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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1998
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[x] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission file number 0-24274
LA JOLLA PHARMACEUTICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 33-0361285
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
6455 NANCY RIDGE DRIVE, SAN DIEGO, CA 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 452-6600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.01 Warrants
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 the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock on the
Nasdaq Stock Market on March 17, 1999, was $71,642,242. The number of shares of
the Registrant's common stock, $.01 par value, outstanding at March 17, 1999 was
20,110,103.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement for its annual meeting of stockholders
to be held on May 13, 1999, which proxy statement will be filed on or about
April 13, 1999.
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FORWARD-LOOKING STATEMENTS
This Report includes forward-looking statements, including without
limitation those dealing with La Jolla Pharmaceutical Company's (the "Company"
or "LJP") drug development plans and clinical trials, its relationship with
Abbott Laboratories ("Abbott"), and other matters described in terms of the
Company's plans and expectations. The forward-looking statements in this Report
involve risks and uncertainties, and a number of factors, both foreseen and
unforeseen, could cause actual results to differ from the Company's current
expectations. The Company's ongoing Phase II/III clinical trial of LJP 394, the
Company's drug candidate for the treatment of systemic lupus erythematosus
("lupus" or "SLE"), could result in a finding that LJP 394 is not effective in
producing a sustained reduction of double-stranded DNA ("dsDNA") antibodies in
large patient populations or does not provide a meaningful clinical benefit. The
Company's other potential drug candidates are at earlier stages of development
and involve comparable risks. Payments by Abbott to the Company are contingent
upon progress of clinical trials and the Company's achievement of certain other
milestones that might not be met. The Company's relationship with Abbott could
be terminated by either party for various reasons. Clinical trials could be
delayed and could have negative or inconclusive results. Additional risk factors
include the uncertainty of obtaining required regulatory approvals, successfully
marketing products, receiving future revenue from product sales or other sources
such as collaborative relationships, future profitability, the need for
additional financing, the Company's dependence on patents and other proprietary
rights, the Company's limited manufacturing capabilities and the Company's lack
of marketing experience. Readers are cautioned not to place undue reliance upon
forward-looking statements, which speak only as of the date hereof, and the
Company undertakes no obligation to update forward-looking statements to reflect
events or circumstances occurring after the date hereof. Interested parties are
urged to review the risks described below under the heading "Certain Risk
Factors" and elsewhere in this Report and in other reports and registration
statements of the Company filed with the Securities and Exchange Commission
("SEC") from time to time.
PART I
ITEM 1. BUSINESS.
OVERVIEW
La Jolla Pharmaceutical Company is a biopharmaceutical company focused
on the research and development of highly specific therapeutics for the
treatment of certain life-threatening antibody-mediated diseases. These
diseases, including autoimmune conditions such as lupus and antibody-mediated
stroke, are caused by abnormal B cell production of antibodies that attack
healthy tissues. Current therapies for these autoimmune disorders address only
symptoms of the disease or nonspecifically suppress the normal operation of the
immune system, which often results in severe, adverse side effects and
hospitalization. Founded in 1989, the Company believes that its drug candidates,
called Toleragens(R), will treat the underlying cause of many antibody-mediated
diseases without these severe, adverse side effects. The Company is currently
conducting a Phase II/III clinical trial initiated in December 1996 for its
lupus drug candidate, LJP 394.
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ANTIBODY-MEDIATED DISEASES
The immune system is the major biological defense mechanism responsible
for recognizing and fighting disease. The immune system identifies antigens,
such as bacteria, viruses and other disease-causing substances, and seeks to rid
the body of these antigens. There are two fundamental types of immune responses:
cell-mediated and antibody-mediated. Cell-mediated immunity is primarily
responsible for ridding the body of cells that have become infected.
Antibody-mediated immunity is primarily responsible for eliminating circulating
antigens. These immune responses are controlled by the activities of white blood
cells called T cells and B cells. T cells provide cell-mediated immunity and
regulate B cells. B cells produce antibodies that recognize and help to
eliminate antigens.
Each B cell produces antibodies against a specific structure on the
antigen's surface called an epitope. The B cell is triggered to produce
antibodies when the specific epitope is recognized by and binds to the antibody
receptors on the surface of the B cell, and only when the B cell receives an
appropriate signal from a T cell. When an epitope binds to the B cell with no
corresponding T cell signal, the B cell may become "tolerized" and cease to
produce antibodies.
A properly functioning immune system distinguishes between foreign
antigens and the body's healthy tissues. In a malfunctioning immune system,
healthy tissue may trigger an immune response that causes B cells to produce
disease-causing antibodies, resulting in antibody-mediated autoimmune disease.
For example, B cells can produce disease-causing antibodies that are associated
with the destruction of the kidneys in lupus and the wasting of muscles in
myasthenia gravis. Other antibody-mediated disorders include antibody-mediated
stroke, heart attack, deep vein thrombosis, recurrent fetal loss, organ
rejection in xenotransplantation, myasthenia gravis and Rh hemolytic disease of
the newborn.
Current therapies for antibody-mediated diseases have significant
shortcomings, including severe side effects and a lack of specificity. Mild
forms of antibody-mediated diseases are generally treated with drugs that
address only the disease symptoms and fail to suppress disease progression,
because such drugs do not control the production of disease-causing antibodies.
Severe antibody-mediated diseases are generally treated with high levels of
corticosteroids and immunosuppressive therapy (primarily anti-cancer drugs)
which broadly suppress the normal function of the entire immune system. These
therapies can leave patients susceptible to potentially life-threatening
infections that may require hospitalization. Repeated dosing with
corticosteroids may cause other serious conditions, including diabetes,
hypertension, cataracts, osteonecrosis, and psychosis, which may limit the use
of this therapy. The use of chemotherapy may lead to acute problems, including
weight loss and nausea, and long-term adverse effects, including sterility and
an increased risk of malignancies.
LJP'S TOLERANCE TECHNOLOGY(R) PROGRAM
The Company's Tolerance Technology program focuses on the discovery and
development of proprietary therapeutics, called Toleragens, which target and
suppress the production of specific disease-causing antibodies without affecting
the protective functions of the immune system. The Company believes that its
Toleragens will treat the underlying causes of antibody-mediated diseases, and
that its Tolerance Technology can be applied broadly wherever antibodies are
involved in the disease process.
Since the 1970s, hundreds of papers have been published describing
animal studies and a Nobel Prize was awarded for research in B cell tolerance.
The underlying science supporting the
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Company's Tolerance Technology is based on these discoveries as well as on the
Company's own patented research.
Toleragens are composed of disease-specific epitopes and a carrier
platform, which are proprietary chemical structures developed and synthesized by
the Company. To mimic the unique epitopes on an antigen's surface, LJP
identifies and synthesizes epitopes specific to particular antibody-mediated
diseases and attaches or conjugates these epitopes to the carrier platform,
which serves as a vehicle for presenting the epitopes to the antibody receptors
on the targeted B cell. When the epitope binds to the antibody receptors on the
B cell in the absence of a T cell signal, the B cell may become tolerized and
cease to produce disease-causing antibodies. The Company believes that the
Toleragen carrier platform, or a modification thereof, can be used with epitopes
specific to various diseases to create therapeutics targeted at different
antibody-mediated diseases.
The Company designs its Toleragens to bind selectively to
disease-causing B cells without affecting the function of disease-fighting B
cells. This process involves: (1) collecting and purifying the disease-causing
antibodies from patients with the targeted disease; (2) generating and selecting
an epitope that strongly binds to the purified antibodies; (3) modifying the
epitope's structure to maximize its binding properties (optimization) and (4)
linking the optimized epitope to the carrier platform. The Company believes this
process enables the Company to create Toleragens that will preferentially
tolerize and shut down B cells that generate antibodies with the highest binding
affinity, which are believed to be the most harmful.
To achieve this process, the Company utilizes advanced technologies to
identify suitable epitopes that will bind to targeted disease-causing B cells.
These technologies include:
Disease-Specific Screening Methods and Assays. The Company clones and
expresses receptors that are associated with the targeted disease to screen the
disease-causing antibodies from patient blood. After screening, these antibodies
are presented to the epitope libraries through a series of assays in order to
identify suitable epitope candidates. Using these methods, the Company selects
lead epitope candidates with the highest antibody-binding affinity.
Combinatorial Epitope Libraries. Since 1991, the Company has been
developing epitope libraries to provide a large and diverse pool of epitope
candidates for screening. The libraries contain a collection of billions of
different epitopes.
Molecular Modeling Capabilities. The Company uses nuclear magnetic
resonance spectroscopy (NMR) and molecular modeling software to determine and
analyze important three-dimensional structural features of epitopes and the
related disease-causing antibodies. These capabilities permit further
optimization of epitopes to increase their binding to targeted B cells.
Chemical Optimization Expertise. The Company optimizes lead epitope
candidates by changing their chemical structure. These changes to the molecule
increase its binding affinity and stability. The Company then attaches multiple
copies of the lead epitope to the carrier platform to create a Toleragen. The
Company's carrier platform technology provides a stable presentation of multiple
copies of the epitope in an optimal configuration that increases binding
affinity and tolerization of B cells.
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BUSINESS STRATEGY
The Company's objective is to become the leading developer of highly
specific therapeutics for the treatment of life-threatening, antibody-mediated
disorders such as lupus, antibody-mediated stroke, heart attack, deep vein
thrombosis, recurrent fetal loss, organ rejection in xenotransplantation,
myasthenia gravis and Rh hemolytic disease of the newborn. The Company's
strategy includes the following key elements:
Complete the Clinical Development of LJP 394. The Company's primary
near-term goal is to complete development of LJP 394 to treat lupus. The
Company, along with its strategic partner Abbott, is conducting a Phase II/III
clinical trial to evaluate the safety and efficacy of the drug in a large
population of patients in North America and Europe.
Apply Tolerance Technology to Life-threatening Antibody-mediated
Diseases. The Company is focusing on chronic, life-threatening diseases and
conditions caused by antibodies, such as lupus, antibody-mediated thrombosis and
organ rejection in xenotransplantation, for which there are no existing
treatments or for which current therapeutics have significant limitations. The
Company intends to use its Tolerance Technology to design therapeutics that
specifically address other targeted antibody-mediated diseases without adversely
affecting normal immune system function.
Utilize Strategic Collaborations to Develop and Commercialize Product
Candidates. The Company has a collaborative agreement with Abbott for the
worldwide development and commercialization of LJP 394, and intends to seek
appropriate collaborations with other pharmaceutical companies to provide
support for its research programs and the clinical development and
commercialization of other drug candidates.
Exploit Proprietary Manufacturing Technology. Through the production of
LJP 394 for clinical trials, the Company has developed proprietary synthesis and
conjugation technologies that are being used in the development of its other
Toleragen candidates. The Company intends to further develop these technologies
to increase manufacturing efficiencies and apply its expertise to the
development and manufacture of other potential products.
Expand Intellectual Property Leadership Position. The Company owns 60
issued patents and has 58 pending patent applications covering various
technologies and drug candidates, including its Tolerance Technology, its lupus
and antibody-mediated stroke drug candidates, and its linkage technologies for
its Toleragens. The Company plans to broaden this position with future
discoveries and patent filings.
PRODUCTS UNDER DEVELOPMENT
The Lupus Program
Systemic lupus erythematosus is a life-threatening, antibody-mediated
disease in which disease-causing antibodies damage various tissues. According to
recent statistics compiled by the Lupus Foundation of America, epidemiological
studies and other sources, the number of lupus patients in the United States is
between 250,000 and 1,000,000, and 16,000 new cases are diagnosed each year.
Approximately nine out of 10 lupus patients are women, who usually develop the
disease during their childbearing years. Lupus is characterized by a multitude
of symptoms, including chronic kidney inflammation -- which can lead to kidney
failure, serious episodes of cardiac and central-nervous-system inflammation, as
well as extreme fatigue, arthritis
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and rashes. Approximately 80% of all lupus patients will progress to even more
serious symptoms. Approximately 50% of lupus patients suffer renal involvement.
Antibodies to dsDNA can be detected in approximately 90% of untreated
lupus patients. These antibodies are widely believed to cause kidney disease
(nephritis), often resulting in morbidity and mortality in lupus patients. These
antibodies are also associated with episodes of potentially life-threatening
inflammation -- called "flares" -- that may occur more than once per year and
usually require intensive-care hospitalization. Significant kidney destruction
occurs during a flare. Lupus nephritis can lead to deterioration of kidney
function and to end-stage kidney disease, requiring long-term renal dialysis or
kidney transplantation to sustain the patient's life.
Current treatments for lupus patients with kidney disease and other
serious symptoms usually include repeated administration of corticosteroids,
often at high levels that can have toxic effects when used as a chronic
treatment regimen. Many patients with advanced disease are also treated with
immunosuppressive therapy, including anti-cancer drugs that have a general
suppressive effect on the immune system and may be carcinogenic. This
immunosuppressive treatment leaves the patient vulnerable to serious infection
and is a significant cause of morbidity and mortality.
The Company has designed LJP 394 to suppress the production of
antibodies to dsDNA in lupus patients without suppressing the normal function of
the immune system. The design of LJP 394 is based upon scientific evidence of
the role of antibodies to dsDNA in lupus. Published studies of lupus patients
indicate that a rise in the level of antibodies to dsDNA may be predictive of
flares in lupus patients with renal involvement, and that suppressing antibodies
to dsDNA by treating with corticosteroids that non-specifically lower antibody
levels prevents relapses in a majority of patients. In a mouse model of lupus
nephritis that generates elevated levels of antibodies to dsDNA, administration
of LJP 394 reduced the production of antibodies to dsDNA; reduced the number of
antibody-forming cells; reduced kidney disease; and extended the life of the
animals. The Company believes that its own and other studies provide evidence
that inhibiting antibodies to dsDNA may provide an effective therapy for lupus
nephritis.
Certain studies of lupus patients indicate that antibodies to dsDNA with
the highest binding affinity are associated with the most damage to the kidneys.
The Company believes that its Tolerance Technology drug candidate preferentially
targets these antibodies.
Results of Clinical Trials
Based on its preclinical findings, the Company filed an Investigational
New Drug ("IND") application for LJP 394 with the United States Food and Drug
Administration ("FDA") in August 1994. In a double-blind, placebo-controlled
Phase I clinical trial conducted in December 1994, healthy volunteers received
LJP 394 and displayed no significant drug-related adverse effects and no immune
reaction to the drug.
The Company's Phase II clinical trials included a single-dose trial; a
repeat escalating-dose trial; and a dose-ranging trial.
The single-dose clinical trial evaluated the safety of a single, 100 mg
intravenous dose of LJP 394 in four female lupus patients by monitoring antibody
levels, blood chemistry, vital signs and complement (inflammation-promoting
proteins) levels for 28 days after dosing. LJP 394 was well tolerated by all
four patients, with no drug-related adverse clinical symptoms and no
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clinically significant complement level changes. In addition, no clinically
significant immune complex formation (inflammation-promoting accumulation of
antibodies and antigens) was observed, indicating the absence of an adverse
immune response to LJP 394. A transient reduction in dsDNA antibody levels was
also observed. These results were presented at the American College of
Rheumatology's Annual International Conference in October 1996.
The repeat escalating-dose clinical trial involved two female patients,
each receiving doses of 10, 10, 50, 50, 100 and 100 mg of LJP 394 at two-week
intervals. After the 10-week dosing regimen, patients were followed for six
weeks. LJP 394 was well tolerated with no drug-related adverse clinical
symptoms, no clinically significant complement changes, and no significant
immune complex formation. Six weeks after the last dose, the antibody levels in
both patients remained suppressed below baseline levels.
The dose-ranging trial evaluated 58 patients with mild lupus symptoms
(53 females and five males). All patients were clinically stable and had dsDNA
antibody levels exceeding those generally found in healthy individuals. The
patients were organized into nine treatment groups at three dose levels (1 mg,
10 mg and 50 mg), and three frequencies (once per week, once every two weeks and
once every four weeks). Patients were randomized to one of the nine treatment
groups so that at each dose and frequency, four to seven patients received LJP
394 and one patient received a placebo.
Patients in the weekly treatment groups showed a dose-response
correlation between increasing doses of LJP 394 and reductions of levels of
dsDNA antibodies. In patients treated weekly with 10 mg or 50 mg doses of LJP
394, antibodies to dsDNA were reduced by statistically significant levels and
remained suppressed in certain patients for up to two months after the last
dose. In the patient group treated weekly with 50 mg, the reductions in median
levels of dsDNA antibodies were accompanied by increases in median levels of two
important inflammation-related complement proteins, C3 and C4, which normally
decrease during active lupus renal disease and increase with clinical
improvement. These study data suggest that complement levels and antibody levels
were normalizing in parallel.
Throughout the dose-ranging trial, the drug was well tolerated with no
clinically significant dose-related adverse reactions observed. Three patients
experienced lupus flares, and three other patients were hospitalized as a result
of transient adverse events that the treating clinicians believed were unrelated
to the underlying disease or to LJP 394. Two of the patients with flares
withdrew from the study, as did four patients who experienced exacerbations of
lupus, and one patient who experienced herpes rash. However, no relationship was
observed between the development of an adverse event and the dose or frequency
of administration of LJP 394.
In December 1996, the Company initiated a multicenter Phase II/III
clinical trial of LJP 394. The purpose of the trial is to evaluate the safety of
the drug and its potential to prevent renal flares, reduce disease severity and
the need for immunosuppressive steroids/chemotherapy drugs and improve patients'
quality of life. The trial is being conducted in collaboration with Abbott in
North America and Europe. Trial completion is currently estimated to be some
time in 2000. This is a double-blind, placebo-controlled trial and the Company
does not expect to announce interim efficacy results.
The clinical trial, and the development of LJP 394 in general, involve
many risks and uncertainties, and there can be no assurance that any previous
clinical results can be replicated in further clinical testing or that LJP 394
will be effective in inducing and sustaining antibody suppression; will prove to
be clinically safe or effective; or will receive required regulatory
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approvals. If the Phase II/III trial produces negative or inconclusive results,
the Company's business and financial condition will be adversely affected and it
may be difficult or impossible for the Company to survive.
Antibody-Mediated Thrombosis, Including Stroke, Heart Attack, Deep Vein
Thrombosis and Recurrent Fetal Loss
Researchers believe that anticardiolipin antibodies promote arterial and
venous blood clots, which can cause a variety of life-threatening medical
problems. For example, blood clots that lodge in the brain may cause stroke and
those that lodge in the legs may cause deep vein thrombosis. There are multiple
conditions associated with these antibodies: antibody-mediated stroke, heart
attack, deep vein thrombosis, recurrent fetal loss, and complications following
cardiovascular surgery. The Company's program to develop a Toleragen to treat
anticardiolipin antibodies targets stroke, myocardial infarction, deep vein
thrombosis, recurrent fetal loss, and post-operative complications. These
antibodies are associated with the formation of blood clots leading to multiple,
recurring, and potentially life-threatening conditions. The Company estimates
that there are more than 500,000 patients world wide with antibody-mediated
thrombosis.
Stroke is a leading cause of death in the United States. In 1996, there
were approximately two million stroke patients in the United States,
approximately 700,000 new episodes occurred, and in 1994, approximately 150,000
people died from stroke. This debilitating condition results from acute
neurological injury caused by the blockage or rupture of blood vessels in the
brain. Many of the blockages are caused by thromboses (blood clots), which
clinicians believe may be caused by a number of factors including a class of
antibodies called anticardiolipin antibodies, which can be identified and
measured by a clinical laboratory assay. It is estimated that 5 to 10% of the
strokes in the United States (affecting 100,000 to 200,000 patients) are caused
by these antibodies. Antibody-mediated stroke is thought to occur in younger
individuals and with greater frequency than non-antibody-mediated stroke. The
cost of treatment for a survivor of a serious stroke is approximately $30,000
per year for life, to provide hospitalization and home nursing care.
Anticardiolipin antibodies are also associated with recurrent fetal
loss, a syndrome of repeated miscarriage. Published clinical reports estimate
that many women with elevated anticardiolipin antibody levels experience
multiple miscarriages, delayed fetal development or premature childbirth. Recent
academic research suggests that elevated levels of anticardiolipin antibodies
are also found in approximately 10 to 30% of patients with other clotting
disorders, including myocardial infarction (heart attack), deep vein thrombosis
and cardiac valve lesion, as well as in approximately 30% of lupus patients. In
myocardial infarction, recent research suggests the relative risk of having a
thrombotic event or death is twice as high in people with high anticardiolipin
antibodies, and this risk is independent of other risk factors. In deep vein
thrombosis, research indicates anticardiolipin antibody-positive patients have
recurring deep vein thromboses twice as often as anticardiolipin
antibody-negative patients.
Current treatments for antibody-mediated thrombosis involve the use of
corticosteroids and chronic, potentially life-long anticoagulant therapy with
drugs such as heparin or warfarin to prevent the formation of blood clots.
Patients must be carefully monitored to minimize serious bleeding episodes that
can occur because of the therapy. If patients are removed from anticoagulant
therapy, they are at an increased risk of stroke or another thrombotic episode.
Warfarin is not recommended in the treatment of recurrent fetal loss because it
is toxic to the developing fetus.
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The Company believes that a Toleragen that binds to B cells producing
anticardiolipin antibodies may suppress antibody production and prevent or
reduce antibody-associated blood clots. To develop such a Toleragen, the Company
established a supply of blood samples taken from patients who had experienced
stroke, deep vein thrombosis and recurrent fetal loss and purified antibodies
from these samples. The Company has used these blood samples to identify several
epitopes that react with a subset of patients. LJP scientists believe they have
localized the epitope to one antibody-binding region of the antigen and will
continue to optimize this and other cross-reactive epitopes prior to developing
a potential Toleragen candidate.
Xenotransplantation
Xenotransplantation, the use of animals as a source of donor organs for
human transplantation, has become an area of great interest due to the worldwide
shortage of human organs available for transplantation. According to the
American Society of Transplant Physicians, approximately 100,000 patients in the
United States are on waiting lists for organ transplants. More than 100,000
patients die annually, many of whom are too sick to qualify for waiting lists. A
typical organ transplant can cost more than $100,000.
Hyperacute rejection, or the immediate destruction of the transplanted
animal organ by the recipient's antibodies, is a major barrier to
xenotransplantation. Human antibodies recognize and bind to an epitope called
di-galactose found on the tissues of transplanted animal organs. This binding
causes massive blood clots that block the blood supply to the transplanted
organ, destroying it within minutes.
The Company believes that a Toleragen that binds to B cells producing
antibodies to di-galactose may suppress antibody production and prevent or
reduce antibody-mediated organ rejection in xenotransplantation. The Company
also believes that such a Toleragen may provide benefit on a long-term basis by
reducing the amount of immunosuppressive drugs needed to control the B cell
production of antibodies to di-galactose.
LJP has synthesized the di-galactose epitope and attached it to several
proprietary platforms to create new Toleragen candidates. The Company has
conducted in vitro studies indicating that an appropriate Toleragen candidate
could have the potential to bind to the antibodies responsible for hyperacute
rejection following xenotransplantation. The Company has initiated the testing
of a series of Toleragen candidates in primates to assess their potential to
arrest the production of antibodies responsible for hyperacute rejection in
xenotransplantation. In 1998, LJP synthesized a new five-fold more potent
Toleragen candidate. In a short-term placebo-controlled study in primates, this
Toleragen reduced levels of antibodies associated with organ rejection and was
well tolerated on a short-term basis. The Company plans to institute additional
primate studies of these improved compounds in 1999.
Other Antibody-Mediated Diseases
The Company believes its Tolerance Technology may be applicable to
additional diseases and conditions caused by the production of disease-causing
antibodies, including myasthenia gravis and Rh hemolytic disease of the newborn.
Myasthenia gravis is a form of muscular paralysis in which neuromuscular
receptors are attacked by antibodies, which can lead to a wasting of muscles,
progressive loss of strength and life-threatening respiratory arrest. This
disease affected an estimated 20,000 people in the United States in 1994. The
Company is engaged in the development of antibody libraries derived from
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myasthenia gravis patients. These libraries may provide antibodies that can be
screened against the Company's epitope libraries in order to identify potential
epitope mimics. These mimics may be useful as Toleragens to specifically
suppress the disease-causing antibodies in myasthenia gravis.
Rh hemolytic disease of the newborn is a life-threatening fetal
condition characterized by the hemolysis (destruction) of fetal red blood cells.
This condition occurs in Rh-incompatible pregnancies in which maternal
antibodies to Rh cross the placenta, bind to fetal red blood cells and cause
their destruction. Each year approximately 500,000 women in the United States
have Rh-incompatible pregnancies. The Company believes that a Toleragen that
binds to the appropriate maternal B cells will suppress Rh antibody production,
and that once the level of antibodies to Rh(+) red blood cells is reduced, the
risk of life-threatening hemolysis will be reduced. LJP has identified a
potentially broadly cross-reactive peptide epitope candidate that binds to
antibodies from patients with Rh hemolytic disease. These blood donors are
specifically immunized to Rh and several known pathogenic monoclonal Rh
antibodies. The Company is currently improving the potency of this epitope while
continuing to evaluate other potentially cross-reactive candidate epitopes, with
the expectation of using them to synthesize lead Toleragens.
COLLABORATIVE ARRANGEMENTS
As part of its business strategy, the Company pursues collaborations
with pharmaceutical companies in an effort to access their research, drug
development, manufacturing, marketing and financial resources. In December 1996,
the Company entered into a collaborative relationship with Abbott for worldwide
development and commercialization of LJP 394. Under the terms of a license and
supply agreement between Abbott and the Company, Abbott obtained the exclusive
right to market and sell LJP 394 throughout the world, and the Company retained
manufacturing rights and ownership of all of its patents relating to the drug.
Abbott is obligated to pay escalating royalties to the Company on sales of LJP
394, with additional premiums payable if specified sales levels are achieved.
Abbott is also contractually obligated to purchase the drug in bulk form from
the Company at prices calculated as a percentage of Abbott's net sales.
Abbott is responsible for funding future clinical development costs and
for obtaining worldwide regulatory approvals for LJP 394. Pending regulatory
approval, the collaborative contract requires Abbott and the Company to
cooperate in the development of and clinical trials for the drug. Abbott also
pays development costs incurred by the Company in accordance with a development
plan and budgets that are mutually agreed upon. Abbott is responsible for
marketing activities throughout the world, with cooperation and assistance from
the Company. The Company is obligated to develop appropriate manufacturing
capabilities and conduct patent prosecution in the major markets of the world.
In 1998, the Company earned revenues of $8.6 million attributable to funding
under the collaborative agreement with Abbott.
Concurrently with the formation of the collaborative relationship,
Abbott made an initial $4.0 million license payment to the Company and purchased
1,000,050 shares of LJP's common stock for gross proceeds of $4.0 million. In
September 1997 and October 1998, Abbott also purchased 831,152 and 1,538,402
shares of LJP's common stock, respectively, for gross proceeds of $4.0 million
on each purchase date. The Company incurred research and development costs for
the development of LJP 394 of approximately $9.9 million in 1997 and $8.6
million in 1998 under the collaborative agreement with Abbott. Abbott is
obligated to make milestone payments upon the attainment of various performance
and regulatory objectives. Both Abbott and the Company have the right to
terminate the agreement under certain circumstances.
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The Company intends to pursue collaborative arrangements with other
pharmaceutical companies to assist in its research programs and the clinical
development and commercialization of other drug candidates. There can be no
assurance that the Company will be able to negotiate arrangements with any other
collaborative partners on acceptable terms, if at all, and any additional
collaborative relationships are likely to include contingencies comparable to
those affecting the Abbott relationship. Once a collaborative relationship is
established, there can be no assurance that the collaborative partner will
continue funding any particular program or will not pursue alternative
technologies or develop alternative drug candidates, either individually or in
collaboration with others, including the Company's competitors, as a means for
developing treatments for the diseases targeted by the Company. Furthermore,
competing products, either developed by a collaborative partner or to which a
collaborative partner has rights, may result in the withdrawal of support by the
collaborative partner with respect to all or a portion of the Company's
technology.
Failure to establish or maintain collaborative arrangements will require
the Company to fund its own research and development activities, resulting in
accelerated depletion of the Company's capital, and will require the Company to
develop its own marketing capabilities for any drug candidate that may receive
regulatory approval. The failure of any collaborative partner to continue
funding any particular program of the Company, or to commercialize successfully
any product, could delay or halt the development or commercialization of any
products involved in such program. As a result, failure to establish or maintain
collaborative arrangements could have a material adverse effect on the Company's
business, financial condition and results of operations.
MANUFACTURING
The Company has constructed and is currently operating a pilot
production facility for the manufacture of LJP 394 that is large enough to
exceed its anticipated research and clinical trial needs for LJP 394. Through
internal development programs and external collaborations, the Company has made
several improvements to the manufacturing process for LJP 394 that have reduced
costs and increased capacity. The Company has developed proprietary synthesis
and conjugation technologies that are being used in the development of its other
Toleragen candidates. The Company intends to further develop these technologies
in order to increase manufacturing efficiencies and apply its expertise to the
development and manufacture of other potential products.
However, the Company's current facilities are not yet adequate for
commercial production. In order to meet its obligations to supply all LJP 394 in
bulk form to Abbott for packaging and commercial resale, the Company will be
required to invest substantial amounts of capital in the expansion of its
facilities. The manufacture of the Company's potential products for clinical
trials and the manufacture of any resulting products for commercial purposes is
subject to current Good Manufacturing Practices ("cGMP"), as defined by the FDA.
The Company has never operated an FDA-approved manufacturing facility, and there
can be no assurance that it will obtain the necessary approvals. The Company has
limited manufacturing experience, and no assurance can be given that it will be
able to make the transition to commercial production successfully. The Company
may enter into arrangements with contract manufacturers to expand its own
production capacity in order to meet requirements for its products, or to
attempt to improve manufacturing efficiency. If the Company chooses to contract
for manufacturing services and encounters delays or difficulties in establishing
relationships with manufacturers to produce, package and distribute its finished
products, clinical trials, market introduction and subsequent sales of such
products would be adversely affected. Moreover, contract manufacturers must
operate in compliance with the FDA's cGMP requirements. The Company's potential
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dependence upon third parties for the manufacture of its products may adversely
affect the Company's profit margins and its ability to develop and deliver such
products on a timely and competitive basis.
MARKETING AND SALES
In order to commercialize any drug candidate approved by the FDA, the
Company must either develop a marketing and sales force or enter into marketing
arrangements with third parties. Such arrangements may be exclusive or
nonexclusive and may provide for marketing rights worldwide or in a specific
market. Abbott is responsible for worldwide marketing of LJP 394, but the Abbott
agreement may terminate under certain circumstances and the Company has no
arrangements with third parties for the marketing of any other drug candidates.
There can be no assurance that the Company will be able to enter into any
additional marketing agreements on terms favorable to the Company, if at all, or
that any such agreements that the Company may enter into will result in payments
to the Company. Under the Abbott agreement and any co-promotion or other
marketing and sales arrangements that may be entered into with other companies,
any revenues to be received by the Company will be dependent on the efforts of
others and there can be no assurance that such efforts will be successful. To
the extent that the Company chooses to attempt to develop its own marketing and
sales capability, it will compete with other companies that currently have
experienced and well-funded marketing and sales operations. Furthermore, there
can be no assurance that the Company or any collaborative partner will be able
to establish sales and distribution capabilities without undue delays or
expenditures or gain market acceptance for any of the Company's drug candidates.
PATENTS AND PROPRIETARY TECHNOLOGIES
The Company files patent applications in the United States and in
foreign countries, as it deems appropriate, for protection of its proprietary
technologies and drug candidates. The Company owns 60 issued patents and has 58
pending patent applications covering various technologies and drug candidates,
including its Tolerance Technology, its lupus and antibody-mediated-stroke drug
candidates, and its linkage technologies for its Toleragens. The Company's
issued patents include (1) four issued United States patents, one issued
Australian patent, one granted Portuguese patent, one granted Norwegian patent,
and one granted European patent, which has been unbundled as thirteen European
national patents concerning its lupus Toleragens (expiring in 2009, 2011, 2013,
2014, 2007, 2013, 2011 and 2011, respectively); (2) two issued United States
patents, two issued Australian patents, one granted European patent, which has
been unbundled as fifteen European national patents and one granted Japanese
patent concerning its Tolerance Technology (expiring in 2010, 2014, 2008, 2014,
2012 and 2012, respectively); (3) four issued United States patents and two
issued Australian patents concerning linkage technologies for its Toleragens
(expiring in 2012, 2015, 2015, 2016, 2014 and 2012, respectively); and (4) one
issued United States patent concerning its antibody-mediated-stroke drug
candidates (expiring in 2016). The Company has received a Notice of Allowance
from the United States Patent And Trademark Office ("USPTO") for a patent
application for antibody-mediated-stroke drug candidates, and a Notice of
Allowance from the Japanese Patent Office and the European Patent Office for
patent applications for linkage technologies for its Toleragens.
The Company's success will depend upon its ability to obtain patent
protection for its therapeutic approaches and for any developed products, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. While the Company has received patents covering certain
aspects of its technology, there can be no assurance that any additional
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patents will be issued, that the scope of any patent protection will be
sufficient, or that any current or future issued patents will be held valid if
subsequently challenged.
There is a substantial backlog of biotechnology patent applications at
the USPTO that may delay the review and issuance of any patents. The patent
position of biotechnology firms in general is highly uncertain and involves
complex legal and factual questions, and no consistent policy has emerged
regarding the breadth of claims covered in biotechnology patents or protection
afforded by such patents. To date, the Company has rights to certain United
States and foreign issued patents and has filed or participated as a licensee in
the filing of a number of patent applications in the United States relating to
the Company's technology, as well as foreign counterparts of certain of these
applications in certain countries. The Company intends to continue to file
applications as appropriate for patents covering both its products and
processes. There can be no assurance that patents will issue from any of these
applications, or that claims allowed under issued patents will be sufficient to
protect the Company's technology. Patent applications in the United States are
maintained in secrecy until a patent issues, and the Company cannot be certain
that others have not filed patent applications for technology covered by the
Company's pending applications or that the Company was the first to invent, or
to file patent applications for, such technology. Competitors may have filed
applications for, or may have received, patents and may obtain additional
patents and proprietary rights relating to compounds or processes that block or
compete with those of the Company.
A number of pharmaceutical and biotechnology companies and research and
academic institutions have filed or may file patent applications, and have
received or may receive patents in the fields being pursued by the Company.
Certain of these applications or patents may be competitive with the Company's
applications or conflict in certain respects with claims made under the
Company's applications. In particular, the Company is aware of one currently
pending United States patent application that, if allowed, may contain claims
covering subject matter that may be competitive or conflicting with the
Company's patents and patent applications. In addition, the Company is aware of
a United States patent that has been issued to a third party that contains
claims that may adversely affect the ability of the Company to pursue one of its
projects. Any conflict between the Company's patents and patent applications and
patents or patent applications of third parties could result in a significant
reduction of the coverage of the Company's existing patents or any future
patents that may be issued. In addition, to determine the priority of
inventions, the Company may have to participate in interference proceedings
declared by the USPTO or in opposition, nullity or other proceedings before
foreign agencies with respect to any of its existing patents or patent
applications or any future patents or applications, which could result in
substantial cost to the Company. Further, the Company may have to participate at
substantial cost in International Trade Commission proceedings to abate
importation of goods which would compete unfairly with products of the Company.
If patents containing competitive or conflicting claims are issued to other
parties and such claims are ultimately determined to be valid, there can be no
assurance that the Company would be able to obtain licenses to these patents at
a reasonable cost, if at all, or be able to develop or obtain alternative
technology.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain consultants. There can be no assurance
that relevant inventions will not be developed by a person not bound by an
invention assignment agreement, or that binding agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known or
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be independently discovered by competitors. In addition, the Company could incur
substantial costs in defending against suits brought against it by others for
infringement of intellectual property rights or in prosecuting suits which the
Company might bring against other parties to protect its intellectual property
rights.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid
technological change. Competition from domestic and foreign biotechnology
companies, large pharmaceutical companies and other institutions is intense and
expected to increase. A number of companies are pursuing the development of
pharmaceuticals in the Company's targeted areas. These include companies that
are conducting clinical trials and preclinical studies for the treatment of
lupus.
In addition, there are many academic institutions, both public and
private, engaged in activities relating to the research and development of
therapeutics for autoimmune, inflammatory and other diseases. Most of these
companies and institutions have substantially greater facilities, resources,
research and development capabilities, regulatory compliance expertise, and
manufacturing and marketing capabilities than the Company. In addition, other
technologies may in the future be the basis of competitive products. There can
be no assurance that the Company's competitors will not develop or obtain
regulatory approval for products more rapidly than the Company, or develop and
market technologies and products that are more effective than those being
developed by the Company or that would render the Company's technology and
proposed products obsolete or noncompetitive.
The Company believes that its ability to compete successfully will
depend upon its ability to attract and retain experienced scientists, develop
patented or proprietary technologies and products, obtain regulatory approvals,
manufacture and market products either alone or through third parties, and
secure additional capital resources to fund anticipated net losses for at least
the next several years. The Company expects that competition among products
approved for marketing will be based in large part upon product safety,
efficacy, reliability, availability, price and patent position.
GOVERNMENT REGULATION
The Company's research and development activities and the future
manufacturing and marketing of any products developed by the Company are subject
to significant regulation by numerous government authorities in the United
States and other countries. In the United States, the Federal Food, Drug and
Cosmetic Act and the Public Health Service Act govern the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of any products the Company may develop. In addition to FDA
regulations, the Company is subject to other federal, state and local
regulations, such as the Occupational Safety and Health Act and the
Environmental Protection Act, as well as regulations governing the handling, use
and disposal of radioactive and other hazardous materials used by the Company in
its research activities. Product development and approval within this regulatory
framework takes a number of years and involves the expenditure of substantial
resources. In addition, this regulatory framework is subject to changes that may
affect approval, delay an application or require additional expenditures by the
Company.
The steps required before a pharmaceutical compound may be marketed in
the United States include (1) preclinical laboratory and animal testing; (2)
submission to the FDA of an IND application, which must become effective before
clinical trials may commence; (3) adequate and
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well-controlled clinical trials to establish the safety and efficacy of the
drug; (4) submission to the FDA of a New Drug Application ("NDA"); and (5) FDA
approval of the NDA prior to any commercial sale or shipment of the drug. In
addition to obtaining FDA approval for each product, each domestic drug
manufacturing establishment must be registered with, and approved by, the FDA.
Drug product manufacturing establishments located in California also must be
licensed by the State of California in compliance with separate regulatory
requirements.
Preclinical testing includes laboratory evaluation of product chemistry
and animal studies to assess the safety and efficacy of the product and its
formulation. The results of preclinical testing 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 involve administration of the drug to healthy volunteers
or to patients diagnosed with the condition for which the drug is being tested
under the supervision of a qualified clinical investigator. 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 is submitted to the FDA as part of the IND. Each
clinical trial is conducted under the auspices of an independent Institutional
Review Board ("IRB"). The IRB will consider, among other matters, ethical
factors, the safety of human subjects and the possible liability of the
institution.
Clinical trials are typically conducted in three sequential phases, but
the phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase
II involves trials in a limited patient population to (1) characterize the
actions of the drug in targeted indications, (2) determine drug tolerance and
optimal dosage and (3) identify possible adverse side effects and safety risks.
When a compound is found to be effective and to have an acceptable safety
profile in Phase II clinical trials, Phase III clinical trials are undertaken to
further evaluate and confirm clinical efficacy and safety within an expanded
patient population at multiple clinical trial sites. The FDA reviews both the
clinical plans and the results of the trials and may discontinue the trials at
any time if significant safety issues arise.
The results of preclinical testing and clinical trials are submitted to
the FDA in the form of an NDA or Product License Application for marketing
approval. The testing and approval process is likely to require substantial time
and effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. In addition, the Company will be required to obtain
separate regulatory approval for each indicated use of a drug. The approval
process is affected by a number of factors, including the severity of the
disease, the availability of alternative treatments, and the risks and benefits
demonstrated in clinical trials.
Additional preclinical testing or clinical trials may be requested
during the FDA review period and may delay marketing approval. After FDA
approval for the initial indications, further clinical trials may be necessary
to gain approval for the use of the product for additional indications. The FDA
mandates that adverse effects be reported to the FDA and may also require
post-marketing testing to monitor for adverse effects, which can involve
significant expense.
Among the conditions for FDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's cGMP requirements. Domestic manufacturing facilities are subject to
biennial FDA inspections and foreign manufacturing facilities are subject to
periodic inspections by the FDA or foreign regulatory authorities.
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The Company is also subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and marketing
approval for pharmaceutical products to be marketed outside of the United
States. The approval procedure varies among countries and can involve additional
testing, and the time required to obtain approval may differ from that required
to obtain FDA approval. The foreign regulatory approval process includes all of
the risks associated with obtaining FDA approval, and approval by the FDA does
not ensure approval by the health authorities of any other country.
EMPLOYEES
The Company has 109 full-time employees (including 26 Ph.D.s or M.D.s),
89 of whom are involved full-time in research, development and manufacturing
scale-up activities. All of the Company's management have had prior experience
with pharmaceutical, biotechnology or medical product companies. The Company
believes that it has been successful in attracting skilled and experienced
scientific personnel, but competition for such personnel is intense and there
can be no assurance that the Company will be able to attract and retain the
individuals needed. None of the Company's employees are covered by collective
bargaining agreements, and management considers relations with the Company's
employees to be good.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
CERTAIN RISK FACTORS
In this section, all references to "we," "our," and "us," refer to La
Jolla Pharmaceutical Company, a Delaware corporation.
LJP 394, OR ANY OTHER DRUG CANDIDATE, MAY NOT BE SAFE OR EFFECTIVE
We must demonstrate in clinical trials that LJP 394, our only drug
candidate in the clinical trial stage, is safe and effective for use before we
apply for any regulatory approvals. The completion of our clinical trials may be
delayed by many factors including slower-than-anticipated patient enrollment, a
slower timetable as determined by us or a collaborative partner or any other
adverse event. It is possible that we may not successfully complete any clinical
trials. Any delays in, or termination of, our clinical trial efforts would have
a material adverse effect on our business, financial condition and results of
operations. If LJP 394 is not found to be safe or effective, we would be unable
to obtain regulatory approval for its commercialization. If that were to occur,
there is no assurance that we would be able to develop an alternative drug
candidate. Therefore, because LJP 394 is our only drug candidate in clinical
trials, our inability to commercialize it would have a material adverse effect
on our business, financial condition and results of operation.
OUR EARLY STAGE OF PRODUCT DEVELOPMENT MAKES SUCCESSFUL MARKETING OR COMMERCIAL
ACCEPTANCE OF OUR PRODUCTS UNCERTAIN
All of our product development efforts are based on unproven
technologies and therapeutic approaches that have not been widely tested or
used. LJP 394 has not been proven to be effective in humans and its tolerance
technology has been used only in our preclinical tests and
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clinical trials. Application of LJP 394's tolerance technology to
antibody-mediated diseases other than lupus is in even earlier research stages.
Our therapeutic approaches may not be successful and may not result in any
commercially successful products.
LJP 394 and our other potential drug candidates require significant
additional research and development and are subject to significant risks. For
example, potential products that appear to be promising at early stages of
development may be ineffective or cause harmful side effects during preclinical
testing or clinical trials, not receive necessary regulatory approvals, be
difficult to manufacture, be uneconomical to produce, not be accepted by
consumers, or be precluded from commercialization by the proprietary rights of
others. We may not successfully complete development of LJP 394 or any other
drug candidate or may not obtain required regulatory approvals. If introduced,
LJP 394 or any other drug candidate may not generate sales.
WE MUST ESTABLISH OR MAINTAIN COLLABORATIVE ARRANGEMENTS
We seek to collaborate with pharmaceutical companies to access their
research, drug development, manufacturing, marketing and financial resources. In
December 1996, we entered into a collaborative agreement with Abbott. The
agreement grants Abbott the exclusive right to market and sell LJP 394
throughout the world in exchange for royalties on sales, development financing,
and milestone payments. Abbott's obligations to make payments to us and to
conduct development activities are conditioned on the progress of clinical
trials and the attainment of milestones related to regulatory approvals and
sales levels. These conditions may not be met. In addition, Abbott has the right
to terminate the relationship at any time based on documented safety or efficacy
issues. Abbott may also terminate the relationship without cause within 90 days
of receipt of the results of the pending Phase II/III clinical trial that was
started in December 1996 and is expected to be completed in 2000. Furthermore,
both Abbott and the Company may terminate the relationship under certain other
circumstances.
We also intend to pursue collaborative arrangements with other
pharmaceutical companies to assist in our research programs and the clinical
development and commercialization of our other drug candidates. However, we may
not be able to negotiate arrangements with any other collaborative partners on
acceptable terms, if at all. Any additional collaborative relationships that we
enter into probably will include conditions comparable to those in the Abbott
agreement. Once a collaborative arrangement is established, the collaborative
partner may not continue funding any particular program or may pursue
alternative technologies or develop alternative drug candidates, either alone or
with others, to develop treatments for the diseases we are targeting. Competing
products, developed by a collaborative partner or to which a collaborative
partner has rights, may result in the collaborative partner withdrawing support
as to all or a portion of our technology. Without collaborative arrangements, we
would need to fund our own research and development activities. This would
accelerate the depletion of our capital and require us to develop our own
marketing capabilities. Therefore, if we fail to establish or maintain
collaborative arrangements, we could experience a material adverse effect on our
business, financial condition and results of operations.
ADDITIONAL FINANCING MAY NOT BE AVAILABLE OR MAY NOT BE AVAILABLE ON ACCEPTABLE
TERMS
Our operations have used substantial capital resources and we will
continue to require substantial and increasing amounts of capital to support
research, product development, preclinical testing and clinical trials of our
drug candidates; to establish commercial-scale manufacturing capabilities; and
to market our potential products. Our future capital requirements will depend on
many factors, including:
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o Continued scientific progress in our research and development
programs;
o The size and complexity of these programs;
o The scope and results of preclinical testing and clinical
trials;
o The time and costs involved in applying for regulatory
approvals;
o The costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims;
o The competing technological and market developments;
o Our ability to establish and maintain collaborative research and
development arrangements; and
o The cost of manufacturing scale-up and effective
commercialization activities and arrangements.
Additional drug development programs are expected to result in increased
expenditures of our funds. Although we expect our capital resources will be
sufficient to fund our currently planned activities into 2000, it is possible
that we will need additional financing sooner than currently expected. If
needed, additional financing may not be available or, if available, may not be
available on acceptable terms. If adequate funds are not available, we may be
required to delay, scale back or eliminate one or more of our research and
development programs or obtain funds through arrangements with collaborative
partners or others that may require us to relinquish rights to our technologies
or potential products. Any of these scenarios could have a material adverse
effect on our business, financial condition and results of operations.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
We have incurred operating losses each year since our inception in 1989
and had an accumulated deficit of approximately $62.6 million as of December 31,
1998. Our losses are likely to exceed those experienced in prior years if the
scope of our programs reaches expected levels, if Abbott does not provide all
the financing currently anticipated for the development of LJP 394, or if we are
not successful in establishing additional collaborative relationships to help
finance other drug discovery programs. To achieve profitability we must, among
other things, complete the development of our products, obtain all necessary
regulatory approvals and establish commercial manufacturing and marketing
capabilities. We expect to incur significant losses each year for at least the
next several years as our clinical trial, research, development and
manufacturing scale-up activities increase. The amount of losses and the time
required by us to reach sustained profitability are highly uncertain, and we do
not expect to generate revenues from the sale of products, if any, for at least
several years. We may never achieve product revenues or profitability.
GOVERNMENT REGULATIONS; WE MAY NOT OBTAIN REGULATORY APPROVAL
We will need to obtain regulatory approval from the FDA and from health
authorities in other countries prior to marketing any potential product that we
develop. The regulatory approval process includes preclinical testing and
clinical trials and may include post-marketing surveillance of each compound to
establish its safety and efficacy. Regulatory approval for a
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drug may include limitations on its indicated uses. In addition, we will be
required to obtain separate regulatory approval for each indicated use of a
drug. This regulatory process can take many years and require the expenditure of
substantial resources. Even if regulatory approval is obtained, a marketed drug
and its manufacturer are subject to continuing review. The discovery of
previously unknown problems with a product may have adverse effects on our
business, financial condition and results of operations, including withdrawal of
the product from the market. A violation of regulatory requirements at any stage
will result in various adverse consequences, including the FDA's delay in
approving or its refusal to approve a product; withdrawal of an approved product
from the market; and the imposition of criminal penalties against the
manufacturer and new-drug-application holder. We have not submitted a new drug
application for any drug candidate other than LJP 394, and none of our drug
candidates have been approved for commercialization in the United States or
elsewhere. We may not obtain regulatory approval for our drug candidates. If we
do not obtain the requisite government approvals or approvals of the scope
requested, we and any of our licensees and marketing partners will be delayed or
precluded from marketing our drug candidate. Any delay will have a material
adverse effect on our business, financial condition and results of operations.
UNCERTAINTY OF PATENTS PENDING AND VULNERABILITY OF PROPRIETARY TECHNOLOGY
We have rights to certain United States and foreign issued patents and
have filed or participated as a licensee in the filing of a number of patent
applications in the United States relating to our technology, as well as foreign
counterparts of certain of these applications in certain countries. Patents may
not issue from any of these applications, and claims allowed under issued
patents may not be sufficient to protect our technology. In addition, the scope
of any patent protection may not be sufficient, and current or future issued
patents may not be held valid if subsequently challenged. Patent applications in
the United States are maintained in secrecy until a patent issues, and we cannot
be certain that others have not filed patent applications for technology covered
by our pending applications or that we were the first to invent, or to file
patent applications for, the technology.
Certain applications or patents filed by pharmaceutical and
biotechnology companies and research and academic institutions may be
competitive with our applications or conflict in certain respects with claims
made under our applications, which could result in a reduction of the coverage
of our existing patents or any future patents that may be issued. In particular,
we are aware of one currently pending United States patent application that, if
allowed, may contain claims covering subject matter that may be competitive or
conflicting with our patents and patent applications. In addition, we are aware
of a United States patent that has been issued to a third party that contains
claims that may adversely affect our ability to pursue one of our projects. If
patents containing competitive or conflicting claims are issued to other parties
and such claims are ultimately determined to be valid, we may not be able to
obtain licenses to these patents at a reasonable cost, if at all, or be able to
develop or obtain alternative technology.
We also rely on unpatented trade secrets and improvements, know-how and
continuing technological innovation to develop and maintain our competitive
position. We seek to protect these trade secrets, in part, through
confidentiality agreements with our commercial partners, collaborators,
employees and consultants. We also have invention or patent assignment
agreements with our employees and consultants. Relevant inventions, however, may
be developed by a person not bound by an invention assignment agreement; or
binding agreements may be breached for which we may not have adequate remedies;
and our trade secrets may otherwise become known or be independently discovered
by competitors. In addition, we could incur substantial costs in defending suits
brought against us by others for infringement of
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intellectual property rights or in prosecuting suits which we might bring
against other parties to protect our intellectual property rights.
INCREASED COMPETITION AND RAPID TECHNOLOGICAL CHANGE MAY ADVERSELY AFFECT THE
MARKETABILITY OF OUR PRODUCTS
The biotechnology and pharmaceutical industries are subject to rapid
technological change. Competition from domestic and foreign biotechnology
companies, large pharmaceutical companies and other institutions is intense and
is expected to increase. A number of companies and institutions are pursuing the
development of pharmaceuticals in our targeted areas. These include companies
that are conducting clinical trials and preclinical studies for the treatment of
lupus. Our competitors may develop or obtain regulatory approval for products
more rapidly than we do, or develop and market technologies and products that
are more effective than those being developed by us or that would render our
technology and proposed products obsolete or noncompetitive.
EXPANSION OF MANUFACTURING CAPABILITIES REQUIRED FOR COMMERCIALIZATION
The manufacture of our potential products for clinical trials and the
manufacture of any resulting products for commercial purposes are subject to
cGMP requirements as defined by the FDA. While we are producing limited
quantities of LJP 394 for clinical trials, our current facilities are not
adequate for commercial production of our potential products. Under our
agreement with Abbott, we are responsible for manufacturing LJP 394 and selling
it in bulk form to Abbott for packaging and commercial resale. Substantial
capital investment in the expansion and build-out of our manufacturing
facilities will be required to enable manufacture of any products in commercial
quantities. We have never operated an FDA-approved manufacturing facility and
may not obtain necessary approvals. We have limited manufacturing experience,
and we may be unable to successfully transition to commercial production.
We may enter into arrangements with contract manufacturing companies to
expand our own production capacity in order to meet requirements for its
products, or to attempt to improve manufacturing efficiency. If we choose to
contract for manufacturing services and encounter delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
our finished products, the clinical trials, market introduction and subsequent
sales of these products would be adversely affected. If we become dependent on
third parties for the manufacture of our products, our profit margins and our
ability to develop and deliver products on a timely and competitive basis may be
adversely affected.
LACK OF MARKETING EXPERIENCE
In order to commercialize any drug candidate approved by the FDA, we
must either develop a marketing and sales force or enter into marketing
arrangements with third parties. Abbott has agreed to be responsible for the
worldwide marketing of LJP 394, but the Abbott agreement may terminate under
certain circumstances. We currently have no arrangements with any other third
party for marketing of any of our drug candidates and we may be unable to enter
into any additional marketing agreements on terms favorable to us, if at all. To
the extent that we choose to attempt to develop our own marketing and sales
capabilities, we will compete with other companies that already have experienced
and well-funded marketing and sales operations. We or any collaborative partner
may be unable to establish sales and distribution capabilities without undue
delays or expenditures. Furthermore, it is possible that we may never achieve
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commercial acceptance of any of our drug candidates. Our inability to
successfully market our drug candidates would have a material adverse effect on
our business, financial condition and results of operations.
UNCERTAINTIES RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT
The emphasis on managed care in the United States will continue to put
pressure on pharmaceutical pricing. Cost control initiatives could decrease the
price that we receive for any products we may develop and sell in the future.
Further, to the extent that cost control initiatives have a material adverse
effect on our commercial partners, our ability to commercialize our products may
be adversely affected.
Our ability to commercialize pharmaceutical products may depend in part
on the extent to which reimbursement for the products will be available from
government health administration authorities, private health insurers and other
third-party payers. Significant uncertainty exists as to the reimbursement
status of newly approved health-care products. Third-party payers, including
Medicare, are increasingly challenging the prices charged for medical products
and services. Third-party insurance coverage may not be available to patients
for any products developed by us. Government and other third-party payers are
increasingly attempting to contain health-care costs by limiting both coverage
and the level of reimbursement for new therapeutic products and by refusing in
some cases to provide coverage for users of approved products for disease
indications for which the FDA has not granted labeling approval. If adequate
coverage and reimbursement levels are not provided by government and other
third-party payers for our products, the market acceptance of these products
would be adversely affected.
The continuing efforts of government and third-party payers to contain
or reduce the costs of health care may have a material adverse effect on our
business, financial condition and results of operations.
POTENTIAL PRODUCT LIABILITY; UNCERTAINTIES RELATED TO INSURANCE
We have not received marketing approval from the FDA for any of our drug
candidates. We currently use LJP 394 only in clinical trials. The use of LJP 394
or any of our other potential products in clinical trials and the ultimate sale
of any approved products will expose us to potential product liability claims.
If any product liability claims were to be made against us, we would also be
subject to negative publicity. Although we maintain product liability insurance
coverage for claims arising from the use of our products in clinical trials in
the amount of $15.0 million, we may not be able to maintain product liability
insurance at a reasonable cost or in sufficient amounts to protect us against
product liability losses. Therefore, both the filing of a product liability
claim against us and the resulting negative publicity could have a material
adverse effect on our business, financial condition and results of operations.
DEPENDENCE ON KEY EMPLOYEES AND CONSULTANTS
We believe that our ability to achieve our research and development
objectives depends on the continued employment of the principal members of our
scientific and management staff and the recruitment of additional qualified
scientific personnel. We also rely on consultants and advisors to assist us in
formulating our research and development, clinical, regulatory and manufacturing
strategies. All of our consultants and advisors are independent contractors and
may have commitments or consulting or advisory contracts with other entities
that may affect their ability to contribute to our objectives.
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ENVIRONMENTAL MATTERS AND HAZARDOUS MATERIALS
Due to the nature of our manufacturing processes, we are subject to
stringent federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials and wastes. We may be
required to incur significant costs to comply with environmental regulations as
manufacturing is increased to commercial volumes. Our operations, business or
assets may be materially and adversely affected by current or future
environmental laws, rules, regulations and policies or by any releases or
discharges of hazardous material.
In our research activities, we utilize radioactive and other materials
that could be hazardous to human health, safety or the environment. These
materials and various wastes resulting from their use are stored at our facility
pending ultimate use and disposal. The risk of accidental injury or
contamination from these materials cannot be eliminated. In the event of such an
accident, we could be held liable for any resulting damages, and any such
liability could exceed our resources.
ANTI-TAKEOVER DEVICES
There are certain anti-takeover devices in place that may discourage or
deter a potential acquirer from attempting to gain control of us. Certain
provisions of the Delaware General Corporation Law may have the effect of
deterring hostile takeovers or delaying or preventing changes in the control or
management of us, including transactions in which stockholders might otherwise
receive a premium for their shares over then-current market prices. We may also
issue shares of preferred stock without stockholder approval and upon such terms
as our Board of Directors may determine. The issuance of preferred stock could
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding stock, and the holders of such preferred stock could
have voting, dividend, liquidation and other rights superior to those of holders
of the common stock. In 1998, we designated 75,000 shares of preferred stock as
Series A Junior Participating Preferred Stock in connection with our Rights
Plan. The Rights Plan could cause an unapproved takeover to be much more
expensive to an acquirer, resulting in a strong incentive to negotiate with our
Board of Directors. In addition, our bylaws do not allow stockholders to call a
special meeting of stockholders, require stockholders to give written notice of
any proposal or director nomination to us within a certain period of time prior
to the stockholder annual meeting, and establish certain qualifications for a
person to be elected or appointed to the Board of Directors during the pendency
of certain business combination transactions.
ITEM 2. PROPERTIES.
The Company leases two adjacent buildings in San Diego, California for a
total of approximately 54,000 square feet. One building contains research and
development labs and clinical manufacturing facilities, and the other contains
general offices and the Company's warehouse. Each building is subject to a
lease, one that expires in 2001 and one that expires in 2004. Each lease
includes an option exercisable by the Company to extend the term of the
agreement for an additional five years and is subject to escalation clauses that
provide for annual rent increases based on the U.S. Consumer Price Index. The
Company believes that these facilities will be adequate to meet its needs for
the near term. Over the longer term, management believes additional space can be
secured at commercially reasonable rates.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the three month period ended December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and key employees of the Company and their ages
are set forth below.
Steven B. Engle 44 Chairman of the Board, Chief Executive Officer, and
Assistant Secretary
Mark T. Edgar, Ph.D. 48 Senior Vice President of Product Development and
Operations
Bonnie Hepburn, M.D. 58 Vice President of Clinical Development
Richard Jack, Ph.D. 45 Vice President of Research
Matthew D. Linnik, Ph.D. 39 Vice President of Research
Wood C. Erwin, CPA 48 Vice President of Finance, Chief Financial Officer and
Secretary
William J. Welch 37 Vice President of Business Development
Richard W. Krawiec, Ph.D. 51 Vice President of Investor Relations
Andrew Wiseman, Ph.D. 50 Director of Business Development
STEVEN B. ENGLE, Chairman of the Board and Chief Executive Officer,
joined the Company in 1993 as Executive Vice President and Chief Operating
Officer. He assumed the offices of President, Director and Secretary in 1994,
and became Chief Executive Officer in 1995, and Chairman of the Board in 1997.
From 1991 to 1993, Mr. Engle served as Vice President of Marketing and in other
senior management positions while at Cygnus Inc., a publicly held company that
develops drug-delivery systems for therapeutic drugs. From 1987 to 1991, he was
Chief Executive Officer of Quantum Management Company, a privately held
management consulting firm serving the pharmaceutical industry. From 1984 to
1987, he was Vice President of Marketing and Divisional General Manager for
Micro Power Systems Inc., a privately held company that manufactures high
technology products including medical devices. From 1979 to 1984, he was a
management consultant at Strategic Decisions Group and SRI International, where
he advised pharmaceutical, high technology and other companies. Since 1998, Mr.
Engle has served as a Director of CareLinc Corporation, a privately held
developer of clinical information management systems, and of BIOCOM, a regional
trade
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association for the biotechnology and medical devices industries. Mr. Engle
holds an M.S.E.E. and a B.S.E.E. with a focus in biomedical engineering from the
University of Texas.
MARK T. EDGAR, Ph.D., Senior Vice President of Product Development and
Operations, joined the Company in May 1995 as Vice President of Manufacturing.
Prior to joining the Company, Dr. Edgar was with Syntex Corp., a pharmaceutical
company, for 15 years, during which time he served in a variety of capacities,
including as Vice President and Director of the CNTF Program Management Team at
Syntex Development Research from 1993 to 1995; Director of Operations at Syntex
Bahamas Chemical from 1990 to 1993; and Director of Manufacturing Engineering
and Materials at Syntex Laboratories, Inc. from 1987 to 1990. Dr. Edgar holds a
Ph.D. in Organic Chemistry from Arizona State University and an M.B.A. from the
University of Colorado.
BONNIE HEPBURN, M.D., a practicing rheumatologist, joined the Company in
April 1996 as Vice President of Clinical Development. Prior to joining the
Company, from 1994 to 1995, Dr. Hepburn served as Director of Immunology
Clinical Research for Centocor, a biopharmaceutical company. From 1987 to 1994,
Dr. Hepburn held several positions with Ciba-Geigy Ltd., a pharmaceutical
company, including Head of Inflammation, Bone and Allergy Clinical Research,
Executive Director of Anti-Inflammatory and Pulmonary Clinical Research, and
Director of Regulatory Affairs. She served as a member and chairman of the FDA
Arthritis Advisory Committee from 1980 to 1983 and also on the Committee for
Revision of FDA Antirheumatic Drug Guidelines. Since 1998, she has been Chief
Medical Officer for Santarus, Inc., a pharmaceutical company. Dr. Hepburn is a
Clinical Professor of Medicine at the University of California, San Diego. Dr.
Hepburn received her B.A. from Wellesley College and her M.D. from the
University of Pennsylvania School of Medicine, and completed her medical
residency and fellowship in rheumatology at the Mayo Clinic.
RICHARD JACK, Ph.D., Vice President of Research, joined the Company in
1996 as Associate Director of Research and Development, was promoted to Director
of Research and Development in 1998 and became Vice President of Research in
1999. Prior to joining the Company, from 1993 to 1996, Dr. Jack was a consultant
with Alkermes, a drug-delivery company. From 1987 to 1997, he served as a
faculty member in the Department of Medicine at Harvard Medical School. From
1988 to 1997, he also served as a Member of the Graduate School Immunology
Program at Harvard Medical School, and was an Associate Immunologist in the
Department of Rheumatology and Immunology at Brigham and Women's Hospital. From
1984 to 1987, Dr. Jack served as Instructor in Medicine at Harvard Medical
School and from 1982 to 1984, he served as Research Fellow in the Department of
Rheumatology and Immunology at Brigham and Women's Hospital and Harvard Medical
School. Dr. Jack holds a B.A. in Biology from Bates College and a Ph.D. in
Immunology from the University of Connecticut Health Center.
MATTHEW D. LINNIK, Ph.D., Vice President of Research, joined the Company
in 1998 as Director of Research and Development and became Vice President of
Research in 1999. Prior to joining the Company, from 1989 to 1998, Dr. Linnik
served as Senior Pharmacologist, Scientist, Research Scientist and Project
Leader for Hoechst Marion Roussel, formerly Marion Merrell Dow and Marion
Laboratories, a pharmaceutical company. From 1996 to 1998, he also served as
Adjunct Associate Professor of Neurosurgery at the University of Cincinnati
School of Medicine. From 1986 to 1988, he served as Postdoctoral Fellow, then
Instructor, in the Departments of Neurology and Neurosurgery at Massachusetts
General Hospital and Harvard Medical School. Dr. Linnik holds a B.A. in
Physiology from Southern Illinois University and a Ph.D. in Physiology and
Pharmacology from Southern Illinois University School of Medicine.
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WOOD C. ERWIN, Vice President of Finance and Chief Financial Officer,
joined the Company in 1996. Prior to joining the Company, Mr. Erwin served
during 1995 as Vice President of Finance and Chief Financial Officer of Resource
Optimization, Inc., a software company. From 1992 to 1995 he served as Chief
Financial Officer of MedClone, Inc., a biotechnology company developing
therapeutics for autoimmune diseases. From 1991 to 1992, Mr. Erwin served as
Vice President of Finance and Chief Financial Officer of Med Images, Inc., a
provider of computerized services to hospitals; and from 1986 to 1991 as Chief
Financial Officer and Director of Operations of LipoGen, Inc., a biotechnology
company. Mr. Erwin was also the Controller of Plasti-Line, Inc., a publicly
traded manufacturer of illuminated signs; Vice President of Finance of Kusan,
Inc., a subsidiary of Bethlehem Steel Corp.; and Cost Analyst for Oscar Mayer
Company. Mr. Erwin holds B.S. and M.B.A. degrees from the University of
Tennessee and is a Certified Public Accountant and Certified Management
Accountant.
WILLIAM J. WELCH joined the Company in 1998 as Vice President of
Business Development. Prior to joining the Company, from 1993 to 1998, Mr. Welch
worked for Abbott Laboratories, with positions advancing to General Manager of
Abbott Ambulatory Infusion Systems. While at Abbott Laboratories, Mr. Welch was
Senior Marketing Manager at Abbott Renal Care and Senior Manager of Corporate
Planning, Development and Licensing. From 1991 to 1993, Mr. Welch was Director
of Business Development for In-Process Technology, a privately held company that
manufactured process equipment for the pharmaceutical industry. Mr. Welch holds
an M.B.A. from Harvard University and a B.S. in Chemical Engineering from the
University of California, Berkeley.
RICHARD W. KRAWIEC, Ph.D., Vice President of Investor Relations, joined
the Company in February 1999. Prior to joining the Company, from 1994 to 1998,
Dr. Krawiec served as Director of Corporate Communications for Amylin
Pharmaceuticals, Inc., a publicly held company that develops drugs. From 1992 to
1994, he was Director of Investor Relations and Corporate Communications at IDEC
Pharmaceuticals Corp., a publicly traded company that develops drugs. From 1991
to 1992, he was Editor-In-Chief of Biotechnology Week magazine at Cahners
Publishing Co. From 1981 to 1991, he held several positions at McGraw-Hill
Publications Co. including Managing Editor of Biotechnology Newswatch. Dr.
Krawiec holds a Ph.D. in Biological Sciences from the University of Rhode Island
and a B.S. in Biology from Boston University.
ANDREW WISEMAN, Ph.D., has served as Director of Business Development
for the Company since its formation in May 1989 and also served as head of
investor relations from 1994 until 1999. From 1983 to 1989, Dr. Wiseman held
several positions with Quidel Corporation, including Senior Research Scientist,
Project Manager in Diagnostic Research and Development, and Manager of Business
Development. Dr. Wiseman was an Assistant Professor at the Medical Biology
Institute and an Assistant Member at the Scripps Clinic and Research Foundation
and holds a Ph.D. in Genetics from Duke University.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the Nasdaq National Market under
the symbol "LJPC." Set forth below are the high and low sales prices for the
Company's Common Stock for each full quarterly period within the two most recent
fiscal years.
Prices
Year Ended December 31, 1998 High Low
------- ------
First Quarter 4-15/16 3-5/16
Second Quarter 4-5/16 3-7/16
Third Quarter 3-10/16 1-10/16
Fourth Quarter 5 2-1/4
Year Ended December 31, 1997
First Quarter 6 4-31/64
Second Quarter 5-5/8 3-7/8
Third Quarter 5-1/2 3-7/8
Fourth Quarter 5-7/8 4-1/8
The Company has not paid dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future.
The approximate number of record holders of the Company's Common Stock
as of March 17, 1999 was 307.
In October 1998, the Company sold 1,538,402 shares of its Common Stock
to Abbott for an aggregate price of $4.0 million. The sale was a privately
negotiated sale to a single buyer and was exempt from registration under Section
4(2) of the Securities Act of 1933, as amended, and there were no underwriters
involved.
ITEM 6. SELECTED FINANCIAL DATA.
The following Selected Financial Data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 below and the financial statements of the Company
and related notes thereto beginning at page F-1 of this Report.
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Years Ended December 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue from collaborative agreements $ -- $ 3,000 $ 4,000 $ 9,860 $ 8,600
Expenses:
Research and development 8,499 9,804 11,663 14,676 14,627
General and administrative 2,049 2,390 2,920 2,937 3,076
-------- -------- -------- -------- --------
Loss from operations (10,548) (9,194) (10,583) (7,753) (9,103)
Interest expense (364) (301) (183) (56) (6)
Interest income 599 941 1,170 1,441 1,232
-------- -------- -------- -------- --------
Net loss $(10,313) $ (8,554) $ (9,596) $ (6,368) $ (7,877)
======== ======== ======== ======== ========
Basic and diluted net loss per share $ (1.44) $ (0.79) $ (0.63) $ (0.36) $ (0.42)
======== ======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share 7,137 10,883 15,150 17,547 18,649
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital $ 12,643 $ 21,949 $ 25,886 $ 23,705 $ 19,911
Total assets $ 17,094 $ 26,375 $ 31,687 $ 29,646 $ 25,815
Noncurrent portion of obligations under
capital leases $ 1,628 $ 892 $ 168 $ -- $ --
Stockholders' equity $ 13,810 $ 23,568 $ 27,938 $ 25,715 $ 21,859
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Since its inception in May 1989, the Company has devoted substantially
all of its resources to the research and development of technology and potential
drugs to treat antibody-mediated diseases. The Company has never generated any
revenue from product sales and has relied upon private and public investors,
revenue from collaborative agreements, equipment lease financings and interest
income on invested cash balances for its working capital. The Company has been
unprofitable since inception and expects to incur substantial additional
expenses and net operating losses for at least the next several years as it
increases its manufacturing scale-up activities including the production of LJP
394 for clinical trials, and increases its research and development expenditures
on additional drug candidates, and general and administrative expenditures to
support increased research and development and manufacturing scale-up
activities. The Company's activities to date are not as broad in depth or scope
as the activities it must undertake in the future and the Company's historical
operations and the financial information included in this Report are not
indicative of its future operating results or financial condition.
The Company expects that losses will fluctuate from quarter to quarter
as a result of differences in the timing of expenses incurred and potential
revenues from collaborative arrangements. Some of these fluctuations may be
significant. As of December 31, 1998, the Company's accumulated deficit was
approximately $62.6 million.
The Company's business is subject to significant risks including, but
not limited to, the risks inherent in its research and development efforts,
including clinical trials, uncertainties associated with both obtaining and
enforcing its patents and with the patent rights of others, the lengthy,
expensive and uncertain process of seeking regulatory approvals, uncertainties
regarding government reforms and of product pricing and reimbursement levels,
technological change and competition, manufacturing uncertainties and dependence
on its collaborative relationship with Abbott, a related party. Even if the
Company's product candidates appear promising at an early stage of development,
they may not reach the market for numerous reasons. Such reasons include the
possibilities that the products will be ineffective or unsafe during clinical
trials, will fail to receive necessary regulatory approvals, will be difficult
to manufacture on a large scale, will be uneconomical to market or will be
precluded from commercialization by proprietary rights of third parties.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Revenue. The Company had revenue of $8.6 million, $9.9 million and $4.0
million for the years ended December 31, 1998, 1997 and 1996, respectively. In
December 1996, the Company entered into a collaborative agreement with Abbott
for the worldwide development and commercialization of LJP 394, the Company's
lupus drug candidate. Revenue in 1998 and 1997 was attributable to the funding
from Abbott for the development of LJP 394. Revenue in 1996 was attributable
solely to an up-front license fee upon the signing of the Company's
collaborative agreement with Abbott. The collaborative agreement with Abbott
obligates Abbott to make further development funding and milestone payments,
however both Abbott and the Company have the right to terminate the agreement
under certain circumstances. Accordingly, there is no assurance that the Company
will realize any further revenue from this arrangement or any other
collaborative arrangement.
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Research and Development Expenses. The Company's research and
development expenses of $14.6 million for the year ended December 31, 1998 were
comparable to the expenses in 1997 of $14.7 million, which increased from $11.7
million in 1996. Although the research and development expenses for 1998
increased due to the expansion of the Company's research and development
programs, these increases were offset by the decrease in expenses related to
clinical trials which were paid directly by Abbott and the timing of purchases
for the production of LJP 394 for use in clinical trials. Several factors
contributed to the increase in research and development expenses from 1996 to
1997, including manufacturing scale-up activities, expansion of the Company's
research and development programs and increased facilities expenditures. The
Company's research and development expenses are expected to increase
significantly in the future as manufacturing scale-up activities including the
production of LJP 394 for clinical trials are increased, efforts to develop
additional drug candidates are intensified, and potential products progress into
and through clinical trials.
General and Administrative Expenses. The Company's general and
administrative expenses of $3.1 million for the year ended December 31, 1998
increased slightly from expenses of $2.9 million in both 1997 and 1996. Several
factors contributed to this increase from 1997, including expanded business
development and investor relations activities. The Company expects general and
administrative expenses to increase in the future to support increased
manufacturing scale-up and research and development activities.
Interest Income and Expense. The Company's interest income decreased to
$1.2 million for the year ended December 31, 1998 from $1.4 million in 1997 and
was comparable to $1.2 million in 1996. The decrease in interest income in 1998
as compared to 1997 was due to lower investment balances. The increase in
interest income in 1997 as compared to 1996 was due to the investment of the
proceeds from the Company's additional stock issuance to Abbott in September
1997 and from the development funding received from Abbott throughout 1997.
Interest expense decreased to $6,000 for the year ended December 31, 1998 from
$56,000 in 1997 and $183,000 in 1996. The decreases in interest expense were the
result of decreases in the Company's capital lease obligations.
Net Operating Loss Carryforwards. At December 31, 1998, the Company had
available net operating loss carryforwards and research tax credit carryforwards
of approximately $59.6 million and $2.6 million, respectively, for federal
income tax purposes, which will begin to expire in 2004 unless previously
utilized. Because of "change in ownership" provisions of the Tax Reform Act of
1986, the Company's net operating loss and tax credit carryforwards will be
subject to an annual limitation regarding utilization against taxable income in
future periods. The Company believes that such limitation will not have a
material impact on the benefits that may arise out of its net operating loss and
tax credit carryforwards. However, there can be no assurance that additional
limitations arising from any future changes in ownership will not have a
material impact on the Company. For more information concerning the provision
for income taxes, see Note 7 of the Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1998, the Company had incurred a
cumulative net loss of approximately $62.6 million and financed its operations
through private and public offerings of its securities, revenues from
collaborative agreements, capital and operating lease transactions, and interest
income on its invested cash balances. As of December 31, 1998, the Company had
raised $83.7 million in net proceeds since its inception from sales of equity
securities.
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At December 31, 1998, the Company had $23.4 million in cash, cash
equivalents and short-term investments, as compared to $27.0 million at December
31, 1997. The Company's working capital at December 31, 1998 was $19.9 million,
as compared to $23.7 million at December 31, 1997. The decrease in cash, cash
equivalents and short-term investments resulted from the decrease in funding
received from Abbott for the development of LJP 394 and the increase in spending
on non-lupus-related research and development programs. The Company received
$11.1 million in funding and a $4.0 million up-front license fee, which was
earned in 1996, from Abbott in 1997, as compared to $9.1 million in funding
received in 1998. The decrease in payments received in 1998 was due to the
direct payment of expenses related to clinical trials by Abbott beginning in the
fourth quarter of 1997. The Company invests its cash in corporate and United
States Government-backed debt instruments.
As of December 31, 1998, the Company had acquired an aggregate of $4.1
million in property and equipment, of which approximately $196,000 of total
equipment costs is financed under capital lease obligations. In addition, the
Company leases its office and laboratory facilities and certain equipment under
operating leases. The Company has no material commitments for the acquisition of
property and equipment. However, the Company anticipates increasing its
investment in property and equipment in connection with the enhancement of its
research and development and manufacturing facilities and capabilities.
The Company intends to use its financial resources to fund manufacturing
scale-up activities including the production of LJP 394 for clinical trials,
research and development efforts, and for working capital and other general
corporate purposes. The amounts actually expended for each purpose may vary
significantly depending upon numerous factors, including the results of clinical
trials, the timing of regulatory applications and approvals, and technological
developments. Expenditures also will depend upon the establishment and
progression of collaborative arrangements and contract research as well as the
availability of other financings. There can be no assurance that these funds
will be available on acceptable terms, if at all.
The Company anticipates that its existing capital and interest earned
thereon and anticipated funding from the Abbott collaboration will be sufficient
to fund the Company's operations as currently planned into 2000. The Company's
future capital requirements will depend on many factors, including continued
scientific progress in its research and development programs, the size and
complexity of these programs, the scope and results of clinical trials, the time
and costs involved in applying for regulatory approvals, the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims,
competing technological and market developments, the ability of the Company to
maintain its collaborative arrangement with Abbott and to establish and maintain
additional collaborative relationships, and the cost of manufacturing scale-up
and effective commercialization activities and arrangements. The Company expects
to incur significant net operating losses each year for at least the next
several years as it expands its current research and development programs and
increases its general and administrative expenses to support a larger, more
complex organization. It is possible that the Company's cash requirements will
exceed current projections and that the Company will therefore need additional
financing sooner than currently expected.
The Company has no current means of generating cash flow from
operations. The Company's lead drug candidate, LJP 394, will not generate
revenues, if at all, until it has been proven safe and effective, has received
regulatory approval and has been successfully commercialized, a process that is
expected to take at least the next several years. The Company's other drug
candidates are much less developed than LJP 394. There can be no assurance that
the
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Company's product development efforts with respect to LJP 394 or any other drug
candidate will be successfully completed, that required regulatory approvals
will be obtained, or that any product, if introduced, will be successfully
marketed or achieve commercial acceptance. Accordingly, the Company must
continue to rely upon outside sources of financing to meet its capital needs for
the foreseeable future.
Abbott's funding of the development costs for LJP 394 and milestone
payments are expected to continue to enhance the Company's short-term liquidity
by minimizing the expenditure of the Company's own funds on further development
of LJP 394. However, the Company anticipates increasing expenditures on the
development of other drug candidates and, over time, the Company's consumption
of cash will necessitate additional sources of financing. Furthermore, the
Company has no internal sources of liquidity, and termination of the Abbott
arrangement would have a serious adverse effect on the Company's ability to
generate sufficient cash to meet its needs.
The Company will continue to seek capital through any appropriate means,
including issuance of its securities and establishment of additional
collaborative arrangements. However, there can be no assurance that additional
financing will be available on acceptable terms and the Company's negotiating
position in its capital-raising efforts may worsen as it continues to use its
existing resources. Financing through collaborative arrangements is uncertain
because payments under the Company's collaborative agreement with Abbott are
subject to certain termination rights, including those related to progress in
clinical trials for LJP 394, and there is no assurance that the Company will be
able to enter into further collaborative relationships.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of computer programs written using
two digits rather than four to define the applicable year. As a result, these
computer programs may not properly recognize calendar dates beginning in the
year 2000. This problem may cause systems to fail or miscalculate causing
disruptions of operations, including a temporary inability to process
transactions or engage in similar normal business activities.
Based on recent assessments, the Company believes that it has an
effective program in place to resolve the Year 2000 Issue in a timely manner,
that its total internal Year 2000 Issue costs for information technology and
non-information technology systems will be less than $85,000 and will primarily
be incurred in 1999. The Company's year 2000 conversion requirements are
expected to be achieved through routine upgrades to its hardware and software
programs and these upgrades are expected to be completed by the second quarter
of 1999. These costs and the expected completion date are based on management's
best estimates; therefore, there can be no assurance that these estimates will
be achieved and actual results could differ materially from those anticipated.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. To date, the
Company has completed the assessment phase for approximately 80% of the systems
that could be significantly affected by the Year 2000 Issue and has determined
that the majority of the systems assessed so far do not require remediation to
be year 2000 compliant. In addition, the Company has initiated communications
with most of its significant suppliers to determine the extent to which the
Company's systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. There can be no assurance that the systems of other
companies on which the
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Company's systems rely will be timely converted and will not have an adverse
effect on the Company's systems.
The Company currently has no contingency plans in place in the event it
does not complete all phases of the year 2000 program. The Company plans to
evaluate the status of completion in the second quarter of 1999 and determine
whether such a plan is necessary.
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company invests its excess cash in interest-bearing investment-grade
securities that it holds for the duration of the term of the respective
instrument. The Company does not utilize derivative financial instruments,
derivative commodity instruments or other market risk sensitive instruments,
positions or transactions in any material fashion. Accordingly, the Company
believes that, while the investment-grade securities it holds are subject to
changes in the financial standing of the issuer of such securities, the Company
is not subject to any material risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices or other market
changes that affect market risk sensitive instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item
are at the end of this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the Company's executive officers is included
under the caption "Executive Officers" following Part I, Item 4 of this Report.
Other information for Item 10 is incorporated by reference from the portions of
the Registrant's definitive proxy statement for its annual meeting of
stockholders to be held on May 13, 1999 entitled "Proposal 1 - Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," which
will be filed with the Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
Information for Item 11 is incorporated by reference from the portions
of the Registrant's definitive proxy statement for its annual meeting of
stockholders to be held on May 13, 1999 entitled "Executive Compensation and
Other Information," "Report of the Compensation Committee on Executive
Compensation," "Compensation Committee Interlocks and Insider Participation,"
and "Stock Performance Graph," which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 31, 1998.
32
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information for Item 12 is incorporated by reference from the portion of
the Registrant's definitive proxy statement for its annual meeting of
stockholders to be held on May 13, 1999 entitled "Security Ownership of Certain
Beneficial Owners and Management," which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
No disclosures are required.
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.
The following financial statements of La Jolla
Pharmaceutical Company are included in Item 8:
Report of Ernst & Young LLP, Independent
Auditors..................................................................F-1
Balance Sheets at December 31, 1998 and 1997..............................F-2
Statements of Operations for each of the three years in
the periods ended December 31, 1998, 1997 and 1996........................F-3
Statements of Stockholders' Equity for each of the three
years in the periods ended December 31, 1998, 1997 and 1996...............F-4
Statements of Cash Flows for each of the three years in
the periods ended December 31, 1998, 1997 and 1996........................F-5
Notes to Financial Statements.............................................F-6
2. Financial Statement Schedules.
No financial statement schedules are required.
33
34
3. Exhibits.
Exhibit
Number Description
- ------- -----------
3.1 Intentionally omitted
3.2 Amended and Restated Bylaws of the Company
3.3 Restated Certificate of Incorporation of the Company(3)
4.0 Rights Agreement dated as of December 3, 1998 between the Company and
American Stock Transfer & Trust Company(13)
10.1 Intentionally omitted
10.2 Stock Option Agreement dated February 4, 1993 entitling Joseph Stemler
to purchase 35,000 shares of Common Stock(1)*
10.3 Letter regarding terms of employment and potential severance of Stephen
M. Coutts (1) and the modification to this letter(10)*
10.4 Intentionally omitted
10.5 Intentionally omitted
10.6 Steven B. Engle Employment Agreement(1) and Amendment No. 1(10) *
10.7 Form of Directors and Officers Indemnification Agreement(1)
10.8 Intentionally omitted
10.9 Intentionally omitted
10.10 Option and Collaborative Research Agreement dated June 10, 1991
regarding certain compounds for potential treatment of muscular
dystrophies or myasthenia gravis between the Company and CepTor
Corporation(1)
10.11 Intentionally omitted
10.12 Intentionally omitted
10.13 Form of Employee Invention and Confidential Information Agreement(1)
10.14 Industrial Real Estate Lease(1)
10.15 Intentionally omitted
10.16 Master Lease Agreement dated June 22, 1993 with Aberlyn Capital
Management Limited Partnership ("ACM") and related Agreements to Issue
Warrant with Warrants issued to ACM and Aberlyn Holding Company, Inc.(1)
10.17 La Jolla Pharmaceutical Company 1989 Incentive Stock Option Plan and
1989 Nonstatutory Stock Option Plan(1)*
10.18 Form of Stock Option Agreement under the 1989 Nonstatutory Stock Option
Plan(1)
10.19 Amended La Jolla Pharmaceutical Company 1994 Incentive Stock Option
Plan*
10.20 Intentionally omitted
10.21 Letter of Agreement dated June 7, 1993 between the Company and Vector
Securities International regarding Vector's engagement as financial
advisor to the Company with respect to potential corporate strategic
alliances(1)
10.22 Intentionally omitted
10.23 Intentionally omitted
34
35
Exhibit
Number Description
- ------- -----------
10.24 Intentionally omitted
10.25 Second Amendment to Lease dated June 30, 1994 by and between the Company
and BRE Properties, Inc.(2)
10.26 Intentionally omitted
10.27 Third Amendment to Lease dated January 26, 1995 by and between the
Company and BRE Properties, Inc.(4)
10.28 Intentionally omitted
10.29 Master Lease Agreement dated September 13, 1995 by and between the
Company and Comdisco Electronics Group(5)
10.30 Intentionally omitted
10.31 Agreement dated September 22, 1995 between the Company and Joseph
Stemler regarding option vesting(6)*
10.32 Consulting Agreement dated January 1, 1996 between the Company and
Joseph Stemler(6)*
10.33 Building Lease Agreement effective November 1, 1996 by and between the
Company and WCB II-S BRD Limited Partnership(7)
10.34 Master Lease Agreement dated December 20, 1996 by and between the
Company and Transamerica Business Credit Corporation(9)
10.35 License and Supply Agreement dated December 23, 1996 by and between the
Company and Abbott Laboratories(8), (9)
10.36 Stock Purchase Agreement dated December 23, 1996 by and between the
Company and Abbott Laboratories(9)
10.37 Option Amendment Agreement dated November 3, 1997 between the Company
and Peter G. Ulrich(11)*
10.38 Master Lease Agreement No. 2 dated June 23, 1998 by and between the
Company and Transamerica Business Credit Corporation(12)
10.39 William J. Welch Employment Agreement and Attachment A*
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
- --------------
* This exhibit is a management contract or compensatory plan or
arrangement.
(1) Previously filed with the Company's Registration Statement on Form S-1
(No. 33-76480) as declared effective by the Securities and Exchange
Commission on June 3, 1994.
(2) Previously filed with the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1994 and incorporated by reference herein.
(3) Previously filed with the Company's annual report on Form 10-K for the
fiscal year ended December 31, 1994 and incorporated by reference
herein.
(4) Previously filed with the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1995 and incorporated by reference herein.
(5) Previously filed with the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1995 and incorporated by reference
herein.
(6) Previously filed with the Company's annual report on Form 10-K for the
fiscal year ended December 31, 1995 and incorporated by reference
herein.
(7) Previously filed with the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1996 and incorporated by reference
herein.
(8) Portions of the Exhibit 10.35 have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment under Rule 24b-2 of the Securities Exchange Act
of 1934.
35
36
(9) Previously filed with the Company's annual report on Form 10-K for the
fiscal year ended December 31, 1996 and incorporated by reference
herein.
(10) Previously filed with the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1997 and incorporated by reference herein.
(11) Previously filed with the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 1997 and incorporated by reference
herein.
(12) Previously filed with the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated by reference herein.
(13) Previously filed with the Company's Registration Statement on Form 8-A
(No. 000-24274) as filed with the Securities and Exchange Commission on
December 4, 1998.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1998, the Company
filed a Current Report on Form 8-K dated November 19,
1998 reporting that the Company adopted a stockholder
rights plan.
36
37
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
La Jolla Pharmaceutical Company
We have audited the accompanying balance sheets of La Jolla Pharmaceutical
Company as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of La Jolla Pharmaceutical Company
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 28, 1999
F-1
38
La Jolla Pharmaceutical Company
Balance Sheets
(In thousands, except share and per share data)
DECEMBER 31,
-----------------------
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 11,176 $ 11,999
Short-term investments 12,174 14,979
Other current assets 517 658
-------- --------
Total current assets 23,867 27,636
Property and equipment, net 659 946
Patent costs and other assets, net 1,289 1,064
-------- --------
$ 25,815 $ 29,646
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,254 $ 1,256
Accrued expenses 575 880
Accrued payroll and related expenses 355 377
Deferred revenue --related party 1,769 1,277
Current portion of obligations under capital leases 3 141
-------- --------
Total current liabilities 3,956 3,931
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 8,000,000 shares authorized, no
shares issued or outstanding -- --
Common stock, $.01 par value; 32,000,000 shares authorized,
20,106,303 and 18,159,807 shares issued and outstanding at December 31,
1998 and 1997, respectively 201 182
Additional paid-in capital 84,276 80,304
Deferred compensation -- (30)
Accumulated deficit (62,618) (54,741)
-------- --------
Total stockholders' equity 21,859 25,715
-------- --------
$ 25,815 $ 29,646
======== ========
See accompanying notes.
F-2
39
La Jolla Pharmaceutical Company
Statements of Operations
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
Revenues:
Revenue from collaborative agreement--related party $ 8,600 $ 9,860 $ 4,000
Expenses:
Research and development 14,627 14,676 11,663
General and administrative 3,076 2,937 2,920
-------- -------- --------
Total expenses 17,703 17,613 14,583
-------- -------- --------
Loss from operations (9,103) (7,753) (10,583)
Interest expense (6) (56) (183)
Interest income 1,232 1,441 1,170
-------- -------- --------
Net loss $ (7,877) $ (6,368) $ (9,596)
======== ======== ========
Basic and diluted net loss per share $ (0.42) $ (0.36) $ (0.63)
======== ======== ========
Shares used in computing basic and diluted net loss per share 18,649 17,547 15,150
======== ======== ========
See accompanying notes.
F-3
40
La Jolla Pharmaceutical Company
Statements of Stockholders' Equity
For the Years Ended December 31, 1996, 1997 and 1998
NOTE
(In thousands) COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
----------------- PAID-IN FROM DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDER COMPENSATION DEFICIT EQUITY
------ ------ ---------- ----------- ------------ -------- ------------
Balance at December 31, 1995 14,047 $ 140 $ 62,647 $(14) $(428) $(38,777) $ 23,568
Issuance of common stock upon
additional public offering,
net of issuance costs 2,140 21 9,753 -- -- -- 9,774
Issuance of common stock 1,000 10 3,790 -- -- -- 3,800
Issuance of common stock under
Employee Stock Purchase Plan 27 1 97 -- -- -- 98
Exercise of stock options and warrants 65 1 85 -- -- -- 86
Payment on note receivable -- -- -- 14 -- -- 14
Amortization of deferred compensation -- -- -- -- 194 -- 194
Adjustment to deferred compensation
for terminations -- -- (65) -- 65 -- --
Net loss -- -- -- -- -- (9,596) (9,596)
------ ------ -------- ---- ----- -------- --------
Balance at December 31, 1996 17,279 173 76,307 -- (169) (48,373) 27,938
Issuance of common stock 831 8 3,852 -- -- -- 3,860
Issuance of common stock under Employee
Stock Purchase Plan 41 1 150 -- -- -- 151
Exercise of stock options 9 -- 11 -- -- -- 11
Amortization of deferred compensation -- -- -- -- 123 -- 123
Adjustment to deferred compensation
for terminations -- -- (16) -- 16 -- --
Net loss -- -- -- -- -- (6,368) (6,368)
------ ------ -------- ---- ----- -------- --------
Balance at December 31, 1997 18,160 182 80,304 -- (30) (54,741) 25,715
Issuance of common stock 1,538 15 3,767 -- -- -- 3,782
Issuance of common stock under Employee
Stock Purchase Plan 43 -- 128 -- -- -- 128
Exercise of stock options 365 4 85 -- -- -- 89
Amortization of deferred compensation -- -- -- -- 22 -- 22
Adjustment to deferred compensation
for terminations -- -- (8) -- 8 -- --
Net loss -- -- -- -- -- (7,877) (7,877)
------ ------ -------- ---- ----- -------- --------
Balance at December 31, 1998 20,106 $ 201 $ 84,276 $ -- $ -- $(62,618) $ 21,859
====== ====== ======== ==== ===== ======== ========
See accompanying notes
F-4
41
La Jolla Pharmaceutical Company
Statements of Cash Flows
(In thousands)
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
OPERATING ACTIVITIES
Net loss $ (7,877) $ (6,368) $ (9,596)
Adjustments to reconcile net loss to net cash used for operating activities:
Write-off of patent costs -- 7 89
Write-off of property and equipment 8 76 --
Depreciation and amortization 367 642 754
Deferred compensation amortization 22 123 194
Changes in operating assets and liabilities:
Receivable -- related party -- 4,000 (4,000)
Other current assets 141 434 (1,020)
Accounts payable and accrued expenses (307) (509) 1,819
Accrued payroll and related expenses (22) 83 (16)
Deferred revenue -- related party 492 1,277 --
-------- -------- --------
Net cash used for operating activities (7,176) (235) (11,776)
INVESTING ACTIVITIES
Purchases of short-term investments (20,576) (21,842) (22,649)
Sales of short-term investments 2,500 5,493 5,028
Maturities of short-term investments 20,881 18,991 3,847
Additions to property and equipment (55) (124) (161)
Increase in patent costs and other assets (258) (250) (391)
-------- -------- --------
Net cash provided by (used for) investing activities 2,492 2,268 (14,326)
FINANCING ACTIVITIES
Payment on note receivable from stockholder -- -- 14
Net proceeds from issuance of common stock 217 162 9,958
Net proceeds from issuance of common stock to related party 3,782 3,860 3,800
Payments on obligations under capital leases (138) (669) (861)
-------- -------- --------
Net cash provided by financing activities 3,861 3,353 12,911
-------- -------- --------
(Decrease) increase in cash and cash equivalents (823) 5,386 (13,191)
Cash and cash equivalents at beginning of period 11,999 6,613 19,804
-------- -------- --------
Cash and cash equivalents at end of period $ 11,176 $ 11,999 $ 6,613
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 6 $ 56 $ 183
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Adjustment to deferred compensation for terminations $ 8 $ 16 $ 65
======== ======== ========
See accompanying notes.
F-5
42
La Jolla Pharmaceutical Company
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
La Jolla Pharmaceutical Company (the "Company") is a biopharmaceutical company
focused on the research and development of highly specific therapeutics for the
treatment of certain life-threatening antibody-mediated diseases. These
diseases, including autoimmune conditions such as systemic lupus erythematosus
("lupus") and antibody-mediated stroke, are caused by abnormal B cell production
of antibodies that attack healthy tissues. In the fourth quarter of 1996, the
Company initiated a Phase II/III clinical trial for its lupus drug candidate,
LJP 394.
All of the Company's revenues to date have been derived from its recent
collaborative agreement with Abbott Laboratories ("Abbott"), a related party,
signed in December 1996 and its former collaborative agreement with Leo
Pharmaceutical Products Ltd., a Danish company ("Leo Pharmaceutical") (See Note
2). As part of its planned business operations, the Company pursues
collaborations with pharmaceutical companies in an effort to access their
research, drug development, manufacturing and financial resources. Prior to
generating product revenues, the Company must complete the development of its
products, including several years of clinical testing, and receive regulatory
approvals prior to selling these products commercially. There can be no
assurance that the Company's product development efforts with respect to LJP 394
or any other drug candidate will be successfully completed, that required
regulatory approvals will be obtained, or that any product, if introduced, will
be successfully marketed or achieve commercial acceptance. In addition, there
can be no assurance that the Company can successfully manufacture and market any
such products at prices that would permit the Company to operate profitably.
The Company actively seeks additional financing to fund its research and
development efforts and commercialize its technologies. There is no assurance
such financing will be available to the Company when required or that such
financing would be available under favorable terms.
The Company believes that patents and other proprietary rights are important to
its business. The Company's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to the development of its business. The patent positions of
biotechnology firms, including the Company, are uncertain and involve complex
legal and factual questions for which important legal principles are largely
unresolved. There can be no assurance that any additional patents will be
issued, or that the scope of any patent protection will be sufficient, or that
any current or future issued patent will be held valid if subsequently
challenged.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the financial statements. Actual results could differ
from those estimates.
F-6
43
La Jolla Pharmaceutical Company
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform with the 1998 presentation.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash and highly liquid investments which
include debt securities with remaining maturities when acquired of three months
or less and are stated at market. Short-term investments mainly consist of debt
securities with maturities greater than three months. Management has classified
the Company's cash equivalents and short-term investments as available-for-sale
securities in the accompanying financial statements. Available-for-sale
securities are stated at fair value, with unrealized gains and losses reported
as a separate component of stockholders' equity. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. The cost of securities sold is based
on the specific identification method. Interest and dividends on securities
classified as available-for-sale are included in interest income.
CONCENTRATION OF RISK
Cash, cash equivalents and short-term investments are financial instruments
which potentially subject the Company to concentrations of credit risk. The
Company deposits its cash in financial institutions. At times, such deposits may
be in excess of insured limits. The Company invests its excess cash in United
States Government securities and debt instruments of financial institutions and
corporations with strong credit ratings. The Company has established guidelines
relative to diversification of its cash investments and their maturities in an
effort to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
To date, the Company has not experienced any losses on its cash, cash
equivalents and short-term investments.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS 133 is effective for years beginning after June 15,
1999. The adoption of this statement is not expected to have a significant
effect on the Company's financial statements.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the assets (primarily five years).
Leasehold improvements and equipment under capital leases are stated at cost and
amortized on a straignt-line basis over the shorter of the estimated useful life
or the lease term.
F-7
44
La Jolla Pharmaceutical Company
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment is comprised of the following (in thousands):
DECEMBER 31,
1998 1997
------- -------
Laboratory equipment $ 2,972 $ 2,943
Computer equipment 291 263
Furniture and fixtures 134 111
Leasehold improvements 718 751
------- -------
4,115 4,068
Less: Accumulated depreciation and amortization (3,456) (3,122)
------- -------
$ 659 $ 946
======= =======
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. The Company also records the assets to be
disposed of at the lower of their carrying amount or fair value less cost to
sell. To date, the Company has not experienced any impairment losses on its
long-lived assets used in operations.
PATENTS
The Company has filed several patent applications with the United States Patent
and Trademark Office and in foreign countries. Legal costs and expenses incurred
in connection with pending patent applications have been deferred. Costs related
to successful patent applications are amortized using the straight-line method
over the lesser of the remaining useful life of the related technology or the
remaining patent life, commencing on the date the patent is issued. Accumulated
amortization at December 31, 1998 and 1997 was $120,000 and $87,000,
respectively. Deferred costs related to patent applications are charged to
operations at the time a determination is made not to pursue such applications.
STOCK OPTIONS
As allowed under Statement of Financial Accounting Standard No. 123, "Accounting
and Disclosure of Stock-Based Compensation" ("SFAS 123"), the Company has
elected to continue to account for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. The Company generally grants
stock options for a fixed number of shares to employees with an exercise price
equal to the fair value of the shares at the date of grant and, under APB 25,
recognizes no compensation expense for such stock option grants.
F-8
45
La Jolla Pharmaceutical Company
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from collaborative agreements typically consists of nonrefundable
up-front fees, ongoing research and development funding and milestone, royalty
and other payments. Revenue from non-refundable up-front fees is recognized upon
signing of the agreement. Revenue from ongoing research and development funding
is recorded as the expenses are incurred. Revenue from milestone, royalty and
other payments will be recognized as earned. Payments received in advance under
these agreements are recorded as deferred revenue until earned.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted-average
number of common shares outstanding during the periods. In February 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standard No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the
previously calculated primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options and warrants.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. The adoption of this statement did not have a
material impact as the Company has incurred a net loss for all three years
presented and therefore stock options and warrants are not included in the
computation of net loss per share since their effect is anti-dilutive.
COMPREHENSIVE LOSS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income (Loss)" ("SFAS 130"). SFAS 130
requires that all components of comprehensive income (loss), including net
income (loss), be reported in the financial statements in the period in which
they are recognized. Comprehensive income (loss) is defined as the change in
equity during the period from transactions and other events and circumstances
from non-owner sources. Net income (loss) and other comprehensive income (loss),
including unrealized gains and losses on investments, shall be reported, net of
their related tax effect, to arrive at comprehensive income (loss). The
Company's comprehensive net loss and net loss are the same and therefore the
adoption of SFAS 130 did not have an impact on the financial statements.
SEGMENT INFORMATION
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 131, "Segment Information" ("SFAS 131"). SFAS 131 redefines
segments and requires companies to report financial and descriptive information
about their operating segments. The Company has determined that it operates in
one business segment and therefore the adoption of SFAS 131 did not affect the
Company's financial statements.
F-9
46
La Jolla Pharmaceutical Company
Notes to Financial Statements
2. COLLABORATIVE AGREEMENTS
In December 1996, the Company entered into a collaborative agreement with
Abbott, a diversified health-care company. Under this agreement, in exchange for
an exclusive, worldwide license to market and sell LJP 394, Abbott agreed to pay
an initial license fee of $4,000,000 upon signing, and agreed to fund the
development of the Company's lupus drug candidate, LJP 394, in accordance with a
mutually agreed upon budget, and to make certain payments to the Company upon
the attainment of specific milestones. In addition, Abbott has agreed to make
royalty and sales incentive payments to the Company on sales of LJP 394, while
the Company retains worldwide manufacturing rights and ownership rights of all
of its patents relating to the drug. Under a separate stock purchase agreement,
Abbott also purchased common stock of the Company in December 1996, September
1997 and October 1998 for an aggregate purchase price of $4,000,000 on each
date. Both Abbott and the Company have the right to terminate the collaborative
agreement under certain circumstances.
Under the collaborative agreement with Abbott, the Company incurred research and
development costs of approximately $8,600,000 and $9,860,000 during the years
ended December 31, 1998 and 1997, respectively, for the development of LJP 394.
In 1998, the Company received $9,077,000 from Abbott for the development of LJP
394, of which $8,600,000 was recorded as revenue. In 1997, the Company received
$11,137,000 from Abbott for the development of LJP 394, of which $9,860,000 was
recorded as revenue.
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of the estimated fair value of available-for-sale
securities (in thousands):
DECEMBER 31,
1998 1997
------- -------
Money market accounts $ 1,117 $ 8,424
United States corporate debt securities 16,181 9,202
Government-asset-backed securities 5,000 7,611
United States Treasury securities and obligations of the United States
government agencies -- 249
------- -------
$22,298 $25,486
======= =======
As of December 31, 1998 and 1997, the difference between cost and estimated fair
value of available-for-sale securities was not significant. Included in cash and
cash equivalents at December 31, 1998 and 1997 were $10,124,000 and $10,507,000,
respectively, of securities classified as available-for-sale. As of December 31,
1998, available-for-sale securities of $22,298,000 are due in one year or less.
4. COMMITMENTS
LEASES
In July 1992, the Company entered into a non-cancellable operating lease for the
rental of its office and research and development facilities, which expires in
July 2004. The lease is subject to an escalation clause that provides for annual
increases based on the Consumer Price Index. The lease also contains
F-10
47
La Jolla Pharmaceutical Company
Notes to Financial Statements
4. COMMITMENTS (CONTINUED)
an option to extend the lease term for an additional five years and a one-time
cancellation option effective any time after August 1, 1998 with the payment of
certain penalties. The lease also contains a construction allowance in the
amount of $1,434,000 for approved tenant improvements to the facility.
In October 1996, the Company entered into a non-cancellable operating lease for
the rental of office and research and development facilities, which expires in
October 2001. The lease contains a provision for scheduled annual rent increases
and an option to extend the lease term for an additional five years. The lease
also contains a construction allowance in the amount of $168,000 for approved
tenant improvements to the facility.
The Company leases certain equipment under a capital lease. The total amount of
equipment originally financed under this capital lease was $3,188,000, of which
approximately $196,000 of equipment costs was remaining under this capital lease
as of December 31, 1998.
The Company leases certain other equipment and leasehold improvements under
operating leases. As of December 31, 1998, the total amount of equipment and
leasehold improvements financed under these operating leases was $5,875,000.
Annual future minimum lease payments as of December 31, 1998, which include
$1,030,000 for the effect of exercising the facility operating lease
cancellation option, are as follows (in thousands):
OPERATING CAPITAL
YEARS ENDED DECEMBER 31, LEASES LEASES
- ------------------------ --------- ------
1999 $ 2,883 $ 3
2000 1,867 --
2001 1,084 --
2002 72 --
2003 -- --
------- ---
Total $ 5,906 3
=======
Less amount representing interest --
------
Present value of net minimum lease payments 3
Less current portion (3)
------
Noncurrent portion of capital lease obligations $ --
======
Rent expense under all operating leases totaled $2,179,000, $1,853,000, and
$952,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Equipment acquired under capital leases included in property and equipment
totaled $44,000 and $290,000 (net of accumulated amortization of $152,000 and
$666,000) at December 31, 1998 and 1997, respectively.
F-11
48
La Jolla Pharmaceutical Company
Notes to Financial Statements
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
As of December 31, 1998, the Company is authorized to issue 8,000,000 shares of
preferred stock with a par value of $0.01 per share, in one or more series.
The Board of Directors has designated 75,000 of preferred stock as nonredeemable
Series A Junior Participating Preferred Stock ("Series A Preferred Stock"). In
the event of liquidation, each share of Series A Preferred Stock is entitled to
receive a preferential liquidation payment of $1,000 per share plus the amount
of accrued unpaid dividends. The Series A Preferred Stock is subject to certain
anti-dilution adjustments, and the holder of each share is entitled to 1,000
votes, subject to adjustments. Cumulative quarterly dividends of the greater of
$0.25 or, subject to certain adjustments, 1,000 times any dividend declared on
shares of common stock, are payable when, as and if declared by the Board of
Directors, from funds legally available for this purpose.
COMMON STOCK
In October 1998, the Company issued an additional 1,538,402 shares of common
stock to Abbott for net proceeds of $3,782,000. (See Note 2.)
WARRANTS
In connection with the Company's initial public offering ("IPO") in June 1994,
including the conversion of the principal and accrued interest on stockholder
bridge notes, the Company issued 3,823,517 redeemable warrants. The redeemable
warrant holders are entitled to purchase one-half of one share of common stock
for each warrant at an exercise price of $3.00 per one-half share. The warrants
are exercisable at any time until June 3, 1999. The Company is entitled to
redeem the warrants on not less than 30 days written notice at $0.05 per warrant
if the average closing bid price of the common stock exceeds 150% of the
then-effective warrant exercise price for one share of common stock, over a
period of 20 consecutive trading days, ending within 15 days of the date of
notice of redemption. At December 31, 1998, 3,822,617 redeemable warrants were
outstanding.
The terms of the shareholder bridge notes also provided for the granting of
additional warrants to the holders. Those additional warrants permit the holders
to purchase 166,697 shares of common stock at $5.00 per share until June 3,
1999. At December 31, 1998, warrants to purchase 154,460 shares of common stock
were outstanding.
Also in connection with the IPO, the Underwriter was granted the option to
purchase up to 260,000 additional shares of common stock and 260,000 redeemable
warrants to purchase one-half of one share of common stock at an exercise price
of $3.60 per one-half share. The purchase option expires on June 3, 1999. At
December 31, 1998, warrants to purchase 130,000 shares of common stock were
outstanding.
F-12
49
La Jolla Pharmaceutical Company
Notes to Financial Statements
5. STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1998, 4,237,077 warrants were outstanding and 2,195,769
shares of common stock are reserved for issuance upon exercise of warrants.
STOCK OPTION PLANS
In May 1989, the Company adopted the 1989 Stock Option Plan and the 1989
Nonstatutory Stock Option Plan (the "1989 Plan"), under which 904,000 shares of
common stock have been authorized for issuance upon exercise of options granted
by the Company.
In June 1994, the Company adopted the 1994 Stock Incentive Plan (the "1994
Plan"), under which 1,750,000 shares of common stock have been authorized for
issuance upon exercise of options granted by the Company. The 1994 Plan provides
for the grant of incentive and non-qualified stock options, as well as other
stock-based awards, to employees, consultants and advisors of the Company with
various vesting periods as determined by the compensation committee, as well as
automatic fixed grants to non-employee directors of the Company.
A summary of the Company's stock option activity, and related data follows:
OUTSTANDING OPTIONS
--------------------------
OPTIONS
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE
-------- --------- -----------
Balance at December 31, 1995 133,310 1,462,038 $1.00-$5.25
Additional shares authorized 500,000 -- --
Granted (426,750) 426,750 $3.75-$8.31
Exercised -- (52,722) $1.00-$5.03
Cancelled 120,982 (120,982) $1.00-$7.88
-------- ---------
Balance at December 31, 1996 327,542 1,715,084 $1.00-$8.31
Additional shares authorized 500,000 -- --
Granted (312,700) 312,700 $4.00-$5.38
Exercised -- (8,620) $1.00-$4.31
Cancelled 56,101 (56,101) $1.00-$7.88
-------- ---------
Balance at December 31, 1997 570,943 1,963,063 $1.00-$8.31
Granted (723,800) 723,800 $2.41-$4.38
Exercised -- (364,903) $1.00-$3.75
Cancelled 388,192 (388,192) $1.00-$7.88
------- ---------
Balance at December 31, 1998 235,335 1,933,768 $1.00-$8.31
======= =========
Included in the table above are 100,000 options to purchase common stock at an
exercise price of $3.63 per share that were granted in December 1998 and are
subject to stockholder approval at the next annual stockholder meeting on May
13, 1999.
F-13
50
La Jolla Pharmaceutical Company
Notes to Financial Statements
5. STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31,
1998 1997 1996
------------------------- ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ---------- --------- ----------- --------- --------
Outstanding - beginning of year 1,963,063 $3.25 1,715,084 $3.00 1,462,038 $2.40
Granted 723,800 $3.54 312,700 $4.82 426,750 $4.91
Exercised (364,903) $1.06 (8,620) $1.38 (52,722) $1.58
Forfeited (388,192) $3.37 (56,101) $4.55 (120,982) $2.98
--------- --------- ---------
Outstanding - end of year 1,933,768 $3.75 1,963,063 $3.25 1,715,084 $3.00
========= ========= =========
Exercisable at end of year 879,502 $3.55 1,171,376 $2.43 931,465 $2.07
Weighted-average fair value of
options granted during the year $1.62 $2.72 $3.08
Exercise prices and weighted-average remaining contractual lives for the options
outstanding as of December 31, 1998 follow:
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
OPTIONS RANGE OF CONTRACTUAL EXERCISE OPTIONS EXERCISE
OUTSTANDING EXERCISE PRICES LIFE PRICE EXERCISABLE PRICE
- ----------- --------------- ----------- --------- ----------- ----------
421,275 $1.00 - $3.50 6.03 $1.74 302,499 $1.36
547,400 $3.63 9.92 $3.63 33,335 $3.63
526,645 $3.75 - $4.69 7.59 $4.16 269,180 $4.14
438,448 $4.75 - $8.31 6.97 $5.37 274,488 $5.39
- --------- -------
1,933,768 $1.00 - $8.31 7.77 $3.75 879,502 $3.55
========= =======
At December 31, 1998, the Company has reserved 2,162,297 shares of common stock
for future issuance under the 1989 and 1994 Plans.
For certain options granted, the Company recognizes as compensation expense the
excess of the deemed value for accounting purposes of the common stock issuable
upon exercise over the aggregate exercise price of such options. Compensation
expense is amortized ratably over the vesting period of each option.
F-14
51
La Jolla Pharmaceutical Company
Notes to Financial Statements
5. STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Effective August 1, 1995, the Company adopted the 1995 Employee Stock Purchase
Plan (the "Purchase Plan") which was amended in July 1996. Under the amended
Purchase Plan, a total of 300,000 shares of common stock are reserved for sale
to full-time employees with six months of service. Employees may purchase common
stock under the Purchase Plan every six months (up to but not exceeding 10% of
each employee's earnings) over the offering period at 85% of the fair market
value of the common stock at certain specified dates. The offering period may
not exceed 24 months. For the year ended December 31, 1998, 43,191 shares of
common stock had been issued under the Purchase Plan (40,840 shares for the year
ended December 31, 1997). To date, 111,689 shares of common stock have been
issued under the Purchase Plan and 188,311 shares of common stock are available
for issuance.
YEARS ENDED DECEMBER 31,
1998 1997 1996
----- ----- -----
Weighted-average fair value of employee
stock purchase plan purchases $1.54 $1.87 $1.83
STOCK-BASED COMPENSATION
Pro forma information regarding net loss and net loss per share is required by
SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock plans granted after December 31,
1994 under the fair value method of that statement. The fair value was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998, 1997 and 1996, respectively:
risk-free interest rate of 4.8%, 5.5% and 6.0%; volatility factor of the
expected market price of the Company's common stock of 0.60, 0.60 and 0.70; and
a dividend yield of 0% and a weighted-average expected life of five years for
all three years presented.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
F-15
52
La Jolla Pharmaceutical Company
Notes to Financial Statements
5. STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for net loss per share
information):
YEARS ENDED DECEMBER 31,
1998 1997 1996
------- ------- -------
Pro forma net loss $(8,500) $(6,873) $(9,970)
======= ======= =======
Pro forma basic and diluted net loss per share $(0.46) $(0.39) $(0.66)
======= ======= =======
The effects of applying SFAS 123 for either recognizing compensation expense or
providing pro forma disclosures are not likely to be representative of the
effects on reported net loss for future years.
STOCKHOLDER RIGHTS PLAN
The Company has adopted a Stockholder Rights Plan (the "Rights Plan"). The
Rights Plan provides for a dividend of one right (a "Right") to purchase
fractions of shares of the Company's Series A Preferred Stock for each share of
the Company's common stock. Under certain conditions involving an acquisition by
any person or group of 15% or more of the common stock, the Rights permit the
holders (other than the 15% holder) to purchase the Company's common stock at a
50% discount upon payment of an exercise price of $30 per Right. In addition, in
the event of certain business combinations, the Rights permit the purchase of
the common stock of an acquirer at a 50% discount. Under certain conditions, the
Rights may be redeemed by the Board of Directors in whole, but not in part, at a
price of $.001 per Right. The Rights have no voting privileges and are attached
to and automatically trade with the Company's common stock. The Rights expire on
December 2, 2008.
6. 401(k) PLAN
The Company has established a 401(k) defined contribution retirement plan (the
"401(k) Plan"), which was amended in July 1997, to cover all employees with six
months of service. The 401(k) Plan provides for voluntary employee contributions
up to 20% of annual compensation (as defined). The Company does not match
employee contributions or otherwise contribute to the 401(k) Plan.
7. INCOME TAXES
At December 31, 1998, the Company had federal and California income tax net
operating loss carryforwards of approximately $59,600,000 and $4,400,000,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California income tax purposes and the 50% percent
limitation on California loss carryforwards. The Company also had federal and
California research tax credit carryforwards of $2,570,000 and $1,190,000,
respectively. The federal net operating loss and tax credit carryforwards will
F-16
53
La Jolla Pharmaceutical Company
Notes to Financial Statements
7. INCOME TAXES (CONTINUED)
begin to expire in 2004 unless previously utilized. A portion of the California
net operating loss carryforwards totaling $520,000 expired in 1998, and will
continue to expire in 1999.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the
Company's net operating loss and credit carryforwards may be limited if a
cumulative change in ownership of more than 50% occurs within a three-year
period.
Significant components of the Company's deferred tax assets are shown below (in
thousands):
DECEMBER 31,
1998 1997
------- -------
Deferred tax assets:
Net operating loss carryforwards $21,100 $18,000
Research and development credits 3,300 3,000
Capitalized research and development 2,800 3,000
------- -------
Total deferred tax assets 27,200 24,000
Valuation allowance for deferred tax assets (27,200) (24,000)
------- -------
Net deferred tax assets $ -- $ --
======= =======
A valuation allowance of $27,200,000 has been recognized to offset the deferred
tax assets as realization of such assets is uncertain.
F-17
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
LA JOLLA PHARMACEUTICAL COMPANY
By: /s/ Steven B. Engle
--------------------------------------
March 29, 1999 Name: Steven B. Engle
Title: Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Steven B. Engle Chairman of the Board and Chief March 29, 1999
- ----------------------------------- Executive Officer
Steven B. Engle (PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR)
/s/ Wood C. Erwin Chief Financial Officer and March 29, 1999
- ---------------------------------- Secretary
Wood C. Erwin (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/s/ Joseph Stemler Director March 29, 1999
- ----------------------------------
Joseph Stemler
/s/ Thomas H. Adams Director March 29, 1999
- ----------------------------------
Thomas H. Adams, Ph.D.
/s/ William E. Engbers Director March 29, 1999
- ----------------------------------
William E. Engbers
/s/ Robert A. Fildes Director March 29, 1999
- ----------------------------------
Robert A Fildes, Ph.D.
/s/ W. Leigh Thompson Director March 29, 1999
- ----------------------------------
W. Leigh Thompson, M.D., Ph.D.
37
55
La Jolla Pharmaceutical Company
Exhibit Index
Exhibit
Number Description
------- -----------
3.2 Amended and Restated Bylaws of the Company
10.19 Amended La Jolla Pharmaceutical Company 1994 Incentive Stock
Option Plan
10.39 William J. Welch Employment Agreement and Attachment A
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
38