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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 0-19454
ANERGEN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0183594
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 PENOBSCOT DRIVE, 94063
REDWOOD CITY, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Telephone number: (650) 361-8901
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 [ ]
At November 6, 1998, Registrant had outstanding 18,924,000 shares of Common
Stock.
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ANERGEN, INC.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed balance sheets - September 30, 1998
and December 31, 1997 ........................................... 3
Condensed statements of operations - three month and nine months
ended September 30, 1998 and 1997 ............................... 4
Condensed statements of cash flows - nine months
ended September 30, 1998 and 1997 ............................... 5
Notes to condensed financial statements ........................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................... 8
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K .................................. 20
Signatures ........................................................ 21
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PART I - FINANCIAL INFORMATION
ANERGEN, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents ....................................... $ 1,868 $ 1,412
Short-term investments .......................................... 502 6,991
Contract receivables ............................................ -- 836
Prepaid expenses ................................................ 50 78
--------- ---------
Total current assets .............................. 2,420 9.317
Property and equipment, net .......................................... 1,173 1,703
Other assets ......................................................... 36 36
--------- ---------
$ 3,629 $ 11,056
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 730 $ 1,281
Deferred revenue................................................. -- 502
Current portion of capital lease obligations and debt 1,003 616
--------- ---------
Total current liabilities ......................... 1,733 2,399
Long-term portion of capital lease obligations and debt -- 870
Commitments
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized;
none issued and outstanding ............................. -- --
Common stock, no par value; 60,000,000 shares authorized;
18,892,000 shares issued and outstanding
(18,846,264 at December 31, 1997) ......................... 57,705 57,670
Additional paid-in-capital....................................... 659 659
Accumulated other comprehensive income -- (6)
Accumulated deficit ............................................. (56,468) (50,536)
--------- ---------
Total shareholders' equity ........................ 1,896 7,787
--------- ---------
$ 3,629 $ 11,056
========= =========
Note: The balance sheet at September 30, 1998 is derived from unaudited
financial statements. The December 31, 1997 information is derived from
audited financial statements.
See accompanying notes.
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ANERGEN, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Contract Revenue related party $ 250 $ 696 $ 923 $ 1,797
Contract Revenue........................... 156 606 2,198 2,667
Interest income............................ 104 161 300 460
-------- -------- -------- --------
510 1,463 3,421 4,924
Expenses:
Research and development................... 1,842 2,902 6,374 8,611
General and administrative................. 1,014 587 2,873 2,180
Interest expense........................... 29 70 106 174
-------- -------- -------- --------
2,885 3,559 9,353 10,965
-------- -------- -------- --------
Net loss........................................ $ (2,375) $ (2,096) $ (5,932) $ (6,041)
======== ======== ======== ========
Basic net loss per share........................ $ (0.13) $ (0.11) $ (0.31) $ (0.32)
======== ======== ======== ========
Shares used in calculating per share data ...... 18,891 18,820 18,878 18,807
======== ======== ======== ========
See accompanying notes.
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ANERGEN, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------- ---------
Cash flows provided by (used in) operating activities:
Net loss..................................................... $ (5,932) $ (6,041)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 625 633
Changes in operating assets and liabilities:
Contract receivables - related party ...................... 333 (889)
Prepaid expenses .......................................... 29 118
Accounts payable and accrued liabilities .................. (551) (18)
--------- ---------
Net cash used in operating activities .......................... (5,496) (6,197)
Cash flows provided by (used in) investing activities:
Purchase of investments available-for-sale .................. (7,285) (20,946)
Sale of investments available-for-sale ...................... 13,779 29,201
Purchase of property and equipment .......................... (94) (1,021)
--------- ---------
Net cash provided by investing activities ...................... 6,400 7,234
--------- ---------
Cash flows provided by (used in) financing activities:
Proceeds from facility and equipment debt financing ......... 0 659
Repayments of capital lease obligations and debt ............ (483) (452)
Issuance of common stock, net................................ 35 102
--------- ---------
Net cash provided by (used in) financing activities ............ (448) 309
Net increase (decrease) in cash ................................ 456 1,346
Cash and cash equivalents at beginning of period ............... 1,412 3,963
--------- ---------
Cash and cash equivalents at end of period ..................... 1,868 5,309
Short-term investments at end of period ........................ 502 4,219
--------- ---------
Cash, cash equivalents and short-term investments
at end of period ............................................... $ 2,370 $ 9,528
========= =========
See accompanying notes.
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ANERGEN, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. NATURE OF BUSINESS
Anergen, Inc. ( the "Company") was incorporated on April 26, 1988 for the
purpose of developing therapies using biopharmaceutical compounds for the
treatment of autoimmune diseases. The Company devotes its efforts to
research and development on its own behalf and also on behalf of its
corporate partners. At September 30, 1998 the Company had cash, cash
equivalents and short-term investments of approximately $2,370,000 which at
historical cash consumption rates is not sufficient to fund operations
through the end of the year. In October 1998 the Company announced that it
was restructuring operations due to an inability to secure financing. The
Company plans to focus on the clinical development of AnergiX for
rheumatoid arthritis, in collaboration with N.V. Organon and partnering and
merger opportunities. The Company is also seeking to raise additional
capital through equity or debt financing. If the Company is unsuccessful in
these efforts it may be required to further reduce or cease operations.
2. BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by the
Company and have not been audited, pursuant to the rules and regulations
promulgated by the Securities and Exchange Commission (the "Commission").
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been omitted pursuant to Commission rules and
regulations; nevertheless, the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed
financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the
Company (subject to year-end adjustments) with respect to the interim
financial statements, and of the results of its operations and cash flows
for the interim periods then ended, have been included. The results of
operations for the interim periods are not necessarily indicative of the
results for the full year.
Net Loss Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more diluted.
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period.
Diluted net loss per share has not been presented as stock options and
other common stock equivalents are antidilutive.
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new
rules for the reporting and presentation of comprehensive income and its
components; however, the adoption of SFAS 130 had no impact on the
Company's net loss or shareholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior
to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income (loss).
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The table below shows comprehensive loss for the periods presented:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------ ------------
(UNAUDITED)
Net loss ...................................................... $ (5,932,000) $ (6,041,000)
Net unrealized gain (loss) on securities available for sale ... (6,000) (37,000)
------------ ------------
Comprehensive loss ............................................ $ (5,926,000) $ (6,004,000)
============ ============
Reclassification
Certain prior year amounts have been reclassified to conform to the current
periods presentation.
3. DEBT OBLIGATION
On December 27, 1996 the Company entered into an agreement with Silicon
Valley Bank of California ("SVB") which provided $1,500,000 in financing
available through December 31, 1997, all of which is secured by equipment
and leasehold improvements purchased by the Company. At September 30, 1998,
the Company had net borrowings of $1,003,000 under the original loan
agreements. As of the end of the third quarter ended September 30, 1998,
the Company was no longer in compliance with certain covenants related to
its outstanding loan with SVB. As a result, the Company has reclassified
the long term portion of the debt obligation into the current portion of
the debt obligation. SVB has the right to demand full repayment of the loan
while the Company is out of compliance with the covenants. Immediate
repayment of the loan would have material adverse effect on the Company's
operating cash flow.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements which involve risks and
uncertainties including but not limited to the adequacy of capital resources,
the nature of the Company's capital requirements, the availability and timing of
financing, the progress of the Company's clinical trials, and research and
development programs, the likelihood of development of potential products, if
any, from such research and the effect of Year 2000 problems, if any. The
Company's actual results could differ materially from the results anticipated in
these forward-looking statements as a result of certain factors set forth
hereunder and in the Company's Annual Report as filed on Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through private
placements of its equity securities with venture capitalists (which raised
an aggregate of approximately $7.6 million in net proceeds), through the
sale of its Common Stock to Novo Nordisk A/S (which raised approximately $8
million in net proceeds), through the issuance of its Common Stock and
Warrants to purchase shares of Common Stock through a private placement in
exchange for $1.5 million in proceeds, and through public offerings of its
Common Stock which have raised an aggregate of $38.8 million in net
proceeds, including $9.4 million in net proceeds from the sale of 3.5
million shares of Common Stock to the public in August 1996 and
approximately $500,000 from the underwriters' exercise of the
over-allotment option in September 1996. The Company's cash, cash
equivalents and short-term investments at September 30, 1998 were
approximately $2.4 million. Accounts payable and accrued liabilities
decreased to $730,000 at September 30, 1998 from $1,281,000 at December 31,
1997. Long-term debt decreased from $870,000 at December 31, 1997 to zero
at September 30, 1998 due to repayment of loans and the need to reclassify
the remaining long term debt to short term as the Company is out of
compliance with the loan convenants. The Company had shareholders' equity
at September 30, 1998 of approximately $1.9 million which decreased from
$7.8 million at December 31, 1997 due to the net loss from operations
During October of 1998, the Company announced a restructuring pursuant to
which it took a number of steps to reduce expenses including the
termination of 33 employees. The Company has also ceased its research
efforts and is focusing on clinical development on AnergiX for rheumatoid
arthritis in collaboration with N.V. Organon. It is also seeking partnering
and merger opportunities. The Company restructured its operations due to an
inability to date to secure financing. As a result of the restructuring,
the Company believes that its current capital resources are likely to be
sufficient to continue to fund the Company's operations through December
31, 1998, assuming Silicon Valley Bank does not require immediate repayment
of its loan. See note 3 of the "Notes to condensed Financial Statements."
Thereafter, the Company will require substantial additional funds to
continue its operations. The Company is currently in negotiations with
certain existing investors to obtain bridge financing which may allow the
Company to continue its operations into 1999. There is no assurance that
the bridge financing will be completed. There is also no assurance that its
partnering and merger efforts will be successful. These foregoing
forward-looking statements regarding the Company's capital requirements
involve risks and uncertainties that could cause actual results to differ
materially. The Company's capital requirements will vary depending on
numerous factors, many of which are outside the Company's control. These
factors include the progress of the Company's development programs, the
results and progress of the Company's clinical programs, the size and
complexity of these programs, the scope and results of laboratory testing
and clinical trials, the time and cost required to seek regulatory
approvals to commence clinical trials for the Company's initial products,
the need to obtain licenses to other proprietary rights, any required
adjustments to the Company's operating plan to respond to competitive
pressures or technological advances, developments with respect to the
Company's existing or future collaborative arrangements, and the
availability of various methods of financing. In addition, The Nasdaq Stock
Market notified the Company in November 1998 that it would be delisted from
the Nasdaq National Market. While the Company is appealing the notice of
delisting, there is no assurance the Company will remain listed on the
Nasdaq National Market, and such delisting could impair the Company's
inability to raise additional capital. Any additional equity financing may
be dilutive to shareholders, and debt financing, if available, may involve
restrictions on
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stock dividends and other restrictions on the Company. Adequate funds for
the Company's operations, whether from equity or debt, collaborative or
other arrangements with corporate partners or from other sources, may not
be available when needed or on terms attractive to the Company.
Insufficient funds may require the Company to delay, scale back or
eliminate some or all of its research and product development programs, to
license third parties to commercialize products or technologies that the
Company would otherwise seek to develop itself, or to cease its operations.
The Company's liquidity will be reduced as amounts are expended for
continuing development.
RESULTS OF OPERATIONS
The Company's net loss increased by 13% to $2,375,000 in the fiscal quarter
ended September 30, 1998 compared to a $2,097,000 loss in the corresponding
period in the previous year. The increase was due to revenues that
decreased 65% to $510,000 in the fiscal quarter ended September 30, 1998
compared to $1,465,000 in the corresponding period in the previous year,
and by a decrease in expenses of 18% to $2,885,000 in the fiscal quarter
ended September 30, 1998 compared to $3,559,000 in the corresponding period
in the previous year. The decrease in revenue was primarily due to
decreasing revenue from the Company's previous collaborative agreement with
Novo Nordisk as the phase I clinical trial of AnergiX for the treatment of
multiple sclerosis completed in August 1998. On February 26, 1998, the
Company announced that it and Novo Nordisk had agreed to terminate the
collaboration on AnergiX for Multiple Sclerosis (MS), Myasthenia Gravis
(MG), and Insulin Dependent Diabetes Mellitus (IDDM). Pursuant to the
termination, Novo Nordisk paid the Company $1,000,000, the estimated costs
to complete the AnergiX for multiple sclerosis phase I study. In addition,
revenue from the Company's collaborative partner, N.V. Organon, has
decreased as the Company moved from reimbursement of manufacturing expenses
in 1997 to reimbursement of phase I clinical trial expenses for AnergiX for
the treatment of rheumatoid arthritis in 1998. Research and development
expenses decreased 37% to $1,842,000 for the quarter ended September 30,
1998 from $2,902,000 in the corresponding period in the previous year. A
contributing factor relates to a decrease in year over year of
manufacturing for clinical trial material in 1997 for the AnergiX RA phase
I clinical trial. The Company's net loss decreased by 2% for the nine
months ended September 30, 1998 compared to the corresponding period in the
previous fiscal year. The decrease was due to revenues that decreased 31%
to $3,421,000 in the nine months ended September 30, 1998 compared to
$4,924,000 in the corresponding period in the previous year. The revenue
decrease was offset by a decrease in expenses of 14% to $9,247,000 for the
nine months ended September 30, 1998 compared to $10,791,000 in the
corresponding period in the previous year. A contributing factor is the
decrease in revenue from the Company's current collaborative partner, N.V.
Organon and the Company's previous collaborative partner Novo Nordisk.
Research and development expenses decreased 26% to $6,374,000 for the nine
months ended September 30, 1998 from $8,611,000 in the corresponding period
in the previous year. A contributing factor is the decrease in expenses
related to the Company's on-going clinical trials of AnergiX RA compared to
expenses related to the clinical trials for AnervaX MS in 1997.
General and administrative expenses increased 73% to $1,014,000 for the
quarter ended September 30, 1998 compared to $587,000 in the corresponding
period in the previous year primarily due to increased personnel expenses
associated with additional officer headcount and related expenses in 1998
compared to 1997. General and administrative expenses increased 32% to
$2,873,125 for the nine months ended September 30, 1998 compared to
$2,180,000 in the corresponding period in the previous year.
Interest income decreased to $104,000 for the quarter ended September 30,
1998 as compared to $161,000 in the corresponding period in the previous
year. Interest income decreased 35% to 300,000 for the nine months ended
September 30, 1998 as compared to $460,000 in the corresponding period in
the previous year. The decreases in interest income are due to lower
average cash balances in 1998. Interest income is expected to decline
gradually over future periods as invested capital is used for operating
activities. Interest expense decreased 58% to $29,000 for the quarter ended
September 30, 1998 as compared to $70,000 in the corresponding period in
the previous year due to lower debt balances.
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The Company's losses on a quarter-by-quarter basis may vary depending upon
a variety of factors, any of which may fluctuate, including the level of
development activities, the timing of hiring of scientific and management
personnel, the retention of consultants, the purchase or leasing of
laboratory equipment, the licensing of any required technology and other
factors. Accordingly, the Company believes that quarter-by-quarter losses
will not be a useful indicator of the performance of the Company.
IMPACT OF YEAR 2000
The Company has established a committee consisting of its Chief Financial
Officer, controller, information systems manager and the facilities manager
to ensure that its information technology (IT) and non-IT systems are Year
2000 compliant. Based on its identification and assessment efforts to date,
the committee has determined that most of the systems it currently uses
(including computer equipment and software) will not need to be replaced or
modified in order to make them Year 2000 compliant. Those systems that are
not compliant are old and will need to be replaced in the normal course of
business over the next year. The Company currently anticipates that its
Year 2000 identification, assessment, remediation and testing efforts,
which began in March 1998, will be completed by July 1999. The Company
believes, but cannot at this time guarantee, that such efforts will be
completed before any currently anticipated impact on its computer equipment
and software. As of November 10, 1998, the Company has completed
approximately 40% of its Year 2000 project plan. The following is a
breakdown by phase of the progress the Company has made to date on its
project plan.
PHASE TIME FRAME PERCENT COMPLETE
----------------------------------------------------------------------------
Initial identification and assessment 3/98 - 8/98 100%
Remediation 3/98 - 3/99 50%
Testing 12/98 - 3/99 0%
Contingency planning 1/99 - 6/99 0%
Implementation 1/99 - 3/99 0%
Post-2000 audit 5/99 - 7/99 0%
----------------------------------------------------------------------------
The Company is reliant upon third parties to provide Year 2000 compliant
systems sufficiently before December 31, 1999. The Company has surveyed all
of the Company's key suppliers, partners, banks, computer hardware and
software providers and its clinical sites ("Third Parties") to determine
whether they are Year 2000 compliant. The Company has discovered that
certain of the Third Parties use systems that are not Year 2000 compliant,
but all of the Third Parties have programs in place to address these Year
2000 issues. The Company cannot guarantee that all of the Third Parties
will achieve Year 2000 compliance in a timely manner. The failure of Third
Parties to successfully address the Year 2000 issue could have a material
adverse effect on the Company's business, financial condition and results
of operations.
The Company expects that the total costs associated with addressing and
solving the Year 2000 issue will not exceed $50,000. These funds will be
provided from contract revenues. As of November 10, 1998, the Company has
spent less than $500 on addressing the Year 2000 issue.
The Company is heavily reliant on its clinical sites to perform clinical
trials on a timely basis in order to meet certain performance milestones.
Failure to correct material Year 2000 problems in such clinical sites could
result in a delay in or disruption of the clinical trial process. This
delay or disruption could cause the Company to miss its performance
milestones, which would result in a loss of contract revenues. The Company
has received assurances from all of its clinical trial sites that they are
either Year 2000 compliant or are actively addressing the Year 2000 issue.
Failure of the Company's (or Third Parties') computer systems could
materially adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty of the Year 2000
readiness of Third Parties, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact
on the Company's results of operations, liquidity and financial condition.
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The Company has not currently completed its contingency planning but
intends to implement a contingency plan in the future.
The costs of the Company's Year 2000 project plan, the dates on which the
Company believes it will complete each phase of its Year 2000 project plan
and the Company's contingency planning are forward-looking statements and
are based on management's best estimates, which are derived from
assumptions regarding future events, including the continued availability
of certain resources, Third Party remediation plans and other factors.
There can be no assurance that these estimates and plans will prove to be
accurate, and actual results could differ materially from those currently
anticipated.
RESTRUCTURING
The Company announced in October that, as a result of the inability to
raise sufficient funds to support its operations and programs at its
current operating level, it was reducing its staff approximately 65% (by 33
people) and is focusing its efforts on clinical and business development
including a possible merger of the Company. The Company is continuing its
phase I clinical trial of its AnergiX technology for rheumatoid arthritis,
which is expected to be complete in the first half of 1999. Further
clinical development for AnervaX for RA and preclinical development of
DiavaX for type I diabetes will depend upon corporate partnering. Anergen
has discontinued all discovery research programs. The Company expects to
take a charge of approximately $657,000 in the fourth quarter ended
December 31, 1998. The charge includes the cost of severance payments to
the employees affected by the reduction.
The Company is currently in negotiation with certain current investors to
obtain bridge financing, which may allow the Company to continue operations
into 1999. There is no assurance that this bridge financing will be
completed, nor that it will be sufficient to fund operations. The Company
believes that it will be delisted from the NASDAQ National Market and will
trade on the over-the-counter market.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
FUTURE REQUIREMENT FOR SIGNIFICANT ADDITIONAL CAPITAL
During October of 1998, the Company announced a restructuring pursuant to
which it took a number of steps to reduce expenses including the
termination of 33 employees. The Company has also ceased its research
efforts and is focusing on clinical development on AnergiX for rheumatoid
arthritis in collaboration with N.V. Organon. It is also seeking partnering
and merger opportunities. The Company restructured its operations due to an
inability to date to secure financing. As a result of the restructuring,
the Company believes that its current capital resources are likely to be
sufficient to continue to fund the Company's operations through December
31, 1998, assuming Silicon Valley Bank does not require immediate repayment
of its loan. See note 3 of the "Notes to condensed Financial Statements."
Thereafter, the Company will require substantial additional funds to
continue its operations. The Company is currently in negotiations with
certain existing investors to obtain bridge financing which may allow the
Company to continue its operations into 1999. There is no assurance that
the bridge financing will be completed. There is also no assurance that its
partnering and merger efforts will be successful. These foregoing
forward-looking statements regarding the Company's capital requirements
involve risks and uncertainties that could cause actual results to differ
materially. The Company's capital requirements will vary depending on
numerous factors, many of which are outside the Company's control. These
factors include the progress of the Company's development programs, the
results and progress of the Company's clinical programs, the size and
complexity of these programs, the scope and results of laboratory testing
and clinical trials, the time and cost required to seek regulatory
approvals to commence clinical trials for the Company's initial products,
the need to obtain licenses to other proprietary rights, any required
adjustments to the Company's operating plan to respond to competitive
pressures or technological advances, developments with respect to the
Company's existing or future collaborative arrangements, and the
availability of various methods of financing. In addition, The Nasdaq Stock
Market notified the Company in November 1998 that it
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would be delisted from the Nasdaq National Market. While the Company is
appealing the notice of delisting, there is no assurance the Company will
remain listed on the Nasdaq National Market, and such delisting could
impair the Company's inability to raise additional capital. Any additional
equity financing may be dilutive to shareholders, and debt financing, if
available, may involve restrictions on stock dividends and other
restrictions on the Company. Adequate funds for the Company's operations,
whether from equity or debt, collaborative or other arrangements with
corporate partners or from other sources, may not be available when needed
or on terms attractive to the Company. Insufficient funds may require the
Company to delay, scale back or eliminate some or all of its research and
product development programs, to license third parties to commercialize
products or technologies that the Company would otherwise seek to develop
itself, or to cease its operations. The Company's liquidity will be reduced
as amounts are expended for continuing development.
EARLY STAGE OF PRODUCT DEVELOPMENT; LACK OF COMMERCIAL PRODUCTS; NO ASSURANCE OF
SUCCESSFUL PRODUCT DEVELOPMENT
The Company was founded in 1988 to discover and develop biopharmaceutical
compounds for the treatment of autoimmune diseases. To achieve profitable
operations, the Company, alone or with others, must successfully develop,
obtain regulatory approval for, manufacture and market products. The
Company does not have any products available for sale nor does it expect to
have any products commercially available for at least several years, if at
all. The Company's potential products are at the early stages of research
and development, with only limited human testing of certain of the
Company's products undertaken to date. The products currently under
development by the Company will require significant additional research,
laboratory testing and clinical trials and investment of capital prior to
their commercialization. There can be no assurance that any potential
products will be successfully developed, prove to be safe and efficacious
in clinical trials, meet applicable regulatory ly standards, be capable of
being produced in commercial quantities at acceptable costs or be
successfully marketed.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company has experienced significant net losses every year since its
inception in 1988. Net losses for the quarters ended September 30, 1998 and
1997 were approximately $2.4 million and $2.1 million, respectively, and
the Company had an accumulated deficit of approximately $56.5 million as of
September 30, 1998. The Company expects to incur substantial and increasing
operating losses for at least the next several years. The amount of net
losses and the time required by the Company to reach profitability are
highly uncertain. There can be no assurance that the Company will ever be
able to generate product revenue or achieve profitability on a substantial
basis or at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
UNCERTAINTIES RELATED TO PRECLINICAL AND CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through
preclinical studies and clinical trials that the product is safe and
efficacious for use in each target indication. The results from preclinical
studies and early clinical trials may not be predictive of results that
will be obtained in large-scale testing, and there can be no assurance that
the Company's clinical trials will demonstrate the safety and ch efficacy
of any products or will result in any marketable products. A number of
companies in the biotechnology industry have suffered significant setbacks
in advanced clinical trials, even after promising results in earlier
trials. The failure to adequately demonstrate the safety and efficacy of a
therapeutic product under development could delay or prevent regulatory
approval of the product and could have a material adverse effect on the
Company.
The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the Food and Drug Administration's willingness to
allow Anergen to proceed; the results of Anergen's continued research and
development, including test results and success in producing the epitopes
and HLA molecules for each AnergiX compound; the number of skilled
scientists, clinicians, and consultants the Company is able to employ in
its efforts and the general interest in the medical community in a
therapeutic using the Company's approach for treatment of the diseases
targeted by the Company and the ability of the Company to secure additional
financing. Currently, the Company does not anticipate establishing its own
clinical trials facility. The rate of completion of clinical trials is also
dependent on patient enrollment, which is a function of many factors,
including the size of
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the patient population, the proximity of patients to clinical sites and the
existence of competitive trials. If the Company is unable to successfully
complete its clinical trials, its business, financial condition and results
of operations could be materially and adversely affected.
UNCERTAINTY OF MARKET ACCEPTANCE
Even if the requisite regulatory approvals are obtained for the Company's
potential products or for products developed in collaboration with the
Company, uncertainty exists as to whether such products will be accepted by
the market. A number of factors also may limit the market acceptance of a
product which may be developed by, or discovered through collaboration
with, the Company, including the rate of adoption by health care
practitioners, the indications for which the product is approved, the rate
of the product's acceptance by the target population, the timing of market
entry relative to competitive products, the availability of alternative
therapies, the price of the Company's product relative to alternative
therapies, the availability of third-party reimbursement and the extent of
marketing efforts by the Company and third-party distributors or agents
retained by the Company. Side effects or unfavorable publicity concerning a
Company product or any similar product could have an adverse effect on the
Company's ability to obtain physician, patient or third-party payor
acceptance and on efforts to sell that product. There can be no assurance
of the Company's ability, or the length of time required, to achieve
commercialization of the Company's products or that physicians, patients or
third party payors will accept any of the Company's products as readily as
alternative therapies, or at all.
GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING PRODUCT APPROVALS
The Company's research and development activities are subject to regulation
by numerous governmental authorities in the United States and other
countries. Further, the future production and marketing of any products
developed by the Company would also be regulated, particularly as to safety
and efficacy. In the United States, vaccines, drugs and biologics are
subject to rigorous FDA review. The Federal Food, Drug, and Cosmetic Act,
the Public Health Service Act and other federal statutes and regulations
govern or influence the testing, manufacture, safety, labeling, storage,
record keeping, approval, advertising and promotion of such products.
Noncompliance with applicable requirements can result in fines, recall or
seizure of products, clinical study holds, total or partial suspension of
production, refusal of the government to approve NDAs, PLAs, ELAs or allow
the Company to enter into supply contracts and criminal prosecution. The
FDA also has the authority to revoke PLAs and ELAs previously granted.
In order to obtain FDA approval of a new biological product, the Company
must submit proof of safety, purity, potency and efficacy. In most cases
such proof entails extensive pre-clinical, laboratory, and clinical tests.
The testing, preparation of necessary marketing applications and processing
of those applications by the FDA is expensive and time consuming, can vary
based on the type of product, and may take several years to complete. There
is no assurance that the FDA will act favorably or quickly in making such
reviews, and significant difficulties or costs may be encountered by the
Company in its efforts to obtain FDA approvals that could delay or preclude
the Company from marketing any products it may develop or furnish an
advantage to competitors. The FDA may also require post-marketing testing
and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications
of such products. Product ly approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following
initial marketing. In addition, delays imposed by the governmental approval
process may materially reduce the period during which the Company may have
the exclusive right to exploit patented products or technologies.
The FDA approval process for a new biological drug involves completion of
pre-clinical studies which include laboratory tests and animal studies to
assess safety and effectiveness of the drug. Among other things, the
results of these studies as well as how the product will be manufactured,
are submitted to the FDA in an IND and, unless the FDA objects, the IND
becomes effective 30 days following receipt by the FDA. FDA cleared human
clinical trials may then be conducted. The results of the clinical trials
are submitted to the FDA as part of a PLA. In addition to obtaining FDA
approval for each AnergiX indication, an ELA must be filed and the FDA must
approve the manufacturing facilities for the product. Product sales may
commence only if the PLA and ELA are approved. Regulatory requirements for
obtaining such FDA approvals are rigorous and there can be no assurance
that such approvals will be obtained on a timely basis or at all.
Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that
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vary widely from country to country. The time required to obtain approvals
required by foreign countries may be longer or shorter than that required
for FDA approval, and requirements for licensing may differ from FDA
requirements.
If FDA approval is obtained, the Company will be subject to continuing FDA
obligations. When manufacturing biologics, the Company will be required to
adhere to regulations setting forth current Good Manufacturing Practices
("GMP"), which require that the Company manufacture its products and
maintain its records in a prescribed manner with respect to manufacturing,
testing and quality control activities. Further, the Company must pass a
preapproval inspection of its manufacturing facilities by the FDA before
obtaining approval.
Satisfaction of these FDA requirements, or similar requirements by foreign
regulatory agencies, typically takes several years and the time needed to
satisfy them may vary substantially, based upon the type, complexity and
novelty of the pharmaceutical product. The effect of government regulation
may be to delay or to prevent marketing of potential products for a
considerable period of time and to impose costly procedures upon the
Company's activities. There can be no assurance that the FDA or any other
regulatory agency will grant approval for any products or indications being
developed by the Company on a timely basis, or at all. Success in
preclinical or early stage clinical trials does not assure success in later
stage clinical trials. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay,
limit or prevent regulatory approval. If regulatory approval of a product
is granted, such approval may impose limitations on the indicated uses for
which a product may be marketed. Further, even if regulatory approval is
obtained, later discovery of previously unknown problems with a product may
result in restrictions on the product, including withdrawal of the product
from the market. Delay in obtaining or failure to obtain regulatory
approvals would have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE UPON COLLABORATIVE PARTNERS
The Company's strategy for the development, clinical trials, manufacturing
and commercialization of its products includes maintaining and entering
into various collaborations with corporate partners, licensors, licensees
and others. The Company has entered into collaborative arrangements with
Novo Nordisk with respect to the Company's AnergiX compounds for the
treatment of MS, MG and IDDM, and with Organon with respect to an AnergiX
compound for the treatment of RA. In February 1998, the he Company
announced that it and Novo Nordisk had agreed to terminate the
collaboration in AnergiX for MS, MG and IDDM effective February 9, 1998
with all rights returning to the Company. There can be no assurance that
the interests and motivations of the Company's collaborators are, or will
remain, aligned with those of the Company or that such collaborators will
successfully perform their development, regulatory compliance,
manufacturing or marketing functions or that such collaborations in he
whole or in part will continue. There can also be no assurance that the
Company will be able to negotiate additional collaborative arrangements in
the future on acceptable terms, if at all, or that any such collaborative
arrangements will be successful. To the extent that the Company is not able
to maintain or establish such arrangements, the Company would be required
to undertake such activities at its own expense, which would significantly
increase the Company's capital requirements and he limit the programs the
Company is able to pursue. In addition, the Company may encounter
significant delays in introducing its products into certain markets or find
that the development, manufacture or sale of its products in such markets
is adversely affected by the absence of such collaborative agreements.
The Company cannot control the amount and timing of resources which its
collaborative partners devote to the Company's program or potential
products, which can vary because of factors unrelated to the potential
product. Collaborator participation will depend not only on the achievement
of research objectives by the Company and its collaborators, which cannot
be assured, but also on each collaborator's own financial, competitive,
marketing and strategic considerations, which are outside the he Company's
control. Such strategic considerations may include the relative advantages
of alternative products being marketed or developed by others, including
relevant patent and proprietary positions. The Company's collaborative
partners may develop, either alone or with others, products that compete
with the development and marketing of the Company's products. Competing
products, either developed by the collaborative partners or to which the
collaborative partners have rights, may result in their withdrawal of
support with respect to all or a portion of the Company's technology, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. If Organon or any future collaborative
partner breaches or terminates their agreements with the Company or
otherwise fails to conduct their collaborative activities in a timely
manner, the preclinical or clinical development or commercialization of
product candidates or research programs in will be delayed, and the Company
will be required
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to devote additional resources to product development and commercialization
or terminate certain development programs. There also can be no assurance
that disputes will not arise in the future with respect to the ownership of
rights to any technology developed with third parties. These and other
possible disagreements between collaborators and the Company could lead to
delays in the collaborative research, development and commercialization of
certain product candidates or could require or result in litigation or
arbitration, which would be time consuming and expensive, and would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".
UNCERTAINTY RELATING TO PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in significant part on its ability to
maintain patent protection for its therapeutic approach and for any
developed products, to preserve its trade secrets and to operate without
infringing the proprietary rights of third parties. Although the Company
has obtained patents covering certain aspects of its technology, no
assurance can be given that additional patents will be issued or, if
issued, that the scope of any patent protection will be significant, or
that the patents will be held valid if subsequently challenged. Moreover,
the Company cannot ascertain with certainty that no patent conflict will
exist with other products or processes which could compete with the
Company's approaches.
Because of the length of time and expense associated with bringing new
products through development and to the marketplace, and the length of time
required for the governmental approval process, the pharmaceutical industry
has traditionally placed considerable importance on obtaining and
maintaining patent and trade secret protection for significant new
technologies, products and processes. The Company and other biotechnology
and pharmaceutical firms have applied, and are applying, for patents for
their products and certain aspects of their technologies. The
enforceability of patents issued to biotechnology and pharmaceutical firms
is highly uncertain. Federal court decisions indicating legal
considerations surrounding the validity of patents in the field are in
transition, and there can be no assurance that the historical legal
standards surrounding questions of validity will continue to be applied or
that current defenses as to issued patents in the field will offer
protection in the future. In addition, there can be no assurance as to the
degree and range of protection any patents will afford, whether patents
will be issued or the extent to which the Company will be successful in not
infringing patents granted to others.
While the Company pursues patent protection for products and processes
where appropriate, it also relies on trade secrets, know-how and continuing
technological advancement to develop and maintain its competitive position.
The Company's policy is to have each employee enter into an agreement that
contains provisions prohibiting the disclosure of confidential information
to anyone outside the Company. Research and development contracts and
relationships between the Company and its scientific n consultants provide
access to aspects of the Company's know-how that is protected generally
under confidentiality agreements with the parties involved. There can be no
assurance, however, that these confidentiality agreements will be honored
or that the Company can effectively protect its rights to its unpatented
trade secrets. Moreover, there can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets.
The Company may be required to obtain licenses to patents or other
proprietary rights from third parties. There can be no assurance that any
licenses required under any patents or proprietary rights will be made
available on terms acceptable to the Company, if at all. If the Company
does not obtain required licenses, it could encounter delays in product
development while it attempts to redesign products or methods or it could
find that the development, manufacture or sale of products requiring such
licenses could be foreclosed.
The Company is aware of a European patent and corresponding U.S. and
Australian patents which contain claims that relate to certain of the
Company's proposed products and their uses. In accordance with European
Patent Office ("EPO") procedures, third parties can oppose an EPO patent
grant by presenting information which they believe justifies narrowing or
revoking the grant of the patent. The Company is opposing the
aforementioned grant in the EPO. There can, however, be no assurance that
the granted EPO claims will be revoked or significantly narrowed in scope
as a result of the opposition proceeding. If valid claims in these patents
are found to be infringed by the Company's products, the Company's ability
to make, use, offer to sell, or sell, such products could be materially and
adversely affected.
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In addition, the Company could incur substantial costs in defending any
patent litigation brought against it or in asserting the Company's patent
rights, including those licensed to the Company by others, in a suit
against another party. The United States Patent and Trademark Office (the
"USPTO") could institute interference proceedings in connection with one or
more of the Company's patents or patent applications which proceedings
could result in an adverse decision as to priority of an he invention. The
USPTO also could institute reexamination proceedings in connection with one
or more of the Company's patents or patent applications, which could result
in an adverse decision as to the patents' validity or scope.
NEED TO DEVELOP MANUFACTURING CAPABILITIES
The Company has no volume manufacturing capacity or experience in volume
manufacturing of pharmaceutical or other biological products. Establishing
its own volume manufacturing capabilities would require significant
scale-up expenses and additions to facilities and personnel. In addition,
the Company must successfully develop the process required for volume
manufacturing. The pharmaceutical products under development by the Company
have never been manufactured on a commercial scale and there can be no
assurance that such products can be manufactured at a cost or in quantities
to make them commercially viable. The Company will be required to establish
arrangements with contract manufacturers to supply a portion of its
compounds for subsequent clinical trials as well as the manufacture,
packaging, labeling and distribution of finished products. If the Company
is unable to contract for sufficient supply of a portion of its compounds
on acceptable terms, and it is unable to develop e the capability to
produce the epitopes internally, the Company's human clinical testing
schedule would be delayed, resulting in the delay of submission of products
for regulatory approval and initiation of new development programs, which
would have a material adverse effect on the Company. If the Company should
encounter delays or difficulties in establishing relationships with
manufacturers to produce, package and distribute its finished products,
market introduction and subsequent sales of e such products would be
adversely affected. Moreover, contract manufacturers that the Company may
use must adhere to current GMP regulations enforced by the FDA through its
facilities inspection program. If these facilities cannot pass a
pre-approval plant inspection, the FDA pre-market approval of the products
will be adversely affected.
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
The Company currently has no sales, marketing or distribution capability.
The Company intends to rely on relationships with one or more
pharmaceutical companies with established distribution systems and direct
sales forces to market its products. In the event that the Company is
unable to reach agreement with one or more pharmaceutical companies to
market its products, it may be required to market its products directly and
to develop a marketing and sales force with technical expertise and
supporting distribution capability. There can be no assurance that the
Company will be able to establish in-house sales and distribution
capabilities or relationships with third parties, or that it will be
successful in gaining market acceptance for its products. To the extent
that the Company decides to utilize existing or future co-promotion or
other licensing arrangements, the Company must develop its own sales,
marketing or distribution capability, and there can be no assurance that
such efforts will be successful.
COMPETITION AND TECHNOLOGICAL CHANGE
The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. The Company's
competitors include major pharmaceutical, chemical and specialized
biotechnology companies, most of which have financial, technical, research
and development, manufacturing, clinical and marketing resources
significantly greater than those of the Company. The Company believes that
these other entities recognize the need for effective therapies for the h
autoimmune diseases targeted by the Company and are highly motivated to
develop such therapies. In addition, many specialized biotechnology
companies have formed collaborations with large, established companies to
support research, development and commercialization of products that may be
competitive with those of the Company. Academic institutions, governmental
agencies and other public and private research organizations are also
conducting research activities and seeking patent protection and may
commercialize products on their own or through joint ventures. The Company
is aware of certain products in development by competitors that are
intended to be used for the prevention or treatment of certain diseases the
Company has targeted for product development.
The existence of these products, or other products or treatments of which
the Company is not aware, or products or treatments that may be developed
in the future which may be more effective, may adversely affect the
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commercialization or marketability of products which may be developed by
the Company or potentially render the Company's technology obsolete or
non-competitive.
The Company's competitive position will depend on its ability to attract
and retain qualified scientific and other personnel, develop effective
proprietary products, implement production and marketing plans, obtain
patent protection and secure adequate capital resources. In addition, the
first pharmaceutical product to reach the market in a therapeutic or
preventive area is often at a significant competitive advantage relative to
later entrants to the market. The Company expects its products, if approved
for sale, to compete primarily on the basis of product efficacy, safety,
patent position, reliability, price and patient convenience rather than on
speed to market.
UNCERTAINTY RELATED TO 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 these 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 existing and potential partners of the Company to limit or eliminate
spending on collaborative development projects. Legislative debate is
expected to continue in the future, market forces are expected to demand
reduced costs and Anergen cannot predict what s impact the 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,
private health insurers and other organizations. In addition, other
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. There can be no assurance that the Company's potential products
or products discovered in collaboration with the Company will be considered
cost-effective or that adequate third-party reimbursement will be available
to enable Anergen to maintain price levels sufficient to realize an
appropriate return on its significant investment in product research and
development. 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
levels 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.
DEPENDENCE ON AND NEED FOR ADDITIONAL KEY PERSONNEL; RELIANCE ON ACADEMIC
COLLABORATORS
As part of the Company's restructuring efforts, the Company announced in
October 1998 that it reduced its staff approximately 65% (by 33 people).
The success of the Company and of its business strategy is dependent in
large part on the ability of the Company to retain key management and
operating personnel and to obtain additional funds to fulfill its personnel
needs as they arise. The Company's current employees are in high demand and
are often subject to competing offers. The Company will s need to develop
expertise or retain consultants in such areas as development, clinical
testing, government approvals, marketing and manufacturing in the future.
There can be no assurance that the Company will be able to attract and
retain the qualified personnel or develop the expertise needed for its
business. The loss of the services of one or more of the Company's officers
or other members of the research or management group or the inability to
hire additional personnel and develop expertise as needed would have a
material adverse effect on the Company.
A significant portion of the Company's research and development and
clinical trials is conducted under sponsored research programs with several
universities. The Company depends on the availability of the principal
investigator for each such program, and the Company cannot assure that
these individuals or their research staffs will be available to conduct
research and development or clinical trials. The Company's academic
collaborators are not employees of the Company. As a result, the s Company
has limited control over their activities and can expect that only limited
amounts of their time will be dedicated to Company activities. In addition,
the Company's academic collaborators are employed by major institutions
which have collaborative relationships
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with other parties, some of which may be competitors of the Company.
Accordingly, there can be no assurance that research and development,
preclinical and clinical testing performed by these collaborators will be
completed in a timely manner, if at all, and any inability to do so could
have a material adverse effect on the Company.
POTENTIAL PRODUCT LIABILITY
The testing, marketing and sale of human health care products entail an
inherent risk of exposure to product liability claims in the event that the
use of the Company's technology or prospective products is alleged to have
resulted in adverse effects. While the Company has taken, and will continue
to take, what it believes are appropriate precautions to minimize exposure
to product liability, there can be no assurance that it will avoid
significant liability. The Company possesses limited a general liability
and product liability insurance related to its clinical trials of AnervaX
for RA and AnergiX for MS and RA and certain other types of insurance
customarily obtained by business organizations. There can be no assurance
that the existing insurance coverage is adequate or that it will avoid
liability. The Company intends to seek insurance against product liability
risks associated with the testing, manufacturing or marketing of its
products. However, there can be no assurance that it will be able to obtain
such insurance in the future, or that if obtained, such insurance will be
sufficient in amount. Consequently, a product liability claim or other
claims with respect to uninsured liabilities or in excess of insured
liabilities could have a material adverse effect on the business or
financial condition of the Company.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company is subject to regulation by the Occupational Safety and Health
Administration ("OSHA") and the Environmental Protection Agency ("EPA") and
to regulation under the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other regulatory statutes, and may in the
future be subject to other federal, state or local regulations. Although
the Company believes that it has complied with these laws, regulations and
policies in all material respects and has not been ce required to take any
significant action to correct any material noncompliance, there can be no
assurance that the Company will not be required to incur significant costs
to comply with environmental and health and safety regulations in the
future. The Company's research and development involves the controlled use
of hazardous materials, including but not limited to certain hazardous
chemicals and radioactive materials. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, the Company could be held
liable for any damages that result and any such liability could exceed the
resources of the Company. In addition, regulations may be promulgated
governing biotechnology that may affect the Company's research and
development programs. The Company is unable to predict whether any agency
will adopt any regulation which would have a material adverse effect on the
Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock, similar to the securities
of other biotechnology companies, has been and is likely to continue to be
highly volatile. Announcements regarding the results of regulatory approval
filings, clinical trials or other testing, technological innovations or new
commercial products by the Company or its competitors, patents and
intellectual property rights by the Company or its competitors,
developments as to current or future collaborations by the Company or its
competitors, government regulations, the status of health care reform
initiatives, fluctuations in operating results, changes in recommendations
by financial analysts, and general market conditions for biotechnology
stocks could have a significant impact on the future price of the Common
Stock. Trading volume of the Company's Common Stock has been relatively
limited and sales of substantial amounts of Common Stock could have an
adverse effect on the price of the Common Stock. In addition, the Company
received notice from the Nasdaq Stock Market that its Common Stock will be
delisted from the Nasdaq National Market. Such delisting will result in the
Company's stock to be traded on the over-the-counter market which may
result in great volatility in the trading price.
CONTROL BY EXISTING STOCKHOLDERS
The Company's officers, directors and principal shareholders, namely
Warburg, Pincus Ventures, L.P. ("Warburg"), International Biotechnology
Trust PLC ("IBT"), and Novo Nordisk, collectively beneficially own
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approximately 48% of the Company's outstanding Common Stock. Under a March
1995 common stock purchase agreement with Warburg and IBT ("Warburg/IBT
Purchase Agreement"), the Company is currently obligated to include in the
slate of nominees recommended by the Company's Board of Directors and
management, at each election of directors, two candidates selected by
Warburg, one candidate selected by IBT and one candidate mutually agreed to
by IBT and Warburg. Additionally, while not obligated to do so, since 1993,
the Company has included a representative of Novo Nordisk in its slate of
nominees for the Board of Directors. The ownership of the Company's Common
Stock, and the ability to designate candidates for the Company's
recommended slate of nominees for the Board of Directors, of Warburg, IBT
and Novo Nordisk will enable such shareholders to have significant
influence over major corporate transactions as well as the election of
directors of the Company and control over board decisions and could have
the effect of delaying, deterring or preventing a change in control of the
Company.
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK OR ACCELERATION
OF OPTION VESTING
The Board of Directors has authority, without further action by
shareholders, to issue up to 10,000,000 shares of Preferred Stock with
rights, preferences and privileges designated by the Board of Directors.
This Preferred Stock could be issued quickly with terms calculated to delay
or prevent a change in control of the Company or to make removal of
management more difficult. In certain circumstances, such issuance could
have the effect of decreasing the market price of the Common Stock or of
delaying, deterring or preventing a change in control of the Company. The
Company has no present plan to issue any shares of Preferred Stock.
Further, pursuant to the Company's option plans, in the event of certain
mergers of the Company with other entities, transfers of voting control of
the Company's capital stock or sale of all or substantially all of the
Company's assets, the Company's Board of Directors has the right under
certain circumstances to cause all outstanding options to become fully
vested prior to the event causing such acceleration and all unexercised
options will terminate upon completion of such event.
SECTION 203 OF THE DELAWARE CORPORATION LAW
Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a broad range of "business combinations" with
an "interested stockholder" (defined generally as a person owning 15% or
more of a corporation's outstanding voting stock) for three years following
the date such person became an interested stockholder unless (i) before the
person becomes an interested stockholder, the transaction resulting in such
person becoming an interested stockholder or the e business combination is
approved by the board of directors of the corporation, (ii) upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owns at least 85% of
the outstanding voting stock of the corporation (excluding shares owned by
directors who are also officers of the corporation or shares held by
employee stock plans that do not provide employees with the right to
determine confidentially whether shares held e subject to the plan will be
tendered in a tender offer or exchange offer), or (iii) on or after such
date on which such person became an interested stockholder the business
combination is approved by the board of directors and authorized at an
annual or special meeting, and not by written consent by the affirmative
vote of at least 66.6% of the outstanding voting stock excluding shares
owned by the interested stockholders. The restrictions of Section 203 do
not apply, among other reasons, if a corporation, by actions of its
shareholders, adopts an amendment to its certificate of incorporation or
bylaws expressly electing not to be governed by Section 203, provided that,
in addition to any other vote required by law, such amendment to the
certificate of incorporation or bylaws must be approved by the affirmative
vote of a majority of the shares entitled to vote. Moreover, an amendment
so adopted is not effective until twelve months after its adoption and does
not apply to any business combination between the corporation and any
person who became an interested stockholder of such corporation on or prior
to such adoption. The Certificate of Incorporation and Bylaws of the
Company do not currently contain any provisions electing not to be governed
by Section 203 of the DGCL.
Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of the Common Stock. This could
have the effect of inhibiting changes in management and may also prevent
temporary fluctuations in the Common Stock that often result from takeover
attempts.
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ANERGEN, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
On December 27, 1996 the Company entered into an agreement with Silicon
Valley Bank of California ("SVB") which provided $1,500,000 in financing
available through December 31, 1997, all of which is secured by equipment
and leasehold improvements purchased by the Company. At September 30, 1998,
the Company had net borrowing of $1,003,000 under the original loan
agreements. As of the end of the third quarter ended September 30, 1998,
the Company was no longer in compliance with certain convenants related to
its outstanding loan with SVB. As a result, the Company has reclassified
the long term portion of the debt obligation into the current portion of
the debt obligation. SVB has the right to demand full repayment of the loan
while the Company is out of compliance with the convenants. Immediate
repayment of the loan would have material effect on the Company's operating
cash flow.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
a) Exhibits
Exhibit Description
------- -----------
3.1(1) Certificate of Incorporation.
3.2 Bylaws, as amended.
4.1(2) Form of Common Stock Certificate.
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with the Form 8-K on July
27, 1998.
(2) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1 (No. 33-42107), as amended.
b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended September 30, 1998.
20
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANERGEN, INC.
Date: November 12, 1998 By: /s/ DAVID V. SMITH
----------------------------------
David V. Smith
Vice President, Finance and Chief
Financial Officer on behalf of the
Company and as principal financial
and chief accounting officer
21
22
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1(1) Certificate of Incorporation.
3.2 Bylaws, as amended.
4.1(2) Form of Common Stock Certificate.
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with the Form 8-K on July
27, 1998.
(2) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1 (No. 33-42107), as amended.