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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1996
Commission File Number 0-26872
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GELTEX PHARMACEUTICALS, INC.
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(Exact name of Registrant as Specified in its Charter)
Delaware 04-3136767
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 Bear Hill Road
Waltham, Massachusetts 02154
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 290-5888
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value, based upon the closing sale price of the shares
as reported by the NASDAQ National Market System, of voting stock held by
non-affiliates (without admitting that any person whose shares are not included
in such calculation is an affiliate) at March 21, 1997 was $ 206,475,839.
As of March 21, 1997, 13,524,002 shares of the registrant's Common Stock,
$.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders are incorporated by
reference into Part III of this Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
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OVERVIEW
GelTex Pharmaceuticals, Inc. ("GelTex" or the "Company") is developing
non-absorbed, polymer-based pharmaceuticals that selectively bind and eliminate
target substances from the intestinal tract. In January and March 1997, GelTex
successfully completed two Phase III clinical studies of RenaGel(R) phosphate
binder for the control of elevated phosphorus levels in chronic kidney failure
patients. These studies showed that RenaGel significantly decreased average
serum phosphorus levels. The Company intends to file a New Drug Application
("NDA") with the United States Food and Drug Administration ("FDA") for RenaGel
in the fourth quarter of 1997. In February 1997, GelTex completed two Phase II
trials of CholestaGel(R) non-absorbed cholesterol reducer. The first study
demonstrated clinically and statistically significant reductions in LDL
cholesterol levels in patients with hypercholesterolemia (elevated cholesterol).
The second study demonstrated similar cholesterol lowering activity between once
daily and split dosing. The Company intends to initiate another Phase II study
with a tablet formulation of CholestaGel in the second quarter of 1997. In 1996,
the Company strengthened its efforts in the infectious disease area by
increasing the size of the research team devoted to this program and focusing
efforts in this area on Cryptosporidium parvum.
THE COMPANY'S TECHNOLOGY
During the digestive process, the intestinal tract delivers nutrients and
water to the bloodstream and eliminates waste products and indigestible
materials through the bowel. Absorption of nutrients, electrolytes, water and
certain digestive substances such as bile acids is controlled by the intestinal
wall, which acts as a gateway from the intestines to the bloodstream, allowing
small molecules to pass from the intestinal tract into the bloodstream and
preventing larger molecules from entering circulation. Orally administered drugs
are either absorbed through the intestinal wall into the bloodstream, or are
non-absorbed and achieve their intended therapeutic effect by acting in the
intestinal tract. Non-absorbed drugs are less likely to cause the toxicities
associated with many absorbed drugs.
GelTex's pharmaceuticals act in the intestinal tract without absorption
into the bloodstream, thereby minimizing the potential for adverse effects. The
Company's product development approach represents an advance in the use of
polymer hydrogels as pharmaceuticals. The Company's technology combines an
understanding of chemical interactions necessary for molecular recognition with
the ability to design and synthesize polymer hydrogels. The Company's technology
enables it to combine commercially available monomers that have distinct
structural qualities to create proprietary, non-absorbed polymers that
selectively bind target molecules. The Company designs its polymers to carry a
high density of selective binding sites for the targeted molecules, making them
potent at low dosage levels.
GelTex's products are designed to be orally administered in capsule or
tablet form. The hydrogels are not broken down during the digestive process and,
as a result, are too large to be absorbed through the intestinal wall and into
the bloodstream. As the hydrogels pass through the stomach and into the
intestines, they selectively and tightly bind targeted molecules and absorb
significant amounts of water, forming a soft, gelatinous material. In this form,
the hydrogel passes easily through the intestinal tract and, with the attached
target molecules, is excreted from the body.
The Company's enabling technology offers the following benefits:
* Broad Application to Diseases and Conditions. The Company believes its
enabling technology is applicable to a broad range of diseases and
conditions treatable through the intestinal tract such as elevated
cholesterol, elevated phosphorus levels, certain infectious diseases,
ulcers, and inflammatory bowel disease.
* Low Risk of Adverse Side Effects. The Company's polymer-based products
are designed to be non-absorbed and well tolerated. Since the products
act only in the intestinal tract and are not
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absorbed into the bloodstream, they are less likely to cause the
toxicities associated with many absorbed drugs.
* Convenient Oral Dosage Form. The Company's polymer-based products are
designed to be potent at low dosage levels, thereby permitting oral
administration in a convenient capsule or tablet form.
PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
The key elements of the Company's product development and commercialization
strategy include: (i) applying the Company's polymer technology to produce drug
therapies that act in the intestinal tract; (ii) producing pharmaceuticals for
which there are major and well defined markets; (iii) producing pharmaceuticals
that offer significant improvements over available therapies or treat diseases
for which no effective therapy currently exists; and (iv) collaborating with
strategic partners to fund and assist in product development activities, as well
as the manufacture and distribution of the Company's products. The Company
believes that the safety profile and well defined clinical pathways of its
products have contributed to its clinical progress to date.
The Company has novel pharmaceutical products in various stages of research
and development for the treatment of elevated cholesterol, elevated phosphorus
and C. parvum. The table below outlines the status of the Company's product
development and research programs.
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PRODUCT/PROGRAM INTENDED INDICATIONS DEVELOPMENT STATUS
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RenaGel Control of elevated phosphorus levels in patients with Phase IIb clinical trial
chronic kidney failure completed in April 1996;
Phase III clinical trials
completed in March 1997
CholestaGel Treatment of elevated cholesterol in patients with Phase IIb and IIc
primary hypercholesterolemia (elevated low-density clinical trials completed
lipoprotein (LDL) cholesterol) in February 1997; Phase
IId clinical trial
planned for mid-1997
Infectious Diseases:
C. parvum Treatment of cryptosporidiosis in Research
immunocompromised patients
<FN>
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Notes
"Clinical trials" refers to testing in humans. See "Government Regulation."
"Research" includes the discovery or creation of prototype compounds, in vitro studies of those
compounds and preliminary evaluation in animals.
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RENAGEL
Overview
The United States Health Care Financing Administration ("HCFA") estimates
that in 1995 more than 200,000 patients in the United States underwent chronic
dialysis treatment for end-stage kidney disease. According to HCFA, the number
of end-stage kidney failure patients in the United States is increasing by 8% to
10% per year. In western Europe, the number of dialysis patients in 1995 was
estimated to be 159,000 and to be increasing by approximately 5% to 7% per year.
In Japan, the number of dialysis patients in 1995 was estimated to be 138,000
and to be increasing by approximately 6% per year.
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Control of blood phosphorus levels is central to the prevention of renal
bone disease in patients with chronic kidney failure. Phosphate is absorbed into
the bloodstream through the small intestine from protein-rich high-phosphate
foods such as meat, fish and dairy products. Healthy kidneys maintain a delicate
balance between phosphorus and calcium levels in the blood by excreting excess
phosphorus in the urine. In patients with chronic kidney failure, the kidneys
are unable to remove enough phosphorus to maintain the necessary balance.
Elevated phosphorus levels signal the body to excrete parathyroid hormone (PTH),
which breaks down bone to release calcium into the blood in an effort to
reestablish the balance between calcium and phosphorus. Chronic kidney failure
patients with uncontrolled elevated phosphorus levels (hyperphosphatemia)
experience bone loss as well as calcification of the circulatory system caused
by excessive amounts of phosphorus and calcium in the blood.
To reduce elevated phosphorous levels, nearly all dialysis patients use
some form of phosphate binder, currently the only available treatment for
hyperphosphatemia. Phosphate binders bind dietary phosphate in the intestinal
tract, thereby preventing its absorption into the bloodstream. The Company
estimates that the worldwide market for phosphate binders for dialysis patients
is $300 million. In addition to the dialysis population, many patients in the
early stages of chronic kidney failure (the pre-dialysis population) use
phosphate binders. An estimated 600,000 Americans can be classified as
pre-dialysis patients.
Currently available phosphate binders include calcium acetate, the only
FDA-approved phosphate binder, and calcium carbonate and aluminum hydroxide,
neither of which is approved in the United States for the control of
hyperphosphatemia in patients with chronic kidney failure. Calcium acetate and
calcium carbonate, the most commonly used agents, must be taken at sufficient
doses to achieve adequate reductions in phosphate absorption, which can lead to
constipation and noncompliance. In addition, calcium therapy requires frequent
monitoring because its use can cause dangerous elevations of blood calcium
levels (hypercalcemia). Hypercalcemia occurs in 25% to 50% of patients taking
calcium-based binders. Aluminum hydroxide is more effective at lower doses than
calcium acetate or calcium carbonate, but it is infrequently used because
aluminum absorbed from the intestinal tract accumulates in the tissues of
patients with chronic kidney failure, causing aluminum-related osteomalacia
(softening of the bones) and dialysis dementia (deterioration of intellectual
function). The Company believes that a non-absorbed, non-calcium-based phosphate
binder will offer significant benefits in the treatment of hyperphosphatemia in
patients with chronic kidney failure.
RenaGel Phosphate Binder
GelTex is developing RenaGel phosphate binder, an orally administered,
non-absorbed hydrogel intended to control hyperphosphatemia in patients with
chronic kidney failure. The product is designed to provide significant
advantages over currently available phosphate binders. RenaGel binds dietary
phosphate without the use of either calcium or aluminum and, therefore, will not
cause hypercalcemia or aluminum toxicities. The Company intends to supply
RenaGel in a convenient capsule form that is more palatable than the chalky
chewable and acidic uncoated tablet forms of currently available phosphate
binders.
The Company filed an Investigational New Drug Application ("IND") for
RenaGel with the FDA in November 1994. In December 1994, the Company initiated a
double-blind, randomized, placebo-controlled, dose-escalation Phase I clinical
trial, designed to establish safety, toleration and phosphate binding efficacy
in 24 healthy volunteers. The trial demonstrated that RenaGel was well
tolerated, and all subjects completed the trial without any drug-related adverse
reactions. The trial also demonstrated a dose-dependent decrease in urinary
phosphorus excretion, indicating that RenaGel bound dietary phosphate, leaving
less to be absorbed into the bloodstream.
The safety, efficacy and tolerability of RenaGel in 36 patients on dialysis
was studied in a double-blind, randomized, cross-over, placebo-controlled Phase
IIa clinical trial completed in August 1995. This study was designed to
demonstrate that RenaGel is equivalent in potency to currently available
calcium-based phosphate binders. In this study, RenaGel was shown to be safe and
well tolerated by patients on dialysis. All patients completed drug treatment,
and the adverse reaction profile of RenaGel was similar to that of the placebo.
This trial demonstrated that RenaGel produces a dose-dependent decrease in serum
phosphorus levels and is approximately equal in potency to the currently
available calcium-based phosphate binders.
The Company completed a two month open-label, dose titration Phase IIb
clinical trial in 48 dialysis patients in April 1996 at five clinical sites.
This trial design followed the expected treatment regimen for RenaGel, which
will
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involve initiation of therapy at a low dose, followed by bi-weekly dose
titration until the dose reflects the unique dietary phosphate intake of each
patient. Results of this trial demonstrated that RenaGel significantly decreased
serum phosphorus without increasing serum calcium, while maintaining adequate
control of PTH levels.
GelTex initiated two pivotal Phase III clinical trials with RenaGel in June
1996. These studies were completed in the first quarter of 1997. The first
trial, a 172-patient open-label placebo controlled study, confirmed and expanded
the results of the Company's Phase IIb study, demonstrating RenaGel's ability to
control phosphate levels without elevating calcium levels. Results of this study
also suggest that reducing phosphorus levels in the absence of calcium
supplementation can aid in the control of PTH levels.
The second Phase III study, an 82-patient crossover study, was designed to
compare the safety and efficacy of RenaGel with that of calcium acetate
(PhosLo(R)). A preliminary analysis of the results of this trial shows that
RenaGel is as effective as calcium acetate in reducing serum phosphorus levels
with significantly fewer incidents of hypercalcemia. The Company expects to file
a NDA for RenaGel with the FDA in the fourth quarter of 1997.
In December 1994, GelTex granted Chugai Pharmaceutical Co., Ltd. ("Chugai")
an exclusive license to develop and commercialize RenaGel in Japan and other
Pacific Rim countries. See "Development and Marketing Agreements."
CHOLESTAGEL
Overview
Elevated LDL cholesterol (hypercholesterolemia) has been widely recognized
as a significant risk factor for coronary heart disease since the mid-1980s. As
a result of the increased awareness and the broad prevalence of elevated LDL
cholesterol, cholesterol-reducing drugs have emerged as one of the largest and
fastest growing pharmaceutical product categories. Worldwide, more than 21
million people used cholesterol-reducing drugs in 1996, representing a global
market exceeding $6 billion.
While the risks of hypercholesterolemia are well recognized, the condition
remains significantly under-treated worldwide. According to a 1993 report from
the National Cholesterol Education Program ("NCEP") of the National Institutes
of Health, an estimated 65 million Americans have elevated cholesterol levels.
Of these, 13 million would require both drug and diet therapy to achieve
adequate reductions in cholesterol levels. A separate 1993 study showed that
only 5 million Americans were receiving cholesterol-reducing drugs. Worldwide,
only an estimated one-third of individuals who should be receiving
cholesterol-reducing drugs are receiving therapy. The market for
cholesterol-reducing drugs is expected to grow as awareness and diagnosis
continue to increase.
Physicians frequently prescribe a low fat, low cholesterol diet (the NCEP
Step I diet) as an initial approach to lowering elevated cholesterol. In cases
where dietary changes alone do not adequately lower a patient's cholesterol
levels, drug therapy may be needed. Physicians have the option of prescribing
one of two types of therapies: non-absorbed cholesterol-reducing drugs (i.e.,
bile acid sequestrants) or several classes of absorbed agents. One class of
absorbed agents is the HMG-CoA reductase inhibitors, the most widely prescribed
class of cholesterol-reducing agents in the United States. Worldwide sales of
the three leading HMG-CoA reductase inhibitors each exceeded $1 billion in 1995.
These drugs work by blocking cholesterol synthesis and enhancing the liver's
ability to clear LDL cholesterol from the blood.
Bile acid sequestrants, an alternative therapy to absorbed agents such as
HMG-CoA reductase inhibitors, have been marketed for decades. Bile acids are
synthesized by the liver from cholesterol and secreted into the intestines to
aid digestion of fats. Bile acid sequestrants bind to bile acids in the
intestinal tract and increase their excretion from the body. To replenish the
bile acid pool, the liver draws cholesterol from the bloodstream, resulting in a
reduction in blood cholesterol levels. Bile acid sequestrants work without
entering the bloodstream and are generally regarded as safer than absorbed
agents such as HMG-CoA reductase inhibitors, which require frequent liver
function tests. Since cholesterol-reducing therapy typically involves a
life-long drug regimen, many doctors prescribe bile acid sequestrants as
first-line drug therapy, especially for primary prevention and in younger
patients.
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Sales of bile acid sequestrants in the United States exceeded $140 million
in 1995. The most widely prescribed bile acid sequestrant in the United States
is cholestyramine, a polymer resin which is based on a single monomer.
Cholestyramine is an inefficient and weak binder of bile acids and, therefore,
must be taken in large quantities. Typically, patients must drink a mixture of
two to three tablespoons of cholestyramine in eight ounces of water twice a day.
The unpleasant intestinal side effects and necessarily large doses of currently
available bile acid sequestrants prompt many patients to discontinue this
therapy. As a result, many physicians either switch patients to or initially
prescribe HMG-CoA reductase inhibitors. The Company believes that CholestaGel, a
bile acid sequestrant with improved efficacy and tolerability in a convenient
capsule or tablet form, will increase patient acceptance and use of bile acid
sequestrant therapy.
CholestaGel Non-Absorbed Cholesterol Reducer
GelTex is developing CholestaGel, an orally administered, non-absorbed
hydrogel intended to reduce elevated LDL cholesterol levels in patients with
hypercholesterolemia. The Company believes that the structural design of
CholestaGel represents a significant advance over existing bile acid
sequestrants in that it carries a high density of bile acid binding sites,
making it more potent at lower doses than currently marketed agents. The Company
expects CholestaGel to meet the needs of the market for a non-absorbed
cholesterol-reducing drug that is safe and well tolerated in long term use, that
is effective at low doses and is available in a convenient capsule or tablet
form.
CholestaGel may be particularly appropriate therapy for young people with
elevated cholesterol levels who may be on therapy for the rest of their lives.
CholestaGel may also expand treatment of mild-to-moderate cholesterol elevations
(LDL cholesterol from 130 to 160 mg/dL) by giving physicians a safer therapy to
prescribe to patients at lower risk of coronary heart disease. In addition,
those patients with established coronary heart disease may benefit by combining
low doses of CholestaGel and HMG-CoA reductase inhibitors, since currently
available bile acid sequestrants are approved for use in combination with
HMG-CoA reductase inhibitors.
The Company filed an IND for CholestaGel with the FDA in May 1995. In June
1995, the Company initiated a double-blind, placebo-controlled, dose-escalation
Phase I clinical trial in 24 healthy volunteers to assess the safety and
tolerability of CholestaGel. Data from this trial indicate that CholestaGel was
well tolerated by all subjects at all dosage levels, and there were no
drug-related adverse events. In addition, CholestaGel caused a significant
dose-dependent reduction in LDL cholesterol in healthy volunteers. Even though
the starting cholesterol levels of the subjects were low, the use of CholestaGel
resulted in statistically significant reductions of LDL cholesterol in all
dosage groups.
In March 1996, the Company completed a Phase IIa study of CholestaGel
initiated in August 1995. This double-blind, placebo-controlled, dose-ranging
study was designed to evaluate the safety, tolerability and lipid-lowering
efficacy of CholestaGel in subjects with LDL cholesterol levels exceeding 160
mg/dL. Analysis of the data from this study indicates that patients receiving
1.2 grams b.i.d. (twice daily) of CholestaGel experienced an average 27 mg/dL
(15%) reduction in LDL cholesterol, and patients receiving 3.6 grams b.i.d.
experienced an average 50 mg/dL (29%) reduction. Patients receiving placebo
experienced no meaningful change in LDL cholesterol levels. No dose-limiting
side effects were reported.
In February 1997, the Company completed a Phase IIb, 147-patient dose
ranging study looking at four dose levels of CholestaGel. Preliminary analysis
of the data from this study indicates patients receiving 1 to 6 grams b.i.d. of
CholestaGel experienced an average 30 mg/dL (15%) reduction in LDL cholesterol
and patients receiving 2.0 grams b.i.d. experienced an average 35 mg/dL (17%)
reduction. This study also showed that CholestaGel was well tolerated with a
lack of gastrointestinal side effects such as constipation, which are
significant problems with existing bile acid sequestrants.
In February 1997, the Company also completed a Phase IIc clinical trial of
CholestaGel. This study compared once daily dosing versus twice daily dosing in
119 patients. All patients took a total of 1.6 grams per day. Results of this
study indicate that once daily dosing is at least as effective as split dosing.
The Phase IIb and IIc studies were conducted with CholestaGel material
manufactured by an improved process which extends the shelf life of the product
and lowers the cost of goods without affecting the cholesterol lowering
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activity of the product. The Company intends to initiate a Phase IId study in
the second quarter of 1997 to test what it believes to be the optimum dosage
form of CholestaGel, a 650 mg tablet.
The Company is continuing to conduct research regarding potential
additional benefits of cholesterol-reduction with CholestaGel. The Company is
conducting animal studies to examine the effects of CholestaGel on the early
stages of atherosclerosis formation (fat deposits on the artery wall). In these
experiments, animals fed diets high in fat develop high cholesterol and
widespread arterial fat deposits similar to those found in humans. When these
animals are treated with CholestaGel, blood cholesterol levels are reduced and
fat deposition on the artery walls is decreased or prevented. In addition to
this research, the Company is continuing to identify more potent bile acid
sequestering polymers and has synthesized several candidates.
In June 1996, the Company received notice from Ono Pharmaceutical Co.,
Ltd., that it had terminated its agreement to develop CholestaGel in Japan,
China, Korea and Taiwan. Upon such termination, GelTex reacquired all rights to
the product in those countries.
INFECTIOUS DISEASE RESEARCH
Overview
The Company is applying its expertise in polymer chemistry and molecular
recognition technology to develop polymers designed to treat infectious diseases
in the intestinal tract by mimicking the body's natural antibody response to
pathogens. In addition to the Company's internal drug discovery and screening
programs, GelTex is collaborating with researchers at Kansas State University,
Tufts University and the VA Palo Alto Healthcare System, who are developing or
have established screening procedures and are testing the effectiveness of
GelTex's compounds in treating targeted infectious diseases. These screening
procedures use animal and cell culture models which enable the Company to
receive information concerning its products in a short time period.
Like antibodies, these polymers are intended to act by selectively
recognizing, binding to and inactivating specific sites on the pathogen's
surface that are used to infect cells on the intestinal wall. The Company
believes that once these sites are blocked, infection will not continue to
occur. The pathogens are then expected to pass through the intestinal tract and
be excreted from the body. GelTex believes that the use of these polymers may be
less likely than current antibiotic therapies to result in the development of
microbial resistance.
GelTex is focusing its research efforts in this area toward designing and
testing polymers for the treatment of cryptosporidiosis. The Company chose this
disorder because (i) no effective drug therapies exist, (ii) the potentially
relevant molecular recognition fragments have been identified and (iii) disease
models are available for testing drug candidates for this condition. In November
1994, GelTex was awarded a $2 million grant from the United States Department of
Commerce's Advanced Technology Program. The grant, which is administered by the
National Institute of Standards and Technology, provides partial funding for
this program distributable over a three year period.
Cryptosporidium parvum
C. parvum is a water borne parasite that can cause cryptosporidiosis, a
debilitating diarrheal disease. In healthy individuals, the immune system is
able to control and eradicate the parasite within 7 to 14 days of infection. In
those individuals with compromised immune function, such as patients with AIDS
and immunosuppressed transplant recipients, the immune system cannot clear the
parasite for months or even years. Patients become rapidly dehydrated, must be
hospitalized for long periods of time and sometimes die from the symptoms of the
infection. There is currently no effective therapy for cryptosporidiosis. Each
year, approximately 10% to 15% of the United States AIDS population develops
cryptosporidiosis.
C. parvum colonizes epithelial cells on the surface of the intestinal
tract. During the course of its life cycle, the parasite produces spores
(merozoites) which float freely for a period of time in the intestinal lumen
before infecting new cells. GelTex is designing polymers that will bind to C.
parvum merozoites during this free-floating period. Both epithelial cells and C.
parvum have short life-spans and are shed from the intestinal wall in a matter
of days. Thus, the Company believes that a polymer ingested over the course of
several days would bind and eliminate each
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new generation of merozoites, preventing the infection of new epithelial cells
and reducing colonization or eliminating the pathogen from the intestinal tract.
OTHER APPLICATIONS OF GELTEX'S TECHNOLOGY
In addition to its development programs and infectious disease research,
the Company is currently evaluating a number of other product development
opportunities using its technology. Specifically, the Company believes that
conditions of the intestinal tract such as ulcers and inflammatory bowel
diseases could be treated with polymer-based products developed using the
Company's enabling technology.
DEVELOPMENT AND MARKETING AGREEMENTS
GelTex intends to commercialize its products through development and
marketing agreements with pharmaceutical companies. GelTex expects that such
agreements will provide the Company with (i) financial support in the form of
license, research and development and/or milestone payments, (ii) capabilities
in research and development and sales and marketing and (iii) a revenue stream
on product sales following regulatory approvals. The Company currently has a
major development and marketing agreement in effect with Chugai.
In December 1994, GelTex granted Chugai an exclusive license to develop and
commercialize RenaGel in Japan and other Pacific Rim countries. Chugai, a
leading Japanese pharmaceutical company, is the largest distributor in Japan of
rHuEPO, a product which is used to treat anemia in patients with chronic kidney
failure.
The agreement provides for Chugai to fund the development of RenaGel in
Japan and other Pacific Rim countries and grants Chugai the exclusive right to
manufacture and market the product in the territory. Under the agreement, Chugai
made an upfront license payment to GelTex and has agreed to make milestone
payments to GelTex, payable throughout the development process in Japan. Chugai
will pay a royalty to GelTex on net product sales in the territory. Chugai has
the right to terminate the agreement on short notice at any time prior to
product approval in Japan. Termination will relieve Chugai of any further
payment obligations under the agreement and will end any license granted to
Chugai by GelTex. In December 1996, Chugai informed the Company that it had
initiated a Phase I clinical trial for RenaGel in Japan, resulting in a $1
million milestone payment to GelTex.
RAW MATERIAL AND MANUFACTURING
The Company's two lead products are manufactured from a raw material for
which the Company has a single source of supply. The supplier has a composition
of matter patent covering the material, and the Company believes that no
additional suppliers have been licensed. In order to address issues of supply of
this raw material, the Company has entered negotiations with the supplier to
obtain a manufacturing license. Should the Company or its corporate partners be
unable to secure an adequate supply of the material or to secure such supply at
commercially reasonable rates, the Company may be unable to commercialize these
products as planned.
The Company has chosen not to build the capacity to manufacture its
potential products and, therefore, purchases from third party manufacturers its
compounds for preclinical research and clinical trial purposes and expects to be
dependent on third party manufacturers for commercial production. The Company
believes that it will be able to negotiate arrangements with third party
manufacturers on commercially reasonable terms and that it will not be necessary
for it to develop internal manufacturing capability in order to successfully
commercialize its products. The Company does not have long term, fixed price
manufacturing agreements with respect to RenaGel or CholestaGel with any
suppliers. In the event that the Company is unable to obtain contract
manufacturing, or obtain such manufacturing on commercially reasonable terms, it
may need to acquire manufacturing capability or it may be unable to
commercialize its products as planned.
The Company has obtained pharmaceutical grade bulk production quantities of
its lead compounds, RenaGel and CholestaGel from two suppliers (one for each
compound). This bulk production is being used in clinical trials of these
products. The Company is continuing to work with its third party manufacturers
to optimize processes for the manufacture of commercial quantities of RenaGel
and CholestaGel. In the event the continuing process development work is not
successful, the Company's profit margins could be adversely affected.
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The Company is currently exploring relationships with other suppliers to
complement its relationships with its existing suppliers. The Company has
established a quality control program, including a set of standard operating
procedures, intended to ensure that third party manufacturers under contract
produce the Company's compounds in accordance with the FDA's current Good
Manufacturing Practices.
The production of GelTex's compounds is based in part on technology that
the Company believes to be proprietary. GelTex maintains confidentiality
agreements, contractual arrangements and patent filings to protect this
proprietary knowledge. In the event that such manufacturers fail to abide by the
limitations or confidentiality restrictions in the manufacturing arrangements,
the proprietary nature of GelTex's technology could be adversely affected and,
consequently, any competitive advantage that GelTex has achieved as a result of
the proprietary nature of this technology could be jeopardized.
PATENTS, TRADE SECRETS AND LICENSES
Protection of the Company's proprietary rights is important to maintaining
its competitive position. The Company actively seeks, when appropriate,
protection for its products and proprietary information by means of United
States and foreign patents, trademarks and contractual arrangements. In
addition, the Company relies upon trade secrets and contractual arrangements to
protect certain of its proprietary information and products.
The Company has three issued U.S. patents. The first, covers technology
related to RenaGel and a class of other orally administered non-absorbed
phosphate-binding polymers and their use in the treatment of hyperphosphatemia.
The second covers methods of binding iron in the gastrointestinal tract with
non-absorbed, polymer-based pharmaceuticals, thereby reducing iron absorption
into the bloodstream. The third, issued in March 1996, covers technology related
to CholestaGel and other polymeric materials. The Company also has approximately
16 pending United States patent applications and has filed approximately 37
international and foreign counterparts. There can be no assurance that any
patents will issue from any of the Company's patent applications. Further, there
can be no assurance that any current or future patents will provide the Company
with significant protection against competitive products or otherwise be of
commercial value.
Much of the Company's technology and many of its processes are dependent
upon the knowledge, experience and skills of its scientific and technical
personnel. To protect its rights to its proprietary know-how and technology, the
Company requires all employees, consultants, advisors and collaborators to enter
into confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside the Company. These agreements require disclosure
and assignment to the Company of ideas, developments, discoveries and inventions
made by employees, consultants, advisors and, when possible, collaborators.
There can be no assurance that these agreements will effectively prevent
disclosure of the Company's confidential information or will provide meaningful
protection for the Company's confidential information if there is unauthorized
use or disclosure. Furthermore, in the absence of patent protection, the
Company's business may be adversely affected by competitors who independently
develop substantially equivalent technology.
COMPETITION
The pharmaceutical industry is intensely competitive. Many companies,
including biotechnology, chemical and pharmaceutical companies, are actively
engaged in activities similar to those of the Company, including research and
development of products for hypercholesterolemia, hyperphosphatemia and
cryptosporidiosis.
In the cholesterol-reduction field, products are currently available that
address some of the needs of the market. These products include other bile acid
sequestrants, HMG-CoA reductase inhibitors, fibric acid derivatives and niacin.
In 1995, sales of HMG-CoA reductase inhibitors represented approximately 74% of
the market for cholesterol-reducing drugs sold in the United States. Worldwide
sales of the three leading HMG-CoA reductase inhibitors each exceeded $1 billion
in 1995. Bile acid sequestrants work without entering the bloodstream and are
generally regarded as safer than absorbed agents such as HMG-CoA reductase
inhibitors, which require frequent liver function tests. However, the unpleasant
intestinal side affects and necessarily large doses of currently available bile
acid sequestrants prompt many patients to discontinue this therapy. The most
widely prescribed bile acid sequestrant in the United States is cholestyramine,
a polymer resin which is based on a single monomer.
8
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Cholestyramine is an inefficient and weak binder of bile acids and, therefore,
must be taken in large quantities. The Company believes that CholestaGel will
effectively compete with currently available bile acid sequestrants by offering
improved efficacy and tolerability and a more palatable formulation than that of
currently available bile acid sequestrants. However, currently marketed products
often have a significant competitive advantage over new entrants, and there can
be no assurance that the Company will be able to secure a sufficient percentage
of its targeted market to meet its current revenue projections. Failure to do so
will adversely affect the Company's ability to achieve and sustain
profitability. See "CholestaGel-CholestaGel Non-Absorbed Cholesterol Reducer."
Phosphate binders are currently the only available treatment for
hyperphosphatemia. There are several phosphate binders available. A prescription
calcium acetate preparation is currently the only product approved in the United
States for the control of elevated phosphorus levels in patients with chronic
kidney failure. Other products used as phosphate binders include
over-the-counter calcium- and aluminum-based antacids and dietary calcium
supplements. Calcium acetate and calcium carbonate, the most commonly used
agents, must be taken at sufficient doses to achieve adequate reductions in
phosphate absorption, which can lead to constipation and noncompliance. In
addition, calcium therapy requires frequent monitoring because its use can cause
dangerous elevations of blood calcium levels (hypercalcemia). Aluminum hydroxide
is more effective at lower doses than calcium acetate or calcium carbonate, but
it is infrequently used because aluminum absorbed from the intestinal tract
accumulates in the tissues of patients with chronic kidney failure, causing
aluminum-related osteomalacia (softening of the bones) and dialysis dementia
(deterioration of intellectual function). RenaGel binds dietary phosphate
without the use of either calcium or aluminum and, therefore, will not cause
hypercalcemia or aluminum toxicities. The Company believes that RenaGel will
effectively compete with existing phosphate binders by offering an excellent
tolerability profile and a more palatable formulation than that of currently
available phosphate binders. However, currently marketed products often have a
significant competitive advantage over new entrants, and there can be no
assurance that the Company will be able to secure a sufficient percentage of its
targeted market to meet its current revenue projections. Failure to do so will
adversely affect the Company's ability to achieve and sustain profitability. See
"RenaGel-RenaGel Phosphate Binder."
In addition to currently available therapies, several of the Company's
competitors are engaged in development activities and clinical trials of bile
acid sequestrants and other types of cholesterol-reducing agents. Many of the
Company's competitors have substantially greater financial and other resources,
larger research and development staffs and more extensive marketing and
manufacturing organizations than the Company. These competitors may also compete
with the Company in establishing development and marketing agreements with
pharmaceutical companies. There are also academic institutions, governmental
agencies and other research organizations that are conducting research in areas
in which the Company is working.
GOVERNMENT REGULATION
The development, manufacture and potential sale of therapeutics is subject
to extensive regulation by United States and foreign governmental authorities.
In particular, pharmaceutical products are subject to rigorous preclinical and
clinical testing and to other approval requirements by the FDA in the United
States under the Federal Food, Drug and Cosmetic Act and the Public Health
Service Act and by comparable agencies in most foreign countries.
Before testing of any agents with potential therapeutic value in healthy
human test subjects or patients may begin, stringent government requirements for
preclinical data must be satisfied. The data, obtained from studies in several
animal species, as well as from laboratory studies, are submitted in an IND
application or its equivalent in countries outside the United States where
clinical studies are to be conducted. The preclinical data must provide an
adequate basis for evaluating both the safety and the scientific rationale for
the initiation of clinical trials.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which frequently begins with the
initial introduction of the compound into healthy human subjects prior to
introduction into patients, the product is tested for safety, adverse affects,
dosage, tolerance, absorption, metabolism, excretion and clinical pharmacology.
Phase II typically involves studies in a small sample of the intended patient
population to assess the efficacy of the compound for a specific indication, to
determine dose tolerance and the optimal dose range as well as to gather
additional information relating to safety and potential adverse effects. Phase
III trials are undertaken to further evaluate clinical safety and efficacy in an
expanded patient population at
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geographically dispersed study sites, in order to determine the overall
risk-benefit ratio of the compound and to provide an adequate basis for product
labeling. Each trial is conducted in accordance with certain standards under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND.
Data from preclinical and clinical trials are submitted to the FDA as a NDA
for marketing approval and to other health authorities as a marketing
authorization application. The process of completing clinical trials for a new
drug is likely to take a number of years and require the expenditure of
substantial resources. Preparing a NDA or marketing authorization application
involves considerable data collection, verification, analysis and expense, and
there can be no assurance that FDA or any other health authority approval will
be granted on a timely basis, if at all. The approval process is affected by a
number of factors, primarily the risks and benefits demonstrated in clinical
trials as well as the severity of the disease and the availability of
alternative treatments. The FDA or other health authorities may deny a NDA or
marketing authorization application if the authority's regulatory criteria are
not satisfied or may require additional testing or information.
Even after initial FDA or other health authority approval has been
obtained, further studies, including Phase IV post-marketing 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 or other
regulatory authorities may require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand the
further marketing of the products. Further, if there are any modifications to
the drug, including changes in indication, manufacturing process or labeling or
a change in manufacturing facility, an application seeking approval of such
changes will be required to be submitted to the FDA or other regulatory
authority.
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 commercial sales 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. Further, the FDA
regulates the export of products produced in the United States and may prohibit
the export even if such products are approved for sale in other countries.
In addition to the statutes and regulations described above, the Company is
also subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resources
Conservation and Recovery Act and other present and potential future federal,
state and local regulations, and by the Nuclear Regulatory Commission.
Completing the multitude of steps necessary before marketing can begin
requires the expenditure of considerable resources and a lengthy period of time.
Delay or failure in obtaining the required approvals, clearances, permits or
inclusions by the Company, its corporate partners or its licensees would have a
materially adverse effect on the ability of the Company to generate sales or
royalty revenue. The impact of new or changed laws or regulations cannot be
predicted with any accuracy.
HUMAN RESOURCES
As of March 24, 1997, GelTex had 45 full-time employees. Thirty-two of
these individuals (13 of whom hold Ph.D. or M.D. degrees) are involved in
research and development, and thirteen are in general and administrative
functions. Members of the Company's scientific advisory board come from a number
of different disciplines, with expertise in polymer chemistry, medicinal
chemistry, molecular recognition, clinical pharmacology and clinical medicine.
See "Management - Executive Officers" and "- Scientific and Bile Acid Advisory
Boards."
RESEARCH AND DEVELOPMENT COSTS
The information required by Item 101(c)(xi) of Regulation S-K is
incorporated by reference from Part II, Item 8 "Financial Statements and
Supplementary Data" and specifically from the "Statement of Operations" set
forth on page F-4 of the Company's attached financial statements.
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ITEM 1(a) MANAGEMENT
- --------------------
EXECUTIVE OFFICERS
The executive officers of the Company, who are elected to serve at the
discretion of the Board of Directors, are as follows:
NAME AGE POSITION
---- --- --------
Mark Skaletsky 48 President, Chief Executive Officer,
Treasurer and Director
Dennis Goldberg, Ph.D. 48 Vice President, Product Development and
Regulatory Affairs
W. Harry Mandeville, Ph.D. 47 Vice President, Chemical Technology
Joseph Tyler 46 Vice President, Manufacturing
MARK SKALETSKY, President, Chief Executive Officer, Treasurer and Director.
Mr. Skaletsky joined GelTex in May 1993 as President, Chief Executive Officer
and a Director of the Company and has served as Treasurer of the Company since
August 1993. Mr. Skaletsky previously served from 1988 to 1993 as Chairman and
Chief Executive Officer of Enzytech, Inc., a biotechnology company, and
President and Chief Operating Officer of Biogen, Inc., a biotechnology company,
from 1983 to 1988. He is a director of Isis Pharmaceuticals, Inc. Mr. Skaletsky
received his B.S. in Finance from Bentley College.
DENNIS GOLDBERG, PH.D., Vice President, Product Development and Regulatory
Affairs. Dr. Goldberg joined GelTex in October 1993 from Transcend Therapeutics,
Inc. (formerly Free Radical Sciences, Inc.), a pharmaceutical company, where he
was a co-founder and served as Vice President, Research and Development since
1993. From 1990 to 1993, he was Director, Research and Development at Clintec
Nutrition Co., a clinical nutrition and pharmaceutical company which is a joint
venture between Baxter Healthcare, Inc. and Nestle S.A. Dr. Goldberg received
his Ph.D. in Physiology and Biochemistry from Temple University.
W. HARRY MANDEVILLE, PH.D., Vice President, Chemical Technology. Dr.
Mandeville joined the Company in 1992 from his position as Director, Research,
Development and Engineering, Chemical Products Group at the Waters
Chromatography Division of Millipore Corp., an analytical instrumentation
company, which he joined in 1987. Dr. Mandeville received his Ph.D. in Organic
Chemistry from the Massachusetts Institute of Technology.
JOSEPH TYLER, Vice President, Manufacturing. Mr. Tyler joined GelTex in
April 1995 from Stryker Biotech, a medical device company, which he joined in
1992, serving as Director, Operations. From 1990 to 1992, Mr. Tyler was employed
at Abbott Biotech (formerly Damon Biotech), a biologicals company, as Director,
Manufacturing and later as General Manager. Mr. Tyler received his M.S. in
Biochemical Engineering from Cornell University.
SCIENTIFIC AND BILE ACID ADVISORY BOARDS
The Company's Scientific Advisory Board consists of individuals with
demonstrated expertise in various fields who advise the Company concerning
long-term scientific planning, research and development. Members also evaluate
the Company's research programs, recommend personnel to the Company and advise
the Company on technological matters. In addition to its Scientific Advisory
Board, GelTex has established consulting relationships with a number of
scientific and medical experts who advise the Company on a project-specific
basis. One of the most important of these is the Company's Bile Acid Advisory
Board, a group of leading experts in the field of bile acids and bile acid
sequestrants who help to guide the Company's efforts in this area.
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No member of the Scientific Advisory Board or the Bile Acid Advisory Board
is employed by the Company, and members may have other commitments to or
consulting or advisory contracts with their employers or other entities that may
conflict or compete with their obligations to the Company. Accordingly, such
persons are expected to devote only a small portion of their time to the
Company.
The members of the Company's Scientific Advisory and Bile Acid Advisory
Boards are:
NAME PRINCIPAL OCCUPATION
---- --------------------
SCIENTIFIC ADVISORY BOARD
George Whitesides, Ph.D. (Chairman) Mallinckrodt Professor of Chemistry,
Harvard University
Joseph Bonventre, M.D. Associate Professor of Medicine,
Harvard Medical School; Associate Professor
of Health Sciences and Technology,
Massachusetts Institute of Technology
Martin C. Carey, M.D., D.Sc. Professor of Medicine, Harvard University,
Brigham and Women's Hospital
John Thomas LaMont, M.D. Chief, Division of Gastroenterology,
Beth Israel Hospital; Charlotte F. & Irving W. Rabb
Professor of Medicine, Harvard Medical School
Andrew G. Plaut, M.D. Professor of Medicine, Tufts University School of Medicine;
Director, Core Center for Gastroenterology Research,
an NIH Center at New England Medical Center Hospital
and Tufts University School of Medicine
BILE ACID ADVISORY BOARD
Martin C. Carey, M.D., D.Sc. Professor of Medicine, Harvard University,
Brigham and Women's Hospital
Scott Grundy, M.D., Ph.D. Professor of Internal Medicine and BioChemistry
University of Texas Southwest Medical Center
Alan Hofmann, M.D., Ph.D. Professor of Medicine in Gastroenterology,
University of California, San Diego
Willis Maddrey, M.D. Executive Vice President, Clinical Affairs,
Southwest Medical Center
Robert Nicolosi, Ph.D. Director of Cardiovascular Research,
University of Massachusetts, Lowell
Ken Setchell, Ph.D. Professor, Department of Pediatrics,
Director of Clinical Mass Spectrometry,
Children's Hospital, Cincinnati
Randolph C. Steer, M.D., Ph.D. Independent Pharmaceutical Consultant
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ITEM 2. PROPERTIES
- ------------------
The Company leases approximately 12,000 square feet of laboratory and
office space in one building at 303 Bear Hill Road in Waltham, Massachusetts.
The lease expires in 2004. The description of the lease terms is incorporated
herein by reference from Note 12 of the Notes to Financial Statements. On
February 28, 1997, the Company entered into a new lease, expiring in 2007, for a
25,200 square foot administrative and research and development facility, located
at 9 Fourth Avenue in Waltham, Massachusetts. Upon the completion of the
construction of leasehold improvements at the new facility, the Company plans to
move all of its operations and personnel and sublease the existing facility. The
Company believes that the new facility will be adequate to meet the Company's
needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
The Company's Common Stock is traded on the over-the-counter market under
the symbol "GELX", and is listed on the Nasdaq National Market. The following
table sets forth the high and low sales prices for the Company's Common Stock as
reported by the Nasdaq National Market for the period from the date the
Company's Common Stock first began trading until December 31, 1996:
Year Ended December 31, 1995 High Low
---------------------------- ---- ---
Fourth Quarter (from November 8, 1995) 12 1/2 9 1/2
Year Ended December 31, 1996
----------------------------
First Quarter 25 5/8 12
Second Quarter 26 1/4 17 1/8
Third Quarter 20 1/2 11 1/2
Fourth Quarter 24 1/2 16 13/15
The Company has never paid a cash dividend. The Company intends to retain
all of its earnings, if any, for use in its business and does not intend to pay
cash dividends in the foreseeable future. Future dividend policy will depend,
among other factors, upon the Company's earnings and its financial condition.
As of March 21, 1997, there were approximately 132 holders of record of the
Company's Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The following selected financial data for the five years ended December 31,
1996 are derived from the Company's financial statements. The data set forth
below should be read in conjunction with the Company's financial statements,
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Annual Report on
Form 10-K. The Company is considered a development stage company as described in
Note 1 of Notes to Financial Statements.
YEAR ENDED DECEMBER 31,
1992(1) 1993 1994 1995 1996
STATEMENT OF OPERATIONS DATA:
Revenue
License fee and research revenue ..... $ -- $ -- $ 3,000,000 $ 750,000 $ 1,244,474
Research grant ....................... -- -- -- 157,410 418,541
---------- ----------- ----------- ----------- ------------
Total revenue ............................ -- -- 3,000,000 907,410 1,663,015
Costs and expenses:
Research and development ............. 283,396 808,191 3,655,067 6,503,788 21,755,298
General and administrative ........... 123,333 776,747 1,279,728 1,873,247 2,923,569
Other, nonrecurring costs ............ -- -- -- -- 230,000
---------- ----------- ----------- ----------- ------------
Total costs and expenses ................. 406,729 1,584,938 4,934,795 8,377,035 24,908,867
---------- ----------- ----------- ----------- ------------
Loss from operations ..................... (406,729) (1,584,938) (1,934,795) (7,469,625) (23,245,852)
Interest income .......................... 11,733 65,514 303,475 684,138 3,342,723
Interest expense ......................... -- -- (51,757) (99,158) (75,015)
---------- ----------- ----------- ----------- ------------
Net loss ................................. $ (394,956) $(1,519,424) $(1,683,077) $(6,884,645) $(19,978,144)
========== =========== =========== =========== ============
Net loss per share ....................... $ (0.27) $ (0.85) $ (1.60)
=========== =========== ============
Shares uses in computing net loss
per share ............................ 6,139,000 8,109,000 12,513,000
DECEMBER 31,
1992(1) 1993 1994 1995 1996
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities ........................... $ 420,758 $ 5,625,637 $13,953,090 $33,175,098 $ 73,424,559
Working capital .......................... 394,508 5,398,601 12,665,333 31,824,253 72,460,802
Total assets ............................. 511,178 5,991,780 16,110,669 35,993,277 78,068,470
Long-term obligations, less current
portion .............................. -- -- 670,693 419,569 124,360
Stockholders' equity ..................... 470,808 5,721,252 13,978,974 33,649,999 75,056,475
<FN>
- -----------
(1) Operations of the Company commenced in January 1992.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
-----------------------------------------------------------------------
Since inception, the Company has devoted substantially all of its resources
to its research and product development programs. GelTex has generated no
revenues from product sales and has been dependent upon funding from external
financing, a strategic corporate alliance, interest income and government
grants. The Company has not been profitable since inception and has incurred a
cumulative net loss of $30.5 million through December 31, 1996. Losses have
resulted principally from costs incurred in research, development and clinical
testing of potential products and from general and administrative expenses. The
Company expects its research and development expenses to continue to increase in
connection with the advancement of its potential products through clinical
trials, the continuing development of a process for the manufacture of
commercial quantities of its products and the expansion of its programs. As a
result, the Company expects to incur increasing operating losses over the next
several years. The Company's ability to achieve profitability is dependent on
its ability to develop and obtain regulatory approval for its products, to enter
into agreements for product development and commercialization with corporate
partners, to secure supply of the raw material for its lead products and to
secure contract manufacturing services for the commercial supply of its products
at an acceptable cost.
RESULTS OF OPERATIONS
Fiscal Years Ended 1996, 1995 and 1994
The Company earned revenues of $1.7 million during 1996, consisting of $1.2
million in milestone payments and research revenue from its corporate partner
and $419,000 from a grant under the United States Department of Commerce's
Advanced Technology Program. In comparison, the Company earned revenues of
$907,000 during 1995, consisting of $750,000 of research revenue from a
corporate partner and $157,000 from the same Department of Commerce program and
$3.0 million in 1994 from a non-recurring license fee.
The Company's total operating expenses for 1996 were $25.0 million,
compared to $8.4 million for 1995 and $4.9 million for 1994. Research and
development expenses more than tripled to $21.8 million for 1996 from the $6.5
million that was spent in 1995, compared to a 78% increase in 1995 from the $3.7
million that was spent in 1994. These increases were due primarily to increasing
third party expenses associated with the development of CholestaGel and RenaGel
(including the production of clinical trial material, clinical trial expenses
and process development expenses) and increases in research and development
personnel costs to expand the infectious disease program and begin preparation
for filing a NDA for RenaGel. General and administrative expenses increased
approximately 56% to $2.9 million in 1996 from $1.9 million for 1995 and $1.3
million in 1994 due primarily to increased business development expenses and
increased administrative personnel costs. In addition, in 1996, the Company
experienced additional administrative costs associated with being a new public
company.
Interest income increased to $3.3 million in 1996 from $684,000 and
$303,000 in 1995 and 1994, respectively, due primarily to higher average cash
and marketable securities balances resulting from the Company's initial public
offering in November 1995 and from a follow-on public offering in May 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through December 31, 1996 primarily
with $87.3 million in net proceeds from two public offerings of equity
securities, $17.8 million from private sales of equity securities, $5.0 million
from license fees and research revenues from collaborative research agreements
and $4.4 million in interest income. Cash and marketable securities were $73.4
million at December 31, 1996, compared to $33.2 million at December 31, 1995.
The Company leases its administrative and research and development facility
under a long term operating lease expiring in 2004 and certain leasehold
improvements and equipment under capital leases expiring in 1997. Upon the
expiration of the capital leases, the Company intends to exercise its option to
purchase the leasehold improvements and equipment at a cost of $230,000, all of
which was charged to operations in the period ended December 31, 1996. On
February 28, 1997, the Company entered into a lease, expiring in 2007, for a new
administrative and research and development facility at an annual cost of
$302,000 for the first five years and $353,000 for the remainder of the lease
term. Upon the completion of the construction of leasehold improvements at the
new facility, the Company plans to move all of its operations and personnel and
sublease the existing facility
15
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and accompanying leasehold improvements. The Company expects to finance the cost
of the leasehold improvements, estimated at approximately $5.0 million, with
additional bank financing.
At December 31, 1996, the Company had $1.0 million available through
December 18, 1997 on a line of credit with a bank and had $288,000 outstanding
on various lines of credit with the bank. The amounts outstanding bear interest
at the prime rate and are due in monthly installments through March 1999.
At December 31, 1996, the Company had net operating losses of approximately
$31.0 million which expire through 2011. Since the Company expects to incur
substantial losses for at least the next several years, the Company believes
that it is more likely than not that all of the deferred tax assets will not be
realized, and therefore no tax benefit for the prior losses has been provided.
The future utilization of net operating loss carryforwards may be subject to
limitation under the changes in stock ownership rules of the Internal Revenue
Code of 1986, as amended. Because of this limitation, it is possible that
taxable income in future years, which would otherwise be offset by net operating
losses, will not be offset and therefore will be subject to tax. See Note 8 of
the Notes to the Financial Statements.
The Company believes that its cash and marketable securities balance and
the interest income thereon, should be sufficient to fund its operating expenses
as currently planned through at least 1998. However, the Company's cash
requirements may vary materially from those now planned because of results of
research and development, results of clinical trials, its ability to enter into
new relationships with strategic partners, competitive technological advances,
the FDA regulatory process and other factors. Adequate additional funds, whether
through sales of securities or collaborative or other arrangements with
corporate partners or from other sources, may not be available when needed or on
terms acceptable to the Company. Insufficient funds may require the Company to
delay, scale back or eliminate certain of its research and product development
programs or to license third parties to commercialize products or technologies
under terms that the Company might otherwise find unacceptable.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The discussion in this section as well as elsewhere in this Annual Report
on Form 10-K contains forward-looking statements that represent the current
expectations of the Company's management. Actual results could differ materially
from those projected due to factors affecting the Company's cash requirements as
described in the preceding paragraph. In addition, the Company's ability to
achieve the results projected is subject to certain risks and uncertainties
regarding the Company's business such as those set forth below. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
Dependence on Single Source of Supply
The Company uses a single supplier to provide a raw material necessary for
the manufacture of CholestaGel and RenaGel. The supplier has a composition of
matter patent covering the material, and the Company believes that there are no
alternative suppliers of this material. The Company does not have a long-term
supply agreement with the supplier. The Company has entered into negotiations to
obtain a manufacturing license to enable it to manufacture the raw material.
Should the Company or its corporate partners be unable to secure an adequate
supply of the material, or to secure such supply at commercially reasonable
rates, the Company may be unable to commercialize its products as planned.
Dependence on Others for Manufacturing; Process Development Risks
The Company is continuing to work with its third party manufacturers to
optimize processes for the manufacture of commercial quantities of CholestaGel
and RenaGel. The Company will rely upon such third parties to manufacture
commercial quantities of the products. In the event that the Company's process
development work is unsuccessful, the Company's profit margins could be
adversely affected.
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Dependence on Corporate Alliances
The Company intends to enter into additional development and marketing
agreements for the continued development and commercialization of CholestaGel
and for the commercialization of RenaGel. The Company plans to rely upon
corporate partners to conduct certain clinical trials, obtain certain regulatory
approvals for and market these products. If the Company is unable to conclude
agreements with partners as planned, the Company will have to either delay the
continued development and commercialization of the products or consume its
resources to fund such activities. This could result in a need for the Company
to seek additional sources of funding and there can be no assurance that such
funding will be available to the Company when needed or on acceptable terms.
No Assurance of FDA Approval; Comprehensive Government Regulation
The Company's potential products require governmental approvals for
commercialization, which have not yet been obtained. The regulatory process,
which includes preclinical, clinical and, in certain instances, post-marketing
testing to establish safety and efficacy, can take many years and require the
expenditure of substantial resources. Delays in obtaining such approvals could
adversely affect the marketing of products developed by the Company and the
Company's ability to generate commercial product revenue.
Competition
The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. Competitors of the Company in the United
States and abroad are numerous and include, among others, pharmaceutical and
biotechnology companies, universities and other research institutions. The
Company's success depends upon developing and maintaining a competitive position
in the development of products and technologies in its areas of focus. There can
be no assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than any which are being
developed by the Company or which would render the Company's technology and
products obsolete or noncompetitive. Many of these competitors have
substantially greater financial and technical resources and production and
marketing capabilities than the Company, and certain of these competitors may
compete with the Company in establishing development and marketing agreements
with pharmaceutical companies. In addition, many of the Company's competitors
have greater experience than the Company in conducting preclinical testing and
human clinical trials and obtaining FDA and other regulatory approvals. The
Company's competitors may succeed in obtaining FDA approval for products more
rapidly than the Company or its partners.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
Financial Statements and Supplementary Data appear at pages F-1 through
F-17 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
(a) DIRECTORS. The information with respect to directors required by this
item is incorporated herein by reference from the section entitled "Election of
Directors" in the Company's definitive Proxy Statement for its Annual Meeting of
Stockholders to be held on May 22, 1997 (the "1997 Proxy Statement").
(b) EXECUTIVE OFFICERS. See the section entitled "Management-Executive
Officers" in Item 1(a) in Part I above.
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ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information required by this item is incorporated herein by reference
from the section entitled "Executive Compensation" in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The information required by this item is incorporated herein by reference
from the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by this item is incorporated herein by reference
from the section entitled "Certain Transactions" in the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS:
Index to Financial Statements....................................F-1
Report of Independent Auditors...................................F-2
Balance Sheets as of December 31, 1996 and 1995..................F-3
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 and the period November
15, 1991 (date of inception) through December 31, 1996.........F-4
Statements of Changes in Stockholders Equity for the period
from November 15, 1991 (date of inception)
through December 31, 1996 .....................................F-5
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 and the period November
15, 1991 (date of inception) through December 31, 1996.........F-7
Notes to Financial Statements....................................F-8
18
20
(2) FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(3) EXHIBITS
Exhibit Number Description
- -------------- -----------
3.1 Restated Certificate of Incorporation of the Company. Filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 and incorporated herein by
reference.
3.2 Certificate of Designation. Filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference.
3.3 Amended and Restated By-laws of the Company, as amended. Filed
as Exhibit 3.3 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference.
4.1 Specimen certificate for shares of Common Stock of the Company.
Filed as Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (File No. 33-97322) and incorporated herein by
reference.
4.2 Rights Agreement dated as of March 1, 1996 between the Company
and American Stock Transfer & Trust Company. Filed as Exhibit 1
to the Company's Registration Statement on Form 8-A dated March
1, 1996 and incorporated herein by reference.
10.1# 1992 Equity Incentive Plan, as amended. Filed as Exhibit 99.1 to
the Company's Registration Statement on Form S-8 (File No.
333-08535) and incorporated herein by reference.
10.2 Express Master Lease Agreement with Equipment Schedule No. VL-1
between the Company and Comdisco, Inc. dated September 27, 1993.
Filed as Exhibit 10.5 to the Company's Registration Statement on
Form S-1 (File No. 33-97322) and incorporated herein by
reference.
10.3# Letter Agreement between the Company and Dennis Goldberg dated
October 1, 1993. Filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 33-97322) and
incorporated herein by reference.
10.4 Promissory Note executed by the Company in favor of Silicon
Valley Bank dated December 9, 1993 with Commercial Security
Agreement attached thereto. Filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (File No. 33-97322)
and incorporated herein by reference.
10.5 Agreement of Sublease between the Company and H&Q Waltham
Limited Partnership dated May 4, 1994, with Exhibit B thereto
(Lease Agreement between the Company and Hickory Drive
Properties Realty Trust dated April 12, 1994). Filed as Exhibit
10.9 to the Company's Registration Statement on Form S-1 (File
No. 33-97322) and incorporated herein by reference.
10.6 Assignment and Assumption Agreement and Landlord Consent among
Registrant and Hickory Drive Properties Realty Trust and H&Q
Waltham Limited Partnership dated May 4, 1994. Filed as Exhibit
10.10 to the Company's Registration Statement on Form S-1 (File
No. 33-97322) and incorporated herein by reference.
10.7* License Agreement between the Company and Chugai Pharmaceutical
Co., Ltd. dated December 26, 1994. Filed as Exhibit 10.14 to the
Company's Registration Statement on Form S-1 (File No. 33-97322)
and incorporated herein by reference.
19
21
10.8 Promissory Note executed by the Company in favor of Silicon
Valley Bank dated February 2, 1995. Filed as Exhibit 10.15 to
the Company's Registration Statement on Form S-1 (File No.
33-97322) and incorporated herein by reference.
10.9# Letter Agreement between the Company and Joseph E. Tyler dated
March 28, 1995. Filed as Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File No. 33-97322) and
incorporated herein by reference.
10.10 Form of Common Stock Purchase Agreement. Filed as Exhibit 10.17
to the Company's Registration Statement on Form S-1 (File No.
33-97322) and incorporated herein by reference.
10.11 Form of Restricted Common Stock Purchase Agreement. Filed as
Exhibit 10.18 to the Company's Registration Statement on Form
S-1 (File No. 33-97322) and incorporated herein by reference.
10.12# Form of Incentive Stock Option Certificate. Filed as Exhibit
10.19 to the Company's Registration Statement on Form S-1 (File
No. 33-97322) and incorporated herein by reference.
10.13 Forms of Nonstatutory Stock Option Certificate. Filed as Exhibit
10.20 to the Company's Registration Statement on Form S-1 (File
No. 33-97322) and incorporated herein by reference.
10.14# 1995 Director Stock Option Plan. Filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference.
10.15# 1995 Employee Stock Purchase Plan. Filed as Exhibit 99.1 to the
Company's Registration Statement on Form S-8 (File No.
333-00864) and incorporated herein by reference.
10.16 Lease Agreement dated February 28, 1997, between the Company and
J. F. White Properties, Inc. Filed herewith.
11.1 Statement re: computation of per share earnings. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors. Filed
herewith.
24.1 Power of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule. Filed herewith. (EDGAR filing only).
----------------------
* Certain confidential material contained in Exhibit 10.7 has been omitted
and filed separately with the Securities and Exchange Commission pursuant
to Rule 406 of the Securities Act of 1933, as amended.
# Identifies a management contract or compensatory plan or agreement in which
an executive officer or director of the Company participates.
20
22
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the fiscal quarter ended December
31, 1996.
21
23
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors..........................................F-2
Balance Sheets as of December 31, 1996 and 1995.........................F-3
Statements of Operations for the years ended December 31, 1996,
1995 and 1994, and the period from November 15, 1991
(date of inception) through December 31, 1996...........................F-4
Statements of Changes in Stockholders' Equity for
the period from November 15, 1991 (date of inception)
through December 31, 1996...............................................F-5
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994, and the period from November 15, 1991
(date of inception) through December 31, 1996...........................F-7
Notes to Financial Statements...........................................F-8
F-1
24
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
GelTex Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of GelTex Pharmaceuticals,
Inc. (a development stage company) as of December 31, 1996 and 1995, and the
related statements of operations, changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996 and the period
from November 15, 1991 (date of inception) through December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GelTex Pharmaceuticals, Inc.
(a development stage company) at December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 and for the period November 15, 1991 (date of inception)
through December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 21, 1997
F-2
25
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31,
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents (inclusive of reverse repurchase
agreements of $8,720,000 and $3,726,000 at
December 31, 1996 and December 31, 1995,
respectively) $ 20,801,465 $ 12,179,988
Marketable securities 52,623,094 20,995,110
Prepaid expenses and other current assets 1,923,878 572,864
------------ ------------
Total current assets 75,348,437 33,747,962
Long-term receivables 20,000 20,000
Property and equipment, net 2,246,910 1,948,788
Intangible assets, net 453,123 276,527
------------ ------------
$ 78,068,470 $ 35,993,277
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,495,869 $ 1,388,416
Current portion of long-term obligations 391,766 535,293
------------ ------------
Total current liabilities 2,887,635 1,923,709
Long-term obligations, less current portion 124,360 419,569
Commitments and contingencies
Stockholders' equity:
Undesignated Preferred Stock, $.01 par value, 5,000,000
shares authorized, none issued or outstanding -- --
Common Stock, $.01 par value, 50,000,000 and 20,000,000
shares authorized; 13,521,302 and 10,535,065 shares
issued and outstanding at December 31, 1996 and 1995,
respectively 135,213 105,350
Additional paid-in capital 105,407,670 44,000,986
Deferred compensation (46,129) (55,825)
Unrealized gain on available-for-sale securities 19,967 81,590
Deficit accumulated during the development stage (30,460,246) (10,482,102)
------------ ------------
Total stockholders' equity 75,056,475 33,649,999
------------ ------------
$ 78,068,470 $ 35,993,277
============ ============
The accompanying notes are an integral part of the financial statements.
F-3
26
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE PERIOD
NOVEMBER 15,
1991 (DATE OF
INCEPTION)
THROUGH
YEAR ENDED DECEMBER 31, DECEMBER 31
1996 1995 1994 1996
---- ---- ---- ----
REVENUE:
License fee and research revenue $ 1,244,474 $ 750,000 $ 3,000,000 $ 4,994,474
Research grant 418,541 157,410 575,951
------------ ----------- ----------- ------------
Total revenue 1,663,015 907,410 3,000,000 5,570,425
COSTS AND EXPENSES:
Research and development 21,755,298 6,503,788 3,655,067 33,005,740
General and administrative 2,923,569 1,873,247 1,279,728 6,976,624
Other, nonrecurring costs 230,000 -- -- 230,000
------------ ----------- ----------- ------------
Total costs and expenses 24,908,867 8,377,035 4,934,795 40,212,364
------------ ----------- ----------- ------------
Loss from operations (23,245,852) (7,469,625) (1,934,795) (34,641,939)
Interest income 3,342,723 684,138 303,475 4,407,623
Interest expense (75,015) (99,158) (51,757) (225,930)
------------ ----------- ----------- ------------
Net loss $(19,978,144) $(6,884,645) $(1,683,077) $(30,460,246)
============ =========== =========== =============
Net loss per share $ (1.60) $ (.85) $ (.27)
============ =========== ===========
Shares used in computing
net loss per share 12,513,000 8,109,000 6,139,000
The accompanying notes are an integral part of the financial statements.
F-4
27
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Deficit Unrealized
Accumulated Gain (Loss)
Preferred Stock Common Stock Additional during the on Available Total
--------------- ------------ Paid-In Deferred Development for Sale Stockholder's
Shares Amounts Shares Amounts Capital Compensation Stage Securities Equity
------ ------- ------ ------- ------- ------------ ----- ---------- ------
Sale of Common Stock,
January, April and
May 1992 276,000 $2,760 $ 2,760
Issuance of Common
Stock in exchange for
intangible assets,
January 1992 270,000 2,700 2,700
Sale of Series A
Preferred Stock net
of issuance costs of
$19,696, March and
June 1992 700,000 $ 855,304 855,304
Issuance of Common
Stock as
compensation,
May 1992 40,000 400 $4,600 5,000
Net loss $ (394,956) (394,956)
--------- ----------- ------- ----- ----- ----------- ---------- -----------
Balance at
December 31, 1992 700,000 855,304 586,000 5,860 4,600 (394,956) 470,808
Sale of Series B
Preferred Stock net
of issuance costs of
$55,132, August 1993 2,656,000 6,584,868 6,584,868
Issuance of Series B
Preferred Stock in
exchange for
cancellation of
indebtedness,
August 1993 74,000 185,000 185,000
Net loss (1,519,424) (1,519,424)
--------- ----------- ------- ----- ----- ----------- ---------- -----------
Balance at
December 31, 1993 3,430,000 7,625,172 586,000 5,860 4,600 (1,914,380) 5,721,252
Sale of Common
Stock, May 1994 2,916 29 335 364
Sale of Series C
Preferred Stock net
of issuance costs of
$36,742, August 1994 3,168,949 10,040,516 10,040,516
Sale of warrants to
purchase 32,500
shares of Series B
Preferred Stock 325 325
Unrealized loss on
available-for-sale
securities $ (100,406) (100,406)
Net loss (1,683,077) (1,683,077)
--------- ----------- ------- ----- ----- ----------- ---------- -----------
Balance at
December 31, 1994 6,598,949 17,665,688 588,916 5,889 5,260 (3,597,457) (100,406) 13,978,974
The accompanying notes are an integral part of the financial statements.
F-5
28
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (Continued)
Deficit Unrealized
Accumulated Gain (Loss)
Preferred Stock Common Stock Additional during the on Available Total
--------------- ------------ Paid-In Deferred Development for Sale Stockholder's
Shares Amounts Shares Amounts Capital Compensation Stage Securities Equity
------ ------- ------ ------- ------- ------------ ----------- ----------- -----------
Issuance of Common
Stock under stock
option plan and
exercise of warrants 472,200 $ 4,722 $ 110,533 $ 115,255
Adjustment to
unrealized gain
(loss) on
available-for-sale
securities $181,996 181,996
Deferred compensation
associated with stock
option grants 77,178 $(77,178) --
Amortization of
deferred compensation 21,353 21,353
Issuance of Common
Stock upon conversion
of all outstanding
Preferred Stock (6,598,949) $(17,665,688) 6,598,949 65,989 17,599,699 --
Issuance of Common
Stock through an
Initial Public
Offering, net of
offering costs of
$2,512,934 2,875,000 28,750 26,208,316 26,237,066
Net loss $ (6,884,645) (6,884,645)
--------- ------------ ---------- -------- ------------ -------- ------------ ------- ------------
Balance at
December 31, 1995 -0- -0- 10,535,065 105,350 44,000,986 (55,825) (10,482,102) 81,590 $33,649,999
Issuance of Common
Stock under stock
option plan and
exercise of warrants 103,837 1,039 152,868 153,907
Issuance of Common
Stock under employee
stock purchase plan 7,400 74 113,919 113,993
Adjustment to
unrealized gain
(loss) on
available-for-sale
securities (61,623) (61,623)
Amortization of
deferred compensation 9,696 9,696
Issuance of Common
Stock through
a Secondary Public
Offering, net of
offering costs of
$327,602 2,875,000 28,750 61,139,897 61,168,647
Net loss (19,978,144) (19,978,144)
--------- ------------ ---------- -------- ------------ -------- ------------ ------- ------------
Balance at
December 31, 1996 -0- -0- 13,521,302 $135,213 $105,407,670 $(46,129) $(30,460,246) $19,967 $ 75,056,475
========= ============ ========== ======== ============ ======== ============ ======= ============
The accompanying notes are an integral part of the financial statements.
F-6
29
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD
NOVEMBER 15,
1991 (DATE OF
INCEPTION)
THROUGH
YEAR ENDED DECEMBER 31, DECEMBER 31
1996 1995 1994 1996
---- ---- ---- ----
OPERATING ACTIVITIES
Net loss $(19,978,144) $ (6,884,645) $(1,683,077) $ (30,460,246)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 745,805 503,730 276,322 1,666,274
Common Stock compensation --- --- --- 5,000
Changes in operating assets and
liabilities:
Prepaid expenses and other current
assets (1,351,014) (399,619) (129,753) (1,923,878)
Long term receivables --- 20,000 --- (20,000)
Accounts payable and accrued expenses 1,107,453 333,501 784,387 2,495,869
------------ ------------ ----------- -------------
Net cash used in operating activities (19,475,900) (6,427,033) (752,121) (28,236,981)
INVESTING ACTIVITIES
Purchase of marketable securities (89,360,425) (21,713,604) (7,493,386) (121,573,585)
Proceeds from sale and maturities of
marketable securities 57,670,818 8,293,470 3,006,170 68,970,458
Purchase of intangible assets (327,829) (265,469) (67,079) (737,587)
Purchase of property and equipment, net (882,998) (497,889) (879,216) (2,603,261)
------------ ------------ ----------- -------------
Net cash used in investing activities (32,900,434) (14,183,492) (5,433,511) (55,943,975)
FINANCING ACTIVITIES
Sale of Common Stock and warrants, net of
issuance costs 61,322,554 26,352,321 689 87,678,324
Proceeds from employee stock purchase plan 113,993 --- --- 113,993
Sale of Preferred Stock, net of issuance costs --- --- 10,040,516 17,480,688
Proceeds from lease financing of assets --- 300,000 248,290 735,000
Payments on notes payable and capital lease
obligations (438,736) (421,918) (163,220) (1,025,584)
------------ ------------ ----------- -------------
Net cash provided by financing activities 60,997,811 26,230,403 10,126,275 104,982,421
------------ ------------ ----------- -------------
Increase in cash and cash equivalents 8,621,477 5,619,878 3,940,643 20,801,465
Cash and cash equivalents at beginning of period 12,179,988 6,560,110 2,619,467 ---
------------ ------------ ----------- -------------
Cash and cash equivalents at end of period $20,801,465 $ 12,179,988 $ 6,560,110 $ 20,801,465
=========== ============ =========== =============
Schedule of noncash investing
and financing activities:
Property and equipment acquired
under capital leases --- --- $ 992,000 $ 1,110,000
The accompanying notes are an integral part of the financial statements.
F-7
30
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. NATURE OF BUSINESS AND ORGANIZATION
GelTex Pharmaceuticals, Inc. (the Company) was incorporated in
November 1991 and commenced operations in 1992. The Company is a
development-stage enterprise as it has not derived revenues from planned
principal operations. The Company is engaged in the design and development
of non-absorbed polymer-based pharmaceuticals that selectively bind to and
eliminate target substances from the intestinal tract. Since inception,
principal activities have been to perform research and technology
development, develop business plans, obtain financing and recruit and train
employees. The Company's ability to progress beyond the development stage
is dependent upon the timely and successful development of its products and
the adequacy of future capital raising.
2. SIGNIFICANT ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
In 1996, the Company adopted Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement No. 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. The effect of adoption did not have a
material impact on the Company's financial position or results of
operations.
In 1996, the Company also adopted Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). In
accordance with the provisions of SFAS 123, the Company has elected to
continue to apply Accounting Principle Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and related interpretations in
accounting for its stock-based compensation plans. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Compensation
cost in 1996 and 1995 was immaterial. Note 10 to the Financial Statements
contains a summary of the pro forma effects to reported net loss and loss
per share in 1996 and 1995 as if the Company had elected to recognize
compensation expense based on the fair value at grant date of the options
as prescribed by SFAS 123.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an
initial maturity of three months or less and money market funds to be cash
equivalents. These cash equivalents are classified as "available-for-sale"
and are carried at fair value, with unrealized gains and losses reported in
a separate component of stockholders' equity. Realized gains and losses and
declines in value which are judged to be other than temporary on
available-for-sale securities are included in investment
F-8
31
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
income. The cost of securities sold is based on the specific identification
method. Interest and dividends and amortization of premiums and accretion
of discounts on available-for-sale securities are included in interest
income.
At December 31, 1996 and 1995, the Company held certain securities
under agreements to resell on January 2, 1997 and 1996, respectively
("Reverse Repurchase Agreements"). Due to the short-term nature of the
agreements, the Company did not take possession of the securities which
were instead held in the Company's safekeeping account at its investment
advisor bank. The Company purchases only high grade securities, typically
with short maturities.
MARKETABLE SECURITIES
Marketable securities consist of U.S. government obligations and
high-grade commercial instruments maturing within one to two years and are
classified as available-for-sale. The Company considers these investments,
which represent funds available for current operations, an integral part of
their cash management activities. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates
such designation on an ongoing basis.
PROPERTY AND EQUIPMENT
Equipment, furniture and fixtures are stated at cost and are being
depreciated using the straight-line method over estimated useful lives of
five years. Equipment under capital leases is stated at the present value
of future lease obligations and is depreciated over the life of the leases.
Leasehold improvements are stated at cost and are amortized over the
remaining life of the related building lease. (See Note 9).
INTANGIBLE ASSETS
The Company capitalizes the costs of purchased technology and
obtaining patents on its technology. These capitalized costs are amortized
over their estimated future lives of five years using the straight-line
method. Accumulated amortization at December 31, 1996 and 1995 was $287,172
and $135,939 respectively.
REVENUE RECOGNITION
The Company recognizes grant revenue as reimbursable expenses are
incurred. The Company recognizes license fee revenue as earned.
F-9
32
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
outstanding shares of Common Stock and Common Stock equivalents, assuming
the conversion of Series A, B and C Convertible Preferred Stock into common
shares as of their original date of issuance, which occurred upon
completion of the initial public offering in November 1995, and the
exercise of stock options and warrants using the treasury stock method.
Common Stock equivalent shares are excluded from the computation if their
effect is anti-dilutive; however, pursuant to the requirements of the
Securities and Exchange Commission, common equivalent shares relating to
stock options (using the treasury stock method and the initial public
offering price) issued during the twelve months prior to the initial filing
of the initial public offering are included for all periods prior to the
offering whether or not they are anti-dilutive.
3. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities:
DECEMBER 31, 1996:
------------------
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
U.S. Corporate Securities $48,336,763 $ --- $(4,030) $48,332,733
U.S. Government Obligations 20,106,537 23,997 --- 20,130,534
Money Market Accounts 4,928,183 --- --- 4,928,183
------------ ------- ------- -----------
Total Securities $73,371,483 $23,997 $(4,030) $73,391,450
=========== ======= ======= ===========
DECEMBER 31, 1995:
------------------
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
U.S. Corporate Securities $12,310,155 $15,465 $ $12,325,620
U.S. Government Obligations 14,899,366 66,125 --- 14,965,491
Money Market Accounts 5,702,093 --- --- 5,702,093
----------- ------- ------- -----------
Total Securities $32,911,614 $81,590 $ --- $32,993,204
=========== ======= ======= ===========
F-10
33
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
The fair value of available-for-sale securities is determined using the
published closing prices of these securities as of December 31, 1996 and 1995.
These securities are classified at their estimated fair value in the
accompanying balance sheet as follows:
December 31,
1996 1995
---- ----
Cash equivalents $20,768,356 $11,998,094
Marketable securities 52,623,094 20,995,110
------------ -----------
$73,391,450 $32,993,204
=========== ===========
The cost and estimated fair value of available-for-sale debt securities at
December 31, 1996, by contractual maturity, are shown below.
Estimated
Cost Fair Value
---- ----------
Due in one year or less $57,356,400 $57,390,422
Due in one year through two years 11,086,900 11,072,845
----------- -----------
$68,443,300 $68,463,267
=========== ===========
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31:
1996 1995
---- ----
Accounts payable $1,209,777 $ 636,653
Accrued research and development expenses 711,153 417,412
Accrued compensation 329,548 182,275
Accrued other 245,391 152,076
---------- ----------
$2,495,869 $1,388,416
========== ==========
5. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of the following:
1996 1995
---- ----
Leasehold improvements $1,718,986 $1,682,036
Equipment 1,758,117 912,069
---------- ----------
3,477,103 2,594,105
Less accumulated depreciation and amortization 1,230,193 645,317
---------- ----------
Property and equipment, net $2,246,910 $1,948,788
========== ==========
F-11
34
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
was approximately $585,000, $400,000 and $250,000, respectively.
At December 31, 1996 and 1995, property under capitalized leases includes
$92,194 in equipment and $900,000 in leasehold improvements with aggregate
accumulated amortization at December 31, 1996 and 1995 of $299,677and $224,798
respectively.
6. STOCKHOLDERS' EQUITY
In November 1995, the Company completed an initial public offering of its
common stock, selling 2,875,000 common shares, with net proceeds to the Company
of $26,237,066 after deducting offering costs. Concurrent with the completion of
the initial public offering, all 6,598,949 shares of Series A, B and C
Convertible Preferred Stock were converted into 6,598,949 shares of Common Stock
pursuant to the conversion terms of the preferred stock agreements. In
connection with this conversion, all such shares of convertible preferred stock
were retired. Effective upon the completion of the initial public offering, the
Company authorized 5,000,000 shares of undesignated preferred stock with a par
value of $.01. In February 1996, the Board of Directors approved an increase in
the authorized shares of common stock to 50,000,000 shares which was approved at
the 1996 Annual Meeting of Stockholders. In May 1996, the Company completed a
public offering of its common stock, selling 2,875,000 common shares, with net
proceeds to the Company of $61,168,647 after deducting offering costs.
The Company has a Shareholder Rights Plan (the "Rights Plan") designed to
protect shareholders from unsolicited attempts to acquire the Company on terms
that do not maximize stockholder value. In connection with the Rights Plan, the
Board of Directors designated 500,000 shares of the Company's preferred stock as
Series A Junior Participating Preferred Stock. Under the Rights Plan, a right to
purchase one one-hundredth of one share of the Series A Junior Participating
Stock (the "Rights") was distributed as a dividend for each share of Common
Stock. The terms of the Rights Plan provide that the Rights will become
exercisable upon the earlier of the tenth day after any person or group acquires
20% or more of the Company's outstanding Common Stock or the tenth business day
after any person or group commences a tender or exchange offer which would, if
completed, result in the offer or owning 20% or more of the Company's
outstanding Common Stock. The Rights may generally be redeemed by action of the
Board of Directors at $0.001 per Right at any time prior to the tenth day
following the public announcement that any person or group has acquired 20% or
more of the outstanding Common Stock of the Company. The Rights expire on March
11, 2006. The Rights have certain anti-takeover effects in that they would cause
substantial dilution to the party attempting to acquire the Company.
In certain circumstances, the Rights allow the Company's stockholders to
purchase the number of shares of the Company's Common Stock having a market
value at the time of the transaction equal to twice the exercise price of the
Rights, or in certain circumstances, the stockholders would be able to acquire
that number of shares of the acquirer's common stock having a market value, at
the time of the transaction, equal to twice the exercise price of the Rights.
The Company will continue to issue Rights with future issuances of common stock.
F-12
35
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. EQUITY INCENTIVE PLANS AND STOCK WARRANTS
Under the Company's 1992 Equity Incentive Plan (the "Plan"), all employees
of the Company and others who have made a significant contribution to the
Company are eligible for awards. At December 31, 1996, the Company has reserved
1,725,000 shares of its Common Stock for awards. Awards can consist of incentive
and nonstatutory stock options, stock appreciation rights, restricted stock
awards and other stock-based awards. Incentive and nonstatutory options granted
under the Plan may be exercisable upon grant and vest over five years or may be
exercisable over a four-year vesting period; however, the Company maintains the
right to repurchase any unvested shares of Common Stock upon termination of such
stockholder's employment with the Company. Of the total options outstanding at
December 31, 1996, options to purchase 225,000 shares of the Company's Common
Stock vest upon the earlier of the achievement by the Company of certain product
development milestones or December 2004.
Incentive stock options are granted with an option price of not less than
the fair market value of the Common Stock at the award date. Nonstatutory
options may be granted at prices as determined by the Board of Directors. Stock
appreciation rights may be awarded in tandem with stock options or alone. Stock
appreciation rights granted alone may be granted at prices as determined by the
Board. The Board may also award performance shares, restricted stock and stock
units subject to such terms, restrictions, performance criteria, vesting
requirements and other conditions deemed appropriate.
The Company has a 1995 Employee Stock Purchase Plan (the "ESPP") which
provides for the grant of rights to eligible employees to purchase up to 250,000
shares of the Company's Common Stock at the lesser of 85% of the fair market
value at the beginning or the end of the established offering period. There were
7,400 shares issued under the ESPP at an average price of $16 in 1996. There
were no shares issued under the ESPP in 1995.
Under the Company's 1995 Director Stock Option Plan (the "Directors Plan"),
all directors who are not employees of the Company are currently eligible to
participate in the Directors Plan. The Directors Plan provides for the granting
of options with a term of 10 years to purchase up to 75,000 shares of Common
Stock at an exercise price equal to the fair market value of Common Stock at the
date of grant. Generally, upon election or re-election at each annual meeting,
each eligible director shall be granted options to purchase 4,000 shares of
Common Stock for each year of the term of office to be served.
The Company applies APB 25 and related interpretations in accounting for
its stock-based compensation plans, including its 1992 Equity Incentive Plan,
its 1995 Employee Stock Purchase Plan, and its 1995 Director Stock Option Plan.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Had compensation expense for the Company's stock-based compensation plans
been determined based upon the fair market value at the grant date for stock
option awards ("stock options") and at the end of the plan period for stock
purchased under its Employee Stock Purchase Plan ("stock purchase shares"),
consistent with the methodology prescribed under SFAS 123, the Company's net
loss and loss per share would have been $20,415,636, or $1.63 per share, and
$6,928,242 or $.85 per share, in 1996 and 1995.
F-13
36
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. EQUITY INCENTIVE PLANS AND STOCK WARRANTS (CONTINUED)
The fair value of stock options granted and stock purchase shares issued
during 1996 and 1995 was estimated at the date of the grant and the end of the
plan period, respectively, using the Black-Scholes option-pricing model with the
following weighted-average assumptions for 1996 and 1995, respectively:
volatility of 60% and 60%, risk-free interest rate of 6.2% and 6.3%,
weighted-average expected life (years) of 4 and 6.4, and no dividends. The
effects on fiscal 1996 and 1995 pro forma net loss and loss per share of
expensing the estimated fair value of stock options and stock purchase shares
are not necessarily representative of the effects of reported net loss for
future years due to such things as the vesting period of the stock options and
the potential for issuance of additional stock options and stock purchase shares
in future years.
The weighted average per-share exercise price of stock options granted,
exercised and canceled during 1996 was $18.48, $2.02 and $5.53, respectively.
The weighted average fair value of stock options granted during 1996 was $9.38.
The weighted-average fair value of stock purchase shares issued during 1996 was
$5.49.
A summary of activity in the Plan and the Directors Plan through December
31, 1996 follows:
Options
---------------------------------------------------------------
Available Price
for Award Outstanding Per Share
--------- ----------- ---------
Authorized 400,000 ---
Awarded (40,000) 40,000 $.125
------- ---------
Balance at December 31,1992 360,000 40,000 $.125
Authorized 150,000 ---
Awarded (411,000) 411,000 $.125 -- $.25
------- ---------
Balance at December 31, 1993 99,000 451,000 $.125 -- $.25
Authorized 150,000 ---
Awarded (219,500) 219,500 $.25 -- $.32
Exercised --- (2,916) $.125
Canceled 22,084 (22,084) $.25 -- $.32
------- ---------
Balance at December 31, 1994 51,584 645,500 $.125 -- $.32
Authorized 700,000 ---
Awarded (589,150) 589,150 $.32 -- $11.25
Exercised --- (449,450) $.125 -- $.32
------- ---------
Balance at December 31, 1995 162,434 785,200 $.125 -- $11.25
Authorized 400,000 ---
Awarded (336,400) 336,400 $11.75-- $24.25
Exercised --- (76,668) $.125 -- $13.00
Canceled or repurchased 35,051 (31,151) $.25 -- $9.00
------- ---------
BALANCE AT DECEMBER 31, 1996 261,085 1,013,781 $.125 -- $24.25
======= =========
F-14
37
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. EQUITY INCENTIVE PLANS AND STOCK WARRANTS (CONTINUED)
A summary of the weighted-average exercise price and remaining contractual
life of options outstanding under the Plan and the Directors Plan as of December
31, 1996 follows:
Weighted-Average
Remaining
Options Weighted-Average Contractual Life
Price Per Share Outstanding Exercise Price (Years)
--------------- ----------- -------------- -------
$.125 - $.32 534,617 $ .28 7.71
$9 - $15 227,764 $11.73 9.15
$16 - $24.25 251,400 $20.37 9.64
A summary of the weighted-average exercise price of options exercisable
under the Plan and the Directors Plan as of December 31, 1996 follows:
Options Weighted-Average
Price Per Share Exercisable Exercise Price
--------------- ----------- --------------
$.125 - $.32 309,617 $ .30
$9 - $15 119,697 $11.77
$16 - $24.25 43,499 $20.56
At December 31, 1996, the Company had warrants outstanding to purchase
shares of the Company's Common Stock. The warrants, which provide for the
purchase of 11,400 shares at an exercise price of $2.50, expire on November 8,
2000.
8. INCOME TAXES
At December 31, 1996, the Company had net operating loss carryforwards of
$30,932,000 and research and development tax credit carry forwards of
approximately $1,290,000, which expire through 2011. Since the Company has
incurred only losses since its inception and due to the degree of uncertainty
related to the ultimate use of the loss carryforwards and tax credits, the
Company has fully reserved this tax benefit. Additionally, the future
utilization of net operating loss carryforwards and tax credits will be subject
to limitations under the change in stock ownership rules of the Internal Revenue
Service.
Significant components of the Company's deferred tax assets as of December
31 are as follows:
1996 1995
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 12,373,000 $ 4,182,000
Research and development tax credits 1,290,000 697,000
Other 236,000 100,000
------------ -----------
Total deferred tax assets 13,899,000 4,979,000
Valuation allowance (13,708,000) (4,836,000)
------------ -----------
Net deferred tax assets 191,000 143,000
Deferred tax liabilities:
Intangible assets and other (191,000) (143,000)
------------ -----------
Total deferred tax liabilities (191,000) (143,000)
------------ -----------
Net deferred tax asset (liability) $ --- $ ---
============ ===========
The valuation allowance increased by $8,872,000 and $3,032,000 during 1996
and 1995, respectively, due primarily to the increase in tax credits and net
operating loss carryforwards.
F-15
38
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG TERM OBLIGATIONS
The Company has issued notes payable to finance purchases of new equipment.
Additionally, the Company has financed certain leasehold improvements and
equipment under capital leases expiring in 1997. Long term obligations consist
of the following:
December 31,
1996 1995
---- ----
Note payable to a bank bearing interest at prime
(8.25% at December 31, 1996) due in
monthly installments through March 1999 $288,398 $388,207
Capital lease obligations 227,728 566,655
-------- --------
516,126 954,862
Less current portion 391,766 535,293
-------- --------
$124,360 $419,569
======== ========
In 1996, the Company determined that it was likely to exercise an option to
acquire title to certain leasehold improvements which is payable in July 1997.
Accordingly, the accompanying statement of operations includes a nonrecurring
charge of $230,000 for such option.
At December 31, 1996, annual note maturities and capital lease payments
over the next three years are as follows:
1997 $391,766
1998 113,632
1999 10,728
--------
$516,126
========
In December 1996, the interest rate on notes payable to a bank existing as
of the prior year were reduced from prime plus 1.5% to prime. Given the variable
rate of interest, the carrying value of the notes payable approximates their
fair value at December 31, 1996. The notes payable require the Company to
maintain a minimum cash balance and net worth (as defined).
The Company has a $1,000,000 line of credit available through December 18,
1997 with a bank for the purchase of new equipment. Borrowings bear interest at
the prime rate and are secured by equipment. The line requires repayment of any
outstanding amounts in 36 equal monthly installments and maintenance of a
minimum liquidity balance and tangible net worth (as defined). There were no
borrowings outstanding under this line at December 31, 1996.
10. LICENSE AGREEMENTS
In December 1994 and October 1995, the Company entered into license
agreements (the "Agreements") with two Japanese pharmaceutical companies (the
"Partners") whereby the Company granted to the Partners licenses to make, use,
and sell certain of the Company's products in certain areas of the world, as
defined by the Agreements (the "Territories"). The Agreements require the
Partners to bear all costs to develop and commercialize the licensed products in
the respective Territories. In consideration of these Agreements, the Company
received a non-refundable license fee in 1994, research support revenue in 1995
and 1996, and a milestone payment in 1996. The payment of the license fee
received in 1994 and the milestone payment in 1996 were made net of a 10%
withholding tax, which was paid on the Company's
F-16
39
GELTEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. LICENSE AGREEMENTS
behalf by the respective partner. The Agreement requires the Company to remit to
this partner any future tax benefit received by the Company as a result of the
withholding taxes paid. The 1995 Agreement was canceled in 1996. The 1994
Agreement calls for additional milestone payments to be paid to the Company
through the commercialization of the product licensed under the Agreement and
royalties based on certain percentages of sales, as defined in the Agreement.
11. RESEARCH GRANT
In February 1995, the Company was awarded a Federal research grant of $2.0
million. The grant is to be paid to the Company for reimbursement of expenses
related to the development of certain products through January 1998.
12. COMMITMENTS
The Company leases its administrative and research and development
facilities under a long-term operating lease expiring in 2004. The future
minimum lease payments under this noncancelable lease are as follows:
1997 $ 75,000
1998 75,000
1999 75,000
2000 75,000
2001 75,000
Thereafter 187,500
--------
Total minimum lease payments $562,500
========
Rental expense charged to operations during the years ended December 31,
1996, 1995 and 1994 was approximately $76,425, $78,928 and $111,000,
respectively.
F-17
40
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GELTEX PHARMACEUTICALS, INC.
Date: March 26, 1997 By: /s/ Mark Skaletsky
_______________________________
Mark Skaletsky
President and Chief Executive Officer
We, the undersigned officer and directors of GelTex Pharmaceuticals, Inc.,
hereby severally constitute Mark Skaletsky and Elizabeth Grammar, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them to sign for use, in our names and in the capacity indicated below, any and
all amendments to this Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Mark Skaletsky Director and President, Chief March 26, 1997
- ---------------------- Executive Officer and Treasurer
Mark Skaletsky (Principal Executive Officer,
Principal Financial Officer
and Principal Accounting Officer)
/s/ Robert Carpenter
- ---------------------- Chairman of the Board March 26, 1997
Robert Carpenter and Director
/s/ Ernest Parizeau
- ---------------------- Director March 26, 1997
Ernest Parizeau
/s/ Barbara A. Piette
- ---------------------- Director March 26, 1997
Barbara A. Piette
/s/ Henri Termeer
- ---------------------- Director March 26, 1997
Henri Termeer
/s/ Jesse Treu
- ---------------------- Director March 26, 1997
Jesse Treu
/s/ George Whitesides
- ---------------------- Director March 26, 1997
George Whitesides
22
41
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 Restated Certificate of Incorporation of the Company. Filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 and incorporated herein by
reference.
3.2 Certificate of Designation. Filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference.
3.3 Amended and Restated By-laws of the Company, as amended. Filed
as Exhibit 3.3 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference.
4.1 Specimen certificate for shares of Common Stock of the Company.
Filed as Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (File No. 33-97322) and incorporated herein by
reference.
4.2 Rights Agreement dated as of March 1, 1996 between the Company
and American Stock Transfer & Trust Company. Filed as Exhibit 1
to the Company's Registration Statement on Form 8-A dated March
1, 1996 and incorporated herein by reference.
10.1# 1992 Equity Incentive Plan, as amended. Filed as Exhibit 99.1 to
the Company's Registration Statement on Form S-8 (File No.
333-08535) and incorporated herein by reference.
10.2 Express Master Lease Agreement with Equipment Schedule No. VL-1
between the Company and Comdisco, Inc. dated September 27, 1993.
Filed as Exhibit 10.5 to the Company's Registration Statement on
Form S-1 (File No. 33-97322) and incorporated herein by
reference.
10.3# Letter Agreement between the Company and Dennis Goldberg dated
October 1, 1993. Filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File No. 33-97322) and
incorporated herein by reference.
10.4 Promissory Note executed by the Company in favor of Silicon
Valley Bank dated December 9, 1993 with Commercial Security
Agreement attached thereto. Filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (File No. 33-97322)
and incorporated herein by reference.
10.5 Agreement of Sublease between the Company and H&Q Waltham
Limited Partnership dated May 4, 1994, with Exhibit B thereto
(Lease Agreement between the Company and Hickory Drive
Properties Realty Trust dated April 12, 1994). Filed as Exhibit
10.9 to the Company's Registration Statement on Form S-1 (File
No. 33-97322) and incorporated herein by reference.
10.6 Assignment and Assumption Agreement and Landlord Consent among
Registrant and Hickory Drive Properties Realty Trust and H&Q
Waltham Limited Partnership dated May 4, 1994. Filed as Exhibit
10.10 to the Company's Registration Statement on Form S-1 (File
No. 33-97322) and incorporated herein by reference.
10.7* License Agreement between the Company and Chugai Pharmaceutical
Co., Ltd. dated December 26, 1994. Filed as Exhibit 10.14 to the
Company's Registration Statement on Form S-1 (File No. 33-97322)
and incorporated herein by reference.
10.8 Promissory Note executed by the Company in favor of Silicon
Valley Bank dated February 2, 1995. Filed as Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (File No. 33-97322)
and incorporated herein by reference.
42
10.9# Letter Agreement between the Company and Joseph E. Tyler dated
March 28, 1995. Filed as Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File No. 33-97322) and
incorporated herein by reference.
10.10 Form of Common Stock Purchase Agreement. Filed as Exhibit 10.17
to the Company's Registration Statement on Form S-1 (File No.
33-97322) and incorporated herein by reference.
10.11 Form of Restricted Common Stock Purchase Agreement. Filed as
Exhibit 10.18 to the Company's Registration Statement on Form S-1
(File No. 33-97322) and incorporated herein by reference.
10.12# Form of Incentive Stock Option Certificate. Filed as Exhibit
10.19 to the Company's Registration Statement on Form S-1 (File
No. 33-97322) and incorporated herein by reference.
10.13 Forms of Nonstatutory Stock Option Certificate. Filed as Exhibit
10.20 to the Company's Registration Statement on Form S-1 (File
No. 33-97322) and incorporated herein by reference.
10.14# 1995 Director Stock Option Plan. Filed as Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference.
10.15# 1995 Employee Stock Purchase Plan. Filed as Exhibit 99.1 to the
Company's Registration Statement on Form S-8 (File No. 333-00864)
and incorporated herein by reference.
10.16 Lease Agreement dated February 28, 1997, between the Company and
J. F. White Properties, Inc. Filed herewith.
11.1 Statement re: computation of per share earnings. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors. Filed
herewith.
24.1 Power of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule. Filed herewith. (EDGAR filing only).
- ----------------------
* Certain confidential material contained in Exhibit 10.7 has been omitted
and filed separately with the Securities and Exchange Commission pursuant
to Rule 406 of the Securities Act of 1933, as amended.
# Identifies a management contract or compensatory plan or agreement in which
an executive officer or director of the Company participates.