -- --
--------- ---------
Total stockholders' equity.............................................................. 39,190 21,846
--------- ---------
Total liabilities and stockholders' equity.............................................. $ 42,085 $ 24,260
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
ALEXION PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED JULY 31,
----------------------------------------
1998 1997 1996
------------ -------------- ----------
<S> <C> <C> <C>
CONTRACT RESEARCH REVENUES............................................. $ 5,037 $ 3,811 $ 2,640
------------ -------------- ----------
OPERATING EXPENSES:
Research and development............................................. 12,323 9,079 6,629
General and administrative........................................... 2,666 2,827 1,843
------------ -------------- ----------
Total operating expenses........................................... 14,989 11,906 8,472
------------ -------------- ----------
OPERATING LOSS ........................................................ (9,952) (8,095) (5,832)
OTHER INCOME, net...................................................... 2,087 843 397
------------ -------------- ----------
Net loss........................................................... (7,865) (7,252) (5,435)
PREFERRED STOCK DIVIDENDS.............................................. (900) -- --
------------ -------------- ----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS............................. $ (8,765) $ (7,252) $ (5,435)
------------ -------------- ----------
------------ -------------- ----------
BASIC AND DILUTED NET LOSS PER COMMON SHARE (NOTE 2)................... $ (.87) $ (.97) $ (1.02)
------------ -------------- ----------
------------ -------------- ----------
SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE..................... 10,056,339 7,450,762 5,350,598
------------ -------------- ----------
------------ -------------- ----------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
ALEXION PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TREASURY
CONVERTIBLE STOCK,
PREFERRED STOCK COMMON STOCK ADDITIONAL AT COST TOTAL
------------------ ------------------ PAID-IN ACCUMULATED -------------- STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT EQUITY
---------- ------ ---------- ------ ---------- ----------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 31, 1995........ 1,986,409 $-- 3,996,913 $ 1 $24,259 $(19,140) 11,875 $-- $ 5,120
Issuance of common stock in
initial public offering,
net of issuance costs of
$2,469.................... -- -- 2,530,000 -- 18,403 -- -- -- 18,403
Conversion of Series A
convertible preferred
stock into common stock... (1,986,409) -- 794,554 -- -- -- -- -- --
Issuance of common stock
from exercise of stock
options................... -- -- 13,442 -- 70 -- -- -- 70
Net change in unrealized
losses on marketable
securities................ -- -- -- -- 4 -- -- -- 4
Compensation expense related
to grant of stock
options................... -- -- -- -- 123 -- -- -- 123
Net loss.................... -- -- -- -- -- (5,435) -- -- (5,435)
---------- ------ ---------- ------ ---------- ----------- ------ ------ -------------
BALANCE, July 31, 1996........ -- -- 7,334,909 1 42,859 (24,575) 11,875 -- 18,285
Issuance of common stock,
net of issuance costs of
$814...................... -- -- 1,450,000 -- 10,424 -- -- -- 10,424
Issuance of common stock
from exercise of
warrants.................. -- -- 38,166 -- 286 -- -- -- 286
Issuance of common stock
from exercise of stock
options................... -- -- 34,937 -- 83 -- -- -- 83
Net change in unrealized
gains on marketable
securities................ -- -- -- -- 20 -- -- -- 20
Net loss.................... -- -- -- -- -- (7,252) -- -- (7,252)
---------- ------ ---------- ------ ---------- ----------- ------ ------ -------------
BALANCE, July 31, 1997........ -- -- 8,858,012 1 53,672 (31,827) 11,875 -- 21,846
Issuance of Series B
convertible preferred
stock, net of issuance
costs of $493............. 400,000 -- -- -- 9,507 -- -- -- 9,507
Issuance of common stock in
payment of preferred stock
dividend.................. -- -- 70,831 -- 900 (900) -- -- --
Conversion of Series B
convertible preferred
stock into common stock... (400,000) -- 935,782 -- -- -- -- -- --
Issuance of common stock,
net of issuance costs of
$49....................... -- -- 836,945 -- 11,779 -- -- -- 11,779
Issuance of common stock
from exercise of
warrants.................. -- -- 513,553 -- 3,858 -- -- -- 3,858
Issuance of common stock
from exercise of stock
options................... -- -- 21,864 -- 67 -- -- -- 67
Net change in unrealized
gains on marketable
securities................ -- -- -- -- (2) -- -- -- (2)
Net loss.................... -- -- -- -- -- (7,865) -- -- (7,865)
---------- ------ ---------- ------ ---------- ----------- ------ ------ -------------
BALANCE, July 31, 1998........ -- $-- 11,236,987 $ 1 $79,781 $(40,592) 11,875 $-- $39,190
---------- ------ ---------- ------ ---------- ----------- ------ ------ -------------
---------- ------ ---------- ------ ---------- ----------- ------ ------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ALEXION PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $ (7,865) $ (7,252) $ (5,435)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 598 698 811
Compensation expense related to grant of stock options........................ -- -- 123
Net realized loss on marketable securities.................................... -- -- 9
Change in assets and liabilities--
Prepaid expenses............................................................ 23 235 (294)
Other current assets........................................................ (137) -- --
Accounts payable............................................................ 82 447 (38)
Accrued expenses............................................................ (384) 801 (175)
Deferred revenue............................................................ (279) (653) --
--------- --------- ---------
Net cash used in operating activities..................................... (7,962) (5,724) (4,999)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (purchases of) marketable securities, net......................... 20 3,119 (8,443)
Purchases of equipment.......................................................... (2,057) (749) (332)
Patent application costs........................................................ (5) (23) (42)
--------- --------- ---------
Net cash (used in) provided by investing activities....................... (2,042) 2,347 (8,817)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred and common stock........................ 25,211 10,793 18,474
Repayments of capital lease obligations......................................... (8) (29) (104)
Borrowings under notes payable.................................................. 1,200 -- --
Repayments of notes payable..................................................... (130) (321) (322)
Security deposits and other..................................................... (1,503) 186 180
--------- --------- ---------
Net cash provided by financing activities................................. 24,770 10,629 18,228
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................................... 14,766 7,252 4,412
CASH AND CASH EQUIVALENTS, beginning of period.................................... 16,743 9,491 5,079
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.......................................... $ 31,509 $ 16,743 $ 9,491
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense.................................................. $ 42 $ 47 $ 109
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES
Preferred stock dividend...................................................... $ 900 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-6
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Alexion Pharmaceuticals, Inc. ("Alexion" or "the Company") was organized in
1992 and is a biopharmaceutical company engaged in the research and development
of proprietary immunoregulatory compounds for the treatment of acute coronary
syndromes (cardiopulmonary bypass, acute myocardial infarction, coronary
angioplasty, and unstable angina) and autoimmune diseases (systemic lupus,
rheumatoid arthritis, multiple sclerosis, and diabete mellitus). As an outgrowth
of its core technologies, the Company is developing, in collaboration with third
parties (see Note 9), non-human organ ("xernograft" organs) products designed
for transplantation into humans without clinical rejection and immunoprotected
retroviral vector particles and producer cells for use in gene therapy.
The Company has incurred losses since inception and has an accumulated
deficit of $40.6 million through July 31, 1998. The Company has made no product
sales to date and has recognized cumulative revenue from research grants and
funding of $11.6 million through July 31, 1998. During 1996, the Company
completed an initial public offering (IPO) of 2,530,000 shares of common stock
resulting in net proceeds of approximately $18.4 million. The Company completed
additional equity offerings resulting in aggregate net proceeds of $21.3 million
and $10.4 million during fiscal 1998 and 1997, respectively.
The Company will need additional financing to obtain regulatory approvals,
fund operating losses, and, if deemed appropriate, establish a manufacturing,
sales and marketing capability. In addition, the Company operates in an
environment of rapid change in technology, substantial competition from
pharmaceutical and biotechnology companies and is dependent upon the services of
its employees and its consultants.
The Company expects to incur substantial expenditures in the foreseeable
future for the research and development and commercialization of its products.
The Company's management believes that, based upon its current business plans,
the cash and marketable securities aggregating $37.5 million as of July 31, 1998
will be sufficient to fund operations of the Company through at least calendar
year 1999.
The Company will require funds in addition to those previously described,
which it will seek to raise through public or private equity or debt financings,
collaborative or other arrangements with corporate sources, or through other
sources of financing. During 1998, the Company obtained a term loan facility for
up to $1.2 million with a commercial bank for the financing of capital
expenditures principally related to facilities manufacturing scale-up equipment
(see Note 7). The Company has no other capital sources and no arrangements or
commitments with regard to obtaining any further funds.
Prior to July 31, 1998, the Company reported as a development stage entity.
F-7
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS--
Cash and cash equivalents are stated at cost, which approximates market, and
include short-term highly liquid investments with original maturities of less
than three months.
MARKETABLE SECURITIES--
The Company invests in marketable securities of highly rated financial
institutions and investment-grade debt instruments and limits the amount of
credit exposure with any one entity.
The Company has classified its marketable securities as "available for sale"
and, accordingly, carries such securities at aggregate fair value. Unrealized
gains or losses are included in stockholders' equity as a component of
additional paid-in capital. At July 31, 1998, the Company's marketable
securities had a maximum maturity of less than one year. The following is a
summary of marketable securities at July 31, 1998 and 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED FAIR
COST GAINS VALUE
----------- ------------- ---------
<S> <C> <C> <C>
U.S. government obligations..................................................... $ 500 $ -- $ 500
Federal agency obligations...................................................... 2,000 -- 2,000
Corporate bonds................................................................. 3,480 5 3,485
----------- ----- ---------
Total marketable securities at July 31, 1998................................ $ 5,980 $ 5 $ 5,985
----------- ----- ---------
----------- ----- ---------
U.S. government obligations..................................................... $ 498 $ 3 $ 501
Federal agency obligations...................................................... 4,001 4 4,005
Corporate bonds................................................................. 1,500 -- 1,500
----------- ----- ---------
Total marketable securities at July 31, 1997................................ $ 5,999 $ 7 $ 6,006
----------- ----- ---------
----------- ----- ---------
</TABLE>
EQUIPMENT--
Equipment is recorded at cost and is depreciated over the estimated useful
lives of the assets involved. Depreciation commences at the time the assets are
placed in service and is computed using the straight-line method over the useful
lives of the equipment of three to five years. Maintenance and repairs are
charged to expense when incurred.
Equipment under capital leases is depreciated over the lesser of the lease
term or the estimated useful life.
F-8
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
LONG-LIVED ASSETS--
The Company accounts for its investments in long-lived assets in accordance
with Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" (SFAS
121). SFAS 121 requires a company to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
LICENSED TECHNOLOGY RIGHTS--
Licensed technology rights are amortized over the shorter of the license
term or seven years, using the straight-line method. The Company reviews
licensed technology rights on a periodic basis and capitalized costs which
provide no future benefit are expensed. Accumulated amortization as of July 31,
1998 and 1997 amounted to $462,000 and $374,000, respectively (see Note 8).
PATENT APPLICATION COSTS--
Costs incurred in filing for patents are capitalized. Capitalized costs
related to unsuccessful patent applications are expensed when it becomes
determinable that such applications will not be successful. Capitalized costs
related to successful patent applications are amortized over a seven year
period or the remaining life of the patent, whichever is shorter, using the
straight-line method. Accumulated amortization as of July 31, 1998 and 1997
amounted to $215,000 and $190,000, respectively.
REVENUE RECOGNITION--
Contract research revenues are recognized as the related work is performed
under the terms of the contracts and expenses for development activities are
incurred. Any revenue contingent upon future funding by the Company is deferred
and recognized as the future funding is expended. Any revenues resulting from
the achievement of milestones would be recognized when the milestone is
achieved.
RESEARCH AND DEVELOPMENT EXPENSES--
Research and development costs are expensed in the period incurred.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT--
In July 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income", which establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The objective of the statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with owners
("comprehensive income").
F-9
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SFAS No. 130 is effective for financial statements issued for fiscal years
beginning after December 15, 1997 with earlier application permitted. The
Company adopted this standard effective August 1, 1998. The impact of adoption
of this statement will not have a significant effect on the Company's financial
position and results of operations.
NET LOSS PER COMMON SHARE--
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share", which superceded Accounting Principles Board
Opinion 15. Additionally, on February 4, 1998, the Securities and Exchange
Commission released Staff Accounting Bulletin (SAB) No. 98 on computations of
earnings per share, which changed the guidance on how cheap stock is treated
in earnings per share computations. This new standard and SAB No. 98 replace
the computation of primary earnings (loss) per share with a new computation
of "basic earnings (loss) per share". Accordingly, period earnings per share
data presented is in accordance with SFAS No. 128 and SAB No. 98. There was
no effect on previously reported net loss per common share for the years
ended July 31, 1998 and 1997. The effect of the restatement on the previously
reported year ended July 31, 1996 was an increase in the net loss per common
share of $.07. There is no difference in basic and diluted net loss per
common share as the effect of exercising outstanding stock options, warrants,
and converting preferred stock to common stock is anti-dilutive for all
periods presented. These outstanding stock options and warrants entitled
holders to purchase 1,947,986, 2,410,953 and 2,172,169 shares of common stock
at July 31, 1998, 1997 and 1996, respectively.
3. EQUIPMENT:
A summary of equipment is as follows (dollars in thousand):
<TABLE>
<CAPTION>
JULY 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Laboratory equipment................................................... $ 4,523 $ 2,646
Office equipment....................................................... 352 230
Furniture.............................................................. 104 46
Equipment under capital leases......................................... 378 378
--------- ---------
5,357 3,300
Less--Accumulated depreciation and amortization........................ 3,000 2,514
--------- ---------
$ 2,357 $ 786
--------- ---------
--------- ---------
</TABLE>
F-10
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SECURITY DEPOSITS AND OTHER:
A summary of security deposits and other assets is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
JULY 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Restricted cash held as collateral for note payable (see Note 7)............. $ 1,500 $ --
Other........................................................................ 85 82
--------- ---------
$ 1,585 $ 82
--------- ---------
--------- ---------
</TABLE>
5. ACCRUED EXPENSES:
A summary of accrued expenses is as follows (dollars in thousands):
<TABLE>
<CAPTION>
JULY 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Research and development..................................................... $ 159 $ 590
Payroll and employee benefits................................................ 477 354
Professional fees............................................................ 77 185
Other........................................................................ 105 73
--------- ---------
$ 818 $ 1,202
--------- ---------
--------- ---------
</TABLE>
6. DEFERRED REVENUE:
Deferred revenue results from cash received in advance of revenue
recognition under research and development contracts (see Notes 1 and 9).
7. NOTES PAYABLE:
Notes payable at July 31, 1998 consist of a $1.2 million term loan used to
finance the purchase of capital equipment. The term loan requires quarterly
principal payments of $92,000 commencing August 3, 1998 and payable through
August 2001. Interest is due with principal at a variable rate to be repriced
quarterly. The rate as of July 31, 1998 (date last repriced) was 7.647%. The
term loan agreement requires the Company to maintain a restricted cash balance
of $1.5 million as collateral for the note.
Future repayments of the term loan are scheduled as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
JULY 31,
- -----------
<S> <C>
1999.................................................... $ 368
2000.................................................... 368
2001.................................................... 464
---------
$ 1,200
---------
---------
</TABLE>
F-11
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LICENSE AND RESEARCH & DEVELOPMENT AGREEMENTS:
The Company has entered into a number of license and research & development
agreements since its inception. These agreements have been made with various
research institutions, universities, and government agencies in order to advance
and obtain technologies management believes important to the Company's overall
business strategy.
License agreements generally provide for an initial fee followed by annual
minimum royalty payments. Additionally, certain agreements call for future
payments upon the attainment of agreed to milestones, such as, but not limited
to, Investigational New Drug (IND) application or Product License Approval
(PLA). These agreements require minimum royalty payments based upon sales
developed from the applicable technologies, if any. The Company's policy is to
amortize capitalized licensed technology over a seven year period or under the
license term, whichever is shorter, using the straight-line method.
Research & development agreements generally provide for the Company to fund
future project research for one to four years. Based upon these agreements, the
Company may obtain exclusive and non-exclusive rights and options to the
applicable technologies developed as a result of the applicable research. The
Company's policy is to expense research and development payments as incurred.
The minimum payments (assuming non-termination of the above agreements) as
of July 31, 1998, for each of the next five years are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR RESEARCH &
ENDING LICENSE DEVELOPMENT
JULY 31, AGREEMENTS AGREEMENTS
- ----------- --------------- ---------------
<S> <C> <C>
1999 209 $ 56
2000 204 50
2001 199 50
2002 292 50
2003 107 50
</TABLE>
Should the Company achieve certain milestones related to product development
and product license applications and approvals, additional payments would be
required if the Company elects to continue and maintain its licenses. The
agreements also require the Company to fund certain costs associated with the
filing of patent applications.
9. CONTRACT RESEARCH REVENUES:
Contract research revenues recorded by the Company during the year ended
July 31, 1998 consisted of research and development support under collaborations
with third parties and various government grants from the National Institutes of
Health and the Commerce Department's National Institute of Standards and
Technology (NIST).
F-12
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CONTRACT RESEARCH REVENUES: (CONTINUED)
In July 1995, the Company entered into a research and development agreement
with United States Surgical Corporation ("US Surgical"). US Surgical agreed to
fund pre-clinical development of the Company's xenotransplant products in return
for exclusive worldwide manufacturing, marketing and distribution rights of such
products by paying the Company up to $7.5 million. This pre-clinical funding
represented $4.0 million paid through July 31, 1997 and $3.5 million upon
achieving certain milestones.
In September 1997, the Company modified its July 1995 research and
development agreement with US Surgical. As part of the modification
agreement, US Surgical purchased 166,945 shares of common stock for $3.0
million and made a payment of $3.5 million to acquire exclusive licensing
rights and certain xenograft manufacturing assets. Further, as part of the
modified agreement, US Surgical and the Company agreed that the preclinical
milestone payments in the original agreement are considered to have been
satisfied. For the years ended July 31, 1998, 1997 and 1996, the Company
recognized $3.7 million, $1.8 million, and $2.0 million, respectively of
revenue related to this agreement. As of July 31, 1998, the Company had
received all of the preclinical funding available under this agreement.
In December 1996, the Company entered into a license and collaborative
research agreement with Genetics Therapy Inc. ("GTI/Novartis"), a subsidiary of
Novartis, Inc., relating to the Company's gene transfer technology. Under the
agreement, GTI/Novartis has been granted a worldwide exclusive license to use
the Company's technology in its gene therapy products. GTI/Novartis agreed to
pay the Company an initial payment of $850,000 (consisting of a non-refundable
license fee of $750,000 and a one-time research support payment of $100,000) and
to fund a minimum of $400,000 per year for two years for research and
development support by the Company. GTI/Novartis will also make payments to the
Company upon achievement of certain product development milestones for gene
therapy products utilizing the Company's technology and pay royalties on net
sales, if any. For the years ended July 31, 1998 and 1997, the Company
recognized approximately $400,000 and $1.1 million, respectively, of revenue
related to this agreement.
In November 1997, the Company and US Surgical were awarded a three-year,
$2.0 million cooperative agreement from NIST to fund a joint xenotransplantation
project.
10. COMMITMENTS:
The Company has entered into three-year and five-year employment agreements
with its executives. These agreements provide that these individuals will
receive aggregate annual base salaries of approximately $952,000 as of July 31,
1998. These individuals may also receive discretionary bonus awards, as
determined by the Board of Directors.
F-13
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS: (CONTINUED)
As of July 31, 1998, the Company leases its administrative and research and
development facilities under three operating leases expiring in December 1997,
June 1998, and March 1999, each with an option for up to an additional three
years. The Company is currently continuing the leases that expired in December
1997 and June 1998 on a month-to-month basis while discussions for lease
extensions are on-going.
Future minimum annual rental payments as of July 31, 1998, under these
leases and other noncancellable operating leases (primarily for equipment) are
approximately $56,000, $17,000, $17,000, $17,000, and $4,000, for the five years
ended July 31, 2003, respectively.
11. COMMON STOCK AND PREFERRED STOCK:
FISCAL 1996 INITIAL PUBLIC OFFERING--
During fiscal 1996, the Company completed an IPO of 2,530,000 shares of
common stock resulting in net proceeds of approximately $18.4 million. In
connection with the Company's IPO, the Series A preferred stockholders converted
all of their shares into 794,554 shares of common stock.
FISCAL 1997 PRIVATE PLACEMENT--
In July 1997, the Company completed a private placement offering for
1,450,000 shares of common stock, resulting in net proceeds of approximately
$10.4 million.
FISCAL 1998 PRIVATE PLACEMENTS--
In September 1997, the Company completed the private placement of 400,000
shares of Series B convertible preferred stock for aggregate consideration of
$10 million to a single institutional investor, Biotech Target S.A. The net
proceeds to the Company were approximately $9.5 million. The investor was
entitled to a dividend of $2.25 per share of Series B convertible preferred
stock if this stock was held through March 4, 1998. In March 1998 the
investor converted the preferred stock into 935,782 shares of common stock
and dividends of $900,000 were paid by the delivery of an additional 70,831
shares of the Company's common stock.
In September 1997, the Company sold 166,945 shares of its common stock to
U.S. Surgical for aggregate consideration of $3.0 million. The sale of common
stock was made in connection with the modification of the joint development
agreement between the Company and U.S. Surgical (see Note 9). In March 1998,
Biotech Target S.A. purchased an additional 670,000 shares of common stock for
aggregate consideration of approximately $8.8 million.
12. STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS--
Under the Company's 1992 Stock Option Plan and 1992 Stock Option Plan for
Directors (the Plans), as amended, incentive and nonqualified stock options may
be granted for up to a maximum of 1.8 million shares of common stock to
directors, officers, key employees and consultants of the Company at no less
than fair market value on the date of grant. Options generally become
exercisable in equal proportions over three to four years and remain exercisable
for up to ten years after the grant date, subject to certain conditions.
F-14
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS AND WARRANTS: (CONTINUED)
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 requires the
measurement of the fair value of stock options or warrants to be included in the
statement of income or disclosed in the notes to financial statements. The
Company has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
elect the disclosure-only alternative under SFAS 123. The Company has computed
the pro forma disclosure required under SFAS 123 for options granted using the
Black-Scholes option pricing model prescribed by SFAS 123. The weighted average
assumptions used are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk free interest rate.............................. 5.25% 6.25% 6.25%
Expected dividend yield.............................. 0% 0% 0%
Expected lives....................................... 5 years 5 years 5 years
Expected volatility.................................. 61% 53% 53%
</TABLE>
Had compensation cost for the Company's stock option Plans been determined
based on the fair value at the grant dates of awards under these Plans
consistent with the method of SFAS 123, the Company's net loss and pro forma net
loss per common share would have been increased to the pro forma amounts
indicated below (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net loss:
As reported ....................................... $(8,765) $ (7,252) $ (5,435)
Pro forma.......................................... (9,958) (7,815) (5,541)
Pro forma net loss per common share:
As reported........................................ (.87) (.97) (1.02)
Pro forma ......................................... (.99) (1.05) (1.03)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to August 1, 1995, the result pro forma compensation cost may not
be representative of that to be expected in future years.
A summary of the status of the Company's stock option Plans at July 31,
1998, 1997 and 1996 and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at August 1......................... 1,484,284 $ 6.63 1,207,334 $ 5.46 842,324 $ 3.45
Granted......................................... 279,750 $ 11.31 337,250 $ 10.37 405,800 9.62
Exercised....................................... (21,864) $ 3.16 (34,937) $ 2.38 (13,442) 5.23
Cancelled....................................... (14,184) $ 11.29 (25,363) $ 6.19 (27,348) 5.46
--------- ----------- --------- ----------- --------- -----
Outstanding at July 31.......................... 1,727,986 $ 7.40 1,484,284 $ 6.63 1,207,334 $ 5.46
--------- ----------- --------- ----------- --------- -----
--------- ----------- --------- ----------- --------- -----
Options exercisable at July 31.................. 883,063 $ 5.73 574,690 $ 4.98 363,492 $ 4.43
Weighted-average fair value of options
granted during the year....................... $ 6.42 $ 5.40 $ 5.38
</TABLE>
F-15
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS AND WARRANTS: (CONTINUED)
During 1996, options to purchase 388,300 shares of common stock were granted
at an exercise price equal to the fair value of the stock at the date of grant.
The weighted average exercise price of these options was $9.94 per share. The
weighted average fair value of these options at the date of grant was $5.27 per
option. In addition, options to purchase 17,500 shares of common stock were
granted to non-management employees at an exercise price of $2.50 per share
which was less than the fair value of the stock at the date of grant. The
weighted average fair value of these options at the date of grant was $7.73 per
option.
The Company recorded compensation expense of $123,000 on certain
nonqualified stock options which were granted to non-management employees during
fiscal 1996 and immediately vested. This charge was based on the difference
between the fair value of the Company's common stock on the date of grant and
the option exercise price.
The following table presents weighted average price and life information
about significant option groups outstanding at July 31, 1998.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
- -------------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 2.375-$ 2.50 604,698 6.4 $ 2.38 452,522 $ 2.38
$ 2.51 -$ 8.24 150,000 3.9 $ 7.57 150,000 $ 7.57
$ 8.25 -$10.50 823,738 8.5 $ 10.03 278,841 $ 10.12
$10.51 -$13.25 149,550 9.4 $ 13.01 1,700 $ 12.13
----------- ----- ----------- ----------- -----------
1,727,986 7.4 $ 7.40 883,063 $ 5.73
----------- ----- ----------- ----------- -----------
----------- ----- ----------- ----------- -----------
</TABLE>
During the year ended July 31, 1998, options to purchase 267,250 shares of
common stock were granted to employees at an exercise price of $9.00 per share.
These options were granted subject to shareholders' approval of an increase in
the number of shares authorized under the Company's 1992 Stock Option Plan. For
financial statement purposes, these options are not considered granted until the
prerequisite approvals have been obtained. Accordingly, these options have been
excluded from the tables above.
WARRANTS--
In connection with its private placements in fiscal 1993 and 1994, the
Company had issued warrants to purchase common stock. These warrants were
exercisable at any time prior to the close of business on December 4, 1997. All
such warrants held expired or were exercised. Warrants were exercised for the
purchase of 551,719 shares of common stock aggregating approximately $4.1
million of proceeds to the Company.
In connection with the Company's initial public offering, the Company sold
to its underwriter for nominal consideration, warrants to purchase 220,000
shares of common stock. These warrants are initially exercisable at a price of
$9.90 per share for a period of forty-two (42) months commencing on August 27,
1997. None of these warrants have been exercised as of July 31, 1998.
F-16
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. RIGHTS TO PURCHASE PREFERRED STOCK:
In February 1997, the Board of Directors of the Company declared a dividend
of one preferred stock purchase right for each outstanding share of common
stock. Under certain conditions, each right may be exercised to purchase one
one-hundredth of a share of a new series of preferred stock at an exercise price
of $75, subject to adjustment. The rights may be exercised only after a public
announcement that a party acquired 20% or more of the Company's common stock or
after commencement or public announcement to make a tender offer for 20% or more
of the Company's common stock. The rights, which do not have voting rights,
expire on March 6, 2002, and may be redeemed by the Company at a price of $.01
per right at any time prior to their expiration or the acquisition of 20% or
more of the Company's stock. The preferred stock purchasable upon exercise of
the rights will have a minimum preferential dividend of $10 per year, but will
be entitled to receive, in the aggregate, a dividend of 100 times the dividend
declared on a share of common stock. In the event of a liquidation, the holders
of the shares of preferred stock will be entitled to receive a minimum
liquidation payment of $100 per share, but will be entitled to receive an
aggregate liquidation payment equal to 100 times the payment to be made per
share of common stock.
In the event that the Company is acquired in a merger, other business
combination transaction, or 50% or more of its assets, cashflow, or earning
power are sold, proper provision shall be made so that each holder of a right
shall have the right to receive, upon exercise thereof at the then current
exercise price, that number of shares of common stock of the surviving company
which at the time of such transaction would have a market value of two times the
exercise price of the right.
14. 401(K) PLAN:
The Company has a 401(k) plan. Under the plan, employees may contribute up
to 15 percent of their compensation with a maximum of $10,000 per employee in
calendar year 1998. Effective January 1998 Company matching contributions of
$.50 for each dollar deferred (up to the first 6% deferred) have been authorized
by the Board of Directors. The Company had matching contributions of
approximately $48,000, $31,000 and $6,000 for the years ended July 31, 1998,
1997 and 1996, respectively.
15. FEDERAL INCOME TAXES:
At July 31, 1998, the Company has available for tax reporting purposes, net
operating loss carryforwards of approximately $37.5 million which expire
commencing in fiscal 2008. The Company also has research and development credit
carryovers of approximately $1.4 million which expire commencing in fiscal 2008.
The Tax Reform Act of 1986 contains certain provisions that may limit the
Company's ability to utilize net operating loss and tax credit carryforwards in
any given year if certain events occur, including cumulative changes in
ownership interests in excess of 50% over a three-year period. There can be no
assurance that ownership changes in future periods will not significantly limit
the Company's use of its existing net operating loss and tax credit
carryforwards.
The Company follows SFAS No. 109, "Accounting for Income Taxes". This
statement requires that deferred income tax assets and liabilities reflect the
impact of "temporary differences" between the amount of assets and liabilities
for financial reporting purposes and such amounts as measured by tax laws and
regulations.
F-17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. FEDERAL INCOME TAXES: (CONTINUED)
The components of deferred income taxes as of July 31, 1998 are as follows
(dollars in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards................................ $ 15,472
Tax credit carryforwards........................................ 1,367
Other........................................................... 368
---------
Total deferred tax assets......................................... 17,207
Valuation allowance for deferred tax assets....................... (17,207)
---------
Net deferred tax assets........................................... $ --
---------
---------
</TABLE>
The Company has not yet achieved profitable operations. Accordingly,
management believes the tax benefits as of July 31, 1998 do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a valuation
allowance for the entire deferred tax asset.
F-18
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements File numbers 333-19905, 333-24863, 333-29617,
333-41397 and 333-47645.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
October 27, 1998
<PAGE>
Exhibit 99
ALEXION PHARMACEUTICALS, INC.
Important Factors Regarding Forward-Looking Statements
IN ADDITION TO OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K AND
IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, THE FOLLOWING RISK FACTORS
SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS
BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY HAVE A
SIGNIFICANT IMPACT ON THE COMPANY'S BUSINESS, OPERATING RESULTS OR FINANCIAL
CONDITION. THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN
MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK-FACTORS SET FORTH BELOW AND
ELSEWHERE IN THIS FORM.
Operating Losses; Uncertainty of Future Profitability. Alexion has
generated no revenues from product sales and is dependent upon its research and
development contracts, including the agreement with US Surgical, external
financing, other research and development contracts and research and development
grants to the extent that they can be obtained and interest income to pursue its
intended business activities. The Company has incurred losses since inception
and has an accumulated deficit of approximately $40.6 million through July 31,
1998. Losses have resulted principally from costs incurred in research
activities aimed at identifying and developing the Company's product candidates
and from general and administrative costs. The Company expects to incur
substantial additional operating losses over the next several years and expects
losses to increase as the Company's research and development efforts expand and
clinical trials continue and potentially expand. The Company's ability to
achieve profitability is dependent on its ability to obtain patent protection
and regulatory approval for its products, to obtain licenses from third parties
to use technology which it may need, to enter into agreements for product
development and commercialization with corporate partners and to develop the
capacity to manufacture and sell products. There can be no assurance that the
Company will successfully develop, commercialize, manufacture or market any of
its potential products, obtain required regulatory approvals, patents or third
party licenses to technology or ever achieve profitability.
Early Stage of Product Development; Risks of Clinical Trials. The
Company's research and development programs are at an early stage. There can be
no assurance that the Company's drug discovery efforts will result in the
development of commercially successful therapeutic drugs. Potential products
which have been identified will require significant additional development,
preclinical and clinical testing, regulatory approval, and additional investment
prior to their commercialization, which may never be achieved. Potential
products may be found to be ineffective or cause harmful side effects or
unexpected results during preclinical testing or clinical trials, fail to
receive necessary regulatory approvals, be difficult to manufacture on a large
scale, fail to achieve market acceptance, be uneconomical or be precluded from
commercialization by proprietary rights of third parties. The results from
preclinical studies and early clinical trials may not be predictive of results
that will be obtained in large-scale clinical trials and do not necessarily
predict or prove safety or efficacy in humans.
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In addition, the Company has commenced clinical trials. There can be no
assurance that clinical trials of the Company's product candidates will
demonstrate sufficient safety and efficacy to obtain the requisite regulatory
approvals or will result in marketable products. Clinical trials are often
conducted with patients that are critically ill. During the course of treatment,
these patients can die or suffer other adverse medical effects for reasons that
may not be related to the pharmaceutical agent being tested but which can
nevertheless affect clinical trial results. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. Any such setback could
have a material adverse effect on the Company's business, financial condition
and results of operations. The completion of clinical trials of the Company's
product candidates may be delayed by many factors and there can be no assurance
that delays or terminations will not occur. One such factor is the rate of
enrollment of patients, which generally varies throughout the course of a
clinical trial and which depends on the size of the patient population, the
number of clinical trial sites, the proximity of patients to clinical trial
sites, the performance of the clinical sites, the eligibility criteria for the
trial and the existence of competing clinical trials. The Company cannot control
the rate at which patients present themselves for enrollment, and there can be
no assurance that the rate of patient enrollment will be consistent with the
Company's expectations or be sufficient to enable clinical trials of the
Company's product candidates to be completed in a timely manner. Further, there
can be no assurance that clinical trial materials will be produced in a timely
manner, if at all.
Need for Additional Funds. The Company will require substantial
additional funds for its research and product development programs, for
operating expenses, for pursuing regulatory approval and for developing required
production, sales and marketing capabilities. With the exception of the
Company's agreements with US Surgical and certain research grants, the Company
does not have any commitments or arrangements to obtain any such funds and there
can be no assurance that funds for these purposes, whether through additional
sales of securities or collaborative or other arrangements with corporate
partners or from other sources, will be available to the Company when needed or
on terms favorable to the Company. The unavailability of additional financing
could require the Company to delay, scale back or eliminate certain of its
research and product development programs or to license third parties to
commercialize products or technologies that the Company would otherwise
undertake itself, any of which would have a material adverse effect on the
Company. The Company believes that its existing available resources, together
with anticipated future funding from US Surgical and certain other research
grants, and interest income should be sufficient to fund its operating expenses
and capital requirements as currently planned for at least 18 months through
April 2000. However, the Company's cash requirements may vary materially from
those now planned because of results of research and development, results of
product testing, relationships with strategic partners, changes in the focus and
direction of the Company's research and development programs, competitive and
technological factors, developments in the regulatory process and other factors,
none of which can be predicted.
To the extent Alexion is the recipient of awards from government
agencies to fund research and development, the actual timing and receipt of
funding with respect to those awards may be dependent on periodically approved
government budgets and appropriations, all of which is outside the control of
the Company. Any change in governmental needs and priorities or any delay in
legislative or other governmental action with respect to budgets and
appropriations could have a material adverse effect on the Company.
Year 2000 ("Y2K") Compliance. The "Year 2000" (or "Y2K") issue affects
computer and information technology ("IT") systems, as well as non-IT systems
which include embedded technology such as micro-processors and micro-controllers
(or micro-chips) that have date sensitive programs that may not properly
recognize the year 2000. Systems that do not properly
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<PAGE>
recognize such information could generate inaccurate data or cause a system to
fail, resulting in business interruption. The Company is currently developing a
plan and taking steps to provide measured assurances that its computer and
IT-systems, non-IT systems including embedded systems such as HVAC systems and
other analytical instruments and equipment, and the Company's third parties
which have a material relationship with the Company are or will be Y2K
compliant. Although the Company has taken steps to address the Y2K problem,
there can be no assurance that the failure of the Company and/or its material
third parties to timely attain Y2K compliance or that the failures and/or the
impacts of broader compliance failures by telephone, mail, data transfer or
other utility or general service providers or government or private entities
will not have a material adverse effect on the Company.
Rapid Technological Change. The Company is engaged in pharmaceutical
fields characterized by extensive research efforts, rapidly evolving technology
and intense competition from numerous organizations, including pharmaceutical
companies, biotechnology firms, academic institutions and others. New
developments are expected to continue at a rapid pace in both industry and
academia. There can be no assurance that research and discoveries by others will
not render any of the Company's programs or potential products obsolete or
uneconomical. In order to compete successfully, the Company will need to
complete development of and obtain regulatory approval of products that keep
pace with technological developments on a timely basis. Any failure by the
Company to anticipate or respond adequately to technological developments will
have a material adverse effect on the Company's business, financial condition
and results of operations.
Patent, License and Proprietary Rights Uncertainties. The Company's
success will depend in part on its ability to obtain United States and foreign
patent protection for its products, preserve its trade secrets and proprietary
rights, and operate without infringing on the proprietary rights of third
parties or having third parties circumvent the Company's rights. Because of the
length of time and expense associated with bringing new products through
development and regulatory approval to the marketplace, the health care industry
has traditionally placed considerable importance on obtaining patent and trade
secret protection for significant new technologies, products and processes.
There can be no assurance that any patents will issue from any of the patent
applications owned by or licensed to the Company. Further, even if patents were
to issue, there can be no assurance that they will provide the Company with
significant protection against competitive products or otherwise be commercially
valuable. In addition, patent law relating to certain of the Company's fields of
interest, particularly as to the scope of claims in issued patents, is still
developing and it is unclear how this uncertainty will affect the Company's
patent rights. Litigation, which could be costly and time consuming, may be
necessary to enforce patents issued to the Company and/or to determine the scope
and validity of others' proprietary rights, in either case in judicial or
administrative proceedings. The Company's competitive position is also dependent
upon unpatented trade secrets which generally are difficult to protect. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets, that the Company's trade secrets will not be
disclosed or that the Company can effectively protect its rights to unpatented
trade secrets. As the biotechnology industry expands and more patents are
issued, the risk increases that the Company's potential products may give rise
to claims that they infringe the patents of others. Any such infringement
litigation would be costly and time consuming to the Company.
The Company is aware of broad patents owned by third parties relating
to the manufacture, use, and sale of recombinant humanized antibodies,
recombinant humanized single chain antibodies and genetically engineered
animals. The Company has received notice from certain of these parties regarding
the existence of certain of these patents which the owners claim may be relevant
to the development and commercialization of certain of the Company's proposed
products.
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<PAGE>
With respect to certain of these patents which it believes are relevant for the
expeditious development and commercialization of certain of its products as
currently contemplated, the Company has acquired licenses. With regard to
certain other patents, the Company has either determined in its judgement that
its products do not infringe the patents or has identified and is testing
various approaches which it believes should not infringe the patents and which
should permit commercialization of its products. There can be no assurance that
the owner of these patents will not seek to enforce the patent against the
Company's so-modified commercial products or against the development activities
related to the non-modified products. To the extent it becomes necessary, there
can be no assurance that the Company will be able to obtain a license on
commercially reasonable terms. If the Company does not obtain necessary
licenses, it could encounter delays in product market introductions while it
attempts to design around such patent, or could find that the development,
manufacture or sale of products requiring such a license could be foreclosed.
Further, there can be no assurance that owners of patents that the Company does
not believe are relevant to the Company's product development and
commercialization will not seek to enforce their patents against the Company.
Such action could result in litigation which would be costly and time consuming.
There can be no assurance that the Company would be successful in such
litigations. The Company is currently unaware of any such threatened action.
Certain of the licenses by which the Company obtained its rights in and
to certain technologies require the Company to diligently commercialize or
attempt to commercialize such technologies. There can be no assurance that the
Company will meet such requirements, and failure to do so for a particular
technology could result in the Company losing its rights to that technology.
Currently, the Company has not sought to register its potential
trademarks and there can be no assurance that the Company will be able to obtain
registration for such trademarks.
No Assurance of FDA Approval; Government Regulation. The preclinical
and clinical testing, manufacturing, and marketing of the Company's products are
subject to extensive regulation by numerous government authorities in the United
States and other countries, including, but not limited to, the FDA. Among other
requirements, FDA approval of the Company's products, including a review of the
manufacturing processes and facilities used to produce such products, will be
required before such products may be marketed in the United States. Similarly,
marketing approval by a foreign governmental authority is typically required
before such products may be marketed in a particular foreign country. In order
to obtain FDA approval of a product, the Company must, among other things,
demonstrate to the satisfaction of the FDA that the product is safe and
effective for its intended uses and that the Company is capable of manufacturing
the product with procedures that conform to the FDA's then current good
manufacturing practice ("cGMP") regulations, which must be followed at all
times. The process of seeking FDA approvals can be costly, time consuming, and
subject to unanticipated and significant delays. There can be no assurance that
such approvals will be granted to the Company on a timely basis, or at all. Any
delay in obtaining or any failure to obtain such approvals would adversely
affect the Company's ability to introduce and market products and to generate
product revenue.
The Company's research and development processes involve the controlled
use of hazardous materials. The Company is subject to federal, state and local
laws and regulations governing the use, manufacture, storage, handling and
disposing of such materials and certain waste products. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company. There can be no
assurance that the Company will not be required to incur significant costs to
comply with the environmental laws and regulations in the future, or that the
business, financial condition and
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results of operations of the Company will not be materially adversely affected
by current or future environmental laws or regulations.
No Currently Approved Xenotransplantation-Based Products. As an
outgrowth of its core technologies, the Company is developing non-human organ
and cell products designed for transplantation into humans. The Company's
approach involves xenotransplantation -- the transplantation or use of live
organs, tissue, and cells from one species into another. Xenotransplantation
technology is an emerging technology with, as yet, limited clinical
applications. There can be no assurance that the Company's organ, tissue, and
cell transplantation technology will result in the development of any
therapeutic products, if at all. Although several companies are focusing on
xenotransplantation-based products, this area represents a novel therapeutic
approach that has not yet been subject to extensive clinical testing.
Xenotransplantation also poses a risk that viruses or other animal
pathogens may be unintentionally transmitted not only to a human patient
recipient, but there is also a possibility that such viruses or other animal
pathogens could be transmitted to all human beings. The Company is aware of
recent scientific publications by others which demonstrate, under laboratory
conditions, that porcine endogenous retroviruses ("PERV") have the potential to
infect human cells. While PERV has not been shown to cause any disease in pigs
or humans, it is not known what effect, if any, PERV may have on humans. The
Company's porcine organ, tissue, and cell product development programs would be
negatively impacted by the detection of infectious PERV in porcine cells in the
Company's preclinical or clinical development program or at other companies
focusing in this area.
No xenotransplantation-based therapeutic product has been approved for
sale by the FDA. The FDA has not yet established definitive regulatory
guidelines for xenotransplantation, but has proposed interim guidelines in an
attempt to reduce the risk of contamination of transplanted organ and cellular
products with infectious agents. There can be no assurance that definitive
guidelines will be issued, if at all, or that the Company will be able to comply
with final definitive guidelines that may be issued. Furthermore, there can be
no assurance that any products developed by the Company will be approved by the
FDA or regulatory authorities in other countries in a timely manner, if at all,
or that xenotransplantation-based products, including products developed by the
Company, will be accepted by the medical community or third-party payers or that
the degree of acceptance will not limit the size of the market for such
products.
Substantial Competition. The pharmaceutical and biotechnology
industries are characterized by intense competition. Many companies, including
major pharmaceutical and chemical companies, as well as specialized
biotechnology companies, are engaged in activities similar to those of the
Company. Certain of these companies have substantially greater financial and
other resources, larger research and development staffs, and more extensive
marketing and manufacturing organizations than the Company. Many of these
companies have significant experience in preclinical testing, human clinical
trials, product manufacturing, marketing and distribution and other regulatory
approval procedures. In addition, colleges, universities, governmental agencies
and other public and private research organizations conduct research and may
market commercial products on their own or through joint ventures. These
institutions are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technology that they have
developed. These institutions also compete with the Company in recruiting and
retaining highly qualified scientific personnel.
In particular, T-Cell Sciences, Inc. ("T-Cell Sciences"), Chiron
Corporation, Abbott Laboratories, Gliatech, and Biocryst Pharmaceuticals have
each publicly announced intentions to develop complement inhibitors to treat
diseases related to trauma, inflammation, or
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neurodegenerative indications and the Company is aware that SmithKline Beecham
PLC, Merck & Co., Inc. and CytoMed Inc. are attempting to develop similar
therapies. In addition, each of Bayer A.G. ("Bayer"), Immunex Corporation,
Pharmacia & Upjohn and Rhone-Poulenc Rorer, Inc. sells a product which is used
to reduce surgical bleeding during CPB. The Company is also aware of announced
and ongoing clinical trials of certain companies, including Autoimmune, Inc.,
Immune Response Corporation, Neurocrine Biosciences, Inc., and Anergen, Inc.
employing T-cell specific tolerance technologies and addressing patients with
multiple sclerosis or diabetes mellitus. Baxter Healthcare Corporation and
Novartis, Inc., in collaboration with Biotransplant Inc., have publicly
announced intentions to commercially develop xenograft organs and the Company is
aware that Diacrin Inc. and Genzyme Tissue Repair, Inc. are also working in this
field. These companies may succeed in developing products that are more
effective or less costly than any that may be developed by Alexion and may also
prove to be more successful than Alexion in production and marketing.
Competition may increase further as a result of potential advances in the
commercial applicability of biotechnology and greater availability of capital
for investment in these fields.
Dependence on Qualified Personnel. The Company is highly dependent upon
the efforts of its senior management and scientific personnel including its
consultants, generally, and Dr. Leonard Bell, its President and Chief Executive
Officer, in particular. The loss of the services of one or more of these
individuals could have a material adverse effect on the Company's ability to
achieve its development objectives on a timely basis or at all. The Company and
Dr. Bell are parties to an employment agreement which expires on April 1, 2000.
The Company has a $2,000,000 key man life insurance policy on the life of Dr.
Bell of which the Company is the beneficiary. Because of the specialized
scientific nature of its business, Alexion is also highly dependent upon its
ability to continue to attract and retain qualified scientific and technical
personnel. There is intense competition for qualified personnel in the areas of
the Company's activities, and there can be no assurance that Alexion will be
able to continue to attract and retain the qualified personnel necessary for the
development of its business. Loss of the services of, or failure to recruit, key
scientific and technical personnel would be significantly detrimental to the
Company's product development programs.
All of the Company's scientific consultants are employed on a full-time
basis by academic or research institutions or may have their own professional
practices or firms on a full-time basis. Accordingly, such advisors and
consultants will be able to devote only a small portion of their time to the
Company. In addition, in certain circumstances, inventions or processes
discovered by them may not become the property of the Company but may be the
property of their full-time employers or of other companies and institutions for
which they now consult. There can be no assurance that the interests and
motivations of the Company's collaborators are or will remain consistent with
those of the Company. Furthermore, there can be no assurance that the Company
will be able to successfully negotiate license rights to the results of
collaborations or that such licenses will be on commercially reasonable terms.
Dependence on Outside Parties and Collaborators. The Company's strategy
for the research, development, manufacture and commercialization of certain of
its products contemplates that it will enter into various arrangements with
corporate partners, licensors, licensees, outside researchers, consultants and
others and, therefore, the success of the Company is, and will be, dependent in
part upon the efforts of outside parties. There can be no assurance that the
Company will be able to negotiate acceptable collaborative arrangements to
develop or commercialize its products, that arrangements or other collaborations
entered into, if any, will be successful, or that current or potential
collaborators will not pursue treatments for other diseases or seek alternative
means of developing treatments for the diseases targeted by programs with the
Company.
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The Company has entered into research and development agreements with
US Surgical to commercialize potential products to be developed in the UniGraft
program. The amount and timing of resources which US Surgical or any other
potential parties to collaboration arrangements devote to these activities may
not be within the control of the Company. There can be no assurance that outside
parties and collaborators will perform their obligations as expected or that any
revenue will be derived from outside arrangements. The Joint Development
Agreement with US Surgical may be terminated by US Surgical for any or no
reason, effective January 1, 1998, if notice is given by US Surgical at least
six months prior thereto. US Surgical completed a merger with a subsidiary of
Tyco International Ltd. on October 1, 1998. The Company believes that the
completed merger will not have a material adverse effect on its currently
anticipated plans for development of the Company's Unigraft technologies,
although no assurances can be given.
If any of the Company's collaborators breaches or terminates its
agreement with the Company or otherwise fails to conduct its collaborative
activities in a timely manner, the development or commercialization of the
product candidate or the research program which is the subject of the agreement
may be delayed and the Company may be required to undertake unforeseen
additional responsibilities or to devote additional resources to development or
commercialization or terminate the development or commercialization. This could
have a material adverse effect on the Company's prospects, financial condition,
intellectual property position and results of operations.
Limited Manufacturing, Marketing, Sales, Clinical Testing and
Regulatory Compliance Capability. The Company has not invested in the
development of commercial manufacturing, marketing, distribution or sales
capabilities. Moreover, the Company has insufficient capacity to manufacture
more than one product candidate at a time or to manufacture its product
candidates for later stage clinical development or commercialization. If the
Company is unable to develop or contract for additional manufacturing
capabilities on acceptable terms, the Company's ability to conduct human
clinical testing will be materially adversely affected, resulting in delays in
the submission of products for regulatory approval and in the initiation of new
development programs, which could have a material adverse effect on the
Company's competitive position and the Company's prospects for achieving
profitability. In addition, as the Company's product development efforts
progress, the Company will need to hire additional personnel skilled in clinical
testing, regulatory compliance, and, if the Company develops products with
commercial potential, marketing and sales. There can be no assurance that the
Company will be able to acquire, or establish third-party relationships to
provide, any or all of these resources or be able to obtain required personnel
and resources to manufacture, or perform testing or engage in marketing,
distribution and sales on its own in a timely manner, or at all.
Uncertainty of Availability of Health Care Reimbursement. The Company's
ability to commercialize its products successfully may depend in part on the
extent to which reimbursement for the cost of such products and related
treatments will be available from government health administration authorities,
private health insurers and other organizations. Third-party payors are
attempting to control costs by limiting coverage of products and treatments and
the level of reimbursement for medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and if the Company succeeds in bringing one or more products to
market, there can be no assurance that these products will be considered
cost-effective, that reimbursement will be available, or, if available, that the
payor's reimbursement policies will not materially adversely affect the
Company's ability to sell its products on a profitable basis.
Product Liability; Potential Liability for Human Clinical Trials. The
Company's business exposes it to potential product liability risks which are
inherent in the testing, manufacturing,
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marketing and sale of human therapeutic products and there can be no assurance
that the Company will be able to avoid significant product liability exposure.
With respect to the Company's UniGraft program, little is known about the
potential long-term health risks of transplanting non-human tissue into humans.
In addition to product liability risks associated with sales of products, the
Company may be liable to the claims of individuals who participate in human
clinical trials of its products. While the Company has obtained, and will seek,
waivers of liability from all persons who participated or may in the future
participate in human clinical trials conducted by or on behalf of the Company,
there can be no assurance that waivers will be effective to protect the Company
from liability or the costs of product liability litigation. The Company
currently has product liability insurance to cover certain liabilities relating
to the conduct of human clinical trials. However, there can be no assurance that
it will be able to maintain such insurance on acceptable terms or that the
insurance will provide adequate protection against potential liabilities. An
inability to maintain sufficient insurance coverage at an acceptable cost or
otherwise to protect against potential product liability claims could prevent or
limit the commercialization of products developed by the Company. Furthermore, a
product liability related claim or recall could have a material adverse effect
on the business, financial condition and results of operations of the Company.
Volatility of Share Price. The market prices for securities of
biopharmaceutical companies have been volatile. Factors such as announcements of
technological innovations or new commercial products by the Company or its
competitors, government regulation, patent or proprietary rights developments,
public concern as to the safety or other implications of biopharmaceutical
products, results of preclinical or clinical trials, positive or negative
developments related to the Company's collaborators and market conditions in
general may have a significant impact on the market price of the Company's
Common Stock.
Dilutive Effect of Stock Issuances, Grants, Options and Warrants. As of
July 31, 1998, Alexion has granted options to purchase an aggregate of
approximately 1,728,000 shares of the Company's Common Stock under certain stock
option plans. Warrants to purchase an aggregate of 220,000 shares of the
Company's Common Stock, are also outstanding under previous financing
arrangements and other transactions. Many of these options have exercise prices
below the current market price of the Company's Common Stock. In addition, the
Company may issue additional stock, warrants and/or options to raise capital in
the future. The Company regularly examines opportunities to expand its
technology base through means such as licenses, joint ventures and acquisition
of assets or ongoing businesses and may issue securities in connection with such
transactions. The Company may also issue additional securities in connection
with its stock option plans. During the terms of such options and warrants, the
holders thereof are given the opportunity to profit from a rise in the market
price of the Company's Common Stock. The exercise of such options and warrants
may have an adverse effect on the market value of the Company's Common Stock.
The existence of such options and warrants may adversely affect the terms on
which the Company can obtain additional equity financing. To the extent the
exercise prices of such options and warrants are less than the net tangible book
value of the Company's Common Stock at the time such options and warrants are
exercised, the Company's stockholders will experience an immediate dilution in
the net tangible book value of their investment.
Possible Adverse Impact on Holders of Common Stock; Anti-takeover
Provisions; Rights Plan. The Board of Directors may issue one or more series of
Preferred Stock, without any action on the part of the stockholders of the
Company, the terms of which may adversely affect the rights of holders of Common
Stock. Issuance of Preferred Stock, which may be accomplished through a public
offering or a private placement, may dilute the voting power of holders of
Common Stock (such as by issuing Preferred Stock with super voting rights) and
may render more difficult the removal of current management, even if such
removal may be in the stockholders' best interests. Further, the issuance of
Preferred Stock may be used as an "anti-takeover" device without further
8 of 9
<PAGE>
action on the part of the stockholders. On February 14, 1997, the Board of
Directors of Alexion declared a dividend distribution of one preferred stock
purchase right (a "Right") for each outstanding share of Common Stock of the
Company. The Rights are not exercisable until the date of the earlier to occur
of (i) ten business days following the time of a public announcement or notice
to the Company that a person or group of affiliated or associated persons has
acquired beneficial ownership of 20% or more of the outstanding shares of Common
Stock of the Company (such 20% beneficial owner, an "Acquiring Person"), or (ii)
ten business days, or such later date as may be determined by the Board of
Directors of the Company, after the date of the commencement or announcement by
a person of an intention to make a tender offer or exchange offer for an amount
of Common Stock which, together with the shares of such stock already owned by
such person, constitutes 20% or more of the outstanding shares of such Common
Stock. The Rights and the Rights Agreement, as well as certain provisions of
Delaware law are designed to prevent any unsolicited acquisitions of the
Company's Common Stock. These provisions and any issuance of Preferred Stock
could prevent the holders of Common Stock from realizing a premium on their
shares.
Ownership by Management and Principal Stockholders. On October 1, 1998,
directors and officers of the Company and certain principal stockholders and
their affiliates beneficially owned (as defined by the Securities and Exchange
Commission (the "SEC")) in the aggregate approximately 1,985,800 shares of
Common Stock, representing 16.8% of the outstanding shares of Common Stock.
Accordingly, they have the ability to influence significantly the affairs of the
Company and matters requiring a stockholder vote, including the election of the
Company's directors, the amendment of the Company's charter documents, the
merger or dissolution of the Company and the sale of all or substantially all of
the Company's assets. The voting power of these holders may also discourage or
prevent any proposed takeover of the Company pursuant to a tender offer.
9 of 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, THE STATEMENT OF OPERATIONS AND STATEMENT OF CASHFLOWS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 31509
<SECURITIES> 5985
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37840
<PP&E> 5357
<DEPRECIATION> (3000)
<TOTAL-ASSETS> 42085
<CURRENT-LIABILITIES> 2063
<BONDS> 1
0
0
<COMMON> 1
<OTHER-SE> 39189
<TOTAL-LIABILITY-AND-EQUITY> 42085
<SALES> 0
<TOTAL-REVENUES> 5037
<CGS> 0
<TOTAL-COSTS> 14989
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2087)
<INCOME-PRETAX> (7865)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7865)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7865)
<EPS-PRIMARY> (0.87)<F1>
<EPS-DILUTED> (0.87)
<FN>
<F1> JULY-31-1998 NET EARNINGS (LOSS) PER COMMON SHARE ARE STATED IN ACCORDANCE
WITH SFAS NO. 128 AND SAB NO. 98.
</FN>
</TABLE>
