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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19871
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CYTOTHERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3078125
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
525 DEL REY AVENUE, SUITE C, SUNNYVALE, CA 94086
(Address of principal offices) (zip code)
701 GEORGE WASHINGTON HIGHWAY, LINCOLN, RI 02865
(Former address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 731-8670
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
JUNIOR PREFERRED STOCK PURCHASE RIGHTS
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 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. / /
Aggregate market value of Common Stock held by non-affiliates at March 20,
2000: $140,213,189.22. Inclusion of shares held beneficially by any person
should not be construed to indicate that such person possesses the power, direct
or indirect, to direct or cause the direction of management policies of the
registrant, or that such person is controlled by or under common control with
the Registrant. Common stock outstanding at March 20, 2000: 19,506,565 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Report.
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FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements regarding, among
other things, the Company's expected results of operations, the progress of the
Company's product development and clinical programs and of its collaborations,
the need for, and timing of, additional capital and capital expenditures,
strategic partner collaboration prospects, costs of manufacture of products, the
protection of and the need for additional intellectual property rights,
regulatory matters, the need for additional facilities and potential market
opportunities. The Company's actual results may vary materially from those
contained in such forward-looking statements because of risks to which the
Company is subject, such as risks of lack of available funding, failure of the
Company to develop strategic partnerships, delays in research, adverse results
from the Company's research or development programs, obsolescence of the
Company's technology, competition from third parties, termination of the
Company's collaborations, intellectual property rights of third parties,
unavailability of needed raw materials, failure of the Company or its
collaborators to perform, litigation, regulatory restrictions, and other risks
to which the Company is subject.
SEE "CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION" FILED
HEREWITH AS EXHIBIT 99 AND INCORPORATED HEREIN BY REFERENCE.
2
BUSINESS
THE COMPANY
CytoTherapeutics, Inc. ("CytoTherapeutics" or the "Company") is a leader in
the development of novel stem cell therapies designed to treat human diseases
and disorders. In 1999 the Company embarked on a major restructuring of its
research and development operations focusing its efforts on the discovery,
development and commercialization of its proprietary platform stem cell
technologies, while abandoning and divesting itself of its development programs
that focused on encapsulated cell therapies. The Company's stem cell therapies
are directed to and based on the transplantation of human stem cells to repair
or repopulate damaged or defective neural, pancreatic or liver tissue that has
been damaged or lost as a result of disease or injury. The Company believes that
it has achieved a leadership position in the neural stem cell therapy area with
its advancements in its research and development program for the isolation,
purification and transplantation of neural stem/progenitor cells. The Company
has also made advancements in its research programs to discover the stem cells
of the pancreas and of the liver, and has established a broad intellectual
property position with respect to stem/progenitor cell therapies in all three
areas through its own patented discoveries and exclusive licensing arrangements.
CytoTherapeutics, Inc. was incorporated in Delaware in 1988 and currently
has one subsidiary, StemCells California, Inc., a California corporation
acquired by the Company in September 1997.
THE UNMET NEED
Many degenerative diseases result from organ failure where organs cannot be
transplanted to cure the disease (e.g., neurodegenerative diseases and
pancreatic failure) or where there are constraints due to a short supply of
organs for transplant (e.g., liver). According to figures from associations for
the various diseases and government sources, these conditions, many of which
have ineffective treatments or none at all, affect more than 18 million people
in the United States and account for more than $160 billion annually in health
care costs. The Company believes its stem cell technologies may provide the
basis for effective therapies resulting in the replacement of certain lost or
damaged cells or regeneration of organs damaged by disease, thus potentially
returning patients to productive lives and significantly reducing health care
costs in these segments. Thus, if the Company can successfully develop and
commercialize its platform stem cell technologies, it believes that the
resulting therapies may provide the basis for addressing a number of
degenerative diseases with significant unmet medical needs.
CELL THERAPY BACKGROUND
ROLE OF CELLS IN HUMAN HEALTH AND TRADITIONAL THERAPIES
In healthy individuals, cells maintain normal physiological function by
secreting or metabolizing substances, such as sugars, amino acids,
neurotransmitters and hormones, which are essential to life. When cells are
damaged or destroyed, they no longer produce, metabolize or accurately regulate
critical molecular substances required by the body. For example, the progressive
decline common to many neurodegenerative diseases, such as Parkinson's disease,
Alzheimer's disease and amyotrophic lateral sclerosis ("ALS"), is associated
with impaired cellular function.
Recent advances in medical science have identified cell loss or impaired
cellular function as leading causes of degenerative diseases. Biotechnology
advances have led to the discovery of a number of specific proteins that, in
certain diseases or disorders, are inadequately produced by the body's own
cells. However, while these proteins overcome some of the limitations of
traditional pharmaceuticals, such as lack of specificity, there is no existing
technology that can deliver such proteins at the precise sites of action and in
the appropriate physiological quantities or for the duration required to cure
the degenerative condition. Cells do this naturally. As a result, investigators
have considered using cell transplantation therapy to replace vital cells that
are failing by implanting cells that are capable of replacing or regenerating
new cells
3
to replace those damaged or destroyed due to the degenerative condition. Where
there has been irreversible damage or failure of vital cells, transplantation of
cells offers the possibility of replacing the functions of these failed cells,
thus potentially restoring health.
THE POTENTIAL OF STEM CELL-BASED THERAPY PLATFORM
Stem cell-based therapy--the use of stem or progenitor cells to treat
diseases--has the potential to provide a broad therapeutic approach comparable
in importance to traditional pharmaceuticals and, more recently, to genetically
engineered biologics. Stem cells are rare cells and are only available in
limited supply, whether from the patients themselves (autologous) or from donors
(allogeneic). Furthermore, since autologous cells are obtained from the same
person who will receive them, they may be abnormal if the patient is ill and
often can only be obtained through significant surgical procedures. The
challenge, therefore, has been two-fold: first, to identify the stem cells and
then, to create techniques and processes that can be used to expand these rare
cells in sufficient quantities for effective auto-transplants, or to establish a
bank of normal human stem or progenitor cells that can be transplanted into a
number of individuals and which will then integrate with the endogenous cells to
repair or replace damaged cells or tissue. The Company has previously shown that
it has a process to reproducibly grow normal human brain stem/progenitor cells
based on a proprietary IN VITRO culture system in chemically defined media. The
Company believes this is the first reproducible process for growing normal human
neural stem cells. More recently, the Company has identified the human neural
stem cell by cell surface markers, allowing it to purify them and eliminate
other unwanted cell types. Together these discoveries enable the Company to
purify normal human neural stem cells and to expand the numbers of these cells
in culture. Because the cells have not been genetically modified, they may be
especially suitable for transplantation and may provide a safer and more
effective alternative to therapies that are based on cells derived from cancer
cells, from cells modified by a cancer gene to make them grow, or from an
unpurified mixture of many different cell types. Thus, CytoTherapeutics believes
its proprietary stem cell technologies may provide a way to replace specific
cells that have been damaged or destroyed. This approach may be necessary when
cell replacement requires repair of cellular architecture or direct cell-to-cell
contact. Such replacement with stem cells may allow for the restoration of
function through the replacement of normal cells where this has not been
possible in the past. The Company's recent advances in its research have shown
that neuronal stem cells transplanted into hosts successfully engraft, migrate,
and differentiate to produce mature neurons and glial cells.
Because the stem cell is the pivotal cell in an organ that produces all the
functional mature cell types, the Company believes this cell serves as a
platform for five major areas of regenerative medicine and biotechnology:
1) tissue repair and replacement, 2) correction of genetic disorders, 3) gene
discovery, 4) drug discovery and screening, and 5) genomics. The company is
pursuing key alliances in each of these areas.
CYTOTHERAPEUTICS' PLATFORM STEM CELL TECHNOLOGY
Stem cells may be functionally characterized as cells whose progeny include
both daughter stem cells (by self-renewal) as well as more differentiated cells.
Stem cells exist in humans as a self-renewing source of cells needed in the
various systems of the body (e.g., hematopoietic; neural, both central and
peripheral; hepatic; pancreatic endocrine; skin; and mesenchymal stem cells).
These rare, self-renewing stem cells are present in many tissues and are
responsible for organ regeneration after injury or during normal cell
replacement. The Company believes that these cells can form the basis of
therapies that have the potential to replace specific subsets of cells that have
been injured or lost through disease, injury or genetic defect.
The Company is seeking to identify, isolate and find methods of expanding a
variety of different human stem cells for use in treatment of a variety of human
diseases and disorders. The Company believes that there is a finite number of
stem cells in the human system and that it is possible for the person or entity
that first identifies and isolates a given stem cell culture to obtain patent
protection for such cells.
4
The Company's strategy is to be the first to identify, isolate and patent
multiple types of human stem/ progenitor cells with commercial importance. The
Company's portfolio of issued patents includes a method of culturing normal
human neural stem/progenitor cells in its proprietary chemically defined medium,
and its published studies show that these cultured and expanded cells give rise
to all three major cell types of the central nervous system (i.e., neurons,
astrocytes, and oligodendrocytes). Also, a separate study sponsored by the
Company using these cultured stem/progenitor cells showed that the cells are
capable of transplantation into hosts, with successful engraftment, migration
and differentiation to produce neurons and glial cells.
More recently, the Company announced the results of a new study that showed
that human brain stem cells can be successfully isolated by cell surface markers
present on freshly obtained brain cells. The Company believes this is the first
reproducible process for isolating highly purified populations of
well-characterized normal human neural stem cells, and has applied for a
composition of matter patent. Because the cells are highly purified and have not
been genetically modified, they may be especially suitable for transplantation
and may provide a safer and more effective alternative to therapies that are
based on cells derived from cancer cells, or from cells modified by a cancer
gene to make them grow, or from an unpurified mixture of many different cell
types. The Company has also filed an improved process patent for the growth and
expansion of these purified noral human neural cells.
Neurological disorders such as Parkinson's disease, epilepsy and Alzheimer's
disease, and the effects of stroke, affect a significant portion of the U.S.
population and currently have no effective long-term therapies. The Company
believes that therapies based on its process for identifying, isolating and
culturing neural stem/progenitor cells may be useful in treating such diseases.
The Company is continuing its research into, and has initiated the development
of, its human neural stem/progenitor cell-based therapies for these diseases.
The Company continues to advance its research programs to discover the human
pancreatic islet stem cell and the liver stem cell. Pancreatic islet stem cells
may be useful in the treatment of Type 1 diabetes and those cases of Type 2
diabetes where insulin secretion is defective. Liver stem cells may be useful in
the treatment of diseases such as hepatitis, cirrhosis of the liver and liver
cancer.
There can be no assurance that the Company will successfully develop its
stem cell therapies. Even in the event that such therapies are successfully
developed, there can be no assurances that they will achieve the benefits
described above, that these therapies will achieve benefits therapeutically
equal to or better than the standard of treatment at time of testing, or that
the advantages of such technology will be greater than the potential
disadvantages.
EXPECTED ADVANTAGES OF THE COMPANY'S STEM CELL TECHNOLOGY
NO OTHER TREATMENT
To the best of the Company's knowledge, no one has developed an FDA-approved
method for replacing lost or damaged tissues from the human nervous system.
Replacement of tissues in other areas of the human body is limited to those few
areas where autologous transplantation is now feasible. In a few additional
areas, allogeneic transplantation is now used, but is limited by the scarcity of
organs available through donation. The Company believes that its stem cell
technologies have the potential to reestablish function in at least some of the
patients who have suffered the losses referred to above.
NATURE OF REPLACEMENT CELLS
The Company believes that stem cells can duplicate themselves ("self-renew")
and differentiate into the multiple kinds of cells that are commonly lost in
various diseases, including neurodegenerative diseases. Transplantated stem
cells may be able to migrate limited distances to the proper location within the
body, to expand and differentiate and to replace damaged or defective cells,
facilitating the return to
5
proper function. The Company believes that such replacement of damaged or
defective cells by functional cells is unlikely to be achieved with any other
treatment.
RESEARCH EFFORTS AND PRODUCT DEVELOPMENT PROGRAMS
OVERVIEW OF RESEARCH AND PRODUCT DEVELOPMENT STRATEGY
The Company has devoted substantial resources to its research programs to
isolate and develop a series of stem/progenitor cells that the Company believes
can serve as a basis for replacing diseased or injured cells. Stem cells are
rare, undifferentiated cells that can both self-renew and produce differentiated
(functionally specialized) cell types that constitute the various tissues or
organ system of the human body. The focus of the Company's efforts to date have
been directed at methods to identify, isolate and culture a variety of
stem/progenitor cells of the human nervous system, liver and pancreas and to
develop therapies utilizing these stem/progenitor cells.
The following table lists the potential therapeutic indications for and
current status of CytoTherapeutics' primary research and product development
programs and projects and is qualified in its entirety by reference to the more
detailed descriptions of such programs and projects appearing elsewhere in this
Report. The Company continually evaluates its research and product development
efforts and reallocates resources among existing programs or to new programs in
light of experimental results, commercial potential, availability of third party
funding, likelihood of near-term efficacy, collaboration success or significant
technology enhancement, as well as other factors. The Company's research and
product development programs are at relatively early stages of development and
will require substantial resources to commercialize. There can be no assurance
that the Company will successfully develop any product or obtain regulatory
approvals, enter clinical trials, achieve other milestones or commercialize any
products in accordance with currently anticipated timetables, or at all.
RESEARCH AND PRODUCT DEVELOPMENT PROGRAMS
PROGRAM DESCRIPTION STAGE/STATUS(1)
HUMAN NEURAL STEM CELL PRECLINICAL
Repair or replace damaged CNS - IN VITRO ability to initiate and expand stem
tissue (including retinal cell-containing human neural cultures and differentiation
degeneration and the results into three types of CNS cells
of certain genetic disorders) - Direct isolation of neurosphere-initiating stem cells from
brain
- IN VIVO demonstration of proper differentiation and
engraftment of human neural cell cultures containing CNS
stem cells in rodent CNS
PANCREATIC ISLET STEM CELL RESEARCH
Repair or replace damaged - Identified cell surface marker used to identify, isolate
pancreatic islet tissue and culture pancreatic islet stem cells
- Commencing small animal testing
LIVER STEM CELL RESEARCH
Repair or replace damaged Discovery program to identify, isolate and patent human stem
liver tissue (including the cells for the liver
results of certain metabolic
genetic diseases)
(1) "Research" refers to early stage research and product development activities
IN VITRO, including the selection and characterization of product candidates
for preclinical testing. "Preclinical" refers to further testing of a
defined product candidate IN VITRO and in animals prior to clinical studies.
6
RESEARCH AND DEVELOPMENT PROGRAMS
The Company's portfolio of stem cell technology results from the Company's
exclusive licensing of neural stem/progenitor cell technology and other
technologies applicable to the pancreas and liver, the Company's own research
and development efforts to date, and the acquisition of StemCells, Inc. (now
renamed StemCells California, Inc.) in 1997. The Company, through its
subsidiary, StemCells California, Inc., has been advancing its program directed
to the discovery, isolation and culturing of various stem cells from the human
body. The Company believes that therapies using stem cells represent a
fundamentally new approach to the treatment of diseases caused by lost or
damaged tissue. The Company has assembled an experienced team of scientists and
scientific advisors to consult with and advise the Company's scientists on their
continuing research and development of stem/progenitor cells. This team
includes, among others, Irving L. Weissman, M.D., of Stanford University, Fred
H. Gage, Ph.D., of The Salk Institute and David Anderson, Ph.D., of the
California Institute of Technology.
NEURAL STEM/PROGENITOR CELL RESEARCH AND DEVELOPMENT PROGRAM
The Company began its work with neural stem/progenitor cultures in
collaboration with NeuroSpheres, Ltd., in 1992. The Company believes that
NeuroSpheres was the first to invent these cultures and NeuroSpheres has filed
patent applications on its inventions relating to these cultures. The Company is
the exclusive, worldwide licensee from NeuroSpheres to such inventions for
transplantation in the human body as embodied in these patents. See "License
Agreements and Sponsored Research Agreements -NeuroSpheres, Ltd." In
December 1998, the Company announced that the US Patent and Trademark Office had
granted patent No. 5,851,832, covering the Company's methods for the human
neural cell cultures containing central nervous system stem cells, for
compositions of human neural cell cultures expanded by these methods, and for
use of these cultures in, e.g., human transplantation and remyelination. These
human neural stem/progenitor cell cultures may be useful for repairing or
replacing damaged central nervous system tissue, including the brain and the
spinal cord.
Previously, in 1997, Company scientists had invented a reproducible method
for isolating and growing human neural stem/progenitor cultures. In preclinical
IN-VITRO and early IN-VIVO studies, the Company demonstrated that these cells
differentiate into all three of the cell types of the CNS. Based on these
results, the Company believes that these cells may form the basis for
replacement of cells lost in certain degenerative diseases. The Company is
continuing research into, and has initiated the development of, its human neural
stem/progenitor cell cultures. The Company has initiated the cultures and
demonstrated that these cultures can be expanded for a number of generations IN
VITRO in chemically defined media. In collaboration with the Company,
Dr. Anders Bjorklund has shown that cells from these cultures can be
successfully engrafted into the brains of rodents where they migrated and
differentiated into the appropriate cell lineages for the site of the brain into
which they were transplanted.
In 1998, the Company expanded its preclinical efforts in this area by
initiating programs aimed at the discovery and use of specific monoclonal
antibodies to facilitate identification and isolation of neural and other stem
and progenitor cells or their differentiated progeny. Also in 1998, Company
researchers devised methods to advance the IN-VITRO culture and passage of human
neural stem cells that have resulted in a 100-fold increase in cell production
of these neural stem/progenitor cells after 6 passages. The Company is expanding
its preclinical efforts toward the goal of selecting the proper indications to
pursue.
In October 1999, the US Patent and Trademark Office granted patent number
5,968,829 entitled "Human CNS Neural Stem Cells," covering the Company's
composition of matter patent for human CNS neural stem cells, and also allowed a
separate patent application for its media for culturing human CNS neural stem
cells. Also in 1999, the Company announced the filing of a US patent application
covering its proprietary process for the direct isolation of normal human neural
stem cells based on the cell surface markers found to be present on freshly
obtained brain cells. Since the filing of this patent application, Company
researchers have completed a study designed to identify, isolate and culture
human neural stem
7
cells utilizing this proprietary process. In November 1999, the Company
announced the study's first results: using its proprietary cell surface markers,
Company researchers had succeeded in identifying, isolating and purifying human
neural stem cells from brain tissue and have expanded the number of these cells
in culture. The Company believes that this is the first study to show a
reproducible process for isolating highly purified populations of
well-characterized normal human neural stem cells. Because the cells are normal
human neural stem cells and have not been genetically modified, they may be
especially suitable for transplantation and may provide a safer and more
effective alternative to therapies that are based on cells derived from cancer
cells or from an unpurified mix of many different cell types.
In January 2000, the Company reported what it regards as an even more
important result: that, in long term animal studies, its researchers were able
to take these purified and expanded stem cells and transplant them into intact
brain hosts, where they engraft and grow into neuronal and glial cells. During
the course of the study, the transplanted human neural stem cells survived for
as long as seven months and had migrated to specific functional domains of the
host brain, with no sign of tumor formation or adverse effects on the animal
recipients; moreover, the cells were still dividing. These findings show that
the neural stem cells isolated and cultured utilizing the Company's proprietary
processes when transplanted adopt the characteristics of the host brain and act
like normal stem cells, and suggest a continual replenishment of normal human
neural cells. Human neural stem/progenitor cells harvested and purified using
the Company's proprietary processes may be useful for creating therapies for the
treatment of neurodegenerative diseases such as Parkinson's and Alzheimer's
disease, and other neurological conditions that affect the central nervous
system, such as stroke and epilepsy--diseases and conditions that affect more
than 5 million people in the United States and for which no effective long-term
therapies are currently available.
The Company believes that the ability to isolate human brain stem cells
directly from fresh, uncultured tissue is important for other reasons as well.
First, it provides a source of genetically unmodified, normal stem cells for
transplantation, uncontaminated by other unwanted or diseased cell types.
Second, it opens the way to better understanding the properties of these cells
and how they might be manipulated in order to treat specific diseases. For
example, stem cell-derived neural cultures can be genetically modified to
secrete needed proteins for the brain. Finally, the efficient engraftment of
these non-transformed normal human stem cells into host brains means that the
cell product can be tested, in animal models, for its ability to correct
deficiencies caused by various human neurological diseases. This technology
could also provide a unique animal model for the testing of drugs that act on
human brain cells.
The Company's neural stem/progenitor cell program is at an early stage and
there can be no assurance that it will result in any commercial product.
PANCREATIC AND LIVER STEM CELLS DISCOVERY RESEARCH PROGRAMS
The Company's discovery program directed to the identification, isolation
and culturing of the pancreatic stem/progenitor cell is currently being
conducted by Nora Sarvetnick, Ph.D., of The Scripps Research Institute, in
collaboration with senior researchers from the Company. According to diabetes
and juvenile diabetes foundations, between 800,000 and 1.5 million Americans
have Type 1 diabetes (often called "juvenile diabetes" and most commonly
diagnosed in childhood); 30,000 new patients are diagnosed with the disease
every year. It is a costly, serious, lifelong condition, requiring constant
attention and insulin injections every day for survival. About 15 million other
people in the United States have Type 2 diabetes mellitus, which is also a
chronic and potentially fatal condition; more than 700,000 new patients are
diagnosed annually. Diabetes is widely recognized as one of the leading causes
of death and disability in the United States and is associated with long term
complications that affect almost every major part of the body. Diabetes-related
treatment costs exceed $100 billion annually. In 1998 the Company obtained an
exclusive, worldwide license from The Scripps Research Institute to novel
technology, developed by Dr. Sarvetnick as a result of the research sponsored by
the Company, which may facilitate the identification and isolation of pancreatic
stem/progenitor cells by identifying specific cell surface markers unique to
8
these cells. The Company believes this may lead to the development of cell-based
treatments for Type 1 diabetes and that portion of Type 2 diabetes characterized
by defective secretion of insulin. In 1999, advances in the research sponsored
by the Company resulted in the Company's obtaining additional exclusive,
worldwide licenses from The Scripps Research Institute to novel cell surface
markers identified by Dr. Sarvetnick and her research team as being unique to
the pancreatic islet stem cell for which the Company has now filed a US patent
application. Company researchers, in collaboration with Dr. Sarvetnick, continue
to advance their discovery program directed to the identification, isolation and
culturing of the pancreatic stem/progenitor cell utilizing this technology.
The Company initiated its discovery work for the liver stem/progenitor cell
through a sponsored research agreement with Markus Grompe, Ph.D., of Oregon
Health Sciences University. Dr. Grompe's work focuses on the discovery and
development of a suitable method for identifying and assessing liver
stem/progenitor cells for use in transplantation. Approximately 1 in 10
Americans suffers from diseases and disorders of the liver for which there are
currently no effective, long-term treatments. In 1998, Company researchers
continued to advance methods for establishing enriched cell populations suitable
for transplantation in preclinical animal models for evaluating these methods.
The Company is focused on discovering and utilizing its proprietary methods to
identify, isolate and culture liver stem/progenitor cells and to evaluate these
cells in preclinical animal models. In 1999, the researchers devised a culture
assay for facilitating the identification of a liver stem/progenitor cell. In
addition to supporting the growth of an early human liver stem/progenitor cell,
it is also possible to infect this culture with human hepatitis virus, so it
provides a valuable system for study of the virus. This technology could also
provide a unique animal model for the testing of drugs that act on or are
metabolized by human liver cells.
An important element of the Company's stem cell discovery program is the
further development of intellectual property positions with respect to stem and
progenitor cells. The Company has also obtained rights to certain inventions
relating to stem cells from, and is conducting stem cell related research at,
several academic institutions. See "License Agreement and Sponsored Research
Agreements." The Company expects to expand its search for new stem/progenitor
cells and to seek to acquire rights to additional inventions relating to
stem/progenitor cells from third parties.
The Company's pancreatic and liver stem/progenitor cells programs are at an
early stage and there can be no assurance that they will result in any
commercial products.
WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAMS
Until mid-1999, CytoTherapeutics engaged in research and development in
encapsulated cell therapy technology ("ECT"), including a pain control program
funded by Astra, and later AstraZeneca Group plc. The results from the
85-patient double-blind, placebo-controlled trial of CytoTherapeutics'
encapsulated bovine cell implant for the treatment of severe, chronic pain in
cancer patients did not, however, meet the criteria AstraZeneca had established
for continuing trials for the therapy. In June 1999, AstraZeneca terminated the
collaboration.
Consequently, in July 1999, the Company announced plans for the
restructuring of its research operations to abandon all further ECT research and
to concentrate its resources on the research and development of its proprietary
stem cell technology platform. The Company reduced its workforce by
approximately 68 full-time employees who had been focused on ECT programs, wound
down its research and manufacturing operations in Lincoln, Rhode Island, and
relocated its remaining research and development activities, and its corporate
headquarters, to the facilities of its wholly owned subsidiary, StemCells
California, Inc., in Sunnyvale, California. The Company is actively marketing
the quarters it had occupied in Rhode Island, seeking to sublease, assign or
sell its interest in its former corporate headquarters building and its pilot
manufacturing and cell processing facility there. (SEE ALSO "LIQUIDITY AND
CAPITAL RESOURCES" UNDER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.)
9
In December 1999, the Company sold its intellectual property assets related
to its ECT to Neurotech S.A., a privately held French company, in exchange for a
payment of $3 million, royalties on future product sales, and a portion of
certain revenues Neurotech may in the future receive from third parties. The
Company retained certain non-exclusive rights to use the ECT in combination with
its proprietary stem cell technology, and in the field of vaccines for
prevention and treatment of infectious diseases. (SEE ALSO "LIQUIDITY AND
CAPITAL RESOURCES" UNDER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND NOTE 2--"PATENT COSTS" TO THE
ACCOMPANYING FINANCIAL STATEMENTS.)
In a related development, by mutual consent the Company and the Advanced
Technology Program of the National Institute of Standards and Technology
terminated two grants previously awarded to the Company for its encapsulated
cell therapy and stem cell-related research. The encapsulated cell therapy grant
was obviated by the sale of the technology to Neurotech. The funding agency has
invited CytoTherapeutics to resubmit a proposal consistent with the new
directions the Company is taking in its research and development of its platform
stem cell technology.
SUBSIDIARY
STEMCELLS CALIFORNIA, INC.
On September 26, 1997, CytoTherapeutics acquired by merger StemCells, Inc.
(now StemCells California, Inc.), a California corporation ("StemCells").
CytoTherapeutics acquired StemCells in exchange for 1,320,691 shares of the
Company's common stock and options and warrants for the purchase of 259,296
common shares. Simultaneously with the acquisition, Richard M. Rose, M.D.,
President of StemCells, became President, Chief Executive Officer and a director
of CytoTherapeutics, and Irving L. Weissman, M.D., a founder of StemCells,
became a director of CytoTherapeutics. The Company, as the sole stockholder of
StemCells, voted on February 23, 2000, to amend the Certificate of Incorporation
of StemCells, Inc., in order to change its name to StemCells California, Inc.
The Company's current stem cell research is being conducted pursuant to the
provisions of an agreement between CytoTherapeutics and Drs. Weissman and Gage
providing for a two-year research plan. If the goals of the research plan are
accomplished, the stem cell research will continue to be funded under an
extension of such Research Plan approved by a Research Committee consisting of
two persons chosen by Drs. Weissman and Gage, two persons chosen by the Company
and a fifth member appointed by Drs. Weissman and Gage, subject to the
reasonable approval of the Company. Increases in stem cell research funding of
not more than 25% a year approved by the Committee will be funded by
CytoTherapeutics (although CytoTherapeutics also retains the right to fund such
programs at a higher level) for as long as the goals of the Research Plan are
being met, provided, however, that CytoTherapeutics will retain the option of
(i) ceasing or reducing neural stem research even if all Research Plan goals are
being met by accelerating the vesting of all still-achievable performance-based
options granted to Drs. Weissman and Gage and other scientists and (ii) ceasing
or reducing non-neural stem cell research even if all Research Plan goals are
being met by affording StemCells' scientific founders the opportunity to
continue development of the non-neural stem research by licensing the technology
related to such research to them in exchange for a payment to CytoTherapeutics
equal to all funding for such research, plus royalty payments.
CORPORATE COLLABORATIONS
ASTRAZENECA PLC
In March 1995, CytoTherapeutics signed a collaborative research and
development agreement with Astra (later AstraZeneca plc) for the development and
marketing of certain encapsulated-cell products to treat pain. Under the
agreement, the Company conducted research and development and received
approximately $42 million, including research and development funding, through
June 1999 when, as noted above (SEE WIND-DOWN OF ENCAPSULATED CELL THERAPY
RESEARCH AND DEVELOPMENT PROGRAMS), Astra exercised its right to terminate the
agreement. (SEE ALSO LIQUIDITY AND CAPITAL RESOURCES UNDER MANAGEMENT'S
10
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND
NOTE 15--"RESEARCH AGREEMENTS" TO THE ACCOMPANYING FINANCIAL STATEMENTS.)
MODEX THERAPEUTIQUES SA
In July 1996, CytoTherapeutics, together with certain founding scientists,
established Modex Therapeutiques SA ("Modex"), a Swiss biotherapeutics company,
to pursue extensions of CytoTherapeutics' broad-based, encapsulated-cell
technology for certain applications outside the central nervous system. Modex,
headquartered in Lausanne, Switzerland, was formed to integrate technologies
developed at three universities in Lausanne (the University of Lausanne, the
Centre Hospitalier Universitaire Vaudois, and the Ecole Polytechnique Federale
de Lausanne), at the Albert Einstein College of Medicine of Yeshiva University
in New York City, and at CytoTherapeutics, to develop products to treat non-CNS
diseases such as diabetes, obesity and anemia. In October 1997, the Company
completed a series of transactions that resulted in the establishment of Modex
as an independent company in which CytoTherapeutics has an equity position of
approximately 17%. The pre-existing Cross License Agreement between the Company
and Modex, which concerned encapsulated cell technology, was assigned to
Neurotech, S.A. in December 1999 as part of the divestiture of the Company's
ECT.
SIGNAL PHARMACEUTICALS, INC.
In December 1997, StemCells California, Inc. entered into two license
agreements with Signal Pharmaceuticals, Inc. under which each party licensed to
the other certain patent rights and biological materials for use in defined
fields. An initial disagreement as to the interpretation of the rights licensed
to StemCells California, Inc. was resolved by the parties, and the agreements
are operating in accordance with their terms.
GENENTECH, INC.
In November 1996, the Company signed collaborative development and licensing
agreements with Genentech relating to the development of products using the
Company's encapsulated cell therapy technology to deliver certain of Genentech's
proprietary growth factors to treat Parkinson's disease, Huntington's disease
and amyotrophic lateral sclerosis ("ALS").
Under the terms of the agreement for Parkinson's disease, Genentech had the
right, in its discretion, to terminate the Parkinson's program at specified
milestones in the program, and on May 21, 1998, Genentech exercised its right to
terminate the Parkinson's collaboration. Pursuant to the terms of the
Parkinson's Agreement, upon termination Genentech demanded that the Company
redeem, at a price of $10.01 per share, certain shares of the Company's
redeemable Common Stock held by Genentech, in an amount equal to the amount of
funds invested by Genentech to acquire such stock less the amount expended by
the Company on the terminated program, a difference of approximately
$3.1 million. In March 2000, the Company announced a settlement of this claim at
no cost to the Company. The Huntington's disease and ALS agreements have been
terminated as well. (FOR FURTHER DETAILS AND INFORMATION REGARDING THIS
SETTLEMENT, SEE LIQUIDITY AND CAPITAL RESOURCES UNDER MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.)
LICENSE AGREEMENTS AND SPONSORED RESEARCH AGREEMENTS
NEUROSPHERES, LTD.
In March 1994, the Company entered into a Contract Research and License
Agreement with NeuroSpheres, Ltd. Under the agreement, the Company obtained from
NeuroSpheres an exclusive, worldwide, royalty-bearing license for the commercial
development and use of certain neural stem cells for transplantation to treat
human disease. In 1997, the Company settled a dispute that arose between it and
NeuroSpheres under the agreement. Pursuant to the settlement, the Company
obtained an exclusive
11
patent license from NeuroSpheres in the field of transplantation, subject to a
limited right of NeuroSpheres to purchase a nonexclusive license from the
Company. Such right was not exercised by Neurospheres and expired in
April 1998. The Company and NeuroSpheres have no further research obligations to
one another. The Company has developed additional intellectual property relating
to the subject matter of the license.
STATE OF RHODE ISLAND
In 1989, the Company entered into an agreement with the State of Rhode
Island pursuant to which the Rhode Island Partnership for Science and Technology
("RIPSAT"), an agency of the State, reimbursed the Company $1,172,000 for
certain research activities the Company funded at Brown University. Under the
terms of this grant, the Company is obligated to pay royalties ranging from
three to five percent of revenues from products developed under the agreement,
to a maximum of $1,758,000. In July 1999, when the Company announced its plans
to proceed no further with its ECT research, wind down its operations in Rhode
Island and relocate its research activities and corporate headquarters to
Sunnyvale, California, RIPSAT alleged that the Company was in default under this
funding agreement. While the Company believed that it was not in default, in
March 2000, the Company entered into a settlement of the claim. (FOR FURTHER
DETAILS AND INFORMATION REGARDING THIS SETTLEMENT, SEE LIQUIDITY AND CAPITAL
RESOURCES UNDER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.)
ACADEMIC RELATIONSHIPS
The Company and its wholly owned subsidiary, StemCells California, Inc.,
have entered into a number of research and/or license agreements with academic
organizations. These research agreements provide that the Company will fund
certain research costs and, in return, will have a license or an option for a
license to the resulting inventions. Under these license agreements, the Company
and/or StemCells California, Inc. will typically be subject to obligations of
due diligence and the requirement to pay royalties on products that use patented
technology licensed under such agreements.
CYTOTHERAPEUTICS, INC.
The Company has historically expended substantial sums to support academic
research programs. However, with the decision by the Company to abandon its
further research and development of its encapsulated cell therapy technology the
Company terminated its academic collaborations with Brown University and
Dr. Patrick Aebischer at the Centre Hospitalier Universitaire Vaudois in
Switzerland. Research and development expenses paid in connection with these
collaborations aggregated approximately $156,600, $701,000 and $1,326,000 for
the years ended December 31, 1999, 1998, and 1997, respectively. The Company
also has a number of collaborative relationships with other academic
institutions and academic researchers.
STEMCELLS CALIFORNIA, INC.
StemCells California, Inc. has entered into a number of research agreements
with academic institutions. Under Sponsored Research Agreements with The Scripps
Research Institute and Oregon Health Sciences University, StemCells
California, Inc. funded certain research (in the amounts of approximately
$77,000 and $28,000 in 1997, $307,000 and $251,000 in 1998, and $309,000 and
$172,000 in 1999, for Scripps and Oregon respectively) in return for licenses or
options to license the inventions resulting from such research. StemCells
California, Inc. has also entered into license agreements with the California
Institute of Technology. All of these agreements relate largely to stem or
progenitor cells and or to processes and methods for the isolation,
identification, expansion or culturing of stem or progenitor cells.
12
MANUFACTURING
The keys to successful commercialization of neural stem/progenitor cells are
expected to include efficacy, safety, and consistency of the product and economy
of the process. The Company expects to address these issues by appropriate
testing and banking representative vials of large-scale cultures. Commercial
production is expected to involve expansion of banked cells and packaging them
in an appropriate container(s) after formulating the cells in an effective
carrier (which may also be used to affect the stability and engrafting of the
stem cells or their progeny). Because of the early stage of the Company's
stem/progenitor cell programs, the issues that will affect manufacture of
stem/progenitor cell products are relatively unclear at this juncture.
MARKETING
The Company expects to market and sell its products primarily through
co-marketing, licensing or other arrangements with third parties. The Company
does not have experience in sales, marketing or distribution and does not expect
to develop such capabilities in the near future. Generally, the Company intends
to have the marketing of its products undertaken by partners, although the
Company may seek to retain limited marketing rights in specific markets,
particularly where the product may be addressed by a specialty or niche sales
force.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company believes that proprietary protection of its inventions will be
of major importance to its future business. The Company has a program of
vigorously seeking and protecting intellectual property it believes may be
useful in connection with its products. The Company believes that its know-how
will also provide a significant competitive advantage and intends to continue to
develop and protect its know-how. The Company may also, from time to time, seek
to acquire licenses to important externally developed technologies.
The Company has exclusive or non-exclusive rights to a portfolio of patents
and patent applications related to various stem and progenitor cells and methods
of deriving and using them. These patents and patent applications relate mainly
to compositions of matter, methods of obtaining such cells, and methods for
preparing, transplanting and utilizing such cells. Currently, the Company's U.S.
patent portfolio in the stem cell therapy area includes 16 issued U.S. patents,
with an additional eight patent applications pending, four of which have been
allowed and are awaiting issuance.
The patent positions of pharmaceutical and biotechnology companies,
including those of the Company, are uncertain and involve complex and evolving
legal and factual questions. The coverage sought in a patent application can be
denied or significantly reduced before or after the patent is issued.
Consequently, the Company does not know whether any of its pending applications
will result in the issuance of patents, or if any existing or future patents
will provide significant protection or commercial advantage or will be
circumvented by others. Since patent applications are secret until patents are
issued in the United States or until the applications are published in foreign
countries, and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first to make the inventions covered by each of its pending
patent applications or that it was the first to file patent applications for
such inventions. There can be no assurance that patents will issue from the
Company's pending or future patent applications or, if issued, that such patents
will be of commercial benefit to the Company, afford the Company adequate
protection from competing products or not be challenged or declared invalid.
In the event that a third party has also filed a patent application relating
to inventions claimed in Company patent applications, 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 uncertainties and cost for the Company, even if the eventual outcome
is favorable to the
13
Company. There can be no assurance that the Company's patents, if issued, would
be held valid by a court of competent jurisdiction.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have been issued
patents relating to cell therapy, stem cells and other technologies potentially
relevant to or required by the Company's expected products. The Company cannot
predict which, if any, of such applications will issue as patents or the claims
that might be allowed. The Company is aware that a number of companies have
filed applications relating to stem cells. The Company is also aware of a number
of patent applications and patents claiming use of genetically modified cells to
treat disease, disorder or injury. The Company is aware of two patents issued to
a competitor claiming certain methods for treating defective, diseased or
damaged cells in the mammalian CNS by grafting genetically modified donor cells
from the same mammalian species.
If third party patents or patent applications contain claims infringed by
the Company's technology and such claims or claims in issued patents are
ultimately determined to be valid, there can be no assurance that the Company
would be able to obtain licenses to these patents at a reasonable cost, if at
all, or be able to develop or obtain alternative technology. If the Company is
unable to obtain such licenses at a reasonable cost, it may be adversely
affected. There can be no assurance that the Company will not be obliged to
defend itself in court against allegations of infringement of third party
patents. Patent litigation is very expensive and could consume substantial
resources and create significant uncertainties. An adverse outcome in such a
suit could subject the Company to significant liabilities to third parties,
require disputed rights to be licensed from third parties, or require the
Company to cease using such technology.
The Company also relies upon trade-secret protection for its confidential
and proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques, gain access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its trade secrets.
The Company's policy is to require its employees, consultants, significant
scientific collaborators and sponsored researchers to execute confidentiality
agreements upon the commencement of an employment or consulting relationship
with the Company. These agreements generally provide that all confidential
information developed or made known to the individual by the Company during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees and consultants, the agreements
generally provide that all inventions conceived by the individual in the course
of rendering services to the Company shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company in the event of
unauthorized use, transfer or disclosure of such information or inventions.
The Company has obtained rights from universities and research institutions
to technologies, processes and compounds that it believes may be important to
the development of its products. These agreements typically require the Company
to pay license fees, meet certain diligence obligations and, upon commercial
introduction of certain products, pay royalties. These include exclusive license
agreements with NeuroSpheres, The Scripps Institute, the California Institute of
Technology and the Oregon Health Sciences University to certain patents and
know-how regarding present and certain future developments in neural and
pancreatic stem cells. The Company's licenses may be canceled or converted to
non-exclusive licenses if the Company fails to use the relevant technology or
the Company breaches its agreements. Loss of such licenses could expose the
Company to the risks of third party patents and/or technology. There can be no
assurance that any of these licenses will provide effective protection against
the Company's competitors.
14
COMPETITION
While in some instances the targeted disease states for the Company's
initial products currently have no effective long-term therapies, the Company's
initial products are expected to compete with a variety of therapeutic products
and procedures. Major pharmaceutical companies currently offer a number of
pharmaceutical products to treat neurodegenerative, pancreatic and liver
diseases, and other diseases for which the Company's technologies may be
applicable. The Company believes that its products, if successfully developed,
will compete with these products principally on the basis of improved and
extended efficacy and safety and the overall economic benefit to the health care
system offered by such products. However, many other pharmaceutical and
biotechnology companies are investigating new drugs and therapeutic approaches
to treat neurodegenerative, pancreatic and liver diseases, which may achieve new
and better efficacy profiles, extend the therapeutic window for such products,
alter the prognosis of these diseases or prevent their onset.
The market for therapeutic products that address degenerative diseases is
large, and competition is intense and is expected to increase. The Company's
most significant competitors are expected to be fully integrated pharmaceutical
companies and more established biotechnology companies. Such competitors have
significant resources and expertise in research and development, manufacturing,
testing, obtaining regulatory approvals and marketing and also have
significantly greater capital resources. Smaller companies may also prove to be
significant competitors, particularly through collaborative arrangements with
large pharmaceutical or biotechnology companies. Many of these competitors have
significant products approved or in development that could be competitive with
the Company's potential products, and also operate large, well-funded research
and development programs. In addition, the Company competes with other companies
and institutions for highly qualified scientific and management personnel.
The Company's stem/progenitor cell products, if successfully developed,
might face competition from orally administered drugs, other forms of cell
transplantation, ablative and stimulative procedures, gene therapy and new drugs
under development. In addition, the Company believes that its competitors are
trying to develop stem/progenitor cell-based technologies. The Company expects
that these products, if developed, will compete with the Company's potential
stem/progenitor cell products based on efficacy, safety, cost and intellectual
property positions. The Company expects that gene therapy, if successfully
developed, will also be a source of competition for potential stem/progenitor
cell products.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than those being
developed by the Company or that would render the Company's technology obsolete
or non-competitive. The Company may also face competition from companies that
have filed patent applications relating to the use of genetically modified cells
to treat disease, disorder or injury. The Company may be required to seek
licenses from these competitors in order to commercialize certain of its
proposed products and there can be no assurance that the Company will be able to
obtain such licenses at a reasonable cost, if at all.
Any product that the Company succeeds in developing and for which it gains
regulatory approval must then compete for market acceptance and market share.
For certain of the Company's potential products, an important competitive factor
will be the timing of market introduction of competitive products. Accordingly,
the Company expects that an important competitive factor will be the relative
speed with which the Company and its competitors can develop products, complete
the clinical testing and approval processes and supply commercial quantities of
a product to market. With respect to clinical testing, competition may delay
progress by limiting the number of clinical investigators and patients available
to test the Company's potential products.
Competition for the Company's products is also expected to be based on
product efficacy, safety, the timing and scope of regulatory approvals
including, in certain instances, obtaining marketing exclusivity under the
Orphan Drug Act, availability of supply, marketing and sales capability,
reimbursement
15
coverage, price and patent and technology position. There can be no assurance
that the Company's technology, if fully developed, will become commercially
viable.
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's potential products and its
research and development activities are and will continue to be subject to
regulation for safety and efficacy by numerous governmental authorities in the
United States and other countries. In the United States, pharmaceuticals,
biologicals and medical devices are subject to rigorous FDA regulation. The
Federal Food, Drug and Cosmetic Act, as amended, and the Public Health Service
Act, as amended, the regulations promulgated thereunder, and other Federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, export, record keeping,
approval, marketing, advertising and promotion of the Company's potential
products. Product development and approval within this regulatory framework
takes a number of years and involves substantial uncertainty combined with the
expenditure of substantial resources. In addition, the United States, states and
other jurisdictions have restrictions on the use of fetal tissue that could
restrict the Company's use of such materials.
The steps required before the Company's potential products may be marketed
in the United States include (i) preclinical laboratory and animal tests,
(ii) the submission to the FDA of an application for an Investigational New Drug
Exemption ("IND"), which must become effective before U.S. human clinical trials
may commence, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the product, (iv) the submission to the FDA
of a marketing authorization application(s) and (v) FDA approval of the
application(s) prior to any commercial sale or shipment of the drug. Biologic
product manufacturing establishments located in certain states also may be
subject to separate regulatory and licensing requirements.
Preclinical tests include laboratory evaluation of the product and animal
studies to assess the potential safety and efficacy of the product and its
formulation as well as the quality and consistency of the manufacturing process.
The results of the preclinical tests are submitted to the FDA as part of an IND,
and the IND becomes effective 30 days following its receipt by the FDA, absent
questions, requests for delay or objections from the FDA.
Clinical trials involve the evaluation of the product in healthy volunteers
or, as may be the case with the Company's potential products, in a small number
of patients under the supervision of a qualified physician. Clinical trials are
conducted in accordance with protocols that detail the objectives of the study,
the parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Any product administered in a U.S. clinical trial must be
manufactured in accordance with clinical Good Manufacturing Practices ("cGMP")
determined by the FDA. Each protocol is submitted to the FDA as part of the IND.
The protocol for each clinical study must be approved by an independent
Institutional Review Board ("IRB") at the institution at which the study is
conducted and the informed consent of all participants must be obtained. The IRB
will consider, among other things, the existing information on the product,
ethical factors, the safety of human subjects, the potential benefits of therapy
and the possible liability of the institution.
Clinical development is traditionally conducted in three sequential phases.
The phases may overlap, however. In Phase I, products are typically introduced
into healthy human subjects or into selected patient populations to test for
safety (adverse reactions), dosage tolerance, absorption and distribution,
metabolism, excretion and clinical pharmacology. Phase II involves studies in a
limited patient population to (i) determine the efficacy of the product for
specific targeted indications and populations, (ii) determine optimal dosage and
dosage tolerance and (iii) identify possible adverse effects and safety risks.
When a dose is chosen and a candidate product is found to be effective and to
have an acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to conclusively demonstrate clinical efficacy and to test further for
safety within an expanded patient population, generally at multiple study sites.
The FDA
16
continually reviews the clinical trial plans and results and may suggest changes
or may require discontinuance of the trials at any time if significant safety
issues arise. The results of the preclinical studies and clinical studies are
submitted to the FDA in the form of a marketing approval authorization
application.
The testing and approval process is likely to require substantial time,
effort and expense and there can be no assurance that any FDA approval will be
granted on a timely basis, if at all. The time to approval is affected by a
number of factors, including relative risks and benefits demonstrated in
clinical trials, the availability of alternative treatments and the severity of
the disease. Additional animal studies or clinical trials may be requested
during the FDA review period and may delay marketing approval. After FDA
approval for the initial indications and requisite approval of the manufacturing
facility, further clinical trials may be necessary to gain approval for the use
of the product for additional indications. The FDA may also require unusual or
restrictive post-marketing testing and surveillance to monitor for adverse
effects, which can involve significant expense or grant only conditional
approvals.
Among the conditions for product licensure is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMP. Even after product licensure approval, the manufacturer must comply
with cGMP on a continuing basis, and what constitutes cGMP may change as the
state of the art of manufacturing changes. Domestic manufacturing facilities are
subject to regular FDA inspections for cGMP compliance (normally at least every
two years), and foreign manufacturing facilities are subject to periodic FDA
inspections or inspections by the foreign regulatory authorities with reciprocal
inspection agreements with the FDA. Domestic manufacturing facilities may also
be subject to inspection by foreign authorities.
The Orphan Drug Act provides incentives to drug manufacturers to develop and
manufacture drugs for the treatment of diseases or conditions that affect fewer
than 200,000 individuals in the United States. Orphan drug status can also be
sought for treatments for diseases or conditions that affect more than 200,000
individuals in the United States if the sponsor does not realistically
anticipate its product becoming profitable from sales in the United States. The
Company may apply for orphan drug status for certain of its therapies. Under the
Orphan Drug Act, a manufacturer of a designated orphan product can seek tax
benefits, and the holder of the first FDA approval of a designated orphan
product will be granted a seven-year period of marketing exclusivity in the
United States for that product for the orphan indication. While the marketing
exclusivity of an orphan drug would prevent other sponsors from obtaining
approval of the same compound for the same indication, it would not prevent
other types of products from being approved for the same use including in some
cases, slight variations on the originally designated orphan product.
Legislation has been introduced in the U.S. Congress in the past, and is likely
to be introduced again in the future, that would restrict the extent and
duration of the market exclusivity of an orphan drug, and there can be no
assurance that the benefits of the existing statute will remain in effect.
Proposed regulations of the FDA and other governmental agencies would place
restrictions, including disclosure requirements, on researchers who have a
financial interest in the outcome of their research. Under the proposed
regulations, the FDA could also apply heightened scrutiny to, or exclude the
results of, studies conducted by such researchers when reviewing applications to
the FDA which contain such research. Certain of the Company's collaborators have
stock options or other equity interests in the Company that could subject such
collaborators and the Company to the proposed regulations.
The FDA has published a "Proposed Approach to Regulation of Cellular and
Tissue-Based Products" which relates to the use of human cells. The Company
cannot presently determine the effects of that approach or what other regulatory
actions might be taken. Restrictions on the testing or use of cells, whether
human or non-human, as human therapeutics could adversely affect the Company's
product development programs and the Company itself and could prevent the
Company from producing and/or selling certain products or make the cost of
production by the Company prohibitively high.
In addition to safety regulations enforced by the FDA, the Company is also
subject to regulations under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances
17
Control Act and other present and potential future supranational, foreign,
Federal, state and local regulations.
Outside the United States, the Company will be subject to regulations which
govern the import of drug products from the United States or other manufacturing
sites and foreign regulatory requirements governing human clinical trials and
marketing approval for its products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursements vary widely from
country to country. In particular, the European Union ("EU") is revising its
regulatory approach to high tech products and representatives from the United
States, Japan and the EU are in the process or harmonizing and making more
uniform the regulations for the registration of pharmaceutical products in these
three markets. Although certain of such proposals have been adopted, the Company
cannot anticipate what effect the adoption of the final forms of this
harmonization or the changes to the EU high tech procedure may have.
REIMBURSEMENT AND HEALTH CARE COST CONTROL
The Company's ability to commercialize products successfully may depend in
part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and others both in the United States and
abroad. Significant uncertainty exists as to the reimbursement status of newly
approved health care products. Reimbursement limitations or prohibitions with
respect to any product developed by the Company could adversely affect the
Company's ability to establish and maintain price levels sufficient for
realization of an appropriate return on its investment in developing new
therapies. Government and other third party payors are increasingly attempting
to contain health care costs by limiting both coverage and the level of
reimbursement for new therapeutic products approved for marketing by the FDA and
by refusing, in some cases, to provide any coverage for uses of approved
products for disease indications for which the FDA has not granted marketing
approval. If adequate coverage and reimbursement levels are not provided by
third party payors for uses of the Company's therapeutic products, the market
acceptance of these products would be adversely affected.
The revenues and profitability of health care-related companies may be
affected by the continuing efforts of governmental and third party payers to
contain or reduce the cost of health care through various means. For example, in
certain foreign markets pricing or profitability of prescription pharmaceuticals
is subject to government control. In the United States, there have been, and the
Company expects that there will continue to be, a number of Federal and state
proposals to implement government control over health care costs. Efforts at
healthcare reform are likely to continue in future legislative sessions. It is
uncertain what legislative proposals will be adopted or what actions Federal,
state or private payers for healthcare goods and services may take in response
to healthcare reform proposals of legislation. The Company cannot predict the
effect healthcare reforms may have on its business. Any such reforms as well as
the uncertainty their proposal engenders could have a material adverse effect on
the Company.
EMPLOYEES
As of March 20, 1999, the Company had 21 full- and part-time employees
(including two contract employees), of whom four have Ph.D. degrees.
Approximately 14 employees work in research and development and laboratory
support services. A number of the Company's employees have held positions with
other biotechnology or pharmaceutical companies or have worked in university
research programs. No employees are covered by collective bargaining agreements.
SCIENTIFIC ADVISORY BOARD
Members of the Company's Scientific Advisory Board provide the Company with
strategic guidance in regard to its research and product development programs,
as well as assistance in recruiting employees and
18
collaborators. Each Scientific Advisory Board member has entered into a
consulting agreement with the Company. These consulting agreements typically
specify the compensation to be paid to the consultant and require that all
information about the Company's products and technology be kept confidential.
All of the Scientific Advisory Board members are employed by employers other
than the Company and may have commitments to or consulting or advising
agreements with other entities which may limit their availability to the
Company. The Scientific Advisory Board members have generally agreed, however,
for so long as they serve as consultants to the Company, not to provide any
services to any other entities which would conflict with the services the member
provides to the Company. Members of the Scientific Advisory Board offer
consultation on specific issues encountered by the Company as well as general
advice on the directions of appropriate scientific inquiry for the Company. In
addition, certain Scientific Advisory Board members assist the Company in
assessing the appropriateness of moving the Company's projects to more advanced
stages. The following persons are members of the Company's Scientific Advisory
Board:
- Irving L. Weissman, M.D., is the Karel and Avice Beekhuis Professor of
Cancer Biology, Professor of Pathology and Professor of Developmental
Biology at Stanford University. Dr. Weissman is a cofounder of
SyStemix, Inc., and Chairman of the Scientific Advisory Board of
SyStemix, Inc. He has served on the Scientific Advisory Boards of
Amgen Inc., DNAX and T-Cell Sciences, Inc. Dr. Weissman is Chairman of the
Scientific Advisory Board of CytoTherapeutics.
- David J. Anderson, Ph.D., is Professor of Biology, California Institute of
Technology, Pasadena, California and Investigator, Howard Hughes Medical
Institute.
- Fred H. Gage, Ph.D., is Professor, Laboratory of Genetics, The Salk
Institute for Biological Studies, La Jolla, California and Adjunct
Professor, Department of Neurosciences, University of California, San
Diego, California.
ITEM 2. PROPERTIES
The Company's current research laboratories and administrative offices are
located in a leased 7,950 square-foot multipurpose building housing wet labs,
specialty research areas and administrative offices located in Sunnyvale,
California. The facilities are leased pursuant to lease agreements expiring
August 31, 2001, with the Company having certain renewal options. The Company's
current facilities are expected to be sufficient to accommodate its needs at
least through the end of 2000.
The Company continues to be the lessee of the following facilities in
Lincoln, Rhode Island obtained in connection with its former encapsulated cell
technology: its former research laboratory and corporate headquarters building
which contains 65,000 square feet of wet labs, specialty research areas and
administrative offices held on a fifteen-year lease agreement, as well as a
21,000 square-foot pilot manufacturing facility and a 3,000 square-foot cell
processing facility financed by bonds issued by the Rhode Island Industrial
Facilities Corporation. The Company is actively seeking to sublease, assign or
sell its interests in these properties.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Common Stock of CytoTherapeutics is traded on the National Market System
of NASDAQ under the Symbol CTII. The quarterly ranges of high and low sales
prices since January 1, 1997 are shown below:
2000 HIGH LOW
- ---- ------------- ------------
First Quarter (through March 20, 2000)...................... $20 $1 3/8
1999 HIGH LOW
- ------------------------------------------------------------ ------------- ------------
Fourth Quarter.............................................. $ 1 5/8 $1
Third Quarter............................................... $ 2 3/8 $ 11/16
Second Quarter.............................................. $ 1 3/8 $ 17/32
First Quarter............................................... $ 1 25/32 $1 5/32
1998 HIGH LOW
- ------------------------------------------------------------ ------------- ------------
Fourth Quarter.............................................. $ 2 17/32 $ 26/32
Third Quarter............................................... $ 1 19/32 $ 29/32
Second Quarter.............................................. $ 3 7/16 $1 1/16
First Quarter............................................... $ 4 3/8 $2 1/2
1997 HIGH LOW
- ------------------------------------------------------------ ------------- ------------
Fourth Quarter.............................................. $ 7 5/8 $3 7/16
Third Quarter............................................... $ 6 1/4 $4 5/8
Second Quarter.............................................. $ 8 3/4 $4 3/4
First Quarter............................................... $11 3/8 $7 1/2
No cash dividends have been declared on the Common Stock since the Company's
inception.
As of March 20, 2000, there were approximately 279 holders of record of the
Common Stock.
20
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA
Revenue from collaborative agreements....... $ 5,022 $ 8,803 $ 10,617 $ 7,104 $11,761
Research and development expenses........... 9,991 17,659 18,604 17,130 14,730
Acquired research and development........... 8,344
Wind-down expenses.......................... 6,048
Net loss.................................... (15,709) (12,628) (18,114) (13,759) (8,891)
Basic and diluted net loss per share........ (0.84) (0.69) (1.08) (0.89) (0.69)
Shares used in computing basic and diluted
net loss per share........................ 18,706 18,291 16,704 15,430 12,799
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Cash, cash equivalents and marketable
securities................................ $ 4,760 $ 17,386 $ 29,050 $ 42,607 $44,192
Total assets................................ 16,081 32,866 44,301 58,397 56,808
Long-term debt, including capitalized
leases.................................... 2,937 3,762 4,108 8,223 5,441
Redeemable common stock..................... 5,249 5,249 5,583 8,159
Stockholders' equity........................ 3,506 17,897 28,900 34,747 45,391
21
\
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of CytoTherapeutics, Inc. should be read in conjunction with the
accompanying financial statements and the related footnotes thereto.
The statements contained in this report, other than statements of historical
fact, constitute forward-looking statements. Such statements include, without
limitation, all statements as to expectation or belief and statements as to the
Company's future results of operations, the progress of the Company's research
and product development programs, the need for, and timing of, additional
capital and capital expenditures, partnering prospects, the need for additional
intellectual property rights, effects of regulations, the need for additional
facilities and potential market opportunities. The Company's actual results may
vary materially from those contained in such forward-looking statements because
of risks to which the Company is subject, such as failure to obtain a corporate
partner or partners to support the development of the Company's stem cell
programs, the Company's ability to sell, assign or sublease its interest in its
facilities related to its encapsulated cell technology program, risks of delays
in research, development and clinical testing programs, obsolescence of the
Company's technology, lack of available funding, competition from third parties,
intellectual property rights of third parties, failure of the Company's
collaborators to perform, regulatory constraints, litigation and other risks to
which the Company is subject. See "Cautionary Factors Relevant to
Forward-Looking-Information" filed herewith as Exhibit 99 and incorporated
herein by reference.
OVERVIEW
Since its inception in August 1988, the Company has been primarily engaged
in research and development of human therapeutic products. No revenues have been
derived from the sale of any products, and the Company does not expect to
receive revenues from product sales for at least several years. The Company has
not commercialized any product and in order to do so it must, among other
things, substantially increase its research and development expenditures as
research and product development efforts accelerate and clinical trials are
initiated. The Company has incurred annual operating losses since inception and
expects to incur substantial operating losses in the future. As a result, the
Company is dependent upon external financing from equity and debt offerings and
revenues from collaborative research arrangements with corporate sponsors to
finance its operations. There can be no assurance that such financing or
partnering revenues will be available when needed or on terms acceptable to the
Company. The Company's results of operations have varied significantly from year
to year and quarter to quarter and may vary significantly in the future due to
the occurrence of material, nonrecurring events, including without limitation,
the receipt of one-time, nonrecurring licensing payments, the initiation or
termination of research collaborations and the winding down of terminated
research and development programs.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues from collaborative agreements totaled $5,022,000, $8,803,000 and
$10,617,000 for the years ending December 31, 1999, 1998 and 1997, respectively.
Revenues were earned primarily from a Development, Marketing and License
Agreement with AstraZeneca Group plc, which was signed in March 1995 (the "Astra
Agreement"). The decrease in revenues from 1998 to 1999 resulted primarily from
the June 1999 termination of the Astra Agreement. 1997 revenues included a
$3,000,000 milestone payment from Astra related to the Phase II clinical program
for the Company's pain control implant.
22
Research and development expenses totaled $9,984,000 in 1999, as compared to
$17,659,000 in 1998 and $18,604,000 in 1997. The decrease of $7,668,000, or 43%,
from 1998 to 1999 was primarily attributable to the wind-down of research
activities relating to the Company's encapsulated cell technology, precipitated
by termination of the Astra Agreement. The decrease of $945,000, or 5%, from
1997 to 1998 was primarily attributable to a reduction in spending on research
agreements and a reduction in research and development personnel.
Acquired research and development consists of a one-time charge of
$8,344,000 related to the acquisition of StemCells California, Inc., in 1997.
Commercialization of this technology will require significant incremental
research and development expenses over a number of years. With the recent
completion of the restructuring of the Company's research operations, the
Company is now focused solely on the research and development of its platform
stem cell technology, which encompasses the technology acquired upon the
acquisition of StemCells California, Inc. and related technology developed or
licensed in by the Company.
General and administrative expenses were $4,927,303 for the year ended
December 31, 1999, compared with $4,603,000 in 1998 and $6,158,000 in 1997. Due
to the wind-down of the Company's encapsulated cell technology and relocation of
the Company's headquarters in October, the 1999 expenses are less than they
would have been had these events not occurred. The reduction of $1,555,000, or
25%, from 1997 to 1998 was primarily attributable to a reduction in legal fees,
recruiting and relocation expenses, as well as a reduction in employees.
Wind-down expenses totaled $6,047,806 for the year ended December 31, 1999;
no such expenses were incurred in 1998 and 1997. These expenses relate to the
wind-down of the Company's encapsulated cell technology research and the
Company's other Rhode Island operations, the transfer of the Company's corporate
headquarters to Sunnyvale, California and an accrual for the Company's estimate
of the costs of settlement of a 1989 funding agreement with the Rhode Island
Partnership for Science and Technology ("RIPSAT").
Interest income for the years ended December 31, 1999, 1998 and 1997 totaled
$564,000, $1,254,000 and $1,931,000, respectively. The average cash and
investment balances were $10,663,000, $21,795,000 and $33,343,000 in 1999, 1998
and 1997, respectively. The decrease in interest income from 1997 to 1998 to
1999 was attributable to lower average balances.
In 1999, interest expense was $335,000, compared with $472,000 in 1998 and
$438,000 in 1997. The decrease from 1998 to 1999 was attributable to lower
outstanding debt and capital lease balances. The increase from 1997 to 1998 was
primarily attributable to capitalization of $210,000 of interest on the new
facility in 1997.
In October 1997, the Company recognized a gain in the amount of $3,387,000
related to the sale of 50 percent of the Company's interest in Modex
Therapeutiques.
The net loss in 1999, 1998 and 1997 was $15,709,000, $12,628,000, and
$18,114,000, respectively. The loss per share was $0.84, $.69 and $1.08 in 1999,
1998 and 1997, respectively. The increase from 1998 to 1999 is primarily
attributable to the elimination of revenue from the Astra Agreement, which was
terminated in June 1999, as well as expenses related to the wind-down of the
Company's encapsulated cell technology researchand its other Rhode Island
operations, the transfer of the Company's corporate headquarters to Sunnyvale,
California and an accrual for the Company's estimate of the costs of settlement
of a funding agreement with RIPSAT. The decrease from 1997 to 1998 was
attributable to a one-time charge of $8,344,000 for acquired research and
development related to the purchase of StemCells California, Inc. offset by a
$3,387,000 gain on a partial sale of the Company's interest in Modex in 1997.
23
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through the
sale of common and preferred stock, the issuance of long-term debt and
capitalized lease obligations, revenues from collaborative agreements, research
grants and interest income.
The Company had unrestricted cash and cash equivalents totaling $4,760,000
at December 31, 1999. Cash and cash equivalents are invested in money market
accounts in institutions insured by the FDIC.
The Company's liquidity and capital resources have been and will continue to
be significantly affected by the Company's relationship with corporate partners.
In March 1995, the Company signed a collaborative research and development
agreement with AstraZeneca for the development and marketing of certain
encapsulated-cell products to treat pain. AstraZeneca made an initial,
nonrefundable payment of $5,000,000, included in revenue from collaborative
agreements in 1995, a milestone payment of $3,000,000 in 1997 and was to remit
up to an additional $13,000,000 subject to achievement of certain development
milestones. Under the agreement, the Company was obligated to conduct certain
research and development pursuant to a four-year research plan agreed upon by
the parties. Over the term of the research plan, the Company originally expected
to receive annual payments of $5 million to $7 million from AstraZeneca, which
was to approximate the research and development costs incurred by the Company
under the plan. Subject to the successful development of such products and
obtaining necessary regulatory approvals, AstraZeneca was obligated to conduct
all clinical trials of products arising from the collaboration and to seek
approval for their sale and use. AstraZeneca had the exclusive worldwide right
to market products covered by the agreement. Until the later of either the
expiration of all patents included in the licensed technology or a specified
fixed term, the Company was entitled to a royalty on the worldwide net sales of
such products in return for the marketing license granted to AstraZeneca and the
Company's obligation to manufacture and supply products. AstraZeneca had the
right to terminate the original agreement beginning April 1, 1998. On June 24,
1999, AstraZeneca informed the Company of the results of AstraZeneca's analysis
of the double-blind, placebo-controlled trial of the Company's encapsulated
bovine cell implant for the treatment of severe, chronic pain in cancer
patients. AstraZeneca determined that, based on criteria it established, the
results from the 85-patient trial did not meet the minimum statistical
significance for efficacy established as a basis for continuing worldwide trials
for the therapy. AstraZeneca therefore indicated that it did not intend to
further develop the bovine cell-containing implant therapy and exercised its
right to terminate the agreement. (SEE ALSO NOTE 15--"RESEARCH AGREEMENTS" TO
THE ACCOMPANYING FINANCIAL STATEMENTS)
In the third quarter of 1999, the Company announced restructuring plans for
the wind-down of operations relating to its encapsulated cell technology and to
focus its resources on the research and development of its proprietary stem cell
technology platform. The Company terminated approximately 68 full time employees
and, in October 1999, relocated its corporate headquarters to Sunnyvale,
California. The Company recorded approximately $5.7 million of wind-down
expenses including employee separation and relocation costs during 1999.
On December 30, 1999 the Company sold its encapsulated cell technology
("ECT") to Neurotech S.A. for a payment of $3,000,000, royalties on future
product sales, and a portion of certain Neurotech revenues from third parties in
return for the assignment to Neurotech of intellectual property assets relating
to ECT. In addition, the Company retained certain non-exclusive rights to use
ECT in combination with its proprietary stem cell technology and in the field of
vaccines for prevention and treatment of infectious diseases. The Company
received $2,800,000 of the initial payment on January 3, 2000 with a remaining
balance of $200,000 placed in escrow, to be received by the Company upon
demonstration satisfactory to Neurotech that certain intellectual property is
not subject to other claims.
As part of the Company's restructuring of its operations and relocation of
its corporate headquarters to Sunnyvale, California, the Company identified a
significant amount of excess fixed assets. In December
24
of 1999, the Company completed the disposition of those excess fixed assets,
from which it received more than $746,000. These proceeds are expected to be
used to fund the Company's continuing operations.
In July 1999, the Rhode Island Partnership for Science and Technology
("RIPSAT") alleged that the Company was in default under a June, 1989 Funding
Agreement (the "Funding Agreement"), and demanded payment of approximately
$2.6 million. While the Company believes it was not in default under the Funding
Agreement, the Company deemed it best to resolve the dispute without litigation
and, on March 3, 2000, entered into a settlement agreement with RIPSAT, the
Rhode Island Industrial Recreational Building Authority ("IRBA") and the Rhode
Island Industrial Facilities Corporation ("RIIFC"). The Company agreed to pay
RIPSAT $1,172,000 in full satisfaction of all obligations of the Company to
RIPSAT under the Funding Agreement. At the same time, IRBA agreed to return to
the Company the full amount of the Company's debt service reserve ("Reserve
Funds"), comprising approximately $610,000 of principal and interest, relating
to the bonds the Company has with IRBA and RIIFC. The Reserve Funds were
transferred directly to RIPSAT, so the net cash paid by the Company was
approximately $562,000. The Company made this payment in March of 2000.
The Company's liquidity and capital resources could have also been affected
by a claim by Genentech, Inc., arising out of the their collaborative
development and licensing agreement relating to the development of products for
the treatment of Parkinson's disease; in the event, however, the claim was
resolved with no effect on the Company's resources. On May 21, 1998, Genentech
exercised its right to terminate the Parkinson's collaboration and demanded that
the Company redeem, for approximately $3,100,000, certain shares of the
Company's redeemable Common Stock held by Genentech. Genentech's claim was based
on provisions in the agreement requiring the Company to redeem, at the price of
$10.01 per share, the shares representing the difference between the funds
invested by Genentech to acquire such stock and the amount expended by the
Company on the terminated program less an additional $1,000,000. In March 2000,
the Company and Genentech entered into a Settlement Agreement under which
Genentech released the Company from any obligation to redeem any shares of the
Company's Common Stock held by Genentech, without cost to the Company.
Accordingly, the $5.2 million of redeemable common stock shown as a liability in
the Company's December 31, 1999 balance sheet will be transferred to equity in
March 2000, and use of the Company's liquidity and capital resources will not be
necessary. The Company and Genentech also agreed that all collaborations between
them were terminated, and that neither had any rights to the intellectual
property of the other.
The Company continues to have substantial outstanding obligations in regard
to its facilities in Lincoln, Rhode Island, including lease payments and
operating costs of approximately $950,000 per year associated with its former
research laboratory and corporate headquarters building, and debt service
payments and operating costs of approximately $1,000,000 per year with respect
to its pilot manufacturing and cell processing facility. The Company is actively
seeking to sublease, assign or sell its interests in these facilities, but there
can be no assurance that the Company will succeed in these efforts within a
reasonable time period; if it does not, this will have a material adverse effect
on the Company's liquidity and capital resources.
In May 1996, the Company secured an equipment loan facility with a bank (the
"Lender") in the amount of $2,000,000 (the "Credit Facility"). On August 5, 1999
the Company made a payment of approximately $752,000 of principal and interest
to the Lender to retire the Credit Facility rather than seek a waiver by the
Lender of the Company's violation of a loan covenant requiring the Company to
maintain unrestricted liquidity in an amount equal to or in excess of
$10 million.
On April 13, 2000, the Company completed arrangements to sell 1,500 shares
of 6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's common stock to a member of its Board of Directors for $1,500,000,
on terms more favorable than it was able to obtain from outside investors. The
shares are convertible at the option of the holder into common stock at a price
to be determined by reference to the price of the Company's common stock for a
period approximately from
25
April 12, 2000 through the twentieth trading day following the filing of this
Form 10-K. The conversion price may be below the trading market price of the
stock at the time of conversion. The holder of the preferred stock has
liquidation rights equal to his original investment plus accrued but unpaid
dividends. The investor would be entitled to make additional investments in the
Company on the same terms as those on which the Company completes offerings of
its securities with third parties within 6 months, if any such offerings are
completed. If offerings totalling at least $6 million are not completed during
the 6 months, the investor has the right to acquire up to 1,500 additional
shares of convertible preferred stock at a pre-determined per share. Any
unconverted preferred stock is converted, at the applicable conversion price, on
April 13, 2002 in the case of the original stock and two years after the first
acquisition of any of the additional 1,500 shares, if any are acquired. The
warrant expires on April 13, 2005. As a result of this transaction, the Company
has adequate resources to fund its operations into the first quarter of 2001.
The Company has limited liquidity and capital resources and must obtain
significant additional capital resources in the near future in order to sustain
its product development efforts. Substantial additional funds will be required
to support the Company's research and development programs, for acquisition of
technologies and intellectual property rights, for preclinical and clinical
testing of its anticipated products, pursuit of regulatory approvals,
acquisition of capital equipment, laboratory and office facilities,
establishment of production capabilities and for general and administrative
expenses. The Company's ability to obtain additional capital will be
substantially dependent on its ability to obtain partnering support for its stem
cell technology and, in the near term, on its ability to realize proceeds from
the sale, assignment or sublease of its facilities in Rhode Island. There can be
no assurance that the Company will succeed in any or all of these efforts, and
failure to do so will have a material adverse effect on the Company's liquidity
and capital resources. Until the Company's operations generate significant
revenues from product sales, the Company must rely on cash reserves and proceeds
from equity and debt offerings, proceeds from the transfer or sale of its
intellectual property rights, equipment or facilities, government grants and
funding from collaborative arrangements, if obtainable, to fund its operations.
The Company intends to pursue opportunities to obtain additional financing
in the future through equity and debt financings, lease agreements related to
capital equipment, grants and collaborative research arrangements. The source,
timing and availability of any future financing will depend principally upon
market conditions, interest rates and, more specifically, on the Company's
progress in its exploratory, preclinical and clinical development programs. Lack
of necessary funds may require the Company to delay, reduce or eliminate some or
all of its research and product development programs or to license its potential
products or technologies to third parties. No assurance can be given that
funding will be available when needed, if at all, or on terms acceptable to the
Company.
While the Company's cash requirements may vary, as noted above, the Company
currently expects that its existing capital resources and income earned on
invested capital will be sufficient to fund its operations into the first
quarter of 2001. This situation may change, however, depending on numerous
factors.
YEAR 2000
The Company tested its material software applications to determine whether
each program was prepared to accommodate date information for the year 2000 and
beyond, and found them to be year 2000 compliant. The Company also tested the
status of its facilities systems such as phones, voice mail, heating/ air
conditioning, electricity and security systems and its laboratory and
manufacturing equipment, and polled its major suppliers and vendors, to
determine if they are year 2000 compliant, again without identifying any
problems. Company has not to date encountered any significant year 2000
problems, but is continuing to monitor for potential issues. The costs of
testing and monitoring have been and are expected to continue to be immaterial
to the Company's operating results, but there can be no assurance that no
problem will reveal itself in the future, or that if a problem does occur it
will not have an adverse effect on the Company's operations or financial
results.
26
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of the year ended December 31, 1999, the Company did not maintain any
investments that were exposed to market risk from changes in interest rates or
the fair market value of such investments. Interest rate risk with respect to
the Company short and long-term debt is considered to be immaterial. As of the
year ended December 31, 1999, the Company did not maintain any hedge positions.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
CytoTherapeutics, Inc.
We have audited the accompanying consolidated balance sheets of
CytoTherapeutics, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in redeemable common stock and
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 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
CytoTherapeutics, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Providence, Rhode Island
April 14, 2000
28
CYTOTHERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,760,064 $ 7,864,788
Marketable securities..................................... -- 9,520,939
Accrued interest receivable............................... 42,212 206,609
Other current assets...................................... 3,000,000 --
------------- -------------
Total current assets........................................ 8,970,855 18,434,010
Property, plant and equipment, net.......................... 5,251,376 8,356,009
Other assets, net........................................... 1,858,768 6,075,663
------------- -------------
Total assets................................................ $ 16,080,999 $ 32,865,682
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 631,315 $ 710,622
Accrued expenses.......................................... 2,905,068 1,020,119
Deferred revenue.......................................... -- 2,500,000
Current maturities of capitalized lease obligations....... 324,167 317,083
Current maturities of long-term debt...................... -- 1,000,000
------------- -------------
Total current liabilities................................... 3,860,550 5,547,824
Capitalized lease obligations, less current maturities...... 2,937,083 3,261,667
Long-term debt, less current maturities..................... 500,000
Deposits.................................................... 26,000 --
Deferred Rent............................................... 502,353 222,673
Commitments and contingencies
Redeemable common stock, $.01 par value; 524,337 shares
issued and outstanding at December 31, 1999 and 1998...... 5,248,610 5,248,610
Common stock to be issued................................... -- 187,500
Stockholders' equity:
Convertible preferred stock, $.01 par value; 1,000,000
shares authorized; no shares issued and outstanding..... -- --
Common stock, $.01 par value; 45,000,000 shares
authorized; 18,635,565 and 17,800,323 shares issued and
outstanding at December 31, 1999 and 1998,
respectively............................................ 186,355 178,003
Additional paid-in capital................................ 123,917,758 122,861,606
Accumulated deficit....................................... (119,372,710) (103,664,084)
Unrealized losses on marketable securities................ -- (5,198)
------------- -------------
Accumulated other comprehensive loss...................... (119,372,710) (103,669,282)
------------- -------------
Deferred compensation..................................... (1,225,000) (1,472,919)
------------- -------------
Total stockholders' equity.................................. 3,506,403 17,897,408
------------- -------------
Total liabilities and stockholders' equity.................. $ 16,080,999 $ 32,865,682
============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
CYTOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenue from collaborative agreements............... $ 5,021,707 $ 8,803,163 $ 10,617,443
Operating expenses:
Research and development.......................... 9,984,027 17,658,530 18,603,523
Acquired research and development................. -- -- 8,343,684
General and administrative........................ 4,927,303 4,602,758 6,158,410
Encapsulated Cell Therapy Wind down and Corporate
Relocation...................................... 6,047,806 -- --
------------ ------------ ------------
20,959,136 22,261,288 33,105,617
------------ ------------ ------------
Loss from operations................................ (15,937,429) (13,458,125) (22,488,174)
Other income (expense):
Interest income................................... 564,006 1,253,781 1,931,260
Interest expense.................................. (335,203) (472,400) (437,991)
Gain on partial sale of Modex..................... -- -- 3,386,808
Loss on sale/leaseback............................ -- -- (342,014)
Loss on equity investment......................... -- -- (105,931)
Other income (expense)............................ -- 48,914 (57,538)
------------ ------------ ------------
228,803 830,295 4,374,594
------------ ------------ ------------
Net loss............................................ $(15,708,626) $(12,627,830) $(18,113,580)
============ ============ ============
Basic and diluted net loss per share................ $ (.84) $ (.69) $ (1.08)
============ ============ ============
Shares used in computing basic and diluted net loss
per share......................................... 18,705,838 18,290,548 16,704,144
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
CYTOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
REDEEMABLE
COMMON STOCK COMMON STOCK ADDITIONAL
---------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ----------- ---------- -------- ------------ -------------
Balances, December 31, 1996............. 815,065 $ 8,158,798 15,614,333 $156,144 $107,649,659 $ (72,922,674)
Issuance of common stock................ -- -- 307,548 3,074 1,552,432 --
Issuance of common stock under the stock
purchase plan......................... -- -- 31,822 319 180,103 --
Deferred compensation recorded in
connection with the granting of stock
options............................... -- -- -- -- 1,750,000 --
Common stock issued pursuant to employee
benefit plan.......................... -- -- 25,588 256 169,196 --
Issuance of common stock--StemCells..... -- -- 1,219,381 12,194 7,381,206 --
Redeemable common stock lapses.......... (257,311) (2,575,688) 257,311 2,573 2,573,115 --
Exercise of stock options............... -- -- 75,237 752 244,427 --
Deferred compensation--amortization and
cancellations......................... -- -- (5,000) (50) (27,294) --
Change in unrealized losses on
marketable securities................. -- -- -- -- -- --
Change in cumulative translation
adjustment............................ -- -- -- -- -- --
Net loss................................ -- -- -- -- -- (18,113,580)
Comprehensive loss......................
-------- ----------- ---------- -------- ------------ -------------
Balances, December 31, 1997............. 557,754 $ 5,583,110 17,526,220 $175,262 $121,472,844 $ (91,036,254)
OTHER COMPREHENSIVE
INCOME
---------------------------
UNREALIZED
GAINS
(LOSSES) CUMULATIVE TOTAL
ON MARKETABLE TRANSLATION DEFERRED STOCKHOLDERS'
SECURITIES ADJUSTMENTS COMPENSATION EQUITY
------------- ----------- ------------- -------------
Balances, December 31, 1996............. $ 14,760 $(60,416) $ (90,118) $ 34,747,355
Issuance of common stock................ -- -- -- 1,555,506
Issuance of common stock under the stock
purchase plan......................... -- -- -- 180,422
Deferred compensation recorded in
connection with the granting of stock
options............................... -- -- (1,750,000) --
Common stock issued pursuant to employee
benefit plan.......................... -- -- -- 169,452
Issuance of common stock--StemCells..... -- -- -- 7,393,400
Redeemable common stock lapses.......... -- -- -- 2,575,688
Exercise of stock options............... -- -- -- 245,179
Deferred compensation--amortization and
cancellations......................... -- -- 137,298 109,954
Change in unrealized losses on
marketable securities................. (23,637) -- -- (23,637)
Change in cumulative translation
adjustment............................ -- 60,416 -- 60,416
Net loss................................ -- -- -- (18,113,580)
Comprehensive loss...................... (18,076,081)
-------- -------- ----------- ------------
Balances, December 31, 1997............. $ (8,877) -- $(1,702,820) $ 28,900,155
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
CYTOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
UNREALIZED
REDEEMABLE GAINS
COMMON STOCK COMMON STOCK ADDITIONAL (LOSSES)
---------------------- --------------------- PAID-IN ACCUMULATED ON MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES
------ ----------- ---------- -------- ------------ ------------- -------------
Issuance of common stock........... -- -- -- -- -- -- --
Issuance of common stock under the
stock purchase plan.............. -- -- 43,542 $ 436 $ 83,622
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- -- -- -- --
Common stock issued pursuant to
employee benefit plan............ -- -- 84,812 848 143,025 -- --
Issuance of common
stock--StemCells................. -- -- 101,320 1,013 505,587 -- --
Redeemable common stock lapses..... (33,417) (334,500) 33,417 334 334,166 -- --
Exercise of stock options.......... -- -- 11,012 110 1,254 -- --
Deferred compensation--amortization
and cancellations................ -- -- -- -- 321,108 -- --
Change in unrealized losses on
marketable securities............ -- -- -- -- -- -- 3,679
Net loss........................... -- -- -- -- -- (12,627,830) --
Comprehensive loss.................
-------- ----------- ---------- -------- ------------ ------------- --------
Balances, December 31, 1998........ 524,337 $ 5,248,610 17,800,323 $178,003 $122,861,606 $(103,664,084) $ (5,198)
======== =========== ========== ======== ============ ============= ========
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- -------------
Issuance of common stock........... -- --
Issuance of common stock under the
stock purchase plan.............. $ 84,058
Deferred compensation recorded in
connection with the granting of
stock options.................... -- --
Common stock issued pursuant to
employee benefit plan............ -- 143,873
Issuance of common
stock--StemCells................. -- 506,600
Redeemable common stock lapses..... -- 334,500
Exercise of stock options.......... -- 1,364
Deferred compensation--amortization
and cancellations................ 229,901 551,009
Change in unrealized losses on
marketable securities............ -- 3,679
Net loss........................... -- (12,627,830)
Comprehensive loss................. (12,624,151)
----------- ------------
Balances, December 31, 1998........ $(1,472,919) $ 17,897,408
=========== ============
32
CYTOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
UNREALIZED
REDEEMABLE GAINS
COMMON STOCK COMMON STOCK ADDITIONAL (LOSSES)
---------------------- --------------------- PAID-IN ACCUMULATED ON MARKETABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES
------ ----------- ---------- -------- ------------ ------------- -------------
Issuance of common stock........... -- -- 196,213 $ 1,962 $ 318,221 -- --
Issuance of common stock under the
stock purchase plan.............. -- -- 57,398 574 41,619
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- -- -- -- --
Common stock issued pursuant to
employee benefit plan............ -- -- 90,798 908 102,502 -- --
Issuance of common
stock--StemCells................. -- -- -- -- -- -- --
Redeemable common stock lapses..... -- -- -- --
Exercise of stock options.......... -- -- 490,833 4,908 513,534 -- --
Deferred compensation--amortization
and cancellations................ -- -- -- -- 80,276 -- --
Change in unrealized losses on
marketable securities............ -- -- -- -- -- -- 5,198
Net loss........................... -- -- -- -- -- (15,708,626) --
Comprehensive loss.................
-------- ----------- ---------- -------- ------------ ------------- --------
Balances, December 31, 1999........ 524,337 $ 5,248,610 18,635,565 $186,355 $123,917,758 $(119,372,710) $ --
======== =========== ========== ======== ============ ============= ========
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- -------------
Issuance of common stock........... -- $ 320,183
Issuance of common stock under the
stock purchase plan.............. 42,193
Deferred compensation recorded in
connection with the granting of
stock options.................... -- --
Common stock issued pursuant to
employee benefit plan............ -- 103,410
Issuance of common
stock--StemCells.................
Redeemable common stock lapses.....
Exercise of stock options.......... -- 518,442
Deferred compensation--amortization
and cancellations................ 218,748 328,195
Change in unrealized losses on
marketable securities............ -- 5,198
Net loss........................... -- (15,708,626)
Comprehensive loss................. (15,703,428)
----------- ------------
Balances, December 31, 1999........ $(1,254,171) $ 3,506,403
=========== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
CYTOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(15,708,626) $(12,627,830) $(18,113,580)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization..................... 1,717,975 2,244,146 1,968,234
Acquired research and development................. -- 551,009 8,343,684
Amortization of deferred compensation............. 328,195 -- 109,954
Other non-cash charges............................ 320,183 410,173 105,931
Gain on investment................................ -- -- (3,386,808)
Loss on sale of fixed assets...................... 1,117,286 -- 413,856
Loss on sale of intangibles....................... 440,486
Changes in operating assets and liabilities:
Accrued interest receivable..................... 164,397 346,577 100,004
Other current assets............................ 276,940 (265,665) (232,604)
Accounts payable and accrued expenses........... 1,644,142 (2,378,613) (1,233,501)
Deferred rent................................... 279,680 -- --
Deferred revenue................................ (2,500,000) 2,483,856 (1,842,948)
------------ ------------ ------------
Net cash used in operating activities............... (12,489,342) (9,236,347) (13,767,778)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Modex, net of cash disposed... -- -- 2,958,199
Purchases of marketable securities.................. (4,397,676) (18,982,387) (14,182,521)
Proceeds from sales of marketable securities........ 13,923,813 22,573,625 23,736,242
Purchases of property, plant and equipment.......... (192,747) (2,153,525) (7,710,126)
Proceeds on sale of fixed assets.................... 746,448 -- 8,003,926
Purchase of other investment........................ -- -- (250,000)
Acquisition of other assets......................... (552,251) (400,219) (1,599,418)
Disposal of other assets............................ 440,485 -- --
Acquisition of StemCells assets..................... -- -- (640,490)
Advance to Cognetix................................. -- -- (250,000)
Repayment from Cognetix............................. -- -- 250,000
------------ ------------ ------------
Net cash provided by investing activities........... 9,968,073 1,037,494 10,315,812
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable common stock... -- -- --
Proceeds from issuance of common stock.............. 145,603 227,931 1,905,380
Proceeds from the exercise of stock options and
warrants.......................................... 518,442 1,364 245,179
Proceeds from debt financings....................... -- 1,259,300 --
Repayments of debt and lease obligations............ (1,817,500) (1,366,655) (2,496,849)
------------ ------------ ------------
Net cash provided by (used in) financing
activities........................................ (1,153,455) 121,940 (346,290)
Effect of exchange rate changes on cash and cash
equivalents....................................... -- -- (181,627)
------------ ------------ ------------
Decrease in cash and cash equivalents............... (3,104,724) (8,076,913) (3,979,883)
Cash and cash equivalents, January 1................ 7,864,788 15,941,701 19,921,584
------------ ------------ ------------
Cash and cash equivalents, December 31.............. $ 4,760,064 $ 7,864,788 $ 15,941,701
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid..................................... $ 335,203 $ 444,047 $ 436,461
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
34
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. NATURE OF BUSINESS
CytoTherapeutics, Inc. (the "Company") is a biopharmaceutical company
engaged in the development of novel stem cell therapies designed to treat human
diseases and disorders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and
StemCells California, Inc., a wholly owned subsidiary. Significant intercompany
accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents include funds held in investments with original maturities
of three months or less when purchased. The Company's policy regarding selection
of investments, pending their use, is to ensure safety, liquidity, and capital
preservation while obtaining a reasonable rate of return. Marketable securities
consist of investments in agencies of the U.S. government, investment grade
corporate notes and money market funds. The fair values for marketable
securities are based on quoted market prices.
The Company determines the appropriate classification of cash equivalents
and marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company classifies such holdings
as available-for-sale securities, which are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including that held under capitalized lease
obligations, is stated at cost and depreciated using the straight-line method
over the estimated life of the respective asset, as follows:
Building and improvements 3--15 years
Machinery and equipment 3--10 years
Furniture and fixtures 3--10 years
PATENT COSTS
The Company capitalizes certain patent costs related to patent applications.
Accumulated costs are amortized over the estimated economic life of the patents,
not to exceed 17 years, using the straight-line method, commencing at the time
the patent is issued. Costs related to patent applications are written off to
expense at the time such patents are deemed to have no continuing value. At
December 31, 1999 and 1998, total costs capitalized were $718,000 and $4,285,000
and the related accumulated amortization were $9,000
35
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and $347,000, respectively. Patent expense totaled $539,000, $3,000, and
$365,000 in 1999, 1998 and 1997, respectively.
In December 1999, the Company sold its Encapsulated Cell Technology ("ECT")
to Neurotech, S.A. for an initial payment of $3,000,000, royalties on future
product sales, and a portion of certain Neurotech revenues from third parties in
return for the assignment to Neurotech of intellectual property assets relating
to ECT. In addition, the Company retained certain non-exclusive rights to use
ECT in combination with its proprietary stem cell technology and in the field of
vaccines for prevention and treatment of infectious diseases. The patent
portfolio that was sold had a net book value of $3,180,000.
STOCK BASED COMPENSATION
The Company grants qualified stock options for a fixed number of shares to
employees with an exercise price equal to the fair market value of the shares at
the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and,
accordingly, recognizes no compensation expense for qualified stock option
grants.
For certain non-qualified stock options granted, the Company recognizes as
compensation expense the excess of the deemed fair value of the common stock
issuable upon exercise of such options over the aggregate exercise price of such
options. The compensation is amortized over the vesting period of each option or
the recipient's term of employment, if shorter.
INCOME TAXES
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities as well as net
operating loss carry forwards and are measured using the enacted tax rates and
laws that are expected to be in effect when the differences reverse. Deferred
tax assets may be reduced by a valuation allowance to reflect the uncertainty
associated with their ultimate realization.
REVENUE FROM COLLABORATIVE AGREEMENTS
Revenues from collaborative agreements are recognized as earned upon either
the incurring of reimbursable expenses or the achievement of certain milestones.
Payments received in advance of research performed are designated as deferred
revenue.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded, as their effect is antidilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Securities Exchange Commission's recently issued Staff Accounting
Bulletin No. 101 provides guidance on revenue recognition that may impact the
Company's future reporting relative to revenues received from collaborative and
similar agreements.
36
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On April 13, 2000, the Company completed arrangements to sell 1,500 shares
of 6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's common stock to a member of its Board of Directors for $1,500,000,
on terms more favorable than it was then able to obtain from outside investors.
The shares are convertible at the option of the holder into common stock at a
price to be determined by reference to the price of the Company's common stock
for a period approximately from April 12, 2000 through the twentieth trading day
following the filing of this Form 10-K. The conversion price may be below the
trading market price of the stock at the time of conversion. The holder of the
preferred stock has liquidation rights equal to his original investment plus
accrued but unpaid dividends. The investor would be entitled to make additional
investments in the Company on the same terms as those on which the Company
completes offerings of its securities with third parties within 6 months, if any
such offerings are completed. If offerings totalling at least $6 million are not
completed during the 6 months, the investor has the right to acquire up to 1,500
additional shares of convertible preferred stock at a pre-determined per share.
Any unconverted preferred stock is converted, at the applicable conversion
price, on April 13, 2002 in the case of the original stock and two years after
the first acquisition of any of the additional 1,500 shares, if any are
acquired. The warrant expires on April 13, 2005.
4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
Wind-down expenses totaled $6,048,000 for the year ended December 31, 1999;
no such expenses were incurred in 1998 and 1997. These expenses relate to the
wind-down of the Company's encapsulated cell technology research and development
program and the Company's other Rhode Island operations, the transfer of the
Company's corporate headquarters to Sunnyvale, California and an accrual for the
Company's estimate of the costs of settlement of a 1989 funding agreement with
the Rhode Island Partnership for Science and Technology ("RIPSAT") associated
with the Company's pilot manufacturing facility.
5. STEMCELLS CALIFORNIA, INC.
In September 1997, a merger of a wholly owned subsidiary of the Company and
StemCells California, Inc. was completed in the form of a purchase. Through the
merger, the Company acquired StemCells for a purchase price totaling
approximately $9,475,000, consisting of 1,320,691 shares of the Company's common
stock and options and warrants for the purchase of 259,296 common shares at
nominal consideration, valued at $7,900,000 in the aggregate, the assumption of
certain liabilities of $934,000 and transaction costs of $641,000. The purchase
price was allocated, through a valuation, to license agreements valued at
$1,131,000 to be amortized over three years and acquired research and
development of $8,344,000, which was expensed. As part of the acquisition of
StemCells, Richard M. Rose, M.D., became President, Chief Executive Officer and
director of the Company and Dr. Irving Weissman became a director of the
Company.
Upon consummation of the merger, the Company entered into consulting
arrangements with the principal scientific founders of StemCells: Dr. Irving
Weissman, Dr. Fred H. Gage and Dr. David Anderson. Additionally, in connection
with the merger, the Company was granted an option by the former shareholders of
StemCells to repurchase 500,000 of the Company's shares of Common Stock
exchanged for StemCells shares, upon the occurrence of certain events.
To attract and retain Drs. Rose, Weissman, Gage and Anderson, and to
expedite the progress of the Company's stem cell program, the Company awarded
these individuals options to acquire a total of
37
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. STEMCELLS CALIFORNIA, INC. (CONTINUED)
approximately 1.6 million shares of the Company's common stock, at an exercise
price of $5.25 per share, the quoted market price at the grant date;
approximately 100,000 of these options were exercisable immediately, 1,031,000
of these options vest and become exercisable only upon the achievement of
specified milestones related to the Company's stem cell development program and
the remaining 469,000 options vest over eight years. In connection with the
469,000 options issued to a non-employee, Dr. Anderson, the Company recorded
deferred compensation of $1,750,000, the fair value of such options at the date
of grant, which will be amortized over an eight-year period. If the milestones
specified relating to the 1,031,000 option grant are achieved, at that time the
Company will record compensation expense for the excess of the quoted market
price of the common stock over the exercise price of $5.25 per share for 562,000
options and the fair market value for 469,000 of such options determined using
the Black-Scholes method. The Company has also designated a pool of 400,000
options to be granted to persons in a position to make a significant
contribution to the success of the stem cell program.
Stem cell research will be conducted pursuant to the provisions of an
agreement between the Company and Drs. Weissman and Gage providing for a
two-year research plan. If the goals of the research plan are accomplished, the
Company has agreed to fund continuing stem cell research. Increases in stem
cells research funding of not more than 25% a year will be funded by the Company
as long as the goals of the research plan are being met. However, the Company
will retain the option of (i) ceasing or reducing neural stem cell research even
if all research plan goals are met, but will be required to accelerate the
vesting of all still-achievable performance based stock options, and
(ii) ceasing or reducing non-neural stem cell research even if all plan goals
are being met by affording the scientific research founders the opportunity to
continue development of the non-neural stem cell research by licensing the
technology related to such research to the founders in exchange for a payment to
the Company equal to all prior Company funding for such research, plus royalty
payments.
6. MODEX
In October 1997, the Company completed a series of transactions, which
resulted in the establishment of its previously 50%-owned Swiss subsidiary,
Modex Therapeutiques, S.A., (Modex) as an independent company. In the
transactions, the Company reduced its ownership interest from 50% to
approximately 25% in exchange for $4 million cash and elimination of its prior
contingent obligation to contribute an additional Sfr 2.4 million (approximately
$1.7 million) to Modex in July 1998. In the transactions, all of the put and
call arrangements between the Company and other stockholders of Modex were
eliminated and the Company forgave $463,000 due from Modex to the Company. The
Company recorded a gain on the transactions of $3,387,000.
In April 1998, Modex completed an additional equity offering, in which the
Company did not participate. This resulted in a reduction in the Company's
ownership to less than 20% ownership; therefore, the Company accounts for this
investment under the cost method.
The pre-existing royalty-bearing Cross License Agreement between the Company
and Modex was assigned by the Company to Neurotech S.A., a privately held French
company, as part of the sale of the intellectual property assets related to the
Company's encapsulated cell therapy technology to Neurotech. Under the terms of
the sale to Neurotech, the Company will receive a portion of revenues Neurotech
receives from Modex under the Cross License Agreement.
38
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. MARKETABLE SECURITIES
During 1999, the Company sold all of its remaining marketable equitable
securities. At December 31, 1999, all of the Company's available funds were held
in cash and cash equivalents. The following is a summary of available-for-sale
securities held at December 31, 1998:
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST LOSSES GAINS FAIR VALUE
----------- ---------- ---------- -----------
U.S. government securities..................... $ 1,500,994 $1,720 $ (504) $ 1,502,210
U.S. corporate securities...................... 9,225,095 3,244 (9,658) 9,218,681
----------- ------ -------- -----------
Total debt securities.......................... $10,726,089 $4,964 $(10,162) 10,720,891
=========== ====== ========
Debt securities included in cash and cash
equivalents.................................. (1,199,952)
===========
Debt securities included in marketable
securities................................... $ 9,520,939
===========
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Building and improvements............................ $5,666,987 $5,665,077
Machinery and equipment.............................. 3,144,107 9,887,251
Furniture and fixtures............................... 219,260 869,831
---------- ----------
9,030,354 16,422,159
Less accumulated depreciation and amortization....... 3,778,978 8,066,150
---------- ----------
$5,251,376 $8,356,009
========== ==========
Depreciation and amortization expense was $1,436,000, $1,720,000, and
$1,778,000 for the years ending December 31, 1999, 1998 and 1997, respectively.
As part of the Company's restructuring of its operations, sale of its
encapsulated cell technology ("ECT"), and relocation of its corporate
headquarters to Sunnyvale, California, the Company identified fixed assets
associated with the ECT or otherwise no longer needed. In December of 1999, the
Company disposed of these excess fixed assets, realizing proceeds of
approximately $746,000. These assets had a net book value of approximately
$1,063,000 after a third quarter write-down of $800,000.
Certain property, plant and equipment have been acquired under capitalized
lease obligations. These assets totaled $5,827,000 and $6,587,000, at
December 31, 1999 and 1998, respectively, with related accumulated amortization
of $2,747,000 and $2,860,000 at December 31, 1999 and 1998, respectively.
39
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
9. OTHER ASSETS
Other assets are as follows:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Patents, net......................................... $ 708,823 $3,938,755
License agreements, net.............................. 282,750 659,750
Security deposit--building lease..................... 750,000 750,000
Restricted cash...................................... -- 603,467
Deferred financing costs, net........................ 117,195 123,701
---------- ----------
$1,858,768 $6,075,663
========== ==========
At December 31, 1999 and 1998, accumulated amortization was $857,000 and
$818,000, respectively, for patents and license agreements.
10. ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
External services.................................... $2,031,961 $ 412,253
Employee compensation................................ 306,342 262,679
Collaborative research............................... 222,140 196,505
Other................................................ 344,625 148,682
---------- ----------
$2,905,068 $1,020,119
========== ==========
11. LEASES
The Company has undertaken direct financing transactions with the State of
Rhode Island and received proceeds from the issuance of industrial revenue bonds
totaling $5,000,000 to finance the construction of its pilot manufacturing
facility. The related leases are structured such that lease payments will fully
fund all semiannual interest payments and annual principal payments through
maturity in August 2014. Fixed interest rates vary with the respective bonds'
maturities, ranging from 5.1% to 9.5%. The bonds contain certain restrictive
covenants which limit, among other things, the payment of cash dividends and the
sale of the related assets. In addition, the Company was required to maintain a
debt service reserve until December 1999. On March 3, 2000 the Company entered
into a settlement agreement with RIPSAT, the Rhode Island Industrial
Recreational Building Authority ("IRBA") and the Rhode Island Industrial
Facilities Corporation ("RIIFC"). The Company agreed to pay RIPSAT $1,172,000 in
full satisfaction of all obligations of the Company to RIPSAT under the Funding
Agreement dated as of June 22, 1989. On execution and delivery of this
Agreement, IRBA agreed to return to the Company the full amount of the Company's
debt serve reserve ("Reserve Funds"), approximately $610,000 of principal and
interest, relating to the bonds the Company has with IRBA and RIIFC. In order to
avoid the loss of
40
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. LEASES (CONTINUED)
interest on the Reserve Funds due to early termination of certain investments,
the parties agreed that the Company would render a net payment to RIPSAT in the
amount of approximately $562,000.
In 1997, the Company completed construction of a new headquarters and
laboratory facility. In November 1997, the Company entered into sale and
leaseback agreements with a real estate investment trust. Under the terms of
these agreements, the Company sold its new facility for $8,000,000, incurring a
$342,000 loss on the sale. The Company simultaneously entered into a
fifteen-year lease for the facility. The lease agreement calls for minimum rent
of $750,000 for the first five years, $937,500 for years six to ten, $1,171,900
for years eleven to fourteen and $1,465,000 in year fifteen, with a $750,000
security deposit held for the term of the lease. The Company is recognizing rent
expense on a straight line basis. At December 31, 1999, the Company has incurred
$426,790 in deferred rent expense.
Future minimum capitalized lease obligations with non-cancelable terms in
excess of one year at December 31, 1999, are as follows:
2000........................................................ $ 606,268
2001........................................................ 589,217
2002........................................................ 519,719
2003........................................................ 436,909
2004........................................................ 425,713
Thereafter.................................................. 2,577,826
----------
Total minimum lease payments................................ 5,302,407
Less amounts representing interest.......................... 2,041,157
----------
Present value of minimum lease payments..................... 3,261,250
Less current maturities..................................... 324,167
----------
Capitalized lease obligations, less current maturities...... $2,937,083
==========
Rent expense for the years ended December 31, 1999, 1998 and 1997, was
$947,000, $1,052,000 and $499,000, respectively.
12. LONG-TERM DEBT
Long-term debt is as follows:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Term note payable, interest at the prime rate plus
1/2% (8.75% at December 31, 1998), principal
payments commence in August 1998, due ratably
through May 2000; secured by certain equipment
(prepaid during 1999).............................. $ -- $1,500,000
Current maturities of long-term debt................. -- 1,000,000
---------- ----------
Long-term debt, less current maturities.............. -- $ $500,000
========== ==========
41
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
13. REDEEMABLE COMMON STOCK
In November 1996, the Company signed certain collaborative development and
licensing agreements with Genentech, Inc, including one under which Genentech
purchased 829,171 shares of redeemable common stock for $8.3 million to fund
development of products to treat Parkinson's disease. The Agreement also
provided that Genentech had the right, at its discretion, to terminate the
Parkinson's program at specified milestones in the program, and that if the
program were terminated, Genentech had the right to require the Company to
repurchase from Genentech the shares of the Company's common stock having a
value equal to the amount by which the $8.3 million exceeded the expenses
incurred by the Company in connection with such studies by more than
$1 million, based upon the share price paid by Genentech. Accordingly, the
common stock is classified as redeemable common stock until such time as the
related funds are expended. At December 31, 1998, $3,051,000 had been spent on
the collaboration with Genentech and, accordingly, the Company has reclassified
those common shares and related value to stockholders' equity. On May 21, 1998,
Genentech exercised its right to terminate the collaboration and negotiations
ensued with respect to the amount of redeemable common stock to be redeemed in
accordance with the agreement and the method of such redemption. In March 2000,
the Company reached a settlement of this matter with Genentech. Under the
settlement agreement, Genentech released the Company from any obligation to
redeem any shares of the Company's Common Stock held by Genentech. Accordingly,
the Company will reclassify the amount currently recorded as Redeemable Common
Stock ($5,248,000) to Stockholders' Equity in March 2000. The Company and
Genentech also agreed that all of the agreements between them were terminated
and that neither had any claim to the intellectual property of the other.
14. COMMON STOCK TO BE ISSUED
In 1998, the Company entered into an agreement with a Company advisor, under
which the advisor prepared a strategic and business overview and provided
related implementation support for the Company. The advisor agreed to accept
cash and the Company's common stock as partial payment for its services. In
1999, the Company issued the $187,500 of common stock due to the advisor.
15. STOCKHOLDERS' EQUITY
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has adopted several stock plans that provide for the issuance of
incentive and nonqualified stock options, performance awards and stock
appreciation rights, at prices to be determined by the Board of Directors, as
well as the purchase of Common Stock under an employee stock purchase plan at a
discount to the market price. In the case of incentive stock options, such price
will not be less than the fair market value on the date of grant. Options
generally vest ratably over four years and are exercisable for ten years from
the date of grant or within three months of termination. At December 31, 1999,
the Company had reserved 2,603,736 shares of common stock for the exercise of
stock options.
42
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents the combined activity of the Company's stock
option plans (exclusive of the plans noted below) for the years ended
December 31:
1999 1998 1997
-------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- ---------- -------------- --------- --------------
Outstanding at January 1...... 1,654,126 $3.62 2,446,573 $7.48 2,423,025 $8.34
Granted....................... 536,078 1.08 1,174,118 1.70 679,074 5.33
Exercised..................... (604,362) 1.50 (11,012) .12 (82,737) 2.96
Canceled...................... (646,507) 5.31 (1,955,553) 7.08 (572,789) 9.21
--------- ----- ---------- ----- --------- -----
Outstanding at December 31.... 939,335 $2.65 1,654,126 $3.62 2,446,573 $7.48
========= ===== ========== ===== ========= =====
Options exercisable at
December 31................. 594,216 $3.44 1,108,936 $4.33 1,338,163 $7.79
========= ===== ========== ===== ========= =====
In addition to the options noted above, in conjunction with the StemCells
California merger, StemCells California options originally issued under a prior
StemCells California options plan were exchanged for options to purchase 250,344
shares of the Company's common stock at $.01 per share; 75,384 of these options
are exercisable at December 31, 1997, 96,750 of these options vest and become
exercisable only upon achievement of specified milestones, and the remaining
78,210 options vest over three years from the date of grant. Additionally, the
Company adopted the 1997 CytoTherapeutics, Inc. StemCells California Research
Stock Option Plan (the StemCells California Research Plan) whereby an additional
2,000,000 shares of Common Stock have been reserved. During 1997, the Company
awarded options under the StemCells Research Plan to purchase 1.6 million shares
of the Company's common stock to the Chief Executive Officer and scientific
founders of StemCells at an exercise price of $5.25 per share; approximately
100,000 of these options are exercisable immediately, 1,031,000 of these options
vest and become exercisable only upon achievement of specified milestones and
the remaining 469,000 options vest over eight years.
FAS 123 DISCLOSURES
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("FAS 123") and accounts for its stock option plans in accordance with the
provisions of APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
43
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
- ------------------------------------------------ ----------- ----------- -------- ----------- --------
Less than $5.00................................. 755,398 8.50 $1.12 411,945 $ 1.02
$5.01--$10.00................................... 90,687 4.56 6.55 89,021 6.55
Greater than $10.00............................. 93,250 2.54 11.18 93,250 11.18
------- -------
939,335 594,216
======= =======
Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share amounts for 1999, 1998, and 1997, as if the
compensation cost for the option plans and the stock purchase plan had been
determined based on the fair value at the grant date for grants in 1999, 1998,
and 1997, consistent with the provisions of FAS 123:
1999 1998 1997
--------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
Net loss............. $(15,708,626) $(15,764,569) $(12,627,830) $(14,919,389) $(18,113,580) $(19,924,437)
Net loss per share... $(.84) $(.84) $(.69) $(.82) $(1.08) $(1.19)
The weighted average fair value per share of options granted during 1999,
1998 and 1997 was $.88, $.82 and $3.40, respectively. The fair value of options
and shares issued pursuant to the stock purchase plan at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:
OPTIONS STOCK PURCHASE PLAN
------------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Expected life (years)........................ 5 5 5 5 .5 .5
Interest rate................................ 5.5% 5.2% 6.2% 5.0% 4.64% 5.5%
Volatility................................... 96.7% 63.5% 59.0% 96.7% 63.5% 59.0%
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
The effects on 1999, 1998 and 1997 pro forma net loss and net loss per share
of expensing the estimated fair value of stock options and shares issued
pursuant to the stock purchase plan are not necessarily representative of the
effects on reporting the results of operations for future years as the period
presented includes only four, three or two years, respectively, of option grants
under the Company's plans. As required by FAS 123, the Company has used the
Black-Scholes model for option valuation, which method may not accurately value
the options described.
44
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK WARRANTS
In conjunction with StemCells California merger, the Company exchanged
StemCells California warrants for warrants to purchase 8,952 shares of Company
common stock at $4.71 per share. In conjunction with various equipment leasing
agreements, the Company has outstanding warrants to purchase 31,545 shares of
common stock at prices ranging from $4.00 to $9.00 per share. The warrants
expire through October 2000.
In connection with a public offering of common stock in April 1995, the
Company issued warrants to purchase 434,500 shares of common stock at $8 per
share. The warrants are nontransferable and expire in April 2000, subject to
certain required exercise provisions. In addition to the foregoing rights, the
holder of such warrants has the right, in the event the Company issues
additional shares of common stock or other securities convertible into common
stock, to purchase at the then market price of such common stock, sufficient
additional shares of common stock to maintain the warrant holder's percentage
ownership of the Company's common stock at 15%. This right, subject to certain
conditions and limitations, expires in April 2000.
COMMON STOCK RESERVED
The Company has reserved 6,461,846 shares of common stock for the exercise
of options, warrants and other contingent issuances of common stock.
16. RESEARCH AGREEMENTS
In November 1997, StemCells California, Inc., a wholly owned subsidiary of
the Company, signed a Research Funding and Option Agreement with The Scripps
Research Institute ("Scripps") relating to certain stem cell research. Under the
terms of the Agreement, StemCells agreed to fund research in the total amount of
approximately $931,000 at Scripps over a period of three years. StemCells paid
Scripps approximately $77,000 in 1997, $307,000 in 1998, and $309,000 in 1999.
In addition, the Company agreed to issue to Scripps 4,837 shares of the
Company's common stock and a stock option to purchase 9,674 shares of the
Company's Common Stock with an exercise price of $.01 per share upon the
achievement of specified milestones. Under the Agreement, StemCells has an
option for an exclusive license to the inventions resulting from the sponsored
research, subject to the payment of royalties and certain other amounts, and is
obligated to make payments totaling $425,000 for achievement of certain
milestones.
In April 1997, the Company entered into an agreement with
Neurospheres, Ltd., which superseded all previous licensing agreements and
settled a dispute with Neurospheres. Under the terms of the settlement, the
Company has an exclusive royalty bearing license for growth-factor responsive
stem cells for transplantation. Neurospheres had an option to acquire
co-exclusive rights but did not exercise by the April 1998 deadline. The Company
retains exclusive rights for transplantation. The parties have no further
research obligations to each other.
In February 1997, CytoTherapeutics and Cognetix, Inc. entered into a
Collaboration and Development Agreement related to the Company's former
encapsulated cell technology. As part of the agreement with Cognetix, the
Company purchased $250,000 of Cognetix preferred stock and, subject to certain
milestones, was obligated to purchase as much as $1,500,000 of additional
Cognetix stock over the next
45
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
16. RESEARCH AGREEMENTS (CONTINUED)
year. In July 1997, the Company loaned $250,000 to Cognetix which was repaid
with interest in October 1997. In October 1998, the Company sold the $250,000 of
preferred stock back to Cognetix for $298,914.
Under the terms of one of those agreements, Genentech purchased 829,171
shares of redeemable common stock for $8.3 million to fund development of
products to treat Parkinson's disease. Genentech had the right, at its
discretion, to terminate the Parkinson's program at specified milestones in the
program. The Agreement also provided that if the Parkinson's program were
terminated and the funds of the Company received from the sale of stock to
Genentech pursuant to the Parkinson's agreement exceeded the expenses incurred
by the Company in connection with such studies by more than $1 million,
Genentech had the right to require the Company to repurchase from Genentech
shares of the Company's common stock having a value equal to the over funding,
based upon the share price paid by Genentech. As such, the common stock
purchased by Genentech has been classified as redeemable common stock until the
funds are expended on the program. On May 21, 1998, Genentech exercised its
right to terminate the collaboration and negotiations ensued with respect to the
amount of redeemable common stock to be redeemed in accordance with the
agreement and the method of such redemption. In March 2000 the Company announced
the settlement of this matter with Genentech. (SEE NOTE 18--"SUBSEQUENT EVENTS"
RELATING TO THE SETTLEMENT OF AND TERMINATION OF THE GENENTECH AGREEMENTS.)
In March 1995, the Company signed a collaborative research and development
agreement with AstraZeneca for the development and marketing of certain
encapsulated-cell products to treat pain. AstraZeneca made an initial,
nonrefundable payment of $5,000,000, included in revenue from collaborative
agreements in 1995, a milestone payment of $3,000,000 in 1997 and was to remit
up to an additional $13,000,000 subject to achievement of certain development
milestones. Under the agreement, the Company was obligated to conduct certain
research and development pursuant to a four-year research plan agreed upon by
the parties. Over the term of the research plan, the Company originally expected
to receive annual payments of $5 million to $7 million from AstraZeneca, which
was to approximate the research and development costs incurred by the Company
under the plan. Subject to the successful development of such products and
obtaining necessary regulatory approvals, AstraZeneca was obligated to conduct
all clinical trials of products arising from the collaboration and to seek
approval for their sale and use. AstraZeneca had the exclusive worldwide right
to market products covered by the agreement. Until the later of either the
expiration of all patents included in the licensed technology or a specified
fixed term, the Company was entitled to a royalty on the worldwide net sales of
such products in return for the marketing license granted to AstraZeneca and the
Company's obligation to manufacture and supply products. AstraZeneca had the
right to terminate the original agreement beginning April 1, 1998. On June 24,
1999, AstraZeneca informed the Company of the results of AstraZeneca's analysis
of the double-blind, placebo-controlled trial of the Company's encapsulated
bovine cell implant for the treatment of severe, chronic pain in cancer
patients. AstraZeneca determined that, based on criteria it established, the
results from the 85-patient trial did not meet the minimum statistical
significance for efficacy established as a basis for continuing worldwide trials
for the therapy. AstraZeneca therefore indicated that it did not intend to
further develop the bovine cell-containing implant therapy and executed its
right to terminate the agreement.
The Company has entered into other collaborative research agreements whereby
the Company funds specific research programs. Pursuant to such agreements, the
Company is typically granted rights to the related intellectual property or an
option to obtain such rights on terms to be agreed, in exchange for
46
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
16. RESEARCH AGREEMENTS (CONTINUED)
research funding and specified royalties on any resulting product revenue. The
Company's principal academic collaborations had been with Brown University and
Dr. Aebischer and Centre Hospitalier Universitaire Vaudois in Switzerland.
However, with the termination of the Company's Encapsulated Cell Technology
program and its focusing on the stem cell field, its principal academic
collaborations are now with the Scripps Institute and the Oregon Health Science
University. Research and development expenses incurred under these
collaborations amounted to approximately $868,000, $1,259,000, and $1,326,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
17. INCOME TAXES
Due to net losses incurred by the Company in each year since inception, no
provision for income taxes has been recorded. At December 31, 1999, the Company
had tax net operating loss carry forwards of $96,195,000 and research and
development tax credit carry forwards of $4,035,000 which expire at various
times through 2019. Due to the "change in ownership" provisions of the Tax
Reform Act of 1986, the Company's utilization of its net operating loss carry
forwards and tax credits may be subject to annual limitation in future periods.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
Deferred tax assets:
Capitalized research and development costs................ $ 4,331,000 $ 28,124,000
Net operating losses...................................... 38,478,000 10,786,000
Research and development credits.......................... 4,035,000 3,646,000
Other..................................................... 928,000 235,000
------------ ------------
47,772,000 42,791,000
Deferred tax liabilities:
Patents................................................... (246,000) (1,537,000)
------------ ------------
47,526,000 41,254,000
Valuation allowance....................................... (47,526,000) (41,254,000)
------------ ------------
Net deferred tax assets..................................... $ -- $ --
============ ============
Since there is uncertainty relating to the ultimate use of the loss carry
forwards and tax credits, a valuation allowance has been recognized at
December 31, 1999 and 1998, to fully offset the Company's deferred tax assets.
The valuation allowance increased $6,272,000 in 1999, due primarily to the
increases in net operating loss carry forwards and tax credits offset by
reduction in capitalized research and development costs .
18. EMPLOYEE RETIREMENT PLAN
The Company has a qualified defined contribution plan covering substantially
all employees. Participants are allowed to contribute a fixed percentage of
their annual compensation to the plan and the Company may match a percentage of
that contribution. The Company matches 50% of employee
47
CYTOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
18. EMPLOYEE RETIREMENT PLAN (CONTINUED)
contributions, up to 6% of employee compensation, with the Company's common
stock. The related expense was $103,000, $146,000, and $169,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
19. CONTINGENCIES
The Company is routinely involved in arbitration, litigation and other
matters as part of the ordinary course of its business. While the resolution of
any matter may have an impact on the Company's financial results for a
particular reporting period, management believes the ultimate disposition of
these matters will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
20. SUBSEQUENT EVENTS
On April 13, 2000, the Company completed arrangements to sell 1,500 shares
of 6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's common stock to a member of its Board of Directors for $1,500,000,
on terms more favorable than it was then able to obtain from outside investors.
(SEE NOTE 3--"SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK.")
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, PROMOTERS AND
CONTROL
DIRECTORS AND EXECUTIVE OFFICERS
The sections entitled "Election of Directors" and "Executive Officer" in the
Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders
are hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's definitive
proxy statement for its 2000 Annual Meeting of Shareholders is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Share Ownership" in the Company's definitive proxy
statement for its 2000 Annual Meeting of Shareholders is hereby incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions" in the
Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders
is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K.
(1) Financial Statement Schedules:
Schedules not included herein are omitted because they are not applicable or
the required information appears in the Financial Statements or Notes thereto.
(2) Exhibits.
EXHIBIT NO. TITLE OR DESCRIPTION
----------- --------------------
3.1* Restated Certificate of Incorporation of the Registrant.
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of
the Registrant's Common Stock in April 1995.
10.4* Amendment to Registration Rights dated as of February 14,
1992 among the Registrant and certain of its stockholders.
10.15* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.20* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.21* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
49
EXHIBIT NO. TITLE OR DESCRIPTION
----------- --------------------
10.28* Master Lease and Warrant Agreement dated April 23, 1991
between the Registrant and PacifiCorp Credit, Inc.
10.29* 1988 Stock Option Plan.
10.30* 1992 Equity Incentive Plan.
10.31* 1992 Stock Option Plan for Non-Employee Directors.
10.32* 1992 Employee Stock Purchase Plan.
10.41**!!!! Development and Supply Agreement dated December 1993 between
Registrant and AKZO Faser AG.
10.43##** Research Agreement dated as of February 1, 1994 between
Genentech, Inc. and Registrant.
10.44##** Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.47++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.48++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.49++ First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
10.50++ Supplementary Agreement dated as of July 1, 1994 between
Akzo Nobel Faser AG and the Registrant.
10.51**++++ Development, Marketing and License Agreement, dated as of
March 30, 1995 between Registrant and Astra AB.
10.52++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in April
1995.
10.53+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
10.54!** Research and Commercialization Agreement dated as of
September 4, 1995 among the Company, Dr. Patrick Aebischer
and Canton of Vaud, Switzerland.
10.57!! Convertible loan agreement dated as of July 10, 1996 between
the Company and Modex Therapeutiques SA.
10.58### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.59!! Modex Therapeutiques SA stockholders voting agreement dated
as of July 10, 1996 among Modex, the Company, the Societe
Financiere Valoria SA and the other stockholders listed
therein.
10.60!! CTI individual stockholders option agreement dated as of
July 10, 1996 among the Company and the individuals listed
therein.
10.61!! CTI Valoria option agreement dated of July 10, 1996 between
the Company and the Societe Financiere Valoria SA.
10.64!!! Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and the Registrant.
10.65*** Agreement and Plan of Merger dated as of August 13, 1997
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.67*** Consulting Agreement dated as of September 25, 1997 between
Dr. Irving Weissman and the Registrant.
10.68### Letter Agreement among each of Dr. Irving Weissman and Dr.
Fred H. Gage and the Registrant.
10.69** Amended and Restated Cross License Agreement dated as of
October 29, 1997 between Modex Therapeutiques SA and the
Registrant.
10.70### Letter Agreement dated as of September 30, 1997 between Dr.
Seth Rudnick and the Registrant.
10.71**** StemCells, Inc. 1996 Stock Option Plan.
50
EXHIBIT NO. TITLE OR DESCRIPTION
----------- --------------------
10.72**** 1997 StemCells Research Stock Option Plan (the "1997 Plan").
10.73**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.74### Employment Agreement dated as of September 25, 1997 between
Dr. Richard M. Rose and the Registrant.
10.75### Employment agreement dated as of April 17, 1997, between
John S. McBride and the Registrant.
10.78### Loan Agreement dated as of May 15, 1996 between Fleet
National Bank and the Registrant, together with the related
Promissory Note executed by the Registrant, and an
amendatory agreement dated as of May 15, 1997.
10.79'*> Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.*
10.80Section** Employment Agreement dated as of June 8, 1998 between Philip
K. Yachmetz and the Registrant.
10.81Section** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
10.82Section** Letter Agreement dated as of December 19, 1998 between
John J. Schwartz and the Registrant.
10.83Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.84Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.85Section** License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant.
10.87SectionSection** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant.
10.88** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.89** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.90 Employment Agreement dated as of June 8, 1998, as amended
and restated as of June 8, 1999, between Philip K. Yachmetz
and the Registrant.
10.91 Letter Agreement dated as of July 1, 1999 between John J.
Schwartz and the Registrant.
10.92 Severance Agreement dated as of April 2, 1999 between John
McBride and the Registrant.
10.93 Severance Agreement dated as of August 30, 1999 between
Moses Goddard, M.D. and the Registrant.
10.94 Employment Agreement dated as of November 17, 1999 between
George W. Dunbar Jr. and the Registrant.
10.95 Agreement dated as of November 17, 1999 between iCEO, LLC
and the Registrant.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule for fiscal year ended December 31,
1999.
99 Cautionary Factors Relevant to Forward-Looking Information.
51
- ------------------------
++ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Registration Statement on Form S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Registration Statement on Form S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Registration Statement on Form S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, Registration
Statement on Form S-1, File No. 33-45739.
# Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Annual Report on Form 10-K for fiscal year ended
December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The
term "confidential treatment" and the mark "**" as used
throughout the indicated Exhibits mean that material has
been omitted and separately filed with the Commission.
## Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and
incorporated by reference to, the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and
incorporated by reference to, the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1996.
!!! Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Registration Statement on Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's
annual report on Form 10-K for the fiscal year ended
December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's
current report on Form 8-K filed on August 3, 1998.
Section Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's
annual report on Form 10-K for the fiscal year ended
December 31, 1998 and filed on March 31, 1999.
SectionSection Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's
current report on Form 8K on January 14, 2000.
(b) Current Reports on Form 8-K.
None
52
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
behalf by the undersigned, thereunto duly authorized.
CYTOTHERAPEUTICS, INC.
BY: /S/ GEORGE W. DUNBAR, JR.
-----------------------------------------
George W. Dunbar, Jr.
ACTING PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Dated: April 14, 2000
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 CAPACITY DATE
--------- -------- ----
Acting President And Chief
GEORGE W. DUNBAR Executive Officer, And Acting
------------------------------------------- Chief Financial Officer April 14, 2000
George W. Dunbar, Jr. (principal executive officer)
MARK J. LEVIN Director
------------------------------------------- April 14, 2000
Mark J. Levin
DONALD KENNEDY, PH.D. Director
------------------------------------------- April 14, 2000
Donald Kennedy, Ph.D.
JOHN J. SCHWARTZ, PH.D. Director, Chairman of the Board
------------------------------------------- April 14, 2000
John J. Schwartz, Ph.D.
IRVING L. WEISSMAN, M.D. Director
------------------------------------------- April 14, 2000
Irving L. Weissman, M.D.
53
EXHIBIT 99
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
CYTOTHERAPEUTICS, INC. (THE "COMPANY" OR "WE" OR "US") WISHES TO CAUTION
READERS THAT THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, IN SOME CASES HAVE
AFFECTED AND IN THE FUTURE COULD AFFECT THE COMPANY'S RESULTS AND COULD CAUSE
ACTUAL RESULTS AND THE NEEDS AND FINANCIAL CONDITION OF THE COMPANY TO VARY
MATERIALLY FROM FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY ON THE BASIS OF
MANAGEMENT'S CURRENT EXPECTATIONS. THE BUSINESS IN WHICH THE COMPANY IS ENGAGED
IS DEPENDENT ON UNPROVEN TECHNOLOGY, RAPIDLY CHANGING, EXTREMELY COMPETITIVE AND
INVOLVES A HIGH DEGREE OF RISK, AND ACCURACY WITH RESPECT TO FORWARD-LOOKING
STATEMENTS IS DIFFICULT.
Investment in CytoTherapeutics involves a high degree of risk. Some of the
following risks relate principally to our business and the industry in which we
operate. Other risks relate principally to the securities market and ownership
of our stock. The risks described below are not the only ones facing us.
Additional risks, not now known to us or that we currently believe to be
immaterial, may also adversely affect our business. Our business, financial
condition or results of operation could be materially or adversely affected by
any of these risks. The trading price of our stock could decline due to any of
these risks, and investors may lose all or part of their investment.
OUR TECHNOLOGY IS AT AN EARLY STAGE OF DEVELOPMENT.
Our stem cells technology is at the early pre-clinical stage and has not yet
led to the development of any proposed product. There can be no assurance that
our stem cell technology will lead to the development of any proposed product or
that any product that may be developed in the future in our stem cell programs
will (i) survive and persist in the desired location, (ii) provide the intended
therapeutic benefits, (iii) properly differentiate and integrate into existing
tissue in the desired manner, or (iv) not cause side effects. Results obtained
in early pre-clinical research may not be indicative of the results that will be
obtained in later stages of pre-clinical or clinical research.
Issues we do not now face because the technology is at an early stage may
become relevant in the future. For example, we neither have nor need marketing,
sales or distribution capabilities. When and if we develop a product or
products, we will need to develop such capabilities or acquire them through
licensing or other relationships with partners. There can be no assurance that
we will be able either to develop adequate capabilities in-house or to enter
into technically and financially acceptable relationships to acquire them. Since
stem cells represent a novel form of therapy, there can be no assurance that any
products we may develop will be accepted in the marketplace. Moreover, the use
of such novel technology could expose us to product liability claims; we cannot
be certain that we will be able to obtain adequate liability insurance on
commercially reasonable terms or otherwise protect ourselves from such claims.
WE HAVE LIMITED LIQUIDITY AND CAPITAL RESOURCES AND MUST OBTAIN SIGNIFICANT
CAPITAL RESOURCES IN ORDER TO SUSTAIN OUR RESEARCH AND DEVELOPMENT EFFORTS.
We have limited liquidity and capital resources and must obtain substantial
additional capital in order to sustain research and development efforts.
Substantial additional funds will be required to support our research and
development programs, for acquisition of technology and intellectual property
rights, and, to the extent we decide to undertake these activities ourselves,
for pre-clinical and clinical testing of our anticipated products, pursuit of
regulatory approvals, establishment of production capabilities and general
administrative expenses.
We intend to pursue our needed capital resources through equity and debt
financings, corporate alliances, grants and collaborative research arrangements.
Our ability to complete any such arrangements successfully will depend upon
market conditions and, more specifically, on our progress in our research and
development efforts. There can be no assurance that we will obtain the necessary
capital resources from any such sources. Lack of necessary funds may require us
to delay, reduce or eliminate some or all of
54
our research and development programs or to license our technology or any
potential products resulting therefrom to third parties. There can be no
assurance that funding will be available to us when needed, if at all, or on
terms acceptable to us.
WE MAY NEED TO OBTAIN A PARTNER OR PARTNERS TO SUPPORT OUR STEM CELL
DEVELOPMENT EFFORTS.
Equity and other funds alone may not be sufficient to fund the cost of
developing our stem cell technologies and we may be dependent on our ability to
reach appropriate partnering arrangements providing support for our stem cell
discovery and development efforts. While we have engaged, and expect to continue
to engage, in discussions regarding such arrangements, we have not reached any
agreement regarding any such arrangement and there can be no assurance that we
will be able to obtain any such agreement on terms acceptable to us, if at all.
WE HAVE A HISTORY OF OPERATING LOSSES AND THERE CAN BE NO ASSURANCE THAT WE
WILL DEVELOP PRODUCTS, OBTAIN PRODUCT REVENUES OR BECOME PROFITABLE.
Substantially all of our revenues to date have been derived from, and, for
the foreseeable future, substantially all of our revenues are expected to be
derived from, cooperative agreements, research grants and income earned on
invested funds. We have incurred substantial operating losses in the past; as
the financial statements in this Form 10K indicate, we incurred a net loss of
approximately $4.568 million in the fourth quarter of 1999, resulting in our
holding approximately $4.76 million in cash and cash equivalents at the end of
1999. The Company will continue to incur substantial operating losses in the
future in order to conduct our research and development activities and, if those
are successful, to fund clinical trials and other expenses. There can be no
assurance that we will develop any product candidates, achieve revenues from any
product sales or become profitable.
WE HAVE SUBSTANTIAL OBLIGATIONS AND POTENTIAL OBLIGATIONS RESULTING FROM THE
CONDUCT OF OUR FORMER ENCAPSULATED CELL THERAPY BUSINESS.
We continue to have substantial obligations in regard to our former
encapsulated cell therapy facilities and administrative offices in Rhode Island,
including lease payments and operating costs of approximately $950,000 per year
associated with our former Science and Administration Facility ("SAF") in
Lincoln, Rhode Island, and debt service payments and operating costs of
approximately $1,000,000 per year with respect to our former encapsulated cell
therapy pilot manufacturing facility, also located in Lincoln, Rhode Island. We
are currently seeking to sublease the SAF and to sell the pilot manufacturing
facility, but there can be no assurance that we will succeed in these efforts.
Failure in these efforts within a reasonable time period could have a material
adverse effect on our liquidity and capital resources and adversely affect our
ability to fund further development of our stem cell technology.
THERE CAN BE NO ASSURANCE THAT WE WILL REALIZE ANY FURTHER REVENUE FROM THE
SALE OF OUR ENCAPSULATED CELL TECHNOLOGY.
In December 1999, we sold our encapsulated cell therapy technology to
Neurotech S.A. While the sale provides for the possibility of our receiving
royalty and other payments from Neurotech, there can be no assurance that any
such payments will be received and we do not anticipate receiving any material
payments from Neurotech in the near future, if at all.
FOUNDERS OF STEMCELLS CALIFORNIA, INC. HAVE THE RIGHT TO CONTROL OUR STEM
CELL RESEARCH AND TO REACQUIRE OUR STEM CELL TECHNOLOGY UNDER CERTAIN
CIRCUMSTANCES.
The agreement by which CytoTherapeutics acquired StemCells California in
September 1997, provides for our stem cell research to be conducted pursuant to
the provisions of an agreement between CytoTherapeutics and Drs. Irving Weissman
and Fred Gage, founders of StemCells California, pursuant to a research plan.
For so long as the goals of the research plan are accomplished, the stem cell
research will continue to be conducted under an extension of such research plan
approved by a Research Committee consisting of two persons chosen by Drs. Gage
and Weissman, two chosen by CytoTherapeutics, and a fifth
55
member appointed by Drs. Gage and Weissman, subject to the reasonable approval
of CytoTherapeutics. Increases in stem cell research funding of not more than
25% a year approved by the Committee must be funded by CytoTherapeutics as long
as the goals of the research plan are being met, provided, however, that
CytoTherapeutics will retain the option of ceasing or reducing neural stem cell
research even if all research plan goals are being met by accelerating the
vesting of all still-achievable performance-based options granted to Drs.
Weissman and Gage in connection with the acquisition of StemCells. If we cease
or reduce non-neural stem cell research although all research plan goals are
being met, however, Drs. Weissman and Gage would have the right to continue
development of the non-neural stem cell research by licensing the technology
related to such research to the founders in exchange for a payment to
CytoTherapeutics equal to all funding for such research, plus royalty payments,
which might not reflect fair market value for such technology at such time.
PATENT PROTECTION FOR OUR TECHNOLOGY IS IMPORTANT BUT UNCERTAIN.
Patent protection for products such as those we propose to develop is highly
uncertain and involves complex factual and legal questions. There can be no
assurance that any of our current or future patent rights will not be
challenged, invalidated or circumvented, or that the rights granted under any
such patent will provide competitive advantages to us. Because the first person
or entity to discover and obtain a valid patent to a particular stem or
progenitor cell may effectively block all others, it will be important to our
development efforts for us or our collaborators to be the first to discover any
stem cell that we are seeking; failure to do so could have a materially adverse
effect on the Company.
Proprietary trade secrets and unpatented know-how are also important to our
research and development activities. We cannot be certain that others will not
develop the same or similar technologies on their own, or that we will be able
to protect our trade secrets and unpatented know-how and to keep them secret.
WE MAY NEED TO OBTAIN LICENSES TO THIRD PARTY PATENTS.
A number of pharmaceutical companies, biotechnology and other companies,
universities and research institutions have filed patent applications or have
been issued patents related to cell therapy and other technologies potentially
relevant to or required by our potential products. We cannot predict which, if
any, of any such applications will issue as patents or the claims that might be
allowed. We are aware that a number of entities have filed applications relating
to stem and/or progenitor cells. We cannot predict the effect of existing patent
applications and patents on our technology or any future products we may
develop. We may be required to seek licenses from others in order to
commercialize our technology. There can be no assurance that we will be able to
obtain such licenses on acceptable terms, if at all, or that the patents
underlying any such licenses will be valid and enforceable.
DEVELOPMENT OF OUR TECHNOLOGY WILL BE SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION.
Our research and development efforts, as well as any future clinical trials,
and the manufacturing and marketing of any products we may develop, will be
subject to extensive regulation by governmental authorities in the United States
and other countries. The process of obtaining FDA and other required regulatory
approvals is lengthy, expensive and uncertain. There can be no assurance that we
or our collaborators will be able to obtain the necessary approvals to commence
or continue clinical testing or to manufacture or market our potential products
in reasonable anticipated time frames, if at all. In addition, the United States
Congress and other legislative bodies may enact regulatory reforms or
restrictions on the development of new therapies that could adversely affect the
regulatory environment in which we operate or the development of any products we
may develop.
DEVELOPMENT OF OUR STEM CELL TECHNOLOGY MAY BE MATERIALLY ADVERSELY AFFECTED
BY REGULATORY CONCERNS REGARDING CELL THERAPY.
56
Regulatory concerns regarding the risk of cell transplantation could lead to
restrictions on the testing or use of cells as human therapeutics, which could
materially adversely affect our stem cell development programs and the Company
itself and could prevent us from developing, producing, licensing or selling
products or make the cost of developing or producing products prohibitively
high.
ACQUISITION OF NEEDED CELLS AND OTHER MATERIALS MAY BE DIFFICULT.
There can be no assurance that the Company will successfully identify or
develop reliable and ethical sources of the cells required for its potential
products and obtain such cells in quantity and quality sufficient to satisfy the
commercial requirements of its potential products.
WE ARE SIGNIFICANTLY DEPENDENT ON A LIMITED NUMBER OF KEY PERSONNEL.
We are highly dependent on the principal members of our management and
scientific staff and certain of our outside consultants. Loss of the services of
any of these individuals could have a material adverse effect on our operations.
In addition, our operations are dependent upon our ability to attract and retain
additional qualified scientific and management personnel. There can be no
assurance the Company will be able to attract and retain such personnel on
acceptable terms given the competition among pharmaceutical, biotechnology and
health care companies, universities and research institutions for experienced
personnel.
WE MAY BE SIGNIFICANTLY DEPENDENT ON THIRD PARTIES.
In order to successfully develop and commercialize our technology, we may
need to enter into a wide variety of arrangements with corporate sponsors,
pharmaceutical companies, universities, research groups and others. There is no
assurance that will be able to establish and maintain such arrangements on terms
acceptable to us, or to successfully perform our obligations under such
arrangements. If any of our collaborators terminates its relationship with us or
fails to perform its obligations in a timely manner, the development or
commercialization of our technology and any product candidates we may develop
may be adversely affected.
WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGE OR WITH THE
ADVANCES OF OUR COMPETITORS.
Competitors of the Company are numerous and include major pharmaceutical and
chemical companies, biotechnology companies, universities and other research
institutions. In addition, we have competitors with substantially greater
capital resources, experience in obtaining regulatory approvals and, in the case
of commercial entities, experience in manufacturing and marketing pharmaceutical
products, than we do. There can be no assurance that our competitors will not
succeed in developing technologies and products that are more effective than
those being developed by CytoTherapeutics or that would render our technology
and products obsolete or non-competitive.
HEALTHCARE INSURERS AND OTHER ORGANIZATIONS MAY NOT PAY FOR OUR PRODUCTS OR
MAY IMPOSE LIMITS ON REIMBURSEMENTS.
In both domestic and foreign markets, sales of potential products is likely
to depend in part upon the availability and amounts of reimbursement from third
party health care payor organizations, including government agencies, private
health care insurers and other health care payors such as health maintenance
organizations and self-insured employee plans. There is considerable pressure to
reduce the cost of therapeutic products. There can be no assurance that
reimbursement will be provided by such payors at all or without substantial
delay, or, if such reimbursement is provided, that the approved reimbursement
amounts will provide sufficient funds to enable us to sell products we may
develop on a profitable basis. Changes in reimbursement policy could also
adversely affect the willingness of pharmaceutical companies to collaborate with
the Company on the development of our stem cell technology.
57
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
Our operating results have varied, and may in the future continue to vary,
significantly from quarter to quarter due to a variety of factors. These factors
include the receipt of one-time license or milestone payments under
collaborative agreements, costs associated with termination of our encapsulated
cell therapy business, variation in the level of expenses related to our
research and development efforts, receipt of grants or other support for our
research and development efforts, and other factors. Quarterly comparisons of
our financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance. These fluctuations may cause the
price of our stock to fluctuate, perhaps substantially.
OUR STOCK PRICE MAY BE VOLATILE.
The market price for our Common Stock has been volatile and could decline
below the offering price for the shares. We believe that the following factors,
among other things, have caused the market price for our Common Stock to
fluctuate substantially, and that they will continue to do so in the future:
- The results of scientific developments by us or our competitors;
- The formation or termination of corporate alliances;
- Determinations regarding our patent rights and the patent rights of
others; and
- Variations in our quarterly operating results.
The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have especially affected the market price of
the stock of many high technology and health care-related companies. Such
fluctuations have often been unrelated to the operating performance of these
companies. Nonetheless, these broad market fluctuations may negatively affect
the market price of our Common Stock.
EVENTS WITH RESPECT TO OUR SHARE CAPITAL COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.
Sales of substantial amounts of our Common Stock on the open market, or the
availability of such shares for sale, could adversely affect the price of our
Common Stock. In particular, as of March 20, 2000, stock options to purchase
approximately 965,160 shares of Common Stock were outstanding, at an average
exercise price of approximately $2.281 per share (subject to adjustment in
certain circumstances); of this total, options covering approximately 395,811
shares are currently exercisable at an average exercise price of approximately
$3.456 per share.
58