SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________ to _________.
Commission File Number 0-21863
EPIX Medical, Inc.
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(Exact name of Registrant as Specified in its Charter)
Delaware 04-3030815
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
71 Rogers Street
Cambridge, Massachusetts 02142
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 250-6000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(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. [ ]
The aggregate market value, based upon the average bid and asked price of the
shares as reported by the Nasdaq National Market, of voting stock held by
non-affiliates (without admitting that any person whose shares are not included
in such calculation is an affiliate) as of March 15, 2001 was $99,566,039.
As of March 15, 2001, 13,946,672 shares of the registrant's Common Stock, $.01
par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
General
We are engaged in the development of targeted contrast agents to both
improve the capability and expand the use of magnetic resonance imaging ("MRI")
as a diagnostic tool for a variety of diseases. We were incorporated in Delaware
in 1988 and commenced operations in 1992.
Overview
We are engaged in the development of targeted contrast agents to
both improve the capability and expand the use of MRI as a tool for
diagnosing human disease. Our principal product under development, MS-325, is
an injectable intravascular contrast agent designed for multiple
cardiovascular imaging applications, including peripheral vascular disease
and coronary artery disease. We believe that MS-325 will significantly
enhance the quality of MR images and provide physicians with a clinically
superior, non-invasive (i.e., no more invasive than a peripheral intravenous
injection ("I.V.") and cost-effective method for diagnosing cardiovascular
disease. We also believe that MS-325 will simplify the diagnostic pathway for
a number of cardiovascular diseases and in many cases replace highly invasive
(i.e., more invasive than a peripheral I.V., up to and including a surgical
procedure) and expensive X-ray angiography, which is currently considered the
definitive diagnostic exam for assessing cardiovascular disease. We are also
investigating additional imaging applications for MS-325, including breast
cancer, female sexual arousal dysfunction and myocardial perfusion imaging.
As a major component of our corporate strategy, we have sought to
enter into alliances with leaders in the pharmaceutical, diagnostic imaging
and MRI equipment industries to facilitate the development, manufacture,
marketing, sale and distribution of our products. To date, we have entered
into strategic alliances with Schering Aktiengesellschaft ("Schering AG"),
and Mallinckrodt Inc., recently acquired by TYCO International, Inc. and
referred to herein as "Mallinckrodt" for the development, manufacture and
commercialization of MS-325 and other vascular contrast agents. We have also
formed collaborations with the three major MRI scanner manufacturers, General
Electric Medical Systems, Philips Medical Systems and Siemens Medical Systems
to develop advanced imaging techniques designed to facilitate the use of
MS-325-enhanced MRI. We entered into these alliances, and will seek to enter
into future strategic alliances with industry leaders, in order to obtain
access to resources and infrastructure to leverage our strengths.
We have completed two Phase I clinical trials to date; the first was
completed in February 1997, and the second in February 1998. In June 1998, we
completed a Phase II clinical trial designed to test the safety and preliminary
efficacy of MS-325-enhanced MR angiography for the evaluation of peripheral
vascular disease. This clinical trial favorably compared MS-325-enhanced MR
angiography to conventional X-ray angiography, the current reference standard.
In June 1999, we initiated a Phase III clinical trial to determine the efficacy
of MS-325-enhanced MR angiography for the detection of aortoiliac occlusive
disease. Evaluation for aortoiliac occlusive disease is a critical component of
two common procedures: abdominal aortography, particularly for the
identification of abdominal aortic aneurysm, and leg arteriography, also known
as peripheral run-off, for the detection of atherosclerosis. The trial, a
multi-center, comparative, two-arm study, is designed to compare the diagnostic
accuracy of MS-325-enhanced MR angiography with that of X-ray angiography. We
are also currently conducting a Phase II feasibility trial to test the safety
and feasibility of MS-325-enhanced MR angiography for the evaluation of coronary
artery disease, and have completed patient enrollment in Phase II feasibility
trials for detection of malignant breast lesions and female sexual arousal
dysfunction. Through our pre-clinical studies, we also intend to determine the
potential utility of MS-325-enhanced MRI for additional applications, including
myocardial perfusion imaging.
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The use of MRI has grown steadily over the past 10 years due to reduced
cost and improved imaging capabilities and now provides an effective diagnostic
modality for a broad range of applications. MRI manufacturers have improved the
hardware and software of their systems, reducing the time per procedure
dramatically while significantly enhancing image resolution. While MRI is
currently used extensively to image many organs and tissues in the body, its use
in imaging the arteries and veins has been limited. Prior attempts to develop
contrast agents to facilitate the clinical utility of MRI, particularly for
coronary arteries, have had limited success. Unlike most currently available MRI
contrast agents, which are non-specific, MS-325 is an injectable intravascular
contrast agent intended to enhance the quality of MR images and provide
physicians with a superior method for diagnosing diseases affecting the
vasculature. MS-325 is a small molecule that produces an MRI signal because of
the presence of gadolinium, a highly magnetically active element favored by
clinicians for enhancing MR images. This molecule is designed with our
proprietary technology to bind to albumin, the most common blood protein. In
MS-325 images using standard MRI techniques, the blood gives off a strong
magnetic signal and appears bright against the dark background of surrounding
tissue. Because of its affinity for albumin, MS-325 remains at high
concentrations in the bloodstream throughout the MRI exam and therefore provides
the image acquisition time and signal strength needed to obtain a high contrast,
high resolution image of the cardiovascular system. Like most currently
available non-specific contrast agents, MS-325 is designed to be excreted safely
through the kidneys over time. We believe that MS-325 will simplify the
diagnostic pathway for a number of diseases and in many cases replace highly
invasive and expensive X-ray angiography.
As discussed in Management's Discussion and Analysis and Results of
Operations, the Company reached certain significant strategic arrangements
with its collaboration partners. In addition, in 2001 the Company received
approximately $6 million pursuant to an existing equity funding arrangement
with Acqua Wellington.
Cardiovascular Disease Background
The human cardiovascular system consists of the heart and a vast series
of arteries and veins that carry blood throughout the body. Cardiovascular
disease, a broad class of diseases affecting the heart and vasculature, is the
number one cause of death in the United States, with over 950,000 fatalities
each year. 1 out of every 2.4 deaths in the United States is attributed to
cardiovascular disease. It is estimated that over 58 million Americans suffer
from some form of this disease.
Atherosclerosis is one of the most common forms of cardiovascular
disease. This condition refers to the accumulation of fatty plaques in the
inner lining of blood vessels, resulting in a thickening or hardening of
affected vessels. As the disease progresses, the arteries can become weakened
or increasingly narrowed, thereby reducing blood flow to vital organs,
including the heart and brain. This condition is often characterized by the
vascular region in which it is diagnosed. Coronary artery disease, for
example, refers to disease in the arteries in the heart, while peripheral
vascular disease refers to disease in the major vessels outside the heart:
vessels of the head and neck, the aorta, the renal arteries, and the large
vessels of the pelvis, legs and arms. Recent research in cardiovascular
disease has begun to highlight the pervasive, or multi-focal nature, of this
condition. Because major risk factors tend to affect all vascular regions,
many patients have multiple clinical symptoms of cardiovascular disease.
Therefore, patients diagnosed with cardiovascular disease in one vascular
region are at high risk of having similar disease in another vascular region.
Clinicians have also begun to realize the importance of characterizing
atherosclerotic plaques once they have been identified. We believe that the
ability to characterize plaques may allow physicians to identify those
regions of cardiovascular disease that present the most immediate threat to
patients' health and that MS-325 will aid in the evaluation of the disease.
The consequences of cardiovascular disease can be extremely severe and
often include one or more of the following:
o Limb Loss. Atherosclerotic blockages in the arteries of the
pelvis and legs - the iliac, femoral, popliteal, and tibial
arteries - can lead to ischemia (lack of oxygen) or infarction
(death of tissue) in these areas. Complications from
atherosclerotic disease in these vessels include pain,
limitations in mobility, and amputation of the extremities. Each
year approximately 100,000 amputations are performed in the
United States primarily due to the complications of some form of
cardiovascular disease.
o Aortic Aneurysm. The aorta is the main blood vessel that carries
blood from the heart to the rest of the body. Degenerative
changes in the vessel wall often result in the enlargement or
bulging of the lower part of this vessel, known as abdominal
aortic aneurysm. Individuals with this condition are at serious
risk that the aneurysm will rupture, causing life-threatening
bleeding. There are an estimated 200,000 cases of abdominal
aortic aneurysm diagnosed each year in the United States. Because
this
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condition can be asymptomatic for many years, many physicians
have begun to consider the merits and cost-effectiveness of
routine screening programs for this disease.
o Heart Attack. The coronary arteries supply blood to the heart
muscle (myocardium). When these arteries are narrowed or clogged
due to atherosclerotic buildup, the result can be chest pain
(angina pectoris) or heart attack (myocardial infarction). This
condition, known as coronary artery disease, is estimated to
afflict 7 million Americans. Coronary artery disease is
responsible for a significant portion of the nearly 500,000 heart
attack deaths each year, making it the number one cause of death
in the United States.
o Hypertension. Hypertension, or high blood pressure, refers to the
constriction of blood vessels, which causes the heart to work
harder to supply blood to the body. This condition, which
significantly elevates an individual's risk of heart attack or
stroke, afflicts approximately 50 million individuals in the
United States. Renal hypertension caused by blockages of the
arteries that carry blood to the kidneys can result in kidney
failure and is estimated to account for up to ten percent of all
cases of hypertension. Early diagnosis can be extremely helpful
for patients with renovascular hypertension because it can be
treated with various revascularization procedures; however, X-ray
angiography, the current definitive diagnosis for this condition,
carries elevated risk for patients with renal impairment due to
the toxicity of the X-ray contrast dye.
o Ischemic Stroke. Blocked arteries in the head and neck can
prevent areas of the brain from receiving the necessary blood
supply, potentially leading to ischemic stroke. Individuals with
atherosclerosis are at increased risk of suffering such blockages
due to atherosclerotic buildup in these arteries or, more
commonly, from plaques originating in other areas which have
broken off and lodged in these vessels. Approximately 80% of the
600,000 strokes each year in the United States are a result of
atherosclerotic disease.
Diagnosing Cardiovascular Disease - The Limits of Current Practice
Cardiovascular disease is currently diagnosed using a number of
different imaging technologies, or modalities, including X-ray angiography,
computed tomography, ultrasound, intravascular ultrasound, nuclear medicine
and MRI. These modalities are often classified as either "screening" or
"definitive" according to their role in the diagnostic pathway. Screening
procedures are typically used early in the diagnostic evaluation to rule out
certain conditions and assist physicians in determining subsequent diagnostic
testing. These procedures tend to be relatively inexpensive and non-invasive.
Physicians rely on definitive diagnostic procedures, on the other hand, to
provide them with the information required to make final diagnosis and plan
treatment. Because of the importance of this definitive information,
physicians are willing to resort to costlier, more invasive modalities.
Screening for Peripheral Vascular Disease. A patient with peripheral
vascular disease may exhibit a wide range of symptoms including: leg pain;
gangrene; hypertension; stroke and transient ischemic attack, a brief episode of
cerebral ischemia usually characterized by blurred vision, slurred speech,
numbness or paralysis. The appropriate screening tests vary according to the
particular disease indication. In the work-up of peripheral vascular disease of
the lower limb, for example, ultrasound is often performed to confirm the
location of disease once it has been detected by non-imaging techniques. In
general, traditional screening modalities for peripheral vascular disease - most
commonly ultrasound and renal nuclear exams - tend to have poor image quality,
leading to exams which are frequently inconclusive.
Screening for Coronary Artery Disease. Typically, a patient enters the
diagnostic pathway for coronary artery disease after experiencing chest pain or
shortness of breath. If the patient cannot be ruled out for this condition after
the initial work-up that includes a physical exam, patient history,
electrocardiogram and exercise stress test, then a cardiologist will often
perform a stress echocardiogram and/or a nuclear stress perfusion study.
STRESS ECHOCARDIOGRAMS use ultrasound to measure motion of the
walls of the heart under physical or pharmacological stress. In
most cases, a lack of blood flow to a particular area of the
heart will be reflected in atypical motion of the heart wall. The
test is non-invasive and costs between $300 and $900. While a
normal stress echocardiogram usually eliminates the
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possibility of blockages that significantly decrease blood flow,
the test is often inconclusive and provides no information on the
anatomy of the coronary arteries. We estimate that over 1.6
million stress echocardiograms were performed in the United
States in 1998.
NUCLEAR STRESS PERFUSION STUDIES measure the flow of blood to
cardiac tissue, and can be used either as the critical diagnostic
test prior to X-ray angiography or to confirm the impact on blood
flow of an intermediate blockage identified through X-ray
angiography. Nuclear stress perfusion tests are non-invasive, use
small quantities of radiation and cost between $600 and $1,400. A
patient is injected with a radioactive agent and then a radiation
sensitive camera is used to detect uptake of the agent in the
heart muscle. A deficiency in blood flow to particular regions of
the heart is shown in the resulting images. While the test can
identify the effects of coronary artery disease, it provides no
information on the anatomy of the coronary arteries and it cannot
determine the location of blockages. We estimate that over 3.8
million nuclear stress perfusion studies were conducted in the
United States in 1998.
Definitive Diagnosis of Plaque Blockages. X-ray angiography is
currently considered to be the definitive diagnostic exam for imaging arterial
anatomy in patients with suspected peripheral vascular disease or coronary
artery disease. Invented in the 1920's, an X-ray angiogram involves the
insertion of a catheter through a puncture of the femoral artery in the
patient's groin. Once the catheter is placed in the relevant artery, nephrotoxic
X-ray contrast dye is injected into the bloodstream and an image is acquired of
that vascular region. X-ray angiography does not always provide sufficient
information for clinical decision-making, particularly in the coronary arteries:
while X-ray angiography identifies the location of arterial blockages, in many
cases it cannot conclusively determine the impact of these blockages on blood
flow. Therefore, for many blockages, additional studies must be performed to
enable the physician to make a definitive diagnosis. Based on available
procedure data, we estimate that over 4.3 million X-ray angiograms were
performed in the United States in 1998, of which approximately 2.1 million were
coronary angiograms. X-ray angiography has a number of undesirable
characteristics as a diagnostic tool, including:
o Invasive procedure results in significant risk of serious
complications including limb loss, renal failure, and death
o Exposure of patients to potentially harmful ionizing
radiation;
o Large volumes of nephrotoxic dye may cause severe reactions:
o Separate exams are necessary to view both arteries and veins;
o Separate exams are necessary for each vascular region;
o Provides only 2-dimensional images;
o Relatively expensive ($1,000-$3,000 for peripheral angiograms,
$2,000-$6,000 for coronary angiograms);
o Cost and invasive nature limit patient post-procedure
follow-up; and
o Inability to characterize plaques.
Another modality currently being investigated as a potential diagnostic
tool for imaging blood vessels is computed tomography, or CT, which is primarily
used to image solid organs. Although it does not require an arterial puncture,
CT requires the use of large quantities of toxic X-ray contrast dye and exposes
patients to radiation, which limits the number of vascular regions it can image
in an exam. CT has shown limited success in imaging the coronary arteries due to
cardiac motion. A specialized form of CT, electron beam CT, is approved in the
United States for angiographic imaging but has had limited impact on clinical
practice due to the low number of electron beam CT scanners installed and its
use of toxic X-ray contrast dye and radiation. CT is also being investigated for
use in detecting calcium deposits in the coronary arteries, which has been
advocated as predictive of atherosclerotic disease in that region. While
extremely sensitive, this technique is limited by its high level of false
positives.
Plaque Characterization. Recent research suggests that plaques
associated with regions of vessel wall inflammation may be at increased risk of
rupture and are consequently more likely to present immediate risk to patients.
The one modality currently used to characterize the content and/or shape of
arterial plaques is known as intravascular ultrasound, or IVUS. An IVUS exam
requires the insertion of a relatively large catheter (i.e., larger than an
X-ray angiographic catheter) equipped with an ultrasound transducer through an
arterial puncture in the femoral artery. These procedures, which are more
invasive then X-ray angiograms, are not commonly used in the United States due
to the elevated risk of complications.
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MRI has been established as the imaging modality of choice for a
broad range of applications, including brain tumors, knee injuries and many
disorders of the head, neck and spine. MRI is performed by placing a portion
of the patient's body in a magnetic field and applying safe, low-energy radio
waves. The different organs and tissues in the body respond uniquely to the
electromagnetic field within the MRI scanner, and these responses can be
captured and converted into high-resolution 3-dimensional images. A contrast
agent is often injected into a vein in the patient's arm prior to an MRI exam
to amplify the signal from the desired anatomical structure. It is estimated
that contrast agents are used in 35-40% of all MRI exams. MR scanners are
characterized by the strength of the magnetic field they generate. Typical
MRI scanners - those most commonly found in hospitals - generate a relatively
strong magnetic field and therefore require significant infrastructure for
installation. Low-field scanners, whose magnetic fields are less than
one-third the strength of traditional scanners, are often found in
out-patient settings due to their relatively low cost and infrastructure
requirements. The trade-off with low-field MR scanners is that a decrease in
the strength of the magnetic field results in a decrease in the MR signal
detected, which typically results in reduced resolution. MRI has not made a
significant impact on the diagnosis of cardiovascular disease to date, with
the exception of certain carotid artery studies. Non-contrast MRI exams of
the vascular system, which image blood flow rather than anatomy, are often
ineffective when used in patients with cardiovascular disease, because of the
minimal or turbulent blood flow associated with this condition. Even for the
imaging of carotid arteries, where flow-based MRI has had some clinical
impact, the lack of direct anatomic data limits the ability of MRI to provide
a quantitative measurement of stenosis required for accurate diagnosis. MRI
exams using existing non-specific contrast agents are limited by the rapid
diffusion of the agents out of the vascular system, which reduces the time
during which an image can be acquired. Consequently, many experts believe MRI
contrast agents that remain in the bloodstream for extended periods of time
will be necessary to obtain sufficient contrast for widespread use of MRI to
image the vascular system.
In summary, the current process for diagnosing cardiovascular disease
is a complicated pathway that typically involves subjecting patients to risky
and invasive procedures before a definitive diagnosis can be rendered. We
therefore believe that there is significant clinical need for a highly accurate,
non-invasive exam that provides more comprehensive diagnostic information about
the cardiovascular system.
Our Approach To Cardiovascular MRI
Our principal product under development, MS-325, is an injectable
intravascular contrast agent intended to enhance the quality of MR images and
provide physicians with a superior method for diagnosing cardiovascular disease.
Unlike most currently available MRI contrast agents, which are non-specific and
therefore leak out of the vasculature, MS-325 binds to albumin, the most common
blood protein. Because of its affinity for albumin, MS-325 remains at high
concentrations in the bloodstream throughout the MRI exam and therefore,
provides the image acquisition time and signal strength needed to obtain a high
contrast, high resolution image of the cardiovascular system. These images are
intended to provide sufficient anatomical detail for definitive diagnosis and
surgical planning. We believe that MS-325-enhanced MRI may facilitate several
clinically valuable diagnostic procedures.
MS-325-Enhanced Angiography
We believe that MS-325-enhanced MR angiography (MRA) will be used to
diagnose cardiovascular disease and has the potential to replace a significant
portion of the estimated 4.3 million X-ray angiograms performed each year in the
United States. In particular, we believe MS-325-enhanced MRA has the following
advantages over conventional X-ray angiography:
Safety. X-ray angiography is an invasive, catheter-based procedure that
exposes patients to significant risk of serious complications due to
femoral puncture. MS-325-enhanced MRA, on the other hand, is a
non-invasive exam requiring only intravenous injection of MS-325.
No Ionizing Gradiation. MRA using MS-325 involves only safe, low-energy
radio waves rather than potentially harmful ionizing radiation.
Arterial and Venous Information in a Single Exam. Due to persistence in
the blood, MS-325 gives MRI the potential to capture image data of both
arteries and veins in a single exam. Venographic imaging plays a
crucial role in identifying veins suitable to be harvested for use in
bypass grafts as well as planning the route for catheter-based
interventional procedures. X-ray technology requires separate exams to
image arteries and veins.
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Whole-Body Imaging. Whereas X-ray angiography captures data over a
limited vascular region, we expect MS-325-enhanced MRA to provide
clinicians with the ability to capture images of the entire vascular
system. We believe that a whole-body MR angiogram with a single
injection of MS-325 will be particularly well suited for the diagnosis
of cardiovascular disease, given the systemic nature of this
condition.
3-Dimensional Images. MS-325-enhanced MRA captures 3-dimensional data
which can be manipulated by physicians to get the best possible view
of the vessels being examined. These 3-dimensional data sets will
allow physicians to rotate, zoom in and "fly through" images in order
to identify cardiovascular disease.
Cost-Effectiveness. Because it will be performed outside the surgical
setting, MS-325-enhanced MRA is likely to cost significantly less than
X-ray angiography. We estimate that an MRI exam using MS-325 will cost
between $500 and $1,000, roughly one-third the cost of an equivalent
X-ray angiogram.
Patient Monitoring. After an intervention for cardiovascular disease
such as angioplasty or bypass graft, optimal patient management could
include follow-up exams, or re-looks, to determine the re-forming of
blockages, or restenosis, as well as proper functioning of grafts. Due
to the risk, discomfort and expense associated with X-ray angiography,
follow-up imaging currently is limited, which can lead to increased
patient management costs and poorer outcomes due to undiagnosed
restenosis and other complications. We estimate that there are
currently over 2 million patients who have undergone a coronary
angioplasty procedure and over 2 million patients who have undergone
coronary bypass grafts who are potential candidates for a periodic
re-look. In addition, we believe that MS-325-enhanced MRA may have
potential utility to monitor the success of therapeutic treatments
designed to affect the proliferation, or angiogenesis, of
microvessels.
Plaque Characterization. Angiographic images with MS-325-enhanced MRA
have demonstrated the ability to visualize the walls of arteries as
well as the interior, or lumen, of these vessels, potentially allowing
precise determination of plaque shape. We believe that MS-325-enhanced
MRA may allow clinicians to identify regions of inflammation in vessel
walls due to the elevated concentration of albumin in these areas. We
therefore believe that MS-325-enhanced MRA may potentially help
clinicians identify those plaques whose shape and proximity to vessel
wall inflammation make them more likely to pose health risks to
patients.
Low-Field MR Angiography
We believe that the extended blood residence time of MS-325 will prove
particularly beneficial in facilitating the use of low-field MRI scanners for
diagnosing cardiovascular disease. These scanners, which account for
approximately 25% of the installed base of MRI scanners, pose several potential
advantages over traditional scanners: they are relatively inexpensive, they use
open configurations for improved patient comfort, they can be portable, they are
compatible with nearby electronic equipment, and they can enable MRI for
patients with pacemakers. However, low-field scanners do not currently provide
the resolution required for clinically useful vascular studies. Because of its
high signal at low magnetic field strengths, MS-325 may enable low-field MRI
scanners to perform high-resolution imaging of the vasculature. This would
potentially allow relatively inexpensive MRI exams to be performed in outpatient
settings, such as physician offices and freestanding imaging centers.
Integrated Cardiac Exam
We believe that MS-325, coupled with anticipated advances in software
and hardware for MRI equipment, will enable physicians to use MRI to perform a
non-invasive, integrated cardiac exam for the diagnosis of coronary artery
disease. Such a procedure would be designed to provide information on coronary
artery anatomy, including location of arterial blockages, as well as cardiac
perfusion and cardiac function data, in one sitting early in the diagnostic
work-up. Because the procedure is intended to provide physicians with more
comprehensive diagnostic information at an earlier stage of the diagnostic
work-up, physicians would be able to make a more informed diagnosis, and
therefore arrange for appropriate patient treatment, sooner than would
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otherwise be possible, thereby potentially achieving better patient outcomes at
a lower cost. Of the estimated 6.75 million patients in the United States who
enter the diagnostic pathway for coronary artery disease each year, we believe
that over half would be candidates for such an integrated cardiac exam.
Other Cardiovascular Applications
We are currently investigating the potential utility of MS-325-enhanced
MRA for a number of additional applications related to cardiovascular disease,
including myocardial perfusion imaging.
Beyond Cardiovascular
MRI - Additional Applications
We believe MS-325-enhanced MRA will find significant clinical utility
beyond the diagnosis of cardiovascular disease. Because of its potential for
high-resolution imaging of the vasculature, for example, MS-325 is being
investigated for possible use in diagnosing several conditions involving damaged
or abnormal microvessels. In addition, as a marker of albumin, MS-325-enhanced
MRA may play a role in diagnosing conditions which result in regions of atypical
albumin concentration. We are pursuing applications for MS-325 beyond
cardiovascular disease in order to fully leverage the broad diagnostic potential
of this technology.
Technology Platform
Background
Our product candidates are small molecule chelates (soluble
metal-organic complexes) containing a magnetically active metal element,
gadolinium, which elicits a strong MRI signal. The design of these molecules
is derived from the unique and highly complex intersection of chemistry,
pharmacology, and biophysics. Our compounds must be safe, easily eliminated from
the body, and display a useful distribution pattern in the body. At the same
time, these agents must elicit the strongest possible effect on the local
magnetic properties of tissue. Our scientists specialize in discovering and
patenting useful ways to combine these two disparate areas of investigation.
Specifically, we believe our ability to design targeted MRI contrast agents is a
result of our expertise in three areas:
Targeting
We develop metal complexes that are engineered to bind to particular
proteins and receptor molecules in the body. This binding causes increased
concentration and retention of the contrast agent in the specific tissues and
fluids that contain the targeted receptor molecules. The challenge in designing
such agents is two-fold: one must both choose the best target - the protein or
cell type that most precisely characterizes the relevant disease state - and
identify a targeting region that binds to that target without binding to other
molecules in the body. The targeting of MS-325, for example, is designed to bind
selectively to albumin, the most common blood protein, which keeps the agent
localized within the bloodstream. For our thrombus MR agent, we have used
combinatorial chemistry technology to select a family of highly specific
peptides which bind to fibrin, the dominant protein inside clots, without
binding to fibrinogen, a similar, but far less clot specific protein in blood.
We have considerable expertise in peptide synthesis and in labeling the peptides
with strongly enhancing clusters of gadolinium.
MRI Signal Generation
A key to our biophysical technology platform is receptor-induced
magnetic enhancement, or RIME. Developed by Dr. Randall Lauffer, our founder and
Chief Scientific Officer, while at Massachusetts General Hospital, RIME is now
exclusively licensed by us under patents held by the Massachusetts General
Hospital. The binding of a RIME agent to its receptor reduces the rate at which
the agent rotates in solution. This reduction in rotation rate leads to a
complex magnetic effect whereby the agent's signal-enhancing characteristics are
substantially increased, resulting in a stronger signal during MR scans. For
MS-325, RIME effects result in an up to 10-fold increase in signal relative to
non-specific gadolinium agents. We also have technology for the synthesis of
discrete, compact clusters of gadolinium chelates to increase the signal from a
single targeting molecule. This involves challenges in both chemistry and
biophysics to maintain the RIME effect.
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Image Acquisition and 3-D Visualization
We have also developed significant expertise in the translation of raw
MRI data into clinically useful 3-dimensional images. MRI is the most flexible
of the major medical imaging modalities. The hardware and software of most MRI
scanners allow an enormous range of data acquisition methods, and, increasingly,
methods for displaying and interpreting the resulting medical images. Through
our research and development, extensive academic collaborations and industrial
partnerships, we have built a deep understanding of the relationships between
the contrast agent biophysics, scanner engineering, and medical practice. Our
expertise allows us not only to create the best images for the agents we have
already designed, but is critical for optimizing the clinical usefulness of
future MRI agents.
Our Product & Development Programs
MS-325
Background
Our lead product candidate, MS-325, is a targeted intravascular
contrast agent intended for use with MRI. MS-325 is a small molecule which
produces an MRI signal by containing gadolinium, a highly magnetically active
element favored by clinicians for enhancing MR images. This molecule is designed
with our proprietary technology to bind to albumin, the most common blood
protein. In MS-325 images using standard MRI techniques, the blood gives off a
strong magnetic signal and appears bright against the dark background of
surrounding tissue. Because of its affinity for albumin, MS-325 remains at high
concentrations in the bloodstream throughout the MRI exam and therefore provides
the image acquisition time and signal strength needed to obtain a high contrast,
high resolution image of the cardiovascular system. Like most currently
available non-specific contrast agents, MS-325 is designed to be excreted safely
through the kidneys over time.
Lead Indication - Aortoiliac Occlusive Disease
In June 1999, we initiated a Phase III clinical trial to determine
the efficacy of MS-325-enhanced MRA for the detection of aortoiliac occlusive
disease, a common form of peripheral vascular disease. Evaluation for
aortoiliac occlusive disease is a critical component of two common procedures
performed on the peripheral vascular system: abdominal aortography,
particularly for the identification of abdominal aortic aneurysm, and leg
arteriography, also known as peripheral run-off, for the detection of
atherosclerosis. The trial, a multi-center, comparative, two-arm study with a
target enrollment of 600 patients, is designed to compare the diagnostic
accuracy of MS-325-enhanced MRA with that of X-ray angiography. This trial is
expected to include over 50 clinical sites worldwide. In June 1998, we
completed a Phase II clinical trial to test the safety and preliminary
efficacy of MS-325 for the evaluation of peripheral vascular disease in the
carotid, iliac and femoral arteries. This Phase II trial was conducted at
seven clinical sites and involved the blinded administration of MS-325 at
several dosing levels in a total of 81 patients. In the trial,
MS-325-enhanced MRA was compared to conventional X-ray angiography, the
current reference standard, to determine the location and degree of plaque
blockages. The results for identification of plaque blockages, combining all
doses, indicate that MS-325 demonstrated 82% accuracy, 80% sensitivity and
82% specificity in the peripheral vasculature relative to X-ray angiography.
In this study, MS-325 was well tolerated by patients at all dose levels, with
no severe side effects reported.
Coronary Artery Disease
We are currently conducting a Phase II feasibility trial to test the
safety and preliminary efficacy of MS-325 for the evaluation of coronary artery
disease. This trial is being conducted at multiple sites. As with the completed
Phase II peripheral vascular disease trial, MS-325-enhanced MR angiography is
being compared to X-ray angiography, the current reference standard, to
determine the location and degree of plaque blockages. Clinical use of MR
angiography for imaging the coronary arteries is particularly difficult at
present due to the problem of cardiac motion which results from both the beating
of the heart and respiration. We have joined with several leading MRI
manufacturers, academic centers and other research organizations to develop
hardware and software solutions to the problem of cardiac motion. Promising
early images from this study have been obtained, which indicate that MS-325 may
increase coronary vessel contrast.
9
Potential Additional Applications
We are currently conducting clinical and preclinical studies to
determine the potential utility of MS-325-enhanced MS-325-enhanced MRI for
additional applications, including the following:
Breast Cancer
In March 2000, we completed enrollment for a 45-patient multi-center
Phase II feasibility trial designed to test the safety and preliminary
efficacy of MS-325-enhanced MRI for detecting malignant breast lesions in
women with breast abnormalities. In this trial, MS-325-enhanced MRI was
evaluated on 20 patients using low field MRI scanners and 25 patients using
high field MRI systems. Data from the sub-population of the twenty patients
using low field MRIs showed marked and persistent contrast enhancement in
both benign and malignant lesions, demonstrating that MS-325 provides a
strong signal enhancement of breast lesions and enables high quality imaging
at field strengths associated with open MR and lower field magnetic resonance
systems that we believe will be appropriate for breast clinics. We believe
that MS-325 has potential utility as part of a non-invasive imaging procedure
that would assist physicians in identifying breast cancer in patients who
have had mammograms that do not yield conclusive information or who are at
high risk of developing breast cancer. Commencement of additional clinical
trial studies for the breast cancer application is contingent upon the future
outlook and development of the breast imaging market.
Female Sexual Arousal Dysfunction
In March 2001, we completed enrollment in a Phase II feasibility
trial which we conducted in collaboration with Pfizer, Inc. to explore the
efficacy of MS-325-enhanced MRI in the diagnosis of female sexual arousal
dysfunction. Preliminary results from this trial indicate that
MS-325-enhanced MRI is able to measure changes in pelvic blood volume and
organ volume during sexual arousal. We believe that this technique may prove
useful in assessing how different diseases affect sexual response in women as
well as examining the effects of potential treatments in restoring impaired
sexual response.
Myocardial Perfusion
We are currently evaluating results from preclinical studies to assess
the utility of MS-325 to detect myocardial perfusion.
Prototype Clot Imaging Agent
Background
Thromboembolic disease refers to a class of relatively common disorders
involving the formation of blood clots or, thrombi, in the veins and arteries.
The most common form of this disease, deep vein thrombosis, or DVT, is
characterized by the presence of thrombi in the deep veins of the leg and calf.
This disease afflicts approximately 2 million Americans each year. The most
severe consequences of DVT tend to occur when a thrombus dislodges from the
vessel wall to form an embolus, which can then pass to and obstruct arteries in
the lung. This condition, known as pulmonary embolism, or PE, affects an
estimated 600,000 patients each year in the United States. In addition, blood
clots in the carotid artery can lead to stroke, while clots in the coronary
arteries can result in heart attack. We estimate that blood clots are
responsible for over 400,000 deaths each year in the United States. The current
method for diagnosing DVT involves a series of venous ultrasound exams typically
followed by X-ray venography. The ultrasound procedure, while non-invasive, is
effective primarily for diagnosing DVT in the thighs. It is ineffective for a
significant portion of the patient population who may be asymptomatic and those
who have clots forming below the knee, in the pelvis and in the vena cava. It is
estimated that over 2.1 million ultrasound procedures are performed each year in
the United States to detect DVT. X-ray venography, which represents the current
gold standard for diagnosis, requires the injection of X-ray contrast dye into
the foot and carries a significant risk of complications, including the
formation of new clots. The diagnosis of PE presents an even greater challenge
for clinicians. In fact, research suggests that this diagnosis is missed more
than 50% of the time. The primary diagnostic technique for PE, a nuclear scan,
is indeterminate in a large number of patients. Nearly 1 million such exams were
performed in the United States in 1998. In the event of an indeterminate exam,
the clinician must either infer the diagnosis from the presence/absence of DVT
or must perform a pulmonary angiogram. Pulmonary angiography is a highly
invasive catheter-based procedure that
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subjects the patient to significant risk of morbidity and mortality. Clots in
the carotid and coronary arteries are diagnosed in much the same way as
atherosclerotic blockages, with X-ray angiography providing definitive diagnosis
in most patients.
Development Program
We are seeking to develop a targeted contrast agent that would
enable MRI to illuminate blood clots. Such a product could potentially change
the diagnostic work-up for many of the conditions associated with
thromboembolic disease, including PE and DVT. We believe that the use of this
new approach could lead to better medical outcomes due to earlier and more
definitive diagnosis. Early diagnosis is especially important for clots in
the thigh, pelvis and vena cava. Because of their increased likelihood of
migrating to the lungs once inside the pulmonary vasculature, these clots can
be fatal. We believe that such a contrast agent could eliminate the need for
the CT, ultrasound and nuclear medicine studies currently used to identify
thrombotic disease, and could potentially provide a non-invasive but
clinically equivalent alternative to pulmonary angiography. We further
believe that our proprietary technology platform could enable MRI to
differentiate old and new clot formation, potentially identifying those clots
that pose the most risk to patients. Our prototype clot-imaging agent is
based on a family of highly specific peptides that bind to fibrin, the
dominant protein inside clots. The selected peptide is linked to a
proprietary gadolinium group, which for the first time will provide a
sufficiently strong signal to allow imaging of clots during MRI exams. In
November 1999, we announced that a prototype agent, EP-862, had been shown in
preclinical testing to detect sub-millimeter blood clots in an animal model.
In 2000, we continued to advance this program, identifying an improved
prototype agent, EP-1242, as our current lead product candidate. We expect to
continue to devote significant resources to this program in the future and
hope to file an Initial New Drug (IND) application with the FDA which, if
approved, will allow us to begin human safety trials.
Business Strategy
Our objective is to become a worldwide leader in MRI contrast agents by
pursuing a strategy based on commercializing MS-325 and developing new
applications for our proprietary technology platform. Our key business
objectives are to:
o Establish the safety and clinical utility of MS-325 for
multiple cardiovascular imaging indications. In June 1999, we
initiated a Phase III clinical trial to determine the efficacy
of MS-325-enhanced MRA for the detection of aortoiliac
occlusive disease. We continue to enroll patients in our Phase
II feasibility trial to assess the safety and preliminary
efficacy of MS-325-enhanced MRA for the evaluation of coronary
artery disease. In each of these clinical trials, we compare
MS-325-enhanced MRA to X-ray angiography, the current
reference standard for these indications. In addition, we are
currently conducting preclinical trials for such applications
as myocardial perfusion imaging.
o Establish the clinical utility of MS-325 beyond cardiovascular
imaging. We are committed to leveraging the unique diagnostic
properties of MS-325 across as many clinical applications as
possible. We are therefore seeking to establish the clinical
utility of MS-325-enhanced MRA in diagnosing many conditions
other than cardiovascular disease. In March 2000, we completed
enrollment for a Phase II feasibility study designed to
evaluate the safety and efficacy of MS-325-enhanced MRA in
identifying malignant breast lesions in women with breast
abnormalities. In March 2001, we completed enrollment in a
Phase II feasibility trial, in conjunction with Pfizer Inc.,
to assess the potential utility of MS-325-enhanced MRA in
diagnosing female sexual arousal dysfunction by monitoring
pelvic blood volume in women.
o Develop an MRI Imaging Agent for Thromboembolic Disease
Imaging. We are currently developing thrombosis-specific MRI
contrast agents based on our proprietary technology platform,
and we hope to file an IND application with the FDA which, if
approved, will allow us to begin human safety trials.
o Maximize the value of strategic alliances. We have established
collaborations with Schering AG, Mallinckrodt, Daiichi
Radioisotope Laboratories, Ltd. ("Daiichi") General Electric
Medical Systems, Philips Medical Systems, Siemens Medical
Systems, and Pfizer. We entered into these alliances, and will
seek to enter into future strategic alliances with
pharmaceutical, imaging agent and MRI equipment industry
leaders, in order to obtain access to resources and
infrastructure to leverage our strengths. See "-Strategic
Alliances."
11
Strategic Alliances
Our strategy includes entering into alliances with leaders in the
pharmaceutical, diagnostic imaging and MRI equipment industries to facilitate
the development, manufacture, marketing, sale and distribution of our products.
To date, we have formed strategic alliances with Schering AG, Mallinckrodt,
General Electric Medical Systems, Philips Medical Systems, Siemens Medical
Systems, and Pfizer.
Co-Development, Sales & Marketing
SCHERING AG
In June 2000, we entered into a strategic collaboration agreement
pursuant to which we granted Schering AG an exclusive license to co-develop
and market MS-325 worldwide, exclusive of Japan. In December 2000, we amended
this strategic collaboration agreement to grant to Schering AG the exclusive
rights to develop and market MS-325 in Japan. Generally, we will both share
equally in MS-325 clinical development costs and profits. Under the
agreement, we will assume responsibility for completing clinical trials and
filing for FDA approval in the United States, and Schering AG will lead
clinical activities for MS-325 outside of the United States. In addition, we
granted Schering an exclusive option to develop and market an unspecified
cardiovascular product from our pipeline. In connection with this strategic
collaboration agreement and in connection with the amendment to the strategic
collaboration agreement between us and Mallinckrodt, as further described
below, Schering AG paid us an up-front fee of $10.0 million, which we then
paid to Mallinckrodt. Schering AG also made a $20.0 million equity investment
in us at $17.98 per share of common stock, through its affiliate, Schering
Berlin Venture Corporation ("Schering BV"). We may receive up to an
additional $20.0 million in milestone payments under the strategic
collaboration agreement. Under the terms of the December 2000 amendment,
Schering AG paid us an up-front fee of $3.0 million and may be required to
pay us an additional $7.0 million upon our achievement of certain milestones.
Also, under the strategic collaboration agreement, we have options
to acquire certain participation rights with respect to two of Schering AG's
products currently in clinical trials, SHU 55C and Gadomer-17. We are
entitled to exercise these options on a region-by-region basis upon the
payment of certain fees. We are entitled to exercise the SHU 555C option for
a period of twelve months after the date the option becomes exercisable. Once
we exercise the SHU 555C option, we will enter into a definitive agreement
with Schering AG with respect to SHU 555C, pursuant to which Schering AG will
be responsible for the conduct of all development, marketing and sales
activities in connection with SHU 555C. We are entitled to exercise the
Gadomer-17 option for a period of 120 days following Schering AG's
performance of certain milestones. Once we exercise the Gadomer-17 option, we
will enter into a definitive agreement with Schering AG with respect to
Gadomer-17, pursuant to which we will share development costs incurred from
the date of the option exercise, as well as profits, equally with Schering
AG. Under the terms of the strategic collaboration agreement, either party
may terminate the agreement upon thirty days notice if there is a material
breach of the contract or if either party fails to meet certain milestones.
In addition, Schering AG may terminate the agreement at any time on a
region-by-region basis or in its entirety, upon six months written notice to
us; and we may terminate the agreement with respect to development of MS-325
in the European Union at any time after June 9, 2001 upon ninety days written
notice to Schering AG, if Schering AG has failed to meet its obligations in
connection with the regulatory approval of MS-325 in the European Union.
On May 8, 2000, we granted to Schering AG a worldwide,
royalty-bearing license to patents covering Schering AG's development
project, Eovist injection, an MRI contrast agent for imaging the liver,
currently in Phase III clinical trials. Also on May 8, 2000, Schering AG
granted us a non-exclusive, royalty-bearing license to certain of its
Japanese patents. We agreed to withdraw our invalidation claim of Schering
AG's Japanese patent 1,932,626 in the Japanese Patent Office pursuant to this
license agreement. See "Patents and Proprietary Rights." Schering AG had been
an opposing party in our European patent case prior to the licensing
agreement. On May 9, 2000, the Opposition Division of the European Patent
Office maintained our European patent in a slightly amended form. The patent
is owned by the Massachusetts General Hospital and is exclusively licensed to
us. The remaining opposing parties have elected to appeal the May 9, 2000
decision.
Mallinckrodt
In June 2000, in connection with the exclusive license that we
granted to Schering AG, we amended our strategic collaboration with
Mallinckrodt to grant Mallinckrodt a non-exclusive, worldwide license to
manufacture MS-325 for clinical development and commercial use in accordance
with a manufacturing agreement entered into in June 2000 between Mallinckrodt
and Schering AG, and to enable us to enter into the strategic collaboration
agreement with Schering AG described above. In connection with this
amendment, we paid Mallinckrodt an up-front fee of $10 million and may be
required to pay up to an additional $5 million in milestones. We will also
pay Mallinckrodt a share of operating margins in the US and a royalty on
gross profits outside the US on sales of MS-325.
In October 1999, we entered into a Non-Negotiable Promissory Note
and Security Agreement (the "Loan") with Mallinckrodt, our strategic partner,
under which we were eligible to borrow our share of MS-325 development costs,
on a quarterly basis, up to a total of $9.5 million. In June 2000, pursuant
to the amended collaboration agreement with Mallinckrodt and the new
strategic collaboration with Schering, Schering assumed the development cost
sharing obligation for MS-325 from Mallinckrodt as of January 1, 2000. As a
result, the terms of the Loan were amended to allow funding under the Loan
for our portion of development costs through December 31, 1999. The Loan
balance at December 31, 2000 of $3,004,607 represents our share of third and
fourth quarter 1999 MS-325 development costs. No additional funding is
available to us under the Loan. The Loan bears interest, adjustable on a
quarterly basis, at the Prime Rate published in the Wall
12
Street Journal and is repayable in full on October 1, 2002. The Loan is secured
by a first priority security interest in all of the Company's intellectual
property.
Daiichi
In March 1996, we entered into a development and license agreement
with Daiichi pursuant to which we granted Daiichi an exclusive license to
develop and commercialize MS-325 in Japan. Under this arrangement, Daiichi
assumed primary responsibility for clinical development, regulatory approval,
marketing and distribution of MS-325 in Japan. We retained the right and
obligation to manufacture MS-325 for development activities and commercial
sale under the agreement. In December 2000, we reacquired the rights to
develop and commercialize MS-325 in Japan from Daiichi. Under the terms of
this Reacquisition Agreement with Daiichi, we agreed to pay Daiichi a total
amount of $5.2 million. In January 2001, we paid Daiichi $2.8 million in fees
and we will pay an additional $2.4 million in the future. Daiichi will also
receive a royalty from us on net sales of MS-325 in Japan. Simultaneously
with our reacquisition from Daiichi of the MS-325 development and marketing
rights in Japan, we assigned these rights to Schering AG as described above.
Equipment Manufacturers
To date, we have formed collaborations with the three major MRI scanner
manufacturers, General Electric Medical Systems, Philips Medical Systems and
Siemens, to develop advanced imaging techniques designed to facilitate the use
of MS-325-enhanced MRI. We believe it is extremely important to collaborate with
equipment manufacturers to develop MRI techniques capable of taking full
advantage of the unique properties of MS-325 to diagnose cardiovascular disease.
General Electric Medical Systems
In January 1998, we announced the formation of collaboration with
General Electric Medical Systems to accelerate the development of cardiovascular
MRI. In particular, the collaboration focuses on reducing the effects of cardiac
motion on MR images, providing user-friendly computer tools as a means of
visualizing arteries and veins in 3-dimensional space, and optimizing MRI
sequences for intravascular MRI contrast agents, including MS-325. Under the
terms of this non-exclusive agreement, research is performed at several centers
in addition to our facilities, including General Electric's corporate research
facility in Schenectady, NY; General Electric Medical Research in Milwaukee, WI;
and several academic centers.
Philips Medical Systems
We agreed in November 1998 to collaborate with Philips Medical Systems
in advancing the development of contrast-based cardiovascular MRI technologies.
Under the terms of this non-exclusive collaboration agreement, we and Philips
Medical Systems will combine our resources to optimize imaging technology and
improve 3-dimensional visualization of arteries and veins in patients undergoing
MR angiography. Research and development is to be carried out at several
international Philips research centers and as well as at our facilities.
Siemens Medical Systems
In September 1999, we announced a non-exclusive collaboration with
Siemens Medical Systems to optimize MR imaging technology and improve
visualization of arteries and veins in patients undergoing MR angiography. The
collaboration will also focus on expanding the use of MRI in diagnosing
cardiovascular disease and providing user-friendly tools for easy visualization
of the cardiovascular system in three-dimensional space. Research and
development will be carried out at our facilities and at Siemens' Iselin, NJ
facilities.
Potential New Applications
Pfizer
In September 1998, we entered into an exclusive agreement with
Pfizer to explore the potential utility of MS-325-enhanced MRI in the
diagnosis of female sexual arousal dysfunction. As part of this collaboration
with Pfizer, we undertook a Phase II feasibility trial to explore the
efficacy of MS-325-enhanced MRI in the detection and monitoring of female
sexual arousal dysfunction. We completed enrollment in this trial in March
2001. Under the terms of this collaboration, Pfizer has full responsibility
for funding the trial. Pfizer currently markets Viagra(R) for erectile
dysfunction in men.
13
Competition
The healthcare industry is characterized by extensive research
efforts and rapid technological change, and there are many companies that are
working to develop products similar to ours. There are currently no
FDA-approved targeted vascular contrast agents for use with MRI. However,
there are a number of non-specific MRI agents approved for marketing in the
United States and in certain foreign markets that are likely to compete with
MS-325 if approved for MR angiography. Magnevist(R) by Schering-AG,
Dotarem(R) by Guerbet, S.A., Omniscan(R) by Nycomed Imaging ASA ("Nycomed"),
ProHance(R) by Bracco S.P.A. ("Bracco"), and OptiMARK(R) by Mallinckrodt are
all such products. We are aware of five agents under clinical development,
Nycomed's NC100150 and Schering AG's Gadomer-17, SHU 55C, Bracco's B-22956/1
and Advanced Magnetic's Code 7228 that have been or are being evaluated for
use in MRA. We are aware of no MRI contrast agent other than EPIX's prototype
being developed for use in imaging blood clots. We can not assure you that
our competitors will not succeed in the future in developing products that
are more effective than any that are being developed by us. We believe that
our ability to compete within the MRI contrast agent market is dependent on a
number of factors, including the success and timeliness with which we
complete FDA trials, the breadth of applications, if any, for which our
products receive approval, and the effectiveness, cost, safety and ease of
use of our products in comparison to the products of our competitors. Our
success will also be dependent on physician acceptance of MRI as a primary
imaging modality for certain cardiovascular and other applications.
We have many competitors, including pharmaceutical, biotechnology
and chemical companies. A number of competitors, including two of our
strategic partners, are actively developing and marketing products that, if
commercialized, would compete with our product candidates. Many of these
competitors have substantially greater capital and other resources than we do
and may represent significant competition for us. Such companies may succeed
in developing technologies and products that are more effective or less
costly than any of those that may be developed by us, and such companies may
be more successful than us in developing, manufacturing and marketing
products. Furthermore, there are several well-established medical imaging
modalities that currently compete, and will continue to compete, with MRI,
including X-ray angiography, CT, nuclear medicine and ultrasound. Other
companies are actively developing the capabilities of the competing
modalities to enhance their effectiveness in cardiovascular system imaging.
For example, we are aware of at least one radiopharmaceutical agent, Schering
AG's AcuTect, which has been approved for imaging acute venous thrombosis.
Several other nuclear medicine agents, including Draxis Health's FibrImage
and Schering AG's P748, are in clinical testing for DVT and PE, respectively.
We believe another radiopharmaceutical under clinical development by Schering
AG, P-773, is being investigated for use in imaging atherosclerotic plaque.
In addition, while no ultrasound contrast agent has yet been approved for
myocardial perfusion imaging, several of these agents are undergoing clinical
testing for this indication, including Tyco Mallinckrodt's Optison, DuPont's
Definity, Alliance Pharmaceutical's Imagent, and Nycomed's Sonazoid. Finally,
we are aware of one ultrasound agent, ImaRx's MRX-408, under preclinical
development for imaging DVT. We cannot guarantee that we will be able to
compete successfully in the future or that developments by others will not
render MS-325 or our future product candidates obsolete or non-competitive or
that our collaborators or customers will not choose to use competing
technologies or products.
Patents and Proprietary Rights
We consider the protection of our proprietary technologies to be
material to our business prospects. We pursue a comprehensive patent program in
the United States and in other countries where we believe that significant
market opportunity exist.
We own or have exclusively licensed patents and patent applications on
the critical aspects of our core technology as well as many specific
applications of this technology. Our patents and applications covering RIME
technology consist of the following: seven U.S. patents exclusively licensed
from the General Hospital Corporation (hereinafter "the Hospital") as well as
their cognate patents and applications in foreign countries; two U.S. patents
owned by us as well as their cognate patents and applications in foreign
countries; seven applications in prosecution on seven different subject matters
as well as their cognate patents and applications in foreign countries. The
application that corresponds to two of the exclusively licensed U.S. patents
which broadly cover RIME technology, albumin binding with metal chelates, and
liver targeting metal chelates, has also issued as a patent in Europe: European
Patent 222,886 (hereinafter "the '886 EP patent"). The two United States patents
were involved in an interference proceeding with an application owned by
Mallinckrodt, but the interference was terminated in our favor. One of our
Japanese patent applications has been opposed by several parties. The Japanese
Patent Office issued a final rejection of this patent application. A Notice of
Appeal was filed in the Japanese Patent Office on May 9, 1999, but the case has
not yet been assigned to an Examiner. The sole issue in these
14
proceedings is whether the Japanese Patent Office should have granted a patent
to us. A divisional of the disputed application is still being prosecuted.
The '886 EP patent was opposed by several parties. The Notices of
Opposition were filed in 1997 and a Preliminary Opinion affirming the patent's
validity was rendered on November 2, 1998. Oral arguments were heard on May 9,
2000, and the European Patent Office issued their written opinion affirming
validity on May 19, 2000. Several of the opposing parties have appealed this
decision.
In addition, third parties have sought, in an Italian court, a
declaration of non-infringement of the '886 EP patent. Those third parties seek
transborder application of a non-infringement declaration in those European
countries where the `886 EP patent is in force. The complaint was filed on
February 23, 1999 in the Court of Milan, Italy. There is no potential liability,
other than court costs, to us in this suit. This case is still in the pretrial
stage. The parties have also sued the Hospital and us in Italy seeking to
invalidate the Italian portion of the same patent. The complaint seeking
invalidity was filed on October 20, 1998 in the Court of Milan, Italy. The sole
issue in this case is whether the Italian portion of the patent is valid. This
case was consolidated with the Italian non-infringement action, discussed above.
The same parties have also sued the Hospital in the United Kingdom
(Patents Court, London) seeking a declaration of invalidity of the UK portion of
the Hospital's patent. The appeals court in the United Kingdom has affirmed a
stay of the proceedings pending the final outcome, including possible appeals,
of the Opposition Proceedings in the European Patent Office. There is no
potential liability to us, except court and legal costs, in this case.
On May 9, 2000, the European Patent Office maintained the validity of
the European patent in a slightly amended form during oral proceedings and
issued their written opinion affirming validity on May 19, 2000. On May 8, 2000,
we granted to Schering AG, one of the opposing parties, a worldwide,
royalty-bearing license to the family of patents that includes the '886 EP
patent. The remaining opposing parties have elected to appeal the May 9, 2000
decision.
In addition, the Hospital and we have commenced two patent
infringement actions in Europe. In these actions, in France and Germany, the
Hospital and we seek to enforce the European patent against the same parties
seeking a judgment of non-infringement in Italy and invalidity judgments in
Italy and the UK. We seek both injunctive relief and damages in these
actions. In Germany, the case is stayed pending a decision on jurisdiction in
Italy, although the decision to stay was appealed with support on December 2,
2000. In France, the court's decision to determine the merits of infringement
was appealed. No decision on the appeal has yet been published. A decision on
the request for a preliminary injunction is currently pending. These
oppositions, appeals relating thereto and the European proceedings, may take
several years to resolve unless the parties reach agreement by settlement.
While we believe that we will prevail in these proceedings, there can
be no assurance as to the scope of the claims that will be maintained, if any,
or the ultimate benefit, if any, of those claims to us in protecting our
products.
We have received a patent in the United States covering the process by
which MS-325 is manufactured (U.S. Patent Number 5,919,967; granted July 6,
1999; expires April 11, 2017). Our patent protection for MS-325 currently
extends to 2006 in the United States and Europe. If the currently pending patent
applications issue, this protection will continue until at least 2015.
Protection for the manufacturing process in the United States already exists
until 2017, and will continue until 2016 in Europe and Japan if the currently
pending patent applications issue. Among the seven pending applications, three
pertaining to methods for imaging were filed during 2000.
An issued patent grants to the owner the right to exclude others from
practicing inventions claimed therein. In the United States, a patent filed
before June 8, 1995 is enforceable for 17 years from the date of issuance or 20
years from the deemed date of filing the underlying patent applications,
whichever is longer. Patents that issue from applications filed after June 8,
1995 expire 20 years from the filing date according to the General Agreement on
Tariffs and Trade. This new rule is generally regarded as unfavorable to
pharmaceutical companies, where the time period between patent filing and
commercialization of the patented product may be extended many years because of
the lengthy development cycle and regulatory process.
The patent positions of pharmaceutical and biopharmaceutical firms
involve complex legal and factual questions. There can be no assurance that our
issued patents, or any patents that may be issued in the future, will
15
effectively protect our technology or provide a competitive advantage. There can
be no assurance that any of our patents or patent applications will not be
challenged, invalidated or circumvented in the future.
Our commercial success will also depend on our ability to operate
without infringing upon the patents of others in the United States and abroad.
If any third-party patents are upheld as valid and enforceable in any judicial
or administrative proceeding, we could be prevented from practicing the subject
matter claimed in such patents, or would be required to obtain licenses from the
patent owners of each such patent, or to redesign our products or processes, to
avoid infringement. There can be no assurance that such licenses would be
available or, if available, would be available on terms acceptable to us or that
we would be successful in any attempt to redesign our products or processes to
avoid infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business, financial condition and results of operations.
Under a strategic collaboration agreement, we have licensed
technology from Schering AG on a worldwide basis relating to methodologies
used by us in the development or use of certain of our product candidates.
This technology relates to MRI contrast agents including MS-325 and other
chelate-based MRI contrast agents. Under this agreement, production and sale
of MS-325 in Japan, the United States, and Europe will be the result of
collaboration with Schering AG and Mallinckrodt. There can be no assurance
that our current or future activities will not be challenged, that additional
patents will not be issued containing claims materially constraining our
proposed activities, that we will not be required to obtain licenses from
third parties, or that we will not become involved in costly, time-consuming
litigation regarding patents in the field of contrast agents, including
actions brought to challenge or invalidate our own patent rights. At the same
time, we are aware of certain products under development and/or on sale by
the third party referred to above and others that we believe may infringe
certain of our exclusively licensed patents. We have commenced and/or expect
to commence litigation in various European countries against other third
parties for infringing our European patent. We are pursuing license or
cross-license arrangements with or, if necessary and appropriate, are
continuing infringement proceedings against, these parties. In this regard,
on May 8, 2000, we granted to Schering AG a worldwide royalty-bearing license
to our patents covering Schering AG's development project, Eovist injection,
an MRI contrast agent for imaging the liver. Also on May 8, 2000, Schering AG
granted us a non-exclusive royalty-bearing license to certain Japanese
patents and applications. While we believe that we will prevail in these
litigations, there can be no assurance as to the outcome or the scope of any
injunctive or monetary relief we may recover. We also intend to pursue
license or cross-license arrangements with or, if necessary and appropriate,
infringement proceedings against, these parties upon their seeking final
regulatory approval for the marketing and sale of any such products.
Many of our competitors are continuing to actively pursue patent
protection for activities and discoveries similar to ours. There can be no
assurance that these competitors, many of which have substantially greater
resources than us and have made substantial investments in competing
technologies, will not in the future seek to assert that our products or
chemical processes infringe their existing patents and/or will not seek new
patents that claim to cover aspects of our technology. Furthermore, patent
applications in the United States as well as patent applications in foreign
countries are maintained in secrecy for a specified period after filing before
they are made public through publication. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and the
filing of related patent applications. In addition, patents issued and patent
applications filed relating to biopharmaceuticals are numerous. Therefore, there
can be no assurance that we are aware of all competitive patents, either pending
or issued, that relate to products or processes used or proposed to be used by
us.
We and the Hospital have entered into a license agreement pursuant to
which the Hospital has granted us an exclusive worldwide license to the patents
and patent applications, which relates to one of our product candidates, MS-325,
which is progressing through regulatory approval. The Hospital license imposed
certain due diligence obligations with respect to the development of products
covered by the license, all of which we believe have been fulfilled to date. The
Hospital license also requires us to pay royalties on our net sales of MS-325.
We must also pay the Hospital a percentage of all royalties received from our
sublicenses. Our failure to comply with these requirements could result in the
conversion of the license from being exclusive to non-exclusive in nature or
termination of the license agreement itself. Any such event would have a
material adverse effect on our business, financial condition and results of
operations.
The pharmaceutical and biotechnology industries have been characterized
by extensive litigation regarding patents and other intellectual property
rights. Litigation may be necessary to enforce any patents issued to us and/or
determine the scope and validity of others' proprietary rights. We may have to
participate in interference
16
proceedings declared by the United States Patent and Trademark Office or by
foreign agencies to determine the priority of inventions. Any involvement in
litigation surrounding these issues could result in extensive costs to us as
well as be a significant distraction for management. Such costs could have a
material adverse effect on our business, financial condition and results of
operations.
We also rely upon trade secrets, technical know-how, and continuing
technological innovation to develop and maintain our competitive position. We
typically require our employees, consultants, and advisors to execute
confidentiality and assignment of invention agreements in connection with their
employment, consulting or advisory relationships with us. These agreements
require disclosure and assignment to us of ideas, developments, discoveries and
inventions made by employees, consultants and advisors. There can be no
assurance, however, that these agreements will not be breached or that we will
have adequate remedies for any breach. Furthermore, no assurance can be given
that competitors will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our
proprietary technology, or that we can meaningfully protect our rights in
unpatented proprietary technology.
We intend to vigorously protect and defend our intellectual property
rights. Costly and time-consuming litigation brought by us may be necessary to
enforce our issued patents, to protect our trade secrets or know-how owned by
us, or to determine the enforceability, scope, and validity of the proprietary
rights of others.
Manufacturing
We currently manufacture, as part of our ongoing development
efforts, small non-GMP (good manufacturing practices as promulgated by the
FDA) batches of MS-325 in our laboratories located in Cambridge,
Massachusetts. MS-325 for use in preclinical toxicology and Phase I and II
clinical trials has been manufactured in accordance with GMP by outside
contractors. Mallinckrodt will serve as primary manufacturer for MS-325
worldwide. If Mallinckrodt is unable to produce MS-325 in adequate amounts
and at a reasonable cost or to comply with any applicable regulations,
including GMP, it could have a material adverse effect on our business,
financial condition and results of operations. Furthermore, should
Mallinckrodt fail to fulfill its manufacturing responsibilities
satisfactorily, Schering AG could be forced to manufacture the compound
itself, or to find an alternative manufacturer. There can be no assurance
that Schering AG would be able to find such an alternative manufacturer or
manufacture MS-325 in a timely manner. If we experience a delay in
manufacturing it could result in a delay in the approval or commercialization
of MS-325. We currently procure the raw materials for the various components
of MS-325 from a broad variety of vendors and, wherever possible, maintain
relationships with multiple vendors for each component. There are a number of
components of MS-325 for which the largest suppliers may have significant
control over the market price due to controlling market shares. If any one of
our suppliers decided to increase prices significantly or reduce quantities
of any component of MS-325 available for sale to us, it could have a material
adverse effect on our ability to commercialize MS-325 and on our business,
financial condition and results of operations. See "Strategic Alliances."
Government Regulation
The manufacture and commercial distribution of our product candidates
are subject to extensive governmental regulation in the United States and other
countries. Pharmaceuticals, including contrast-imaging agents for use with MRI,
are regulated in the United States by the FDA under the Food, Drug and Cosmetic
Act ("FD&C Act") and require FDA approval prior to commercial distribution.
Pursuant to the FD&C Act, pharmaceutical manufacturers and distributors must be
registered with the FDA and are subject to ongoing FDA regulation, including
periodic FDA inspection of their facilities and review of their operating
procedures. Noncompliance with applicable requirements can result in failure to
receive approval, withdrawal of approval, total or partial suspension of
production, fines, injunctions, civil penalties, recalls or seizure of products
and criminal prosecution, each of which would have a material adverse effect on
our business, financial conditions and results of operations.
In order to undertake clinical trials and market pharmaceutical
products for diagnostic or therapeutic use in humans, the procedures and safety
standards established by the FDA and comparable agencies in foreign countries
must be followed. In the United States, a company seeking approval to market a
new pharmaceutical must obtain FDA approval of a new drug application ("NDA").
Before an NDA may be filed, however, a certain procedure is typically followed.
This includes: (i) performance of preclinical laboratory and animal studies;
(ii) submission to the FDA of an application for an investigational new drug
application ("IND"), which must become effective before human clinical trials
may commence; (iii) completion of adequate and well-controlled human
17
clinical trials to establish the safety and efficacy of the pharmaceutical for
its intended use; (iv) submission to the FDA of an NDA; and (v) approval of the
NDA by the FDA prior to any commercial sale or shipment of the agent. In
November 1997, the Food and Drug Administration Modernization Act of 1997 was
passed and signed into law (the "Act"). The Act, most of which became effective
in February 1998, promises, among other things, to streamline the approval
process for drugs and enable patients with serious diseases to more easily
access experimental products. The effect, if any, of the Act on us, MS-325 and
our other product candidates is not known at this time.
Preclinical studies include laboratory evaluation of product chemistry
and animal studies to assess the potential safety and efficacy of the product
and its formulation. The results of the preclinical studies are submitted to the
FDA as part of an IND, and unless the FDA objects, the IND will become effective
30 days following its receipt by the FDA. 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. Each protocol together with information about the clinical
investigators who will perform the studies and the institutions at which the
trials will be performed are submitted to the FDA as part of the IND.
An independent institutional review board ("IRB") at each institution
at which the trial will be conducted will also be asked by the principal
investigator at that institution to approve, according to FDA regulations
governing IRBs, the trials that will be performed at that institution. The IRB
will consider, among other things, ethical factors, the protection of human
subjects and the possible liability of the institution.
Clinical trials under the IND are typically conducted in three
sequential phases, but the phases may overlap. In Phase I, the initial
introduction of the pharmaceutical into humans, the pharmaceutical is tested for
safety, dosage tolerance, metabolism, distribution, excretion and clinical
pharmacology in healthy adult subjects. Imaging agents may also be subject to a
Phase IB trial under which an agent's imaging characteristics in humans are
first evaluated. Phase II involves a detailed evaluation of the safety and
efficacy of the agent in a range of doses in patients with the disease or
condition being studied. Phase III clinical trials typically consist of
evaluation of safety and efficacy in a larger patient population and at more
institutions.
We have completed two Phase I clinical trials to date; the first was
completed in February 1997, and the second in February 1998. No clinically
significant adverse events were reported for these Phase I trials. In June 1998,
we completed a Phase II clinical trial to test the safety and preliminary
efficacy of MS-325-enhanced MRA for the evaluation of PVD. In June 1999, we
initiated a Phase III clinical trial to determine the efficacy of
MS-325-enhanced MRA for the detection of AIOD.
A Phase II trial to assess the safety and feasibility of
MS-325-enhanced MR imaging in the diagnosis of CAD is currently ongoing. The
process of completing clinical testing and obtaining FDA approval for a new
product is likely to take a number of years. When the study for a particular
indication as described in the IND is complete, and assuming that the results
support the safety and efficacy of the product for that indication, the Company
intends to submit an NDA to the FDA. The NDA approval process can be expensive,
uncertain and lengthy. Although the FDA is supposed to complete its review of an
NDA within 180 days of the date that it is filed, the review time is often
significantly extended by the FDA, which may require more information or
clarification of information already provided in the NDA. During the review
period, an FDA advisory committee likely will be asked to review and evaluate
the application and provide recommendations to the FDA about approval of the
pharmaceutical. In addition, the FDA will inspect the facility at which the
pharmaceutical is manufactured to ensure compliance with GMP and other
applicable regulations. Failure of the third-party manufacturers to comply or
come into compliance with GMP requirements could significantly delay FDA
approval of the NDA. The FDA may grant an unconditional approval of an agent for
a particular indication or may grant approval conditioned on further
post-marketing testing and/or surveillance programs to monitor the agent's
efficacy and side effects. Results of these post-marketing programs may prevent
or limit the further marketing of the agent. In addition, further studies and a
supplement to the initially approved NDA will be required to gain approval for
the use of an approved product in indications other than those for which the NDA
was approved initially.
After an NDA is approved, we would continue to be subject to pervasive
and continuing regulation by the FDA, including record keeping requirements,
reporting of adverse experience from the use of the agent and other requirements
imposed by the FDA. FDA regulations also require FDA approval of an NDA
supplement for certain changes if they affect the safety and efficacy of the
pharmaceutical, including, but not limited to, new indications for use, labeling
changes, the use of a different facility to manufacture, process or package the
product, changes in manufacturing methods or quality control systems and changes
in specifications for the product. Failure by us to receive approval of an NDA
supplement could have a material adverse effect on our business,
18
financial condition and results of operations.
The advertising of most FDA-regulated products is subject to FDA and
Federal Trade Commission jurisdiction, but the FDA has sole jurisdiction over
advertisements for prescription drugs. We are and may be subject to regulation
under state and Federal law regarding occupational safety, laboratory practices,
handling of chemicals, environmental protection and hazardous substance control.
We also will be subject to other present and possible future local, state,
federal and foreign regulation. Failure to comply with regulatory requirements
could have a material adverse effect on our business, financial condition and
results of operations.
Approval and marketing of pharmaceutical products outside of the United
States are subject to regulatory requirements that vary widely from country to
country. In the European Union ("EU"), the general trend has been towards
coordination of common standards for clinical testing of new agents, leading to
changes in various requirements imposed by each EU country. The level of
regulation in the EU and other foreign jurisdictions varies widely. The time
required to obtain regulatory approval from comparable regulatory agencies in
each foreign country may be longer or shorter than that required for FDA
approval. In addition, in certain foreign markets we may be subject to
governmentally mandated prices for our products.
Regulations regarding the approval, manufacture and sale of our product
candidates are subject to change. We cannot predict what impact, if any, such
changes might have on our business, financial condition or results of
operations.
Our research, development and manufacturing processes require the use
of hazardous substances and testing on certain laboratory animals. As a result,
we are also subject to federal, state, and local laws, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials and waste as well as the
use of and care of laboratory animals. These laws and regulations are all
subject to change. We cannot predict what impact, if any, such changes might
have on our business, financial condition or results of operations.
Reimbursement
We expect that sales volumes and prices of our products will be
dependent in large measure on the availability of reimbursement from third-party
payers and that individuals seldom would be willing or able to pay directly for
all the costs associated with procedures which in the future may incorporate the
use of our products. We expect that our products will be purchased by hospitals,
clinics, doctors and other users that bill various third-party payers, such as
Medicare, Medicaid and other government insurance programs, and private payers
including indemnity insurers, Blue Cross Blue Shield plans and managed care
organizations ("MCOs") such as health maintenance organizations. Most of these
third-party payers provide coverage for MRI for some indications when it is
medically necessary, but the amount that a third-party payer will pay for MRI
may not include a separate payment for a contrast-imaging agent that is used
with MRI. Reimbursement rates vary depending on the procedure performed, the
third-party payer, the type of insurance plan and other factors. For example,
Medicare pays hospitals a prospectively determined amount for an in-patient stay
based on a Medicare beneficiary's discharge diagnosis related group ("DRG").
This payment includes payment for any procedure, including MRI that is performed
while a beneficiary is in the hospital. No additional payment has been made for
contrast agents used during the procedure. Federal legislation enacted in 2000
provides for a separate reimbursement code for the procedure employing a
contrast agent. Certain new contrast agents may be eligible for additional
pass-through payments. Other third-party payers may pay a hospital an
additional amount for an MRI procedure performed on an in-patient according to
another methodology such as a fee schedule or a percentage of charge. Such
payment may or may not include a payment for a contrast-imaging agent.
Third-party payers carefully review and increasingly challenge the
prices charged for procedures and medical products. In the past few years, the
amounts paid for radiology procedures in particular have come under careful
scrutiny and have been subject to decreasing reimbursement rates. In addition,
an increasing percentage of insured individuals are receiving their medical care
through MCOs that monitor and often require preapproval of the services that a
member will receive. Many MCOs are paying their providers on a capitated basis
that puts the providers at financial risk for the services provided to their
patients by paying them a predetermined payment per member per month. The
percentage of individuals, including Medicare beneficiaries, covered by MCOs is
expected to grow in the United States over the next decade. We believe that the
managed care approach to healthcare and the growth in capitated arrangements and
other arrangements under which the providers are at financial risk for the
services that are provided to their patients will facilitate the market
acceptance of our products, as we believe that the use of our products will
significantly lower the overall costs and improve the
19
effectiveness of managing patient populations. There can be no assurance,
however, that our products will be available, will lower costs of care for any
patients or that providers will choose to utilize them even if they do, or if
reimbursement will be available.
In foreign markets, reimbursement is obtained from a variety of
sources, including governmental authorities, private health insurance plans and
labor unions. In most foreign countries, there are also private insurance
systems that may offer payments for alternative therapies. Although not as
prevalent as in the United States, health maintenance organizations are emerging
in certain European countries. We may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have a material adverse effect on market
acceptance of our product candidates in the international markets in which such
approvals are sought.
We believe that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. We believe that the overall escalating cost of medical
products and services has led to, and will continue to lead to, increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. There
can be no assurance, in either the United States or foreign markets, that third
party reimbursement and coverage will be available or adequate, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation, or reimbursement policies of third-party payers will
not otherwise adversely affect the demand for our product candidates or our
ability to sell our product candidates on a profitable basis, particularly if
MRI exams enhanced with our contrast agents are more expensive than competing
vascular imaging techniques that are equally effective. The unavailability or
inadequacy of third-party payer coverage or reimbursement could have a material
adverse effect on our business, financial condition and results of operations.
Product Liability Insurance
The clinical and commercial development of pharmaceuticals, including
contrast agents such as those being developed by us, may entail exposure to
product liability claims. While we have never been subject to any liability
claims stemming from the manufacture of or preclinical or clinical trials of our
products, there can be no assurance that we will not face such claims in the
future. While we currently have product liability insurance coverage for the
clinical research use of our product candidates, there can be no assurance that
such coverage limits will be adequate or that a successful product liability
lawsuit would not have a material adverse effect on us. We do not have product
liability insurance coverage for the commercial sale of our products but intend
to obtain such coverage if and when our products are commercialized. If and when
MS-325 or our other product candidates are approved for marketing by the FDA, or
similar foreign regulatory bodies, there can be no assurance that sufficient
product liability insurance will be available on terms acceptable to us or at
all.
Employees
As of December 31, 2000 we employed 83 persons on a full-time basis, of
which 67 were involved in research and development and 16 in administration and
general management. Twenty six of our employees hold Ph.D. or M.D. degrees. We
believe that our relations are good with all of our employees. None of our
employees are a party to a collective bargaining agreement.
Research and Development
During the years ended December 31, 2000, 1999, and 1998, we incurred
research and development expenses of $25,833,243, $14,667,370 and $13,349,337,
respectively.
20
ITEM 2. PROPERTIES
We lease a total of 17,050 square feet of space at 71 Rogers Street
and adjacent locations, and 13,310 square feet at 161 First Street, all in
Cambridge, Massachusetts. The current leases at 71 Rogers Street and adjacent
locations, and our lease at 161 First Street run until December 31, 2002. We
have an option to extend the lease at 71 Rogers Street and adjacent locations
for an additional three or five years. During 2000, we exercised our right of
first offer on 5900 square feet of additional laboratory space located at 67
Rogers Street. We expect to occupy this space during the second quarter of
2001 at which time the lease will commence and be incorporated into our
existing lease at 71 Rogers Street. We believe that our current facilities
and currently available space are adequate to meet our needs until the
expiration of the leases in December 31, 2002.
ITEM 3. LEGAL PROCEEDINGS
To our knowledge, we are not a party to any material legal
proceedings that would materially adversely affect our business, results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during
the quarter ended December 31, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers and key employees:
Name Age Position
---- --- --------
Michael D. Webb 42 Chief Executive Officer and Secretary
Stephen C. Knight, M.D. 40 President and Chief Operating Officer
*James E. Smith, Ph.D. 57 Executive Vice President, Research and Development
*Alan Carpenter, Ph.D. 48 Executive Vice President, Research and Development
Randall B. Lauffer, Ph.D. 43 Chief Scientific Officer
A. Gregory Sorensen, M.D. 44 Vice President and Chief Medical Officer
Susan M. Flint 49 Vice President, Regulatory Affairs and Clinical
Operations
Pamela E. Carey 42 Vice President of Finance and Administration,
Chief Financial Officer
- --------------
* Currently James E. Smith and Alan Carpenter are both serving as Executive
Vice President, Research and Development. Following a transition period,
Dr. Smith will step down as Executive Vice President, Research and
Development and Dr. Carpenter will continue in that position. Also following
the transition, Dr. Smith will serve as a consultant to us.
Michael D. Webb joined us in December 1994 from Ciba-Corning
Diagnostics, Inc., where he was most recently Senior Vice President, Worldwide
Marketing and Strategic Planning. During his tenure at Ciba from April 1989 to
December 1994, Mr. Webb's achievements included the development and
commercialization of the ACS:180\R immunodiagnostics system. From 1984 to 1989,
Mr. Webb was a senior consultant at Booz, Allen & Hamilton, Inc., specializing
in healthcare and life sciences. Mr. Webb holds a MBA in marketing and finance
from the J.L. Kellogg Graduate School of Management at Northwestern University
and an MA in International Relations from Sussex University, U.K.
Dr. Stephen C. Knight joined us in July 1996 and most recently served
as Chief Financial Officer and Senior Vice President, Finance and Business
Development, before being promoted to President and Chief Operating Officer in
November 1999. From April 1991 to June 1996, Dr. Knight was a senior consultant
with Arthur D. Little specializing in biotechnology, pharmaceuticals and
valuation. Dr. Knight was also a consultant at APM, Inc., a consulting company.
Prior to 1990, Dr. Knight performed research at AT&T Bell Laboratories, the
21
National Institute of Neurological and Communicative Diseases and Stroke, and
Yale University. Dr. Knight holds an M.D. from the Yale University School of
Medicine and a MPPM from the Yale School of Organization and Management.
Dr. James E. Smith has over 20 years experience in the in vivo
diagnostics industry. Prior to joining us in February 1996, Dr. Smith worked
for 16 years at Du Pont Merck Pharmaceutical Company, where his experience
included research and development, regulatory, QA/QC and manufacturing for the
radio-pharmaceutical division, most recently as Senior Director of
Radiopharmaceutical Research and Development. Dr. Smith has published and
lectured on radio-pharmaceutical research and development. Dr. Smith received
his Ph.D. in inorganic chemistry from the University of Washington.
Dr. Alan Carpenter joined us in February 2001 as the Executive Vice
President, Research and Development. He has 20 years experience in imaging
R&D. From November 1996 through February 2001, Dr. Carpenter was the Vice
President of Medical Imaging at DuPont Pharmaceuticals Company. He was the
Vice President of Clinical Research and Regulatory Affairs, Medical Imaging
R&D from December 1996 through March 2000. Prior to that, Dr. Carpenter was
the Senior Director of Clinical Research, Regulatory Affairs and Business
Development at DuPont Merck Pharmaceutical Company. Dr. Carpenter received
his Ph.D. in analytical chemistry and his B.S. in Chemistry from the
University of Massachusetts. He holds a J.D. from the Massachusetts School of
Law.
Dr. Randall B. Lauffer founded EPIX in November 1988 and served as
Chief Executive Officer until December 1994 and as Chairman until October
1996. From November 1983 to March 1992, Dr. Lauffer was a member of the
faculty of Harvard Medical School, serving as Assistant Professor of
Radiology from 1987 to 1992. During this time he was also Director of the NMR
Contrast Media Laboratory at Massachusetts General Hospital (MGH) as well as
an NIH Postdoctoral Fellow and an NIH New Investigator. Dr. Lauffer is the
primary inventor of our core technology and is the originator of several
types of MRI technology, including hepatobiliary (liver-enhancing) agents,
vascular agents, tissue blood flow agents, and strategies to increase the
magnetic efficiency of MRI agents in the body. He has written over 50
scientific publications and two books, and has been named on several U.S.
patents. Dr. Lauffer holds a Ph.D. in inorganic chemistry from Cornell
University.
Dr. A. Gregory Sorensen joined us in April, 2000. Dr. Sorensen is
the Associate Director at the Massachusetts General Hospital-Neuroradiology
MR Center. He has been an Assistant Professor of Radiology at the Harvard
Medical School and an Assistant Radiologist at Massachusetts General Hospital
since 1998. Dr. Sorensen holds a medical degree from Harvard Medical School
and the Massachusetts Institute of Technology, and trained in Diagnostic
Radiology and Neuropathology at the MGH, where he has been on the staff since
1994. Dr. Sorensen is a Research Committee member for both the American
Society of Neuropathology and the International Headache Society. He also
sits on the Editorial Board of the American Journal of Neuropathology.
Ms. Susan M. Flint joined us in April 1995. She is a Regulatory
Affairs specialist with over twenty years of experience in regulatory
submissions and clinical trials. She was a regulatory affairs/clinical
research consultant to various companies, including ours, from April 1993 to
April 1995. Ms. Flint previously held the position of Director of Clinical
Trials at Advanced Magnetic, Inc. from February 1989 to March 1993 and
Director of Regulatory Affairs at Due Pont Pharmaceutical Company from June
1975 to January 1989. She has filed a number of applications for IND's and
ten NDA's, along with several medical device applications. Ms. Flint is
certified by the Regulatory Affairs Professional Society. She received her
M.S. in pharmacology from Northeastern University.
Ms. Pamela E. Carey has served as our Vice President of Finance and
Administration and Chief Financial Officer since July 2000. She joined us in
June 1998 as Director of Finance from private practice where she served as a
consultant to several life science and technology companies. From July 1992
to March 1994, she was Director of Finance at Intellution, Inc. and from
February 1989 to June 1992, she was Corporate Controller at Genetics
Institute, Inc. Ms. Carey also served as Corporate Controller of ISI Systems,
Inc. from June 1987 to January 1989 and as Audit Manager at Arthur Young &
Company, where she worked from 1980 to 1987. Ms. Carey is a certified public
accountant and holds a B.S. degree in accounting from Canisius College.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock commenced trading on the Nasdaq Stock Market on
January 30, 1997 under the symbol "EPIX", and is listed on Nasdaq's National
Market. The following table sets forth, for the periods indicated, the range of
the high and low bids for our Common Stock:
High Low
---- ---
1999
First Quarter $11.44 $8.00
Second Quarter 8.87 5.00
Third Quarter 7.37 4.12
Fourth Quarter 11.50 6.12
2000
First Quarter $26.75 $8.88
Second Quarter 22.63 12.75
Third Quarter 18.94 13.19
Fourth Quarter 14.06 4.88
The above quotations reflect inter-dealer prices without retail
mark-up, markdown or commission and may not necessarily represent actual
transactions.
On March 15, 2001 the last reported bid for the Common Stock was
$8.75 per share. As of March 15, 2001 there were approximately 98 holders of
record of our Common Stock. To date we have neither declared nor paid any
cash dividends on shares of our Common Stock and do not anticipate doing so
for the foreseeable future.
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from our audited
financial statements and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Financial Statements, related Notes and other financial information included
elsewhere herein.
Year Ended
-----------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31,
(In thousands, except per share 2000 1999 1998 1997 1996
data) --------------- -------------- -------------- -------------- --------------
Statement of Operations Data:
Revenues $6,924 $1,144 $1,781 $4,228 $10,010
Operating income (loss) (23,745) (17,935) (15,825) (7,462) 269
Income (loss) before cumulative effect
of change in accounting principle (22,957) (16,983) (13,998) (6,112) 268
Cumulative effect of change in
accounting principle (1) (4,363) -- -- -- --
Income (loss) (27,320) (16,983) (13,998) (6,112) 268
Weighted average common shares outstanding:
Basic 12,445 11,556 11,354 8,333 1,561
Diluted 12,445 11,556 11,354 8,333 7,732
Earnings/(loss) per share:
Earnings/(loss) before
cumulative effect of change
in accounting principle $(1.85) $(1.47) $(1.23) $(0.73) $0.12
Cumulative effect of change in
accounting principle $(0.35) -- -- -- --
Earnings/(loss), basic $(2.20) $(1.47) $(1.23) $(0.73) $0.12
Earnings/(loss), diluted $(2.20) $(1.47) $(1.23) $(0.73) $0.03
Pro forma amounts assuming the
accounting change is applied
retroactively:
Net loss ($22,957) ($15,892) ($12,907) ($7,021) ($5,368)
Net loss per share
basic & diluted ($1.85) ($1.38) ($1.14) ($0.84) ($0.69)
December 31,
---------------------------------------------------------------------
Balance Sheet Data: 2000 1999 1998 1997 1996
----------- ------------ ------------- ------------ ------------
Cash, cash equivalents and
marketable securities $24,713 $14,140 $29,101 $42,813 $10,664
Working capital 15,020 10,514 25,593 39,673 8,299
Total assets 29,681 17,886 32,903 44,775 12,575
Long-term liabilities 10,050 2,281 1,374 279 176
Redeemable convertible preferred
stock -- -- -- -- 17,204
Total stockholders' equity
(deficit) $ 6,566 $10,764 $27,503 $41,046 $(7,240)
(1) The cumulative effect of change in accounting principle is a one-time,
noncash charge relating to our adoption of SEC Staff Accounting
Bulletin No. 101 (SAB 101). SAB 101 was issued by the Securities and
Exchange Commission (SEC) in December 1999 and provides guidance related
to revenue recognition policies based on interpretations and practices
followed by the SEC. The impact of our adoption of SAB 101 was to defer
revenue recognition for certain portions of the revenue previously
recognized by us under our strategic alliances into future accounting
periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Since commencing operations in 1992, we have been principally engaged
in the research and development of our product candidates as well as seeking
various regulatory clearances and patent protection. We have had no revenues
from product sales and have incurred cumulative losses since inception through
December 31, 2000 aggregating approximately $72.7 million.
24
We have received revenues in connection with the following licensing
and collaboration agreements:
Schering AG
In June 2000, we entered into a strategic collaboration agreement
pursuant to which we granted Schering AG an exclusive license to co-develop
and market MS-325 worldwide, exclusive of Japan. In December 2000, we amended
this strategic collaboration agreement to grant to Schering AG the exclusive
rights to develop and market MS-325 in Japan. Generally, we will both share
equally in MS-325 clinical development costs and profits. Under the
agreement, we will assume responsibility for completing clinical trials and
filing for FDA approval in the United States, and Schering AG will lead
clinical activities for MS-325 outside of the United States. In addition, we
granted Schering an exclusive option to develop and market an unspecified
cardiovascular product from our pipeline. In connection with this strategic
collaboration agreement and in connection with the amendment to the strategic
collaboration agreement between us and Mallinckrodt, as further described
below, Schering AG paid us an up-front fee of $10.0 million, which we then
paid to Mallinckrodt. Schering AG also made a $20.0 million equity investment
in us at $17.98 per share of common stock, through its affiliate, Schering
Berlin Venture Corporation ("Schering BV"). We may receive up to an
additional $20.0 million in milestone payments under the strategic
collaboration agreement. Under the terms of the December 2000 amendment,
Schering AG paid us an up-front fee of $3.0 million and may be required to
pay us an additional $7.0 million upon our achievement of certain milestones.
Mallinckrodt
In June 2000, in connection with the exclusive license that we
granted to Schering AG, we amended our strategic collaboration with
Mallinckrodt to grant Mallinckrodt a non-exclusive, worldwide license to
manufacture MS-325 for clinical development and commercial use in accordance
with a manufacturing agreement entered into in June 2000 between Mallinckrodt
and Schering AG, and to enable us to enter into the strategic collaboration
agreement with Schering AG described above. In connection with this
amendment, we paid Mallinckrodt an up-front fee of $10.0 million and may be
required to pay up to an additional $5.0 million in milestones. We will also
pay Mallinckrodt a share of operating margins in the US and a royalty on
gross profits outside the US on sales of MS-325.
As a result of the above noted agreements, Schering AG effectively
purchased the MS-325 marketing rights previously owned by Mallinckrodt. The
$10.0 million payment from Schering AG to us was required to be paid by us to
Mallinckrodt. We paid the $10.0 million to Mallinckrodt immediately
subsequent to its receipt and did not reflect the receipt and the
disbursement in our statement of operations on the basis that the payment to
us from Schering AG did not constitute an earnings process nor did the
payment by us to Mallinckrodt represent an expense. Such amounts are,
however, reflected in the statement of cash flows.
In October 1999, we entered into a Non-Negotiable Promissory Note
and Security Agreement (the "Loan") with Mallinckrodt, our strategic partner,
under which we were eligible to borrow our share of MS-325 development costs,
on a quarterly basis, up to a total of $9.5 million. In June 2000, pursuant
to the amended collaboration agreement with Mallinckrodt and the new
strategic collaboration with Schering, Schering assumed the development cost
sharing obligation for MS-325 from Mallinckrodt as of January 1, 2000. As a
result, the terms of the Loan were amended to allow funding under the Loan
for our portion of development costs through December 31, 1999. The Loan
balance at December 31, 2000 of $3,004,607 represents our share of third and
fourth quarter 1999 MS-325 development cost. No additional funding is
available to us under the Loan. The Loan bears interest, adjustable on a
quarterly basis, at the Prime Rate published in the Wall Street Journal and
is repayable in full on October 1, 2002. The Loan is secured by a first
priority security interest in all of the Company's intellectual property.
25
Daiichi
In March 1996, we entered into a development and license agreement
with Daiichi pursuant to which we granted Daiichi an exclusive license to
develop and commercialize MS-325 in Japan. Under this arrangement, Daiichi
assumed primary responsibility for clinical development, regulatory approval,
marketing and distribution of MS-325 in Japan. We retained the right and
obligation to manufacture MS-325 for development activities and commercial
sale under the agreement. In December 2000, we reacquired the rights to
develop and commercialize MS-325 in from Daiichi. Under the terms of this
Reacquisition Agreement, we agreed to pay Daiichi a total of $5.2 million. In
January 2001, we paid Daiichi $2.8 million in fees and we will pay an
additional $2.4 million in the future. Daiichi will also receive a royalty
from us on net sales of MS-325 in Japan. Simultaneously with our
reacquisition from Daiichi of the MS-325 development and marketing rights in
Japan, we assigned these rights to Schering AG as described above.
We expect continued operating losses for the next several years as we
incur expenses to support research, development and efforts to obtain regulatory
approvals.
Our initial product candidate, MS-325, is currently our only product
candidate undergoing human clinical trials. We filed an IND application for
MS-325 in July 1996. We initiated a Phase I clinical trial in 1996 and a Phase I
dose escalation study in 1997, both of which have been completed. We completed a
Phase II clinical trial in June 1998 to test the safety and preliminary efficacy
of MS-325-enhanced MRA for the evaluation of PVD and are currently conducting a
Phase II feasibility trial to test the safety and feasibility of MS-325-enhanced
MRA for the evaluation of CAD. In addition, in March 2000, we completed
enrollment in a Phase II clinical trial to test the safety and feasibility of
MS-325 for detecting breast cancer. In June 1999, we initiated a Phase III
clinical trial to determine the efficacy of MS-325-enhanced MRA for the
detection of AIOD.
We anticipate fluctuation in our quarterly results of operations due to
several factors, including: the timing of fees and milestone payments received
from strategic partners; the formation of new strategic alliances by us; the
timing of expenditures in connection with research and development activities;
the timing of product introductions and associated launch, marketing and sales
activities; and the timing and extent of product acceptance for different
indications and geographical areas of the world.
Results of Operations
Comparison of Years ended December 31, 2000 and December 31, 1999
In the fourth quarter of 2000, we adopted SEC Staff Accounting
Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements"
retroactively to January 1, 2000, changing our method of recognizing revenue.
We recorded a cumulative effect of change in accounting principle in
accordance with the adoption of SAB 101 in the amount of $4.4 million, which
related to up-front and guaranteed milestone fees paid in 1996 and 1997 by
Mallinckrodt, our previous marketing partner for MS-325. Prior to the
adoption of SAB 101, we recognized revenues from non-refundable license fees
upon execution of the underlying license agreement. Revenues from milestone
payments under collaborative agreements were recorded as revenue based upon
the provisions of each agreement. Under the new accounting method, after the
adoption of SAB 101, we now recognize revenues from non-refundable license
fees, and milestone payments not specifically tied to a separate earnings
process ratably over the period during which we have a substantial continuing
obligation to perform services under the contract. Included in 2000 revenues
is $1.1 million of revenue that was recognized in prior years relating to the
adoption of SAB 101. The remaining $3.3 million of revenue to be recognized
in future years that is included in the cumulative effect of change in
accounting principle will be recognized ratably over the future period during
which we have a substantial continuing obligation to perform services under
the contract.
The pro forma amounts presented in the statements of operations were
calculated assuming the accounting change was made retroactively to prior
periods. $1.1 million is included, each year, in revenue for 2000, 1999 and
1998.
The following discussions relating to revenue for the year ended
December 31, 2000 and revenue for the year ended December 31, 1999 reflect
pro forma results as if we had followed SAB 101 from our inception.
Revenues for the year ended December 31, 2000 and 1999 totaled $6.9
million and $2.2 million, respectively. Excluding $1.1 million of SAB 101
revenues in both periods, revenues were derived from work performed in
26
connection with product development contracts with Schering AG in the year
ended December 31, 2000 and Mallinckrodt in the year ended December 31, 1999.
The increase in revenues was due to the impact of the development funding
terms under the strategic collaboration agreement entered into with Schering
AG in June 2000.
Research and Development Expenses
Research and development expenses for the year ended December 31,
2000 were $25.8 million as compared to $14.7 million for 1999. The $11.1
million increase resulted primarily from higher costs associated with
advancing MS-325 through clinical trials and the related effect of new
development funding terms under the strategic collaboration agreement with
Schering AG, increased costs for personnel and other resources associated
with advancing our thrombus imaging program and $4.9 million of expenses
incurred in December 2000 associated with the reacquisition of the Japanese
rights to develop and commercialize MS-325 from Daiichi. These increased
costs were partially offset by lower manufacturing costs of material produced
in connection with our strategic alliance with Daiichi.
General and Administrative Expenses
General and administrative expenses for the year ended December 31,
2000 were $4.8 million as compared to $4.4 million for 1999. The $400,000
increase was due to increased costs related to corporate communications and
marketing activities. These increased costs were partially offset by lower
legal costs related to ongoing patent activities.
Interest Income and Interest Expense
Interest income for the year ended December 31, 2000 was $1.3 million
as compared to $1.2 million for 1999. The $100,000 increase was primarily due to
slightly higher average levels of cash, cash equivalents and marketable
securities during 2000. Interest expense for the year ended December 31, 2000
was $468,000 as compared to $222,000 in 1999. The increase in interest expense
was attributable to a higher average balance in our loan payable to Mallinckrodt
in the year ended December 31, 2000.
Comparison of Year Ended December 31, 1999 and Year Ended December 31, 1998
The following discussions relating to revenue for the year ended
December 31, 1999 and revenue for the year ended December 31, 1998 reflect
pro forma results as if we had followed SAB 101 from our inception.
Revenues
Revenues for the year ended December 31, 1999 and 1998 totaled $2.2
million and $2.9 million, respectively. Excluding $1.1 million of revenues in
both periods relating to SAB 101, revenues were derived from work performed
in connection with product development contracts. The decrease in revenues
was due to the timing of cost-sharing reimbursements and from development
costs incurred by our partners and us.
Research and Development Expenses
Research and development expenses for the year ended December 31,
1999 were $14.7 million as compared to $13.3 million for 1998. The increased
expenses resulted from higher manufacturing costs of material to be provided
to our Japanese partner, Daiichi, and increased personnel and related costs
associated with advancing MS-325 through clinical trials.
General and Administrative Expenses
General and administrative expenses for the year ended December 31,
1999 were $4.4 million as compared to $4.3 million for 1998. The slight increase
was due to higher legal costs associated with ongoing patent activities and was
partially offset by lower compensation expense and recruiting costs.
Interest Income and Expense
Interest income for the year ended December 31, 1999 was $1.2 million
as compared to $1.9 million for 1998. The $700,000 decrease was primarily due to
lower average levels of invested cash, cash equivalents and marketable
securities during 1999. Interest expense for the year ended December 31, 1999
was $222,000 as
27
compared to $61,000 in 1998. The increase in interest expense was attributable
to a higher average note payable balance outstanding during 1999.
Liquidity and Capital Resources
Our principal sources of liquidity consist of cash, cash equivalents
and marketable securities, which totaled $24.7 million at December 31, 2000, as
compared to $14.1 million at December 31, 1999.
In June 2000, we entered into a strategic collaboration agreement
pursuant to which we granted Schering AG an exclusive license to co-develop
and market MS-325 worldwide, exclusive of Japan. In December 2000, we amended
this strategic collaboration agreement to grant to Schering AG the exclusive
rights to develop and market MS-325 in Japan. In connection with this
strategic collaboration agreement and in connection with the amendment to the
strategic collaboration agreement between us and Mallinckrodt, as further
described below, Schering AG paid us an up-front fee of $10.0 million, which
we then paid to Mallinckrodt. Schering AG also made a $20.0 million dollar
equity investment in us at $17.98 per share of common stock, through its
affiliate, Schering Berlin Venture Corporation ("Schering BV"). In return for
their investment, we issued 1,112,075 shares of our common stock to Schering
BV. We may receive up to an additional $20.0 million in milestone payments
under the strategic collaboration agreement. Under the terms of the December
2000 amendment, Schering AG paid us an up-front fee of $3.0 million and may
be required to pay us an additional $7.0 million upon our achievement of
certain milestones.
In June 2000, in connection with the exclusive license that we
granted to Schering AG, we amended our strategic collaboration with
Mallinckrodt to grant Mallinckrodt a non-exclusive, worldwide license to
manufacture MS-325 for clinical development and commercial use in accordance
with a manufacturing agreement entered into in June 2000 between Mallinckrodt
and Schering AG, and to enable us to enter into the strategic collaboration
agreement with Schering AG described above. In connection with this
amendment, we paid Mallinckrodt an up-front fee of $10.0 million and may be
required to pay up to an additional $5.0 million in milestones. We will also
pay Mallinckrodt a share of operating margins in the US and a royalty on
gross profits outside the US on sales of MS-325.
In October 1999, we entered into a Non-Negotiable Promissory Note
and Security Agreement (the "Loan") with Mallinckrodt, Inc. ("Mallinckrodt"),
under which we were eligible to borrow our share of development costs, on a
quarterly basis, up to a total of $9.5 million. In June 2000, pursuant to the
amended collaboration agreement with Mallinckrodt and the new strategic
collaboration with Schering, Schering assumed the development cost sharing
obligation for MS-325 from Mallinckrodt as of January 1, 2000. As a result,
the terms of the Loan were amended to allow funding under the Loan for our
portion of development costs through December 31, 1999. The Loan balance at
December 31, 2000 of $3,004,607 represents our share of third and fourth
quarter 1999 MS-325 development costs and the balance at December 31, 1999 of
$1,583,557 represents our share of third quarter 1999 MS-325 development
costs. No additional funding is available to us under the Loan. The Loan
bears interest, adjustable on a quarterly basis, at the Prime Rate published
in the Wall Street Journal and is repayable in full on October 1, 2002. The
Loan is secured by a first priority security interest in all of the Company's
intellectual property.
In March 1996, we entered into a development and license agreement
with Daiichi pursuant to which we granted Daiichi an exclusive license to
develop and commercialize MS-325 in Japan. Under this arrangement, Daiichi
assumed primary responsibility for clinical development, regulatory approval,
marketing and distribution of MS-325 in Japan. We retained the right and
obligation to manufacture MS-325 for development activities and commercial
sale under the agreement. In December 2000 we reacquired the rights to
develop and commercialize MS-325 in from Daiichi. Under the terms of this
Reacquisition Agreement, we agreed to pay Daiichi a total of $5.2 million. In
January 2001, we paid Daiichi $2.8 million in fees and we will pay an
additional $2.4 million in the future. Daiichi will also receive a royalty
from us on net sales of MS-325 in Japan. Simultaneously with our
reacquisition from Daiichi of the MS-325 development and marketing rights in
Japan, we assigned these rights to Schering AG as described above.
During the year ended December 31, 2000, we used approximately
$12.8 million of cash for operating activities. We expect that our cash needs
for operations will increase significantly in future periods due to planned
clinical trials and other expenses associated with the development of MS-325
and new research and development programs.
In September 2000, we entered into an agreement with Acqua
Wellington North American Equities Fund Ltd. ("Acqua Wellington") for an
equity financing facility covering the sale of up to $45 million of our
common stock over a 28 month period. These shares may be sold at our
discretion at a small discount to the market price of our shares at the
time of the sale. The total amount of the investment is dependent, in part,
on our stock price, with us controlling the amount and timing of the stock
sold. During 2000, we received $885,397 and in 2001, we received an
additional $6,119,218 in net proceeds from Acqua Wellington under this
facility.
We estimate that existing cash, cash equivalents and marketable
securities, as well as our equity financing facility with Acqua Wellington,
will be sufficient to fund our operations through the first quarter of 2004.
We believe that we will need to raise additional funds for research,
development and other expenses through equity or debt financing, strategic
alliances or otherwise, in order to achieve commercial introduction of any of
our product candidates. Our future liquidity and capital requirements will
depend on numerous factors, including the following: the progress and scope
of clinical trials; the timing and costs of filing future regulatory
submissions; the timing and costs required to receive both United States and
foreign governmental approvals; the cost of filing, prosecuting, defending
and enforcing patent claims and other intellectual property rights; the
extent to which our products gain market acceptance; the timing and costs of
product introductions; the extent of our ongoing research
28
and development programs; the costs of training physicians to become proficient
with the use of our products; and, if necessary, once regulatory approvals are
received, the costs of developing marketing and distribution capabilities.
Because of anticipated spending to support development of MS-325 and
new research programs, we do not expect positive cash flow from operating
activities for any future quarterly or annual period prior to commercialization
of MS-325. We anticipate continued investments in fixed assets, including
equipment and facilities expansion to support new and continuing research and
development programs. We have in place a lease agreement that will enable us to
utilize our current principal scientific facilities through December 31, 2002,
and we have an option to extend the lease for an additional three or five years.
We also have a lease for nearby office space, which expires in December 2002.
We have incurred tax losses to date and therefore have not paid
significant federal or state income taxes since inception. At December 31,
2000, we had loss carryforwards of approximately $59.0 million available to
offset future taxable income. These amounts expire at various times through
2020. As a result of ownership changes resulting from sales of equity
securities, our ability to use the loss carryforwards is subject to
limitations as defined in Sections 382 and 383 of the Internal Revenue Code
of 1986, as amended (the "Code"). We currently estimate that the annual
limitation on our use of net operating losses through May 31, 1996 will be
approximately $900,000. Pursuant to Sections 382 and 383 of the Code, the
change in ownership resulting from public equity offerings in 1997 and any
other future ownership changes may further limit utilization of losses and
credits in any one year. We also are eligible for research and development
tax credits that can be carried forward to offset federal taxable income. The
annual limitation and the timing of attaining profitability may result in the
expiration of net operating loss and tax credit carryforwards before
utilization.
We do not believe that inflation has had a material impact on our
operations.
The discussion included in this section as well as elsewhere in this
Annual Report on Form 10-K may contain forward-looking statements based on our
current expectations. Such statements are subject to risks and uncertainties
that could cause actual results to differ from those projected. See "Factors
Regarding Forward Looking Statements" attached hereto as Exhibit 99.1 and
incorporated by reference into this Form 10-K. Readers are cautioned not to
place undue reliance on the forward looking statements which speak only as the
date hereof. We undertake no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137, requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The effective date
of this statement was deferred to fiscal years beginning after June 15, 2000 by
SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities --
Deferral of Effective Date of
Subsequent Events
The Company received $6,119,218 in net proceeds during 2001,
pursuant to its funding arrangement with Acqua Wellington.
29
SFAS No. 133." We believe the adoption of this new accounting standard will not
have a significant effect on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our cash in a variety of financial instruments, including
bank time deposits, and taxable and tax-advantaged variable rate and fixed
rate obligations of corporations, municipalities, and local, state and
national governmental entities and agencies. These investments are
denominated in U.S. dollars.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected
if interest rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest rates or we
may suffer losses in principal if forced to sell securities that have seen a
decline in market value due to changes in interest rates. A hypothetical 100
basis point increase or decrease in interest rates, however, would not have a
material adverse effect on our financial condition. The weighted-average
interest rate and weighted-average remaining maturity of marketable
securities at December 31, 2000 was 6.3% and approximately 1-1/2 months,
respectively. The fair market value of securities held at December 31, 2000
was $24,310,253.
The interest rate on our note payable to Mallinkrodt is adjustable
on a quarterly basis and therefore subjects the Company to interest rate
risk. However, based on the outstanding loan balance of $3,004,607 at
December 31, 2000, a 100 basis point increase in interest rates would not
result in a significant increase in the Company's annual interest expense.
The interest rates on our capital lease obligations are fixed and
therefore not subject to interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and supplementary data appear at pages F-1 through
F-24 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors. The information required under this item is incorporated
herein by reference to the section entitled "Election of Directors" in our
definitive Proxy Statement for our 2001 Annual Meeting of Stockholders (the
"2001 Proxy Statement") to be filed with the Commission not later than April 30,
2001.
(b) Executive Officers. See Item 4A. of Part I above.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference to the section entitled "Executive Compensation" in the 2001 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference to the section entitled "Security Ownership of Certain Beneficial
Owners And Management" in the 2001 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference to the section entitled "Certain Transactions" in the 2001 Proxy
Statement.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Documents filed as part of this Report:
1. Financial Statements:
Index to Financial Statements: F-1
Report of Independent Auditors F-2
Financial Statements:
Balance Sheets F-3
Statements of Operations F-4
Statements Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
b. No reports on Form 8-K were filed in the fourth quarter of 2000.
c. Exhibits
3.1 Restated Certificate of Incorporation of the Company. Filed as Exhibit
4.1 to the Company's Registration Statement on Form S-8 (File No.
333-30531) and incorporated herein by reference.
3.2 Form of Amended and Restated By-Laws of the Company. Filed as Exhibit
4.2 to the Company's Registration Statement on Form S-8 (File No.
333-30531) and incorporated herein by reference.
4.1 Specimen certificate for shares of Common Stock of the Company. Filed
as Exhibit 4.1 to the Company's Registration Statement on Form S-1
(File No. 333-17581) and incorporated herein by reference.
10.1 Short Form Lease from Trustees of the Cambridge East Trust to the
Company dated July 1, 1992. Filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.2 First Amendment Lease From Trustees of the Cambridge Trust to the
Company dated October 20, 1993. Filed as Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.3 Second Amendment Lease From Trustees of the Cambridge East Trust to
the Company dated September 17, 1994. Filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.4+ Amended and Restated License Agreement between the Company and The
General Hospital Corporation dated July 10, 1995. Filed as Exhibit
10.14 to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.5 Third Amendment Lease From Trustees of the Cambridge East Trust to the
Company dated May 1, 1996. Filed as Exhibit 10.20 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
31
10.6 Third Amended and Restated Stockholders' Rights Agreement by and among
the Company and certain of its stockholders named therein dated May
29, 1996. Filed as Exhibit 10.22 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.7 Form of Warrant to Purchase Shares of Series D Preferred Stock dated
May 29, 1996. Filed as Exhibit 10.23 to the Company's Registration
Statement on Form S-1 (File No. 333-17581) and incorporated herein by
reference.
10.8 Amendment No. 1 to Third Amended and Restated Stockholders' Rights
Agreement dated May 31, 1996. Filed as Exhibit 10.24 to the Company's
Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.9+ Strategic Collaboration Agreement between the Company and Mallinckrodt
Medical, Inc. and Mallinckrodt Group Inc. dated August 30, 1996. Filed
as Exhibit 10.26 to the Company's Registration Statement on Form S-1
(File No. 333-17581) and incorporated herein by reference.
10.10 Amendment No. 2 to Third Amended and Restated Stockholders' Rights
Agreement dated December 6, 1996. Filed as Exhibit 10.27 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.11# Amended and Restated 1992 Equity Incentive Plan. Filed as Exhibit 99.1
to the Company's Registration Statement on Form S-8 (File No.
333-30531) and incorporated herein by reference.
10.12# Form of Incentive Stock Option Certificate. Filed as Exhibit 10.29 to
the Company's Registration Statement on Form S-1 (File No. 333-17581)
and incorporated herein by reference.
10.13 Form of Nonstatutory Stock Option Certificate. Filed as Exhibit 10.30
to the Company's Registration Statement on Form S-1 (File No.
333-17581) and incorporated herein by reference.
10.14# 1996 Director Stock Option Plan. Filed as Exhibit 10.31 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.15# 1996 Employee Stock Purchase Plan. Filed as Exhibit 10.32 to the
Company's Registration Statement on Form S-1 (File No. 333-17581) and
incorporated herein by reference.
10.16 Short Form Lease from Trustees of the Cambridge Trust to the Company
with a commencement date of January 1, 1998. Filed as Exhibit 10.39 to
the Company's Registration Statement on Form S-1 (File No. 333-38399)
and incorporated herein by reference.
10.17 Sublease dated as of October 31, 1997 between the Company and SatCon
Technology Corporation. Filed as Exhibit 10.40 to the Company's annual
report on Form 10-K for the period ended December 31, 1998 (File No.
000-21863) and incorporated herein by reference.
10.18 First Amendment to Sublease dated as of July 15, 1998 between the
Company and SatCon Technology Corporation. Filed as Exhibit 10.41 to
the Company's annual report on Form 10-K for the period ended December
31, 1998 (File No. 000-21863) and incorporated herein by reference.
10.19++ Amendment No. 1 dated as of September 10, 1998 to the Strategic
Collaboration Agreement between the Company and Mallinckrodt Medical,
Inc. and Mallinckrodt Group Inc. dated August 30, 1996. Filed as
Exhibit 10.42 to the Company's annual report on Form 10-K for the
period ended December 31, 1998 (File No. 000-21863) and incorporated
herein by reference.
10.20 Promissory Note dated December 21, 1998 between the Company and Finova
Technology Finance, Inc. Filed as Exhibit 10.43 to the Company's
annual report on Form 10-K for the period ended December 31, 1998
(File No. 000-21863) and incorporated herein by reference.
10.21 First Amendment dated February 8, 1999 to the Short Form Lease dated
as of July 7, 1998 with a commencement date as of January 1, 1998
between the Company and the Trustees of The Cambridge East Trust.
Filed as Exhibit 10.1 to the Company's quarterly report on
32
Form 10-Q for the period ended March 31, 1999 (File No. 000-21863) and
incorporated herein by reference.
10.22 Sublease extension election for an additional three years, beginning
January 1, 2000 and ending December 31, 2002 pursuant to Article 5 of
the First Amendment to Sublease dated as of July 15, 1998 between the
Company and SatCon Technology Corporation. Filed as Exhibit 10.1 to
the Company's quarterly report on Form 10-Q for the period ended June
30, 1999 (File No. 000-21863) and incorporated herein by reference.
10.23++ Amendment No. 2 dated as of July 9, 1999 to the Strategic
Collaboration Agreement between the Company and Mallinckrodt Medical,
Inc. and Mallinckrodt Group, Inc. dated August 30, 1996 and amended
pursuant to Amendment No. 1 as of September 10, 1998. Filed as
Exhibit 10.46 to the Company's annual report on Form 10-K for the
period ended December 31, 1999 (File No. 000-21863) and incorporated
herein by reference.
10.24 Non-Negotiable Promissory Note dated October 8, 1999 between the
Company and Mallinckrodt Inc. Filed as Exhibit 10.47 to the
Company's annual report on Form 10-K for the period ended
December 31, 1999 (File No. 000-21863) and incorporated
herein by reference.
10.25 Security Agreement dated October 8, 1999 between the Company and
Mallinckrodt Inc. Filed as Exhibit 10.48 to the Company's annual
report on Form 10-K for the period ended December 31, 1999 (File
No. 000-21863) and incorporated herein by reference.
10.26 Second Amendment dated June 30, 2000 to the Short Form Lease dated as
of July 7, 1998 with a commencement date as of January 1, 1998 between
the Company and the Trustees of The Cambridge East Trust. Filed as
Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the
period ended June 30, 2000 and incorporated herein by reference.
10.27++ Amended and Restated Strategic Collaboration Agreement dated June 9,
2000, among the Company, Mallinckrodt Inc. (a Delaware
corporation) and Mallinckrodt Inc. (a New York corporation). Filed
as Exhibit 10.1 to the Company's current report on Form 8-K dated
June 29, 2000 (File No. 000-21863) and incorporated herein by
reference.
10.28++ Strategic Collaboration Agreement dated as of June 9, 2000, between
the Company and Schering Aktiengesellschaft. Filed as Exhibit 10.2
to the Company's current report on Form 8-K dated June 29, 2000
(File No. 000-21863) and incorporated herein by reference.
10.29 Stock Purchase Agreement, dated as of June 9, 2000, between the
Company and Schering Berlin Venture Corporation. Filed as Exhibit
10.3 to the Company's current report on Form 8-K dated June 29,
2000 (File No. 000-21863) and incorporated herein by reference.
10.30 Standstill Agreement, dated as of June 9, 2000, between the Company
and Schering Berlin Venture Corporation. Filed as Exhibit 10.4 to
the Company's current report on Form 8-K dated June 29, 2000 (File
No. 000-21863) and incorporated herein by reference.
10.31 Common Stock Purchase Agreement dated as of September 18, 2000 by and
between the Company and Acqua Wellington North American Equities
Fund, Ltd. Filed as Exhibit 10.1 to the Company's current report on
Form 8-K dated September 18, 2000 (File No. 000-21863) and
incorporated herein by reference.
10.32++ Reacquisition Agreement dated December 22, 2000 between the
Company and Daiichi Radioisotope Laboratories, Ltd. Filed
herewith.
10.33 Amendment No. 1 dated as of December 22, 2000 to the
Strategic Collaboration agreement, dated as of June 9, 2000,
between the Company and Schering Aktiengesellschaft. Filed
herewith.
23.1 Consent of Ernst & Young LLP. Filed herewith.
99.1 Important Factors Regarding Forward-Looking Statements. Filed
herewith.
+ Certain confidential material contained in the document has been
omitted and filed separately with the Securities and Exchange
Commission pursuant to Rule 406 of the Securities Act of 1933, as
amended.
# Identifies a management contract or compensatory plan or agreement in
which an executive officer or director of the Company participates.
++ Certain confidential material contained in the document has been
omitted and filed separately with the Securities and Exchange
Commission pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
33
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, we have duly caused this report to be signed on our behalf
by the undersigned, thereto duly authorized.
EPIX MEDICAL, INC.
Date: April 2, 2001 By: /s/ Michael D. Webb
-----------------------
Michael D. Webb
Chief Executive Officer
We the undersigned officer and directors of EPIX Medical, Inc., hereby severally
constitute Michael D. Webb, Pamela E. Carey, and William T. Whelan, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them to sign for use, in our names and in the capacity indicated below, any and
all amendments to this annual report on this Form 10-K for the fiscal year ended
December 31, 2000, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each said attorneys-in-fact may cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Title Date
/s/ Michael D. Webb Chief Executive Officer and Director April 2, 2001
- ------------------- (Principal Executive Officer)
Michael D. Webb
/s/ Pamela E. Carey Chief Financial Officer April 2, 2001
- -------------------
Pamela E. Carey
/s/ Christopher F. O. Gabrieli Chairman of the Board and Director April 2, 2001
- ------------------------------
Christopher F. O. Gabrieli
/s/ Stanley T. Crooke, M.D., Ph.D. Director April 2, 2001
- ----------------------------------
Stanley T. Crooke, M.D., Ph.D.
/s/ Luke B. Evnin, Ph.D. Director April 2, 2001
- ------------------------
Luke B. Evnin, Ph.D.
/s/ Randall B. Lauffer, Ph.D. Director April 2, 2001
- -----------------------------
Randall B. Lauffer, Ph.D.
EPIX MEDICAL, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Financial Statements
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
EPIX Medical, Inc.
We have audited the accompanying balance sheets of EPIX Medical, Inc. as of
December 31, 2000 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 2000. 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 generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EPIX Medical, Inc. at December
31, 2000 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 2 to the financial statements, in 2000 the Company
changed its method of accounting for revenue recognition.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 9, 2001
F-2
EPIX MEDICAL, INC.
BALANCE SHEETS
December 31, December 31,
2000 1999
---- ----
Assets
Current assets:
Cash and cash equivalents $ 402,621 $ 430,124
Available-for-sale marketable securities 24,310,253 13,709,980
Due from strategic partner 3,000,000 519,757
Prepaid expenses and other current assets 371,318 695,172
------------- -------------
Total current assets 28,084,192 15,355,033
Property and equipment, net 1,461,443 2,058,282
Notes receivable from officer - 356,159
Other assets 134,952 116,109
------------- -------------
Total assets $29,680,587 $17,885,583
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,800,046 $ 1,773,212
Accrued expenses 3,677,833 1,980,624
Contract advances 2,462,340 308,955
Accrued reacquisition costs 2,800,000 -
Current portion of capital lease obligations 259,308 379,911
Current portion of note payable 373,783 397,864
Deferred revenue 1,690,909 -
------------- -------------
Total current liabilities 13,064,219 4,840,566
Capital lease obligations, less current portion 64,440 323,748
Note payable, less current portion - 373,783
Accrued reacquisition costs, less current
portion 2,400,000 -
Loan payable to strategic partner 3,004,607 1,583,557
Deferred revenue 4,581,818 -
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 and 15,000,000 shares
authorized at December 31, 2000 and 1999, respectively;
13,203,991 and 11,680,315 shares issued and outstanding at
December 31, 2000 and 1999, respectively 132,040 116,803
Additional paid-in capital 79,144,912 56,520,680
Loans to stock option holders - (387,430)
Accumulated deficit (72,718,720) (45,398,477)
Other comprehensive income (loss) 7,271 (87,647)
------------- -------------
Total stockholders' equity 6,565,503 10,763,929
------------- -------------
Total liabilities and stockholders' equity $ 29,680,587 $ 17,885,583
============= =============
See accompanying notes.
F-3
EPIX MEDICAL, INC.
STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------------------------------------------
2000 1999 1998
----------------- ---------------- -----------------
Revenues $ 6,923,750 $ 1,144,056 $ 1,780,985
Operating expenses:
Research and development 25,833,243 14,667,370 13,349,337
General and administrative 4,835,160 4,411,194 4,256,557
----------------- ---------------- -----------------
Total operating expenses 30,668,403 19,078,564 17,605,894
----------------- ---------------- -----------------
Operating loss (23,744,653) (17,934,508) (15,824,909)
Interest income 1,256,323 1,173,136 1,887,812
Interest expense (468,277) (221,781) (61,132)
----------------- ---------------- -----------------
Loss before cumulative effect
of change in accounting principle $(22,956,607) $(16,983,153) $(13,998,229)
Cumulative effect of change in accounting
principle (4,363,636) - -
----------------- ---------------- -----------------
Net loss $(27,320,243) $(16,983,153) $(13,998,229)
================= ================ =================
Weighted average shares:
Basic and diluted 12,444,622 11,555,964 11,354,200
================= ================ =================
Net loss per share, basic and diluted:
Loss before cumulative effect of
change in accounting principle $(1.85) $(1.47) $(1.23)
Cumulative effect of change in
accounting principle (.35) -- --
----------------- ---------------- -----------------
Net loss $(2.20) $(1.47) $(1.23)
================= ================ =================
Pro forma amounts assuming the accounting
change is applied retroactively:
Net loss $(22,956,607) $(15,892,244) $(12,907,320)
================= ================ =================
Net loss per share, basic and diluted $(1.85) $(1.38) $(1.14)
================= ================ =================
See accompanying notes.
F-4
EPIX MEDICAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Loans Accumulated
Common Common Additional Stock Other Total
Stock Stock Paid in Options Accumulated Comprehensive Stockholders'
Shares Amount Capital Holder Deficit Income/(Loss) Equity
-------------------------------------------------------------------------------------------
Balance at
December 31, 1997 11,218,264 $112,183 $55,351,091 $ - $(14,417,095) $ - $41,046,179
Issuance of common
stock upon exercise
of options 221,793 2,218 249,922 252,140
Issuance of common
stock under employee
stock purchase plan 18,344 183 151,992 152,175
Issuance of
compensatory stock
option loan (123,119) (123,119)
Compensatory stock
option expense 86,406 86,406
Net Loss (13,998,229) (13,998,229)
Available-for-sale
marketable securities 87,453 87,453
unrealized loss ------------
Comprehensive loss (13,910,776)
-------------------------------------------------------------------------------------------
Balance at
December 31, 1998 11,458,401 114,584 55,839,411 (123,119) (28,415,324) 87,453 27,503,005
Issuance of common
stock upon exercise
of options 142,037 1,420 119,388 120,808
Issuance of common
stock under employee
stock purchase plan 24,323 243 116,659 116,902
Issuance of
compensatory stock
option plan 55,554 556 249,438 249,994
Issuance of
compensatory
stock option loan (249,994) (249,994)
Compensatory stock
option expense 98,956 98,956
Disqualifying
disposition of
compensatory stock
option 96,828 96,828
Interest income on
compensatory stock (14,317) (14,317)
options loans
Net loss (16,983,153) (16,983,153)
Available-for-sale
marketable securities
unrealized loss (175,100) (175,100)
------------
Comprehensive loss (17,158,253)
-------------------------------------------------------------------------------------------
Balance at
December 31, 1999 11,680,315 116,803 56,520,680 (387,430) (45,398,477) (87,647) 10,763,929
Issuance of common
stock upon exercise
of options 332,803 3,328 1,615,179 1,618,507
Issuance of common
stock under employee
stock purchase plan 14,708 147 120,018 120,165
Issuance of common
stock 1,176,165 11,762 20,873,635 20,885,397
Compensatory stock
option loan
expense 15,400 15,400
Repayment of stock
option loans 387,430 387,430
Net loss (27,320,243) (27,320,243)
Available-for-sale
marketable securities
unrealized gain 94,918 94,918
-----------
Comprehensive loss (27,255,325)
-------------------------------------------------------------------------------------------
Balance at
December 31, 2000 13,203,991 $132,040 $79,144,912 $ - $(72,718,720) $ 7,271 $ 6,565,503
===========================================================================================
See accompanying notes.
F-5
EPIX MEDICAL, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------------------
2000 1999 1998
---------------- ---------------- ---------------
Operating activities:
Net loss $(27,320,243) $(16,983,153) $(13,998,229)
Adjustments to reconcile net loss to cash
used in operating activities:
Cumulative effect of change in accounting
principle 4,363,636 - -
Depreciation and amortization 938,839 996,461 778,221
Stock compensation expense 15,400 195,784 86,406
Loss on sale of fixed assets - 18,071 -
Changes in operating assets and liabilities:
Due from strategic partner 519,757 (519,757) -
Prepaid expenses and other current assets 323,854 (177,471) (206,791)
Notes receivable from officer 356,159 (20,271) (20,272)
Other assets (18,843) (28,957) (5,186)
Accounts payable 26,834 993,534 28,781
Accrued expenses 1,697,209 79,165 316,221
Accrued reacquisition costs 5,200,000 - -
Contract advances 2,153,385 (302,083) (183,308)
Deferred revenue (1,090,909) - -
Receipt of cash from Schering AG for marketing
rights 10,000,000 - -
Disbursement of cash to Mallinckrodt for
marketing rights (10,000,000) - -
---------------- ---------------- ---------------
Net cash used in operating activities (12,834,922) (15,748,677) (13,204,157)
Investing activities
Purchases of fixed assets (342,000) (101,778) (1,568,473)
Proceeds from sale of fixed assets - 45,000 -
Purchases of marketable securities (522,346,251) (164,384,194) (410,500,904)
Sale or redemption of marketable securities 511,840,896 179,230,860 423,213,550
---------------- ---------------- ---------------
Net cash (used in) provided by
investing activities (10,847,355) 14,789,888 11,144,173
Financing activities:
Repayment of capital lease obligations (379,911) (438,483) (428,068)
Issuance of note payable - - 1,120,656
Proceeds from loan payable from strategic partner 1,421,050 1,583,557 -
Repayment of note payable (397,864) (349,009) -
Proceeds from repayment of stock option loan and 387,430 - -
related interest
Proceeds from Employee Stock Purchase Plan 120,165 116,902 152,175
Proceeds from stock options and warrants 1,618,507 106,492 129,018
Proceeds from sale of Common Stock 20,885,397 - -
---------------- ---------------- ---------------
Net cash provided by financing activities 23,654,774 1,019,459 973,781
Net increase (decrease) in cash and cash equivalents (27,503) 60,670 (1,086,203)
Cash and cash equivalents at beginning of period 430,124 369,454 1,455,657
---------------- ---------------- ---------------
Cash and cash equivalents at end of period $402,621 $430,124 $369,454
================ ================ ===============
Supplemental disclosure of noncash investing and
financing activities:
Capital lease obligations incurred in connection
with acquisition of fixed assets - $154,759 $816,740
================ ================ ===============
Issuance of stock option loan for exercise of
stock options and related interest - $264,311 $123,119
================ ================ ===============
Supplemental cash flow information:
Cash paid for interest $468,279 $221,781 $61,131
================ ================ ===============
See accompanying notes.
F-6
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
1. Business
EPIX Medical, Inc. ("EPIX" or the "Company") was formed on November 29,
1988 as a Delaware corporation and commenced operations in 1992. The Company is
developing targeted contrast agents both to improve the capability and expand
the use of magnetic resonance imaging ("MRI") as a tool for diagnosing human
disease. The Company's principal product under development, MS-325, is an
injectable vascular contrast agent designed for multiple vascular imaging
indications, including peripheral vascular disease ("PVD") and coronary artery
disease ("CAD").
In June 1999, the Company initiated a Phase III clinical trial to
determine the efficacy of MS-325-enhanced MRA for the detection of Aortoiliac
Occlusive Disease ("AIOD"), a sub-category of PVD. The Company completed a
Phase II clinical trial in June 1998 to test the safety and preliminary
efficacy of MS-325-enhanced MR angiography ("MRA") for the evaluation of PVD
and is currently conducting a Phase II feasibility trial to test the safety
and feasibility of MS-325-enhanced MRA for the evaluation of CAD. In March
2000, the Company completed enrollment in an additional Phase II clinical
trial to test the safety and feasibility of MS-325 for detecting breast
cancer.
Significant Revenues
For the year ended December 31, 2000, one source represented 84% of
revenues and another represented 16% of revenues. For the year ended December
31, 1999, one source represented 100% of revenues. For the year ended
December 31, 1998, one source represented 80% of revenues and one source
represented 20% of revenues. The 1999 and 1998 revenue percentages do not
reflect the effect of SAB 101.
2. Significant Accounting Policies
Cash Equivalents
The Company considers all investments with an original maturity of
three months or less when purchased to be cash equivalents. Cash equivalents
consist of money market accounts.
Property and Equipment
Property and Equipment are recorded at historical cost. Depreciation on
laboratory equipment and furniture, fixtures and other equipment is determined
using the straight-line method over the estimated useful lives of the related
assets, ranging from 3 to 5 years. Leasehold improvements are amortized using
the straight-line method over the shorter of the asset life or the remaining
life of the lease. Expenditures for maintenance and repairs are charged to
expense; betterments are capitalized.
Capital Lease Obligations
Assets and liabilities relating to capital leases are recorded at the
present value of the future minimum rental payments using interest rates
appropriate at the inception of the lease.
F-7
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 2000
2. Significant Accounting Policies (continued)
Income Taxes
The Company provides for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this
method, deferred taxes are recognized using the liability method, whereby tax
rates are applied to cumulative temporary differences between carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes are based on when and how they are expected to affect
the tax return. A valuation allowance is provided to the extent that there is
uncertainty as to the Company's ability to generate taxable income in the future
to realize the benefit from its net deferred tax asset.
Fair Value of Financial Instruments
At December 31, 2000 and 1999, the Company's financial instruments
consist of cash and cash equivalents, available-for-sale marketable
securities, notes receivable from an officer, capital lease obligations, and
notes payable.
The fair value of cash equivalents approximate cost due to their
short-term maturities. The fair value of the available-for-sale marketable
securities, notes receivable, note payable, loan payable and capital lease
obligations are discussed in Notes 3, 6, 7, and 8, respectively.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and
available-for-sale marketable securities. In accordance with the Company's
investment policy, marketable securities are restricted to United States
government issues and high-grade corporate bonds.
Revenue Recognition
In the fourth quarter of 2000, the Company adopted SEC Staff
Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial
Statements" retroactively to January 1, 2000, changing its method of
recognizing revenue. The Company recorded a cumulative effect of change in
accounting principle, in accordance with the adoption of SAB 101, in the
amount of $4.4 million, which related to up-front and milestone fees paid in
1996 and 1997 by Mallinckrodt, the Company's previous marketing partner for
MS-325. Prior to the adoption of SAB 101, the Company recognized revenues
from non-refundable license fees upon execution of the underlying license
agreement. Revenues from milestone payments under collaborative agreements
were recorded as revenue based upon the provisions of each agreement. Under
the new accounting method, after the adoption of SAB 101, the Company
recognizes revenues from non-refundable license fees and milestone payments
not specifically tied to a separate earning process ratably over the period
during which the Company has a substantial continuing obligation to perform
services under the contract. Included in 2000 revenues is $1.1 million of
revenue that was recognized in prior years relating to the adoption of SAB
101. The remaining $3.3 million of revenue to be recognized in future years
that is included in the cumulative effect of change in accounting principle
will be recognized ratably over the future period during which the Company
has a substantial continuing obligation to perform services under the
contract. Payments received from the Company's strategic partner for
development cost sharing obligations are recorded as revenue when the
underlying costs are incurred. Non-refundable payments received for which
revenue has not been earned are recorded as deferred revenue. Contract
advances represent refundable amounts received in advance of services
rendered.
The pro forma amounts presented in the statements of operations were
calculated assuming the accounting change was made retroactively to prior
periods. $1.1 million is included, each year, in revenue for 2000, 1999 and
1998.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-8
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
2. Significant Accounting Policies (Continued)
Research and Development
Research and development costs, including those associated with
technology, licenses and patents, are expensed as incurred.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") in accounting for
its stock-based compensation plans, rather than the alternative fair value
accounting method provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company has provided the required disclosures
pursuant to SFAS 123.
Earnings (Loss) Per Share
The Company computes net income (loss) per share in accordance with
the provisions of SFAS No. 128, "Earnings per Share." Basic net income (loss)
per share is based upon the weighted-average number of common shares
outstanding. Diluted net income (loss) per share, includes the effect of
dilutive common equivalent shares from stock options and warrants using the
treasury stock method. Basic and diluted loss per share are the same for all
periods presented, due to the Company's operating losses.
Comprehensive Income (Loss)
The Company reports and presents comprehensive income and its
components in accordance with the provisions of SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income (loss) is reflected in the
statements of stockholders' equity and relates to unrealized gains and losses
in marketable securities.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137, requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The effective date
of this statement was deferred to fiscal years beginning after June 15, 2000 by
SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities -
Deferral of Effective Date of SFAS No. 133." The Company believes the adoption
of this new accounting standard will not have a significant effect on its
financial statements.
F-9
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
3. Available-for-sale Marketable Securities
The estimated fair value of marketable securities is determined
based on broker quotes or quoted market prices or rates for the same or similar
instruments. The estimated fair value and carrying amount of marketable
securities are as follows:
Fair Value Cost
--------------------------------- ---------------------------------
December 31, December 31,
--------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- --------------
Federal agency obligations........................... $ 2,034,306 $ 4,791,456 $ 2,036,594 $ 4,829,189
U.S. Treasury obligations............................ 2,732,721 2,955,288 2,735,881 2,984,960
Bank obligations...................................... 18,525,188 - 18,518,689 -
Corporate obligations................................ 1,018,038 5,963,236 1,011,818 5,983,478
-------------- --------------- -------------- --------------
$24,310,253 $13,709,980 $24,302,982 $13,797,627
============== =============== ============== ==============
Maturities of marketable securities classified as available-for-sale by
contractual maturity are shown below:
December 31,
----------------------------------------
2000 1999
-------------------- ----------------
Due within one year..................................................... $24,310,253 $ 5,727,824
Due after one year through two years.................................... - 7,982,156
-------------------- ----------------
$24,310,253 $13,709,980
==================== ================
F-10
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
4. Property and Equipment
Property and equipment consist of the following:
December 31,
------------------------------------
2000 1999
----------------- --------------
Laboratory equipment............................................ $ 1,995,258 $ 1,766,075
Leasehold improvements.......................................... 2,120,601 2,045,702
Furniture, fixtures and other equipment......................... 694,913 656,995
----------------- --------------
4,810,772 4,468,772
Less accumulated depreciation and amortization.................. (3,349,329) (2,410,490)
----------------- --------------
$ 1,461,443 $ 2,058,282
================= ==============
Depreciation and amortization expense was $938,839, $996,461 and
$778,221 in 2000, 1999 and 1998, respectively.
5. Accrued Expenses
Accrued expenses consist of the following:
December 31,
-------------------------------------
2000 1999
------------------ ---------------
Accrued development expenses $2,152,101 $ 635,890
Accrued legal expense 110,000 181,337
Accrued compensation 815,514 595,437
Other accrued expenses 600,218 567,960
------------------ ---------------
$3,677,833 $1,980,624
================== ===============
6. Note Payable
In December 1998, the Company borrowed $1,120,656 in the form of a
34-month note payable that bears annual interest at 13.17%. The proceeds from
this note payable were used to finance certain leasehold improvements at both
of the Company's facilities. The loan balance at December 31, 2000 of
$373,782 is due in December 2001.
F-11
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
7. Loan Payable to Strategic Partner
In October 1999, the Company entered into a Non-Negotiable Promissory
Note and Security Agreement (the "Loan") with Mallinckrodt, a strategic
partner, under which the Company was eligible to borrow its share of
development costs, on a quarterly basis, up to a total of $9.5 million. In
June 2000, pursuant to the amended collaboration agreement with Mallinckrodt
and the new strategic collaboration with Schering, Schering assumed the
development cost sharing obligation for MS-325 from Mallinckrodt as of
January 1, 2000. As a result, the terms of the Loan were amended to allow
funding under the Loan for the Company's portion of development costs through
December 31, 1999. The Loan balance at December 31, 2000 of $3,004,607
represents EPIX's share of third and fourth quarter 1999 MS-325 development
costs. No additional funding is available to the Company under the Loan. The
Loan bears interest, adjustable on a quarterly basis, at the Prime Rate
published in the Wall Street Journal and is repayable in full on October 1,
2002. The Loan is secured by a first priority security interest in all of the
Company's intellectual property.
8. Leases
Assets under capital leases, the majority of which are laboratory
equipment, totaled $1,375,691 at December 31, 2000 and 1999. During the years
ended December 31, 2000, 1999, and 1998, the Company incurred amortization
expense relating to assets under capital leases of $371,300, $427,740 and
$433,548, respectively. Accumulated amortization relating to assets under
capital leases was $1,081,320 and $710,020 at December 31, 2000 and 1999,
respectively.
In addition, the Company leases office space under operating lease
arrangements. The leases for the two principal facilities expire in December
2002.
Future minimum commitments under leases with non-cancelable terms of
one or more years are as follows at December 31, 2000:
Capital Operating
Leases Leases
----------------- --------------
2001 $ 275,763 $1,281,595
2002 66,166 1,265,417
2003 - 386,897
2004 - 31,719
----------------- --------------
Total minimum lease payments 341,929 $2,965,628
==============
Less amounts representing interest 18,181
-----------------
Present value minimum lease payments 323,748
Less amounts due within one year (259,308)
-----------------
$ 64,440
=================
Rent expense amounted to $614,268, $598,694 and $546,866 for 2000,
1999, and 1998, respectively.
F-12
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
9. Stockholders' Equity
Common Stock
In May 2000, the Company's shareholders approved an increase to the
Company's authorized shares from 15,000,000 to 40,000,000.
In June 2000, the Company issued 1,112,075 shares of common stock to
Schering BV, pursuant to a stock purchase agreement, at a price of $17.98 per
share, which was based on an average market price over a period of time as
specified in the agreement. This investment in the Company by Schering BV was
made in conjunction with the Strategic Collaboration Agreement entered into
between the Company and Schering AG in June 2000.
In September 2000, the Company entered into an equity financing
facility with Acqua Wellington North American Equities Fund Ltd. ("Acqua
Wellington") covering the sale of up to $45 million of the Company's common
stock, over a twenty eight month period. The shares may be sold, at the
Company's discretion, at a small discount to the market price at the time of
sale. The total amount of the investment is dependent, in part, on the
Company's stock price, with the Company controlling the amount and timing of
stock sold. During 2000, the Company sold 64,090 shares under this facility
providing net proceeds of $885,397, and in 2001, the Company sold an
additional 599,284 shares providing additional net proceeds of $6,119,218.
Warrants
In connection with the issuance of certain notes payable and the
sale of Series D preferred stock in 1996, the Company issued warrants to
purchase 40,000 shares of Series D preferred stock. Effective with the
initial public offering and the conversion of Series D preferred stock into
Common Stock, the holders of the warrants became entitled to exercise the
warrants for an aggregate of 26,665 shares of common stock at a cost equal to
$4.50 per common share. These warrants, which expire in May 2006, remain
outstanding as of December 31, 2000.
Equity Plans
Equity Incentive Plan
The Company has in place the 1992 Equity Incentive Plan (the "Equity
Plan"), which provides stock awards to purchase shares of Common Stock to be
granted to employees and consultants under incentive and non-statutory stock
option agreements. In May 2000, September 1999, June 1999 and May 1998, the
Company amended the Equity Plan to, among other things, increase the number
of shares reserved for issuance pursuant to future grants. The Equity Plan
provides for the grant of stock options (incentive and non-statutory), stock
appreciation rights, performance shares, restricted stock or stock units for
the purchase of an aggregate of 4,599,901 shares of Common Stock, subject to
adjustment for stock-splits and similar capital changes. Awards under the
Equity Plan can be granted to officers, employees and other individuals as
determined by a committee of the Board of Directors, which administers the
Equity Plan. The Compensation Committee selects the participants and
establishes the terms and conditions of each option or other equity right
granted under the Equity Plan, including the exercise price, the number of
shares subject to options or other equity rights and the time at which such
options become exercisable. As of December 31, 2000, 3,575,746 shares of
Common Stock are reserved for issuance under the Equity Plan.
F-13
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
9. Stockholders' Equity (Continued)
Stock option information relating to the Equity Incentive Plan is as
follows:
Options Exercisable
------------------------
Weighted Weighted
Option Price Average Available Average
Options Range Per Exercise For Exercise
Outstanding Share Price Grant Number Price
- ----------------------------- ------------------- ------------------ ------------ ------------- ---------- ----------
December 31, 1997............. 1,666,714 $0.42 - $13.50 $4.33 161,219 562,704 $2.04
Granted....................... 328,344 $5.38 - $13.88 $9.68
Exercised..................... (221,793) $0.42 - $8.75 $1.14
Canceled...................... (35,673) $0.45 - $13.88 $9.87
---------
December 31, 1998............. 1,737,592 $0.42 - $13.88 $5.64 118,548 559,631 $3.04
Granted....................... 881,322 $4.50 - $11.125 $5.84
Exercised..................... (197,591) $0.42 - $9.94 $1.88
Canceled...................... (41,361) $4.50 - $13.88 $8.81
---------
December 31, 1999............. 2,379,962 $0.42 - $13.88 $5.97 78,587 703,485 $4.28
Granted....................... 615,915 $6.75 - $22.50 $12.75
Exercised..................... (332,803) $0.42 - $13.88 $4.86
Canceled...................... (278,411) $0.83 - $22.25 $7.55
---------
December 31, 2000............. 2,384,663 $0.42 - $22.50 $7.69 1,191,083 786,682 $5.25
=========
1996 Directors Stock Option Plan
In December 1996, the Board of Directors and stockholders of the
Company adopted the Company's 1996 Director Stock Option Plan (the "Director
Plan"). In May 1998, the Company amended the Director Plan to increase the
number of shares for issuance pursuant to grants and to increase the number of
shares granted upon election or reelection. All of the directors who are not
employees of the Company (the "Eligible Directors") are currently eligible to
participate in the Director Plan. At December 31, 2000, there are 100,000 shares
of Common Stock reserved for issuance under the Director Plan. As of December
31, 2000, upon the election or reelection of an Eligible Director, such director
is automatically granted an option to purchase 15,000 shares of Common Stock
(the "Option"). Each Option becomes exercisable with respect to 5,000 shares on
each anniversary date of grant for a period of three years, provided that the
option holder is still a director of the Company at the opening of business on
such date. Effective January 1, 2001, the numbers of shares underlying the
option granted to Eligible Directors upon election or reelection was increased
from 15,000 to 25,000 shares. The Options have a term of ten years. The exercise
price for the Options is equal to fair value at the date of grant. The exercise
price may be paid in cash or shares of Common Stock or combination of both.
F-14
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
9. Stockholders' Equity (Continued)
Stock option information relating to the Director Plan is as follows:
Options Exercisable
--------------------------
Option Price Weighted Weighted
Options Range Per Average Available Average
Outstanding Share Exercise Price for Grant Number Exercise Price
----------- ----- -------------- --------- -------- --------------
December 31, 1997 6,666 $8.50 $8.50 60,000
Granted 38,334 $8.50 - $13.25 $12.40
----------
December 31, 1998 45,000 $8.50 - $13.25 $11.80 55,000 15,000 $12.83
Granted 15,000 $7.00 $7.00
----------
December 31, 1999 60,000 $7.00 - $13.25 $10.60 40,000 28,666 $12.42
Granted 15,000 $17.75 $17.75
----------
December 31, 2000 75,000 $7.00 - $17.75 $12.03 25,000 42,333 $11.53
==========
Combined Option Information
The following table summarizes information about options outstanding at
December 31, 2000:
Options Outstanding Exercisable
- ------------------------------------------------------------------------------- -----------------------------
Weighted
Options Average Options Weighted
Outstanding at Remaining Weighted Exercisable Average
Range of Exercise December 31, Contractual Average at December Exercise
Prices 2000 Life Exercise Price 31, 2000 Price
- --------------------- -------------- ---------------- --------------- -------------- -----------
$0.42 - $5.12 816,651 6.92 $3.70 415,540 $2.43
$5.25 - $8.75 767,617 7.09 $6.98 286,669 $7.39
$9.00 - $12.00 573,136 8.67 $11.10 81,115 $10.75
$12.13 - $21.63 299,759 8.86 $14.80 45,691 $13.61
$22.50 2,500 9.45 $22.50 _ _
-------------- --------------
$0.42 - $22.50 2,459,663 7.62 $7.82 829,015 $5.57
============== ==============
F-15
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. Stockholders' Equity (Continued)
1996 Employee Stock Purchase Plan
The Company sponsored the 1996 Employee Stock Purchase Plan (the
"Purchase Plan") under which employees may purchase shares of Common Stock at
a discount from fair market value at specified dates. Employees first
purchased shares under the Purchase Plan in 1998. There are 66,666 shares of
Common Stock reserved for issuance under the Purchase Plan. Employees
purchased 14,708 shares in 2000 at an average price of $8.17 and 24,323
shares in 1999 for an average price of $4.81. At December 31, 2000, 9,291
common shares remained available for issuance under the Purchase Plan. The
Purchase Plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the code. Rights to purchase Common
Stock under the Purchase Plan are granted at the discretion of the
Compensation Committee, which determines the frequency and duration of
individual offerings under the Purchase Plan and the dates when stock may be
purchased. Eligible employees participate voluntarily and may withdraw from
any offering at any time before stock is purchased. Participation terminates
automatically upon termination of employment. The purchase price per share of
Common Stock in an offering is 85% of the lesser of its fair market value at
the beginning of the offering period or on the applicable exercise date and
are paid through payroll deductions. The Purchase Plan terminates in December
2006.
FAS 123 Pro Forma Information
The pro forma information required by FAS 123 is presented below and
has been determined as if the Company accounted for its stock-based awards
under the fair value method per FAS 123. The fair value of the Company's
stock-based awards to employees was estimated using the Black-Scholes
option-pricing model and assuming no expected dividends and the following
weighted average assumptions:
Options ESPP
------------------------------------------- --------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Weighted-average life (Years) 4.90 4.96 4.75 .50 0.50 0.50
Weighted-average contractual
life (Years) 7.62 7.92 7.83 - - -
Expected stock price volatility 1.14 0.81 0.74 1.14 0.81 0.74
Risk-free interest rate 6.20% 5.50% 6.00% 6.20% 5.50% 6.00%
The following is a summary of weighted average grant date values
generated by the application of the Black-Scholes model:
Weighted Average Grant Date Fair Value
------------------------------------------------
Year Ended December 31,
------------------------------------------------
2000 1999 1998
---- ---- ----
Stock option plans $10.18 $3.70 $5.73
ESPP $5.64 $2.80 $4.06
F-16
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
9. Stockholders' Equity (Continued)
As required under FAS 123, the following pro forma net loss and loss per
share presentation reflects the amortization of the option grant fair value.
For purposes of this disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting periods. The Company's pro
forma information follows:
Year Ended December 31,
------------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
Pro forma net loss $(29,696,369) $(18,386,545) $(15,160,591)
Pro forma basic and diluted
loss per share $(2.39) $(1.59) $(1.34)
F-17
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
10. Income Taxes
The Company has reported losses since inception and, due to the degree of
uncertainty related to the ultimate use of the loss carryforwards, fully
reserved this tax benefit. The Company has the following deferred tax assets
as of December 31, 2000 and 1999:
December 31,
-----------------------------------
2000 1999
--------------- ---------------
Deferred tax assets:
Net operating loss carryforwards $ 23,760,000 $17,045,000
Research and development tax credits 2,953,000 2,260,000
Book over tax depreciation and amortization 1,299,000 941,000
Deferred revenue 2,073,000 --
Other 1,045,000 154,000
--------------- ---------------
Total deferred tax assets 31,130,000 20,400,000
Valuation allowances (31,130,000) (20,400,000)
--------------- ---------------
Deferred income taxes, net $ -- $ --
=============== ===============
As of December 31, 2000, the Company has net operating loss
carryforwards for income tax purposes of approximately $59.0 million, which
expire through the year 2020 and 2005, for Federal and State purposes,
respectively. The valuation allowance increased by $10,730,000 during the
twelve months ended December 31, 2000. The tax net operating loss
carryforwards differ from the accumulated deficit principally due to
temporary differences in the recognition of certain revenue and expense items
for financial and tax reporting purposes.
As a result of ownership changes resulting from sales of equity
securities, the Company's ability to use the loss carryforwards is subject to
limitations as defined in Sections 382 and 383 of the Internal Revenue Code
of 1986, as amended (the "Code"). The Company currently estimates that the
annual limitation on its use of net operating losses through May 31, 1996
will be approximately $900,000. Pursuant to Sections 382 and 383 of the Code,
the change in ownership resulting from public equity offerings in 1997 and
any other future ownership changes may further limit utilization of losses
and credits in any one year. The Company is also eligible for research and
development tax credits, which can be carried forward to offset federal
taxable income. The annual limitation and the timing of attaining
profitability may result in the expiration of net operating loss and tax
credit carryforwards before utilization.
The reconciliation of income tax computed at the U.S. federal statutory
rate to income tax expense is as follows:
Years ended December 31, Years ended December 31,
------------------------------------ --------------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Tax at U.S. statutory rate ($7,805,000) ($5,774,000) (34.00%) (34.00%)
State taxes, net of federal benefit (1,377,000) (1,020,000) (6.00%) (6.00%)
Non-deductible items 53,000 55,000 0.23% 0.03%
Tax credits (1,601,000) (1,519,000) (6.98%) (8.90%)
Change in Valuation Allowance 10,730,000 8,258,000 46.75% 48.87%
--------------- --------------- --------------- ---------------
Income tax expense $ -- $ -- 0.00% 0.00%
=============== =============== =============== ===============
F-18
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
11. Defined Contribution Plan
The Company offers a defined contribution 401(k) plan which covers
substantially all employees. The plan permits participants to make contributions
from 1% to 15% of their compensation. Beginning in 1999, the Company began
matching up to 3% of employees' contributions. During 2000 and 1999, the
Company's match amounted to $158,097 and $134,355 respectively.
F-19
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
12. Significant Agreements
In June 2000, the Company entered into a strategic collaboration
agreement pursuant to which it granted Schering AG an exclusive license to
co-develop and market MS-325 worldwide, exclusive of Japan. In December 2000,
the Company amended this strategic collaboration agreement to grant to
Schering AG the exclusive rights to develop and market MS-325 in Japan.
Generally, the Company and Schering AG will both share equally in MS-325
clinical development costs and profits. Under the agreement, the Company will
assume responsibility for completing clinical trials and filing for FDA
approval in the United States, and Schering AG will lead clinical activities
for MS-325 outside of the United States. In addition, the Company granted
Schering an exclusive option to develop and market an unspecified
cardiovascular product from our pipeline. In connection with this strategic
collaboration agreement and in connection with the amendment to the strategic
collaboration agreement between the Company and Mallinckrodt, as further
described below, Schering AG paid the Company an up-front fee of $10.0
million, which the Company then paid to Mallinckrodt. Schering AG also made a
$20.0 million equity investment in the Company at $17.98 per share of common
stock, through its affiliate, Schering Berlin Venture Corporation ("Schering
BV"). The Company may receive up to an additional $20.0 million in milestone
payments under the strategic collaboration agreement. Under the terms of the
December 2000 amendment, Schering AG paid the Company, in January 2001, an
up-front fee of $3.0 million and may be required to pay the Company an
additional $7.0 million upon the achievement of certain milestones. The
upfront payment of $3.0 million is recorded as Due from Strategic Partner in
the accompanying balance sheet.
Also, under the strategic collaboration agreement, the Company has
options to acquire certain participation rights with respect to two of Schering
AG's products currently in clinical trials, SHU 55C and Gadomer-17. The Company
is entitled to exercise these options on a region by region basis upon the
payment of certain fees. The Company is entitled to exercise the SHU 555C option
for a period of twelve months after the date the option becomes exercisable.
Once the Company exercises the SHU 555C option, it will enter into a definitive
agreement with Schering AG with respect to SHU 555C, pursuant to which Schering
AG will be responsible for the conduct of all development, marketing and sales
activities in connection with SHU 555C. The Company is entitled to exercise the
Gadomer-17 option for a period of 120 days following Schering AG's performance
of certain milestones. Once the Company exercises the Gadomer-17 option, it will
enter into a definitive agreement with Schering AG with respect to Gadomer-17,
pursuant to which it will share development costs incurred from the date of the
option exercise as well as profits, equally with Schering AG. Under the terms of
the strategic collaboration agreement, either party may terminate the agreement
upon thirty days notice if there is a material breach of the contract or if
either party fails to meet certain milestones. In addition, Schering AG may
terminate the agreement at any time on a region-by-region basis or in its
entirety, upon six months written notice to the Company, and the Company may
terminate the agreement with respect to development of MS-325 in the European
Union at any time after June 9, 2001 upon ninety days written notice to Schering
AG, if Schering AG has failed to meet its obligations in connection with the
regulatory approval of MS-325 in the European Union.
F-20
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
12. Significant Agreements (Continued)
As a result of the above noted agreements, Schering AG effectively
purchased the MS-325 marketing rights previously owned by Mallinckrodt. The
$10.0 million payment from Schering AG to the Company was required to be paid
by the Company to Mallinckrodt. The Company paid the $10.0 million to
Mallinckrodt immediately subsequent to its receipt, and did not reflect the
receipt and the disbursement in its statement of operations on the basis that
the payment to us from Schering AG did not constitute an earnings processs
nor did the payment by us to Mallinckrodt represent an expense. Such amounts
are, however, reflected in the statement of cash flows.
In August 1996, the Company entered into collaboration agreement
with Mallinckrodt pursuant to which we granted Mallinckrodt an exclusive
license to develop and commercialize MS-325 worldwide, excluding Japan. In
June 2000, in connection with the exclusive license that the Company granted
to Schering AG, the Company amended its strategic collaboration with
Mallinckrodt to grant Mallinckrodt a non-exclusive, worldwide license to
manufacture MS-325 for clinical development and commercial use in accordance
with a manufacturing agreement entered into in June 2000 between Mallinckrodt
and Schering AG, and to enable the Company to enter into the strategic
collaboration agreement with Schering AG described above. In connection with
this amendment, the Company paid Mallinckrodt an up-front fee of $10.0
million and may be required to pay up to an additional $5.0 million in
milestones. The Company will also pay Mallinckrodt a share of operating
margins in the US and a royalty on gross profits outside the US on sales of
MS-325.
In October 1999, the Company entered into a Non-Negotiable
Promissory Note and Security Agreement (the "Loan") with Mallinckrodt, the
Company's strategic partner, under which it was eligible to borrow its share
of development costs, on a quarterly basis, up to a total of $9.5 million. In
June 2000, pursuant to the amended collaboration agreement with Mallinckrodt
and the new strategic collaboration with Schering, Schering assumed the
development cost sharing obligation for MS-325 from Mallinckrodt as of
January 1, 2000. As a result, the terms of the Loan were amended to allow
funding under the Loan for the Company's portion of development costs through
December 31, 1999. The Loan balance at December 31, 2000 of $3,004,607
represents the Company's share of third and fourth quarter 1999 MS-325
development costs. No additional funding is available to the Company under
the Loan. The Loan bears interest, adjustable on a quarterly basis, at the
Prime Rate published in the Wall Street Journal and is repayable in full on
October 1, 2002. The Loan is secured by a first priority security interest in
all of the Company's intellectual property.
In March 1996, the Company entered into a development and license
agreement with Daiichi pursuant to which it granted Daiichi an exclusive
license to develop and commercialize MS-325 in Japan. Under this arrangement,
Daiichi assumed primary responsibility for clinical development, regulatory
approval, marketing and distribution of MS-325 in Japan. The Company retained
the right and obligation to manufacture MS-325 for development activities and
commercial sale under the agreement. In December 2000, the Company reacquired
the rights to develop and commercialize MS-325 in from Daiichi. Under the
terms of this Reacquisition Agreement, the Company agreed to pay Daiichi a
total of $5.2 million. In January 2001, the Company paid Daiichi $2.8 million
in up-front fees and it will pay an additional $2.4 million in the future.
Daiichi will also receive a royalty from the Company on net sales of MS-325
in Japan. Simultaneously with the Company's reacquisition from Daiichi of the
MS-325 development and marketing rights in Japan, the Company assigned these
rights to Schering AG as described above. The amounts due Daiichi by the
Company under the Reacquisition Agreement are reflected as Accrued
reacquisition costs in the accompanying balance sheet.
In September 2000, we entered into an agreement with Acqua
Wellington North American Equities Fund Ltd. ("Acqua Wellington") for an
equity financing facility covering the sale of up to $45 million of the
Company's common stock over a 28 month period. These shares may be sold at
the Company's discretion at a small discount to the market price of the
Company's shares at the time of the sale. The total amount of the investment
is dependent, in part, on the Company's stock price, with the Company
controlling the amount and timing of the stock sold. During 2000, we received
$885,397 and in 2001, we received an additional $6,119,218 in net proceeds
from Acqua Wellington under this facility.
In June 1997, the Company and Dyax Corp. ("Dyax") formed a strategic
alliance to develop novel contrast imaging agents for the diagnosis of severe
blood clots in the lungs and legs. The companies jointly sought to identify and
develop compounds that specifically target PE and DVT for use as in vivo MRI and
nuclear medicine imaging agents for the diagnosis of these disorders. The
Company partially funded the program and provided expertise in MRI contrast
technology for development of MRI-specific imaging agents. Dyax assumed primary
responsibility for developing agents for use in nuclear medicine. Dyax will
receive royalties on sales of MRI products, and the Company will receive
royalties on sales of nuclear medicine products resulting from this
collaboration. The discovery phase of this collaboration was formally completed
in 1999 with the identification of several peptide candidates.
F-21
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
12. Significant Agreements (Continued)
The Company has a license agreement with Massachusetts General Hospital
("MGH") for the exclusive license of a number of patents and patent
applications on which the Company's research and development efforts are
significantly based. In exchange, the Company will remit royalties based on a
specified percentage of revenues. Under this agreement, the Company is
required to pay for all patent application costs related to the licensed
technology. On July 10, 1995, the Company issued and sold to the MGH 83,723
shares of the Company's Common Stock for $1,256 as consideration for certain
modifications to the license. The Company expensed the difference between
proceeds received and fair value of the common stock at the time of issuance,
approximately $68,000.
F-22
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
13. Quarterly Financial Information (unaudited)
The quarterly information for the four quarters of 2000 reflects the quarters
as previously reported and as restated for the retroactive adoption of SAB
101 to January 1, 2000, as noted in the column headings. The 1999 quarterly
information has not been restated for the adoption of SAB 101.
First Quarter Ended Second Quarter Ended Third Quarter Ended Fourth Quarter Ended
March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
-----------------------------------------------------------------------------------------------------
As As As As As As As As
Previously Restated Previously Restated Previously Restated previously Restated
Reported Reported Reported Reported
-------- -------- -------- --------- -------- -------- -------- --------
Revenues $ 859,400 $ 1,132,127 $ 2,286,729 $ 2,559,456 $ 1,635,827 $ 1,908,554 $ 4,050,886 $ 1,323,613
Operating expense:
Research &
development 5,050,906 5,050,906 5,456,370 5,456,370 5,535,849 5,535,849 9,790,117 9,790,117
General &
administrative 1,042,083 1,042,083 1,439,641 1,439,641 1,041,168 1,041,168 1,312,271 1,312,271
------------------------------------------------------------------------------------------------------
Total operating
expenses 6,092,989 6,092,989 6,896,011 6,896,011 6,577,017 6,577,017 11,102,388 11,102,398
Other Income, net 73,004 73,004 38,864 38,864 361,430 361,430 314,750 314,750
------------------------------------------------------------------------------------------------------
Loss before
cumulative effect of
change in accounting
principle (5,160,585) (4,887,858) (4,570,418) (4,297,691) (4,579,760) (4,307,033) (6,737,752) (9,464,025)
Cumulative effect
of change in
accounting principle -- (4,363,636) -- -- -- -- -- --
------------------------------------------------------------------------------------------------------
Net loss $(5,160,585) $(9,251,494) $(4,570,418) $(4,297,691) $(4,579,760) $(4,307,033) $(6,737,752) $(9,464,025)
=======================================================================================================
Weighted average
shares, basic and
diluted 11,720,515 11,720,515 11,869,515 11,869,515 13,022,045 13,022,045 13,152,290 13,152,290
=======================================================================================================
Net loss per share,
basic and diluted:
Loss before
cumulative effect of
change in accounting
principle $ (0.44) $(0.42) $(0.39) $(0.36) $(0.35) $(0.33) $(0.51) $(0.72)
Cumulative effect
of change in
accounting
principle -- (0.37) -- -- -- -- -- --
------------------------------------------------------------------------------------------------------
Net loss $ (0.44) $(0.79) $(0.39) $(0.36) $(0.35) $(0.33) $(0.51) $(0.72)
=======================================================================================================
F-23
EPIX MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
13. Quarterly Financial Information (unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
Ended Ended Ended Ended
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
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Revenues $ 287,267 $ 266,552 $ 70,480 $ 519,757
Operating expenses:
Research Development 3,286,491 3,431,476 3,785,555 4,163,848
General & administrative 1,041,955 1,090,087 1,106,759 1,172,393
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Total operating expenses 4,328,446 4,521,563 4,892,314 5,336,241
Other income (loss), net 316,500 262,139 216,857 155,859
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Net loss $(3,724,679) $(3,992,872) $(4,604,977) $(4,660,625)
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Weighted average shares,
basic and diluted 11,464,242 11,494,531 11,608,707 11,654,483
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Net loss per share:
Basic and diluted $(0.32) $(0.35) $(0.40) $(0.40)
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F-24