<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
-
Exchange Act of 1934:
For the quarterly period ended October 31, 2000
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
---
Exchange Act of 1934:
For the transition period from to
----------- --------
Commission file number: 0-27756
ALEXION PHARMACEUTICALS, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3648318
-------- ----------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
352 KNOTTER DRIVE, CHESHIRE, CONNECTICUT 06410
----------------------------------------------
(Address of principal executive offices) (Zip Code)
203-272-2596
------------
(Registrant's telephone number, including area code)
25 SCIENCE PARK, SUITE 360, NEW HAVEN, CONNECTICUT 06511
--------------------------------------------------------
(Former address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- ----------
COMMON STOCK, $0.0001 PAR VALUE 18,016,311 SHARES
------------------------------- -------------------------------
CLASS OUTSTANDING AT DECEMBER 1, 2000
<PAGE>
ALEXION PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION 3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3
Consolidated Balance Sheets as of July 31, 2000,
October 31, 2000 and October 31, 2000 Proforma 3
Consolidated Statements of Operations for the three months
ended October 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the three months
ended October 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES 18
</TABLE>
Page 2 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
July 31, 2000 October 31,2000 October 31, 2000
-------------- --------------- ----------------
ASSETS (UNAUDITED) Proforma (Note 3)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 91,858 $ 47,693 $ 256,272
Marketable securities 82,671 118,906 118,906
Reimbursable contract costs: billed 3,660 1,840 1,840
unbilled 1,435 2,062 2,062
Prepaid expenses 456 849 849
--------- --------- ---------
Total current assets 180,080 171,350 379,929
Property, plant, and equipment, net 8,213 10,407 10,407
Purchased intangible assets, net 22,015 22,015
Deferred financing costs, net 3,752 3,700 3,700
Other assets 657 535 535
--------- --------- ---------
TOTAL ASSETS $ 192,702 $ 208,007 $ 416,586
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of notes payable $ 369 $ 277 $ 277
Accounts payable 2,100 2,572 2,572
Accrued expenses 1,229 1,774 1,774
Accrued interest 2,730 863 863
Deferred revenue 750 788 788
--------- --------- ---------
Total current liabilities 7,178 6,274 6,274
--------- --------- ---------
Notes payable, less current portion included above 3,920 3,920 3,920
--------- --------- ---------
Convertible subordinated notes 120,000 120,000 120,000
--------- --------- ---------
Stockholders' Equity:
Common stock $.0001 par value; 25,000 shares
authorized; 15,146, 15,718 and 18,018
shares issued at July 31, 2000, October
31, 2000, and October 31, 2000 proforma,
respectively 2 2 2
Additional paid-in capital 128,836 174,700 383,200
Accumulated deficit (67,214) (96,802) (96,802)
Deferred offering costs -- (79) --
Other comprehensive loss (20) (8) (8)
Treasury stock, at cost; 12 shares -- -- --
--------- --------- ---------
Total stockholders' equity 61,604 77,813 286,392
--------- --------- ---------
TOTAL LIABILITIES AND NET STOCKHOLDERS' EQUITY $ 192,702 $ 208,007 $ 416,586
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended October 31,
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
CONTRACT RESEARCH REVENUES $ 3,252 $ 6,288
-------- --------
OPERATING EXPENSES:
Research and development 10,923 11,140
General and administrative 1,378 615
In-process research and development 21,000 --
Amortization of purchased intangible assets 349 --
-------- --------
Total operating expenses 33,650 11,755
-------- --------
OPERATING LOSS (30,398) (5,467)
-------- --------
OTHER INCOME AND EXPENSE:
Interest income 2,808 408
Interest expense (1,998) (118)
-------- --------
Total other income, net 810 290
-------- --------
NET LOSS ($29,588) ($ 5,177)
======== ========
BASIC AND DILUTED NET LOSS PER COMMON
SHARE (Note 5) ($ 1.93) ($ 0.46)
======== ========
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER COMMON SHARE 15,323 11,319
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
( amounts in thousands )
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31
-----------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($29,588) ($ 5,177)
Adjustments to reconcile net loss to net cash
used in operating activities:
In-process research and development 21,000 --
Depreciation and amortization 562 361
Amortization of purchased intangible assets 349 --
Compensation expense related to grant of stock options 457 49
Change in assets and liabilities:
Reimbursable contract costs 1,236 (1,716)
Prepaid expenses 168 71
Accounts payable 61 860
Accrued expenses (84) (1,482)
Accrued interest (1,867) --
Deferred revenue 38 150
-------- --------
Net cash used in operating activities (7,668) (6,884)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, net (36,223) (3,986)
Purchases of property, plant and equipment (2,075) (347)
Cash received in acquisition of Prolifaron 771 --
-------- --------
Net cash used in investment activities (37,527) (4,333)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,462 265
Deferred financing and offering costs (175) (32)
Repayments of notes payable (92) (93)
Security deposits and other assets (165) 105
-------- --------
Net cash provided by financing activities 1,030 245
-------- --------
NET DECREASE IN CASH (44,165) (10,972)
CASH AND CASH EQUIVALENTS, beginning of period 91,858 24,238
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 47,693 $ 13,266
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense $ 3,735 $ 72
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Acquisition of Prolifaron through the issuance of
common stock and stock options $ 43,945 --
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS AND BASIS OF PRESENTATION -
Alexion Pharmaceuticals, Inc. ("Alexion" or the "Company") was organized in 1992
and is engaged in the development of proprietary products for the treatment of
heart disease, diseases of the immune system, inflammation and cancer. The
Company currently has an extensive clinical development program in progress. For
one of its lead antibody candidates, 5G1.1-SC, enrollment has been completed in
a large Phase II clinical study in cardiopulmonary bypass patients and two
additional large Phase II studies in myocardial infarction (heart attack)
patients are in progress. For the Company's other lead antibody product
candidate, 5G1.1, enrollment in a large Phase II clinical study in rheumatoid
arthritis patients has been completed and clinical trials are ongoing in four
additional diseases.
In September 2000, the Company acquired Prolifaron, Inc. ("Prolifaron"), a
privately held biopharmaceutical company that possesses extensive combinatorial
human antibody library technologies and expertise (the Prolifaron Acquisition)
(See Note 2). With the merger of Prolifaron into Alexion's subsidiary to form
Alexion Antibody Technologies, the Company has developed important additional
capabilities to discover and develop additional antibody product candidates for
the treatment of autoimmune diseases and cancer.
The Company is also developing Apogen immunotherapeutic products to target
T-cell related disorders and is developing therapies employing the
transplantation of cells from other species into humans known as
xenotransplantation.
In October 2000, the Company filed a shelf registration statement to offer up to
$300 million of equity securities. In November 2000, the Company sold 2.3
million shares of common stock to U.S. Bancorp Piper Jaffray, Inc. resulting in
proceeds of approximately $208.5 million, net of fees and other expenses of
approximately $225,000 related to the transaction (See Notes 3 and 10).
In October 2000, the Company agreed to contribute certain technology to a newly
formed company, Arradial, Inc. ("Arradial"), in exchange for a 15% equity
interest in Arradial and a $200,000 license fee (See Note 6). The cost of the
contributed technology had been previously expensed by the Company as research
and development expenditures; and, therefore, there is no value assigned to the
investment in Alexion's consolidated financial statements. Arradial is an
informatics and instrumentation company that applies diverse proprietary
technologies to provide to drug discovery scientists high throughput bench top
tools that accelerate the discovery and validation of therapeutic compounds. The
Company will account for its investment in Arradial under the cost method of
accounting.
The accompanying consolidated financial statements include Alexion
Pharmaceuticals, Inc. and its wholly-owned subsidiaries, Columbus Farming
Corporation ("Columbus") and Alexion Antibody Technologies ("AAT"). Columbus was
formed on February 9, 1999 to acquire certain manufacturing assets from United
States Surgical Corporation ("US Surgical") (See Note 9). AAT was formed for the
purpose of merging Prolifaron into a newly created, wholly owned subsidiary of
Alexion. Results of operations of AAT are included in the Company's consolidated
statements of operations since September 23, 2000, the effective date of the
Prolifaron Acquisition (See Note 2). All significant inter-company balances and
transactions have been eliminated in consolidation.
The Company has incurred consolidated losses since inception and has made no
product sales to date. The Company may need additional financing to obtain
regulatory approvals for its product candidates, fund operating losses, and if
deemed appropriate, establish manufacturing, sales, marketing and distribution
capabilities.
The Company expects to incur substantial expenditures in the foreseeable future
for the research and development and commercialization of its products. The
Company will seek to raise necessary funds through public or private equity or
debt financings, bank loans, collaborative or other arrangements with corporate
sources, or through other sources of financing.
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC") and include, in the opinion of management, all
adjustments, consisting of normal, recurring adjustments, necessary for a fair
presentation of interim period results. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The results for the interim periods
presented are not necessarily indicative of results to be expected for any
future period. These consolidated condensed financial statements should be read
in conjunction
Page 6 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
with the audited financial statements and notes thereto included in the
Company's Form 10-K Annual Report for the fiscal year ended July 31, 2000.
2. PROLIFARON ACQUISITION -
On September 23, 2000, the Company acquired Prolifaron, Inc. ("Prolifaron"), a
privately-held biopharmaceutical company possessing extensive combinatorial
human antibody library technologies and expertise. The acquisition was
accomplished when Prolifaron was merged with a wholly owned subsidary of Alexion
and renamed Alexion Antibody Technologies, Inc. In consideration thereof, the
Company issued 355,594 shares of the Company's common stock and fully vested
options to purchase 44,364 shares of the Company's common stock at a weighted
average exercise price of $44.35 per share, in exchange for all of the
outstanding equity of Prolifaron including fully vested options under their
stock option plan. The fair value of the Company's common stock and stock
options issued at the date of the acquisition was approximately $43.9 million.
The Prolifaron Acquisition has been accounted for as a purchase and,
accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of the
acquisition. The Company allocated $21.0 million of the purchase price to
in-process research and development projects. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to the incomplete
research and development projects. At the date of the acquisition, development
of these projects had not yet reached technological feasibility and the research
and development in progress had no alternative future uses. Accordingly, these
costs were expensed as of the acquisition date. The excess cost over the fair
value of the net assets acquired, which amounted to approximately $22.4 million,
is reflected as purchased intangible assets and is being amortized over
approximately 7 years. The following table summarizes the allocation of the
purchase price to the net assets acquired (dollars in thousands):
Cash and cash equivalents acquired $771
Reimbursable contract costs 43
Prepaid expenses and other current assets 307
Property, plant and equipment 493
Other 7
Purchased intangible assets 22,364
In-process research & development 21,000
Accounts payable and accrued expenses (540)
Accrued transaction costs (500)
-------
Total fair value of equities issued $43,945
=======
The following unaudited pro forma condensed consolidated information has been
prepared to give effect to the acquisition as if such transaction had occurred
at the beginning of the periods presented. The historical results have been
adjusted to reflect: i) elimination of the one-time charge to operations for the
purchase of acquired in-process research and development, ii) amortization of
purchased intangible assets arising from the transaction, and iii) elimination
of income tax benefits or expenses that would not have been realized on a
combined basis (dollars in thousands, except per share data).
THREE MONTHS ENDED OCTOBER 31,
------------------------------
2000 1999
---- -----
Contract research revenues $ 4,373 $ 6,861
Net loss $ (9,387) $ (5,858)
Basic and diluted net loss per common share $ (0.60) $ (0.50)
Shares used in computing basic and
diluted net loss per common share 15,528 11,675
The unaudited pro forma condensed consolidated financial information is not
necessarily indicative of what actual results would have been had the
transaction occurred on the dates indicated and do not purport to indicate the
results of future operations.
Page 7 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. UNAUDITED PRO FORMA PRESENTATION -
The unaudited proforma balance sheet as of October 31, 2000 reflects the sale of
2.3 million shares of common stock for net proceeds of approximately $208.5
million, which occurred on November 1, 2000 (See Note 1).
4. CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES -
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.
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 other
comprehensive loss as a component of stockholders' equity.
5. NET LOSS PER SHARE -
The Company computes and presents net loss per common share in accordance with
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share".
Basic net loss per common share is based on the weighted average shares of
common stock outstanding during the period. Diluted net loss per common share
assumes in addition to the above, a dilutive effect of common share equivalents
during the period. Common share equivalents represent dilutive stock options,
warrants, and convertible subordinated debt. There is no difference in basic and
diluted net loss per common share for the three months ended October 31, 2000
and 1999 as the effect of common share equivalents is anti-dilutive.
6. REVENUES -
Contract research revenues recorded by the Company consist of research and
development support payments, license fees, and milestone payments under
collaboration with third parties and amounts received from various government
grants.
Research and development support revenues are recognized as the related work and
expenses are incurred under the terms of the contracts for development
activities. Revenues derived from the achievement of milestones are recognized
when the milestone is achieved. Non-refundable license fees received in exchange
for specific rights to the Company's technologies, research, potential products
and markets are recognized as revenues as earned in accordance with the terms of
the contracts (See Note 7).
Unbilled reimbursable contract costs as shown on the accompanying consolidated
balance sheets represent reimbursable costs incurred in connection with research
contracts which have not yet been billed. The Company bills these costs and
recognizes the costs and related revenues in accordance with the terms of the
contracts.
Deferred revenue results from cash received in advance of revenue recognition
under research and development contracts.
Revenues recorded during the three months ended October 31, 2000 and 1999
consist of license fees, research and development support, reimbursement of
costs related to clinical development and manufacturing of clinical supplies
under the collaboration agreement with Procter & Gamble Pharmaceuticals Inc.
("P&G"). Revenues also include funding from the Commerce Department's National
Institute of Standards and Technology ("NIST") through grants from the Advanced
Technology Program, and the National Institutes of Health/Small Business
Innovation Research ("NIH-SBIR") program.
In November 1997, the Company and US Surgical had been awarded a three-year, $2
million cooperative agreement from NIST to fund a joint xenotransplantation
project, it was modified in February 1999 as a single entity (Alexion only). In
October 1998, the Company was awarded another three-year $2 million agreement
from NIST to fund a xenotransplantation project. In November 1999, the Company
was awarded a three-year $2 million agreement from NIST to fund another
xenotransplantation project.
Page 8 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 1999, the Company entered into an exclusive collaboration with P&G to
develop and commercialize 5G1.1-SC. Under this collaboration, the Company will
initially pursue the development of 5G1.1-SC for the treatment of inflammation
caused by cardiopulmonary bypass surgery, myocardial infarction (heart attack)
and angioplasty. The Company has granted P&G an exclusive license to the
Company's intellectual property related to 5G1.1-SC, with the right to
sublicense. P&G has agreed to fund all clinical development and manufacturing
costs relating to 5G1.1-SC for these indications. In addition, under this
agreement, P&G has agreed to pay the Company up to $95 million in payments,
which include a non-refundable up-front license fee (See Note 7), as well as
milestone and non-clinical research and development support payments. In
addition, the Company will receive royalties on worldwide sales of 5G1.1-SC for
all indications. The Company has a preferred position relative to third-party
manufacturers to manufacture 5G1.1-SC worldwide. The Company shares co-promotion
rights with P&G to sell, market and distribute 5G1.1-SC in the United States,
and has granted P&G the exclusive rights to sell, market and distribute 5G1.1-SC
outside of the United States.
In September 2000, the Company was awarded a two year grant of $250,000 from the
Small Business Innovative Research/Center for Disease Control to fund a research
project for humanization of anti-viral antibodies. In addition, in July 2000,
the Company was awarded a one year grant of $100,000 from the NIH-SBIR to fund a
research project for Type I diabetes.
In October 2000, the Company entered into a license agreement with Arradial (See
Note 1), in exchange for a 15% equity interest in Arradial, $200,000 of license
payments and future royalty payments based upon product sales utilizing the
licensed technologies. The license payments which will be recognized as license
revenue over the estimated life of the agreement. No revenues have been
recognized under this agreement as of October 31, 2000.
A summary of revenues generated from contract research collaboration and grant
awards is as follows for the three months ended October 31, (dollars in
thousands):
COLLABORATION/GRANT AWARDS 2000 1999
-------------------------- ---- ----
P&G ........................ $2,802 $6,038
NIST and NIH ............... 418 250
Other ...................... 32 --
------ ------
$3,252 $6,288
===== =====
7. RECENTLY ISSUED ACCOUNTING STANDARDS -
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, was issued in
December 1999. SAB 101 requires companies to recognize certain up-front
non-refundable fees over the life of the related collaboration agreement when
such fees are received in conjunction with collaboration agreements which have
multiple elements. The Company is required to adopt this new accounting
principle through a cumulative charge to retained earnings through the statement
of operations, in accordance with the provisions of APB Opinion No. 20, in
fiscal 2001. The Company believes that the adoption of SAB 101 will have a
material impact on its future operating results as it applies to the $10.0
million up-front non-refundable payment received by it in connection with its
collaboration with Procter & Gamble. The Company's historical financial
statements reflect this payment as revenue in the year ended July 31, 1999.
Based on guidance currently available, the Company will be required to record
the $10.0 million fee as revenue over the future life, as defined, of the
collaboration agreement. As of October 31, 2000, the Company had not yet adopted
this new accounting principle.
8. CONVERTIBLE SUBORDINATED NOTES -
In March 2000, the Company completed a $120 million private placement of 5.75%
Convertible Subordinated Notes due March 15, 2007. The notes bear interest
payable semi-annually on September 15 and March 15 of each year, beginning
September 15, 2000. The holders may convert all or a portion of the notes into
common stock at any time on or before March 15, 2007 at a conversion price of
$106.425 per common share. The Company incurred interest expense of
approximately $1.8 million for the three months ended October 31, 2000 related
to these notes.
Page 9 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company incurred deferred financing costs related to this offering of
approximately $4.0 million which are recorded in the consolidated balance sheet
and are being amortized as a component of interest expense over the seven-year
term of the notes. Amortization expense associated with the financing costs was
$148,000 for the three months ended October 31, 2000.
9. NOTES PAYABLE -
In November 1997, a term loan was 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. The balance on the
note was $277,000 at October 31, 2000. The term loan agreement requires the
Company to maintain a restricted cash balance equal to the outstanding loan
balance divided by 85% plus accrued interest in an interest bearing account as
collateral for the note. This restricted cash balance is included in other
assets in the accompanying consolidated balance sheets.
In February 1999, the Company acquired manufacturing assets for the
xenotransplantation program developed by US Surgical, a subsidiary of Tyco
International Ltd., and financed the purchase with a note payable bearing
interest at 6% per annum, in the amount of approximately $3.9 million due in May
2005. The note is secured by certain manufacturing assets of Columbus. Interest
on the note is payable quarterly.
10. EQUITY -
In November 2000, the Company sold 2.3 million shares of common stock at a
price of $90.75 per share to U.S. Bancorp Piper Jaffray Inc. resulting in net
proceeds of approximately $208.5 million to the Company.
In September 2000, in connection with the Prolifaron Acquisition, the Company
issued 355,594 shares of common stock and fully vested options to purchase
44,364 shares of the Company's common stock at a weighted average exercise price
of $44.35 (See Note 2).
In November 1999, the Company sold 3.415 million shares of common stock at a
price of $14.00 per share in a follow-on public offering resulting in net
proceeds of approximately $44.4 million to the Company.
11. COMPREHENSIVE INCOME (LOSS) -
SFAS No. 130 "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income (loss) and its components in a
full set of general purpose financial statements. Comprehensive loss is
comprised of net loss, unrealized gains and losses on marketable securities and
cumulative translation adjustments. The Company's other comprehensive loss
arises from net unrealized gains (losses) on marketable securities. The
Company's total comprehensive loss was approximately $29.6 million and $5.2
million for the three month periods ended October 31, 2000 and 1999,
respectively.
12. RIGHTS TO PURCHASE PREFERRED STOCK -
On September 18, 2000, the Board of Directors of the Company amended the
purchase price under Alexion's Shareholder Rights Plan ("Rights Plan"). Such
purchase price, for each one one-hundredth of a share of Junior Participating
Cumulative Preferred Stock of the Company to be issued upon the exercise of each
preferred stock purchase right under that certain Rights Agreement, dated as of
February 14, 1997, was increased from $75.00 to $725.00. Except for the increase
in the purchase price, the terms and conditions of the Rights Plan remain
unchanged from the description contained in the Form 8-A filed on February 21,
1997.
Page 10 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
ITEM 2. 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
OUR PLANS AND RESULTS TO DIFFER SIGNIFICANTLY FROM PLANS AND RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO THOSE DISCUSSED IN EXHIBIT 99.1
TO OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JULY 31, 2000.
OVERVIEW
We are engaged in the development of biopharmaceutical products for the
treatment of patients with cardiovascular and autoimmune disorders, inflammation
and cancer. Since our inception in January 1992, we have devoted substantially
all of our resources to drug discovery, research, product and clinical
development. Since mid-1996, we have focused our resources increasingly to
clinical manufacturing and clinical development. We are currently examining our
two lead genetically altered or "humanized" antibody product candidates in eight
different clinical development programs.
One of our lead antibody product candidates, 5G1.1-SC, which is in development
in collaboration with Procter & Gamble, has completed its enrollment in a Phase
IIb study for the treatment of inflammation caused by cardiopulmonary bypass
surgery. Two additional Phase II studies are on-going in myocardial infarction
patients; the one study in patients receiving thrombolytic therapy, and the
other in patients receiving angioplasty. In September 2000, the Food and Drug
Administration or FDA granted Fast Track status for the development of 5G1.1-SC
in cardiopulmonary bypass surgery. Our other lead antibody product candidate,
5G1.1, is in clinical development for the treatment of a variety of chronic
autoimmune diseases. Enrollment has also been completed in a Phase II clinical
study in rheumatoid arthritis patients and a Phase II study in membranous
nephritis patients, a kidney disease, is on-going. In both of these indications,
enrollment has commenced in an additional 12 month open-label extension study to
test long-term safety. In addition, we have three separate Phase Ib pilot
on-going trials to study 5G1.1 in patients with psoriasis, dermatomyositis, a
muscle disorder, and bullous pemphigoid, a severe inflammatory skin disorder. In
October 2000, the FDA granted us orphan drug status for the development of 5G1.1
for the treatment of dermatomyositis.
To date, we have not received any revenues from the sale of products. We have
incurred operating losses since our inception. As of October 31, 2000, we had
an accumulated deficit of $96.8 million. We expect to incur substantial and
increasing operating losses for the next several years due to expenses
associated with product research and development, pre-clinical studies and
clinical testing, regulatory activities, manufacturing development, scale-up and
manufacturing and developing a sales and marketing force.
In September 2000, we acquired Prolifaron, Inc., a privately held
biopharmaceutical company located in San Diego, California, through the issuance
of common stock and fully vested options having an aggregate fair value of
approximately $43.4 million. Prolifaron was developing therapeutic antibodies
addressing multiple diseases, including cancer. The acquisition was in the form
of a merger with our wholly owned subsidiary and Prolifaron. With the merger of
Prolifaron with Alexion's subsidiary to form Alexion Antibody Technologies,
Inc., we have developed the important additional capabilities to discover and
develop additional antibody product candidates for the treatment of autoimmune
diseases and cancer. We accounted for the acquisition of Prolifaron using the
purchase method of accounting.
In October 2000, the Company contributed technology to form a new company,
Arradial, Inc., which is aimed at commercializing the Company's novel, desktop
silicon-based microarray assay technology. The technology is expected to have
applications in genomics and drug discovery. The Company is a minority
shareholder of the new company.
We plan to develop and commercialize on our own those product candidates for
which the clinical trials and marketing requirements can be funded by our own
resources. For those products for which greater resources will be required, our
strategy is to form corporate partnerships with major pharmaceutical companies
for product development and commercialization.
Page 11 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2000
COMPARED WITH THREE MONTHS ENDED OCTOBER 31, 1999
We earned contract research revenues of $3.3 million for the three months ended
October 31, 2000 and $6.3 million for the same period ended October 31, 1999.
The lower contract revenues were due primarily to lower clinical manufacturing
related expense reimbursements from our collaborative agreement with P&G as the
manufacturing of the clinical supplies for the Phase IIb studies utilizing
5G1.1-SC were completed.
We incurred research and development expenses of $10.9 million for the three
months ended October 31, 2000 and $11.1 million for the three months ended
October 31, 1999. The decrease resulted primarily from lower clinical
manufacturing and clinical trial costs associated with one of our lead C5
inhibitor, 5G1.1-SC, due to enrollment completion in the cardiopulmonary bypass
Phase IIb trial. These lower costs were offset by increased clinical trial costs
associated with our other lead C5 inhibitor, 5G1.1, which is in clinical studies
in rheumatoid arthritis, membranous nephritis, psoriasis, dermatomyositis, and
pemphgoid patients. In addition, we incurred higher costs in the three months
ended October 31, 2000 due to non-cash stock-based compensation expenses and the
consolidated ongoing research costs of Alexion Antibody Technologies that were
included for the first time as a result of our acquisition of Prolifaron in
September 2000.
Our general and administrative expenses were $1.4 million for the three months
ended October 31, 2000 and $615,000 for the three months ended October 31, 1999.
This increase resulted principally from additional legal fees related to
intellectual property and patents and other professional fees as well as
increased rents and higher payroll costs. Higher rents resulted from our lease
for our new headquarters and research and development facility in Cheshire,
Connecticut.
During the three months ended October 31, 2000, we recognized a $21.0 million
in-process research and development charge resulting from the September 2000
Prolifaron Acquistion. This allocation represented the estimated fair value
based on risk-adjusted cash flows related to the incomplete research and
development projects. At the date of the acquisition, development of these
projects had not yet reached technological feasibility and the research and
development in progress had no alternative future uses. Accordingly, these costs
were expensed as of the acquisition date. The excess cost over the fair value of
the net assets acquired, which amounted to approximately $22.4 million, is
reflected as purchased intangible assets and is being amortized over
approximately 7 years. Accordingly, the purchased intangible assets resulted in
$349,000 of amortization expense during the three months ended October 31, 2000.
Other income, net, was $810,000 for the three months ended October 31, 2000 and
$290,000 for the three months ended October 31, 1999. The increase in interest
income of $2.4 million resulted from higher cash balances resulting from the net
proceeds from the sale of the $120 million of 5.75% Subordinated Convertible
Notes in March 2000 and the follow-on public offering in November 1999. This
increase in interest income was offset by the increase in interest expense of
$1.9 million resulting from the Convertible Notes.
As a result of the above factors, we incurred a net loss of $29.6 million or
$1.93 basic and diluted net loss per common share for the three months ended
October 31, 2000 and a net loss of $5.2 million or $0.46 basic and diluted net
loss per common share for the three months ended October 31, 1999. Net loss,
excluding the one-time non-cash in-process research and development charge of
$21 million and the amortization expense of $349,000 for purchased intangibles
related to the Prolifaron Acquisition, was $8.2 million or $0.54 basic and
diluted proforma net loss per common share for the three months ended October
31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2000, we had working capital of $165.1 million, including
$166.6 million of cash, cash equivalents and marketable securities. This
compares with working capital at October 31, 1999 of $24.1 million, including
$21.3 million of cash, cash equivalents and marketable securities. This increase
in working capital was primarily due to the increase in available cash from our
sale of 5.75% Convertible Subordinated Notes in March 2000 and the follow-on
public offering of shares of the Company's common stock in November 1999.
Page 12 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
Cash used in operations for the three months ended October 31, 2000 was $7.7
million compared with $6.9 for the same period in 1999. A net loss of $29.6
million for the fiscal quarter ended October 31, 2000 was principally offset by
non-cash charges of $21.0 million for in-process research and development and
the $349,000 amortization of purchased intangible assets related to the our
acquisition of Prolifaron. During the three months ended October 31, 2000, we
had invested $36.2 million in marketable securities and $2.1 million in
property, plant and equipment additions, principally leasehold improvements
related to the our new facility in Cheshire discussed below. We also received
net proceeds of $1.5 million from the issuance of common stock related to stock
option and warrant exercises during the fiscal quarter ended October 31, 2000.
In October 2000, we filed a shelf registration statement to offer up to $300
million of equity securities. On November 1, 2000, we sold 2.3 million shares of
common stock to US Bancorp Piper Jaffray, Inc. resulting in net proceeds of
approximately $208.5 million, net of estimated fees and other expenses of
approximately $225,000 related to the transaction.
In March 2000, we completed a $120 million private placement of 5.75%
Convertible Subordinated Notes due March 15, 2007. The notes bear interest
semi-annually on September 15 and March 15 of each year, beginning September 15,
2000. The holders may convert all or a portion of the notes into common stock at
any time on or before March 15, 2007 at a conversion price of $106.425 per
share. We incurred issuance costs related to this offering of approximately $4.0
million which are being amortized into interest expense over the seven-year term
of the notes. We incurred interest expense of approximately $1.8 million for the
three months ended October 31, 2000 related to these notes.
In November 1999, we sold 3.415 million shares of common stock at a price of
$14.00 per share in a follow-on public offering, resulting in net proceeds of
approximately $44.4 million to the Company.
We anticipate that our existing available capital resources from the proceeds of
our sale of $208.5 million of common stock in November 2000 and the proceeds
from $120 million of 5.75% Convertible Subordinated Notes, together with the
anticipated funding from the collaboration agreement with Procter and Gamble, as
well as the addition of our interest earned on available cash and marketable
securities will provide us adequate funding for the clinical testing of our C5
inhibitor products and support our broad research and development of antibody
candidates. Our lead C5 inhibitor products and their respective indications are:
5G1.1-SC in cardiopulmonary bypass and acute coronary syndromes, and 5G1.1 for
the treatment of chronic immune diseases, rheumatoid arthritis, membranous
nephritis, dermatomyositis, and pemphigoid.
With our cash, cash equivalents, and marketable securities totaling $375 million
on November 1, 2000 (including the recent sale of 2.3 million shares of common
stock) and our anticipated funding from our Procter & Gamble collaboration along
with our anticipated interest income, we should have sufficient resources to
fund our operating expenses and capital requirements as currently planned for at
least the next thirty-six months. While we currently have no material
commitments for capital expenditures, other than the leasehold improvements at
the Cheshire facility discussed below, our future capital requirements will
depend on many factors, including the progress of our research and development
programs, progress and results of clinical trials, the time and costs involved
in obtaining regulatory approvals, the costs involved in obtaining and enforcing
patents and any necessary licenses, our ability to establish development and
commercialization relationships, and the costs of manufacturing scale-up.
We expect to incur substantial additional costs for research, pre-clinical and
clinical testing, manufacturing process development, additional capital
expenditures related to personnel and facilities expansion, clinical and
commercial manufacturing requirements, and marketing and sales in order to
commercialize our products currently under development. In addition to funds we
may receive from our collaboration with Procter & Gamble, we may need to raise
or generate substantial additional funding in order to complete the development
and commercialization of our product candidates. Our additional financing may
include public or private debt or equity offerings, equity line facilities, bank
loans and/or collaborative research and development arrangements with corporate
partners. There can be no assurance that funds will be available on terms
acceptable to us, if at all, or that discussions with potential strategic or
collaborative partners will result in any agreements on a timely basis, if at
all. The unavailability of additional financing could require us to delay, scale
back or eliminate certain research and product development programs or to
license third parties to commercialize products or technologies that we would
otherwise undertake itself, any of which could have a material adverse effect.
In August 2000, we commenced a lease for our new headquarters and research and
development facility in Cheshire, Connecticut. The lease has a term of ten years
and six months. At this site we lease and occupy a total of
Page 13 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
82,000 square feet of space, which includes approximately 64,000 square feet of
research laboratories. We expect to incur initial leasehold improvements and
relocation costs aggregating approximately $4.5 million. In addition, we will be
required to pay a pro rata percentage of real estate taxes and operating
expenses. Our pilot manufacturing plant, which is used for producing compounds
for some of our current clinical trials, will remain in New Haven, Connecticut
encompassing approximately 24,000 square feet of labs and offices at 25 Science
Park. We are currently negotiating a longer-term arrangement of our facilities
in New Haven. We believe the new space and our pilot manufacturing facility will
be adequate for our current activities. Alexion Antibody Technologies, Inc.
leases approximately 5,800 square feet of labs and office space.
Page 14 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.
The Company accounts for its marketable securities in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). All of the cash equivalents and
marketable securities are treated as available-for-sale under SFAS 115.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Due in part to these
factors, the Company's future investment income may fall short of expectations
due to changes in interest rates or the Company may suffer losses in principal
if forced to sell securities which have seen a decline in market value due to
changes in interest rates. The Company's marketable securities are held for
purposes other than trading and we believe that we currently have no material
adverse market risk exposure. The marketable securities as of October 31, 2000,
had maturities of less than two years. The weighted-average interest rate on
marketable securities at October 31, 2000 was approximately 6.5%. The fair value
of marketable securities held at October 31, 2000 was $118.9 million.
Page 15 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
PART II. OTHER INFORMATION
<TABLE>
Item 6. Exhibits and Reports
<S> <C>
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of September 22, 2000, between
the Registrant, Prolifaron, certain shareholders of
Prolifaron and PI Acquisition Company, Inc. *(1)
2.2 Amendment No.1 to the Agreement and Plan of Merger, dated as of
September 22, 2000, between the Registrant, Prolifaron,
certain shareholders of Prolifaron and PI Acquisition
Company, Inc. *(1)
4.1 Amendment No.1 to Rights Agreement, dated as of September 18, 2000,
between the Registrant and Continental Stock Transfer and
Trust Company. *(1)
10.1 Employment Agreement between the Registrant and Katherine Bowdish,
dated September 21, 2000. *(1)
10.2 Purchase Agreement, dated October 26, 2000, among Alexion
Pharmaceuticals, Inc. and U.S. Bancorp Piper Jaffray Inc. *(2)
27 Financial Data Schedule
</TABLE>
--------------------------
* Previously filed.
(1) Incorporated by reference to the Company's current report
on Form 8-K, dated October 3, 2000.
(2) Incorporated by reference to the Company's current report
on Form 8-K, dated October 27, 2000.
(b) Form 8-K
Report on Form 8-K/A, filed November 20, 2000, amending the
Form 8-K filed on October 3, 2000 relating to the Company's acquisition of
Prolifaron, Inc. and to provide the required pro forma financial information
relating to the business combination.
Report on Form 8-K, filed October 27, 2000, relating to an
agreement to sell 2,300,000 shares of the Company's Common Stock to U.S.
Bancorp Piper Jaffray Inc. from the Company's shelf registration statement
(Registration No. 333-47594), filed October 6, 2000.
Report on Form 8-K, filed October 3, 2000, relating to the
announcement that the Company had entered into an agreement to acquire
Prolifaron, Inc. The Company also announced that on September 18, 2000,
the Board of Directors of the Company had amended the purchase price
under the Company's Shareholder Rights Plan.
Report on Form 8-K, filed September 25, 2000, relating to the
announcement of the promotion of Stephen P. Squinto, Ph.D., to Executive Vice
President and Head of Research, Dr. Christopher Mojcik, M.D., Ph.D., to Vice
President, Clinical Development, and Scott A. Rollins, Ph.D., to Vice
President, Drug Development and Project Management, and the appointment of
Samuel S. Chu, Ph.D. as Vice President, Manufacuring and Process Sciences.
In addition, the Company also announced that Louis A. Matis, M.D., had
resigned from the Company to pursue other interests, but he had joined the
Company's Scientific Advisory Board.
Page 16 of 17
<PAGE>
ALEXION PHARMACEUTICALS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALEXION PHARMACEUTICALS, INC.
Date: December 13, 2000 By: /s/ Leonard Bell, M.D.
-------------------------------
Leonard Bell, M.D.
President and Chief Executive
Officer, Secretary and Treasurer
(principal executive officer)
Date: December 13, 2000 By: /s/ David W. Keiser
-------------------------------------
David W. Keiser
Executive Vice President and Chief
Operating Officer (principal
financial officer)
Date: December 13, 2000 By: /s/ Barry P. Luke
-------------------------------
Barry P. Luke
Vice President of Finance and
Administration
(principal accounting officer)
Page 17 of 17
