1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
--------------- .
COMMISSION FILE NO. 0-21905
COULTER PHARMACEUTICAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-32190758
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
550 CALIFORNIA AVENUE, PALO ALTO, CALIFORNIA 94306
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA 650-849-7500
CODE:
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 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 (Section 229.405 of this chapter) 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the closing price of the Common Stock on the Nasdaq
Stock Market on February 27, 1998 was $211,951,859*.
The number of shares outstanding of the Registrant's Common Stock was
13,625,028 as of February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the 1998 Annual Meeting
are incorporated herein by reference into Part III of this Report.
Certain Exhibits filed with the Registrant's Registration Statement on Form
S-1 (Registration Nos. 333-17661 and 333-36607), are incorporated herein by
reference into Part IV of this Report.
- ---------------
* Based on a closing price of $23.25 per share. Excludes 4,508,819 shares of the
Registrant's Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
February 27, 1998. Exclusion of such shares should not be construed to
indicate that any such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the Registrant
or that such person is controlled by or under common control with the
Registrant.
================================================================================
2
PART I
Except for historical information contained herein, this Annual Report on
Form 10-K contains forward-looking statements which involve risks and
uncertainties. All forward-looking statements included in this document are
based upon information available to the Company as of the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. It
is important to note that the Company's actual results could differ materially
from those in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risk Factors" at
the end of Item 1 Business.
ITEM 1. BUSINESS
Coulter Pharmaceutical is engaged in the development of novel drugs and
therapies for the treatment of people with cancer. The Company currently is
developing a family of cancer therapeutics based upon two drug discovery
programs: therapeutic antibodies and targeted oncologics. Within these broad
drug discovery programs, the Company is currently concentrating on two distinct
platform technologies: therapeutic antibodies based on conjugated antibody
technology and targeted oncologics based on tumor activated peptide ("TAP")
pro-drugs.
The Company's most advanced product candidate, Bexxar, consists of a
monoclonal antibody conjugated with a radioisotope. The Company intends to seek
expedited initial approval of Bexxar for the treatment of low-grade and
transformed low-grade non-Hodgkin's lymphoma ("NHL") in patients refractory to
chemotherapy, while simultaneously pursuing clinical trials to expand the
potential use of Bexxar to other indications. In a Phase I/II clinical trial of
Bexxar, 42 patients with low-grade or transformed low-grade NHL who had relapsed
from previous chemotherapy regimens achieved an 83% overall response rate, with
a 48% complete response rate and a 35% partial response rate. Of those patients
who experienced a complete response, the average duration of response was 20.2
months as of July 1997. In December 1997, the Company presented data on a
multi-center, Phase II clinical trial in heavily pre-treated low-grade and
transformed low-grade NHL patients. The patients achieved a complete response
rate of 31% of the 45 evaluable patients with the median duration of complete
response not yet reached (longest complete response of greater than twenty
months). Currently, the Company is conducting a pivotal Phase III clinical trial
in patients with low-grade and transformed low-grade NHL refractory to
chemotherapy. This trial includes a target enrollment of 60 evaluable patients
and a post-treatment follow-up period of up to six months. The Company intends
to file for United States Food and Drug Administration ("FDA") marketing
approval of Bexxar for this indication in the second half of 1998. The Company
believes that Bexxar, if successfully developed, could become the first
radioimmunotherapy approved in the United States for the treatment of people
with cancer.
The Company intends to pursue additional trials to expand the potential use
of Bexxar to other indications. The Company currently is conducting a
single-center Phase II trial in newly diagnosed low-grade NHL patients. An
interim analysis of data from the first 24 patients showed a 100% overall
response rate, with 71% having achieved complete responses. Seventeen (17)
patients are in ongoing remission, with the longest being eighteen (18) months
as of December 1997. The Company believes that its Phase II trial of Bexxar for
patients newly diagnosed with NHL is the first clinical trial of a
radioimmunotherapy as a stand-alone, first-line treatment for people with
cancer.
The objective of the Company's second technology platform, the TAP pro-drug
program, is to broaden significantly the therapeutic windows of conventional
chemotherapies. The Company currently is developing a pro-drug version of
doxorubicin to treat certain solid tumor cancers with the objective of
commencing clinical trials as early as the end of 1998.
The Company was incorporated under the laws of Delaware in February 1995.
The Company's conjugated antibody program is based upon the antibody
therapeutics program which originated in the late 1970s at Coulter Corporation,
a recognized leader in the field of hematology. Upon its formation in February
1995, the Company acquired worldwide rights to Bexxar and related intellectual
property, know-how and other assets from Coulter Corporation. In October 1997,
Coulter Corporation was acquired by Beckman Instruments, Inc., upon which
occurrence Coulter Corporation became known as Beckman Coulter ("Beckman
Coulter").
1
3
BACKGROUND
CANCER: THE DISEASE AND ITS TREATMENT
Cancer afflicts millions of people worldwide. It is currently the second
leading cause of death in the United States and is estimated to account for more
than 560,000 deaths in 1997 alone. Some forty percent of Americans are expected
to develop cancer and, despite noteworthy success in the treatment of some
cancers, about half of these cancer patients will die from the disease.
Cancer is a family of more than one hundred diseases that can be
categorized into two broad groups: (i) hematologic or blood-borne malignancies
(e.g., lymphomas and leukemia's) and (ii) solid tumor cancers (e.g., lung,
prostate, breast and colon cancers). Both groups are generally characterized by
a breakdown of the cellular mechanisms that regulate cell growth and cell death
("apoptosis") in normal tissues.
Blood-borne cancers involve a disruption of the developmental processes of
blood cell formation, preventing these cells from functioning normally in the
blood and lymph systems. Death from blood-borne cancers ultimately is caused by
infection, organ failure or bleeding. While chemotherapy is the primary
treatment for blood-borne malignancies, many such malignancies are
radiosensitive and some localized lymphomas can be treated with radiation
therapy. Nonetheless, radiation therapy cannot be used in the treatment of most
blood-borne malignancies because the levels of radiation necessary to destroy
diseases that are widely disseminated within the body would result in severe
damage to the bone marrow of the patient, leading to life-threatening
suppression of the immune system, and other serious side effects.
In solid tumor cancers, malignant tumors invade and disrupt nearby tissues
and can also spread throughout the body or "metastasize." The impact of these
tumors on vital organs such as the lungs and the liver frequently leads to
death. Surgery is used to remove solid tumors that are accessible to the surgeon
and can be effective if the cancer has not metastasized. Radiation therapy also
can be employed to irradiate a solid tumor and surrounding tissues and is a
first-line therapy for inoperable tumors, but side effects are a limiting factor
in treatment. Radiation therapy is used frequently in conjunction with surgery
either to reduce the tumor mass prior to surgery or to destroy tumor cells that
may remain at the tumor site after surgery. However, radiation therapy cannot
assure that all tumor cells will be destroyed and has only limited utility for
treating widespread metastases. While surgery and radiation therapy are the
primary treatments for solid tumors, chemotherapy and hormonal treatments often
are used as adjunctive therapies and also are used as primary therapies for
inoperable or metastatic cancers.
Chemotherapy, which typically involves the intravenous administration of
drugs designed to destroy malignant cells, is used for the treatment of both
solid tumors and blood-borne malignancies. Chemotherapeutic drugs generally
interfere with cell division and are therefore more toxic to rapidly dividing
cancer cells. Since cancer cells can often survive the effect of a single drug,
several different drugs usually are given in a combination therapy designed to
target overlapping mechanisms of cellular metabolism to overwhelm the ability of
cancer cells to develop resistance to chemotherapy. Combination chemotherapy is
used widely as first-line therapy for leukemias and lymphomas and has had
considerable success in the treatment of some forms of these cancers.
Nevertheless, partial and even complete remissions obtained through chemotherapy
often are not durable, and the patient relapses when the cancer reappears and/or
resumes its progression within a few months or years of treatment. The relapsed
patient's response typically becomes shorter and shorter with each successive
treatment regimen as the cancer becomes resistant to the chemotherapy.
Eventually, patients may become "refractory" to chemotherapy, meaning that the
length of their response, if any, to treatment is so brief as to lead to the
conclusion that further chemotherapy regimens would be of little or no benefit.
Chemotherapeutic drugs are not sufficiently specific to cancer cells to
avoid affecting normal cells, especially those that are growing rapidly. As a
result, patients often experience debilitating side effects such as nausea,
vomiting, hair loss, anemia, nerve toxicity, and fatigue, as well as
life-threatening side effects such as immune system suppression and cardiac
toxicity. Such side effects can limit the effectiveness of therapy because the
clinician must avoid exceeding the maximum dose of drug that the patient can
tolerate. Since dosages must be limited to avoid unacceptable side effects, it
may not be possible to administer sufficiently
2
4
high doses of chemotherapeutic drugs to overcome the natural ability of cancer
cells to become resistant. A number of chemotherapeutic agents originally
thought to have promise as cancer drugs have failed in the clinic because the
minimum effective dose exceeded the maximum tolerable dose. Ideally, a
chemotherapeutic agent would have a minimum effective dose well below the
maximum tolerable dose, thereby providing physicians with a wide "therapeutic
window" or a range of doses within which all patients could be treated
effectively.
In cases of certain severe blood-borne malignancies and metastatic solid
tumor cancers, bone marrow transplants ("BMT") may be performed to treat
patients who typically have exhausted all other treatment options. Transplants
generally are performed in connection with regimens of aggressive chemotherapy
and/or radiation therapy. While techniques are improving, BMTs are associated
with significant mortality and high rates of morbidity and remain a very
expensive alternative.
EMERGING METHODS OF TREATMENT
Scientific progress in the elucidation of the underlying molecular biology
of cancer in recent years has yielded a number of promising treatment
approaches. These approaches generally are designed to enhance the specificity
and potency of cancer therapeutics, to improve overall efficacy and to reduce
side effects. The Company believes that two of the most promising of these
approaches are (i) monoclonal antibodies that bind to targeted cells to
stimulate the body's immune system and/or to deliver cytotoxic agents to destroy
malignant cells and (ii) modifications of conventional chemotherapeutic drugs
and drug formulations to improve efficacy by expanding their therapeutic
windows.
MONOCLONAL ANTIBODIES
The human immune system is composed of specialized cells, including B-cells
and T-cells, that function in the recognition, destruction and elimination of
disease-causing foreign substances and of virally infected or malignant cells.
Human antibodies, which are produced by the B-cells, play a vital role in the
proper functioning of the immune system. They have predetermined functions based
primarily upon their ability to recognize specific antigens, which are molecular
structures on the surface of disease-causing substances or diseased cells. Each
antigen serves as a binding site for the antibody specific to that antigen, and
each disease-causing substance or diseased cell can be identified by its
antigens.
The ability of specific antibodies to bind to specific antigens that are
expressed on the surface of targeted cells, and to trigger an immune system
attack on those cells, provides the theoretical basis for the development of
cancer immunotherapeutics. In the 1970s, researchers discovered techniques to
produce unlimited supplies of identical murine (mouse-derived) antibodies,
referred to as monoclonal antibodies, by cloning antibody producing cells that
were derived from hybridization of a single B-cell. These techniques provided
researchers with the tools to identify and study specific antigens and to
produce potential therapeutics. In principle, once an antigen expressed by
malignant cells has been identified, a monoclonal antibody specific to that
antigen can be created. If an antibody could be produced that binds to an
antigen expressed exclusively by human cancer cells, the antibody would be
specific to only those cells. As a result, the use of such a monoclonal antibody
as a therapeutic would have few, if any, side effects. However, the development
of such a therapy has proven to be more problematic than originally hoped.
Immunotherapies based solely upon monoclonal antibodies have had only limited
clinical effectiveness, particularly in solid tumors where the uneven supply of
blood throughout such tumors prevents adequate exposure of monoclonal antibodies
to malignant cells.
The effectiveness of a particular monoclonal antibody in the treatment of
cancer fundamentally is linked to the characteristics of the antigen to which it
binds. For example, while researchers have identified numerous antigens on
cancer cells that can be recognized by monoclonal antibodies, most of these
antigens are also expressed to some degree by other types of cells. An antibody
to such an antigen may not be sufficiently specific to the cancer cells to avoid
or minimize unintended side effects caused by damage to normal cells. Moreover,
the behavior of antigens following binding with an antibody is quite variable:
the bound antibody-antigen complex can remain on the cell surface, can be
internalized into the cell or can be released from the
3
5
cell surface. Thus, the identification of suitable antigens to serve as targets
for therapeutic monoclonal antibodies must account for these and other
complexities.
Once a suitable antigen has been identified, researchers have found that
different antibodies binding to different sites on the antigen may not have the
same biological activity, introducing another element of variability. Antibodies
also differ in the degree to which they stimulate an immune system response and
in the extent to which they have other effects on the cell. Even the most
effective antibodies have limited biological activity. In addition, research
conducted since the late 1970s has revealed the importance of selecting the
proper type of antibody for use in the intended therapy. Murine antibodies are
appropriate in treatments involving a single dose or other short treatment
regimen where it is beneficial that the antibodies, together with any
therapeutic conjugate, are metabolized and cleared from the body fairly quickly.
Chimerized or humanized antibodies are desirable for multi-dose or chronic
treatment regimens as they reduce the risk of a human immune response to the
antibodies themselves. While these manipulations of the antibodies have
permitted more extended therapeutic regimens in some circumstances, they do not
overcome the inherent limitations in the biological activity of the underlying
antibodies. Thus, despite early expectations, no monoclonal antibody has yet
been shown to be effective as a stand-alone, first-line therapy in the treatment
of cancer.
Researchers have attempted to increase the effectiveness of antibodies by
attaching radioisotopes or other cytotoxic agents for use in
"radioimmunotherapy" or "chemoimmunotherapy," respectively. By using an antibody
to deliver a radioisotope or other cytotoxic agent to the targeted cells, the
effect of the radiation or cytotoxic agent can be concentrated in the immediate
vicinity of malignant cells. Development of effective radioimmunotherapies,
however, presents an additional set of challenges, including the need to select
an appropriate radioisotope for the intended therapy, to develop a reliable
means of linking the radioisotope to the antibody and to devise a therapeutic
protocol that optimizes therapeutic effect while minimizing undesirable side
effects. The development of effective chemoimmunotherapies presents similar
challenges.
ENHANCEMENTS OF CONVENTIONAL CHEMOTHERAPIES
A number of organizations have explored methods of improving the delivery
of cytotoxic drugs to tumor cells, with the objective of expanding the
therapeutic window for these drugs in the treatment of cancer. Approaches that
have been commercialized include encapsulation of the drug in a liposome to
regulate the rate at which it is released and impregnation of an implantable
matrix with the drug to enable its delivery locally over time as the matrix
dissolves. Sustained release of cytotoxic drugs using liposomal formulations has
modestly enhanced the therapeutic window for these compounds, but instability of
the formulations and accumulations in the skin have produced undesirable side
effects. Surgical implantation of a matrix is limited inherently to the
treatment of localized tumor masses and is not applicable to blood-borne or
metastatic cancers.
Another approach, the development of pro-drugs, involves the chemical
modification of cytotoxic drugs to render them inactive until they are delivered
to, or into the proximity of, targeted cancer cells. The pro-drug is transformed
into its active form only in the presence of enzymes or other chemicals produced
by the tumor cells. The preferential activation of a pro-drug in the tumor
milieu increases its lethal effect on tumor cells while limiting side effects to
non-malignant tissues. Pro-drug versions of cytotoxic drugs offer the potential
to broaden significantly the therapeutic windows of such drugs beyond that which
can be achieved using existing approaches such as liposomal formulations.
Challenges that have constrained the development of effective pro-drugs to date
have included the inability to construct or identify suitable tumor-specific
activation mechanisms and difficulties in designing pro-drugs that will have
adequate stability in circulation.
COULTER PHARMACEUTICAL'S APPROACH
Coulter Pharmaceutical is developing a family of cancer therapeutics to
address the shortcomings of current therapies based upon two drug discovery
programs: therapeutic antibodies and targeted oncologics. Within these broad
drug discovery programs, the Company is currently concentrating on two distinct
platform
4
6
technologies: therapeutic antibodies based on conjugated antibody technology and
targeted oncologics based on tumor activated peptide pro-drugs.
The Company is developing conjugated antibody therapies to overcome the
inherent limitations of monoclonal antibodies when used as stand-alone
therapeutics and to provide advantages over current chemotherapy and radiation
therapy treatments. The Company believes that Bexxar, its first product
candidate, incorporates each of the principal attributes of an effective
radioimmunotherapy for the treatment of NHL: (i) an antigen specific to B-cells,
(ii) a therapeutically active monoclonal antibody, (iii) the radioisotope
appropriate for the disease profile, and (iv) an optimized therapeutic protocol.
In a Phase I/II clinical trial of Bexxar conducted at the University of
Michigan Medical Center, 42 patients with low-grade and transformed low-grade
NHL, who on average had failed more than four prior treatment regimens with
chemotherapy, achieved an 83% overall response rate, with a 48% complete
response rate and a 35% partial response rate. In a multi center Phase II
clinical trial of Bexxar in heavily pre-treated low-grade and transformed low
grade NHL patients, 31% of the 45 evaluable patients achieved a complete
response. Bexxar is currently the subject of a pivotal Phase III trial for the
treatment of low-grade and transformed low-grade NHL patients refractory to
chemotherapy as its initial indication. The Company also intends to seek
approval for other NHL indications based on additional clinical trials, and has
commenced a Phase II clinical trial of Bexxar as a stand-alone, first-line
treatment for patients newly diagnosed with low-grade NHL. An interim analysis
of data presented in December 1997 from the first 24 patients in this trial
showed a 100% overall response rate, with 71% having achieved complete
responses. Seventeen (17) patients are in ongoing remission, with the longest
being eighteen (18) months as of December 1997. The Company believes that this
Phase II trial is the first clinical trial of a radioimmunotherapy as a
stand-alone, first-line treatment for people with cancer. See "-- Clinical
Results and Development Plan."
The Company believes that radioimmunotherapies will emerge as important
treatments for blood-borne cancers due to the radiosensitivity of these
malignancies and the ready accessibility of the blood and lymph systems to
monoclonal antibodies. Radioimmunotherapy also may become an important
adjunctive therapy for the treatment of certain solid tumor cancers following
surgery, radiation therapy or chemotherapy, where it may be useful in
eliminating circulating and other undetected malignant cells missed by primary
therapies. In the future, the Company intends to use its expertise in conjugated
antibodies to expand beyond radioimmunotherapy to develop effective
chemoimmunotherapies for the treatment of certain cancers.
The Company's second technology platform, its TAP pro-drug technology, has
the potential to broaden significantly the therapeutic windows of conventional
chemotherapies based on the Company's understanding of biochemical mechanisms
involved in metastasis and the identification of a potential means for
exploiting these mechanisms. TAP pro-drug versions of existing cytotoxic drugs
are designed to be activated preferentially in the proximity of metastatic
cancer cells, yet stable in circulation and in normal tissues. Accordingly,
relatively larger quantities of cytotoxic agents are expected to reach and enter
malignant cells as opposed to normal cells, which could permit a significant
increase in maximum tolerated dosages, potentially overcoming drug resistance in
cancer cells. The Company also believes that cytotoxic agents currently
considered too toxic to be used in their unmodified forms may be suitable
candidates to become TAP pro-drugs.
COULTER PHARMACEUTICAL'S STRATEGY
The Company's goal is to develop and commercialize novel drugs and drug
therapies for the treatment of people with cancer based on selected insights
from the emerging understanding of the molecular biology of malignant cells. The
Company's conjugated antibody program is based upon the antibody therapeutics
program which originated in the late 1970s at Beckman Coulter, a recognized
leader in the field of hematology. Upon its formation, Coulter Pharmaceutical
obtained worldwide rights to Bexxar and related intellectual property, as well
as a significant body of expertise pertaining to the selection and development
of suitable antibodies and appropriate radioisotopes (and other cytotoxic
agents) and methods for devising optimized therapies. The Company's TAP pro-drug
program is based upon technology that has been under development at Catholique
Universite de Louvain, Belgium, since 1986 and which was exclusively licensed to
5
7
the Company in 1996. Based on this foundation, the Company has established a
strategy comprised of the following primary elements:
Pursue Expedited Initial Approval of Bexxar. The Company intends to seek
expedited FDA review for marketing approval for Bexxar for the treatment of
low-grade and transformed low-grade NHL in patients refractory to chemotherapy,
while simultaneously pursuing clinical trials to expand the potential use of
Bexxar to other indications. The ongoing pivotal Phase III clinical trial of
Bexxar is designed to take advantage of regulatory changes intended to
accelerate the testing, review and approval of therapies for patients who have
limited treatment options. This multi-center trial includes a target enrollment
of 60 evaluable patients and a post-treatment follow-up period of up to six
months. The Company intends to file for FDA marketing approval for this
indication in the second half of 1998. The Company also intends to seek approval
for other NHL indications based on additional clinical trials, and has commenced
a Phase II clinical trial of Bexxar as a stand-alone, first-line treatment for
patients newly diagnosed with low-grade NHL.
Establish Sales and Marketing Capability. The Company intends to market and
sell its products in the United States through a direct sales force and, where
appropriate, in collaboration with marketing partners. This strategy is intended
to enable the Company to establish a commercial presence in the cancer
therapeutics market with Bexxar, if approved, and to create the capability to
sell other products that it may develop or in-license. The Company believes that
an established sales and marketing capability will enable it to compete
effectively for opportunities to license or distribute later-stage product
candidates and approved products. Internationally, the Company intends to
distribute its products through marketing partners.
Leverage Existing Technology Platforms. The Company intends to develop
additional products based on the lead compounds being generated in its TAP
pro-drug program and by leveraging its expertise in conjugated antibodies to
develop other immunotherapies. In its TAP pro-drug program, the Company
currently is engaged in preclinical development of Super-Leu-Dox, a pro-drug
version of doxorubicin, with the objective of commencing clinical trials as
early as the end of 1998. The Company also intends to apply its TAP pro-drug
technology to other classes of cytotoxic drugs to broaden significantly the
therapeutic windows of such agents. The Company is evaluating potential
conjugated antibody therapies for the treatment of other blood-borne
malignancies and selected solid tumor cancers.
Leverage Development Expertise. The Company believes that it has built
substantial product development capabilities and expertise in the cancer field
due in part to the advanced stage of the Bexxar program at the time that it was
obtained from Beckman Coulter. The Company believes it can leverage this
development expertise to accelerate the development of other products in the
cancer therapeutics field. The Company intends to pursue other product
candidates derived from sponsored research or available for in-licensing in both
blood-borne malignancies and solid tumor cancers, particularly in areas that may
be complementary to its existing technology platforms.
Utilize Contract Manufacturers. The Company intends to manufacture its
commercial products through contract manufacturers. This strategy is expected to
(i) accelerate the scale-up of manufacturing processes to commercial scale, (ii)
reduce initial capital investment, (iii) result in competitive manufacturing
costs, and (iv) provide access to a wide range of manufacturing technologies.
BEXXAR: RADIOIMMUNOTHERAPY FOR NON-HODGKIN'S LYMPHOMA
The Company's first product candidate, Bexxar, is in clinical trials for
the treatment of NHL. The Company believes that Bexxar, if successfully
developed, could become the first radioimmunotherapy approved in the United
States for the treatment of people with cancer.
Non-Hodgkin's Lymphoma and Its Current Treatment
Non-Hodgkin's lymphomas are blood-borne cancers of the immune system, all
sharing the common feature of a proliferation of malignant B-cells. According to
statistics from the National Cancer Institute, approximately 270,000 people are
afflicted with NHL in the United States. More than 54,000 new cases are
6
8
expected to be diagnosed in 1998. NHL is currently the sixth leading cause of
death among cancers in the United States and has the second fastest growing
mortality rate.
NHL is categorized by histology as either low-, intermediate- or high-grade
disease. These classifications differ significantly with respect to the speed of
disease progression, the pattern of response to and relapse after conventional
chemotherapy and the average life expectancy. In relapsed low-grade patients,
the disease can transform to an intermediate- or high-grade histology
("transformed low-grade NHL"). In the United States, the Company estimates that
approximately 140,000 patients have low-grade or transformed low-grade, 100,000
have intermediate-grade and 30,000 have high-grade NHL. Initially, the Company
is pursuing clinical development of Bexxar for the treatment of patients with
low-grade and transformed low-grade NHL. Patients with low-grade NHL have a
fairly long life expectancy from the time of diagnosis with a median survival of
more than six years. While patients with low-grade and transformed low-grade NHL
can often achieve one or more remissions with chemotherapy, these patients
eventually relapse. Relapsed patients are more difficult to treat as remissions
are harder to achieve and, if achieved, last for shorter periods of time as the
disease becomes more resistant to chemotherapy and/or transforms to an
intermediate- or high-grade histology. Patients ultimately die from the disease
or from complications of treatment. Intermediate- and high-grade NHL are more
rapidly growing forms of the disease. However, approximately one-half of all
intermediate- and high-grade cases can be treated effectively with conventional
chemotherapy.
Description of Bexxar
Bexxar consists of a radioisotope, (131)Iodine ("(131)I"), combined with a
monoclonal antibody that recognizes and binds to the CD20 antigen, an antigen
commonly expressed on the surface of B-cells primarily during that stage of
their life cycle when NHL arises. Bexxar is administered to patients in a
proprietary therapeutic protocol consisting of a single, two-dose regimen. The
Company believes that the potential benefits of Bexxar result from the following
four constituent elements:
PROPRIETARY PROTOCOL
Bexxar is administered intravenously in a single, two-dose regimen
consisting of a dosimetric dose, three whole body radioactive counts and a
therapeutic dose. The proprietary protocol is flexible: the timing of the counts
and of the therapeutic dose can be adjusted to some extent to accommodate the
schedules of clinicians and patients. The chart below depicts an example of
Bexxar's protocol used in the Company's current clinical trials. The dosimetric
dose consists of 35 mg of B-1 Antibody trace-labeled with 5 millicuries ("mCi")
of (131)I. Immediately after the dosimetric dose, the patient is scanned with a
gamma camera to provide whole body counts. The patient returns for additional
counts on the third and eighth days of the therapy to show how much of the
radiolabeled antibody has been eliminated from the body at each point in time.
This information is used to calculate the correct therapeutic dose to achieve a
total body radiation of 75 centiGray ("cGy"). The amount of radiolabeled
antibody needed to achieve this optimal dose ranges from approximately 50 to 200
mCi of (131)I due to wide patient-to-patient variability in the rates at which
the antibody is eliminated. Both the dosimetric dose and the therapeutic dose
immediately are preceded by a 450 mg dose of unlabeled B-1 Antibody to improve
the targeting of malignant B-cells by the radiolabeled B-1 Antibody. These
pre-doses of unlabeled B-1 Antibody serve to protect the spleen, liver and other
vital organs from excessive radiation exposure by binding to some of the CD20
antigens on circulating B-cells which naturally accumulate in these
7
9
organs. Additionally, the patient takes non-radioactive iodine drops orally
during the course of the therapy to prevent uptake of (131)I into the thyroid
gland.
[FLOW CHART]
Relying upon the dosimetric properties of (131)I to account for critical
patient-to-patient variability in the rate at which the antibody is cleared
makes it possible to deliver predictably a total body radiation dose that has
been determined to maximize therapeutic benefit with manageable side effects and
without the need for bone marrow rescue. Because Bexxar is administered in a
single, two-dose regimen and is well tolerated, it is expected to require
relatively little patient follow-up and physician intervention. In contrast,
chemotherapy requires administration of several cytotoxic agents in repeated
cycles of therapy over a six- to eight-month period during which the patient
must be monitored carefully and/or treated for side effects. Until recently,
patients have been kept in the hospital to monitor radiation levels for up to
three days following the therapeutic dose. However, under recently enacted NRC
regulations, some patients have been treated with Bexxar on an outpatient basis.
Although the Company believes that Bexxar can be administered primarily on an
outpatient basis, some hospitals may be required to administer the therapeutic
dose on an inpatient basis under their own or under applicable state or local
regulations. See "-- Radioactive and Other Hazardous Materials."
CD20 ANTIGEN
The CD20 antigen is a highly selective cell surface marker found on
B-cells: expression of the CD20 antigen is limited to B-cells, is found on 95%
of such cells and occurs on B-cells primarily during that stage of their life
cycle when NHL arises. The CD20 antigen is not expressed by stem cells, B-cell
progenitor cells or plasma cells; thus, these cells are not targeted by Bexxar.
As a result, while Bexxar targets and destroys both normal and malignant
B-cells, unaffected plasma cells continue to function in the immune system and
B-cell populations can be regenerated after therapy by unaffected B-cell
progenitor cells.
[B-Cell Life Cycle Diagram]
8
10
In addition, the CD20 antigen is neither internalized by the B-cell nor
released into circulation after it has been bound to the B-1 Antibody, ensuring
that the antibody-radioisotope conjugate will remain in place to destroy the
B-cell.
THE B-1 ANTIBODY
The B-1 Antibody exhibits very high specificity for the CD20 antigen and,
because it is a murine sub-class IgG(2a) antibody, is capable of recruiting an
immune response to those B-cells to which it binds. Further, the B-1 Antibody
directly affects cell function, triggering apoptosis in a portion of the B-cells
to which it binds. The use of a murine antibody promotes rapid clearance of
unbound radiolabeled antibody from circulation, which reduces radiotoxicity. Due
to the impaired state of the NHL patient's immune system and the short course of
therapy, the human immune response to the murine antibody has been minimal to
date and has not been a limiting factor in treatment under the protocol.
The B-1 Antibody used in Bexxar was generated in 1978 by the Dana-Farber
Cancer Institute in collaboration with Beckman Coulter. The B-1 Antibody has
been available commercially from Beckman Coulter as a diagnostic reagent since
1982 and is generally accepted as the reference standard for the identification
of B-cells. Rights to the antibody for therapeutic applications were transferred
to Coulter Pharmaceutical from Beckman Coulter in February 1995.
(131)IODINE RADIOISOTOPE
The (131)I radioisotope used in Bexxar was selected over other
radioisotopes because it (i) produces both gamma emissions which permit
dosimetry for dose optimization and compact beta emissions for a concentrated
therapeutic effect, (ii) provides additional commercial and clinical benefits
based on its relatively long half-life, (iii) has characteristics which reduce
the risk of bone marrow damage without sacrificing efficacy, and (iv) has
long-established medical uses in other cancer treatments.
Gamma emissions from (131)I permit dose optimization by enabling clinicians
to calculate the actual clearance rate of radiolabeled antibody for each
patient. Use of the same radioisotope for both the dosimetric and the
therapeutic dose provides assurance that the clearance rates observed in
dosimetry also will apply for the therapeutic dose. Having established the
patient's actual clearance rate, the clinician can determine reliably the
therapeutic dose which will deliver the optimized level of total body radiation.
The lower relative energy and short path length of the beta emission of
(131)I concentrate the destructive energy of the radioisotope on the B-cell to
which the antibody is bound and, in a so-called bystander effect, on adjacent
B-cells in the microscopic clusters of malignant cells which are common to NHL.
Moreover, (131)I causes minimal damage to nearby normal tissues in contrast to
other radioisotopes that have longer path length beta emissions which may extend
too far beyond the targeted area.
The relatively long half-life of (131)I, approximately eight days, permits
radiolabeling at a centralized facility to ensure consistent quality, increase
the number of clinical sites capable of administering this radioimmunotherapy
and reduce overall manufacturing costs. The eight-day half-life also provides
the therapeutic advantage of exposing bound malignant cells to radiation over a
longer period of time.
When bound to a B-cell, (131)I's lower relative energy and short path
length, together with its relatively long half-life, minimize bone marrow damage
while optimizing the therapeutic effect of the radiation. Further, as the B-1
Antibody is metabolized, the released (131)I radioisotope is eliminated rapidly
and unlike other radioisotopes does not concentrate naturally in the bone
matrix.
(131)Iodine is an inexpensive radioisotope that has long-established
medical uses in other cancer treatments. Hence, medical facilities and
clinicians are accustomed to its handling, use and disposal and already have
developed the appropriate procedures and facilities for its safe therapeutic
application.
CLINICAL RESULTS AND DEVELOPMENT PLAN
Bexxar was developed initially in the course of an extended Phase I/II dose
escalation clinical trial at the University of Michigan Medical Center which
completed patient enrollment in early 1996. This trial was used
9
11
to develop and refine the proprietary therapeutic protocol, to determine the
maximum tolerated dose of total body radiation and to assess the safety and
efficacy profile of treatment with the radiolabeled B-1 Antibody in patients
representing a full range of NHL histologies. Based on the data generated in
this clinical trial, the Company is pursuing clinical development of Bexxar for
the treatment of low-grade and transformed low-grade NHL.
The following definitions apply to all discussions of the results of the
Company's clinical trials: A "complete response" is defined as the disappearance
of all detectable disease and all signs and symptoms of the disease. A "partial
response" is defined as a greater than 50% reduction in tumor measurement. The
"overall response" rate combines complete response with partial response.
Complete and partial response classifications also require that there be no
progression at any disease site and no new sites of disease.
PHASE I/II TRIAL RESULTS
A total of 59 patients were enrolled in the Phase I/II dose escalation
clinical trial. Preliminary data from this clinical trial were first published
in August 1993 in the New England Journal of Medicine and updated, interim
clinical results were reported in July 1996 in the Journal of Clinical Oncology.
Of the 59 patients enrolled in this trial, 42 had low-grade or transformed
low-grade NHL, which are the histologies the Company is pursuing in its clinical
trials. These 42 patients, who had failed on average more than four prior
treatment regimens with chemotherapy, achieved an 83% overall response rate,
with a 48% complete response rate and a 35% partial response rate. This
42-patient cohort included eight patients who previously had received and failed
an autologous bone marrow transplant prior to participation in the clinical
trial. The 42 patients in this cohort received total body radiation doses of up
to 85 cGy in this dose escalation trial. Four of the 42 patients did not receive
the therapeutic dose of radiolabeled antibody due to their rapidly deteriorating
medical condition or the presence of a human immune response to the murine
antibody, which arose prior to May 1993 in the early stages of the Phase I/II
dose escalation clinical trial under the yet to be optimized treatment protocol.
Of the 38 patients who received a therapeutic dose, 53% experienced a complete
response with an average duration of response of 20.2 months, with a range of
five to 46 months as of July 1997. As of such date, nine of these patients were
still in complete response.
On an intent-to-treat basis, which includes all enrolled patients whether
treated or not, the 59 enrolled patients achieved an overall response rate of
71%, with a complete response rate of 34% and a 37% partial response rate. Of
the 17 patients in this trial who had intermediate- or high-grade NHL, the
overall response rate was 41%, with no complete responders. While this data is
encouraging, the Company currently is pursuing clinical development of Bexxar in
low-grade and transformed low-grade NHL patients.
Bexxar was generally well tolerated by patients. Dose limiting side effects
were hematologic, consisting primarily of reversible declines in blood cell
counts. These toxicities were generally mild to moderate, with no patient
requiring stem cell rescue. Other side effects observed were mild and consisted
primarily of temporary flu-like symptoms.
PHASE II DOSIMETRY VALIDATION CLINICAL TRIAL
The Company completed a multi-center dosimetry validation clinical trial in
a total of 47 patients with relapsed or refractory low-grade and transformed
low-grade NHL in order to demonstrate that Bexxar's treatment protocol could be
implemented consistently at multiple clinical sites. During this trial, the
Company refined its proprietary protocol to streamline the therapeutic dose
calculation, establishing that accurate antibody elimination rates could be
determined from three gamma camera scans. Overall, 45 of the 47 enrolled
patients were evaluable, having received the protocol-specified therapy. The
evaluable patients had received on average, over four prior therapies, 42% had
bulky disease (tumor burden of greater than 500 grams), and 53% had not
responded to their last chemotherapy. Of the evaluable patients, 31% (14
patients) achieved a complete response. Ten of the 14 patients with a complete
response had not relapsed with the longest duration of response exceeding 20
months as of December 1997. None of the evaluable patients developed human
anti-mouse antibodies. A complete response was achieved at each clinical site
involved in the trial.
Results presented are based upon interim data which have been submitted to
the FDA, certain portions of which have not yet been published in a peer
reviewed publication. No assurance can be given that the
10
12
Company's future clinical results will be consistent with the results of the
Phase I/II dose escalation and the Phase II dosimetry validation trials, which
were conducted at relatively few sites with a relatively small number of
patients per NHL histology and disease stage and had different clinical
objectives than the Company's current or planned clinical trials. See "Risk
Factors -- Uncertainties Related to Product Development."
CLINICAL DEVELOPMENT OF BEXXAR
Based on the foregoing results of the Phase I/II and Phase II dosimetry
validation clinical trials, the Company will rely on two additional clinical
trials to support an application to the FDA for the initial marketing approval
of Bexxar: an ongoing pivotal Phase III clinical trial for the treatment of
patients refractory to chemotherapy, and interim data from an ongoing Phase II
clinical trial to evaluate the extent to which the therapeutic benefit of Bexxar
is derived from the combination of the B-1 Antibody and the radioisotope, in
comparison to the B-1 Antibody alone. To expand the use of Bexxar to other
indications, the Company also is conducting a Phase II clinical trial of Bexxar
as a first-line treatment for patients with low-grade NHL and intends to conduct
additional clinical trials in the future.
Pivotal Phase III Clinical Trial. The Company's pivotal Phase III clinical
trial, which commenced in December 1996, is designed to enroll a target of 60
evaluable patients who have low-grade and transformed low-grade NHL, are
refractory to chemotherapy, and have not received prior bone marrow
transplantation. This multi-center clinical trial is focused on the refractory
segment of this NHL population in an effort to qualify for expedited FDA
approval of Bexxar. Because of the limited treatment options for refractory
patients, each patient's response to Bexxar will be measured against his or her
own response to the previous regimen of chemotherapy, rather than by comparison
to patients in a separate control arm. Based on this primary endpoint, the
Company designed this clinical trial with a relatively short post-treatment
follow-up period of approximately six months. In March 1998, the Company
announced that it had reached target enrollment in the Phase III trial.
Phase II Unlabeled Versus Labeled Antibody Clinical Trial. The Company is
conducting a multi-center Phase II clinical trial in 78 patients with relapsed,
low-grade and transformed low-grade NHL. Patients are randomized into two
groups: one group receives Bexxar pursuant to the proprietary protocol; the
other group receives two 485 mg doses of unlabeled B-1 Antibody eight days apart
in a treatment regimen that is parallel to Bexxar. The objective of this
clinical trial is to assess the incremental clinical activity from radiolabeling
the B-1 Antibody as compared to the clinical activity of the unlabeled B-1
Antibody alone. Administration of the unlabeled B-1 Antibody has not been
designed for use as a stand-alone therapy, nor has the treatment regimen been
optimized for such use. This trial was the subject of an abstract presented at
the 1997 American Society of Therapeutic Radiation Oncology meeting in October
1997. The Company's objective is to complete enrollment of patients in this
clinical trial in the second half of 1998.
Phase II First-Line, Stand-Alone Treatment Clinical Trial. The Company
currently is conducting a single-center Phase II trial in 60 newly diagnosed
low-grade NHL patients. An interim analysis of data from the first 24 patients
was presented at the American Society of Hematology meeting in December 1997.
All 24 patients (100%) had responded to Bexxar, with 71% having achieved
complete responses. All side-effects were mild to moderate and self-limited. The
Company's objective is to complete enrollment of patients in this clinical trial
in the second half of 1998.
The ability of the Company to conduct and complete its ongoing and planned
clinical trials in a timely manner is subject to a number of uncertainties and
risks, including the rate at which patients can be accrued in each clinical
trial, the Company's ability to obtain necessary regulatory approvals, the
capacity of the Company's contract manufacturers to supply unlabeled and
radiolabeled B-1 Antibody as needed for patient treatment and the occurrence of
unanticipated adverse events. Any suspension or delay of one or more of such
clinical trials could have a material adverse effect on the Company's business,
financial condition and results of operation. See "Risk Factors -- Uncertainties
Related to Product Development," "-- Government Regulation; No Assurance of
Regulatory Approvals," and "-- Dependence on Suppliers; Manufacturing and Scale-
up Risk."
11
13
OTHER CLINICAL TRIALS
The radiolabeled B-1 Antibody has been the subject of other clinical trials
to assess the efficacy of using the radiolabeled B-1 Antibody to deliver the
high levels of radiation necessary to prepare patients for autologous bone
marrow transplants. The conventional preparation for autologous bone marrow
transplants is chemotherapy and total body irradiation. These clinical trials
were designed to demonstrate improved tolerability, response rate and duration
of response.
The first of two clinical trials conducted at the University of Washington
Cancer Center and the Fred Hutchinson Cancer Research Center tested radiolabeled
B-1 Antibody as a single agent to prepare patients for an autologous bone marrow
transplant by achieving a total body radiation level of up to 997 cGy (over ten
times Bexxar's dose). As reported in The Lancet in August 1995, of the 21
patients receiving the full radiotherapeutic regimen, the overall response rate
was 86%, with a 76% complete response rate and a 10% partial response rate. High
incidences of radiotoxicity-related side effects were reported due to the
extreme dosages employed. Interim data from this clinical trial were published
in the New England Journal of Medicine in October 1993.
The second clinical trial, currently ongoing, is designed to test the
combination of similarly high doses of radiolabeled B-1 Antibody and standard
doses of chemotherapy in preparation for autologous bone marrow transplant. This
clinical trial has enrolled 40 patients since its commencement in January 1995.
Data from this clinical trial have not yet appeared in a peer reviewed
publication.
In addition, a Phase II dose escalation clinical trial has commenced at the
University of Nebraska for the combined use of radiolabeled B-1 Antibody and
standard chemotherapy as preparation for autologous bone marrow transplant.
TAP PRO-DRUG PLATFORM
The Company's second technology platform, its tumor-activated peptide
pro-drug technology, has the potential to broaden significantly the therapeutic
window of cytotoxic agents. The TAP pro-drug technology is based upon an
understanding of the biochemical mechanisms utilized by cancer cells to
metastasize and the identification of a potential means for exploiting these
mechanisms and is being developed in collaboration with the Catholique
Universite de Louvain, Belgium. TAP pro-drugs are designed to be (i) activated
preferentially at the tumor site by enzymes secreted by the tumor, (ii) stable
in circulation and in normal tissues and (iii) unable to penetrate normal cells
or malignant cells until activated. As a result, relatively larger quantities of
cytotoxic agents are expected to reach and enter malignant cells as opposed to
normal cells, which could permit a significant increase in maximum tolerated
dosages, potentially overcoming drug resistance in cancer cells. The Company's
lead preclinical pro-drug candidate is a pro-drug version of doxorubicin known
as Super-Leu-Dox. Doxorubicin is an off-patent chemotherapeutic drug which
currently is used in the treatment of a number of solid tumor cancers, including
breast, prostrate, ovarian and soft-tissue sarcoma cancers.
12
14
SUPER LEU DOX
As depicted in the graphic above, Super-Leu-Dox is based on a proprietary
peptide of four amino acids (a "tetrapeptide") that can be linked to
doxorubicin's active site. In the two-step activation process, (1) the
extracellular tumor enzyme cleaves three amino acids from the tetrapeptide
leaving a leucine amino acid-doxorubicin conjugate that is able to penetrate
cells. (2) The resulting conjugate is then capable of entering cells. Since this
first activation step occurs in the immediate vicinity of tumor cells that are
secreting the enzyme, the probability that the cytotoxic drug will enter tumor
cells as opposed to normal cells is increased. Moreover, the conjugate remains
inactive inside the cells until (3) the remaining leucine is removed from
doxorubicin's active site by an intracellular enzyme. Although it is expressed
in both normal and tumor cells, this intracellular enzyme is present in tumor
cells in concentrations three to five times higher than in normal cells. As a
result, (4) the doxorubicin is activated to a greater extent in tumor cells
relative to normal cells.
This two-step activation process is designed to produce a significantly
higher ratio of active to inactive doxorubicin in cancer cells relative to
normal cells. In in vitro studies of Super-Leu-Dox, researchers have found that
the concentration of activated to inactivated doxorubicin in tumor cells was 40
times higher than in normal cells. These results, if confirmed in clinical
trials, offer the potential to improve significantly the therapeutic window of
doxorubicin. The Company currently plans to complete preclinical development of
Super-Leu-Dox and to commence clinical trials as early as the end of 1998.
Prior to the licensing of the TAP pro-drug technology by Coulter
Pharmaceutical, an earlier generation leucine-doxorubicin conjugate was tested
as a stand-alone therapy for the treatment of solid tumors in two separate dose
escalation clinical trials in Europe. A total of 59 patients were enrolled in
these clinical trials, and patients safely tolerated doses well in excess of
those associated with unmodified doxorubicin. Results from these clinical
trials, along with data from preclinical studies, will be used by the Company to
select the initial indication to pursue in clinical trials of Super-Leu-Dox.
Selection of the particular indication or indications to be evaluated in such
clinical trials has not been finalized.
While the Company will focus initially on previously approved
chemotherapeutic drugs, it also is evaluating TAP pro-drug versions of cytotoxic
agents currently considered too toxic to be used in their unmodified forms. The
Company believes that the TAP pro-drug technology potentially can be applied to
13
15
several classes of cytotoxic agents, including the vinca alkaloids, which are
used commonly to treat blood-borne malignancies and some solid tumors. The
Company also plans to develop and evaluate other peptide structures for possible
use in pro-drug versions of cytotoxic agents and other cancer therapeutics.
Under its agreement with Catholique Universite de Louvain, Belgium, the
Company has secured an exclusive license to the intellectual property underlying
the program and will pay royalties on sales of licensed products. The agreement
also provides for specified minimum payments, including one payment that will be
due if the Company should elect to relocate the program outside of Belgium. The
amounts of these payments are not material and, in any event, the Company does
not currently intend to relocate the research program. In 1997, the Company also
entered into a sponsored research agreement with Catholique Universite de
Louvain to conduct research in the area of TAP pro-drugs.
OTHER PRODUCT CANDIDATES
In 1997, the Company began a program which actively seeks to in-license
promising product development candidates in the area of cancer therapeutics with
the objective of expanding the Company's product pipeline.
RESEARCH AND DEVELOPMENT
The Company incurred research and development expenses of $2.5 million,
$13.7 million and $21.0 million for the periods from inception (February 16,
1995) to December 31, 1995 and for the years ended December 31, 1996 and 1997,
respectively.
MANUFACTURING
The Company intends to utilize contract manufacturers for most of the
preclinical and clinical requirements for its potential products and for all of
its commercial needs. This strategy is expected to (i) accelerate the scale-up
of manufacturing processes to commercial scale, (ii) reduce initial capital
investment, (iii) result in competitive manufacturing costs, and (iv) provide
access to a wide range of manufacturing technologies.
Pursuant to a development contract with the Company, Lonza Biologics PLC
("Lonza") now is supplying the B-1 Antibody for use in ongoing clinical trials
and to meet initial commercial requirements. The Company's contract with Lonza
is structured on a staged basis, with specified payments due upon Lonza's
satisfactory completion of particular steps in the re-cloning and production
scale-up process. Aggregate commitments under this contract are approximately
$10.7 million, of which approximately $5.8 million had been incurred and
expensed through 1997. The Company will make purchases of material from Lonza
pursuant to purchase orders to be issued from time to time based on the
Company's needs. The level of purchases that will be made from Lonza during the
course of the program is currently unknown. The Company has entered into an
agreement whereby Lonza has committed to provide material and, further, the
Company is negotiating a definitive commercial supply agreement with Lonza.
There can be no assurance that agreement will be entered into in a timely
manner.
In addition, the Company has entered into a Development Agreement with
Boehringer Ingleheim Pharma KG ("BI Pharma KG") to manufacture and supply B-1
Antibody for use in ongoing clinical trials and to meet commercial requirements.
Aggregate commitments under this contract are approximately $7.0 million, of
which $2.9 million had been incurred and expensed through 1997. The Company is
currently negotiating a commercial supply agreement that will, in addition to
manufacturing, provide for fill/finish and packaging services. There can be no
assurance that agreement will be entered into in a timely manner or that the
material produced under the Development Agreement will be suitable for human
use.
Radiolabeling currently is conducted at MDS Nordion Inc.'s ("Nordion")
centralized radiolabeling facility. The Company has a development contract with
Nordion that is structured on a cost-plus-a-percentage-of-cost basis and
provides a framework for the negotiation of separate facilities and supply
agreements. The Company paid a total of $5.1 million to Nordion under this
development contract. The
14
16
Company and Nordion currently are negotiating an agreement for supply of the
radiolabeled B-1 Antibody for both clinical trials and commercial sale. In the
interim, the Company is procuring radiolabeling services from Nordion on a
purchase order basis. There can be no assurance that the contract with Nordion
will be entered into in a timely manner, if at all, or that clinical trials or
commercial supply will not be delayed or disrupted as a result.
If Bexxar is successfully developed and is approved for marketing by the
FDA, the Company expects that production for commercialization will consist of
(i) production of bulk B-1 Antibody by Lonza and BI Pharma KG, (ii) filling and
labeling of individual product vials with B-1 Antibody by another third-party
supplier and/or BI Pharma KG, and (iii) radiolabeling of B-1 Antibody at
Nordion. While the Company plans to develop additional suppliers of these
services, it expects to rely on its current suppliers for all or a significant
portion of its requirements for Bexxar for the foreseeable future. Radiolabeled
antibody cannot be stockpiled against future shortages due to the eight-day
half-life of the (131)I radioisotope. Accordingly, any change in the Company's
existing or planned contractual relationships with, or interruption in supply
from, its third-party suppliers could adversely affect the Company's ability to
complete its ongoing clinical trials and to market Bexxar, if approved. Any such
change or interruption would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Dependence on Suppliers; Manufacturing and Scale-up Risk."
The Company believes that the products it expects to develop in its TAP
pro-drug program can be produced with standard chemical synthesis processes and
expects to utilize third parties to meet clinical trial and any commercial
requirements for these products. The Company is in discussions with potential
manufacturers of Super-Leu-Dox, its initial pro-drug product candidate. There
can be no assurance that agreements will be entered into in a timely manner or
that the material produced under the agreements will be suitable for human use.
MARKETING AND SALES
The Company intends to market and sell its products in the United States
through a direct sales force and, where appropriate, in collaboration with
marketing partners. This strategy is intended to enable the Company to establish
a commercial presence in the cancer therapeutics market with Bexxar, if
approved, and to create the capability to sell other products that it may
develop or in-license. The sales force is expected to initially call upon
oncologists, hematologists and nuclear medicine physicians in connection with
the sale of Bexxar. The Company initially will focus its sales force on those
physicians who treat the largest volume of NHL patients. These physicians
generally are concentrated in large metropolitan areas. Because of the
characteristics of Bexxar, the target physician must have access to a facility
with radiopharmaceutical and gamma camera scan capabilities. The Company
believes such facilities generally are available in large metropolitan areas
such that a significant portion of physicians who treat NHL patients will be
able to prescribe Bexxar. The Company intends to distribute its products
internationally through marketing partners. The Company has not yet identified
or entered into any agreements with any such partners, and there is no assurance
that it will be able to do so in a timely manner, if at all. The Company has not
yet established a sales force in North America, and there is no assurance that
it will be able to do so in a timely or cost effective manner, if at all.
The current purchasers of cancer therapeutics are hospitals, clinics,
physicians, pharmacies, large HMOs and state and federal governments.
Historically, physicians made treatment decisions and prescribed therapeutics
which then were dispensed through the clinic, hospital or pharmacy. However, the
United States health care system is undergoing significant changes and the
decision-making authority of the physician varies. These changes may make it
necessary for the Company to alter its strategy prior to launch of Bexxar or
even after launch and could affect adversely the ability of the Company to
generate revenues.
The Company's ability to market effectively may be affected adversely by a
number of factors including physicians' resistance to change from established
methods of treatment such as chemotherapy or radiation therapy and the special
handling and administration requirements of a radioimmunotherapy. Further, the
Company can provide no assurance as to whether Bexxar will be priced
competitively compared to existing
15
17
methods of treatment such as chemotherapy and radiation therapy. See "Risk
Factors -- Uncertainty of Market Acceptance of Bexxar."
PHARMACEUTICAL PRICING AND REIMBURSEMENT
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Initiatives to reduce
the federal deficit and to reform health care delivery are increasing
cost-containment efforts. The Company anticipates that Congress, state
legislatures and the private sector will continue to review and assess
alternative benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, price controls on
pharmaceuticals and other fundamental changes to the health care delivery
system. Any such proposed or actual changes could cause the Company to limit or
eliminate spending on development projects and affect the Company's ultimate
profitability. Legislative debate is expected to continue in the future, and
market forces are expected to drive reductions of health care costs. The Company
cannot predict what impact that adoption of any federal or state health care
reform measures or future private sector reforms may have on its business.
In both domestic and foreign markets, sales of the Company's proposed
products will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
managed care providers, private health insurers and other organizations. In
addition, other third-party payors increasingly are challenging the price and
cost effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
Bexxar, as potentially the first radioimmunotherapy for cancer, faces particular
uncertainties due to the absence of a comparable, approved therapy to serve as a
model for pricing and reimbursement decisions. There can be no assurance that
the Company's product candidates will be considered cost effective or that
adequate third-party reimbursement will be available to enable the Company to
maintain price levels sufficient to realize an appropriate return on its
investment in product development. Further, there can be no assurance that
products can be manufactured on a commercial scale at a cost that will enable
the Company to price its products within reimbursable rates. Legislation and
regulations affecting the pricing of pharmaceuticals may change before the
Company's proposed products are approved for marketing. Adoption of such
legislation could further limit reimbursement for medical products. If adequate
coverage and reimbursement rates are not provided by the government and
third-party payors for the Company's products, the market acceptance of these
products would be adversely affected, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
The testing, manufacturing, labeling, advertising, promotion, export and
marketing, among other things, of the Company's proposed products are subject to
extensive regulation by governmental authorities in the United States and other
countries. In the United States, pharmaceutical products are regulated by the
United States Food and Drug Administration ("FDA") under the Federal Food, Drug
and Cosmetic Act and other laws, including, in the case of biologics, the Public
Health Service Act. At the present time, the Company believes that Bexxar and
other immunotherapeutics that it may develop will be regulated by the FDA as
biologics and that other products to be developed by the Company, including
Super-Leu-Dox and other TAP pro-drugs, are likely to be regulated as drugs.
The steps required before a drug or biologic may be approved for marketing
in the United States generally include (i) preclinical laboratory tests and
animal tests, (ii) the submission to the FDA of an Investigational New Drug
application ("IND") for human clinical testing, which must become effective
before human clinical trials may commence, (iii) adequate and well-controlled
human clinical trials to establish the safety and efficacy of the product, (iv)
in the case of a biologic, the submission to the FDA of a Biologic License
Application ("BLA"), or in the alternative a Product License Application ("PLA")
for the product and an Establishment License Application ("ELA") for the
facility at which the product is manufactured, or in the case of a drug, a New
Drug Application ("NDA"), (v) FDA review of the BLA (or PLA/ELA) or NDA and (vi)
satisfactory completion of an FDA inspection of the manufacturing facilities at
16
18
which the product is made to assess compliance with Good Manufacturing Practices
("GMP"). The testing and approval process requires substantial time, effort and
financial resources, and there can be no assurance that any approval will be
granted on a timely basis, if at all.
Preclinical studies include laboratory evaluation of the product, as well
as animal studies to assess the potential safety and efficacy of the product.
The results of the preclinical studies, together with manufacturing information
and analytical data, are submitted to the FDA as part of the IND, which must
become effective before clinical trials may be commenced. The IND automatically
will become effective thirty days after receipt by the FDA, unless the FDA
before that time raises concerns or questions about the conduct of the trials as
outlined in the IND. In such case, the IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can proceed. There can be no
assurance that submission of an IND will result in FDA authorization to commence
clinical trials.
Clinical trials involve the administration of the investigational products
to healthy volunteers or patients under the supervision of a qualified principal
investigator. Further, each clinical trial must be reviewed and approved by an
independent Institutional Review Board ("IRB") at each institution at which the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into human
subjects, the drug is usually tested for safety (adverse effects), dosage
tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics.
Phase II clinical trials usually involve studies in a limited patient population
to (i) evaluate the efficacy of the drug for specific, targeted indications,
(ii) determine dosage tolerance and optimal dosage and (iii) identify possible
adverse effects and safety risks. Phase III clinical trials generally further
evaluate clinical efficacy and test further for safety within an expanded
patient population and at multiple clinical sites. Phase IV clinical trials are
conducted after approval to gain additional experience from the treatment of
patients in the intended therapeutic indication and to document a clinical
benefit in the case of drugs approved under accelerated approval regulations. If
the FDA approves a product while a company has ongoing clinical trials that were
not necessary for approval, a company may be able to use the data from these
clinical trials to meet all or part of any Phase IV clinical trial requirement.
These clinical trials are often referred to as "Phase III/IV post-approval
clinical trials." Failure to conduct promptly Phase IV clinical trials could
result in withdrawal of approval for products approved under accelerated
approval regulations.
In the case of products for severe or life-threatening diseases, the
initial clinical trials are sometimes done in patients rather than in healthy
volunteers. Since these patients are afflicted already with the target disease,
it is possible that such clinical trials may provide evidence of efficacy
traditionally obtained in Phase II clinical trials. These trials are referred to
frequently as Phase I/II trials. There can be no assurance that Phase I, Phase
II or Phase III testing will be completed successfully within any specific time
period, if at all, with respect to any of the Company's product candidates.
Furthermore, 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.
The results of the preclinical studies and clinical trials, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA in the form of a BLA requesting approval to market the
product. Before approving a BLA or NDA, the FDA will inspect the facilities at
which the product is manufactured and will not approve the product unless the
manufacturing facility complies with GMP. The FDA may delay approval of a BLA or
NDA if applicable regulatory criteria are not satisfied, require additional
testing or information, and/or require postmarketing testing and surveillance to
monitor safety or efficacy of a product. There can be no assurance that FDA
approval of any BLA or NDA submitted by the Company will be granted on a timely
basis, if at all. Also, if regulatory approval of a product is granted, such
approval may entail limitations on the indicated uses for which such product may
be marketed.
The Company also will be subject to a variety of foreign regulations
governing clinical trials and sales of its products. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the
17
19
product in those countries. The approval process varies from country to country
and the time needed to secure approval may be longer or shorter than that
required for FDA approval.
CLINTON-KESSLER CANCER INITIATIVE
In March 1996, the FDA announced a new policy intended to accelerate the
approval process for cancer therapies addressing disease conditions in which
patients have limited treatment options. The Company may elect to seek approval
of Bexxar under this accelerated approval process. Significant uncertainty
exists as to the extent to which such initiative will result in accelerated
review and approval. Further, the FDA has not made available comprehensive
guidelines with respect to this initiative, and it retains considerable
discretion in determining eligibility for accelerated review and approval and is
not bound by discussions that an applicant may have with FDA staff. Accordingly,
the FDA could employ such discretion to deny eligibility of Bexxar as a
candidate for accelerated review or require additional clinical trials or other
information before approving Bexxar. The Company cannot predict the ultimate
impact, if any, of the new approval process on the timing or likelihood of FDA
approval of Bexxar or any of its other potential products.
ORPHAN DRUG DESIGNATION
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a "rare disease or condition," which is generally a
disease or condition that affects fewer than 200,000 individuals in the United
States. Orphan drug designation must be requested before submitting a BLA. After
the FDA grants orphan drug designation, the generic identity of the therapeutic
agent and its potential orphan use are disclosed publicly by the FDA. Orphan
drug designation does not convey any advantage in, or shorten the duration of,
the regulatory review and approval process. If a product that has orphan drug
designation subsequently receives FDA approval for the indication for which it
has such designation, the product is entitled to orphan exclusivity, i.e., the
FDA may not approve any other applications to market the same drug for the same
indication, except in very limited circumstances, for seven years. Bexxar has
received orphan drug designation from the FDA. Although the FDA recently decided
to remove NHL from the list of diseases for which orphan drug designation may be
obtained, the previous designation of Bexxar will not be affected. In any event,
there can be no assurance that competitors will not receive approval of other,
different drugs or biologics for low-grade NHL. Thus, although obtaining FDA
approval to market a product with orphan drug exclusivity can be advantageous,
there can be no assurance that it would provide the Company with a material
commercial benefit.
RADIOACTIVE AND OTHER HAZARDOUS MATERIALS
The manufacturing and administration of Bexxar requires the handling, use
and disposal of (131)I, a radioactive isotope of iodine. These activities must
comply with various state and federal regulations, regarding the handling and
use of radioactive materials. Violations of these regulations could
significantly delay completion of clinical trials and commercialization of
Bexxar. For its ongoing clinical trials and for commercial-scale production, the
Company relies on Nordion to radiolabel the B-1 Antibody with (131)I at a single
location in Canada. Violations of safety regulations could occur and the risk of
accidental contamination or injury cannot be eliminated completely. In the event
of any such noncompliance or accident, the supply of radiolabeled B-1 Antibody
for use in clinical trials or commercially could be interrupted, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "-- Manufacturing."
The administration of Bexxar entails the introduction of radioactive
materials into patients. These patients emit radioactivity at levels that pose a
safety concern to others around them, especially healthcare workers for whom the
cumulative effect of repeated exposure to radioactivity is of particular
concern. These concerns are addressed in regulations promulgated by the NRC, as
well as by various state and local governments and individual hospitals.
Generally, patients who emit radioactivity above specified levels were required
to be admitted to the hospital, where they could be isolated from others until
radiation fell to acceptable levels. The NRC recently enacted regulations that
have made it easier for hospitals to treat patients with radioactive materials
on an outpatient basis. Under these regulations, Bexxar may be administered on
an
18
20
outpatient basis in most cases. Although state and local governments often
follow the lead of the NRC, many currently do not, and there can be no assurance
that they will do so or that patients receiving Bexxar will not have to remain
in the hospital for one to three days following administration of the
therapeutic dose, adding to the overall cost of the therapy.
The Company also expects to use hazardous chemicals and radioactive
compounds in its ongoing research activities. Although the Company believes that
safety procedures for handling and disposing of such materials will comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. The Company could be held liable for any damages that result from
such an accident, as well as for unexpected remedial costs and penalties that
may result from any violation of applicable regulations, which could result in a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may incur substantial costs to
comply with environmental regulations.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company believes that patent and trade secret protection is important
to its business and that its future will depend in part on its ability to
maintain its technology licenses, protect its trade secrets, secure additional
patents and operate without infringing the proprietary rights of others. The
Company currently holds exclusive rights to one issued United States patent and
several patent applications that relate to the Bexxar therapeutic protocol. The
Company also holds exclusive rights to a United States patent application
relating to the manufacture of Bexxar and to several patent applications
relating to the dosimetry methods employed in the administration of Bexxar. The
Company also holds an exclusive license to patent applications filed in the
United States and Europe relating to its TAP pro-drug program.
The pharmaceutical and biotechnology fields are characterized by a large
number of patent filings. A substantial number of patents have already been
issued to other pharmaceutical and biotechnology companies. Research has been
conducted for many years in the monoclonal antibody field by pharmaceutical and
biotechnology companies and other organizations. Competitors may have filed
applications for or have been issued patents and may obtain additional patents
and proprietary rights related to products or processes competitive with or
similar to those of the Company. Patent applications are maintained in secrecy
for a period after filing. Publication of discoveries in the scientific or
patent literature tends to lag behind actual discoveries and the filing of
related patent applications. The Company may not be aware of all of the patents
potentially adverse to the Company's interest that may have been issued to other
companies, research or academic institutions, or others. No assurances can be
given that such patents do not exist, have not been filed, or could not be filed
or issued, which contain claims relating to the Company's technology, products
or processes.
To date, no consistent policy has emerged regarding the breadth of claims
allowed in pharmaceutical and biotechnology patents. If patents have been or are
issued to others containing preclusive or conflicting claims and such claims are
ultimately determined to be valid, the Company may be required to obtain
licenses to one or more of such patents or to develop or obtain alternative
technology. The Company is aware of various patents that have been issued to
others that pertain to a portion of the Company's prospective business; however,
the Company believes that it does not infringe any patents that ultimately would
be determined to be valid. There can be no assurance that patents do not exist
in the United States or in other foreign countries or that patents will not be
issued to third parties that contain preclusive or conflicting claims with
respect to Bexxar or any of the Company's other product candidates or programs.
Commercialization of monoclonal antibody-based products may require licensing
and/or cross-licensing of one or more patents with other organizations in the
field. There can be no assurance that the licenses that might be required for
the Company's processes or products would be available on commercially
acceptable terms, if at all.
The Company's breach of an existing license or failure to obtain a license
to technology required to commercialize its product candidates may have a
material adverse effect on the Company's business, financial condition and
results of operations. Litigation, which could result in substantial costs to
the Company, may also be necessary to enforce any patents issued to the Company
or to determine the scope and validity of third-
19
21
party proprietary rights. If competitors of the Company prepare and file patent
applications in the United States that claim technology also claimed by the
Company, the Company may have to participate in interference proceedings
declared by the United States Patent and Trademark Office to determine priority
of invention, which could result in substantial cost to the Company, even if the
eventual outcome is favorable to the Company. An adverse outcome could subject
the Company to significant liabilities to third parties and require the Company
to license disputed rights from third parties or to cease using such technology.
The Company also relies on trade secrets to protect its technology,
especially where patent protection is not believed to be appropriate or
obtainable. The Company protects its proprietary technology and processes, in
part, by confidentiality agreements with its employees, consultants, advisory
board members, collaborators and certain contractors. There can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets or those of its
collaborators or contractors will not otherwise become known or be discovered
independently by competitors.
Patents issued and patent applications filed internationally relating to
biologics are numerous and there can be no assurance that current and potential
competitors and other third parties have not filed or in the future will not
file applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company. Moreover, there is certain
subject matter which is patentable in the United States and not generally
patentable outside of the United States. Statutory differences in patentable
subject matter may limit the protection the Company can obtain on some of its
inventions outside of the United States. For example, methods of treating humans
are not patentable in many countries outside of the United States. These and/or
other issues may prevent the Company from obtaining patent protection outside of
the United States which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Rights to use the name "Coulter Pharmaceutical, Inc." are licensed from
Beckman Coulter. The rights expire on October 31, 2002 or earlier upon the
occurrence of certain events.
COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive.
Any product candidate developed by the Company would compete with existing drugs
and therapies. There are many pharmaceutical companies, biotechnology companies,
public and private universities and research organizations actively engaged in
research and development of products for the treatment of people with cancer.
Many of these organizations have financial, technical, manufacturing and
marketing resources greater than those of the Company. Several of them have
developed or are developing therapies that could be used for treatment of the
same diseases targeted by the Company. One competitor known to the Company
recently received approval from the FDA for a non-radiolabeled chimeric antibody
for the treatment of low-grade NHL. If a competing company were to develop or
acquire rights to a more efficient or safer cancer therapy for treatment of the
same diseases targeted by the Company, or one which offers significantly lower
costs of treatment, the Company's business, financial condition and results of
operations could be materially adversely affected.
The Company believes that competition in the development and marketing of
new cancer therapies will be based primarily on product efficacy and safety,
time to market and price. To the extent the Company's product programs are
successful, it also intends to rely to some degree on patents and other
intellectual property and orphan drug designations to protect its products from
competition.
The Company believes that its product development programs will be subject
to significant competition from companies utilizing alternative technologies as
well as to increasing competition from companies that develop and apply
technologies similar to the Company's technologies. Other companies may succeed
in developing products earlier than the Company, obtaining approvals for such
products from the FDA more rapidly than the Company or developing products that
are safer and more effective than those under development or proposed to be
developed by the Company. There can be no assurance that research and
development by others will not render the Company's technology or potential
products obsolete or non-competitive or result in treatments superior to any
therapy developed by the Company, or that any therapy developed by the Company
will be preferred to any existing or newly developed technologies.
20
22
PRODUCT LIABILITY AND INSURANCE
The manufacture and sale of human therapeutic products involve an inherent
risk of product liability claims and associated adverse publicity. The Company
has only limited product liability insurance for clinical trials and no
commercial product liability insurance. There can be no assurance that the
Company will be able to maintain existing insurance or obtain additional product
liability insurance on acceptable terms or with adequate coverage against
potential liabilities. Such insurance is expensive, difficult to obtain and may
not be available in the future on acceptable terms, if at all. An inability to
obtain sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims brought against the Company in excess
of its insurance coverage, if any, or a product recall could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
HUMAN RESOURCES
As of December 31, 1997 the Company had 66 employees, 39 of whom were
engaged in product development activities. Twenty-eight of such employees hold
post-graduate degrees, including four with medical degrees and eleven with
Ph.D.s. The Company's employees are not represented by a collective bargaining
agreement. The Company believes its relations with its employees are good.
SCIENTIFIC ADVISORY BOARD
James O. Armitage, M.D., is Chairman of the Department of Internal Medicine
at the University of Nebraska Medical Center. He previously directed the Bone
Marrow Transplant Program at the University of Iowa, where he was an Assistant
Professor of Medicine.
Paul P. Carbone, M.D., MACP, D.Sc. (Hon.), is the Director of the
University of Wisconsin Comprehensive Cancer Center. He also is Professor
Emeritus of Medicine and Associate Dean for Program Development at the
University of Wisconsin Medical School. He previously served as a physician
scientist at the National Institutes of Health. His clinical research has
included the development of active combination chemotherapy for Hodgkin's
disease, non-Hodgkin's lymphoma and breast cancer.
Lawrence H. Einhorn, M.D., is Distinguished Professor of Medicine at
Indiana University Medical Center. His research of germ cell tumors focused upon
the discovery of treatments for testicular and ovarian cancer. Dr. Einhorn's
work has also been directed toward the optimization of combination chemotherapy
for these cancers.
Robert J. Mayer, M.D., is the President of the American Society of Clinical
Oncology, Chief of the Division of Clinical Oncology at the Dana-Farber Cancer
Institute and Professor of Medicine at Harvard Medical School. He also is an
attending physician at The Brigham and Women's Hospital, The Massachusetts
General Hospital and the Beth Israel/Deaconess Medical Center. Dr. Mayer is
known for his work in the treatment of leukemia and gastrointestinal cancers and
for developing programs to train cancer researchers and clinicians.
Saul Rosenberg, M.D., MACP, is Professor of Medicine and Radiology Emeritus
at Stanford University School of Medicine and is an oncologist known for his
contributions to advances in the treatment of Hodgkin's disease.
Daniel Douglas Von Hoff, M.D., is Professor of Cellular and Structural
Biology and Clinical Professor of Oncology at The University of Texas Health
Science Center at San Antonio. Dr. Von Hoff also serves as Director of Research
and as Director of the Institute for Drug Development at the Cancer Therapy &
Research Center in San Antonio, Texas. He is also an Adjunct Scientist at the
Southwest Foundation for Biomedical Research and President of the CTRC Research
Foundation, both in San Antonio, Texas.
21
23
RISK FACTORS
In this Section, the Company summarizes certain risks that should be
considered by stockholders and prospective investors in the Company. These risks
are discussed in greater detail below, and are discussed in context in other
Sections of this Report.
Uncertainties Related to Product Development. The Company's product
candidates are generally in early stages of development, with only one in
clinical trials. The development of safe and effective therapies for the
treatment of people with cancer is highly uncertain and subject to numerous
risks. Product candidates that may appear to be promising at early stages of
development may not reach the market for a number of reasons. Product candidates
may be found ineffective or cause harmful side effects during clinical trials,
may take longer to progress through clinical trials than had been anticipated,
may fail to receive necessary regulatory approvals, may prove impracticable to
manufacture in commercial quantities at reasonable cost and with acceptable
quality or may fail to achieve market acceptance.
The results of initial preclinical and clinical testing of the products
under development by the Company are not necessarily indicative of results that
will be obtained from subsequent or more extensive preclinical studies and
clinical testing. The Company's clinical data gathered to date with respect to
Bexxar are primarily from a Phase I/II dose escalation trial which was designed
to develop and refine the therapeutic protocol, to determine the maximum
tolerated dose of total body radiation and to assess the safety and efficacy
profile of treatment with a radiolabeled antibody. Further, the data from this
Phase I/II dose escalation trial were compiled from testing conducted at a
single site and with a relatively small number of patients per NHL histology and
disease stage. The Company has since completed a multi-center Phase II dosimetry
clinical trial and currently is conducting a multi-center pivotal Phase III
clinical trial. However, substantial additional development, clinical testing
and investment will be required prior to seeking any regulatory approval for
commercialization of this potential product. There can be no assurance that
clinical trials of Bexxar or other product candidates under development will
demonstrate the safety and efficacy of such products to the extent necessary to
obtain regulatory approvals for the indications being studied, or at all.
Companies in the pharmaceutical and biotechnology industries have suffered
significant setbacks in advanced clinical trials, even after obtaining promising
results in earlier trials. The failure to demonstrate adequately the safety and
efficacy of Bexxar or any other therapeutic product under development could
delay or prevent regulatory approval of the product and would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Furthermore, the timing and completion of current and planned clinical
trials of Bexxar, as well as clinical trials of other products, are dependent
upon, among other factors, the rate at which patients are enrolled, which is a
function of many factors, including the size of the patient population, the
proximity of patients to the clinical sites, the number of clinical sites, the
eligibility criteria for the study and the existence of competing clinical
trials. There can be no assurance that delays in patient enrollment in clinical
trials will not occur, and any such delays may result in increased costs,
program delays or both, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Early Stage of Development. Since its inception in 1995, the Company has
been engaged in the development of drugs and related therapies for the treatment
of people with cancer. The Company's product candidates are generally in early
stages of development, with only one in clinical trials. No revenues have been
generated from product sales or product royalties; and products resulting from
the Company's research and development efforts, if any, are not expected to be
available commercially for at least the next few years. No assurance can be
given that the Company's product development efforts, including clinical trials,
will be successful, that required regulatory approvals for the indications being
studied can be obtained, that its products can be manufactured at acceptable
cost and with appropriate quality or that any approved products can be
successfully marketed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Government Regulation; No Assurance of Regulatory Approvals. All new drugs
and biologics, including the Company's products under development, are subject
to extensive and rigorous regulation by the federal government, principally the
FDA under the Food, Drug and Cosmetic Act and other laws including, in the
22
24
case of biologics, the Public Health Services Act, and by state and local
governments. Such regulations govern, among other things, the development,
testing, manufacture, labeling, storage, premarket approval, advertising,
promotion, sale and distribution of such products. If drug products are marketed
abroad, they also are subject to extensive regulation by foreign governments.
The regulatory process, which includes preclinical studies and clinical
trials of each potential product, is lengthy, expensive and uncertain. Prior to
commercial sale in the United States, most new drugs and biologics, including
the Company's products under development, must be approved by the FDA. Securing
FDA marketing approvals often requires the submission of extensive preclinical
and clinical data and supporting information to the FDA. Product approvals, if
granted, can be withdrawn for failure to comply with regulatory requirements or
upon the occurrence of unforeseen problems following initial marketing.
Moreover, regulatory approvals for products such as new drugs and biologics,
even if granted, may include significant limitations on the uses for which such
products may be marketed.
There can be no assurance that the Company will be able to obtain necessary
regulatory approvals on a timely basis, if at all, for any of its product
candidates, and delays in receipt or failures to receive such approvals or
failures to comply with existing or future regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. Certain material manufacturing changes to new drugs and
biologics also are subject to FDA review and approval. There can be no assurance
that any approvals that are required, once obtained, will not be withdrawn or
that compliance with other regulatory requirements can be maintained. Further,
failure to comply with applicable FDA and other regulatory requirements can
result in sanctions being imposed on the Company or the manufacturers of its
products, including warning letters, fines, product recalls or seizures,
injunctions, refusals to permit products to be imported into or exported out of
the United States, refusals of the FDA to grant premarket approval of drugs and
biologics or to allow the Company to enter into government supply contracts,
withdrawals of previously approved marketing applications and criminal
prosecutions.
Manufacturers of drugs and biologics also are required to comply with the
applicable FDA good manufacturing practice ("GMP") regulations, which include
requirements relating to quality control and quality assurance as well as the
corresponding maintenance of records and documentation. Manufacturing facilities
are subject to inspection by the FDA, including unannounced inspection, and must
be licensed before they can be used in commercial manufacturing of the Company's
products. There can be no assurance that the Company or its suppliers will be
able to comply with the applicable GMP regulations and other FDA regulatory
requirements. Such failure could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company may elect to seek approval of Bexxar under the Clinton-Kessler
Cancer Initiative. Significant uncertainty exists as to the extent to which such
initiative will result in accelerated review and approval. Further, the FDA has
not made available comprehensive guidelines with respect to this initiative,
retains considerable discretion to determine eligibility for accelerated review
and approval and is not bound by discussions that an applicant may have had with
FDA staff. Accordingly, the FDA could employ such discretion to deny eligibility
of Bexxar as a candidate for accelerated review or to require additional
clinical trials or other information before approving Bexxar. A determination
that Bexxar is not eligible for accelerated review or delays and additional
expenses associated with generating a response to any such request for
additional trials could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Government Regulation."
Dependence on Suppliers; Manufacturing and Scale-up Risk. The Company has
no existing capacity or experience with respect to manufacturing products for
large-scale clinical trials or commercial purposes. The Company has contracted
with two third-party manufacturers, Lonza and BI Pharma KG to produce unlabeled
B-1 Antibody. The Company is negotiating commercial supply agreements. The
manufacturers have limited experience producing the B-1 Antibody, and there can
be no assurance that they will be able to produce the Company's requirements at
commercially reasonable prices or with acceptable quality.
The Company relies upon Nordion for radiolabeling of the B-1 Antibody at
Nordion's centralized radiolabeling facility. The Company and Nordion are
negotiating an agreement for supply of the radiolabeled
23
25
B-1 Antibody for both clinical trials and commercial sale. If Bexxar is approved
and is successful in the market, Nordion's capacity to radiolabel antibodies may
not be sufficient to meet all of the Company's commercial requirements. There
can be no assurance that the contract with Nordion will be entered into in a
timely manner, if at all.
The Company is aware of only a limited number of manufacturers capable of
producing the B-1 Antibody in commercial quantities or radiolabeling the
antibody with (131)I on a commercial scale. Should the Company's existing or
planned contractual relationships for production or radiolabeling of the B-1
Antibody cease or be interrupted, or if its existing suppliers are unable to
meet the Company's requirements for any reason, there can be no assurance that
any additional or alternative third parties could be engaged to carry out said
production or radiolabeling on a timely basis or on commercially acceptable
terms, if at all. To establish and qualify a new facility to centrally
radiolabel antibodies could take as long as two years. Further, radiolabeled
antibody cannot be stockpiled against future shortages due to the eight-day
half-life of the (131)I radioisotope. Accordingly, any change in the Company's
existing contractual relationships with, or interruption in supply from, its
producer of unlabeled antibody or its radiolabeler could affect adversely the
Company's ability to complete its ongoing clinical trials and to market Bexxar,
if approved. Any such change or interruption would have a material adverse
effect on the Company's business, financial condition and results of operations.
Although the Company is evaluating additional sources of supply for production
and radiolabeling of the B-1 Antibody, no assurance can be given that such
sources will be secured on commercially reasonable terms, on a timely basis, or
at all.
Prior to August 1997, the Company obtained B-1 Antibody from an inventory
produced by Beckman Coulter, and radiolabeling was performed by radiopharmacies
at the individual clinical trial sites. In order to begin using the centrally
radiolabeled B-1 Antibody from Nordion, the Company filed and the FDA cleared an
IND amendment to establish that the centrally radiolabeled material was
biologically and biochemically equivalent to the on-site radiolabeled B-1
Antibody. The Company is collecting data from its ongoing clinical trials to be
filed with the FDA to establish clinical comparability between the centrally and
on-site radiolabeled B-1 Antibody, however, there can be no assurance that it
will be able to establish clinical comparability. A failure to establish
clinical comparability could lead to a requirement that the Company enlarge the
size of its ongoing Phase III pivotal clinical trial, which would delay the
completion of such trial, increase its cost and potentially delay the Company's
initial pursuit of regulatory approval for Bexxar.
Third-party manufacturers must comply with GMP regulations prescribed by
the FDA and other standards prescribed by various federal, state and local
regulatory agencies in the United States and any other relevant country. Failure
to comply with these regulations could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Government Regulation; No Assurance of Regulatory Approvals" and
"Business -- Government Regulation."
Future Capital Needs; Uncertainty of Additional Funding. The Company's
operations to date have consumed substantial and increasing amounts of cash. The
negative cash flow from operations is expected to continue and to accelerate in
the foreseeable future. The development of the Company's technology and
potential products will require a commitment of substantial funds. The Company
expects that its existing capital resources will be adequate to satisfy the
requirements of its current and planned operations into 1999. However, the rate
at which the Company expends its resources is variable, may be accelerated and
will depend on many factors, including the scope and results of preclinical
studies and clinical trials, continued progress of the Company's research and
development of product candidates, the cost, timing and outcome of regulatory
approvals, the expenses of establishing a sales and marketing force, the timing
and cost of establishment or procurement of requisite production, radiolabeling
and other manufacturing capacities, the cost involved in preparing, filing,
prosecuting, maintaining, defending and enforcing patent claims, the acquisition
of technology licenses, the status of competitive products and the availability
of other financing.
The Company will need to raise substantial additional capital to fund its
operations and intends to seek such additional funding through public or private
equity or debt financings, as well as through collaborative arrangements. There
can be no assurance that such additional funding will be available on acceptable
terms, if at all. If additional funds are raised by issuing equity securities,
substantial dilution to stockholders may result.
24
26
If adequate funds are not available, the Company may be required to delay,
reduce the scope of, or eliminate one or more of its research and development
programs or obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Uncertainty of Market Acceptance of Bexxar. Even if the Company's product
candidates are approved for marketing by the FDA and other regulatory
authorities, there can be no assurance that the Company's products will be
commercially successful. If the Company's most advanced product candidate,
Bexxar, is approved, it would represent a significant departure from currently
approved methods of treatment for NHL and would require the handling of
radioactive materials. Accordingly, Bexxar may experience under-utilization by
oncologists and hematologists who are unfamiliar with the application of Bexxar
in the treatment of NHL. Further, oncologists and hematologists are not
typically licensed to administer radioimmunotherapies such as Bexxar and will
need to engage a nuclear medicine physician or receive specialty training to
administer Bexxar. Recently enacted NRC regulations permit Bexxar to be
administered on an outpatient basis in most cases as is currently contemplated
by the Company. However, market acceptance could be affected adversely because
some hospitals may be required to administer the therapeutic dose of Bexxar on
an inpatient basis under applicable state or local or individual hospital
regulations. As with any new drug, doctors may be inclined to continue to treat
patients with conventional therapies, in this case chemotherapy. Market
acceptance also could be affected by the availability of third-party
reimbursement. Failure of Bexxar to achieve significant market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "-- Uncertainty Related to Health Care Reform and
Third-Party Reimbursement," "-- Hazardous and Radioactive Materials," and
"Business -- Radioactive and Other Hazardous Materials."
Absence of Commercialization Resources and Experience. The Company intends
to market and sell its products in the United States through a direct sales
force and, where appropriate, in collaboration with marketing partners, and
internationally through marketing partners. The Company currently does not
possess the resources and experience necessary to commercialize any of its
product candidates. The Company's ability to market Bexxar, if approved, will be
contingent upon recruitment, training and deployment of a sales and marketing
force. Development of an effective sales force will require significant
financial resources and time. There can be no assurance that the Company will be
able to establish such a sales force in a timely or cost effective manner, if at
all, or that such a sales force will be capable of generating demand for Bexxar
or other product candidates. The Company has no collaborative arrangements for
the distribution of Bexxar, and there can be no assurance that the Company will
be able to enter into any such arrangements in a timely manner or on
commercially favorable terms, or at all. Failure to enter into any such
collaborative arrangements could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Marketing and Sales."
Dependence Upon Proprietary Technology; Uncertainty of Patents and
Proprietary Technology. The pharmaceutical and biotechnology fields are
characterized by a large number of patent filings. A substantial number of
patents have already been issued to other pharmaceutical and biotechnology
companies. Research has been conducted for many years in the monoclonal antibody
field by pharmaceutical and biotechnology companies and other organizations.
Competitors may have filed applications for or have been issued patents and may
obtain additional patents and proprietary rights related to products or
processes competitive with or similar to those of the Company. Patent
applications are maintained in secrecy for a period after filing. Publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries and the filing of related patent applications. The Company may not
be aware of all of the patents potentially adverse to the Company's interests
that may have been issued to other companies, research or academic institutions,
or others. No assurance can be given that such patents do not exist, have not
been filed, or could not be filed or issued, which contain claims relating to
the Company's technology, products or processes.
To date, no consistent policy has emerged regarding the breadth of claims
allowed in pharmaceutical and biotechnology patents. If patents have been or are
issued to others containing preclusive or conflicting claims
25
27
and such claims are determined ultimately to be valid, the Company may be
required to obtain licenses to one or more of such patents or to develop or
obtain alternative technology. The Company is aware of various patents that have
been issued to others that pertain to a portion of the Company's prospective
business; however, the Company believes that it does not infringe any patents
that ultimately would be determined to be valid. There can be no assurance that
patents do not exist in the United States or in other foreign countries or that
patents will not be issued to third parties that contain preclusive or
conflicting claims with respect to Bexxar or any of the Company's other product
candidates or programs. Commercialization of monoclonal antibody-based products
may require licensing and/or cross-licensing of one or more patents with other
organizations in the field. There can be no assurance that the licenses that
might be required for the Company's processes or products would be available on
commercially acceptable terms, if at all.
The Company's breach of an existing license or failure to obtain a license
to technology required to commercialize its product candidates may have a
material adverse effect on the Company's business, financial condition and
results of operations. Litigation, which could result in substantial costs to
the Company, may also be necessary to enforce any patents issued to the Company
or to determine the scope and validity of third-party proprietary rights. If
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the United States Patent
and Trademark Office to determine priority of invention, which could result in
substantial cost to the Company, even if the eventual outcome is favorable to
the Company. An adverse outcome could subject the Company to significant
liabilities to third parties and require the Company to license disputed rights
from third parties or to cease using such technology.
The Company also relies on trade secrets to protect its technology,
especially where patent protection is not believed to be appropriate or
obtainable. The Company protects its proprietary technology and processes, in
part, by confidentiality agreements with its employees, consultants, advisory
board members, collaborators and certain contractors. There can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets or those of its
collaborators or contractors will not otherwise become known or be discovered
independently by competitors.
Patents issued and patent applications filed internationally relating to
biologics are numerous and there can be no assurance that current and potential
competitors and other third parties have not filed or in the future will not
file applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company. Moreover, there is certain
subject matter which is patentable in the United States and not generally
patentable outside of the United States. Statutory differences in patentable
subject matter may limit the protection the Company can obtain on some of its
inventions outside of the United States. For example, methods of treating humans
are not patentable in many countries outside of the United States. These and/or
other issues may prevent the Company from obtaining patent protection outside of
the United States which would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Patents and Other Intellectual Property."
History of Operating Losses; Anticipated Future Losses. The Company has a
limited history of operations and has experienced significant losses since
inception. As of December 31, 1997, the Company's accumulated deficit was
approximately $44.7 million. The Company expects to incur significant additional
operating losses over the next several years and expects cumulative losses to
increase substantially due to expanded research and development efforts,
preclinical studies and clinical trials and development of manufacturing,
marketing and sales capabilities. The Company expects that losses will fluctuate
from quarter to quarter and that such fluctuations may be substantial. All of
the Company's product candidates are in development in preclinical studies and
clinical trials, and no revenues have been generated from product sales. To
achieve and sustain profitable operations, the Company, alone or with others,
must develop successfully, obtain regulatory approval for, manufacture,
introduce, market and sell its products. The time frame necessary to achieve
market success is long and uncertain. The Company does not expect to generate
product revenues for at least the next few years. There can be no assurance that
the Company will ever generate sufficient product revenues to become profitable
or to sustain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
26
28
Highly Competitive Industry; Risk of Technological Obsolescence. The
pharmaceutical and biotechnology industries are intensely competitive. Any
product candidate developed by the Company would compete with existing drugs and
therapies. There are many pharmaceutical companies, biotechnology companies,
public and private universities and research organizations actively engaged in
research and development of products for the treatment of people with cancer.
Many of these organizations have financial, technical, manufacturing and
marketing resources greater than those of the Company. Several of them may have
developed or are developing therapies that could be used for treatment of the
same diseases targeted by the Company. One competitor known to the Company
recently received a approval from the FDA of its non-radiolabeled chimeric
antibody for the treatment of low-grade NHL. If a competing company were to
develop or acquire rights to a more efficacious or safer cancer therapy for
treatment of the same diseases targeted by the Company, or one which offers
significantly lower costs of treatment, the Company's business, financial
condition and results of operations could be materially adversely affected. The
Company believes that its product development programs will be subject to
significant competition from companies utilizing alternative technologies as
well as to increasing competition from companies that develop and apply
technologies similar to the Company's technologies. Other companies may succeed
in developing products earlier than the Company, obtaining approvals for such
products from the FDA more rapidly than the Company or developing products that
are safer and more effective than those under development or proposed to be
developed by the Company. There can be no assurance that research and
development by others will not render the Company's technology or product
candidates obsolete or non-competitive or result in treatments superior to any
therapy developed by the Company, or that any therapy developed by the Company
will be preferred to any existing or newly developed technologies. See
"Business -- Competition."
Dependence on Management and Other Key Personnel. The Company is dependent
upon a limited number of key management and technical personnel. The loss of the
services of one or more of such key employees could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company's success will be dependent upon its ability to attract
and retain additional highly qualified sales, management, manufacturing and
research and development personnel. The Company faces intense competition in its
recruiting activities, and there can be no assurance that the Company will be
able to attract and/or retain qualified personnel.
Exposure to Product Liability. The manufacture and sale of human
therapeutic products involve an inherent risk of product liability claims and
associated adverse publicity. The Company has only limited product liability
insurance for clinical trials and no commercial product liability insurance.
There can be no assurance that the Company will be able to maintain existing
insurance or obtain additional product liability insurance on acceptable terms
or with adequate coverage against potential liabilities. Such insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms, if at all. An inability to obtain sufficient insurance
coverage on reasonable terms or to otherwise protect against potential product
liability claims brought against the Company in excess of its insurance
coverage, if any, or a product recall could have a material adverse effect upon
the Company's business, financial condition and results of operations. See
"Business -- Product Liability and Insurance."
Uncertainty Related to Health Care Reform and Third-Party
Reimbursement. Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. Initiatives to
reduce the federal deficit and to reform health care delivery are increasing
cost-containment efforts. The Company anticipates that Congress, state
legislatures and the private sector will continue to review and assess
alternative benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, price controls on
pharmaceuticals and other fundamental changes to the health care delivery
system. Any such proposed or actual changes could cause the Company to limit or
eliminate spending on development projects and affect the Company's ultimate
profitability. Legislative debate is expected to continue in the future, and
market forces are expected to drive reductions of health care costs. The Company
cannot predict what impact the adoption of any federal or state health care
reform measures or future private sector reforms may have on its business.
27
29
In both domestic and foreign markets, sales of the Company's proposed
products will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
managed care providers, private health insurers and other organizations.
Third-party payors are increasingly challenging the price and cost effectiveness
of medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. Bexxar, as
potentially the first radioimmunotherapy for cancer, faces particular
uncertainties due to the absence of a comparable, approved therapy to serve as a
model for pricing and reimbursement decisions. Further, if Bexxar is not
administered in most cases on an outpatient basis, as is contemplated currently
by the Company, the projected cost of the therapy will be higher than
anticipated. In addition, there can be no assurance that products can be
manufactured on a commercial scale for a cost that will enable the Company to
price its products within reimbursable rates. Consequently, there can be no
assurance that the Company's product candidates will be considered cost
effective or that adequate third-party reimbursement will be available to enable
the Company to maintain price levels sufficient to realize an appropriate return
on its investment in product development. If adequate coverage and reimbursement
rates are not provided by the government and third-party payors for the
Company's products, the market acceptance of these products could be adversely
affected, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Pharmaceutical
Pricing and Reimbursement."
Hazardous and Radioactive Materials. The manufacturing and administration
of Bexxar requires the handling, use and disposal of (131)I, a radioactive
isotope of iodine. These activities must comply with various state and federal
regulations. Violations of these regulations could delay significantly
completion of clinical trials and commercialization of Bexxar. For its ongoing
clinical trials and for commercial-scale production, the Company relies on
Nordion to radiolabel the B-1 Antibody with (131)I at a single location in
Canada. Violations of safety regulations could occur with this manufacturer,
and, therefore, there is a risk of accidental contamination or injury. In the
event of any such noncompliance or accident, the supply of radiolabeled B-1
Antibody for use in clinical trials or commercially could be interrupted, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company also expects to use hazardous chemicals and radioactive
compounds in its ongoing research activities. The Company could be held liable
for any damages that result from such an accident, contamination or injury from
the handling and disposal of these materials, as well as for unexpected remedial
costs and penalties that may result from any violation of applicable
regulations, which could result in a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company may incur substantial costs to comply with environmental regulations.
See "Business -- Radioactive and Other Hazardous Materials."
Control By Officers, Directors and Principal Stockholders. As of December
31, 1997, executive officers and principal stockholders of the Company will
beneficially own approximately 33.7% of the outstanding shares of the Company's
Common Stock. Accordingly, these stockholders, individually and as a group, may
be able to control the Company and direct its affairs and business, including
any determination with respect to a change in control of the Company, future
issuances of Common Stock or other securities by the Company, declaration of
dividends on the Common Stock and the election of directors. See "Principal
Stockholders."
Potential Volatility of Stock Price. The securities markets have from time
to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. The market prices of the
common stock of many publicly held biotechnology and pharmaceutical companies
have in the past been, and can in the future be expected to be, especially
volatile. Announcements of technological innovations or new products by the
Company or its competitors, release of reports by securities analysts,
developments or disputes concerning patents or proprietary rights, regulatory
developments, changes in regulatory or medical reimbursement policies, economic
and other external factors, as well as period-to-period fluctuations in the
Company's financial results, may have a significant and adverse impact on the
market price of the Common Stock. See "Price Range of Common Stock."
Potential Adverse Impact of Shares Eligible for Future Sale. Sales of
shares of Common Stock (including shares issued upon the exercise of outstanding
options) in the public market could adversely affect
28
30
the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company deems appropriate.
Adverse Impact of Possible Issuances of Preferred Stock; Anti-Takeover
Effect of Certain Charter and Bylaw Provisions. The Board of Directors has
authority to issue up to 3,000,000 shares of Preferred Stock and to fix the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. The issuance of Preferred Stock could affect adversely
the voting power of holders of Common Stock and the likelihood that such holders
will receive dividend payments and payments upon liquidation. Additionally, the
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
affect adversely the market price of and the voting and other rights of the
holders of the Common Stock. In addition, the Company's Bylaws provide that
special meetings of stockholders may be called only by the Chairman of the Board
of Directors, the Chief Executive Officer or the Board of Directors pursuant to
a resolution approved by a majority of the Board of Directors. In July 1997, the
Company adopted a Share Purchase Rights Plan, commonly referred to as a "poison
pill." In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibits the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. These provisions, along with certain provisions of
California law that may be applicable to the Company, could have the effect of
discouraging certain attempts to acquire the Company which could deprive the
Company's stockholders of the opportunity to sell their shares of Common Stock
at prices higher than prevailing market prices. See "Description of Capital
Stock."
ITEM 2. PROPERTIES
The Company currently leases approximately 15,000 square feet of office
space located in Palo Alto, California, under a short-term lease agreement. In
November 1997, the Company entered into a cancelable agreement to build and
lease new facilities in South San Francisco. The first building will be
approximately 50,000 square feet and contain both office and laboratory
facilities. The Company expects to relocate to the new facilities in late 1998.
In connection with its lease agreement, the Company obtained a letter of credit
agreement from a bank which secures the aggregate future payments under the
lease.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
29
31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "CLTR." Trading of the Company's Common Stock commenced on January
28, 1997, following effectiveness of its initial public offering. The following
table presents quarterly information on the price range of the Company's Common
Stock, indicating the high and low sales prices reported by the Nasdaq National
Market. These prices do not include retail markups, markdowns or commissions.
1997 HIGH LOW
---- ------ ------
First Quarter (from January 28)................ 13.250 8.750
Second Quarter................................. 12.625 6.500
Third Quarter.................................. 15.125 7.875
Fourth Quarter................................. 23.500 13.000
As of March 19, 1998, the Company had approximately 331 holders of record
of its Common Stock.
The Company has never paid any cash dividends on its capital stock and does
not expect to pay any such dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1996
and 1997 and for each of the two years in the period ended December 31, 1997 and
the periods and from inception (February 16, 1995) to December 31, 1995 and 1997
are derived from the consolidated financial statements of Coulter
Pharmaceutical, Inc. that have been audited by Ernst & Young LLP, independent
auditors, and which are included herein. The selected consolidated financial
data as of December 31, 1995 are derived from the consolidated financial
statements of Coulter Pharmaceutical, Inc. that have been audited by Ernst &
Young LLP, and which are not included herein. The selected consolidated
financial data as of December 31, 1993 and 1994 and for each of the two years in
the period ended December 31, 1994 and for the period from January 1, 1995 to
February 15, 1995 are derived from the financial statements of the Antibody
Therapeutics Business Operations of Coulter Corporation that have been audited
by Ernst & Young LLP, and which are not included herein.
FULL YEAR 1995
----------------------------
ANTIBODY THERAPEUTICS BUSINESS
OPERATIONS OF COULTER
CORPORATION(2) COMPANY
------------------------------- ---------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
DECEMBER 31, JAN 1, 1995 (FEB 16, 1995) YEAR ENDED YEAR ENDED (FEB 16, 1995)
----------------- TO FEB 15, TO DEC 31, DEC 31, DEC 31, TO DEC 31,
1993 1994 1995 1995 1996 1997 1997
------- ------- ----------- -------------- ---------- ---------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Operating expenses:
Research and development.......... $ 1,838 $ 2,798 $ 200 $ 2,539 $ 13,681 $ 21,045 $ 37,265
Selling, general and
administrative.................. 178 288 36 581 2,409 7,610 10,600
------- ------- ----- ----------- -------- -------- --------
Total operating expenses.... 2,016 3,086 236 3,120 16,090 28,655 47,865
Interest income and other, net...... -- -- -- 127 752 2,327 3,206
------- ------- ----- ----------- -------- -------- --------
Net loss............................ $(2,016) $(3,086) $(236) $ (2,993) $(15,338) $(26,328) $(44,659)
======= ======= ===== =========== ======== ======== ========
Basic and diluted net loss per
share(1).......................... $(12,736.17) $(649.39) $ (2.58)
----------- -------- --------
Shares used in computing basic and
diluted net loss per share(1)..... 0.235 24 10,197
----------- -------- --------
Pro forma basic and diluted net loss
per share......................... $ (1.28) $ (2.65)
----------- --------
Shares used in computing pro forma
basic and diluted net loss per
share............................. 2,342 5,793
----------- --------
30
32
ANTIBODY THERAPEUTICS
BUSINESS OPERATIONS OF
COULTER CORPORATION(2) COMPANY
--------------------------- ------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.... $ -- $ -- $ 3,438 $ 16,443 $ 75,445
Working capital (deficit)............................ (124) (50) 2,878 10,737 65,202
Total assets......................................... 109 135 3,628 18,321 78,671
Noncurrent portion of equipment financing obligations
and debt facility.................................. -- -- -- 1,535 2,298
Deficit accumulated during the development stage..... -- -- (2,993) (18,331) (44,659)
Total stockholders' equity........................... -- -- 2,997 10,546 65,861
Coulter Corporation(2) net investment................ (15) 85 -- -- --
----- ---- ------- -------- --------
- ---------------
(1) Retroactively restated to comply with Staff Accounting Bulletin No. 98,
which was issued by the staff of the Securities and Exchange Commission in
February 1998.
(2) Coulter Corporation was acquired by Beckman Instruments, Inc. upon which
occurance the entity is known as Beckman Coulter.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Coulter Pharmaceutical is engaged in the development of novel drugs and
therapies for the treatment of people with cancer. The Company currently is
developing a family of cancer therapeutics based upon two drug discovery
programs, therapeutic antibodies and targeted oncologics. Within these broad
discovery programs, the Company is currently concentrating on two distinct
platform technologies: therapeutic antibodies based on congugated antibody
technology and targeted oncologics based on tumor activated peptide pro-drugs.
The Company's most advanced product candidate, Bexxar (formerly known as
the "B-1 Therapy"), consists of a monoclonal antibody conjugated with a
radioisotope. The Company intends to seek initial approval of Bexxar for the
treatment of low-grade and transformed low-grade non-Hodgkin's lymphoma ("NHL")
in patients refractory to chemotherapy, while simultaneously pursuing clinical
trials to expand the potential use of Bexxar to other indications. Bexxar is
based upon the antibody therapeutics program which originated at Coulter
Corporation. In 1995 Coulter Pharmaceutical was incorporated and acquired
worldwide rights to Bexxar and related intellectual property, know-how and other
assets from Coulter Corporation. In 1997 Beckman Instruments, Inc. acquired
Coulter Corporation, upon which occurrence Coulter Corporation became known as
Beckman Coulter ("Beckman Coulter").
To date, the Company has devoted substantially all of its resources to
research and development programs, as well as selling, general and
administrative activities needed to support product development and potential
product sales. No revenues have been generated from product sales, and products
resulting from the Company's research and development efforts, if any, are not
expected to be available commercially for at least the next few years. The
Company has a limited history of operations and has experienced significant
operating losses to date. The Company expects to incur significant additional
operating losses over the next several years and expects cumulative losses to
increase substantially due to expanded research and development efforts,
preclinical studies and clinical trials and development of manufacturing,
marketing and sales capabilities. The Company expects that losses will fluctuate
from quarter to quarter and that such fluctuations may be substantial. There can
be no assurance that the Company will successfully develop, manufacture and
commercialize its products or ever achieve or sustain product revenues or
profitability. As of December 31, 1997, the Company's accumulated deficit was
approximately $44.7 million.
31
33
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1996 AND PERIOD FROM
INCEPTION (FEBRUARY 16, 1995) TO DECEMBER 31, 1995.
Operating Expenses. Research and development expenses were $21.0 million
for the year ended December 31, 1997, compared to $13.7 million for the year
ended December 31, 1996 and $2.5 million for the period from inception (February
16, 1995) to December 31, 1995. The $7.3 million increase from the year ended
December 31, 1996 to the year ended December 31, 1997 was due primarily to
increases in staffing and expenditures associated with the development of
Bexxar, including costs of clinical trials and manufacturing expenses. These
manufacturing expenses included certain expenses associated with scaled-up
production of monoclonal antibodies and the establishment of a centralized
radiolabeling capability. The $11.2 million increase from the period from
inception (February 16, 1995) to December 31, 1995 to the year ended December
31, 1996 was due primarily to increases in staffing and in expenditures
associated with the development of Bexxar, including costs of clinical trials
and manufacturing expenses. The Company expects its research and development
expenses to grow in 1998, reflecting anticipated increased costs related to
additions to staffing, preclinical studies, clinical trials and manufacturing.
Selling, general and administrative expenses were $7.6 million for the year
ended December 31, 1997, compared to $2.4 million for the year ended December
31, 1996 and $0.6 million for the period from inception (February 16, 1995) to
December 31, 1995. The $5.2 million increase from the year ended December 31,
1996 to the year ended December 31, 1997 was incurred to support the Company's
increased pre-commercialization expenses, as well as facilities and staffing
expansion, increased corporate development activities and related legal and
patent activities. The $1.8 million increase in expenses from the period from
inception (February 16, 1995) to December 31, 1995 to the year ended December
31, 1996 was incurred to support the Company's facilities expansion, increased
research and development efforts, and related legal and patent activities. The
Company expects its selling, general and administrative expenses to continue to
increase in 1998, due to increasing commercialization efforts in anticipation of
potential product sales, as well as to support its increased research and
development, patent and corporate development activities and facilities
expansion.
Interest Income and other, net. Interest income was $2.3 million for the
year ended December 31, 1997, compared to $0.8 million for the year ended
December 31, 1996 and $0.1 million for the period from inception (February 16,
1995) to December 31, 1995. The Company first recorded interest income in the
period from inception (February 16, 1995) to December 31, 1995 which resulted
from investment of the net proceeds from the sale of the Company's preferred
stock in 1995. The $0.7 million increase from the period from inception
(February 16, 1995) to December 31, 1995 to the year ended December 31, 1996 was
due to higher average cash, cash equivalent and short-term investment balances
as a result of the Company's sale of preferred stock in August 1995 and April
1996. The $1.5 million increase from the year ended December 31, 1996 to the
year ended December 31, 1997 was due to higher average cash, cash equivalent and
short-term investment balances as a result of the Company's initial public
offering of common stock in January 1997 and follow-on offering of common stock
in October 1997.
LIQUIDITY AND CAPITAL RESOURCES
In January 1997, the Company completed its initial public offering of
2,500,000 shares of common stock at a price to the public of $12.00 per share
resulting in net proceeds to the Company of approximately $27.1 million. Also in
January 1997, the Company received an additional $3.1 million from the exercise
of warrants to purchase 385,315 shares of common stock. In February 1997, the
Company received an additional $4.2 million from the sale of 375,000 shares of
its common stock pursuant to the exercise of the underwriters' over-allotment
option in connection with its initial public offering.
In October 1997 the Company completed a follow-on public offering of
2,750,000 shares of common stock at a price to the public of $15.50 per share,
resulting in net proceeds to the Company of approximately $40.2 million. Also in
October 1997, the underwriters for the Company's follow-on offering of common
stock exercised their full over-allotment option to purchase 412,500 additional
shares of common stock, raising additional net proceeds of $6.0 million.
32
34
Since its inception through December 31, 1997, the Company has financed its
operations primarily through private placements and public offerings of equity
securities totaling $109.2 million. In addition, the Company entered into a $3.8
million equipment lease financing and debt facility in December 1996, $0.3
million of which is available at December 31, 1997. Cash, cash equivalents and
short-term investments totaled $75.4 million at December 31, 1997.
The negative cash flow from operations results primarily from the Company's
net operating losses and is expected to continue and to accelerate in the
foreseeable future. The Company expects to incur substantial and increasing
research and development expenses, including expenses related to additions to
personnel, preclinical studies, clinical trials, manufacturing and
commercialization efforts. The Company will need to raise substantial additional
capital to fund its operations. The Company intends to seek such additional
funding through public or private equity or debt financings from time to time,
as market conditions permit. There can be no assurance that additional financing
will be available on acceptable terms, if at all. If adequate funds are not
available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research and development programs or obtain funds
through arrangements with collaborative partners or others that may require the
Company to relinquish rights to certain of its technologies, product candidates
or products that the Company would otherwise seek to develop or commercialize.
Net cash used in operations was $21.1 million for the year ended December
31, 1997, compared to $10.4 million for the year ended December 31, 1996. This
increase is primarily the result of the increased net loss for the period ended
December 31, 1997. Net cash used in investing activities increased to $49.0
million for the year ended December 31, 1997 from $8.5 million for the year
ended December 31, 1996 primarily resulting from the purchase of $61.5 million
in short-term investments using a portion of the proceeds from the Company's
sales of common stock in January and October 1997. The Company's capital
expenditures increased to $1.6 million for the year ended December 31, 1997 from
$0.9 million for the year ended December 31, 1996, primarily representing
investment in equipment for the central radiolabeling facility and equipment and
furniture related to increased staffing. Net cash provided by financing
activities increased to $81.7 million for the year ended December 31, 1997 from
$24.3 million for the year ended December 31, 1996, resulting primarily from the
public offerings of the Company's common stock in January and October 1997. Net
cash used in operations was $10.4 million for the year ended December 31, 1996,
compared to $2.6 million for the combined year ended December 31, 1995. This
increase was primarily the result of the increased net loss for the period ended
December 31, 1996, partially offset by an increase in accrued liabilities. Net
cash used in investing activities increased $8.4 million for the year ended
December 31, 1996 from $0.1 million for the combined year ended December 31,
1995 primarily resulting from the purchase of $8.6 million in short-term
investments using a portion of the proceeds of the Company's sale of preferred
stock in April 1996. The Company's capital expenditures increased to $0.9
million for the year ended December 31, 1996 from $0.1 million for the combined
year ended December 31, 1995, primarily representing investment in equipment
associated with the centralized radiolabeling capability. Net cash provided by
financing activities increased to $24.3 million for the year ended December 31,
1996 from $6.2 million for the combined year ended December 31, 1995, resulting
primarily from the sale of the Company's preferred stock in April 1996.
The Company expects that its existing capital resources, including the net
proceeds of its public offerings and interest thereon, will be adequate to
satisfy the requirements of its current and planned operations into 1999. At
December 31, 1997, the Company had entered into a long-term lease obligation for
office and laboratory space that will require material commitments for capital
expenditures. The Company's future capital requirements will depend on a number
of factors, including: the scope and results of preclinical studies and clinical
trials; continued progress of the Company's research and development of
potential products; the cost, timing and outcome of regulatory approvals; the
expenses of establishing a sales and marketing force; the timing and cost of
establishment or procurement of requisite production, radiolabeling and other
capacities; the cost involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims; the need to acquire licenses to new
technology; the status of competitive products; and the availability of other
financing.
33
35
IMPACT OF THE YEAR 2000
At this time, the Company believes that with upgrades of existing software
and conversions to new software, both of which are readily available in the
market, the Year 2000 issue will not pose significant operational problems for
its internal computer systems. Modifications and conversions to the Company's
internal computer systems are expected to be completed not later than September
30, 1999. Some risks associated with the Year 2000 issue are beyond the ability
of the Company to control, for example, the extent to which the Company's
suppliers and service providers, including providers of telephone services,
address the Year 2000 issue. A failure by a third party to adequately address
the Year 2000 issue would have a material adverse impact on such third party,
and could result in a material adverse impact on the Company. The Company,
however, has initiated formal communications with its significant suppliers and
service providers to determine the extent to which the Company may be vulnerable
to those third parties' failure to remediate their own Year 2000 issues. The
Company does not expect the estimated cost of implementing its Year 2000 plan to
be significant.
34
36
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Coulter Pharmaceutical, Inc.
We have audited the accompanying consolidated balance sheets of Coulter
Pharmaceutical, Inc. (a development stage company) (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations and cash flows for each of the two years in the period ended December
31, 1997 and for the periods from inception (February 16, 1995) to December 31,
1995 and 1997 and the related statement of stockholders' equity for the period
from inception (February 16, 1995) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Coulter
Pharmaceutical, Inc. at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1997 and for the periods from inception (February 16, 1995)
to December 31, 1995 and 1997, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 26, 1998
35
37
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Current assets:
Cash and cash equivalents................................. $ 20,451 $ 8,826
Short-term investments.................................... 54,994 7,617
Prepaid expenses and other current assets................. 269 499
Current portion of employee loans receivable.............. -- 35
-------- --------
Total current assets.............................. 75,714 16,977
Property and equipment, net................................. 2,263 924
Employee loans receivable................................... 323 271
Other assets................................................ 371 149
-------- --------
$ 78,671 $ 18,321
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,768 $ 1,490
Payable to Beckman Coulter................................ 70 111
Accrued liabilities....................................... 7,959 4,330
Current portion of equipment financing obligations and
debt facility.......................................... 715 309
-------- --------
Total current liabilities......................... 10,512 6,240
Non current portion of equipment financing obligations and
debt facility............................................. 2,298 1,535
Commitments
Stockholders' equity:
Preferred stock, issuable in series, $.001 par value:
3,000,000 and 20,000,000 shares authorized; none and
19,797,940 shares issued and outstanding at December
31, 1997 and 1996, respectively........................ -- 28,355
Common stock, $.001 par value: 30,000,000 shares
authorized; 13,570,224 and 437,612 shares issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 14 1
Additional paid-in capital.................................. 111,598 2,488
Net unrealized loss on securities available-for-sale........ (7) (3)
Deferred compensation....................................... (1,085) (1,964)
Deficit accumulated during the development stage............ (44,659) (18,331)
-------- --------
Total stockholders' equity........................ 65,861 10,546
-------- --------
$ 78,671 $ 18,321
======== ========
See accompanying notes.
36
38
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE PERIOD
FOR THE PERIOD FROM
FROM INCEPTION INCEPTION
(FEBRUARY 16, (FEBRUARY 16,
1995) TO YEAR ENDED YEAR ENDED 1995) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1997
--------------- ------------ ------------ --------------
Operating expenses:
Research and development.................. $ 2,539 $ 13,681 $ 21,045 $ 37,265
Selling, general and administrative....... 581 2,409 7,610 10,600
------------ -------- -------- --------
Total operating expenses.................... 3,120 16,090 28,655 47,865
Interest income and other, net.............. 127 752 2,327 3,206
------------ -------- -------- --------
Net loss.................................... $ (2,993) $(15,338) $(26,328) $(44,659)
============ ======== ======== ========
Basic and diluted net loss per share........ $ (12,736.17) $(649.39) $ (2.58)
------------ -------- --------
Shares used in computing
basic and diluted net loss per share...... 0.235 24 10,197
============ ======== ========
Pro forma basic and diluted net loss per
share..................................... $ (1.28) $ (2.65)
------------ --------
Shares used in computing pro forma basic and
diluted net loss per share................ 2,342 5,793
============ ========
See accompanying notes.
37
39
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NET
UNREALIZED
CONVERTIBLE PREFERRED LOSS
STOCK COMMON STOCK ADDITIONAL ON SECURITIES
--------------------- ------------------- PAID-IN AVAILABLE-FOR- DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL SALE COMPENSATION
----------- ------- ---------- ------ ---------- -------------- ------------
Issuance of Series A convertible
preferred stock to founders at
$1.00 per share for cash and
technology in February 1995..... 7,500,000 $ 2,500 -- $-- $ -- $-- $ --
Issuance of Series B convertible
preferred stock to a founder at
$1.50 per share for cash in
August and October 1995, less
issuance costs of $11............ 2,333,333 3,489 -- -- -- -- --
Exercise of common stock options
by a consultant at $0.30 per
share for cash in November
1995............................. -- -- 2,059 -- 1 -- --
Net loss.......................... -- -- -- -- -- -- --
----------- ------- ---------- --- -------- --- -------
Balances at December 31, 1995..... 9,833,333 $ 5,989 2,059 -- $ 1 -- --
Issuance of Series C convertible
preferred stock and warrants for
498,705 shares of common stock to
investors at $2.25 per share for
cash in April 1996, less issuance
costs of $55..................... 9,964,607 22,366 -- -- -- -- --
Issuance of common stock to a
prospective officer at $0.45 per
share for cash in March 1996..... -- -- 400,000 1 179 -- --
Issuance of common stock pursuant
to stock option exercises........ -- -- 35,553 -- 14 -- --
Unrealized loss on securities
available-for-sale, net.......... -- -- -- -- -- (3) --
Deferred compensation related to
grants of certain stock
options.......................... -- -- -- -- 2,294 -- (2,294)
Amortization of deferred
compensation..................... -- -- -- -- -- -- 330
Net loss.......................... -- -- -- -- -- -- --
----------- ------- ---------- --- -------- --- -------
Balances at December 31, 1996..... 19,797,940 $28,355 437,612 $ 1 $ 2,488 $(3) $(1,964)
Conversion of convertible
preferred stock into common
stock............................ (19,797,940) (28,355) 6,599,287 6 28,349 -- --
Issuance of 2,875,000 shares of
common stock at $12.00 per share
less issuance costs of $3,226.... -- -- 2,875,000 3 31,274 -- --
Issuance of common stock pursuant
to stock options exercises....... -- -- 77,358 -- 45 -- --
Issuance of common stock pursuant
to warrant exercises............. -- -- 385,315 1 3,127 -- --
Deferred compensation related to
grant of certain stock options... -- -- -- -- 206 -- (206)
Amortization of deferred
compensation..................... -- -- -- -- -- -- 1,085
Issuance of common stock pursuant
to the employee stock purchase
plan............................. -- -- 33,152 -- 280 -- --
Issuance of 3,162,500 shares of
common stock at $15.50 per share
less issuance costs of $3,190.... -- -- 3,162,500 3 45,829 -- --
Unrealized loss on securities
available-for-sale, net.......... -- -- -- -- -- (4) --
Net loss.......................... -- -- -- -- -- -- --
----------- ------- ---------- --- -------- --- -------
Balance at December 31, 1997...... -- $ -- 13,570,224 $14 $111,598 $(7) $(1,085)
=========== ======= ========== === ======== === =======
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT STOCKHOLDERS'
STAGE EQUITY
------------ -------------
Issuance of Series A convertible
preferred stock to founders at
$1.00 per share for cash and
technology in February 1995..... $ -- $ 2,500
Issuance of Series B convertible
preferred stock to a founder at
$1.50 per share for cash in
August and October 1995, less
issuance costs of $11............ -- 3,489
Exercise of common stock options
by a consultant at $0.30 per
share for cash in November
1995............................. -- 1
Net loss.......................... (2,993) (2,993)
-------- --------
Balances at December 31, 1995..... $ (2,993) $ 2,997
Issuance of Series C convertible
preferred stock and warrants for
498,705 shares of common stock to
investors at $2.25 per share for
cash in April 1996, less issuance
costs of $55..................... -- 22,366
Issuance of common stock to a
prospective officer at $0.45 per
share for cash in March 1996..... -- 180
Issuance of common stock pursuant
to stock option exercises........ -- 14
Unrealized loss on securities
available-for-sale, net.......... -- (3)
Deferred compensation related to
grants of certain stock
options.......................... --
Amortization of deferred
compensation..................... -- 330
Net loss.......................... (15,338) (15,338)
-------- --------
Balances at December 31, 1996..... $(18,331) $ 10,546
Conversion of convertible
preferred stock into common
stock............................ -- --
Issuance of 2,875,000 shares of
common stock at $12.00 per share
less issuance costs of $3,226.... -- 31,277
Issuance of common stock pursuant
to stock options exercises....... -- 45
Issuance of common stock pursuant
to warrant exercises............. 3,128
Deferred compensation related to
grant of certain stock options... --
Amortization of deferred
compensation..................... -- 1,085
Issuance of common stock pursuant
to the employee stock purchase
plan............................. -- 280
Issuance of 3,162,500 shares of
common stock at $15.50 per share
less issuance costs of $3,190.... -- 45,832
Unrealized loss on securities
available-for-sale, net.......... -- (4)
Net loss.......................... (26,328) (26,328)
-------- --------
Balance at December 31, 1997...... $(44,659) $ 65,861
======== ========
See accompanying notes.
38
40
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
FOR THE PERIOD
FOR THE PERIOD FROM
FROM INCEPTION INCEPTION
(FEBRUARY 16, YEAR ENDED (FEBRUARY 16,
1995) TO DECEMBER 31, 1995) TO
DECEMBER 31, ------------------- DECEMBER 31,
1995 1996 1997 1997
-------------- -------- -------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $(2,993) $(15,338) $(26,328) $(44,659)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization....................... 12 49 250 311
Amortization of deferred compensation............... -- 330 1,085 1,415
Changes in operating assets and liabilities:
Prepaid expenses and other current assets........... (40) (459) 230 (269)
Employee loans receivable........................... (31) (275) (17) (323)
Other assets........................................ (26) (123) (222) (371)
Accounts payable.................................... 341 1,149 278 1,768
Payable to Beckman Coulter.......................... 25 86 (41) 70
Accrued liabilities................................. 265 4,152 3,629 8,046
------- -------- -------- --------
Net cash used in operating activities....... (2,447) (10,429) (21,136) (34,012)
------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments................... -- (10,879) (61,525) (72,404)
Maturities of short-term investments.................. -- 986 14,144 15,130
Sale of short-term investments........................ -- 2,270 -- 2,270
Purchases of property and equipment................... (105) (876) (1,589) (2,570)
------- -------- -------- --------
Net cash used in investing activities....... (105) (8,499) (48,970) (57,574)
------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of equipment financing obligations and debt
facility............................................ -- (44) (531) (575)
Borrowings under equipment financing obligations and
debt facility....................................... -- 1,800 1,700 3,500
Proceeds from issuances of convertible preferred
stock, net.......................................... 5,989 22,366 -- 28,355
Proceeds from issuance of common stock, net........... 1 194 80,562 80,757
------- -------- -------- --------
Net cash provided by financing activities............. 5,990 24,316 81,731 112,037
------- -------- -------- --------
Net increase in cash and cash equivalents............. 3,438 5,388 11,625 20,451
Cash and cash equivalents at beginning of period...... -- 3,438 8,826 --
------- -------- -------- --------
Cash and cash equivalents at end of period............ $ 3,438 $ 8,826 $ 20,451 $ 20,451
======= ======== ======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid......................................... $ -- $ -- $ 283 $ 283
Schedule of non-cash investing and financing
activities:
Net exercises of warrants to purchase 37,785 shares of
common stock........................................ $ -- $ -- $ 453 $ 453
Acquisition of equipment pursuant to supplemental
lease obligation.................................... $ -- $ 78 $ -- $ 78
Deferred compensation related to grant of certain
stock options....................................... $ -- $ 2,294 $ 206 $ 2,500
See accompanying notes.
39
41
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Principles of Consolidation
Coulter Pharmaceutical, Inc. (the "Company" or "Coulter") was incorporated
in the State of Delaware on February 16, 1995 to engage in the research and
development of products for the treatment of cancer. The Company's principal
activities to date have involved conducting research and development, recruiting
management and technical personnel, obtaining financing and securing operating
facilities. Therefore, the Company is classified as a development stage company.
In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to continue over the next
several years. The Company plans to continue to finance its operations with a
combination of stock sales, collaborative agreements with corporate partners,
revenues from product sales and technology licenses. The Company's ability to
continue as a going concern is dependent upon successful execution of financings
and, ultimately, upon achieving profitable operations.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Coulter Pharma Belgium, SA which was formed
under the laws of Belgium in June 1996. Intercompany balances and transactions
have been eliminated.
In connection with its formation, the Company issued 5,000,000 shares of
its Series A preferred stock (since converted to 1,666,666 shares of common
stock) to Coulter Corporation in exchange for rights to certain intellectual
property, contractual rights and other assets pertaining to Bexxar(TM). In 1997
Beckman Instruments acquired Coulter Corporation (now known as "Beckman
Coulter"). Prior to the acquisition, all shares of the Company's stock were
distributed to the members of the Coulter family. Beckman Coulter retains the
rights to the assignment agreement and under the terms of this assignment
agreement, royalties are payable to Beckman Coulter upon commercial sale of
product, if any, derived from these licenses. Beckman Coulter also has the
right, in lieu of receiving cash, to purchase shares of the Company's equity
securities at the then current fair market value of such securities with respect
to the first $4.5 million payable to Beckman Coulter under this assignment
agreement. This transaction was accounted for as an acquisition of assets from
an affiliate with the amounts brought over at their historical basis of $0.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Loss Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Standards No. 128 "Earnings Per Share" ("SFAS 128"). The Statement requires the
presentation of basic earnings (loss) per share and diluted earnings (loss) per
share, if more dilutive, for all periods presented.
For all periods presented, both basic and diluted net loss per share are
computed based on weighted average number of common shares outstanding during
the period. Stock options and warrants to purchase common shares could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted net loss per share as their effect is
anti-dilutive for the periods presented.
Pro forma basic net loss per share as presented in the Statements of
Operations has been computed as described above and also gives effect to the
conversion of the convertible preferred stock that automatically
40
42
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
converted into common stock upon completion of the Company's initial public
offering in January 1997 (using the if converted method). Such shares are
included from their original date of issuance.
A reconciliation of shares used in the calculation of basic and diluted and
pro forma basic and diluted net loss per share follows:
PERIOD FROM INCEPTION
(FEBRUARY 16, 1995) YEAR ENDED DECEMBER 31
TO DECEMBER ---------------------------
1995 1996 1997
--------------------- ------------ ------------
Net loss......................... $(2,993,000) $(15,338,000) $(26,328,000)
=========== ============ ============
Basic and diluted
Weighted-average shares of Common
Stock outstanding.............. 235 23,619 10,197,225
----------- ------------ ------------
Shares used in computing basic
and diluted net loss per
share.......................... 235 23,619 10,197,225
=========== ============ ============
Basic and diluted net loss per
share.......................... $(12,736.17) $ (649.39) $ (2.58)
=========== ============ ============
Pro Forma Basic and diluted
Shares used in computing basic
and diluted net loss per
share.......................... 235 23,619
Adjusted to reflect the effect of
the assumed conversion of
Preferred Stock................ 2,341,665 5,768,911
----------- ------------
Shares used in computing pro
forma basic and diluted net
loss per share................. 2,341,900 5,792,530
=========== ============
Pro forma basic and diluted net
loss per share................. $ (1.28) $ (2.65)
=========== ============
Current Vulnerability to Certain Concentrations
The Company has contracted with two third-party manufacturers, Boehringer
Ingleheim Pharma KG ("BI Pharma KG") and LONZA Biologics plc ("Lonza"), to
produce a monoclonal antibody (the "B-1 Antibody"). The Company has also
contracted with a third-party manufacturer, MDS Nordion, Inc. ("Nordion") for
the radiolabeling of the B-1 Antibody in a centralized facility. However, should
the Company not be able to obtain sufficient quantities of the B-1 Antibody from
BI Pharma KG or Lonza or radiolabeled B-1 Antibody from Nordion, or additional
suppliers, certain research and development activities may be delayed.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with maturities of
three months or less from the date of purchase to be cash equivalents.
Short-term investments consist of investments with original maturities greater
than three months, but less than two years.
The Company accounts for its cash equivalents and short-term investments
under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). Under the
provisions of SFAS 115, the Company has classified its cash equivalents and
short-term investments as "available-for-sale." Such investments are recorded at
fair value and unrealized gains and losses, which are considered to be
temporary, are recorded as a separate component of Stockholders' equity until
realized. The Company classifies all investments in its available-for-sale
portfolio as current assets.
41
43
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Foreign Currency Translation
The functional currency of Coulter Pharma Belgium, SA is the U.S. Dollar.
Assets and liabilities of Coulter Pharma Belgium, SA are translated at current
exchange rates, and the related revenues and expenses are translated at average
exchange rates in effect during the period. The resulting translation adjustment
is recorded in selling, general and administrative expense in the accompanying
consolidated statements of operations and has been immaterial since the
formation of the subsidiary in June 1996.
Property and Equipment
Purchased property and equipment are stated at cost less accumulated
depreciation which is calculated using the straight-line method over the
estimated useful lives of the respective assets of three to five years.
Sponsored Research and License Fees
Research and development expenses paid to third parties under sponsored
research arrangements are recognized as the related services are performed,
generally ratably over the period of service. License fees are expensed when the
related obligation is incurred.
Stock-Based Compensation
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock option plans. Under APB 25,
if the exercise price of the Company's employee stock options equals or exceeds
the fair value of the underlying stock on the date of grant as determined by the
Company's Board of Directors, no compensation expense is recognized.
42
44
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
December 31, 1997
Money market funds............................ $ 1,409 $-- $ -- $ 1,409
Commercial paper.............................. 22,792 -- (7) 22,785
Corporate Bond................................ 23,661 5 (8) 23,658
US Government-backed securities............... 11,061 -- (4) 11,057
Certificate of Deposits....................... 16,316 4 -- 16,320
-------- -- ---- --------
Total............................... 75,239 9 (19) 75,229
Less amounts classified as cash equivalents... (20,238) -- (3) (20,235)
-------- -- ---- --------
Total short-term investments........ $ 55,001 $9 $(16) $ 54,994
======== == ==== ========
December 31, 1996
Money market funds............................ $ 1,874 $-- $ -- $ 1,874
Commercial paper.............................. 14,481 -- (3) 14,478
-------- -- ---- --------
Total............................... 16,355 -- (3) 16,352
Less amounts classified as cash equivalents... (8,735) -- -- (8,735)
-------- -- ---- --------
Total short-term investments........ $ 7,620 $-- $ (3) $ 7,617
======== == ==== ========
There were no realized gains or losses on the sales of available-for-sale
securities in the year ended December 31, 1997. Realized gain or losses of
available-for-sale securities in the year ended December 31, 1996 were not
significant.
At December 31, 1997, the contractual maturities of short-term investments
were as follows (in thousands):
ESTIMATED
AMORTIZED COST FAIR VALUE
-------------- ----------
Due in one year or less............................. $47,260 $47,253
Due after one year through two years................ 7,741 7,741
------- -------
$55,001 $54,994
======= =======
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
1996 1997
---- ------
Machinery and equipment..................................... $143 $1,427
Furniture and fixtures...................................... 95 176
Construction in process..................................... 743 967
---- ------
981 2,570
Less accumulated depreciation............................... (57) (307)
---- ------
Property and equipment, net................................. $924 $2,263
==== ======
43
45
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS
The Company has entered into numerous agreements with research
institutions, universities, and other entities for the performance of research
and development activities and for the acquisition of licenses related to those
activities. As of December 31, 1997, noncancelable commitments under these
arrangements were approximately $1.6 million. In order to maintain certain of
these licenses, the Company must pay specified annual license fees. Certain of
the licenses provide for the payment of royalties by the Company on future
product sales, if any.
5. ACCRUED LIABILITIES
Accrued liabilities consists of the following at December 31 (in
thousands):
1996 1997
------ ------
Accrued research and development expenses.................. $3,505 $6,426
Accrued clinical trial costs............................... 342 620
Other...................................................... 483 913
------ ------
Total............................................ $4,330 $7,959
====== ======
6. EQUIPMENT FINANCING OBLIGATIONS AND LONG TERM DEBT
In December 1996, the Company entered into a $3,827,000 equipment lease
financing and debt facility with a financing company of which $327,000 remains
available at December 31, 1997. The Company makes monthly payments plus interest
on amounts borrowed over the 48-month term of the facility. Amounts outstanding
under the equipment facility are secured by the underlying assets. Included in
property and equipment at December 31, 1997 are assets with a cost of $1,165,000
($78,000 at December 31, 1996) acquired pursuant to a fixed interest rate
equipment loan. Accumulated amortization of assets acquired pursuant to these
obligations was approximately $196,000 and $15,000 at December 31, 1997 and
1996, respectively.
In December 1996, the Company borrowed $1,722,000 under the unsecured debt
provision of the facility. The Company will make 48 monthly payments of
approximately $42,000 followed by a final payment of approximately $172,000 all
of which include interest at a fixed rate of 11.75%.
In March 1997, the Company borrowed $613,000 under the unsecured debt
provision of the facility. The Company will make 48 monthly payments
approximately $15,000 followed by a final payment of approximately $61,000, all
of which include interest at a fixed rate of 11.91%.
44
46
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, the Company's aggregate commitment under such
agreement, together with the net present value of the obligations, is as follows
(in thousands):
YEARS ENDING
DECEMBER 31:
------------
1998................................................... $1,023
1999................................................... 1,023
2000................................................... 1,200
2001................................................... 424
------
$3,670
Less amounts representing interest.......................... (657)
Less current portion........................................ (715)
------
$2,298
======
7. COMMITMENTS
The Company leases its offices under operating leases which expire at
various dates beginning in 1999 through 2002. Rent expense under these leases
totaled approximately $461,000 for the year ended December 31,1997, $186,000 for
the year ended December 31, 1996, and $71,000 for the period from inception
(February 16, 1995) to December 31, 1995.
At December 31, 1997, the aggregate noncancelable future minimum payments
under the operating leases are as follows (in thousands):
YEARS ENDING OPERATING
DECEMBER 31: LEASES
------------ ---------
1998..................................................... $ 567
1999..................................................... 398
2000..................................................... 321
2001..................................................... 268
2002..................................................... 99
------
Total............................................ $1,653
======
On November 7, 1997, the Company entered into a cancelable agreement to
lease additional facilities. The monthly rent payments are from $78,000 to
$120,000 throughout the term of the lease. In connection with its lease
agreement, the Company obtained a letter of credit agreement from a bank which
secures the aggregate future payments under the lease.
The Company is also contractually committed under development agreements
with contract manufacturers. Such future commitments are approximately
$8,300,000 at December 31, 1997 (none at December 31, 1996).
8. RELATED PARTY TRANSACTIONS
The Company issued loans to employees totaling $30,000 and $455,000 for the
period from inception (February 16, 1995) to December 31, 1995 and the year
ended December 31, 1996, respectively. The loans were either repaid in full or
converted to new loan agreements in 1997. The Company entered into loan
agreements with certain key employees, totaling $670,000 for the period ended
December 31, 1997. The loans are non-interest bearing with various terms ranging
from four to ten years. The forgiven amount and the repaid amount will be
calculated on a pro-rata basis over years one through ten of continued
employment. In the
45
47
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
event an employee ceases to be employed by the Company, the loan becomes
interest-bearing and due within a reasonable period not to exceed three months.
Each loan is secured by a Second Deed of Trust on employee's residence. As of
December 31, 1997, $595,000 was outstanding.
The Company had a relationship with Beckman Coulter, an affiliate at the
time. Prior to the acquisition of Coulter Corporation by Beckman Instruments,
Inc. in 1997, all of the Company's stock was distributed to members of the
Coulter family. Beckman Coulter had supplied the B-1 Antibody and certain other
services at its cost in support of the Company's ongoing development of Bexxar.
In addition, pursuant to a sublicense assignment agreement, the Company has
agreed to reimburse Beckman Coulter for royalties due to third parties with
respect to certain intellectual property rights sublicensed to the Company.
Beckman Coulter also has the right, in lieu of receiving cash, to purchase
shares of the Company's equity securities at the then current market value of
such securities with respect to the first $4.5 million payable under the
assignment agreement for royalties due upon commercial sale of product, if any,
derived from these licenses. Included in research and development expense is
$254,000 and $172,000 for the years ended December 31, 1996 and 1997,
respectively and $291,000 for the period from inception (February 16, 1995) to
December 31, 1995 related to services provided by Beckman Coulter and
reimbursements to Beckman Coulter for license fees and supplies.
9. STOCKHOLDERS' EQUITY
Preferred Stock
In January 1997, the Company completed its initial public offering of
common stock under the Securities Act of 1933, in which approximately $31.3
million in net proceeds was realized (including net proceeds from the exercise
of the underwriter's over-allotment option). Upon the completion of the initial
public offering all of the Series A, B and C preferred stock outstanding
converted into 6,599,287 shares of common stock. Also upon the completion of the
offering, the Company's Certificate of Incorporation was amended to authorize
3,000,000 shares of preferred stock, none of which are issued or outstanding.
The Company's board of directors is authorized to determine the designation,
powers, preferences and rights of any such series. The company has reserved
200,000 shares of preferred stock for potential issuance under the Share
Purchase Rights Plan.
EQUITY INCENTIVE PLANS
The 1995 Equity Incentive Plan (the "1995 Plan") was adopted in 1995 by the
Board of Directors and allowed for the granting of options for up to 866,666
shares of common stock to employees, consultants and directors.
In December 1996, the Board of Directors adopted the 1996 Equity Incentive
Plan (the "1996 Plan") under which a total of 1,400,000 shares of the Company's
authorized but unissued common stock has been reserved for issuance thereunder.
Stock options granted under the 1995 and 1996 Plans (collectively, the
"Plans") may be either incentive stock options or non-qualified stock options.
Incentive stock options may be granted to employees with exercise prices not
less than the fair market value at the date of grant and nonqualified stock
options may be granted at exercise prices of no less than 85% of the fair market
value of the common stock on the date of grant, as determined by the Board of
Directors. All options are to have a term not greater than 10 years from the
date of grant. Options vest as determined by the Board of Directors, generally
at the rate of 25% at the end of the first year with the remaining balance
vesting ratably over the next three years (but not less than 20% of the total
number of shares granted per year). The 1995 Plan terminated upon the closing of
the Company's initial public offering in January 1997.
46
48
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity under the Plans was as follows:
OPTIONS OUTSTANDING
------------------------
OPTIONS NUMBER EXERCISE WEIGHTED-
AVAILABLE OF PRICE AVERAGE
FOR GRANT SHARES PER SHARE EXERCISE PRICE
---------- --------- ------------ --------------
Shares authorized..................... 333,333 -- $ -- $ --
Options granted....................... (220,756) 220,756 $ 0.30 $ 0.30
Options exercised..................... -- (2,059) $ 0.30 $ 0.30
---------- --------- ------------ ------
Balance at December 31, 1995.......... 112,577 218,697 $ 0.30 $ 0.30
Shares authorized..................... 533,333 -- $ -- --
Options granted....................... (658,492) 658,492 $0.30-$12.00 $ 1.99
Options exercised..................... -- (35,551) $0.30-$ 2.25 $ 0.41
Options canceled...................... 19,333 (19,333) $0.30-$ 0.75 $ 0.73
---------- --------- ------------ ------
Balance at December 31, 1996.......... 6,751 822,305 $0.30-$12.00 $ 1.64
Shares authorized..................... 1,400,000 -- $ -- $ --
Options granted....................... (1,010,100) 1,010,100 $8.50-$19.13 $10.83
Options exercised..................... -- (77,358) $0.30-$ 2.25 $ 0.59
Options cancelled..................... 106,063 (106,063) $0.30-$10.75 $ 2.04
Options terminated.................... (100,314) -- -- --
---------- --------- ------------ ------
Balance at December 31, 1997.......... 402,400 1,648,984 $0.30-$19.13 $ 7.29
========== ========= ============ ======
Options were exercisable to purchase 11,104 shares (at a weighted-average
exercise price of $0.30 per share), 65,440 shares (at a weighted-average
exercise price of $0.43 per share), and 222,201 shares (at a weighted-average
exercise price of $6.52 per share) at December 31, 1995, 1996 and 1997,
respectively.
Exercise prices for options outstanding under the Plans as of December 31,
1997 ranged from $0.30 to $19.13 per share. The weighted-average remaining
contractual life of those options is 9.1 years.
WEIGHTED-
OPTIONS OUTSTANDING AVERAGE EXERCISABLE OPTIONS
-------------------------- REMAINING -------------------------
WEIGHTED- CONTRACTUAL WEIGHTED-
EXERCISE PRICE AVERAGE LIFE AVERAGE
RANGE NUMBER EXERCISE PRICE (IN YEARS) NUMBER EXERCISE PRICE
- -------------- --------- -------------- ----------- ------- ---------------
$0.30-$0.75 292,082 $ 0.5545 8.1 127,266 $ 0.5039
$1.20-$2.25 288,970 $ 2.0078 8.9 64,813 $ 1.8785
$4.50-$8.50 198,332 $ 7.4849 9.2 16,722 $ 4.8189
$8.625-$8.625 524,400 $ 8.6250 9.6 3,000 $ 8.6250
$8.875-$18.50 207,800 $12.7359 9.3 10,000 $12.1875
$19.125-$19.125 137,400 $19.1250 9.9 400 $19.1250
--------- -------- --- ------- --------
1,648,984 $ 7.2917 9.1 222,201 $ 1.8985
The Company has reserved 2,051,384 shares of its common stock for options
to purchase common shares which may be issued under the Plans.
In March 1996, 400,000 shares of common stock were purchased at $0.45 per
share by an officer of the Company. The Company has the right to repurchase
these shares under certain conditions. At December 31, 1997, 225,000 common
shares were available for repurchase.
The Company recorded deferred compensation expense for the difference
between the exercise price and the deemed fair value for financial statement
presentation purposes of the Company's common stock, as
47
49
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
determined by the Board of Directors, for common stock issued and common stock
options granted in 1996 and 1997. Such amount totals approximately $2,500,000
and are being amortized over the corresponding vesting period of each respective
share purchase or option, generally four years.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value of these options was estimated at the date of grant using the
minimum value method with weighted-average risk-free assumptions for 1995 and
1996 of 5.94% and 6.06%, respectively. The weighted-average expected life of the
options was approximately 4.9 years and 5.1 years for 1995 and 1996,
respectively. The fair value of employee stock options granted subsequent to
December 1996 was estimated at the date of grant using a Black-Scholes option
pricing model for the single option approach with the following weighted-average
assumptions for 1997: weighted average risk-free interest rate of 5.8%;
volatility factor of the expected market price of the Company's common stock of
68%; and a weighted-average expected life of the option of 4.1 years from the
granting date. No dividend payments are expected.
The pro forma information required by SFAS 123 includes compensation
expenses related to the Company's employee stock purchase plan and has also been
calculated based on the fair value method using a Black-Scholes option pricing
model using the weighted-average assumptions discussed above.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma information follows (in thousands, except for earnings per
share information):
PERIOD FROM
INCEPTION
(FEBRUARY
16, 1995) YEAR ENDED
TO DECEMBER 31,
DECEMBER 31, -----------------------------
1995 1996 1997
------------ ------------- ------------
Pro forma (as adjusted) net loss...... $(2,994) $(15,378) $(27,296)
Pro forma (as adjusted) net loss per
share............................... $ (1.28) $ (2.65) $ (2.68)
The weighted average fair market value of options granted from the period
of inception (February 16, 1995) to December 31, 1995, and for the years ended
December 31, 1996 and 1997 was $0.08, $1.46 and $10.83, respectively. Because
SFAS 123 is applicable only to options granted subsequentl to December 31, 1994,
its pro forma effect will not be fully reflected until fiscal 1998.
1996 Employee Stock Purchase Plan
In December 1996, the Board of Directors adopted the 1996 Employee Stock
Purchase Plan (the "Purchase Plan") under which employees can purchase shares of
the Company's common stock based on a percentage of their compensation. The
purchase price per share must be equal to at least 85% of the market value on
the date offered or the date purchased. A total of 350,000 shares of common
stock are reserved for issuance thereunder. At December 31, 1997, 33,152 shares
had been issued under the Purchase Plan (none at December, 1996).
The Company has reserved sufficient shares of its common stock, which may
be issued under the Purchase Plan.
48
50
COULTER PHARMACEUTICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Share Purchase Rights Plan
In July 1997, the Company adopted a Share Purchase Rights Plan (the "Rights
Plan"), commonly known as a "poison pill". The Rights Plan provides for the
distribution of certain rights to acquire shares of the Company's Series A
Junior Participating Preferred Stock (the "Rights") as a dividend for each share
of common stock held of record as of August 20, 1997. Under certain conditions
involving an acquisition or proposed acquisition by any person or group holding
20% or more of the common stock, the Rights permit the holders (other than the
20% holder) to purchase the Company's common stock at a 50% discount from the
market price at that time, upon payment of an exercise price of $70 per Right.
In addition, in the event of certain business combinations, the Rights permit
the purchase of shares of common stock of an acquirer at a 50% discount from the
market price at that time. The Rights have no voting privileges and are attached
to and automatically trade with the Company's common stock. The Rights expire on
July 30, 2007.
Warrants
In January 1997, the Company received approximately $3.1 million from the
cash exercise of warrants to purchase 347,530 shares of its common stock and
issued an additional 37,785 shares of its common stock upon the net exercise of
warrants to purchase 151,173 shares of its common stock.
As of December 31, 1997, a warrant to purchase 24,666 shares of common
stock at an exercise price of $9.75 per share was outstanding and expires on or
before dates ranging from December 6, 1996 through December 6, 2002.
The Company has reserved sufficient shares of its common stock which may be
issued upon the exercise of outstanding warrants.
10. INCOME TAXES
As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $42,500,000. The federal net operating loss
carryforwards will expire at various dates beginning in 2010 through 2012 if not
utilized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets are as follows
at December 31 (in thousands):
1996 1997
------- --------
Net operating loss carryforwards........................ $ 6,200 $ 14,900
Capitalized research and development.................... 900 2,100
Research credit carryforwards (expiring 2010 - 2012).... 100 600
Other -- net............................................ 100 100
------- --------
Total deferred tax assets..................... 7,300 17,700
Valuation allowance..................................... (7,300) (17,700)
------- --------
Net deferred tax assets................................. $ 0 $ 0
======= ========
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $6,200,000 during the year ended December 31, 1996.
49
51
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors and Executive Officers
The information required by this Item concerning the Company's directors
and executive officers is incorporated by reference to the Registrant's
Definitive Proxy Statement filed with the Commission pursuant to Regulation 14A
in connection with the 1998 Annual Meeting (the "Proxy Statement") under the
headings "Nominees" and "Executive Officers."
Compliance with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions" and "Executive
Compensation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- -------- ------- -----------------------
(1) 3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
(1) 3.2 Bylaws of the Registrant.
(1) 4.1 Reference is made to Exhibits 3.1 and 3.2.
(1) 4.2 Specimen stock certificate
(1) 4.3 Amended and Restated Investors' Rights Agreement, dated
April 18, 1996, between the Registrant and certain
investors.
(1) 4.4 Warrant Agreement to purchase Common Stock, dated December
6, 1996, between the Registrant and Lease Management
Services, Inc.
(1) 10.1 Form of Indemnity Agreement to be entered into between the
Registrant and its officers and directors.
(2) 10.2 1996 Equity Incentive Plan.
(2) 10.3 Form of Equity Incentive Stock Option.
(2) 10.4 Form of Nonstatutory Stock Option.
50
52
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- -------- ------- -----------------------
(2) 10.5 1996 Employee Stock Purchase Plan.
(1) 10.6 Assignment Agreement, dated February 24, 1995, between the
Registrant, Beckman Coulter and certain investors.
(1) 10.7 Manufacturing Agreement, dated August 20, 1996, between
Lonza Biologics PLC and the Registrant.
(1) 10.8 Equipment Lease Financing Agreement, dated December 6, 1996,
between the Registrant and Lease Management Services, Inc.
(1) 10.9+ First Amendment to Manufacturing Agreement, dated November
21, 1996, by and between Lonza Biologics PLC and the
Registrant.
(1) 10.10+ Development Agreement, dated November 15, 1995, by and
between MDS Nordion Inc. and the Registrant.
(1) 10.11+ Patent License Agreement, dated March 15, 1996, by and
between the Region Wallone, the Universite Cathololique de
Louvain and Coulter Pharma Belgium, SA.
(3) 10.12+ Second Amendment to Manufacturing Agreement, dated June 30,
1997, by and between Lonza Biologics PLC and the Registrant.
(4) 10.13+ Third Amendment to Manufacturing Agreement, date September
26, 1997, by and between Lonza Biologics PLC and the
Registrant.
(4) 10.14+ Fourth Amendment to Manufacturing Agreement, dated September
17, 1997, by and between Lonza Biologics PLC and the
Registrant
10.15+ Contract Research and Development Agreement, dated October
22, 1997, by and between Dr. Karl Thomae GmbH and the
Registrant
10.16+ Fifth Amendment to Manufacturing Agreement, dated October
27, 1997, by and between Lonza Biologics PLC and the
Registrant.
10.17+ Lease Agreement, dated November 7, 1997, by and between HMS
Gateway Office L.P. and the Registrant.
(1) 21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
- ---------------
(1) Incorporated by reference to the indicated exhibit in the Company's
Registration Statement on Form S-1 (File No. 333-17661), as amended.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-23265) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Special Report on Form 8-K filed
September 29, 1997 and incorporated herein by reference.
+ Portions omitted pursuant to a request of confidentiality filed separately
with the Commission.
(3) Form 8-K.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the last
quarter covered by this Report.
51
53
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.
COULTER PHARMACEUTICAL, INC.
BY: /s/ MICHAEL F. BIGHAM
-----------------------------------
Michael F. Bigham
President and CEO
Date: March 20, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael F. Bigham and William G. Harris
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MICHAEL F. BIGHAM President, Chief Executive March 20, 1998
- ----------------------------------------------------- Officer and Director
(Michael F. Bigham) (Principal Executive
Officer)
/s/ WILLIAM G. HARRIS Vice President and Chief March 20, 1998
- ----------------------------------------------------- Financial Officer
(William G. Harris) (Principal Financial and
Accounting Officer)
/s/ BRIAN ATWOOD Director March 20, 1998
- -----------------------------------------------------
(Brian Atwood)
/s/ DONALD L. LUCAS Director March 20, 1998
- -----------------------------------------------------
(Donald L. Lucas)
/s/ ROBERT MOMSEN Director March 20, 1998
- -----------------------------------------------------
(Robert Momsen)
/s/ ARNOLD ORONSKY Director March 20, 1998
- -----------------------------------------------------
(Arnold Oronsky)
52
54
SIGNATURE TITLE DATE
--------- ----- ----
/s/ SUE VAN Director March 20, 1998
- -----------------------------------------------------
(Sue Van)
/s/ GEORGE J. SELLA, JR. Director March 20, 1998
- -----------------------------------------------------
(George J. Sella, Jr.)
/s/ JOSEPH R. COULTER, III Director March 20, 1998
- -----------------------------------------------------
(Joseph R. Coulter, III)
53
55
EXHIBIT INDEX
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- -------- ------- -----------------------
(1) 3.1 Amended and Restated Certificate of Incorporation of the
Registrant..................................................
(1) 3.2 Bylaws of the Registrant....................................
(1) 4.1 Reference is made to Exhibits 3.1 and 3.2...................
(1) 4.2 Specimen stock certificate..................................
(1) 4.3 Amended and Restated Investors' Rights Agreement, dated
April 18, 1996, between the Registrant and certain
investors...................................................
(1) 4.4 Warrant Agreement to purchase Common Stock, dated December
6, 1996, between the Registrant and Lease Management
Services, Inc. .............................................
(1) 10.1 Form of Indemnity Agreement to be entered into between the
Registrant and its officers and directors...................
(2) 10.2 1996 Equity Incentive Plan..................................
(2) 10.3 Form of Equity Incentive Stock Option.......................
(2) 10.4 Form of Nonstatutory Stock Option...........................
(2) 10.5 1966 Employee Stock Purchase Plan...........................
(1) 10.6 Assignment Agreement, dated February 24, 1995, between the
Registrant, Beckman Coulter and certain investors...........
(1) 10.7 Manufacturing Agreement, dated August 20, 1996, between
Lonza Biologics PLC and the Registrant......................
(1) 10.8 Equipment Lease Financing Agreement, dated December 6, 1996,
between the Registrant and Lease Management Services,
Inc. .......................................................
(1) 10.9+ First Amendment to Manufacturing Agreement, dated November
21, 1996, by and between Lonza Biologics PLC and the
Registrant..................................................
(1) 10.10+ Development Agreement, dated November 15, 1995, by and
between MDS Nordion, Inc. and the Registrant................
(1) 10.11+ Patent License Agreement, dated March 15, 1996, by and
between the Region Wallone, the Universite Cathololique de
Louvain and Coulter Pharma Belgium, SA......................
(3) 10.12+ Second Amendment to Manufacturing Agreement, dated June 30,
1997, by and between Lonza Biologics PLC and the
Registrant..................................................
(4) 10.13+ Third Amendment to Manufacturing Agreement, dated September
26, 1997, by and between Lonza Biologics PLC and the
Registrant..................................................
(4) 10.14+ Fourth Amendment to Manufacturing Agreement, dated Septem-
ber 17, 1997, by and between Lonza Biologics PLC and the
Registrant..................................................
10.15+ Contract Research and Development Agreement, dated October
22, 1997, by and between Dr. Karl Thomae GmbH and the
Registrant..................................................
10.16+ Fifth Amendment to Manufacturing Agreement, dated October
27, 1997, by and between Lonza Biologics PLC and the
Registrant..................................................
10.17+ Lease Agreement, dated November 7, 1997, by and between HMS
Gateway Office L.P. and the Registrant......................
(1) 21.1 Subsidiaries of the Registrant..............................
23.1 Consent of Ernst & Young LLP, Independent Auditors..........
27.1 Financial Data Schedule.....................................
- ---------------
(1) Incorporated by reference to the indicated exhibit in the Company's
Registration Statement on Form S-1 (File No. 333-17661), as amended.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-23265) and incorporated herein by reference.
54
56
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Special Report on Form 8-K filed
September 29, 1997 and incorporated herein by reference.
+ Portions omitted pursuant to a request of confidentiality filed separately
with the Commission.
55