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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-23247
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FOCAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3142791
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4 MAGUIRE ROAD, LEXINGTON, MA 02173
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (781) 280-7800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Preferred Share Purchase Rights
(Title of class)
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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 disclosures 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. Yes /X/
The aggregate value of voting stock held by non-affiliates of the Registrant
was approximately $72,784,000 as of December 31, 1997, based upon the average of
the high and low prices of the Registrant's Common Stock reported for such date
on the Nasdaq National Market. Shares of Common Stock held by each executive
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of December 31, 1997, the
Registrant had outstanding 12,868,570 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by
reference to the Proxy Statement for the Registrant's 1998 annual meeting of
stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K. Certain information is incorporated into Parts II and IV of
this report by reference to the Registrant's annual report to stockholders for
the year ended December 31, 1997.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Focal, Inc. ("Focal" or the "Company") develops, manufactures and
commercializes synthetic, absorbable, liquid surgical sealants based on the
Company's proprietary polymer technology. The Company's family of FOCALSEAL
surgical sealant products is currently being developed for use inside the body
with or without sutures and staples to seal leaks resulting from lung, neuro,
cardiovascular and gastrointestinal surgery. FOCALSEAL-L, the Company's first
surgical sealant product, will initially be used to seal air leaks following
lung surgery. The Company has entered into an exclusive marketing and
distribution agreement for its surgical sealant products outside North America
with Ethicon, Inc., a division of Johnson & Johnson ("Ethicon"), a worldwide
leader in surgical wound closure products. The Company has received CE mark
approval for FOCALSEAL-L and has initiated commercial launch of FOCALSEAL-L for
lung surgery indications in Europe through Ethicon.
There are more than 4 million open and minimally invasive lung, neuro,
cardiovascular and gastrointestinal surgical procedures performed annually
worldwide in which air or fluid leaks may arise in an unpredictable and
unexpected manner, and in which the Company's products, if approved, may be
effective in reducing post-surgical leaks. In many of these surgical procedures,
as well as in cardiovascular surgeries, air and fluid leaks can occur
unpredictably and it can be difficult at the conclusion of surgery for the
surgeon to determine whether a particular surgical site will leak. Accordingly,
the Company believes that its FOCALSEAL surgical sealants may be used
prophylactically in many of these procedures. The Company has conducted clinical
trials of FOCALSEAL-L for lung surgery and intends to develop products and
conduct clinical trials for neuro, cardiovascular and gastrointestinal surgery
indications. Patients with persistent air or fluid leaks may require prolonged
hospitalization, have more complications and higher levels of post-operative
pain, and a higher risk of mortality. Sutures and staples, the principal
products comprising the over $2.0 billion worldwide wound closure market, do not
have inherent sealing capabilities, and therefore cannot consistently eliminate
air and fluid leakage at the wound site. Focal's liquid surgical sealants adhere
rapidly to underlying tissue, expand and contract with tissue, withstand air and
fluid pressure, and are designed to provide an effective seal to reduce the
incidence of air and fluid leaks following surgery. FOCALSEAL surgical sealants,
which are biocompatible, remain intact through the critical wound healing period
and are then absorbed and eliminated by the body. The Company believes the use
of its FOCALSEAL liquid surgical sealants could potentially shorten patient
recovery times and hospital stays and reduce post-surgical complications.
Focal is currently developing two principal surgical sealant formulations,
FOCALSEAL-L and FOCALSEAL-S, for a broad range of applications inside the body.
The Company has completed a 60-patient, multicenter, randomized, controlled
clinical trial in Europe involving use of FOCALSEAL-L in sealing air leaks
following lung surgery. In the trial, following surgery with standard sutures
and staples and prior to randomization, it was determined that 79% of all
patients had intraoperative air leaks. FOCALSEAL-L was shown to be 100%
effective in sealing intraoperative air leaks in the 30 patients who were
randomized into the treated group. In the other patients, who were randomized
into the untreated (control) group and received sutures and staples alone, only
27% were free of intraoperative air leaks. In September 1997, the Company
initiated a pivotal, 180-patient, multicenter clinical trial in the United
States under a conditional investigational device exemption ("IDE") to evaluate
FOCALSEAL-L in sealing intraoperative and postoperative air leaks following lung
surgery. The Company expects to submit a Premarket Approval ("PMA") application
to the FDA for lung surgery indications by the end of 1998.
FOCALSEAL-S, the Company's second surgical sealant formulation, is absorbed
by the body more quickly than FOCALSEAL-L and is designed for applications in
which shorter sealing duration is desired. FOCALSEAL-S will initially be used to
seal fluid leaks following neurosurgery. The Company expects to commence a
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clinical trial in Europe for this indication in mid-1998. The Company believes,
based upon preclinical evaluation of its polymers, that its FOCALSEAL-L and
FOCALSEAL-S formulations, which are designed to have absorption times that
parallel long-term and short-term synthetic, absorbable polymer sutures,
respectively, will also be widely applicable to cardiovascular surgery,
gastrointestinal surgery and other surgical applications.
Focal is also developing other applications for the liquid formulations of
its polymer technology, including local drug delivery systems and tissue
coatings. In local drug delivery applications, the Company believes that its
polymers can deliver high concentrations of drugs at local disease sites,
thereby potentially enhancing efficacy and reducing toxicity associated with
systemic delivery of drugs. In addition, the Company is developing tissue
coatings to prevent the formation of post-surgical adhesions, excessive scar
tissue which attaches to surrounding tissue and can cause serious complications,
particularly in abdominal and gynecological surgeries. The Company intends to
enter into other collaborations with pharmaceutical companies for additional
drug delivery and tissue coating indications.
Focal's family of surgical sealants and its other products under development
are based on the Company's proprietary synthetic, absorbable, liquid formulation
polymer technology. The Company's polymers are comprised of polyethylene glycol
("PEG"), other synthetic components and water. PEG and other synthetic
components comprise approximately 10-20% of the Company's liquid formulations
and are widely used in other medical products approved for use inside the body,
such as IV-administered pharmaceuticals, synthetic absorbable sutures, bone and
dental cements, pain medications and eye drops. Water comprises the other 80-90%
of Focal's formulations. The Company combines PEG and other synthetic compounds
in various proprietary polymer formulations in order to control characteristics
such as viscosity, setting time, strength, absorption, flexibility and
elasticity. This enables the Company to tailor formulations for particular
applications. A key distinguishing characteristic of the Company's polymer
formulations is that they are applied as liquids and then photopolymerized by
light into solid gels inside the body, a process known as photopolymerization.
The solid gel formed after the light has been applied, is highly flexible,
elastic and transparent and strongly adheres to moist or dry tissue.
The Company believes it has built a strong patent portfolio related to its
photopolymerizable polymer technology. The Company has received, licensed or
believes it has the option or right to license 21 issued United States patents
and 9 foreign patents corresponding to certain of the issued United States
patents, has 13 additional United States patent applications that have been
allowed and has 25 patent applications pending in the United States, as well as
foreign counterparts of certain of these applications.
The Company's objective is to become a leader in the market for surgical
sealants and in other markets where the Company's novel polymer technology could
address large unmet clinical needs. The Company intends to achieve its goals by
(i) commercializing FOCALSEAL surgical sealants to parallel the existing
products in the market for synthetic absorbable sutures; (ii) marketing its
FOCALSEAL surgical sealant products through Ethicon internationally and by
building a direct sales force in North America; (iii) leveraging its proprietary
polymer technology to develop new products; (iii) funding new research and
development initiatives through corporate collaborations; and (v) retaining
proprietary, and outsourcing non-proprietary, manufacturing processes.
Focal was incorporated in Delaware in June 1991. The Company's principal
executive offices are located at 4 Maguire Road, Lexington, Massachusetts 02173.
Its telephone number is (781) 280-7800.
This Report on Form 10-K contains certain forward looking statements
regarding future events with respect to the Company. Actual events and/or future
results of operations may differ materially as a result of the factors described
herein and in the documents incorporated herein by reference, including, in
particular, those factors described under "Business--Product and Product
Development Programs," "-- Strategic Alliances," "--Patents and Proprietary
Rights," "--Government Regulation," "--Sales and Marketing," "--Manufacturing,"
"--Competition and Technological Change," "--Third Party Reimbursement" and
"Factors Affecting Operating Results."
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SURGICAL SEALANT MARKET OPPORTUNITY
Effective closure of internal wounds following surgical procedures is
critical to the restoration of the function of injured and diseased tissue and
the ultimate success of the surgical procedure. Failure to effectively seal
surgical wounds can result in leakage of air in lung surgeries, cerebral spinal
fluid in neurosurgeries, blood in cardiovascular surgeries, and gastrointestinal
contents in gastrointestinal surgeries. Air and fluid leaks resulting from
surgical procedures can lead to significant post-surgical morbidity resulting in
prolonged hospitalization, higher levels of post-operative pain and
complications and a higher mortality rate.
The current annual worldwide market for wound closure products, consisting
primarily of surgical sutures and staples, is estimated at over $2 billion.
Sutures and staples facilitate healing by joining wound edges and allowing the
body to heal naturally. However, because sutures and staples do not have
inherent sealing capabilities, they cannot consistently eliminate air and fluid
leakage at the wound site. This is particularly the case when sutures and
staples are used to close tissues containing air or fluids under pressure, such
as the lobes of the lung, the dural membrane surrounding the brain and spinal
cord, blood vessels and the gastrointestinal tract. In addition, in minimally
invasive surgical procedures, where the physician must operate through small
access devices, it can be more difficult and time-consuming for the physician to
place sutures and staples as compared to open surgical procedures. The Company
believes that the use of surgical sealants with or without sutures and staples
in minimally invasive procedures could enhance the efficacy of these procedures
through more effective and rapid wound closure.
The limitations of sutures and staples in sealing certain air and fluid
leaks have led to the adaptation of other technologies for wound closure. These
alternatives include the use of liquid fibrin glues and nonliquid collagen patch
products. Fibrin glues, which were originally developed as hemostatic agents,
have limited efficacy in many surgical sealant applications because they do not
adhere strongly to, or move and expand with, underlying tissue, particularly
moist tissue. In spite of these limitations, annual international sales of
fibrin glue sealants are estimated at $250 million. Collagen patches have
similar limitations, in that they are not highly adherent, strong or elastic. In
addition, both collagen patches and fibrin glues are absorbed by enzymatic
reaction. Enzymatic reaction can result in variable absorption time from patient
to patient, depending upon metabolic rates, and can potentially result in
absorption prior to healing of the surgical site. Collagen patches and fibrin
glues are derived from animal by-products, including bovine collagen and bovine
and/or human plasma. These derivatives have resulted in significant safety
concerns, and are reported to be one of the primary reasons fibrin glues have
not received FDA approval for United States commercial sales. Furthermore, the
wound closure industry has undergone a significant shift away from animal
derived materials to synthetic materials due to the more predictable absorption,
superior performance characteristics and safety of synthetic sutures. Currently,
the Company estimates that over 65% of suture material is synthetic, as compared
to only approximately 25% in 1975.
Due to the limitations of sutures and staples in achieving rapid, leakproof
wound closure and the inadequacy of animal by-product sourced glues and patches,
Focal believes that a significant market opportunity exists for its synthetic,
absorbable, liquid, surgical sealants.
FOCAL'S SYNTHETIC POLYMER TECHNOLOGY
Focal's family of surgical sealants and its other products under development
are based on the Company's proprietary synthetic, absorbable, liquid formulation
polymer technology. The Company's polymers are designed to incorporate several
beneficial characteristics, including adherence to tissue, strength, flexibility
and elasticity, consistent absorption, and safety and biocompatibility, which
are critical to their use as surgical sealants and in other clinical
applications.
The Company's proprietary polymer formulations are comprised of polyethylene
glycol ("PEG"), other synthetic components and water. PEG and other synthetic
components comprise approximately 10-20% of the Company's synthetic liquid
formulation polymers and are widely used in other medical
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products approved for use inside the body, such as intravenously-administered
pharmaceuticals, synthetic absorbable sutures, bone and dental cements, pain
medications and eye drops. Water comprises the other 80-90% of Focal's
formulations. The Company combines PEG and other synthetic components in various
proprietary polymer formulations in order to control characteristics such as
viscosity, setting time, strength, absorption, flexibility and elasticity. This
enables the Company to tailor polymers for particular applications. A key
distinguishing characteristic of the Company's polymer formulations is that they
are applied as liquids and are photopolymerized by light into solid gels inside
the body, a process known as photopolymerization. The solid gel formed after the
light has been applied is highly flexible, elastic and transparent and strongly
adheres to moist or dry tissue. The design and macromer composition of the
Company's polymers enable them to polymerize quickly without generating heat,
which is a significant clinical advantage over other IN VIVO polymerizable
materials.
The key technological hurdle which the Company overcame in the development
of its synthetic, liquid surgical sealants was the crucial need to adhere
strongly to moist tissue surfaces. The Company's sealants adhere to tissue as a
result of a proprietary two-step priming and sealing process. To use FOCALSEAL,
the physician first applies a liquid primer which penetrates the uneven surfaces
of spongy, porous tissue. Once the primer is brushed on, the sealant is applied
over the primer and both are exposed to a standard wavelength of visible light.
The primer and sealant contain a photoinitiator which enables them to polymerize
rapidly upon exposure to light, a process known as photopolymerization. The
viscosity and rapid photopolymerization characteristics of the Company's
surgical sealants enable the physician to apply the sealant where desired and
avoid significant run off of the material prior to polymerization. Surgeons can
perform the entire surgical sealant application process quickly and efficiently
after limited training.
The key properties of the Company's synthetic liquid polymers are:
- ADHERENCE TO TISSUE. The Company's FOCALSEAL surgical sealants adhere
strongly to both moist and dry tissue, a requirement for effective
sealants which, to the Company's knowledge, has not been adequately
demonstrated by alternative technologies in clinical applications. The
combination of a viscous liquid formulation polymer incorporating a
photoinitiator enables the Company's polymers to adhere to tissue when
applied as a liquid and to polymerize rapidly when exposed to light.
- STRENGTH, FLEXIBILITY AND ELASTICITY. The composition of the Company's
polymers provides a high degree of strength, flexibility and elasticity,
enabling them to stretch with the tissue to which they are applied. These
qualities are especially significant when the polymers are used in areas
where resistance to air and fluid pressure is critical, including the
lungs, the dural membrane surrounding the brain, the vascular system and
the gastrointestinal tract.
- CUSTOMIZABLE POLYMER CHARACTERISTICS. By modifying the chemical
composition of its polymers, the Company is able to control
characteristics such as viscosity, setting time, strength, absorption,
flexibility and elasticity. The customizable nature of the Company's
polymer technology enables Focal to design and develop products with
characteristics and properties that are tailored for specific clinical
indications.
- HYDROLYTIC ABSORPTION. The Company's synthetic polymers are designed to be
predictably broken down by water, a process known as hydrolysis, and are
absorbed by the body over a specified period of time depending upon their
chemical composition. As a result, the Company's polymers should have a
relatively consistent absorption profile from patient to patient. Collagen
patches and fibrin glues are absorbed by enzymatic reaction, which can
vary significantly from patient to patient depending upon an individual's
metabolism, and can potentially result in these products being absorbed
before the wound site is completely healed.
- SAFETY AND BIOCOMPATIBILITY. Focal's synthetic polymers are comprised of
materials which are commonly found in other medical products approved for
use in humans. The PEG backbone allows the resulting formulations to be
water-soluble and biocompatible, resulting in minimal reaction with
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the tissue to which the polymer is applied. In addition, the absence of
animal or human derived by-products eliminates safety concerns related to
transmission of blood borne diseases such as HIV and hepatitis.
Preclinical toxicology testing of FOCALSEAL-L and FOCALSEAL-S, and initial
clinical trials of FOCALSEAL-L in Europe, indicate that these biomaterial
formulations are nontoxic.
- TRANSPARENCY. The Company's polymers are transparent, enabling the
physician to observe the underlying tissue to which the polymers have
adhered to confirm sufficient coverage of the wound site. Other products
used as surgical sealants, including fibrin glues and collagen patches,
are not transparent.
The Company has also developed proprietary systems to deliver its surgical
sealants and other products to the wound site. Easy to use brush applicators
have been designed by the Company to apply its FOCALSEAL surgical sealants and
primer over tissue surfaces. The Company also employs a light source and light
wand to generate and deliver consistent amounts of light necessary for
photopolymerization of its surgical sealants.
The Company believes it has built a strong patent portfolio related to its
photopolymerizable polymer technology. The Company has received, licensed or
believes it has the option or right to license 21 issued United States patents
and 9 foreign patents corresponding to certain of the issued United States
patents, has 13 additional United States patent applications that have been
allowed and has 25 patent applications pending in the United States, as well as
foreign counterparts of certain of these applications. These patents and patent
applications cover certain aspects of the Company's photopolymerizable polymer
formulations, surgical sealant compositions and methods, and designs for
delivery devices.
FOCAL BUSINESS STRATEGY
The Company's objective is to become a leader in the market for surgical
sealants and in other markets where the Company's novel polymer technology could
address large unmet clinical needs. The following are key elements of the
Company's strategy
- COMMERCIALIZE FOCALSEAL SURGICAL SEALANTS TO PARALLEL THE EXISTING MARKET
FOR SYNTHETIC ABSORBABLE SUTURES. The Company intends to develop
formulations for FOCALSEAL-L surgical sealants to parallel the absorption
times of long- and short-term synthetic absorbable polymer sutures. The
Company is developing FOCALSEAL-L, a long-term absorbable sealant
initially for use in lung surgery indications, where long-term absorbable
sutures are typically used, and FOCALSEAL-S, a short-term absorbable
sealant initially for use in neurosurgery indications, where short-term
absorbable sutures are typically used. The Company believes this strategy
may result in accelerated adoption of the Company's sealant products by
practitioners.
- MARKET FOCALSEAL SURGICAL SEALANT PRODUCTS THROUGH ETHICON INTERNATIONALLY
AND ESTABLISH ITS OWN DIRECT SALES FORCE IN NORTH AMERICA. The Company
will market and sell its surgical sealant products internationally through
Ethicon and intends to develop its own direct sales force for North
America concurrent with receipt of appropriate marketing approvals. The
Company's agreement with Ethicon will enable the Company to introduce its
surgical sealant products internationally through Ethicon's extensive
sales, marketing and distribution infrastructure. The Company believes
that international commercialization of its surgical sealants may
contribute to more rapid adoption in the United States following receipt
of FDA approvals.
- DEVELOP NEW PRODUCTS BY LEVERAGING ITS PROPRIETARY POLYMER
TECHNOLOGY. Focal's versatile polymers provide a broad technology platform
for the development of new products. The Company's novel synthetic polymer
technology allows for the modification of formulations yielding properties
well-suited to a variety of indications, including surgical sealants,
post-surgical adhesion prevention and local drug delivery.
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- FUND NEW RESEARCH AND DEVELOPMENT INITIATIVES THROUGH CORPORATE
COLLABORATIONS. The Company intends to obtain funding for major research
and development initiatives through strategic relationships with corporate
partners. Through December 31, 1997, the Company's strategic relationships
have provided the Company with over $21.5 million of research and
development funding. The Company may, however, commence future research
and development initiatives on its own and may seek strategic partner
funding for such initiatives as programs develop or if a strategic
relationship can provide significant advantages for product development,
clinical or regulatory support or marketing and distribution.
- RETAIN PROPRIETARY, AND OUTSOURCE NON-PROPRIETARY, MANUFACTURING
PROCESSES. The Company intends to manufacture its proprietary polymer
formulations in-house, and use third-party contract manufacturers for most
nonproprietary, high volume processes and the provision of system
components. The Company believes that this strategy will enable the
Company to protect its intellectual property, accelerate manufacturing
scale-up and reduce costs as production volume increases.
- EXPANSION OF OPERATIONS. The Company intends to expand its corporate
operations over the next several years to accommodate anticipated
commercialization of its FOCALSEAL surgical sealant products. The Company
intends to expand its manufacturing capacity, either at the Company's
current facility or at a new location and develop a direct sales force in
the United States. The Company anticipates capital expenditures of
approximately $2.5 million for expansion of surgical sealant manufacturing
capacity. The Company will also incur expenditures in connection with
development of a United States sales force. Expansion of manufacturing and
sales and marketing efforts will require the Company to recruit, hire and
train additional manufacturing, sales and marketing personnel.
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PRODUCTS AND PRODUCT DEVELOPMENT PROGRAMS
The following table summarizes the status of the Company's products and
research and product development programs:
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MARKETING RIGHTS
PRODUCT -----------------------------
DEVELOPMENT PROGRAM INDICATION STATUS NORTH AMERICA INTERNATIONAL
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Surgical Sealants
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FOCALSEAL-L Lung Surgery CE Mark approval received, Focal Ethicon
European commercial launch
under-way; Pivotal U.S.
clinical trial in progress
FOCALSEAL-S Neurosurgery Preclinical (1); European Focal Ethicon
clinical trial expected to be
initiated in mid-1998
FOCALSEAL-L or S Cardiovascular Preclinical(1) Focal Ethicon
surgery
FOCALSEAL-L or S Gastrointestinal Preclinical(1) Focal Ethicon
surgery
Tissue Coatings Post-surgical Preclinical(1) (2) (2)
- ------------------------------- adnesion
prevention
Local Drug Delivery Various Research(3)
- -------------------------------
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(1) "Preclinical" refers to formulation development and laboratory
experimentation in animal models, including animal efficacy, safety and
toxicology testing.
(2) The Company and Ethicon are negotiating a possible additional collaboration
for this field and there can be no assurance that the Company will
successfully enter into this collaboration.
(3) "Research" refers to basic or early stage research activities and initial
feasability studies with respect to a particular application.
FOCALSEAL SURGICAL SEALANT PRODUCTS.
Focal is developing its FOCALSEAL-L and FOCALSEAL-S liquid surgical sealants
for use inside the body with or without sutures and staples to seal leaks
resulting from lung, neuro, cardiovascular and gastrointestinal surgery.
FOCALSEAL is expected to be used as an adjunct to sutures and staples in most
indications; however, the Company believes there are numerous occasions where
FOCALSEAL can be used in lieu of sutures and staples. In lung surgery,
FOCALSEAL-L can be used to seal air leaks in areas of the lung where sutures and
staples are ineffective. In neurosurgery, FOCALSEAL-S can potentially reduce the
number of sutures needed to close the dura in cranial procedures and can replace
sutures in spinal surgery where their use can be ill-advised due to the
proximity of the spinal cord. The FOCALSEAL surgical sealant system consists of
a procedure kit containing primer and sealant solutions and disposable
applicators, a light source used for photopolymerization of the polymer, and a
reusable light wand. The Company's surgical sealant products will be marketed
outside North America by Ethicon, a world leader in surgical wound closure
products. The Company has retained North American marketing rights to all of its
FOCALSEAL surgical sealants.
FOCALSEAL-L FOR LUNG SURGERY. The Company is developing FOCALSEAL-L to seal
air leaks resulting from lung surgery. During lung surgery, air leaks can
develop in the lung tissue that has been traumatized during
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surgery and can unpredictably occur along staple and suture lines. Approximately
260,000 lung surgery procedures, primarily for the treatment of lung cancer, are
performed worldwide each year including 130,000 such procedures in the United
States. According to the Company's European clinical trial data, 79% of patients
undergoing lung surgery experience intraoperative air leaks that are not
resolved with sutures or staples. Approximately 15% of lung surgery patients
have air leaks that persist longer than seven days and approximately 5-10% of
patients have air leaks that are severe enough to warrant additional surgical
intervention.
As air leaks from the lung it accumulates in the thoracic cavity, making
breathing difficult as the lung cannot expand and contract normally. As a
result, patients require insertion of chest drainage tubes to vent accumulated
air. These chest tubes prolong pain and limit patient mobility. In addition to
undergoing prolonged hospitalization until the air leaks are resolved, patients
with persistent air leaks must receive more intense nursing observation and care
while in the hospital than patients who do not experience air leaks. This
additional hospitalization and more intensive care, as well as the additional
surgical procedures needed for patients whose air leaks are severely prolonged,
result in substantial additional health care costs. Because it is often not
possible to determine at the conclusion of surgery which air leaks are likely to
be prolonged or sustained, the Company believes that FOCALSEAL-L may be used
prophylactically in major lung surgery procedures.
The Company has completed a 60-patient, multicenter, controlled, randomized
clinical trial in Europe involving use of FOCALSEAL-L in sealing air leaks
following lung surgery. Of the 60 patients in the study, the initial four were
pilot patients and the remaining 56 were randomized into the treated or
nontreated group. In the study, prior to randomization, it was determined that
79% of the patients had air leaks following the use of standard sutures and
staples. FOCALSEAL-L as 100% effective in sealing intraoperative air leaks in
the 30 patients who were randomized into the treated group. By contrast, of the
patients in the untreated group who received sutures and staples alone, only 27%
were free of intraoperative air leaks.
The Company has received CE mark approval for European commercialization of
FOCALSEAL-L for lung surgery and has initiated commercial introduction of
FOCALSEAL-L for lung surgeries in Europe through its strategic marketing
alliance with Ethicon. See "--Strategic Alliances--Ethicon--a division of
Johnson & Johnson."
The protocol for the European clinical trial called for application of
FOCALSEAL-L to all lung tissues that could potentially leak postoperatively.
This included the end of the bronchial segment, known as the bronchial stump,
leading to the diseased lung lobe that was removed during surgery. In lung
surgeries, the bronchial stump is carefully closed with sutures or staples.
During the trial, a higher than anticipated incidence of insufficient wound
healing at the bronchial stump was observed in patients in the treated group.
The bronchial stump typically heals through tissue overgrowth from surrounding
areas. Based upon its review and analysis of the clinical data, the Company
believes that in those cases in which FOCALSEAL-L was applied directly to the
bronchial stump it may have acted as a barrier to such tissue overgrowth,
thereby slowing natural healing of the bronchial stump. As a result of this
observed clinical event, the protocol for the United States clinical trial of
FOCALSEAL-L prohibits its use on the bronchial stump. The clinical data from the
Company's European trial indicates that this limitation will not result in
reduced efficacy of the product. Intraoperative air leaks rarely occur at the
bronchial stump, and were not observed there during the study. These clinical
observations were provided to the European regulatory body as part of the CE
mark approval process and to the FDA as part of the IDE submission for the
Company's United States clinical trial.
In September 1997, pursuant to a conditionally approved IDE, the Company
initiated a 180-patient, pivotal, multicenter clinical trial in the United
States involving the use of FOCALSEAL-L in sealing intraoperative and
postoperative air leaks following lung surgery. The IDE allows for enrollment of
patients at up to seven sites and the Company is currently conducting the study
at four clinical sites, including Massachusetts General Hospital, University of
Pennsylvania Medical Center, The Johns Hopkins University Medical Center and
Strong Memorial Hospital. The Company believes that enrollment in this clinical
trial will be
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completed in the first half of 1998 and that it will submit a PMA to the FDA for
FOCALSEAL-L by the end of 1998. As a result of communications with the FDA, the
Company will pursue clinical trial endpoints that were not the subject of the
European clinical trial. Because the Company will be pursuing these new
endpoints, it may be more difficult for the Company to demonstrate the efficacy
of FOCALSEAL-L in the United States trial than in the European trial, which
could result in delays in or adversely affect the success of the clinical trial.
Approval of a PMA application for FOCALSEAL-L will be required prior to
commercial sales in the United States.
FOCALSEAL-S FOR NEUROSURGERY. The Company is developing FOCALSEAL-S to seal
the dura, a membrane that encapsulates the brain and spinal cord and contains
cerebral spinal fluid ("CSF") for cushioning and support. In cranial surgeries,
the neurosurgeon must open the cranium and penetrate the dura. Following
surgery, the neurosurgeon must meticulously suture the dura in an attempt to
achieve leakproof closure, a process that requires the use of up to hundreds of
small sutures. Approximately 185,000 cranial surgeries are performed annually in
the United States, and the Company estimates that 370,000 of such procedures are
performed annually worldwide. Leakage of CSF has been reported to occur in
approximately 15% of these procedures. CSF leakage can result in infections,
including meningitis, caused by the passage of infectious agents through the
dural leak, as well as debilitating headaches resulting from settling of the
brain onto the spinal cord due to the loss of CSF. The Company believes that,
because CSF leaks can occur unpredictably in cranial surgeries, FOCALSEAL-S may
be used prophylactically in cranial surgery procedures.
In 1996, neurosurgeons at two major universities demonstrated the safety and
efficacy of FOCALSEAL-S in sealing CSF leaks in cranial surgeries in a
randomized, controlled large animal study. This work was presented at the 1997
meetings of the American Association of Neurological Surgeons and the Southern
Neurological Society. In addition, the results of the study were published in
the February 1998 issue of the Journal of Neurosurgery. The Company expects to
initiate a human clinical trial of FOCALSEAL-S in cranial surgery applications
in Europe in mid-1998.
In spinal surgeries, the surgeon seeks to avoid penetration of the dura.
According to published literature, inadvertent penetration of the dura occurs in
up to approximately 13% of the approximately 800,000 spinal surgeries that are
performed annually worldwide. Penetration of the dura can result in leakage of
CSF with potential complications similar to those that can arise in cranial
surgeries. When inadvertent penetration of the dura occurs in spinal surgeries,
the surgeon generally does not elect to use sutures to close the dural leak due
to the risk of injuring the spinal cord with the suturing needle.
CARDIOVASCULAR SURGICAL SEALANT. Focal is evaluating use of its FOCALSEAL
surgical sealants for use in sealing anastomoses (the attachment of vessels in
surgical procedures) and arteriotomies (the surgical removal of a portion of an
artery for use in a bypass graft) in cardiovascular surgeries, of which
approximately 1.3 million are performed annually worldwide. These procedures
include both open and minimally invasive coronary artery bypass graft ("CABG")
surgeries and other vascular surgical procedures. In most cardiovascular
surgical procedures, vascular anastomoses are closed with sutures. These
anastomoses use both blood vessel grafts from the patient's own veins or
arteries, which occasionally leak, and synthetic grafts, which regularly leak.
In minimally invasive CABG surgeries, achievement of a leakproof vascular
anastomosis can be particularly difficult and time consuming because the small
access ports through which the surgeon must operate can make placement of
sutures difficult. Failure to achieve a leakproof vascular graft anastomosis can
result in sudden blood leaks that may potentially be life-threatening. These
complications can add significant costs to cardiovascular procedures by
increasing the level of care required and prolonging hospitalization. The
Company's sealants have been shown to be effective in sealing vascular leaks in
several preclinical large animal models. The Company and Ethicon are currently
preparing preclinical development plans for this indication.
GASTROINTESTINAL SURGICAL SEALANT. Focal is evaluating use of its FOCALSEAL
surgical sealants to prevent leakage of gastrointestinal contents following
gastrointestinal surgery. Leakage can occur as a result of incomplete
anastomosis of the portions of the digestive tract being operated upon and may
result in
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infections, delayed healing or fibrosis. Clinically significant gastrointestinal
tract leakage is most prevalent and unpredictable in esophageal and large bowel
surgeries. Approximately 1.5 million gastrointestinal surgeries are performed
annually worldwide, including approximately 400,000 esophageal and large bowel
surgeries. Postoperative leaks are reported to occur up to 5% of large bowel
surgeries and up to 25% of esophageal surgeries. The Company believes that, due
to the unpredictable nature of leaks in these procedures, FOCALSEAL surgical
sealant may be used prophylactically. The Company's sealants have been shown to
be effective in sealing gastrointestinal leaks in several preclinical large
animal models. The Company and Ethicon are currently preparing preclinical
development plans for this indication.
TISSUE COATINGS FOR POST-SURGICAL ADHESION PREVENTION
The Company is exploring the development of its synthetic, liquid
formulation polymers as coatings that could be applied to surgical sites with
the objective of preventing the growth of post-surgical adhesions. Post-surgical
adhesions develop as a result of wound healing and scar formation triggered by
surgical trauma to tissue. The growth of this scar tissue following surgical
procedures is part of the body's normal healing process. During the healing
process, this growth can become excessive and result in the formation of fibrous
structures that connect tissues or organs that are not normally joined. These
fibrous structures are known as adhesions. Although the majority of surgery
patients develop post-surgical adhesions, these adhesions are generally the most
serious and clinically significant in abdominal and gynecological surgeries.
There are approximately 1.0 million gynecological and 1.0 million abdominal
surgical procedures performed annually worldwide in which post-surgical adhesion
formation may occur. In abdominal surgeries, the growth of adhesions in the
bowel regions can cause bowel obstructions. In gynecological surgeries, the
growth of adhesions can result in infertility and serious pain in the pelvic
region.
Treatment alternatives for post-surgical adhesions are limited. The
principal current treatment is to undertake additional surgical procedures to
remove these adhesions. These procedures can, however, result in the regrowth of
existing adhesions and the development of new adhesions.
Due to the seriousness of the complications that abdominal and gynecological
adhesions can cause and the difficulty in treating adhesions with methods other
than additional surgeries, several companies have focused on the development of
products that can be applied to surgical sites to reduce the risk of growth of
post-surgical adhesions. Products based on hyaluronic acid, which is derived
from a naturally-occurring carbohydrate known as hyaluronate and is produced
either by fermentation or by extraction from rooster comb tissue, have been
developed for use in preventing post-surgical adhesions. The Company believes
that the principal limitation of hyaluronic acid based products as adhesion
prevention barriers is rapid absorption through enzymatic reaction. As a result,
these products may not remain in place long enough to prevent adhesion growth.
The Company believes that a market opportunity exists for a synthetic
bioabsorbable polymer that could be deposited at the surgical site with the
objective of preventing the growth of post-surgical adhesions.
In connection with the Company's collaborative agreement with Ethicon for
surgical sealants, the Company and Ethicon are negotiating a possible additional
collaboration in this area. There can be no assurance that the Company will
successfully enter into this collaboration.
LOCAL DRUG DELIVERY
Focal's polymers have properties that enable them to incorporate and deliver
drugs over a sustained period of time at local disease sites. Local drug
delivery can enable the administration of drugs in much higher concentrations
than if the drugs were delivered systemically. This can potentially
significantly increase the efficacy of the drugs without a corresponding
increase in side effects. Focal has explored the delivery of drugs, including
growth factors, proteins and cardiovascular drugs, with its polymers.
In April 1996, the Company entered into a collaboration with Novartis and
Chiron for the development of non-surgical, vascular restenosis prevention
therapy products. From the date of such agreement
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through the end of 1997, the Company's research and development activities for
anti-restenosis drug delivery were funded by Novartis and Chiron. In January
1998, the Company received notice from Novartis that Novartis had exercised its
90-day right of termination under such agreement. As a result of such
termination, the Company has terminated this research program.
OTHER RESEARCH AND DEVELOPMENT INITIATIVES
The Company has identified several additional potential applications for its
proprietary synthetic, liquid formulation polymer technology. These include
tissue and membrane reinforcement, periodontal infection control, orthopedic
surgery, other drug delivery applications, vascular grafts and nonvascular
stenting. All of these projects are at an early research stage, and the Company
is not currently devoting a significant amount of resources to any of these
projects. Accordingly, there can be no assurance that the Company will continue
any of these research initiatives, that any of such research initiatives will
result in the identification of product formulations that demonstrate sufficient
promise in animal models to enable them to become candidates to enter human
clinical trials, or that any products for which the Company is able to seek and
obtain regulatory approvals and introduce commercially either in the United
States or internationally will result from these efforts.
RESEARCH AND DEVELOPMENT EXPENDITURES
During the years ended December 31, 1995, 1996 and 1997 the Company incurred
expenses of $9.7, $11.7 and $15.7 million, respectively, on research and
development activities, including amounts funded by the Company's strategic
partners.
STRATEGIC ALLIANCES
Focal's commercial strategy is to develop its products both independently
and in collaboration with strategic corporate partners, including pharmaceutical
companies and medical device companies. The Company's strategic corporate
relationships are described below.
ETHICON (A DIVISION OF JOHNSON & JOHNSON)
In January 1997, the Company entered into an exclusive Distribution, License
and Supply Agreement with Ethicon, Inc., a division of Johnson & Johnson, for
the research, development and commercialization of the Company's surgical
sealant products (the "Ethicon Agreement"). Ethicon received marketing rights
for all surgical sealant indications in all territories outside North America,
while the Company retained manufacturing rights worldwide and marketing rights
for North America and receives a royalty on all Ethicon sales. The Ethicon
Agreement outlines the basis and timetable for the development, supply,
marketing, packaging and distribution of FOCALSEAL-L and FOCALSEAL-S for use
intraoperatively as surgical sealants for lung surgery and neurosurgery
indications and other indications. The Ethicon Agreement also establishes a
framework for additional funding for the development of cardiovascular,
gastrointestinal and other surgical sealant indications. Ethicon will continue
to receive marketing rights outside North America to new surgical sealants as
they are developed.
The Ethicon Agreement provided the Company a one-time, non-refundable
payment of $7.0 million for research and development. During 1997 and 1998,
Ethicon is also obligated to provide Focal with development funding and, if and
to the extent certain regulatory milestones are achieved, milestone payments.
The initial payment, research and development funding and milestone payments for
the FOCALSEAL-L and FOCALSEAL-S surgical sealants will aggregate $18.0 million
over the term of the agreement. Through December 31, 1997, the Company had
received $12.8 million from Ethicon under the Ethicon Agreement.
Focal is responsible for obtaining the CE mark for its FOCALSEAL-L and
FOCALSEAL-S sealants for lung surgery and neurosurgery indications,
respectively. Ethicon is responsible for obtaining regulatory clearances and
approvals in Japan and countries outside of the European Union. Focal is
responsible for
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manufacturing products covered by the collaboration. Ethicon will pay Focal a
specified percentage of net sales of surgical sealant products manufactured by
Focal and shipped to Ethicon. In addition, in the event Focal is unable to
achieve specified supply targets or is in non-compliance with the manufacturing
standards established for the CE mark and by Ethicon, Ethicon has the right to
manufacture surgical sealants for sale in all territories outside North America.
Such manufacturing rights, if they are exercised by Ethicon, will be
royalty-bearing and non-exclusive.
The agreement is terminable upon specified events including material breach
by either party or bankruptcy or insolvency of either party. In addition,
Ethicon may terminate the agreement at any time after January 2000 upon 12
months' prior written notice with or without cause.
In addition, in connection with the Ethicon Agreement, the Company and
Ethicon are negotiating a possible additional collaboration in the post-surgical
adhesions prevention area. There can be no assurance that the Company will
successfully enter into this collaboration.
OTHER COLLABORATIONS
The Company entered into a strategic alliance with Novartis and Chiron in
April 1996 for the development of non-surgical, vascular restenosis prevention
therapy products. Under the terms of the agreement, Novartis and Chiron funded
research and development expenses and were obligated to make certain milestone
payments upon achievement of certain preclinical, clinical, regulatory and
commercial milestones. Through December 31, 1997, Focal had received $5.8
million in research and development funding from Novartis and Chiron. In January
1998, the Company received notice from Novartis that Novartis had exercised its
90-day right of termination under such agreement. As a result of such
termination, the Company has terminated this research program.
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 inventions that are considered
important to its business and that provide a competitive advantage. Focal also
relies on trade secrets, general know-how, in-licensing opportunities and
continuing technological innovation.
The Company has received, licensed or believes it has the option or right to
license 21 issued United States patents and 9 foreign patents corresponding to
certain of the issued United States patents, has 13 additional United States
patent applications that have been allowed and has 25 patent applications
pending in the United States, as well as foreign counterparts of certain of
these applications. The issued United States patents have expiration dates
ranging from 2010 to 2015. These patents and patent applications cover certain
aspects of the Company's photopolymerizable polymer formulations, surgical
sealant compositions and methods, and designs for delivery devices. These
patents and patent applications are either held directly by Focal, or the
Company has licensed or believes it has rights to license these patents. The
Company has licensed from the University of Texas and Endoluminal Therapeutics,
Inc. (a company controlled by one of the Company's founding scientists)
worldwide rights to certain technologies which are the subject of issued patents
and pending patent applications based upon technologies developed by two of the
Company's founders. These licenses are terminable in the event of failure by the
Company to pay scheduled royalties, failure to commercialize products in the
fields covered by these licenses and under certain other conditions. Because of
the substantial length of time and expense associated with bringing new products
through the development and regulatory approval processes in order to reach the
marketplace, the medical products industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. Accordingly, the Company intends to seek patent protection for its
proprietary technology, products and processes.
The Company's success will depend in part on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate
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without infringing upon the proprietary rights of others, both in the United
States and internationally. There can be no assurance that the Company's pending
or future patent applications will issue, or that the claims of the Company's
issued patents, or any patents that may issue in the future will provide any
competitive advantages for the Company's products or that they will not be
successfully challenged, narrowed, invalidated or circumvented in the future.
Moreover, litigation and interference or opposition proceedings associated with
enforcing or defending patents or trade secrets is expensive and can divert the
efforts of technical and management personnel. The Company has filed patent
applications in certain foreign countries corresponding to certain patent
applications that it filed in the United States and may file additional patent
applications inside and outside the United States. The Company believes that
obtaining foreign patents may be more difficult than obtaining domestic patents
because of differences in patent laws and believes the protection afforded by
foreign patents or any other foreign intellectual property protection, if
obtained, may be more limited than that provided domestically. In addition,
there can be no assurance that competitors will not seek to apply for and obtain
patents that will prevent, limit or interfere with the Company's ability to
make, use, import and sell its products. The Company is aware that certain
medical device, pharmaceutical and other companies, universities and research
institutions have filed patent applications or have issued patents relating to
the compositions and methods for wound closure and adhesion prevention. In
addition, the medical device and pharmaceutical industry has been characterized
by extensive litigation regarding patents and other intellectual property
rights, and many companies in the medical device industry have employed
intellectual property litigation to gain a competitive advantage. There can be
no assurance that litigation will not be brought against the Company by third
parties in the future challenging the Company's patent rights or claiming
infringement by the Company of patents held by the third parties. Because patent
applications in the United States are confidential until the patents issue, and
publication of discoveries in the scientific and patent literature tends to lag
behind actual discoveries by several months, the Company cannot be certain that
Company inventors or licensors were the first to conceive of inventions covered
by pending patent applications or that Company was the first to file patent
applications for such inventions.
The Company may be required or find it desirable to obtain licenses to
patents or proprietary rights of others. No assurance can be given that any
licenses required under any patents or proprietary rights of third parties would
be made available on terms acceptable to the Company, or at all. If the Company
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or could find
that the development, manufacture or sale of products requiring such licenses is
foreclosed. Litigation may be necessary to defend against or assert claims of
patent infringement or invalidity, to enforce or defend patents issued to the
Company, to protect trade secrets or know-how owned by the Company, or to
determine the scope and validity of the proprietary rights of others. In
addition, interference proceedings declared by the United States Patent and
Trademark Office, or opposition proceedings in a foreign patent office, may be
necessary to determine the priority of inventions with respect to patent
applications of the Company or its licensors. Litigation, interference or
opposition proceedings could result in substantial costs to and diversion of
effort by the Company, and adverse determinations in any such proceedings could
have a material adverse effect on the business, financial condition or results
of operations of the Company.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that binding agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
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GOVERNMENT REGULATION
UNITED STATES
The Company's proposed products and its research and development activities
are subject to regulation by numerous governmental authorities, principally, the
FDA and corresponding state and foreign regulatory agencies. The Federal Food,
Drug, and Cosmetic Act (the "FDC Act"), as amended, the regulations promulgated
thereunder, and other federal and state statutes and regulations, govern, among
other things, the preclinical and clinical testing, manufacture, safety,
efficacy, labeling, storage, record keeping, advertising and promotion of
medical devices and drugs, including the products currently under development by
the Company. Product development and approval within this regulatory framework
take a number of years and involves the expenditure of substantial resources.
In the United States, medical devices are classified into three different
classes, class I, II and III, on the basis of controls deemed necessary to
reasonably ensure the safety and effectiveness of the device. Class I devices
are subject to general controls (e.g., labeling, premarket notification and
adherence to FDA's good manufacturing practices ("GMPs")) and class II devices
are subject to general and special controls (e.g., performance standards,
postmarket surveillance, patient registries, and FDA guidelines). Generally,
class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness (e.g., life-sustaining, life-supporting
and implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed devices).
Before a new medical device can be marketed, marketing clearance must be
obtained through a premarket notification under Section 510(k) of the FDC Act or
a premarket approval ("PMA") application under Section 515 of the FDA Act. A
510(k) clearance will typically be granted by the FDA if it can be established
that the device is substantially equivalent to a "predicate device," which is a
legally marketed class I or II device or a preamendment class III device (i.e.
one that has been marketed since a date prior to May 28, 1976) for which the FDA
has not called for PMAs. The FDA has been requiring an increasingly rigorous
demonstration of substantial equivalence and this may include a requirement to
submit human clinical trial data. It generally takes four to twelve months from
the date of a 510(k) submission to obtain clearance, but it may take longer.
The FDA may determine that a medical device is not substantially equivalent
to a predicate device, or that additional information is needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional information, could
prevent or delay the market introduction of new products that fall into this
category. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
effectiveness, or that constitute a major change in the intended use of the
device, will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed class I or class II device, or if it is a
preamendment class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must include the proposed labeling,
advertising literature, and any training materials. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA. The FDA review of a PMA application generally takes one to three years
from the date the PMA is accepted for filing, but may take significantly longer.
The review time is often significantly extended by the FDA
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asking for more information or clarification of information already provided in
the submission. During the review period, an advisory committee, typically a
panel of clinicians, may be convened to review and evaluate the application and
provide a recommendation to the FDA as to whether the device should be approved.
The FDA accords substantial weight to the recommendation but is not bound by it.
Toward the end of the PMA review process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure compliance with applicable
GMP requirements, which include elaborate testing, control documentation and
other quality assurance procedures. The Company has not yet undergone an FDA GMP
inspection and does not anticipate that it will undergo such an inspection until
after filing of its initial PMA application for FOCALSEAL surgical sealants.
If FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval letter, authorizing marketing of the device for certain indications. If
the FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a
"non-approvable" letter. The FDA may determine that additional clinical trials
are necessary, in which case the PMA may be delayed for one or more years while
additional clinical trials are conducted and submitted in an amendment to the
PMA. Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
If human clinical trials of a device are required, either for a 510(k)
submission or a PMA application, and the device presents a "significant risk,"
the sponsor of the trial (usually the manufacturer or the distributor of the
device) must file an investigational device exemption ("IDE") application prior
to commencing human clinical trials. The IDE application must be supported by
data, typically including the results of animal and laboratory testing. If the
IDE application is approved by the FDA and one or more appropriate Institutional
Review Boards ("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs without the need for FDA approval. Submission of an IDE
does not give assurance that FDA will approve the IDE and, if it is approved,
there can be no assurance that FDA will determine that the data derived from the
studies support the safety and efficacy of the device or warrant the
continuation of clinical studies. Sponsors of clinical trials are permitted to
sell investigational devices distributed in the course of the study provided
such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. An IDE supplement must be submitted to and
approved by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.
The Company's FOCALSEAL surgical sealant products will be regulated as a
class III medical device and will require PMA approval prior to being marketed
in the United States. Although the Company has received an IDE from the FDA
permitting the Company to conduct clinical trials of FOCALSEAL-L for lung
surgery in the United States, and such clinical study has recently commenced,
there can be no assurance that data from such studies will demonstrate the
safety and effectiveness of the FOCALSEAL-L product or will adequately support a
PMA application for the product. In addition, the Company will be required to
obtain additional IDEs for other applications of FOCALSEAL and for other
products that the Company develops that are regulated by the FDA as medical
devices. There is no assurance that data, typically the results of animal and
laboratory testing, that may be provided by the Company in support of future IDE
applications will be deemed adequate for the purpose of obtaining IDE approval
or that the Company will obtain approval to conduct clinical studies of any such
future product.
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If clearance or approval is obtained, any device manufactured or distributed
by the Company will be subject to pervasive and continuing regulation by the
FDA. The Company will be subject to routine inspection by the FDA and will have
to comply with the host of regulatory requirements that usually apply to medical
devices marketed in the United States, including labeling regulations, GMP
requirements, the Medical Device Reporting ("MDR") regulation (which requires a
manufacturer to report to the FDA certain types of adverse events involving its
products), and the FDA's prohibitions against promoting products for unapproved
or "off-label" uses. The Company's failure to comply with applicable regulatory
requirements could result in enforcement action by the FDA, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The President recently signed into law the Food and Drug Administration
Modernization Act of 1997. This legislation makes changes to the device
provisions of the FDC Act and other provisions in the Act affecting the
regulation of devices. Among other things, the changes will affect the IDE,
510(k) and PMA processes, and also will affect device standards and data
requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third party review, and the
dissemination of off label information. The Company cannot predict how or when
these changes will be implemented or what effect the changes will have on the
regulation of the Company's products.
Other products that may be developed by the Company, including products for
local drug delivery, may be regulated as drugs requiring FDA approval of a new
drug application ("NDA") prior to commercialization in the United States. The
NDA approval process is generally considered more onerous, costly and lengthy
than the PMA process, often requiring more extensive preclinical and clinical
testing, and many products for which NDAs have been submitted by other companies
have never been approved for marketing.
If the FDA believes that a company is not in compliance with law, it can
institute proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the Company, its
officers and its employees. Failure to comply with the regulatory requirements
could have material adverse effect on the Company's business, financial
condition and results of operations. In addition, regulations regarding the
manufacture and sale of the Company's products are subject to change. The
Company cannot predict the effect, if any, that such changes might have on its
business, financial condition or results of operations.
Among the requirements for product approval is the requirement that the
prospective manufacturer conform to the FDA's GMP regulations for drugs. In
complying with the GMP regulations, manufacturers must continue to expend time,
money and effort in product, record keeping and quality control to assure that
the product meets applicable specifications and other requirements. The FDA
periodically inspects device and drug manufacturing facilities in the U.S. in
order to assure compliance with applicable GMP requirements. Failure of the
Company to comply with the GMP regulations or other FDA regulatory requirements
could have a material adverse effect on the Company's business, financial
condition, or results of operations.
INTERNATIONAL
In order for the Company and its strategic partners to market its products
in Europe and other foreign countries, the Company and/or its partners must
obtain required regulatory approvals and comply with extensive regulations
governing safety, quality and manufacturing processes. These regulations vary
significantly from country to country. The time required to obtain approval to
market the Company's products may be longer or shorter than that required in the
United States. In order to market FOCALSEAL surgical sealants and other products
being developed by the Company in the member countries of the European Union,
the Company will be required to obtain CE mark certification. CE mark
certification is an international symbol of adherence to quality assurance
standards and compliance with applicable European medical device directives. In
September 1997, the Company completed a CE mark and ISO 9001 standards audit,
which is one of the principal steps in the CE mark approval process. The
remainder of the CE mark approval process consists primarily of review by the
approving body of additional documentation
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submitted by the Company in response to observations made during the CE mark
audit. Although the CE mark and ISO 9001 standards audit has been completed,
there can be no assurance that the Company will be successful in completing the
remainder of the CE mark certification process or obtaining CE mark
certification in a timely manner, if at all.
SALES AND MARKETING
The Company intends to market and sell its surgical sealants internationally
through Ethicon and to develop its own direct sales and marketing force for
these products in North America. The Company initiated launch of its FOCALSEAL-L
surgical sealant for lung surgery in Europe through Ethicon in March 1998.
Johnson & Johnson is one of the leading manufacturers of sutures and staples
worldwide and has a significant sales and marketing presence in Europe, Latin
America and the Pacific Rim. If and when the Company receives marketing approval
in the United States, the Company intends to build a direct sales force for
marketing its surgical sealant products in North America.
The Company's sales and marketing strategy for other products may include
using a combination of the Company's own direct sales force, strategic marketing
partners and distributors. The sales and marketing plans for these products will
be dependent on the Company's success in entering into strategic marketing
relationships, its ability to leverage its own internal sales force to market
additional products beyond the surgical sealant products and its ability to hire
and retain additional specialized sales personnel. There can be no assurance
that the Company will be able to secure any additional strategic marketing
partners or international distributors on terms that are acceptable to the
Company, or at all, or that the Company will be successful in building a direct
sales force in the United States.
MANUFACTURING
The Company has only limited experience in manufacturing its FOCALSEAL
surgical sealants. The Company has recently added manufacturing capacity at its
Lexington, Massachusetts facility in order to meet anticipated supply
requirements for the European commercial introduction of its FOCALSEAL-L
surgical sealant and for the United States clinical trial.
The Company performs certain steps in the FOCALSEAL manufacturing process
internally and relies on outside contractors for others. Certain proprietary
processes, including polymer synthesis, are performed by Focal. The Company uses
outside contractors for nonproprietary, high volume processes including
sterilization and fill and finish. The Company also contracts with third parties
for the manufacture of syringes, applicators, light sources and light wands.
There can be no assurance that the Company will be able to attract, train
and retain the required personnel or will be able to increase its manufacturing
capability to manufacture commercial quantities of surgical sealants in a timely
manner, or at all. Manufacturers often encounter difficulties in scaling up
production of their products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company anticipates that it will need to increase significantly
its current manufacturing capacity to meet commercial needs over the next
several years and that it may need to establish off-site manufacturing capacity
to meet these anticipated needs. In addition, the Company expects that it will
need to identify and qualify additional sources for materials and outsourced
manufacturing processes. There can be no assurance that the Company's
manufacturing scale-up efforts will be successful or that reliable, high-volume
manufacturing can be established or maintained at commercially reasonable costs
on a timely basis, or at all. Furthermore, the Company may be required to
establish an off-site manufacturing facility and qualify such facility under
GMP, ISO 9001 and other applicable regulatory and quality standards. The Company
would experience supply interruptions in the event it is unable to establish or
maintain commercial levels of polymer synthesis, as the Company's polymer
formulations are proprietary and are not available from third parties. In
addition, there can be no assurance that the Company will not encounter
unanticipated problems and delays in connection with its contract manufacturers
and suppliers. Delays associated with or difficulties encountered in
establishing commercial manufacturing, the establishment of new manufacturing
facilities, or problems encountered
18
<PAGE>
with contract manufacturers and suppliers, would result in disruptions of
product supply to the Company's marketing partners and for use in clinical
trials. In such event, Ethicon could, under its agreement with the Company,
commence manufacturing of surgical sealants for sales in all territories outside
North America. Any of the foregoing would have a material adverse affect on the
Company's business, financial condition and results of operations.
The Company purchases raw materials used in its products from various
suppliers and outsources certain manufacturing processes. Certain materials and
components are purchased from a single source vendor and certain processes such
as sterile fill and finish are outsourced to a single source vendor. These
materials and process manufacturing services have generally been readily
available in the marketplace and have not been the subject of shortages. There
can, however, be no assurance that the Company or its suppliers or contract
manufacturers will not experience material shortages in the future. Any such
future shortages of materials or components could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and to list its products with the FDA. As such, the Company is
subject to inspections by the FDA for compliance with applicable GMP
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. Further, the Company and the third party
manufacturers of its products are required to comply with various FDA
requirements for design, safety, advertising and labeling. The Company has not
yet undergone an FDA GMP inspection and does not anticipate that it will undergo
such an inspection until after submission of its initial PMA application for
FOCALSEAL surgical sealants.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company competes with many domestic and foreign medical device,
pharmaceutical and biopharmaceutical companies. In the surgical sealant area,
the Company will compete with existing methodologies for sealing air and fluid
leaks resulting from surgery, including some traditional wound closure products
such as sutures and staples, marketed by companies such as Johnson & Johnson,
United States Surgical Corporation, American Home Products Corporation and
others. Other products currently being marketed include fibrin glue, sold in
Europe and the Pacific Rim countries by Immuno AG, Cention and Fujisawa and
under development by Baxter Healthcare Corporation, Bristol-Myers Squibb Company
and Vitex. Other competitors in the surgical sealant market include Closure
Medical Corporation, B. Braun GmBH and Cryolife. Competitive products may also
be under development by other large medical device, pharmaceutical and
biopharmaceutical companies. The other areas in which Focal is developing
products, such as post-surgical adhesion prevention and restenosis drug
delivery, are intensely competitive markets and the Company will encounter
competition from major medical device, pharmaceutical and biopharmaceutical
companies in such markets. Many of the Company's current and potential
competitors have substantially greater financial, technological, research and
development, regulatory and clinical, marketing and sales, and personnel
resources than the Company.
These competitors may also have greater experience in developing products,
conducting clinical trials, obtaining regulatory approvals, and manufacturing
and marketing such products. Certain of these competitors may obtain patent
protection, approval or clearance by the FDA or foreign countries or product
commercialization earlier than the Company, any of which could materially
adversely affect the Company. Furthermore, if the Company commences significant
commercial sales of its products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it currently
has limited experience. Finally, there can be no assurance that the Company's
marketing partners will not pursue parallel development of other technologies or
products, which may result in a marketing partner developing additional products
that would compete with the Company's products.
Other recently developed technologies or procedures are, or may in the
future be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have or are being developed by the Company or
that would render
19
<PAGE>
the Company's technology and products obsolete and non-competitive in these
fields. In such event, the Company's business, financial condition and results
of operations could be materially adversely affected.
THIRD PARTY REIMBURSEMENT
Reimbursement and health care payment systems in international markets vary
significantly by country. In connection with international product
introductions, the Company and its strategic marketing partners may be required
to seek international reimbursement approvals. If required, there can be no
assurance that any such approvals will be obtained in a timely manner, or at
all, and failure to receive such international reimbursement approvals could
have an adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payors, there will be no separate,
additional reimbursement for the Company's products. Accordingly, the Company
believes that there will be no procedure-specific reimbursement codes for the
Company's products. The Company anticipates that hospital administrators and
physicians will justify the additional cost of surgical sealants by the
attendant cost savings and clinical benefits that the Company believes will be
derived from the use of its products.
There can be no assurance that reimbursement for the Company's products will
be available in the United States or in international markets under either
governmental or private reimbursement systems. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors. Failure by physicians, hospitals and other users of
the Company's products to obtain sufficient reimbursement from health care
payors for procedures in which the Company's products are used or adverse
changes in governmental and private third party payors' policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's business may be also materially adversely affected by the
continuing efforts of government and third-party payors to contain or reduce the
costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of certain medical products and prescription
pharmaceuticals is subject to government control. In the United States, an
increasing emphasis on managed care has put, and will continue to put, pressure
on pharmaceutical and medical product pricing. Such initiatives and proposals,
if adopted, could decrease the price that the Company receives for any products
it may develop and sell in the future, and thereby have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, to the extent that such proposals or initiatives have a material
adverse effect on other companies that are corporate partners or prospective
corporate partners for certain of the Company's products, the Company's ability
to commercialize its products may be materially adversely affected.
EMPLOYEES
As of December 31, 1997, the Company employed 98 persons of whom 71 were in
research, development and manufacturing, 8 were in clinical, regulatory affairs
and quality assurance, and 19 were in management, finance and administration.
None of the Company's current employees is represented by a labor union or is
the subject of a collective bargaining agreement. The Company believes that
relations with its employees are good.
SCIENTIFIC ADVISORS
Focal has recruited several physician specialists and experienced
practitioners in various fields pertaining to its products to serve as
scientific advisors. The four founding scientists of Focal are scientific
20
<PAGE>
advisors to the Company, including Jeffrey Hubbell, Ph.D., Professor, Swiss
Federal Institute of Technology, Zurich, Switzerland; Marvin Slepian, M.D.,
Cardiologist, University of Arizona Medical Center; Robert Langer, Ph.D.,
Professor, Massachusetts Institute of Technology; and Henry Brem, M.D.,
Professor, The Johns Hopkins University.
There is no fixed term of service for the scientific advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. In general, members do not serve on an exclusive basis with the
Company and are not obligated to assign inventions to the Company. Drs. Langer,
Brem, Hubbell and Slepian are scientific founders of the Company and certain
inventions of Drs. Hubbell and Slepian were assigned to the Company under the
Company's license agreements with the University of Texas and Endoluminal
Therapeutics, Inc., a company controlled by Dr. Slepian, respectively. Drs.
Langer and Brem also serve as members of the Company's board of directors.
Scientific advisors have from time to time received option grants to purchase
Common Stock of the Company. Scientific Advisors have also received cash
compensation, with the amount of such compensation dependent on the time
commitment and level of involvement of each advisor. All scientific advisors
receive reimbursement for expenses incurred in traveling to and attending
meetings on behalf of the Company.
The following individuals are scientific advisors to Focal in their
respective areas of specialization identified below.
<TABLE>
<S> <C>
BIOMATERIALS/POLYMER SCIENCE
Jeffrey Hubbell, Ph.D. Swiss Federal Institute of Technology
John Eaton, Ph.D. Baylor University College of Medicine
Joachim Kohn, Ph.D. Rutgers University
Joseph Vacanti, M.D. Boston Children's Hospital
Allan Hoffman, Ph.D. University of Washington
DRUG DELIVERY AND TISSUE ENGINEERING
Elazar Edelman, M.D., Ph.D. Harvard Medical School
Robert Langer, Ph.D. Massachusetts Institute of Technology
Jane Shaw, Ph.D. President of Stable Network; Former President
of Alza Corporation
Jeffrey Isner, M.D. St. Elizabeth's Hospital
PROCEDURE DEVELOPMENT
Joseph LoCicero, M.D. Harvard Medical School
Peter Johnson, M.D. University of Pittsburgh Medical School
Ogan Gurel, M.D. Harvard Medical School
</TABLE>
FACTORS AFFECTING OPERATING RESULTS
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY. The Company has incurred net losses in each year since its
inception, including a net loss of approximately $442,000 during 1997. At
December 31, 1997, the Company had an accumulated deficit of $45.9 million. The
Company's operating losses have resulted primarily from expenses incurred in
connection with the Company's research and development activities, including
preclinical and clinical trials, development of manufacturing processes and
general and administrative expenses. The Company expects to incur net losses
into 1999 and may incur net losses in subsequent periods, although the amount of
future net losses and time required by the Company to reach profitability are
highly uncertain. The Company is dependent upon corporate partners for funding
of a significant portion of its research and development expenses. If the
Company does not continue to receive funding from its current corporate
partners, or is unable to otherwise obtain third-party funding, operating losses
will increase. Focal does not expect to generate revenues from the
21
<PAGE>
sale of products, if any, until the first half of 1998. The Company's ability to
achieve and sustain profitability will be dependent upon obtaining regulatory
approval for and successfully commercializing its FOCALSEAL surgical sealants,
and developing the manufacturing capacity and sales and marketing capability for
its products. There can be no assurance that Focal will obtain required
regulatory approvals, or successfully develop, manufacture, commercialize and
market products or that the Company will ever record product revenues or achieve
profitability. Profitability, if achieved, may not be sustained.
UNCERTAINTIES RELATED TO EARLY STAGE OF COMMERCIALIZATION AND
DEVELOPMENT. Except for the FOCALSEAL-L surgical sealant for lung surgery
indications, all of the Company's products are in early stages of development or
research. To date the Company has not received marketing approval for its
FOCALSEAL-L lung surgical sealant or any other product from the FDA. The
Company's initial product, FOCALSEAL-L, is not expected to be commercially
available in the United States until the end of 1999, at the earliest. In
addition, FOCALSEAL-L and FOCALSEAL-S will require significant additional
research and development efforts before either is suitable for other
indications. The development and commercialization of new bioabsorbable
synthetic polymer products are highly uncertain and subject to a number of
significant risks. Potential products that appear to be promising at early
stages of development may not reach the market for a number of reasons. Such
reasons include the possibilities that the potential products will be found
ineffective or cause harmful side effects during preclinical testing or clinical
trials, fail to receive necessary regulatory approvals, be difficult to
manufacture on a commercial scale, be uneconomical, fail to achieve market
acceptance or be precluded from commercialization by proprietary rights of third
parties. No assurance can be given that any of the Company's development
programs will be successfully completed, that clinical trials will generate
anticipated results or will commence or be completed as planned, that any PMA
application will be accepted or ultimately approved by the FDA, that required
regulatory approvals will be obtained on a timely basis, if at all, or that any
products for which approval is obtained will be commercially successful. If any
of the Company's development programs are not successfully completed, required
regulatory approvals are not obtained, or products for which approvals are
obtained are not commercially successful, the Company's business, financial
condition and results of operations would be materially adversely affected.
EARLY STAGE OF CLINICAL TESTING AND LACK OF EXTENSIVE CLINICAL DATA. The
FOCALSEAL-L product for lung surgery is in clinical testing in the United
States, and clinical data obtained to date is insufficient to demonstrate the
safety and efficacy of this product under applicable FDA regulatory guidelines.
The Company has completed a 60-patient controlled, randomized human clinical
trial in Europe involving use of FOCALSEAL-L in lung surgery. Although the
Company believes that the results of this trial are sufficient to obtain
marketing approval in Europe, significant additional clinical data will be
required prior to submission of a PMA application in the United States. The
Company has only recently commenced United States clinical trials of FOCALSEAL-L
pursuant to a conditionally approved IDE issued by the FDA. As a result of
communications with the FDA, the Company will pursue certain clinical endpoints
that were not the subject of the European clinical trial. It may therefore be
more difficult for the Company to demonstrate the efficacy of FOCALSEAL-L in the
United States trial than in the European trial, which could result in delays or
adversely affect the success of the clinical trial. There can be no assurance
that FOCALSEAL-L will receive marketing approval from the FDA or that any of the
Company's other products will prove to be safe and effective in United States or
international clinical trials under applicable regulatory guidelines. In
addition, clinical trials may identify significant technical or other obstacles
to be overcome prior to obtaining necessary regulatory or international
approvals. In particular, during the Company's European clinical trial of
FOCALSEAL-L in lung surgery, a higher than anticipated incidence of insufficient
wound healing at the bronchial stump was observed in patients in the treated
group. The bronchial stump typically heals through tissue overgrowth from
surrounding areas. Based upon its review and analysis of the clinical data, the
Company believes that in those cases in which FOCALSEAL-L was applied directly
to the bronchial stump it may have acted as a barrier to such tissue overgrowth,
thereby slowing natural healing of the bronchial stump. As a result of this
observed clinical event, the labelling for FOCALSEAL-L in the United States
clinical trial indicates that the product may be applied to all lung tissues
22
<PAGE>
other than the bronchial stump. Other unforeseen circumstances may arise, or
adverse events related to the use of the product may occur, during clinical
trials and any such events may require suspension or termination of clinical
trials as well as reporting to the FDA or other regulatory authorities. If the
FOCALSEAL product and the Company's other products under development do not
prove to be safe and effective in clinical trials or if the Company is otherwise
unable to commercialize these products successfully, the Company's business,
financial condition and results of operations will be materially and adversely
affected.
DEPENDENCE UPON FOCALSEAL SURGICAL SEALANTS. The Company anticipates that
revenues derived from European sales of FOCALSEAL-L will account for a
substantial majority of the Company's near term product revenues. In addition,
the Company's future success will depend, in significant part, on its ability to
complete successfully additional clinical trials and to obtain regulatory
approval and market acceptance of FOCALSEAL-L in the United States. Although the
Company recently commenced a 180-patient, pivotal, multicenter trial of
FOCALSEAL-L for lung surgery indications in the United States and anticipates
submitting a PMA application to the FDA based on the results of the trial, there
can be no assurance that the FDA will accept the PMA for filing, that the
Company will be able to demonstrate to the FDA's satisfaction that FOCALSEAL-L
is safe and effective, or, if marketing approval were granted by the FDA, that
the Company will commercialize successfully FOCALSEAL-L in the United States.
Failure by the Company to gain marketing approval from the FDA for FOCALSEAL-L
or to be able to commercialize successfully FOCALSEAL-L in the United States
would have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's FOCALSEAL surgical sealants
represent a new method of sealing air and fluid leaks that arise in connection
with surgery, and there can be no assurance that these products will gain
commercial acceptance among physicians, patients and health care payors, even if
necessary international and United States marketing approvals can be obtained.
The Company believes that recommendations and endorsements by physicians will be
essential for market acceptance of FOCALSEAL, and there can be no assurance that
any such recommendations or endorsements will be obtained. Physicians will not
use the FOCALSEAL surgical sealants unless they determine, based on clinical
data and other factors, that these systems are an effective means of sealing air
and fluid leaks and that the clinical benefits to the patient and cost savings
achieved through use of these systems outweigh their cost. Such determinations
will depend, in part, on the ability of the Company's FOCALSEAL-L surgical
sealant to reduce the time a lung surgery patient must be connected to a chest
tube and the length of hospital stays associated with lung surgery. Acceptance
among physicians may also depend upon the Company's ability to train thoracic
surgeons and other potential users of the Company's products in the application
of liquid surgical sealants, which such physicians typically have not performed,
and the willingness of such users to learn these new techniques. Failure of the
Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL. Focal will
require substantial additional funding in order to continue its research and
product development programs, including for preclinical testing and clinical
trials of its product candidates, for operating expenses, for the pursuit of
regulatory approvals for its product candidates, and may require additional
funding for establishing manufacturing and marketing capabilities in the future.
The Company believes that its existing capital resources, together with the net
proceeds of this offering, interest income and future payments due under
strategic alliances, will be sufficient to satisfy its current and projected
funding requirements for at least 18 months. However, no assurance can be given
that such net proceeds will be sufficient to conduct its research and
development programs as planned. The Company's future capital requirements will
depend on many factors, including continued scientific progress in its research
and development programs, the magnitude of these programs, progress with
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, if any, the costs involved in filing and
prosecuting patent applications and enforcing patent claims, competing
technological and market developments, the establishment of additional strategic
23
<PAGE>
alliances, the cost of manufacturing facilities and of commercialization
activities, and the cost of product in-licensing and any possible acquisitions.
There can be no assurance that the Company's cash, cash equivalents and
marketable securities, including the net proceeds of this offering, and interest
income earned thereon, together with funding that may be received under the
Company's strategic alliances, will be adequate to satisfy its capital and
operating requirements.
Focal intends to seek additional funding through strategic alliances, and
may seek additional funding through public or private sales of the Company's
securities, including equity securities. In addition, the Company has obtained
equipment lease financing and other forms of debt financing and may continue to
pursue opportunities to obtain additional lease or debt financing in the future.
There can be no assurance, however, that additional equity or debt financing
will be available on reasonable terms, if at all. Any additional equity
financings would be dilutive to the Company's stockholders. If adequate funds
are not available, Focal may be required to curtail significantly one or more of
its research and development programs and/or obtain funds through arrangements
with corporate partners or others that may require Focal to relinquish rights to
certain of its technologies or product candidates.
UNCERTAINTY OF ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT, EMPLOYEES AND
CONSULTANTS. The Company is highly dependent on the principal members of its
management and scientific staff. The loss of services of any of these personnel
could impede the achievement of the Company's development objectives.
Furthermore, recruiting and retaining qualified scientific personnel to perform
research and development work in the future will also be critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain personnel on acceptable terms given the competition among
biotechnology, pharmaceutical and healthcare companies, universities and
non-profit research institutions for experienced scientists. In addition, the
Company relies on members of its Scientific Advisory Board and a significant
number of consultants to assist the Company in formulating its research and
development strategy. All of Focal's consultants and the members of the
Company's Scientific Advisory Board are employed by employers other than the
Company, and may have commitments to, or advisory or consulting agreements with,
other entities that may limit their availability to the Company.
POTENTIAL PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE. The use
of any of the Company's potential products in clinical trials, and the sale of
any approved products, may expose the Company to liability claims resulting from
the use of its products. These claims might be made directly by consumers,
health care providers or by pharmaceutical companies or others selling such
products. Focal has obtained product liability insurance coverage, subject to
certain policy limits, for its clinical trials. However, insurance coverage is
becoming increasingly expensive, and no assurance can be given that the Company
will be able to maintain insurance coverage at a reasonable cost or in
sufficient amounts to protect the Company against losses due to liability. There
can also be no assurance that the Company will be able to obtain commercially
reasonable product liability insurance for any products approved for marketing.
A successful product liability claim or series of claims brought against the
Company could have a material adverse effect on its business, financial
condition and results of operations.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS. 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 disposal of such materials and
certain waste products. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by such laws and regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. 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. The Company
believes that it is in compliance in all material respects with applicable
environmental laws and regulations.
VOLATILITY OF COMMON STOCK PRICE. The market prices for securities of life
sciences companies have historically been highly volatile, and the market has
from time to time experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Factors such
24
<PAGE>
as fluctuations in the Company's operating results, announcements of
technological innovations or new therapeutic products by the Company or others,
clinical trial results, developments concerning strategic alliance agreements,
government regulation, developments in patent or other proprietary rights,
public concern as to the safety of products developed by the Company or others,
future sales of substantial amounts of Common Stock by existing stockholders,
comments by securities analysts and general market conditions can have an
adverse effect on the market price of the Common Stock. In addition, the
realization of any of the risks described in these "Factors Affecting Operating
Results" could have a material adverse impact on market price of the Company's
Common Stock.
ITEM 2.
PROPERTIES
Focal currently occupies approximately 54,000 square feet of manufacturing,
laboratory and administrative space in Lexington, Massachusetts under a lease
which expires in September 2004. Focal has an option to extend this lease for
several additional five year periods. The Company believes that this facility is
sufficient to meet the Company's requirements through 1998. The Company is
currently evaluating the possibility of obtaining additional facility space in
the Lexington, Massachusetts area and believes such space can be obtained on
commercially reasonable terms.
ITEM 3.
LEGAL PROCEEDINGS
The Company is not currently a party to any material pending legal
proceedings.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company on November 25, 1997,
the following matters were acted upon by the stockholders of the Company:
1.) The approval of an amendment to the company's Certificate of
Incorporation to effect a 1 for 3.25 reverse stock split of the company's
Common Stock; and
2.) The approval of the adoption of the Company 1997 Director Stock
Option Plan and the reservation of 150,000 post-reverse split shares of
Common Stock; and
3.) The approval of the adoption of the Company's 1997 Employee Stock
Purchase Plan and the reservation of 200,000 post reverse split shares of
Common Stock for issuance thereunder; and
4.) The approval of an amendment to the Company's 1992 Incentive Stock
Plan to increase the number of shares reserved for issuance thereunder to a
new total of 2,600,000 post-reserve split shares of Common Stock; and
5.) The election of Henry Brem, M.D., David M. Clapper, Janet Effland,
Robert Langer, Ph.D., Mark J. Levin, Michael J. Levinthal, Fred E.
Silverstein, M.D. and Jesse I. Treu, Ph.D. to the board of directors; and
6.) The approval of the company's initial public offering Restated
Certificate of Incorporation and Bylaws; and
7.) The ratification of Ernst &. Young LLP as the independent auditors
of the Company for the year ending December 31, 1997.
Each of the foregoing items was approved by the affirmative vote of the
holders of a majority of the shares of Company capital stock present at the
meeting. Certain items required a separate class vote of the holders of the
Company's then outstanding Preferred Stock (which was automatically converted
into Common Stock upon the closing of the Company's initial public offering in
December 1997). All such items were approved by the requisite class vote.
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PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "FOCL." The following table sets forth the range of the high and low sale
prices by quarter as reported on the Nasdaq National Market since December 11,
1997, the date the Common Stock commenced trading.
<TABLE>
<CAPTION>
QUARTER HIGH LOW
- -------------------------------------------------------------------------------- --------- ---
<S> <C> <C>
1997: Fourth Quarter (from December 11, 1997)................................... 10 3/4 10
</TABLE>
As of March 1, 1998, the number of common stockholders of record was 163.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends in the foreseeable future.
On December 11, 1997, the Company commenced and completed its initial public
offering (the "IPO") of 2,500,000 shares of its Common Stock, $0.01 par value
per share, at a public offering price of $10.00 per share pursuant to a
registration statement on Form S-1 (file no. 333-38379) filed with the
Securities and Exchange Commission. All of the shares registered were sold,
including an additional 375,000 shares which were sold upon exercise of the
underwriters' over-allotment option. Lehman Brothers, Piper Jaffray, Inc., and
Pacific Growth Equities, Inc. were the managing underwriters of the IPO.
The following table indicates the amount and aggregate offering price of the
Common Stock registered and sold in the IPO for the account of the Company.
There were no selling stockholders in the IPO.
<TABLE>
<CAPTION>
AGGREGATE PRICE AGGREGATE
OF OFFERING
AMOUNT OFFERING AMOUNT PRICE OF AMOUNT
TITLE OF SECURITY REGISTERED REGISTERED AMOUNT SOLD SOLD
- ----------------------------------- ------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value...... 2,875,000 shares $ 28,750,000 2,875,000 shares $ 28,750,000
</TABLE>
The following table lists the amount of expenses incurred for the Company's
account in connection with the issuance and distribution of the Common Stock
issued in the IPO.
<TABLE>
<CAPTION>
DIRECT OR INDIRECT PAYMENTS TO
DIRECTORS OR OFFICERS OF THE
COMPANY OR THEIR ASSOCIATES; TO
PERSONS OWNING TEN PERCENT OR DIRECT OR
MORE OF ANY CLASS OF EQUITY INDIRECT
SECURITIES OF THE COMPANY; AND TO PAYMENTS TO
AFFILIATES OF THE COMPANY OTHERS
----------------------------------- ----------------
<S> <C> <C>
Underwriting discounts and commissions......................... $ 0 $ 2,012,500
Expenses paid to or for underwriters........................... $ 0 $ 0
Other expenses to date......................................... $ 0 $ 753,000
----------------
Total expenses................................................. $ 0 $ 2,765,500
----------------
Net Proceeds of IPO............................................ $ 25,984,500
----------------
----------------
</TABLE>
All of the net proceeds of the IPO were held in temporary investments.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
Registrant's 1997 annual report to stockholders under the caption "Selected
Financial Data."
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by reference to
Registrant's 1997 annual report to stockholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information required by this item is incorporated by reference to
Registrant's 1997 annual report to stockholders.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report on Form
10-K in that the Registrant will file a definitive proxy statement within 120
days after the end of its fiscal year pursuant to Regulation 14A with respect to
the 1998 Annual Meeting of Stockholders (the "Proxy Statement") to be held May
27, 1998 and certain information included therein is incorporated herein by
reference.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors is incorporated
by reference to the information under the caption "Proposal No. 1 -- Election of
Directors" in the Proxy Statement.
The executive officers of the Registrant, who are elected by the board of
directors, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
David M. Clapper..................................... 46 President, Chief Executive Officer and Director
Arthur J. Coury, Ph.D................................ 57 Vice President, Material Research
David J. Enscore, Ph.D............................... 46 Vice President, Development & Drug Delivery
Stephen J. Herman.................................... 50 Vice President, Operations
Glenn M. Kazo........................................ 37 Vice President, Corporate Development
Mary Lou Mooney...................................... 42 Vice President, Clinical and Regulatory Affairs &
Quality
Ronald S. Rudowsky................................... 49 Vice President, Marketing and Procedure Development
W. Bradford Smith.................................... 42 Vice President, Finance and Administration and Chief
Financial Officer
</TABLE>
DAVID M. CLAPPER has been President, Chief Executive Officer and a Director
since joining Focal in July 1993. Before joining Focal, Mr. Clapper was employed
at Johnson & Johnson from 1977 until 1993. He served as Vice President and a
Board member at the Critikon, Inc. division of Johnson & Johnson from July 1992
to July 1993. From 1977 to June 1992, Mr. Clapper held a variety of positions,
including Vice President of Sales & Marketing and a Board Member of Ethicon
Endo-Surgery, and Vice President of Product Management and a Board Member at
Ethicon Inc.. Mr. Clapper holds a B.S. in Marketing from Bowling Green State
University.
27
<PAGE>
ARTHUR J. COURY, PH.D. has been Vice President, Materials Research of the
Company since July 1993. From 1976 to June 1993, Dr. Coury held various
positions with Medtronic, Inc., serving most recently as Director, Polymer
Technology and Corporate Research Fellow. He has over 20 years of biomaterials
research and development experience and has been issued 30 patents. Dr. Coury
holds a Ph.D. in Organic Chemistry and an M.B.A. from the University of
Minnesota.
DAVID J. ENSCORE, PH.D. has been Vice President, Development and Drug
Delivery of the Company since September 1995. From 1979 until joining the
Company, Dr. Enscore held several positions with ALZA Corporation, a
biopharmaceutical company, most recently as Executive Director, Transdermal
Product Development. Dr. Enscore has been issued 15 patents. He holds a Ph.D. in
Chemical Engineering from North Carolina State University.
STEPHEN J. HERMAN has been Vice President, Operations of the Company since
August 1992. From March 1990 to May 1992, Mr. Herman served as President and
Chief Executive Officer of Cardiopulmonary Corporation, a medical equipment
development company. From 1982 to 1990, he held various positions with C. R.
Bard, Inc., a medical device company, most recently as President of its critical
care division. Mr. Herman previously held product development management
positions with Cobe Laboratories. Mr. Herman holds an M.B.A. from the University
of Colorado and a B.S. in Mechanical Engineering from the University of
Missouri.
GLENN M. KAZO has been Vice President, Corporate Development of the Company
since November 1995. During 1995, prior to joining the Company, Mr. Kazo was
Managing Partner of Kazo Associates, a consulting business focusing on health
care strategy and development. From 1981 to 1994, he held various positions with
Enzon, Inc., a biopharmaceutical and drug delivery company, most recently as
Corporate Vice President, Strategic Planning and Public Affairs. Mr. Kazo holds
an M.S. in Biochemistry from Rutgers University.
MARY LOU MOONEY, Vice President, Clinical Affairs, Regulatory Affairs and
Quality, joined the Company in June 1993 as Director, Regulatory Affairs. In
January 1997, Ms. Mooney was promoted to her current position. From March 1991
to June 1993, she held various positions with C.R. Bard Inc., a medical device
company, most recently as Director, Regulatory Affairs and Quality Assurance for
its ventures division. Ms. Mooney has also held regulatory positions with
Cardiac Pacemakers, Inc., Biometric Research Institute, Inc. and Cordis
Corporation. Ms. Mooney holds an M.S. in Biomedical Science from Drexel
University.
RONALD S. RUDOWSKY, Vice President, Marketing and Procedure Development,
joined the Company in January 1994 as Director, Procedure Development. In
January 1997, Mr. Rudowsky was promoted to his current position. From June 1991
to December 1993, he was the Director of Marketing of Ethicon Endo-Surgery, a
medical device company and a division of Johnson & Johnson. Previously, he spent
14 years in various sales and marketing positions at Ethicon, Inc. Mr. Rudowsky
holds a B.B.A. in Marketing from Marshall University.
W. BRADFORD SMITH, Vice President, Finance and Administration and Chief
Financial Officer, joined the Company as Director of Finance in May 1993. In
March 1994, Mr. Smith was appointed to his current position. From June 1990 to
May 1993, he served as Director of Finance for CytoTherapeutics, Inc., a
biotechnology company. Prior to that, he was Director of Finance at ImmuCell
Corporation, a biotechnology company, a Financial Analyst for a division of
Lockheed Corporation and a Senior Accountant with Coopers & Lybrand. Mr. Smith
holds an M.B.A. from the University of New Hampshire and a B.S. from Tufts
University.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" in the Proxy Statement.
28
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Record Date and Stock Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following Financial Statements of Focal, Inc. and Report of Independent
Auditors are incorporated by reference to pages through of the
Registrant's 1997 annual report to stockholders:
Report of Independent Auditors
Balance Sheets, As of December 31, 1997 and 1996
Statements of Operations, Years Ended December 31, 1997, 1996 and 1995
Statements of Stockholders' Equity, Years Ended December 31, 1997, 1996
and 1995
Statements of Cash Flows, Years Ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
2. Financial Statement Schedules
The following financial statement schedule(s) of Focal, Inc. is filed as
part of this report on Form 10-K and should be read in conjunction with the
Financial Statements of Focal, Inc incorporated by reference herein: None
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the notes thereto.
3. EXHIBITS
Refer to (c) below.
(b) Reports on Form 8-K
None.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.2(1) Restated Certificate of Incorporation of the Registrant.
3.3(1) Bylaws of the Registrant as amended.
4.2(1) Specimen Common Stock Certificate.
10.1(1) Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.2(1) 1992 Incentive Stock Plan, as amended, and form of Stock Option Agreement.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.3(1) 1997 Employee Stock Purchase Plan and forms of agreements thereunder.
10.4(1) 1997 Directors' Option Plan and forms of agreements thereunder.
10.5(1) Restated Investors Rights Agreement dated April 12, 1996 among the Registrant and certain stockholders
of the Registrant.
10.6(1) Lease Agreement dated April 4, 1994 between Registrant and The Mutual Life Insurance Company of New
York relating to lease of facility located at 4 Maguire Road, Lexington, MA, as amended to date.
10.7(1) Master Lease Agreement dated October 30, 1992 between Registrant and Comdisco, Inc.
10.8(1) Master Lease Agreement dated February 28, 1994 between Registrant and MMC/GATX Limited Partnership I.
10.9(1) Master Loan and Security Agreement dated April 18, 1997 between Registrant and Transamerica Leasing.
10.10(1) Patent and Technology License Agreement dated June 11, 1992 between Registrant and University of Texas.
10.11(1) Exclusive License Agreement dated August 7, 1992 among Registrant, Marvin Slepian, M.D. and Endoluminal
Therapeutics, Inc.
10.12(1) Collaboration and License Agreement dated April 25, 1996 between Registrant, Ciba Corporation and
Chiron Corporation.
10.13(1) Distribution, License and Supply Agreement dated January 2, 1997 between Registrant and Ethicon, Inc.
10.14(1) Agreement for Consulting Services dated November 15, 1991 between Registrant and Robert Langer, Ph.D.
10.15(1) Agreement for Consulting Services dated August 7, 1992 between Registrant and Marvin Slepian, M.D.
10.16(1) Agreement for Consulting Services and Sabbatical Employment dated June 1, 1992 between Registrant and
Jeffrey Hubbell.
10.17(1) Form of Restricted Stock Purchase Agreement.
10.18(1) Loan Agreement dated March 29, 1995 between Registrant and Ronald Rudowsky.
10.19(1) Loan Agreement dated February 28, 1997 between Registrant and Arthur Coury, Ph.D.
10.20(1) Form of Preferred Shares Rights Agreement between Registrant and Norwest Bank Minnesota N.A.
13 Annual Report to Stockholders
23.1 Consent of Ernst & Young, Independent Auditors
27.1-
27.4 Financial Data Schedules.
</TABLE>
- ------------------------
(1) Incorporated by reference to the like-numbered exhibits previously filed
with Registrant's Registration Statement on Form S-1, File No. 333-38379,
originally filed with the Securities and Exchange Commission on October 21,
1997.
30
<PAGE>
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.
Date: March 27, 1998 FOCAL, INC.
By: /s/ DAVID M. CLAPPER
-----------------------------------------
David M. Clapper,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David M. Clapper and W. Bradford Smith,
jointly and severally, his or her attorneys-in-fact, and each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ DAVID M. CLAPPER Officer and Director
- ------------------------------ (Principal Executive March 27, 1998
(David M. Clapper) Officer)
Vice President, Finance and
/s/ W. BRADFORD SMITH Chief Financial Officer
- ------------------------------ (Principal Financial and March 27, 1998
(W. Bradford Smith) Accounting Officer)
/s/ HENRY BREM Director
- ------------------------------ March 27, 1998
(Henry Brem, M.D.)
/s/ JANET EFFLAND Director
- ------------------------------ March 27, 1998
(Janet Effland)
/s/ ROBERT LANGER Director
- ------------------------------ March 27, 1998
(Robert Langer, Ph.D.)
/s/ MARK J. LEVIN Director
- ------------------------------ March 27, 1998
(Mark J. Levin)
/s/ MICHAEL J. LEVINTHAL Director
- ------------------------------ March 27, 1998
(Michael J. Levinthal)
/s/ FRED E. SILVERSTEIN Director
- ------------------------------ March 27, 1998
(Fred E. Silverstein, M.D.)
/s/ JESSE I. TREU Director
- ------------------------------ March 27, 1998
(Jesse I. Treu, Ph.D.)
31
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
13 Annual Report to Stockholders
23.1 Consent of Ernst & Young, Independent Auditors
27.1-27.4 Financial Data Schedules.
</TABLE>
<PAGE>
Focal, Inc.
Selected Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Collaborative research
revenue......................... $ -- $ -- $ 50 $ 968 $ 3,098 $ 17,489
Operating expenses:
Research and development...... 1,793 7,405 11,890 9,665 11,680 15,712
General and administrative.... 466 1,925 2,034 2,098 2,175 3,058
-------- -------- -------- -------- -------- ---------
Total operating expense........... 2,259 9,330 13,924 11,763 13,855 18,770
Loss from operations.............. (2,259) (9,330) (13,874) (10,795) (10,757) (1,281)
Interest Income................... 6 357 668 443 691 968
Interest Expense.................. 13 44 79 107 92 129
-------- -------- -------- -------- -------- ---------
Net loss.......................... $(2,266) $(9,017) $(13,285) $(10,459) $(10,158) $ (442)
-------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- ---------
Pro forma net loss per share(1)... $ (1.26) $ (0.04)
-------- ---------
-------- ---------
Shares used in computing pro
forma net loss per share........ 8,088,898 10,410,091
--------- ----------
--------- ----------
<CAPTION>
December 31,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
marketable securities.......... $ 6,945 $19,027 $ 12,240 $ 6,948 $ 12,208 $ 33,239
Working capital.................. 6,320 17,776 10,159 4,401 9,003 30,867
Total assets..................... 7,173 20,936 15,331 9,306 14,089 39,606
Capital lease obligations,
long-term portion.............. -- 602 934 462 315 1,422
Total stockholders' equity....... 6,471 18,556 11,626 5,995 10,099 32,512
</TABLE>
(1) The pro forma net loss per share for 1996 has been restated to conform
to SFAS No. 128, "Earnings Per Share." See note 1 to the financial
statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, including the notes thereto, appearing elsewhere in this 10K.
This Management's Discussion and Analysis contains certain forward
looking statements regarding future events with respect to the Company.
Actual events and/or future results of operations may differ materially as a
result of the factors described herein and in the Company's Report on Form
10-K for the year ended December 31, 1997, into which this Management's
Discussion and Analysis is incorporated by reference. Those factors
described under "Business--Product and Product Development Programs,"
"--Strategic Alliances," "--Patents and Proprietary Rights," "--Government
Regulation," "--Competition and Technological Change," "--Sales and
Marketing," "--Manufacturing," "--Competition and Technological Change,"
"--Third Party Reimbursement" and "Factors Affecting Operating Results" in
the 10-K Report should be read in conjunction with this Management's
Discussion and Analysis.
Overview
The Company was founded in 1991, and is focused on the development,
manufacture and commercialization of synthetic, absorbable, liquid surgical
sealants based on the Company's proprietary polymer technology. Since inception,
the Company has funded its operations primarily through the private placement of
equity securities and most recently, in December 1997, through an initial public
offering of common stock. In addition, the Company has entered into strategic
alliances with corporate partners and has recorded revenues totalling $21.5
million through December 31, 1997, in connection with these alliances.
The Company has incurred net losses in each year since its inception,
including net losses of approximately $442,000 during 1997. At December 31,
1997, the Company had an accumulated deficit of $45.9 million. The Company's
modest net loss of $442,000 during the year ended December 31, 1997, resulted
primarily from the receipt of a one-time, non-refundable payment of $7.0
million, as well as receipt of quarterly research and development funding and a
milestone payment under the Company's strategic alliance with Ethicon, Inc., a
division of Johnson and Johnson ("Ethicon"), for FocalSeal surgical sealants.
The Company's operating losses have resulted primarily from expenses incurred in
connection with the Company's research and development activities, including
preclinical and clinical trials, development of manufacturing processes and
general and administrative expenses. The Company expects to incur net losses
into 1999 and may incur net losses in subsequent periods although the amount of
future net losses and time required by the Company to reach profitability are
highly uncertain. The Company is dependent upon corporate partners for funding
of a significant portion of research and development expenses. If the Company
does not continue to receive funding from its current corporate partners, or is
unable to otherwise obtain third-party funding, net losses will continue to
increase. Focal does not expect to generate revenues from the sale of products
until the first half of 1998. The Company's ability to achieve and sustain
profitability will be dependent upon obtaining regulatory approval for and
successfully commercializing its FocalSeal surgical sealants, and developing the
manufacturing capacity and sales and marketing capability for its products.
There can be no assurance that Focal will obtain required regulatory approvals,
or successfully develop, manufacture, commercialize and market products or that
the Company will ever record product revenues or achieve profitability.
Through December 31, 1997, the Company had not recorded any product
revenues. The Company introduced its first commercial product, FocalSeal-L for
lung surgery indications, in Europe in March 1998 through its strategic
marketing alliance with Ethicon. The Company anticipates that revenues derived
from European sales of the Company's FocalSeal surgical sealants will account
for a substantial majority of the Company's near term product revenues. The
Company has obtained a CE mark to market FocalSeal surgical sealant in the
member countries of the European Union.
Results of Operations
Year ended December 31, 1997, compared to year ended December 31, 1996
<PAGE>
Revenues for the year ended December 31, 1997, increased to $17.5
million from $3.1 million for the year ended December 31, 1996, due to higher
collaborative research and development funding, which comprised all of the
Company's revenues during both years. The increase in 1997 was due primarily
to a strategic alliance for surgical sealants entered into with Ethicon in
January 1997. Revenues recorded in connection with this strategic alliance
for the year ended December 31, 1997, included a one-time, non-refundable
payment of $7.0 million, as well as funding of $1.25 million per quarter for
research and development activities and a milestone payment of $2.0 million
for obtaining a CE mark for FocalSeal-L for lung surgery.
Research and development expenses increased to $15.7 million for the year
ended December 31, 1997, from $11.7 million for the year ended December 31,
1996. This increase resulted from the hiring of additional research and
development personnel in 1997, as well as increased clinical trials and
manufacturing start-up costs.
General and administrative expenses increased to $3.1 million for the year
ended December 31, 1997 from $2.2 million for the year ended December 31, 1996.
General and administrative expenses during these years consisted primarily of
personnel costs, which increased due to the hiring of additional administrative
personnel.
Interest income increased to $968,000 for the year ended December 31, 1997, from
$691,000 for the year ended December 31, 1996, as a result of higher average
cash balances.
The Company recorded a net loss of approximately $442,000 for the year ended
December 31, 1997. The Company's modest net loss was primarily the result of
receipt of a one-time payment and quarterly funding of research and
development by Ethicon. The Company anticipates that it will incur net
operating losses at least through 1999.
Year ended December 31, 1996, compared to year ended December 31, 1995
Revenues for 1996 increased to $3.1 million from $968,000 in 1995.
Revenues during both years consisted of research and development funding from
corporate partners. The increase was due to a strategic alliance signed in
April 1996 with Novartis Corporation and Chiron Corporation. Revenues recorded
in connection with corporate alliances in 1996 include one-time payments,
milestone payments and funding for research and development activities.
Research and development expenses increased to $11.7 million in 1996 from
$9.7 million in 1995, due to the hiring of research personnel and increased
clinical trial expenses.
General and administrative expenses increased to $2.2 million in 1996 from
$2.1 million in 1995 and consisted primarily of personnel costs.
Interest income increased to $691,000 in 1996 from $443,000 in 1995 due to
higher cash balances as a result of a $19.7 million private placement completed
in April 1996.
<PAGE>
Liquidity and Capital Resources
Since its inception, the Company has financed operations primarily from
the sale of preferred stock in private placements as well as the Company's
1997 initial public offering. Through December 31, 1997, the Company has
raised approximately $83.5 million from equity financings and has received
$5.9 million in equipment lease financing. In addition, the Company has
received funding from Ethicon and other corporate partners totaling
approximately $21.5 million through December 31, 1997.
Cash used in operations totalled $177,000 in the year ended December 31,
1997, as compared to the use of $8.4 million for the same period of 1996. The
change in cash from operations was due to significantly lower net losses
incurred in 1997, compared to 1996. Cash used in operations is equal to the net
loss incurred for each period, plus non-cash charges such as depreciation and
amortization of property and equipment plus any changes in working capital.
Capital expenditures from inception through December 31, 1997 totaled $6.4
million, representing laboratory equipment, office furniture and equipment,
computers and certain leasehold improvements. The majority of these purchases
have been financed through either direct financing leases or sale and leaseback
arrangements. As of December 31, 1997, the Company did not have any material
commitments for future capital expenditures. In the next 12 to 18 months, the
Company anticipates capital expenditures of approximately $2.5 million for
manufacturing facilities and related equipment. The Company has commitments
from lenders in the form of lease lines totalling $1.5 million to provide for
its expected capital needs during 1998.
Based on a review of its existing information systems, the Company does
not anticipate that it will incur significant costs in connection with
bringing its information systems into compliance with year 2000 requirements.
The Company believes that its existing capital resources, interest income
and future payments due under strategic alliances, will be sufficient to satisfy
its current and projected funding requirements for at least 24 months. Under the
Company's surgical sealant collaboration agreement with Ethicon, the Company
will receive fixed quarterly research and development funding of $750,000 per
quarter through 1998. The Company may receive additional payments under these
agreements for research and development activities and upon achievement of
specified development milestones; however, as such payments are dependent upon
the achievement of such milestones, there can be no assurance as to the receipt
or timing of any such payments. Under certain agreements with universities and
consultants, the Company is obligated to make payments for sponsored research
and consulting services. The Company's research funding commitments under these
agreements totalled approximately $268,000 at December 31, 1997. Payments under
these agreements are typically made on a quarterly or monthly
<PAGE>
basis. There can be no assurance that the Company's capital resources will be
sufficient to enable the Company to conduct its research and development
programs and the magnitude of these programs, progress with preclinical testing
and clinical trials, the time and costs involved in obtaining regulatory
approvals, if any, the costs involved in filing and prosecuting patent
applications and enforcing patent claims, competing technological and market
developments, the establishment of additional strategic alliances, the cost of
manufacturing facilities and of commercialization activities and arrangements,
and the cost of product in-licensing and any possible acquisitions. There can
be no assurance that the Company's cash, cash equivalents and marketable
securities and interest income earned thereon, together with funding that may be
received under the Company's strategic alliances, will be adequate to satisfy
its capital and operating requirements.
The Company intends to seek additional funding through strategic
alliances, and may seek additional funding through public or private sales of
the Company's securities, including equity securities. In addition, the
Company has obtained equipment lease financing and other forms of debt
financing and may continue to pursue opportunities to obtain additional lease
or debt financing in the future. There can be no assurance, however, that
additional equity or debt financing will be available on reasonable terms, if
at all. Any additional equity financing would be dilutive to the Company's
stockholders. If adequate funds are not available, the Company may be
required to curtail significantly one or more of its research and development
programs and/or obtain funds through arrangements with corporate partners or
others that may require the Company to relinquish rights to certain of its
technologies or product candidates.
<PAGE>
Financial Statements
Focal, Inc.
Years ended December 31, 1995, 1996 and 1997
<PAGE>
Focal, Inc.
Financial Statements
Years ended December 31, 1995, 1996 and 1997
Contents
Report of Independent Auditors . . . . . . . . . . . . . . . . 1
Audited Financial Statements
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Operations . . . . . . . . . . . . . . . . . . . 4
Statements of Stockholders' Equity . . . . . . . . . . . . . . 5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . 7
Notes to Financial Statements. . . . . . . . . . . . . . . . . 9
<PAGE>
Report of Independent Auditors
The Board of Directors
and Stockholders
Focal, Inc.
We have audited the accompanying balance sheets of Focal, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Focal, Inc. at December 31,
1996 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
---------------------
Boston, Massachusetts
February 2, 1998
<PAGE>
Focal, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1997
----------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,465,471 $ 26,810,777
Marketable securities 6,742,718 6,428,374
Accrued interest receivable 158,435 201,225
Contract revenues receivable - 2,046,641
Inventories, net - 566,989
Prepaid expenses and other assets 311,881 485,718
-------------------------
Total current assets 12,678,505 36,539,724
Notes receivable from related parties 265,150 343,480
Property and equipment 3,732,451 6,438,098
Less accumulated depreciation and
amortization 2,598,662 3,727,585
-------------------------
Net property and equipment 1,133,789 2,710,513
Other assets 12,049 12,696
-------------------------
Total assets $14,089,493 $39,606,413
----------------------------
----------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
December 31
1996 1997
---------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 501,604 $ 1,577,105
Accrued liabilities 1,864,990 2,454,702
Deferred revenue 655,333 750,000
Current portion of capital lease
obligations 653,932 890,451
---------------------------
Total current liabilities 3,675,859 5,672,258
Capital lease obligations 314,607 1,421,983
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized; none issued and
outstanding - -
Convertible preferred stock, issuable in
series; $.01 par value; 31,681,540 shares
authorized in 1996; 24,345,247 and no
shares issued and outstanding at
December 31, 1996 and 1997, respectively 243,452 -
Common stock, $.01 par value; 50,000,000
shares authorized; 723,344, and 12,868,570
shares issued and outstanding at
December 31, 1996 and 1997, respectively 7,233 128,686
Additional paid-in capital 56,303,958 80,777,780
Accumulated deficit (45,478,469) (45,920,014)
Notes receivable from related parties - (1,688,057)
Deferred compensation (934,104) (768,865)
Unrealized loss on marketable securities (43,043) (17,358)
---------------------------
Total stockholders' equity 10,099,027 32,512,172
---------------------------
Total liabilities and stockholders'
equity $14,089,493 $39,606,413
---------------------------
---------------------------
</TABLE>
See accompanying notes.
3
<PAGE>
Focal, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1995 1996 1997
------------------------------------------
<S> <C> <C> <C>
Collaborative research revenue $ 968,543 $ 3,098,289 $17,489,264
Operating expenses:
Research and development 9,665,091 11,679,942 15,711,504
General and administrative 2,098,138 2,174,911 3,058,424
------------------------------------------
Total operating expenses 11,763,229 13,854,853 18,769,928
------------------------------------------
Loss from operations (10,794,686) (10,756,564) (1,280,664)
Other income (expense):
Interest income 442,505 690,745 968,141
Interest expense (106,895) (92,270) (129,022)
-------------------------------------------
335,610 598,475 839,119
-------------------------------------------
Net loss $(10,459,076) $(10,158,089) $ (441,545)
-------------------------------------------
-------------------------------------------
Pro forma basic and diluted
net loss per share (unaudited) $ (1.26) $ (0.04)
----------------------------
----------------------------
Shares used in computing pro
forma basic and diluted net
loss per share (unaudited) 8,088,898 10,410,091
---------------------------
---------------------------
</TABLE>
See accompanying notes.
4
<PAGE>
Focal, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1994 13,023,095 $130,231 639,329 $6,394 $36,384,778
Issuance of Series E
convertible preferred
stock at $3.15 per
share (net of issuance
costs of $30,406) 1,537,951 15,379 -- -- 4,798,761
Exercise of stock
options -- -- 25,175 251 32,143
Unrealized loss on
marketable securities -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------- ------------ -------------
Balances at
December 31, 1995 14,561,046 145,610 664,504 6,645 41,215,682
Issuance of Series E
convertible preferred
stock at $1.74 per
share (net of
placement fees and
issuance costs
of $798,659) 9,784,201 97,842 -- -- 13,959,510
Exercise of stock
options -- -- 58,840 588 54,129
Unrealized gain on
marketable securities -- -- -- -- --
Deferred compensation -- -- -- -- 1,074,637
Amortization of
deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------- ------------ -------------
Balances at
December 31, 1996 24,345,247 243,452 723,344 7,233 56,303,958
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Notes Gain (Loss)
Receivable on Total
Accumulated From Related Deferred Marketable Stockholders'
Deficit Parties Compensation Securities Equity
----------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1994 $(24,861,304) $ -- $ -- $ (34,346) $ 11,625,753
Issuance of Series E
convertible preferred
stock at $3.15 per
share (net of issuance
costs of $30,406) -- -- -- -- 4,814,140
Exercise of stock
options -- -- -- -- 32,394
Unrealized loss on
marketable securities -- -- -- (18,054) (18,054)
Net loss (10,459,076) -- -- -- (10,459,076)
------------ ------------ ------------ ----------- -------------
Balances at
December 31, 1995 (35,320,380) -- -- (52,400) 5,995,157
Issuance of Series E
convertible preferred
stock at $1.74 per
share (net of
placement fees and
issuance costs
of $798,659) -- -- -- -- 14,057,352
Exercise of stock
options -- -- -- -- 54,717
Unrealized gain on
marketable securities -- -- -- 9,357 9,357
Deferred compensation -- -- (1,074,637) -- --
Amortization of
deferred compensation -- -- 140,533 -- 140,533
Net loss (10,158,089) -- -- -- (10,158,089)
------------ ------------ ------------ ----------- -------------
Balances at
December 31, 1996 (45,478,469) -- (934,104) (43,043) 10,099,027
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Convertible Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Exercise of Stock
Options for notes
receivable -- -- 1,494,775 14,948 1,673,109
Net proceeds from
initial public
offering -- -- 2,500,000 25,000 22,471,550
Conversion of preferred
stock upon IPO (24,345,247) (243,452) 8,117,803 81,178 162,274
Exercise of stock
options and warrants -- -- 32,648 327 13,849
Unrealized gain on
marketable securities -- -- -- -- --
Deferred compensation -- -- -- -- 153,040
Amortization of deffered
compensation -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ----------- -----------
Balances at
December 31, 1997 -- $ -- 12,868,570 $128,686 $80,777,780
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Notes Gain (Loss)
Receivable on Total
Accumulated From Related Deferred Marketable Stockholders'
Deficit Parties Compensation Securities Equity
------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Exercise of Stock
Options for notes
receivable -- (1,688,057) -- -- --
Net proceeds from
initial public
offering -- -- -- -- 22,496,550
Conversion of preferred
stock upon IPO -- -- -- -- --
Exercise of stock
options and warrants -- -- -- -- 14,176
Unrealized gain on
marketable securities -- -- -- 25,685 25,685
Deferred compensation -- -- (153,040) -- --
Amortization of deffered
compensation -- -- 318,279 -- 318,279
Net loss (441,545) -- -- -- (441,545)
------------- ------------ ------------ ----------- -------------
Balances at
December 31, 1997 $(45,920,014) $(1,688,057) $(768,865) $(17,358) $ 32,512,172
------------- ------------ ------------ ----------- -------------
------------- ------------ ------------ ----------- -------------
</TABLE>
6
<PAGE>
Focal, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Operating activities
Net loss $(10,459,076) $(10,158,089) $ (441,545)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and amortization 872,842 969,868 1,128,923
Amortization of deferred
compensation -- 140,533 318,279
Interest accrued on notes
receivable (8,096) (10,604) (112,238)
Loss on sale of equipment,
furniture and fixtures -- 3,647 --
Increase (decrease) in cash
arising from changes of
operating assets and
liabilities:
Accrued interest receivable 135,384 (110,006) (42,790)
Contract revenues receivable -- -- (2,046,641)
Inventories -- -- (566,989)
Prepaid expenses and other
assets 99,729 (58,146) (173,837)
Accounts payable 73,343 (112,894) 1,075,501
Accrued liabilities 48,199 315,969 589,712
Deferred revenue -- 655,333 94,667
------------ ------------ -----------
Net cash used in operating
activities (9,237,675) (8,364,389) (176,958)
Investing activities
Purchase of marketable
securities -- (12,760,761) (9,589,782)
Sale of marketable securities 5,929,346 7,975,000 9,929,811
Issuance of notes receivable (50,000) (88,000) (30,000)
Repayment of notes receivable 45,000 -- 63,908
Purchase of property and
equipment (280,426) (388,683) (2,326,008)
Proceeds from sale of
property and equipment -- 2,150 --
Other assets (42,284) 565,666 (647)
------------ ------------ -----------
Net cash provided by
(used in) investing activities 5,601,636 (4,694,628) (1,952,718)
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Financing activities
Proceeds from issuance
of common stock, net of
repurchases 32,394 54,717 22,510,726
Proceeds from lease financing 312,426 372,356 2,029,382
Principal payments on capital
lease obligations (867,595) (960,243) (1,065,126)
Proceeds from the issuance
of convertible preferred
stock, net of issuance costs 4,464,140 14,057,352 --
Proceeds from notes payable
and advances 350,000 -- --
------------ ------------ -----------
Net cash provided by
financing activities 4,291,365 13,524,182 23,474,982
------------ ------------ -----------
Net increase in cash and
cash equivalents 655,326 465,165 21,345,306
Cash and cash equivalents
at beginning of the year 4,344,980 5,000,306 5,465,471
------------ ------------ -----------
Cash and cash equivalents
at end of the year $ 5,000,306 $ 5,465,471 $ 26,810,777
------------ ------------ -----------
------------ ------------ -----------
Supplemental disclosure
of cash flow information:
Property acquired under
capital lease obligations $ 39,165 $ 408,943 $ 379,639
------------ ------------ -----------
------------ ------------ -----------
Interest paid $ 106,895 $ 92,270 $ 129,022
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See accompanying notes.
8
<PAGE>
Focal, Inc.
Notes to Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies
Organization and Business
Focal, Inc. (the Company) develops, manufactures and commercializes synthetic,
absorbable, liquid surgical sealants based on the Company's proprietary polymer
technology. The Company's family of FocalSeal surgical sealant products is
currently being developed for use inside the body with or without sutures and
staples to seal leaks resulting from lung surgery, neurosurgery, cardiovascular
surgery and gastrointestinal surgery.
Reverse Stock Split
On October 16, 1997, the Board of Directors approved a 1 for 3.25 reverse stock
split of common shares, effected in the form of a reverse stock dividend which
became effective on December 11, 1997. All common share and per common share
amounts included in the accompanying financial statements and notes thereto have
been retroactively restated to give effect to a 1 for 3.25 reverse stock split.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents include funds held in investments with original
maturities of three months or less. Marketable securities consist of
investments in agencies of the U.S. government, investment grade corporate notes
and other investments with original maturities of greater than three months.
9
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
The Company determines the appropriate classification of cash equivalents and
marketable securities at the time of purchase and reevaluates such designation
as of each balance sheet date. The Company has classified such holdings as
available-for-sale securities, which are carried at fair value, with unrealized
gains and losses reported as a separate component of stockholders' equity.
Concentration of Credit Risk
The Company invests its cash equivalents and marketable securities with
institutions that have strong credit ratings. The Company has developed
guidelines relative to investment risk and liquidity.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. At December 31, 1997, inventories consist of purchased materials.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over estimated useful lives of 3-5 years. Property and
equipment under capital leases are amortized using the straight-line method over
the lease term, typically 3-4 years.
Collaborative Research Revenue
Revenues from collaborative research agreements are recognized as earned upon
the incurrence of reimbursable expenses or the achievement of certain
milestones. Payments received in advance of research performed are designated
as deferred revenue. Milestones achieved but not yet reimbursed are designated
as contract revenues receivable.
10
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Research and Development Costs and Patent Costs
All research and development costs, including the cost of acquiring patents and
licensing fees paid in connection with university technology licensing
agreements, are expensed as incurred.
Stock Based Compensation
The Company accounts for its stock based compensation arrangements under the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
rather than the alternative fair value accounting method provided for under FAS
No. 123, "Accounting for Stock-Based Compensation." Under APB 25, when the
exercise price of options granted to employees and non-employee directors under
these plans equals the market price of the underlying stock on the date of
grant, no compensation expense is recorded.
Income Taxes
The liability method is used to account for income taxes. Deferred tax assets
and liabilities are determined based on differences between the financial
reporting and income tax basis of assets and liabilities as well as net
operating loss carryforwards and are measured using the enacted tax rates and
laws that will be in effect when the differences reverse. Deferred tax assets
may be reduced by a valuation allowance to reflect the uncertainty associated
with their ultimate realization.
Unaudited Pro Forma Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. Pursuant to the previous requirements of the Securities and Exchange
Commission (SEC), common shares and common share equivalents issued by the
Company during the twelve-month period prior to the initial public offering of
11
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
the Company's common stock had been included in the calculations as if they were
outstanding for all periods prior to the offering in October 1997 whether or not
they were anti-dilutive. In February 1998 the SEC issued Staff Accounting
Bulletin 98 which, among other things, conformed prior SEC requirements to
Statement 128 and eliminated inclusion of such shares in the computation of
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128 and
SEC requirements.
Pro forma net loss per share for 1997 and 1996 is computed using the weighted
average number of outstanding common shares and convertible preferred shares,
assuming conversion at date of issuance. Historical earnings per share have not
been presented since such amounts are not deemed meaningful due to the
significant change in the Company's capital structure that occurred in
connection with the initial public offering.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" and Statement No. 131, "Disclosures About Segments of an Enterprise
and Related Information." Statement No. 130 establishes standards for the
reporting and display of comprehensive income and its components. Statement
No. 131 establishes standards for the way that public companies report
information about operating segments in financial statements. This Statement
supersedes Statement No. 14, Financial Reporting for Segments of a Business
Enterprise, but retains the requirements to report information about major
customers. Statements 130 and 131 are effective for the Company in fiscal
1998. The Company does not believe that the adoption of these Statements
will have a material effect on the Company's financial statements.
12
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
2. Marketable Securities
Available-for-sale marketable securities consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government securities
due within one year $2,000,000 $9,100 $(50,900) $1,958,200
Corporate notes due
within one year 4,785,761 - (1,243) 4,784,518
--------------------------------------------------
Total debt securities
included in marketable
securities $6,785,761 $9,100 $(52,143) $6,742,718
--------------------------------------------------
--------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government securities
due within one year $2,000,000 $4,200 $(19,300) $1,984,900
Corporate notes due
within one year 4,445,732 - (2,258) 4,443,474
--------------------------------------------------
Total debt securities
included in marketable
securities $6,445,732 $4,200 $(21,558) $6,428,374
--------------------------------------------------
--------------------------------------------------
</TABLE>
Amortized cost basis was used in computing the cost of marketable securities
sold.
13
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
3. Property and Equipment
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------------------------
<S> <C> <C>
Leasehold improvements $ 6,655 $ 1,094,980
Laboratory equipment 2,682,151 3,905,092
Office equipment, computers
and software 635,013 867,667
Furniture and fixtures 408,632 570,359
---------------------------
$ 3,732,451 $ 6,438,098
---------------------------
---------------------------
</TABLE>
4. Accrued Liabilities
Accrued liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------------------------
<S> <C> <C>
Accrued university research
funding and outside scientific
services $ 840,142 $ 950,107
Accrued payroll-related
expenses 283,747 453,481
Accrued professional fees 183,488 349,988
Accrued other 557,613 701,126
---------------------------
$ 1,864,990 $ 2,454,702
---------------------------
---------------------------
</TABLE>
14
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
5. Stockholders' Equity
Preferred Stock
The following table summarizes share information with respect to all series of
convertible preferred stock outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
Preferred Shares
---------------------------
Conversion Number of
Factor into Common Shares
Issued and Common after
Authorized Outstanding Shares Conversion
---------------------------------------------------------
<S> <C> <C> <C> <C>
Series A 1,000,000 1,000,000 .3077 307,700
Series B 666,667 666,667 .3077 205,133
Series C 4,261,467 4,220,183 .3321 1,401,522
Series D 7,553,406 7,136,245 .3811 2,719,622
Series E 18,200,000 11,322,152 .3077 3,483,826
------------------------ ---------------
31,681,540 24,345,247 8,117,803
------------------------ ---------------
------------------------ ---------------
</TABLE>
The preferred stock automatically converted into 8,117,803 shares of common
stock upon the completion of the initial public offering of the Company's
common stock on December 11, 1997.
On October 16, 1997, the Board of Directors approved the authorization of an
additional 5,000,000 shares of preferred stock, $.01 par value, issuable in one
or more series, each of such series to have such rights and preferences,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board of
Directors.
On October 16, 1997, the Board of Directors adopted a Shareholder Rights Plan
(the "Rights Plan") designed to protect shareholders from unsolicited attempts
to acquire the Company on terms that do not maximize stockholder value. In
connection with the Rights Plan, the Board of Directors will designate a certain
number of shares of the Company's preferred stock as Series A Participating
Preferred Stock. Under the Rights Plan, a right to purchase one one-thousandth
15
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
5. Stockholders' Equity (continued)
of one share of the Series A Preferred Stock (the "Rights") will be
distributed as a dividend for each share of common stock. The terms of the
Rights Plan provide that the Rights will become exercisable upon the earlier
of the tenth day after any person or group acquires 15% or more of the
Company's outstanding common stock or the tenth business day after any person
or group commences a tender or exchange offer which would, if completed,
result in the offer or owning 15% or more of the Company's outstanding common
stock. The Rights may generally be redeemed by action of the Board of
Directors at $.001 per Right at any time prior to the tenth day following the
public announcement that any person or group has acquired 15% or more of the
outstanding common stock of the Company. The Rights expire on January 28,
2007. The Rights have certain anti-takeover effects in that they would cause
substantial dilution to the party attempting to acquire the Company.
In certain circumstances, the Rights allow the Company's stockholders to
purchase the number of shares of the Company's common stock having a market
value at the time of the transaction equal to twice the exercise price of the
Rights, or in certain circumstances, the stockholders would be able to acquire
that number of shares of the acquirer's common stock having a market value, at
the time of the transaction, equal to twice the exercise price of the Rights.
The Company will continue to issue Rights with future issuances of common stock.
Warrants
Prior to the initial public offering, the Company granted warrants to secure
lease financing, to raise capital, to obtain letters of credit and as a form of
compensation to various consultants. At December 31, 1997, the Company has
common stock warrants outstanding covering 179,596 shares at exercise prices
ranging from $5.66 to $13.83 per share expiring at various dates through
February 2006.
16
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
5. Stockholders' Equity (continued)
During 1996, the Company granted warrants for the purchase of 19,496 shares of
common stock in connection with the sale of Series E convertible preferred
stock. These warrants were exercised as of the effective date of the Company's
initial public offering in December 1997 through a cashless exercise which
resulted in the issuance of 17,136 shares of common stock.
Stock Options
The 1992 Incentive Stock Plan ("the 1992 Plan") authorizes the grant of
incentive stock options and nonqualified stock options to employees and
nonqualified stock options to consultants. A total of 2,600,000 shares have
been reserved for issuance under the 1992 Plan. The exercise price of incentive
stock options granted under the 1992 Plan may not be less than 100% of the fair
market value of the common stock as of the grant date, as determined by the
Board of Directors. The exercise price of nonqualified stock options may not be
less than 85% of the fair market value of the common stock as of the grant date.
Options issued under the 1992 Plan generally have a four year vesting period,
unless otherwise determined by the Board of Directors. The term of stock
options granted under the 1992 Plan may not exceed ten years. Subject to the
approval of the Board of Directors, the Plan allows option holders the right to
immediately exercise outstanding options (both vested and unvested), with the
subsequent share issuances being subject to a repurchase option by the Company
under certain conditions according to the original vesting schedule and exercise
price.
For certain options granted, the Company recognizes as compensation expense the
excess of the deemed value for accounting purposes of the common stock issuable
upon exercise of such options over the aggregate exercise price of such options.
In connection with these grants, $1,074,637 and $153,040 of deferred
compensation was recorded in the years ended December 31, 1996 and 1997,
respectively. This compensation expense is being amortized over the vesting
period of each option.
In 1995, the Board approved the cancellation of 157,129 options with exercise
prices ranging from $2.44 - $3.25 per common share and the issuance of 157,129
new options at $1.20 per common share.
17
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
5. Stockholders' Equity (continued)
In January 1997, the Board of Directors approved a program under which
directors, executive officers and certain other key employees were permitted to
exercise options to purchase 1,494,775 common shares in exchange for four-year
notes with an interest rate of 6% per annum as permitted by the 1992 Plan. The
notes are full recourse and principal and accrued interest are payable upon the
maturity of the note. Under certain conditions, the shares are subject to a
repurchase option by the Company according to the original vesting schedule. At
December 31, 1997, a total of 787,192 shares issued under the 1992 Plan are
subject to the Company's repurchase option and $1,688,057 of notes receivable
are outstanding and included in the stockholders' equity section of the
accompanying financial statements.
On October 16, 1997, the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (Purchase Plan) and reserved 200,000 shares of common stock for
issuance thereunder. Under the Purchase Plan eligible employees may purchase
common shares at a price per share equal to 85% of the lower of the fair market
value of the common stock at the beginning of a two year offering period or the
end of each six month purchase period included in such offering period.
Participation in the offering period is limited to 15% of the employee's
compensation or $25,000 in any calendar year. The first offering period
commenced in January 1998 and the Purchase Plan will terminate in 2007.
On October 16, 1997, the Board of Directors adopted the 1997 Non-Employee
Director Option Plan (the "Director Plan") and reserved 150,000 shares of common
stock for issuance thereunder. Effective with the 1998 annual meeting of
stockholders and annually thereafter, each nonemployee director will
automatically be granted a nonstatutory option to purchase 5,000 shares of
common stock. The exercise price of each of these options will be equal to the
fair market value of the common stock on the date of grant. Each option granted
under the Director Plan will vest on a cumulative monthly basis over a four-year
period. The Director Plan will terminate in September 2007, unless terminated
earlier in accordance with the provisions of the Director Plan.
18
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
5. Stockholders' Equity (continued)
The following table presents the activity of the 1992 Plan for the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------ -------------------------------- -----------------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
------------ ----------------- -------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year........... 544,787 $1.37 557,894 $.94 1,712,650 $1.14
Granted....................... 239,692 1.63 1,275,691 1.20 313,058 6.40
Exercised..................... (25,176) 1.30 (58,840) .85 (1,510,287) 1.13
Canceled...................... (201,409) 2.63 (62,095) 1.17 (18,154) 2.01
------------ ----------------- -------------- ---------------- ----------------- ------------
Outstanding at end
of year..................... 557,894 $.94 1,712,650 $1.14 497,267 $4.42
------------ ----------------- -------------- ---------------- ----------------- ------------
------------ ----------------- -------------- ---------------- ----------------- ------------
Options exercisable
at end of year.............. 272,979 $.88 537,121 $1.01 184,052 $2.74
------------ ----------------- -------------- ---------------- ----------------- ------------
------------ ----------------- -------------- ---------------- ----------------- ------------
Weighted average fair value per share
of options granted during the year....... $.62 $.46 $3.69
----------------- ---------------- ------------
----------------- ---------------- ------------
</TABLE>
The following table presents weighted average price and life information about
significant option groups outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price
- --------------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$0.72 24,153 5.4 $ 0.72 24,153 $0.72
1.20 180,672 7.8 1.20 107,416 1.20
4.06-5.69 86,353 9.5 4.66 13,506 4.45
7.64 205,689 9.8 7.64 38,977 7.64
10.19 400 9.8 10.19 - -
------------ ------------
497,267 184,052
------------ ------------
------------ ------------
</TABLE>
19
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
5. Stockholders' Equity (continued)
FAS 123 Disclosures
The Company has adopted the disclosure provisions only of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation" ("FAS
123"). If the compensation cost for the option plans had been determined based
on the fair value at the grant date for grants in 1995, 1996 and 1997,
consistent with the provisions of FAS 123, the pro forma net loss and net loss
per share for 1995, 1996 and 1997, would be as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------- -------------------------- -----------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
--------------------------- -------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss......... $(10,459,076) $(10,487,061) $(10,158,089) $(10,287,235) $(441,545) $(791,745)
Net loss per
share.......... $(1.26) $(1.27) $(.04) $(.08)
</TABLE>
The fair value of options and warrants issued at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Options Granted
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Expected life (years) 5.0 5.0 5.0
Interest rate 6.6 6.6 6.0
Volatility 30% 30% 60%
</TABLE>
The Company has never declared nor paid dividends on any of its capital stock
and does not expect to do so in the foreseeable future.
20
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
5. Stockholders' Equity (continued)
The effects on 1995, 1996 and 1997 pro forma net loss and net loss per share
of expensing the estimated fair value of stock options are not necessarily
representative of the effects on reporting the results of operations for
future years as the periods presented include only one, two and three years,
respectively, of option grants under the Company's plans.
Common Stock Reserved for Issuance
At December 31, 1997, the Company has reserved 1,533,967 shares of common
stock for issuance upon the exercise of all outstanding warrants and shares
authorized under the 1992 Plan, Purchase Plan and the Director Plan.
6. Commitments
The Company has a ten-year lease agreement expiring in 2004 for its principal
facility. In connection with this lease, the lessor funded approximately
$4,367,000 of leasehold improvements which are reimbursed as part of the minimum
lease payments. The Company has certain options to purchase the building and
the leasehold improvements.
As of December 31, 1996, the Company was required to provide a $1.2 million
letter of credit collateralizing these leasehold improvements. In addition, the
Company was required to comply with certain financial covenants. Effective
September 1997, the letter of credit requirement under the Company's facility
operating lease was terminated.
The Company leases the majority of its equipment, furniture and fixtures under
capital leases. Included in property and equipment at December 31, 1996 and
1997, respectively, were assets with a cost basis of $3,492,118 and $6,057,532
acquired under capital leases. Accumulated amortization as of December 31, 1996
and 1997, respectively, related to these assets was $2,485,480 and $3,599,571.
21
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
6. Commitments (continued)
As of December 31, 1997, the Company's future minimum lease payments under
capital and operating leases are as follows:
<TABLE>
<CAPTION>
Building
Capital Operating
Leases Lease
----------- -----------
<S> <C> <C>
1998.......................... $1,048,684 $1,095,809
1999.......................... 834,410 1,109,337
2000.......................... 546,852 1,109,337
2001.......................... 187,367 1,109,337
2002.......................... - 1,109,337
Thereafter.................... - 1,975,161
---------- -----------
Total minimum lease payments.. 2,617,313 $7,508,318
-----------
-----------
Less interest................. 304,879
----------
Present value of minimum
lease payments.............. 2,312,434
Less capital lease obligations
due within one year.......... 890,451
----------
Capital lease obligations
long-term portion............ $1,421,983
------------
------------
</TABLE>
Total rent expense was $1,023,770, $1,078,803 and $1,090,332 in 1995, 1996, and
1997, respectively.
Effective April 1997, the Company received commitments totaling $2.5 million
from a leasing company for the financing of equipment and leasehold
improvements. Under this agreement, the term for financing equipment purchases
and leasehold improvements is 48 months and 36 months, respectively. The
interest rate is established as of the commencement date for each new drawdown,
based on a treasury security index, and is fixed for the term of the financing.
There is a fixed percentage buy-out provision at the end of the lease period.
The lease financings are collateralized by the equipment and leasehold
improvements being financed. As of December 31, 1997, there were $2,029,382 in
outstanding borrowings under this financing arrangement. There are no financial
covenants in connection with this lease financing.
22
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
6. Commitments (continued)
Effective January 1998, the Company received another commitment totaling $1.5
million from a leasing company for the financing of equipment and leasehold
improvements.
7. Research and Development and Licensing Agreements
In January 1997, the Company entered into a distribution and licensing agreement
with the Ethicon, Inc. division of Johnson & Johnson ("Ethicon") for the
research, development and commercialization of the Company's surgical sealant
products. Ethicon received marketing rights to all territories outside North
America in exchange for (a) a one-time, nonrefundable payment to the Company for
past research and development expenditures; (b) fixed quarterly funding for two
years to be applied toward future research and development costs; (c) funding of
certain additional research and development expenses; (d) payments upon
achievement of specific milestones; and (e) specified percentages of product
sales, if any, representing a combined royalty and product cost payment. The
Company retained worldwide manufacturing rights and North American marketing
rights. The term of the Ethicon Agreement extends until January 2007, subject
to one year extensions at Ethicon's discretion. In addition, Ethicon may
terminate the agreement at any time after January 2000 upon 12 months' prior
written notice with or without cause.
In April 1996, the Company entered into a collaboration and license agreement
with Novartis and Chiron for the research, development and commercialization of
products for the treatment and prevention of restenosis and received a one-time,
nonrefundable payment at that time. The terms of this agreement provide for
quarterly research and development funding from Novartis and Chiron on the basis
of full-time equivalent personnel engaged on the project. This agreement allows
for certain preclinical and commercial milestone payments of which $500,000 was
received in 1997, and a combined royalty and product cost payment on sales once
a product has been commercialized. Novartis and Chiron received exclusive
worldwide marketing rights for the products developed under the agreement and
the Company retained worldwide manufacturing rights. Novartis terminated the
research collaboration with the Company in January 1998, with funding committed
through March 1998.
23
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
7. Research and Development and Licensing Agreements (continued)
The Company has collaborative research agreements and technology licensing
agreements with certain universities. The Company has worldwide exclusive
licenses to the technologies developed under these agreements, in exchange for
funding certain research and payment of licensing fees and royalties on
applicable product sales. Research and development expense and licensing fees
incurred under these agreements during the years ended December 31, 1995, 1996,
and 1997, totaled $295,000, $156,000, and $144,000, respectively. In connection
with these agreements, the Company has research funding commitments totaling
approximately $268,000 at December 31, 1997.
8. Income Taxes
Due to net losses incurred by the Company in each year since its inception, no
provision for income taxes has been recorded. At December 31, 1997, the Company
had tax net operating loss carryforwards of approximately $43 million and
federal and state research and development tax credit carryforwards of
approximately $2.3 million which expire at various times through 2011.
Significant components of the Company's deferred tax assets as of December 31
are as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating losses.................... $ 17,528,000 $ 17,327,000
Research and development tax credits.... 1,567,000 2,363,000
Other................................... 545,000 735,000
------------ ------------
19,640,000 20,425,000
Valuation allowance..................... (19,640,000) (20,425,000)
------------ ------------
Net deferred tax assets................... $ - $ -
------------ ------------
------------ ------------
</TABLE>
For financial reporting purposes, a valuation allowance has been provided since
realization of such deferred tax assets is uncertain at this time. The
valuation allowance increased by $785,000 during 1997, due primarily to the
increase in tax credits offset by the utilization of net operating loss
carryforwards. The future utilization of the net operating loss carryforwards
may be subject to limitations under the change in stock ownership provisions of
the Internal Revenue Code.
24
<PAGE>
Focal, Inc.
Notes to Financial Statements (continued)
9. Related Party Transactions
A total of $68,800 was paid to the spouse of a member of the Company's Board of
Directors for certain recruiting services performed in 1995.
In connection with an employment agreement, interest-bearing loans aggregating
$120,000 have been made to an officer of the Company. Principal and accrued
interest are payable in full if the aggregate fair value of the common stock
owned by the officer exceeds a certain threshold. Other officer and nonofficer
employee notes receivable, certain of which notes contain similar repayment
terms as those described above, are outstanding and included in notes receivable
from related parties in the accompanying financial statements.
Certain participants in the Company's preferred stock financing transactions
include venture capital funds affiliated with members of the Company's board of
directors.
10. Subsequent Events
Effective January 1998, the underwriters exercised the overallotment option on
375,000 shares of common stock granted to them in connection with the Company's
initial public offering of common stock. The Company received net proceeds of
$3,487,500 from the issuance of these shares.
25
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Focal, Inc. of our report dated February 2, 1998, included in the 1997
Annual Report to Stockholders of Focal, Inc.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996 SEP-30-1997 SEP-30-1996
<CASH> 26,810,777 5,465,471 5,160,698 0
<SECURITIES> 6,428,374 6,742,718 8,054,492 0
<RECEIVABLES> 2,046,641 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 566,989 0 0 0
<CURRENT-ASSETS> 36,539,724 12,678,505 13,749,381 0
<PP&E> 6,438,098 3,732,451 5,789,937 0
<DEPRECIATION> 3,727,585 2,598,662 3,438,419 0
<TOTAL-ASSETS> 39,606,413 14,089,493 16,491,213 0
<CURRENT-LIABILITIES> 5,672,258 3,675,859 4,495,479 0
<BONDS> 0 0 0 0
0 0 0 0
0 243,452 243,542 0
<COMMON> 128,686 7,233 22,280 0
<OTHER-SE> 32,383,486 9,848,342 10,522,616 0
<TOTAL-LIABILITY-AND-EQUITY> 39,606,413 14,089,493 16,491,213 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 17,489,264 3,098,289 12,831,123 2,349,328
<CGS> 0 0 0 0
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 18,769,928 13,854,853 13,035,205 10,252,810
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 129,022 92,270 80,920 71,614
<INCOME-PRETAX> (441,545) (10,158,089) 445,831 (7,459,638)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (441,545) (10,158,089) 445,831 (7,459,638)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (441,545) (10,158,089) 445,831 (7,459,638)
<EPS-PRIMARY> $(.04) $(1.26) $.04 $(.95)
<EPS-DILUTED> $(.04) $(1.26) $.04 $(.95)
</TABLE>
