SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number 001-16043
ALTEON INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3304550
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
170 WILLIAMS DRIVE, RAMSEY, NEW JERSEY 07446
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(Address of principal executive offices)
(Zip Code)
(201) 934-5000
--------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
On August 6, 2003, 35,968,314 shares of the registrant's Common Stock were
outstanding.
Page 1 of 22 pages
The Exhibit Index is on page 21
ALTEON INC.
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of June 30, 2003 and
December 31, 2002................................................... 3
Statements of Operations for the three and
six months ended June 30, 2003 and 2002............................. 4
Statements of Cash Flows for the six months
ended June 30, 2003 and 2002........................................ 5
Notes to Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk............ 18
Item 4. Controls and Procedures............................................... 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................... 19
Item 6. Exhibits and Reports on Form 8-K...................................... 19
SIGNATURES .................................................................... 20
INDEX TO EXHIBITS ............................................................. 21
2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
ALTEON INC.
BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 31,
2003 2002
------------- -------------
Current Assets:
Cash and cash equivalents .................................................. $ 12,876,088 $ 14,452,413
Short-term investments ..................................................... 2,988,600 2,986,200
Other current assets ....................................................... 597,613 143,124
------------- -------------
Total current assets ..................................................... 16,462,301 17,581,737
Property and equipment, net ................................................ 245,878 517,623
------------- -------------
Total assets .................................................................. $ 16,708,179 $ 18,099,360
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................................... $ 1,062,453 $ 537,394
Accrued expenses ........................................................... 2,351,994 3,258,729
------------- -------------
Total current liabilities ................................................ 3,414,447 3,796,123
------------- -------------
Stockholders' Equity:
Preferred Stock, $0.01 par value, 1,993,329 shares authorized, and 1,125 and
1,079 of Series G and 3,379 and 3,241 of Series H shares issued and
outstanding, as of June 30, 2003 and
December 31, 2002, respectively .......................................... 45 43
Common Stock, $0.01 par value, 80,000,000 shares authorized, and 35,910,841
and 33,600,841 shares issued and outstanding, as of
June 30, 2003 and December 31, 2002, respectively ........................ 359,108 336,008
Additional paid-in capital ................................................. 194,432,678 183,341,416
Accumulated deficit ........................................................ (181,500,289) (169,375,594)
Accumulated other comprehensive income ..................................... 2,190 1,364
------------- -------------
Total stockholders' equity ............................................... 13,293,732 14,303,237
------------- -------------
Total liabilities and stockholders' equity .................................... $ 16,708,179 $ 18,099,360
============= =============
The accompanying notes are an integral part of these unaudited statements.
3
ALTEON INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Investment income .................................... $ 55,176 $ 116,980 $ 103,898 $ 252,644
------------ ------------ ------------ ------------
Expenses:
Research and development (which includes non-cash
variable stock compensation expense/(benefit) of
$21,669 and $(46,678) for the three months ended
June 30, 2003 and 2002, respectively, and $83,639
and $(93,516), for the six months ended June 30,
2003 and 2002, respectively) ....................... 3,260,095 4,364,157 6,164,938 7,651,414
General and administrative (which includes non-cash
variable stock compensation expense/(benefit) of
$509,988 and $(728,528) for the three months ended
June 30, 2003 and 2002, respectively, and $1,475,917
and $(1,315,635) for the six months ended June 30,
2003 and 2002, respectively) ....................... 1,856,555 597,028 4,223,491 1,187,020
------------ ------------ ------------ ------------
Total expenses .................................. 5,116,650 4,961,185 10,388,429 8,838,434
------------ ------------ ------------ ------------
Net loss ................................................ (5,061,474) (4,844,205) (10,284,531) (8,585,790)
------------ ------------ ------------ ------------
Preferred stock dividends ........................... 934,707 859,304 1,840,164 1,691,719
------------ ------------ ------------ ------------
Net loss applicable to
common stockholders .................................. $ (5,996,181) $ (5,703,509) $(12,124,695) $(10,277,509)
============ ============ ============ ============
Basic/diluted net loss per share
applicable to common stockholders .................... $ (0.17) $ (0.18) $ (0.35) $ (0.32)
============ ============ ============ ============
Weighted average common shares used
in computing basic/diluted net loss per share ........ 35,907,764 31,838,057 34,773,382 31,656,256
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited statements.
4
ALTEON INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months
Ended June 30,
-------------------------------
2003 2002
------------ ------------
Cash Flows from Operating Activities:
Net loss ........................................................... $(10,284,531) $ (8,585,790)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization ...................................... 322,686 317,337
Amortization of deferred compensation .............................. 46,659 3,237
Non-cash compensation expense/(benefit) related to
variable plan employee stock options ............................. 1,559,556 (1,409,151)
Changes in operating assets and liabilities:
Other assets ....................................................... (454,489) 857,931
Accounts payable and accrued expenses .............................. (381,676) 1,730,042
------------ ------------
Net cash used in operating activities ............................ (9,191,795) (7,086,394)
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures ............................................... (50,941) (29,760)
Purchases of marketable securities ................................. (3,001,574) (11,979,102)
Maturities of marketable securities ................................ 3,000,000 5,503,000
------------ ------------
Net cash used in investing activities ............................ (52,515) (6,505,862)
------------ ------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock ......................... 7,657,355 18,610,521
Net proceeds from exercise of employee stock options ............... 10,630 115,210
------------ ------------
Net cash provided by financing activities ........................ 7,667,985 18,725,731
------------ ------------
Net (decrease)/increase in cash and cash equivalents .................. (1,576,325) 5,133,475
Cash and cash equivalents, beginning of period ........................ 14,452,413 4,249,439
------------ ------------
Cash and cash equivalents, end of period .............................. $ 12,876,088 $ 9,382,914
============ ============
The accompanying notes are an integral part of these unaudited statements.
5
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of Management, all
adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three and
six months ended June 30, 2003, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002,
filed with the Securities and Exchange Commission.
The Company's business is subject to significant risks, which are
described in this Report, including under the heading "Forward-Looking
Statements and Cautionary Statements."
NOTE 2 - LIQUIDITY
Alteon has incurred an accumulated deficit of $181,500,289 as of June 30,
2003, and expects to incur operating losses, potentially greater than losses in
prior years, for a number of years. The Company has devoted substantially all of
its resources to research, drug discovery and development programs. To date, it
has not generated any revenues from the sale of products and does not expect to
generate any such revenues for a number of years, if at all.
The Company has financed its operations through proceeds from the sale of
common and preferred equity securities, revenue from collaborative
relationships, reimbursement of certain of its research and development expenses
by its collaborative partners, investment income earned on cash balances and
short-term investments and the sale of a portion of its New Jersey net operating
loss carryforwards.
As of June 30, 2003, the Company had working capital of $13,047,854,
including $15,864,688 of cash and cash equivalents and short-term investments.
The Company's net cash used in operations for the six months ended June 30,
2003, was $9,191,795 and for the year ended December 31, 2002 was $14,931,030.
The Company raised $7,657,355 of net proceeds through the sale of common stock
in March 2003 (see Note 7 to the unaudited financial statements).
In July 2003, the Company announced results from two Phase 2b efficacy
trials of ALT-711, the SAPPHIRE and SILVER trials. The results demonstrated
efficacy against systolic hypertension, but did not meet the primary endpoints.
The Company continues to assess the data and is working with its external
advisors to determine the appropriate clinical development strategy and timeline
of additional Phase 2 trials of ALT-711. However, the Company will require
additional new funding to complete any new clinical trials it initiates. During
the period prior to the initiation of any new trials, the Company expects to
reduce its cash burn rate, initially through the reduction of research and
development expenses, including clinical trial expenses and discretionary
spending. The Company currently has adequate resources to sustain its
operations, exclusive of the full cost of any new clinical trials, into the
second half of 2004. Throughout the next 12 months, the Company will continue to
monitor its liquidity position and continue to explore fund-raising
alternatives. Depending upon the results of any attempts made by the Company to
raise additional funds through the sale of additional equity securities or
through strategic collaborations, it may be required to further reduce or
curtail its research and product development activities and other operations
(including any new clinical trials) if cash and cash equivalents fall below
pre-determined levels.
The Company will require, over the long-term, substantial new funding to
pursue development and commercialization of ALT-711 and its other product
candidates to continue its operations. The Company believes that satisfying
these capital requirements over the long-term will require successful
commercialization of its product candidates. However, it is uncertain whether
any products will be approved or will be commercially successful. The amount of
the Company's future capital requirements will depend on numerous factors,
including the progress of its research and development programs, the conduct of
pre-clinical tests and clinical trials, the development of regulatory
submissions, the costs associated with protecting patents and other proprietary
rights, the development of marketing and sales capabilities and the availability
of third-party funding.
Because of Alteon's near-term and long-term capital requirements, the
Company will seek access to the public or private equity markets whenever
conditions are favorable. This may have the effect of materially diluting the
current holders of the Company's outstanding stock. The Company may also seek
additional funding through
6
corporate collaborations and other financing vehicles, potentially including
off-balance sheet financing through limited partnerships or corporations. There
can be no assurance that such funding will be available at all or on terms
acceptable to Alteon. If adequate funds are not available, the Company may be
required to curtail significantly one or more of its research or development
programs. If Alteon obtains funds through arrangements with collaborative
partners or others, the Company may be required to relinquish rights to certain
of its technologies or product candidates.
NOTE 3 - CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include cash and highly liquid investments,
which have a maturity of less than three months at the time of purchase.
Short-term investments are considered available-for-sale and are recorded at
fair value, as determined by quoted market values, with changes in fair value
recorded as a component of accumulated other comprehensive income. Premiums or
discounts on the purchase of short-term debt securities are amortized to
interest income. As of June 30, 2003 and December 31, 2002, short-term
investments were invested in debt instruments of the U.S. government and
government agencies. They consist of the following:
June 30, December 31,
2003 2002
---------- ------------
U.S. government agency funds....................... $2,988,600 $2,986,200
========== ==========
NOTE 4 - NET LOSS PER SHARE
Basic loss per share is based on the weighted average number of shares
outstanding during the period. For the three- and six-month periods ended June
30, 2003 and 2002, diluted loss per share is the same as basic loss per share,
since the assumed exercise of stock options and warrants and the conversion of
preferred stock would be antidilutive. The amount of common stock equivalents
excluded from the calculation as of June 30, 2003 and 2002, was 15,902,268 and
25,342,161, respectively.
NOTE 5 - STOCK COMPENSATION
The Company accounts for employee stock-based compensation and awards
issued to non-employee directors under Accounting Principles Board Opinion No.
25 ("APB Opinion No. 25"), "Accounting for Stock Issued to Employees," and
related interpretations, under which no compensation cost (excluding those
options granted below fair market value) has been recognized. Stock option
awards issued to consultants and contractors are accounted for in accordance
with Statement of Financial Accounting Standards (`SFAS") No. 123, "Accounting
for Stock-Based Compensation." In March 2000, the Financial Accounting Standards
Board ("FASB") released Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation, An Interpretation of APB
Opinion No. 25." The interpretation became effective on July 1, 2000, but in
some circumstances applies to transactions that occurred prior to the effective
date. Under the interpretation, stock options that are repriced must be
accounted for as variable-plan arrangements until the options are exercised,
forfeited or expire. This requirement applies to any options repriced after
December 15, 1998.
On February 2, 1999, the Company repriced certain stock options. The total
non-cash stock compensation expense/(benefit) resulting from the 1999 repricing
for the three months ended June 30, 2003 and 2002, is $531,657 and $(775,206),
respectively, and for the six months ended June 30, 2003 and 2002, is $1,559,556
and $(1,409,151), respectively. As of June 30, 2003, there were 579,899 repriced
options outstanding, which expire on various dates through January 2008.
If the Company had applied the fair value recognition provisions of SFAS
No. 123 to all of its option grants, the Company's pro forma net loss and net
loss per share applicable to common stockholders for the three and six months
ended June 30, 2003 and 2002, would be as follows:
7
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss, as reported ................................. $ (5,061,474) $ (4,844,205) $(10,284,531) $ (8,585,790)
Add: Variable non-cash stock
compensation expense/
(benefit) included in reported
net loss ...................................... 531,657 (775,206) 1,559,556 (1,409,151)
Less: Total stock-based employee
compensation expense
determined under fair value
method ........................................ (313,716) (455,079) (642,943) (921,085)
------------ ------------ ------------ ------------
Pro forma net loss .................................... (4,843,533) (6,074,490) (9,367,918) (10,916,026)
Preferred stock dividends ............................. 934,707 859,304 1,840,164 1,691,719
------------ ------------ ------------ ------------
Pro forma net loss applicable to
common stockholders ................................... $ (5,778,240) $ (6,933,794) $(11,208,082) $(12,607,745)
============ ============ ============ ============
Earnings per share applicable to
common stockholders:
Basic/diluted, as reported .................... $ (0.17) $ (0.18) $ (0.35) $ (0.32)
Basic/diluted pro forma ....................... $ (0.16) $ (0.22) $ (0.32) $ (0.40)
NOTE 6 - COMPREHENSIVE LOSS
The following sets forth comprehensive loss for the three and six months
ended June 30, 2003 and 2002:
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Loss ................... $ (5,061,474) $ (4,844,205) $(10,284,531) $ (8,585,790)
Net Unrealized Gain/(Loss)
on Short-Term Investments 1,576 11,868 826 (6,486)
------------ ------------ ------------ ------------
Comprehensive Loss ......... $ (5,059,898) $ (4,832,337) $(10,283,705) $ (8,592,276)
============ ============ ============ ============
NOTE 7 - STOCKHOLDERS' EQUITY
In March 2003, Alteon completed a public offering of 2,300,000 shares of
common stock at $3.50 per share, which provided net proceeds of $7,657,355 after
offering expenses of $392,645.
Series G Preferred Stock and Series H Preferred Stock dividends are
payable quarterly in shares of preferred stock at a rate of 8.5%. Each share of
Series G Preferred Stock and Series H Preferred Stock is convertible, upon 70
days' prior written notice, into the number of shares of common stock determined
by dividing $10,000 by the average of the closing sales price of the common
stock, as reported on the American Stock Exchange, for the 20 business days
immediately preceding the date of conversion. For the three months ended June
30, 2003 and June 30, 2002, preferred stock dividends were $934,707 and
$859,304, respectively, and for the six months ended June 30, 2003 and June 30,
2002, preferred stock dividends were $1,840,164 and $1,691,719, respectively.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are a product-based biopharmaceutical company primarily engaged in the
discovery and development of oral drugs to reverse or slow down diseases of
aging and complications of diabetes. Our product candidates represent novel
approaches to some of the largest pharmaceutical markets. Our lead compound is
in clinical development; several others are in earlier development stages. These
pharmaceutical candidates were developed as a result of our research on the
Advanced Glycation End-product ("A.G.E.") pathway, a fundamental pathological
process and inevitable consequence of aging that causes or contributes to many
medical disorders, including cardiovascular, kidney and eye diseases.
Our lead compound, ALT-711, is being developed initially for
cardiovascular indications. Two Phase 2a clinical trials have been completed,
one in cardiovascular compliance and the DIAMOND (Distensibility Improvement And
ReMOdeliNg in Diastolic Heart Failure) trial in diastolic heart failure ("DHF").
In July 2003, we announced results from two Phase 2b efficacy trials of ALT-711,
the SAPPHIRE (Systolic And Pulse Pressure Hemodynamic Improvement by Restoring
Elasticity) and SILVER (Systolic Hypertension Interaction with Left VEntricular
Remodeling) trials in systolic hypertension that demonstrated efficacy against
systolic hypertension, but did not meet the primary endpoints. We continue to
assess the data and are working with our external advisors to determine the
appropriate clinical development strategy and timeline of additional phase 2
trials of ALT-711.
We will require, over the long-term, substantial new funding to pursue
development and commercialization of ALT-711 and our other product candidates to
continue our operations. We believe that satisfying these capital requirements
over the long-term will require successful commercialization of our product
candidates. However, it is uncertain whether any products will be approved or
will be commercially successful. The amount of our future capital requirements
will depend on numerous factors, including the progress of our research and
development programs, the conduct of pre-clinical tests and clinical trials, the
development of regulatory submissions, the costs associated with protecting
patents and other proprietary rights, the development of marketing and sales
capabilities and the availability of third-party funding.
Because of our near-term and long-term capital requirements, we will seek
access to the public or private equity markets whenever conditions are
favorable. This may have the effect of materially diluting the current holders
of our outstanding stock. We may also seek additional funding through corporate
collaborations and other financing vehicles, potentially including off-balance
sheet financing through limited partnerships or corporations. There can be no
assurance that such funding will be available at all or on terms acceptable to
us. If adequate funds are not available, we may be required to curtail
significantly one or more of our research or development programs. If we obtain
funds through arrangements with collaborative partners or others, we may be
required to relinquish rights to certain of our technologies or product
candidates.
As we continue clinical development of ALT-711, we will determine if it is
appropriate to retain development and marketing rights for one or several
indications in North America, while at the same time continuing to evaluate
potential corporate partnerships for the further development and ultimate
marketing of the compound in other territories throughout the world. We believe
that ALT-711 may address the cardiovascular, diabetes and primary care physician
markets.
We will continue to explore the use of topical A.G.E. Crosslink Breakers
in skin and photo aging, as a result of our recent evaluation of ALT-744's
positive activity in this area. We will focus efforts on bringing forward other
crosslink breaker compounds with more attractive formulation characteristics
than those of ALT-744 to address the pharmaceutical market for skin and photo
aging, and will discontinue research on the ALT-744 prototype.
Since our inception in October 1986, we have devoted substantially all of
our resources to research, drug discovery and development programs. To date, we
have not generated any revenues from the sale of products and do not expect to
generate any such revenues for a number of years, if at all. We have incurred an
accumulated deficit of $181,500,289 as of June 30, 2003, and expect to incur
operating losses, potentially greater than losses in prior years, for a number
of years.
We have financed our operations through proceeds from an initial public
offering of common stock in 1991, subsequent public offerings of common stock,
private placements of common and preferred equity securities, revenue from
collaborative relationships, reimbursement of certain of our research and
development expenses by our collaborative partners, investment income earned on
cash balances and short-term investments and the sale of a portion of our New
Jersey net operating loss carryforwards.
Our business is subject to significant risks, which are described in this
Report, including under the heading "Forward-Looking Statements and Cautionary
Statements."
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 AND 2002
Total revenues for the three months ended June 30, 2003 and 2002, were
$55,176 and $116,980, respectively. Revenues were derived from interest earned
on cash and cash equivalents and short-term investments. Total revenues
decreased due to smaller investment balances and a decrease in short-term
interest rates.
Our total expenses were $5,116,650 for the three months ended June 30,
2003, compared to $4,961,185 for the three months ended June 30, 2002, and in
each period consisted primarily of research and development expenses. Research
and development expenses included third-party expenses associated with
pre-clinical and clinical studies, manufacturing costs, including the
development and preparation of clinical supplies, personnel and
personnel-related expenses and facility expenses. Research and development
expenses were $3,260,095 for the three months ended June 30, 2003, as compared
to $4,364,157 for the same period in 2002. In 2003, they primarily consisted of
$1,298,008 in personnel and personnel-related expenses, $857,554 in clinical
trial expenses, including $504,724 related to the Phase 2b SAPPHIRE and SILVER
trials, $288,356 related to manufacturing (tableting and API production) and
drug stability studies, $176,359 in pre-clinical expenses and non-cash variable
stock compensation expense of $21,669. Research and development expenses for the
three months ended June 30, 2002, primarily consisted of $1,771,295 in clinical
trial expenses related to the Phase 2b SAPPHIRE and SILVER trials, $763,617 of
manufacturing expenses (tablet manufacturing, process development and packaging)
and drug stability studies, $880,685 in personnel and personnel-related expenses
and $190,766 in pre-clinical expenses, partially offset by a non-cash variable
stock compensation benefit of $(46,678).
Research and development expenses decreased $1,104,062, or 25.3%, as
compared to the three months ended June 30, 2002. The decrease was primarily
attributed to lower clinical costs associated with patients completing the
SAPPHIRE and SILVER trials in the second quarter of 2003 and lower manufacturing
costs. These decreased costs were partially offset by higher personnel and
personnel-related costs, including temporary help related to the SAPPHIRE and
SILVER trials.
The development and successful commercialization of ALT-711 are subject to
substantial risks described in this Report. See, for example, "Forward-Looking
Statements and Cautionary Statements -- If we do not successfully develop any
products, we may not derive any revenues."
General and administrative expenses increased to $1,856,555 for the three
months June 30, 2003, compared to $597,028 for the same period in 2002 and
included a non-cash variable stock compensation expense/(benefit) of $509,988
and $(728,528), respectively. Non-cash variable stock compensation
expense/(benefit) is directly related to changes in our stock price (see Note 5
to the unaudited financial statements). In addition to the non-cash variable
stock compensation expense, general and administrative expenses included an
increase in business development and marketing research costs.
Our net loss applicable to common stockholders was $5,996,181 for the
three months ended June 30, 2003, compared to $5,703,509 in the same period in
2002, an increase of 5.1%, primarily related to variable non-cash stock
compensation expense/(benefit), partially offset by decreased clinical trial
expenses and lower manufacturing expenses. Included in the net loss applicable
to common stockholders are preferred stock dividends of $934,707 and $859,304
for the three months ended June 30, 2003 and 2002, respectively.
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Total revenues for the six months ended June 30, 2003, and the six months
ended June 30, 2002, were $103,898 and $252,644, respectively. Revenues were
derived from interest earned on cash and cash equivalents and short-term
investments. Total revenues decreased due to smaller investment balances and a
decrease in short-term interest rates.
Our total expenses were $10,388,429 for the six months ended June 30, 2003
compared to $8,838,434 for the six months ended June 30, 2002, and in each year
consisted primarily of research and development expenses. Research and
development expenses for the six months ended June 30, 2003 were $6,164,938 and
included $2,329,106 in personnel and personnel-related expenses, $1,325,150 in
clinical trial expenses related to the Phase 2b SAPPHIRE and SILVER trials,
$483,058 in pre-clinical expenses, manufacturing costs of $432,606, primarily
related to tablet manufacturing and drug stability studies, and a non-cash
variable stock compensation expense/(benefit) of $83,639. Research and
development expenses for the six months ended June 30, 2002 were $7,651,414 and
included $2,822,000 in clinical trial expenses related to the Phase 2b
SAPPHIRE and SILVER trials, $1,634,818 related to the manufacturing of the
active ingredient for ALT-711, process development, packaging, tablet
manufacturing
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
and drug stability studies, $1,549,155 in personnel and personnel-related
expenses, $419,644 in pre-clinical expenses and a non-cash variable stock
compensation (benefit)/expense of $(93,516).
Research and development expenses decreased by $1,486,476, or 19.4%,
primarily due to decreased clinical trial and manufacturing costs associated
with the Phase 2b SAPPHIRE and SILVER clinical trials, partly offset by higher
personnel costs.
The development and successful commercialization of ALT-711 are subject to
substantial risks described in this Report. See, for example, "Forward-Looking
Statements and Cautionary Statements -- If we do not successfully develop any
products, we may not derive any revenues."
General and administrative expenses increased to $4,223,491 for the six
months ended June 30, 2003, compared to $1,187,020 for the same period in 2002,
and included a non-cash variable stock compensation expense/(benefit) of
$1,475,917 and $(1,315,635), respectively. In addition to the non-cash variable
stock compensation expense/(benefit), general and administrative expenses
increased primarily due to higher business development and marketing research
costs in 2003.
Our net loss applicable to common stockholders increased to $12,124,695
for the six months ended June 30, 2003, compared to $10,277,509 in the same
period in 2002, an increase of 18.0%. This was primarily a result of decreased
research and development expenses and lower manufacturing expenses due to
completion of the Phase 2b SAPPHIRE and SILVER clinical trials and increased
preferred stock dividends, partially offset by a non-cash stock compensation
expense/(benefit). Included in the net loss applicable to common stockholders
are preferred stock dividends of $1,840,164 and $1,691,719 for the six months
ended June 30, 2003 and 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents and short-term investments at June 30,
2003, of $15,864,688, compared to $17,438,613 at December 31, 2002. This is a
decrease in cash and cash equivalents and short-term investments of $1,573,925.
Cash increased during the six months ended June 30, 2003 by $7,657,355 from net
proceeds from a public offering of 2,300,000 shares of common stock at $3.50 per
share in March 2003. This was more than offset by $9,191,795 of net cash used in
operations, consisting primarily of research and development expenses,
personnel-related costs and facility expenses and $50,941 of cash used in
capital expenditures during the six months ended June 30, 2003.
At December 31, 2002, we had available federal net operating loss
carryforwards, which expire in various amounts from the years 2006 through 2022,
of approximately $152,365,000 and New Jersey net operating loss carryforwards,
which expire in the years 2004 through 2009, of approximately $106,771,000. In
addition, we had federal research and development tax credit carryforwards of
approximately $7,048,000 and New Jersey research and development tax credit
carryforwards of approximately $811,000 at December 31, 2002. The amount of
federal net operating loss and research and development tax credit carryforwards
which can be utilized in any one period may become limited by federal income tax
regulations if a cumulative change in ownership of more than 50% occurs within a
three-year period.
In December 2002, we sold $1,839,000 of our gross New Jersey net operating
loss carryforwards and $578,000 of our New Jersey research and development tax
credit carryforwards under the State of New Jersey's Technology Business Tax
Certificate Transfer Program (the "Program"). The Program allows qualified
technology and biotechnology businesses in New Jersey to sell unused amounts of
net operating loss carryforwards and defined research and development tax
credits for cash. The proceeds from the sale in 2002 were $647,000 and were
recorded as a tax benefit in the December 31, 2002 statement of operations. The
State of New Jersey may renew the Program annually and limits the aggregate
proceeds to $10,000,000. We cannot be certain if we will be able to sell any of
the carryforwards in the future.
In July 2003, we announced results from two Phase 2b efficacy trials of
ALT-711, the SAPPHIRE and SILVER trials. The results demonstrated efficacy
against systolic hypertension, but did not meet the primary endpoints. We
continue to assess the data and are working with our external advisors to
determine the appropriate clinical development strategy and timeline of
additional Phase 2 trials of ALT-711. However, we will require additional new
funding to complete any new clinical trials we initiate. During the period prior
to the initiation of any new trials, we expect to reduce the cash burn rate,
initially through the reduction of research and development expenses, including
clinical trial expenses and discretionary spending. We currently have adequate
resources to sustain our operations, exclusive of the full cost of any new
clinical trials, into the second half of 2004. Throughout the next 12 months, we
will continue to monitor our liquidity position and continue to explore
fund-raising alternatives. Depending upon the results of any attempts made by us
to raise additional funds through the sale of additional equity securities or
through strategic collaborations, we may be required to further reduce or
curtail our research and product development activities and other operations
(including any new clinical trials) if cash and cash equivalents fall below
pre-determined levels.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The amount of our future capital requirements will depend on numerous
factors, including the progress of our discovery research programs, the
initiation of pre-clinical tests and clinical trials, the development of
regulatory submissions, the costs associated with protecting patents and other
proprietary rights, the development of marketing and sales capabilities and the
availability of third-party funding.
Because of our near-term and long-term capital requirements, we will seek
access to the public or private equity markets whenever conditions are
favorable. This may have the effect of materially diluting the current holders
of our outstanding stock. We may also seek additional funding through corporate
collaborations and other financing vehicles, potentially including off-balance
sheet financing through limited partnerships or corporations. There can be no
assurance that such funding will be available at all or on terms acceptable to
us. If adequate funds are not available, we may be required to curtail
significantly one or more of our research or development programs. If we obtain
funds through arrangements with collaborative partners or others, we may be
required to relinquish rights to certain of our technologies or product
candidates.
Our current priorities are the evaluation and continued development of
ALT-711, our lead A.G.E. Crosslink Breaker candidate and determining the optimal
course for the continued development of additional A.G.E. Crosslink Breaker
compounds and A.G.E.-Formation Inhibitors. We are focusing our resources on the
development of ALT-711. As we continue clinical development of ALT-711, we are
evaluating potential corporate partnerships for further development and ultimate
marketing of the compound in territories throughout the world. We plan to retain
development and marketing rights for one or several indications in the United
States. As described above, we believe that additional development of this
compound and other product candidates will require us to find additional sources
of funding.
CRITICAL ACCOUNTING POLICIES
In December 2001, the U.S. Securities and Exchange Commission issued a
statement concerning certain views of the Commission regarding the appropriate
amount of disclosure by publicly held companies with respect to their critical
accounting policies. In particular, the Commission expressed its view that in
order to enhance investor understanding of financial statements, companies
should explain the effects of critical accounting policies as they are applied,
the judgments made in the application of these policies and the likelihood of
materially different reported results if different assumptions or conditions
were to prevail. We have since carefully reviewed the disclosures included in
our filings with the Commission, including, without limitation, our Annual
Report on Form 10-K for the year ended December 31, 2002, and accompanying
audited financial statements and related notes thereto. We believe the effect of
the following accounting policy is significant to our results of operations and
financial condition.
We account for options granted to employees and directors in accordance
with APB Opinion No. 25, and related interpretations. As such, compensation
expense is recorded on fixed stock grants only if the current fair value of the
underlying stock exceeds the exercise price of the option at the date of grant
and it is recognized on a straight-line basis over the vesting period. Based on
the performance of our stock, we repriced certain employee stock options on
February 2, 1999. As a result of this repricing, options to purchase 1.06
million shares of stock were repriced and certain vesting periods related to
these options were modified or extended. Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, An Interpretation of APB
Opinion No. 25," requires us to record compensation expense or benefit, which is
adjusted every quarter, for increases or decreases in the fair value of the
repriced options based on changes in our stock price from the value at July 1,
2000, until the repriced options are exercised, forfeited or expire. As a
result, net loss applicable to common stockholders and net loss per share to
common stockholders may be subject to volatility. Had we accounted for repricing
of stock option grants in accordance with SFAS No. 123, the expense related to
the vested options would have been recorded at the repricing date, and the
expense related to non-vested options would have been recorded over the vesting
period. As of June 30, 2003, there were 579,899 repriced options outstanding,
which expire on various dates through January 2008.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS
Statements in this Form 10-Q that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking
statements made by us or our representatives are based on a number of
assumptions. The words "believe," "expect," "anticipate," "intend," "estimate"
or other expressions, which are predictions of or indicate future events and
trends and which do not relate to historical matters, identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, as they involve risks and uncertainties, and actual
results could differ materially from those currently anticipated due to a number
of factors, including those set forth in this section and elsewhere in this Form
10-Q. These factors include, but are not limited to, the risks set forth below.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The forward-looking statements represent our judgment and expectations as
of the date of this Report. We assume no obligation to update any such
forward-looking statements.
IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR NEEDS, WE MAY HAVE
TO CURTAIL OR DISCONTINUE THE RESEARCH, PRODUCT DEVELOPMENT, PRE-CLINICAL
TESTING AND CLINICAL TRIALS OF SOME OR ALL OF OUR PRODUCT CANDIDATES.
As of June 30, 2003, we had working capital of $13,047,854, including
$15,864,688 of cash and cash equivalents and short-term investments. During
March 2003, we sold 2,300,000 shares of common stock, raising net proceeds of
$7,657,355. Our cash used in operations for the six months ended June 30, 2003
was $9,191,795, and for the year ended December 31, 2002 was $14,931,030.
In July 2003, the we announced results from two Phase 2b efficacy trials
of ALT-711, the SAPPHIRE and SILVER trials. The results demonstrated efficacy
against systolic hypertension, but did not meet the primary endpoints. We
continue to assess the data and are working with our external advisors to
determine the appropriate clinical development strategy and timeline of
additional Phase 2 trials of ALT-711. However, we will require additional new
funding to complete any new clinical trials we initiate. During the period prior
to the initiation of any new trials, we expect to reduce the cash burn rate,
initially through the reduction of research and development expenses, including
clinical trial expenses and discretionary spending. We currently have adequate
resources to sustain our operations, exclusive of the full cost of any new
clinical trials, into the second half of 2004. Throughout the next 12 months, we
will continue to monitor our liquidity position and continue to explore fund
raising alternatives. Depending upon the results of any attempts made by us to
raise additional funds through the sale of additional equity securities or
through strategic collaborations, we may be required to further reduce or
curtail our research and product development activities and other operations
(including any new clinical trials) if cash and cash equivalents fall below
pre-determined levels.
We will require, over the long-term, substantial new funding to pursue
development and commercialization of ALT-711 and our other product candidates to
continue our operations. We believe that satisfying these capital requirements
over the long-term will require successful commercialization of our product
candidates. However, it is uncertain whether any products will be approved or
will be commercially successful. The amount of our future capital requirements
will depend on numerous factors, including the progress of our research and
development programs, the conduct of pre-clinical tests and clinical trials, the
development of regulatory submissions, the costs associated with protecting
patents and other proprietary rights, the development of marketing and sales
capabilities and the availability of third-party funding.
Because of our near-term and long-term capital requirements, we will seek
access to the public or private equity markets whenever conditions are
favorable. This may have the effect of materially diluting the current holders
of our outstanding stock. We may also seek additional funding through corporate
collaborations and other financing vehicles, potentially including off-balance
sheet financing through limited partnerships or corporations. There can be no
assurance that such funding will be available at all or on terms acceptable to
us. If adequate funds are not available, we may be required to curtail
significantly one or more of our research or development programs. If we obtain
funds through arrangements with collaborative partners or others, we may be
required to relinquish rights to certain of our technologies or product
candidates.
IF WE DO NOT SUCCESSFULLY DEVELOP ANY PRODUCTS, WE MAY NOT DERIVE ANY REVENUES.
We have not yet requested or received regulatory approval for any product
from the United States Food and Drug Administration ("FDA") or any other
regulatory body. All of our product candidates, including our lead candidate,
ALT-711, are still in research or clinical development. We may not succeed in
the development and marketing of any therapeutic or diagnostic product. To
achieve profitable operations, we must, alone or with others, successfully
identify, develop, introduce and market proprietary products. Such products will
require significant additional investment, development and pre-clinical and
clinical testing prior to potential regulatory approval and commercialization.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Potential products may be found ineffective or cause harmful side
effects during pre-clinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. We may not be able to
undertake additional clinical trials. In addition, our product development
efforts may not be successfully completed, we may not obtain regulatory
approvals, and our products, if introduced, may not be successfully marketed or
achieve customer acceptance. We do not expect any of our products, including
ALT-711, to be commercially available for a number of years, if at all.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
CLINICAL TRIALS REQUIRED FOR OUR PRODUCT CANDIDATES ARE EXPENSIVE AND
TIME-CONSUMING, AND THEIR OUTCOME IS UNCERTAIN.
Before obtaining regulatory approvals for the commercial sale of any of
our products under development, we must demonstrate through pre-clinical studies
and clinical trials that the product is safe and effective for use in each
target indication. The length of time necessary to complete clinical trials
varies significantly and may be difficult to predict. Factors which can cause
delay or termination of our clinical trials include: (i) slower than expected
patient enrollment due to the nature of the protocol, the proximity of patients
to clinical sites, the eligibility criteria for the study, competition with
clinical trials for other drug candidates or other factors; (ii) lower than
expected retention rates of patients in a clinical trial; (iii) inadequately
trained or insufficient personnel at the study site to assist in overseeing and
monitoring clinical trials; (iv) delays in approvals from a study site's review
board; (v) longer treatment time required to demonstrate effectiveness or
determine the appropriate product dose; (vi) lack of sufficient supplies of the
product candidate; (vii) adverse medical events or side effects in treated
patients; (viii) lack of effectiveness of the product candidate being tested and
(ix) regulatory changes.
Even if we obtain positive results from pre-clinical or clinical trials
for a particular product, we may not achieve the same success in future trials
of that product. In addition, some or all of the clinical trials we undertake
may not demonstrate sufficient safety and efficacy to obtain the requisite
regulatory approvals, which could prevent the creation of marketable products.
Our product development costs will increase if we have delays in testing or
approvals, if we need to perform more or larger clinical trials than planned or
if our trials are not successful. Delays in our clinical trials may harm our
financial results and the commercial prospects for our products.
IF WE ARE UNABLE TO DERIVE REVENUES FROM PRODUCT SALES, WE MAY NEVER BE
PROFITABLE.
All of our revenues to date have been generated from collaborative
research agreements and financing activities, or interest income earned on these
funds. We have not received any revenues from product sales. We may not realize
product revenues on a timely basis, if at all.
At June 30, 2003, we had an accumulated deficit of $181,500,289. We
anticipate that we will incur substantial, potentially greater, losses in the
future. Our products under development may not be successfully developed and our
products, if successfully developed, may not generate revenues sufficient to
enable us to earn a profit. We expect to incur substantial additional operating
expenses over the next several years as our research, development and clinical
trial activities increase. We do not expect to generate revenues from the sale
of products, if any, for a number of years. Our ability to achieve profitability
depends, in part, on our ability to enter into agreements for product
development, obtain regulatory approval for our products and develop the
capacity, or enter into agreements, for the manufacture, marketing and sale of
any products. We may not obtain required regulatory approvals, or successfully
develop, manufacture, commercialize and market product candidates, and we may
never achieve product revenues or profitability.
PRIOR STOCK OPTION REPRICING MAY HAVE AN ADVERSE EFFECT ON OUR FUTURE FINANCIAL
PERFORMANCE.
Based on the performance of our stock, we repriced certain employee stock
options on February 2, 1999, in order to bolster employee retention. As a result
of this repricing, options to purchase 1.06 million shares of stock were
repriced and certain vesting periods related to these options were modified or
extended. This repricing may have a material adverse impact on future financial
performance based on the Financial Accounting Standards Board ("FASB")
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, An Interpretation of APB Opinion No. 25." This
interpretation requires us to record compensation expense or benefit, which is
adjusted every quarter, for increases or decreases in the fair value of the
repriced options based on changes in our stock price from the value at July 1,
2000, until the repriced options are exercised, forfeited or expire. The options
expire at various dates through January 2008.
IF WE ARE UNABLE TO FORM THE COLLABORATIVE RELATIONSHIPS THAT OUR BUSINESS
STRATEGY REQUIRES, THEN OUR PROGRAMS WILL SUFFER AND WE MAY NOT BE ABLE TO
DEVELOP PRODUCTS.
Our strategy for developing and deriving revenues from our products
depends, in large part, upon entering into arrangements with research
collaborators, corporate partners and others. We are seeking to establish these
relationships to provide the funding necessary for continuation of our product
development, but if such efforts may not be successful, our programs may suffer
and we may be unable to develop products.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
IF WE ARE ABLE TO FORM OUR COLLABORATIVE RELATIONSHIPS, BUT ARE UNABLE TO
MAINTAIN THEM, OUR PRODUCT DEVELOPMENT MAY BE DELAYED AND DISPUTES OVER RIGHTS
TO TECHNOLOGY MAY RESULT.
We may form collaborative relationships that will, in some cases, make us
dependent upon outside partners to conduct pre-clinical testing and clinical
trials and to provide adequate funding for our development programs. Such
corporate partners, if any, may have all or a significant portion of the
development and regulatory approval responsibilities. Failure of the corporate
partners to develop marketable products or to gain the appropriate regulatory
approvals on a timely basis, if at all, would have a material adverse effect on
our business, financial condition and results of operations.
In most cases, we will not be able to control the amount and timing of
resources that our corporate partners devote to our programs or potential
products. If any of our corporate partners breached or terminated its agreement
with us or otherwise failed to conduct its collaborative activities in a timely
manner, the pre-clinical or clinical development or commercialization of product
candidates or research programs could be delayed, and we would be required to
devote additional resources to product development and commercialization or
terminate certain development programs.
Disputes may arise in the future with respect to the ownership of rights
to any technology we develop with third parties. These and other possible
disagreements between us and collaborators could lead to delays in the
collaborative research, development or commercialization of product candidates,
or could require or result in litigation or arbitration, which would be
time-consuming and expensive and would have a material adverse effect on our
business, financial condition, results of operations and liquidity.
Any corporate partners we have may develop, either alone or with others,
products that compete with the development and marketing of our products.
Competing products, either developed by the corporate partners or to which the
corporate partners have rights, may result in their withdrawal of support with
respect to all or a portion of our technology, which would have a material
adverse effect on our business, financial condition, results of operations and
liquidity.
IF WE CANNOT SUCCESSFULLY DEVELOP A MARKETING AND SALES FORCE OR MAINTAIN
SUITABLE ARRANGEMENTS WITH THIRD PARTIES TO MARKET AND SELL OUR PRODUCTS, OUR
ABILITY TO DELIVER PRODUCTS MAY BE IMPAIRED.
We currently have no experience in marketing or selling pharmaceutical
products. In order to achieve commercial success for any approved product, we
must either develop a marketing and sales force or, where appropriate or
permissible, enter into arrangements with third parties to market and sell our
products. We might not be successful in developing marketing and sales
capabilities. Further, we may not be able to enter into marketing and sales
agreements with others on acceptable terms, and any such arrangements, if
entered into, may be terminated. If we develop our own marketing and sales
capability, it will compete with other companies that currently have
experienced, well funded and larger marketing and sales operations. To the
extent that we enter into co-promotion or other sales and marketing arrangements
with other companies, revenues will depend on the efforts of others, which may
not be successful.
IF WE CANNOT SUCCESSFULLY FORM AND MAINTAIN SUITABLE ARRANGEMENTS WITH THIRD
PARTIES FOR THE MANUFACTURING OF THE PRODUCTS WE MAY DEVELOP, OUR ABILITY TO
DEVELOP OR DELIVER PRODUCTS MAY BE IMPAIRED.
We have no experience in manufacturing products for commercial purposes
and do not have manufacturing facilities. Consequently, we are dependent on
contract manufacturers for the production of products for development and
commercial purposes. The manufacture of our products for clinical trials and
commercial purposes is subject to current Good Manufacturing Practice ("cGMP")
regulations promulgated by the FDA. In the event that we are unable to obtain or
retain third-party manufacturing for our products, we will not be able to
commercialize such products as planned. We may not be able to enter into
agreements for the manufacture of future products with manufacturers whose
facilities and procedures comply with cGMP and other regulatory requirements.
Our current dependence upon others for the manufacture of our products may
adversely affect our profit margin, if any, on the sale of future products and
our ability to develop and deliver such products on a timely and competitive
basis.
IF WE ARE NOT ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO OUR
SUCCESS, THE DEVELOPMENT AND ANY POSSIBLE SALES OF OUR PRODUCT CANDIDATES COULD
SUFFER AND COMPETITORS COULD FORCE OUR PRODUCTS COMPLETELY OUT OF THE MARKET.
Our success will depend on our ability to obtain patent protection for our
products, preserve our trade secrets, prevent third parties from infringing upon
our proprietary rights and operate without infringing upon the proprietary
rights of others, both in the United States and abroad.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The degree of patent protection afforded to pharmaceutical inventions is
uncertain and our potential products are subject to this uncertainty.
Competitors may develop competitive products outside the protection that may be
afforded by the claims of our patents. We are aware that other parties have been
issued patents and have filed patent applications in the United States and
foreign countries with respect to other agents that have an effect on A.G.E.s.
or the formation of A.G.E. crosslinks. In addition, although we have several
patent applications pending to protect proprietary technology and potential
products, these patents may not be issued, and the claims of any patents, which
do issue, may not provide significant protection of our technology or products.
In addition, we may not enjoy any patent protection beyond the expiration dates
of our currently issued patents.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to maintain, develop and expand
our competitive position, which we seek to protect, in part, by confidentiality
agreements with our corporate partners, collaborators, employees and
consultants. We also have invention or patent assignment agreements with our
employees and certain, but not all, corporate partners and consultants. Relevant
inventions may be developed by a person not bound by an invention assignment
agreement. Binding agreements may be breached, and we may not have adequate
remedies for such breach. In addition, our trade secrets may become known to or
be independently discovered by competitors.
IF WE FAIL TO OBTAIN REGULATORY APPROVALS FOR OUR PRODUCTS, THE COMMERCIAL USE
OF OUR PRODUCTS WILL BE LIMITED.
Our research, pre-clinical testing and clinical trials of our product
candidates are, and the manufacturing and marketing of our products will be,
subject to extensive and rigorous regulation by numerous governmental
authorities in the United States and in other countries where we intend to test
and market our product candidates.
Prior to marketing, any product we develop must undergo an extensive
regulatory approval process. This regulatory process, which includes
pre-clinical testing and clinical trials and may include post-marketing
surveillance of each compound to establish its safety and efficacy, can take
many years and can require the expenditure of substantial resources. Data
obtained from pre-clinical and clinical activities is susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. In
addition, we may encounter delays or rejections based upon changes in FDA policy
for drug approval during the period of product development and FDA regulatory
review of each submitted new drug application ("NDA"). We may encounter similar
delays in foreign countries. We may not obtain regulatory approval for the drugs
we develop. Moreover, regulatory approval may entail limitations on the
indicated uses of the drug. Further, even if we obtain regulatory approval, a
marketed drug and its manufacturer are subject to continuing review and
discovery of previously unknown problems with a product or manufacturer which
may have adverse effects on our business, financial condition and results of
operations, including withdrawal of the product from the market. Violations of
regulatory requirements at any stage, including pre-clinical testing, clinical
trials, the approval process or post-approval, may result in various adverse
consequences, including the FDA's delay in approving, or its refusal to approve
a product, withdrawal of an approved product from the market and the imposition
of criminal penalties against the manufacturer and NDA holder. None of our
products has been approved for commercialization in the United States or
elsewhere. We may not be able to obtain FDA approval for any products. Failure
to obtain requisite governmental approvals or failure to obtain approvals of the
scope requested will delay or preclude our licensees or marketing partners from
marketing our products or limit the commercial use of such products and will
have a material adverse effect on our business, financial condition, results of
operations and liquidity.
IF WE ARE NOT ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE
DEVELOPMENT AND MARKETING OF CURES AND THERAPIES FOR CARDIOVASCULAR DISEASES,
DIABETES AND THE OTHER CONDITIONS FOR WHICH WE SEEK TO DEVELOP PRODUCTS, WE MAY
NOT BE ABLE TO CONTINUE OUR OPERATIONS.
We are engaged in pharmaceutical fields characterized by extensive
research efforts and rapid technological progress. Many established
pharmaceutical and biotechnology companies with resources greater than ours are
attempting to develop products that would be competitive with our products.
Other companies may succeed in developing products that are safer, more
efficacious or less costly than any we may develop and may also be more
successful than us in production and marketing. Rapid technological development
by others may result in our products becoming obsolete before we recover a
significant portion of the research, development or commercialization expenses
incurred with respect to those products.
Certain technologies under development by other pharmaceutical companies
could result in better treatments for cardiovascular disease, or diabetes and
its related complications. Several large companies have initiated or expanded
research, development and licensing efforts to build pharmaceutical franchises
focusing on these medical conditions. It is possible that one or more of these
initiatives may reduce or eliminate the market for some of our products. In
addition, other companies have initiated research in the inhibition or crosslink
breaking of A.G.E.s.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
IF GOVERNMENTS AND THIRD-PARTY PAYERS CONTINUE THEIR EFFORTS TO CONTAIN OR
DECREASE THE COSTS OF HEALTHCARE, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR
PRODUCTS SUCCESSFULLY.
In certain foreign markets, pricing and/or profitability of prescription
pharmaceuticals are subject to government control. In the United States, we
expect that there will continue to be federal and state initiatives to control
and/or reduce pharmaceutical expenditures. In addition, increasing emphasis on
managed care in the United States will continue to put pressure on
pharmaceutical pricing. Cost control initiatives could decrease the price that
we receive for any products we may develop and sell in the future and have a
material adverse effect on our business, financial condition and results of
operations. Further, to the extent that cost control initiatives have a material
adverse effect on our corporate partners, our ability to commercialize our
products may be adversely affected.
Our ability to commercialize pharmaceutical products may depend, in part,
on the extent to which reimbursement for the products will be available from
government health administration authorities, private health insurers and other
third-party payers. Significant uncertainty exists as to the reimbursement
status of newly approved healthcare products, and third-party payers, including
Medicare, are increasingly challenging the prices charged for medical products
and services. Third-party insurance coverage may not be available to patients
for any products developed by us. Government and other third-party payers are
attempting to contain healthcare costs by limiting both coverage and the level
of reimbursement for new therapeutic products and by refusing in some cases to
provide coverage for uses of approved products for disease indications for which
the FDA has not granted labeling approval. If adequate coverage and
reimbursement levels are not provided by government and other third-party payers
for our products, the market acceptance of these products would be adversely
affected.
IF THE USERS OF THE PRODUCTS WE DEVELOP CLAIM THAT OUR PRODUCTS HAVE HARMED
THEM, WE MAY BE SUBJECT TO COSTLY AND DAMAGING PRODUCT LIABILITY LITIGATION,
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS.
The use of any of our potential products in clinical trials and the sale
of any approved products, including the testing and commercialization of ALT-711
or other compounds, exposes us to liability claims resulting from the use of
products or product candidates. A claim, which was subsequently settled, was
made by a participant in one of our clinical trials, and additional claims might
be made directly by other such participants, consumers, pharmaceutical companies
or others. We maintain product liability insurance coverage for claims arising
from the use of our products in clinical trials. However, coverage is becoming
increasingly expensive, and we may not be able to maintain or acquire insurance
at a reasonable cost or in sufficient amounts to protect us against losses due
to liability that could have a material adverse effect on our business,
financial conditions and results of operations. We may not be able to obtain
commercially reasonable product liability insurance for any product approved for
marketing in the future and insurance coverage and our resources may not be
sufficient to satisfy any liability resulting from product liability claims. A
successful product liability claim or series of claims brought against us could
have a material adverse effect on our business, financial condition, results of
operations and liquidity.
IF WE ARE UNABLE TO ATTRACT AND RETAIN THE KEY PERSONNEL ON WHOM OUR SUCCESS
DEPENDS, OUR PRODUCT DEVELOPMENT, MARKETING AND COMMERCIALIZATION PLANS COULD
SUFFER.
We are highly dependent on the principal members of our management and
scientific staff. The loss of services of any of these personnel could impede
the achievement of our development objectives. Furthermore, recruiting and
retaining qualified scientific personnel to perform research and development
work in the future will also be critical to our success. We may not be able to
attract and retain personnel on acceptable terms given the competition between
pharmaceutical and healthcare companies, universities and non-profit research
institutions for experienced scientists. In addition, we rely on consultants to
assist us in formulating our research and development strategy. All of our
consultants are employed outside of us and may have commitments to or consulting
or advisory contracts with other entities that may limit their availability to
us.
OUR OPERATIONS INVOLVE A RISK OF INJURY OR DAMAGE FROM HAZARDOUS MATERIALS, AND
IF AN ACCIDENT WERE TO OCCUR, WE COULD BE SUBJECT TO COSTLY AND DAMAGING
LIABILITY CLAIMS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our research and development activities involve the controlled use of
hazardous materials and chemicals. Although we believe that our safety
procedures for handling and disposing of hazardous materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of an accident, we could be held liable for any damages or fines that
result. Such liability could have a material adverse effect on our business,
financial condition, results of operations and liquidity.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to our investments in short-term marketable securities. We do not use
derivative financial instruments. Our investments consist primarily of debt
instruments of the U.S. government, government agencies, financial institutions
and corporations with strong credit ratings. We prepared a detailed market risk
disclosure of these investments in our 2002 Annual Report on Form 10-K. There
have been no material changes in our market risk position since December 31,
2002.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer
and our Vice President, Finance, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
fiscal quarter covered by this Quarterly Report on Form 10-Q. Based upon that
evaluation, the Chief Executive Officer and the Vice President, Finance, have
concluded that as of the end of such fiscal quarter, our current disclosure
controls and procedures are adequate and effective to ensure that information
required to be disclosed in the reports we file under the Exchange Act is
recorded, processed, summarized and reported on a timely basis.
b) Changes in internal control over financial reporting. There was no change in
our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) during the fiscal quarter covered by this Quarterly
Report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 5, 2002, Lisa Weller, a former Alteon employee, filed suit
against Alteon in the Superior Court of New Jersey asserting claims for alleged
pregnancy, sex and handicap discrimination, wrongful termination and intentional
infliction of emotional distress, all arising from the company's termination of
her employment as an executive assistant. Alteon removed the case to the United
States District Court for the District of New Jersey. In December 2002, we
agreed to a settlement with Ms. Weller under which we deny all liability in
exchange for a dismissal and release by Ms. Weller of any and all claims against
us. A settlement was reached by both parties and the case was dismissed on June
3, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Annual Meeting of Stockholders of Alteon (the "Meeting") was held on
June 4, 2003. The following matters were voted upon at the Meeting: (i) the
election of two directors and (ii) the ratification of the appointment of KPMG
LLP as independent public accountants for the fiscal year ending December 31,
2003.
(i) The following table sets forth the names of the nominees who were
elected to serve as directors and the number of votes cast for or withheld from
the election of such nominee:
Name Votes For Votes Withheld
---- --------- --------------
David McCurdy 33,306,061 196,373
Mark Novitch, M.D. 33,305,961 196,473
(ii) The number of votes cast for, against and abstaining from the
ratification of the appointment of KPMG LLP as independent public accountants
for the fiscal year ending December 31, 2003, were as follows:
Votes For Votes Against Abstentions
--------- ------------- -----------
32,192,526 1,291,246 18,662
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See Exhibit Index on page 21 for Exhibits filed with this Quarterly
Report on Form 10-Q.
b) No reports on Form 8-K were filed during the quarter ended June 30,
2003.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 2003
ALTEON INC.
By: /s/Kenneth I. Moch
--------------------------------------
Kenneth I. Moch
President and Chief Executive Officer
(principal executive officer)
By: /s/Elizabeth A. O'Dell
--------------------------------------
Elizabeth A. O'Dell
Vice President, Finance
Secretary and Treasurer
(principal accounting officer)
20
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
--- ----------------------
3.1 Restated Certificate of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 to the Company's Report on Form 10-Q filed
on November 10, 1999, S.E.C. File Number 000-19529.)
3.2 Certificate of the Voting Powers, Designations, Preference and
Relative Participating, Optional and Other Special Rights and
Qualifications, Limitations or Restrictions of Series F Preferred
Stock Alteon Inc. (Incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000, S.E.C. File Number 001-16043.)
3.3 Certificate of Retirement dated September 10, 2000, of Alteon Inc.
(Incorporated by reference to Exhibit 3.1 to the Company's Report on
Form 10-Q filed on November 10, 1999, S.E.C. File Number 000-19529.)
3.4 Certificate of Designations of Series G Preferred Stock of Alteon
Inc. (Incorporated by reference to Exhibit 3.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
S.E.C. File Number 000-19529.)
3.5 Certificate of Amendment of Certificate of Designations of Series G
Preferred Stock of Alteon Inc. (Incorporated by reference to Exhibit
3.4 to the Company's Report on Form 10-Q filed on August 14, 1998,
S.E.C. File Number 000-19529.)
3.6 Certificate of Designations of Series H Preferred Stock of Alteon
Inc. (Incorporated by reference to Exhibit 3.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
S.E.C. File Number 000-19529.)
3.7 Amended Certificate of Designations of Series H Preferred Stock of
Alteon Inc. (Incorporated by reference to Exhibit 3.6 to the
Company's Report on Form 10-Q filed on August 14, 1998, S.E.C. File
Number 000-19529.)
3.8 Certificate of Retirement dated November 20, 2000, of Alteon Inc.
(Incorporated by reference to Exhibit 3.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, S.E.C.
File Number 001-16043.)
3.9 Certificate of Amendment to Restated Certificate of Incorporation of
Alteon Inc., dated June 7, 2001. (Incorporated by reference to
Exhibit 3.8 to the Company's Report on Form 10-Q filed on August 14,
2001, S.E.C. File Number 001-16043.)
3.10 By-laws, as amended. (Incorporated by reference to Exhibit 3.10 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2002, S.E.C. File Number 001-16043.)
4.1 Stockholders' Rights Agreement dated as of July 27, 1995, between
Alteon Inc. and Registrar and Transfer Company, as Rights Agent.
(Incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, S.E.C.
File Number 001-16043.)
4.2 Amendment to Stockholders' Rights Agreement dated as of April 24,
1997, between Alteon Inc. and Registrar and Transfer Company, as
Rights Agent. (Incorporated by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K filed on May 9, 1997, S.E.C.
File Number 000-19529.)
4.3 Registration Rights Agreement dated as of April 24, 1997, between
Alteon Inc. and the investors named on the signature page thereof.
(Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on May 9, 1997, S.E.C. File Number
000-19529.)
4.4 Form of Common Stock Purchase Warrant. (Incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K filed on May
9, 1997, S.E.C. File Number 000-19529.)
4.5 Amendment to Stockholders' Rights Agreement dated as of December 1,
1997, between Alteon Inc. and Registrar and Transfer Company, as
Rights Agent. (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on December 10, 1997,
S.E.C. File Number 000-19529.)
4.6 Registration Rights Agreement dated September 29, 2000.
(Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on October 5, 2000, S.E.C. File Number
001-16043.)
21
4.7 Form of Series 1 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form 8-K
filed on October 5, 2000, S.E.C. File Number 001-16043.)
4.8 Form of Series 2 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.3 to the Company's Current Report on Form 8-K
filed on October 5, 2000, S.E.C. File Number 001-16043.)
4.9 Notice of Appointment, dated August 29, 2002, of The American Stock
Transfer & Trust Company as successor Rights Agent, pursuant to
Stockholders' Rights Agreement dated as of July 27, 1995.
(Incorporated by reference to Exhibit 4.4 of the Company's Report on
Form 10-Q filed on November 13, 2002, S.E.C. File Number 001-16043.)
10.1+ Letter Agreement dated June 5, 2003, between Alteon Inc. and Robert
C. deGroof, Ph.D. amending Amended and Restated Employment Agreement
dated as of May 5, 2003.
10.2+ Letter Agreement dated June 5, 2003, between Alteon Inc. and Judith
S. Hedstrom amending Employment Agreement dated as of February 11,
2002.
10.3+ Letter Agreement dated June 5, 2003, between Alteon Inc. and
Elizabeth O'Dell amending Employment Agreement dated as of October
21, 2000.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
-------------
+ Denotes a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 6(a) of this Form 10-Q.
22