UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: 0-19871
March 31, 1998 Commission File Number
CYTOTHERAPEUTICS, INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3078125
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No)
701 GEORGE WASHINGTON HIGHWAY
LINCOLN, RI 02865
-----------------
(Address of principal executive offices including zip code)
(401) 288-1000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter periods 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_________
At April 30, 1998, there were 18,277,656 shares of Common Stock, $.01 par value,
issued and outstanding. There were no issued and outstanding shares of Preferred
Stock.
Page 1 of 15
CYTOTHERAPEUTICS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
- ------------------------------ -----------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations (unaudited)
Three months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-13
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
Page 2 of 15
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED BALANCE SHEETS
March 31, 1998 December 31, 1997
(unaudited) (audited)
------------- -------------
Assets
Current assets:
Cash and cash equivalents $14,384,717 $15,941,701
Marketable securities 9,771,672 13,108,497
Receivables from collaborative agreement 186,906 150,880
Other current assets 1,169,922 978,314
------------- -------------
Total current assets 25,513,217 30,179,392
Property, plant and equipment, net 7,785,061 7,922,751
Other assets 6,388,486 6,199,323
------------- -------------
Total assets $39,686,764 $44,301,466
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $3,032,487 $4,109,351
Deferred revenue 14,862 16,144
Current maturities of capitalized lease obligations 375,184 419,095
Current maturities of long term debt 630,977 658,986
------------- -------------
Total current liabilities 4,053,510 5,203,576
Capitalized lease obligations, less current maturities 3,481,250 3,552,500
Long term debt, less current maturities 457,695 555,525
Redeemable stock 5,248,610 5,583,110
Common stock to be issued 48,375 506,600
Stockholders' equity
Common stock 176,749 175,262
Additional paid in capital 122,420,640 121,472,844
Accumulated deficit (94,554,791) (91,036,254)
Deferred compensation (1,641,134) (1,702,820)
Unrealized loss on marketable securities (4,140) (8,877)
------------- -------------
Total stockholders' equity 26,397,324 28,900,155
------------- -------------
Total liabilities and stockholders' equity $39,686,764 $44,301,466
------------- -------------
------------- -------------
See accompanying notes to condensed consolidated financial statements.
Page 3 of 15
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited) Three Months Ended
March 31,
1998 1997
------------ ------------
Revenue from collaborative arrangements $1,842,975 $1,856,622
Operating expenses:
Research and development 4,499,662 4,649,500
General and administrative 1,147,006 1,796,430
------------ ------------
5,646,668 6,445,930
------------ ------------
Loss from operations (3,803,693) (4,589,308)
Other income (expense):
Investment income 393,974 648,630
Interest expense (108,818) (175,511)
Currency loss -- (95,420)
------------ ------------
285,156 377,699
------------ ------------
Net loss ($3,518,537) ($4,211,609)
------------ ------------
------------ ------------
Net loss per share ($0.19) ($0.26)
------------ ------------
------------ ------------
Shares used in calculation 18,184,474 16,471,203
------------ ------------
------------ ------------
See accompanying notes to condensed consolidated financial statements.
Page 4 of 15
PART I - ITEM 1 - FINANCIAL STATEMENTS
CYTOTHERAPEUTICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended
(unaudited) March 31,
1998 1997
------------ ------------
Cash flows from operating activities:
Net loss ($3,518,537) ($4,211,609)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 525,620 476,337
Foreign currency loss -- 95,049
Compensation expense relating to the grant
of stock options 61,686 15,311
Changes in operating assets and liabilities (1,459,414) 843,865
------------ ------------
Net cash used in operating activities (4,390,645) (2,781,047)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 10,056,212 4,801,463
Purchases of marketable securities (6,716,668) (4,999,820)
Purchase of property, plant and equipment (267,583) (1,772,590)
Acquisition of other assets (153,858) (430,973)
Other investments -- --
------------ ------------
Net cash provided by (used in) investing activities 2,918,103 (2,401,920)
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 156,558 297,651
Proceeds from financing transactions -- --
Principal payments under capitalized lease obligations
and mortgage payable (241,000) (282,503)
Net cash provided by (used in) financing activities (84,442) 15,148
Effect of exchange rate on cash and cash equivalents (210,976)
------------ ------------
Decrease in cash and cash equivalents (1,556,984) (5,378,795)
Cash and cash equivalents, January 1 15,941,701 19,921,584
------------ ------------
Cash and cash equivalents, March 31 $14,384,717 $14,542,789
------------ ------------
------------ ------------
See accompanying notes to condensed consolidated financial statements.
Page 5 of 15
PART I - ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1998 and 1997
NOTE 1. BASIS OF PRESENTATION
The accompanying, unaudited, condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying financial
statements include all adjustments, consisting of normal recurring
accruals considered necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the entire
fiscal year ended December 31, 1998.
For further information, refer to the audited financial statements and
footnotes thereto as of December 31, 1997 included in the Company's Annual
Report to Stockholders and the Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
NOTE 2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options
and warrants are excluded as their effect is antidilutive.
NOTE 3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. Statement 130 requires unrealized gains or losses on
the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported seperately
in shareholders' equity to be included in other comprhensive income.
During the first quarter of 1998 and 1997, total comprehensive loss
amounted to $3,514,000 and $4,307,000.
Page 6 of 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company for the three months ended March 31, 1998 and 1997 should be read in
conjunction with the accompanying unaudited condensed consolidated financial
statements and the related footnotes thereto.
This report may contain certain forward-looking statements regarding, among
other things, the Company's results of operations, the progress of the Company's
product development and clinical programs, the need for, and timing of,
additional capital and capital expenditures, partnering prospects, the need for
additional intellectual property rights, effects of regulations, the need for
additional facilities and potential market opportunities. The Company's actual
results may vary materially from those contained in such forward-looking
statements because of risks to which the Company is subject such as risks of
delays in research, development and clinical testing programs, obsolescence of
the Company's technology, lack of available funding, competition from third
parties, intellectual property rights of third parties, failure of the Company's
collaborators to perform, regulatory constraints, litigation and other risks to
which the Company is subject. See "Cautionary Factors Relevant to
Forward-Looking-Information" filed herewith as Exhibit 99 and incorporated
herein by reference.
Overview
Since its inception in August 1988, the Company has been primarily engaged in
research and development of human therapeutic products. No revenues have been
derived from the sale of any products, and the Company does not expect to
receive revenues from product sales for at least several years. The Company
expects that its research and development expenditures will increase
substantially in future years as research and product development efforts
accelerate and clinical trials are initiated or broadened. The Company has
incurred annual operating losses since inception and expects to incur
substantial operating losses in the future. As a result, the Company is
dependent upon external financing from equity and debt offerings and revenues
from collaborative research arrangements with corporate sponsors to finance its
operations. The Company's results of operations have varied significantly from
year to year and quarter to quarter and may vary significantly in the future due
to the occurrence of material, nonrecurring events, including without
limitation, the receipt of one-time, nonrecurring licensing payments.
Results of Operations
Three months ended March 31, 1998 and 1997
For the quarter ended March 31, 1998 and 1997, revenues from collaborative
Page 7 of 15
agreements totaled $1,843,000 and $1,857,000, respectively. The revenues were
earned solely from a Development, Marketing and License Agreement with Astra AB,
which was signed in March 1995.
Research and development expenses totaled $4,500,000 for the three months ended
March 31, 1998, compared with $4,650,000 for the same period in 1997.
General and administrative expenses were $1,147,000 for the three months ended
March 31, 1998, compared with $1,796,000 for the same period in 1997. The
decrease of $649,000, or 36%, from 1997 to 1998 was primarily attributable to a
reduction in legal expenses as well as a reduction in employee expenses.
Interest income for the three months ended March 31, 1998 and 1997 was $394,000
and $649,000, respectively. The decrease in interest income in 1998 is
attributable to the lower average investment balances, $26,696,00 vs.
$40,393,000 in the first quarter of 1998 and 1997, respectively.
Interest expense was $109,000 for the three months ended March 31, 1998,
compared with $176,000 for the same period in 1997. The decrease from 1998 to
1997 was attributable to lower outstanding debt and capital lease balances in
1998 compared to 1997.
Net loss for the three months ended March 31, 1998 was $3,519,000, or $0.19 per
share, as compared to net loss of $4,212,000, or $0.26 per share, for the
comparable period in 1997. The consolidated results for the first quarter of
1998 include a $233,000 net loss attributable to StemCells, Inc., the Company's
wholly owned subsidiary in California, compared to the consolidated results for
the first quarter of 1997 which include a $431,000 net loss attributable to
Modex Therapeutiques SA, the Company's former 50% owned Swiss subsidiary.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations through the sale of
common and preferred stock, the issuance of long-term debt and capitalized lease
obligations, revenues from collaborative agreements, research grants and
interest income.
The Company had unrestricted cash, cash equivalents and marketable securities
totaling $24,156,000 at March 31, 1998. Cash equivalents and marketable
securities are invested in agencies of the U.S. government, investment grade
corporate bonds and money market funds.
Page 8 of 15
In May 1996, the Company secured an equipment loan facility with a bank in the
amount of $2,000,000. The Company has borrowed $741,000 under this agreement as
of March 31, 1998. The loan requires interest payments only for the first
two years; principal payments are payable over a three-year period beginning May
1998. Any unused commitment expires on May 15, 1998. The loan is secured by
equipment purchased with the proceeds of the credit facility.
In October 1997, the Company completed a series of transactions which resulted
in the establishment of its previously 50%-owned Swiss subsidiary, Modex
Therapeutiques, SA, as an independent company. In the transactions, the Company
reduced its ownership interest from 50% to approximately 25% in exchange for $4
million cash and elimination of its prior contingent obligation to contribute an
additional Sfr 2.4 million (approximately $1.7 million) to Modex in July 1998.
In the transactions, all of the put and call arrangements between the Company
and other stockholders of Modex were eliminated and the Company forgave $463,000
due from Modex to the Company. The Company recorded a gain on the transaction of
$3,387,000 and will account for its now 25% ownership interest under the equity
method.
The Company and Modex also modified the terms of their existing royalty-bearing
Cross License Agreement to (i) expand the field in which Modex is exclusively
licensed to apply the Company's proprietary encapsulated cell technology to
include, in addition to the original field of diabetes, obesity and anemia, the
treatment of hemophilia A and B utilizing Factor VIII and/or Factor IX and two
additional applications to be agreed to by the Company and Modex; (ii) eliminate
the requirement to make future milestone payments to Modex of up to 300,000
shares of the Company's Common Stock; (iii) limit the scope of the Company's
technology licensed to Modex to existing and future encapsulation technology;
and (iv) specify the terms under which the Company will manufacture any products
Modex may develop based on the Company's technology and grant Modex an option to
manufacture or have manufactured such products on payment of a higher royalty.
The Cross License Agreement continues to provide for the payment of royalties
from Modex to the Company on the sale of any licensed products. The revised
agreement similarly limits the scope of the Modex technology exclusively
licensed, on a royalty-bearing basis, to the Company for the application of
diseases, conditions and disorders of the central nervous system to existing and
future encapsulation technology and certain additional existing technology. In
addition to their purchase of Modex Common Stock from the Company, the investors
participating in the transaction, invested $1.6 million directly in Modex.
Page 9 of 15
In September 1997, a merger of a wholly-owned subsidiary of the Company and
StemCells, Inc. was completed in the form of a purchase. Through the merger, the
Company acquired StemCells for a purchase price totaling approximately
$9,475,000, consisting of 1,320,691 shares of the Company's common stock and
options and warrants for the purchase of 259,296 common shares at nominal
consideration, valued at $7,900,000 in the aggregate, the assumption of certain
liabilities of $934,000 and transaction costs of $641,000. The purchase price
was allocated, through a valuation, to license agreements valued at $1,131,000
to be amortized over three years and acquired research and development of
$8,344,000 which has been expensed. As part of the acquisition of StemCells,
Richard M. Rose, M.D., became President, Chief Executive Officer and a director
of the Company and Dr. Irving Weissman became a director of the Company.
Upon consummation of the merger, the Company entered into consulting
arrangements with the principal scientific founders of StemCells: Dr. Irving
Weissman, Dr. Fred H. Gage and Dr. David Anderson. Additionally, in connection
with the merger, the Company was granted an option by the former principal
shareholders of StemCells to repurchase approximately 500,000 of the Company's
shares of Common Stock exchanged for StemCells shares, upon the occurrence of
certain events as defined.
To attract and retain Drs. Rose, Weissman, Gage and Anderson, and to expedite
the progress of the Company's stem cell program, the Company awarded these
individuals options to acquire a total of approximately 1.6 million shares of
the Company's common stock, at an exercise price of $5.25 per share, the quoted
market price at the grant date; approximately 100,000 of these options are
exercisable immediately, 1,031,000 of these options vest and become exercisable
only on the achievement of specified milestones related to the Company's stem
cell development program and the remaining 469,000 options vest over eight
years. In connection with the 469,000 options issued to a non-employee, Dr.
Anderson, the Company has recorded deferred compensation of $1,750,000, the fair
value of such options at the date of grant, which will be amortized over an
eight year period. If the milestones specified relating to the 1,031,000 option
grant are achieved, at that time the Company will record compensation expense
for the excess of the quoted market price of the common stock over the exercise
price of $5.25 per share for 562,000 options and the fair market value for
469,000 of such options determined using the Black-Scholes method. The Company
has also designated a pool of 400,000 options to be granted to persons in a
position to make a significant contribution to the success of the stem cells
program.
Stem cells research will be conducted pursuant to the provisions of an agreement
between the Company and Drs. Weissman and Gage providing for a two-year research
plan. If the goals of the research plan are
Page 10 of 15
accomplished, the Company has agreed to fund continuing stems cells research.
Increases in stem cells research funding of not more than 25% a year will be
funded by the Company as long as the goals of the research plan are being met.
However, the Company will retain the option of (i) ceasing or reducing neural
stem cell research even if all research plan goals are met, but will be required
to accelerate the vesting of all still-achievable performance based stock
options, and (ii) ceasing or reducing non-neural stem cell research even if all
plan goals are being met by affording the scientific research founders the
opportunity to continue development of the non-neural stem cell research by
licensing the technology related to such research to the founders in exchange
for a payment to the Company equal to all prior Company funding for such
research, plus royalty payments.
In April 1997, CytoTherapeutics entered into an agreement with NeuroSpheres Ltd.
replacing all previous agreements and resolving its dispute with NeuroSpheres.
The pending action in the United State District Court and its counterpart
actions in Calgary, as well as all arbitration proceedings have been
discontinued. Under the terms of the settlement, the Company has an exclusive
royalty-bearing license to growth-factor responsive stem cells for
transplantation. NeuroSpheres had an option to acquire co-exclusive rights, but
failed to exercise the option by the April 1998 deadline. Accordingly, the
NeuroSpheres' option to acquire co-exclusive rights has lapsed and
CytoTherapeutics retains exclusive rights for transplantation. The parties have
no further research obligations to each other.
In February 1997, CytoTherapeutics and Cognetix, Inc. entered into a
Collaboration and Development Agreement to screen selected peptides isolated by
Cognetix for possible development into therapeutic products aimed at a broad
range of human disease states using CytoTherapeutics' cell-based delivery
technology. The Company and Cognetix are reexamining their relationship; the
Company expects this reexamination will lead to termination of the joint project
under agreement signed in February 1997.
The Company and Cognetix have also entered into an option agreement giving
CytoTherapeutics the right to option up to three of Cognetix's compounds for use
in treating eye diseases. CytoTherapeutics has exercised its right as to one
protein.
In November 1996, the Company signed collaborative development and licensing
agreements with Genentech, Inc. relating to the development of products using
the Company's technology to deliver certain of Genentech's proprietary growth
factors to treat Parkinson's disease, Huntington's disease and amyotrophic
lateral sclerosis ("ALS").
Page 11 of 15
Under the terms of the agreement for Parkinson's disease, Genentech purchased
829,171 shares of common stock for $8,300,000 to fund development of products to
treat Parkinson's disease. Additional equity purchases and other funding by
Genentech is available for future clinical development as determined by the
parties. Genentech has the right, in its discretion, to terminate the
Parkinson's program at specified milestones in the program. If the Parkinson's
program is terminated and the funds the Company received from the sale of stock
to Genentech pursuant to the Parkinson's agreement exceed the expenses incurred
by the Company in connection with such studies by more than $1 million,
Genentech has the right to require the Company to repurchase from Genentech
shares of Company Common Stock having a value equal to the amount of the
overfunding, based upon the share price paid by Genentech. As such, the Common
Stock purchased by Genentech is classified as Redeemable Common Stock until such
time as the related funds are expended on the program. Upon commercialization,
Genentech and the Company will share profits in the U.S. at an agreed upon
percentage, and Genentech will pay the Company a royalty based upon deals
outside the U.S. The Company retains manufacturing rights and will be paid
manufacturing costs for products sold.
The Company also licensed certain growth factors for the treatment of
Huntington's disease and amyotrophic lateral sclerosis ("ALS"). Under the terms
of the agreements, the Company is responsible for conducting and funding all
preclincal and clinical development, subject to specified rights of Genentech to
participate in the development and marketing of the proposed products. Should
Genentech share in the development cost of the proposed products, the companies
will share profits at a negotiated percentage upon commercialization. Should
Genentech elect not to participate in the development, upon commercialization,
the Company will pay Genentech an agreed upon royalty based upon sales. These
agreements supersede the Development Collaboration and License Agreement between
the Company and Genentech entered into in March 1994.
In March 1995, the Company signed a collaborative research and development
agreement with Astra for the development and marketing of certain
encapsulated-cell products to treat pain. Astra made an initial, nonrefundable
payment of $5,000,000, a milestone payment of $3,000,000 in the first quarter of
1997 which was recognized as revenue in the second quarter of 1997 and may make
up to $13,000,000 in additional payments subject to the achievement of certain
development milestones. Under the agreement, the Company is obligated to conduct
certain research and development pursuant to a four-year research plan agreed
upon by the parties. Over the term of the research plan, the Company expects to
receive annual research payments from Astra of $5 million to $7 million. Subject
to the successful development of such products and obtaining necessary
regulatory approvals, Astra is obligated to conduct all clinical trials of
products arising from the collaboration and to seek approval for their
Page 12 of 15
sale and use. Astra has the exclusive worldwide right to market products covered
by the agreement. Until the later of either the last to expire of all patents
included in the licensed technology or a specified fixed term, the Company is
entitled to a royalty on the worldwide net sales of such products in return for
the license granted to Astra and the Company's obligation to manufacture and
supply products. Astra has the right to terminate the original agreement
beginning April 1, 1998.
Substantial additional funds will be required to support the Company's research
and development programs, for acquisition of technologies and intellectual
property rights, for preclinical and clinical testing of its anticipated
products, pursuit of regulatory approvals, acquisition of capital equipment,
expansion of laboratory and office facilities, establishment of production
capabilities and for general and administrative expenses. Until the Company's
operations generate significant revenues from product sales, cash reserves and
proceeds from equity and debt offerings, and funding from collaborative
arrangements will be used to fund operations.
The Company intends to pursue opportunities to obtain additional financing in
the future through equity and debt financings, lease agreements related to
capital equipment, grants and collaborative research arrangements. The source,
timing and availability of any future financing will depend principally upon
equity market conditions, interest rates and, more specifically, on the
Company's continued progress in its exploratory, preclinical and clinical
development programs. There can be no assurance that such funds will be
available on favorable terms, if at all.
The Company expects that its existing capital resources, revenues from
collaborative agreements and income earned on invested capital will be
sufficient to fund its operations through 1999. The Company's cash requirements
may vary, however, depending on numerous factors. Lack of necessary funds may
require the Company to delay, scale back or eliminate some or all of its
research and product development programs and/or its capital expenditures or to
license its potential products or technologies to third parties.
Page 13 of 15
PART II - ITEM 1
LEGAL PROCEEDINGS
None.
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99 - Cautionary Factors Relevant to Forward-Looking-Information.
(b) Reports on Form 8-K
None.
Page 14 of 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTOTHERAPEUTICS, INC.
(Name of Registrant)
May 14, 1998 /s/ John S. McBride
- -------------- -------------------
(Date) Executive Vice President and Chief
Financial Officer
(principal financial officer and
principal accounting officer)
Page 15 of 15
5
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
14,384,717
9,771,672
0
0
0
25,513,217
0
0
39,686,764
4,053,510
3,938,945
0
0
176,749
26,220,575
39,686,764
0
1,842,975
0
0
5,646,668
0
108,818
(3,518,537)
0
(3,518,537)
0
0
0
(3,518,537)
(.19)
(.19)
EXHIBIT 99
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
CytoTherapeutics, Inc. (the "Company") wishes to caution readers that the
following important factors, among others, in some cases have affected and in
the future could affect the Company's results and could cause actual results and
needs of the Company to vary materially from forward-looking statements made in
this Annual Report by the Company on the basis of management's current
expectations. The business in which the Company is engaged is rapidly changing,
extremely competitive and involves a high degree of risk, and accuracy with
respect to forward-looking projections is difficult.
Early Stage Development; History of Operating Losses - Substantially all of the
Company's revenues to date have been derived, and for the foreseeable future
substantially all of the Company's revenues will be derived, from collaborative
agreements, research grants and income earned on invested funds. The Company
will incur substantial operating losses in the future as the Company conducts
its research, development, clinical trial and manufacturing activities. There
can be no assurance that the Company will achieve revenues from product sales or
become profitable.
Future Capital Needs; Uncertainty of Additional Funding - The development of the
Company's products will require the commitment of substantial resources to
conduct the time-consuming research, preclinical development and clinical trials
that are necessary for regulatory approvals and to establish production and
marketing capabilities, if such approvals are obtained. The Company will need to
raise substantial additional funds to continue its product development efforts
and intends to seek such additional funds through partnership, collaborative or
other arrangements with corporate sponsors, public or private equity or debt
financings, or from other sources. Future cash requirements may vary from
projections based on changes in the Company's research and development programs,
progress in preclinical and clinical testing, the Company's ability to enter
into, and perform successfully under, collaborative agreements, competitive and
technological advances, the need to obtain proprietary rights owned by third
parties, facilities requirements, regulatory approvals and other factors. Lack
of necessary funds may require the Company to delay, reduce or eliminate some or
all of its research and product development programs or to license its potential
products or technologies to third parties. No assurance can be given that
funding will be available when needed, if at all, or on terms acceptable to the
Company.
Uncertainties of Clinical Development and New Mode of Therapy - None of the
Company's proposed products has been approved for commercial sale or entered
Phase III clinical trials. Even if the Company's proposed products appear to be
promising at an early stage of research or development such products may later
prove to be ineffective, have adverse side effects, fail to receive necessary
regulatory approvals, be difficult or uneconomical to manufacture or market on a
commercial scale, be adversely affected by government price controls or
limitations on reimbursement, be precluded from commercialization by proprietary
rights of third parties, by regulatory restrictions, or be subject to
significant competition from other products. There can be no assurance that the
Company will be able to demonstrate, as required, that its implants, on a
consistent basis and on a commercial scale, among other things: (i) successfully
isolate transplanted cells from the recipient's immune system; (ii) remain
biocompatible with the tissue into which they are implanted, including, for
certain implants, brain tissue; (iii) adequately maintain the viability of cells
contained within the membrane for a sufficiently long time to be efficacious and
commercially viable; (iv) safely permit the therapeutic substances produced by
the cells within the membrane to pass through the membrane unto the patient in
controlled doses for extended
-1-
periods; and (v) are sufficiently durable for the intended indication. While
clinicians have generally had little difficulty in retrieving the Company's
implants, there have been cases where the implant broke on attempted explant.
The Company has changed its implantation procedure and is continuing a program
of developing stronger implants. In addition, the viability of implanted
encapsulated cells varies depending of the cell type, the implantation location
and other factors. Lack of viability could restrict certain of the Company's
programs to indications where long-term delivery of the therapeutics substances
is not required. There can also be no assurance that the products that may be
generated in the Company's stem cell programs will: (i) survive and persist in
the desired locations, (ii) provide the therapeutic benefits intended, (iii)
properly differentiate and integrate into existing tissue in the desired manner,
or (iv) not cause tumors or other side effects.
There has been increasing regulatory concern about the risks of cell
transplantation. Concern has focused on the use of cells derived from cows (such
as are used in the Company's pain program) and cells from primates and pigs. The
United Kingdom has adopted a moratorium on xenotransplantation pending further
research and discussion; the EC Commission has introduced a ban on the use of
"high-risk material" from cattle and sheep in the Member States of the European
Union in the manufacture of pharmaceuticals (this ban would apparently not
include the type of cells used in the Company's pain program). In addition, the
FDA has proposed guidelines which impose significant constraints on the conduct
of clinical trials utilizing xenotransplantion and are likely to significantly
affect the cost of producing the Company's products using nonhuman cells; such
costs could make the Company's products cost more to produce than the Company
receives for their production. Furthermore, the FDA has published a "Proposed
Approach to Regulation of Cellular and Tissue-Based Products" which relates to
the use of human cells. The Company cannot presently determine the effects of
such actions nor what other actions might be taken. Restrictions on the testing
or use of cells, whether human or nonhuman, as human therapeutics could
adversely affect the Company's product development programs and the Company
itself. See "Government Regulation."
Dependence on Outside Parties - The Company's strategy for the research,
development, commercialization and marketing of its products contemplates that
the Company will enter into various arrangements with corporate sponsors,
pharmaceutical companies, universities, research groups and others. There is no
assurance that the Company will be able to enter into any additional
arrangements on terms acceptable to the Company, or successfully perform its
obligations under its existing or any additional arrangements. If any of the
Company's collaborators fails to perform its obligations in a timely manner or
terminate their agreement with the Company, the development or commercialization
of the Company's product candidate or research program under such collaborative
agreement may be adversely affected. Moreover, the Company is particularly
dependent on its pain program partner, Astra AB, because changes in the
development of this particular program may significantly affect the Company's
stock price. In addition, because of the Company's obligation to repurchase
certain of the stock it sold to Genentech in connection with certain
terminations of the Parkinson's Agreement, any such termination could have an
adverse effect on the Company's liquidity.
Need for and Uncertainty of Obtaining Patent Protection - Patent protection for
products such as those the Company proposes to develop is highly uncertain and
involves complex factual and evolving legal questions. No assurance can be given
that any patents issued or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted under such patents will
provide competitive advantages to the Company.
Existence of Third Party Patents and Proprietary Rights; Need to Obtain Licenses
- - A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have been issued
patents relating to cell therapy and encapsulation and other technologies
potentially relevant to or required by the Company's expected products. The
Company cannot predict which, if any, of such applications will issue as patents
or
the claims which might be allowed. The Company is aware that a number of
entities have filed applications relating to stem and/or progenitor cells. The
Company is also aware of a number of third-party patent applications and patents
relating to cell encapsulation or claiming use of genetically modified cells to
treat disease, disorder or injury. In particular, the Company is aware of a
third-party U.S. patent which relates the use of cells for alleviating chronic
pain in humans and of two issued U. S. patents claiming certain methods for
treating defective, diseased or damaged cells in the mammalian CNS by grafting
genetically modified cells. The Company cannot predict the effect of existing
patent applications and patents on future unencapsulated products. In addition,
the Company is aware of third-party patents and patent applications claiming
rights to the neurotrophic factors (such as CNTF, NT 4/5, Neurturin, and CT-1)
which the Company hopes to deliver with its technology, and to the production of
these factors through the use of genetically modified cells. The Company expects
to use genetically modified cells to produce these factors for use in its
encapsulated products and expects that it may wish to genetically modify its
stem/progenitor cells. The Company may also be required to seek licenses in
regard to other cell lines, the techniques used in creating or obtaining such
cell lines, the materials used in the manufacture of its implants or otherwise.
There can be no assurance that the Company will be able to establish
collaborative arrangements or obtain licenses to the foregoing technology or to
other necessary or desirable technology on acceptable terms, if at all, or that
the patents underlying any such licenses will be valid and enforceable. See
"Patents, Proprietary Rights and Licenses" in the Company's Annual Report on
Form 10-K.
Government Regulation - The Company's research, preclinical development and
clinical trials, as well as the manufacturing and marketing of its potential
products, are subject to extensive regulation by governmental authorities in the
United States and other countries. The process of obtaining FDA and other
required regulatory approvals is lengthy, expensive and uncertain. There can be
no assurance that the Company or its collaborators will be able to obtain the
necessary approvals to commence or continue clinical testing or to manufacture
or market its potential products in anticipated time frames, if at all. In
addition, several legislative proposals have been made to reform the FDA. If
such proposals are enacted they may result in significant changes in the
regulatory environment the Company faces. These changes could result in
different, more costly or more time consuming approval requirements for the
Company's products, in the dilution of FDA resources available to review the
Company's products, or in other unpredictable consequences. See "Government
Regulation"
Sources of Cells and Other Materials - The Company's potential products require
genetically engineered cell lines or living cells harvested from animal or human
sources. There can be no assurance that the Company will successfully identify
or develop sources of the cells required for its potential products and obtain
such cells in quantities sufficient to satisfy the commercial requirements of
its potential products. These supply limitations may apply, in particular, to
primary cells which must be drawn directly from animal or human sources, such as
the bovine adrenal chromaffin cells currently used in the Company's product for
the treatment of pain. As an alternative to primary cells, the Company is
developing products based on the use of genetically altered cells. Intellectual
property rights to important genetic constructs used in developing such cells,
including the constructs used to develop cells producing neurotrophic factors,
are or may be claimed by one or more companies, which could prevent the Company
from using such cells. In addition, many suppliers of materials used by the
Company in its media, implants, and other components have restricted the use of
such materials for implantation into humans; if the Company cannot obtain the
necessary materials for its implants, the Company would be adversely affected.
Manufacturing Uncertainties - The Company's pilot manufacturing plant, may not
have sufficient capacity to permit the Company to produce all the products for
all of the clinical trials it anticipates developing. In addition, the Company
has not developed the capability to commercially manufacture any of its proposed
products and is unaware of any other company which has
manufactured any membrane-encapsulated cell product on a commercial scale. There
can be no assurance that the Company will be able to develop the capability of
manufacturing any of its proposed products at a cost or in the quantities
necessary to make a commercially viable product, if at all.
Competition - Competitors of the Company are numerous and include major
pharmaceutical and chemical companies, biotechnology companies, universities and
other research institutions. Currently, several of these competitors market and
sell therapeutic products for the treatment of chronic pain, Parkinson's disease
and other CNS conditions. In addition, most of the Company's competitors have
substantially greater capital resources, experience in obtaining regulatory
approvals and, in the case of commercial entities, experience in manufacturing
and marketing pharmaceutical products, than the Company. A number of other
companies are attempting to develop methods of delivering therapeutic substances
within or across the blood brain barrier. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective than those being developed by the Company or that would
render the Company's technology and products obsolete or non-competitive. See
"Competition."
Dependence on Key Personnel - The Company is highly dependent on the principal
members of its management and scientific staff and certain of its outside
consultants. Loss of the services of any of these individuals could have a
material adverse effect on the Company's operations. In addition, the Company's
operations are dependent upon its ability to attract and retain additional
qualified scientific and management personnel. There can be no assurance the
Company will be able to attract and retain such personnel on acceptable terms
given the competition among pharmaceutical, biotechnology and health care
companies, universities and research institutions for experienced personnel.
Reimbursement and Health Care Reform - In both domestic and foreign markets,
sales of the Company's potential products will depend in part upon the
availability and amounts of reimbursement from third-party health care payor
organizations, including government agencies, private health care insurers and
other health care payors such as health maintenance organizations and
self-insured employee plans. There is considerable pressure to reduce the cost
of therapeutic products. There can be no assurance that reimbursement will be
provided by such payors at all or without substantial delay, or, if such
reimbursement is provided, that the approved reimbursement amounts will provide
sufficient funds to enable the Company to sell its products on a profitable
basis. See "Reimbursement and Health Cost Control."
