IXION
IXion Biotechnology, Inc.
1998 Annual Report
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Letter To Shareholders
April 27, 1999
Alachua, Florida
Dear Shareholder:
This letter, accompanied by the attached Securities and Exchange
Commission filing on Form 10KSB (which contains our audited financial
statements), is your annual report for Ixion for the year 1998.
Overview - Another Good Year for Ixion in a Bad Year for the Biotechnology
Sector
There was general agreement prior to 1996 that if a small, technology
rich biotech company had a strong and unique technology platform, it was likely
that a big pharmaceutical company would purchase it if the approach was
demonstrably sound. The early success of Amgen, Biogen, Genentech, and Genzyme
led the management of the large pharmaceuticals into the belief that the biotech
companies had discovered a new method of drug discovery and that collaborations
with biotech companies were competitively necessary. If the biotech company
didn't want to be purchased, additional money was easy to raise from venture
capitalists. A small company with a strong management team and products that
were promising in preclinical studies was a good candidate to go public,
provided it had at least one pharmaceutical collaboration to validate its
technology.
In the mid-1990s, shortly after the founding of Ixion, changes began to
occur in the structure of the biotech sector. For one thing, several
high-profile, late stage clinical failures shook the confidence of the big
pharmaceutical companies. These late stage failures came as a nasty surprise to
the VCs and investment communities as well. As the understanding of how much it
costs, how long it takes, and how risky it is to get a product to market became
obvious to these investment communities, several adjustments, all unfavorable,
occurred.
To begin with, the public market for small cap, early stage biotech
companies (already caught in the downdraft affecting small cap stocks
generally), virtually disappeared. 1998 was the worst year for biotech
investment that there ever has been. In terms of market capitalization, public
low cap biotech stocks have essentially collapsed since October 1997. For
example, in early October 1998, the BioCentury biotech index was at its lowest
level since 1992. By year end 1998, 270 of 384 public biotech stocks had
declined from December 31, 1997.
This market collapse meant that Ixion's Internet public offering was
swimming upstream, with the result that we did not sell enough to provide the
Company with the financing we require to move forward aggressively.
The venture capital sector, influenced by the market's collapse, by
their own herd mentality, by the frenzy in Internet stocks, and by the late
stage failures in biotech, began to withdraw from the biotech sector. During the
past year, a number of venture capital firms have fired or redirected their
partners involved in this sector.
Most disturbing of all, however, is the trend in big pharma (possibly
an outgrowth of the consolidation in that sector of the industry) to wait until
biotech products are through Phase II before licensing. This reduces the risk to
the big pharma company and to the product manger personally. This has
consistently been Ixion's experience with big pharma companies, who are very
enthusiastic about our product pipeline, but want additional data before
agreeing to a collaboration.
The implications include:
o There will be significantly less money available to small
companies from traditional financing sources than there has been
in the past, and thus they will have to raise more money directly.
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o Fewer products will be developed. Small companies will have to
make difficult product decisions earlier.
o Technology based companies will be less valuable and less
marketable. Up until now, for example, the big pharma companies
have used their enormous financial resources to pay higher prices
for later stage products. But, if current trends continue, they
may actually be able to acquire these technologies at later stages
for bargain prices because the biotech companies will be
desperate as more and more of them start running out of money.
o Earnings, or at least significant revenues, will drive stock
values. Without earnings, biotech stock prices will remain low.
o Consolidations will accelerate as more and more companies run low
on cash.
Financing Breakthrough
Your company has taken several steps to improve our chance of success in
this difficult time. The most important has been a search for a partner who can
help us achieve product revenue in the shortest possible time. We think we have
found that partner - Q-Med AB.
Founded in 1987, Q-MED AB is a fast-growing, profitable Swedish company
that develops, manufactures and sells natural yet highly specialized medical
implants. It has several international subsidiaries, including a U.S. subsidiary
based in Princeton, NJ. Dr. Karl Arfors, a member of Ixion's board, is also a
senior scientist with Q-Med. All of Q-Med's products are constructed using a
unique form of non-animal, stabilized hyaluronic acid. This technology
represents the most modern development within the area of reabsorbable implants.
The majority of Q-Med's revenues are accounted for by Restylane(R) for the
filling out of lips, facial wrinkles, and facial folds. More information about
Q-Med is available on the Internet at www.q-med.se.
Q-Med's and Ixion's interest in each other arose from the potential of
using hyaluronic acid as an encapsulation material for our transplantable
islets. Thus the technologies of the two companies are complementary, and the
combination will hasten our ability to deliver a diabetes cure.
In early April, Ixion reached an agreement in principle with Q-Med in which
they will grant a royalty-free license to certain of their proprietary
technology, plus make a multi-million dollar investment in Ixion over the next
18 months in exchange for a significant equity position in the Company. These
funds will supply sufficient resources to provide for two years of accelerated
operations. The agreement in principle is contingent on a definitive agreement
as well as the successful completion of additional financing by Q-Med. If the
transaction closes as planned, Ixion will be able to move forward rapidly in its
product development.
Personnel Changes
The only change in your management team was the addition of Desmond A.
Schatz, M.D., to the Scientific Advisory Board. Dr. Schatz is the Medical
Director of the Diabetes Center at the University of Florida, and a Professor of
Pediatric Endocrinology at the Medical School and will add clinical expertise to
our scientific team.
Product Development
In June, we announced our first product, the XEntrIx(TM) Oxalobacter
formigenes Monitor for the detection of O.formigenes at the American Urological
Association. Our product is offered by the University of Florida Diagnostic
Referral Laboratories, which are responsible for marketing. No material revenues
have been generated to date, and we don't expect much in the way of revenue
while we work on market acceptance of the product.
Work on IxC1-62/47, our enzymatic treatment for oxalate-related problems,
has been proceeding well. During the last month, we have worked with Amersham
Pharmacia Biotech to develop the commercial purification process. That work is
proceeding very well.
Collaborations and Research Grants
We recently received notice from the NIH that they will fund a $100,000
Small Business Technology Transfer ("STTR") Phase I grant application for
"Enteric Elimination of Oxalic Acid." This is our first successful
oxalate-related grant, and a Phase I award usually leads to a successfully
$1,000,000 Phase II.
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We have a variety of other grant applications pending in both the oxalate
and diabetes areas. Currently pending in the oxalate area are two $100,000 Phase
I Small Business Innovation Research ("SBIR") applications and one $100,000
Phase I STTR application, all pending before the NIH. In the diabetes area, we
have one $100,000 SBIR Phase I application, one $750,000 SBIR Phase II
application, and one $100,000 response to a request for applications, all before
the NIH, and a $500,000 special award application to the Juvenile Diabetes
Foundation.
Other 1998 Milestones
During 1998, we had several other successes, including:
o Receipt of a notice of allowance from the U.S. patent office for
our oxalate technology. We already have two issued patents in this
area.
o Receipt of a notice of allowance from the U.S. patent office for
our islet technology. We already have one patent in this area.
o We executed an agreement with the University of Florida acquiring
their rights to a technology which was jointly developed by
Ixion and UF scientists in the area of a quantitative test for
enteric bacteria, including, of course, O. formigenes.
o We were listed in Med Ad News as one of "The World's Top
Biotechnology Companies" as one of only six Florida companies
named.
o Our ground-breaking study of the significance of O. formigenes in
cystic fibrosis patients was published in Lancet.
o We were the first company to graduate from the University of
Florida's biotechnology incubator when we moved last fall into
our expanded quarters in the Progress Center.
o Several of our scientists were invited to speak at the first
oxalate workshop held by the National Institute of Diabetes and
Digestive and Kidney Diseases in Bethesda, Maryland, illustrating
the growing awareness at the NIH and nationally of the importance
of oxalate in certain diseases.
o We sponsored the Finlayson Symposium on Urolithiasis at the
University of Florida last winter at which kidney stone experts
from around the world attended a three-day conference moderated by
Dr. Saeed Khan, a member of our Scientific Advisory Board.
Several of our scientists and collaborators from around the world
gave papers at this conference.
o Members of our scientific team also gave invited presentations at
the Fifth Workshop on Primary Hyperoxaluria in Zurich, and at
the 1999 Charleston Conference on Innovative Techniques for Lead
Discovery and Development.
In short, it's been another good year.
Thank you again for your wonderful support.
Sincerely yours,
Weaver H. Gaines
Chairman & CEO
David C. Peck
President & CFO
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Officers, Board, Advisors, Staff...
Scientific Advisory Board
Ammon B. Peck, Ph.D. Chairman and Ixion's Chief Scientist
Milton J. Allison, Ph.D. Professor Microbiology, Immunology and
Preventive Medicine, Iowa State University
Marguerite Hatch, Ph.D. Professor, College of Medicine, Nephrology
Division and Director of the Kidney Stone
Center, University of California, Irvine
Saeedur R. Khan, Ph.D. Associate Professor of Pathology, University
of Florida College of Medicine
Desmond A. Schatz, M.D. Medical Director, Diabetes Center, and
Associate Professor of Pediatric
Endocrinology at the University of Florida.
Sheldon M. Schuster, Ph.D. Biotechnology Program Director University
of Florida
Hans Wigzell, M.D., D. Sci. Rector, Karolinska Institute, Stockholm,
Sweden
Executive Staff
Weaver H. Gaines Chairman, Chief Executive Officer and
Director
David C. Peck President, Chief Financial Officer and
Director
Ammon B. Peck, Ph.D. Senior Vice President and Chief Scientist
Kimberly A. Ramsey Controller
Harmeet Sidhu, Ph.D. Director of Research, Oxalate Division
Vijay K. Ramiya, Ph.D. Director of Research, Diabetes Division
Board of Directors
Karl-E. Arfors, Ph.D. President of Experimental Medicine, Inc.
Weaver H. Gaines Chairman, Chief Executive Officer and
Director
David M. Margulies, M.D. Executive Vice President and Chief
Scientist, Synetic, Inc.
Vincent P. Mihalik Senior Vice President and General Manager,
Lab Systems and Molecular Biochemicals,
Roche Diagnostics
David C. Peck President, Chief Financial Officer and
Director
Corporate Information
Headquarters: 13709 Progress Blvd., Box 13,
Alachua, Florida 32615
Tel: 904-418-1428
Fax: 904-418-1583
Email: [email protected]
Web Site: http://www.ixion-biotech.com
Shareholder Relations: Gwen E. Thompson, Director of Administration
Tel: 904-418-1428
Fax: 904-418-1583
Email: [email protected]
Transfer agent& registrar: Questions regarding stockholdings,
certificate replacement, and address changes
should be directed to:
Sun Trust Bank, Central Florida, N.A.
58 Edgewood Avenue, Room 225
Atlanta, Georgia 30303
Tel: 404-581-1579
Fax: 404-332-3875
Customer Service 800-568-3476
Independent accountants: PricewaterhouseCoopers L.L.P.
Orlando, Florida
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IXION Biotechnology, Inc.
13709 Progress Blvd., Box 13
Alachua, FL 32615
904-418-1428
904-418-1583 (fax)
Internet Web Site:
http://www.ixion-biotech.com
