Filed Pursuant to Rule 424(b)(3)
Registration No. 333-43050
PROSPECTUS
1,161,781 SHARES
[GRAPHIC]
INCARA PHARMACEUTICALS CORPORATION
COMMON STOCK
-------------
The stockholders of Incara Pharmaceuticals Corporation listed in this
prospectus are offering for sale and may sell from time to time some or all of
the 1,161,781 shares of our common stock under this prospectus. We will not
receive any proceeds from the sale of the shares. However, we will pay
substantially all of the expenses of this offering, estimated at approximately
$47,000. The selling stockholders may offer the shares through public or private
transactions, on or off the Nasdaq National Market, at prevailing market prices
or at privately negotiated prices.
Our common stock is traded on the Nasdaq National Market under the
symbol "INCR." On September 11, 2000, the last sale price of our common stock on
the Nasdaq National Market was $3.875 per share.
Our principal executive offices are located at 3200 East Highway 54,
Cape Fear Building, Suite 300, P.O. Box 14287, Research Triangle Park, North
Carolina 27709, Attention: Investor Relations. Our telephone number is (919)
558-8688.
Investing in our common stock involves risks. See "Risk Factors"
beginning on page 4.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OUR SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. IT IS ILLEGAL FOR ANYONE TO TELL YOU OTHERWISE.
The date of this prospectus is September 14, 2000.
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell and seeking offers to
buy shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of the common stock. In this prospectus, "Incara," "we,"
"us" and "our" refer to Incara Pharmaceuticals Corporation and its wholly owned
subsidiaries, Aeolus Pharmaceuticals, Inc., a Delaware corporation ("Aeolus")
and Renaissance Cell Technologies, Inc., a Delaware corporation ("Renaissance").
Table of Contents
Page Page
Prospectus Summary..............................3 Business.........................................20
Risk Factors....................................4 Management.......................................32
Forward-Looking Statements.....................10 Certain Relationship and Related Transactions....37
Use of Proceeds................................10 Principal Stockholders...........................38
Dividend Policy................................10 Description of Capital Stock.....................39
Market for Common Stock........................11 Selling Stockholders.............................42
Selected Financial Data........................12 Plan of Distribution.............................42
Unaudited Pro Forma Consolidated Financial Legal Matters....................................43
Information..................................13 Experts..........................................43
Management's Discussion and Analysis Where You Can Find More Information..............44
of Financial Condition and Results of Index to Consolidated Financial Statements.......F-1
Operations...................................15
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus, including "Risk Factors" and
the financial statements, carefully before making an investment decision.
Incara Pharmaceuticals Corporation
Our Business
Incara Pharmaceuticals Corporation develops innovative pharmaceutical
products and treatments for major diseases afflicting large patient populations.
We are currently developing products in three areas that represent a diversified
portfolio of potentially breakthrough therapeutics. Each of these areas is
currently underserved in terms of effective treatments. The three therapeutics
under development by the Company are as follows:
o An ultra-low molecular weight heparin, as a treatment for
inflammatory bowel disease, or IBD, a debilitating disease of the
intestine that includes ulcerative colitis and Crohn's disease.
Approximately two million patients suffer from IBD in the United
States and Europe combined. Ulcerative colitis can be so debilitating
that up to 20% of patients opt for removal of their colon as a cure.
There is no cure for the equally debilitating Crohn's disease.
o Liver precursor cell transplant, as a treatment for liver failure.
Currently, there are an estimated 300,000 hospitalizations for
chronic liver disease each year in the United States, 30,000 of which
result in death. There are, however, only approximately 4,500 donor
livers available annually in the United States and over 16,000 people
on the liver transplant waiting list. The number of patients with
severe cirrhosis who could become candidates for a transplant exceeds
100,000. Additionally, the liver precursor cell technology can be
used to determine gene expression patterns at various stages of the
liver lineage, providing genomic information for drug discovery.
o Novel small molecule catalytic antioxidants, as a treatment for
disorders such as stroke and chronic bronchitis. An estimated 500,000
to 700,000 individuals suffer strokes in the United States each year,
with estimated direct costs of treating stroke exceeding in the
aggregate of $40 billion annually.
Our current programs reflect the business strategy that we have pursued
over the past four years of building a diversified portfolio of innovative
therapeutic products by advancing basic and clinical research discoveries from
leading academic research centers through the clinical development process.
These institutions include the University of North Carolina (partner for liver
precursor cells), and the Duke University Medical Center and the National Jewish
Medical and Research Center (partners for antioxidants). We choose programs for
our portfolio that address large potential markets and where we can evaluate the
likelihood of clinical efficacy for a reasonable expenditure of time and money.
We add value to these programs by applying the significant expertise of our
management and Board of Directors in preclinical and clinical drug development
and business management to efficiently bring promising therapeutics to clinical
proof and ultimately to the marketplace.
Our strategy for bringing promising therapeutics to the market includes
the selection of collaborative partners for their capabilities outside our areas
of focus, particularly for manufacturing, sales and marketing functions. We
believe that such collaborative agreements not only will provide funding and
assist with the commercialization of our therapeutics, but often can validate
the commercial viability of the programs and allow the Company to maintain its
low fixed cost structure. We generally intend to wait until we begin to receive
clinical indications of efficacy before entering into such collaborations, thus
allowing us to negotiate more favorable terms.
Our History
Incara was incorporated in Delaware as Intercardia, Inc. in 1994. In
July 1999 Incara changed its name to Incara Pharmaceuticals Corporation.
Corporate Information
Incara's executive offices are located at 3200 East Highway 54, Cape
Fear Building, Suite 300, Research Triangle Park, North Carolina 27709, and our
telephone number at that location is (919) 558-8688. Our primary Web site is
located at www.incara.com. Information on our Web site is not part of this
prospectus.
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"Incara" and our logo are registered trademarks. Each other trademark,
trade name or service mark appearing in this prospectus belongs to its holder.
In addition, www.incara.com is a domain name that is owned by Incara.
The Offering
Shares of common stock offered by us................. none
Shares of common stock which may be sold by the
selling stockholders................................. 1,161,781
Use of Proceeds...................................... We will not receive any proceeds from the resale of
shares offered hereby, all of which proceeds will be paid
to the selling stockholders
Nasdaq National Market Trading Symbol................ INCR
RISK FACTORS
You should be aware that there are various risks to an investment in
our common stock, including those described below. You should carefully consider
these risk factors, together with all of the other information included in this
prospectus, before you decide to invest in shares of our common stock.
If any of the following risks, or other risks not presently known to us
or that we currently believe to not be significant, develop into actual events,
then our business, financial condition, results of operations or prospects could
be materially adversely affected. If that happens, the market price of our
common stock could decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
discussed in this prospectus. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below and elsewhere
in this prospectus, and in any documents incorporated in this prospectus by
reference.
We will continue to incur substantial losses and do not expect to achieve
profitability in the foreseeable future, if at all.
As of June 30, 2000, we had an accumulated deficit of $81,723,000 from
our research, development and other activities. We have not generated any
revenues from product sales and do not expect to do so for several years, at
least. In the past, most of our revenues have come from collaborators who
reimbursed us for research and development activities. None of our current
activities are being funded by third parties at this time.
If we do not raise significant additional capital, we will be unable to fund all
of our research and development activities and will need to eliminate or curtail
these programs.
One of the most significant issues facing the Company is adequate
funding of existing projects. As of June 30, 2000, we had cash and investments
of $8,644,000. We believe we have adequate financial resources to fund our
operations into calendar 2001.
Our financial requirements during 2001 and over the longer term will
depend upon the success of our research and development programs and our ability
to enter into new collaborations that provide fees and research and development
funding. If some or all of our programs continue to show scientific progress, we
will need significant additional funds to move compounds through the preclinical
stages and into clinical trials.
There can be no assurance that we will be able to raise the amount of
capital necessary to complete development and reach commercialization of any of
the therapeutic products currently being sponsored by the Company. If we are
unable to raise such capital, we will need to delay or cease development of one
or more of our products.
Stockholders might experience significant dilution from our sale of shares to
Torneaux Fund Ltd. under a common stock purchase agreement and warrants.
In August 2000, we entered into a common stock purchase agreement with
Torneaux Fund Ltd., an institutional investor, for an equity financing facility
covering the purchase of our common stock over 15 months. Under this facility,
we will control the amount and timing of stock sold to Torneaux, with the amount
of the investment being dependent, in part, on our stock price. Assuming our
stock price maintains a minimum threshold, the cumulative potential investment
is anticipated to exceed $3,000,000 and is capped at $18,900,000. Each purchase,
if any, of common stock will require the issuance to Torneaux of warrants to
purchase an amount of common stock equal to 15% of the common stock shares
purchased. The sale of our common stock to Torneaux under the common stock
purchase agreement and warrants will have a dilutive effect on our stockholders.
The number of shares that we issue to Torneaux upon a draw down under the
agreement is based upon a discount to the daily weighted average market price of
our stock over a 20-day trading period. As the market price declines, the number
of shares that may be sold to Torneaux will increase. If we put shares to
Torneaux at a time when our stock price is low, our stockholders would be
significantly diluted. In addition, the perceived risk of dilution by Torneaux
and our other stockholders might cause them to sell their shares, which could
further decrease the market price of our shares. We also agreed to register with
the SEC the shares of common stock we sell to Torneaux to enable Torneaux to
resell those shares. Torneaux's resale of our common stock will increase the
number of our publicly traded shares, which could also lower the market price of
our common stock.
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The ownership interest of our stockholders will be substantially diluted by
future issuances of stock, including new offerings and exercises of currently
outstanding options and warrants.
As of August 31, 2000, Incara had 7,246,062 shares of common stock
outstanding.
Options to purchase a total of 2,500,000 shares of Incara common stock
may be granted under the 1994 Stock Option Plan to our employees, directors and
consultants. As of August 31, 2000, options to purchase 1,337,160 shares at
exercise prices ranging from $0.04 to $20.50 (or a weighted average exercise
price of $3.05) and warrants to purchase 66,816 shares at exercise prices
ranging from $8.25 to $13.49 were outstanding. In addition, we have reserved
200,715 shares for issuance pursuant to our Employee Stock Purchase Plan.
We intend to sell new shares of our common stock or preferred stock
during the next year to meet our capital requirements. All of these issuances of
stock will dilute the ownership interests of the existing stockholders. The
threat of dilution posed by shares available for future sale could reduce the
market price of our common stock and could make it more difficult for us to
raise funds through equity offerings in the future.
The price of our common stock is extremely volatile and the sale of shares
registered in this offering could cause our stock price to decline.
Our common stock is listed on the Nasdaq National Market System under
the symbol "INCR." The public market for our common stock has been characterized
by low and/or erratic trading volume, often resulting in price volatility. An
active public market for our common stock might be limited because of the small
number of shares outstanding, the limited number of investors and the small
market capitalization (which is less than that authorized for investment by many
institutional investors).
All shares registered in this offering will be freely tradable upon
effectiveness of the registration statement of which this prospectus is a part.
The sale of a significant amount of shares registered in this offering at any
given time could cause the trading price of our common stock to decline and to
be highly volatile.
The market price of our common stock also is subject to wide
fluctuations for factors that we can not control, including the results of
preclinical and clinical testing of our product candidates, decisions by
collaborators regarding product development, regulatory developments, market
conditions in the pharmaceutical and biotechnology industries, future
announcements concerning our competitors, adverse developments concerning
proprietary rights, public concern as to the safety or commercial value of our
products, and general economic conditions.
Furthermore, the stock market has experienced significant price and
volume fluctuation unrelated to the operating performance of particular
companies. These market fluctuations can adversely affect the market price and
volatility of our common stock.
Our R&D programs are at an early stage and therefore are subject to significant
scientific risks and uncertainties.
Our product programs are in the early stages of development, involve
unproven technology, require significant further research and development and
regulatory approvals, and are subject to the risks of failure inherent in the
development of products or therapeutic procedures based on innovative
technologies. These risks include the possibilities that any or all of these
proposed products or procedures are found to be unsafe or ineffective, or
otherwise fail to receive necessary regulatory approvals; that the proposed
products or procedures are uneconomical to market or do not achieve broad market
acceptance; that third parties hold proprietary rights that preclude us from
marketing them; or that third parties market a superior or equivalent product.
We are unable to predict whether any commercially viable products will result
from our R&D activities. Further, the timeframes for commercialization of any
products are long and uncertain, because of the extended testing and regulatory
review process required before marketing approval can be obtained.
We face intense competition in all of our development programs. The
markets for therapeutic products that address inflammatory, liver and pulmonary
diseases are large and competition is expected to increase. Our products might
never be accepted in the market.
A failure to obtain or maintain patent and other intellectual property rights
could impair our business.
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The success of our business depends, in part, on our ability to
establish and maintain adequate protection for our intellectual property,
whether owned by us or licensed from third parties. We rely primarily on patents
in the United States and in other key markets to protect our intellectual
property. If we do not have patent protection, other companies could sell
substantially identical products as ours, without incurring any liability to us.
Patent prosecution, maintenance and enforcement on a global basis is expensive,
and many of these costs must be incurred before we know whether a product
covered by the claims will be successfully developed or marketed.
Even if we expend considerable time and money on prosecution, a patent
application might never issue as a patent. We can never be certain that we were
the first to invent the particular technology or that we were the first to file
a patent application for the technology, because United States patent
applications are maintained in secrecy until a patent issues. Publications in
the scientific or patent literature generally do not identify the date of an
invention, so it is possible that a competitor could be pursuing the same
invention and have an earlier invention date than ours.
Even if patents issue, the claims allowed might not be sufficiently
broad to protect our technology against competitive products. Patent protection
also may differ from country to country, giving rise to increased competition
from other products in countries where patent coverage is weak or not enforced.
Once a patent issues, we still face the risk that others will try to design
around our patent or will try to challenge or invalidate the patent. If a patent
were invalidated, we could be subject to significant liabilities to a third
party, be required to license the invention from a third party, or be prevented
from using the invention altogether. The cost of litigation can be substantial,
even if we prevail.
We have the exclusive license from Opocrin, in all countries other than
Japan and Korea, for an issued patent claiming certain oligosaccharides derived
from heparin and their use in antiatherosclerotic activity to develop and
commercialize OP2000. We also have a non-exclusive license from Opocrin to
practice certain related patents, to the extent required for our activities
related to OP2000. We are aware of a recently issued patent claiming the use of
certain fractions of heparin for the treatment of inflammatory bowel disease. We
do not believe OP2000 falls within the scope of this patent. If OP2000 were to
be determined to fall within the scope of this patent and if the patent's claims
were found to be valid, we would have to license this patent in order to
commercialize OP2000. If this were the case we might not be able to license this
patent at a reasonable cost which would result in our not being able to market
OP2000. Uncertainty regarding the scope or validity of this patent might deter
potential partners from collaborating with us for the development and
commercialization of OP2000.
If a third party were to bring an infringement claim against us, we would incur
significant costs in our defense; if the claim were successful, we would need to
obtain licenses to develop non-infringing technology.
Our business also depends on our ability to commercialize products
without infringing patents or other proprietary rights of others and without
breaching the scope of the licenses related to our intellectual property. The
pharmaceutical industry is subject to frequent and protracted litigation
regarding patent and other intellectual property rights. Most companies have
numerous patents that protect their intellectual property rights. These third
parties may assert claims against us with respect to our product candidates and
future products. If litigation were required to determine the validity of a
third party's claims, we could spend significant resources and be distracted
from our core business activities, regardless of the outcome. If we did not
prevail in the litigation, we could be required to license a third party's
technology, which might not be possible on satisfactory terms, or discontinue
our own activities and develop non-infringing technology, any of which could
delay our development programs.
Protection of trade secret and confidential information is difficult, and loss
of confidentiality could eliminate our competitive advantage.
In addition to patent protection, we rely on trade secrets, proprietary
know-how and confidential information to protect our technological advances. We
use confidentiality agreements with our employees, consultants and collaborative
partners to maintain the proprietary nature of this technology. However,
confidentiality agreements can be breached by the other party, which would make
our trade secrets and proprietary know-how available for use by others. There is
generally no adequate remedy for breach of confidentiality obligations. In
addition, the competitive advantage afforded by trade secrets is limited because
a third party can independently discover or develop something identical to our
own trade secrets or know-how, without liability to us.
If our employees, consultants or collaborators were to use information
improperly obtained from others (even if unintentional), disputes could arise as
to ownership and rights in any resulting know-how or inventions.
Our research programs rely on technology licensed from third parties, and
termination of any of those licenses would result in loss of significant rights.
6
We have exclusive worldwide rights to catalytic antioxidant small
molecule technology through a license agreement with Duke. We have an exclusive
license agreement in all countries except Japan and Korea related to OP2000. We
also have the worldwide exclusive rights to patents licensed from Albert
Einstein College of Medicine and patent applications and rights to license
future technology arising out of research sponsored at UNC (related to the liver
precursor cell program) and National Jewish Medical Center (related to
antioxidant small molecules). Key financial and other terms would still need to
be negotiated with the research institutions, and it may not be possible to
obtain any such license on terms that are satisfactory to us.
Our licenses generally may be terminated by the licensor if we fail to
perform our obligations, including obligations to develop the compounds and
technologies under license. If terminated, we would lose the right to develop
the products, which could adversely affect our business. The license agreements
also generally require us to meet specified milestones or show reasonable
diligence in development of the technology. If disputes arise over the
definition of these requirements or whether we have satisfied the requirements
in a timely manner, or if any other obligations in the license agreements are
disputed by the other party, the other party could terminate the agreement and
we could lose our rights to develop the licensed technology.
We need to obtain collaborative partners to perform manufacturing and marketing
responsibilities for our potential products, and if those partners are not
obtained, we will have to develop the expertise, obtain the additional capital
and spend the resources to perform those functions.
We do not have the staff or facilities to manufacture or market any
compounds or cell therapy products being developed in our programs. We need to
enter into collaborative arrangements in the future to develop, commercialize,
manufacture and market products emerging from the superoxide dismutase mimetics.
We also might seek a partner to develop the manufacturing capability for the
hepatic precursor cell therapy being developed by us and intend to seek a
partner to work with on development of a liver assist device. Ultimately, we
also plan to seek marketing and manufacturing partners for OP2000 if clinical
studies are successful.
A large number of small biotechnology companies are seeking
collaborators, some of whom compete in the same therapeutic areas as our
programs, and obtaining and maintaining new collaborative arrangements will be
difficult. We might not be successful in entering into third party arrangements
on acceptable terms, if at all. If we are unable to obtain or retain third party
manufacturing or marketing on acceptable terms, we might be delayed in our
ability to commercialize products. Substantial additional funds and personnel
would be required if we needed to establish our own manufacturing or marketing
operations. We might not be able to obtain adequate funding or establish such
capabilities at all or in a cost-effective manner.
Even if we do succeed in obtaining a collaborator for any of our
programs, there is no guarantee that the product will ultimately be
commercialized profitably, if at all. The compensation owed to collaborative
partners for the manufacturing and marketing of products will reduce our profit
margins and might delay or limit our ability to develop, deliver and sell
products on a timely and competitive basis. Furthermore, a collaborative partner
could pursue alternative technologies or develop alternative compounds either on
its own or in collaboration with others, targeted at the same diseases as those
involved in our programs.
A manufacturer must conform to certain cGMP regulations for the
production and packaging of products. If any of our manufacturers can not meet
our needs or applicable regulatory standards with respect to the timing,
quantity or quality of products, our development programs would be delayed.
We are in discussions with third parties to conduct the cell processing
to produce the hepatic precursor cells being developed by Incara. To begin
clinical trials, we must contract with a supplier to isolate the hepatic
precursor cells in compliance with cGMP regulations. We have not yet established
the terms of any supply arrangement, and we might not be able to enter into any
third party arrangements on satisfactory terms. We also must establish and
maintain sources of livers or liver tissues from which the precursor cells can
be isolated. We have historically relied on several suppliers of liver tissues
for research, but entering into the clinical trial stage of development will
increase our needs. For clinical trials and ultimately for commercialization, we
plan to obtain livers which are not suitable for full liver transplant from the
traditional organ transplant donor programs. We have established an arrangement
with an established organ procurement agency to obtain these organs.
If we cannot retain or hire qualified personnel, our programs could be delayed.
We have only 20 employees and are highly dependent on the principal
members of the management and scientific staff, including in particular Clayton
I. Duncan, our Chairman, President and Chief Executive Officer. We also are
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highly dependent on the academic collaborators for each of our programs. The
loss of key employees or academic collaborators could delay progress in our
programs or result in termination of them in their entirety.
We believe that our future success will depend in large part upon our
ability to attract and retain highly skilled scientific and managerial
personnel. We face competition for the kinds of personnel from other companies,
research and academic institutions, government entities and other organizations.
We might not be successful in hiring or retaining the personnel needed for
success.
If we do not obtain and maintain government authorizations to manufacture and
market products, our business will be significantly harmed.
Our research and development activities and the manufacturing and
marketing of our products are subject to extensive regulation by governmental
authorities in the United States and other countries. Clinical trials and the
manufacturing and marketing of products are subject to the testing and approval
processes of the FDA and foreign regulatory authorities. The process of
obtaining required regulatory approvals for pharmaceuticals from the FDA and
other regulatory authorities takes many years and is expensive. Data obtained
from preclinical and clinical activities are susceptible to varying
interpretations, and if regulatory authorities do not agree with our analyses of
data, our product programs could be delayed or regulatory approval could be
withheld. Additional government regulations might be promulgated which could
delay regulatory approval of our products. We can not control the decisions of
regulatory authorities, and we therefore can not assume that any products
developed by us alone or in collaboration with others will be determined to be
safe and efficacious in clinical trials or meet other applicable regulatory
standards to receive the necessary approvals for manufacturing and marketing.
Even if these approvals are obtained, post-marketing, adverse events or other
monitoring of the products could result in suspension or limitation of the
approvals.
Product liability claims, if asserted against us in the future, could exceed our
insurance coverage and require us to use our limited cash resources for payment.
The pharmaceutical and biotechnology business exposes us to the risk of
product liability claims alleging that use of our products caused an injury or
harm. These claims can arise at any point in the development, testing,
manufacture, marketing or sale of pharmaceutical products, and might be made
directly by patients involved in clinical trials of our products, by consumers
or healthcare providers or by organizations selling such products. Product
liability claims can be expensive to defend even if the product did not actually
cause the injury or harm.
Insurance covering product liability claims becomes increasingly
expensive as a product moves through the development pipeline to
commercialization. We have obtained limited product liability insurance coverage
for the clinical trials for OP2000. However, the available insurance coverage
may not be sufficient to cover us against all potential losses due to liability,
if any, or to the expenses associated with defending liability claims. A product
liability claim successfully asserted against us could exceed our coverage and
require us to use our own cash resources, which would then not be available for
our own products.
In addition, some of our licensing agreements with third parties
require us to maintain product liability insurance. If we can not maintain
acceptable amounts of coverage on commercially reasonable terms, the
corresponding agreements would be subject to termination.
The costs of compliance with environmental, safety and similar laws could
increase our cost of doing business or subject us to liability in the event of
noncompliance.
Our business is subject to regulation under state and federal laws
regarding occupational safety, laboratory practices, environmental protection
and the use, generation, manufacture, storage and disposal of hazardous
substances. Although we believe we comply with these laws and regulations in all
material respects and have not been required to take any action to correct any
noncompliance, we may be required to incur significant costs in the future to
comply with existing or future environmental and health and safety regulations.
Our research activities involve the use of hazardous materials, chemicals and
radioactive compounds. Although we believe that our procedures for handling such
materials comply with applicable state and federal regulations, we cannot
eliminate the risk of accidental contamination or injury from these materials.
In the event of an accident, we could be liable for any resulting damages.
Provisions of our charter documents, our stock option program and Delaware law
could discourage or delay offers to acquire Incara, which might reduce the
market price of our common stock and the voting rights of the holders of common
stock.
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Certain provisions of our charter documents and Delaware law make it
more difficult for a third party to acquire Incara, and might discourage a third
party from offering to acquire Incara, even if a change in control would be
beneficial to our stockholders. These provisions also could limit the price that
certain investors might be willing to pay in the future for shares of common
stock.
The Board of Directors of Incara has the authority to issue up to
3,000,000 shares of preferred stock in one or more series, and to determine the
prices, rights, preferences, privileges and restrictions, including voting
rights, of the shares within each series without any further vote or action by
the stockholders. The rights of the holders of Incara common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock with voting rights could make it more difficult for a third party to
acquire a majority of the outstanding voting stock.
Further, some provisions of Delaware law could delay or make more
difficult a merger, tender offer or proxy contest involving Incara. Incara is
subject to the antitakeover provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. While such provisions are
intended to enable the Incara Board of Directors to maximize stockholder value,
they might have the effect of discouraging takeovers that could be in the best
interest of certain stockholders. Such provisions could reduce the market value
of Incara's common stock in the future.
We remain contingently liable for certain IRL obligations.
In connection with the sale of Incara Research Laboratories, or IRL, in
December 1999 to a private pharmaceutical company, we remain contingently liable
through May 2007 on certain debt and lease obligations assumed by the purchaser,
including the IRL facility lease in Cranbury, New Jersey. This contingent
liability was approximately $9,000,000 in June 2000 and will decline on an
approximately straight-line basis to zero in May 2007.
If we do not reach the market with our products before our competitors offer
products for the same use, or if we do not compete effectively in marketing our
products, the revenues from product sales, if any, will be reduced.
We face intense competition in all of our development programs. The
markets for therapeutic products that address inflammatory, liver and pulmonary
diseases are large and competition is expected to increase. Our products might
never be accepted in the market.
If our products do not qualify for third-party reimbursement, sales could suffer
because patients cannot afford the product.
The success of our products, if any, will depend in part upon the level
of reimbursement to customers from insurance companies and other payers. Sales
could be reduced if governmental and third-party payers contain or reduce the
cost of healthcare through the control of the price of pharmaceutical products.
For example, in certain foreign markets pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United States there
have been, and we expect that there will continue to be, a number of federal and
state proposals to implement similar controls. While we cannot predict whether
any such legislative or regulatory proposals will be adopted, the announcement
or adoption of such proposals could make it more difficult to obtain a
reasonable profit from our products.
In addition, in both the United States and elsewhere, sales of
prescription pharmaceuticals are dependent in part on the availability of
reimbursement to the consumer from third-party payers, such as government and
private insurance plans. Significant uncertainty exists regarding the
reimbursement status of newly approved therapeutic products. Third-party payers
are increasingly challenging the prices charged for medical products and
services. This type of pressure is intense in a market where multiple products
are available. If we succeed in bringing any of our product candidates to the
market, there can be no assurance that any of them will be considered
cost-effective compared to other available therapies, and that reimbursement to
the consumer will be available or will be sufficient to allow us to sell our
products on a competitive basis.
We do not presently anticipate paying cash dividends on our common stock.
9
We intend to retain all earnings for the foreseeable future for funding
our business operations. In addition, our outstanding preferred stock and credit
facilities contain restrictions on our ability to declare and pay dividends on
our common stock. Consequently, we do not anticipate paying any cash dividends
on our common stock for the foreseeable future.
We face uncertainties and risks relating to our Nasdaq National Market listing.
Our common stock is currently listed on the Nasdaq National Market.
Nasdaq has certain requirements that a company must meet in order to remain
listed on the Nasdaq National Market. If we continue to experience losses from
our operations or we are unable to raise additional funds, we may not be able
to maintain the standards for continued quotation on the Nasdaq National Market.
Furthermore, Nasdaq recently adopted new rules that make continued
listing of companies on either the Nasdaq National Market or the Nasdaq SmallCap
Market more difficult. If as a result of the application of these new rules, our
common stock were delisted from the Nasdaq National Market, our stock could be
subject to what are known as the "penny stock" rules. The "penny stock" rules
place additional requirements on broker-dealers who sell or make a market in
such securities. Consequently, if we were removed from the Nasdaq National
Market, the ability or willingness of broker-dealers to sell or make a market in
our common stock could decline. As a result, your ability to resell your shares
of our common stock could be adversely affected.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus discuss our plans
and strategies for our business and are "forward-looking statements" as that
term is defined in the Private Securities Litigation Reform Act. The words
"anticipates," "believes," "estimates," "expects," "plans," "intends," "likely,"
"will," "suggests," "might," "may," "could," "should," "would" and similar
expressions are meant to identify these statements as forward-looking
statements, but they are not the exclusive means of identifying them. The
forward-looking statements in this prospectus reflect the current views of our
management; however, various risks, uncertainties and contingencies could cause
our actual results, performance or achievements to differ materially from those
expressed or implied by these statements, including:
o The success or failure of our efforts to implement our business
strategy;
o The early stage of products under development;
o Uncertainties relating to clinical trials and regulatory reviews;
o The need for additional funds;
o Competition and dependence on collaborative partners;
o The other factors discussed in the "Risk Factors" section and
elsewhere in this prospectus.
We assume no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
For a discussion of important risks of an investment in our common stock,
including factors that could cause actual results to differ materially from
results referred to in the forward-looking statements, see the "Risk Factors"
section of this prospectus. In light of the risks and uncertainties discussed in
"Risk Factors" and elsewhere in this prospectus, events referred to in
forward-looking statements in this prospectus might not occur.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares of the
common stock offered by the selling stockholders. We are registering the shares
for sale to provide the holders thereof with freely tradable securities, but the
registration of such shares does not necessarily mean that any of such shares
will be offered or sold by the holders thereof.
DIVIDEND POLICY
We have never paid a cash dividend on our common stock and we do not
anticipate paying cash dividends in the foreseeable future. In addition, our
outstanding preferred stock and credit facilities contain restrictions on our
ability to declare and pay dividends on our common stock. We plan to retain all
earnings, if any, for the foreseeable future for use in the operation of our
business and to fund future growth.
10
MARKET FOR COMMON STOCK
Our common stock trades on the Nasdaq National Market under the symbol
"INCR". The following sets forth the quarterly high and low sales prices as
reported by Nasdaq for the periods indicated. These prices are based on
quotations between dealers, which do not reflect retail mark-up, markdown or
commissions, and do not necessarily represent actual transactions.
High Low
---- ---
Fiscal Year Ended September 30, 1998
October 1, 1997 through December 31, 1997........................... $25 1/2 $16 7/8
January 1, 1998 through March 31, 1998.............................. 21 1/4 15
April 1, 1998 through June 30, 1998................................. 20 3/8 7 3/8
July 1, 1998 through September 30, 1998............................. 10 1/8 3 5/8
Fiscal Year Ended September 30, 1999
October 1, 1998 through December 31, 1998........................... 10 1/8 3 3/8
January 1, 1999 through March 31, 1999.............................. 15 1/2 5
April 1, 1999 through June 30, 1999................................. 8 1/4 4 1/16
July 1, 1999 through September 30, 1999............................. 5 5/8 1/2
Fiscal Year Ending September 30, 2000
October 1, 1999 through December 31, 1999........................... 1 13/16 1/2
January 1, 2000 through March 31, 2000.............................. 11 1 17/32
April 1, 2000 through June 30, 2000................................. 6 1/8 1 1/2
July 1, 2000 through August 31, 2000................................ 4 3/4 1 11/16
As of August 31, 2000, the number of record holders of the Company's
common stock was 124 and we estimate that the number of beneficial owners was
approximately 5,000.
11
SELECTED FINANCIAL DATA
The following selected financial data should be read with our
consolidated financial statements and the notes to those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statements
of operations data for the fiscal years ended September 30, 1995, 1996, 1997,
1998, and 1999 and the consolidated balance sheet data at September 30, 1995,
1996, 1997, 1998 and 1999, are derived from our consolidated financial
statements which have been audited by PricewaterhouseCoopers LLP, independent
accountants, and, except for the consolidated statements of operations for the
fiscal years ended September 30, 1995 and 1996 and the consolidated balance
sheet data at September 30, 1995, 1996 and 1997, are included elsewhere in this
prospectus. The consolidated statement of operations data for the nine months
ended June 30, 1999 and 2000 and the consolidated balance sheet data at June 30,
1999 and 2000 are derived from our unaudited consolidated financial statements.
Our unaudited consolidated financial statements have been prepared on a basis
consistent with our audited consolidated financial statements. Please be advised
that historical results are not necessarily indicative of the results to be
expected in the future, particularly given our acquisition and disposition
history.
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
Nine Months Ended June 30, Year Ended September 30,
--------------------------- -----------------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
Revenue:
Contract and license fee revenue..................... $ 100 $ 588 $ 2,088 $ 6,121 $ 5,360
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Research and development............................. 5,985 15,074 18,996 16,799 19,972
Purchase of in-process research and development...... 6,664 - - 5,343 411
General and administrative........................... 1,970 2,266 3,045 3,509 4,179
------------ ------------ ------------ ------------ ------------
Total costs and expenses.......................... 14,619 17,340 22,041 25,651 24,562
------------ ------------ ------------ ------------ ------------
Loss from operations....................................... (14,519) (16,752) (19,953) (19,530) (19,202)
Gain on sale of division................................... 9,751 - - - -
Investment income (expense), net........................... 287 336 355 384 831
Income taxes............................................... - - - - -
Minority interest.......................................... - - - - 568
------------ ------------ ------------ ------------ ------------
Net loss................................................... $ (4,481) $ (16,416) $ (19,598) $ (19,146) $ (17,803)
============ ============ ============ ============ ============
Net loss per common share:
Basic and diluted.................................... ($0.75) ($2.24) ($2.98) ($2.69) ($2.55)
============ ============ ============ ============ ============
Weighted average common shares outstanding:
Basic and diluted.................................... 6,005 7,315 6,583 7,113 6,982
============ ============ ============ ============ ============
Year Ended September 30,
---------------------------
1996 1995
---- ----
Revenue:
Contract and license fee revenue..................... $ 5,348 $ 304
------------- ------------
Costs and expenses:
Research and development............................. 5,276 5,127
Purchase of in-process research and development...... 350 -
General and administrative........................... 3,396 2,063
------------- ------------
Total costs and expenses.......................... 9,022 7,190
------------- ------------
Loss from operations....................................... (3,674) (6,886)
Gain on sale of division................................... - -
Investment income (expense), net........................... 719 (207)
Income taxes............................................... (37) -
Minority interest.......................................... (568) -
------------- ------------
Net loss................................................... $ (3,560) $ (7,093)
============= ============
Net loss per common share:
Basic and diluted.................................... ($0.59) ($1.62)
============= ============
Weighted average common shares outstanding:
Basic and diluted.................................... 6,062 4,384
============= ============
BALANCE SHEET DATA:
(in thousands)
June 30, September 30,
-------------------- --------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
Cash and cash equivalents and marketable securities........ $ 8,644 $ 8,093 $ 4,960 $23,562 $37,580 $37,391 $ 1,168
Working capital (deficit).................................. 6,701 2,837 2,207 14,607 9,855 28,870 (1,397)
Total assets............................................... 9,309 10,991 8,044 27,836 42,623 40,650 2,095
Long-term portion of capital lease obligations and
notes payable........................................ 48 1,147 981 1,593 2,128 896 869
Total liabilities.......................................... 2,467 6,546 4,253 8,160 29,167 9,401 3,463
Total stockholders' equity (deficit)....................... 6,842 4,445 3,791 19,676 13,456 30,680 (1,368)
12
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial statements of Incara are included elsewhere in
this prospectus. The unaudited pro forma consolidated financial information
presented herein should be read in conjunction with those financial statements
and related notes.
The unaudited pro forma consolidated financial information of Incara for
the year ended September 30, 1999 and the nine months ended June 30, 2000
include adjustments to give effect in the unaudited pro forma condensed
consolidated statement of operations for the disposition of Incara Research
Laboratories ("IRL") as if it had occurred on October 1, 1998.
The unaudited pro forma condensed consolidated statements of operations are
provided for informational purposes and are not necessarily indicative of the
results of operations that would have been achieved had the transactions been in
effect as of the beginning of the periods presented and should not be construed
as being representative of future results of operations.
13
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Year Ended September 30, 1999
------------------------------------------------------
Pro Forma
Consolidated Adjustments - Pro Forma
Actual IRL As Adjusted
---------------- --------------- ---------------
Revenue:
Contract and license fee revenue $ 2,088 $ 2,063 $ 25
---------------- --------------- ---------------
Costs and expenses:
Research and development 18,996 8,245 10,751
General and administrative 3,045 - 3,045
---------------- --------------- ---------------
Total costs and expenses 22,041 8,245 13,796
---------------- --------------- ---------------
Loss from operations (19,953) (6,182) (13,771)
Investment income, net 355 (343) 698
---------------- --------------- ---------------
Net loss $ (19,598) $ (6,525) $ (13,073)
================ =============== ===============
Net loss per common share:
Basic $ (2.98) $ (1.99)
================ ===============
Diluted $ (2.98) $ (1.99)
================ ===============
Weighted average common shares
outstanding 6,583 6,583
================ ===============
Nine Months Ended June 30, 2000
------------------------------------------------------
Pro Forma
Consolidated Adjustments - Pro Forma
Actual IRL As Adjusted
---------------- --------------- ---------------
Revenue:
Contract and license fee revenue $ 100 $ 100 $ -
---------------- --------------- ---------------
Costs and expenses:
Research and development 5,985 1,376 4,609
Purchased in-process research
and development 6,664 - 6,664
General and administrative 1,970 - 1,970
---------------- --------------- ---------------
Total costs and expenses 14,619 1,376 13,243
---------------- --------------- ---------------
Loss from operations (14,519) (1,276) (13,243)
Gain on sale of division 9,751 9,751 -
Interest income, net 287 (37) 324
---------------- --------------- ---------------
Net income (loss) $ (4,481) $ 8,438 $ (12,919)
================ =============== ===============
Net loss per common share:
Basic $ (0.75) $ (2.15)
================ ===============
Diluted $ (0.75) $ (2.15)
================ ===============
Weighted average common
shares outstanding 6,005 6,005
================ ===============
The pro forma adjustments reflect the elimination of revenue and expenses
related to IRL for the fiscal year ended September 30, 1999 and the nine months
ended June 30, 2000, as if the IRL sale had occurred at the beginning of the
fiscal year. The pro forma adjustments for the nine months ended June 30, 2000
also reflect the elimination of the gain recognized on the sale of IRL.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the notes appearing elsewhere in this
prospectus. The following discussion contains forward-looking statements. Our
actual results may differ materially from those projected in the forward-looking
statements. Factors that might cause future results to differ materially from
those projected in the forward-looking statements include those discussed in
"Risk Factors" and elsewhere in this prospectus. Unless otherwise noted, the
phrase "Incara," "we" or "our" refers collectively to Incara Pharmaceuticals
Corporation, formerly Intercardia, Inc., and its subsidiaries, Aeolus
Pharmaceuticals, Inc. and Renaissance Cell Technologies, Inc. and CPEC LLC.
OVERVIEW
We conduct discovery and development programs in three areas: (1)
inflammatory bowel disease, using an ultra-low molecular weight heparin known as
OP2000; (2) liver disorders, using hepatic precursor cell therapy; and (3) small
molecule antioxidants for disorders such as stroke and chronic bronchitis. Our
current programs reflect the business strategy that we have pursued over the
past four years of building a diversified portfolio of innovative therapeutic
products by advancing basic and clinical research discoveries from leading
academic research centers through the clinical development process. Our strategy
for bringing promising therapeutics to the market includes the selection of
collaborative partners for their capabilities outside our areas of focus,
particularly for manufacturing, sales and marketing functions. We believe that
such collaborative agreements not only will provide funding and assist with the
commercialization of our therapeutics, but often can validate the commercial
viability of the programs and allow the Company to maintain its low fixed cost
structure.
At September 30, 1999, Incara owned 65.8% of the outstanding stock of
Aeolus and 78.0% of the outstanding stock of Renaissance; these ownership
interests were increased to 100% on March 31, 2000. Incara also has a 35.0%
interest in CPEC.
On March 31, 2000, Incara acquired all of the minority interests of
Renaissance and Aeolus. Prior to the acquisition, Incara owned 78.0% of
Renaissance and 65.8% of Aeolus. Incara issued 1,220,041 shares of its common
stock for the subsidiaries' minority ownership. The acquisition was accounted
for using the purchase method of accounting with a total purchase price of
$6,664,000. We allocated the total purchase price to purchased in-process
research and development and immediately charged it to operations because at the
date of the acquisition the in-process research purchased was in preclinical
stages, feasibility had not been established and it was deemed to have no
alternative future use. We estimated at the acquisition date that Renaissance
and Aeolus will need to spend in excess of an additional $50,000,000 to complete
the research and development and that it would be at least 2006 before the
research and development is completed. The cost to complete research and
development for these programs might be shared with collaborative partners in
the future. The acquisition of these minority interests should not have a
significant impact on future operating results as we previously recognized for
1999 and 1998 all losses of Renaissance and Aeolus due to established funding
arrangements.
On December 29, 1999, we sold our anti-infective division, known as
Incara Research Laboratories, or IRL, to a private pharmaceutical company for
$11,000,000 in cash and the right to receive future payments totaling up to an
additional $4,000,000 in the event a compound originating from a collaboration
with Merck & Co., Inc. reaches preclinical and clinical trial milestones. The
transaction involved the sale of assets associated with IRL, including rights
under the collaboration with Merck and the assumption of related liabilities by
the purchaser. We remain contingently liable through May 2007 on debt and lease
obligations of approximately $9,000,000 assumed by the purchaser, including the
IRL facility lease in Cranbury, New Jersey. We recognized a gain of $9,751,000
on the sale of IRL, which we recorded as other income. The effect of the IRL
transaction on Incara's historical financial statements is shown in "Pro Forma
Consolidated Financial Information".
In May 1998, Incara acquired all of the outstanding stock of Transcell
Technologies, Inc., a majority-owned subsidiary of Interneuron Pharmaceuticals,
Inc., through a merger with Transcell in exchange for Incara common stock, stock
options and stock warrants. The former Transcell operation is referred to as
Incara Research Laboratories, or IRL. The purchase of Interneuron's 77.9%
interest in Transcell by Incara was treated in a manner similar to a
"pooling-of-interests," because it represented a transfer of stock between
entities under common control, and the acquisition of the non-Interneuron
ownership interest was accounted for by using the purchase method of accounting.
All of Transcell's past results of operations have been combined with our
consolidated results of operations. The stock issued in the Transcell merger
was paid in three installments. The first installment was paid upon the closing
of the merger in May 1998. In lieu of the second installment payment due to
Interneuron in connection with the merger, Interneuron retained 281,703 shares
of Incara common stock as part of a corporate restructuring between Interneuron
and Incara. In August 1999, Incara issued 867,583 shares of Incara common stock
to the other former Transcell stockholders as payment for their second
15
installment of the merger. The third and final installment of 856,861 shares of
Incara common stock to the former Transcell stockholders, including Interneuron,
was issued in February 2000.
We had net losses of $19,598,000 and $4,481,000 for the fiscal year
ended September 30, 1999 and for the nine months ended June 30, 2000,
respectively. We had an accumulated deficit of $81,723,000 at June 30, 2000. We
have not yet generated any revenues from product sales and do not expect to
receive any product revenues in the foreseeable future, if at all.
RESULTS OF OPERATIONS
Three and Nine Months Ended June 30, 2000 Compared to
Three and Nine Months Ended June 30, 1999
We incurred net losses of $2,944,000 and $4,481,000 for the three and
nine months ended June 30, 2000, respectively. The net loss for the nine months
ended June 30, 2000 resulted from the net effect of recognizing a $9,751,000
gain on the sale of IRL in December 1999, offset by operating expenses for the
nine months of $7,955,000 and the expensing of $6,664,000 for purchased
in-process research and development in March 2000 in connection with the
acquisition of minority interests of Aeolus and Renaissance. We had net losses
of $4,119,000 and $16,416,000 for the three and nine months ended June 30, 1999,
respectively.
We did not have any revenue during the three months ended June 30,
2000. Contract and license fee revenue was $100,000 and $588,000 for the nine
months ended June 30, 2000 and 1999, respectively. Substantially all of this
revenue resulted from an IRL collaboration with Merck & Co., Inc. We will not
receive any additional revenue from this collaboration, because it was sold with
the other IRL assets.
Our research and development ("R&D") expenses decreased $1,294,000
(35%) to $2,360,000 for the for the three months ended June 30, 2000 from
$3,654,000 for the three months ended June 30, 1999. R&D expenses decreased
$9,089,000 (60%) to $5,985,000 for the nine months ended June 30, 2000 from
$15,074,000 for the nine months ended June 30, 1999. The lower expenses were
primarily due to the result of discontinuing our bucindolol development program
in the fourth quarter of fiscal 1999 and to the sale of our IRL operation in
December 1999.
During the last quarter of fiscal 1999, we discontinued our bucindolol
development program and, therefore, we did not incur any bucindolol related
expenses this fiscal year. During the nine months ended June 30, 1999, we
incurred $4,820,000 of bucindolol related R&D expenses. We do not anticipate any
additional expenses for bucindolol.
Because we sold IRL at the end of December 1999, we did not incur any
significant R&D expenses for IRL between January 1, 2000 and June 30, 2000. R&D
expenses for IRL were approximately $1,376,000 for the three months ended
December 31, 1999 and for the nine months ended June 30, 2000. IRL expenses were
$1,663,000 and $6,275,000 for the three and nine months ended June 30, 1999,
respectively. We do not expect any additional expenses for IRL in the future.
We incurred $433,000 and $1,166,000 of R&D expenses for OP2000 during
the three months and nine months ended June 30, 2000, respectively. OP2000
expenses were $55,000 and $125,000 for the three months and nine months ended
June 30, 1999, respectively. The higher expenses in fiscal 2000 were primarily
due to costs incurred in connection with our Phase 1 clinical trials that began
in October 1999 and were completed in April 2000, as well as preparation costs
for the Phase 2/3 clinical trial which we plan to begin in fall of 2000.
R&D expenses for our liver cell program decreased $9,000 (4%) to
$237,000 for the three months ended June 30, 2000 from $248,000 for the three
months ended June 30, 1999. These R&D expenses increased $154,000 (27%) to
$730,000 for the nine months ended June 30, 2000 from $576,000 for the nine
months ended June 30, 1999. The higher expenses in the current fiscal year
resulted primarily from more R&D staff time being devoted to the program.
R&D expenses for our antioxidant program increased $268,000 (69%) to
$657,000 for the three months ended June 30, 2000 from $389,000 for the three
months ended June 30, 1999. This increase for the quarter was primarily due to
expenses associated with the selection of a lead antioxidant compound. R&D
expenses for our antioxidant program decreased $403,000 (25%) to $1,231,000 for
the nine months ended June 30, 2000 from $1,634,000 for the nine months ended
June 30, 1999. The decrease in expenses from fiscal 1999 to fiscal 2000 was
primarily due to the reduction of outside contract services and sponsored
research costs.
16
General and administrative ("G&A") expenses decreased $59,000 (8%) to
$718,000 for the three months ended June 30, 2000 from $777,000 for the three
months ended June 30, 1999. G&A expenses decreased $296,000 (13%) to $1,970,000
for the nine months ended June 30, 2000 from $2,266,000 for the nine months
ended June 30, 1999. The higher G&A expenses in fiscal 1999 were primarily for
expenses related to the bucindolol program, which was terminated in the last
quarter of fiscal 1999.
In May 1998, we acquired Transcell Technologies, Inc., which became
IRL. We issued the third and final installment of the purchase price of 856,861
shares of Incara common stock to the former stockholders of Transcell on
February 8, 2000. The number of shares issued was calculated using a formula
based on the market price of Incara common stock prior to the stock issuance
date. The issuance of these additional shares did not impact our fiscal 2000
operating results, because the value of these shares was included in the
determination of the purchase price of Transcell in fiscal 1998.
In March 2000, we recognized an in-process research and development
charge of $6,664,000 as a result of the acquisition of the minority interests of
Renaissance and Aeolus. We allocated the total purchase price to in-process
research and development because at the date of acquisition it had not reached
feasibility and it had no alternative future use. Renaissance and Aeolus spent
approximately $10,000,000 through March 2000 and estimate that in excess of
$50,000,000 over at least the next five years will need to be spent to complete
the research and development. The cost to complete a portion of this research
and development might be shared with a collaborative partner in the future.
Fiscal Year Ended September 30, 1999 Compared To
Fiscal Year Ended September 30, 1998
Our net loss of $19,598,000 for fiscal 1999 was $452,000 (2%) greater
than the $19,146,000 net loss for fiscal 1998.
Contract and license fee revenue for fiscal 1999 was $2,088,000, as
compared to $6,121,000 for fiscal 1998. Contract and license fee revenue for
fiscal 1999 primarily resulted from our collaboration with Merck & Co., Inc.
During fiscal 1999, we received a $1,500,000 milestone payment from Merck for
compounds that demonstrated specific in vitro and in vivo activity in both
resistant and sensitive bacterial strains. Merck also funded $563,000 of
research and development costs at IRL during fiscal 1999.
Contract and license fee revenue for fiscal 1998 included (1) a
$4,000,000 payment from Astra Pharmaceuticals, L.P. received pursuant to the
termination of a collaboration with Astra Merck Inc. for the development,
manufacturing and marketing of bucindolol in the United States, (2) $833,000 of
U.S. bucindolol development support from Astra Merck prior to the termination of
the Astra Merck collaboration, and (3) $1,138,000 of revenue recognized in
conjunction with the Merck collaboration.
Our research and development expenses increased $2,197,000 (13%) to
$18,996,000 in fiscal 1999 from $16,799,000 in fiscal 1998.
Expenses for the development of bucindolol and general R&D expenses
increased $2,885,000 (59%) to $7,807,000 for fiscal 1999 from $4,922,000 for
fiscal 1998. Our expenses increased after funding from the Astra Merck
collaboration ended in September 1998 and also increased as a result of the
costs of expanded European clinical trials for bucindolol during fiscal 1999.
Pursuant to the Astra Merck collaboration, during fiscal 1998 Astra
Merck paid for most expenses related to the development of the twice-daily
formulation of bucindolol for the United States, including liabilities assumed
by Astra Merck on our behalf of approximately $6,065,000. This additional amount
did not flow through our Statements of Operations, because it was terminated in
September 1998, we absorbed all of the U.S. development expenses for bucindolol
in fiscal 1999. In addition, the European bucindolol clinical program with BASF
Pharma/Knoll AG was expanded during fiscal 1999, resulting in expense of
approximately $2,326,000 in fiscal 1999 versus approximately $1,309,000 in
fiscal 1998. The development of bucindolol was terminated in the last quarter of
fiscal 1999 and all estimated costs of termination were accrued as of September
30, 1999.
R&D expenses for IRL increased by $44,000 (1%) to $8,245,000 for fiscal
1999 from $8,201,000 for fiscal 1998. During fiscal 1999 IRL incurred increased
expenses for license fees paid to Princeton University and patent preparation
fees. These increased expenses were offset by lower depreciation costs, because
in fiscal 1998 we expensed $856,000 of property and equipment acquired from
Transcell which did not meet our capitalization criteria.
17
R&D expenses for Aeolus increased by $96,000 (5%) to $2,112,000 for
fiscal 1999 from $2,016,000 for fiscal 1998, primarily due to an increase in
contract services for research and preclinical studies of its antioxidant small
molecule research program.
R&D expenses for Renaissance increased by $172,000 (26%) to $832,000
for fiscal 1999 from $660,000 for fiscal 1998, primarily due to increased fees
for patent preparation and a fee to the University of North Carolina for the
license of certain technology developed under the research agreement with UNC.
During fiscal 1998, we paid and expensed a $1,000,000 license fee for a
development compound licensed from Opocrin S.p.A.
In conjunction with the Transcell merger, we incurred a charge of
$5,343,000 for the purchase of in-process research and development during fiscal
1998, because feasibility of the in-process research and development acquired
was not yet established and the technology has no alternative future use. This
charge represents the market value of the shares of Incara stock issued to the
former minority interest owners of Transcell.
General and administrative expenses decreased by $464,000 (13%) to
$3,045,000 for fiscal 1999 from $3,509,000 for fiscal 1998, primarily due to the
elimination of certain IRL administrative personnel and functions at IRL in
conjunction with the Transcell merger.
Fiscal Year Ended September 30, 1998 Compared To
Fiscal Year Ended September 30, 1997
Our net loss of $19,146,000 for fiscal 1998 was $1,343,000 (8%) greater
than the $17,803,000 net loss incurred in fiscal 1997.
Contract and license fee revenue for fiscal 1998 was $6,121,000, as
compared to $5,360,000 for fiscal 1997. Contract and license fee revenue for
fiscal 1998 included (1) a $4,000,000 payment from Astra Pharmaceuticals
received pursuant to the termination of the Astra Merck collaboration, (2)
$833,000 of U.S. bucindolol development support from Astra Merck prior to the
termination of the Astra Merck collaboration, and (3) $1,138,000 of revenue
recognized in conjunction with the Merck collaboration.
Contract and license fee revenue for fiscal 1997 included (1) one-time
initial contract payments of $3,143,000 received from Knoll in conjunction with
the execution of the collaboration with Knoll to provide for the development,
manufacturing and marketing of bucindolol outside the United States and Japan,
(2) $553,000 of U.S. bucindolol development support from Astra Merck, and (3)
$1,317,000 of revenue recognized in conjunction with the Merck collaboration.
R&D expenses decreased $3,173,000 (16%) to $16,799,000 in fiscal 1998
from $19,972,000 in fiscal 1997, primarily due to the additional fiscal 1997
expense of a $10,000,000 contract payment due to Astra Merck in conjunction with
the development of bucindolol. R&D expenses other than the $10,000,000 accrual
increased $6,827,000 (68%) to $16,799,000 in fiscal 1998 from $9,972,000 in
fiscal 1997. R&D expenses increased in all of our programs, as described below.
Expenses for the development of bucindolol and general R&D expenses
decreased to $4,922,000 for fiscal 1998 from $12,806,000 for fiscal 1997. This
decrease was the result of the $10,000,000 Astra Merck contract payment being
accrued in fiscal 1997, offset by increased costs for additional personnel
expenses and costs related to the development of bucindolol for Europe.
The Astra Merck collaboration required Astra Merck to pay for certain
expenses related to the development of the twice-daily formulation of bucindolol
for the United States. Astra Merck assumed liabilities on our behalf of
$6,065,000 and $5,505,000 during fiscal 1998 and fiscal 1997, respectively.
These additional amounts did not flow through our Statements of Operations,
because they were offset against related expenses. As of September 30, 1998, we
had approximately $944,000 of accounts receivable due from Astra Pharmaceuticals
and approximately $941,000 of accrued expenses related to obligations assumed by
Astra Pharmaceuticals.
During fiscal 1998 we paid and expensed a $1,000,000 license fee for a
development compound licensed from Opocrin.
R&D expenses for IRL increased by $2,492,000 (44%) to $8,201,000 for
fiscal 1998 from $5,709,000 for fiscal 1997. The increase was the result of
additional personnel, a full year of costs in IRL's new facilities and
18
$856,000 of expenses to write-off property and equipment acquired from Transcell
which did not meet our capitalization criteria.
R&D expenses for Aeolus increased by $603,000 (43%) to $2,016,000 for
fiscal 1998 from $1,413,000 for fiscal 1997, primarily because Aeolus continued
to move forward with preclinical studies under its antioxidant small molecule
research program.
R&D expenses for Renaissance increased by $544,000 to $660,000 for
fiscal 1998 from $116,000 for fiscal 1997, primarily because only one month of
operations was included in the fiscal 1997 results, due to the fact that
Renaissance was not acquired until September 1997.
In conjunction with the Transcell merger, we incurred a charge of
$5,343,000 for the purchase of in-process research and development during fiscal
1998, because feasibility of the in-process research and development acquired
was not yet established and the technology had no alternative future use. This
charge represents the market value of the shares of Incara stock issued to the
former minority interest owners of Transcell. We incurred a charge of $411,000
for purchase of in-process research and development during fiscal 1997 when
Incara acquired 79.6% of the outstanding capital stock of Renaissance.
G&A expenses decreased by $670,000 (16%) to $3,509,000 for fiscal 1998
from approximately $4,179,000 for fiscal 1997, primarily due to the elimination
of certain IRL administrative personnel and functions, offset by legal and
accounting costs related to the Transcell merger.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had cash and cash equivalents and marketable
securities of $8,644,000, an increase of $3,684,000 from September 30, 1999.
Cash increased due to the receipt of $11,000,000 from the sale of IRL, offset by
operating costs for the nine months. We believe we have adequate financial
resources to fund our current operations at least into calendar 2001.
In August 2000, we entered into a definitive agreement with Torneaux
Fund Ltd., an institutional investor, for an equity financing facility covering
the purchase of the Company's common stock over 15 months. Under this facility,
Incara will control the amount and timing of stock sold to Torneaux, with the
amount of the investment being dependent, in part, on Incara's stock price.
Assuming Incara's stock price maintains a minimum threshold, the cumulative
potential investment is anticipated to exceed $3,000,000 and is capped at
$18,900,000. The agreement includes the issuance of warrants to purchase an
amount of common stock equal to 15% of the common stock shares purchased and is
subject to a number of conditions, including filing with and declaration of
effectiveness by the Securities and Exchange Commission of a registration
statement.
We expect to incur substantial additional costs and losses over the
next few years. Our cash requirements for subsequent periods will depend on
numerous factors, particularly the progress of our research and development
programs. Significant additional funds will be required for us to continue our
clinical program evaluating the use of OP2000 and to complete preclinical
activities, and to begin clinical trials for our liver precursor cell and
antioxidant programs.
We have completed two Phase 1 clinical trials for OP2000, the most
recent having been completed in April 2000. These trials looked at single and
multiple dose administrations of the drug, and preliminary results indicate that
we will be able to give OP2000 on a once-a-day basis. Assuming we have adequate
financial resources, we plan to begin a Phase 2/3 safety and efficacy trial in
ulcerative colitis patients in fall of 2000. We have an exclusive license from
Opocrin, in all countries other than Japan and Korea, for an issued patent
claiming certain oligosaccharides derived from heparin and their use in
antiatherosclerotic activity to develop and commercialize OP2000. We are aware
of a recently issued patent claiming the use of certain fractions of heparin for
the treatment of inflammatory bowel disease. We do not believe OP2000 falls
within the scope of this patent. If OP2000 were to be determined to fall within
the scope of this patent and if the patent's claims were found to be valid, we
would have to license this patent in order to commercialize OP2000. If this were
the case, we might not be able to license this patent at a reasonable cost,
which would result in our not being able to market OP2000.
Incara is exploring two patient populations for the initial clinical
trials of liver precursor cell transplantation. The first group consists of
infants with life-threatening inborn errors of metabolism who are too young for
liver transplants. This patient population represents a group with limited
treatment alternatives where improvement in patient condition and production of
the missing gene products would demonstrate the function of the transplanted
cells. The second series of clinical trials being planned involves adults with
such severe cirrhosis and other forms of chronic liver failure that they could
become candidates for a transplant. Assuming we have adequate financial
resources, Incara plans to begin these initial clinical trials in 2001.
In a model of ischemic stroke, where the middle cerebral artery of a
rat is blocked for 90 minutes and then unblocked, our lead antioxidant compound
reduced infarct size significantly when introduced as late as 7 1/2 hours after
the start of the stroke. Stroke is a form of ischemia/reperfusion injury, and
this compound is also highly active in a model of liver ischemia/reperfusion
injury. We are currently evaluating another antioxidant compound and we
anticipate selecting the most promising drug candidate for stroke in fall of
2000, once more data is available.
19
Assuming satisfactory completion of the preclinical studies and assuming we have
adequate financial resources, we intend to initiate Phase 1 clinical trials for
an antioxidant compound in 2001.
We might acquire other products, technologies or businesses that
complement our existing or planned products or programs, although we currently
have no understanding, commitment or agreement with respect to any such
acquisitions.
In addition to the equity financing with Torneaux discussed above, we
intend to seek additional capital necessary to execute our business plan through
one or more potential sources, including the sale of common or preferred stock
in private or public equity offerings and from new collaborations related to one
or more of our product development programs. Adequate funds might not be
available at all or on terms acceptable or favorable to us. At times it is
difficult for biotechnology companies to raise funds in the equity markets. Any
additional equity financing, if available, would likely result in substantial
dilution to Incara's stockholders. If we are successful in obtaining
collaborations for any of our programs, we expect to relinquish rights to
technologies, product candidates or markets which we might otherwise develop
ourselves. If we are unable to enter into new collaborations or raise additional
capital to support our current level of operations, we might be required to
scale back, delay or discontinue one or more of our research and development
programs, such as our proposed clinical trials, or obtain funds on terms that
are not favorable to us, which could have a material adverse affect on our
business. Reduction or discontinuation of research and development programs
could result in additional charges, which would be reflected in the period of
the reduction or discontinuation.
In January 2000, our Board of Directors authorized the repurchase of up
to $2,000,000 of our common stock during the following two months through
purchases on the stock market. During that period, we repurchased 104,100 shares
of our common stock at a cost of $332,000.
YEAR 2000 COMPLIANCE
As of June 30, 2000, we had not incurred any material cost directly
associated with our year 2000 compliance efforts. We do not expect the total
cost of year 2000 issues to be material to our business, financial condition and
operating results. As of June 30, 2000, we had not encountered any material year
2000 problems with the hardware and software systems used in our operations. In
addition, none of our critical venders have reported any material year 2000
problems nor have we experienced any decline in service levels from such
venders. We expect to continue to monitor internal and external issues related
to year 2000. While no material problems have been discovered, we cannot assure
you that material problems will not materialize in the future.
BUSINESS
General
Incara Pharmaceuticals Corporation develops innovative pharmaceutical
products and treatments for major diseases afflicting large patient populations.
We are currently developing products in three areas that represent a diversified
portfolio of potentially breakthrough therapeutics. Each of these areas is
currently underserved in terms of effective treatments. The three therapeutics
under development by the Company are as follows:
o An ultra-low molecular weight heparin, as a treatment for
inflammatory bowel disease, or IBD, a debilitating disease of the
intestine that includes ulcerative colitis and Crohn's disease.
Approximately two million patients suffer from IBD in the United
States and Europe combined. Ulcerative colitis can be so
debilitating that up to 20% of patients opt for removal of their
colon as a cure. There is no cure for the equally debilitating
Crohn's disease.
o Liver precursor cell transplant, as a treatment for liver failure.
Currently, there are an estimated 300,000 hospitalizations for
chronic liver disease each year in the United States, 30,000 of
which result in death. There are, however, only approximately 4,500
donor livers available annually in the United States and over
16,000 people on the liver transplant waiting list. The number of
patients with severe cirrhosis who could become candidates for a
transplant exceeds 100,000. Additionally, the liver precursor cell
technology can be used to determine gene expression patterns at
various stages of the liver lineage, providing genomic information
for drug discovery.
o Novel small molecule catalytic antioxidants, as a treatment for
disorders such as stroke and chronic bronchitis. An estimated
500,000 to 700,000 individuals suffer strokes in the United States
each year, with estimated direct costs of treating stroke exceeding
in the aggregate $40 billion annually.
20
Our current programs reflect the business strategy that we have pursued
over the past four years of building a diversified portfolio of innovative
therapeutic products by advancing basic and clinical research discoveries from
leading academic research centers through the clinical development process.
These institutions include the University of North Carolina (partner for liver
precursor cells), and the Duke University Medical Center and the National Jewish
Medical and Research Center (partners for antioxidants). We choose programs for
our portfolio that address large potential markets and where we can evaluate the
likelihood of clinical efficacy for a reasonable expenditure of time and money.
We add value to these programs by applying the significant expertise of our
management and Board of Directors in preclinical and clinical drug development
and business management to efficiently bring promising therapeutics to clinical
proof and ultimately to the marketplace.
Our strategy for bringing promising therapeutics to the market includes
the selection of collaborative partners for their capabilities outside our areas
of focus, particularly for manufacturing, sales and marketing functions. We
believe that such collaborative agreements not only will provide funding and
assist with the commercialization of our therapeutics, but often can validate
the commercial viability of the programs and allow the Company to maintain its
low fixed cost structure. We generally intend to wait until we begin to receive
clinical indications of efficacy before entering into such collaborations, thus
allowing us to negotiate more favorable terms.
OP2000
Our program for inflammatory bowel disease, or IBD, centers on OP2000,
an oligosaccharide product derived from heparin. In July 1998 we obtained an
exclusive 15-year license to develop OP2000 from its manufacturer, Opocrin
S.p.A. of Modena, Italy. Based upon clinical evidence with the use of
unfractionated heparin in treatment of IBD and the known antithrombotic and
anti-inflammatory effects of OP2000 and other heparin-derived products, we
believe that the antithrombotic and anti-inflammatory properties of OP2000
provide the rationale for evaluating its use in treating IBD. We have completed
two Phase 1 pharmacokinetic clinical trials in normal volunteers and, assuming
we have adequate financial resources, we plan to begin a pivotal Phase 2/3
clinical trial in patients with IBD in the fall of 2000. (For information on the
three sequential phases of clinical trials, see "Government Regulation" below).
Inflammatory Bowel Disease
Inflammatory bowel disease describes a group of chronic inflammatory
disorders of the intestine of unknown cause, often causing recurrent flares of
abdominal pain, cramps, diarrhea (with or without bleeding), fever and fatigue.
Two forms of IBD are Crohn's disease and ulcerative colitis. Crohn's disease
typically affects the full thickness of the intestinal wall, most commonly in
the lowest portion of the small intestine, but may involve any portion of the
gastrointestinal tract. Ulcerative colitis results in the large intestine
becoming inflamed with ulceration and bleeding. Current treatments of IBD such
as steroids and aminosalicylates are designed to reduce inflammation and relieve
symptoms, but treatment results are often unsatisfactory. In serious cases,
surgery may be required. Ulcerative colitis can be so debilitating that up to
20% of patients opt for removal of their colon as a cure. There is no cure for
the equally debilitating Crohn's disease.
According to the Crohn's & Colitis Foundation of America, Inc.,
approximately one million people in the United States have IBD. The prevalence
of IBD is expected to increase as the population ages, and we believe there
remains a need for effective and safe treatments.
Heparins and IBD
A large number of case reports and a recent double blind
placebo-controlled clinical trial of unfractionated heparin in ulcerative
colitis support the hypothesis that heparin can safely induce remission in IBD
patients. A review (Korzenik, IBD 1997) of the clinical experience with
unfractionated heparin in ulcerative colitis found benefit in 51 out of 60
reported cases, with increased bleeding in only three cases. In a recent U.S.
double blind placebo-controlled trial of unfractionated heparin in 68 patients
with active ulcerative colitis receiving treatment with standard therapies, 42%
of patients who were given additional heparin therapy had clinical remission or
improvement, compared with 20% on placebo.
These clinical results are bolstered by observations linking increased
clotting activity to the pathogenesis of IBD. Investigators have observed
evidence of increased thrombotic activity, including microvascular thrombosis
and ischemic damage to the bowel, during flares of IBD. Clotting factors are
activated and clot lysis is inactivated during flares. Patients with inherited
coagulation deficiencies, such as von Willebrand's disease and hemophilia, have
a much lower incidence of IBD than expected. The clinical results and other
supporting studies discussed
21
above provide a strong rationale for the use of an ultra-low molecular weight
heparin such as OP2000 in the treatment of flares of IBD.
We have licensed OP2000 from Opocrin for all uses worldwide, except in
Japan and Korea. OP2000 is a product of the chemical cleavage of heparin with
the comparatively low molecular weight of 2,500 daltons (compared with
full-length heparin's molecular weight of about 14,000 daltons and other low
molecular weight heparin's molecular weight of 4,000 to 6,000 daltons). This
heparin derivative has been shown to be a potent antithrombotic agent. Like low
molecular weight heparins, and unlike unfractionated heparin, routine monitoring
of coagulation factors during treatment should not be necessary, providing a
substantial advantage over unfractionated heparin. OP2000 has pharmacokinetic
advantages over low molecular weight heparins and initial results indicate that
OP2000 can be given in once-daily subcutaneous injections. A key objective of
the Company is to have OP2000 be the first heparin-related product to obtain
regulatory approval to treat inflammatory bowel disease in the United States and
Europe. The composition of OP2000 is covered by claims of patents issued to
Opocrin in the United States and Europe.
Clinical Development Program
We completed two Phase 1 clinical trials for OP2000, the most recent
having been completed in April 2000. These trials looked at single and multiple
dose administrations of the drug, and preliminary results indicate that we will
be able to give OP2000 on a once-a-day basis. OP2000 has been studied for
another indication in over 150 subjects and patients in Europe with no
significant unexpected side effects. Assuming we have adequate financial
resources, we plan to begin a Phase 2/3 safety and efficacy trial in ulcerative
colitis patients in the fall of 2000. Our clinical scientists will manage the
trials, including all data collection and analysis activities.
Commercialization
Because of the relatively large number of patients suffering from
inflammatory bowel disease both in the United States and abroad, effectively
marketing a pharmaceutical for treatment of this indication requires the
resources of a large sales organization. We intend to seek development and
marketing partnerships or licensing arrangements for OP2000 with pharmaceutical
companies with an established marketing presence in the gastrointestinal field.
Human Liver Precursor Cell Transplant
Hepatic precursor cells are a subpopulation of cells in the liver that
can differentiate into a variety of daughter cells that provide liver function.
These are the early cells in the liver lineage and include the liver stem cells
and their progeny. We are developing human liver precursor cells for use in the
treatment of a wide variety of liver ailments.
Incara established its liver precursor cell program with the
acquisition of a majority ownership interest in Renaissance Cell Technologies,
Inc. in September 1997. Renaissance was founded in 1995 to commercialize
applications from research on human liver precursor cells from the laboratory of
Dr. Lola Reid, previously at the Albert Einstein College of Medicine and now a
Professor in the Department of Cell and Molecular Physiology, Program in
Molecular Biology and Biotechnology, at the University of North Carolina at
Chapel Hill School of Medicine. In March 2000, Incara acquired the remaining
minority interest of Renaissance, which is now a wholly owned subsidiary of
Incara.
Liver Disease
The liver is one of the largest and most complex organs in the body,
serving many critical metabolic functions. More than most other organs, the
liver has the ability to regenerate itself by repairing or replacing injured
tissue. Despite this protection, once a critical mass of liver cells has died
through disease or damage, the liver can fail, leading to illness and death.
Liver failure is a serious health problem. Each year, there are an estimated
300,000 hospitalizations and 30,000 deaths in the United States due to chronic
liver diseases.
Currently, the only cure for many of these liver diseases is a liver
transplant. However, only about 4,500 donor livers become available each year in
the United States and the total cost of transplantation and first year follow-up
is estimated to average over $300,000. As of September 2000, over 16,000
patients were on the liver transplant waiting list, an increase of more than 90%
over the last three years and up from fewer than 1,000 ten years ago.
Furthermore, there are a total of approximately 100,000 adults with severe
cirrhosis and other forms of chronic liver failure in the United States who
could become candidates for a transplant. Not all of these people will get
transplants, or even get onto the transplant waiting list. The incidence of
chronic liver failure is expected to increase
22
in the next ten years as a result of the "silent epidemic" of hepatitis C. Up to
4 million people in the United States are currently infected with the hepatitis
C virus. Researchers estimate that 15% of these persons will develop cirrhosis,
a disease that typically develops over a period of 10 to 20 years.
As a result of the shortage of donor organs, potential liver transplant
patients must wait for a donor liver to become available, often for years. The
vast majority of patients with liver diseases therefore cannot rely on organ
transplantation as a solution. To bridge the gap between supply and demand for
liver donors, several companies are investigating the use of pig livers and pig
liver cells, as well as mature human liver cells and human tumor cells housed in
a bioartificial liver to support an individual on a short-term basis. These
approaches, however, present a variety of scientific and medical problems,
including the risk of contamination from animal viruses. We believe there is an
urgent need for new technologies to support patients with damaged livers, both
acutely and long-term.
Liver Cell Transplantation
The ability to transplant cells that have the capacity to reproduce and
function in an impaired liver could reduce the need for whole organ transplants
and provide treatment for thousands of patients. In this procedure, a physician
injects a suspension of donor liver cells, or hepatocytes, into blood vessels
leading to the patient's liver or spleen. The transplanted cells take up
residence in the recipient's body and provide liver functions, including
detoxification and protein synthesis.
Positive results from hepatocyte transplantation in rodents (both with
mature hepatocytes and hepatocyte precursors) have prompted physicians outside
of Incara to perform transplantation of unfractionated human hepatocytes (liver
cells not separated by their stage of maturity or other parameters) in a number
of human patients with encouraging results. Unfractionated human hepatocytes,
obtained from livers rejected for transplant use, have been introduced into over
30 patients, with beneficial results often observed. These include patients with
cirrhosis, metabolic disorders and fulminant liver failure. Some patients with
severe encephalopathy awoke from coma after receiving liver cell transplant,
coincident with a decrease in ammonia levels, improved cerebral blood flow and
reduction of intracranial pressure. In one patient, a 10-year-old girl, the
transplanted hepatocytes have survived and partially corrected a metabolic
disorder for over 22 months. Treatment by hepatocyte transplantation, however,
has been limited because of the lack of available organs from which viable
hepatocytes can be obtained.
Human Liver Precursor Cells
Incara proposes to advance the present state of hepatocyte
transplantation by isolating, processing and transplanting human liver precursor
cells. Human liver precursor cells, unlike mature liver cells, can divide many
times, greatly expanding the utility of a single donor liver such that one liver
could supply the needs of many patients. Moreover, precursor cells might provide
a much longer functional life, potentially surviving the lifetime of the
recipient. These cells also can survive freezing and thawing better than
unfractionated cells, permitting precursors to be stored until the need for them
arises. The precursor cells should have the capability to differentiate into the
entire lineage of liver cells, providing the functions of early cells that may
be missing and unable to be regenerated by injection of unfractionated
hepatocytes. The precursor cells also might require less immunosuppression drugs
to prevent rejection of the new cells and a smaller injection volume than that
of unfractionated cells. The human liver precursors also avoid some of the
medical and scientific challenges associated with strategies involving pig
livers, pig liver cells and human tumor cells.
Use of Alternative Sources of Donor Livers
Currently, whole organ liver transplantation procedures require a donor
who has undergone brain death, but whose heart is still beating. This occurs
only in approximately one to two percent of hospital deaths, severely limiting
the potential donor pool.
Dr. Reid has demonstrated that viable liver precursor cells can be
isolated postmortem from the livers of non-beating-heart donors, whose livers
cannot be used for whole organ transplant. A major advantage of liver precursor
cells is their ability to survive periods with limited oxygen. The window of
time that viable liver precursors can be isolated postmortem is now under
investigation, along with the useful age range of donors. Since liver precursor
cells can be purified from livers inappropriate for transplant, our program will
not compete for organs with existing liver transplant programs. We have
established an arrangement with a traditional organ donor program for
procurement of livers from non-beating-heart donors. Preclinical experiments
suggest that one donor liver may provide enough liver precursor cells for many
recipients.
23
Development Strategy
We are now scaling-up the liver precursor cell isolation and selection
process to produce the cells required for clinical trials. This step includes
establishing isolation and processing procedures needed for a 1,500-gram to
3,000-gram whole human liver instead of the 100-gram portions of liver used in
the basic research stage of the program. The scaled-up procedures will also be
adapted for a sterile good manufacturing practices, or cGMP, environment. After
scale-up, we expect to transfer the liver precursor cell processing procedure to
a contract cell processor with a facility compliant with cGMP to produce cells
suitable for use in clinical trials.
Clinical Trials
Incara is exploring two patient populations for the initial clinical
trials of precursor cell transplantation. The first group consists of infants
with life-threatening inborn errors of metabolism who are too young for liver
transplants. This patient population represents a group with limited treatment
alternatives where improvement in patient condition and production of the
missing gene products would demonstrate the function of the transplanted cells.
The second series of clinical trials being planned targets the approximately
100,000 adults in the United States with severe cirrhosis and other forms of
chronic liver failure that could become candidates for a transplant. Initially,
these patients would receive the same immunosuppression as liver transplant
patients to prevent rejection of the transplanted cells. Assuming we have
adequate financial resources, Incara plans to begin these initial Phase 1
clinical trials in 2001. Clinical investigators from several leading research
hospitals have expressed interest in participating in our clinical trials. Some
of these investigators have experience with cell transplants using
unfractionated human liver cells and bioartificial livers and believe the
strategy of transplanting liver precursor cells provides a better rationale for
hepatocyte transplants.
Gene Therapy
Gene therapy clinical trial results have in general been disappointing
for both physicians and patients, often because of the inability to obtain
sustained gene expression of the target gene. Precursor cells, because of their
extensive expansion potential, represent a promising cell population to produce
continued gene expression. Incara's gene therapy strategy will be to insert an
exogenous gene into the liver precursor cells and transplant these cells into
the patient. Logical target disorders are diseases resulting from the inability
of the patient's liver cells to properly make an important protein, such as the
missing LDL receptors in hypercholesterolemia and clotting factors in
hemophilia.
Genomics and Research Applications
The liver precursor cell technology developed by Incara has application
as a tool for identifying new drugs and in the drug development and testing
process. The liver precursor cells can be made to grow and differentiate into
mature liver cells. Determining gene expression patterns at various stages of
the liver lineage provides genomic information for drug discovery. For example,
this information can be used to identify new targets for drug discovery programs
or to identify proteins performing biological functions that may have
applications in therapy.
As a tool for the drug testing and development process, the liver
precursor cells and their progeny could be used to assess changes in gene
expression patterns caused by drugs being considered for development. The
changes in gene expression pattern from potential drugs could be compared with
those caused by drugs known to affect the liver. This would allow a
pharmaceutical company to screen compounds for their effect on the liver earlier
in the development process, saving time and money. The full lineage of liver
cells, from precursors to mature cells, could also be used to test drugs for
toxicity to the liver and to study how the drug is metabolized. Currently,
pharmaceutical companies have difficulty obtaining a consistent supply of liver
cells for toxicity testing.
Incara plans to seek a collaboration with a well-funded biotech company
experienced with genomics.
Liver Assist Device
Incara's liver precursor cell technology has application in the
development of a liver assist device, or LAD. LADs are designed to provide
treatment for patients with acute liver failure by providing liver function for
a short period of time (7 to 30 days) to allow sufficient time for a patient's
own liver to recover from failure or to provide a bridge to transplant. Incara's
LAD is expected to be a bio-artificial liver composed of human liver cells in a
bioreactor through which the patient's blood or plasma is circulated.
24
Attempts at clinically useful LADs by others have utilized pig
hepatocytes or human liver tumor cells in a wide variety of bioreactor types.
These devices have shown promise, but all utilize cells with limitations that
our LAD is designed to overcome. The pig hepatocytes, while easily obtained,
have severe limitations; e.g., immune reactions to secreted pig proteins,
limited lifetime and non-human viruses. The liver tumor cells can easily be
grown, but retain only a subset of the functions of normal liver cells and
involve safety concerns. Functioning human liver cells from donor organs have
not been an alternative due to the scarcity of donor livers.
We believe that a LAD using our human liver precursor cells will
overcome many of the problems experienced to date. Proteins secreted by these
cells will be of human origin so immune reactions should be minimized. The
precursor cells can divide extensively in culture so that cells from one donor
liver may be able to supply many LADs. Most importantly, these cells should
display the wide range of liver functions necessary for clinical utility.
Commercialization
There are approximately 115 liver transplant programs in hospitals in
the United States. We believe that marketing to these hospitals could be
accomplished by an internal sales force of approximately 15 people. We intend to
maintain rights to market the liver precursor cell transplantation therapy in
the United States and develop a focused marketing effort following establishment
of the efficacy of the program in clinical trials. Outside of the United States,
we expect to seek a partnership or licensing arrangement with another
pharmaceutical or biotechnology company for commercialization of the liver
precursor cell therapy program. We also intend to seek partnerships for the
development of our liver precursor cells in gene therapy, drug research and
genomic applications and for use in a liver assist device.
Catalytic Antioxidant Small Molecule Program
Incara established its catalytic antioxidant program with the
acquisition of a majority interest in Aeolus Pharmaceuticals, Inc. in July 1995.
The scientific founders of Aeolus, James D. Crapo, M.D., and Irwin Fridovich,
Ph.D., in collaboration with colleagues at Duke University, the National Jewish
Medical and Research Center and Incara, are working to develop small molecules
as therapeutics that overcome the limitations of superoxide dismutases, or SODs,
as drugs. SODs are enzymes that normally protect the body from harmful oxygen
breakdown products. In March 2000, Incara acquired the remaining minority
interest in Aeolus, which is now a wholly owned subsidiary of Incara. Incara has
obtained from Duke University and the National Jewish Medical and Research
Center the right to license the products developed by Drs. Crapo and Fridovich
in exchange for the payment of costs associated with the research and royalties
on sales of the licensed products.
Antioxidants and Disease
Oxygen plays a pivotal role in supporting life by enabling energy
stored in food to be converted to energy that living organisms can use. The
ability of oxygen to participate in key metabolic processes derives from its
highly reactive nature; this reactivity is necessary for life, but also causes
oxygen to react harmfully with living organisms. In the body, oxygen is
converted to various reactive oxygen species, including superoxide, which can
then react with DNA, proteins and lipids. The cumulative result of these
reactions is reduced cellular function and, ultimately, disease. Reactive oxygen
species are thought to play a role in a wide variety of conditions including
chronic bronchitis, stroke, asthma, reperfusion injury following heart attack,
rheumatoid arthritis, Alzheimer's disease, Parkinson's disease and even aging
itself.
The enzyme SOD breaks down the free radical superoxide and plays a
critical role in protecting the body against attack by reactive oxygen species.
However, the natural enzyme's high molecular weight, short half-life in
circulation, inability to penetrate cells and high cost of production limit its
usefulness as a drug. Numerous attempts by many pharmaceutical companies in the
1980's and 1990's using forms of the SOD enzyme failed to demonstrate the
expected efficacy.
Incara has synthesized a group of small molecules that have multiple
potent antioxidant activities, act in a catalytic manner and have more desirable
pharmaceutical characteristics than the natural SOD enzyme. These compounds have
potent SOD activity, scavenge peroxynitrite and inhibit lipid peroxidation. Some
of these compounds have superoxide dismutase activities greater than the natural
SOD enzymes on a weight basis in in vitro experiments. The lead compound in this
series, AEOL 10113, has shown promising activity in preclinical models of stroke
and chronic bronchitis. We also have a number of additional compounds available
in this series.
25
Stroke
An estimated 500,000 to 700,000 people in the United States annually
suffer strokes, about 400,000 of which are first-time strokes that occur
essentially without warning. In the United States, stroke kills approximately
158,000 people annually and has left more than one million people disabled to
some extent, according to the American Heart Association. The estimated direct
cost of stroke is over $40 billion annually, much of which is attributable to
the high expense of rehabilitating and caring for victims.
In a model of ischemic stroke, where the middle cerebral artery of a
rat is blocked for 90 minutes and then unblocked, AEOL 10113 reduced infarct
size significantly when introduced as late as 7 1/2 hours after the start of the
stroke. Stroke is a form of ischemia/reperfusion injury, and AEOL 10113 is also
highly active in a model of liver ischemia/reperfusion injury. We are currently
evaluating another compound, AEOL 10150, and we anticipate selecting the most
promising drug candidate for stroke in the fall of 2000, once more data on AEOL
10150 is available.
The following activities are expected to be completed prior to
initiating Phase 1 clinical trials:
o Scale-up manufacturing of drug candidate
o Analytical/bioanalytical methods development and validation
o Formulation development
o Manufacture and release of preclinical and clinical supplies
o Additional toxicology studies (through two-week exposure in two
species)
We believe that the above activities will take about 9 to 12 months. Assuming we
have adequate financial resources and satisfactory completion of the preclinical
studies, Incara intends to initiate Phase 1 clinical trials in 2001.
Chronic Bronchitis
Chronic bronchitis is an inflammatory disease of the lung often caused
by smoking. According to the American Lung Association, approximately 14 million
Americans suffer from chronic bronchitis.
In preclinical models, AEOL 10113 given by inhalation significantly
inhibited the influx of inflammatory cells into the lung after administration of
lipopolysaccharide or antigen. Lung inflammation is thought to be central to the
pathogenesis of chronic bronchitis.
The selection of a drug candidate for chronic conditions requires more
extensive safety studies than for acute conditions such as stroke. Following
selection of AEOL 10113 or AEOL 10150 as the candidate for chronic bronchitis,
activities similar to those described above for stroke will be performed. Incara
does not expect to pursue this area unless it has a collaborative partner to
fund clinical development.
Commercialization
Because of the large numbers of patients suffering from stroke and
chronic bronchitis, effectively marketing a pharmaceutical for treatment of
these indications requires the resources of a large sales organization. We
intend to seek development and marketing partnerships or licensing arrangements
for the stroke and chronic bronchitis indications of our antioxidant program
with pharmaceutical companies with an established marketing presence in the
target indication.
Collaborative and Licensing Arrangements
Incara's strategy is to develop and add value to both in-licensed
products and sponsored research programs and to enter into collaborations and
licensing agreements with corporate partners for certain functions, particularly
manufacturing and marketing. All of our product development programs rely on
licenses of technology from third parties, as described below.
Opocrin License
In July 1998, we signed an agreement with Opocrin to obtain the
exclusive rights to OP2000 on a worldwide basis, except for Japan and Korea. We
paid $1,000,000 to Opocrin as a license fee upon execution of the agreement.
Additional compensation will be payable to Opocrin upon initiation of specified
clinical trials, upon filing for specified regulatory approval, upon obtaining
specified regulatory approval, and upon achieving specified
26
aggregate annual sales. Incara also is to pay Opocrin royalties on net sales and
is responsible for the costs of conducting clinical trials for OP2000. Incara
and Opocrin have agreed to diligently pursue the negotiation and execution of a
manufacturing supply agreement, whereby Opocrin would manufacture OP2000 for
commercial purposes. This agreement is scheduled to expire in July 2013.
University of North Carolina License
We have a sponsored research agreement which covers research at the
University of North Carolina by certain scientists in the area of hepatic stem
cells and which grants us a first option to obtain an exclusive license to
inventions resulting from the research during the term of the research
agreement, or during the one-year period following termination of the agreement.
The research aspect of the agreement with UNC can be terminated by mutual
consent or by 12 months' written notice by either party. In August 1999, we
obtained an exclusive worldwide license from UNC to make, use and sell products
using proprietary information and technology developed under this sponsored
research agreement. The UNC license includes rights to five U.S. patent
applications filed during 1999 and 2000, including patent applications for
isolating and purifying human liver precursor cells. We are pursuing
international patent protection, as appropriate. We will make milestone payments
to UNC upon the occurrence of development milestones and royalties on net sales.
We are also obligated to pay patent filing, prosecution, maintenance and defense
costs.
Albert Einstein College of Medicine
We have obtained exclusive worldwide rights from Albert Einstein
College of Medicine for patents resulting from research conducted on liver stem
and precursor cells by Dr. Reid and other scientists, while Dr. Reid was at
Einstein. The United States component of this patent portfolio includes three
issued patents, three pending patent applications and one additional patent
application that has received a Notice of Allowance. We also have two pending
patent applications in each of Europe and Japan.
Incara must pay royalties to Einstein on net product sales during the
term of the licenses and must pay minimum royalties beginning in 2004. We also
must pay patent prosecution, maintenance and defense costs. The Einstein
licenses are terminable in the event of breach and other customary
circumstances, and otherwise expire when the last licensed patent expires.
Duke Licenses
We have obtained exclusive worldwide rights from Duke University to
products using certain technology and compounds developed by Dr. Irwin Fridovich
and other scientists at Duke. These scientists provide research support and
advice in the field of free radical and antioxidant research. Further
discoveries in the field of antioxidant research from these scientists'
laboratories at Duke also are covered by the licenses from Duke.
Incara must pay royalties to Duke on net product sales during the term
of the Duke licenses, and milestone payments upon the occurrence of certain
events, including FDA approval of the first product using the licensed
technology. In addition, we are obligated under the Duke license to pay patent
prosecution, maintenance and defense costs. The Duke licenses are terminable in
the event of breach and other customary circumstances, and otherwise expire when
the last licensed patent expires.
National Jewish Agreement
In September 1997, Aeolus executed a Sponsored Research Agreement with
National Jewish Medical and Research Center. The National Jewish Agreement
grants Aeolus an option to negotiate a royalty-bearing exclusive license for
certain technology, patents and inventions resulting from research by certain
individuals at National Jewish within the field of antioxidant compounds,
nitrosylating compounds and related discoveries. Aeolus has agreed to support
National Jewish's costs incurred in performance of the research.
Manufacturing and Marketing
Our strategy is to contract with third parties for manufacturing
capabilities that cannot be established by us in a cost-effective manner. Our
most advanced product, OP2000, is being manufactured for clinical trials for us
in bulk form by Opocrin, the licensor of that product, on a cost plus basis.
Incara and Opocrin have agreed to diligently pursue the negotiation and
execution of a manufacturing supply agreement, whereby Opocrin would manufacture
OP2000 for commercial purposes.
27
We have identified and are in discussions with third parties to conduct
the cell processing for hepatic precursor cells being developed by Incara. To
begin clinical trials, we must contract with a supplier to isolate the hepatic
precursor cells in compliance with cGMP regulations. We have not yet established
the terms of any supply arrangement, and we might not be able to enter into any
third party arrangements on satisfactory terms. We also must establish and
maintain sources of livers or liver tissues from which the precursor cells can
be isolated. We have historically relied on several suppliers of liver tissues
for research, but entering into the clinical trial stage of development will
increase our needs. For clinical trials and ultimately for commercialization, we
plan to obtain livers which are not suitable for full liver transplant from the
traditional organ transplant donor programs. We have established an arrangement
with an established organ procurement agency to obtain these organs.
We have identified a potential manufacturer of clinical products for
the catalytic antioxidants being developed, but we have not yet negotiated the
terms of clinical supply.
Because some of our potential products are being developed for large
therapeutic markets requiring broad sales and marketing capabilities, we expect
to partner with larger pharmaceutical companies to obtain the needed reach of a
large sales force for these products. This could include OP2000 and products
resulting from our antioxidant program and the international marketing of all of
our products. We have not identified marketing partners for our ongoing product
development programs. We might not be able to enter into any marketing
arrangements on satisfactory terms.
We might choose to establish our own marketing capabilities for product
areas where a targeted marketing effort would be appropriate. This could include
the liver precursor cell program, which we believe would target the
approximately 115 liver transplant centers in the United States. Establishing
marketing capabilities could require substantial funds and we might not
successfully establish our own marketing capabilities on a cost effective basis
or at all.
Competition
General
Competition in the pharmaceutical industry is intense and we expect it
to increase. Technological developments in our fields of research and
development occur at a rapid rate and we expect competition to intensify as
advances in these fields are made. We will be required to continue to devote
substantial resources and efforts to research and development activities. Our
most significant competitors are fully integrated pharmaceutical companies and
more established biotechnology companies, which have substantially greater
financial, technical, sales and marketing and human resources. These companies
might succeed in obtaining regulatory approval for competitive products more
rapidly than we can for our own products. In addition, competitors might develop
technologies and products that are cheaper, safer or more effective than those
being developed by us or that would render our technology obsolete.
We expect that important competitive factors in our potential product
markets will be the relative speed with which we and other companies can develop
products, complete the clinical testing and approval processes, and supply
commercial quantities of competitive product(s) to the market. With respect to
clinical testing, competition may result in a scarcity of clinical investigators
and patients available to test our potential products, which could delay
development.
As described below, we are aware of products in research or development
by our competitors that address the diseases being targeted by us.
Inflammatory Bowel Disease
The two major forms of inflammatory bowel disease, ulcerative colitis
and Crohn's disease, are treated by antidiarrheals, aminosalicylates, steroids
and immunosuppressants. Crohn's disease also is being treated by off-label use
of metronidazole, an antibiotic that acts as an anti-inflammatory through an
unknown mechanism. Some of the drugs used to treat these diseases are available
in generic form and are being marketed at a price that could be less than the
price of OP2000, if it were successfully developed and approved.
Remicade(R) was approved by the FDA in 1998 for use in treating
moderately to severely active Crohn's disease. Remicade is a monoclonal antibody
indicated for the reduction of the signs and symptoms of Crohn's disease in
patients who have an inadequate response to conventional therapy. The drug is
being marketed in the
28
United States by Centocor, Inc. Its cost and the concern over possible allergic
reaction to the protein, however, have limited its use in this indication.
Hepatic Diseases
We are aware of competitive efforts in academic, research and
commercial institutions using human hepatic cells in treatment of liver disease.
Diacrin, Inc. is conducting a Phase 1 clinical trial for treatment of cirrhosis
using human hepatocyte transplantation. In addition, other companies and
academic laboratories are pursuing strategies to investigate the use of pig
livers in transplantation as a substitute for human liver and the use of
hepatocytes prepared from pig livers in a form of cell therapy. Several other
companies have conducted research and development on a bioartificial liver
device to treat acute liver failure that could be competitive with our
technology under development. In particular, Circe Biomedical, Inc. has
conducted clinical trials with a bioartificial liver that uses pig liver cells,
and VitaGen Incorporated is conducting a clinical trial with a bioartificial
liver that utilizes immortalized human liver cells. At least one company is
pursuing the growth in vitro of mini-organs, including liver. StemCells, Inc.,
formerly Cytotherapeutics, Inc., other corporations and academic institutions
are conducting research in the area of liver and other organ stem and precursor
cells. Stem cell research in general is being developed by a number of
companies, including Geron Corporation, which has announced that it has isolated
embryonic stem cells. Embryonic stem cells in theory could have the capacity to
differentiate into all human systems, including the liver.
Antioxidants
Several companies have explored the therapeutic potential of
antioxidant compounds in numerous indications. Historically, most of these
companies have focused on recombinant versions of naturally occurring
antioxidant enzymes, but with limited success, perhaps because the large size of
these molecules makes delivery into the cells difficult. Antioxidant drug
research continues at a rapid pace despite previous clinical setbacks. Several
companies have antioxidant compounds in Phase 2 clinical trials. These compounds
will likely be commercially available sooner than any products being developed
by us. In October 1998, Metaphore Pharmaceuticals Inc. reported results from
studies of a stable superoxide dismutase mimetic, which demonstrated benefits in
animal models of inflammation and reperfusion injury. Metaphore reported that
their SOD mimetic substantially reduced tissue damage due to inflammation and
reperfusion. AstraZeneca is developing NXY-059 for stroke. The compound,
licensed from Centaur Pharmaceuticals, is currently in Phase 2 development.
NXY-059 is a nitrone compound with free radical trapping properties.
Patents and Proprietary Rights
We generally seek patent protection for potential products and
proprietary technology in the United States and other jurisdictions, including
products and technology licensed from third parties. The process for preparing
and prosecuting patents is lengthy, uncertain and costly. Patents might not
issue on any of the pending patent applications owned or licensed by us from
third parties. Even if patents issue, the claims allowed might not be
sufficiently broad to protect our technology or provide us protection against
competitive products or otherwise be commercially valuable. Patents issued to or
licensed by us could be challenged, invalidated, infringed, circumvented or held
unenforceable. Even if we successfully defend our patents, the costs of defense
can be significant.
We have the exclusive license from Opocrin, in all countries other than
Japan and Korea, for an issued patent claiming certain oligosaccharides derived
from heparin and their use in antiatherosclerotic activity to develop and
commercialize OP2000. We also have a non-exclusive license from Opocrin to
practice certain related patents, to the extent required for our activities
related to OP2000. We are aware of a recently issued patent claiming the use of
certain fractions of heparin for the treatment of inflammatory bowel disease. We
do not believe OP2000 falls within the scope of this patent. If OP2000 were to
be determined to fall within the scope of this patent and if the patent's claims
were found to be valid, we would have to license this patent in order to
commercialize OP2000. If this were the case we might not be able to license this
patent at a reasonable cost which would result in our not being able to market
OP2000. Uncertainty regarding the scope or validity of this patent might deter
potential partners from collaborating with us for the development and
commercialization of OP2000.
In the liver precursor cell program, we have an exclusive license for
three issued United States patents and three pending patent applications from
Albert Einstein College of Medicine. In addition we have received Notice of
Allowance on one other patent licensed from Einstein. Claims included in these
allowed patents include an isolated hepatocyte precursor capable of
differentiating into a hepatocyte and a population of genetically engineered
hepatocyte precursor cells. We also have two related pending patent applications
in each of Europe and Japan. Our UNC sponsored research agreement allows us to
obtain an exclusive worldwide license to make, use and sell
29
products using proprietary information and technology developed under the UNC
sponsored research agreement. Rights to five U.S. patent applications filed
during 1999 and 2000 are currently included in the UNC license, as well as
appropriate related international applications. Pending claims on the UNC
patents include human liver precursor cell composition and process for their
isolation, expansion and cryopreservation and the use of non-beating-heart
donors as a source for precursor cells.
Our catalytic antioxidant small molecule technology base is described
in three issued U. S. patents, one U. S. patent application that has been
allowed, and five patent applications that are pending. These patents and patent
applications belong in whole or in part to Duke or National Jewish and are
licensed to us. These patents and patent applications cover soluble manganic
porphyrins as antioxidant molecules as well as targeted compounds obtained by
coupling such antioxidant compounds to molecules that bind to specific
extracellular elements. The pending U.S. applications include composition of
matter claims for several series of compounds. Corresponding international
patent applications have been filed, one of which has issued.
In addition to patent protection, we rely upon trade secrets,
proprietary know-how and technological advances that we seek to protect in part
through confidentiality agreements with our collaborative partners, employees
and consultants. Our employees and consultants are required to enter into
agreements providing for confidentiality and the assignment of rights to
inventions made by them while in our service. We also enter into non-disclosure
agreements to protect our confidential information furnished to third parties
for research and other purposes. These types of agreements can be difficult to
enforce and for some types of breach there is no satisfactory remedy for
unauthorized disclosures. It is possible that our trade secrets and proprietary
know-how will become known or will be independently discovered by others despite
our efforts.
Our commercial success will also depend in part on our ability to
commercialize products without infringing patents or other proprietary rights of
others or breaching the licenses granted to us. If we are not able to obtain a
license to any third-party technology needed for our business at a reasonable
cost, we might have to stop developing the product.
As with any pharmaceutical company, our patent and other proprietary
rights are uncertain. The patent rights related to our products might conflict
with current or future proprietary rights of others. For the same reasons the
products of others could infringe our patent or proprietary rights. Litigation
or patent interference proceedings, either of which could result in substantial
cost, might be necessary to enforce any patents or other proprietary rights
issued to us or to determine the scope and validity or enforceability of other
parties' proprietary rights. The defense and prosecution of patent and
intellectual property claims are both costly and time consuming, even if the
outcome is favorable to us. Any adverse outcome could make us pay damages to
third parties, require disputed rights to be licensed from third parties, or
require us to cease selling our products.
Government Regulation
Our research and development activities and the manufacturing and
marketing of our future products are subject to regulation by numerous
governmental agencies in the United States and in other countries. The FDA and
comparable agencies in other countries impose mandatory procedures and standards
for the conduct of clinical trials and the production and marketing of products
for diagnostic and human therapeutic use. Before obtaining regulatory approvals
for the commercial sale of any of our products under development, we must
demonstrate through preclinical studies and clinical trials that the product is
safe and efficacious for use in each target indication. The results from
preclinical studies and early clinical trials may not be predictive of results
that will be obtained in large-scale testing. Our clinical trials may not
successfully demonstrate the safety and efficacy of any products or result in
marketable products.
The steps required by the FDA before new drug or cell therapy products
may be marketed in the United States include: (1) preclinical studies; (2) the
submission to the FDA of a request for authorization to conduct clinical trials
on an investigational new drug or cell therapy, which must become effective
before human clinical trials may commence; (3) adequate and well-controlled
human clinical trials to establish the safety and efficacy of the drug or cell
therapy for its intended use; (4) submission to the FDA of a New Drug
Application, or NDA, for a drug, or submission to the FDA of a Biological
License Application, or BLA, in the case of a cell therapy; and (5) review and
approval of the NDA or BLA by the FDA before the product may be shipped or sold
commercially. In addition to obtaining FDA approval for each product, each
manufacturing and cell processing establishment must be registered with the FDA
and undergo an inspection prior to the approval of an NDA or BLA. Each
manufacturing facility, and its quality control and manufacturing procedures
must also conform and adhere at all times to the FDA's cGMP regulations. In
addition to preapproval inspections, the FDA and other government agencies
regularly
30
inspect manufacturing facilities for compliance with these requirements.
Manufacturers must expend time, money and effort in the area of production and
quality control to ensure full technical compliance with these standards.
Preclinical testing includes both in vitro and in vivo laboratory
evaluation and characterization of the safety and efficacy of a drug or cell
therapy and its formulation. Preclinical testing results are submitted to the
FDA as a part of an Investigational New Drug Application, or IND, which must
become effective prior to commencement of human clinical trials. Clinical trials
are typically conducted in three sequential phases following submission of an
IND. Phase 1 represents the initial administration of the drug or cell therapy
to a small group of humans, either patients or healthy volunteers, typically to
test for safety (adverse effects), dosage tolerance, absorption, distribution,
metabolism, excretion and clinical pharmacology, and, if possible, to gain early
evidence of effectiveness. Phase 2 involves studies in a small sample of the
actual intended patient population to assess the efficacy of the drug or cell
therapy for a specific indication, to determine dose tolerance and the optimal
dose range and to gather additional information relating to safety and potential
adverse effects. Once an investigational drug or cell therapy is found to have
some efficacy and an acceptable safety profile in the targeted patient
population, Phase 3 studies are initiated to further establish clinical safety
and efficacy of the therapy in a broader sample of the general patient
population, in order to determine the overall risk-benefit ratio of the drug or
cell therapy and to provide an adequate basis for any physician labeling. During
all clinical studies, we must take care to adhere to good clinical practice, or
GCP, standards. The results of the research and product development,
manufacturing, preclinical studies, clinical studies and related information are
submitted in an NDA or BLA to the FDA.
The process of completing clinical testing and obtaining FDA approval
for a new drug or cell therapy product is likely to take a number of years and
require the expenditure of substantial resources. If an application is
submitted, there can be no assurance that the FDA will review and approve the
NDA or BLA in a timely manner. Even after initial FDA approval has been
obtained, further studies, including post-market studies, may be required to
provide additional data on safety and will be required to gain approval for the
use of a product as a treatment for clinical indications other than those for
which the product was initially tested. Also, the FDA will require post-market
reporting and may require surveillance programs to monitor the side effects of
the drug or cell therapy. Results of post-marketing programs may limit or expand
the further marketing of the products. Further, if there are any modifications
to the drug or cell therapy, including changes in indication, manufacturing
process, labeling or a change in manufacturing facility, an NDA or BLA
supplement may be required to be submitted to the FDA.
The rate of completion of our clinical trials will be dependent upon,
among other factors, the rate of patient enrollment. Patient enrollment is a
function of many factors, including the size of the patient population, the
nature of the protocol, the availability of alternative therapies and drug
regimens, the proximity of patients to clinical sites and the eligibility
criteria for the study. Delays in planned patient enrollment may result in
increased costs and delays, which could have a material adverse effect on us.
Failure to comply with applicable FDA requirements may result in a
number of consequences that could materially and adversely affect us. Failure to
adhere to approved protocols and GCPs in conducting clinical trials could cause
the FDA to place a clinical hold on one or more studies which would delay
research and data collection necessary for product approval. Noncompliance with
GCPs could also have a negative impact on FDA's evaluation of an NDA or BLA.
Failure to adhere to GMPs and other applicable requirements could result in FDA
enforcement action and in civil and criminal sanctions, including but not
limited to fines, seizure of product, refusal of the FDA to approve product
approval applications, withdrawal of approved applications, and prosecution.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of marketing of the product in such countries. The requirements
governing the conduct of clinical trials and product approvals vary widely from
country to country, and the time required for approval may be longer or shorter
than that required for FDA approval. Although there are some procedures for
unified filings for certain European countries, in general, each country at this
time has its own procedures and requirements. There can be no assurance that any
foreign approvals will be obtained on a timely basis or at all.
In addition to the regulatory framework for product approvals, we and
our collaborative partners must comply with laws and regulations regarding
occupational safety, laboratory practices, the use, handling and disposition of
radioactive materials, environmental protection and hazardous substance control,
and other local, state, federal and foreign regulation. The impact of such
regulation upon us cannot be predicted and could be material and adverse.
31
Employees
As of August 31, 2000, we had 20 employees. We enhance our research and
development activities with sponsored research at Universities, collaborators,
consultants and clinical research organizations. None of our employees is
represented by a labor union. We consider our employee relations to be good. We
are highly dependent on the principal members of our management and scientific
staff. The loss of certain key employees could have a material adverse effect on
us. In addition, we believe that our future success will depend in large part
upon our ability to attract and retain highly skilled scientific and managerial
personnel. We face competition for such personnel from other companies, research
and academic institutions, government entities and other organizations. We might
not be successful in hiring or retaining the personnel we require.
Properties
Incara currently leases 9,444 square feet of office space in Research
Triangle Park, North Carolina, which is leased through April 2001. We believe
that these leased facilities, or other facilities available in the area will be
adequate to meet our current and future needs.
Legal Proceedings
The Company is not a party to any legal proceedings.
Discontinued Programs
Our historical cash expenditures prior to December 31, 1999 were
significantly higher than our current cash spending rate. This lower level of
expenditures has resulted from the discontinuation of the IRL and BEXTRA(R)
programs.
IRL
On December 29, 1999, we completed the sale of Incara Research
Laboratories, or IRL, our anti-infective drug discovery division, to a
subsidiary of Advanced Medicine, Inc., a private pharmaceutical company, for a
cash payment of $11,000,000. In addition, we might also receive future payments
totaling up to an additional $4,000,000 in the event a compound originating from
the collaboration with Merck & Co., Inc. reaches preclinical and clinical trial
milestones. The transaction involved the sale of assets associated with Incara's
anti-infective division, including rights under the collaboration agreement with
Merck, and the assumption of related liabilities by the purchaser. Expenses for
IRL were $1,376,000 for the quarter ended December 31, 1999 and $8,245,000 for
the fiscal year ended September 30, 1999. We do not expect any additional
expenses for IRL. As a result of the sale of IRL, we remain contingently liable
through May 2007 on debt and lease obligations assumed by the purchaser,
including the IRL facility lease in Cranbury, New Jersey. This contingent
liability was approximately $9,000,000 in June 2000 and will decline on an
approximately straight-line basis to zero in May 2007.
BEXTRA
Until July 1999, our most advanced product was BEXTRA (bucindolol HCl),
a beta-blocker that was being evaluated in a Phase 3 clinical trial conducted by
the National Institutes of Health and the United States Department of Veterans
Affairs for use in treating congestive heart failure patients. The study was
terminated in July 1999 prior to its scheduled termination date based on an
interim analysis by the Data and Safety Monitoring Board that showed that
treatment with bucindolol did not demonstrate a statistically significant
improvement in survival in the patient population as a whole. Based on this
result, we agreed to end our collaboration with BASF Pharma/Knoll AG for BEXTRA
for countries outside the United States and Japan, and we terminated the
European trial of BEXTRA. We do not expect to pursue further development of the
compound for this or any other indication. The compound was being developed with
Interneuron Pharmaceuticals, Inc. through a jointly owned company named CPEC
LLC. BEXTRA related expenses were $6,469,000 for fiscal 1999. We do not
anticipate any additional expenses for BEXTRA.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors and their ages as of August 31,
2000 are as follows;
32
Age Position
--- --------
Clayton I. Duncan.......................51................Director, President and Chief Executive Officer
David B. Sharrock.......................64................Director
Edgar H. Schollmaier ...................66................Director
Stephen M. Prescott, M.D................52................Director
Richard W. Reichow......................49................Executive Vice President and Chief Financial Officer
David P. Ward, M. D.....................54................Executive Vice President, Research and Development
John P. Richert.........................50................Vice President, Market Development
W. Bennett Love.........................45................Vice President, Corporate Planning/Communications
Clayton I. Duncan has been President, Chief Executive Officer and a
director of Incara since January 1995. From 1989 until December 1993, Mr. Duncan
was President and Chief Executive Officer of Sphinx Pharmaceuticals Corporation
("Sphinx"), a biopharmaceutical company which was acquired by Eli Lilly and
Company ("Lilly") in September 1994. From December 1993 until September 1994, he
served as an independent consultant to Sphinx with regard to the sale of Sphinx
to Lilly. From 1987 to 1989, Mr. Duncan was a General Partner of Intersouth
Partners, a venture capital firm. From 1979 to 1987, he was an executive with
Carolina Securities Corporation, a regional investment banking firm, serving as
Executive Vice President and a director from 1984 to 1987. Mr. Duncan was
founder and Chairman of the Board of CRX Medical, Inc., a medical products
company that conducted research and development in wound management, ophthalmic
disorders and interventional radiology. Mr. Duncan is also a director of Aeolus
Pharmaceuticals, Inc., CPEC LLC, and Renaissance Cell Technologies, Inc., all of
which are subsidiaries of Incara. Mr. Duncan received an M.B.A. from the
University of North Carolina at Chapel Hill. In addition, Mr. Duncan is a
director of The Forest at Duke, a continuing care retirement community and
Chairman of the Board of Directors of the Carolina Ballet, a professional ballet
company.
David B. Sharrock has been a director of Incara since October 1995. Mr.
Sharrock was associated with Marion Merrell Dow, Inc., a multi-national
pharmaceutical company, and its predecessor companies for over 35 years until
his retirement in December 1993. Most recently, since December 1989, he served
as Executive Vice President, Chief Operating Officer and a director, and in
1988, he was named President and Chief Operating Officer of Merrell Dow
Pharmaceuticals Inc. Mr. Sharrock is also a director of Interneuron
Pharmaceuticals, Inc. ("Interneuron") and Broadwing Inc.
Edgar H. Schollmaier has been a director of Incara since May 1998. Mr.
Schollmaier is Chairman of Alcon Laboratories, Inc. ("Alcon"), a wholly owned
subsidiary of Nestle' SA. He served as President of Alcon from 1972 to 1997 and
was Chief Executive Officer for the last 20 years of that term. He is a graduate
of the University of Cincinnati and the Harvard Graduate School of Business
Administration. He serves as a director of DENTSPLY International, Inc., a
dental products company, and Stevens International Inc., a printing and
packaging company. In addition, he is a Regent of Texas Christian University and
a director of the University of Cincinnati Foundation, the Cook Children's
Hospital, Research to Prevent Blindness and the Foundation of the American
Academy of Ophthalmology.
Stephen M. Prescott, M.D. was elected to the Board in April 2000. Dr.
Prescott is the Executive Director of the Huntsman Cancer Institute at the
University of Utah in Salt Lake City. Dr. Prescott received his M.D. degree from
Baylor College of Medicine in 1973 and then completed training in Internal
Medicine at the University of Utah. Dr. Prescott subsequently undertook advanced
research training in biochemistry and molecular biology at Washington University
School of Medicine. He joined the faculty at the University of Utah in 1982 and
currently is a Professor of Internal Medicine at the University of Utah and
holds the H.A. & Edna Benning Presidential Endowed Chair in Human Molecular
Biology and Genetics. His previous position at the University of Utah (from 1998
- - 1999) was Director of the Program in Human Molecular Biology & Genetics, in
the Eccles Institute.
Richard W. Reichow has been Executive Vice President since July 1998,
Secretary since October 1995, and Senior Vice President, Chief Financial Officer
and Treasurer since March 1995. Mr. Reichow was employed by Sphinx as President
and Chief Executive Officer from December 1993 to September 1994, as Vice
President, Finance & Administration from August 1991 to September 1994, and as
Chief Financial Officer and Treasurer from March 1990 to September 1994. Between
September 1994 and March 1995, he was an independent financial consultant. Mr.
Reichow was Vice President, Chief Financial Officer and Treasurer of CRX Medical
from 1987 to 1990. Mr. Reichow is a Certified Public Account.
David P. Ward, M. D. has been Executive Vice President, Research and
Development of Incara since July 1998, and was Senior Vice President, Research &
Development from Mach 1995 to July 1998. Dr. Ward was Group Vice President,
Medical, Regulatory Affairs and Clinical Operations of Quintiles Transnational
Corporation,
33
a contract research organization, from October 1994 to March 1995. Dr. Ward was
Vice President of Clinical Development and Regulatory Affairs of Sphinx from
January 1992 to September 1994. Prior to that time, Dr. Ward was employed by
SmithKline Beecham, a multinational pharmaceutical company, for more than six
years, serving as a Vice President in various clinical areas. Dr. Ward received
his M. D. from Case Western University Medical School.
John P. Richert has been employed by Incara since 1995, and has been
Vice President, Market Development since December 1996. Mr. Richert served as
Director, Market Development with Sphinx from 1991 to 1994. Mr. Richert was
employed by Schering-Plough Corporation, a major pharmaceutical manufacturer,
from 1981 to 1990 where he held positions of increasing responsibility in
marketing. Mr. Richert received an M.B.A. in Pharmaceutical Marketing from
Fairleigh-Dickinson University.
W. Bennett Love has been employed by Incara since 1995, and has been
Vice President, Corporate Planning/Communications since June 1997. From 1990 to
1994, Mr. Love was employed as Sphinx as Director, Corporate Planning/
Communications. From 1983 through 1989, he was an investment banker with a
regional securities firm. Mr. Love received an M. B. A. from the University of
North Carolina at Chapel Hill.
Management Changes
On January 31, 2000, Barbara S. Schilberg resigned as Executive Vice
President and General Counsel. On June 22, 2000, Director Joseph J. Ruvane, Jr.
died.
Executive Compensation
Summary Compensation
The following table sets forth all compensation earned for services
rendered to it in all capacities for the fiscal years ended September 30, 1999,
1998 and 1997, by Incara's Chief Executive Officer and by the four most highly
compensated executive officers who earned at least $100,000 in the respective
fiscal year (collectively, the "Named Officers").
Summary Compensation Table
Annual Compensation Long Term Compensation Awards
-------------------------- -------------------------------------------
Name and Fiscal Stock Options Restricted Stock All Other
Principal Position Year Salary Bonus (Shares) (Shares) (2) Compensation (1)
- --------------------------- -------- ------------ ----------- ------------------ ------------------ -------------------
Clayton I. Duncan 1999 $ 300,000 $84,000 --- 188,375 $ 2,934
President and Chief 1998 295,225 78,652 235,877 --- 2,791
Executive Officer 1997 275,600 95,400 --- --- 3,345
David P. Ward, M.D. 1999 235,000 51,994 --- 120,000 3,993
Executive Vice President, 1998 221,250 44,520 140,000 --- 3,657
Research & Development 1997 207,000 54,000 20,000 --- 3,134
Richard W. Reichow 1999 235,000 54,637 --- 120,000 3,044
Executive Vice President, 1998 212,250 46,825 140,000 --- 2,811
Chief Financial Officer, 1997 196,650 52,725 20,000 --- 3,192
Treasurer and Secretary
Barbara S. Schilberg (3) 1999 230,000 16,447 --- --- 1,397
Executive Vice President 1998 17,466 --- 180,000 --- 66
and General Counsel
W. Bennett Love 1999 122,000 23,028 --- 44,000 1,608
Vice President, Corporate 1998 117,333 17,480 54,000 --- 1,554
Planning/Communications 1997 105,452 17,280 29,000 --- 1,708
- ---------------------
(1) Consists of Life and Long-term disability insurance premiums and health club
fees reimbursed or paid on behalf of the Named Officers.
(2) As of September 23, 1999, the Named Officer purchased the number of shares
of restricted stock indicated at par value ($0.001 per share) and cancelled
stock options to purchase an equal number of shares of common stock. The
shares of restricted stock vest over up to three years from the date of
grant and vesting could be
34
accelerated pursuant to certain events, such as a change of control or an
involuntary termination of employment. No shares were vested as of September
30, 1999. The value of the restricted stock received by the Named Officer,
based on the closing price of Incara's stock on September 23, 1999 ($0.625),
was as follows: for Mr. Duncan $117,546; for Dr. Ward $74,880; for Mr.
Reichow $74,880; and for Mr. Love $27,456.
(3) On January 31, 2000, Ms. Schilberg resigned as Executive Vice President and
General Counsel.
Management Incentive Plan
The Compensation Committee and the Board of Directors have approved a
Management Incentive Plan ("MIP") for the executive officers of Incara. The
MIP provides for cash payments to the executive officers upon the achievement
of certain corporate and individual objectives. The MIP is intended to be an
annual compensation program. For the calendar year ended December 31, 1999 and
the calendar year ended December 31, 1998, the corporate objectives related
primarily to the development and commercialization of bucindolol and the
identification and advancement of other potential products or programs. The
corporate and individual objectives for calendar 1999 were evaluated and
measured, and cash payments were made to the executive officers in January
2000.
Option Grants, Exercises and Holdings and Fiscal Year-End Option values
No stock option grants were made to any of the Named Officers during
the fiscal year ended September 30, 1999.
The following table sets forth certain information concerning all
stock options exercised during the fiscal year ended September 30, 1999 by the
Named Officers, and the number and value of unexercised options held by the
Named Officers as of September 30, 1999:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of Value of
Securities Underlying Unexercised
Unexercised Options In-the-Money Options
Shares at September 30, 1999 at September 30, 1999(2)
Acquired Value ---------------------------------- ---------------------------------
Name on Exercise Realized (1) Exercisable Unexerciseable Exercisable Unexerciseable
- ---------------------- ------------- -------------- ------------- ----------------- ------------- ----------------
Clayton I. Duncan - - 251,557 - $ 57,546 $ -
David P. Ward, M.D. - - 116,500 - 28,588 -
Richard W. Reichow - - 115,800 - 28,381 -
Barbara S. Schilberg - - 45,000 135,000 - -
W. Bennett Love - - 36,000 - - -
- ----------------------
(1) Market value of underlying securities on the date of exercise, minus the
exercise price.
(2) Value based on the difference between the fair market value of the shares of
common stock at September 30, 1999 ($0.65625), as quoted on the Nasdaq Stock
Market, and the exercise price of the options.
Employment Agreements
In September 1999, Incara entered into individual severance agreements
with Mr. Duncan, Dr. Ward, Mr. Reichow and Mr. Love. The severance agreements
provide that if the officer's employment with Incara is terminated, without just
cause, subsequent to a change in control as defined in the severance agreements,
such officer shall receive a severance benefit of two and one-half times his
annual base salary and average bonus.
In December 1997, Incara entered into a three-year employment agreement
with Mr. Duncan. The agreement provides for an annual base salary (which was
increased to $330,000 in January 2000) and annual bonuses based on the
achievement of performance milestones to be mutually agreed upon by Mr. Duncan
and the Board or its Compensation Committee. The agreement with Mr. Duncan also
provides that during the term of the agreement and, unless Mr. Duncan terminates
his employment for cause, for a period of one year thereafter, Mr. Duncan will
not compete with Incara, directly or indirectly. In the event Mr. Duncan's
employment is terminated by the Board, other than in a change in control and
without just cause, Incara shall continue to pay for a period of one
35
year, Mr. Duncan's base salary plus a percentage of his salary equal to the
average annual bonus percentage earned for the two years prior to the date of
termination.
In November 1998, Incara entered into three-year employment agreements
with each of Dr. Ward and Mr. Reichow. The agreements provide for base salaries
and annual bonuses based upon the achievement of performance milestones to be
mutually agreed upon by the officer and the Chief Executive Officer, the Board
or the Compensation Committee. The agreements also provide that during their
term and, unless the employee terminates his employment for cause, for a period
of nine months thereafter, the employee will not compete with Incara, directly
or indirectly. In the event that the employment of Dr. Ward or Mr. Reichow is
terminated by the Board, other than in a change in control and without just
cause, Incara shall continue to pay, for a period of nine months, Dr. Ward or
Mr. Reichow, as the case may be, his base salary plus a percentage of his salary
equal to the average annual bonus percentage earned for the two years prior to
the date of termination.
In November 1998, Incara entered into a three-year employment agreement
with Mr. Love. The agreement provides for base salary and annual bonus based
upon the achievement of performance milestones to be mutually agreed upon by Mr.
Love and the Chief Executive Officer, the Board or the Compensation Committee.
The agreement also provides that during its term and, unless Mr. Love terminates
his employment for cause, for a period of six months thereafter, Mr. Love will
not compete with Incara, directly or indirectly. In the event that the
employment of Mr. Love is terminated by the Board, other than in a change in
control and without just cause, Incara shall continue to pay Mr. Love his base
salary for a period of six months.
Compensation of Directors
All directors are reimbursed for expenses incurred in connection with
each board or committee meeting attended. For fiscal 1999 and through January
17, 2000, each director who was not an employee of Incara received a fee of
$2,000 per Board meeting attended in person. In addition, the 1994 Stock Option
Plan provided for the grant of nonstatutory options to non-employee directors of
Incara pursuant to a non-discretionary, automatic grant mechanism (the
"Automatic Grant Program"). Each non-employee director of Incara ("Eligible
Director") was granted a stock option to purchase 5,000 shares of Incara common
stock on the date each such person first became an Eligible Director. Each
Eligible Director thereafter was granted automatically each year upon re-
election (except in the year his or her initial director stock option was
granted) an option to purchase 3,000 shares of Incara common stock as long as
such director was a member of the Board. The exercise price of options granted
under the Automatic Grant Program is the fair market value of Incara's common
stock on the date of grant. Such options became exercisable ratably over 36
months commencing one month from the date of grant and will expire the earlier
of 10 years after the date of grant or 90 days after termination of the
director's service on the Board.
After a review of director compensation programs of other companies in
its industry, on January 18, 2000, the Compensation Committee and the Board
adopted a new compensation program for Eligible Directors. Each Eligible
Director will receive an annual retainer of $13,000 and will receive a fee of
$500 for each Board meeting attended in person. The annual retainer will be due
on the date that the Eligible Director is elected or re-elected to the Board of
Directors. Directors may elect to receive all or a portion of their annual
retainer as an option to purchase common stock. Any remainder will be paid in
cash. Any option elected will enable the director to purchase a number of shares
equal to three times the number of shares that could have been purchased with
the portion of the annual retainer elected to be received as option. The
exercise price per share for the option will be the fair market value of the
common stock on the date of the grant. The date of grant will be the date the
annual retainer is granted to the director. These options will be fully vested
upon grant and will be exercisable for ten years from the date of the grant.
This director compensation program was adopted on January 18, 2000, subject to
the transition policy that the date of the annual retainer and the grant date
shall be January 18, 2000 for each Eligible Director who was a director on the
date the program was adopted and the director shall not receive any additional
retainer at the following Annual Meeting. In addition, the Automatic Grant
Program was revised to increase the initial stock option grant for new Eligible
Directors from 5,000 shares to 10,000 shares and the annual automatic stock
option grant was increased from 3,000 shares to 6,000 shares. The options will
become exercisable ratably over 36 months commencing one month from the date of
grant and will expire 10 years after the date of grant.
Compensation Committee Interlocks and Insider Participation
During fiscal 1999, the Compensation Committee consisted of Mr. Ruvane,
Mr. Sharrock and Mr. Schollmaier. Mr. Ruvane, Mr. Sharrock and Mr. Schollmaier
were not at any time during fiscal 1999 or at any other time an officer or
employee of Incara. No executive officer of Incara serves as a member of the
board of directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Board of Directors of Incara or
the Compensation Committee.
36
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 26, 2000, Incara purchased from each of Lola M. Reid and James
D. Crapo, both of whom are consultants to Incara, 18,000 shares of our common
stock at a per share price of $2.25, the closing price as listed on Nasdaq
on July 26, 2000. Incara repurchased these shares in order to comply with Nasdaq
Rule 4460, which limits the amount of our common stock we can issue under
certain circumstances without stockholder approval. The shares repurchased were
issued to Drs. Reid and Crapo in the acquisitions of Renaissance Cell
Technologies and Aeolus Pharmaceuticals on March 31, 2000.
On March 31, 2000, Incara purchased all of the minority interests of
Renaissance Cell Technologies, Inc. and Aeolus Pharmaceuticals, Inc. Prior to
the acquisition, Incara owned 78.0% of Renaissance and 65.8% of Aeolus. Incara
issued 1,220,041 shares of its common stock in exchange for the subsidiaries'
minority ownership. The acquisition has been accounted for using the purchase
method of accounting. The total purchase price of $6,664,000 consisted of
1,220,041 shares of Incara's common stock with a fair market value of $5.46 per
share, based on the price of the Company's common stock at the date of
acquisition. The total purchase price was allocated to purchased in-process
research and development and immediately charged to operations because the
in-process research purchased was in preclinical stages and feasibility had not
been established at the date of the acquisition and was deemed to have no
alternative future use. Additionally, Renaissance and Aeolus had no workforce or
other tangible fixed assets.
In January 2000, the Company's Board of Directors authorized the
repurchase of up to $2,000,000 of Incara's common stock during the following two
months through purchases on the stock market. During that period, the Company
repurchased 104,100 shares of common stock at a cost of $332,000.
On July 15, 1999, Incara restructured its corporate relationship with
Interneuron Pharmaceuticals, Inc. to reduce Interneuron's majority ownership of
Incara in exchange for an increased ownership by Interneuron of CPEC, Inc. (the
"Restructuring"). Prior to the Restructuring, CPEC, Inc. was owned 80.1% by
Incara and 19.9% by Interneuron. As a preliminary step in the Restructuring,
Incara acquired Interneuron's 19.9% interest in CPEC, Inc., which was then
merged into CPEC LLC, a Delaware limited liability company. Incara redeemed
4,229,381 of the
37
4,511,084 shares of Incara common stock owned by Interneuron, in exchange for a
65.0% ownership of CPEC LLC and cancellation of certain liabilities owed to
Interneuron by Incara and CPEC, Inc. which totalled $2,421,000.
In May 1998, Incara acquired all of the outstanding stock of Transcell
Technologies, Inc. in a merger of Transcell with and into Incara and also
acquired certain related technology rights held by Interneuron in exchange for
Incara common stock with an aggregate market value of $14,200,000. In addition,
Incara issued replacement stock options and warrants to purchase 241,705 shares
and 17,783 shares, respectively, of Incara common stock to Transcell employees
consultants and warrant holders, with a total estimated value of $1,507,000.
Prior to the Transcell merger, Transcell and Incara were both majority-owned
subsidiaries of Interneuron. Under the terms of the Agreement and Plan of Merger
between Incara, Transcell and Interneuron dated March 2, 1998, Transcell
stockholders received Incara common stock in three installments. The first
installment of 320,151 shares was issued upon closing the transaction on May 8,
1998 (the "Closing"). In exchange for certain license and technology rights held
by Interneuron, and for Interneuron's continuing guarantee of certain of
Transcell's lease obligations, Incara issued to Interneuron 174,672 shares of
Incara common stock at Closing with a value of $3,000,000 and agreed to pay
Interneuron a royalty on net sales of certain products that might result from a
Research Collaboration and Licensing Agreement originally entered into among
Transcell, Interneuron and Merck & Co., Inc. In lieu of the second installment
payment due to Interneuron, Interneuron retained 281,703 shares of Incara common
stock as part of the Restructuring. On August 9, 1999, Incara issued 867,583
shares of Incara common stock, valued at approximately $1.38 per share, to the
other former Transcell stockholders as payment for their second installment in
the principal amount of $1,202,000. On February 8, 2000, Incara issued 856,861
shares of Incara common stock, valued at approximately $3.36 per share, to
Interneuron and the other former Transcell stockholders as payment for the third
and final installment in the principal amount of $2,881,000.
Incara has adopted a policy that all transactions between Incara and
its executive officers, directors and other affiliates must be approved by a
majority of the members of the Board of Directors of Incara and by a majority of
the disinterested members of the Board, and must be on terms no less favorable
to Incara than could be obtained from unaffiliated third parties. In addition,
the policy requires that any loans by Incara to its executive officers,
directors or other affiliates be for bona fide business purposes only.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
ownership of shares of Incara's common stock as of August 31, 2000 by (i) each
person known by Incara to beneficially own more that 5% of the outstanding
shares of common stock, (ii) each director of Incara, (iii) executive officer of
Incara, and (iv) all directors and executive officers of Incara as a group.
Except as indicated in footnotes to this table, the persons named in this table
have sole voting and investment power with respect to all shares of common stock
indicated below. As of August 31, 2000 Incara had 7,246,062 shares of common
stock outstanding. Share ownership in each case includes shares issuable upon
exercise of options that may be exercised within 60 days after August 31, 2000
for purposes of computing the percentage of common stock owned by such person
but not for purposes of computing percentage owned by any other person.
38
Beneficially Percentage
Owned Owned
---------------- ----------------
Clayton I. Duncan (1).................................................... 696,027 9.4%
David B. Sharrock (2).................................................... 46,034 *
Edgar H. Schollmaier (3)................................................. 33,479 *
Stephen M. Prescott, M.D. (3)............................................ 15,322 *
David P. Ward, M.D. (4).................................................. 226,116 3.1%
Richard W. Reichow (5)................................................... 282,706 3.9%
W. Bennett Love (6)...................................................... 102,105 1.4%
John P. Richert (7)...................................................... 103,354 1.4%
Lola M. Reid (8)......................................................... 555,890 7.6%
3621 Sweeten Creek Road
Chapel Hill, NC 27514
James D. Crapo (9)....................................................... 495,951 6.7%
4650 South Forest St.
Englewood, CO 80110
Interneuron Pharmaceuticals, Inc. ....................................... 482,011 6.7%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02421
All directors and executive officers as a group (8 persons) (10)......... 1,505,143 19.4%
- --------------
*Less than one percent
(1) Includes 392,470 shares owned (of which, 121,491 shares are unvested shares
of restricted stock) by Mr. Duncan, 152,000 shares owned by Mr. Duncan's
children, and 151,557 shares issuable upon exercise of options held by Mr.
Duncan. Mr. Duncan disclaims beneficial ownership of the shares held by his
children. Mr. Duncan is Chairman of the Board of Directors, President and
Chief Executive Officer of Incara.
(2) Includes 1,000 shares owned and 45,034 shares issuable upon exercise of
options held by Mr. Sharrock, a director of Incara.
(3) Consists of shares issuable upon exercise of options held by the named
individual, a director of Incara.
(4) Includes 109,616 shares owned (of which, 79,506 shares are unvested shares
of restricted stock) and 116,500 shares issuable upon exercise of options
held by Dr. Ward, an executive officer of Incara.
(5) Includes 206,906 shares owned (of which, 79,506 shares are unvested shares
of restricted stock) and 75,800 shares issuable upon exercise of options
held by Mr. Reichow, an executive officer of Incara.
(6) Includes 66,105 shares owned (of which 31,304 shares are unvested shares of
restricted stock) and 36,000 shares issuable upon exercise of options held
by Mr. Love, an executive officer of Incara.
(7) Includes 67,354 shares owned (of which, 34,430 shares are unvested shares
of restricted stock) and 36,000 shares issuable upon exercise of options
held by Mr. Richert, an executive officer of Incara.
(8) Includes 339,951 shares owned by Dr. Reid and 131,604 shares owned by Dr.
Mark Furth, Dr. Reid's husband and 110,000 shares issuable upon exercise of
options held by Dr. Reid. Dr. Reid disclaims beneficial ownership of the
shares held by her husband.
(9) Includes 339,951 shares owned by Dr. Crapo and 156,000 shares issuable upon
exercise of options held by Dr. Crapo.
(10) See footnotes (1)-(7).
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Incara consists of 40,000,000 shares of
common stock, par value $.001 per share, and 3,000,000 shares of preferred
stock, par value $.01 per share.
39
Common Stock
As of August 31, 2000, there were 7,246,062 shares of common stock
outstanding, 1,337,160 shares of common stock issuable upon the exercise of
outstanding stock options and 66,816 shares of common stock issuable upon the
exercise of warrants.
Holders of shares of the common stock are entitled to one vote per
share on all matters to be voted upon by the stockholders and are not entitled
to cumulate votes for the election of directors. Subject to preferences that may
be applicable to any outstanding shares of preferred stock, holders of shares of
common stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
Incara, the holders of shares of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior
distributions rights applicable to any outstanding shares of preferred stock.
Shares of common stock have no preemptive, conversion or other subscription
rights, and there are no redemption or sinking fund provisions applicable to the
common stock.
Preferred Stock
The Company has the authority to issue up to 3,000,000 shares of
preferred stock. The Board of Directors has the authority to issue preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions, including the dividend, conversion, voting, redemption (including
sinking fund provisions), and other rights, liquidation preferences, and the
number of shares constituting any series and the designations of such series,
without any further vote or action by the stockholders of Incara. Because the
terms of the preferred stock may be fixed by the Board of Directors of Incara
without stockholder action, the preferred stock could be issued quickly with
terms calculated to defeat a proposed take-over of Incara or to make the removal
of management of Incara more difficult. Under certain circumstances this could
have the effect of decreasing the market price of the common stock. Management
of Incara is not aware of any threatened transaction to obtain control of
Incara.
Warrants
As of August 31, 2000, warrants to purchase 66,816 shares were
outstanding, 49,033 of which are exercisable at an exercise price of $8.25 per
share and expire on February 2001, and 17,783 of which are exercisable at an
exercise price of $13.49 per share and expire on May 2003. Each warrant contains
provisions for the adjustment of the exercise price under certain circumstances,
including sales of stock at less than the exercise price, stock dividends, stock
splits, reorganizations, reclassifications or mergers.
Section 203 of the Delaware Corporation Law
Section 203 of the General Corporation Law of the State of Delaware
(the "DGCL") prevents an "interested stockholder" (defined in Section 203 of the
DGCL, generally, as a person owning 15% or more of a corporation's outstanding
voting stock), from engaging in a "business combination" (as defined in Section
203 of the DGCL) with a publicly-held Delaware corporation for three years
following the date such person became an interested stockholder, unless: (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
rights to determine confidentially whether shares held subject to the plant will
be tendered in a tender or exchange offer); or (iii) following the transaction
in which such person became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of two-thirds of
the outstanding voting stock of the corporation not owned by the interested
stockholder. The statute could prohibit or delay a merger, takeover or other
change in control of Incara and therefore could discourage attempts to acquire
Incara.
40
Limitation of Liability
Section 145 ("Section 145") of the DGCL provides a detailed statutory
framework covering indemnification of officers and directors against liabilities
and expenses arising out of legal proceedings brought against them by reason of
their being or having been directors or officers. Section 145 generally provides
that a director or officer of a corporation (i) shall be indemnified by the
corporation for all expenses of such legal proceedings when he is successful on
the merits, (ii) may be indemnified by the corporation for the expenses,
judgments, fines and amounts paid in settlement of such proceedings (other than
a derivative suit), even if he is not successful on the merits, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, and
(iii) may be indemnified by the corporation for the expenses of a derivative
suit (a suit by a stockholder alleging a breach by a director or officer of a
duty owed to the corporation), even if he is not successful on the merits, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. No indemnification may be made
under clause (iii) above, however, if the director or officer is adjudged liable
for negligence or misconduct in the performance of his duties to the
corporation, unless a corporation determines that despite such adjudication, but
in view of all the circumstances, he is entitled to indemnification. The
indemnification described in clauses (ii) and (iii) above may be made only upon
a determination that indemnification is proper because the applicable standard
of conduct has been met. Such a determination may be made by a majority of a
quorum of disinterested directors, independent legal counsel, the stockholders
or a court of competent jurisdiction.
Article Seventh of Incara's Certificate of Incorporation provides in
substance that, to the fullest extent permitted by the DGCL as it now exists or
as amended, each director and officer shall be indemnified against reasonable
costs and expenses, including attorney's fees, and any liabilities which he may
incur in connection with any action to which he may be made a party by reason of
his being or having been a director or officer of Incara. The indemnification
provided by Incara's Certificate of Incorporation is not deemed exclusive of or
intended in any way to limit any other rights to which any person seeking
indemnification may be entitled.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
Certificate of Incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit.
Article Ninth of Incara's Certificate of Incorporation provides for the
elimination of personal liability of a director for breach of fiduciary duty, as
permitted by Section 102(b)(7) of the DGCL.
We maintain liability insurance on our officers and directors against
liabilities that they may incur in such capacities.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is American Stock
Transfer and Trust Company.
41
SELLING STOCKHOLDERS
The shares offered under this prospectus are being offered and may be
sold for the account of the selling stockholders named in the following table.
The table also contains information regarding each selling stockholder's
beneficial ownership of shares of our common stock as of August 31, 2000, and as
adjusted to give effect to the possible sale of the shares.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
---------------------------------------------------- ---------------------------
NUMBER OF
POSITION WITH NUMBER OF PERCENT OF SHARES NUMBER OF PERCENT OF
NAME INCARA SHARES CLASS REGISTERED SHARES CLASS
- ---- -------------------------------------------------------------------------------------------------
Shlomo Brill -- 13,160 * 13,160 -- --
James D. Crapo Consultant 495,951 6.7% 276,951 219,000 3.0%
Brian Day Consultant 79,783 * 67,783 12,000 *
Duke University -- 125,215 1.7% 125,215 -- --
Ronald Faris -- 3,293 * 3,293 -- --
Anthony Fiorino -- 3,293 * 3,293 -- --
Alan Fisher -- 842 * 842 -- --
Irwin Fridovich Consultant 119,650 1.6% 119,650 -- --
Mark Furth(1) -- 131,604 1.8% 131,604 -- --
John Griffin -- 210 * 210 -- --
Sanjeev Gupta -- 6,582 * 6,582 -- --
Douglas C. Hixson Living -- 3,293 * 3,293 -- --
Trust
Patricia Holst -- 13,160 * 13,160 -- --
Hiroshi Kubota -- 7,858 * 7,858 -- --
Cynthia Lodestro -- 842 * 842 -- --
Huifei Lui -- 459 * 459 -- --
Tom Luntz -- 842 * 842 -- --
Jeffrey M. MacDonald -- 6,106 * 6,106 -- --
Nicholas Moss -- 2,594 * 2,594 -- --
Lola M. Reid(2) Consultant 424,286 5.8% 314,286 110,000 1.5%
John P. Richert Vice President 103,354 1.4% 5,565 97,789 1.3%
Samuel Sigal -- 13,160 * 13,160 -- --
UNC-CH Foundation, Inc. -- 31,585 * 31,585 -- --
Robert P. Venuti Vice President 79,684 1.1% 5,565 74,119 1.0%
Steve Wolfe -- 709 * 459 250 *
Arron Xu -- 842 * 842 -- --
Isabel Zvibel -- 6,582 * 6,582 -- --
----------------- ---------------- -------------
Totals 1,674,939 22.1% 1,161,781 513,158 6.8%
* less than 1%
(1) Dr. Furth is the husband of Dr. Reid. Dr. Furth disclaims beneficial
ownership of the shares held by Dr. Reid, which shares have not been
included in the shares shown as beneficially owned by Mr. Furth.
(2) Dr. Reid is the wife of Dr. Furth. Dr. Reid disclaims beneficial ownership
of the shares held by Dr. Furth, which shares have not been included in the
shares shown as beneficially owned by Dr. Reid.
We issued an aggregate of 1,220,041 shares of our common stock in
connection with the purchase of the minority ownership of Aeolus
Pharmaceuticals, Inc. and Renaissance Cell Technologies, Inc. on March 31, 2000.
Through this purchase, Aeolus and Renaissance became our wholly owned
subsidiaries. Prior to March 31, 2000, we owned only a portion of Aeolus and
Renaissance common stock. We agreed to register the 1,220,041 shares issued to
the former Aeolus and Renaissance stockholders and to pay substantially all of
the expenses of registering the shares. A total of 1,161,781 of these shares are
being registered under this prospectus (two of the stockholders, who also are
executive officers of Incara, waived their rights to registration and an
aggregate of 36,000 shares were repurchased by us on July 26, 2000). Although
the shares offered by this prospectus are being registered for sale, the shares
may or may not be sold by the selling stockholders.
PLAN OF DISTRIBUTION
The selling stockholders may offer the shares at various times in one or more of
the following transactions:
o on the Nasdaq National Market;
o in the over-the-counter market;
42
o in transactions other than market transactions;
o in connection with short sales of our common stock;
o by pledge to secure debts or other obligations;
o in connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options; or
o in a combination of any of the above.
The selling stockholders may sell shares at market prices then
prevailing, at prices related to prevailing market prices, at negotiated prices
or at fixed prices.
In order to comply with the securities laws of certain states, if
applicable, the shares may be sold only through registered or licensed brokers
or dealers.
The selling stockholders may use broker-dealers to sell shares. If this
happens, broker-dealers will either receive discounts or commissions from the
selling stockholders, or they will receive commissions from purchasers of shares
for whom they have acted as agents.
The selling stockholders and any broker-dealers who act in connection
with the sale of the shares hereunder may be deemed to be "underwriters" within
the meaning of the Securities Act, and any commissions they receive and proceeds
of any sale of the shares may be deemed to be underwriting discounts and
commissions under the Securities Act.
Neither we nor the selling stockholders can presently estimate the amount
of such compensation. We know of no existing arrangements between any selling
stockholders, any other stockholder, broker, dealer, underwriter or agent
relating to the sale or distribution of the shares.
We will pay all of the expenses incident to the registration, offering
and sale of the shares to the public other than commissions or discounts of
underwriters, broker-dealers or agents.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officer and controlling persons, we have
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
We have advised the selling stockholders that during such time as they
may be engaged in a distribution of the shares included in this prospectus they
are required to comply with Regulation M promulgated under the Securities
Exchange Act of 1934, as amended. With certain exceptions, Regulation M
precludes the selling stockholders, any affiliated purchasers, and any
broker-dealer or other person who participates in such distribution from bidding
for or purchasing or attempting to induce any person to bid for or purchase any
security which is the subject of the distribution until the entire distribution
is complete. Regulation M also prohibits any bids or purchases made in order to
stabilize the price of a security in connecting with the distribution of that
security. All of the foregoing may affect the marketability of the shares
offered hereby.
This offering will terminate on the earlier of (a) the date on which the
shares are eligible for resale without restrictions pursuant to Rule 144(k)
under the Securities Act, (b) the date on which all shares offered by this
prospectus have been sold by the selling stockholders or (c) March 31, 2002.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
will be passed upon for us by Wyrick Robbins Yates & Ponton LLP, Raleigh, North
Carolina.
EXPERTS
The financial statements as of September 30, 1999 and 1998 and for each
of the three years in the period ended September 30, 1999 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
43
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-1,
including exhibits, schedules and amendments, under the Securities Act with
respect to the shares of common stock to be sold in this offering. This
prospectus does not contain all the information included in the registration
statement. For further information about us and the shares of our common stock
to be sold in this offering, please refer to this registration statement.
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy our registration statement or any other document we file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. You should call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms. Our SEC filings are also available to the public at
the SEC's web site at "http:/www.sec.gov."
You may request a copy of our filings, at no cost, by writing or
telephoning us at the following address:
Incara Pharmaceuticals Corporation
Investor Relations
Post Office Box 14287
3200 East Highway 54, Cape Fear Building, Suite 300
Research Triangle Park, North Carolina 27709
(919) 558-8688
You should rely only on the information or representations provided in
this prospectus. We have authorized no one to provide you with different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Fiscal Years Ended September 30, 1999, 1998 and 1997
Report of Independent Accountants................................................................................ F-2
Consolidated Balance Sheets - As of September 30, 1999 and September 30, 1998.................................... F-3
Consolidated Statements of Operations - For the fiscal years ended September 30,
1999, 1998 and 1997.............................................................................................. F-4
Consolidated Statements of Stockholders' Equity - For the fiscal years ended
September 30, 1999, 1998 and 1997................................................................................ F-5
Consolidated Statements of Cash Flows - For the fiscal years ended September 30, 1999, 1998 and 1997............. F-6
Notes to Consolidated Financial Statements....................................................................... F-7
Nine Months Ended June 30, 2000 and 1999
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and September 30, 1999............................... F-21
Consolidated Statements of Operations for the Three Months and Nine Months ended June 30, 2000
and 1999 (unaudited)............................................................................................. F-22
Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2000 and 1999 (unaudited)............... F-23
Notes to Consolidated Financial Statements....................................................................... F-24
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
INCARA PHARMACEUTICALS CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Incara
Pharmaceuticals Corporation and its subsidiaries (the "Company") at September
30, 1999 and 1998 and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 1999, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
October 29, 1999, except with regard to Note A, paragraph 6 and Note M, for
which the date is December 29, 1999
F-2
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30,
-------------------------
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .............................................................. $ 2,407 $ 10,647
Marketable securities .................................................................. 2,553 9,314
Accounts receivable .................................................................... 282 1,096
Prepaids and other current assets ...................................................... 237 117
--------- ---------
Total current assets ................................................................. 5,479 21,174
Marketable securities ................................................................... -- 3,601
Property and equipment, net ............................................................. 2,483 2,976
Other assets ............................................................................ 82 85
--------- ---------
$ 8,044 $ 27,836
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................................... $ 654 $ 752
Accrued expenses ....................................................................... 1,933 3,191
Current portion of capital lease obligations ........................................... 488 565
Current portion of notes payable ....................................................... 197 194
Accounts payable to Interneuron ........................................................ -- 1,865
--------- ---------
Total current liabilities ............................................................ 3,272 6,567
Long-term portion of capital lease obligations .......................................... 399 816
Long-term portion of notes payable ...................................................... 582 777
Stockholders' equity:
Common stock, $.001 par value per share, 40,000,000 shares authorized, 5,226,969 and
7,289,153 shares issued and outstanding at September 30, 1999 and 1998, respectively . 5 7
Additional paid-in capital ............................................................. 81,772 78,399
Restricted stock ....................................................................... (744) --
Deferred compensation .................................................................. -- (1,086)
Accumulated deficit .................................................................... (77,242) (57,644)
--------- ---------
Total stockholders' equity ........................................................... 3,791 19,676
--------- ---------
$ 8,044 $ 27,836
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Year Ended September 30,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenue:
Contract and license fee revenue .................... $ 2,088 $ 6,121 $ 5,360
--------- --------- ---------
Costs and expenses:
Research and development ............................ 18,996 16,799 19,972
Purchase of in-process research and development ..... -- 5,343 411
General and administrative .......................... 3,045 3,509 4,179
--------- --------- ---------
Total costs and expenses .......................... 22,041 25,651 24,562
--------- --------- ---------
Loss from operations ................................. (19,953) (19,530) (19,202)
Investment income, net ............................... 355 384 831
Minority interest .................................... -- -- 568
--------- --------- ---------
Net loss ............................................. $ (19,598) $ (19,146) $ (17,803)
========= ========= =========
Net loss per common share:
Basic ............................................. $ (2.98) $ (2.69) $ (2.55)
========= ========= =========
Diluted ........................................... $ (2.98) $ (2.69) $ (2.55)
========= ========= =========
Weighted average common shares outstanding ........... 6,583 7,113 6,982
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Common Stock
------------------------- Additional
Number Par Paid-in
of Shares Value Capital
--------------- --------- ----------
Balance at September 30, 1996 ............... 6,929,986 $ 7 $51,831
Exercise of common stock options ........... 8,500 -- 7
Stock-based compensation ................... -- -- 85
Cashless exercise of stock warrant ......... 1,156 -- --
Amortization of deferred compensation ...... -- -- --
Proceeds from offerings of Employee
Stock Purchase Plan ...................... 16,903 -- 320
Net loss for the fiscal year ended
September 30, 1997 ....................... -- -- --
--------- ---- -------
Balance at September 30, 1997 ............... 6,956,545 7 52,243
Exercise of common stock options ........... 15,576 -- 59
Grants of common stock options at
below fair value ......................... -- -- 1,450
Stock-based compensation ................... -- -- 464
Amortization of deferred compensation ...... -- -- --
Proceeds from offerings of Employee
Stock Purchase Plan ...................... 13,592 -- 142
Contribution to Transcell capital by
Interneuron .............................. -- -- 18,698
Common stock issued to unrelated
parties in conjunction with Transcell
Merger ................................... 303,440 -- 5,343
Net loss for the fiscal year ended
September 30, 1998 ....................... -- -- --
--------- ---- -------
Balance at September 30, 1998 ............... 7,289,153 7 78,399
Exercise of common stock options ........... 21,851 -- 53
Amortization of deferred compensation ...... -- -- --
Proceeds from offerings of Employee
Stock Purchase Plan ...................... 67,851 -- 134
Contribution of payables to capital by
Interneuron .............................. -- -- 2,421
Cancellation of common stock returned
by Interneuron ........................... (4,229,381) (4) 4
Common stock issued to unrelated
parties in conjunction with Transcell
Merger ................................... 867,583 1 (1)
Write-off of deferred compensation
related to common stock options
cancelled ................................ -- -- (259)
Restricted common stock sold to
employees and consultants ................ 1,209,912 1 755
Stock-based compensation and
amortization of Restricted Stock ......... -- -- 266
Net loss for the fiscal year ended
September 30, 1999 ....................... -- -- --
---------- ------ --------
Balance at September 30, 1999 ............... 5,226,969 $ 5 $81,772
========== ====== ========
Total
Restricted Deferred Accumulated Stockholders'
Stock Compensation Deficit Equity
----------- -------------- ------------ --------------
Balance at September 30, 1996 ............... $ -- $ (462) $ (20,695) $ 30,681
Exercise of common stock options ........... -- -- -- 7
Stock-based compensation ................... -- -- -- 85
Cashless exercise of stock warrant ......... -- -- -- --
Amortization of deferred compensation ...... -- 166 -- 166
Proceeds from offerings of Employee
Stock Purchase Plan ...................... -- -- -- 320
Net loss for the fiscal year ended
September 30, 1997 ....................... -- -- (17,803) (17,803)
------ --------- --------- ----------
Balance at September 30, 1997 ............... -- (296) (38,498) 13,456
Exercise of common stock options ........... -- -- -- 59
Grants of common stock options at
below fair value ......................... -- (1,450) -- --
Stock-based compensation ................... -- -- -- 464
Amortization of deferred compensation ...... -- 660 -- 660
Proceeds from offerings of Employee
Stock Purchase Plan ...................... -- -- -- 142
Contribution to Transcell capital by
Interneuron .............................. -- -- -- 18,698
Common stock issued to unrelated
parties in conjunction with Transcell
Merger ................................... -- -- -- 5,343
Net loss for the fiscal year ended
September 30, 1998 ....................... -- -- (19,146) (19,146)
------ --------- --------- ----------
Balance at September 30, 1998 ............... -- (1,086) (57,644) 19,676
Exercise of common stock options ........... -- -- -- 53
Amortization of deferred compensation ...... -- 827 -- 827
Proceeds from offerings of Employee
Stock Purchase Plan ...................... -- -- -- 134
Contribution of payables to capital by
Interneuron .............................. -- -- -- 2,421
Cancellation of common stock returned
by Interneuron ........................... -- -- -- --
Common stock issued to unrelated
parties in conjunction with Transcell
Merger ................................... -- -- -- --
Write-off of deferred compensation
related to common stock options
cancelled ................................ -- 259 -- --
Restricted common stock sold to
employees and consultants ................ (755) -- -- 1
Stock-based compensation and
amortization of Restricted Stock ......... 11 -- -- 277
Net loss for the fiscal year ended
September 30, 1999 ....................... -- -- (19,598) (19,598)
------ --------- --------- ----------
Balance at September 30, 1999 ............... $ (744) $ -- $ (77,242) $ 3,791
====== ========= ========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fiscal Year Ended September 30,
-----------------------------------------
1999 1998 1997
------------- ------------- -------------
Cash flows from operating activities:
Net loss ...................................................................... $ (19,598) $ (19,146) $ (17,803)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 771 1,837 813
Noncash compensation ........................................................ 1,105 1,125 251
Purchase of in-process research and development ............................. -- 5,343 --
Interest expense on notes payable to Interneuron ............................ -- 918 1,152
Minority interest in net income (loss) of consolidated subsidiary ........... -- -- (568)
Change in assets and liabilities:
Accounts receivable ........................................................ 814 31 318
Prepaids and other assets .................................................. (117) 120 (171)
Accounts payable and accrued expenses ...................................... (1,356) (10,054) 10,377
Deferred revenue ........................................................... -- (500) 500
--------- --------- ---------
Net cash used in operating activities ....................................... (18,381) (20,326) (5,131)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales and maturities of marketable securities ................... 11,406 20,400 19,545
Purchases of marketable securities ............................................ (1,044) (13,920) (23,284)
Purchases of property and equipment ........................................... (278) (1,110) (2,244)
--------- --------- ---------
Net cash provided by (used in) investing activities ......................... 10,084 5,370 (5,983)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock and warrants .............................. 187 201 327
Proceeds from notes payable ................................................... 2 460 155
Principal payments on notes payable ........................................... (194) (117) (36)
Principal payments on capital lease obligations ............................... (494) (345) (475)
Advances from Interneuron, net ................................................ 556 7,219 6,252
Proceeds from sale/leaseback transactions ..................................... -- -- 1,341
--------- --------- ---------
Net cash provided by financing activities ................................... 57 7,418 7,564
--------- --------- ---------
Net decrease in cash and cash equivalents ................................... (8,240) (7,538) (3,550)
Cash and cash equivalents at beginning of period ............................... 10,647 18,185 21,735
--------- --------- ---------
Cash and cash equivalents at end of period ..................................... $ 2,407 $ 10,647 $ 18,185
========= ========= =========
Supplemental disclosure of investing and financing activities:
Cash payments of interest ..................................................... $ 251 $ 222 $ 129
========= ========= =========
Contribution of payables to capital by Interneuron ............................ $ 2,421 $ -- $ --
========= ========= =========
Property and equipment acquired through financing arrangements ................ $ -- $ 110 $ 500
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF THE BUSINESS
The Company conducts discovery and development programs in three areas: (1)
inflammatory bowel disease, using an ultra-low molecular weight heparin; (2)
liver disorders, using a novel form of hepatic progenitor cell therapy; and (3)
novel small molecule antioxidants for disorders such as stroke, asthma and
reperfusion injury.
The "Company" refers collectively to Incara Pharmaceuticals Corporation
("Incara"), formerly Intercardia, Inc., and its subsidiaries, Aeolus
Pharmaceuticals, Inc., a Delaware corporation ("Aeolus") and Renaissance Cell
Technologies, Inc., a Delaware corporation ("Renaissance"). At September 30,
1999, the Company owned a 35.0% interest in CPEC LLC, a Delaware limited
liability company. At September 30, 1999, Incara owned 65.8% of the outstanding
stock of Aeolus and 78.0% of the outstanding stock of Renaissance.
Until July 15, 1999, Incara was a majority-owned subsidiary of Interneuron
Pharmaceuticals, Inc. ("Interneuron"). On July 15, 1999, Incara restructured its
corporate relationship with Interneuron to reduce Interneuron's majority
ownership of Incara in exchange for an increased ownership by Interneuron of
CPEC, Inc., a Nevada corporation (the "Restructuring"). Prior to the
Restructuring, CPEC, Inc. was owned 80.1% by Incara and 19.9% by Interneuron.
Subsequent to the Restructuring, CPEC LLC is owned 35.0% by Incara and 65.0% by
Interneuron (see Note J).
Until July 1999, the Company's most advanced product was BEXTRA(R)
(bucindolol HCl), a beta-blocker that was being evaluated in a Phase 3 clinical
trial conducted by the National Institutes of Health (the "NIH") and the U.S.
Department of Veterans Affairs (the "VA") for use in treating congestive heart
failure patients. The agencies terminated the study in July 1999, prior to its
scheduled termination date, because an interim data analysis indicated there was
no significant survival advantage of treatment with bucindolol for the patient
population as a whole. In August 1999, the Company agreed to end the
collaboration (the "Knoll Collaboration") with BASF Pharma/Knoll AG ("Knoll")
for BEXTRA for countries outside the United States and Japan (the "Knoll
Territory"), and terminated the European trial of BEXTRA. Based on information
to date, the Company does not expect to pursue the compound further for this or
any other indication, but a final decision will be made after the database is
received from the U.S. study.
In May 1998, Incara acquired all of the outstanding stock of Transcell
Technologies, Inc. ("Transcell"), a majority-owned subsidiary of Interneuron, in
a merger of Transcell with and into Incara and also acquired certain related
technology rights held by Interneuron in exchange for Incara Common Stock, stock
options and stock warrants (the "Transcell Merger"). The purchase of
Interneuron's 77.9% interest in Transcell by Incara was treated in a manner
similar to a "pooling-of-interests," because it represented a transfer of stock
between entities under common control, and the acquisition of the non-
Interneuron ownership interest was accounted for by using the "purchase" method
of accounting. All of Transcell's past results of operations have been combined
with the results of operations for the Company, and the Company's financial
statements for all prior periods presented have been restated to reflect the
Transcell Merger.
On December 29, 1999, the Company sold the former Transcell operation,
which is referred to as Incara Research Laboratories ("IRL"), to a private
pharmaceutical company for $11,000,000 and the right to receive up to an
additional $4,000,000 in the event a compound originating from the Research
Collaboration and Licensing Agreement (the "Merck Collaboration"), originally
entered into among Transcell, Interneuron and Merck & Co., Inc. ("Merck"),
reaches certain preclinical and clinical trial milestones. The transaction
involved the sale of assets associated with Incara's anti-infective division,
including rights under the Merck Collaboration and the assumption of certain
related liabilities by the purchaser. The Company remains contingently liable on
some debt and lease obligations assumed by the purchaser, including the IRL
facility lease in Cranbury, New Jersey. With the proceeds from the sale of IRL,
the Company had cash and cash equivalents and marketable securities of
approximately $13,000,000 at December 29, 1999. The Company believes that it has
adequate financial resources to fund its remaining operations at least through
December 2000. The Company's financial requirements over the longer term will
depend upon the success of its research and development programs and its ability
to enter into new collaborations that provide fees and research and development
funding. If all of the Company's programs continue to show scientific progress,
the Company will need significant additional funds to move compounds through the
preclinical stages and into clinical trials.
F-7
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of Incara and its majority-owned subsidiaries. The operations of CPEC,
Inc. prior to the Restructuring are included in the Company's consolidated
financial statements. Subsequent to the Restructuring, the Company uses the
equity method to account for its 35.0% ownership interest in CPEC LLC (see Note
J). All significant intercompany accounts and transactions have been eliminated.
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 reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: The Company invests available cash in short-term
bank deposits, money market funds, commercial paper and U.S. Government
securities. Cash and cash equivalents include investments with maturities of
three months or less at the date of purchase. The carrying value of cash and
cash equivalents approximate their fair market value at September 30, 1999 and
1998 due to their short-term nature.
Marketable Securities: The Company considers its investment portfolio
available-for-sale as defined in Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Debt and equity securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of related income taxes. Premiums are
amortized and discounts accreted using the interest method over the remaining
terms of the related securities. Gains and losses on the sale of securities are
determined using the specific identification method.
Accounts Receivable: The accounts receivable balance at September 30, 1999
is primarily comprised of an amount due from Interneuron for the portion of the
amount payable by the Company to Knoll for bucindolol related liabilities. The
accounts receivable balance at September 30, 1998 was primarily comprised of
amounts due from Astra Pharmaceuticals, L.P. ("Astra Pharmaceuticals"), formerly
Astra Merck Inc. ("Astra Merck"), for bucindolol related liabilities assumed by
Astra Pharmaceuticals.
Property and Equipment: Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method based
on estimated useful lives or, in the case of leasehold improvements and
equipment under capital leases, over the lesser of the estimated useful lives or
the lease terms. The estimated useful lives are two years for computers and five
years for equipment. Subsequent to the Transcell Merger in May 1998, the Company
wrote off $856,000 of property and equipment acquired from Transcell because
certain items did not meet the Company's minimum cost per item capitalization
criteria. The majority of the Company's property and equipment at September 30,
1999 and 1998 relates to the former Transcell operations.
The Company evaluates the recoverability of its property and equipment, and
other assets in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of"
("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the estimated future
undiscounted cash flows attributable to such assets or the business to which
such intangible assets related. No impairments were required to be recognized
during the fiscal years ended September 30, 1998 and 1999.
F-8
Expenses for repairs and maintenance are charged to operations as incurred.
Upon retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is credited or charged to operations.
Revenue Recognition: Revenue is recognized under collaboration or research
and development agreements when services are performed or when contractual
obligations are met. Cash received in advance of revenue recognition is recorded
as deferred revenue.
Research and Development: Research and development costs are expensed in
the period incurred. Payments related to the acquisition of in-process research
and development are either capitalized or expensed based upon the stage of
development of the acquired compound or technology at the date of acquisition.
Income Taxes: Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce net deferred tax assets to the amounts
expected to be realized.
Net Loss Per Common Share: During 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128").
Pursuant to the adoption of SFAS 128 and Securities and Exchange Commission
Staff Accounting Bulletin No. 98, all net loss per common share calculations
reflect a historical approach methodology. Basic net loss per common share is
computed using the weighted average number of shares of Common Stock outstanding
during the period. Diluted net loss per common share is computed using the
weighted average number of shares of common and dilutive potential common shares
outstanding during the period. Potential common shares consist of stock options,
warrants and convertible preferred stock using the treasury stock method and are
excluded if their effect is antidilutive. At September 30, 1999 had such
potential common shares not been antidilutive, their effect would be to increase
the shares used in computing diluted net loss per common share to 6,278,346
shares.
Accounting for Stock-Based Compensation: The Company accounts for
stock-based compensation based on the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), which
states that no compensation expense is recorded for stock options or other
stock-based awards to employees that are granted with an exercise price equal to
or above the estimated fair value per share of the Company's common stock on the
grant date. The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which requires compensation expense to be disclosed
based on the fair value of the options granted at the date of the grant.
Comprehensive Income: The Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), during the fiscal year ending September 30,
1999. SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements.
Segment Reporting: The Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"), during the
fiscal year ending September 30, 1999. SFAS 131 specifies revised guidelines for
determining an entity's operating segments and the type and level of financial
information to be disclosed. The Company currently operates in only one segment.
Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
As issued, SFAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, with earlier application encouraged. In May 1999,
the FASB delayed the effective date of SFAS 133 for one year, to fiscal quarters
of all fiscal years beginning after June 15, 2000. The Company does not
currently use, nor does it intend in the future to use, derivative instruments
and therefore does not expect that the adoption of SAFS 133 will have any impact
on its financial position or results of operations.
F-9
Reclassifications: Certain reclassifications have been made to the 1998
and 1997 consolidated financial statements to conform with classifications
adopted in 1999.
C. MARKETABLE SECURITIES
The Company has classified all marketable securities as available-for-sale.
The amortized cost of these securities approximates their market value, yielding
no unrealized holding gains or losses at September 30, 1999 and 1998. Marketable
securities consisted of the following at September 30, 1999 and 1998 (in
thousands):
1999 1998
------ -------
Corporate notes ................ $2,553 $11,886
Government notes ............... -- 1,029
------ -------
$2,553 $12,915
====== =======
The maturities of these securities as of September 30, 1999 and 1998
were as follows (in thousands):
1999 1998
--------- ---------
Within one year ...................... $2,553 $ 9,314
After one year through two years ..... -- 3,601
------ -------
$2,553 $12,915
====== =======
D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1999
and 1998 (in thousands):
1999 1998
----------- ---------
Office equipment ............................... $ 735 $ 610
Laboratory equipment ........................... 1,411 1,258
Leasehold improvements ......................... 1,774 1,774
-------- ------
3,920 3,642
Less: accumulated depreciation and amortization (1,437) (666)
-------- ------
$ 2,483 $2,976
======== ======
The above amounts included equipment under capital lease obligations
with a cost of $930,000 at September 30, 1999 and 1998 and a net book value of
$394,000 and $663,000 at September 30, 1999 and 1998, respectively. Property and
equipment with a cost and net book value of $360,000 and $201,000 at September
30, 1999, respectively, was pledged as collateral on notes payable.
E. ACCRUED EXPENSES
At September 30, 1999 and 1998, accrued expenses consisted of the
following (in thousands):
F-10
1999 1998
-------- ---------
Payroll related liabilities ........................ $ 305 $ 674
Bucindolol liabilities assumed by Astra Merck....... -- 941
Other accrued bucindolol development costs. ........ 1,619 1,491
Other .............................................. 9 85
------ ------
$1,933 $3,191
====== ======
F. COMMITMENTS
The Company leases office and laboratory space under non-cancelable
operating leases. Rent expense under non-cancelable operating leases was
$1,147,000, $1,154,000 and $909,000 for the fiscal years ended September 30,
1999, 1998 and 1997, respectively. The Company also leases certain equipment
under capital leases.
At September 30, 1999, the Company's future minimum payments under lease
arrangements consisted of the following (in thousands):
Operating Capital
Fiscal Year Ending September 30, Leases Leases
- ------------------------------- ---------- --------
2000 ............................................... $1,124 $ 585
2001 ............................................... 1,046 386
2002 ............................................... 939 28
2003 ............................................... 957 20
2004 ............................................... 958 --
After 2004 ......................................... 3,508 --
------ ------
Total minimum lease payments ....................... $8,532 1,019
======
Less: amount representing interest .......................... (132)
------
Present value of future minimum lease payments .............. $ 887
======
F-11
G. NOTES PAYABLE
Notes payable at September 30, 1999 and 1998 consisted of the following (in
thousands):
1999 1998
--------- ---------
Note payable to North Carolina Biotechnology Center, including accrued
interest at 8.75%, principal and interest due in December 2000 .......... $ 25 $ 23
Note payable to minority stockholder of Renaissance, including accrued
interest at 5.79%, principal and interest due in March 2000 ............. 29 76
Note payable to a financial institution, principal and interest at 13.4%,
payable in monthly installments of $14,000 with a balloon payment of
$69,000 due in June 2001 ................................................ 297 461
Note payable to landlord, principal and interest at 11.5%, payable in
monthly installments of $7,000 with a balloon payment of $320,000
due in June 2002 ........................................................ 428 411
------ ------
Notes payable, including current maturities .............................. 779 971
Less: current maturities ................................................. (197) (194)
------ ------
Long-term notes payable .................................................. $ 582 $ 777
====== ======
At September 30, 1999, future maturities of notes payable were as follows
(in thousands):
Fiscal Year Ending September 30,
- ----------------------------------
2000 ........................... $197
2001 ........................... 232
2002 ........................... 350
----
$779
====
H. STOCKHOLDERS' EQUITY
Preferred Stock: The Certificate of Incorporation of Incara authorizes the
issuance of up to 3,000,000 shares of Preferred Stock, at a par value of $.01
per share. The Board of Directors has the authority to issue Preferred Stock in
one or more series, to fix the designation and number of shares of each such
series, and to determine or change the designation, relative rights,
preferences, and limitations of any series of Preferred Stock, without any
further vote or action by the stockholders of the Company. No shares of
Preferred Stock were outstanding at September 30, 1999 and 1998.
Common Stock: The Certificate of Incorporation of Incara authorizes the
issuance of up to 40,000,000 shares of Common Stock, at a par value of $.001
per share.
In May 1998, Incara issued 494,823 shares of Common Stock as the first
installment of the Transcell Merger (see Note K). In lieu of the second
installment payment due to Interneuron, Interneuron retained 281,703 shares of
Incara Common Stock as part of the Restructuring (see Note J). On August 9,
1999, Incara issued 867,583 shares of Incara Common Stock, valued at
approximately $1.38 per share, to the other former Transcell stockholders as
payment for their second installment of the Transcell Merger in the principal
amount of $1,202,000. The third and final installment of $2,881,000 is due to
the former Transcell stockholders, including Interneuron, in February 2000 and
will be paid in shares of Incara Common Stock, calculated based on the per share
price at that time. The impact of the issuance of the
F-12
additional shares to be issued subsequent to September 30, 1999 has not been
reflected in Incara's Common Stock outstanding or its earnings per share
calculations, but was included in the determination of the value of the purchase
price consideration of Transcell in May 1998.
Restricted Stock: As an integral component of a management and employee
retention program designed to motivate, retain and provide incentive to the
Company's management, employees and key consultants, the Company's Board of
Directors adopted the 1999 Equity Incentive Plan (the "1999 Plan") in September
1999. The 1999 Plan provides for the grant of restricted stock ("Restricted
Stock") awards which entitle employees and consultants to receive up to an
aggregate of 1,400,000 shares of the Company's Common Stock upon satisfaction of
specified vesting periods. As of September 30, 1999, Restricted Stock awards to
acquire an aggregate of 1,209,912 shares had been granted to employees and key
consultants of the Company (the "Participants") in consideration of services
rendered by the Participants to the Company, the cancellation of options for an
equal number of shares of Common Stock and payment of the par value of the
shares. The shares subject to the awards have not been registered under the
Securities Act of 1933, but it is the Company's intention to register the
Restricted Stock so that the shares may be sold by the Participants upon vesting
of the shares. The shares of Restricted Stock vest over up to three years. No
shares of Restricted Stock were vested at September 30, 1999.
The Company has incurred and will continue to incur compensation expense
through the vesting period of the Restricted Stock. The value of the Restricted
Stock awards of 1,209,912 shares at the date of the grant totaled $755,000,
based on the trading price of the Company's common stock of $0.625 per share.
The value of the Restricted Stock will be amortized on a straight-line basis
over the vesting period of the Restricted Stock. The Company recognized $11,000
of expenses related to these awards during fiscal 1999.
Employee Stock Purchase Plan: In October 1995, Incara adopted the Employee
Stock Purchase Plan (the "ESPP") covering an aggregate of 100,000 shares of
Common Stock. In March 1999, the stockholders approved an amendment to increase
the Common Stock reserved for issuance under the ESPP to 200,000 shares.
Offerings are for one-year periods beginning on October 1 of each year (an
"Offering") and are divided into two six-month Purchase Periods (the "Purchase
Periods"). Employees may contribute up to ten percent (10%) of gross wages, with
certain limitations, via payroll deduction, to the ESPP. Common Stock is
purchased at the end of each Purchase Period with employee contributions at the
lower of 85% of the closing price of Incara's Common Stock on the first day of
an Offering or the last day of the related Purchase Period. As of September 30,
1999, 110,298 shares of Common Stock had been purchased pursuant to the ESPP and
89,702 shares were reserved for future issuances.
Stock Option Plan: Under Incara's 1994 Stock Option Plan (the "1994 Plan"),
incentive stock options ("ISOs") or non-qualified stock options to purchase
2,500,000 shares of Incara's Common Stock may be granted to employees, directors
and consultants of the Company. The exercise price of the ISOs granted under the
1994 Plan must not be less than the fair market value of the Common Stock as
determined on the date of the grant. The options may have a term up to 10 years.
All options which have been granted under the 1994 Plan vest at various rates
over periods from two to seven years following the date of the grant.
F-13
Stock option activity under the 1994 Plan was as follows:
Weighted Average
Shares Exercise Price
--------------- -----------------
Outstanding at September 30, 1996 1,176,549 $ 8.36
Granted ........................ 276,713 $ 16.38
Exercised ...................... (8,745) $ 0.77
Cancelled ...................... (27,807) $ 12.15
---------
Outstanding at September 30, 1997 1,416,710 $ 9.89
Granted ........................ 1,901,886 $ 9.61
Exercised ...................... (15,629) $ 3.77
Cancelled ...................... (1,032,835) $ 19.18
----------
Outstanding at September 30, 1998 2,270,132 $ 5.47
Granted ........................ 95,500 $ 5.66
Exercised ...................... (21,851) $ 2.45
Cancelled ...................... (1,359,220) $ 7.53
----------
Outstanding at September 30, 1999 984,561 $ 2.70
==========
In August 1998, the Company's Board of Directors approved a resolution
whereby current employees and consultants were granted the right to amend the
terms of stock options with an exercise price greater than $11.00 per share. The
amended options reduced the exercise price to $8.00 per share, which was the
trading value of the Company's stock on the date of the repricing, and extended
the vesting period of the stock options.
The details of stock options outstanding at September 30, 1999 were as
follows:
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding at Average Average Exercisable at Average
Exercise September 30, Exercise Remaining September 30, Exercise
Price 1999 Price Contractual Life 1999 Price
--------- -------------- --------- ---------------- --------------- ---------
$0.36 423,048 $ 0.36 5.4 years 423,048 $ 0.36
$0.60-$0.63 80,500 $ 0.60 6.2 years 70,500 $ 0.60
$1.00 162,809 $ 1.00 5.9 years 162,809 $ 1.00
$3.19-$4.38 9,594 $ 3.31 7.7 years 9,594 $ 3.31
$5.75 180,000 $ 5.75 8.9 years 45,000 $ 5.75
$7.12-$11.03 110,985 $ 8.41 8.1 years 73,565 $ 8.81
$15.00-$20.50 17,625 $ 16.71 6.8 years 13,583 $ 17.03
------- -------
984,561 $ 2.70 6.5 years 798,099 $ 1.91
======= =======
Under the principles of APB No. 25, the Company does not recognize
compensation expense associated with the grant of stock options to employees,
except if an option is granted with an exercise price at less than fair market
value. SFAS 123 requires the use of option valuation models to recognize as
expense stock option grants to consultants and to provide supplemental
information regarding options granted to employees after September 30, 1995.
F-14
The Company's pro forma information utilizing the Black-Scholes option
valuation model for the fiscal years ended September 30, 1999, 1998 and 1997 is
as follows:
1999 1998 1997
------------ ------------ ------------
Net loss (in thousands)
As reported ...................... $ 19,598 $ 19,146 $ 17,803
Pro forma ........................ $ 20,889 $ 22,353 $ 20,314
Basic and diluted net loss per share
As reported ...................... $ 2.98 $ 2.69 $ 2.55
Pro forma ........................ $ 3.17 $ 3.14 $ 2.91
Pro forma information regarding net loss was determined as if the Company
had accounted for its employee stock options and shares sold under the ESPP
under the fair value method of SFAS 123. The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes option valuation
model with the following weighted-average assumptions used for grants:
1999 1998
------------- -------------
Dividend yield ........................ 0% 0%
Expected volatility ................... 84.8% 69.9%
Risk-free interest rate ............... 4.8%-5.3% 5.3%-5.6%
Expected option life after
shares are vested..................... 3 years 2 years
For the fiscal years ended September 30, 1999, 1998 and 1997, all stock
options issued were either issued at fair market value or were replacement stock
options issued pursuant to the Transcell Merger. During fiscal 1998, Transcell
granted to certain key consultants, stock options with an exercise price below
fair market value on the date of the grant.
Subsidiary Stock Option Plans: Incara's subsidiaries, Aeolus and
Renaissance, also have stock option plans. The number of options authorized for
the Aeolus stock option plan is 50,000 shares. During the year ended September
30, 1997, an option to purchase 30,000 shares of common stock was granted. This
option was outstanding at September 30, 1999. The number of options authorized
for the Renaissance stock option plan is 68,055 shares, with no options granted
or outstanding at September 30, 1999.
Warrants: In May 1998, Incara issued replacement stock warrants to purchase
17,783 shares of Incara Common Stock at an exercise price of $13.49 in
connection with the Transcell Merger. As of September 30, 1999, warrants to
purchase 66,816 shares were outstanding, 49,033 of which are exercisable at an
exercise price of $8.25 per share until February 2001, and 17,783 of which are
exercisable at an exercise price of $13.49 per share until May 2003.
I. INCOME TAXES
As of September 30, 1999 and 1998, the Company had federal net operating
loss carryforwards of $56,375,000 and $44,602,000, respectively, and state
operating loss carryforwards of $17,509,000 and $12,660,000, respectively. The
use of these federal net operating loss carryforwards may be subject to
limitation under the rules regarding a change in stock ownership as determined
by the Internal Revenue Code. The federal net operating losses will begin to
expire in 2010. The state net operating losses will begin to expire in 2001.
F-15
Significant components of the Company's deferred tax assets at September
30, 1999 and 1998 consisted of the following (in thousands):
1999 1998
------------ ------------
Net operating loss carryforwards .................. $ 20,063 $ 15,812
AMT credit carryforwards .......................... 37 37
Research and development credit carryforwards ..... 1,195 768
Accrued payroll related liabilities ............... 1,521 1,387
Charitable contribution carryforwards ............. 441 217
Other ............................................. 533 660
--------- ---------
Total deferred tax assets ........................ 23,790 18,881
Valuation allowance for deferred assets ........... (23,790) (18,881)
--------- ---------
Net deferred tax asset ........................... $ -- $ --
========= =========
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, all of the deferred tax assets have been fully
offset by a valuation allowance. The change in the valuation allowance is
primarily a result of the net operating loss carryforwards.
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows (dollars in thousands):
1999 1998 1997
------------ ------------ ------------
Effective tax rate ....................... 0% 0% 0%
======= ======= =======
United States Federal statutory rate ..... $ (6,663) $ (6,510) $ (6,246)
State taxes (net of federal benefit) ..... (273) 853 (505)
Change in valuation reserves ............. 4,909 4,394 7,011
Gain on sale of subsidiary ............... 2,371 -- --
Pipeline research and development ........ -- 1,464 --
Other .................................... (344) (201) (260)
---------- ---------- ----------
Provision for income taxes .............. $ -- $ -- $ --
========== ========== ==========
J. BUCINDOLOL TRANSACTIONS
In September 1994, Incara acquired 80.0% of the outstanding stock of CPEC,
Inc. CPEC, Inc. held the rights to bucindolol, including the exclusive,
worldwide license from Bristol-Myers Squibb Company to develop bucindolol for
congestive heart failure and left ventricular dysfunction.
In December 1995, the Company entered into a collaboration with Astra Merck
for the development of bucindolol in the United States (the "Astra Merck
Collaboration"). During the fiscal years ended September 30, 1998 and 1997, the
Company recognized contract revenue of $834,000 and $553,000, respectively, from
payments made by Astra Merck to the Company, exclusive of a termination fee of
$4,000,000 received in September 1998 discussed below. During the fiscal years
ended September 30, 1998 and 1997, Astra Merck funded $6,065,000 and $5,505,000,
respectively, of the Company's research and development expenses. These
additional amounts did not flow through the Company's Statements of Operations,
because they were offset against related expenses. Pursuant to the terms of the
Astra Merck Collaboration, the Company paid Astra Merck $10,000,000 in December
1997, which had been accrued as a liability at September 30, 1997. In July 1998,
Astra Merck's business was restructured to combine it with Astra AB's
wholly-owned subsidiary, Astra USA Inc., in a new limited partnership in which
Astra AB had management control as the general partner. The new company, Astra
Pharmaceuticals, had an expanded product line that included a beta-blocker
(metoprolol succinate). Because metoprolol and bucindolol were both
beta-blockers being investigated for heart failure, Astra Pharmaceuticals and
the Company agreed in September 1998 to terminate the Astra Merck Collaboration.
Pursuant to the Termination and Settlement Agreement. Astra Pharmaceuticals
returned to the Company all rights, material and information relating to
bucindolol and paid it a termination fee in the amount of $4,000,000. This
payment
F-16
was immediately recognized as contract and license fee revenue because the
Company had no ongoing obligations.
In December 1996, the Company entered into the Knoll Collaboration with
Knoll to develop bucindolol for the Knoll Territory. Knoll and the Company had
agreed to share the development costs of bucindolol for the Knoll Territory. In
general, Knoll was to pay approximately 60% of certain development and marketing
costs and the Company was to pay approximately 40% of such costs, subject to
certain maximum dollar limitations. The Company recognized contract and license
fee revenue from the Knoll Collaboration of $26,000, $149,000 and $3,480,000 for
the fiscal years ended September 30, 1999, 1998 and 1997, respectively.
On July 15, 1999, Incara restructured its corporate relationship with
Interneuron to reduce Interneuron's majority ownership of Incara in exchange for
an increased ownership by Interneuron of CPEC, Inc. Prior to the Restructuring,
CPEC, Inc. was owned 80.1% by Incara and 19.9% by Interneuron. As a preliminary
step in the Restructuring, Incara acquired Interneuron's 19.9% interest in CPEC,
Inc., which was then merged into CPEC LLC, a Delaware limited liability company.
Incara redeemed 4,229,381 of the 4,511,084 shares of Incara Common Stock owned
by Interneuron, in exchange for a 65.0% ownership of CPEC LLC and cancellation
of certain liabilities owed to Interneuron by Incara and CPEC, Inc. which
totalled $2,421,000. This cancellation has been treated as a contribution to
capital by Interneuron to Incara. The Company's net investment in CPEC LLC of
$140,000 at September 30, 1999 is included in Other Assets in the accompanying
consolidated balance sheet. The Company's share of CPEC LLC's loss since the
date of the Restructuring was $385,000 which is included in research and
development expenses in the accompanying consolidated statement of operations.
Before the Restructuring, Incara had funded approximately 80.1% of the net
worldwide expenses related to bucindolol and Interneuron funded approximately
19.9%, in proportion to their respective ownership interests in CPEC, Inc. After
the Restructuring, Incara and Interneuron are responsible for funding 35.0% and
65.0%, respectively, of CPEC LLC's expenses related to the development of
bucindolol in the United States and Japan (the "CPEC Territory"). As part of the
Restructuring, Incara received an exclusive license of CPEC's rights in the
Knoll Territory and is responsible for all bucindolol expenses in the Knoll
Territory.
On July 29, 1999, the Company was notified that the NIH and the VA had
terminated the double-blind, placebo-controlled, Phase 3 study of bucindolol
known as BEST (Beta-blocker Evaluation of Survival Trial) earlier than
scheduled, based on an interim analysis by the Data and Safety Monitoring Board
("DSMB") that treatment with bucindolol did not demonstrate a statistically
significant improvement in survival in the patient population as a whole. BEST
was designed to evaluate bucindolol's use in treating patients with moderate to
severe congestive heart failure. Incara has not received the final data from
BEST. Based on information to date, the Company does not expect to pursue the
compound further for this or any other indication, but a final decision will be
made after the database is received from the U.S. study. Some costs, such as
completion of clinical monitoring of BEST and storage of clinical supplies, will
continue to be incurred, although Incara and CPEC LLC are taking steps where
possible to minimize those costs. All estimated BEST termination costs were
accrued as of September 30, 1999.
On August 3, 1999, following the decision by the NIH and VA to terminate
BEST, Knoll terminated the Knoll Collaboration. Knoll and Incara also terminated
the Phase 3 clinical study of bucindolol being conducted in Europe, which was
known as BEAT (Bucindolol Evaluation after Acute myocardial infarction Trial).
Some costs, such as BEAT termination costs, will continue to be incurred,
although Incara and Knoll are also taking steps to minimize those costs. All
estimated BEAT termination costs were accrued as of September 30, 1999.
F-17
K. ACQUISITIONS
Transcell Technologies, Inc.
In May 1998, Incara acquired all of the outstanding stock of Transcell in a
merger of Transcell with and into Incara, and also acquired related technology
rights held by Interneuron in exchange for Incara Common Stock with an aggregate
market value of $14,200,000. In addition, Incara issued replacement stock
options and warrants to purchase 241,705 shares and 17,783 shares, respectively,
of Incara Common Stock to Transcell employees, consultants and warrant holders,
with a total estimated value of $1,507,000. Under the terms of the Agreement and
Plan of Merger between Incara, Transcell and Interneuron dated March 2, 1998,
Transcell stockholders receive Incara Common Stock in three installments. The
first installment of 320,151 shares was issued upon closing the transaction on
May 8, 1998 (the "Closing"). In lieu of the second installment payment due to
Interneuron, Interneuron retained 281,703 shares of Incara Common Stock as part
of the Restructuring. On August 9, 1999, Incara issued 867,583 shares of Incara
Common Stock, valued at approximately $1.38 per share, to the other former
Transcell stockholders as payment for their second installment of the Transcell
Merger in the principal amount of $1,202,000. The third and final installment of
approximately $2,900,000 to the former Transcell stockholders, including
Interneuron, is due in February 2000 and will be paid in shares of Incara Common
Stock, calculated based on the per share price at that time. The impact of the
shares to be issued subsequent to September 30, 1999 has not been reflected in
the Company's Common Stock outstanding or its earnings per share calculations,
but was included in the determination of the purchase price of Transcell in May
1998. In exchange for certain license and technology rights held by Interneuron,
and for Interneuron's continuing guarantee of certain of Transcell's lease
obligations, Incara issued to Interneuron 174,672 shares of Incara Common Stock
at Closing with a value of $3,000,000 at the date of issuance and will pay
Interneuron a royalty on net sales of certain products that may result from the
Merck Collaboration. Prior to the Transcell Merger, Incara and Transcell were
both majority-owned subsidiaries of Interneuron. The acquisition of
Interneuron's 77.9% ownership interest in Transcell by Incara was treated in a
manner similar to a "pooling-of-interests", because it represented a transfer of
stock between entities under common control. The acquisition of the
non-Interneuron ownership interest was accounted for using the "purchase" method
of accounting. The Company incurred a charge to operations of $5,343,000 in
fiscal 1998 for the purchase of the non-Interneuron interest in Transcell,
because feasibility of the in-process research and development was not yet
established and the technology had no alternative future use at the date of the
acquisition. All of Transcell's prior results of operations were combined with
the results of operations of the Company, because Transcell's minority interest
owners had no responsibility to fund their share of the losses of Transcell.
Renaissance Cell Technologies, Inc.
In September 1997, Incara acquired all of the newly issued Series A
Preferred Stock of Renaissance, which represented 79.6% of the total shares of
preferred and common stock of Renaissance. Renaissance is an early stage company
conducting research in the area of hepatic stem cells. The acquisition was
accounted for using the purchase method of accounting. The purchase price for
Renaissance was $411,000, which was expensed as in-process research and
development, because feasibility of the in-process research was not yet
established and the technology had no alternative future use. Because Incara
controls the activities of Renaissance through its majority ownership interest,
the financial statements of Renaissance are included in the consolidated
financial statements of the Company. Renaissance had limited activity prior to
its acquisition.
L. AGREEMENTS
UNC License
Renaissance has a sponsored research agreement (the "UNC Agreement") with
the University of North Carolina at Chapel Hill ("UNC") which covers research at
UNC by certain scientists in the area of hepatic stem cells and which grants
Renaissance a first option to obtain an exclusive license to inventions
resulting from the agreement with UNC. Renaissance has agreed to reimburse UNC
for certain costs incurred in connection with the research, of which $788,000
remained to be paid as of September 30, 1999. In August 1999, Renaissance
obtained an exclusive worldwide license (the "UNC License") from UNC to make,
use and sell products using proprietary information and technology developed
F-18
under the UNC Agreement. Renaissance paid license fees of $75,000 to UNC and
will also pay milestones on certain development events and royalties on net
sales. Renaissance is also obligated to pay patent filing, prosecution,
maintenance and defense costs. Unless terminated earlier, the UNC License
continues until the last underlying patent expires. UNC is a minority
stockholder of Renaissance.
Opocrin License
In July 1998, Incara licensed a development compound ("OP2000") from
Opocrin S.p.A., of Modena, Italy ("Opocrin"). Incara is investigating the use of
OP2000 as a drug for the treatment of inflammatory bowl disease. The license is
worldwide except for Japan and Korea. During fiscal 1998, Incara made a
$1,000,000 license fee payment to Opocrin, which was expensed by the Company
because the compound was in the early clinical stage of development. Incara will
be responsible for conducting clinical trials for OP2000 and is required to make
additional milestone payments to Opocrin upon initiation of Phase 3 clinical
trials, upon filing for regulatory approval, upon obtaining regulatory approval
and upon achieving specified annual sales.
Merck Collaboration
In July 1997, Transcell and Interneuron entered into the Merck
Collaboration to discover and commercialize certain novel antibacterial agents.
The agreement provided for Merck to make initial payments totaling $2,500,000
which included a non-refundable commitment fee of $1,500,000 and a
non-refundable option payment of $1,000,000 plus research support during the
first two years of the agreement. Based upon estimated relative value of such
licenses and rights, the commitment fee and option payment was shared two-thirds
by the Company and one-third by Interneuron. The Company's share of revenue in
conjunction with this agreement was $2,063,000, $1,138,000 and $1,317,000 for
the fiscal years ended September 30, 1999, 1998 and 1997, respectively,
including a $1,500,000 milestone payment received from Merck in August 1999.
This milestone payment resulted from Incara providing Merck with compounds that
demonstrated specific in vitro and in vivo activity in both resistant and
sensitive bacterial strains. Merck is required to make additional payments based
upon achievement of certain defined clinical development and regulatory
milestones and to pay royalties based upon net sales of products resulting from
the collaboration. Certain of the rights licensed to Merck are based on
exclusive licenses or rights held by the Company and Interneuron from Princeton
University. Interneuron has transferred its rights and obligations under the
Merck Collaboration and its licenses with Princeton University to the Company.
Duke Licenses
Aeolus has obtained exclusive worldwide licenses (the "Duke Licenses") from
Duke University ("Duke") to develop, make, have made, use and sell products
using certain technology in the field of free radical and antioxidant research,
developed by certain scientists at Duke. Future discoveries in the field of
antioxidant research from these scientists' laboratories at Duke are also
covered by the Duke Licenses. The Duke Licenses require Aeolus to use its best
efforts to pursue development of products using the licensed technology and
compounds. These efforts are to include the manufacture or production of
products for testing, development and sale. Aeolus is also obligated to use its
best efforts to have the licensed technology cleared for marketing in the United
States by the U.S. Food and Drug Administration and in other countries in which
Aeolus intends to sell products using the licensed technology. Aeolus will pay
royalties to Duke on net product sales during the term of the Duke Licenses, and
milestone payments upon certain regulatory approvals and annual sales levels. In
addition, Aeolus is obligated under the Duke Licenses to pay all or a portion of
patent prosecution, maintenance and defense costs. Unless earlier terminated,
the Duke Licenses continue until the expiration of the last to expire issued
patent on the licensed technology. Duke is a minority stockholder of Aeolus.
Other Sponsored Research Agreements
Aeolus has a sponsored research agreement with National Jewish Medical and
Research Center ("NJC") which grants Aeolus an option to negotiate a
royalty-bearing exclusive license for certain technology, patents and inventions
resulting from research by certain individuals at NJC within the field of
antioxidant, nitrosylating and related areas. Aeolus has agreed to support
certain of NJC's costs incurred in performance of the research, of which,
$225,000 remained to be paid as of September 30, 1999.
F-19
Incara has entered into a number of license and sponsored research
agreements with Princeton University which grant Incara rights to certain
research conducted at Princeton University in exchange for annual license fees,
milestone payments and royalties. Incara's commitment to Princeton University
for the fiscal year ending September 30, 2000 under these agreements is
$900,000.
M. SALE OF IRL
On December 29, 1999, the Company sold IRL to a private pharmaceutical
company for $11,000,000 and the right to receive up to an additional $4,000,000
in the event a compound originating from the Merck Collaboration reaches certain
preclincial and clinical trial milestones. The transaction involved the sale of
assets associated with Incara's anti-infective division, including rights under
the Merck Collaboration and the assumption of certain related liabilities by the
purchaser. The Company remains contingently liable on some debt and lease
obligations assumed by the purchaser, including the IRL facility lease in
Cranbury, New Jersey.
F-20
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
June 30, September 30,
2000 1999
----------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,644 $ 2,407
Marketable securities - 2,553
Accounts receivable 245 282
Prepaids and other current assets 231 237
----------------- ------------------
Total current assets 9,120 5,479
Property and equipment, net 189 2,483
Other assets - 82
----------------- ------------------
$ 9,309 $ 8,044
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 589 $ 654
Accrued expenses 1,782 1,933
Current portion of capital lease obligations 21 488
Current portion of notes payable 27 197
----------------- ------------------
Total current liabilities 2,419 3,272
Long-term portion of capital lease obligations 48 399
Long-term portion of notes payable - 582
Stockholders' equity:
Common stock, $.001 par value per share, 40,000,000 shares authorized,
7,284,261 and 5,226,969 shares issued and outstanding at June 30,
2000 and September 30, 1999,
respectively 7 5
Additional paid-in capital 88,837 81,772
Restricted stock (279) (744)
Accumulated deficit (81,723) (77,242)
----------------- ------------------
Total stockholders' equity 6,842 3,791
----------------- ------------------
$ 9,309 $ 8,044
================= ==================
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
Revenue:
Contract and license fee revenue $ - $ 188 $ 100 $ 588
-------------- -------------- -------------- --------------
Costs and expenses:
Research and development 2,360 3,654 5,985 15,074
Purchased in-process research
and development - - 6,664 -
General and administrative 718 777 1,970 2,266
-------------- -------------- -------------- --------------
Total costs and expenses 3,078 4,431 14,619 17,340
-------------- -------------- -------------- --------------
Loss from operations (3,078) (4,243) (14,519) (16,752)
Gain on sale of division - - 9,751 -
Investment income, net 134 124 287 336
-------------- -------------- -------------- --------------
Net loss $ (2,944) $ (4,119) $ (4,481) $ (16,416)
============== ============== ============== ==============
Net loss per common share:
Basic $ (0.41) $ (0.56) $ (0.75) $ (2.24)
============== ============== ============== ==============
Diluted $ (0.41) $ (0.56) $ (0.75) $ (2.24)
============== ============== ============== ==============
Weighted average common shares
outstanding 7,258 7,341 6,005 7,315
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
June 30,
---------------------------------
2000 1999
-------------- -------------
Cash flows from operating activities:
Net loss $ (4,481) $ (16,416)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 236 582
Purchased in-process research and development 6,664 -
Gain on sale of division (9,751) -
Loss on disposal of property and equipment 35 -
Noncash compensation 1,098 1,018
Change in assets and liabilities:
Accounts receivable 37 1,069
Prepaids and other assets 2 3
Accounts payable and accrued expenses (726) (1,368)
------------- -------------
Net cash used in operating activities (6,886) (15,112)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of division 11,000 -
Proceeds from sales and maturities of marketable securities 2,553 11,414
Purchases of marketable securities - (1,044)
Purchases of property and equipment (85) (278)
------------- -------------
Net cash provided by investing activities 13,468 10,092
------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of stock 102 167
Proceeds from capital leases 38 -
Repurchase of Incara stock (332) -
Advances from former parent, net - 251
Principal payments on notes payable (56) (129)
Principal payments on capital lease obligations (97) (368)
------------- -------------
Net cash used in financing activities (345) (79)
------------- -------------
Net increase (decrease) in cash and cash equivalents 6,237 (5,099)
Cash and cash equivalents at beginning of period 2,407 10,647
------------- -------------
Cash and cash equivalents at end of period $ 8,644 $ 5,548
============= =============
The accompanying notes are integral part of these unaudited consolidated
financial statements.
F-23
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
---------------------
The "Company" or "Incara" refers collectively to Incara Pharmaceuticals
Corporation and its wholly owned subsidiaries, Aeolus Pharmaceuticals, Inc., a
Delaware corporation, and Renaissance Cell Technologies, Inc., a Delaware
corporation.
Incara conducts discovery and development programs in three areas: (1)
inflammatory bowel disease, using an ultra-low molecular weight heparin; (2)
liver disorders, using hepatic precursor cell therapy; and (3) small molecule
antioxidants for disorders such as stroke, asthma and chronic bronchitis.
All significant intercompany activity has been eliminated in the preparation of
the consolidated financial statements. The unaudited consolidated financial
statements have been prepared in accordance with the requirements of Form 10-Q
and Rule 10-01 of Regulation S-X. Some information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations. In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the consolidated
financial position, results of operations and cash flows of the Company. The
consolidated balance sheet at September 30, 1999 was derived from the Company's
audited financial statements included in the Company's Annual Report on Form
10-K. The unaudited consolidated financial statements included herein should be
read in conjunction with the audited consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1999 and in the Company's other SEC filings.
Results for the interim period are not necessarily indicative of the results for
any other interim period or for the full fiscal year.
B. Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative instruments, including some derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS 133 will be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier
application encouraged. The Company does not currently use derivatives, nor does
it intend in the future to use derivatives. Therefore, the Company does not
expect that the adoption of SFAS 133 will have any impact on its financial
position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," which provides guidance on the
recognition, presentation and disclosure
F-24
of revenue in financial statements filed with the SEC. SAB 101, as amended by
SAB 101A and SAB101B, outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosures related to revenue recognition
policies. The Company does not expect SAB 101 to have a significant impact on
the Company's revenue recognition policies.
C. Purchased In-Process Research and Development
---------------------------------------------
The acquisition cost of in-process technology that at the date of purchase had
not achieved technological feasibility and had no alternative future use was
charged to operations in the period such technology was acquired. Purchased
in-process research and development costs for the nine months ended June 30,
2000 relate to the acquisition of the minority interests of Renaissance and
Aeolus (see Note F).
D. Net Loss Per Common Share
-------------------------
The Company computes basic net loss per common share using the weighted average
number of shares of common stock outstanding during the period. The Company
computes diluted net loss per common share using the weighted average number of
shares of common and dilutive potential common shares outstanding during the
period. Potential common shares consist of stock options using the treasury
stock method and are excluded if their effect is antidilutive. For the
three-month and nine-month periods ended June 30, 2000 and 1999, the weighted
average shares outstanding used in the calculation of net loss per common share
did not include potential shares outstanding because they had the effect of
reducing net loss per common share.
E. Sale of IRL
-----------
On December 29, 1999, the Company sold its anti-infective division, known as
Incara Research Laboratories ("IRL"), to a private pharmaceutical company for
$11,000,000 in cash and the right to receive up to an additional $4,000,000 if a
compound originating from a collaboration with Merck & Co., Inc. reaches
preclinical and clinical trial milestones. The transaction involved the sale of
assets associated with IRL, including rights under the collaboration with Merck
and the assumption of related liabilities by the purchaser. In December 1999,
the Company recognized a gain of $9,751,000 on the sale of IRL. The Company
remains contingently liable through May 2007 on debt and lease obligations of
approximately $9,000,000 assumed by the purchaser, including the IRL facility
lease in Cranbury, New Jersey.
F. Acquisitions
------------
On March 31, 2000, Incara purchased all of the minority interests of Renaissance
and Aeolus. Prior to the acquisitions, Incara owned 78.0% of Renaissance and
65.8% of Aeolus. Incara issued 1,220,041 shares of its common stock in exchange
for the subsidiaries' minority ownership. The acquisitions have been accounted
for using the purchase method of accounting.
F-25
The total purchase price of $6,664,000 consisted of 1,220,041 shares of Incara's
common stock with a fair value of $5.46 per share, based on the price of the
Company's common stock at the date of acquisition. The total purchase price was
allocated to purchased in-process research and development and immediately
charged to operations because at the date of the acquisition the in-process
research purchased was in preclinical stages, feasibility had not been
established and it was deemed to have no alternative future use. Additionally,
Renaissance and Aeolus had no workforce or other tangible fixed assets.
Renaissance and Aeolus had incurred approximately $10,000,000 in
research and development costs prior to the acquisition of the minority
interests by Incara. Incara expects that it will take until at least 2006 to
complete development of all aspects of the research and that Renaissance and
Aeolus will need to spend in excess of an additional $50,000,000 to do so.
G. Stock Transactions
------------------
In May 1998, Incara acquired Transcell Technologies, Inc., which became
IRL. Incara issued the third and final installment of the purchase price of
856,861 shares of Incara common stock to the former stockholders of Transcell on
February 8, 2000. The number of shares issued was calculated using a formula
based on the average market price of Incara common stock prior to the stock
issuance date. The issuance of these additional shares did not impact the
Company's fiscal 2000 operating results, because the value of these shares was
included in the determination of the purchase price of Transcell in fiscal 1998.
In January 2000, the Company's Board of Directors authorized the
repurchase of up to $2,000,000 of Incara's common stock through the end of March
2000 through purchases on the stock market. During that period, the Company
repurchased 104,100 shares of its common stock at a cost of $332,000.
F-26