SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 31, 2001
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from______________ to ______________
Commission file number 000-31191
THE MEDICINES COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 04-3324394
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 SYLVAN WAY, SUITE 200
PARSIPPANY, NEW JERSEY 07054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 656-1616
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of voting Common Stock held by non-affiliates
of the registrant was $224,188,562 based on the last reported sale price of the
Common Stock on the Nasdaq National Market on March 27, 2002.
Number of shares of the registrant's class of Common Stock outstanding as
of March 27, 2002: 34,757,701.
DOCUMENTS INCORPORATED BY REFERENCE:
Document Description 10-K Part
-------------------- ---------
Portions of the Registrant's Proxy Statement for Part III
the 2002 Annual Meeting of Stockholders
THE MEDICINES COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
Part I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 19
Item 3. Legal Proceedings.............................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............................................ 19
Executive Officers and Key Employees............................................................................. 19
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 21
Item 6. Selected Financial Data........................................................................ 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................................. 23
Item 7A. Quantitative and Qualitative Disclosure About Market Risk...................................... 34
Item 8. Financial Statements and Supplementary Data.................................................... 35
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................................... 35
Part III
Item 10. Directors and Executive Officers of the Registrant............................................. 35
Item 11. Executive Compensation......................................................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters............................................................................ 35
Item 13. Certain Relationships and Related Transactions................................................. 35
Part IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K......................................... 35
Signatures....................................................................................................... 37
PART I
ITEM 1. BUSINESS
OVERVIEW
We operate as a pharmaceutical company selling and developing products for the
treatment of hospital patients. We acquire, develop and commercialize
biopharmaceutical products that are in late stages of development or have been
approved for marketing. We began selling Angiomax, our lead product, in U.S.
hospitals in January 2001 as an anticoagulant replacement for heparin, selling
$14.2 million of Angiomax in 2001. In December 2000, we received marketing
approval from the United States Food and Drug Administration, or FDA, for
Angiomax for use as an anticoagulant in combination with aspirin in patients
with unstable angina undergoing coronary balloon angioplasty. Coronary balloon
angioplasty is a procedure that is used to restore normal blood flow in an
obstructed artery in the heart.
Our hospital sales force of 85 people targets approximately 750 hospitals in the
United States that perform 200 or more coronary angioplasties per year. We are
seeking to broaden Angiomax sales using educational programs, preceptorships in
leading medical centers, publications, clinical trials and support for
investigator-initiated studies. We plan to leverage our sales presence in these
hospitals by expanding the uses of Angiomax beyond the cardiac catheterization
laboratory into the operating room and for the emergency treatment of ischemic
heart disease patients, and by seeking to acquire and develop additional
pharmaceutical products that our hospital sales force can sell. In 2002, we
acquired rights from AstraZeneca AB to clevidipine, an intravenous compound for
the short term control of high blood pressure, for which Phase 3 clinical trials
are planned.
We are developing Angiomax for additional potential hospital applications as a
procedural anticoagulant and for use in the treatment of ischemic heart disease,
a condition which occurs when organs receive an inadequate supply of oxygen as a
result of decreased blood flow. As of March 15, 2002, clinical investigators had
administered Angiomax to approximately 14,000 patients in clinical trials in the
treatment and prevention of blood clots in a wide range of hospital
applications. We believe that Angiomax can become the leading replacement for
heparin in hospital care. In the United States, heparin is the most widely-used
acute care anticoagulant and is used to treat over seven million hospitalized
patients per year.
Angiomax directly blocks or inhibits the actions of thrombin, a key component in
the formation and growth of blood clots. Thrombin is a factor central to the
clotting process because it plays an essential role in the formation of fibrin,
a protein that forms the mesh of a blood clot, and because thrombin is a potent
activator of platelets which clump around fibrin as a blood clot forms. By
blocking thrombin directly, rather than indirectly like heparin, Angiomax
inhibits the actions of thrombin both in the clot and in the blood. The
inhibition of thrombin by Angiomax is reversible, which means that its
thrombin-blocking effect wears off over time, allowing thrombin to again work in
the clotting process. This reversibility is associated with a reduced risk of
bleeding.
In clinical trials in angioplasty, Angiomax has:
- reduced the frequency of life-threatening coronary events including
heart attack and the need for emergency coronary procedures;
- reduced the likelihood of major bleeding and the need for blood
transfusion;
- demonstrated a predictable anticoagulant response to a specific
Angiomax dose, which enables simplified dosing; and
- been used in combination with GP IIb/IIIa inhibitors and other
products used in angioplasty, demonstrating no evidence of
significant interactions.
Our strategy is to build a commercial biopharmaceutical operation by acquiring,
developing and commercializing development-stage or approved products that make
a clinical difference to hospitalized patients. In acquiring development-stage
products, we seek to acquire late-stage products with
(1) existing clinical data which provides reasonable evidence of safety and
efficacy, (2) an anticipated time to market of four years or less and (3)
potential cost savings to payors or improved efficiency of patient care.
ANGIOMAX
Overview
In December 2000, we received marketing approval from the FDA for Angiomax for
use as an anticoagulant in combination with aspirin in patients with unstable
angina undergoing coronary balloon angioplasty. We began selling Angiomax in the
United States in January 2001. In September 1999, Angiomax was approved in New
Zealand for use in the treatment of patients undergoing coronary balloon
angioplasty.
We believe Angiomax will be a valuable replacement to heparin, an anticoagulant
used in almost all angioplasty procedures performed in the United States, used
in most major cardiac and vascular surgical procedures in the United States and
administered to a majority of patients treated in hospitals in the United States
for acute coronary syndromes, including heart attack. As of March 15, 2002,
clinical investigators had administered Angiomax to approximately 14,000
patients in clinical trials for the treatment and prevention of blood clots in a
wide range of hospital applications. In clinical trials in angioplasty, use of
Angiomax compared to heparin has resulted in fewer life-threatening coronary
events and fewer bleeding events, including a reduction in the need for blood
transfusion. The therapeutic effect of Angiomax is more predictable than
heparin, which enables simplified dosing. The therapeutic benefit of Angiomax is
strongest in high-risk patients who have previously experienced a heart attack
or unstable angina.
We believe that Angiomax has additional potential applications for the treatment
of ischemic heart disease and for use as a procedural anticoagulant. At present,
we:
- are conducting a randomized double blind Phase 3b/4 trial program in
angioplasty comparing Angiomax with the provisional use of
a GP IIb/IIIa inhibitor, at the choice of the physician, to heparin
plus a GP IIb/IIIa inhibitor;
- are conducting a Phase 3 trial program studying the use of Angiomax
in the treatment of patients undergoing angioplasty who experience
reduced platelet count and clotting due to an immunological reaction
to heparin, known as heparin-induced thrombocytopenia and
heparin-induced thrombocytopenia and thrombosis syndrome, or
HIT/HITTS;
- are conducting a Phase 2 trial program studying the use of Angiomax
as an anticoagulant in patients undergoing coronary artery bypass
graft surgery, or CABG, without the use of a bypass pump;
- plan to commence a Phase 3 trial program to study the use of
Angiomax in HIT/HITTS patients undergoing CABG, with and without the
use of a bypass pump;
- plan to commence a randomized Phase 3 trial program to study the
use of Angiomax in emergency patients for whom angioplasty is
planned and who are at high risk due to a heart attack or unstable
angina; and
- plan to commence a Phase 2 trial program in prematurely born
babies with active thrombosis.
Through the Angiomax Foundation Program we are also supporting
investigator-initiated studies of Angiomax in angioplasty patient groups where
the clinical and economic limitations of heparin are likely to be most
significant.
Background
Clotting. Normally, blood loss at the site of an injury is limited by the
formation of blood clots, or thrombosis. In general, clotting serves a
life-saving function by reducing bleeding, but sometimes unwanted clots in
arteries can lead to heart attack, stroke or organ failure. A blood clot is a
collection of cross-linked strands of a protein called
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fibrin that forms a mesh around activated platelets and red blood cells. Blood
clots are formed through precisely regulated interactions among the blood vessel
wall, plasma clotting factors, including thrombin and fibrinogen, and platelets.
The trigger for the clotting process in an artery is typically a tearing or
spontaneous rupture which exposes cholesterol and fat deposited on a blood
vessel wall to the bloodstream. This may happen without an apparent cause or may
be caused as a direct result of, for example, an angioplasty procedure. In
parallel, the clotting factor, thrombin, is activated, and a thin protective
layer of platelets is deposited at the rupture site. Thrombin activates
platelets, thrombin and platelets interact, and thrombin formation, fibrin
formation and platelet clumping take place. A full-blown clot may form rapidly.
As a clot blocks the blood vessel it may then cut off blood supply to the heart
muscle, to the brain or to other organs. If a clot blocks blood supply to the
heart muscle, the muscle stops working either in part, which is a heart attack,
or myocardial infarction, or completely, which may lead to cardiac arrest as the
heart stops beating. This may result in irreversible damage to the heart or
death.
During medical procedures such as coronary angioplasty, the blood clotting
process must be slowed to avoid unwanted clotting in the coronary artery, and
the potential growth or movement of a clot along blood vessels to new sites.
The trigger for clotting in veins is usually slower than that in arteries. In
general, venous clots are caused by slow blood flow, which typically occurs when
patients are immobilized, such as after surgery and during pregnancy, or when
patients experience changes in the blood as a result of diseases such as cancer.
When a clot develops in large, deep veins, which return blood to the heart by
way of the lungs, this condition is referred to as deep vein thrombosis. In some
cases of deep vein thrombosis, part of the clot may break off and move to the
lungs with potentially fatal results.
Anticoagulation Therapy. Anticoagulation therapy attempts to modify actions of
the components in the blood system that cause clot-forming factors leading to
blood clots. The most important approach to the prevention and management of
arterial and venous clots is diet and exercise. When the risks of clot formation
cannot be avoided, or when medical procedures such as angioplasty almost
guarantee some degree of increased risk of clots, anticoagulation therapy is
indicated. Anticoagulation therapy involves the use of drugs to inhibit one or
more components of the clotting process, thereby reducing the risk of clot
formation. Anticoagulation therapy is usually started immediately after a
diagnosis of blood clots or after risk factors for clotting are identified.
Because anticoagulation therapy reduces clotting, it also may cause excessive
bleeding.
To date, three principal components of the clotting process, thrombin, fibrin
and platelets, have been targeted for anticoagulation therapy:
- The actions of thrombin in the clotting process may be inhibited by
indirect thrombin inhibitors, such as heparin, which act to turn off
coagulation factors and turn on natural anti-clotting factors such
as antithrombin-III, or AT-III. The actions of thrombin in the
clotting process also may be inhibited by direct thrombin
inhibitors, which act directly on thrombin. Because thrombin
activates platelets, direct thrombin inhibitors also prevent
platelet clumping.
- Fibrin may be dissolved after clotting has occurred by products
called fibrinolytics.
- The aggregation of platelets in the clotting process may be
inhibited by products called platelet inhibitors, which act on
different pathways, including specific enzyme pathways like the
cyclo-oxygenase and the adenosine diphosphate, or ADP, pathways and
surface sites like the GP IIb/IIIa receptor.
Drugs are currently used alone or in combination with other anticoagulant
therapy to target one or more components of the clotting process. These drugs
have anticoagulant effects but also increase the patient's risk of bleeding due
to the high doses needed to produce anticoagulant effects. In order to reduce
this risk, physicians increasingly use combinations of drugs targeted at
different components of the clotting process at lower doses, which reduce the
risk of thrombosis while minimizing the risk of bleeding.
- 3 -
Indirect Thrombin Inhibitors. In the hospital environment, most patients
undergoing anticoagulation therapy for the prevention and treatment of arterial
and venous thrombosis receive heparin or low molecular weight heparin. In the
United States, over seven million hospitalized patients annually receive
heparin. Heparin is a standard component of acute anticoagulation therapy
because of the central role of thrombin in the clotting process and heparin's
rapid anticoagulant effect.
Heparin's properties as an anticoagulant were discovered in 1916. It is prepared
from the intestines of pigs or cows. Heparin is a complex mixture of
animal-derived sugars with variable anticoagulant potencies. The anticoagulant
effects of heparin on any given patient are difficult to predict because heparin
binds non-specifically to human cells and circulating substances in the blood.
For these and other reasons, heparin, as a non-specific, indirect thrombin
inhibitor, presents a variety of clinical challenges including:
- Weak effect in clots. Because it is an indirect thrombin inhibitor,
heparin is ineffective on thrombin when clots have formed.
- Activates platelets. Heparin has been shown to enhance the clumping
of platelets in unstable angina patients.
- Risk of bleeding. Patients who receive heparin have a high incidence
of bleeding. This is particularly the case with patients who are
elderly, female or have low body weight. Recent clinical trials have
shown that bleeding risk may also be increased when heparin is used
in combination with intravenous platelet inhibitors.
- Unpredictability. The anticoagulant effect of a given dose of
heparin is unpredictable and therefore requires close monitoring.
- Adverse reaction risk. Heparin can cause HIT/HITTS, a dangerous
immunological reaction.
- Diminished effect in sick patients. Heparin's effect may be reduced
in the presence of blood factors found in patients stressed by
disease, such as heart attack patients.
- Requires other factors for effect. Heparin can only bind to thrombin
by first binding to a blood factor called antithrombin-III, which
may be absent or present in insufficient amounts in some patients.
Antithrombin-III deficiency is often severe or unpredictable in
infants and children.
- Limitations in patients with impaired kidney function. Heparin is
dependent on the kidney for clearance from the body. Among patients
with impaired kidney function, unpredictability in the dosing of
heparin leads to an excess in bleeding and thrombotic risk. Because
kidney disease is associated with ischemic heart disease, these
limitations of heparin are clinically important in patients
undergoing angioplasty.
Physicians are increasingly using low molecular weight heparins as an
alternative to heparin, especially as chronic therapy. In contrast to heparin,
low molecular weight heparins tend to be more specific in their effect and may
be administered once or twice daily by subcutaneous injection on an outpatient
basis. Despite these advantages, low molecular weight heparins exhibit similar
clinical challenges to those of heparin, including a weak effect in a clot that
has already formed and a comparable risk of bleeding. In addition, clinicians
are currently unable to monitor the anticoagulant effects of low molecular
weight heparins, making their use in angioplasty problematic.
Angiomax Potential Advantages
Angiomax is a synthetic peptide of 20 amino acids that is a quick-acting, direct
and specific inhibitor of thrombin and is administered by intravenous injection.
Angiomax is specific in that it only binds to thrombin and does not bind to any
other blood factors or cells.
- 4 -
Angiomax was engineered based on the biochemical structure of hirudin, a natural
65-amino acid protein anticoagulant. However, Angiomax is reversible while
hirudin is not. This reversibility is associated with a reduced risk of
bleeding.
Angiomax has numerous clinical advantages over heparin including:
- Effective in clots. Angiomax, as a direct thrombin inhibitor, is
equally effective on thrombin in the clot as well as thrombin
circulating in the blood;
- Inhibits platelets. Angiomax directly inhibits thrombin which is a
potent activator of platelets;
- Reduced bleeding risk. As a reversible thrombin inhibitor, Angiomax
has consistently shown clinically meaningful reductions in bleeding
as compared to heparin;
- Predictability. A specified dose of Angiomax results in a
predictable level of anticoagulation;
- Diminished adverse reaction risk. To date, Angiomax has not caused
dangerous immunological reactions in clinical trials;
- Effective in sick patients. Angiomax is effective even in the
presence of blood factors found in patients stressed by disease,
such as heart attack patients;
- Independent of other factors for effect. Unlike heparin, Angiomax's
effect does not require the presence of AT-III or any other factors
to act on thrombin; and
- Predictable and effective in patients with impaired kidney function.
As a direct and reversible thrombin inhibitor, Angiomax can be
administered reliably in patients with impaired kidney function,
resulting in reduced thrombotic and bleeding complications as
compared to heparin.
Angiomax Potential Applications
We believe that Angiomax will become the leading replacement for heparin in
acute cardiovascular care. We are commercializing Angiomax first for use in
patients undergoing coronary angioplasty. In addition, we are developing
Angiomax for use as an alternative to heparin as a procedural anticoagulant
and for the hospital treatment of acute coronary syndromes. At present we have a
Phase 3b/4 trial called REPLACE-2 underway in angioplasty, a Phase 3 angioplasty
trial underway in HIT/HITTS, a Phase 2 trial underway in CABG without the use of
a bypass pump and plans to study the use of Angiomax in high risk emergency
patients for whom angioplasty is planned, in HIT/HITTS patients undergoing CABG
and in prematurely born babies with active thrombosis. Our development plan is
designed to highlight the clinical benefits of Angiomax initially in broad
patient populations who are being treated with heparin and are at high risk of
clots, bleeding or immunological reactions. We are also investigating other
applications of Angiomax as an acute care product.
Use of Angiomax in Angioplasty
Angioplasty. Angioplasty is a procedure involving the inflation of a balloon or
deployment of a stent or other device inside an obstructed artery to restore
normal blood flow. The coronary angioplasty procedure itself increases the risk
of coronary clotting, potentially leading to myocardial infarction, or MI, CABG,
or death.
Based on hospital reimbursement data, in the United States in 2000 there were
approximately 1,867,000 patients undergoing a procedure in a cardiac
catheterization laboratory, including 813,000 coronary angioplasty patients. We
believe that approximately forty-two to fifty percent of patients undergoing
angioplasty were admitted through the emergency room and may be categorized as
high risk. Many of these high-risk patients have previously experienced a heart
attack or have unstable angina.
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To prevent clotting, anticoagulation therapy is routinely administered to
patients undergoing angioplasty. Heparin is currently used as an anticoagulant
in virtually all patients undergoing angioplasty. In addition, platelet
inhibitors such as aspirin, an ADP inhibitor or a GP IIb/IIIa inhibitor are
often administered.
A segment of patients undergoing angioplasty and receiving anticoagulation
therapy are at risk of significant bleeding. For example, bleeding risk is
greater for patients who are elderly, female or underweight. Many patients
undergoing angioplasty have impaired kidney function, making the use of heparin
problematic.
Angiomax Clinical Experience in Angioplasty. We and the licensor of Angiomax,
Biogen, have conducted or are conducting clinical trials of Angiomax in over
7,700 patients undergoing angioplasty. These trials have shown that Angiomax is
a predictable anticoagulant, which can be used in combination with other
therapies and which results in fewer adverse clinical events when compared to
heparin.
A total of 6,134 patients have been treated in Angiomax trials completed in
angioplasty. These trials have included patients treated with a variety of
platelet inhibitors and patients in whom stents have been deployed. When
measured seven days after treatment in the hospital, in comparison to
heparin-treated patients in the trials, Angiomax-treated patients experienced:
- 43% fewer clinical events as measured by death, MI,
revascularization procedures or major bleeding;
- 24% fewer ischemic events as measured by death, revascularization or
MI; and
- 63% less bleeding.
The following table summarizes the combined clinical results for these patients.
ANGIOMAX HEPARIN P-VALUE*
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Number of patients................................. 3,277 2,857
In hospital up to 7 days
Death, MI, revascularization or major bleeding... 7.4% 13.0% (less than) 0.0001
Death, MI or revascularization................... 5.7% 7.5% 0.0034
Death or MI...................................... 3.4% 4.4% 0.0445
Revascularization................................ 3.3% 4.8% 0.0022
Major bleeding................................... 2.8% 7.6% (less than) 0.0001
------------------
* The statistical significance of clinical results is determined by a
widely-used statistical method that establishes the p-value of clinical
results. For example, a p-value of less than 0.01 (p(less than)0.01) means
that the chance of the clinical results occurring by accident is less than
1 in 100.
CACHET-B/C Trials in Angioplasty. In February 2000, we completed the CACHET-B/C
study, a 210 patient randomized, multicenter study, in angioplasty. The trial
analyzed the use of Angiomax versus low-dose heparin. All heparin patients also
received ReoPro, a GP IIb/IIIa inhibitor. Although Angiomax patients could
receive ReoPro under certain circumstances, physicians in the trial opted not to
use ReoPro in 76% of the Angiomax patients.
The CACHET-B/C patient study population was broader than in earlier Angiomax
trials, targeting lower risk patients undergoing angioplasty with expected
stenting. Heparin and Angiomax doses were designed to achieve similar levels of
anticoagulation. Aspirin with Ticlid or Plavix were used as platelet inhibitors
in most patients. As in previous trials, Angiomax provided predictable levels of
dose response anticoagulation.
The combined incidence of death, MI, revascularization or major bleeding
reported within seven days was 3.5% in Angiomax patients and 14.3% in heparin
and ReoPro patients with a p-value of 0.013.
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Low platelet count, or thrombocytopenia, was significantly less frequent among
Angiomax patients than among heparin/ReoPro patients with a p-value of 0.012.
Other adverse events occurred with similar frequency in both groups. Angiomax
showed no apparent pharmacological interaction with ReoPro.
The results of the CACHET-B/C study provide support for the use of Angiomax as a
foundation anticoagulant for angioplasty. In this study, Angiomax demonstrated
predictable reversible anticoagulation and improved net clinical benefit over
heparin. In addition, by decreasing major bleeds and reducing the need for
revascularization and drug costs, we believe that, on average, substantial cost
savings are possible for hospitals treating patients with Angiomax.
REPLACE-2 Trial in Angioplasty. In November 2001, we commenced the REPLACE-2
trial, which is a randomized double blind study in at least 6,000 patients who
have been referred for angioplasty in 200 to 300 sites in the United States and
eight other countries. REPLACE-2 includes two randomized arms:
- heparin with a GP IIb/IIIa inhibitor; and
- Angiomax with the provisional use of a GP IIb/IIIa inhibitor at the
choice of the physician.
We plan to complete the REPLACE-2 trial in 2002.
Angiomax Commercial Operations in Angioplasty. We are selling Angiomax in the
United States with a hospital sales force of 85 people. We began selling
Angiomax in the United States in January 2001 using a sales force of 52 people
contracted from Innovex, Inc., which we managed. In October 2001 we terminated
our agreement with Innovex, hired members of the Innovex sales force as our
employees and increased the size of our sales force.
We are focusing our Angiomax marketing efforts on interventional cardiologists
and other key clinical decision-makers. Our sales force has been configured to
target the approximately 750 hospitals with cardiac catheterization laboratories
in which most of the angioplasty procedures in the United States are performed.
We expect Angiomax to provide cost savings to medical decision-makers who use
Angiomax as part of a safe and effective anticoagulant therapy. Many United
States hospitals receive a fixed reimbursement amount for the angioplasties they
perform. Because this amount is not based on the actual expenses the hospital
incurs, the use of Angiomax has the potential to reduce a hospital's cost of
treating an angioplasty patient by reducing bleeding and ischemic events and
reducing the need for other treatment therapies. From 1995 to 1997, the
incremental costs to a hospital averaged the following: approximately $12,000
for an angioplasty patient receiving a 2-unit transfusion; approximately $4,000
for revascularization in the form of a repeat angioplasty; and approximately
$17,000 for an angioplasty patient revascularized by means of coronary artery
bypass graft surgery. Our pricing structure for Angiomax is designed to provide
hospitals with cost savings based on reductions in clinical events, reductions
in the use of other drugs, reductions in length of hospital stay, reduced need
for lab tests and earlier patient ambulation.
If Angiomax is approved for use in other indications, we intend to market
Angiomax for these indications in the United States by supplementing our
commercial organization, or by collaborating with other biopharmaceutical
companies.
We plan to market, sell and distribute Angiomax outside of the United States
through commercial partners. At present we have distribution agreements for
Angiomax covering 59 countries. We have entered into an exclusive collaboration
with Nycomed Danmark A/S for the distribution of Angiomax in 35 countries,
including 12 countries in the European Union. We have also entered into a
collaboration agreement with Grupo Ferrer Internacional for the registration,
distribution and promotion of Angiomax in Spain, Portugal, Greece and eighteen
Latin America markets including Argentina, Brazil and Mexico. We have entered
into similar agreements with Medison Pharma Ltd. in Israel and Palestine and
with CSL Limited in Australia.
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Use of Angiomax in the Operating Room
Heparin is used widely as a procedural anticoagulant in major surgical
procedures. Heparin is often unpredictable in its effect in these patients and
frequently must be reversed with a protamine, a reversal agent. In addition,
many surgery patients develop antibodies to heparin partly as a result of their
exposure to heparin.
Based on hospital reimbursement data, in the United States in 2000 there were
approximately 1,350,000 patients undergoing major cardiac or vascular surgical
procedures, including 520,000 patients undergoing CABG and 347,000 patients
undergoing vascular bypass surgery.
We have initiated a 100 patient Phase 2 trial of Angiomax comparing Angiomax to
heparin in patients undergoing off pump CABG. The trial was initiated in
November 2000 and 90 patients had been enrolled in the trial as of March 15,
2002. We plan to commence a Phase 3 trial program to study the use of Angiomax
in HIT/HITTS patients undergoing CABG, with and without the use of a bypass
pump.
Use of Angiomax in Acute Coronary Syndromes
Ischemic heart disease patients are subject to severe episodes often resulting
in hospitalization that range from unstable angina to acute myocardial
infarction. These severe episodes are collectively referred to as acute coronary
syndromes.
Unstable angina is a condition in which patients experience the new onset of
severe chest pain, increasingly frequent chest pain or chest pain that occurs
while they are resting. Unstable angina is caused most often by a rupture of
plaque on an arterial wall that ultimately decreases coronary blood flow but
does not cause complete blockage of the artery. Unstable angina is often treated
in hospitals with anticoagulation therapy that may include aspirin, indirect
thrombin inhibitors such as heparin or low molecular weight heparin and GP
IIb/IIIa inhibitors. Many unstable angina patients undergo angioplasty or CABG.
Acute myocardial infarction, or AMI, is a leading cause of death. AMI occurs
when coronary arteries, which supply blood to the heart, become completely
blocked by a clot. AMI patients are routinely treated with heparin, with and
without fibrinolytics. Heart attack patients are increasingly undergoing
angioplasty as a primary treatment to unblock clogged arteries.
Based on hospital reimbursement data, in the United States in 2000 there were
approximately 1,882,000 patients hospitalized for acute coronary syndromes,
including 900,000 unstable angina patients and 982,000 patients with heart
attacks of varying severity.
Angiomax Clinical Experience in AMI. We and Biogen have conducted clinical
trials comparing Angiomax and heparin in over 17,600 AMI patients. Three Phase 2
trials demonstrated that use of Angiomax resulted in normal blood flow in at
least 34% more patients than heparin and resulted in substantially less bleeding
and the need for fewer transfusions than heparin.
In 2001, we completed a 17,000 patient Phase 3 clinical trial in AMI in 46
countries. In this Phase 3 trial, which we refer to as the HERO-2 trial, AMI
patients received Angiomax or heparin prior to treatment with a fibrinolytic.
All patients received aspirin and Streptase, a fibrinolytic. Two previous trials
using high doses of hirudin in patients including heart attack patients had been
stopped early because of excessive bleeding in the hirudin patients. Clinical
results were assessed 30 days after treatment or in the hospital. The trial
assessed second heart attacks, or reinfarction, based on both adjudication by a
panel of experts and direct observation by the sites in the trial. In comparison
to heparin-treated patients in the trials, Angiomax-treated patients
experienced:
- no significant difference in mortality, the primary endpoint of the
trial;
- 22% fewer second heart attacks; and
- no significant difference in hemorrhagic stroke and transfusions.
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The following table summarizes the results for all patients in the HERO-2 trial.
ANGIOMAX HEPARIN P-VALUE*
-------- ------- --------
Number of patients................................. 8,516 8,557
At 30 days
Death............................................ 10.5% 10.9% 0.443
In hospital
Adjudicated reinfarction......................... 2.8% 3.6% 0.004
Site determined reinfarction..................... 3.5% 4.5% 0.001
Hemorrhagic stroke............................... 0.6% 0.4% 0.09
Transfusions..................................... 1.4% 1.1% 0.11
Higher rates of bleeding in the Angiomax patients in the trial resulted in part
from higher administered levels of anticoagulation in the Angiomax patients.
When the data were adjusted for the level of anticoagulation, Angiomax patients
experienced lower severe bleeding rates than the heparin patients.
Angiomax Clinical Experience in Unstable Angina. We and Biogen have completed
five Phase 2 trials of Angiomax in patients with unstable angina or who had
experienced a less serious form of MI known as non Q-wave MI. These trials
enrolled a total of 630 patients, of whom 553 received various doses of
Angiomax. These studies have demonstrated that Angiomax is an anticoagulant
which can be administered safely in patients with unstable angina.
The largest of these Phase 2 trials was a multicenter, double blind,
placebo-controlled and randomized study in 410 patients with unstable angina or
who had experienced non Q-wave MI. The trial compared the effect of three active
dose levels and one placebo dose level of Angiomax with respect to death, MI,
recurrent angina and major bleeding. Angiomax demonstrated a significant
correlation between dose and anticoagulant effect.
In comparison to 160 patients treated with placebo doses in the trial, 250
patients treated with active doses of Angiomax experienced:
- a 68% reduction in death or MI in hospital with a p-value equal to
0.009; and
- a 59% reduction in death or MI after six weeks with a p-value equal
to 0.014.
Biogen commenced a Phase 3 trial in 1994, the TIMI-8 trial, in unstable angina
patients comparing Angiomax to heparin. The trial was discontinued after
enrolling 133 patients when Biogen discontinued the Angiomax development
program. Analysis of the data from the discontinued study showed the combined
incidence of death, MI, or major bleeding reported in hospital within fourteen
days of admission was 2.9% in Angiomax patients and 13.8% in heparin patients
with a p-value of 0.03.
We have plans to commence a randomized Phase 3 trial program to study the use of
Angiomax in emergency patients for whom angioplasty is planned and who are at
high risk due to a heart attack or unstable angina.
Other Indications
We and Biogen have conducted a number of additional clinical trials of Angiomax
for other indications.
HIT/HITTS. Approximately one to three percent of patients who have received
heparin for seven to 14 days experience a condition known as HIT/HITTS. The
underlying mechanism for the condition appears to be an immunological response
to a complex formed by heparin and another factor, resulting in the lowering of
platelet counts, commonly referred to as thrombocytopenia, and in some cases in
arterial or venous clotting, which may
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result in death or the need for limb amputation. Because further administration
of heparin is not possible, an alternative anticoagulant is necessary.
Prior to 1997, Angiomax was administered to a total of 39 HIT/HITTS patients
undergoing angioplasty requiring anticoagulation for invasive coronary
procedures or treatment of thrombosis. For those patients undergoing angioplasty
and other procedures, Angiomax provided adequate anticoagulation, was well-
tolerated and rarely resulted in bleeding complications.
Based upon the encouraging data in the 39 patients previously treated, we are
currently enrolling patients in a Phase 3 trial designed to evaluate the use of
Angiomax for treatment of HIT/HITTS patients undergoing angioplasty. As of March
15, 2002, the trial had enrolled 27 patients and planned to enroll 50 patients
in total. We plan to commence a Phase 3 trial program in HIT/HITTS patients
undergoing CABG, with and without the use of a bypass pump.
Antithrombin-III deficiency. Heparin can only bind to thrombin by first binding
to a blood factor called AT-III, which may be absent or present in insufficient
amounts in some patients. AT-III deficiency is often severe or unpredictable in
infants and children, making cardiovascular surgery and other procedures
especially difficult. We plan to commence a Phase 2 trial program in prematurely
born babies with active thrombosis.
Deep Venous Thrombosis. Thirty-one patients with clots in the veins in their
legs and 222 patients undergoing orthopedic surgical procedures were treated
with Angiomax in two open-label, dose-ranging Phase 2 trials in 1990. Both
studies established that Angiomax was an active and well-tolerated anticoagulant
and that the anticoagulant effects correlated with the dose of Angiomax.
Regulatory Status
In December 2000, we received approval from the FDA for the use of Angiomax in
combination with aspirin in patients with unstable angina undergoing coronary
balloon angioplasty. In connection with this approval, the FDA has required us
to complete our ongoing trial evaluating the use of Angiomax for the treatment
of HIT/HITTS patients undergoing angioplasty. Angiomax is intended for use with
aspirin and has been studied only in patients also receiving aspirin. We have
received approval to market Angiomax stored at controlled room temperature as
well as at refrigerated temperatures, which allows stocking of Angiomax in
cardiac catheterization laboratories and other parts of a hospital that do not
have refrigerators.
In February 1998, we submitted a Marketing Authorization Application, or MAA, to
the European Agency for the Evaluation of Medicinal Products, or EMEA, for use
in unstable angina patients undergoing angioplasty. Following extended
interaction with European regulatory authorities, the Committee of Proprietary
Medicinal Products, or CPMP, of the EMEA voted in October 1999 not to recommend
Angiomax for approval in angioplasty. The United Kingdom and Ireland dissented
from this decision. We have withdrawn our application to the EMEA and plan to
resubmit an MAA with the results of the REPLACE-2 program if positive.
Angiomax was approved in New Zealand in September 1999 for use as an
anticoagulant in patients undergoing angioplasty, and we began selling Angiomax
in New Zealand in June 2000. We have submitted an application in Canada and
Israel to market Angiomax for use in unstable angina patients undergoing
angioplasty and are in active dialogue with Canadian and Israeli regulators.
During 2002, we plan to file applications for marketing authorization in
angioplasty in Australia and in several Latin American countries including
Brazil and Mexico.
CLEVIDIPINE
In March 2002, we entered into a study and exclusive option agreement with
AstraZeneca AB relating to the licensing, development and commercialization of
clevidipine, an intravenous compound for the short term control of high blood
pressure, for which Phase 3 clinical trials are planned. Blood pressure control
is frequently important in patients undergoing surgery or other interventional
procedures in hospital. These patients are often treated with multiple
medications, which tends to increase the duration of the patient's stay in the
intensive care units. We plan to investigate the potential of clevidipine to
simplify and improve the treatment of these patients.
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Clevidipine belongs to a well-known class of drugs called calcium channel
inhibitors which are used to reduce high blood pressure. Clevidipine acts by
selectively relaxing the smooth muscle cells that line small arteries,
resulting in widening of the artery opening, and reduction of blood pressure
within the artery. Unlike some other blood pressure reducing agents, including
some other calcium channel inhibitors, clevidipine does not appear, based on
animal studies, to have effects on muscles of the heart or the veins, has not
been associated with quickening of the heart rate, and has been shown to improve
the pumping performance of the heart.
Prior to our acquisition of Clevidipine, AstraZeneca conducted Phase 2 clinical
trials of clevidipine. These clinical trials demonstrated that clevidipine acts
to reduce blood pressure almost immediately after intravenous infusion.
Clevidipine is metabolized rapidly by enzymes in the blood, which results in the
drug being cleared from the blood stream in a short period of time. Therefore
the effects of clevidipine are short-lived, and in clinical trials it has been
possible to demonstrate reductions in blood pressure that are dose-dependent and
that cease rapidly after stopping clevidipine infusions.
In double-blind placebo controlled trials among patients undergoing cardiac
surgery, clevidipine has been shown to cause a significant reduction in blood
pressure. The following table summarizes the results of the largest clinical
trial of clevidipine to date.
TABLE: COMPARISON OF CLEVIDIPINE WITH PLACEBO FOR REDUCTION IN BLOOD PRESSURE
AMONG 91 PATIENTS UNDERGOING CARDIAC SURGERY
CLEVIDIPINE DOSE NUMBER OF RESPONDERS (%)
MICROGRAMS/KILOGRAM/ TOTAL
MINUTE VS. PLACEBO PATIENTS YES NO P-VALUE
------------------ -------- --- -- -------
Placebo 11 0 (0) 11 (100) 0.50
0.05 11 1 (9) 10 (91) 0.067
0.18 13 4 (31) 9 (69) 0.067
0.32 10 6 (60) 4 (40) 0.004
1.37 12 9 (75) 3 (25) (Less than)0.001
3.19 20 19 (95) 1 (5) (Less than)0.001
9.58 14 14 (100) 0 (0) (Less than)0.001
We believe that attributes of clevidipine demonstrated in clinical trials to
date, namely rapid, titratable onset of effect on blood pressure, simple
preparation and administration, arterial selectivity and rapid metabolism and
elimination, could potentially benefit patients with high blood pressure
undergoing surgical procedures and patients with severely elevated blood
pressure that requires rapid reduction.
We expect to commence Phase 3 studies of clevidipine in these clinical
situations in 2002. We plan to study clevidipine in patients undergoing CABG. We
believe that clevidipine can be efficiently sold by our hospital sales force to
hospital customers, including Angiomax customers, when and if clevidipine is
approved for sale by the FDA and corresponding foreign regulatory authorities.
CTV-05
In 1999, we acquired from GyneLogix, Inc. exclusive worldwide rights to CTV-05,
a strain of bacteria under clinical investigation for a broad range of
applications in the areas of gynecological and reproductive health. We entered
into a clinical trial agreement with the National Institutes of Allergy and
Infectious Diseases, a division of the National Institutes of Health, commonly
referred to as NIH, to conduct a Phase 2 trial of CTV-05, a proprietary
biotherapeutic agent for the treatment of bacterial vaginosis, or BV. BV, the
most common gynecological infection in women of childbearing age, is an
imbalance of naturally occurring organisms in the vagina.
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BV develops when certain bacteria normally present in the vagina in low levels
multiply to infectious levels. BV is associated with serious health risks such
as pelvic inflammatory disease, pre-term birth, post-surgical infection and an
increased susceptibility to sexually transmitted diseases, including AIDS. The
standard treatments currently prescribed for BV are oral or topical antibiotics
including metronidazole and clindamycin. These treatments are not optimal,
having significant recurrence rates. Moreover, antibiotic use depletes a
beneficial bacteria called lactobacilli.
A healthy vagina is principally populated by lactobacilli. The presence of
lactobacilli in the vagina, particularly those that produce hydrogen peroxide,
has been linked to decreased incidence of BV and other urinary tract and
gynecological infections. However, many women lack sufficient populations of
hydrogen peroxide-producing lactobacilli to maintain vaginal health, making them
more susceptible to infection. Studies had shown that the CTV-05 strain of
lactobacillus is able to restore the natural balance of the bacteria in the
vagina and produce both hydrogen peroxide and lactic acid, substances which are
active against disease-causing bacteria and serve a protective role.
In the Phase 2 safety and efficacy trial, which we recently announced, CTV-05
was administered topically to BV patients. In the trial, treatment with CTV-05
resulted in vaginal colonization by lactobacillus crispatus in 62% of patients
at 30 days compared to 2% on placebo (p-value<0.001). However, treatment with
CTV-05 did not improve clinical cure rates at 30 days, the primary endpoint of
the trial. Based on this result, we have no plans for making significant new
expenditures related to CTV-05.
IS-159
In 1998, we acquired from Immunotech S.A. exclusive worldwide rights to IS-159,
a selective chemical that reacts with receptors found on cerebral blood vessels
and nerve terminals. We are seeking a collaborator to develop IS-159 and do not
intend to initiate further studies of IS-159 unless we enter into a
collaborative arrangement.
PRODUCT ACQUISITION STRATEGY
We plan to continue to acquire, develop and commercialize late-stage product
candidates or approved products that make a clinical difference to hospital
patients. Our strategy is to acquire late-stage development product candidates
with an anticipated time to market of four years or less and existing clinical
data which provides reasonable evidence of safety and efficacy. In addition, we
aim to acquire approved products that can be marketed in hospitals by our
commercial organization. In making our acquisition decisions we attempt to
select products that meet these criteria and achieve high investment returns by:
- understanding the market opportunity for initially-targeted uses of
the drug;
- assessing the investment and development programs that will be
necessary to achieve a marketable product profile in these initial
uses; and
- attempting to structure the design of our development programs to
obtain critical information relating to the clinical and economic
performance of the product early in the development process, so that
we can make key development decisions.
We intend to acquire products and product candidates with possible uses and
markets beyond those on which our initial investment program will be focused. We
plan to acquire other products that will enhance the acute hospital product
franchise we are building around Angiomax.
We have assembled a management team with significant experience in drug
development and in drug product launches and commercialization.
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MANUFACTURING
We do not intend to build or operate manufacturing facilities but instead intend
to enter into contracts for manufacturing development and/or commercial supply.
Angiomax
In December 1999, we entered into a commercial development and supply agreement
with UCB Bioproducts for the development and supply of Angiomax bulk drug
substance. All Angiomax bulk drug substance used to date has been produced by
UCB Bioproducts by means of a chemical synthesis process. Using this validated
manufacturing process, UCB Bioproducts has successfully completed the
manufacture of bulk drug substance to meet anticipated commercial supply
requirements in 2002.
Together with UCB Bioproducts, we have developed a second generation chemical
synthesis process to improve the economics of manufacturing Angiomax bulk drug
substance. This process, which must be approved by the FDA before it can be
used, is known as the Chemilog process and involves limited changes to the early
manufacturing steps of our current process in order to improve process
economics. We expect the Chemilog process to produce material that is chemically
equivalent to that produced using the current process. UCB Bioproducts has
completed development of the process and has manufactured validation batches.
We have received an approvable letter from the FDA in March 2002 for our
supplemental new drug application, or NDA, submitted in 2001 relating to use of
the Chemilog process and, subject to receipt of formal FDA approval, expect
Angiomax produced by the Chemilog process to be sold in 2003.
We agreed to partially fund development activities relating to the Chemilog
process, as a result of which we anticipate paying to UCB Bioproducts total
development expenses of approximately $9.1 million. Of these development
expenses, through December 31, 2001, we had paid $6.6 million, and we will pay
$2.5 million in 2002. Of these payments, we paid $4.8 million in 2001 and will
pay $2.5 million in 2002 for validation batches of Angiomax manufactured using
the Chemilog process, which we may use for commercial sale following regulatory
approval of the Chemilog process.
We have agreed that, following successful development and regulatory approval of
the Chemilog process, we would purchase Angiomax bulk drug substance exclusively
from UCB Bioproducts at agreed upon prices for a period of seven years from the
date of the first commercial sale of Angiomax produced under the Chemilog
process. Following the expiration of the agreement, which automatically renews
for consecutive three year periods unless either party provides notice of non-
renewal within one year prior to the expiration of the initial term or any
renewal term, or if we terminate the agreement prior to its expiration, UCB
Bioproducts will transfer the development technology to us. If we engage a third
party to manufacture Angiomax for us using this technology, we will be obligated
to pay UCB Bioproducts a royalty based on the amount paid by us to the third-
party manufacturer.
We have developed reproducible analytical methods and processes for the
manufacture of Angiomax drug product by Ben Venue Laboratories. Ben Venue
Laboratories has carried out all of our Angiomax fill-finish activities and has
released product for clinical trials and commercial sale.
Clevidipine
To date, Astra Production Chemicals has manufactured all clevidipine bulk drug
which, after testing and release by Astra Hassle, has been used in clinical
trials. Both Astra Production Chemicals and Astra Hassle are divisions of
AstraZeneca. All finished drug product formulation has been manufactured by
Fresenius Kabi L.P., using its formulation technology, which also carried out
release testing and clinical packaging.
- 13 -
CTV-05
To date, GyneLogix had manufactured all CTV-05 material used in
clinical trials. We have transferred the CTV-05 manufacturing technology to
Cambrex Bio Science, Inc., a contract manufacturing organization.
COMPETITION
The development and commercialization of new drugs is competitive, and we face
competition from major pharmaceutical companies, specialty pharmaceutical
companies and biotechnology companies worldwide. Our competitors may develop or
license products or other novel technologies that are more effective, safer or
less costly than any that have been or are being developed by us, or may obtain
FDA approval for their products more rapidly than we may obtain approval for
ours.
Due to the incidence and severity of cardiovascular diseases, the market for
anticoagulant therapies is large and competition is intense and growing. We are
developing Angiomax as an anticoagulant therapy for the treatment of ischemic
heart disease and for additional potential hospital applications as a procedural
anticoagulant. There are a number of anticoagulant therapies currently on the
market, awaiting regulatory approval or in development.
In general, anticoagulant drugs may be classified in three groups: drugs that
directly or indirectly target and inhibit thrombin or its formation, drugs that
target and inhibit platelets activation and aggregation and drugs that break
down fibrin. Indirect thrombin inhibitors include heparin, low molecular weight
heparins and heparinoids such as Lovenox, Fragmin and pentasaccharide. Direct
thrombin inhibitors include Angiomax, Argatroban, Melagatran and hirudins such
as Refludan. Platelet inhibitors include aspirin, Ticlid, Plavix and GP IIb/IIIa
inhibitors such as ReoPro, Integrilin and Aggrastat. Fibrinolytics include
Streptase, Activase, Retevase and TNKase.
Because each group of anticoagulants acts on different clotting factors, we
believe that there will be continued clinical work to determine the best
combination of drugs for clinical use. We plan to position Angiomax as an
alternative to heparin as baseline anticoagulation therapy for use in patients
with ischemic heart disease. We expect Angiomax to be used with aspirin alone or
in conjunction with other fibrinolytic drugs or platelet inhibitors. We will
compete with indirect and direct thrombin inhibitors on the basis of efficacy
and safety, ease of administration and economic value. Heparin's widespread use
and low cost to hospitals will provide a challenge to our ability to sell
Angiomax.
We do not plan to position Angiomax as a direct competitor to platelet
inhibitors such as ReoPro from Centocor, Inc. and Eli Lilly and Company,
Aggrastat from Merck, Inc. or Integrilin from Millennium Pharmaceuticals, Inc.
and Schering-Plough Corporation. Similarly, we do not plan to position Angiomax
as a competitor to fibrinolytic drugs such as Streptase from Aventis S.A.,
Retevase from Centocor, Inc., and Activase and TNKase from Genentech Inc.
Platelet inhibitors and fibrinolytic drugs may, however, compete with Angiomax
for the use of hospital financial resources. Many U.S. hospitals receive a fixed
reimbursement amount per procedure for the angioplasties and other treatment
therapies they perform. Because this amount is not based on the actual expenses
the hospital incurs, hospitals may be forced to use either Angiomax or a
platelet inhibitor or fibrinolytic drugs but not necessarily several of the
drugs together.
The acquisition or licensing of pharmaceutical products is a competitive area,
and a number of more established companies, which have acknowledged strategies
to license or acquire products, may have competitive advantages as may other
emerging companies taking similar or different approaches to product
acquisition. In addition, a number of established research-based pharmaceutical
and biotechnology companies may have acquired products in late stages of
development to augment their internal product lines. These established companies
may have a competitive advantage over us due to their size, cash flows and
institutional experience.
- 14 -
Many of our competitors will have substantially greater financial, technical and
human resources than we have. Additional mergers and acquisitions in the
pharmaceutical industry may result in even more resources being concentrated in
our competitors. Competition may increase further as a result of advances made
in the commercial applicability of technologies and greater availability of
capital for investment in these fields. Our success will be based in part on our
ability to build and actively manage a portfolio of drugs that addresses unmet
medical needs and create value in patient therapy.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
Our success will depend in part on our ability to protect the products we
acquire or license by obtaining and maintaining patent protection both in the
United States and in other countries. We also rely upon trade secrets, know-how,
continuing technological innovations, contractual restrictions and licensing
opportunities to develop and maintain our competitive position. We plan to
prosecute and defend any patents or patent applications we acquire or license,
as well as any proprietary technology.
We have exclusively licensed from Biogen patents and applications for patents
covering Angiomax and Angiomax analogs and other novel anticoagulants as
compositions of matter, and processes for using Angiomax and Angiomax analogs
and other novel anticoagulants. Subject to certain clinical trial results, we
have agreed to license exclusively from AstraZeneca, except in Japan, patents
and patent applications covering formulations and uses of clevidipine, a
compound used to control blood pressure. We have exclusively licensed from
GyneLogix a patent and patent applications covering formulations and uses of the
biotherapeutic agent CTV-05 for the treatment of urogenital and reproductive
health. We have also exclusively licensed from Immunotech a patent and patent
applications covering the pharmaceutical IS-159 and its use for the treatment of
acute migraine headache. We are responsible for prosecuting and
maintaining patents and patent applications relating to Angiomax, CTV-05 and
IS-159. AstraZeneca will prosecute and maintain any patents and patent
applications that we license relating to clevidipine, and we will reimburse
AstraZeneca for expenses it incurs in connection with the prosecution and
maintenance of the patents or patent applications. In all, as of March 15, 2002,
we exclusively licensed 11 issued United States patents and a broadly filed
portfolio of corresponding foreign patents and patent applications. We have not
yet filed any independent patent applications. The U.S. patents licensed by us
expire at various dates ranging from March 2010 to April 2017.
The patent positions of pharmaceutical and biotechnology firms like us are
generally uncertain and involve complex legal, scientific and factual questions.
In addition, the coverage claimed in a patent application can be significantly
reduced before the patent is issued. Consequently, we do not know whether any of
the applications we acquire or license will result in the issuance of patents
or, if any patents are issued, whether they will provide significant proprietary
protection or will be challenged, circumvented or invalidated. Because patent
applications in the United States are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, we cannot be certain of the priority of
inventions covered by pending patent applications. Moreover, we may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office to determine priority of invention, or in opposition
proceedings in a foreign patent office, either of which could result in
substantial cost to us, even if the eventual outcome is favorable to us. There
can be no assurance that the patents, if issued, would be held valid by a court
of competent jurisdiction. An adverse outcome could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require us to cease using such technology.
The development of anticoagulants is intensely competitive. A number of
pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents in this field.
Some of these applications are competitive with applications we have acquired or
licensed, or conflict in certain respects with claims made under such
applications. Such conflict could result in a significant reduction of the
coverage of the patents we have acquired or licensed, if issued, which would
have a material adverse effect on our business, financial condition and results
of operations. In addition, if patents are issued to other companies that
contain competitive or conflicting claims and such claims are ultimately
determined to be valid, no assurance can be given that we would be able to
obtain licenses to these patents at a reasonable cost, or develop or obtain
alternative technology.
We also rely on trade secret protection for our confidential and proprietary
information. No assurance can be given that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets or disclose such technology, or that
we can meaningfully protect our trade secrets.
- 15 -
We have a number of trademarks that we consider important to our business. These
trademarks are protected by registration in the United States and other
countries in which our products are marketed.
It is our policy to require our employees, consultants, outside scientific
collaborators, sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of employees, the
agreements provide that all inventions conceived by the individual shall be our
exclusive property. There can be no assurance, however, that these agreements
will provide meaningful protection or adequate remedies for the our trade
secrets in the event of unauthorized use or disclosure of such information.
LICENSE AGREEMENTS
Biogen, Inc.
In March 1997, we entered into an agreement with Biogen for the license of the
anticoagulant pharmaceutical bivalirudin, which we have developed as Angiomax.
Under the terms of the agreement, we acquired exclusive worldwide rights to the
technology, patents, trademarks, inventories and know-how related to Angiomax.
In exchange for the license, we paid $2.0 million on the closing date and are
obligated to pay up to an additional $8.0 million upon reaching certain Angiomax
sales milestones, including the first commercial sales of Angiomax for the
treatment of AMI in the United States and Europe. In addition, we are obligated
to pay royalties on future sales of Angiomax and on any sublicense royalties
earned until the later of (1) 12 years after the date of the first commercial
sale of the product in a country or (2) the date on which the product or its
manufacture, use or sale is no longer covered by a valid claim of the licensed
patent rights in such country. The agreement also stipulates that we use
commercially reasonable efforts to meet certain milestones related to the
development and commercialization of Angiomax, including expending at least
$20.0 million for certain development and commercialization activities, which we
met in 1998. The licenses and rights under the agreement remain in force until
our obligation to pay royalties ceases. Either party may terminate the agreement
for material breach, and we may terminate the agreement for any reason upon 90
days prior written notice. Through March 15, 2002, we had paid a total of
approximately $1.1 million in royalties relating to Angiomax.
AstraZeneca AB
In March 2002, we entered into a study and exclusive option agreement with
AstraZeneca AB relating to the licensing, development and commercialization of
the intravenous blood pressure control pharmaceutical, clevidipine. Under the
terms of the agreement, we have agreed to conduct a pilot study of clevidipine.
Subject to the achievement of certain clinical trial results, we will acquire
exclusive worldwide rights to the know-how, patents and trademarks relating to
clevidipine except for in Japan. We plan to develop the product as a short
acting blood pressure control agent for use in hospital setting. In exchange for
the license we will pay $1.0 million in development milestones and up to an
additional $5.0 million upon reaching certain regulatory milestones. In
addition, we will be obligated to pay royalties on a country-by-country basis on
future annual sales of clevidipine, and on any sublicense royalties earned,
until the later of (1) the duration of the licensed patent rights which are
necessary to manufacture, use or sell clevidipine in a country or (2) ten years
from our first commercial sale of clevidipine in such country. The licenses and
rights under the agreement remain in force until we cease selling clevidipine in
any country or the agreement is otherwise terminated. We may terminate the
agreement upon 30 days written notice, unless AstraZeneca, within 20 days of
having received our notice, requests that we enter into good faith discussions
to redress our concerns. If we cannot reach a mutually agreeable solution with
AstraZeneca within three months of the commencement of such discussions, we may
then terminate the agreement upon 90 days written notice. Either party may
terminate the agreement for material breach upon 60 days prior written notice,
if the breach is not cured within such 60 days.
GyneLogix, Inc.
In August 1999, we entered into an agreement with GyneLogix, which was amended
in March 2002, for the license of the biotherapeutic agent CTV-05, a strain of
human lactobacillus currently under clinical investigation for applications in
the areas of urogenital and reproductive health. Under the terms of the
agreement, we acquired exclusive worldwide rights to the patents and know-how
related to CTV-05. In exchange for the license, we paid GyneLogix $400,000 and
are obligated to fund agreed-upon operational costs of GyneLogix related to the
development of CTV-05 on a monthly basis subject to a limitation of $28,000 per
month. We may discontinue this funding obligation for any reason upon 60 days
written notice. In addition, we are obligated to pay royalties on future sales
of CTV-05 and on any sublicense royalties earned until the date on which the
product is no longer covered by a valid claim of the licensed patent rights in a
country. The agreement also stipulates that we must use commercially reasonable
efforts in pursuing the development, commercialization and marketing of CTV-05
to maintain the license. The licenses and rights under the agreement remain in
force until our obligation to pay royalties ceases. Either party may terminate
- 16 -
the agreement for material breach, and we may terminate the agreement for any
reason upon 60 days prior written notice.
GOVERNMENT REGULATION
Government authorities in the United States and other countries extensively
regulate, among other things, the research, development, testing, manufacture,
labeling, promotion, advertising, distribution, and marketing of our products.
In the United States, the FDA regulates drugs under the Federal Food, Drug, and
Cosmetic Act, and, in the case of biologics, also under the Public Health
Service Act, and implementing regulations. Failure to comply with the applicable
U.S. requirements may subject us to administrative or judicial sanctions, such
as the FDA refusal to approve pending applications, warning letters, product
recalls, product seizures, total or partial suspension of production or
distribution, injunctions, and/or criminal prosecution.
The steps required before a drug may be marketed in the United States include:
- pre-clinical laboratory tests, animal studies and formulation
studies;
- submission to the FDA of an investigational new drug exemption, or
IND, for human clinical testing, which must become effective before
human clinical trials may begin;
- adequate and well-controlled clinical trials to establish the safety
and efficacy of the drug for each indication;
- submission to the FDA of a new drug application, or NDA, or
biologics license application, or BLA;
- satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the drug is produced to assess
compliance with cGMP; and
- FDA review and approval of the NDA or BLA.
Pre-clinical tests include laboratory evaluations of product chemistry,
toxicity, and formulation, as well as animal studies. The results of the
pre-clinical tests, together with manufacturing information and analytical data,
are submitted to the FDA as part of an IND, which must become effective before
human clinical trials may begin. An IND will automatically become effective 30
days after receipt by the FDA, unless before that time the FDA raises concerns
or questions about issues such as the conduct of the trials as outlined in the
IND. In such a case, the IND sponsor and the FDA must resolve any outstanding
FDA concerns or questions before clinical trials can proceed. Submission of an
IND may not result in the FDA allowing clinical trials to commence.
Clinical trials involve the administration of the investigational drug to human
subjects under the supervision of qualified investigators. Clinical trials are
conducted under protocols detailing the objectives of the study, the parameters
to be used in monitoring safety, and the effectiveness criteria to be evaluated.
Each protocol must be submitted to the FDA as part of the investigational new
drug exemption.
Clinical trials typically are conducted in three sequential Phases, but the
phases may overlap or be combined. Each trial must be reviewed and approved by
an independent Institutional Review Board before it can begin. Phase 1 usually
involves the initial introduction of the investigational drug into people to
evaluate its safety, dosage tolerance, phamacodynamics, and, if possible, to
gain an early indication of its effectiveness. Phase 2 usually involves trials
in a limited patient population to:
- evaluate dosage tolerance and appropriate dosage;
- identify possible adverse effects and safety risks; and
- evaluate preliminarily the efficacy of the drug for specific
indications.
- 17 -
Phase 3 trials usually further evaluate clinical efficacy and test further for
safety by using the drug in its final form in an expanded patient population. We
cannot guarantee that Phase 1, Phase 2 or Phase 3 testing will be completed
successfully within any specified period of time, if at all. Furthermore, we or
the FDA may suspend clinical trials at any time on various grounds, including a
finding that the subjects or patients are being exposed to an unacceptable
health risk.
Assuming successful completion of the required clinical testing, the results of
the preclinical studies and of the clinical studies, together with other
detailed information, including information on the manufacture and composition
of the drug, are submitted to the FDA in the form of an NDA or BLA requesting
approval to market the product for one or more indications. Before approving an
application, the FDA usually will inspect the facility or the facilities at
which the drug is manufactured, and will not approve the product unless cGMP
compliance is satisfactory. If the FDA determines the application and the
manufacturing facilities are acceptable, the FDA will issue an approval letter.
If the FDA determines the application or manufacturing facilities are not
acceptable, the FDA will outline the deficiencies in the submission and often
will request additional testing or information. Notwithstanding the submission
of any requested additional information, the FDA ultimately may decide that the
application does not satisfy the regulatory criteria for approval. The testing
and approval process requires substantial time, effort, and financial resources,
and we cannot be sure that any approval will be granted on a timely basis, if at
all. After approval, certain changes to the approved product, such as adding new
indications, manufacturing changes, or additional labeling claims are subject to
further FDA review and approval.
In December 2000, we received marketing approval from the FDA for Angiomax for
use as an anticoagulant in combination with aspirin in patients with unstable
angina undergoing coronary balloon angioplasty.
After regulatory approval of a product is obtained, we are required to comply
with a number of post-approval requirements. For example, as a condition of
approval of an application, the FDA may require postmarketing testing and
surveillance to monitor the drug's safety or efficacy. In the case of Angiomax,
the FDA has required us to complete an ongoing 50 patient trial in which we are
treating patients with HIT/ HITTS who need coronary balloon angioplasty.
In addition, holders of an approved NDA or BLA are required to report certain
adverse reactions and production problems, if any, to the FDA, and to comply
with certain requirements concerning advertising and promotional labeling for
their products. Also, quality control and manufacturing procedures must continue
to conform to cGMP after approval, and the FDA periodically inspects
manufacturing facilities to assess compliance with cGMP. Accordingly,
manufacturers must continue to expend time, money, and effort in the area of
production and quality control to maintain compliance with current good
manufacturing practices and other aspects of regulatory compliance.
We use and will continue to use third-party manufacturers to produce our
products in clinical and commercial quantities, and we cannot be sure that
future FDA inspections will not identify compliance issues at our facilities or
at the facilities of our contract manufacturers that may disrupt production or
distribution, or require substantial resources to correct. In addition,
discovery of problems with a product may result in restrictions on a product,
manufacturer, or holder of an approved NDA or BLA, including withdrawal of the
product from the market. Also, new government requirements may be established
that could delay or prevent regulatory approval of our products under
development.
EMPLOYEES
We believe that our success will depend greatly on our ability to identify,
attract and retain capable employees. We have assembled a management team with
significant experience in drug development and commercialization.
As of March 15, 2002, we employed 153 persons. Our employees are not represented
by any collective bargaining unit, and we believe our relations with our
employees are good.
- 18 -
ITEM 2. PROPERTIES
We currently lease approximately 6,660 square feet of office space in
Parsippany, New Jersey under a lease expiring in September 2005. In connection
with the termination in November 2001 of our agreement with Stack
Pharmaceuticals, Inc., we assumed a facility lease expiring in March 2005 for
approximately 2,400 additional square feet of office space in the same building.
We also lease approximately 9,000 square feet of office space in Cambridge,
Massachusetts under a lease expiring in August 2003. We believe our current
facilities will be sufficient to meet our needs for the foreseeable future, and
that additional space will be available on commercially reasonable terms to meet
space requirements if they arise. We also have offices in Oxford, United Kingdom
and Parnell, Auckland, New Zealand.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various legal proceedings in the ordinary
course of our business. In our opinion, these proceedings involve amounts that
would not have a material effect on our financial position or results of
operations if such proceedings were resolved unfavorably.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders, through
solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 2001.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
---------------------------------------------------------------------------------------------------------------
NAME AGE POSITION(S)
---------------------------------------------------------------------------------------------------------------
Clive A. Meanwell, M.D., Ph.D.* ............... 44 Executive Chairman and Chairman of the Board of
Directors
David M. Stack*................................ 50 Chief Executive Officer and President and Director
Peyton J. Marshall, Ph.D.*..................... 46 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
John M. Nystrom, Ph.D.......................... 56 Vice President and Chief Technical Officer
Gary Dickinson................................. 50 Vice President
David C. Mitchell.............................. 48 Vice President
Steven H. Koehler, M.B.A.*..................... 51 Vice President
John D. Richards, D.Phil.*..................... 45 Vice President
Fred M. Ryan, M.B.A............................ 49 Vice President
Peter Teuber, Ph.D.*........................... 43 Vice President
John W. Villiger, Ph.D......................... 47 Vice President
----------
* Executive Officer
Set forth below is certain information regarding the business experience during
the past five years for each of the above-named persons, as well as their
positions and offices with us.
Clive A. Meanwell, M.D., Ph.D. has been the Chairman of the Board of Directors
since the inception of our company in July 1996 and has served as our Executive
Chairman since September 2001. From 1996 to September 2001, Dr. Meanwell served
as our Chief Executive Officer and President. From 1995 to 1996, Dr. Meanwell
was a Partner and Managing Director at MPM Capital L.P., a venture capital firm.
From 1986 to 1995, Dr. Meanwell held various positions at Hoffmann-La Roche,
Inc., a pharmaceutical company, including Senior Vice President from 1992 to
1995, Vice President from 1991 to 1992 and Director of Product Development from
1986 to 1991. Dr. Meanwell received his M.D. and Ph.D. from the University of
Birmingham, United Kingdom.
David M. Stack has been our President and Chief Executive Officer and a Director
since September 2001. From April 1, 2000 to September 2001, Mr. Stack served as
a Senior Vice President. From October 1999 to September 2001, Mr. Stack also
served as President and General Partner of Stack Pharmaceuticals, Inc., a
commercialization,
- 19 -
marketing and strategy consulting firm serving healthcare companies, and as a
Senior Advisor to the Chief Executive Officer of Innovex Inc., a contract
pharmaceutical organization. Mr. Stack served as President and General Manager
of Innovex Inc. from May 1995 to December 1999. Mr. Stack currently serves as
director of Bio Imaging Laboratories, Inc. Mr. Stack received his B.S. in
biology from Siena College and his B.S. in pharmacy from Albany College of
Pharmacy.
Peyton J. Marshall, Ph.D. has been a Senior Vice President since January 2000
and our Chief Financial Officer, Secretary and Treasurer since joining us in
October 1997. From October 1997 to December 1999, Dr. Marshall served as a Vice
President. From 1995 to October 1997, Dr. Marshall was based in London as a
Managing Director and head of European Corporate Financing and Risk Management
Origination at Union Bank of Switzerland, an investment banking firm. From 1986
to 1995, Dr. Marshall held various investment banking positions at Goldman Sachs
and Company, an investment banking firm, including head of European product
development from 1987 to 1993 and Executive Director, Derivatives Origination
from 1993 to 1995. From 1981 to 1986, Dr. Marshall held several product
development positions at The First Boston Corporation, an investment banking
firm, and was an Assistant Professor of Economics at Vanderbilt University. Dr.
Marshall received his Ph.D. in economics from the Massachusetts Institute of
Technology.
John M. Nystrom, Ph.D. has been a Vice President since October 1998 and our
Chief Technical Officer since December 1999. From July 1979 to October 1998, Dr.
Nystrom was employed by the Arthur D. Little, an international technology and
management consulting firm. During his 19 years with the firm he held numerous
positions consulting to the fine chemical, biotechnology and pharmaceutical
industries. In 1994 he was elected a Vice President of the firm, and his last
position was that of Vice President and Director. Dr. Nystrom currently serves
as a director of Cangene Corp. Dr. Nystrom received his B.S. and Ph.D. in
chemical engineering from the University of Rhode Island.
Gary Dickinson has been a Vice President since April 2001 with a focus on human
resources activities. From May 2000 to April 2001, Mr. Dickinson was the Vice
President of Human Resources of Elementis Specialties, a specialty chemicals
manufacturing firm. From January 1997 to April 2001, Mr. Dickinson was the
Senior Director of Human Resources of Bristol-Myers Squibb Company, a
pharmaceuticals firm. Mr. Dickinson holds a B.A. from the University of
Sheffield, England.
David C. Mitchell has been a Vice President since December 2000 with a focus on
information technology and information systems. From February 1999 to December
2000, Mr. Mitchell was the Vice President of Information Technology for Innovex
Americas. From July 1997 to September 1998, Mr. Mitchell was Director of
Information Technology at NBC Broadcasting. From 1985 to July 1997, Mr. Mitchell
served as the Director of Information and Technology at the Walt Disney Company.
Mr. Mitchell received his Bachelor of Music from Arizona State University.
Steven H. Koehler, M.B.A. has been Vice President, Finance and Business
Administration since March 2002. From July 2001 to March 2002, Mr. Koehler was
Vice President, Finance and Chief Financial Officer of Vion Pharmaceuticals,
Inc., a biotechnology company which develops cancer treatments. From April 1999
to July 2001, Mr. Koehler served as Vice President, Finance and Administration
and as a member of the executive board of Knoll Pharmaceuticals, Inc., a wholly
owned subsidiary of BASF Corporation, the U.S. subsidiary of a transnational
chemical and life sciences company. From June 1997 to April 1999, Mr. Koehler
was Vice President, Finance and Controlling for Knoll A.G. in Ludwigshafen,
Germany, the global pharmaceutical subsidiary of BASF A.G. From November 1995 to
June 1997, he served as Vice President, Value Based Management for Knoll A.G.
Mr. Koehler was Vice President, Finance and Treasurer for Boots Pharmaceuticals,
Inc. from 1993 until its acquisition by Knoll in 1995. From 1977 to 1993, Mr.
Koehler held a series of senior financial positions with Baxter International,
Inc., a global medical products and services company. Mr. Koehler received his
B.A. degree from Duke University and his M.B.A. degree from the Kellogg Graduate
School of Management, Northwestern University. Mr. Koehler is a Certified Public
Accountant.
John D. Richards, D.Phil. joined us in October 1997 and has been a Vice
President since 1999, with a focus on product manufacturing and quality. From
1993 until he joined us in October 1997, Dr. Richards was Director of Process
Development and Manufacturing at Immulogic Pharmaceutical Corporation, a
pharmaceutical company. From 1989 to 1993, Dr. Richards was a Technical Manager
at Zeneca PLC, a pharmaceutical company, where he developed and implemented
processes for the manufacture of peptides as pharmaceutical active
intermediates. In 1986, Dr. Richards helped establish Cambridge Research
Biochemicals, a manufacturer of peptide-based products for pharmaceutical and
academic customers. Dr. Richards received his M.A. and D.Phil. in organic
chemistry from
- 20 -
the University of Oxford, United Kingdom, and has carried out post-doctoral
research work at the Medical Research Councils Laboratory of Molecular Biology
in Cambridge, United Kingdom.
Fred M. Ryan, M.B.A. has been a Vice President since April 2000, with a focus on
corporate strategic development, new product acquisitions and Angiomax
commercial development. Under Mr. Ryan's employment agreement with us, Mr. Ryan
has agreed to devote at least 24 hours per week to our business. Since April
2000, Mr. Ryan has also served as a Partner and the Vice President of Business
Development of Stack Pharmaceuticals, Inc. From July 1991 to April 2000, he held
senior management positions with Novartis Pharmaceuticals, Inc. in the United
States in both the Consumer Pharmaceuticals and Prescription Pharmaceuticals
businesses in the areas of Finance, Strategic Planning, Business Development and
Marketing, serving from 1998 to April 2000 as Executive Director Mature Products
responsible for managing sales and marketing activities for a portfolio of
products having annual sales in excess of $500 million. He received his B.S. and
B.A. degrees from Bryant College and his M.B.A. from Fairleigh Dickinson
University.
Peter Teuber, Ph.D. has been a Vice President since June 2001 with a focus on
product development. From February 1990 to June 1999, Dr. Teuber held positions
at Roche Pharmaceuticals, a global pharmaceutical company, working on product
development, strategic marketing and business development. He led the
development and global marketing team working on Xeloda(TM), an oral cancer
treatment, from the product's first human trials through the initial NDA
filings, two supplemental filings and approval in the United States, Europe and
over 70 other countries. In addition, at Roche Dr. Teuber acted as the head of
project management and served as a member of the global regulatory management
team. Dr. Teuber received his Ph.D., in Pharmacy from the University of Basel in
Switzerland.
John W. Villiger, Ph.D. has been a Vice President since March 1997, with a focus
on cardiovascular product development. From December 1986 until he joined us in
March 1997, Dr. Villiger held various positions in product development at
Hoffmann-La Roche, including Head of Global Project Management from 1995 to 1996
and International Project Director from 1991 to 1995. As Head of Global Project
Management, Dr. Villiger was responsible for overseeing the development of
Hoffmann-LaRoche's pharmaceutical portfolio, with management responsibility for
over 50 development programs. As International Project Director, Dr. Villiger
was responsible for the global development of Tolcapone, also known as tasmar.
Dr. Villiger received his Ph.D. in neuropharmacology from the University of
Otago.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION AND HOLDERS
Our common stock has been trading on The Nasdaq National Market under the symbol
"MDCO" since August 8, 2000, the date of our initial public offering. The
following table sets forth, for the periods indicated, the high and low intraday
sales prices per share of our common stock as reported on The Nasdaq National
Market.
2000 HIGH LOW
---- ---- ---
Third Quarter (since August 8, 2000) ..................... $35.38 $16.50
Fourth Quarter ........................................... $34.75 $17.13
2001
----
First Quarter ............................................ $20.48 $ 8.75
Second Quarter ........................................... $22.05 $ 9.10
Third Quarter ............................................ $22.20 $ 4.52
Fourth Quarter ........................................... $12.15 $ 4.81
- 21 -
Mellon Investor Services, LLC is the transfer agent and registrar for our common
stock. As of the close of business on March 15, 2002, we had 242 holders of
record of our common stock.
DIVIDENDS
We have never declared or paid cash dividends on our common stock. We anticipate
that we will retain all of our future earnings, if any, for use in the expansion
and operation of our business and do not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors. In addition, covenants in our loan and
security agreement impose restrictions on our ability to pay dividends.
USES OF PROCEEDS FROM SALES OF REGISTERED SECURITIES
In August and September 2000, we completed an initial public offering pursuant
to a registration statement on Form S-1. The effective date and Securities and
Exchange Commission file number of the registration statement were August 7,
2000 and 333-37404, respectively. In the initial public offering, we sold an
aggregate of 6,900,000 shares of common stock (including an over-allotment
option of 900,000 shares) at $16.00 per share. We received aggregate net
proceeds of approximately $101.4 million, after deducting underwriting discounts
and commissions of approximately $7.7 million and expenses of the offering of
approximately $1.3 million. From August 7, 2000 through December 31, 2001, of
the net proceeds, the Company used approximately $98.8 million for general
corporate purposes, including operations, working capital and capital
expenditures, with the remaining $2.6 million in proceeds invested in cash, cash
equivalents and available for sale securities. Of the approximately $98.8
million, we paid approximately $445,000 to Stack Pharmaceuticals, Inc. and
approximately $6.9 million to Innovex, Inc. Prior to becoming our President and
Chief Executive Officer, David M. Stack was the President and General Partner of
Stack Pharmaceuticals and a Senior Advisor to the Chief Executive Officer of
Innovex. Other than these payments, none of the net proceeds of the initial
public offering has been paid by us, directly or indirectly, to any director,
officer or general partner of us, or any of their associates, or to any person
owning ten percent or more of any class of our equity securities, or any of our
affiliates.
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with our selected consolidated financial
data. We have prepared this information using our audited consolidated financial
statements for the for the years ended December 31, 1997, 1998, 1999, 2000 and
2001. The pro forma net loss per share data reflects the conversion of our
convertible notes, and accrued interest, and the conversion of our outstanding
convertible preferred stock, and accrued dividends, into common stock upon the
closing of our initial public offering in August 2000. The pro forma net loss
per share data does not include the effect of any options or warrants
outstanding. For further discussion of earnings per share, please see note 8 to
the consolidated financial statements.
- 22 -
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- -----------
In thousands, except share and per share data
STATEMENTS OF OPERATIONS DATA
Net revenue .................................... $ -- $ -- $ -- $ -- $ 14,248
Operating expenses
Cost of revenue .............................. -- -- -- -- 2,110
Research and development ..................... 16,0444 24,005 30,345 39,572 32,768
Selling, general and administrative .......... 2,421 6,248 5,008 15,034 36,567
----------- ----------- ----------- ----------- -----------
Total operating expenses ................... 18,465 30,253 35,353 54,606 71,445
----------- ----------- ----------- ----------- -----------
Loss from operations ......................... (18,465) (30,253) (35,353) (54,606) (57,197)
Other income (expense), net .................. 659 1,302 640 (16,686) 2,313
----------- ----------- ----------- ----------- -----------
Net loss ..................................... (17,806) (28,951) (34,713) (71,292) (54,884)
Dividends and accretion to redemption
value of redeemable convertible
preferred stock ............................ (2,018) (3,959) (5,893) (30,343) --
----------- ----------- ----------- ----------- -----------
Net loss attributable to common
stockholders ............................... $ (19,824) $ (32,910) $ (40,606) $ (101,635) $ (54,884)
=========== =========== =========== =========== ===========
Net loss attributable to common
stockholders per common share, basic
and diluted ................................ $ (4.06) $ (6.03) $ (80.08) $ (8.43) $ (1.67)
=========== =========== =========== =========== ===========
Shares used in computing net loss
attributable to common stockholders per
common shares, basic and diluted ........... 4,887,230 5,454,653 507,065 12,059,275 32,925,968
Unaudited pro forma net loss attributable
to common stockholders per common
share, basic and diluted ................... $ (1.94) $ (2.10) $ (1.67)
Shares used in computing unaudited pro
forma net loss attributable to common
stockholders per common shares, basic
and diluted ................................ 17,799,876 24,719,075 32,925,968
AS OF DECEMBER 31,
-----------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- -----------
In thousands
BALANCE SHEET DATA
Cash, cash equivalents, available for sale
securities and acrrued interest receivable ..... $ 25,416 $ 29,086 $ 7,238 $ 80,718 $ 54,016
Working capital (deficit) ......................... 18,779 24,570 (4,103) 68,023 59,744
Total assets ...................................... 25,595 29,831 7,991 84,363 77,901
Convertible notes ................................. -- -- 5,776 -- --
Redeemable convertible preferred stock ............ 40,306 79,384 85,277 -- --
Accumulated deficit ............................... (21,409) (54,319) (94,925) (196,560) (251,444)
Total stockholders' (deficit) equity .............. (21,387) (54,266) (94,558) 69,239 61,121
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We operate as a pharmaceutical company selling and developing products for the
treatment of hospital patients. We acquire, develop and commercialize
biopharmaceutical products that are in late stages of development or have been
approved for marketing. We began selling Angiomax, our lead product, in U.S.
hospitals in January 2001 as an anticoagulant replacement for heparin, selling
$14.2 million of Angiomax in 2001. In December 2000, we received marketing
approval from U.S. Food and Drug Administration for Angiomax for use as an
anticoagulant in combination with
- 23 -
aspirin in patients with unstable angina undergoing coronary balloon
angioplasty. Coronary balloon angioplasty is a procedure used to restore normal
blood flow in an obstructed artery in the heart. In August and September 2000,
we consummated our initial public offering resulting in $101.4 million in net
proceeds. In May 2001, we completed a private placement of 4.0 million shares of
common stock resulting in net proceeds of $41.8 million.
We began selling Angiomax in the United States in January 2001. Until October 1,
2001, we marketed Angiomax in the United States using a sales force contracted
from Innovex, Inc., which we managed. On October 1, 2001, we hired as our
full-time employees certain members of the Innovex sales force. In addition,
during September 2001 we hired additional employees, which resulted in an
increase of the sales force of approximately 30%.
Since our inception, we have incurred significant losses. Most of our
expenditures to date have been for research and development activities and
selling, general and administrative expenses. Research and development expenses
represent costs incurred for product acquisition, clinical trials, activities
relating to regulatory filings and manufacturing development efforts. We
generally outsource our clinical trials and manufacturing development activities
to independent organizations to maximize efficiency and minimize our internal
overhead. We expense our research and development costs as they are incurred.
Selling, general and administrative expenses consist primarily of salaries and
related expenses, general corporate activities and costs associated with product
sales and marketing activities. Interest expense consists of costs associated
with convertible notes that were issued in 2000 and 1999 to fund our business
activities. These convertible notes were converted into equity in 2000.
We expect to continue to incur operating losses for the foreseeable future as a
result of research and development activities attributable to new and existing
products and costs associated with the sales and marketing of our products. We
will need to generate significant revenues to achieve and maintain
profitability.
During the year ended December 31, 2000, we recorded deferred stock compensation
on the grant of stock options of approximately $17.3 million, representing the
difference between the exercise price of such options and the fair market value
of our common stock at the date of grant of such options. The exercise prices of
these options were below the estimated fair market value of our common stock as
of the date of grant based on the estimated price of our common stock in our
initial public offering. No deferred compensation was recorded during 2001
because all grants of stock options during this period were issued at the fair
market value on the date of grant.
We amortize deferred stock compensation over the respective vesting periods of
the individual stock options. We recorded amortization expense for deferred
compensation of approximately $3.7 million and $4.1 million for the years ended
December 31, 2000 and 2001, respectively. We expect to record amortization
expense for the deferred compensation as follows: approximately $3.7 million in
2002, approximately $3.6 million in 2003 and approximately $1.3 million in 2004.
We have not generated taxable income to date. At December 31, 2001, net
operating losses available to offset future taxable income for federal income
tax purposes were approximately $173 million. If not utilized, federal net
operating loss carryforwards will expire at various dates beginning in 2011 and
ending 2021. We have not recognized the potential tax benefit of our net
operating losses in our statements of operations. The future utilization of our
net operating loss carryforwards may be limited pursuant to regulations
promulgated under the Internal Revenue Code of 1986, as amended.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
is based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported assets and liabilities, revenues and
expenses, and other financial information. Actual results may differ
significantly from these estimates under different assumptions and conditions.
In December 2001, the SEC requested that all registrants discuss their "critical
accounting policies" in the discussion and analysis of their financial condition
and results of operations. The SEC indicated that a "critical accounting policy"
is one which is both important to the portrayal of the company's financial
condition and results and requires
- 24 -
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
Our significant accounting policies are more fully described in Note 2 to our
financial statements. Not all of these significant accounting policies, however,
require management to make difficult, complex or subjective judgments or
estimates. We believe that our accounting policies relating to revenue
recognition and inventory described below fit the definition of "critical
accounting policies."
Revenue Recognition
Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, the price is fixed and determinable, delivery has occurred,
and collectibility is reasonable assured. Revenue is recorded net of allowances,
including estimated allowances for returns, rebates, and other discounts. In
accordance with Statement of Financial Accounting Standards No. 48 "Revenue
Recognition When Right of Return Exists," revenue is recognized when the price
to the buyer is fixed, the buyer is obligated to pay us and the obligation to
pay is not contingent on resale of the product, the buyer has economic substance
apart from us, we have no obligations to bring about the sale of the product and
the amount of returns can be reasonably estimated. Our returns during 2001 were
not material.
Inventories
Inventory is recorded upon transfer of title from our vendors. Inventory is
stated at the lower of cost or market with cost determined using a weighted
average of costs. All costs associated with the manufacture of Angiomax bulk
drug product and finished product to which the title transferred to us prior to
FDA approval of Angiomax was expensed as research and development. In December
2000, we received FDA approval for Angiomax and any Angiomax bulk drug product
to which we took title after FDA approval is recorded as inventory. We review
the inventory for slow moving or obsolete amounts based on expected revenues. If
actual revenues are less than expected, allowances for excess amounts may be
required in the future.
RESULTS OF OPERATIONS
Years Ended December 31, 2001 and 2000
Net Revenue. We had net revenue of $14.2 million in 2001 from sales of Angiomax.
We had no net revenue in 2000.
Cost of Revenue. Cost of revenue during 2001 was $2.1 million, or 15% of product
revenue. The cost of revenue consisted of expenses in connection with the
manufacture of the Angiomax sold, the logistical costs of selling Angiomax and
royalty expenses under our agreements with Biogen. The cost of manufacturing as
a percentage of product revenue was approximately 2% during 2001 because we sold
Angiomax that was manufactured prior to the date of FDA approval of Angiomax in
December 2000. The cost associated with the manufactured of Angiomax incurred by
us prior to date of FDA approval was expensed as research and development. In
2002, we expect to sell Angiomax manufactured after the date of FDA approval, as
a result of which we expect our cost of manufacturing as a percentage of product
revenue will increase substantially by the end of 2002.
Research and Development Expenses. Research and development expenses decreased
17% from $39.6 million in 2000 to $32.8 million in 2001. The decrease in
research and development expenses of $6.8 million was primarily due to lower
manufacturing development costs related to UCB Bioproduct's manufacture of
Angiomax bulk drug product in 2000, which was expensed prior to FDA approval,
and to lower clinical development costs associated with the completion in 2001
of the HERO-2 trial program, our Phase 3 clinical trial in AMI. Partly
offsetting this decrease in research and development costs were higher costs
related to our trials in angioplasty called REPLACE-1 and REPLACE-2 and higher
development costs related to our modified production process known as the
Chemilog process.
We have a number of clinical trial programs currently underway, or about to
commence, for expanding the applications of Angiomax in the treatment of
ischemic heart disease and for use as a procedural anticoagulant. The
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funding for Angiomax, our main product, has represented and will continue to
represent a significant portion of research and development spending. For 2001
and 2000, research and development expenses related to Angiomax included the
costs of clinical trials, development manufacturing costs for the bulk drug
product and the cost associated with preparation of U.S. and worldwide marketing
applications. In late 2000, after obtaining FDA approval for Angiomax, we began
recording as inventory bulk drug supply purchased, reducing the amount
classified as research and development expense. We are currently working on a
second generation manufacturing process for Angiomax, called Chemilog, for which
we have received an approvable letter from the FDA, and will continue to incur
research and development expenses until we receive FDA approval of this process.
The amount of future research and development expenses associated with Angiomax
are not reasonably certain as these costs are dependent upon the regulatory
process and the timing for obtaining marketing approval for other applications
of the product in the United States and other countries. However, they are
expected to be substantial.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 143% to $36.6 million in 2001 from $15.0
million in 2000. The increase in selling, general and administrative expenses of
$21.5 million was primarily due to an increase in marketing and selling expenses
and corporate infrastructure costs arising from an increase in activity relating
to the commercial launch of Angiomax in 2001, including the addition of sales
personnel.
Other Income and Expense. Interest income increased 19% to $3.2 million in 2001
from $2.7 million in 2000. The increase in interest income of $459,000 was
primarily due to interest income arising from the investment of the proceeds of
our initial public offering in August and September 2000 and from the investment
of the proceeds from our sale of 4.0 million shares of our common stock in a
private placement in May 2001.
We had no interest expense in 2001. Interest expense of $19.4 million in 2000
was related to interest charges and amortization of the discount on our
convertible notes issued in October 1999 and March 2000.
During the second quarter of 2001, we liquidated our $3.0 million principal
investment in Southern California Edison 5 7/8% bonds, recognizing a loss of
$850,000 on the sale.
Years Ended December 31, 2000 and 1999
Net Revenue/Cost of Revenue. We had no net revenue or cost of revenue in 2000 or
1999.
Research and Development Expenses. Research and development expenses increased
30% from $30.3 million in 1999 to $39.6 million in 2000. The increase of $9.3
million was primarily due to the increased enrollment rate of our Phase 3
clinical trial in AMI, called HERO-2, during 2000, initiation in 2000 of a Phase
3b trial in angioplasty called REPLACE-1 and the recognition of $12.2 million of
research and development costs in connection with the completion of UCB
Bioproduct's manufacture of Angiomax bulk drug substance prior to FDA approval.
The increase in costs was partly offset by reduced development expenses
reflecting our termination of the semilog manufacturing development program with
Lonza AG in the fourth quarter of 1999 and a reduction in development activity
for IS-159 in 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 200% from $5.0 million in 1999 to $15.0
million in 2000. The increase of $10.0 million was primarily due to an increase
in marketing and selling expenses and corporate infrastructure costs arising
from an increase in activity in preparation for the commercial launch of
Angiomax.
Interest Income and Interest Expense. Interest income increased 223% from
$838,000 in 1999 to $2.7 million in 2000. The increase of $1.9 million was
primarily due to interest income arising from investment of the proceeds of our
initial public offering.
Interest expense was $19.4 million in 2000 and was related to interest charges
and the amortization of the discount on our convertible notes issued in October
1999 and March 2000. The notes were converted into shares of series IV
convertible preferred stock in May 2000, accelerating the remaining unamortized
discount.
LIQUIDITY AND CAPITAL RESOURCES
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Since our inception, we have financed our operations through the sale of
common and preferred stock, sales of convertible promissory notes and warrants,
interest income and revenues from sales of Angiomax.
In August and September 2000, we received $101.4 million in net proceeds from
the sale of common stock in our initial public offering and received an
additional $41.8 million in net proceeds in May 2001 from the sale of 4.0
million shares of our common stock in a private placement. Prior to the initial
public offering, we had received net proceeds of $79.4 million from the private
placement of equity securities, primarily redeemable convertible preferred
stock, and $19.4 million from the issuance of convertible notes and warrants.
As of December 31, 2001, we had $54.0 million in cash, cash equivalents and
available for sale securities, as compared to $79.3 million as of December 31,
2000. The decrease in cash, cash equivalents and available for sale securities
of $25.3 million was primarily attributable to cash used in operating activities
and for purchases of fixed assets, partly offset by funds received from
maturities and sales of available for sale securities and financing activities
and sales of Angiomax.
We used net cash of $67.2 million in operating activities during 2001. This
consisted of a net loss of $54.9 million, combined with increases in accounts
receivable of $5.3 million and inventory of $14.6 million, and partly offset by
a decrease in accrued expenses of $1.1 million, in accrued interest receivable
of $1.4 million and an increase in accounts payable of $2.8 million, and from
non-cash amortization of deferred compensation of $4.1 million and depreciation
of $471,000. The increase in inventory of $14.6 million was primarily
attributable to the scheduled receipt of bulk Angiomax from our supplier, UCB
Bioproducts.
During 2001, we generated approximately $41.7 million of cash from net investing
activities, which consisted principally of the maturity or sale of available for
sale securities, partly offset by the purchase of fixed assets of $736,000,
which is primarily computer related equipment. During 2001, we received $42.5
million from financing activities primarily related to proceeds from the sale of
shares of our common stock in a private placement and from employees purchasing
stock under our stock plans.
We expect to devote substantial resources to our research and development
efforts and to our sales, marketing and manufacturing programs associated with
the commercialization of our products. Our funding requirements will depend on
numerous factors including:
- whether Angiomax is commercially successful;
- the progress, level and timing of our research and development activities;
- the cost and outcomes of regulatory reviews;
- the continuation or termination of third party manufacturing or sales and
marketing arrangements;
- the cost and effectiveness of our sales and marketing programs;
- the status of competitive products;
- our ability to defend and enforce our intellectual property rights; and
- the establishment of additional strategic or licensing arrangements with
other companies or acquisitions.
We believe, based on our current operating plan, plus anticipated revenues from
Angiomax and interest income, that our current cash, cash equivalents and
available for sale securities will be sufficient to fund our operations for
approximately 18 months. If our existing resources are insufficient to satisfy
our liquidity requirements due to slower than anticipated revenues from Angiomax
or otherwise, or if we acquire additional product candidates, we may need to
sell additional equity or debt securities or seek additional financing through
other arrangements. The sale of additional equity or debt securities may result
in additional dilution to our stockholders, and we cannot be certain that
additional public or private financing will be available in amounts or on terms
acceptable to us, if at all. If we are unable to obtain this additional
financing, we may be required to delay, reduce the scope of, or eliminate one or
more of our planned research, development and commercialization activities,
which could harm our financial
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condition and operating results. In addition, in order to obtain additional
financing, we may be required to relinquish rights to products, product
candidates or technologies that we would not otherwise relinquish.
In March 2002, we entered into a loan and security agreement with Comerica Bank-
California. Under the agreement, we may borrow up to $10,000,000. Amounts
outstanding under the agreement are collateralized by all of the Company's
personal property. The agreement has term of one year and provides for interest
on amounts outstanding at a rate of one percent above the prime rate. In order
to draw on the facility, and while borrowings are outstanding, we must satisfy
certain covenants, including covenants related to cash, working capital and
revenues. As of March 29, 2002, we had drawn down the full $10.0 million under
the agreement.
CONTRACTUAL OBLIGATIONS
Our long-term contractual commitments consist of operating leases for our
facilities in Cambridge, Massachusetts and Parsippany, New Jersey, which expire
in August 2003 and September 2005, respectively. Future annual minimum payments
under these operating leases are $669,000, $502,000, $282,000 and $177,000 in
2002, 2003, 2004 and 2005, respectively. In addition to amounts accrued or
payable as of December 31, 2001, we expect to make payments to UCB Bioproducts
of a total of $7.5 million during 2002 and 2003 for Angiomax bulk drug substance
produced using the Chemilog process.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. For this purpose, any
statements contained herein regarding our strategy, future operations, financial
position, future revenues, projected costs, prospects, plans and objectives of
management, other than statements of historical facts, are forward-looking
statements. The words "anticipates," "believes," "estimates," "expects,"
"intends," "may," "plans," "projects," "will," "would" and similar expressions
are intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. We cannot guarantee
that we actually will achieve the plans, intentions or expectations disclosed in
our forward-looking statements. There are a number of important factors that
cause actual results or events to differ materially from those disclosed in the
forward-looking statements we make. These important factors include our
"critical accounting policies" and the risk factors set forth below. Although we
may elect to update forward-looking statements in the future, we specifically
disclaim any obligation to do so, even if our estimates change, and readers
should not rely on those forward-looking statements as representing our views as
of any date subsequent to the date of filing this Annual Report.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET LOSSES
AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY
We have incurred net losses since our inception, including net losses of
approximately $54.9 million for the year ended December 31, 2001. As of December
31, 2001, we had an accumulated deficit of approximately $251.4 million. We
expect to make substantial expenditures to further develop and commercialize our
products, including costs and expenses associated with clinical trials,
regulatory approval and commercialization of products. As a result, we are
unsure when we will become profitable, if at all, and if we do become
profitable, we may not remain profitable for any substantial period of time. If
we fail to achieve profitability within the time frame expected by investors or
securities analysts, the market price of our common stock may decline.
OUR BUSINESS IS VERY DEPENDENT ON THE COMMERCIAL SUCCESS OF ANGIOMAX
Other than Angiomax, our products are in clinical phases of development and,
even if approved by the FDA, are a number of years away from entering the
market. As a result, Angiomax will account for almost all of our revenues for
the foreseeable future. The commercial success of Angiomax will depend upon its
acceptance by physicians, patients and other key decision-makers as a safe,
therapeutic and cost-effective alternative to heparin and other products used in
current practice. If Angiomax is not commercially successful, we will have to
find additional sources of revenues or curtail or cease operations.
FAILURE TO RAISE ADDITIONAL FUNDS IN THE FUTURE MAY AFFECT THE DEVELOPMENT,
MANUFACTURE AND SALE OF OUR PRODUCTS
Our operations to date have generated substantial and increasing needs for cash.
Our negative cash flow from operations is expected to continue into the
foreseeable future. The clinical development and regulatory approval of Angiomax
for additional indications, the development and regulatory approval of our other
product candidates and the acquisition and development of additional product
candidates by us will require a commitment of substantial funds. Our future
capital requirements are dependent upon many factors and may be significantly
greater than we expect.
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We believe, based on our current operating plan, plus anticipated sales of
Angiomax and interest income, that our current cash, cash equivalents and
available for sale securities will be sufficient to fund our operations for
approximately 18 months. If our existing resources are insufficient to satisfy
our liquidity requirements due to slower than anticipated sales of Angiomax or
otherwise, or if we acquire additional product candidates, we may need to sell
additional equity or debt securities or seek additional financing through other
arrangements. The sale of additional equity or debt securities may result in
additional dilution to our stockholders, and we cannot be certain that
additional public or private financing will be available in amounts or on terms
acceptable to us, if at all. If we are unable to obtain this additional
financing, we may be required to delay, reduce the scope of, or eliminate one or
more of our planned research, development and commercialization activities,
which could harm our financial condition and operating results. In addition, in
order to obtain additional financing, we may be required to relinquish rights to
products, product candidates or technologies that we would not otherwise
relinquish.
WE CANNOT EXPAND THE INDICATIONS FOR ANGIOMAX UNLESS WE RECEIVE FDA APPROVAL FOR
EACH ADDITIONAL INDICATION. FAILURE TO EXPAND THESE INDICATIONS WILL LIMIT THE
SIZE OF THE COMMERCIAL MARKET FOR ANGIOMAX
In December 2000, we received approval from the FDA for the use of Angiomax as
an anticoagulant in combination with aspirin in patients with unstable angina
undergoing coronary balloon angioplasty. One of our key objectives is to expand
the indications for which the FDA will approve Angiomax. In order to do this, we
will need to conduct additional clinical trials and obtain FDA approval for each
proposed indication. If we are unsuccessful in expanding the approved
indications for the use of Angiomax, the size of the commercial market for
Angiomax will be limited.
FAILURE TO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WILL PREVENT US
FROM MARKETING ANGIOMAX ABROAD
We intend to market our products in international markets, including Europe. In
order to market our products in the European Union and many other foreign
jurisdictions, we must obtain separate regulatory approvals. In February 1998,
we submitted a Marketing Authorization Application to the European Agency for
the Evaluations of Medicinal Products, or the EMEA, for use of Angiomax in
unstable angina patients undergoing angioplasty. Following extended interaction
with European regulatory authorities, the Committee of Proprietary Medicinal
Products of the EMEA voted in October 1999 not to recommend Angiomax for
approval in angioplasty. The United Kingdom and Ireland dissented from this
decision. We have withdrawn our application to the EMEA and plan to resubmit an
MAA with the results of the REPLACE-2 program if positive. We may not be able
to obtain approval from any or all of the jurisdictions in which we seek
approval to market Angiomax. Obtaining foreign approvals may require additional
trials and additional expense.
THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS MAY BE TERMINATED OR
DELAYED, AND THE COSTS OF DEVELOPMENT AND COMMERCIALIZATION MAY INCREASE, IF
THIRD PARTIES WHO WE RELY ON TO MANUFACTURE AND SUPPORT THE DEVELOPMENT AND
COMMERCIALIZATION OF OUR PRODUCTS DO NOT FULFILL THEIR OBLIGATIONS
Our development and commercialization strategy entails entering into
arrangements with corporate and academic collaborators, contract research
organizations, distributors, third-party manufacturers, licensors, licensees and
others to conduct development work, manage our clinical trials, manufacture our
products and market and sell our products outside of the United States. Although
we manage these services, we do not have the expertise or the resources to
conduct such activities on our own and, as a result, are particularly dependent
on third parties in most areas.
We may not be able to maintain our existing arrangements with respect to the
commercialization of Angiomax or establish and maintain arrangements to develop
and commercialize clevidipine or any additional product candidates or products
on terms that are acceptable to us. Any current or future arrangements for the
development and commercialization of our products may not be successful. If we
are not able to establish or maintain agreements relating to Angiomax,
clevidipine or any additional products on terms which we deem favorable, our
financial condition would be materially adversely affected.
Third parties may not perform their obligations as expected. The amount and
timing of resources that third parties devote to developing, manufacturing and
commercializing our products may not be within our control. Furthermore, our
interests may differ from those of third parties that manufacture or
commercialize our products. Disagreements that may arise with these third
parties could delay or lead to the termination of the development or
commercialization of our product candidates, or result in litigation or
arbitration, which would be time consuming
- 29 -
and expensive. If any third party that manufactures or supports the development
or commercialization of our products breaches or terminates its agreement with
us, or fails to conduct its activities in a timely manner, such breach,
termination or failure could:
- delay or otherwise adversely impact the development or commercialization
of Angiomax, clevidipine our other product candidates or any additional
product candidates that we may acquire or develop;
- require us to undertake unforeseen additional responsibilities or devote
unforeseen additional resources to the development or commercialization of
our products; or
- result in the termination of the development or commercialization of our
products.
WE ARE CURRENTLY DEPENDENT ON A SINGLE SUPPLIER FOR THE PRODUCTION OF ANGIOMAX
BULK DRUG SUBSTANCE AND A DIFFERENT SINGLE SUPPLIER TO CARRY OUT ALL FILL-FINISH
ACTIVITIES FOR ANGIOMAX
We have no experience in manufacturing, and we lack the facilities and personnel
to manufacture products in accordance with FDA regulations. Currently, we obtain
all of our Angiomax bulk drug substance from one manufacturer, UCB Bioproducts
S.A., and rely on another manufacturer, Ben Venue Laboratories, Inc., to carry
out all fill-finish activities for Angiomax, which includes final formulation
and transfer of the drug into vials where it is then freeze-dried and sealed.
The FDA requires that all manufacturers of pharmaceuticals for sale in or from
the United States achieve and maintain compliance with the FDA's current Good
Manufacturing Practice, or cGMP, regulations and guidelines. There are a limited
number of manufacturers that operate under cGMP regulations capable of
manufacturing Angiomax. We do not currently have alternative sources for
production of Angiomax bulk drug substance or to carry out fill-finish
activities. In the event that either of our current manufacturers is unable to
carry out its respective manufacturing obligations to our satisfaction, we may
be unable to obtain alternative manufacturing, or obtain such manufacturing on
commercially reasonable terms or on a timely basis. If we were required to
transfer manufacturing processes to other third party manufacturers, we would be
required to satisfy various regulatory requirements, which could cause us to
experience significant delays in receiving an adequate supply of Angiomax. Any
delays in the manufacturing process may adversely impact our ability to meet
commercial demands for Angiomax on a timely basis and supply product for
clinical trials of Angiomax.
IF WE DO NOT SUCCEED IN DEVELOPING A SECOND-GENERATION PROCESS FOR THE
PRODUCTION OF BULK ANGIOMAX DRUG SUBSTANCE, OUR GROSS MARGINS MAY BE BELOW
INDUSTRY AVERAGES
We are currently developing with UCB Bioproducts a second-generation process for
the production of bulk Angiomax drug substance. This process involves changes to
the early manufacturing steps of our current process in order to improve our
gross margins on the future sales of Angiomax. If we cannot develop the process
successfully or regulatory approval of the process is not obtained or is
delayed, then our ability to improve our gross margins on future sales of
Angiomax may be limited.
CLINICAL TRIALS OF OUR PRODUCT CANDIDATES ARE EXPENSIVE AND TIME-CONSUMING, AND
THE RESULTS OF THESE TRIALS ARE UNCERTAIN
Before we can obtain regulatory approvals for the commercial sale of any product
that we wish to develop, we will be required to complete pre-clinical studies
and extensive clinical trials in humans to demonstrate the safety and efficacy
of such product. We are currently conducting clinical trials of Angiomax for use
in the treatment of ischemic heart disease and for additional potential hospital
applications as a procedural anticoagulant. There are numerous factors that
could delay our clinical trials or prevent us from completing our trials
successfully. We, or the FDA, may suspend a clinical trial at any time on
various grounds, including a finding that patients are being exposed to
unacceptable health risks.
The rate of completion of clinical trials depends in part upon the rate of
enrollment of patients. Patient enrollment is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the
- 30 -
eligibility criteria for the trial, the existence of competing clinical trials
and the availability of alternative or new treatments. In particular, the
patient population targeted by some of our clinical trials may be small. Delays
in future planned patient enrollment may result in increased costs and program
delays.
In addition, clinical trials, if completed, may not show any potential product
to be safe or effective. Results obtained in pre-clinical studies or early
clinical trials are not always indicative of results that will be obtained in
later clinical trials. Moreover, data obtained from pre-clinical studies and
clinical trials may be subject to varying interpretations. As a result, the FDA
or other applicable regulatory authorities may not approve a product in a timely
fashion, or at all. Even if regulatory approval to market a product is granted,
the regulatory approval may impose limitations on the indicated use for which
the drug may be marketed.
OUR FAILURE TO ACQUIRE AND DEVELOP ADDITIONAL PRODUCT CANDIDATES OR APPROVED
PRODUCTS WILL IMPAIR OUR ABILITY TO GROW
As part of our growth strategy, we intend to acquire and develop additional
pharmaceutical product candidates or approved products. The success of this
strategy depends upon our ability to identify, select and acquire pharmaceutical
products in late-stage development or that have been approved that meet the
criteria we have established. Because we neither have, nor intend to establish,
internal scientific research capabilities, we are dependent upon pharmaceutical
and biotechnology companies and other researchers to sell or license product
candidates to us.
Any product candidate we acquire will require additional research and
development efforts prior to commercial sale, including extensive pre-clinical
and/or clinical testing and approval by the FDA and corresponding foreign
regulatory authorities. All of our product candidates are prone to the risks of
failure inherent in pharmaceutical product development, including the
possibility that the product candidate will not be safe, non-toxic and effective
or approved by regulatory authorities. In addition, we cannot assure you that
any approved products that we develop or acquire will be:
- manufactured or produced economically;
- successfully commercialized; or
- widely accepted in the marketplace.
In addition, proposing, negotiating and implementing an economically viable
acquisition is a lengthy and complex process. Other companies, including those
with substantially greater financial, marketing and sales resources, may compete
with us for the acquisition of product candidates and approved products. We may
not be able to acquire the rights to additional product candidates and approved
products on terms that we find acceptable, or at all.
IF WE BREACH ANY OF THE AGREEMENTS UNDER WHICH WE LICENSE COMMERCIALIZATION
RIGHTS TO PRODUCTS OR TECHNOLOGY FROM OTHERS, WE COULD LOSE LICENSE RIGHTS THAT
ARE IMPORTANT TO OUR BUSINESS
We license commercialization rights to products and technology that are
important to our business, and we expect to enter into additional licenses in
the future. For instance, we acquired our first four products through exclusive
licensing arrangements. Under these licenses we are subject to commercialization
and development, sublicensing, royalty, insurance and other obligations. If we
fail to comply with any of these requirements, or otherwise breach these license
agreements, the licensor may have the right to terminate the license in whole or
to terminate the exclusive nature of the license. In addition, upon the
termination of the license we may be required to license to the licensor the
intellectual property that we developed.
OUR ABILITY TO MANAGE OUR BUSINESS EFFECTIVELY COULD BE HAMPERED IF WE ARE
UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS
The biopharmaceutical industry has experienced a high rate of turnover of
management personnel in recent years. We are highly dependent on our ability to
attract and retain qualified personnel for the acquisition, development and
- 31 -
commercialization activities we conduct or sponsor. If we lose one or more of
the members of our senior management, including our executive chairman, Dr.
Clive A. Meanwell, or our chief executive officer, David M. Stack, or other key
employees or consultants, our ability to implement successfully our business
strategy could be seriously harmed. Our ability to replace these key employees
may be difficult and may take an extended period of time because of the limited
number of individuals in the biotechnology industry with the breadth of skills
and experience required to develop and commercialize products successfully.
Competition to hire from this limited pool is intense, and we may be unable to
hire, train, retain or motivate such additional personnel.
WE FACE SUBSTANTIAL COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING,
DEVELOPING OR COMMERCIALIZING COMPETING PRODUCTS BEFORE OR MORE SUCCESSFULLY
THAN WE DO
The biopharmaceutical industry is highly competitive. Our success will depend on
our ability to acquire and develop products and apply technology and our ability
to establish and maintain a market for our products. Potential competitors in
the United States and other countries include major pharmaceutical and chemical
companies, specialized biotechnology firms, universities and other research
institutions. Many of our competitors have substantially greater research and
development capabilities and experience, and greater manufacturing, marketing
and financial resources than we do. Accordingly, our competitors may develop or
license products or other novel technologies that are more effective, safer or
less costly than existing products or technologies or products or technologies
that are being developed by us or may obtain FDA approval for products more
rapidly than we are able. Technological development by others may render our
products or product candidates noncompetitive. We may not be successful in
establishing or maintaining technological competitiveness.
BECAUSE THE MARKET FOR THROMBIN INHIBITORS IS COMPETITIVE, OUR PRODUCT MAY NOT
OBTAIN WIDESPREAD USE
We have positioned Angiomax as a replacement for heparin, which is widely used
and inexpensive, for use in patients with ischemic heart disease. Because
heparin is inexpensive and has been widely used for many years, medical
decision-makers may be hesitant to adopt our alternative treatment. In addition,
due to the high incidence and severity of cardiovascular diseases, the market
for thrombin inhibitors is large and competition is intense and growing. There
are a number of thrombin inhibitors currently on the market, awaiting regulatory
approval and in development, including orally administered agents.
THE LIMITED RESOURCES OF THIRD-PARTY PAYERS MAY LIMIT THE USE OF OUR PRODUCTS
In general, anticoagulant drugs may be classified in three groups: drugs that
directly or indirectly target and inhibit thrombin, drugs that target and
inhibit platelets and drugs that break down fibrin. Because each group of
anticoagulants acts on different components of the clotting process, we believe
that there will be continued clinical work to determine the best combination of
drugs for clinical use. We expect Angiomax to be used with aspirin alone or in
conjunction with other therapies. Although we are not positioning Angiomax as a
direct competitor to platelet inhibitors or fibrinolytic drugs, platelet
inhibitors and fibrinolytic drugs may compete with Angiomax for the use of
hospital financial resources. Many U.S. hospitals receive a fixed reimbursement
amount per procedure for the angioplasties and other treatment therapies they
perform. Because this amount is not based on the actual expenses the hospital
incurs, U.S. hospitals may have to choose among Angiomax, platelet inhibitors
and fibrinolytic drugs.
FLUCTUATIONS IN OUR OPERATING RESULTS COULD AFFECT THE PRICE OF OUR COMMON STOCK
Our operating results may vary from period to period based on the amount and
timing of sales of Angiomax to customers in the United States, the availability
and timely delivery of a sufficient supply of Angiomax, the timing and expenses
of clinical trials, announcements regarding clinical trial results and product
introductions by our competitors, the availability and timing of third-party
reimbursement and the timing of approval for our product candidates. If our
operating results do not match the expectations of securities analysts and
investors as a result of these and other factors, the trading price of our
common stock will likely decrease.
WE MAY UNDERTAKE STRATEGIC ACQUISITIONS IN THE FUTURE AND ANY DIFFICULTIES FROM
INTEGRATING SUCH ACQUISITIONS COULD DAMAGE OUR ABILITY TO ATTAIN OR MAINTAIN
PROFITABILITY
We may acquire additional businesses and products that complement or augment our
existing business. Integrating any newly acquired businesses or product could be
expensive and time-consuming. We may not be able to integrate any acquired
business or product successfully or operate any acquired business profitably.
Moreover, we may need to raise additional funds through public or private debt
or equity financing to acquire any businesses, which may result in dilution for
stockholders and the incurrence of indebtedness.
WE HAVE SIGNIFICANT CREDIT EXPOSURE BECAUSE WE SELL ANGIOMAX TO A LIMITED NUMBER
OF WHOLESALERS
Our products are sold primarily to a limited number of national medical and
pharmaceutical distributors and wholesalers with distribution centers located
throughout the United States. We generally do not require collateral from these
distributors and wholesalers. During 2001, our revenues from four of our
customers totaled approximately 93% of our net revenues. As a result, failure to
pay us by any of these wholesalers could impair our financial position and
results of operations.
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RISKS RELATED TO OUR INDUSTRY
IF WE DO NOT OBTAIN FDA APPROVALS FOR OUR PRODUCTS OR COMPLY WITH GOVERNMENT
REGULATIONS, WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS AND MAY BE SUBJECT TO
STRINGENT PENALTIES
Except for Angiomax, which has been approved for sale in the United States and
New Zealand, we do not have a product approved for sale in the United States or
any foreign market. We must obtain approval from the FDA in order to sell our
product candidates in the United States and from foreign regulatory authorities
in order to sell our product candidates in other countries. We must successfully
complete our clinical trials and demonstrate manufacturing capability before we
can file with the FDA for approval to sell our products. The FDA could require
us to repeat clinical trials as part of the regulatory review process. Delays in
obtaining or failure to obtain regulatory approvals may:
- delay or prevent the successful commercialization of any of our product
candidates;
- diminish our competitive advantage; and
- defer or decrease our receipt of revenues or royalties.
The regulatory review and approval process is lengthy, expensive and uncertain.
Extensive pre-clinical data, clinical data and supporting information must be
submitted to the FDA for each additional indication to obtain such approvals,
and we cannot be certain when we will receive these regulatory approvals, if
ever.
In addition to initial regulatory approval, our products and product candidates
will be subject to extensive and rigorous ongoing domestic and foreign
government regulation. Any approvals, once obtained, may be withdrawn if
compliance with regulatory requirements is not maintained or safety problems are
identified. Failure to comply with these requirements may also subject us to
stringent penalties.
WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN PATENT PROTECTION FOR OUR PRODUCTS, AND
WE MAY INFRINGE THE PATENT RIGHTS OF OTHERS
The patent positions of pharmaceutical and biotechnology companies like us are
generally uncertain and involve complex legal, scientific and factual issues.
Our success depends significantly on our ability to:
- obtain U.S. and foreign patents;
- protect trade secrets;
- operate without infringing the proprietary rights of others; and
- prevent others from infringing our proprietary rights.
We may not have any patents issued from any patent applications that we own or
license. If patents are granted, the claims allowed may not be sufficiently
broad to protect our technology. In addition, issued patents that we own or
license may be challenged, invalidated or circumvented. Our patents also may not
afford us protection against competitors with similar technology. Because patent
applications in the United States are maintained in secrecy until patents issue,
others may have filed or maintained patent applications for technology used by
us or covered by our pending patent applications without our being aware of
these applications. In all, we exclusively license 10 issued U.S. patents and a
broadly filed portfolio of corresponding foreign patents and patent
applications. We have not yet filed any independent patent applications.
We may not hold proprietary rights to some patents related to our product
candidates. In some cases, others may own or control these patents. As a result,
we may be required to obtain licenses under third-party patents to market some
of our product candidates. If licenses are not available to us on acceptable
terms, we will not be able to market these products.
- 33 -
We may become a party to patent litigation or other proceedings regarding
intellectual property rights. The cost to us of any patent litigation or other
proceeding, even if resolved in our favor, could be substantial. If any patent
litigation or other intellectual property proceeding in which we are involved is
resolved unfavorably to us, we may be enjoined from manufacturing or selling our
products without a license from the other party, and we may be held liable for
significant damages. We may not be able to obtain any required license on
commercially acceptable terms, or at all.
IF WE ARE NOT ABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL, OUR TECHNOLOGY AND
INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US
We rely significantly upon unpatented proprietary technology, information,
processes and know-how. We seek to protect this information by confidentiality
agreements with our employees, consultants and other third-party contractors, as
well as through other security measures. We may not have adequate remedies for
any breach by a party to these confidentiality agreements. In addition, our
competitors may learn or independently develop our trade secrets.
WE COULD BE EXPOSED TO SIGNIFICANT LIABILITY CLAIMS IF WE ARE UNABLE TO OBTAIN
INSURANCE AT ACCEPTABLE COSTS AND ADEQUATE LEVELS OR OTHERWISE PROTECT OURSELVES
AGAINST POTENTIAL PRODUCT LIABILITY CLAIMS
Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing, marketing and sale of human healthcare products.
Product liability claims might be made by patients in clinical trials,
consumers, health care providers or pharmaceutical companies or others that sell
our products. These claims may be made even with respect to those products that
are manufactured in licensed and regulated facilities or otherwise possess
regulatory approval for commercial sale.
These claims could expose us to significant liabilities that could prevent or
interfere with the development or commercialization of our products. Product
liability claims could require us to spend significant time and money in
litigation or pay significant damages. We are currently covered, with respect to
our commercial sales in the United States and New Zealand and our clinical
trials, by primary product liability insurance in the amount of $20.0 million
per occurrence and $20.0 million annually in the aggregate on a claims-made
basis. This coverage may not be adequate to cover any product liability claims.
As we commercialize our products, we may wish to increase our product liability
insurance. Product liability coverage is expensive. In the future, we may not be
able to maintain or obtain such product liability insurance on reasonable terms,
at a reasonable cost or in sufficient amounts to protect us against losses due
to product liability claims.
OUR ABILITY TO GENERATE FUTURE REVENUE FROM PRODUCTS WILL DEPEND ON
REIMBURSEMENT AND DRUG PRICING
Acceptable levels of reimbursement of the cost of developing and
manufacturing of drugs and treatments related to those drugs by government
authorities, private health insurers and other organizations will have an effect
on the successful commercialization of, and attracting collaborative partners to
invest in the development of, our product candidates. We cannot be sure that
reimbursement in the United States or elsewhere will be available for any
products we may develop or, if already available, will not be decreased in the
future. If reimbursement is not available or is available only to limited
levels, we may not be able to commercialize our products, and may not be able to
obtain a satisfactory financial return on our products.
Third-party payors increasingly are challenging prices charged for medical
products and services. Also, the trend toward managed health care in the United
States and the changes in health insurance programs, as well as legislative
proposals to reform health care or reduce government insurance programs, may
result in lower prices for pharmaceutical products, including any products that
may be offered by us in the future. Cost-cutting measures that health care
providers are instituting, and the effect of any health care reform, could
materially adversely affect our ability to sell any products that are
successfully developed by us and approved by regulators. Moreover, we are unable
to predict what additional legislation or regulation, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted in
the future or what effect such legislation or regulation would have on our
business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk is confined to our cash, cash equivalents and
available for sale securities. We place our investments in high-quality
financial instruments, primarily money market funds and corporate debt
securities with maturities or auction dates of less than one year, which we
believe are subject to limited credit risk. We currently do not hedge interest
rate exposure. At December 31, 2001, we held $54.0 million in cash, cash
equivalents, and available for sale securities, all due within one year, which
had an average interest rate of approximately 2.0%.
Most of our transactions are conducted in U.S. dollars. We do have certain
development and commercialization agreements with vendors located outside the
United States. Transactions under certain of these agreements are conducted in
U.S. dollars, subject to adjustment based on significant fluctuations in
currency exchange rates. Transactions under certain other of these agreements
are conducted in the local foreign currency. If the applicable exchange rate
undergoes a change of 10%, we do not believe that it would have a material
impact on our results of operations or cash flows.
- 34 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statements required to be filed hereunder are filed as Appendix A
hereto, are listed under Item 14 (a) (1) and are incorporated herein by this
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers and Key Employees" in Part I hereof, and the remainder is
contained in our definitive proxy statement relating to the 2002 annual meeting
of stockholders (the "2002 Proxy Statement") under the captions "Proposal 1 -
Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" and is incorporated herein by this reference. The 2002 Proxy
Statement will be filed with the SEC not later than 120 days after the end of
our last fiscal year.
Officers are elected on an annual basis and serve at the discretion of our Board
of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the captions
"Directors," "Executive Compensation," "Executive Employment Agreements,"
"Compensation Committee Interlocks and Insider Participation," "Report of the
Compensation Committee on Executive Compensation" and "Comparative Stock
Performance" in the 2002 Proxy Statement and is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained under the caption "Principal
Stockholders" in the 2002 Proxy Statement and incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the captions
"Transactions with Executive Officers, Directors and Five Percent Stockholders"
and "Certain Relationships" in the 2002 Proxy Statement and is incorporated
herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) Financial Statements. The Consolidated Financial Statements are included as
Appendix A hereto and are filed as part of this Report. The Consolidated
Financial Statements include:
- 35 -
Page
----
1. Report of Independent Auditors............................................................ F-2
2. Consolidated Balance Sheets............................................................... F-3
3. Consolidated Statements of Operations..................................................... F-4
4. Consolidated Statements of Redeemable Preferred Stock and Stockholder's Equity
(Deficit)................................................................................. F-5
5. Consolidated Statements of Cash Flows..................................................... F-6
6. Notes to Consolidated Financial Statements................................................ F-7
(2) Financial Statement Schedule. Financial Statement Schedule II
"Valuation and Qualifying Accounts" immediately following the Notes to
Consolidated Financial Statements is filed as part of this Report.
(3) Exhibits. The exhibits set forth on the Exhibit Index following the
signature page to this Report are filed as part of this Report. This list of
exhibits identifies each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Report.
(b) Reports on Form 8-K:
On October 4, 2001, we filed a Current Report on Form 8-K with the SEC in
connection with revised revenue guidance for 2001 and 2002.
On October 26, 2001, we filed a Current Report on Form 8-K with the SEC in
connection with our announcement of financial results for the quarter and nine
month periods ended September 30, 2001.
- 36 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on April 1, 2002.
THE MEDICINES COMPANY
By: /s/Clive A. Meanwell
----------------------
Clive A. Meanwell
Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on April 1,
2002:
SIGNATURE TITLE(S)
--------- --------
/s/Clive A. Meanwell Executive Chairman and Chairman of the Board of Directors
----------------------------------------------- (Principal Executive Officer)
Clive A. Meanwell
/s/David M. Stack Chief Executive Officer and President and Director
-----------------------------------------------
David M. Stack
/s/Peyton J. Marshall Senior Vice President, Chief Financial Officer, Treasurer and
----------------------------------------------- Secretary (Principal Financial and Accounting Officer)
Peyton J. Marshall
Director
-----------------------------------------------
Leonard Bell
/s/ Stewart J. Hen Director
-----------------------------------------------
Stewart J. Hen
/s/M. Fazle Husain Director
-----------------------------------------------
M. Fazle Husain
Director
-----------------------------------------------
T. Scott Johnson
Director
-----------------------------------------------
Armin M. Kessler
/s/Nicholas J. Lowcock Director
-----------------------------------------------
Nicholas J. Lowcock
/s/James E. Thomas Director
-----------------------------------------------
James E. Thomas
APPENDIX A
INDEX TO THE
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE OF
THE MEDICINES COMPANY
Page
----
Report of Independent Auditors......................................................................... F-2
Consolidated Balance Sheets............................................................................ F-3
Consolidated Statements of Operations.................................................................. F-4
Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit)............... F-5
Consolidated Statements of Cash Flows.................................................................. F-6
Notes to Consolidated Financial Statements............................................................. F-7
Schedule - Item 14(a).................................................................................. F-24
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
The Medicines Company
We have audited the accompanying consolidated balance sheets of The Medicines
Company as of December 31, 2000 and 2001, and the related consolidated
statements of operations, redeemable preferred stock and stockholders' equity
(deficit), and cash flows, for each of the three years in the period ending
December 31, 2001. Our audit also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Medicines Company at December 31, 2000 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the financial statements, in 2001 the Company changed
its method of accounting for derivatives in accordance with Statement of
Financial Accounting Standards No. 133.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 8, 2002, except for Note 15,
as to which the dates are March 6, March 25, March 26, and March 29, 2002
F-2
THE MEDICINES COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
2000 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 36,802,356 $ 53,884,376
Available for sale securities 42,522,729 125,000
Accrued interest receivable 1,392,928 6,757
------------- -------------
80,718,013 54,016,133
------------- -------------
Accounts receivable, net of allowances of $823,000 in 2001 -- 5,346,684
Inventories 1,963,491 16,610,928
Prepaid expenses and other current assets 465,650 550,564
------------- -------------
Total current assets 83,147,154 76,524,309
Fixed assets, net 965,832 1,223,528
Other assets 250,144 153,076
------------- -------------
Total assets $ 84,363,130 $ 77,900,913
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,987,213 $ 8,805,476
Accrued expenses 9,136,934 7,974,473
------------- -------------
Total current liabilities 15,124,147 16,779,949
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $.001 par value, 75,000,000 shares authorized at December 31, 2000
and December 31, 2001, respectively; 30,320,455 and 34,606,582 issued and
outstanding at December 30, 2000 and December 31, 2001, respectively 30,320 34,607
Additional paid-in capital 279,126,337 321,041,704
Deferred compensation (13,355,694) (8,593,773)
Accumulated deficit (196,560,034) (251,443,682)
Accumulated other comprehensive income (loss) (1,946) 82,108
------------- -------------
Total stockholders' equity 69,238,983 61,120,964
------------- -------------
Total liabilities and stockholders' equity $ 84,363,130 $ 77,900,913
============= =============
See accompanying notes.
F-3
THE MEDICINES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999 2000 2001
------------ ------------- ------------
Net revenue $ -- $ -- $ 14,247,724
Operating expenses:
Cost of revenue -- -- 2,110,425
Research and development 30,344,892 39,572,297 32,767,394
Selling, general and administrative 5,008,387 15,033,585 36,566,761
------------ ------------- ------------
Total operating expenses 35,353,279 54,605,882 71,444,580
Loss from operations (35,353,279) (54,605,882) (57,196,856)
Other income (expense):
Interest income 837,839 2,704,126 3,163,208
Interest expense (197,455) (19,390,414) --
Loss on sale of investment -- -- (850,000)
------------ ------------- ------------
Net loss (34,712,895) (71,292,170) (54,883,648)
Dividends and accretion to redemption value
of redeemable preferred stock (5,893,016) (30,342,988) --
------------ ------------- ------------
Net loss attributable to common stockholders $(40,605,911) $(101,635,158) $(54,883,648)
============ ============= ============
Basic and diluted net loss attributable to common
stockholders per common share $ (80.08) $ (8.43) $ (1.67)
Unaudited pro forma basic and diluted net loss
attributable to common stockholders per
common share $ (1.94) $ (2.10) $ (1.67)
Shares used in computing net loss attributable
to common stockholders per common share:
Basic and diluted 507,065 12,059,275 32,925,968
Unaudited pro forma basic and diluted 17,799,876 24,719,075 32,925,968
See accompanying notes.
F-4
THE MEDICINES COMPANY
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- -------------
Balance at December 31, 1998 21,493,621 $ 79,384,470 889,778 $ 890
Repurchase of common stock (56,378) (56)
Dividends on preferred stock 1,468,729 5,351,178
Accretion of preferred stock to redemption value 541,765
Issuance of warrants associated with convertible notes
Net loss
Currency translation adjustment
Unrealized loss on marketable securities
Comprehensive loss
----------- ------------- ---------- -------------
Balance at December 31, 1999 22,962,350 85,277,413 833,400 834
Repurchase of common stock (22,205) (22)
Employee stock purchases 227,525 226
Issuance of redeemable preferred stock 5,946,366 25,688,284
Accretion and dividend on preferred stock 1,751,241 4,898,537
Beneficial conversion of redeemable convertible
preferred stock
Issuance of warrants associated with convertible notes
Issuance of common stock through initial public offering 6,900,000 6,900
Conversion of preferred stock to common stock (30,659,957) (115,864,234) 22,381,735 22,382
Deferred compensation expense associated with
stock options
Adjustments to deferred compensation for terminations
Amortization of deferred stock compensation
Net loss
Currency translation adjustment
Unrealized loss on marketable securities
Comprehensive loss
----------- ------------- ---------- -------------
Balance at December 31, 2000 -- -- 30,320,455 30,320
Repurchase of common stock (11,239) (11)
Employee stock purchases 297,366 298
Issuance of common stock through private placement 4,000,000 4,000
Adjustments to deferred compensation for terminations
Amortization of deferred stock compensation
Net loss
Currency translation adjustment
Reclassification adjustment for realized loss on
available for sale securities
Comprehensive loss
----------- ------------- ---------- -------------
Balance at December 31, 2001 -- $ -- 34,606,582 $ 34,607
=========== ============= ========== =============
ADDITIONAL DEFERRED
PAID-IN STOCK ACCUMULATED
CAPITAL COMPENSATION DEFICIT
------------- ------------- -------------
Balance at December 31, 1998 $ 13,810 $ (54,319,117)
Repurchase of common stock (21)
Dividends on preferred stock (5,351,251)
Accretion of preferred stock to redemption value (541,765)
Issuance of warrants associated with convertible notes 325,355
Net loss (34,712,895)
Currency translation adjustment
Unrealized loss on marketable securities
Comprehensive loss
------------- ------------- -------------
Balance at December 31, 1999 339,144 -- (94,925,028)
Repurchase of common stock
Employee stock purchases 286,068
Issuance of redeemable preferred stock
Accretion and dividend on preferred stock (4,898,537)
Beneficial conversion of redeemable convertible
preferred stock 25,444,299 (25,444,299)
Issuance of warrants associated with convertible notes 18,789,805
Issuance of common stock through initial public offering 101,343,162
Conversion of preferred stock to common stock 115,841,732
Deferred compensation expense associated with
stock options 17,279,612 $ (17,279,612)
Adjustments to deferred compensation for terminations (197,485) 197,485
Amortization of deferred stock compensation 3,726,433
Net loss (71,292,170)
Currency translation adjustment
Unrealized loss on marketable securities
Comprehensive loss
------------- ------------- -------------
Balance at December 31, 2000 279,126,337 (13,355,694) (196,560,034)
Repurchase of common stock --
Employee stock purchases 743,147
Issuance of common stock through private placement 41,798,975
Adjustments to deferred compensation for terminations (626,755) 626,755
Amortization of deferred stock compensation 4,135,166
Net loss (54,883,648)
Currency translation adjustment
Reclassification adjustment for realized loss on
available for sale securities
Comprehensive loss
------------- ------------- -------------
Balance at December 31, 2001 $ 321,041,704 $ (8,593,773) $(251,443,682)
============= ============= =============
COMPREHENSIVE TOTAL
INCOME STOCKHOLDERS'
(LOSS) EQUITY/(DEFICIT)
------------- ----------------
Balance at December 31, 1998 $ 38,658 $ (54,265,759)
Repurchase of common stock (77)
Dividends on preferred stock (5,351,251)
Accretion of preferred stock to redemption value (541,765)
Issuance of warrants associated with convertible notes 325,355
Net loss (34,712,895)
Currency translation adjustment (3,847) (3,847)
Unrealized loss on marketable securities (7,416) (7,416)
-------------
Comprehensive loss (34,724,158)
------------- -------------
Balance at December 31, 1999 27,395 (94,557,655)
Repurchase of common stock (22)
Employee stock purchases 286,294
Issuance of redeemable preferred stock --
Accretion and dividend on preferred stock (4,898,537)
Beneficial conversion of redeemable convertible
preferred stock --
Issuance of warrants associated with convertible notes 18,789,805
Issuance of common stock through initial public offering 101,350,062
Conversion of preferred stock to common stock 115,864,114
Deferred compensation expense associated with --
stock options --
Adjustments to deferred compensation for terminations --
Amortization of deferred stock compensation 3,726,433
Net loss (71,292,170)
Currency translation adjustment 5,141 5,141
Unrealized loss on marketable securities (34,482) (34,482)
-------------
Comprehensive loss (71,321,511)
------------- -------------
Balance at December 31, 2000 (1,946) 69,238,983
Repurchase of common stock (11)
Employee stock purchases 743,445
Issuance of common stock through private placement 41,802,975
Adjustments to deferred compensation for terminations --
Amortization of deferred stock compensation 4,135,166
Net loss (54,883,648)
Currency translation adjustment 47,446 47,446
Reclassification adjustment for realized loss on
available for sale securities 36,608 36,608
-------------
Comprehensive loss (54,799,594)
------------- -------------
Balance at December 31, 2001 $ 82,108 $ 61,120,964
============= =============
See accompanying notes.
F-5
THE MEDICINES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 2000 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(34,712,895) $(71,292,170) $(54,883,648)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 207,663 277,307 470,930
Amortization of discount on convertible notes 101,674 19,013,486 --
Amortization of deferred stock compensation -- 3,726,433 4,135,166
Loss on sales and disposal of fixed assets -- 14,631 2,113
Changes in operating assets and liabilities: -- --
Accrued interest receivable 690,290 (1,337,703) 1,386,171
Accounts receivable -- -- (5,346,684)
Inventory -- (1,963,491) (14,620,838)
Prepaid expenses and other current assets 39,141 (312,027) (85,806)
Other assets (3,349) (82,391) 96,927
Accounts payable 5,528,544 (1,823,602) 2,819,943
Accrued expenses 1,258,366 5,708,535 (1,149,886)
------------ ------------ ------------
Net cash used in operating activities (26,890,566) (48,070,992) (67,175,612)
Cash flows from investing activities:
Purchases of available for sale securities -- (51,098,901) (7,430,886)
Maturities and sales of available for sale securities 18,796,493 9,083,090 49,863,097
Purchase of fixed assets (258,788) (834,160) (735,571)
------------ ------------ ------------
Net cash provided by (used in) investing activities 18,537,705 (42,849,971) 41,696,640
Cash flows from financing activities:
Proceeds from issuance of convertible notes and warrants 6,000,000 13,348,779 --
Proceeds from issuances of preferred stock, net -- 6,095,338 --
Proceeds from issuances of common stock, net -- 101,636,356 42,546,420
Repurchases of common stock (77) (22) (11)
Dividends paid in cash (73) (118) --
------------ ------------ ------------
Net cash provided by financing activities 5,999,850 121,080,333 42,546,409
Effect of exchange rate changes on cash (1,245) (280) 14,583
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (2,354,256) 30,159,090 17,082,020
Cash and cash equivalents at beginning of period 8,997,522 6,643,266 36,802,356
------------ ------------ ------------
Cash and cash equivalents at end of period $ 6,643,266 $ 36,802,356 $ 53,884,376
============ ============ ============
Non-cash transactions:
Dividends on preferred stock $ 5,351,178 $ 31,894,474 $ --
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ -- $ 255,781 $ --
============ ============ ============
See accompanying notes.
F-6
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. NATURE OF BUSINESS
The Medicines Company (the Company) was incorporated in Delaware on July 31,
1996. The Company is a pharmaceutical company engaged in the acquisition,
development and commercialization of late-stage development drugs or drugs
approved for marketing. The U.S. Food and Drug Administration approved Angiomax
(R) (bivalirudin) for use as an anticoagulant in patients with unstable angina
undergoing percutaneous transluminal coronary angioplasty in December 2000 and
the Company commenced sales of Angiomax in the first quarter of 2001. The
Company was considered to be a development-stage enterprise, as defined in
Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by
Development Stage Enterprises" through December 31, 2000. With the commencement
of sales in 2001, the Company is no longer considered to be a development stage
enterprise.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The Company has no
unconsolidated subsidiaries.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES
The Company is subject to risks common to companies in the pharmaceutical
industry including, but not limited to, uncertainties related to regulatory
approvals, dependence on key products, dependence on key customers, and
protection of proprietary rights.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk include cash, cash equivalents, available for sale securities and
accounts receivable. The Company believes it minimizes its exposure to potential
concentrations of credit risk by placing investments in high-quality financial
instruments with high quality institutions. At December 31, 2001, approximately
$52,352,000 of the cash and cash equivalents balance was invested in a single
fund, the Merrill Lynch Premier Institutional Fund, a no-load money market fund.
The Company's products are sold primarily to a limited number of national
medical and pharmaceutical distributors and wholesalers with distribution
centers located throughout the United States. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company maintains reserves for potential credit losses and, during 2001,
such losses were within the expectations of management. During 2001, the
Company's revenues to four of its customers totaled approximately 93% of net
revenues. At December 31, 2001, these same customers represented approximately
$5.9 million, or 97%, of gross accounts receivable.
CASH, CASH EQUIVALENTS AND AVAILABLE FOR SALE SECURITIES
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents at
December 31, 2001 consist of investments in money market funds. These
investments are carried at cost, which approximates fair value.
F-7
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
The Company considers securities with original maturities of greater than three
months to be available-for-sale securities. Securities under this classification
are recorded at fair market value and unrealized gains and losses are recorded
as a separate component of stockholders' equity. The estimated fair value of the
available for sale securities is determined based on quoted market prices or
rates for similar instruments. At December 31, 2000, available for sale
securities consisted of investments in corporate bonds and certificates of
deposit with maturities of less than one year and are summarized as follows:
UNREALIZED
COST LOSS FAIR VALUE
---- ---- ----------
December 31, 2000 $42,559,337 $36,608 $42,522,729
December 31, 2001 $ 125,000 $ -- $ 125,000
At December 31, 2000 and 2001, the Company held a certificate of deposit for
$125,000 with a one-year term that was pledged as a security deposit on its
facility lease in Parsippany, New Jersey.
During the second quarter of 2001, the Company sold its $3.0 million investment
in Southern California Edison 5 7/8% bonds, which were originally due on January
15, 2001, realizing a loss of $850,000 on the sale. There were also maturities
of available for sale securities during the years ended December 31, 2000 and
2001, which are disclosed in the accompanying consolidated statements of cash
flows.
REVENUE RECOGNITION
The Company recognizes revenue from product sales in accordance with generally
accepted accounting principles in the United States including the guidance in
Staff Accounting Bulletin 101. Revenue is recognized when there is persuasive
evidence of an arrangement, delivery has occurred, the price is fixed and
determinable, and collectibility is reasonably assured.
The Company's products are sold with limited rights of return. In accordance
with Statement of Financial Accounting Standards No. 48 (SFAS 48) "Revenue
Recognition When Right of Return Exists", revenue is recognized when the price
to the buyer is fixed, the buyer is obligated to pay the Company and the
obligation to pay is not contingent on resale of the product, the buyer has
economic substance apart from the Company, the Company has no obligations to
bring about sale of the product and the amount of returns can be reasonably be
estimated. Returns during 2001 were not material.
The Company does not offer price protection to its customers. The Company offers
its customers rebates based on the volume of a customers' purchases. The Company
provides for such estimated rebates at the time of sale and such amounts are
reported net of revenues.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs were
approximately $484,000, $807,000 and $1,258,000 for the years ended December 31,
1999, 2000 and 2001, respectively.
INVENTORIES
The Company records inventory upon the transfer of title from its vendor.
Inventory is stated at the lower of cost or market with cost determined using a
weighted average of costs. All costs associated with the manufacture of Angiomax
bulk drug product and finished product to which title transferred to the Company
prior to FDA approval of Angiomax were expensed as research and development. In
December 2000, the Company received FDA approval for Angiomax and any Angiomax
bulk drug product to which the Company took title after FDA approval is recorded
as inventory. At December 31, 2001 the inventory consists of substantially all
raw materials and work-in- process.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is provided using the
straight-line method based on estimated useful lives or, in the case of
leasehold improvements, over the lesser of the useful lives or the lease terms.
F-8
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has elected to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").
TRANSLATION OF FOREIGN CURRENCIES
The functional currencies of the Company's foreign branches and subsidiaries are
the local currencies; British pound sterling, Swiss franc and New Zealand
dollar. The Company translates its foreign operations using a current exchange
rate. In accordance with Statement of Financial Accounting Standards No. 52,
assets and liabilities are exchanged using the current exchange rate as of the
balance sheet date. Expenses and items of income are exchanged using a weighted
average exchange rate over the period ended on the balance sheet date.
Adjustments resulting from the translation of the financial statements of the
Company's foreign subsidiaries into U.S. dollars are excluded from the
determination of net loss and are accumulated in a separate component of
stockholders' equity. Foreign exchange transaction gains and losses are included
in the results of operations and are not material to the Company's consolidated
financial statements.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and income tax bases of assets and liabilities, as well as
net operating loss carryforwards, and are measured using the enacted tax rates
and laws that will be in effect when the differences reverse. Deferred tax
assets are reduced by a valuation allowance to reflect the uncertainty
associated with ultimate realization.
COMPREHENSIVE INCOME/(LOSS)
The Company reports comprehensive income/loss and its components in accordance
with the provisions of SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income/loss includes all changes in equity for cumulative
translations adjustments resulting from the consolidation of foreign branches
and subsidiaries' financial statements and unrealized gains and losses on
available-for-sale securities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The Company
adopted SFAS No. 133 effective January 1, 2001 and it did not have a material
impact on the Company's financial condition or results of operations.
In September 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on Issue 00-19, "Determination of
Whether Share Settlement is Within the Control of the Issuer for Purposes of
Applying Issue No. 96-13, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." The consensus
provides guidance regarding when a contract indexed to a company's own stock
must be classified in stockholders' equity versus classified as an asset or
liability. Any new contracts entered into after the date of consensus must
comply with the consensus, and any contracts outstanding as of the September
2000 consensus date must comply with the consensus by June 2001. The Company
adopted this consensus in the quarter ended June 30, 2001, and it did not have a
material impact on the Company's financial condition or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes APB No.
16, Business Combinations, and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises", and requires that all business
combinations be accounted for by a single method - the purchase method. SFAS No.
141 also provides guidance on the recognition of intangible assets identified in
a business combination and requires enhanced financial statement disclosures.
SFAS No. 142 adopts a more aggregate view of goodwill and bases the accounting
for goodwill on the units of the combined entity into which an acquired entity
is integrated. In addition, SFAS No. 142 concludes that goodwill and intangibles
assets that have indefinite
F-9
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
useful lives will not be amortized but rather will be tested at least annually
for impairment. Intangibles assets that have finite lives will continue to be
amortized over their useful lives. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. The adoption of SFAS No. 142 is
required for fiscal years beginning after December 15, 2001, except for the
nonamortization and amortization provision, which are required for goodwill and
intangible assets acquired after June 30, 2001. The Company believes that the
adoption of SFAS No. 141 and SFAS No. 142 will not have a material impact on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No.143, "Accounting for Asset Retirement
Obligations". The standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. The Company believes that the adoption of SFAS No. 143
will not have a material impact on the Company's financial position or results
of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of", and certain provisions of Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, Extraordinary, Unusual and Infrequent
Occurring Events and Transactions." SFAS No. 144 requires that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and it broadens the presentation of
discontinued operations to include more disposal transactions. The standard is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
adoption permitted. The Company believes that the adoption of SFAS No. 144 will
not have a material impact on the Company's financial position or results of
operations.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding during the period reduced, where applicable, for
outstanding, yet unvested, shares. Diluted net loss per share includes the
effect of stock options, warrants and redeemable convertible preferred stock and
convertible notes outstanding during the period, if dilutive. Since the Company
has a net loss for all periods presented, the effect of all potentially dilutive
securities is antidilutive. Accordingly, basic and diluted net loss per share
are the same.
UNAUDITED PRO FORMA NET LOSS PER SHARE
Unaudited pro forma net loss per share is computed using the weighted average
number of common shares outstanding, including the pro forma effects of
automatic conversion of all outstanding redeemable convertible preferred stock
and accrued dividends and convertible notes and accrued interest through the
balance sheet date into shares of the Company's common stock effective upon the
closing of the Company's initial public offering, as if such conversion had
occurred at the date of original issuance.
SEGMENTS
The Company is focused on the acquisition, development and commercialization of
late-stage development drugs and drugs approved for marketing. The Company has
license rights to three potential products, Angiomax(R), CTV-05 and IS-159. The
Company manages its business and operations as one segment. The only revenues
reported to date are from the sales of the Company's Angiomax(R) product.
3. MANAGEMENT'S PLANS AND FINANCING
F-10
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
The Company has incurred substantial losses since inception. To date, the
Company has primarily funded its operations through the issuance of debt and
equity. The Company expects to continue to expend substantial amounts for
continued product research, development and commercialization activities for the
foreseeable future, and management plans to fund these expenditures by
increasing revenue or through debt or equity financing, if possible, and to
secure collaborative partnering arrangements that will provide available cash
funding for operations.
Should revenue growth or additional debt or equity financing or collaborative
partnering arrangements be unavailable to the Company, management will restrict
certain of the Company's planned activities and operations, as necessary, to
sustain operations and conserve cash resources.
4. FIXED ASSETS
Fixed assets consist of the following:
DECEMBER 31,
ESTIMATED ----------------------------
LIFE (YEARS) 2000 2001
------------ ---- ----
Furniture, fixtures and equipment 3 $ 547,748 $ 675,482
Computer hardware and software 3 728,333 1,314,358
Leasehold improvements 5 243,060 250,585
----------- -----------
1,519,141 2,240,425
Less: Accumulated depreciation (553,309) (1,016,897)
----------- -----------
$ 965,832 $ 1,223,528
=========== ===========
Depreciation expense was approximately $208,000, $277,000 and $471,000 for the
years ended December 31, 1999, 2000 and 2001, respectively.
5. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
2000 2001
---------- ----------
Development services $5,998,117 $3,394,720
Sales & marketing 1,106,119 2,202,632
Other 2,032,698 2,377,121
---------- ----------
$9,136,934 $7,974,473
========== ==========
F-11
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
6. CONVERTIBLE NOTES
In October 1999, the Company issued $6,000,000 of 8% Convertible Notes ("the
October Notes") and 1,013,877 Common Stock Purchase Warrants ("the October
Warrants") to existing investors, raising proceeds of $6,000,000. The October
Notes were convertible into shares of stock of the Company upon a subsequent
sale of stock of the Company provided that such sale resulted in aggregate gross
proceeds of at least $6,000,000. Each October Warrant provides the holder with
the right to purchase one share of Common Stock of the Company at a price of
$5.92 per share at any time prior to October 19, 2004. The Company recorded
$325,355 as the fair value of the October Warrants using the Black-Scholes
method and the estimated fair value of the Company's Common Stock on the date of
the issuance of the October warrants, and $5,674,645 as the value of the October
Notes on the issuance date. The discount on the October Notes was amortized to
interest expense over the expected term of the October Notes to June 2000. Since
the October Notes were issued in October 1999, the carrying amount at December
31, 1999 approximated their fair value at December 31, 1999. Upon completion of
the Company's sale of Series IV Preferred Stock in May 2000, the principal and
accrued interest on the October Notes was converted into 1,393,909 shares of
Series IV Preferred Stock.
In March 2000, the Company issued $13,348,779 of 8% Convertible Notes ("the
March Notes") and 2,255,687 Common Stock Purchase Warrants ("the March
Warrants") to current stockholders, raising proceeds of $13,348,779. The March
Notes were convertible into shares of stock of the Company upon a subsequent
private sale of stock of the Company provided that such sale resulted in
aggregate gross proceeds of at least $6,000,000. Each March Warrant provides the
holder with the right to purchase one share of Common Stock of the Company at a
price of $5.92 per share at any time prior to March 2005. The Company recorded
approximately $18,800,000 as the value of the March Warrants using the
Black-Scholes method and the estimated fair value of the Company's Common Stock
on the date of the issuance of the March warrants. The discount on the March
Notes was amortized over the expected term of the Notes to June 2000. For the
year ended December 31, 2000, amortization of the discount was approximately
$18,800,000 and is included with the interest expense in the accompanying
financial statements. Upon completion of the Company's sale of Series IV
Preferred Stock in May 2000, the principal and accrued interest on the Notes was
converted into 3,141,457 shares of Series IV Preferred stock.
7. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
On June 29, 2000, the Company's Board of Directors approved a reverse split of
..73 shares for every one share of Common Stock then outstanding. The reverse
stock split became effective on August 4, 2000. The accompanying financial
statements and footnotes including all share and per share amounts reflect the
reverse stock split.
SERIES I, SERIES II, SERIES III AND SERIES IV REDEEMABLE CONVERTIBLE PREFERRED
STOCK
During 1999 and 2000, the Company had designated four series of redeemable
convertible preferred stock. A brief summary of the Series I, Series II, Series
III and Series IV Redeemable Convertible Preferred Stock follows. At December
31, 2000 and 2001, there was no Redeemable Preferred Stock outstanding.
In August 1998, the Company executed an agreement (the "Exchange Agreement")
under which 8,892,912 shares of Common Stock and 41,992 shares of Series A
Redeemable Preferred Stock were exchanged for 2,506,000 shares of Series I
Redeemable Convertible Preferred Stock and 10,565,714 shares of Series II
Redeemable Convertible Preferred Stock. Holders of Series A Redeemable Preferred
Stock were entitled to receive preferential cumulative annual dividends payable
in additional shares of Series A Redeemable Preferred Stock at the rate of 7%
per annum of the stated value. Prior to the Exchange Agreement, dividends earned
from January 1, 1998 through the date of the Exchange Agreement were paid to the
holders of Series A Redeemable Preferred Stock. During 1997, certain preferred
shareholders waived their
F-12
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
right to a portion of earned dividends and the Company paid agreed-upon amounts
through December 31, 1997. To the extent that all or any part of the Stock would
have resulted in the issuance of a fractional share of the Series A Preferred
stock, the amount of such fraction, multiplied by the stated value, was paid in
cash.
On May 17, 2000, the Company issued 1,411,000 shares of Series IV Redeemable
Convertible Preferred Stock for net proceeds of $6,095,520. In addition, on May
17, 2000, the October and March Notes and accrued interest were converted into
4,535,366 shares of Series IV Redeemable Convertible Preferred Stock. The Series
IV Preferred Stock carried terms and conditions similar to the Series I, II, III
Preferred Stock. The Series IV Preferred Stock was convertible into Common Stock
at a 1-for-0.73 conversion rate and automatically converted upon the closing of
the Company's initial public offering (IPO). The Series IV Redeemable
Convertible Preferred Stock issued on May 17, 2000 contained a beneficial
conversion feature based on the estimated fair market value of common stock into
which it is convertible. In accordance with EITF 98-5, the total amount of such
beneficial conversion is approximately $25,450,000. The beneficial conversion is
analogous to a dividend and was recognized during 2000 when issued.
Simultaneously with the closing of the Company's IPO, 30,659,957 shares of the
Series I, II, III and IV Redeemable Convertible Preferred Stock then outstanding
(including accrued dividends for the period August 1, 2000 to August 11, 2000)
were converted into 22,381,735 shares of Common Stock.
COMMON STOCK
Common Stockholders are entitled to one vote per share and dividends when
declared by the Board of Directors, subject to the preferential rights of
preferred stockholders.
In its IPO on August 11, 2000, the Company sold 6,000,000 shares of its common
stock at a price of $16.00 per share. In addition, on September 8, 2000, the
underwriters of the IPO exercised their over-allotment option and purchased an
additional 900,000 shares of Common Stock at a price of $16.00 per share. The
Company received proceeds of approximately $101.4 million, net of underwriting
discounts and commissions, and expenses. Simultaneously with the closing of the
IPO, 30,659,957 shares of Redeemable Convertible Preferred Stock then
outstanding (including accrued dividends for the period August 1, 2000 to August
11, 2000) were converted into 22,381,735 shares of Common Stock.
In May 2001, the Company received $41.8 million from a private placement of
4,000,000 shares of Common Stock sold to both new and existing shareholders at a
price of $11.00 per share, The shares sold in the private placement were
subsequently registered for resale.
During 1996, 1997 and 1998, certain employees of the Company purchased 335,800,
627,070 and 32,850 shares of Common Stock, respectively, for $0.001 per share.
These shares are subject to restriction and vesting agreements that limit
transferability and allow the Company to repurchase unvested shares at the
original purchase price. The shares vest ratably over a four-year period that
generally begins on each employee's hire date. During 1999, 2000 and 2001, the
Company repurchased 56,378, 22,205 and 11,239 shares, respectively, of unvested
Common Stock for $0.001 per share. There were 1,672 shares of Common Stock
unvested at December 31, 2001.
STOCK PLANS
In April 1998, the Company adopted the 1998 Stock Incentive Plan (the "Plan"),
which provides for the grant of stock options, restricted stock and other
stock-based awards to employees, directors and consultants. The Board of
Directors determines the term of each option, the option price, the number of
shares for which each option is granted and the rate at which each option is
exercisable. During 1999, the Board of Directors amended all outstanding grants
to allow holders the opportunity to exercise options prior to vesting. Exercised
options that are unvested are subject to repurchase by the Company at the
original exercise price. Options granted under the plan generally vest in
increments over four years.
F-13
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
In January 2000, the Board of Directors approved an amendment to the Plan to
increase the number of shares available under the Plan to 1,448,259. In May
2000, the Board of Directors approved an amendment to the Plan to increase the
number of shares available under the Plan to 4,368,259. In addition, the Board
of Directors also approved the 2000 Employee Stock Purchase Plan which provides
for the issuance of up to 255,500 shares of Common Stock to participating
employees and the 2000 Directors Stock Option Plan which provides for the
issuance of up to 250,000 shares of Common Stock to the Company's outside
directors. Both the 2000 Employee Stock Purchase Plan and the 2000 Directors
Stock Option Plan have received stockholder approval. In May 2001, the Board of
Directors approved the 2001 Non-Officer, Non-Director Employee Stock Incentive
Plan (the "2001 Plan"), which provides for the grant of nonstatutory stock
options to employees, consultants and advisors, of the Company and its
subsidiaries. The 2001 Plan provides for the issuance of up to 1,250,000 shares
of stock. The Board of Directors administers the 2001 plan, although it may
delegate its authority to one or more committees and, in limited circumstances,
to one or more of the executive officers.
Prior to the Company's IPO, the Board of Directors determined the fair value of
the Company's Common Stock in its good faith judgment at each option grant date
for grants under the Plan considering a number of factors including the
financial and operating performance of the company, recent transactions in the
Company's Common and Preferred Stock, if any, the values of similarly situated
companies and the lack of marketability of the Company's Common Stock. Following
the Company's IPO, the fair value is determined based on the traded value of the
Company's Common Stock.
During the period January 1, 2000 to September 30, 2000, the Company issued
2,273,624 options at exercise prices below the estimated fair value of the
Company's Common Stock as of the date of grant of such options based on the
price of the Company's Common Stock in connection with the Company's IPO. The
total deferred compensation associated with these options is approximately $17.3
million. Included in the results of operations for the years ended December 31,
2000 and 2001 is compensation expense of approximately $3.7 million and $4.1
million, respectively, associated with such options.
The Company has elected to follow APB 25 in accounting for its stock options
granted to employees because the alternative fair value accounting provided for
under SFAS 123, requires the use of option valuation models that were not
developed for use in valuing employee stock options. Because the exercise price
of the Company's stock options generally equals the market price of the
underlying stock on the date of grant, no compensation is recognized under APB
25. Had compensation costs for the Plan been determined based on the fair value
at the grant dates as calculated in accordance with SFAS 123, the Company's net
loss for the year ended December 31, 1999, 2000 and 2001 would have been
increased to the pro forma amounts indicated below.
YEARS ENDED DECEMBER 31,
1999 2000 2001
----------- ------------ -----------
Net loss attributable to common
stockholders - As reported $40,605,911 $101,635,158 $54,883,648
Net loss attributable to common
stockholders - Pro forma $40,771,828 $106,150,604 $65,806,800
Net loss per share attributable to
common stockholders -- As reported $(80.08) $(8.43) $(1.67)
Net loss per share attributable to
common stockholders -- Pro forma $(80.41) $(8.80) $(2.00)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
F-14
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
YEARS ENDED DECEMBER 31,
1999 2000 2001
-----------------------------------------------
Expected dividend yield 0% 0% 0%
Expected stock price volatility 70% 70% 96%
Risk-free interest rate 5.45% 6.32% 4.0%
Expected option term 3.30 years 3.35 years 3.34 years
A summary of stock option activity under all the Company's plans are as follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
PER SHARE
---------- ----------------
Outstanding, December 31, 1998 705,271 $ 1.12
Granted 239,075 1.23
Canceled (175,380) 1.05
---------- ------
Outstanding, December 31, 1999 768,966 $ 1.16
Granted 3,080,424 9.80
Exercised (227,523) 1.26
Canceled (406,713) 1.22
---------- ------
Outstanding, December 31, 2000 3,215,154 $ 9.43
Granted 2,090,000 11.25
Exercised (216,118) 2.45
Canceled (329,086) 14.94
---------- ------
Outstanding, December 31, 2001 4,759,950 $10.16
========== ======
Available for future grant at December 31, 2001 662,631
==========
The weighted average per share fair value of options granted during 1999, 2000
and 2001 was $0.62, $10.34 and $7.17, respectively. There were no options
granted during 2001 with an exercise price below the fair market value of the
underlying shares on the date of grant. The weighted average fair value and
exercise price of options granted during 2000 that were granted with exercise
prices below fair market value were $9.35 and $4.68, respectively. The weighted
average fair value and exercise price of options granted with exercise prices
equal to fair value were $13.19 and $24.96, respectively, during 2000 and $7.17
and $11.25, respectively during 2001.
The following table summarizes information about stock options from all the
Company's plans outstanding at December 31, 2001:
F-15
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
OPTIONS OUTSTANDING OPTIONS VESTED
-------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING AT CONTRACTUAL PRICE PER OUTSTANDING AT PRICE PER
PER SHARE 12/31/01 LIFE (YEARS) SHARE 12/31/01 SHARE
--------- -------- ------------ ----- -------- -----
$0.69 - $4.79 1,528,931 8.10 $ 3.45 748,270 $ 3.01
$5.90 - $9.50 1,067,120 9.17 6.24 221,979 5.91
$10.11 - $14.88 1,220,775 9.46 12.23 90,188 12.78
$15.00 - $18.10 278,200 9.18 17.58 30,833 17.45
$21.50 - $30.63 664,924 8.92 25.01 182,929 25.06
--------- ------ ------ --------- ------
4,759,950 8.87 $10.16 1,274,199 $ 7.72
========= ====== ====== ========= ======
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 2001, there were 9,047,113 shares of common stock reserved for
future issuance under the Employee Stock Purchase Plan, for conversion of the
Common Stock Warrants and for grants made under the 1998 Stock Incentive Plan,
the 2001 Non-Officer, Non-Director Employee Stock Incentive Plan and the 2000
Director Stock Option Plan.
F-16
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
8. NET LOSS AND UNAUDITED PRO FORMA NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted, and
unaudited pro forma basic and diluted net loss per share for the respective
periods. The unaudited pro forma basic and diluted net loss per share for 1999
and 2000 gives effect to the conversion of the redeemable convertible preferred
stock and the convertible notes and accrued interest as if converted at the date
of original issuance.
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000 2001
---- ---- ----
Basic and diluted
Net loss $(34,712,895) $ (71,292,170) $(54,883,648)
Dividends and accretion on redeemable
convertible preferred stock (5,893,016) (30,342,988) --
------------ ------------- ------------
Net loss attributable to common stockholders $(40,605,911) $(101,635,158) $(54,883,648)
============ ============= ============
Weighted average common shares outstanding 850,238 12,225,537 32,987,766
Less: unvested restricted common shares
outstanding (343,173) (166,262) (61,798)
------------ ------------- ------------
Weighted average common shares used to
compute net loss per share 507,065 12,059,275 32,925,968
============ ============= ============
Basic and diluted net loss per share $ (80.08) $ (8.43) $ (1.67)
============ ============= ============
UNAUDITED PRO FORMA BASIC AND DILUTED
Net loss $(34,712,895) $ (71,292,170) $(54,883,648)
Interest expense on convertible notes 197,455 19,390,414 --
------------ ------------- ------------
Net loss used to compute pro forma net
loss per share $(34,515,440) $ (51,901,756) $(54,883,648)
============ ============= ============
Weighted average common shares used to
compute net loss per share 507,065 12,059,275 32,925,968
Weighted average number of common shares
assuming the conversion of all redeemable
convertible preferred stock and convertible
notes and accrued interest at the date of
original issuance 17,292,811 12,659,800 --
------------ ------------- ------------
Weighted average common shares used to
compute pro forma net loss per share 17,799,876 24,719,075 32,925,968
============ ============= ============
Unaudited pro forma basic and diluted pro
forma net loss per share $ (1.94) $ (2.10) $ (1.67)
============ ============= ============
Options to purchase 768,966, 3,215,154 and 4,759,950 shares of common stock have
not been included in the computation of diluted net loss per share for the years
ended December 31, 1999, 2000 and 2001, respectively, as their effects would
have been antidilutive. Warrants to purchase 1,013,877, 3,269,564 and 3,156,073
shares of common stock were excluded from the computation of diluted net loss
per share for the years ended December 31, 1999, 2000 and 2001, respectively, as
their effect would be antidilutive.
F-17
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
9. INCOME TAXES
The significant components of the Company's deferred tax assets are as follows:
DECEMBER 31,
---------------------------------
2000 2001
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 48,494,000 $ 68,689,000
Research and development credit 3,576,000 5,062,000
Intangible assets 1,233,000 998,000
Other 86,000 491,000
------------ ------------
53,389,000 75,240,000
Valuation allowance (53,389,000) (75,240,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
The Company has increased its valuation allowance by $21,851,000 in 2001 to
provide a full valuation allowance for deferred tax assets since the realization
of these future benefits is not considered more likely than not. The amount of
the deferred tax asset considered realizable is subject to change based on
estimates of future taxable income during the carryforward period. If the
Company achieves profitability, these deferred tax assets would be available to
offset future income taxes. The future utilization of net operating losses and
credits may be subject to limitation based upon changes in ownership under the
rules of the Internal Revenue Code. The Company will assess the need for the
valuation allowance at each balance sheet date based on all available evidence.
At December 31, 2001, the Company had federal net operating loss carryforwards
available to reduce taxable income, and federal research and development tax
credit carryforwards available to reduce future tax liabilities, which expire
approximately as follows:
FEDERAL RESEARCH
FEDERAL NET AND DEVELOPMENT
YEAR OF OPERATING LOSS TAX CREDIT
EXPIRATION CARRYFORWARDS CARRYFORWARDS
---------- ------------- -------------
2011 $ 929,000 $ 22,000
2012 15,260,000 527,000
2018 27,876,000 425,000
2019 33,800,000 1,000,000
2020 45,335,000 1,176,000
2021 49,700,000 1,000,000
------------ ----------
$172,900,000 $4,150,000
============ ==========
For state tax purposes, net operating loss carryforwards of approximately
$165,000,000 expire in the years 2002 through 2005. State research and
development tax credit carryforwards are approximately $900,000.
10. LICENSE AGREEMENTS
ANGIOMAX(R)
In March 1997, the Company entered into an agreement with Biogen, Inc. for the
license of the anticoagulant pharmaceutical bivalirudin (now known as Angiomax).
Under the terms of the agreement, the Company acquired exclusive worldwide
rights to the technology, patents, trademarks, inventories and know-how related
to Angiomax. In exchange for the license, the Company paid $2 million on the
closing
F-18
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
date and is obligated to pay up to an additional $8 million upon reaching
certain Angiomax sales milestones, including the first commercial sale of
Angiomax for the treatment of AMI in the United States and Europe. In addition,
the Company will pay royalties on future sales of Angiomax and on any sublicense
royalties earned until the later of (1) 12 years after the date of the first
commercial sale of the product in a country or (2) the date on which the product
or its manufacture, use or sale is no longer covered by a valid claim of the
licensed patent right in such country. The agreement also stipulates that the
Company use commercially reasonable efforts to meet certain milestones related
to the development and commercialization of Angiomax, including expending at
least $20 million for certain development and commercialization activities,
which the Company met in 1998. The license and rights under the agreement remain
in force until the Company's obligation to pay royalties ceases. Either party
may terminate for material breach, and the Company may terminate the agreement
for any reason upon 90 days prior written notice. During 2001, the Company
recognized royalty expense under the agreement of $1.1 million for Angiomax
sales.
CTV-05
In August 1999, the Company entered into an agreement with Gynelogix, Inc. for
the license of the biotherapeutic agent CTV-05, a strain of human lactobacillus
currently under clinical investigation for applications in the areas of
urogenital and reproductive health. Under the terms of the agreement, the
Company acquired exclusive worldwide rights to the patents and know-how related
to CTV-05. In exchange for the license, the Company has paid $400,000 and is
obligated to pay an additional $100,000 upon reaching certain development and
regulatory milestones. The Company and Gynelogix have mutually agreed to extend
the development activities of CTV-05 at a reduced level of effort through
January 2003. In addition, the Company is obligated to pay royalties on future
sales of CTV-05 and on any sublicense royalties earned until the date on which
the product is no longer covered by a valid claim of the licensed patent rights
in a country. The agreement also stipulates that the Company must use
commercially reasonable efforts in pursuing the development, commercialization
and marketing of CTV-05 to maintain the license. The license and rights under
the agreement remain in force until the Company's obligation to pay royalties
ceases. Either party may terminate the agreement for material breach, and may
terminate the agreement for any reason upon 60 days prior written notice.
IS-159
In July 1998, the Company entered into an agreement with Immunotech S.A. for the
license of the pharmaceutical IS-159 for the treatment of acute migraine
headache. Under the terms of the agreement, the Company acquired exclusive
worldwide rights to the patents and know-how related to IS-159. In exchange for
the license, the Company paid $1 million on the closing date and is obligated to
pay up to an additional $4.5 million upon reaching certain development and
regulatory milestones. In addition, the Company will pay royalties on future
sales of IS-159 and on any sublicense royalties earned until the date on which
the product is no longer covered by a valid claim of the licensed patent rights
in a country. The agreement also stipulates that the Company must use
commercially reasonable efforts in pursuing the development, commercialization
and marketing of IS-159 and meet certain development and regulatory milestones
to maintain the license. The licenses and rights under the agreement remain in
force until the Company's obligation to pay royalties ceases. Either party may
terminate the agreement for material breach, and the Company may terminate the
agreement for any reason upon 60 days prior written notice
11. STRATEGIC ALLIANCES
UCB
In December 1999, the Company entered into a commercial supply agreement with
UCB-Bioproducts S.A. ("UCB") to develop and supply the Angiomax bulk drug
substance. Under the terms of the commercial supply agreement, UCB completed
development of a modified production process known as the "Chemilog" process and
filed an amendment in 2001 to its drug master file for regulatory approval of
the Chemilog process by the FDA. In addition UCB manufactured two validation
batches of Angiomax bulk drug substance using the Chemilog process in 2001, with
a third validation batch completed in January 2002. During 2000 and 2001,
expenses incurred for such services were approximately $560,000 and $4.8
F-19
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
million, respectively, of which approximately $789,000 was recorded in accounts
payable and accrued expenses at December 31, 2000. There were no outstanding
balances recorded in accounts payable and accrued expenses at December 31, 2001.
In addition, the Company has agreed to purchase Angiomax bulk drug product
exclusively from UCB at agreed upon prices for a period of seven years from the
date of the first commercial sale of Angiomax produced using the Chemilog
process. Following the expiration of the agreement, or if the Company terminates
the agreement prior to its expiration, UCB will transfer the development
technology to the Company. If the Company engages a third party to manufacture
Angiomax using this technology, the Company will be obligated to pay UCB a
royalty based on the amount paid by the Company to the third-party manufacturer.
During 1999, the Company placed an order with UCB Bioproducts for the
manufacture of Angiomax bulk drug product. During 2000, UCB manufactured $14.2
million of this material, of which $12.2 million was expensed during the period.
All costs associated with the manufacture of Angiomax bulk drug product and
finished products to which title was transferred to the Company prior to the
date of FDA approval of Angiomax were expensed as research and development. The
Company recorded any Angiomax bulk drug product to which title transferred after
the date of FDA approval of Angiomax as inventory. In November 2000, the Company
placed additional orders with UCB Bioproducts for the manufacture of Angiomax
bulk drug product. Under the terms of these orders, the Company took title to
material for a total of $14.5 million in 2001 and for $2.9 million in January
2002.
The Company has ordered commercial supplies of Angiomax bulk drug substance
produced by the Chemilog process for a total of $5.3 million to be delivered in
2002 and 2003.
LONZA
In September 1997, the Company entered into an agreement with Lonza AG ("Lonza")
for the development of a new commercial manufacturing process for an advanced
intermediate compound used in the manufacturing of Angiomax ("Angiomax
intermediate"). In November 1998, the Company entered into an additional
agreement with Lonza for the engineering, procurement and installation of
equipment for the initial manufacturing of the Angiomax intermediate using the
new process. The agreement also contemplated the purchase of the Angiomax
intermediate from Lonza at specified prices for an anticipated two-year period
following initial production and stipulated the basic principles of a long-term
commercial supply contract. In January 2000, the Company notified Lonza of its
intention to terminate the agreement. As a result of the termination, the
Company retained certain ownership rights to intellectual property and was
responsible for reimbursement of all costs incurred under the terms of the
agreement through the date of notice. There were no outstanding obligations to
Lonza at December 31, 2000 and 2001.
PHARMABIO
In August 1996, the Company entered into a strategic alliance with one of its
stockholders, PharmaBio Development Inc. ("PharmaBio"), a wholly owned
subsidiary of Quintiles Transnational Corporation ("Quintiles"). Under the terms
of the strategic alliance agreement, PharmaBio and any of its affiliates who
work on the Company's projects will, at no cost to the Company, review and
evaluate, jointly with the Company, development programs designed by the Company
related to potential or actual product acquisitions. The purpose of this
collaboration is to optimize the duration, cost, specifications and quality
aspects of such programs. PharmaBio and its affiliates have also agreed to
perform other services with respect to our products, including clinical and
non-clinical development services, project management, project implementation,
pharmacoeconomic services, regulatory affairs and post marketing surveillance
services and statistical, statistical programming, data processing and data
management services pursuant to work orders agreed to by the Company and
PharmaBio from time to time. Through December 31, 2001, the Company has entered
into approximately 45 work orders with PharmaBio and has paid PharmaBio a total
of $13.4 million. During 1999, 2000 and 2001, expenses incurred for such
services were approximately $3.7 million, $2.3 million and $2.3 million,
respectively, of which approximately $813,000 and $229,000 was recorded in
accounts payable and accrued expenses at December 31, 2000 and 2001,
respectively. In addition, at December 31, 2001, the Company had open work
orders with PharmaBio for such services that reflect estimated aggregate future
payments of approximately $581,000.
F-20
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
INNOVEX
In January 1997, the Company entered into a consulting agreement with Innovex,
Inc. ("Innovex"), a subsidiary of Quintiles, which was subsequently superceded
by a consulting agreement executed with Innovex in December 1998. Pursuant to
the terms of the agreement, Innovex provides the Company with consulting
services with respect to pharmaceutical marketing and sales. Since December
1997, the Company has also entered into various clinical services agreements
with Innovex pursuant to which Innovex has provided project management, clinical
monitoring, site management, medical monitoring, regulatory affairs, data
management and quality assurance services with respect to clinical trials of
Angiomax. None of the clinical services agreements is currently outstanding.
Through December 31, 2001 the Company has paid Innovex $1.8 million under these
agreements.
In December 2000, the Company signed a master services agreement and a work
order with Innovex under which Innovex agreed to provide contract sales,
marketing and commercialization services relating to Angiomax. Under the master
services agreement and the Angiomax work order, Innovex was to provide a sales
force of up to 52 representatives, a sales territory management system and
operational support for the launch of Angiomax. The Company provided the
marketing plan and marketing materials for the sales force and other sales and
marketing support and direction for the sales force. For Innovex services, the
Company agreed to pay a daily fee for each day worked by the members of the
Innovex sales force. The Company was also responsible for reimbursing Innovex
for expenses incurred in providing its services and for the incentive
compensation paid to the sales force. The Company had the right to terminate the
work order and the master services agreement at any time upon 90 days prior
written notice and could hire members of the sales force, potentially incurring
additional fees to Innovex. In June 2001, the Company notified Innovex of its
decision to terminate the agreement with Innovex, and in October, the Company
hired most of the Innovex sales representatives. Through December 31, 2001, the
Company has paid Innovex $6.8 million under the master services agreement and
work order.
During 1999, 2000 and 2001, total expenses incurred for services provided by
Innovex were approximately $616,000, $1.7 million and $5.6 million,
respectively, of which approximately $280,000, $440,000, and $275,000 were
recorded in accounts payable and accrued expenses at December 31, 1999, 2000 and
2001, respectively.
STACK PHARMACEUTICALS
In 2000, the Company entered into an agreement, with Stack Pharmaceuticals Inc.
(SPI), an entity controlled by David M. Stack, then one of the Company's senior
vice presidents. Pursuant to the terms of this agreement, SPI performed
infrastructure services for the Company, which included providing office
facilities, equipment and supplies, and such consulting, advisory and related
services for the Company as was agreed upon from time to time. For the
infrastructure services, the Company agreed to pay SPI a service fee of $20,100
per month. From January 2000 through March 2000, SPI provided the Company with
consulting services under a consulting agreement that expired on March 31, 2000.
In November 2001, the Company terminated its agreement with SPI when David M.
Stack became President and Chief Executive Officer of the Company. As part of
the termination agreement, the Company assumed SPI's facility lease in
Parsippany, New Jersey and acquired all its furniture and equipment for
approximately $70,000. Through December 31, 2001, the Company had paid SPI
$711,000 under these agreements. There was no outstanding obligation to SPI at
December 31, 2001.
12. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities in Cambridge, Massachusetts and Parsippany,
New Jersey and certain office furniture and equipment at those facilities under
operating leases. The leases for the Cambridge and Parsippany facilities expire
in August 2003 and September 2005, respectively. As part of the termination
agreement with SPI, the Company assumed the facilities lease in Parsippany.
Future annual minimum payments under all non-cancelable operating leases are
$669,000, $502,000, $282,000 and $177,000 in
F-21
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
2002, 2003, 2004 and 2005, respectively. Rent expense was approximately
$442,000, $504,000 and $634,000 in 1999, 2000 and 2001, respectively.
The Company is involved in ordinary and routine matters and litigation
incidental to its business. There are no such matters pending that the Company
expects to be material in relation to its financial condition or results of
operations.
13. EMPLOYEE BENEFIT PLAN
The Company has an employee savings and retirement plan which is qualified under
Section 401(k) of the Internal Revenue Code. The Company's employees may elect
to reduce their current compensation up to the statutorily prescribed limit and
have the amount of such reduction contributed to the 401(k) plan. The Company
may make matching or additional contributions to the 401(k) plan in amounts to
be determined annually by the Board of Directors. The Company has not made any
matching or additional contributions to date.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the years
ended December 31, 2000 and 2001.
Three Months Ended
---------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2000 2000 2000 2000 2001 2001 2001 2001
------------------------------------------------------------------------------------------------------------------------------------
In thousands, except per share data
Net revenue $ -- $ -- $ -- $ -- $ 1,861 $ 2,048 $ 3,526 $ 6,813
Total operating expenses 11,840 8,706 10,297 23,763 21,987 18,196 15,623 15,639
Net loss (19,243) (20,408) (9,459) (22,182) (19,056) (16,003) (11,309) (8,516)
Net loss attributable to
common stockholders (20,773) (47,596) (11,083) (22,182) (19,056) (16,003) (11,309) (8,516)
Basic and diluted net loss
attributable to common
stockholders per common share $ (32.91) $ (68.65) $ 0.67 $ (0.74) $ (0.63) $ (0.49) $ (0.33) $ (0.25)
Pro forma basic and diluted
net loss attributable to common
stockholders per common share (0.55) (0.38) (0.34) (0.74) (0.63) $ (0.49) (0.33) (0.25)
The increasing level of revenues in each subsequent quarter of 2001 of the
Company's first commercial product, Angiomax(R), began with the launch of the
product in the first quarter of 2001. The higher gross margins from those
revenues were attributed to the expensing in 2000 of all bulk drug substance
received prior to FDA approval as research and development costs. Higher
selling, general and administrative expenses associated with the commercial
launch of Angiomax (R) starting in the fourth quarter of 2000 continued
throughout 2001, but were partly offset by lower development costs in 2001
associated with completion of the HERO-2 trial in AMI and with lower
manufacturing development costs in 2001. Net losses and net losses attributed to
common stockholders in each subsequent quarter of 2001 were favorably impacted
by the increases in sales, lower development costs, and to lower interest
expense related to the amortization of the discount of convertible notes that
were converted in the first half of 2000. In the second quarter of 2000, the
higher net loss attributed to common stockholders related to the recording of a
dividend from the beneficial conversion associated with the issuance of
convertible preferred stock in prior periods.
F-22
THE MEDICINES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
15. SUBSEQUENT EVENTS
On March 6, 2002, the Company entered into an agreement with AstraZeneca PLC for
the licensing, development and commercialization of clevidipine, an intravenous,
short-acting calcium channel blocker. Clevidipine will be developed in Phase 3
by the Company for the short-term control of high blood pressure in the hospital
setting. AstraZeneca has completed clinical pharmacology, dose-finding and
efficacy studies that demonstrate that clevidipine has a short duration of
action, a short plasma half life, and a selective effect on blood pressure. The
agreement covers all worldwide territories except Japan. The Company will
perform further clinical development and has the right to commercialize the
product in all other territories worldwide including the United States.
On March 25, 2002, the Company entered into a collaboration with Nycomed Danmark
A/S, a European pharmaceutical company, to be the exclusive distributor of
ANGIOMAX(R) (bivalirudin) in 35 countries. The agreement includes European and
other countries. Nycomed will exclusively market and distribute ANGIOMAX within
the territory. Nycomed will pay an initial fee of $1.5 million with up to $2.5
million in additional milestones based on regulatory approval in Europe. In
addition, Nycomed purchased 79,428 shares of the Company's common stock for a
total purchase price of approximately $1.0 million. The Company and Nycomed will
work together to achieve regulatory approval in the countries covered by the
agreement and share costs of clinical trials used to extend indications in
Europe beyond coronary angioplasty.
On March 26, 2002, the Company signed a Loan and Security agreement with
Comerica Bank-California providing for borrowings of up to $10 million. Amounts
outstanding under the agreement are collateralized by all of the Company's
personal property. In order to draw on the facility, and while borrowings are
outstanding, the Company must satisfy certain covenants, including covenants
related to cash, working capital and revenues. The borrowings will be used to
support working capital needs. As of March 29, 2002, the Company had drawn down
the full $10.0 million under the agreement.
F-23
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 2001
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND CHARGES END
OF PERIOD EXPENSES (DEDUCTIONS) OF PERIOD
---------- --------------- ------------- ----------
Allowances for returns,
rebates and
doubtful accounts $ -- $ 1,316,000 (1) $ 493,000 (2) $ 823,000
(1) amounts presented herein were charged to and reduced revenues
(2) represent rebates and returns processed
F-24
INDEX TO EXHIBITS
Number Description
------ -----------
3.1* Third Amended and Restated Certificate of Incorporation of the
registrant
3.2 Amended and Restated By-laws of the registrant, as amended
4.1* Form of Common Stock Purchase Warrant dated October 19, 1999
4.2* Form of Common Stock Purchase Warrant dated March 2, 2000
10.1* 1998 Stock Incentive Plan, as amended
10.2 2000 Employee Stock Purchase Plan, as amended
#10.3** Form of 2000 Outside Director Stock Option Plan
10.4* Amended and Restated Registration Rights Agreement, dated as
of August 12, 1998, as amended, by and among the registrant
and the other parties thereto
10.5* Third Amended and Restated Stockholder's Agreement, dated as
of August 12, 1998, as amended, by and among the registrant
and the other parties thereto
+10.6* Chemilog Development and Supply Agreement, dated as of
December 20, 1999, by and between the registrant and UCB
Bioproducts S.A.
+10.7* License Agreement, dated as of June 6, 1990, by and between
Biogen, Inc. and Health Research, Inc., as assigned to the
registrant
+10.8* License Agreement dated March 21, 1997, by and between the
registrant and Biogen, Inc.
+10.9* Development and Commercialization Agreement, dated August 16,
1999, by and between the registrant and GyneLogix, Inc.
10.10**** Termination Agreement, dated November 1, 2001, by and between
the Registrant and Stack Pharmaceuticals, Inc. relating to the
Services Agreement dated April 1, 2000, as amended
10.11*** Form of Stock Purchase Agreement dated May 11, 2001 between
the registrant and the selling stockholders party thereto
#10.12* Employment agreement dated September 5, 1996 by and between
the registrant and Clive Meanwell
#10.13* Employment agreement dated March 10, 1997 by and between the
registrant and John Villiger
#10.14** Employment Agreement dated October 16, 1997 by and between the
registrant and Thomas P. Quinn, as amended
#10.15** Employment Agreement dated October 16, 1997 by and between the
registrant and John D. Richards
#10.16* Employment agreement dated October 20, 1997 by and between the
registrant and Peyton Marshall
#10.17* Employment agreement dated September 29, 1998 by and between
the registrant and John Nystrom
#10.18**** Amended and Restated Employment Agreement, dated November 1,
2001, by and between the Registrant and David M. Stack
10.19* Lease for One Cambridge Center dated March 15, 1997 by and
between Boston Properties, Inc. and the registrant, as amended
10.20** Lease for 5 Sylvan Way dated August 15, 2000, by and between
the registrant and Mack-Cali Morris Realty LLC
10.21**** Assignment and Assumption of Lease, dated October 18, 2001, by
and between the Registrant and Stack Pharmaceuticals, Inc.
21** Subsidiaries of the registrant
23 Consent of Ernst & Young LLP, Independent Auditors
------------------
# Management contract or compensatory plan or arrangement filed as an exhibit to
this form pursuant to Items 14 (a) and 14 (c) of Form 10-K
+ Confidential treatment was granted for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act
* Incorporated by reference to the exhibits to the registration statement on
Form S-1 (registration no. 333-37404)
** Incorporated by reference to the exhibits to the registration statement on
Form S-1 (registration no. 333-53280)
*** Incorporated by reference to the exhibits to the registration statement on
Form S-1 (registration no. 333-61430)
**** Incorporated by reference to the exhibits to the registrant's quarterly
report on Form 10-Q for the quarter ended September 30, 2001