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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND SPECIAL REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 0-25544
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Miravant Medical Technologies
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(Exact name of Registrant as specified in its charter)
Delaware 77-0222872
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7408 Hollister Avenue, Santa Barbara, California 93117
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(Address of principal executive offices, including zip code)
(805) 685-9880
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $.01 Par Value
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The approximate aggregate market value of voting stock held by
non-affiliates as of March 15, 1999, based upon the last sale price of the
Common Stock reported on the Nasdaq National Market was approximately
$89,064,113. For purposes of this calculation only, the registrant has assumed
that its directors and executive officers, and any person who has filed a
Schedule 13D or 13G, is an affiliate.
The number of shares of Common Stock outstanding as of March 15, 1999
was 17,915,302.
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ITEM 1. BUSINESS
General
Miravant Medical Technologies, formerly PDT, Inc., is engaged in the
integrated development of drugs and medical device products for use in
PhotoPoint(TM), our proprietary technologies for photodynamic therapy.
PhotoPoint is a medical procedure which integrates the use of proprietary
light-activated drugs, proprietary light producing devices and light delivery
devices to achieve selective photochemical destruction of diseased cells. We
believe that PhotoPoint has the potential to be a safe, cost-effective,
minimally invasive primary or adjunctive treatment for indications in a broad
number of disease areas, including oncology, ophthalmology, urology, dermatology
and cardiovascular disease. We are currently conducting clinical trials in
ophthalmology and oncology. Our current clinical trials are testing our leading
drug candidate, SnET2 (tin ethyl etiopurpurin). We are developing products in
collaboration with our corporate partners, including certain subsidiaries of
Pharmacia & Upjohn, Inc.
Effective September 15, 1997, we changed our name from PDT, Inc.
to Miravant Medical Technologies.
See "--Risk Factors" for a discussion of certain risks, including those
relating to operating losses, the early stage of the development of Miravant and
our products, strategic collaborations and forward-looking statements.
Background
Photodynamic therapy is a minimally invasive medical procedure that
uses photoselective, or light-activated, drugs to treat or diagnose disease. The
technology involves three components: photoselective drugs, light producing
devices and light delivery devices.
Photoselective drugs transform light energy into chemical energy in a
manner similar to the action of chlorophyll in green plants. Certain
photoselective drugs accumulate and are retained in fast-growing
(hyperproliferating) cells. Hyperproliferation is a characteristic of cells
associated with a variety of diseases such as cancer, certain vascular disorders
and skin diseases such as psoriasis.
A photoselective drug is typically administered by intravenous
injection and distributes throughout the body. After several hours, the drug
starts to clear from normal tissues but is retained in hyperproliferating
tissues for up to several days. The drug is inactive until exposed to light of a
specific wavelength, which can vary depending on the drug's molecular structure.
Exposing the target cells to the appropriate light wavelength permits selective
activation of the retained drug and initiates a chemical reaction that generates
a highly reactive form of oxygen. High concentrations of this form of oxygen
lead to destruction of the cellular membrane and, ultimately, cell death. The
response of the target cells depends on, among other factors, the drug dose, the
amount of light energy delivered, the physiology of the cell and the vasculature
in the diseased areas. Neither the drug nor the light on its own can cause the
desired effect. The drug is a catalyst which transfers energy. The chemical
reaction stops when the light is turned off. The result of this process is that
diseased cells are destroyed with minimal damage to surrounding normal tissues,
offering the potential for a more selective method of treating disease than
chemotherapy, radiation therapy or surgery, which can damage both normal and
abnormal tissues.
Low-power, non-thermal light can be used to activate photoselective
drugs. As a result, there is little or no risk of thermal damage to surrounding
tissue, as with traditional thermal lasers. The light is typically generated
electronically or by lasers which have been specifically modified for use in
photodynamic therapy. The light is often delivered from the light source to the
patient via specially modified fiber optics. These fiber optic light delivery
devices produce patterns of light for different disease applications and can be
channeled into the body for internal applications.
While light of a specific wavelength is used to cause a photoselective
drug to produce chemical reactions leading to cell death, light of a different
wavelength can be used to cause the same drug to fluoresce (glow). The
fluorescent property of photodynamic drugs offers the potential for their use in
diagnostic applications.
Industry
As early as 1900, scientists observed that certain compounds will
sensitize tissues to light. Since the mid-1970s, various aspects of photodynamic
therapy have been studied and established in humans. Photodynamic therapy is
currently being studied by a variety of companies, physicians and researchers
around the world for the treatment of a broad range of disease applications. We
believe that industry development has been hindered by various drawbacks
including inconsistent drug purity and performance, costly difficult-to-maintain
lasers and non-integrated drug and device development. We are addressing these
issues in our development programs.
Business Strategy
Our objective is to apply PhotoPoint -- our photodynamic therapy
systems, which integrate photoselective drugs, light producing devices and light
delivery devices -- as a primary therapy in targeted disease areas and as an
adjunct to surgery or other therapies in these same or other disease areas.
Although the potential applications for our PhotoPoint systems are numerous, in
1998 we announced our intention to refine our focus to target large potential
market opportunities or diseases with significant unmet medical needs. By doing
so, we believe we may be able to accelerate regulatory processes where
appropriate and facilitate commercial success. In addition, to facilitate
development, regulatory approval, manufacturing, marketing and distribution of
our products, we have or seek to form strategic collaborations with partners who
are leaders in our targeted disease areas.
Technology and Products
We are developing synthetic photoselective drugs together with
software-controlled desktop light producing devices and fiber optic light
delivery and measurement devices for the application of PhotoPoint to a broad
range of disease indications. We believe that by being expert in both PhotoPoint
drugs and devices, and by integrating the development of these technologies, we
can produce easy-to-use PhotoPoint systems which offer the potential for
predictable and consistent results.
Drug Technology. We hold exclusive license rights under certain U.S.
and foreign patents to several classes of synthetic, photoselective compounds,
subject to certain governmental rights. From our classes of compounds, we have
selected SnET2 as our leading drug candidate and have used SnET2 in each of our
clinical trials to date. We have granted to Pharmacia & Upjohn an exclusive,
worldwide license to use SnET2 in the field of photodynamic therapy for disease
indications in the fields of ophthalmology, oncology and urology. We are
developing other potential photoselective drugs for additional disease
applications and future partnering opportunities.
We believe that our synthetic photoselective drugs may provide the
following benefits:
o Predictable. The synthetic nature of our photoselective compounds
permits us to design drugs with a single molecular structure. We
believe that this characteristic may facilitate consistency in
clinical treatment settings, as well as predictability in
manufacturing and quality control.
o Minimal side effects. Treatments to date have been well-tolerated,
with the primary side effect being a mild, transient skin
photosensitivity in some patients.
o Versatile. We can design drugs with specific characteristics, such
as activation by a particular wavelength of light. This
versatility provides us with the potential to customize our drugs
for particular uses and to take advantage of semiconductor light
technology.
Light Producing Devices. Because our photoselective drugs are
synthetic, we have been able to design our drugs to be activated by light
produced by readily available, reliable and relatively inexpensive light
sources. Our light technologies include software-controlled microchip diodes,
light emitting diode or LED arrays and non-thermal lasers. We are collaborating
with Iridex Corporation or Iridex on the development of light producing
devices for PhotoPoint in the field of ophthalmology and have co-developed a
portable, solid state diode light device which is currently being used in
clinical trials.
We believe that our diode and LED array devices offer advantages over
laser technology historically used in photodynamic therapy. For example, our
software-controlled designs offer reliability and built-in control and measuring
features. In addition, our diode systems, which are roughly the size of a
desktop computer, are smaller and more portable than traditional laser systems.
We believe that it has the potential to offer light producing devices that will
be more affordable and convenient than surgical laser systems historically used
in photodynamic therapy.
Light Delivery and Measurement Devices. We are developing and
manufacturing light delivery and measurement devices, including a wide variety
of fiber optic light delivery devices with specialized tips for use in
PhotoPoint. These devices must be highly flexible and appropriate for endoscopic
use and must be able to deliver unique patterns of uniform, diffuse light for
different disease applications. Our products include microlenses that produce a
tiny flashlight beam for discrete surface lesions, the Flex(R) cylinder diffuser
which delivers light in a radial pattern along a flexible tip for sites such as
the esophagus and spherical diffusers which emit a diffuse ball of light for
sites such as the bladder or nasopharynx. Certain of our light delivery devices
have been used in our clinical trials. We have also developed light measurement
devices for PhotoPoint including devices that detect wavelength and fluorescence
to facilitate the measurement of light or drug dose. In addition, through
collaborative arrangements with Boston Scientific Corporation in the fields of
urology, pulmonology and gastroenterology and Cordis Corporation in the field of
cardiovascular disease, we are co-developing medical catheters for use in
PhotoPoint.
Targeted Diseases and Clinical Trials
We believe that PhotoPoint has potential in a wide range of
applications. We have selected, based upon regulatory, clinical and market
considerations, a number of disease applications, discussed below, on which to
focus. Of these applications, age-related macular degeneration, or AMD,
currently represents our highest priority, and represents the largest
collaborative effort with our corporate partner Pharmacia & Upjohn. Our current
clinical trials use SnET2 together with light producing devices and light
delivery devices either developed on our own or in collaboration with our
partners. Our decision to proceed to clinical trials in any application depends
upon such factors as preclinical results, FDA communications, competitive
factors, corporate partner commitment and resources, economic considerations and
our overall business strategy.
Ophthalmology
We believe that PhotoPoint has the potential to treat a variety of
ophthalmic disorders, including conditions caused by neovascularization, such as
AMD, as well as other ophthalmic conditions. Neovascularization is a condition
in which new blood vessels grow abnormally under the surface of the retina or
other parts of the eye. These fragile vessels can hemorrhage, causing scarring
and damage to the nerve tissue and lead to loss of vision. AMD is the leading
cause of blindness in Americans over age 50. We are conducting clinical trials
for the treatment of choroidal neovascularization associated with AMD. We
targeted this area because of the large potential market size as well as the
potential for expedited review by governmental regulatory bodies. In June 1998,
SnET2 received fast track designation from the U.S. Food and Drug
Administration, or FDA, for the treatment of choroidal neovascularization
associated with AMD. Under the FDA Modernization Act of 1997, the FDA gives fast
track designation to drugs and devices that treat serious or life-threatening
conditions that represent unmet medical needs. The designation means that we can
submit data during the clinical trial process based on clinical or surrogate
endpoints that are likely to predict clinical benefit, and the FDA can expedite
its regulatory review. We began Phase III clinical trials for AMD in the United
States in the fourth quarter of 1998. We are collaborating with Pharmacia &
Upjohn on the co-development of SnET2 in the field of ophthalmology and are
collaborating with Iridex, through its subsidiary company, Iris Medical
Instruments, Inc., on the co-development of light devices in this field. In
addition, we have conducted preclinical studies for the treatment of other
ophthalmic diseases such as corneal neovascularization and glaucoma.
Oncology
Cancer is a large group of diseases characterized by uncontrolled
growth and spread of hyperproliferating cells. We targeted this area for our
initial products both because of the large potential market size as well as the
potential for certain cancer treatments to receive expedited review by
governmental regulatory bodies.
Prostate Cancer. Prostate cancer is the most common malignancy in
American men, and mortality from it is second only to lung cancer. Prostate
cancer generally progresses slowly, and 58% of all prostate cancers are
discovered while still localized (cancer has not spread beyond the prostate
gland). We are conducting a Phase I clinical trial using SnET2 for the treatment
of localized prostate cancer.
Other Cancers. In 1998, we announced that we would no longer pursue the
commercialization of cutaneous metastatic breast cancer, or CMBC. This decision
was made because of business considerations such as small market size, increased
costs from changes in FDA required tests, lack of a committed marketing partner
for this disease indication and continued use of internal resources. We
discontinued trials in AIDS-related Kaposi's sarcoma for similar reasons,
including our renewed focus on large market opportunities and those with
significant unmet medical need. The information we obtained from these clinical
trials has provided an invaluable amount of information on our PhotoPoint
treatment in cancer and has enabled us to advance in preclinical studies for the
treatment of a variety of other cancers including lung cancer, brain tumors and
head and neck cancers. We have an existing oncology Investigational New Drug
application, or IND, under which we may choose to submit protocols for clinical
trials in oncology indications.
Dermatology
A number of non-cancerous dermatological disorders have shown potential
for being treated with PhotoPoint. One of these is psoriasis, a chronic and
potentially debilitating skin disorder. We are currently evaluating topical
formulations of SnET2 for psoriasis and other dermatological diseases. We are
collaborating with Medicis Pharmaceutical Corporation on the co-development of
PhotoPoint in the field of dermatology and, under the provisions of our letter
of intent with Medicis, we are responsible for the funding and development of
dermatological clinical trials if we elect to move forward. We are continuing to
evaluate psoriasis as the next possible dermatology indication and may advance
to a clinical trial based on the progress of the development of a topical
formulation, preclinical studies and other factors. Preparations include
development of LED or other light sources and delivery systems for use in
dermatology applications and protocol development for possible clinical trials.
In 1998, development and marketing rights to SnET2 for dermatology reverted from
Pharmacia & Upjohn back to Miravant.
Other Disease Areas
We are investigating the use of PhotoPoint in additional disease areas,
including the field of cardiovascular disease. Early preclinical studies with
PhotoPoint indicate that certain photoselective drugs may be preferentially
retained in the hyperproliferating and lipid-rich components of arterial
plaques, as they are in cancer cells. We are conducting preclinical studies for
the prevention of restenosis, the renarrowing of arterial vessels following
angioplasty. We believe that PhotoPoint may provide a means of preventing
restenosis, or even treating diffuse atherosclerosis. We have collaborated with
Cordis on the joint development of medical catheter devices for such
cardiovascular applications. In addition, we believe that PhotoPoint may provide
a means of reducing intimal hyperplasia, or excessive cell growth at the
anastomosis (stitch) sites, associated with bypass grafts, and we may
collaborate with Ramus Medical Technologies on the application of PhotoPoint in
the area of bypass grafts. Our decision to proceed to clinical trials depends
upon such factors as preclinical results, FDA communications, competitive
factors, corporate partner commitment and the availability of financial
resources, economic considerations and our overall business strategy. In light
of several of these factors, we decided to discontinue development activities in
certain diseases, including dysfunctional uterine bleeding, benign prostatic
hyperplasia and basal cell carcinoma. This will allow us to focus our activities
and resources on other disease applications which better represent large markets
and significant unmet medical needs.
Strategic Collaborations
We are pursuing a strategy of establishing license agreements and
collaborative arrangements for the purpose of securing exclusive access to drug
and device technologies, funding development activities and providing market
access for our products. We seek to obtain from our collaborative partners
exclusivity in the field of photodynamic therapy and to retain certain
manufacturing and co-development rights. We intend to continue to pursue this
strategy where appropriate in order to enhance in-house research programs,
facilitate clinical testing and gain access to distribution channels and
additional technology. To date, we have entered into the following collaborative
arrangements:
Pharmacia & Upjohn
We have had a collaborative relationship with Pharmacia & Upjohn, Inc.
and certain of its subsidiaries, collectively referred to as Pharmacia & Upjohn,
relating to the development and commercialization of SnET2 since 1994. Our
current relationship is critical to our ophthalmology program.
The original SnET2 license agreements with Pharmacia & Upjohn provided for:
o The co-development of, and exclusive marketing rights to, SnET2 in
the fields of oncology, urology and dermatology;
o An equity investment in Miravant; and
o Formulation of the SnET2 drug product.
In 1996, these agreements were amended to include the field of ophthalmology.
In 1998, significant amendments were made, resulting in:
o Additional financial commitment by Pharmacia & Upjohn to oncology;
o Additional flexibility in Miravant's oncology and urology
programs;
o Increased reimbursement commitment by Pharmacia & Upjohn to the
ophthalmology program; and
o The development and marketing rights for SnET2 in dermatology
reverting back to Miravant.
In 1999, the agreements were again amended and supplemented, as follows:
o Pharmacia & Upjohn increased its participation in ophthalmology by
assuming operational control of the clinical and regulatory
aspects of the joint ophthalmic programs, including AMD;
o Pharmacia & Upjohn made an additional $19.0 million equity
investment in Miravant, and extended a line of credit to Miravant
of $22.5 million;
o Eliminated certain AMD milestone payments and oncology clinical
reimbursements; and
o Added a right of first negotiation by Pharmacia & Upjohn to SnET2
marketing rights for the cardiovascular field, subject to certain
limitations.
License Agreements. Under a July 1995 development and license agreement
and subsequent amendments, collectively referred to as the License Agreements,
we granted to Pharmacia & Upjohn an exclusive, worldwide license to use,
distribute and sell SnET2 for use in PhotoPoint in the fields of ophthalmology,
oncology, urology, and right of first negotiation in cardiovascular diseases.
Under the amended License Agreements:
o Pharmacia & Upjohn is responsible for conducting certain aspects
of clinical trials involving SnET2 and to fund other current and
future preclinical studies and clinical trials conducted by us
involving SnET2;
o We are entitled to receive royalties on the sale of SnET2,
payments for certain contemplated indications upon the achievement
of certain milestones and reimbursement for certain expenses;
o Pharmacia & Upjohn has agreed to promote, market and sell SnET2 in
certain fields, subject to certain limitations, to refrain from
developing or selling other photodynamic therapy drugs in the
fields contained in the License Agreements during the agreement
term; and
o Pharmacia & Upjohn has a right of first negotiation with respect
to the marketing rights to any new photodynamic therapy drug
developed by Miravant in the fields contained in the License
Agreements, as well as right of first negotiation to SnET2 for
cardiovascular indications.
With respect to ophthalmology, the License Agreements remain in force
for the duration of the patents related to SnET2 or for a period of ten years
from the first commercial sale of SnET2 on a country-by-country basis, whichever
is longer. After those periods have expired, Pharmacia & Upjohn will have an
irrevocable, royalty-free, non-exclusive license to SnET2. With respect to
oncology and urology, the license agreement remains in force for so long as
Pharmacia & Upjohn is required to pay royalties; certain additional termination
provisions apply, which may terminate the agreement as early as July 1, 2000.
Equity Investment Agreement. In 1999, in connection with the amended
license agreement, Miravant and Pharmacia & Upjohn entered into an Equity
Investment Agreement, under which Pharmacia & Upjohn purchased from Miravant
1,136,533 shares Common Stock for an aggregate purchase price of $19.0 million.
This agreement is in addition to an earlier (1995) stock purchase agreement,
under which Pharmacia & Upjohn purchased 600,000 shares of Common Stock from
Miravant for $12.0 million, subject to certain restrictions.
Credit Agreement. In 1999, in connection with the amended license
agreement, Miravant and Pharmacia & Upjohn entered into a Credit Agreement under
which Pharmacia & Upjohn will lend to Miravant up to $22.5 million in the form
of quarterly term loans to be used to support Miravant's ophthalmology, oncology
and other development programs, as well as for general corporate purposes,
subject to certain affirmative, negative and financial covenants and
requirements. Pharmacia & Upjohn may also receive a total of up to 360,000
warrants to purchase Miravant Common Stock. The exercise price of each warrant
will be equal to 140% of the average of the closing prices of the Common Stock
for the ten (10) trading days immediately preceding the borrowing request for
the related loan.
Drug Supply Agreement. Under a Drug Supply Agreement we agreed to
manufacture, or have manufactured, and supply to Pharmacia & Upjohn, upon
specified payment terms, Pharmacia & Upjohn's requirements of SnET2 in finished
pharmaceutical form for clinical and commercial purposes in the area of
photodynamic therapy in the fields of oncology and ophthalmology. The Drug
Supply Agreement remains in force for the term of the License Agreements,
subject to termination under certain limited circumstances. Upon termination, we
have agreed to continue to provide SnET2 to Pharmacia & Upjohn on terms to be
negotiated by the parties.
Device Supply Agreement. Under a Device Supply Agreement we appointed
Pharmacia & Upjohn as a non-exclusive worldwide distributor of certain
instruments developed, manufactured or licensed by Miravant that produce,
deliver or measure light, collectively known as light devices, for use with
SnET2 in photodynamic therapy in the fields contained in the License Agreements.
The Device Supply Agreement provides for the sale by Miravant to Pharmacia &
Upjohn of such light devices at specified rates and we are responsible for the
development and regulatory approval of the light devices. During the term of the
Device Supply Agreement, Pharmacia & Upjohn is prohibited from developing,
manufacturing or purchasing from third parties such light devices or
distributing or selling them for use with any photodynamic drug other than
SnET2. If, however, we decide not to or are unable to manufacture or supply a
particular light device, Pharmacia & Upjohn is entitled to manufacture that
device. The Device Supply Agreement remains in force during the term of the 1995
development and license agreement, subject to earlier termination under limited
circumstances.
Formulation Agreement. In August 1994, we entered into a supply
contract with Pharmacia & Upjohn to develop an emulsion formulation suitable for
intravenous administration of SnET2. Under this agreement, Pharmacia & Upjohn
agreed to the following:
o They will be our exclusive supplier of such emulsion products;
o They will manufacture and supply all of our worldwide requirements
of certainemulsion formulations containing SnET2; and
o They will not develop or supply formulations or services for use
in any photodynamic therapy applications for any other company.
This agreement continues indefinitely except that it may be terminated
ten (10) years after the first commercial sale of SnET2. Effective November 30,
1998, Pharmacia & Upjohn's rights and obligations under the Formulation
Agreement were assigned to Fresenius Kabi LLC, a subsidiary of Fresenius AG, as
part of an Asset Transfer Agreement between Pharmacia & Upjohn and Fresenius.
Operating terms of the Formulation Agreement were not changed as part of the
assignment.
Iridex Corporation
In May 1996, we entered into a co-development and distribution
agreement with Iridex, a leading provider of semiconductor-based laser systems
to treat eye diseases. The agreement generally provides:
o Miravant with the exclusive right to co-develop with Iridex light
producing devices for use in photodynamic therapy in the field of
ophthalmology;
o We will conduct clinical trials and make regulatory submissions
with respect to all co-developed devices and Iridex will
manufacture all devices for such trials, with costs shared as set
forth in the agreement; and
o Iridex will have an exclusive, worldwide license to make,
distribute and sell all co-developed devices, on which it will pay
us royalties.
The agreement remains in effect, subject to earlier termination in
certain circumstances, until ten (10) years after the date of the first FDA
approval of any co-developed device for commercial sale, subject to certain
renewal rights. The light producing device used in AMD clinical trials was
co-developed with Iris Medical Instruments Inc., a subsidiary of Iridex, under
this agreement, and its commercialization is governed in part by this
agreement.
The University of Toledo, The Medical College of Ohio and St. Vincent Medical
Center
In July 1989, we entered into a License Agreement with the University
of Toledo, the Medical College of Ohio and St. Vincent Medical Center, of
Toledo, Ohio, collectively referred to as Toledo. This agreement provides us
with, among other items, exclusive, worldwide rights:
o To make, use, sell, license or sublicense certain photoselective
compounds (including SnET2) covered by certain Toledo patents and
patent applications, or not covered by Toledo patents or patent
applications but owned or licensed to Toledo (and which Toledo has
the right to sublicense);
o To make, use, sell, license or sublicense certain of the compounds
for which we have provided Toledo with financial support; and
o To make, use or sell any invention claimed in Toledo patents or
applications and any composition, method or device related to
compounds conceived or developed by Toledo under research funded
by Miravant.
The agreement further provides that we pay Toledo royalties on the
sales of the compounds. As of December 31, 1998, no royalties had been paid or
accrued since no drug or related product had been sold. Under the agreement, we
are required to satisfy certain development and commercialization objectives.
This agreement terminates upon the expiration or non-renewal of the last patent
which may issue under this agreement, currently 2013. By its terms, however,
the license extends upon issuance of any new Toledo patents. We do not have
contractual indemnification rights against Toledo under the agreement. Some of
the research relating to the compounds covered by the License Agreement,
including SnET2, has been or is being funded in part by certain governmental
grants under which the United States Government has or will have certain rights
in the technology developed, including the right under certain circumstances to
a non-exclusive license or to require Miravant to grant an exclusive license to
a third party.
Boston Scientific Corporation
In December 1993, we executed a strategic development letter agreement
with Boston Scientific Corporation, a leading developer, manufacturer and
marketer of catheter-based medical technology, for the joint development of
catheter-based light delivery devices for photodynamic therapy in the fields
of urology, pulmonology and gastroenterology. The letter agreement is intended
to provide the framework for a more definitive agreement, relating to, among
other things, the distribution, manufacturing and licensing of developed
products, and continues until the parties enter into such an agreement. At this
time, Miravant and Boston Scientific have not entered into a more definitive
agreement.
Chiron Diagnostics
In November 1997, we executed a letter of intent with Chiron
Diagnostics, a subsidiary of Bayer Corporation and an international leader in in
vitro diagnostics, to collaborate on studies directed towards the early
detection and treatment of lung cancer. The alliance is designed to give us a
potentially more sensitive, less invasive and less costly way to identify
patients in early stages of cancer who are eligible for participation in
PhotoPoint clinical trials. In addition to assisting us in these clinical
trials, Chiron has agreed to work exclusively with us in the field of
photodynamic therapy for certain oncology indications.
Cordis Corporation
In December 1993, we executed a strategic development letter agreement
with Cordis Corporation, a Johnson & Johnson company and a leader in coronary
catheter devices, for the joint development of catheter-based light delivery
devices for photodynamic therapy in the cardiovascular field. The letter
agreement under which the parties are collaborating is intended to provide the
framework for a more definitive agreement, relating to, among other things, the
distribution, manufacturing and licensing of developed products, and continues
until the parties enter into a definitive agreement. At this time, Miravant
and Cordis have not entered into a definitive agreement.
Laserscope
In April 1992, we entered into a seven (7) year License and
Distribution Agreement with Laserscope of San Jose, California, a leader in the
surgical laser industry. Under this agreement, among other terms:
o We granted to Laserscope rights to manufacture and sell a dye
laser module developed by us;
o We retained the right to manufacture and sell this system for use
with our own photoselective drugs; and
o Laserscope agreed to pay to us a license fee and royalties on
Laserscope's sales.
We had developed this light producing device prior to the development
of our current diode light systems. This agreement terminates in April 1999, at
which point Laserscope will have a fully paid-up, non-exclusive license to use
the technology.
Medicis Pharmaceutical Corporation
In October 1997, we executed a letter of intent with Medicis
Pharmaceutical Corporation, the leading independent dermatology company in the
United States, to develop and commercialize certain PhotoPoint procedures for
dermatology applications. The letter agreement is intended to facilitate the
clinical development of PhotoPoint in dermatology and provide the framework for
a more definitive agreement which would grant Medicis an exclusive license to
distribute and sell certain PhotoPoint products in the United States. At this
time, Miravant and Medicis have not entered into a definitive agreement.
Ramus Medical Technologies
In December 1996, our wholly owned subsidiary, Miravant Cardiovascular,
Inc., entered into a co-development agreement with Ramus, an innovator in the
development of autologous tissue stent-grafts for vascular bypass surgeries.
Generally the agreement provides us with the exclusive rights to co-develop our
photodynamic therapy technology with Ramus' proprietary technology in the
development of autologous vascular grafts for coronary arteries and other
vessels. Ramus shall provide, at no cost to us, products for use in preclinical
studies and clinical trials with all other preclinical and clinical costs to be
paid by us. The agreement remains in effect until the later of ten (10) years
after the date of the first FDA approval of any co-developed device for
commercial sale, or the life of any patent issued on a co-developed device,
subject to certain renewal rights.
In conjunction with the co-development agreement, we purchased a 33%
equity interest in Ramus for $2.0 million, and obtained an option to acquire the
remaining shares of Ramus. We have declined to exercise this option and the
option period has now expired. Further, we have first refusal rights and
pre-emptive rights for any issuance of new securities, whether debt or equity,
made by Ramus and Ramus must maintain certain financial and other covenants.
Additionally, we entered into a revolving credit agreement with Ramus which
provided Ramus with the ability to borrow up to $2.0 million.
Xillix Technologies Corp.
In June 1998, Miravant purchased a 9% equity interest in Xillix
Technologies Corp. for $5.0 million. In conjunction with the investment, we also
entered into an exclusive strategic alliance agreement with Xillix to co-develop
proprietary systems incorporating PhotoPoint and Xillix's fluorescence imaging
technology for diagnosing and treating early stage cancer and pre-malignant
tissues. The agreement provides that both companies will own co-developed
products and will share the research and development costs associated with the
development program. Xillix will receive drug royalty payments from us based on
the sale of our drugs used in conjunction with the co-developed technology.
Research and Development Programs
Our research and development programs are devoted to the discovery and
development of drugs and devices for PhotoPoint. These research activities are
conducted in-house in our pharmaceutical and engineering laboratories or
elsewhere in collaboration with medical or other research institutions or with
other companies. We have expended, and expect to continue to spend, substantial
funds on our research and development programs.
Our pharmaceutical research program is focused on the ongoing
evaluation of our proprietary compounds for different disease applications.
Among our outside or extramural research, we are conducting preclinical studies
at various academic and medical research institutions in the United States. We
are also active in the research and development of devices for PhotoPoint. These
programs include development of fiber optic light delivery devices and
measurement devices for accuracy in dosimetry. Device research and development
is presently conducted either in-house or in collaboration with partners.
We have pursued and been awarded various government grants and
contracts, such as grants sponsored by the National Institutes of Health and the
Small Business Innovative Research Administration, which complement our research
efforts and facilitate new development.
Manufacturing
Our strategy is generally to retain manufacturing rights and maintain
pilot manufacturing capabilities and, where appropriate due to financial and
production constraints, to partner with leading pharmaceutical and medical
device companies for certain elements of our manufacturing processes. We are
licensed by the State of California to manufacture bulk drug substance at our
Santa Barbara, California facility for clinical trial use. We currently
manufacture active SnET2 drug substance, light producing devices and light
delivery devices, and conduct other production and testing activities, at this
location. However, we have limited capabilities and experience in the
manufacture of drug, light producing and light delivery products and utilize
outside suppliers, contracted or otherwise, for certain materials and services
related to our manufacturing activities. Although most of our materials and
components are available from various sources, we are dependent on certain
suppliers for key materials or services used in our drug and light producing and
light delivery device development and production operations. One such supplier
is Fresenius, which processes SnET2 into a sterile injectable formulation and
packages it in vials for distribution by Miravant. We expect to continue to
develop new formulations which may or may not have similar dependencies on
suppliers. In addition, regulatory approval will be necessary before we can
manufacture drug substance for commercial use.
In February 1997, we received registration to ISO 9001 and EN 46001
signifying compliance to the International Standards Organization quality
systems requirements for design, manufacture and distribution of medical
devices. This registration should enable us to more easily attain international
device marketing approvals.
Marketing, Sales and Distribution
Our strategy is to partner with leading pharmaceutical and medical
device companies for the marketing, sales and distribution of our products. We
have granted to Pharmacia & Upjohn the exclusive, worldwide license to market
and sell our leading drug candidate SnET2 in certain disease fields. Under the
terms of our co-development arrangements with Boston Scientific and Cordis,
these companies have the option of negotiating to enter into long-term
agreements with Miravant, under which they will have a license to market and
sell the co-developed medical catheters - Boston Scientific in the fields of
urology, pulmonology and gastroenterology and Cordis in the field of
cardiovascular disease- on a worldwide basis. At this time, we have not
entered into long-term agreements. Also, we have granted to Iridex the
worldwide license to market and sell all co-developed light producing devices
for use in PhotoPoint in the field of ophthalmology, subject to certain
provisions with Pharmacia & Upjohn, and we have granted to Medicis the worldwide
license to market and sell certain drugs for use in PhotoPoint in the field of
dermatology.
Where appropriate, we intend to seek additional arrangements with
collaborative partners, selected for experience in diseaseapplications or
markets, to act as our marketing and sales arm and to establish distribution
channels for our drugs and devices. We may also distribute our products directly
or through independent distributors.
Patents and Proprietary Technology
We pursue a policy of seeking patent protection for our technology both
in the United States and in selected countries abroad. We plan to prosecute,
assert and defend our patent rights when appropriate. We also rely upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
We are currently the record owner of 26 United States patents, which
expire during the time frame 2010 through 2017, a substantial number of which
relate to certain light delivery and measurement devices and methods. We are
also the record owner of four foreign patents expiring during the time frame
from 2012 to 2014. We have a number of United States (and related foreign)
patent applications filed and pending. In addition, we have exclusive license
rights under 16 issued United States patents, which expire during the time frame
from 2006 through 2013, and three issued foreign patents expiring in 2006, and
under several pending United States and foreign patent applications, relating to
certain photoselective compounds, as well as rights to five method-of-use
patents and one co-owned formulation patent.
We obtained the majority of our photoselective compound patent rights,
including rights to SnET2, through an exclusive License Agreement with Toledo.
This agreement is the basis for our core drug technology. Certain of the
foregoing patents and applications are subject to certain governmental rights
described below.
It is our policy to require our employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of our
relationship are to be kept confidential and not disclosed to third parties
except in specific limited circumstances. We also require signed confidentiality
or material transfer agreements from any company that is to receive confidential
data or proprietary compounds. In the case of employees and consultants, the
agreements generally provide that all inventions conceived by the individual
while rendering services to us, which relate to our business or anticipated
business, shall be assigned to us as our exclusive property.
Certain of our research, including research relating to certain
pharmaceutical compounds covered by the License Agreement with Toledo, including
SnET2, has been or is being funded in part by Small Business Innovation Research
Administration or National Institutes of Health grants. As a result, the United
States Government has or will have certain rights in the inventions developed
with the funding. These rights include a non-exclusive, paid-up, worldwide
license under such inventions for any governmental purpose. In addition, the
government has the right to require us to grant an exclusive license under any
of such inventions to a third party if the government determines that:
o Adequate steps have not been taken to commercialize such
inventions;
o Such action is necessary to meet public health or safety needs; or
o Such action isnecessary to meet requirements for public use under
federal regulations.
Federal law requires that any exclusive licensor of an invention that
was partially funded by federal grants (which is the case with the subject
matter of certain patents issued in our name or licensed from Toledo) agree
that it will not grant exclusive rights to use or sell the invention in the
United States unless the grantee agrees that any products embodying the
invention will be manufactured substantially in the United States, although
such requirement is subject to a discretionary waiver by the government. It is
not expected that the government will exercise any such rights or that such
exercise would have a material impact on us.
Government Regulation
The research, development, manufacture, marketing and distribution of
our products are subject to regulation for safety and efficacy by numerous
governmental authorities in the United States and other countries. In the United
States, pharmaceutical products and medical devices are regulated by the FDA
through the Food, Drug and Cosmetic Act, known as the FDC Act. The FDC Act and
various other federal and state statutes control and otherwise affect the
development, approval, manufacture, testing, storage, records and distribution
of drugs and medical devices. We are subject to regulatory requirements
governing both drugs and devices.
Drug Products. The FDA generally requires the following steps
before a new drug product may be marketed in the United States:
o Preclinical studies (laboratory and animal tests);
o The submission to the FDA of an application for an IND exemption,
which must become effective before human clinical trials may
commence;
o Adequate and well-conducted clinical trials to establish safety
and efficacy of the drug for its intended use;
o The submission to the FDA of a New Drug Application, or NDA; and
review and approval of the NDA by the FDA before any commercial
sale or shipment of the drug.
In addition to obtaining FDA approval for each new drug product, each
drug manufacturing establishment must be registered with the FDA. Manufacturing
establishments, both domestic and foreign, are subject to inspections by or
under the authority of the FDA and by other federal, state or local agencies
and must comply with the FDA's current Good Manufacturing Practices, or GMP,
regulations. The FDA will not approve an NDA until a preapproval inspection of
the manufacturing facilities confirms that the drug is produced in accordance
with current drug GMPs. In addition, drug manufacturing establishments in
California must also be licensed by the State of California and must comply
with manufacturing, environmental and other regulations promulgated and
enforced by the California Department of Health Services.
Preclinical studies include laboratory evaluation of product chemistry,
conducted under Good Laboratory Practices, or GLP, regulations, and animal
studies to assess the potential safety and efficacy of the drug and its
formulation. The results of the preclinical studies are submitted to the FDA as
part of the IND. Unless the FDA objects to the IND, the IND becomes effective 30
days following its receipt by the FDA.
Clinical trials involve the administration of the investigational drug
to human subjects under FDA regulations and other guidance commonly known as
Good Clinical Practice, or GCP, requirements under the supervision of a
qualified physician. Clinical trials are conducted in accordance with protocols
that detail the objectives of the study, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol is submitted to
the FDA as a part of the IND. Each clinical study must be conducted under the
auspices of an independent Institutional Review Board, or IRB. The IRB
considers, among other things, ethical factors, the safety of human subjects and
the possible liability of the testing institution.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap.
o Phase I represents the initial introduction of the drug to a small
group of humans to test for safety (adverse effects), dosage
tolerance, absorption, distribution, metabolism, excretion and
clinical pharmacology and, if possible, to gain early evidence of
effectiveness;
o Phase II involves studies in a limited sample of the intended
patient population to assess the efficacy of the drug for a
specific indication, to determine dose tolerance and optimal dose
range and to identify possible adverse effects and safety risks;
and
o Once a compound is found to have some efficacy and to have an
acceptable safety profile in Phase II evaluations, Phase III
clinical trials are initiated for definitive clinical safety and
efficacy studies in a broader sample of the patient population at
multiple study sites. The results of the preclinical studies and
clinical trials are submitted to the FDA in the form of an NDA for
marketing approval.
Completing clinical trials and obtaining FDA approval for a new drug
product is likely to take several years and require expenditure of substantial
resources. If an NDA application is submitted, there can be no assurance that
the FDA will approve the NDA. Even if initial FDA approval is obtained, further
studies may be required to gain approval for the use of a product as a treatment
for clinical indications other than those for which the product was initially
approved. Also, the FDA requires post-market surveillance programs to monitor
and report the drug's side effects. For certain drugs, the FDA may also,
concurrent with marketing approval, seek agreement from the sponsor to conduct
post-marketing ("Phase IV") studies to obtain further information about the
drug's risks, benefits and optimal use. Results of such monitoring and of Phase
IV post-marketing studies may affect the further marketing of the product.
Where appropriate, we may seek to obtain accelerated review and/or
approval of products and to use expanded access programs that may provide
broader accessibility and, if approved by the FDA, payment for an
investigational drug product. Examples of such activities include pursuing
programs such as treatment IND or parallel track IND classifications which allow
expanded availability of an investigational treatment to patients not in the
ongoing clinical trials, and seeking physician or cross-referenced INDs which
allow individual physicians to use an investigational drug before marketing
approval and for an indication not covered by the ongoing clinical trials.
However, there can be no assurance that we will seek such avenues at any time,
or that such activities will be successful or result in accelerated review or
approval of any of our products.
Medical Device Products. Our medical device products are subject to
government regulation in the United States and foreign countries. In the United
States, we are subject to the rules and regulations established by the FDA
requiring that our medical device products are safe and efficacious and are
designed, tested, developed, manufactured and distributed in accordance with FDA
regulations.
Under the FDC Act, medical devices are classified into one of three
classes (i.e., class I, II, or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Safety and effectiveness can
reasonably be assured for class I devices through general controls (e.g.,
labeling, premarket notification and adherence to GMPs) and for class II devices
through the use of 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 device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a premarket approval application, or PMA. A PMA requires the
completion of extensive clinical trials comparable to those required of new
drugs and typically requires several years before FDA approval, if any, is
obtained. A 510(k) clearance will be granted if the submitted data establish
that the proposed device is "substantially equivalent" to a legally marketed
class I or class II medical device, or to a class III medical device for which
the FDA has not called for PMAs. Currently, devices indicated for use in
photodynamic therapy, such as our devices, regardless of classification, must be
evaluated in conjunction with an IND as a combination drug-device product.
Combination Drug-Device Products. Medical products containing a
combination of drugs, devices or biological products may be regulated as
"combination products." A combination product is generally defined as a product
comprised of components from two or more regulatory categories (drug/device,
device/biologic, drug/biologic, etc.) and in which the various components are
required to achieve the intended effect and are labeled accordingly. Each
component of a combination product is subject to the rules and regulations
established by the FDA for that component category, whether drug, biologic or
device. Primary responsibility for the regulation of a combination product
depends on the FDA's determination of the "primary mode of action" of the
combination product, whether drug, biologic or device.
In order to facilitate premarket review of combination products, the
FDA designates one of its centers to have primary jurisdiction for the premarket
review and regulation of both components, in most cases eliminating the need to
receive approvals from more than one center. The determination whether a product
is a combination product or two separate products is made by the FDA on a
case-by-case basis. Market approval authority for combination photodynamic
therapy drug/device products is vested in the FDA Center for Drug Evaluation and
Research, or CDER, which is required to consult with the FDA Center for Devices
and Radiological Health. As the lead agency, the CDER administers and enforces
the premarket requirements for both the drug and device components of the
combination product. The FDA has reserved the decision on whether to require
separate submissions for each component until the product is ready for premarket
approval. Although, to date, photodynamic therapy products have been categorized
by the FDA as combination drug-device products, the FDA may change that
categorization in the future, resulting in different submission and/or approval
requirements.
If separate applications for approval are required in the future for
PhotoPoint devices, it may be necessary for us to submit a PMA or a 510(k) to
the FDA for our PhotoPoint devices. Submission of a PMA would include the same
clinical studies submitted under the IND to show the safety and efficacy of the
device for its intended use in the combination product. A 510(k) notification
would include information and data to show that our device is substantially
equivalent to previously marketed devices. There can be no assurance as to the
exact form of the premarket approval submission required by the FDA or
post-marketing controls for our PhotoPoint devices.
Post-Approval Compliance. Once a product is approved for marketing, we
must continue to comply with various FDA, and in some cases Federal Trade
Commission, requirements for design, safety, advertising, labeling, record
keeping and reporting of adverse experiences associated with the use of a
product. The FDA actively enforces regulations prohibiting marketing of products
for non-approved uses. Failure to comply with applicable regulatory requirements
can result in, among other things, fines, injunctions, civil penalties, failure
of the government to grant premarket clearance, premarket approval or export
certificates for devices or drugs, delays or suspensions or withdrawals of
approvals, seizures or recalls of products, operating restrictions and criminal
prosecutions. Changes in existing requirements or adoption of new requirements
could have a material adverse effect on our business, financial condition and
results of operations.
International. We are also subject to foreign regulatory requirements
governing testing, development, marketing, licensing, pricing and/or
distribution of drugs and devices in other countries. These regulations vary
from country to country. Beginning in 1995, a new regulatory system to approve
drug market registration applications was implemented in the European Union, or
EU. The system provides for new centralized, decentralized and national (member
state by member state) registration procedures through which a company may
obtain drug marketing registrations. The centralized procedure allows for
expedited review and approval of biotechnology and high technology/innovative
product marketing applications by a central Committee for Proprietary Medicinal
Products that is binding on all member states in the EU. The decentralized
procedure allows a company to petition individual EU member states to review and
recognize a market application previously approved in one member state by the
national route. Our devices must also meet the new Medical Device Directive
effective in Europe in 1998. The Directive requires that our manufacturing
quality assurance systems and compliance with technical essential requirements
be certified with a CE Mark authorized by a registered notified body of an EU
member state prior to free sale in the EU. Registration and approval of a
photodynamic therapy product in other countries, such as Japan, may include
additional procedures and requirements, nonclinical and clinical studies, and
may require the assistance of native corporate partners.
Competition
The pharmaceutical and medical device industries are characterized by
extensive worldwide research and development efforts and rapid technological
change. Competition from other domestic and foreign pharmaceutical or medical
device companies and research and academic institutions in the areas of product
development, product and technology acquisition, manufacturing and marketing is
intense and is expected to increase. These competitors may succeed in obtaining
approval from the FDA or other regulatory agencies for their products more
rapidly than Miravant. Competitors have also developed or are in the process of
developing technologies that are, or in the future may be, the basis for
competitive products.
We believe that a primary competitive issue will be the performance
characteristics of photoselective drugs, including product efficacy and safety,
as well as availability, price and patent position, among other issues. As the
photodynamic therapy industry evolves, we believe that new and more
sophisticated devices will be required and that the ability of any group to
develop advanced devices will be important to market position. We believe that,
after approval, competition will be based on product reliability, clinical
utility, patient outcomes, marketing and distribution partner capabilities,
availability, price and patent position.
We are aware of various competitors involved in the photodynamic
therapy arena. We understand that these companies are conducting preclinical
studies and/or clinical trials in various countries and for a variety of disease
indications. One such company is QLT PhotoTherapeutics or QLT. We understand
that QLT's drug Photofrin(R) has received marketing approval in the United
States and certain other countries for various specific disease indications. QLT
is also conducting clinical testing of another drug for the treatment of AMD,
which may be first to market.
Employees
As of March 15, 1999, we employed 171 individuals, approximately 88 of
which were engaged in research and development, 40 were engaged in manufacturing
and clinical activities and 43 in general and administrative activities. We
believe that our relationship with our employees is good and none of the
employees are represented by a labor union.
Risk Factors
This Annual Report on Form 10-K contains forward-looking statements,
which involve known and unknown risks and uncertainties. These statements relate
to our future plans, objectives, expectations and intentions. These statements
may be identified by the use of words such as "expects," "anticipates,"
"intends," "plans" and similar expressions. Our actual results could differ
materially from those discussed in these statements. The factors listed below
are not intended to represent a complete list of the general or specific risks
that may affect us. It should be recognized that other risks may be significant,
presently or in the future, and the risks set forth below may affect us to a
greater extent than indicated.
Early Stage of the Company and its Products
Our business is at an early stage of development. No revenues have been
generated from sales of our drugs and only limited revenues have been generated
from sales of our devices. We do not expect to achieve significant levels of
revenues for at least several years. Our revenues to date have consisted, and
for the foreseeable future are expected to consist, principally of grants
awarded, payments for our devices, license fees, royalties, clinical
reimbursements, milestone payments and interest income. Our ability to generate
significant revenues in the future is dependent upon:
o Successfully completing our research or product development
efforts or those of our collaborative partners;
o Successfully transforming our drugs or devices currently under
development into marketable products;
o Obtaining the required regulatory approvals;
o Manufacturing our products at an acceptable cost and with
appropriate quality;
o Favorable acceptance of any products marketed; and
o Successful marketing and sales efforts of our corporate
partner(s).
We may not be successful in achieving any of the above, and if we are
not successful, our business, financial condition and operating results could be
adversely affected. The time frame necessary to achieve these goals for any
individual product is long and uncertain. Most of our products currently under
development will require significant additional research and development and
preclinical studies and clinical trials, and all will require regulatory
approval prior to commercialization. The likelihood of our success must be
considered in light of these and other problems, expenses, difficulties,
complications and delays.
Unproven Safety and Efficacy; Clinical Trials
All of our drug and device products currently under development will
require extensive preclinical studies and clinical trials prior to regulatory
approval for commercial use. None of our products have completed testing for
efficacy or safety in humans. Some of the risks and uncertainties related to
safety and efficacy testing and the completion of preclinical studies and
clinical trials include:
o Our ability to demonstrate to the FDA that SnET2 or any other of
our products is safe and efficacious;
o Our ability to successfully commence and complete the testing for
any of our compounds within any specified time period, if at all;
o Clinical data reported may change as a result of the continuing
evaluation of patients;
o Data obtained from preclinical studies and clinical trials are
subject to varying interpretations which can delay, limit or
prevent approval by the FDA or other regulatory authorities;
o Problems in research and development, preclinical studies or
clinical trials that will cause us to delay, suspend or cancel
clinical trials; and
o As a result of changing economic considerations, competitive or
new technological developments, market approvals or changes,
clinical or regulatory conditions, or clinical trial results, our
focus may shift to other indications, or we may determine not to
further pursue one or more of the indications currently being
pursued.
To date, we have limited experience in conducting clinical trials. We
will either need to rely on third parties, including our collaborative partners,
to design and conduct any required clinical trials or expend resources to hire
additional personnel or engage outside consultants or contract research
organizations to administer the clinical trials. We may not be able to find
appropriate third parties to design and conduct clinical trials or we may not
have the resources to administer clinical trials in-house.
Reliance on Collaborative Partners
We have entered into collaborative relationships with certain
corporations and academic institutions for the research and development,
preclinical studies and clinical trials, licensing, manufacturing, sales and
distribution of our products. These collaborative relationships include:
o In 1995, we entered into a collaborative agreement with Pharmacia
& Upjohn, which was subsequently amended in 1996, 1998 and 1999,
pursuant to which we granted to Pharmacia & Upjohn an exclusive
worldwide license to use, distribute and sell SnET2 for
therapeutic or diagnostic applications in photodynamic therapy for
ophthalmology, oncology and urology;
o Collaborations with Boston Scientific and Cordis for the
co-development of catheters for use in photodynamic therapy;
o Collaborations with Medicis for the clinical development of
PhotoPoint in dermatology;
o Collaborations with Chiron for the early detection and treatment
of lung cancer;
o Collaborations with Iridex, Ramus and Xillix for the development
of devices for use in photodynamic therapy in the fields of
ophthalmology, cardiovascular disease and oncology, respectively;
and
o Collaborations with Fresenius for final drug formulation and drug
product supply.
The amount of royalty revenues and other payments, if any, ultimately
paid by Pharmacia & Upjohn globally to Miravant for sales of SnET2 is dependent,
in part, on the amount and timing of resources Pharmacia & Upjohn commits to
research and development, clinical testing and regulatory and marketing and
sales activities, which are entirely within the control of Pharmacia & Upjohn.
Pharmacia & Upjohn may not pursue the development and commercialization of SnET2
and/or may not perform its obligations as expected. Also, we have not yet
entered into any definitive collaborative agreements with Boston Scientific,
Cordis, Medicis or Chiron. These collaborations may not culminate in definitive
collaborative agreements or marketable products. Additionally, Iridex, Ramus and
Xillix may not continue the development of devices for use in photodynamic
therapy, or such development may not result in marketable products.
We are currently at various stages of discussions with other companies
regarding the establishment of collaborations. Our current and future
collaborations are important to us because they allow us greater access to
funds, to research, development or testing resources and to manufacturing, sales
or distribution resources that we would otherwise not have. We intend to
continue to rely on such collaborative arrangements. Some of the risks and
uncertainties related to the reliance on collaborations include:
o Our ability to negotiate acceptable collaborative arrangements;
o Future or existing collaborative arrangements may not be
successful or may not result in products that are marketed or
sold;
o Such collaborative relationships may limit or restrict us;
o Collaborative partners are free to pursue alternative
technologies or products either on their own or with others,
including our competitors, for the diseases targeted by our
programs and products;
o Our partners may terminate the relationships described above, and
we may be required to seek other partners, or expend substantial
additional resources to pursue these activities independently.
These efforts may not be successful; and
o Our ability to manage, interact and coordinate our timelines and
objectives with our strategic partners.
Competition and Technological Uncertainty
Many of our competitors have substantially greater financial, technical
and human resources than we do, and may also have substantially greater
experience in developing products, conducting preclinical studies or clinical
trials, obtaining regulatory approvals and manufacturing and marketing. Further,
our competitive position could be materially adversely affected by the
establishment of patent protection by our competitors. The existing competitors
or other companies may succeed in developing technologies and products that are
more safe, effective or affordable than those being developed by us or that
would render our technology and products less competitive or obsolete.
Liability or Recall
The use of our products in clinical trials and the sale of our products
may expose us to liability claims. These claims could be made directly by
patients or consumers, or by companies, institutions or others using or selling
our products. The following are some of the risks related to liability and
recall:
o We are subject to the inherent risk that a governmental authority
or third party may require the recall of one or more of our
products;
o We have not obtained liability insurance that would cover a claim
relating to the use or recall of our products;
o In the absence of liability insurance,claims made against us or
a product recall could have a material adverse effecton us;
o If we obtain insurance coverage in the future, this coverage may
not beavailable at a reasonable cost and in amounts sufficient to
protect us against claims that could have a material adverse
effect on our financial condition and prospects; and
o Liability claims relating to our products or a product recall
could negatively effect our ability to obtain or maintain
regulatory approval for our products.
We have agreed to indemnify certain of our collaborative partners
against certain potential liabilities relating to the manufacture and sale of
SnET2 and PhotoPoint light devices.
Government Regulation
The production and marketing of our products and our ongoing research
and development, preclinical studies and clinical trial activities are subject
to extensive regulation and review by numerous governmental authorities in the
United States, including the FDA, and in other countries. All drugs and most
medical devices we develop must undergo rigorous preclinical studies and
clinical trials and an extensive regulatory approval process administered by the
FDA under the FDC Act, and comparable foreign authorities, before they can be
marketed. These processes involve substantial cost and can often take many
years. We have limited experience in, and limited resources available for
regulatory activities. Failure to comply with the applicable regulatory
requirements can, among other things, result in non-approval, suspensions of
regulatory approvals, fines, product seizures and recalls, operating
restrictions, injunctions and criminal prosecution. To date, none of our product
candidates being developed have been submitted for approval or have been
approved by the FDA or any other regulatory authority for marketing. Some of the
risks and uncertainties include:
o Delays in obtaining approval or rejections due to regulatory
review of each submitted new drug, device or combination
drug/device application or product license application, as well as
changes in regulatory policy during the period of product
development;
o If regulatory approval of a product is granted, such approval may
entail limitations on the uses for which the product may be
marketed;
o If regulatory approval is obtained, the product, our manufacturer
and the manufacturing facilities are subject to continual review
and periodic inspections;
o If regulatory approval is obtained, such approval may be
conditional on the satisfaction of the completion of clinical
trials or require additional clinical trials;
o Later discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on such
product or manufacturer, including withdrawal of the product from
the market and litigation; and
o Photodynamic therapy products have been categorized by the FDA as
combination drug-device products. If current or future drug/device
products do not continue to be categorized for regulatory purposes
as combination products, then:
o The FDA may require separate drug and device submissions;
and
o The FDA may require separate approval by regulatory
authorities.
Internationally, beginning in 1995, a new regulatory system to approve
drug market registration applications was implemented in the EU. The system
provides for new centralized, decentralized and national registration procedures
through which a company may obtain drug marketing registrations. The centralized
procedure allows for expedited review and approval of biotechnology and high
technology/innovative product marketing applications by a central Committee for
Proprietary Medicinal Products. The decentralized procedure allows a company to
petition individual EU member states to review and recognize a market
application previously approved in one member state by the national route. Some
of the international risks and uncertainties include:
o Foreign regulatory requirements governing testing, development,
marketing, licensing, pricing and/or distribution of drugs and
devices in other countries;
o Our drug products may not qualify for the centralized review
procedure or we may not be able to obtain a national market
application that will be accepted by other EU member states;
o Our devices must also meet the new Medical Device Directive
effective in Europe in 1998. The Directive requires that our
manufacturing quality assurance systems and compliance with
technical essential requirements be certified with a CE Mark
authorized by a registered notified body of an EU member state
prior to free sale in the EU; and
o Registration and approval of a photodynamic therapy product in
other countries, such as Japan, may include additional procedures
and requirements, nonclinical and clinical studies, and may
require the assistance of native corporate partners.
Other Laws; Future Legislation or Regulations
In addition to the regulations for drug or device approvals, we are
subject to regulation under state, federal or other law, including regulations
for worker occupational safety, laboratory practices, environmental protection
and hazardous substance control. We continue to make capital and operational
expenditures for protection of the environment in amounts which are not
material. Some of the risks and uncertainties related to laws and future
legislation or regulations include:
o Our future capital and operational expenditures may increase and
become material;
o We may also be subject to other present and possible future local,
state, federal and foreign regulation;
o Heightened public awareness and concerns regarding the growth in
overall health care expenditures in the United States, combined
with the continuing efforts of governmental authorities to contain
or reduce costs of health care, may result in the enactment of
national health care reform or other legislation or regulations
that impose limits on the number and type of medical procedures
which may be performed or which have the effect of restricting a
physician's ability to select specific products for use in certain
procedures;
o Such new legislation or regulations may materially adversely
affect the demand for our products. In the United States, there
have been, and we expect that there will continue to be, a number
of federal and state legislative proposals and regulations to
implement greater governmental control in the health care
industry;
o The announcement of such proposals may materially adversely
affect our ability to raise capital or to form collaborations;
and
o Legislation or regulations that impose restrictions on the price
that may be charged for health care products or medical devices
may adversely affect our results of operations.
We are unable to predict the likelihood of adverse effects which might
arise from future legislative or administrative action, either in the United
States or abroad.
Health Care Reimbursement
Our products may not be covered by the various health care providers.
If they are not covered, our products may or may not be purchased or sold as
expected. Our ability to commercialize our products successfully may depend, in
part, on the extent to which reimbursement for these products and related
treatment will be available from collaborative partners, government health
administration authorities, private health insurers, managed care entities and
other organizations. These payers are increasingly challenging the price of
medical products and services and establishing protocols and formularies, which
effectively limit physicians' ability to select products and procedures.
Uncertainty exists as to the reimbursement status of health care products
(especially innovative technologies). Additionally, reimbursement coverage, if
available, may not be adequate to enable us to achieve market acceptance of our
products or to maintain price levels sufficient for realization of an
appropriate return on our products.
Limited Manufacturing and Marketing Capability and Experience
To be successful, our products must be manufactured in commercial
quantities under current GMP, prescribed by the FDA and at acceptable costs.
Although we intend to manufacture drugs and devices, we have not yet
manufactured any products in commercial quantities under GMP and have no
experience in such commercial manufacturing. We currently have the capacity, in
conjunction with our manufacturing partners Pharmacia & Upjohn and Iridex, to
manufacture products at certain commercial levels and will be able to do so upon
FDA approval. If we receive an FDA or other regulatory approval we may need to
expand our manufacturing capabilities and/or depend on our collaborators,
licensees or contract manufacturers for the expanded commercial manufacture of
our products. If we expand our manufacturing capabilities, we will need to
expend substantial funds, hire and retain significant additional personnel and
comply with extensive regulations. We may not be able to expand successfully or
we may be unable to manufacture products in increased commercial quantities for
sale at competitive prices. Further, we may not be able to enter into future
manufacturing arrangements with collaborators, licensees, or contract
manufacturers on acceptable terms or at all. If we are not able to expand our
manufacturing capabilities or enter into additional commercial manufacturing
agreements, our business growth could be limited and could be materially and
adversely affected.
We have limited experience in marketing, distributing and selling
pharmaceutical or medical device products. We will need to develop a sales force
or rely on our collaborators or licensees or make arrangements with others to
provide for the marketing, distribution and sale of our products. We are
currently relying on Pharmacia & Upjohn and Iridex for these needs. Our
marketing, distribution and sales capabilities or current or future arrangements
with third parties for such activities may not be adequate for the successful
commercialization of our products.
Uncertainty Regarding Patents and Proprietary Technology
Our success will depend, in part, on our and our licensors' ability to
obtain, assert and defend our patents, protect trade secrets and operate without
infringing the proprietary rights of others. The exclusive license relating to
various drug compounds, including our leading drug candidate SnET2, may become
non-exclusive if we fail to satisfy certain development and commercialization
objectives. The termination or restriction of our rights under this or other
licenses for any reason would likely have a material adverse impact on the our
business and financial condition. Although we believe we should be able to
achieve such objectives, we may not be successful.
The patent position of pharmaceutical and medical device firms
generally is highly uncertain. Some of the risks and uncertainties include:
o The patent applications owned by or licensed to us may not result
in issued patents;
o Our issued patents may not provide us with proprietary protection
or competitive advantages;
o Our issued patents may be infringed upon or designed around by
others;
o Our issued patents may be challenged by others and held to be
invalid or unenforceable; and
o The patents of others may have a material adverse effect on us.
We are aware that our competitors and others have been issued patents
relating to photodynamic therapy. In addition, our competitors and others may
have been issued patents or filed patent applications relating to other
potentially competitive products of which we are not aware. Further, our
competitors and others may in the future file applications for, or otherwise
obtain proprietary rights to, such products. These existing or future patents,
applications or rights may conflict with our or our licensors' patents or
applications. Such conflicts could result in a rejection of our or our
licensors' applications or the invalidation of the patents. This could have a
material adverse effect on our competitive position. If such conflicts occur, or
if we believe that such products may infringe on our proprietary rights, we may
pursue litigation or other proceedings, or may be required to defend against
such litigation. Such proceedings may materially adversely affect our
competitive position, and we may not be successful in any such proceeding.
Litigation and other proceedings can be expensive and time consuming, regardless
of whether we prevail. This can result in the diversion of substantial
financial, managerial and other resources from other activities. An adverse
outcome could subject us to significant liabilities to third parties or require
us to cease any related research and development activities or product sales.
Some of the risks and uncertainties include:
o We do not have contractual indemnification rights against the
licensors of the various drug patents;
o We may be required to obtain licenses under dominating or
conflicting patents or other proprietary rights of others;
o Such licenses may not be made available on terms acceptable to
us, if at all; and
o If we do not obtain such licenses, we could encounter delays
or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed.
We also seek to protect our proprietary technology and processes in
part by confidentiality agreements with our collaborative partners, employees
and consultants. These agreements could be breached and we may not have adequate
remedies for any breach. Also, our trade secrets may become known or be
independently discovered by competitors. Certain research activities relating to
the development of certain patents owned by or licensed to us were funded, in
part, by agencies of the United States Government. When the United States
Government participates in research activities, it retains certain rights that
include the right to use the resulting patents for government purposes under a
royalty-free license.
We also rely upon unpatented trade secrets, and no assurance can be
given that others will not independently develop substantially equivalent
proprietary information and techniques, or otherwise gain access to our trade
secrets or disclose such technology, or that we can meaningfully protect its
rights to its unpatented trade secrets and know-how.
Dependence upon Key Personnel and Consultants
Our success will depend in large part on our ability to attract and
retain highly qualified scientific, management and other personnel and to
develop and maintain relationships with leading research institutions and
consultants. We are highly dependent upon principal members of our management,
key employees, scientific staff and consultants which we may retain from time to
time. Competition for such personnel and relationships is intense, and we may
not be able to continue to attract and retain such personnel. Our consultants
may be affiliated with or employed by others, and some have consulting or other
advisory arrangements with other entities that may conflict or compete with
their obligations to us. Inventions or processes discovered by such persons will
not necessarily become our property and may remain the property of such persons
or others.
Dependence upon Suppliers
We depend on outside suppliers for certain raw materials and components
for our products. Such raw materials or components may not continue to be
available to our standards or on acceptable terms, if at all, and alternative
suppliers may not be available to us on acceptable terms, if at all. Further, we
may not be able to adequately produce needed materials or components in-house.
We are currently dependent on single, contracted sources for a couple of key
materials or services used by us in our drug development, light producing and
light delivery device development and production operations. Although most of
our raw materials and components are available from various sources, we are
currently developing qualified backup suppliers for each of these resources. We
have or will enter into agreements with these suppliers, which may or may not be
successful or which may encounter delays or other problems, which may materially
adversely affect our business.
Environmental Matters
We are subject to federal, state, county and local laws and regulations
relating to the protection of the environment. In the course of our business, we
are involved in the handling, storage and disposal of materials that are
classified as hazardous. Our safety procedures for handling, storage and
disposal of such materials are designed to comply with applicable laws and
regulations. However, we may be involved in contamination or injury from these
materials. If this occurs, we could be held liable for any damages that result,
and any such liability could materially and adversely affect us. Further, the
cost of complying with these laws and regulations may increase materially in the
future.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Our computer
equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, such as:
o A temporary inability to process accounting, payroll, database,
network and software transactions;
o Possible disruption of environmental, lighting, security controls
and other corporate equipment;
o A temporary inability to process clinical and preclincal testing
and data; and
o Loss of telephone and related voicemail and internet messages,
in addition to other similar normal business activities.
We have undertaken various initiatives intended to ensure that our
computer equipment and software will function properly with respect to dates in
the Year 2000 and thereafter. The term "computer equipment and software"
includes systems that are commonly thought of as Information Technology or IT
systems, including accounting, data processing and telephone/PBX systems and
other miscellaneous systems. It also includes systems that are not commonly
thought of as IT systems, such as alarm systems, fax machines, air conditioning
units, internally developed software and other miscellaneous systems. Based upon
our efforts to date, we believe that certain of the computer equipment and
software we use may require replacement or modification. Utilizing both internal
and external resources to identify and assess needed Year 2000 remediation, we
currently anticipate that our Year 2000 identification, assessment, remediation
and testing efforts, which began in February 1998, will be completed by June 30,
1999. We estimate that as of December 31, 1998, we had completed approximately
60% of the initiatives that we believe will be necessary to fully address
potential Year 2000 issues relating to our computer equipment software and
non-IT systems. The projects comprising the remaining 40% of the initiatives are
in process and are expected to be completed on or about June 30, 1999. The
following table describes the Year 2000 initiatives as well as our progress and
the anticipated completion dates as of December 31, 1998:
<TABLE>
<CAPTION>
Expected
Year 2000 Initiatives Completion Percent
Date Complete
---------- --------
<S> <C> <C>
Initial IT system identification...................................... 10/98 100%
Initial IT system assessment.......................................... 11/98 100%
Remediation regarding central system issues........................... 6/99 60%
Testing regarding central system issues............................... 6/99 10%
Identification, assessment, remediation and testing regarding desktop
and individual system issues........................................ 6/99 60%
Identification regarding non-IT system issues......................... 10/98 100%
Assessment regarding non-IT system issues............................. 11/98 100%
Remediation regarding non-IT system issues............................ 6/99 60%
Testing regarding non-IT system issues................................ 6/99 10%
</TABLE>
We are in the process of communicating with our significant vendors and
service providers and strategic partners to determine the extent to which
interfaces with such entities are vulnerable to Year 2000 issues and whether the
products and services utilized by such entities are Year 2000 compliant. This
process is expected to be completed in May 1999.
We believe that the cost of our Year 2000 efforts, as well as those
costs related to Year 2000 issues of third parties, are expected to approximate
$250,000. As of December 31, 1998, we had not incurred any external costs
related to our Year 2000 efforts. Other non-Year 2000 IT efforts have not been
materially delayed or impacted by Year 2000 initiatives. We presently believe
that the Year 2000 issue will not pose significant operational problems for us.
However, if all Year 2000 issues are not properly identified, the Year 2000
issue may materially adversely impact our results of operations or adversely
affect our relationships with vendors, or others. Additionally, the Year 2000
issues of other entities may have a material adverse impact on our systems or
results of operations.
Volatility of Stock Price
The market prices for our Common Stock, and the securities of emerging
pharmaceutical and medical device companies, have historically been highly
volatile and subject to extreme price fluctuations, which may have a material
adverse effect on the market price of the Common Stock. Extreme price
fluctuations could be the result of the following:
o Future announcements concerning Miravant or our collaborators,
competitors or industry;
o The results of our testing, technological innovations or new
commercial products;
o The achievement of or failure to achieve certain milestones;
and
o Governmental regulations, rules and orders, or developments
concerning safety of our products.
In addition, the stock market has experienced extreme price and volume
fluctuations. This volatility has significantly affected the market prices of
securities of many emerging pharmaceutical and medical device companies for
reasons frequently unrelated or disproportionate to the performance of the
specific companies. These broad market fluctuations may materially adversely
affect the market price of the Common Stock.
ITEM 2. PROPERTIES
We have entered into four leases for approximately 101,050 square feet
of office, laboratory and potential manufacturing space in Santa Barbara,
California. The first lease for approximately 18,900 square feet of space was
entered into in 1992 and the base rent for 1998, which is adjusted annually
based on increases in the consumer price index, was $24,400 per month. This
lease was extended in March 1999 and expires in October 2003. The facility is
equipped and licensed to allow certain laboratory testing and manufacturing. We
manufacture and distribute our active SnET2 drug substance from this facility.
In the second half of 1996, we entered into two additional leases for
approximately 54,800 square feet of office, laboratory and manufacturing space.
Each lease provides for rent to be adjusted annually based on increases in the
consumer price index and the total rent for both leases was $64,700 per month in
1998. These leases were extended in March 1999 and expire in August 2002. Each
leased property is located in a business park and is subject to a master lease
agreement. We manufacture our light producing and light delivery devices and
perform research and development of drugs, light delivery and light producing
devices from these facilities.
In July 1998, we entered into a fourth lease agreement for
approximately 27,400 square feet of primarily office space. The current base
rent for this lease is $34,200 per month. The lease expires in October 2003 and
provides for rent to be adjusted annually based on increases in the consumer
price index. The lease also allows us the ability to sublet all or a portion of
the property and it is management's intention to sublet this space during 1999.
The leased property is located in a business park where our headquarters are
located and is subject to a master lease agreement.
For each of the four facilities noted above, we may continue to incur
additional costs for the construction of the manufacturing, laboratories and
office space associated with these facilities.
During 1997, we entered into a letter of intent with a local developer
to have a facility constructed to house our operations for the foreseeable
future. We continue to work with the developer with the expected completion date
in 2001. Depending on our future needs and financial capabilities we may or may
not continue this project.
In September 1997, the Company began to sublease approximately 3,900
square feet of one of its buildings to Ramus Medical Technologies. The sublease
agreement is for three years with rent based upon the percentage of square
footage occupied. Rental income from Ramus, which is approximately $4,500 per
month, is also subject to increases based upon the consumer price index.
ITEM 3. LEGAL PROCEEDINGS
We are not currently party to any material litigation or proceeding and
are not aware of any material litigation or proceeding threatened against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our Common Stock is traded on The Nasdaq National Market under the
symbol MRVT. From August 30, 1995 to September 12, 1997, our Stock was traded on
The Nasdaq National Market under the symbol PDTI. Effective September 15, 1997,
we changed our name to Miravant Medical Technologies and our ticker symbol to
MRVT. The following table sets forth high and low sales prices per share of
Common Stock as reported on The Nasdaq National Market based on published
financial sources.
<TABLE>
<CAPTION>
High Low
---- ---
1998:
<S> <C> <C>
First quarter.................................................................................. $39.00 $28.56
Second quarter................................................................................. 36.00 21.88
Third quarter.................................................................................. 28.75 4.69
Fourth quarter................................................................................. 17.69 6.13
1997:
First quarter.................................................................................. $37.25 $25.50
Second quarter................................................................................. 36.75 22.75
Third quarter.................................................................................. 60.75 34.00
Fourth quarter................................................................................. 72.00 30.50
</TABLE>
As of March 15, 1999, there were approximately 306 stockholders of
record of the Common Stock. Except for the three for two split of the Common
Stock declared for stockholders of record at July 24, 1995, we have never paid
dividends, cash or otherwise, on our capital stock and do not anticipate paying
any dividends in the foreseeable future. We currently intend to retain
future earnings, if any, to finance the growth and development of our business.
Any future determination to pay dividends will be at the discretion of the Board
of Directors and will be dependent upon our financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors deems relevant. Our credit agreement with Pharmacia & Upjohn
prohibits the payment of dividends on the Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with summary historical financial
data of Miravant Medical Technologies. We have prepared this information
using the consolidated financial statements of Miravant for the five years
ended December 31, 1998. The financial statements for the five fiscal years
ended December 31, 1998 have been audited by Ernst & Young LLP.
When you read this summary of historical financial data, it is
important that you read along with it the historical statements and related
notes in our annual and quarterly reports filed with the SEC, as well as the
section of our annual and quarterly reports titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
(in thousands, except share and per share data)
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ....................... $ 10,179 $ 2,278 $ 3,598 $ 521 $ 130
Costs and expenses.............. 41,788 35,065 22,113 12,416 9,350
--------------- --------------- --------------- --------------- --------------
Loss from operations............ (31,609) (32,787) (18,515) (11,895) (9,220)
Net interest income (expense) .. 3,545 2,578 2,373 185 (259)
--------------- --------------- --------------- --------------- ---------------
Net loss........................ $ (28,064) $ (30,209) $ (16,142) $ (11,710) $ (9,479)
=============== =============== =============== =============== ===============
Net loss per share (1) ......... $ (1.94) $ (2.36) $ (1.37) $ (1.19) $ (1.04)
=============== =============== =============== =============== ===============
Shares used in computing net
loss per share (1) .......... 14,464,044 12,791,044 11,786,429 9,861,212 9,115,926
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and marketable securities (2). $ 11,284 $ 83,462 $ 52,098 $ 8,886 $ 1,483
Working capital.................... 11,134 80,734 51,519 6,403 (882)
Total assets....................... 23,810 93,031 59,886 11,259 3,545
Long-term obligations ............. -- -- 21 203 778
Accumulated deficit................ (108,918) (80,854) (50,645) (34,503) (22,793)
Total shareholders' equity......... 19,686 87,698 56,717 8,167 150
- -----------
(1)See Note 1 of Notes to Consolidated Financial Statements for information concerning the computation of net loss per share.
(2)See Note 3, 11 and 12 of Notes to Consolidated Financial Statements for information concerning the changes in cash and
marketable securities.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
General
Since our inception, we have been principally engaged in the research
and development of drugs and medical device products for use in PhotoPoint, our
proprietary technologies for photodynamic therapy. We have been unprofitable
since our founding and have incurred a cumulative net loss of approximately
$108.9 million as of December 31, 1998. We expect to continue to incur
substantial, and possibly increasing, operating losses for the next several
years due to continued and increased spending on research and development
programs, the funding of preclinical studies, clinical trials and regulatory
activities and the costs of manufacturing and administrative activities.
Our revenues primarily reflect income earned from licensing agreements,
grants and royalties from device product sales. To date, we have received no
revenue from the sale of drug products, and we are not permitted to engage in
commercial sales of drugs or devices until such time, if ever, as we receive
requisite regulatory approvals. As a result, we do not expect to record
significant product sales until such approvals are received.
Until we commercialize our product(s), we expect revenues to continue
to be attributable to licensing agreements, grants and royalties from device
product sales. We anticipate that future revenues and results of operations may
continue to fluctuate significantly depending on, among other factors, the
timing and outcome of applications for regulatory approvals, our ability to
successfully manufacture, market and distribute our drug products and device
products and/or the restructuring or establishment of collaborative arrangements
for the manufacturing, marketing and distribution of some of our products. We
anticipate our operating activities will result in substantial net losses for
several more years.
In June 1998, we amended the development and funding provisions of our
previously executed 1995 SnET2 license agreements with Pharmacia & Upjohn, Inc.
and some of its subsidiaries, which together are referred to as Pharmacia &
Upjohn in this report. Under the amended ophthalmology agreement, we were to
conduct all preclinical studies and U.S. clinical trials and would be reimbursed
by Pharmacia & Upjohn for all out-of-pocket expenses incurred, provided that the
trials were conducted in accordance with the agreement. Pharmacia & Upjohn was
to conduct all international clinical trials in ophthalmology. We also amended
our oncology, urology and dermatology license agreement to return to us the
rights for SnET2 in dermatology and to provide for the funding of $2.5 million
in quarterly amounts for use in our oncology and urology programs. Subsequently,
in January 1999, we entered into an Equity Investment Agreement, which amended
the June 1998 ophthalmology, oncology and urology agreements with Pharmacia &
Upjohn. Under this 1999 agreement, Pharmacia & Upjohn has purchased 1,136,533
shares of our Common Stock for an aggregate purchase price of $19.0 million,
which represents the acceleration of the remaining six $2.5 million quarterly
payments and two future milestone payments for age-related macular degeneration,
or AMD, under the amended June 1998 license agreements. Under a separate
agreement, Pharmacia & Upjohn will also extend to us up to $22.5 million in
credit in the form of six quarterly loans of $3.75 million each to be used to
support our ophthalmology, oncology and other development programs, as well as
for general corporate purposes, which are subject to certain limitations and
requirements.
During the third quarter of 1998 and in connection with the 1998
amendment of the Pharmacia & Upjohn agreements, we implemented a cost
restructuring program designed to focus our resources on our core development
programs, which emphasizes large potential market opportunities and unmet
medical needs. Additionally, the program was designed to utilize the cost
reimbursement components of the 1998 amended Pharmacia & Upjohn agreements as
well as streamline administrative activities, reduce overhead costs and
eliminate positions that were not central to our core development programs. We
will continue to evaluate the use of our resources as our funding
provisions change and as opportunities present themselves.
We are currently conducting clinical trials in oncology and
ophthalmology. In dermatology, we are investigating the development of topical
formulations of our photoselective drugs. Based upon the outcome of these
studies and various economic and development factors, including cost,
reimbursement and the available alternative therapies, we may or may not elect
to further develop PhotoPoint procedures in oncology, ophthalmology, dermatology
or in any other indications.
We have awarded, and may award in the future, stock options that vest
upon the achievement of certain milestones. Under Accounting Principals Board
Opinion No. 25, such options are accounted for as variable stock options. As
such, until the milestone is achieved (but only after it is determined to be
probable), deferred compensation is recorded in an amount equal to the
difference between the fair market value of the Common Stock on the date of
determination less the option exercise price and is adjusted from period to
period to reflect changes in the market value of the Common Stock. Deferred
compensation, as it relates to a particular milestone, is amortized over the
period between when achievement of the milestone becomes probable and when the
milestone is estimated to be achieved. Amortization of deferred compensation
could result in significant additional compensation expense being recorded in
future periods based on the market value of the Common Stock from period to
period.
Results of Operations
The following table provides a summary of our revenues for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Consolidated Revenues 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Product sales ................................................ $ -- $ 2,000 $ 5,000
Grants........................................................ 674,000 146,000 577,000
Royalties..................................................... 191,000 234,000 73,000
License....................................................... 9,314,000 1,896,000 2,943,000
---------------------------------------------------------------------------------------------------------------------------
Total Revenues................................................ $10,179,000 $ 2,278,000 $ 3,598,000
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues. Our revenues decreased from $3.6 million in 1996 to $2.3
million in 1997 and increased to $10.2 million in 1998.
The fluctuations in license income are due to the following:
o During 1998, we recorded revenues for oncology expenditures of
$1.2 million under the original Pharmacia & Upjohn license
agreement and $5.0 million under the June 1998 amended license
agreement. In 1997 and 1996, revenues were $1.2 million and $2.3
million, respectively. The amounts were recorded for the specific
reimbursement of oncology clinical program costs during those
years in metastatic breast cancer, basal cell carcinoma, Kaposi's
sarcoma and prostate cancer. These fluctuations in revenues are
based on the timing of specific reimbursements and reimbursable
costs incurred in preclinical studies and clinical trials, as
well as the structure of the payments received under the different
oncology agreements. In 1996, 1997 and the first two quarters of
1998, we were reimbursed for only the out-of-pocket or direct
costs incurred in these programs. In the last two quarters of
1998, under the amended agreement, we received two quarterly
payments of $2.5 million each which were designed to cover
both the direct and indirect costs of these programs.
o During 1998, we recorded revenues of $3.1 million for the specific
reimbursement for out-of-pocket or direct costs incurred in
preclinical studies and clinical trials in ophthalmology from
the continuation of Phase I/II clinical trials in the first
half of 1998 and the commencement of our Phase III clinical
trials in the second half of 1998. During 1997 and 1996, we
recorded revenues of $724,000 and $636,000, respectively, for
expenditures related to preclinical studies and Phase I/II
clinical trials in ophthalmology. The revenues recorded for
ophthalmology cost reimbursement have continued and are expected
to continue to increase as we progress through various stages of
clinical trials.
The fluctuations in grant income are due to the following:
o We were awarded a one year grant of $904,000 in 1995 and a two
year grant of $1.5 million in 1997. Since the grant periods began
October 1 of those years, we recorded nine and twelve months worth
of grant revenue in 1996 and 1998, respectively. In 1996 and 1998,
grant revenue amounted to $577,000 and $674,000, respectively. In
1997, we recorded only one quarter's worth of grant income of
$146,000.
The fluctuations in royalty income are due to the following:
o We earn royalty income from a 1992 license agreement with
Laserscope, which provides royalties on the sale of our previously
designed device products. The fluctuations in revenues recorded
are a function of the number of device products sold by Laserscope
in each of the respective periods.
The level of license, grant and royalty income is likely to fluctuate
materially from period to period and in the future depending on the amount of
clinical costs incurred and/or reimbursed, the achievement of milestones and the
extent of development activities under the amended Pharmacia & Upjohn license
agreements, the amount of grant income awarded and expended and the amount of
device products sold by Laserscope. Under the 1999 amended Pharmacia & Upjohn
license agreements for ophthalmology, oncology and urology, we will only be
reimbursed for the specific costs for preclinical studies and clinical trials in
ophthalmology and we will no longer be reimbursed for any oncology and urology
program costs, as the quarterly reimbursement payments for these costs were
accelerated in connection with the $19.0 million equity investment made by
Pharmacia & Upjohn. The Laserscope license agreement will terminate in April
1999 and no further royalties are expected to be received.
Cost of Goods Sold. Our cost of goods sold decreased from $5,000 in
1996 to $1,000 in 1997 and to zero in 1998. The decrease in cost of goods sold
from 1996 through 1998 is due to the reduction in sales of our custom devices
due to our decision to allocate our manufacturing resources to supporting our
preclinical and clinical programs. We expect gross margins to be insignificant
until we commence commercial sales of our products.
Research and Development. Our research and development expenses
increased from $15.7 million in 1996 to $19.1 million in 1997 and to $27.5
million in 1998. The increase in research and development expenses for the year
ended December 31, 1998 compared to the year ended December 31, 1997, relates
primarily to:
o The costs associated with the screening, treatment and monitoring
of qualified individuals participating in clinical trials for AMD
and prostate cancer;
o The preparation of the documentation for clinical trials and
regulatory filings; and
o The preclinical studies and development work associated with the
development of existing and new drug compounds, formulations and
clinical programs.
In addition, research and development expenses continue to increase in
conjunction with our progression through the various stages of preclinical
studies and clinical trials and the increased costs associated with the purchase
of raw materials and supplies for the production of devices and drugs for use in
these studies and trials. The increase in research and development expense from
1996 to 1997 is consistent with the above items, except for that the clinical
trial costs were those incurred in clinical programs in Phase II/III metastatic
breast cancer, basal cell carcinoma and Kaposi's sarcoma and in the Phase I/II
AMD program. Future research and development expenses may fluctuate
depending on the impact of our cost restructuring program implemented in
September 1998, the structure of any future or existing collaborative
agreements, continued expenses incurred in our clinical trials in ophthalmology
and oncology, and costs associated with the pharmaceutical manufacturing
scale-up and expansion of our research and development programs, which includes
the increased hiring of personnel and continued expansion of preclinical studies
and clinical trials.
Selling, General and Administrative. Our selling, general and
administrative expenses increased from $6.4 million in 1996 to $14.9 million in
1997 and decreased to $11.3 million in 1998. The overall decrease in selling,
general and administrative expenses for the year ended December 31, 1998 as
compared to the year ended December 31, 1997 is primarily due to a $5.5 million
decrease in advertising expenses. Aside from the advertising expenses incurred
in 1997, selling, general and administrative expenses have increased from 1996
to 1998 due primarily to:
o An increase in costs associated with professional services
received from financial consultants, attorneys and public and
media relations;
o An increase in payroll and overhead costs due to the addition of
administrative and corporate personnel needed to support research
and development and corporate activities; and
o An increase in compensation expense associated with options and
warrants issued to consultants and expense recorded for the
executive option loans.
Future selling, general and administrative expenses are expected to
remain constant due to our September 1998 cost restructuring program, but may
change due to the increased support required for research and development
activities, continuing corporate development and professional services,
compensation expense associated with stock options and warrants and financial
consultants and general corporate matters.
Loss in Investment in Affiliate. In connection with our equity
investment in Ramus Medical Technologies, or Ramus, made in December 1996, we
recorded $2.9 million as expense related to Ramus for the year ended December
31, 1998 as compared to $1.1 million for the year ended December 31, 1997. For
the year ended December 31, 1998, the $2.9 million loss consists primarily of a
$1.8 million reserve for funds provided to Ramus in 1998 under the Ramus
revolving credit agreement, as well as $895,000 related to our equity investment
in Ramus. The $1.1 million in expense recorded in 1997 represents 100% of
Ramus' losses for fiscal 1997. While Ramus' losses from operations are expected
to continue beyond 1998, we will not record any further losses associated with
Ramus' operating losses as our investment in Ramus has been completely reduced
to zero as of December 31, 1998. As of December 31, 1998, Ramus had $250,00
available to borrow on their loan which, if borrowed, will be fully reserved
for.
Interest and Other Income. Interest and other income increased from
$2.4 million in 1996 to $2.6 million in 1997 and to $3.5 million in 1998. The
increase from 1996 to 1998 resulted primarily from the investment of proceeds
received from our secondary public offering in April 1996 and our private equity
offerings in September and October 1997. The level of future interest and other
income will primarily be subject to the level of cash balances we maintain from
period to period.
Interest Expense. Interest expense decreased from $34,000 in 1996 to
$6,000 in 1997 and to $1,000 in 1998. The decrease in interest expense from 1996
through 1998 resulted primarily from the conversion of our convertible notes to
Common Stock and the completion of payments under our capital lease
arrangements. The level of future interest expense will be subject to the amount
of borrowings under the Pharmacia & Upjohn Credit Agreement.
As of December 31, 1998, we had approximately $120.1 million of net
operating loss carryforwards for federal income tax purposes, which expire at
various dates from the years 2002 through 2018. In addition, we had
approximately $5.1 million of research and development and alternative minimum
tax credit carryforwards available for federal and state tax purposes. We also
had a state net operating loss tax carryforward of $28.1 million which expires
at various dates from the years 1999 to 2003. Under Section 382 of the Internal
Revenue Code, utilization of the net operating loss carryforwards may be limited
based on our changes in the percentage of ownership. Our ability to utilize the
net operating loss carryforwards, without limitation, is uncertain.
We do not believe that inflation has had a material impact on our
results of operations.
Liquidity and Capital Resources
Since inception through December 31, 1998, we have accumulated a
deficit of approximately $108.9 million and expect to continue to incur
substantial, and possibly increasing, operating losses for the next several
years. We have financed our operations primarily through private placements of
Common Stock and Preferred Stock, private placements of convertible notes and
short-term notes, our initial public offering, Pharmacia & Upjohn's purchases of
Common Stock and a secondary public offering. As of December 31, 1998, we have
received proceeds from the sale of equity securities and convertible notes of
approximately $181.5 million.
In September and October 1997, we entered into a private placement
offering, which was subsequently amended with respect to certain purchasers,
which provided net proceeds to Miravant of approximately $68.2 million. During
1998, under the price protection and repurchase provisions of these agreements,
we issued an additional 2,444,380 shares of Common Stock, repurchased 337,500
shares of Common Stock for $16.9 million and paid $8.6 million. Additionally,
during 1999, we completed our price protection obligations through the payment
of $4.2 million and the issuance of 688,996 shares Common Stock and the issuance
of 450,000 warrants to purchase Common Stock at an exercise price of $35.00 per
share. As such, we have no further obligation to these purchasers under
the price protection or repurchase provisions of the Securities Purchase
Agreements and the amendments thereto.
In December 1997, the Board of Directors authorized a Common Stock
repurchase program allowing for the repurchase of up to 750,000 shares of Common
Stock. This 750,000 share repurchase authorization was in addition to and
superseded the repurchase program authorized in July 1996, which allowed for the
repurchase of up to 600,000 shares of Common Stock. Under these programs, we
repurchased 725,000 shares in 1998 and 301,000 shares in 1997 at a cost of $17.9
million and $10.0 million, respectively. As of December 31, 1998 all shares
repurchased were retired.
In January 1999, we entered into an Equity Investment Agreement with
Pharmacia & Upjohn whereby Pharmacia & Upjohn purchased 1,136,533 shares of our
Common Stock for an aggregate purchase price of $19.0 million, which represented
the acceleration of the oncology and urology reimbursement payments and the
AMD milestone payments. Pharmacia & Upjohn will also extend to us up to $22.5
million in credit over the next two years to be used to support our
ophthalmology, oncology and other development programs, as well as for general
corporate purposes.
In June 1998, we purchased a $5.0 million, 9% equity interest in
Xillix. We received 2,691,904 shares of Xillix common stock in exchange for $3.0
million in cash and 58,909 shares of restricted Miravant Common Stock at the
market value on the date of the agreement of $25.06 per share, or $1.5 million.
In addition, we entered into a strategic alliance agreement with Xillix to
co-develop proprietary systems incorporating the technology of each company and
to share the research and development costs. To date, we have not incurred any
costs under this agreement.
In April 1998, we entered into a revolving credit agreement with our
affiliate, Ramus, which provided Ramus with the ability to borrow up to $2.0
million. During 1998, we provided $1.8 million in loans to Ramus. In addition,
we had an exclusive option to purchase the remaining shares of Ramus for a
specified amount under certain terms and conditions. The option expired March 3,
1999 and we elected not to exercise the option.
In February 1998, we agreed to guaranty a term loan in the amount of
$7.6 million from a bank to a director of ours at the time. In June 1998, the
director did not stand for re-election on the Board of Directors. The loan is
due and payable on July 31, 1999, or sooner upon an event of default and is
secured by all of the individual's shares of our Common Stock. We also granted
the bank a security interest in an account maintained at the bank and agreed,
upon an event of default, to purchase the loan from the bank for a price
generally equal to the then outstanding principal, plus accrued interest, fees
and costs. If we purchase the loan, we have the option to acquire all of the
individual's shares at a price equal to 50% of the 20-day average closing price,
net of the loan repayment. The individual also agreed to certain restrictions on
the sale of such shares. Under the loan agreement and the guaranty, the
individual and Miravant are subject to the maintenance of specified financial
and other covenants.
For 1998, 1997 and 1996, we required cash for operations of $21.7
million, $23.8 million and $15.1 million, respectively. The increase from 1996
through 1998 was primarily due to an increase in operating activities associated
with the continued expansion of preclinical studies and clinical trials, the
increase in research and development programs and personnel and the increase in
general corporate activities. For 1998, we required net cash for financing
activities of $42.5 million as compared to net cash provided by our financing
activities of $59.1 million in 1997 and $62.2 million in 1996. The increase in
1998 is primarily related to our repurchase of Common Stock under the Board
authorized stock repurchase program and the repurchase of our Common Stock
pursuant to the Securities Purchase Agreement and related amendments, which
amounted to $17.9 million and $16.9 million, respectively. The 1997 and 1996
increases resulted from proceeds from our private equity placements in September
and October 1997 and our secondary public offering in April 1996.
We invested a total of $8.5 million in property and equipment from 1996
through 1998. During 1998, we entered into a new lease agreement for an
additional facility, for which we have the ability to sublease. We expect to
continue to purchase property and equipment in the future as we continue to
expand our preclinical, clinical and research and development activities as well
as the buildout and expansion of laboratories and office space.
Our future capital requirements will depend on numerous factors
including:
o The progress and magnitude of our research and development
programs, including preclinical studies and clinical trials;
o The time involved in obtaining regulatory approvals;
o The cost involved in filing and maintaining patent claims;
o Competitor and market conditions;
o Investment opportunities;
o Our ability to establish and maintain collaborative arrangements;
o The cost of manufacturing scale-up and the cost and effectiveness
of commercialization activities and arrangements; and
o Our ability to obtain grants to finance research and development
projects.
Our ability to generate substantial funding to continue our research
and development activities, preclinical studies and clinical trials and
manufacturing, scale-up, administrative activities and additional investment
opportunities is subject to a number of risks and uncertainties and will depend
on numerous factors including:
o Our ability to raise funds in the future through public or private
financings, collaborative arrangements or from other sources;
o The potential for equity investments, collaborative arrangements,
license agreements or development or other funding programs with
us in exchange for manufacturing, marketing, distribution or other
rights to products developed by us; and
o Our ability to maintain our existing collaborative arrangements.
We can not guarantee that additional funding will be available to us
when needed. If it is not, we will be required to scale back our research and
development programs, preclinical studies and clinical trials and administrative
activities and our business and financial results and condition would be
materially adversely affected.
Except for the historical information herein, the matters discussed in
this report are deemed forward-looking statements under federal securities laws
that involve risks and uncertainties. Actual results may differ materially from
those in the forward-looking statements depending on a number of factors
including, among other things, the risks, uncertainties and other factors
detailed in Item 1, "Business - Risk Factors."
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates. The risks related to foreign currency
exchange rates are immaterial and we do not use derivative financial
instruments.
From time to time, we maintain a portfolio of highly liquid cash
equivalents maturing in three months or less as of the date of purchase. Given
the short-term nature of these investments, and that the we have no borrowings
outstanding, we are not subject to significant interest rate risk.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The Report of Independent Accountants and the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements of Miravant that
are filed as part of this Report are listed under Item 14, "Exhibits, Financial
Statement Schedules, and Reports on Form 8-K" and are set forth on pages 34
through 53 immediately following the signature page of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is incorporated by reference to the Company's
definitive proxy statement to be filed pursuant to Regulation 14A not later than
120 days after the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference to the Company's
definitive proxy statement to be filed pursuant to Regulation 14A not later than
120 days after the end of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the Company's
definitive proxy statement to be filed pursuant to Regulation 14A not later than
120 days after the end of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the Company's
definitive proxy statement to be filed pursuant to Regulation 14A not later than
120 days after the end of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a)(1) Index to Consolidated Financial Statements: Page
Report of Independent Auditors 36
Consolidated Balance Sheets as of
December 31, 1998 and 1997 37
Consolidated Statements of Operations for the
years ended December 31, 1998, 1997 and 1996 38
Consolidated Statements of Shareholders'
Equity for the years ended December 31,
1998, 1997 and 1996 39
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 40
Notes to Consolidated Financial Statements 41
</TABLE>
(a)(2) Index to Consolidated Financial Statement Schedules:
All schedules are omitted because the required information is
not present or is not present in amounts sufficient to require submission of the
schedule or because the information required is given in the consolidated
financial statements or notes thereto.
(a)(3) Index to Exhibits:
See Index to Exhibits on pages 54 to 55
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Miravant Medical Technologies
/S/ Gary S. Kledzik
---------------------------------------
Gary S. Kledzik, Ph.D., Chief Executive
Officer and Chairman of the Board
Dated: March 30, 1999
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 dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ Gary S. Kledzik Chairman of the Board, Director, March 30, 1999
- ----------------------- and Chief Executive Officer,
Gary S. Kledzik, Ph.D. (Principal Executive Officer)
/S/ David E. Mai Director and President March 30, 1999
- -----------------------
David E. Mai
/S/ John M. Philpott Chief Financial Officer and Controller March 30, 1999
- ----------------------- (Principal Financial Officer and
John M. Philpott Principal Accounting Officer)
/S/ Larry S. Barels Director March 30, 1999
- -----------------------
Larry S. Barels
/S/ William P. Foley II Director March 30, 1999
- -----------------------
William P. Foley II
/S/ Charles T. Foscue Director March 30, 1999
- -----------------------
Charles T. Foscue
/S/ Raul E. Perez Director March 30, 1999
- -----------------------
Raul E. Perez, M.D.
/S/ Jonah Shacknai Director March 30, 1999
- -----------------------
Jonah Shacknai
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Miravant Medical Technologies
We have audited the accompanying consolidated balance sheets of Miravant Medical
Technologies as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Miravant Medical
Technologies at December 31, 1998 and 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/S/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Woodland Hills, California
March 4, 1999
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------ -------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................... $ 11,284,000 $ 55,666,000
Investments in short-term marketable securities......................... -- 27,796,000
Accounts receivable..................................................... 3,182,000 1,833,000
Prepaid expenses and other current assets............................... 792,000 772,000
------------------ -------------------
Total current assets....................................................... 15,258,000 86,067,000
Property, plant & equipment:
Vehicles................................................................ 28,000 28,000
Furniture and fixtures.................................................. 1,720,000 1,578,000
Equipment............................................................... 5,180,000 3,752,000
Leasehold improvements.................................................. 4,232,000 3,071,000
Capital lease equipment................................................. 184,000 184,000
------------------ -------------------
11,344,000 8,613,000
Accumulated depreciation and amortization............................... (5,514,000) (2,886,000)
------------------ -------------------
5,830,000 5,727,000
Investments in affiliates.................................................. 1,512,000 895,000
Loan to affiliate, net of reserve of $1.8 million at December 31, 1998..... -- --
Patents and other assets................................................... 1,210,000 342,000
------------------ -------------------
Total assets............................................................... $ 23,810,000 $ 93,031,000
================== ===================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable........................................................ $ 3,541,000 $ 4,290,000
Accrued payroll and expenses............................................ 583,000 1,022,000
Current portion of capital lease obligations............................ -- 21,000
------------------ -------------------
Total current liabilities.................................................. 4,124,000 5,333,000
Shareholders' equity:
Common stock, 50,000,000 shares authorized; 16,080,054 and 13,952,847
shares issued and outstanding at December 31, 1998 and
December 31, 1997, respectively....................................... 135,989,000 170,451,000
Notes receivable from officers.......................................... (1,525,000) --
Deferred compensation................................................... (2,896,000) (1,899,000)
Unrealized loss on available-for-sale securities........................ (2,964,000) --
Accumulated deficit..................................................... (108,918,000) (80,854,000)
------------------ -------------------
Total shareholders' equity................................................. 19,686,000 87,698,000
------------------ -------------------
Total liabilities and shareholders' equity................................. $ 23,810,000 $ 93,031,000
================== ===================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1998 1997 1996
------------------- ------------------- ------------------
<S> <C> <C> <C>
Revenues:
Product sales..................................... $ -- $ 2,000 $ 5,000
Grants, licensing and royalty revenues............ 10,179,000 2,276,000 3,593,000
------------------- ------------------- ------------------
Total revenues....................................... 10,179,000 2,278,000 3,598,000
Costs and expenses:
Cost of goods sold................................ -- 1,000 5,000
Research and development.......................... 27,548,000 19,053,000 15,715,000
Selling, general and administrative............... 11,311,000 14,906,000 6,393,000
Loss in affiliate................................. 2,929,000 1,105,000 --
------------------- ------------------- ------------------
Total costs and expenses............................. 41,788,000 35,065,000 22,113,000
Loss from operations................................. (31,609,000) (32,787,000) (18,515,000)
Interest and other income (expense):
Interest and other income......................... 3,546,000 2,584,000 2,407,000
Interest expense.................................. (1,000) (6,000) (34,000)
------------------- ------------------- ------------------
Total net interest and other income.................. 3,545,000 2,578,000 2,373,000
------------------- ------------------- ------------------
Net loss............................................. $ (28,064,000) $ (30,209,000) $ (16,142,000)
=================== =================== ==================
Net loss per share - basic and diluted............... $ (1.94) $ (2.36) $ (1.37)
=================== =================== ==================
Shares used in computing net loss per share.......... 14,464,044 12,791,044 11,786,429
=================== =================== ==================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Notes Accumulated
Receivable Other
Common Stock From Deferred Accumulated Comprehensive
Shares Amount Officers Compensation Deficit Income Total
------------ -------------- ---------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996....... 10,401,358 $ 50,188,000 $ -- $ (7,518,000) $ (34,503,000) $ -- $ 8,167,000
Issuance of stock at $48.00 per
share (net of approximately
$6,733,000 of offering
costs).......................... 1,500,000 65,267,000 -- -- -- -- 65,267,000
Exercise of stock options and
warrants........................ 563,456 1,010,000 -- -- -- -- 1,010,000
Conversion of notes payable
(net of approximately $5,000
of debt issuance costs)......... 11,562 87,000 -- -- -- -- 87,000
Repurchases of stock............. (138,500) (3,948,000) -- -- -- -- (3,948,000)
Deferred compensation related
to stock options and warrants
granted......................... -- (3,630,000) -- 3,630,000 -- -- --
Amortization of deferred
compensation .................. -- -- -- 2,276,000 -- -- 2,276,000
Net loss ........................ -- -- -- -- (16,142,000) -- (16,142,000)
------------ -------------- ----------- -------------- -------------- -------------- ------------
Balance at December 31, 1996..... 12,337,876 108,974,000 -- (1,612,000) (50,645,000) -- 56,717,000
Issuance of stock at $50.00 per
share (net of approximately
$2,627,000 of offering costs)... 1,416,000 68,173,000 -- -- -- -- 68,173,000
Exercise of stock options and
warrants........................ 485,799 1,080,000 -- -- -- -- 1,080,000
Issuance of stock awards......... 14,172 456,000 -- -- -- -- 456,000
Repurchases of stock............. (301,000) (10,041,000) -- -- -- -- (10,041,000)
Deferred compensation related
to warrants granted, net of
cancellations................... -- 1,809,000 -- (1,809,000) -- -- --
Amortization of deferred
compensation.................... -- -- -- 1,522,000 -- -- 1,522,000
Net loss......................... -- -- -- -- (30,209,000) -- (30,209,000)
------------ -------------- ------------ ------------- -------------- ------------- -------------
Balance at December 31, 1997..... 13,952,847 170,451,000 -- (1,899,000) (80,854,000) -- 87,698,000
Exercise of stock options and
warrants....................... 551,566 2,330,000 -- -- -- -- 2,330,000
Notes receivable from officers.. 83,731 179,000 (1,525,000) -- -- -- (1,346,000)
Issuance of stock awards........ 51,121 1,579,000 -- -- -- -- 1,579,000
Repurchases of stock............ (725,000) (17,911,000) -- -- -- -- (17,911,000)
Fulfillment of obligations
under the Securitie Purchase
Agreement and related
amendments..................... 2,106,880 (25,521,000) -- -- -- -- (25,521,000)
Deferred compensation related
to warrants granted and notes
from officers.................. -- 3,406,000 -- (3,406,000) -- -- --
Amortization of deferred
compensation................... -- -- -- 2,409,000 -- -- 2,409,000
Issuance of stock related to
investment in Xillix and
unrealized loss................ 58,909 1,476,000 -- -- -- (2,964,000) (1,488,000)
Net loss........................ -- -- -- -- (28,064,000) -- (28,064,000)
=========== ============== ============= ============= ============== ============= =============
Balance at December 31, 1998.... 16,080,054 $ 135,989,000 $(1,525,000) $(2,896,000) $(108,918,000) $(2,964,000) $ 19,686,000
=========== ============== ============= ============= ============== ============= =============
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Operating activities:
Net loss............................................... $ (28,064,000) $ (30,209,000) $ (16,142,000)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization....................... 2,736,000 1,099,000 615,000
Amortization of deferred compensation............... 2,409,000 1,522,000 2,276,000
Reserve for loan receivable from affiliate.......... 1,808,000 -- --
Stock awards........................................ 1,579,000 456,000 --
Write-off of investment in affiliate................ 895,000 1,105,000 --
Changes in operating assets and liabilities:
Accounts receivable ............................. (1,349,000) 346,000 (2,168,000)
Prepaid expenses and other assets................ (528,000) (372,000) 44,000
Accounts payable and accrued payroll and
expenses......................................... (1,188,000) 2,244,000 269,000
------------------ ------------------ -------------------
Net cash used in operating activities.................. (21,702,000) (23,809,000) (15,106,000)
Investing activities:
Purchases of marketable securities..................... (230,660,000) (44,696,000) (130,200,000)
Sales of marketable securities......................... 258,456,000 37,500,000 109,600,000
Investments in affiliates.............................. (3,000,000) -- (2,000,000)
Loan to affiliate...................................... (1,808,000) -- --
Purchases of property, plant and equipment............. (2,731,000) (3,942,000) (1,855,000)
Purchases of patents................................... (468,000) (17,000) (51,000)
------------------ ------------------ -------------------
Net cash provided by (used in) investing activities.... 19,789,000 (11,155,000) (24,506,000)
Financing activities:
Proceeds from issuance of Common Stock, less
issuance costs...................................... 2,509,000 69,253,000 66,271,000
Purchases of Common Stock............................. (17,911,000) (10,041,000) (3,948,000)
Payments of notes to officers.......................... (1,525,000) -- --
Payments of capital lease obligations.................. (21,000) (38,000) (43,000)
Payments of long term obligations...................... -- (42,000) (56,000)
Purchases of Common Stock under the Amended Securities
Agreement........................................... (16,875,000) -- --
Payments for price protection obligations under the
Amended Securities Agreement........................ (8,646,000) -- --
------------------ ------------------ -------------------
Net cash (used in) provided by financing activities.... (42,469,000) 59,132,000 62,224,000
Net (decrease) increase in cash and cash equivalents... (44,382,000) 24,168,000 22,612,000
Cash and cash equivalents at beginning of period....... 55,666,000 31,498,000 8,886,000
------------------ ------------------ -------------------
Cash and cash equivalents at end of period............. $ 11,284,000 $ 55,666,000 $ 31,498,000
================== ================== ===================
Supplemental disclosures:
State taxes paid....................................... $ 113,000 $ 104,000 $ 14,000
================== ================== ===================
Interest paid.......................................... $ 1,000 $ 7,000 $ 34,000
================== ================== ===================
See accompanying notes.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
Description of Business and Basis of Presentation
Miravant Medical Technologies, or Miravant, or the Company is engaged
in the research and development of drugs and medical device products for use in
PhotoPoint, the Company's proprietary technologies for photodynamic therapy.
Effective September 15, 1997, the Company changed its name from PDT, Inc. to
Miravant Medical Technologies. The Company is located in Santa Barbara,
California. The Company has had limited sales of devices and its customers are
medical device companies, researchers, hospitals and universities located
throughout the world.
As of December 31, 1998, the Company had an accumulated deficit of
$108.9 million and anticipates it will continue to incur losses for some time.
The Company is continuing its efforts in research and development and the
clinical trials of its products. These efforts, and obtaining requisite
regulatory approval, prior to commercialization, will require substantial
expenditures. While management of the Company believes that it has sufficient
resources to fund the required expenditures for the next few years and that
additional funding will be available when required, there is no assurance that
this will be the case.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results may differ from those estimates and such
differences may be material to the financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Miravant
Medical Technologies and its wholly owned subsidiaries, Miravant Systems, Inc.,
Miravant Pharmaceuticals, Inc. and Miravant Cardiovascular, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications of prior year amounts have been made for purposes of
presentation.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Marketable Securities
Marketable securities consist of short-term, interest-bearing corporate
bonds, U.S. Government obligations and municipal obligations. As of December 31,
1998 the Company held no marketable securities. As of December 31, 1997
marketable securities consisted of short-term, interest-bearing corporate bonds,
U.S. Government obligations and municipal obligations in the amount $8.3
million, $8.5 million and $11.0 million, respectively. The Company has
established investing guidelines relative to concentration, maturities and
credit ratings that maintain safety and liquidity.
In accordance with Statement of Financial Accounting Standards or SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company determines the appropriate classification of debt and equity securities
at the time of purchase and re-evaluates such designation as of each balance
sheet date. As of December 31, 1998 and 1997, all marketable securities and
certain investments in affiliates were classified as "available-for-sale".
Available-for-sale securities and investments are carried at fair value with
unrealized gains and losses reported as a separate component of shareholders'
equity. Realized gains and losses on investment transactions are recognized when
realized based on settlement dates and recorded as interest income. Interest and
dividends on securities are recognized when earned.
Investments in Affiliates
Investments in affiliates owned more than 20% but not in excess of 50%,
where the Company is not deemed to be able to exercise controlling influence,
are recorded under the equity method. Investments in affiliates, owned less than
20%, where the Company is not deemed to be able to exercise controlling
influence, are recorded under the cost method. Under the equity method,
investments are carried at acquisition cost and adjusted for the proportionate
share of the affiliates' earnings or losses. Under the cost method, investments
are recorded at acquisition cost and adjusted to fair value based on the
investments classification.
In December 1996, the Company purchased a 33% equity interest in Ramus
Medical Technologies or Ramus for $2.0 million. The investment was accounted for
under the equity method. As the Company is the main source of financing for
Ramus, the Company has conservatively recorded 100% of Ramus' loss to the extent
of the investment made by the Company, resulting in losses from affiliates of
$895,000 and $1.1 million for the years ended December 31, 1998 and 1997,
respectively. The investment in Ramus has been fully written down as of December
31, 1998.
In connection with the investment made in Ramus and the related
investment agreement, the Company had the exclusive option to purchase the
remaining shares of Ramus at a specified amount under certain terms and
conditions. The option period began in 1998 and expired March 3, 1999 as the
Company elected not to exercise its option to purchase the remaining shares of
Ramus.
In June 1998, the Company purchased a $5.0 million, 9% equity interest
in Xillix Technologies Corp. or Xillix. The Company received 2,691,904 shares of
Xillix common stock, in exchange for $3.0 million in cash and the remainder in
restricted Miravant Common Stock at the market value on the date of the
agreement, which represented 58,909 shares of Common Stock at $25.06 per share,
or $1.5 million. The investment has been accounted for under the cost method and
classified as available-for-sale. At December 31, 1998, in accordance with the
accounting for available-for-sale securities, the investment was adjusted to the
current market value of Xillix common stock, with the resulting unrealized loss
recorded as a separate component of shareholders' equity.
Equipment and Leasehold Improvements
Equipment is stated at cost with depreciation provided over the
estimated useful lives of the respective assets on the straight-line basis.
Leasehold improvements are stated at cost with amortization provided on the
straight-line basis. The estimated useful lives of the assets are as follows:
Furniture and fixtures 5 years
Equipment 3 - 5 years
Leasehold improvements 5 years or the remaining life of the lease term,
whichever is shorter
Patents and Other Assets
Costs of acquiring patents are capitalized and amortized on the
straight-line basis over the estimated useful life of the patents, seventeen
years. Accumulated amortization was $175,000 and $67,000 at December 31, 1998
and 1997, respectively. The costs of servicing the Company's patents are
expensed as incurred. Also included in this caption are deposits and other
miscellaneous non-current assets.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. No such impairment
losses have been identified by the Company. An impairment loss would be
recognized when the estimated future cash flows expected to result from the use
of the asset and its eventual disposition is less than its carrying amount.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages,
but does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
by Accounting Principles Board Opinion or APB Opinion No. 25. In the past, the
Company has awarded stock options that vest upon the achievement of certain
milestones. Under APB Opinion No. 25, such options are accounted for as variable
stock options. As such, until the milestone is achieved (but only after it is
determined to be probable), deferred compensation is recorded in an amount equal
to the difference between the fair market value of the Common Stock on the date
of determination less the option exercise price and is adjusted from period to
period to reflect changes in the market value of the Common Stock. Deferred
compensation, as it relates to a particular milestone, is amortized over the
period between when achievement of the milestone becomes probable and when the
milestone is estimated to be achieved.
Revenue Recognition
The Company recognizes revenues from product sales at the time of
shipment to the customer. Grant, royalty and licensing income is recognized
based on the terms of the related agreements and license income includes the
reimbursement of certain preclinical and clinical costs.
Research and Development Expenses
Research and development costs are expensed as incurred. The
acquisition of technology rights for research and development projects and the
value of equipment for specific research and development projects are also
included in research and development expenses.
Advertising
Costs incurred for producing and communicating advertising are
generally expensed when incurred. In September 1997, the Company commenced a
name change awareness and product-branding program pursuant to which advertising
costs were incurred. Advertising expense was not material for the years ended
December 31, 1998 and 1996 and was $5.5 million for the year ended December 31,
1997. The amounts incurred in 1997 were primarily associated with the name
change awareness and product-branding program.
Segment Reporting
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 established standards for the way that public business enterprises report
information about operating segments in the annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS No. 131 also established standards
for related disclosures about products and services, geographic areas and major
customers. The adoption of SFAS No. 131 did not affect the reported results of
operations or financial position of the Company. In addition, the adoption of
the new statements did not affect disclosures of segment information as the
Company is engaged principally in one aggregated line of business, the research
and development of drugs and medical device products for the use in the
Company's proprietary technologies for photodynamic therapy.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's net loss or shareholders' equity.
Under SFAS No. 130, the Company has elected to report other comprehensive
income, which includes unrealized gains or losses on available-for-sale
securities in the statement of shareholders' equity.
For the years ended December 31, 1998, 1997 and 1996, comprehensive
loss amounted to approximately $31.0 million, $30.2 million and $16.1 million,
respectively. The difference between net loss and comprehensive loss relates to
the unrealized loss the Company recorded for its available-for-sale securities
on its investment in its affiliate Xillix.
Net Loss Per Share
During the year ended December 31, 1997, the Company adopted SFAS No.
128, "Earnings per Share", which supersedes APB Opinion No. 15 and required a
change in the method used to compute earnings per share. SFAS No. 128 replaced
the presentation 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 and reflects the potential dilution
that would occur if securities or other contracts to issue common stock were
exercised or converted to common stock. Common stock equivalent shares from all
stock options and warrants for all years presented, have been excluded from this
computation as their effect is anti-dilutive. All previously stated earnings per
share amounts conform to the new SFAS No. 128 requirements.
Basic loss per common share is computed by dividing the net loss by the
weighted average shares outstanding during the period in accordance with SFAS
No. 128. Since the effect of the assumed exercise of common stock options and
other convertible securities was anti-dilutive, basic and diluted loss per share
as presented on the consolidated statements of operations are the same.
2. Credit Arrangements
The Company had a $1.0 million line of credit agreement with a bank
with a variable rate of interest based on the bank's lending rate. The Company
did not utilize the line of credit during 1998 or 1997 and the line of credit
expired on January 31, 1999 and was subsequently not renewed.
In April 1998, the Company entered into a revolving credit agreement
with its affiliate, Ramus, pursuant to which the Company, at the request of
Ramus, shall from time to time make loans to Ramus in an aggregate outstanding
principal amount not exceeding at any one time $2.0 million. The unpaid
principal amount of the loans, which are to be used to fund Ramus' clinical
trials and operating costs, accrues interest at a variable rate (7.25% as of
December 31, 1998) based on the Company's bank rate, and matures in March 2000.
The loans are evidenced by a promissory note, the balance of which shall be
convertible under certain circumstances at the option of the Company into shares
of Ramus stock. As of December 31, 1998, Ramus had borrowed $1.8 million under
the revolving credit agreement. The Company has established a reserve for the
entire outstanding balance of the loan receivable at December 31, 1998, which is
included in loss in affiliate in the consolidated statements of operations.
3. Shareholders' Equity
In September and October 1997, the Company completed three private
equity placements totaling $70.8 million, which provided net proceeds to the
Company of $68.2 million. The private placements included the issuance of
1,416,000 shares of Common Stock at $50.00 per share, as well as one detachable
Common Stock warrant for each share of Common Stock purchased. With respect to
the warrants issued in connection with these placements, 50% were exercisable at
$55.00 per share and 50% were exercisable at $60.00 per share. Both the Common
Stock and warrants to purchase Common Stock were subject to a Lock-Up Agreement
which prohibited any offer or sale for a one-year period after the closing of
the purchase. The Lock-Up Agreement was subject to earlier termination in
certain limited circumstances and the prohibition on sales was subject to
certain limited exceptions. Additionally, the Securities Purchase Agreements
provided price protection provisions that if on the first anniversary of the
closing of the purchase, the thirty (30) day average closing bid price of the
Common Stock for the period ending on the trading day prior to the anniversary
date is less than the closing price paid by the purchasers, then the Company
shall pay each purchaser additional cash or stock, or a combination of both,
as determined by the Company at its sole option. In October 1998, for the
purchasers of 516,000 shares, the Company satisfied its price protection
obligation by issuing an additional 2,444,380 shares of Common Stock.
Effective June 30, 1998, the Company entered into an Amended Securities
Purchase Agreement or Amendment Agreement with the purchasers of 900,000 shares
under the Securities Purchase Agreement dated September 22, 1997. Included among
the provisions of the Amendment Agreement is a change in the price protection
provisions. Under the Amendment Agreement, the Company's obligation under the
price protection provisions is now spread out over an eight month period
beginning August 1, 1998 and ending March 1, 1999, and is determined by the
difference between the original purchase price and the thirty (30) day average
closing bid price of the Common Stock on the first day of each month beginning
August 1st and ending March 1st (each a "measurement date"). Additionally, the
Amendment Agreement included repurchase provisions which provided that the
Company also had the option to repurchase all or a part of the purchasers'
shares at the original closing price of $50.00 per share and thus eliminate all
of the purchasers' rights under the price protection provisions of the Amendment
Agreement and the Securities Purchase Agreement.
Under the Amendment Agreement, the exercise price of the original
warrants issued to certain of the purchasers under the Securities Purchase
Agreement was reduced to $35.00 and, under certain limited circumstances, the
Company has the right to redeem the warrants. Furthermore, the Lock-Up Agreement
was amended to provide that, if the Company does not repurchase the Common
Stock, 1/8th of the shares and original warrant shares will be released from the
lock-up on each measurement date. In addition, if the Company did not repurchase
all of the purchasers' original 900,000 shares within sixty (60) days of the
closing of the Amendment Agreement, the Company agreed to issue an additional
450,000 warrants to the purchasers at an exercise price of $35.00 per share
within five business days of March 1, 1999 or the early termination of the
Lock-Up Agreement.
In accordance with the Amendment Agreement, the Company repurchased
337,500 shares subject to the repurchase provisions of the Amendment Agreement
at a cost of $16.9 million. This repurchase eliminated the Company's obligation
to issue additional shares or pay cash under the amended price protection
provisions for the August 1, September 1 and October 1, 1998 measurement dates.
Additionally, for the November 1 and December 1, 1998 measurement dates, the
Company fulfilled its price protection obligation by electing to pay the
purchasers cash, which amounted to $4.6 million and $4.0 million, respectively.
In December 1997, the Company's Board of Directors authorized the
repurchase of up to 750,000 shares of the Company's Common Stock. This 750,000
repurchase authorization was in addition to and superseded the repurchase
program authorized in July 1996, which allowed the Company to repurchase up to
600,000 shares. Under the Board authorized repurchase programs, the Company
repurchased 725,000 shares in 1998, 301,000 shares in 1997 and 138,500 shares in
1996 at a cost of $17.9 million, $10.0 million and $3.9 million, respectively.
As of December 31, 1998, all shares repurchased were retired and no further
stock repurchase plans have been approved.
In April 1996, the Company completed a secondary public offering in
which it sold 1,500,000 shares of Common Stock at $48 per share. The offering
provided net proceeds to the Company of approximately $65.3 million.
Stock Option Plans
The Company has five stock-based compensation plans which are described
below - the 1989 Plan, the 1992 Plan, the 1994 Plan or the Prior Plans, the
Miravant Medical Technologies 1996 Stock Compensation Plan or the 1996 Plan and
the Non-Employee Directors Stock Option Plan or the Directors' Plan. As
disclosed in Note 1, the Company applies APB Opinion No. 25 and related
interpretations in accounting for its stock option plans. The Company records
deferred compensation for the excess of the fair value of Common Stock over the
exercise price of stock options. With respect to variable stock options granted,
deferred compensation is recorded when the likelihood of the achievement of the
specified milestone is considered probable.
The Prior Plans provided for the grant of both incentive stock options
and non-statutory stock options. Stock options were granted under these plans to
certain employees and corporate officers. The purchase price of incentive stock
options must equal or exceed the fair market value of the Common Stock at the
grant date and the purchase price of non-statutory stock options may be less
than fair market value of the Common Stock at grant date. Effective July 21,
1996, the Prior Plans were superseded with the adoption of the 1996 Plan except
to the extent of options outstanding in the Prior Plans. The Company has
allocated 300,000 shares, 750,000 shares and 600,000 shares for the 1989 Plan,
the 1992 Plan and the 1994 Plan, respectively. The outstanding shares granted
under the Prior Plans vest in equal annual installments over four years
beginning one year from the grant date and expire ten years from the original
grant date.
The 1996 Plan provides for awards which include incentive stock
options, non-qualified stock options, restricted shares, stock appreciation
rights, performance shares, stock payments and dividend equivalent rights.
Included in the 1996 Plan is a stock purchase program which has not yet been
implemented. Also included in the 1996 Plan is a Non-Employee Directors' Stock
Option award program which provides for an automatic fully vested annual grant
on the first day of the fourth quarter of each year to each non-employee
director of a non-qualified stock option for the purchase of 7,500 shares of
Common Stock at fair market value. Officers, key employees, directors and
independent contractors or agents of the Company may be eligible to participate
in the 1996 Plan, except that incentive stock options may only be granted to
employees of the Company. The 1996 Plan supersedes and replaces the Prior Plans
and the Directors' Plan, except to the extent of options outstanding under those
plans. The purchase price for awards granted from the 1996 Plan may not be less
than the fair market value at the date of grant. The maximum amount of shares
that could be awarded under the 1996 Plan over its term is 4,000,000 shares.
Awards granted under the 1996 Plan expire on the date determined by the Plan
Administrators as evidenced by the award agreement, but shall not expire later
than ten years from the date the award is granted except for grants of
restricted shares which expire at the end of a specified period if the specified
service or performance conditions have not been met.
Effective March 1997, the Directors' Plan was superseded by the
adoption of the 1996 Plan except to the extent of options outstanding under the
Directors' Plan. The Directors' Plan provided for an automatic annual grant of
an option for the purchase of 7,500 shares at fair market value on the first day
of the fourth quarter of each year to be made to each non-employee director. The
options vest on the grant date and expire ten years from the date of grant or
within 90 days of termination of the individual's directorship.
As of December 31, 1995, the Company had nonvested variable stock
options included in the outstanding options under the 1992 Plan, with an
exercise price of $34.75 per share covering 427,500 shares of Common Stock.
Effective June 21, 1996, the Compensation Committee of the Board of Directors
adjusted the future vesting periods of the variable stock options granted in
1995 under the 1992 Plan covering 400,000 shares of Common Stock. The remaining
options covering 27,500 shares were not adjusted due to milestones being
attained. These variable stock options were adjusted to change the vesting
periods to specific dates as opposed to the original vesting periods, which were
based upon the achievement of milestones; no change was made to the exercise
prices of these variable stock options. This change in the vesting periods
provides for the options to be accounted for as non-variable options, and
therefore, alleviates the impact of deferred compensation and the related
expense fluctuating in future periods based on the changes in the per share
market value from period to period. The Company recorded $9,800 and $17,000 of
deferred compensation expense related to these options for the years ended
December 31, 1998 and 1997, respectively. For the year ended December 31, 1996,
the Company recorded deferred compensation expense of $767,000 and a reduction
in deferred compensation of $3.7 million with respect to variable milestone
options. As of December 31, 1998, options covering 287,500 shares with an
exercise price of $34.75 per share have vested and options covering 110,000
shares have been canceled. The remaining 30,000 unvested shares will vest in the
years 1999 and 2000.
Additionally, during the years ended December 31, 1996 and 1995, the
Company recorded deferred compensation with respect to certain of the stock
options which had been granted at less than the estimated fair value. Deferred
compensation recorded is amortized ratably over the period that the options vest
to the option holder and is adjusted for options which have been canceled. This
resulted in compensation expense of $21,000, $39,000 and $378,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Other Stock Options
In connection with employment agreements the Company has with its
executives and certain key employees, non-qualified stock options have been
granted to purchase shares of Common Stock. The options generally become
exercisable in equal installments over four years beginning one year from the
grant date and expire ten years from the original grant date.
<TABLE>
<CAPTION>
The following table summarizes all stock option activity:
Weighted
Average
Exercise price Exercise Stock
per share Price Options
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1996.......... $ 0.33 - 40.25 $ 8.74 2,563,370
Granted.............................. 24.38 - 56.00 36.58 355,040
Exercised............................ 0.33 - 8.00 1.58 (545,062)
Canceled............................. 6.00 - 56.00 49.83 (114,918)
- ---------------------------------------------------------------------------------------------
Outstanding at December 31, 1996........ 0.33 - 52.25 12.76 2,258,430
Granted.............................. 28.00 - 55.50 35.05 446,000
Exercised............................ 0.33 - 29.00 5.06 (262,002)
Canceled............................. 6.00 - 46.75 25.52 (200,645)
- ---------------------------------------------------------------------------------------------
Outstanding at December 31, 1997........ 0.33 - 55.50 16.80 2,241,783
Granted.............................. 8.50 - 39.00 21.21 1,117,250
Exercised............................ 0.33 - 28.00 2.43 (483,423)
Canceled............................. 4.00 - 55.50 32.82 (376.754)
- ---------------------------------------------------------------------------------------------
Outstanding at December 31, 1998........ $ 0.67 - 55.50 $ 19.14 2,498,856
- ---------------------------------------------------------------------------------------------
Options Outstanding by Price Range at
December 31, 1998.................... $ 0.67 - 6.00 $ 2.96 649,877
$ 8.00 - 15.00 $ 8.62 697,187
$15.13 - 32.13 $ 28.81 742,792
$33.50 - 55.50 $ 36.30 409,000
Exercisable at:
December 31, 1996....................... $ 0.33 - 40.25 $ 8.39 1,629,469
December 31, 1997....................... $ 0.33 - 55.50 $ 11.55 1,629,942
December 31, 1998....................... $ 0.67 - 55.50 $ 15.45 1,227,651
</TABLE>
In accordance with APB Opinion No. 25 and in connection with accounting
for the Company's stock-based compensation plans, the Company recorded total
stock compensation expense of $31,000, $56,000 and $1.1 million for the years
ended December 31, 1998, 1997 and 1996, respectively, with respect to the
variable stock options and options granted at less than fair value described
previously. Additionally, in January 1998, the Company issued loans to the Chief
Executive Officer, President and Chief Financial Officer for the purpose of
exercising stock options. In accordance with the accounting guidance for these
types of loans, the Company recorded deferred compensation of $2.7 million
related to these loans. For the year ended December 31, 1998 the Company
recorded $540,000 of compensation expense related to these loans.
If the Company had elected to recognize stock compensation expense
based on the fair value of the options granted at grant date for its stock-based
compensation plans consistent with the method of SFAS No. 123, the Company's net
loss and loss per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------- -- ----------------- -- --------------------- -- --------------------
<S> <C> <C> <C>
Net Loss
As reported...................... $ (28,064,000) $ (30,209,000) $ (16,142,000)
Pro forma........................ $ (34,371,000) $ (34,332,000) $ (22,940,000)
Loss per share - basic and diluted
As reported...................... $ ( 1.94) $ ( 2.36) $ ( 1.37)
Pro forma........................ $ ( 2.38) $ ( 2.68) $ ( 1.95)
- ----------------------------------------- -- ----------------- -- --------------------- -- --------------------
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
option pricing model using the Multiple Option approach whereby a separate fair
value is computed for each vesting increment of an option. The following
assumptions were used:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------- -- ----------------- -- -------------------- -- --------------------
<S> <C> <C> <C>
Expected dividend yield............. 0% 0% 0%
Expected stock price volatility..... 50% 50% 50%
Risk-free interest rate............. 4.62% - 4.83% 5.71% - 5.81% 6.01% - 6.41%
Expected life of options............ 2 - 4 years 2 - 4 years 2 - 4 years
- ----------------------------------------- -- ----------------- -- -------------------- -- --------------------
</TABLE>
The above assumptions are highly subjective, in particular the expected
stock price volatility of the underlying stock. Because changes in these
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not provide a reliable single
measure of the fair value of its stock options.
The weighted average remaining contractual life of options outstanding at
December 31, 1998, 1997 and 1996 was 7.2 years, 6.6 years and 6.9 years,
respectively.
Warrants
In connection with a private placement offering which commenced in 1993 and
continued through 1994, the Company issued one detachable Common Stock warrant
for every two shares of Common Stock purchased. Each half warrant was allocated
$0.67 of the overall $8.00 per share purchase price. In 1994 and 1993, the
Company issued detachable stock warrants in connection with the private
placement offering of 287,294 and 242,247, respectively. Each detachable stock
warrant provides for the purchase of one share of Common Stock at $8.00 per
share with the warrants expiring in February 2000. Warrants to purchase 136,688
shares, 136,783 shares and 13,190 shares of Common Stock were exercised during
1998, 1997 and 1996, respectively.
During 1994 and 1993, the Company issued warrants to private placement
selling agents and a corporate partner to purchase 7,216 shares and 148,449
shares of Common Stock, respectively. Each warrant provides for the purchase of
one share of Common Stock at $8.00 per share with the warrants expiring February
2000. Warrants to purchase 312 shares and 125,000 shares of Common Stock were
exercised during 1998 and 1997, respectively, and no warrants were exercised in
1996.
In January 1995, the Company, in connection with a loan received from a
principal of its designated selling agent, issued warrants to purchase 15,000
shares of the Company's Common Stock at $10.67 per share. The warrants expire
February 2000. As of December 31, 1998, no warrants have been exercised.
In April 1995, the Company, in connection with consulting agreements,
issued warrants to purchase 750,000 shares of Common Stock at $10.67 per share
to various consultants. Additionally, in November 1995, the Company, in
connection with consulting agreements, issued warrants to purchase 55,000 shares
of Common Stock at $34.75 per share to different consultants. During 1997 and
1998, the Company, in connection with consulting agreements, issued warrants to
purchase 128,000 shares and 240,000 shares, respectively, of Common Stock to
various consultants. These warrants were priced at the fair market value on the
date of grant and the prices ranged from $7.00 to $32.13 per share. All of these
warrants vest equally over the term of the agreements, generally between one and
four years. The consulting agreements can be terminated by the Company at any
time with only those warrants vested as of the date of termination exercisable.
The warrants expire four or five years after the date of issuance. As of
December 31, 1998, no warrants have been exercised. The Company recorded
deferred compensation associated with the value of these warrants of $717,000
and $1.9 million in 1998 and 1997, respectively. The Company recorded
compensation expense of $1.8 million, $1.5 million and $1.1 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
In September and October of 1997, the Company, in connection with three
private equity placements, issued warrants to purchase 1,416,000 shares of
Common Stock with 50% of the warrants exercisable at $55.00 per share and 50%
exercisable at $60.00 per share. In addition, in connection with these private
equity placements, the Company also issued warrants to purchase 250,000 shares
of Common Stock to various selling agents. In accordance with the Amendment
Agreement, for the purchasers of 900,000 shares, the warrant price was amended
to be $35.00 per share. The warrants are exercisable beginning one year after
the closing of the purchase and expire in December 2001. As of December 31,
1998, no warrants have been exercised.
4. Convertible Notes Payable
During 1993, the Company issued $3.0 million in convertible notes payable.
The notes earned interest at 10% per year which was payable quarterly (beginning
September 30, 1993) and the principal balance was due three years from the date
of issuance. The principal balance was due to be paid on the due date or could
be converted into shares of Common Stock at a price of $8.00 per share.
In December 1994, the holders of $2.4 million in principal amount of
convertible notes exchanged their notes for shares of Common Stock at $8.00 per
share for 294,624 shares of Common Stock. The conversion also provided the
noteholders with one warrant for every two shares of Common Stock converted for
total warrants covering 147,312 shares of Common Stock. The warrants provide for
the purchase of one share of Common Stock at $8.00 per share and expire February
2000. During 1995, noteholders converted an additional $550,000 in principal
amount of convertible notes for 68,748 shares of Common Stock at $8.00 per
share. During 1996, holders of the remaining $93,000 in principal amount of
convertible notes exchanged their notes for 11,562 shares of Common Stock at
$8.00 per share. For the years ended December 31, 1998, 1997 and 1996 warrants
to purchase 17,186 shares, 23,435 shares and 5,204 shares, respectively, of
Common Stock were exercised.
5. Employee Benefit Plans
The Company has available a retirement savings plan for all eligible
employees who have completed three months and 500 hours of service and who are
at least 21 years of age. The plan has received Internal Revenue Service
approval under Section 401(a) of the Internal Revenue Code. Participating
employees are 100% vested upon entering the plan and no matching contribution is
made by the Company.
On December 9, 1996, the Board of Directors approved the Miravant Medical
Technologies 401(k) - Employee Stock Ownership Plan or the ESOP which provides
substantially all employees with the opportunity for long-term benefits. The
ESOP was implemented by management on July 1, 1997 and operates on a calendar
year basis. In conjunction with the ESOP, the Company registered with the
Securities and Exchange Commission 300,000 shares of the Company's Common Stock
for purchase by the ESOP. The ESOP provides for eligible employees to allocate
pre-tax deductions from payroll which are used to purchase the Company's Common
Stock on a bi-weekly basis. The ESOP also provides for a discretionary
contribution made by the Company based on the amounts contributed by the
participants. The amount to be contributed by the Company is determined by the
Board of Directors prior to the start of each plan year. Company contributions,
which the Board of Directors determined to be 50% for the 1998 plan year, are
made on a quarterly basis and vest equally over a five year period. Total
Company matching contributions for 1998 and 1997 were not material.
6. Provision for Income Taxes
Deferred income taxes reflect the net tax effects of net operating loss
carryforwards, credits and temporary differences between the financial
statements and tax basis of assets and liabilities. Significant components of
the Company's deferred tax assets and liabilities as of December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------
Current Non-current Current Non-current
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Other accruals and reserves........... $ 118,000 $ -- $ 110,000 $ --
Capitalized research and development.. -- 3,315,000 -- 2,293,000
Net operating losses and tax credits.. -- 47,529,000 -- 33,951,000
----------------------------------------------------------------
Total deferred tax assets............... 118,000 50,844,000 110,000 36,244,000
Deferred tax liabilities:
Amortization and depreciation expense. -- 234,000 -- 468,000
Federal benefit for state income taxes 8,000 2,261,000 8,000 1,633,000
----------------------------------------------------------------
Total deferred tax liabilities.......... 8,000 2,495,000 8,000 2,101,000
----------------------------------------------------------------
Net deferred tax assets................. 110,000 48,349,000 102,000 34,143,000
Less valuation reserve.................. 110,000 48,349,000 102,000 34,143,000
----------------------------------------------------------------
$ -- $ -- $ -- $ --
================================================================
</TABLE>
The Company has net operating loss carryforwards for federal tax purposes
of $120.1 million which expire in the years 2002 to 2018. Research and
alternative minimum tax credit carryforwards aggregating $5.1 million are
available for federal and state tax purposes and expire in the years 2002 to
2013. The Company also has a state net operating loss carryforward of $28.1
million which expires in the years 1999 to 2003. Under Section 382 of the
Internal Revenue Code, the utilization of the Company's tax attributes may be
limited based on changes in the percentage of ownership in the Company.
Included in the valuation allowance balance is $8.2 million related to the
exercise of stock options which are not reflected as an expense for financial
reporting purposes. Accordingly, any future reduction in the valuation allowance
relating to this amount will be credited directly to equity and not reflected as
an income tax benefit in the statement of operations.
7. Commitments and Contingencies
The Company has entered into agreements with various parties to perform
research and development and conduct clinical trials on behalf of the Company.
For the research and development agreements, the Company has the right to use
and license, patent and commercialize any products resulting from these
agreements. The Company does not have any financial commitments with respect to
these agreements and records these expenses as the services and costs are
incurred. The Company has also entered into licensing and OEM agreements to
develop, manufacture and market drugs and devices for photodynamic therapy and
other related uses. The agreements provide for the Company to receive or pay
royalties at various rates. The Company has recorded royalty income of
$191,000, $234,000 and $73,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
In 1994, the Company entered into a development and commercial supply
agreement with Pharmacia & Upjohn to receive formulation and packaging services
for one of the Company's drugs at specified prices. For the years ended December
31, 1998, 1997 and 1996 the Company paid $2.6 million, $3.3 million and $2.6
million, respectively, and recorded as expense $2.9 million, $2.9 million and
$2.5 million, respectively, primarily for drug formulation development cost.
In July 1995, the Company entered into an exclusive development and
licensing agreement with Pharmacia & Upjohn for the Company's leading
proprietary photoselective drug. Under this agreement, the Company is entitled
to receive funding for certain preclinical development and clinical trial costs,
payments upon the achievement of certain milestones and royalties upon the
commercial sale of drug products. In September 1995, the Company signed two
supply contracts with Pharmacia & Upjohn which support the license agreement by
providing drug product for the ongoing clinical development and medical light
devices for use with the drug product. In July 1996, the Company amended the
license agreement to include an additional disease field and in December 1996,
entered into an additional supply contract for devices under the new field. For
the years ended December 31, 1998 and 1997, the Company recorded license
revenues of $9.3 million and $1.9 million, respectively, related to the billing
for the reimbursement of preclinical and clinical costs related to the Pharmacia
& Upjohn license agreement.
Certain of the Company's research has been or is being funded in part by
Small Business Innovation Research or National Institutes of Health grants. As a
result of such funding, the United States Government has or will have certain
rights in the technology developed which includes a non-exclusive, worldwide
license under such inventions of any governmental purpose and the right to
require the Company to grant an exclusive license under any of such intentions
to a third party based on certain criteria. For the years ended December 31,
1998, 1997 and 1996, the Company has recorded income from grants of $674,000,
$146,000 and $550,000, respectively.
In February 1998, the Company agreed to guaranty a term loan in the amount
of $7.6 million from a bank to a director of the Company. In June 1998, the
director did not stand for re-election on the Board of Directors. The loan is
due and payable on July 31, 1999, or sooner upon an event of default (as defined
in the loan agreement), bears interest at the bank's reference rate, minus .5%
per annum payable quarterly, and is secured by all of the individual's shares of
the Company's Common Stock. In connection with the guaranty, the Company granted
the bank a security interest in an account maintained at the bank and agreed,
upon an event of default, to purchase the loan from the bank for a price
generally equal to the then outstanding principal, plus accrued interest, fees
and costs. In the event the Company purchases the loan, the individual granted
the Company the option to acquire all of his shares of Common Stock at a price
equal to 50% of the 20-day average closing price, net of the loan repayment. The
individual also agreed to certain restrictions on the sale of such shares. Under
the loan agreement and the guaranty, the individual and the Company are subject
to the maintenance of specified financial and other covenants.
The Company is involved in certain claims and inquiries that are routine to
its business. Legal proceedings tend to be unpredictable and costly. Based on
currently available information, management believes that the resolution of
pending claims, regulatory inquiries, and legal proceedings will not have a
material adverse effect on the Company's operating results, financial position
or liquidity position.
8. Leases
The Company leases four buildings for a total monthly rental of $123,000.
Three of the leases were renewed in 1999 and expire between August 2002 and
October 2003. The fourth lease expires in the year 2003. The leases provide for
annual rental increases based upon a consumer price index. In September 1997,
the Company began to sublease a portion of one of its buildings to Ramus, an
affiliate. The sublease agreement is for three years with rent based upon the
percentage of square footage occupied. Sublease rental income from Ramus, which
is approximately $4,500 per month, and is netted against the Company's rent
expense which is included in general and administrative expenses.
Beginning in 1993, the Company entered into capital lease agreements for
various research equipment. The leases were from one to five years and required
equal monthly payments of principal and interest, with interest ranging from 10%
to 14%. Amortization expense related to this capitalized leased equipment is
included as depreciation expense. Accumulated amortization was $158,000 and
$128,000 at December 31, 1998 and 1997, respectively. As of December 31, 1998,
the Company had no remaining capital lease obligations.
Future minimum operating lease payments as of December 31, 1998 are as
follows:
1999.......................................... $ 1,146,000
2000.......................................... 655,000
2001.......................................... 411,000
2002.......................................... 411,000
2003.......................................... 360,000
------------------
Total minimum lease payments.................. $ 2,983,000
==================
Rent expense, net of sublease income, was $1.1 million, $866,000 and
$504,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
9. Related Party Transactions
An outside director of the Company is an officer of a consulting firm,
which provides corporate financial consulting services in the areas of mergers
and acquisitions, public and private financings, strategic planning and
financial analysis. Both the consulting firm and the outside director have been
advisors to the Company since 1991 and have been involved in the Company's
private and public financings from 1991 to the present. The consulting firm was
paid $45,800 in connection with the Company's initial public offering in 1995,
$1.1 million in connection with the Company's secondary offering in 1996 and
$222,000 in connection with the Company's private equity placements in 1997. In
connection with ongoing services provided by the consulting firm, the Company
recorded as expense $373,000, $178,000 and $224,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
In July 1996, a partner in a law firm used by the Company for outside legal
counsel, was elected by the Board of Directors to serve as Secretary of the
Company. The Company paid $131,000 in connection with legal services for the
Company's initial public offering in 1995, $57,000 in connection with the
Company's secondary offering in 1996 and $57,000 in connection with the
Company's private equity placements in 1997. In connection with general legal
services provided by the law firm, the Company recorded as expense $246,000,
$155,000 and $116,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
10. Fair Value of Financial Instruments
The following is information concerning the fair value of each class of
financial instruments as of December 31, 1998 and 1997:
Cash, cash equivalents, accounts receivable and marketable securities
The carrying amounts of cash, cash equivalents, accounts receivable and
marketable equity securities approximate their fair values. Fair values of cash
equivalents and marketable securities are based on quoted market prices.
Long-Term Obligations
The carrying amount of long-term obligations approximate their fair values
due to the short remaining term of maturity of these obligations.
11. Subsequent Events
Collaboration with Pharmacia & Upjohn
In January 1999, the Company and Pharmacia & Upjohn, Inc. and Pharmacia &
Upjohn S.p.A., which involve these entities and certain other wholly owned
subsidiaries or Pharmacia & Upjohn, entered into an Equity Investment Agreement
pursuant to which Pharmacia & Upjohn has purchased from the Company 1,136,533
shares of Common Stock for an aggregate purchase price of $19.0 million, or
$16.71 per share. This price includes a premium of approximately 20% over the
ten (10) day average per share closing price of the Common Stock through January
14, 1999. The Company and certain wholly owned subsidiaries of Pharmacia &
Upjohn have also entered into certain other agreements, including a Credit
Agreement which will extend to the Company up to $22.5 million in credit to be
used to support the Company's ophthalmology, oncology and other development
programs, as well as for general corporate purposes, which are subject to
certain limitations and restrictions. In connection with the extension of this
credit, Pharmacia & Upjohn, or its wholly owned subsidiaries, will receive a
total of up to 360,000 warrants to purchase Common Stock of Miravant. The
exercise price of each warrant will be equal to 140% of the average of the
closing prices of the Common Stock for the ten (10) trading days immediately
preceding the borrowing request for the related loan. Additionally, the Company
and Pharmacia & Upjohn have amended their existing ophthalmology and oncology
development and license agreements to eliminate future cost reimbursements for
oncology and urology and any future milestone payments in age-related macular
degeneration or AMD. Upon its initial borrowing under the Credit Agreement, the
Company will be required to meet certain affirmative, negative and financial
covenants.
Shareholders' Equity
In accordance with the Amendment Agreement dated June 30, 1998, the Company
fulfilled its obligations related to 112,500 shares subject to the price
protection provisions for the January 1, February 1, and March 1, 1999
measurement dates. The Company elected to pay the purchasers cash and Common
Stock, with the cash portion amounting to $1.2 million, $1.3 million and $1.7
million, respectively. The remainder of the price protection obligations for
those measurement dates was paid in the form of shares of Miravant Common Stock,
which amounted to 199,746 shares, 207,072 shares and 282,178 shares,
respectively. The original shares and a corresponding number of warrants are now
released from the lock-up provisions under the Amendment Agreement with the
purchasers. In addition, under the Amendment Agreement, in March 1999 the
Company issued an additional 450,000 warrants to the purchasers at an exercise
price of $35.00 per share. The Company has now satisfied all of its obligations
under the Amendment Agreement and, as such, the Company has no further
obligations under this agreement to any of these parties.
12. Pro Forma Disclosure for Subsequent Events (Unaudited)
The following unaudited consolidated pro forma condensed balance sheet
information presented below includes adjustments for the subsequent events above
in Note 11:
<TABLE>
<CAPTION>
Adjustment for Pro Forma
December 31, 1998 Subsequent Events December 31, 1998
- ----------------------------------------- --- --------------------- -- --------------------- -- --------------------
<S> <C> <C> <C>
Cash and cash equivalents (1)......... $ 11,284,000 $ 14,800,000 $ 26,084,000
Total current assets.................. 15,258,000 14,800,000 30,058,000
Total assets (1)...................... $ 23,810,000 $ 14,800,000 $ 38,610,000
===================== -- ===================== -- ====================
Total current liabilities............. $ 4,124,000 $ -- $ 4,124,000
Common stock (1)...................... 135,989,000 14,800,000 150,789,000
Total shareholders' equity (1)........ 19,686,000 14,800,000 34,486,000
Total liabilities and shareholders'
equity (1).......................... $ 23,810,000 $ 14,800,000 $ 38,610,000
- ----------------------------------------- --- ===================== -- ===================== -- ====================
</TABLE>
(1) Cash received, and related Common Stock issued, in connection with the
equity investment made by Pharmacia & Upjohn net of cash paid to fulfill price
protection provisions as noted above in Note 11 as if such events had occurred
as of December 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Incorporating
Exhibit Reference
Number Description (if applicable)
- ------ ----------- ---------------
<S> <C> <C>
3.1 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant
filed with the Delaware Secretary of State on September 12, 1997. [D][3.1]
3.2 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant [C][3.11]
filed with the Delaware Secretary of State on July 24, 1995.
3.3 Restated Certificate of Incorporation of the Registrant filed with the Delaware Secretary [B][3.1]
of State on December 14, 1994.
3.4 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with [A][3.2]
the Delaware Secretary of State on March 17, 1994.
3.5 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with [A][3.3]
the Delaware Secretary of State on October 7, 1992.
3.6 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with [A][3.4]
the Delaware Secretary of State on November 21, 1991.
3.7 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with [A][3.5]
the Delaware Secretary of State on September 27, 1991.
3.8 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with [A][3.6]
the Delaware Secretary of State on December 20, 1989.
3.9 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with [A][3.7]
the Delaware Secretary of State on August 11, 1989.
3.10 Certificate of Amendment of the Certificate of Incorporation of the Registrant filed with [A][3.8]
the Delaware Secretary of State on July 13, 1989.
3.11 Certificate of Incorporation of the Registrant filed with the Delaware Secretary of State [A][3.9]
on June 16, 1989.
3.12 Amended and Restated Bylaws of the Registrant. [D][3.12]
4.1 Specimen Certificate of Common Stock. [B][4.1]
4.2 Form of Convertible Promissory Note. [A][4.3]
4.3 Form of Indenture. [A][4.4]
4.4 Special Registration Rights Undertaking. [A][4.5]
4.5 Undertaking Agreement dated August 31, 1994. [A][4.6]
4.6 Letter Agreement dated March 10, 1994. [A][4.7]
4.7 Form of $10,000,000 Common Stock and Warrants Offering Investment Agreement. [A][4.8]
4.8 Form of $55 Common Stock Purchase Warrant. [E][4.1]
4.9 Form of $60 Common Stock Purchase Warrant. [E][4.2]
4.10 Form of $35 Amended and Restated Common Stock Purchase Warrant. [F][4.1]
4.11 Form of Additional $35 Common Stock Purchase Warrant. [F][4.2]
4.12 Warrant to Purchase 10,000 Shares of Common Stock between the Registrant and Charles S. [G][4.12]
Love.*
10.1 Amendment No. 6 dated as of January 1, 1998 to Employment Agreement between the [G][10.1]
Registrant and Gary S. Kledzik.**
10.2 Amendment No. 11 dated as of January 1, 1998 to Employment Agreement between the [G][10.2]
Registrant and David E. Mai.**
10.3 Amendment No. 3 dated as of January 1, 1998 to Employment Agreement between the [G][10.3]
Registrant and John M. Philpott.**
10.4 Security Agreement dated February 17, 1998 between the Registrant and Sanwa Bank. [G][10.4]
10.5 Continuing Guaranty dated February 17, 1998 between the Registrant and Sanwa Bank. [G][10.5]
10.6 Addendum to Continuing Guaranty dated February 17, 1998 between the Registrant and Sanwa [G][10.6]
Bank.
10.7 Indemnification Agreement dated February 27, 1998 between the Registrant and Michael D. [G][10.7]
Farney.
10.8 Amended and Restated Development and Commercial Supply Agreement dated June 8, 1998 [H][10.1]
between the Registrant and Pharmacia & Upjohn Co.*
10.9 Amended and Restated Development and License Agreement dated June 8, 1998 between the [H][10.2]
Registrant and Pharmacia & Upjohn S.p.A.*
10.10 Amended and Restated Ophthalmology Development and License Agreement dated June 8, 1998 [H][10.3]
between the Registrant and Pharmacia & Upjohn AB.*
10.11 Right of First Refusal Agreement dated June 8, 1998 between the Registrant and Pharmacia [H][10.4]
& Upjohn, Inc.*
10.12 Credit Agreement dated April 1, 1998 between the Registrant and Ramus Medical [H][10.5]
Technologies.*
10.13 Convertible Promissory Note dated April 1, 1998 between the Registrant and Ramus Medical [H][10.6]
Technologies.*
10.14 Strategic Alliance Agreement dated June 2, 1998 between the Registrant and Xillix [H][10.7]
Technologies Corp.*
10.15 Subscription Agreement relating to the Registrant's Common Stock dated June 2, 1998 [H][10.8]
between the Registrant and Xillix Technologies Corp.
10.16 Subscription Agreement relating to Xillix's Common Stock dated June 2, 1998 between the [H][10.9]
Registrant and Xillix Technologies Corp.
10.17 Commercial Lease Agreement dated May 27, 1998 between the Registrant and Raytheon Company [I][10.4]
10.18 Equity Investment Agreement dated January 15, 1999 between the Registrant and Pharmacia [J][10.1]
& Upjohn, Inc., and Pharmacia & Upjohn, S.p.A.
10.19 Credit Agreement between the Registrant and the Lender. [J][10.2]
10.20 Warrant Agreement between the Registrant and Pharmacia & Upjohn, Inc. [J][10.3]
10.21 Security Agreement between the Registrant and the Secured Party. [J][10.4]
10.22 Registration Rights Agreement between the Registrant and Pharmacia & Upjohn, Inc. [J][10.5]
10.23 Amended and Restated Ophthalmology Development & License Agreement between the Registrant [J][10.6]
and Pharmacia & Upjohn AB.
10.24 Cardiovascular Right of First Negotiation between the Registrant and Pharmacia & Upjohn, [J][10.7]
Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
- -------------------------------------------
</TABLE>
[A] Incorporated by reference from the exhibit referred to in brackets
contained in the Registrant's Registration Statement on Form S-1
(File No. 33-87138).
[B] Incorporated by reference from the exhibit referred to in brackets
contained in Amendment No. 2 to the Registrant's Registration
Statement on Form S-1 (File No. 33-87138).
[C] Incorporated by reference from the exhibit referred to in brackets
contained in the Registrant's Form 10-Q for the quarter ended June
30, 1995, as amended on Form 10-Q/A dated December 6, 1995 (File No.
0-25544).
[D] Incorporated by reference from the exhibit referred to in brackets
contained in the Registrant's Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-25544).
[E] Incorporated by reference from the exhibit referred to in brackets
contained in the Registrant's Registration Statement on Form S-3
(File No. 333-39905).
[F] Incorporated by reference from the exhibit referred to in brackets
contained in the Registrant's Form 8-K dated June 30, 1998 (File No.
0-25544).
[G] Incorporated by reference from the exhibit referred to in brackets
contained in the Registrant's Form 10-Q for the quarter ended March
31, 1998 (File No. 0-25544).
[H] Incorporated by reference from the exhibit referred to in brackets
contained in the Registrant's Form 10-Q for the quarter ended June
30, 1998 (File No. 0-25544).
[I] Exhibit A-1 to this exhibit is incorporated by reference from the
exhibit referred to in the Registrant's Registration Statement on
Form S-1 (File No. 33-87138).
[J] Incorporated by reference from the exhibit referred to in brackets
contained in the Registrant's Form 8-K dated January 15, 1999 (File
No. 0-25544).
* Confidential portions of this exhibit have been deleted and filed
separately with the Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
** Management contract or compensatory plan or arrangement.
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
Miravant Pharmaceuticals, Inc.
Miravant Systems, Inc.
Miravant Cardiovascular, Inc.
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-29413) pertaining to the Miravant Medical Technologies 401(k)
- - Employee Stock Ownership Plan and (Form S-8 No. 333-34953) pertaining to the
Miravant Medical Technologies 1989 Stock Option Plan, the Miravant Medical
Technologies 1994 Stock Option Plan and the Miravant Medical Technologies 1996
Stock Compensation Plan and to the incorporation by reference in the
Registration Statement (Form S-3/A No. 333-60251) and in the related Prospectus
of our report dated March 4, 1999, with respect to the consolidated financial
statements of Miravant Medical Technologies included in its Annual Report (Form
10-K) for the year ended December 31, 1998.
/S/ ERNST & YOUNG LLP
-----------------------
ERNST & YOUNG LLP
March 26, 1999
Woodland Hills, California
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN
THE COMPANY'S FORM 10-K FOR THE PERIOD ENDING DECEMBER 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,284
<SECURITIES> 0
<RECEIVABLES> 3,182
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,258
<PP&E> 11,344
<DEPRECIATION> (5,514)
<TOTAL-ASSETS> 23,810
<CURRENT-LIABILITIES> 4,124
<BONDS> 0
0
0
<COMMON> 135,989
<OTHER-SE> (116,303)
<TOTAL-LIABILITY-AND-EQUITY> 23,810
<SALES> 0
<TOTAL-REVENUES> 10,179
<CGS> 0
<TOTAL-COSTS> 41,788
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (28,064)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,064)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,064)
<EPS-PRIMARY> (1.94)
<EPS-DILUTED> (1.94)
</TABLE>
