SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- - Act of 1934: For the quarterly period ended October 31, 2001
OR
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934: For the transition period from_______ to_______
Commission file number: 0-27756
Alexion Pharmaceuticals, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3648318
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(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
352 Knotter Drive, Cheshire, Connecticut 06410
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(Address of principal executive offices) (Zip Code)
203-272-2596
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(Registrant's telephone number, including area code)
N/A
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(Former address of principal executive offices) (Zip Code)
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 __________
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Common Stock, $0.0001 par value 18,117,851 shares
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Class Outstanding at December 6, 2001
ALEXION PHARMACEUTICALS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of October 31, 2001 and
July 31, 2001 3
Consolidated Statements of Operations for the three months
ended October 31, 2001 and 2000 4
Consolidated Statements of Cash Flows for the three months
ended October 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION 16
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES 17
Page 2 of 17
ALEXION PHARMACEUTICALS, INC.
Consolidated Balance Sheets
(amounts in thousands)
October 31, 2001 July 31, 2001
====================== ======================
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $120,158 $135,188
Marketable securities 229,335 220,086
Reimbursable contract costs: billed 3,210 2,974
unbilled 3,957 4,006
Prepaid expenses 362 493
---------------------- ----------------------
Total current assets 357,022 362,747
Property, plant, and equipment, net 13,388 13,731
Goodwill, net 20,230 20,270
Deferred financing costs, net 3,122 3,265
Other assets 248 246
---------------------- ----------------------
TOTAL ASSETS $394,010 $400,259
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 1,213 1,722
Accrued expenses 3,352 2,271
Accrued interest 921 2,646
Deferred revenue 1,427 1,352
---------------------- ----------------------
Total current liabilities 6,913 7,991
---------------------- ----------------------
Deferred revenue, less current portion included above 7,793 7,940
---------------------- ----------------------
Notes payable 3,920 3,920
---------------------- ----------------------
Convertible subordinated notes 120,000 120,000
---------------------- ----------------------
Stockholders' Equity:
Preferred Stock $.0001 par value; 5,000 shares authorized;
no shares issued or outstanding - -
Common stock $.0001 par value; 145,000 shares
authorized; 18,123 and 18,119 shares issued
at October 31, 2001 and July 31, 2001, respectively 2 2
Additional paid-in capital 384,195 384,091
Accumulated deficit (132,046) (124,257)
Other comprehensive gain 3,233 572
Treasury stock, at cost; 12 shares - -
---------------------- ----------------------
Total stockholders' equity 255,384 260,408
---------------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $394,010 $400,259
====================== ======================
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3 of 17
ALEXION PHARMACEUTICALS, INC.
Consolidated Statements of Operations
(UNAUDITED)
(amounts in thousands, except per share amounts)
Three months ended October 31,
------------------------------
2001 2000
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CONTRACT RESEARCH REVENUES $ 1,860 $ 3,399
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OPERATING EXPENSES:
Research and development 9,671 10,923
General and administrative 1,599 1,378
In-process research and development (Note 3) - 21,000
Amortization of goodwill (Note 4) - 349
------------- -------------
Total operating expenses 11,270 33,650
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Operating loss (9,410) (30,251)
Interest income 3,538 2,808
Interest expense (1,917) (1,998)
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Loss before cumulative effect of Staff Accounting
Bulletin No. 101 (SAB 101) (7,789) (29,441)
CUMULATIVE EFFECT OF ADOPTION OF SAB 101 (Note 2) - (9,118)
------------- -------------
Net loss $(7,789) $(38,559)
============= =============
BASIC AND DILUTED PER SHARE DATA:
Loss before cumulative effect of adoption of SAB 101 $ (0.43) $ (1.92)
Cumulative effect of adoption of SAB 101 - (0.60)
------------- -------------
Net loss $ (0.43) $ (2.52)
============= =============
SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE 18,110 15,323
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4 of 17
ALEXION PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
(UNAUDITED)
(amounts in thousands)
Three months ended October 31,
------------------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,789) $(38,559)
Adjustments to reconcile net loss to net cash
used in operating activities:
In-process research and development - 21,000
Cumulative effect of adoption of SAB 101 - 9,118
Depreciation and amortization 925 562
Amortization of goodwill - 349
Compensation expense related to grant of stock options 54 457
Change in assets and liabilities:
Reimbursable contract costs (187) 1,236
Prepaid expenses 171 168
Accounts payable (509) 61
Accrued expenses 1,105 (84)
Accrued interest (1,725) (1,867)
Deferred revenue (72) (109)
-------------- -------------
Net cash used in operating activities (8,027) (7,668)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (214,206) (64,385)
Proceeds from marketable securities 207,618 28,162
Purchases of property, plant and equipment (443) (2,075)
Cash paid for transaction costs, net of cash received
for acquisition of Prolifaron (24) 771
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Net cash used in investing activities (7,055) (37,527)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 50 1,462
Deferred financing and offering costs - (175)
Repayments of notes payable - (92)
Other 2 (165)
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Net cash provided by financing activities 52 1,030
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NET DECREASE IN CASH AND CASH EQUIVALENTS (15,030) (44,165)
CASH AND CASH EQUIVALENTS, beginning of period 135,188 91,858
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CASH AND CASH EQUIVALENTS, end of period $ 120,158 $ 47,693
============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense $ 3,509 $ 3,735
============== =============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Acquisition of Prolifaron through the issuance of
common stock and stock options - $ 43,945
============== =============
The accompanying notes are an integral part of these consolidated
financial statements.
Page 5 of 17
ALEXION PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Operations and Basis of Presentation -
Alexion Pharmaceuticals, Inc. ("Alexion" or the "Company") was organized in 1992
and is engaged in the development of therapeutic products for the treatment of a
wide array of severe disease states, including cardiovascular and autoimmune
disorders and cancer. The Company's two lead product candidates are antibodies
that address specific diseases that arise when the human immune system attacks
the human body itself and produces undesired inflammation. Antibodies are
proteins that bind specifically to selected targets in the body. After the
antibody binds to its target, it may activate the body's immune system against
the target, block activities of the target or stimulate activities of the
target. For one of the Company's lead antibody product candidates, pexelizumab,
a large Phase IIb clinical study in cardiopulmonary bypass ("CPB") patients was
completed and two additional large Phase II studies in myocardial infarction
(heart attack) patients are in progress. For the Company's other lead antibody
product candidate, 5G1.1, a large Phase II clinical study in rheumatoid
arthritis patients was completed and clinical programs are on-going in four
additional diseases, including a Phase II study in membranous nephritis
patients, as well as open label extension trials in rheumatoid arthritis and
membranous nephritis patients. The Company is also developing Apogen
immunotherapeutic products to target T-cell related disorders and is developing
therapies employing the transplantation of cells from other species into humans,
known as xenotransplantation.
In September 2000, the Company acquired Prolifaron, Inc. ("Prolifaron"), a
privately held biopharmaceutical company with extensive combinatorial human
antibody library technologies and expertise (the Prolifaron Acquisition) (See
Note 3).
The accompanying consolidated financial statements include Alexion
Pharmaceuticals, Inc. and its wholly-owned subsidiaries, Alexion Antibody
Technologies ("AAT") and Columbus Farming Corporation ("Columbus"). All
significant inter-company balances and transactions have been eliminated in
consolidation. Columbus was formed on February 9, 1999 to acquire certain
manufacturing assets from United States Surgical Corporation ("US Surgical").
The Company has incurred consolidated losses since inception and has made no
product sales to date. The Company will continue to seek financing to obtain
regulatory approvals for its product candidates, fund operating losses, and if
deemed appropriate, establish manufacturing, sales, marketing, and distribution
capabilities. The Company expects to incur substantial expenditures in the
foreseeable future for the research and development and commercialization of its
products. The Company will seek to raise necessary funds through public or
private equity or debt financings, bank loans, collaborative or other
arrangements with corporate sources, or through other sources of financing.
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC") and include, in the opinion of management, all
adjustments, consisting of normal, recurring adjustments, necessary for a fair
presentation of interim period results. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The results for the interim periods
presented are not necessarily indicative of results to be expected for any
future period. These consolidated condensed financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in the Company's Form 10-K Annual Report for the fiscal year ended July 31,
2001.
2. Cumulative Effect of Accounting Change -
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements
and specifically addresses revenue recognition in the biotechnology industry for
non-refundable upfront fees. Prior to the
Page 6 of 17
implementation of SAB 101, non-refundable license fees received upon execution
of license agreements were recognized as revenue immediately. The Company
elected to adopt SAB 101 during the quarter ended April 30, 2001, retroactive to
August 1, 2000, and therefore the quarter ended October 31, 2001 reflects the
adoption of SAB 101. As a result of the adoption of SAB 101, the Company has
changed its revenue recognition policy for up-front non-refundable payments from
immediate recognition to deferral of the revenue with the up-front fee amortized
into revenue over the life of the agreement.
In 1999 the Company recognized $10,000,000 of revenue from a non-refundable up-
front licensing fee received from Procter and Gamble (see Note 6). With the
adoption of SAB 101, the Company is now required to recognize this $10,000,000
license fee as revenue over the average of the remaining patent lives of the
underlying technologies (17 years) as the agreement with Procter & Gamble
provides for ongoing collaborative services and the funding of specified
clinical development and manufacturing costs of the Company's pexelizumab
product candidate. The license is being recognized over the lives of the
patents, as the agreement does not have a specified contractual term. As part of
the change to this accounting method, the Company has recognized a non-cash
cumulative effect adjustment of $9.1 million as of August 1, 2000. The Company
recognized $147,000 of revenue in each of the three months ended October 31,
2001 and 2000, respectively, that was previously recognized and is included in
the cumulative effect adjustment. There are no income tax effects related to
this accounting change.
3. Prolifaron Acquisition -
On September 23, 2000, the Company acquired Prolifaron, Inc. ("Prolifaron"), a
privately-held biopharmaceutical company with extensive combinatorial human
antibody library technologies and expertise. The acquisition was accomplished
when Prolifaron was merged with a wholly owned subsidiary of Alexion and renamed
Alexion Antibody Technologies, Inc. The fair value of the Company's common stock
and stock options issued at the date of the acquisition was approximately $43.9
million. The Prolifaron acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of the
acquisition. In addition, the Company allocated $21.0 million of the purchase
price as a one-time, non-cash in-process research and development charge
("IPRD") resulting from the acquisition. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to the incomplete
research and development projects. At the date of the acquisition, development
of these projects had not yet reached technological feasibility and the research
and development in progress had no alternative future uses. Accordingly, these
costs were expensed as of the acquisition date. The excess cost over the fair
value of the net assets acquired, which amounted to approximately $23.1 million,
is reflected as goodwill and was being amortized over approximately 7 years (see
Note 4).
The following unaudited pro forma condensed consolidated information has been
prepared to give effect to the acquisition as if such transaction had occurred
at the beginning of the period presented. The historical results have been
adjusted to reflect: i) elimination of the one-time charge to operations for the
purchase of acquired in-process research and development, ii) amortization of
goodwill arising from the transaction, and iii) elimination of income tax
benefits or expenses that would not have been realized on a combined basis
(dollars in thousands, except per share data).
Page 7 of 17
Three months ended October 31,
------------------------------
2000
----
Contract research revenues $ 4,520
Loss before cumulative effect of adoption of SAB 101 (9,240)
Net loss (18,358)
Basic and diluted net loss per common share $ (1.18)
Shares used in computing basic and
diluted net loss per common share 15,528
The unaudited pro forma condensed consolidated financial information is not
necessarily indicative of what actual results would have been had the
transaction occurred on the dates indicated and do not purport to indicate the
results of future operations.
4. Adoption of New Accounting Standard -
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets", which together significantly
change the accounting and disclosures required for these activities and related
assets. The primary changes resulting from these standards consist of the
cessation of the "pooling of interests" method of accounting and how goodwill
and intangible assets will be segregated, amortized (or not amortized), reviewed
for impairment (if any), and disclosed within the footnotes to financial
statements. The Company's adoption of SFAS No. 141 did not have an impact on
the historical financial statements.
The Company adopted SFAS No. 142 effective August 1, 2001. The adoption of SFAS
No. 142 caused the amortization as it relates to the $23.2 million of goodwill
acquired in connection with the acquisition of Prolifaron to cease effective
August 1, 2001. Prior to the adoption of this standard, this annual
amortization was expected to be approximately $3.3 million annually over a
seven-year period. On a prospective basis, this goodwill is subject to annual
impairment reviews (see Note 9), and, if conditions warrant, interim reviews
based upon its estimated fair value. Impairment charges, if any, will be
recorded as a component of operating expenses in the period in which the
impairment is determined. No impairment charge resulted upon the adoption of
this standard.
A reconciliation of reported net loss to adjusted net loss before amortization
of goodwill is as follows (dollars in thousands, except per share amounts):
Three months ended October 31,
------------------------------
2001 2000
---- ----
Reported net loss $(7,789) $(38,559) -a)
Amortization of goodwill - 349
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Adjusted net loss $(7,789) $(38,210) -a)
======= ========
Basic and diluted loss per share:
--------------------------------
Reported net loss $ (0.43) $ (2.52) -b)
Amortization of goodwill - .02
------- --------
Adjusted net loss $ (0.43) $ (2.50) -b)
======= ========
Page 8 of 17
(a- includes the non-cash charges for IPRD of $21,000 and Cumulative
Effect of Adoption of SAB 101 of $9,118
(b- includes the non-cash charges for IPRD of $1.37 per share and
Cumulative Effect of Adoption of SAB 101 of $0.60 per share
5. Net Loss Per Share -
The Company computes and presents net loss per common share in accordance with
SFAS No. 128, "Earnings Per Share." Basic net loss per common share is based on
the weighted average shares of common stock outstanding during the period.
Diluted net loss per common share assumes in addition to the above, the dilutive
effect of common share equivalents outstanding during the period. Common share
equivalents represent dilutive stock options and convertible subordinated debt.
These outstanding stock options and convertible subordinated debt entitled
holders to acquire 4,688,175 shares of common stock at October 31, 2001. There
is no difference in basic and diluted net loss per common share for the three
months ended October 31, 2001 and 2000 as the effect of common share equivalents
is anti-dilutive.
6. Revenues -
During the three months ended October 31, 2001 and 2000, the Company recorded
contract research revenues from research and development support payments and
license fees under collaboration with third parties and amounts received from
various government grants.
In January 1999, the Company and Procter and Gamble Pharmaceuticals, Inc.("P&G")
entered into an exclusive collaboration to develop and commercialize
pexelizumab, one of the Company's lead product candidates. Under this
collaboration, the Company is pursuing the development of pexelizumab for the
treatment of inflammation caused by cardiopulmonary bypass surgery, heart
attack, and angioplasty. The Company has granted P&G an exclusive license to
the Company's intellectual property related to pexelizumab, with the right to
sublicense. P&G has agreed to fund clinical development and manufacturing costs
relating to pexelizumab for these indications. Additionally, P&G has agreed to
pay the Company up to $95 million in payments, which include a non-refundable
up-front license fee, milestone payments, and research and development support
payments. The Company will also receive royalties on worldwide sales of
pexelizumab, if any, for all indications. The Company also has a preferred
position relative to third-party manufacturers to manufacture pexelizumab
worldwide. The Company shares co-promotion rights with P&G to sell, market and
distribute pexelizumab in the United States, and has granted P&G the exclusive
rights to sell, market and distribute pexelizumab outside of the United States.
Through October 31, 2001, the Company received proceeds of approximately $46.0
million from P&G, including receiving a non-refundable up-front license fee of
$10 million in fiscal 1999 (see Note 2) and $36.0 million for research and
development support expenses.
The Company has been awarded various grants by agencies of the U.S. government
to fund specific research projects. Based upon costs incurred under these
projects as of October 31, 2001, the Company has up to approximately $1.0
million of additional funding available under these grants.
A summary of revenues generated from contract research collaboration and grant
awards is as follows for the three months ended October 31 (dollars in
thousands):
Page 9 of 17
Three months ended October 31,
-------------------------------
2001 2000
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Collaboration/Grant Awards
--------------------------
P&G............................ $1,328 $2,949
U.S. government grants......... 519 418
Other.......................... 13 32
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$1,860 $3,399
====== ======
7. Convertible Subordinated Notes -
In March 2000, the Company completed a $120 million private placement of 5.75%
Convertible Subordinated Notes due March 15, 2007. The notes bear interest
payable semi-annually on September 15 and March 15 of each year, beginning
September 15, 2000. The holders may convert all or a portion of the notes into
common stock at any time on or before March 15, 2007 at a conversion price of
$106.425 per common share. The Company incurred interest expense of
approximately $1.7 million and $1.8 million for the three months ended October
31, 2001 and 2000, respectively, related to these notes.
The Company incurred deferred financing costs related to this offering of
approximately $4.0 million, which are recorded in the consolidated balance sheet
and are being amortized as a component of interest expense over the seven-year
term of the notes. Amortization expense associated with the financing costs was
$143,000 and $148,000 for the three months ended October 31, 2001 and 2000,
respectively.
8. Comprehensive Income (Loss) -
SFAS No. 130 "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income (loss) and its components in a
full set of general purpose financial statements. Total comprehensive loss is
comprised of net loss, unrealized gains and losses on marketable securities and
cumulative translation adjustments. The Company's other comprehensive income
arises from net unrealized gains on marketable securities.
A summary of total comprehensive loss is as follows (dollars in thousands):
Three months ended October 31,
------------------------------
2001 2000
---- ----
Net loss $(7,789) $ (38,559) -a)
Other comprehensive income 2,661 12
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Total comprehensive loss $(5,128) $ (38,547) -a)
======= =========
(a- includes the non-cash charges for IPRD of $21,000 and Cumulative
Effect of Adoption of SAB 101 of $9,118
9. Recently Issued Accounting Pronouncements -
Page 10 of 17
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 modifies the rules for accounting for the impairment or disposal of
long-lived assets. The new rules become effective for fiscal years beginning
after December 15, 2001, with earlier application encouraged. The Company does
not believe that the adoption of this principle will have a material impact on
either the operating results or financial position of the Company.
Page 11 of 17
ALEXION PHARMACEUTICALS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements. Such statements are subject to
certain factors which may cause our plans to differ or results to vary from
those expected, including the results of pre-clinical or clinical studies
(including termination or delay in clinical programs or inability to move
forward to the next Phase of clinical development), the need for additional
research and testing, delays in developing or arranging satisfactory
manufacturing capability, inability to access capital and funding on a timely
basis and on favorable terms, delays in development of or adverse changes in
status of commercial relationships, the possibility that favorable results of
earlier clinical trials are not predictive of safety and efficacy results in
larger clinical trials, dependence on Procter & Gamble Pharmaceuticals for
performance of development and commercial matters related to pexelizumab, the
risk that third parties won't agree to license us on reasonable terms their
intellectual property necessary for us to develop and commercialize our
products, and a variety of other risks set forth from time to time in our
filings with the Securities and Exchange Commission, including but not limited
to the risks discussed in "Important Factors Regarding Forward-Looking
Statements" - Exhibit 99 in our Annual Report on Form 10-K for the year ended
July 31, 2001.
Overview
- --------
We are engaged in the discovery and development of therapeutic products aimed at
treating patients with a wide array of severe disease states, including
cardiovascular and autoimmune disorders, inflammation and cancer. Since our
inception in January 1992, we have devoted substantially all of our resources to
drug discovery, research, and product and clinical development. Additionally,
through our wholly owned subsidiary, Alexion Antibody Technologies, Inc. or AAT,
we are engaged in the discovery and development of a portfolio of additional
antibody therapeutics targeting severe unmet medical needs.
We are currently examining our two lead antibody product candidates in eight
different clinical development programs. One of our antibody product
candidates, pexelizumab, is an antibody fragment being developed in
collaboration with Procter & Gamble Pharmaceuticals, and has completed a Phase
IIb study in patients undergoing coronary artery bypass graft surgery ("CABG")
with cardiopulmonary bypass ("CPB"). Following discussions with the FDA, or the
U.S. Food and Drug Administration, with Procter & Gamble and ourselves, we are
preparing to initiate a pivotal Phase III clinical trial of pexelizumab in
approximately 3,000 patients undergoing CABG with CPB. The Phase III trial will
assess the safety and efficacy of pexelizumab in reducing the combined incidence
of death and myocardial infarction in this patient population. Also in
collaboration with Procter & Gamble, we are currently conducting two additional
Phase II studies with pexelizumab in acute myocardial infarction or heart attack
patients: one study in patients receiving thrombolytic therapy, a procedure for
dissolving clots that block heart vessels, and the other in patients receiving
angioplasty, a procedure for opening up narrowed or blocked arteries that supply
blood to the heart. In September 2000, the FDA granted "Fast Track" status for
the development of pexelizumab in CPB. Fast Track designation provides for
expedited development and application review for approval of a drug through the
FDA.
Our other lead antibody product candidate, 5G1.1, is in clinical development for
the treatment of a variety of chronic autoimmune diseases. We initiated a Phase
II study in lupus nephritis, a kidney disease, and a separate Phase II study is
on-going in membranous nephritis, a kidney disease. We completed a large Phase
II clinical study in rheumatoid arthritis or RA patients and we plan to initiate
two Phase IIb RA studies, one of which we expect may serve as a pivotal study if
we obtain strong efficacy and safety results.
In both the study of the effects of our products on rheumatoid arthritis and
membranous nephritis, enrollment has commenced in additional 12-month open-label
extension studies to test long-term safety. In addition, we have two separate
early stage clinical programs to study 5G1.1 in patients with dermatomyositis, a
muscle disorder, and bullous pemphigoid, a severe inflammatory skin disorder.
In October 2000, the FDA granted us Orphan Drug status for the development of
5G1.1 for the treatment of dermatomyositis. We recently completed a Phase I
pilot safety trial of 5G1.1 in psoriasis patients.
To date, we have not received any revenues from the sale of our products. We
have incurred operating losses since our inception. As of October 31, 2001, we
had an accumulated deficit of $132.0 million. We expect to incur
Page 12 of 17
substantial and increasing operating losses for the next several years due to
expenses associated with product research and development, pre-clinical studies
and clinical testing, regulatory activities, manufacturing development, scale-up
and commercial manufacturing and developing a sales and marketing force and we
may need to obtain additional financing to cover these costs.
In September 2000, we acquired Prolifaron, Inc., a privately held
biopharmaceutical company located in San Diego, California, through the issuance
of common stock and fully vested options having an aggregate fair value of
approximately $43.9 million. Prolifaron was developing therapeutic antibodies
addressing multiple diseases, including cancer. The acquisition was in the form
of a merger with a wholly owned subsidiary of Alexion to form Alexion Antibody
Technologies, Inc. We accounted for the acquisition of Prolifaron using the
purchase method of accounting. Through Alexion Antibody Technologies, we have
developed important additional capabilities to discover and develop additional
antibody product candidates for the treatment of inflammatory diseases and
cancer.
We plan to develop and commercialize on our own those product candidates for
which the clinical trials and marketing requirements can be funded and
accomplished by our own resources. For those products for which require greater
resources, our strategy is to form corporate partnerships with major
pharmaceutical companies for product development and commercialization.
Results of Operations
- ---------------------
Three Months Ended October 31, 2001
------------------------------------
Compared with Three Months October 31, 2000
-------------------------------------------
We earned contract research revenues of $1.9 million for the three months ended
October 31, 2001 and $3.4 million for the same period ended October 31, 2000.
The $1.5 million decrease in contract research revenues was primarily due to
lower contract research revenues resulting from the completion of the Phase II
pexelizumab CPB study related to our collaborative research and development
agreement with Procter and Gamble.
We incurred research and development expenses of $9.7 million for the three
months ended October 31, 2001 and $10.9 million for the three months ended
October 31, 2000. The $1.2 million decrease resulted primarily from lower
clinical manufacturing and clinical trial costs associated with pexelizumab due
to the patient enrollment completion in the cardiopulmonary bypass Phase IIb
trial announced in September 2000. These lower costs were partially offset by
increased costs associated with the clinical trials of our other lead product
candidate, 5G1.1, in rheumatoid arthritis, membranous nephritis, psoriasis,
dermatomyositis, and pemphigoid patients.
Our general and administrative expenses were $1.6 million for the three months
ended October 31, 2001 and $1.4 million for the three months ended October 31,
2000. This increase resulted principally from additional legal fees related to
intellectual property and patents as well as higher payroll costs.
During the three months ended October 31, 2000, we incurred approximately $30.5
million of non-cash charges associated with in-process research and development,
amortization of goodwill, and the cumulative effect of adoption of SAB 101.
Interest income was $3.5 million for the three months ended October 31, 2001 and
$2.8 million for the three months ended October 31, 2000. The increase in
interest income of $700,000 resulted from higher cash balances resulting from
the net proceeds of $208.5 million from the sale of common stock in November
2000.
As a result of the above factors, we incurred a net loss of $7.8 million or
$0.43 basic and diluted net loss per common share for the three months ended
October 31, 2001 compared to a net loss of $38.6 million or $2.52 basic and
diluted net loss per common share for the three months ended October 31, 2000.
Excluding the $30.5 million of non-cash charges as described above, the pro
forma net loss for the three months ended October 31, 2000 would have been $8.1
million or $0.53 basic and diluted net loss per common share.
Page 13 of 17
Liquidity and Capital Resources
- -------------------------------
As of October 31, 2001, we had working capital of $350.1 million, including
$349.5 million of cash, cash equivalents and marketable securities. This
compares with working capital at July 31, 2001 of $354.8 million, including
$355.3 million of cash, cash equivalents and marketable securities. This
decrease in working capital was primarily due to funding our operating expenses.
Cash used in operations for the three months ended October 31, 2001 was $8.0
million. During the three months ended October 31, 2001, we had invested $6.6
million, net, in marketable securities and $443,000 in property, plant and
equipment additions.
Interest on our $120 million 5.75% convertible subordinated notes due March 15,
2007 is payable semi-annually in September and March of each year. The holders
may convert all or a portion of the notes into common stock any time on or
before March 15, 2007 at a conversion price of $106.425 per common share.
Interest on our $3.9 million note due in May 2005, bearing interest at 6.0% per
annum, is payable quarterly. This note was used to finance certain
manufacturing assets for our xenotransplantation program.
In October 2000, we filed a shelf registration statement to offer up to $300
million of equity securities. On November 1, 2000, we sold 2.3 million shares
of our common stock to US Bancorp Piper Jaffray, Inc. resulting in net proceeds
to us of approximately $208.5 million, net of estimated fees and other expenses
of approximately $201,000 related to the transaction.
Our cash, cash equivalents, and marketable securities totaled $349.5 million on
October 31, 2001. We anticipate that our existing capital resources together
with the funding from our collaboration agreement with Procter & Gamble, as well
as the addition of our interest and investment income earned on available cash
and marketable securities should provide us adequate resources to fund our
operating expenses and capital requirements as currently planned for at least
the next thirty-six months. This should also provide us adequate funding for
the clinical testing of our C5 inhibitor product candidates and support our
broad research and development of our additional product candidates. The
indications we are currently investigating for our lead C5 product candidates
are respectively: pexelizumab in cardiopulmonary bypass and acute coronary
syndromes, and 5G1.1 for the treatment of rheumatoid arthritis, membranous
nephritis, lupus nephritis, dermatomyositis, and bullous pemphigoid.
We currently have no material commitments for capital expenditures. Our future
capital requirements will depend on many factors, including the progress of our
research and development programs, progress and results of clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
obtaining and enforcing patents and any necessary licenses, dependence on
Procter & Gamble for performance of development and commercial matters related
to pexelizumab, delays in development of or changes in status of commercial
relationships, delays in developing or arranging satisfactory manufacturing
capability, our ability to establish marketing and sales capabilities,
development and commercialization relationships, and the costs, either to
establish on our own or to obtain from third parties, of clinical manufacturing,
manufacturing scale-up, and commercial manufacturing. With regards to our
commercial relationship with Procter & Gamble, we are in discussions with
Procter & Gamble that may allow us to assume more responsibility and funding
obligations for pexelizumab in return for a greater future commercial interest.
We expect to incur substantial additional costs for research, pre-clinical and
clinical testing, manufacturing process development, additional capital
expenditures related to personnel and facilities expansion, clinical and
commercial manufacturing requirements, and marketing and sales in order to
commercialize our products currently under development. If and when we achieve
contractual milestones related to product development and product license
applications and approvals, additional payments would be required if we elect to
continue and maintain our licenses with our licensors, aggregating up to $20.2
million. Furthermore, we will owe royalties to parties we have licensed
intellectual property from in connection with the sale of our products. In
addition to funds we may receive from our collaboration with Procter & Gamble,
we will need to raise or generate substantial additional funding in order to
complete the development and commercialization of our product candidates. Our
additional financing may include
Page 14 of 17
public or private debt or equity offerings, equity line facilities, bank loans
and/or collaborative research and development arrangements with corporate
partners. There can be no assurance that funds will be available on terms
acceptable by us, if at all or that discussions with potential strategic or
collaborative partners will result in any agreements on a timely basis, if at
all. The unavailability of additional financing could require us to delay, scale
back or eliminate certain research and product development programs or to
license third parties to commercialize products or technologies that we would
otherwise undertake ourselves, any of which could have a material adverse
effect.
There can be no assurance that funds will be available on terms acceptable to
us, if at all, or that discussions with potential strategic or collaborative
partners will result in any agreements on a timely basis, if at all. The
unavailability of additional financing when and if required could require us to
delay, scale back or eliminate certain research and product development programs
or to license third parties to commercialize products or technologies that we
would otherwise undertake ourselves, any of which could have a material adverse
effect.
Item 3. Quantitative and Qualitative Disclosure about Market Risks.
We account for our marketable securities in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). All of the cash equivalents and
marketable securities are treated as available-for-sale under SFAS 115.
Investments in fixed 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. 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, which have seen a decline in market value due to changes in interest
rates. Our marketable securities are held for purposes other than trading and
we believe that we currently have no material adverse market risk exposure. The
marketable securities as of October 31, 2001, had maturities of less than two
years. The weighted-average interest rate on marketable securities at October
31, 2001 was approximately 3.4%. The fair value of marketable securities held
at October 31, 2001 was $229.3 million.
We believe the $3.9 million note payable approximates fair value based upon
recent borrowing rates. The carrying value of the $120 million convertible
subordinated notes exceeded fair value by approximately $48.5 million based upon
the trading values reported at October 31, 2001.
Page 15 of 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports
(a) Exhibits
(b) Form 8-K - none
Page 16 of 17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALEXION PHARMACEUTICALS, INC.
Date: December 7, 2001 By: /s/ Leonard Bell, M.D.
------------------------------------
Leonard Bell, M.D.
President and Chief Executive Officer,
Secretary and Treasurer (principal
executive officer)
Date: December 7, 2001 By: /s/ David W. Keiser
------------------------------------
David W. Keiser
Executive Vice President and Chief Operating
Officer (principal financial officer)
Date: December 7, 2001 By: /s/ Barry P. Luke
------------------------------------
Barry P. Luke
Vice President of Finance and Administration
(principal accounting officer)
Page 17 of 17