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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-19871
CYTOTHERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3078125
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2 RICHMOND SQUARE, PROVIDENCE, RHODE ISLAND 02906
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (401) 272-3310
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.01 PAR VALUE
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. [x]
Aggregate market value of Common Stock held by non-affiliates at March 10,
1997: $140,832,286. Exclusion of shares held beneficially by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of management policies of the
registrant, or that such person is controlled by or under common control with
the Registrant. Common stock outstanding at March 10, 1997: 16,485,840 shares.
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]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Report.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements regarding, among
other things, the Company's expected results of operations, the progress of the
Company's product development and clinical programs, the need for, and timing
of, additional capital and capital expenditures, partnering prospects, the need
for additional intellectual property rights, the need for additional facilities
and potential market opportunities. The Company's actual results may vary
materially from those contained in such forward-looking statements because of
risks to which the Company is subject such as risks of delays in research,
development and clinical testing programs, obsolescence of the Company's
technology, lack of available funding, competition from third parties, failure
of the Company's collaborators to perform, regulatory constraints, litigation
and other risks to which the Company is subject; see "Cautionary Factors
Relevant to Forward-looking Information" filed herewith as Exhibit 99
and incorporated herein by reference and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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PART 1
FORM 10-K
CYTOTHERAPEUTICS, INC.
For Fiscal Year Ended December 31, 1996
ITEM 1: BUSINESS
THE COMPANY
CytoTherapeutics, Inc. ("CytoTherapeutics" or the "Company") is a
leader in the development of novel cell therapy systems designed to deliver
therapeutic substances to the central nervous system ("CNS"). The Company
believes that its core technology, based on cell-containing, biocompatible
implants, may be used to deliver a variety of therapeutic substances. The
Company focuses on treatment of CNS diseases using its capsules to deliver
proteins within the central nervous system, bypassing the blood brain barrier,
a fundamental obstacle to effective treatment of many CNS diseases. The Company
is currently developing products for the treatment of chronic pain, Parkinson's
disease and amyotrophic lateral sclerosis ("ALS") with additional research
efforts directed to several other CNS disorders including Huntington's disease.
The Company has also begun to develop products for treatment of certain
ophthalmologic diseases. The Company has two product candidates in clinical
trials: an implant to treat chronic pain and an implant to treat ALS.
CytoTherapeutics, Inc. was incorporated in Delaware in 1989 and has one
subsidiary, Modex Therapeutiques S.A., a Swiss company fifty percent owned by
the Company.
The Unmet Need for CNS Therapies
Diseases such as Parkinson's disease, ALS, pain and other degenerative
diseases of the CNS affect a significant portion of the U.S. population,
particularly the rapidly increasing older segment of the U.S. population. There
are generally few effective treatments for these diseases and their cost to
society is very high. Development of treatments for these diseases has been
constrained by the difficulty of delivering potential drugs to the CNS locations
where the drugs are needed. CytoTherapeutics believes that its encapsulated cell
therapy can overcome this constraint. If the Company can successfully develop
its cell therapy technology, it believes that its technology can provide the
platform for treatment of many presently untreatable CNS diseases.
CELL THERAPY BACKGROUND
Role of Cells in Human Health and Traditional Therapies
In healthy individuals, cells maintain normal physiological function by
secreting or metabolizing substances, such as sugars, amino acids,
neurotransmitters and hormones, which are essential to life. When cells are
damaged or destroyed, they no longer produce, metabolize or accurately regulate
critical molecular substances required by the body. For example, the progressive
decline common to many neurodegenerative diseases, such as Parkinson's disease
and ALS, is associated with impaired cellular function.
Biotechnology has created major advances in the development of therapeutic
products. In particular, genetic engineering has allowed the production of
specific proteins which may be inadequately produced by the body's own cells,
whether as a result of genetic defect, disease or injury. Such advances have
overcome some of the limitations of traditional pharmaceuticals, such as lack of
specificity, but do not reproduce the natural ability of cells to secrete
substances at the precise sites of action and in the appropriate physiological
quantities or for the duration required. As a result, investigators have
considered replacing vital cells which are failing by implanting cells which
carry the ability to provide a needed critical molecule. In situations of
irreversible failure of vital cells, transplantation of cells offers the
possibility of replacing the functions of these failed cells, thus potentially
restoring health.
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The Potential of Cell Therapy
Cell therapy, which is the use of cells to treat diseases, has the
potential to provide a broad therapeutic approach of comparable importance to
traditional pharmaceuticals and the more recently developed genetically
engineered biologics. However, autologous cells (cells from the individual to
whom they are to be transplanted) are available in limited supply, may be
abnormal if the patient is ill and often can only be obtained through
significant surgical procedures. Allogeneic (same species) cellular transplants
and xenogeneic (cross-species) cellular transplants generally require the use of
potent immunosuppressive drugs. These drugs broadly compromise the patient's
immune system in order to decrease the likelihood of rejection of the
transplanted cells and expose the transplant recipient to adverse side effects
such as increased risk of infection or cancer. While transplantation of
autologous cells, such as those now used in some gene therapy, may not require
immunosuppression, these cells cannot be retrieved once administered, even if
medically necessary, and it appears to be difficult to control the level and
stable output of therapeutic substances which these unencapsulated cells
produce. CytoTherapeutics believes its encapsulation technology will reduce or
eliminate the need for immunosuppression, and allow site-specific delivery and
relative control of cell output, thus unlocking the potential of cell therapy.
CYTOTHERAPEUTICS' PLATFORM TECHNOLOGY:
ENCAPSULATED CELL THERAPY
Encapsulated cell therapy may provide the basis for treating a number of
currently poorly treated or untreatable diseases, especially those of the CNS.
The Company is employing its proprietary encapsulation techniques to develop
cell-containing, semipermeable polymer implants designed to be placed into
selected sites in the body to treat specific diseases or conditions. These
membranes are designed to restrict passage into the implant of substances above
a certain size, thereby protecting the transplanted cells by reducing their
exposure to the recipient's immune system. The implants are also designed to
allow nutrients to reach the encapsulated cells and to allow wastes and the
therapeutic protein(s) to pass out of the implant. Typical rejection mechanisms
are not activated or are muted because most of the elements of the recipient's
immune system, particularly complement and lymphocytes, generally are too large
to enter the capsules through the membrane and do not contact the transplanted
cells, which remain protected within the encapsulating membrane.
The Company's implants are designed to be biocompatible, remaining in
contact with the recipient's tissues without generating a response that would
significantly inhibit the functioning of the cells contained within the membrane
or cause significant injury to host tissues. When such biocompatibility is
achieved, the membrane can selectively permit nutrients and oxygen to pass from
the recipient through the membrane into the implant, nourishing the cells and
allowing them to function. Similarly, such biocompatibility, together with the
permeability of the membrane, enables the substances produced by the
encapsulated cells to pass through the membrane and provide the desired
therapeutic effect.
ADVANTAGES OF THE COMPANY'S PLATFORM TECHNOLOGY
Many CNS diseases have no satisfactory treatment today, largely because
substances generally do not reach the CNS in therapeutic concentrations when
administered by conventional routes. The Company believes that its technology
represents an approach that may offer a number of advantages over other forms of
delivery for therapeutics, especially with regard to diseases and disorders of
the CNS or other so-called immunologically privileged sites.
Site-Specific CNS Delivery
Researchers have identified a number of substances which may be beneficial
in the treatment of CNS disorders. However, it has been difficult or impossible
to find a safe and effective way to deliver many of these substances across the
blood brain barrier at the required concentrations. The blood brain barrier is a
tightly woven network of endothelial cells which protects the CNS. This barrier
restricts the molecules that can enter the brain tissue and excludes many
compounds that would otherwise pass from the bloodstream into the brain,
including a large number of therapeutics. These therapeutics are generally given
by systemic administration, which necessarily distributes the compound
throughout the body and results in only a small fraction of the compound
reaching the CNS. Systemic delivery may also cause significant side effects
since very potent molecules are being delivered to sites in the body where they
are not normally present. This is especially likely where large amounts are
administered systemically to provide higher levels in the CNS. A recent clinical
trial of a new protein, CNTF, for example, resulted in significant systemic side
effects after peripheral administration.
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In contrast, CytoTherapeutics' cell-containing devices are designed to
deliver these therapeutic substances within the brain, spinal column, the
surrounding fluid-filled spaces or the eye, bypassing the blood brain barrier
(or the blood retina barrier) and directing the therapeutic substances to the
site or sites where they are needed. With this site-specific delivery, the
Company believes that its devices may be capable of delivering the required
amount of therapeutic substance in the locations where it is actually needed,
thus avoiding many of the side effects associated with conventional routes of
administration. This form of delivery should result in better therapeutic ratios
reflecting an ability to provide effective doses with lower toxicity. In
addition, because the therapeutic substances are produced by living cells
sustained within the implant, these doses potentially may be delivered over
extended periods of time. The production of these substances at the site of
action eliminates the problems of drug stability which hamper delivery from
pumps and polymers.
Retrievability
The Company's implants are designed to be retrievable. If complications
arise, or if a new implant is desired, a physician should be able to retrieve
and replace the capsule. This retrievability also offers a potential safety
advantage over unencapsulated cells, which may be difficult or impossible to
recover from the recipient. Moreover, the capsule keeps the cells in the
location intended as opposed to unencapsulated cells which cannot be so
constrained.
Delivery of Multiple Substances
The Company's implants may provide the advantage of delivering multiple
therapeutic substances at a single site. In many instances, the body naturally
produces at a single location a number of substances vital to normal function of
cells and the body. The Company believes that the ability to provide multiple
substances simultaneously could lead to development of improved therapies. The
Company's implant to treat chronic pain is one such example of delivery of
multiple substances. In addition, preclinical research suggests that multiple
proteins may be better than any single factor in the treatment of certain
diseases such as ALS. In the CNS, in particular, the Company believes that the
simultaneous delivery of multiple neurotrophic factors may be useful for
treatment of certain chronic CNS disorders, and the Company is developing
methods to deliver such multiple factors.
There can be no assurance that the Company will successfully develop its
encapsulation technology commercially or that, if successfully developed, it
will achieve the benefits described above or that the advantages of such
technology will be greater than the potential disadvantages.
PRODUCT DEVELOPMENT PROGRAMS AND RESEARCH EFFORTS
Overview of Research and Product Development Strategy
The Company's product development strategy is based on the Company's belief
that its technology can be used to deliver a wide variety of therapeutic
substances across the blood brain barrier and the blood retina barrier. The
Company's lead product, its implant for treatment of chronic pain, is designed
to provide a new means of delivering substances with known therapeutic effects
to the CNS. The Company is evaluating development of implants delivering other
agents of known activity. The next group of proposed products in the Company's
pipeline seeks to build on the Company's expertise in cell encapsulation to
deliver to the CNS genetically engineered therapeutics, such as neurotrophic
factors, for the treatment of such chronic and disabling CNS disorders as ALS,
Parkinson's and Huntington's disease. The Company has also established a program
to treat diseases of the eye. In addition, the Company is investigating the use
of encapsulated and unencapsulated neural stem cells for the treatment of
various CNS disorders.
The following table lists the potential therapeutic indications for and
current status of CytoTherapeutics' primary product development programs and
research projects and is qualified in its entirety by reference to the more
detailed descriptions of such programs and projects appearing elsewhere in this
Report. The Company continually evaluates its research and product development
efforts and reallocates resources among existing programs or to new programs in
light of experimental results, commercial potential, availability of third-party
funding, likelihood of near-term efficacy or significant technology enhancement,
as well as other factors. The Company's research and product development
programs are at relatively early stages of development and will require
substantial resources to commercialize. There can be no assurance that the
Company will successfully develop any product or obtain regulatory approvals,
enter clinical trials, achieve other milestones or commercialize any products in
accordance with currently anticipated timetables, or at all.
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====================================================================================================================================
PRODUCT DEVELOPMENT PROGRAMS
AND RESEARCH PROGRAMS PROGRAM
- ------------------------------------------------------------------------------------------------------------------------------------
PROGRAM CELL TYPE(1) STATUS(2) PARTNER
- ------------------------------------------------------------------------------------------------------------------------------------
Chronic pain Bovine adrenal Phase I studies completed in Astra AB
chromaffin cells approximately 50 patients;
Phase II start in cancer pain
and/or neuropathic pain
anticipated in first half of 1997
----------------------------------------------------------------------------------------------------
Engineered cells Research Astra AB
releasing analgesics
- ------------------------------------------------------------------------------------------------------------------------------------
Parkinson's disease Engineered cells Preclinical Genentech, Inc.
releasing development
neurotrophic factor(s)
- ------------------------------------------------------------------------------------------------------------------------------------
Amyotrophic lateral Engineered cells Swiss pilot clinical CytoTherapeutics, Inc.
sclerosis releasing CNTF study under way
----------------------------------------------------------------------------------------------------
Engineered cells Preclinical Genentech, Inc.*
releasing NT4/5 and development
CT-1
- ------------------------------------------------------------------------------------------------------------------------------------
Huntington's disease Engineered cells Research Genentech, Inc.*
releasing neurotrophic
factor(s)
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Ophthalmologic Engineered cells Preclinical CytoTherapeutics, Inc.
diseases releasing development
neurotrophic factor(s),
anti-inflammatory(s)
and/or antiangiogenic(s)
- ------------------------------------------------------------------------------------------------------------------------------------
Multiple sclerosis Neural stem cells Research CytoTherapeutics, Inc.
(unencapsulated)
====================================================================================================================================
<FN>
(1) All cells are encapsulated unless otherwise indicated. Engineered cells are
genetically altered xenogeneic cells generally derived from rodents.
(2) "Research" refers to early stage research and product development
activities IN VITRO, including the selection and characterization of
product candidates for preclinical testing.
"Preclinical" refers to further testing of a defined product candidate IN
VITRO and in animals prior to clinical studies.
"Pilot clinical study" refers to an initial clinical study in a small
number of patients.
*Genentech has commercialization options in these programs; they are funded
by CytoTherapeutics.
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Chronic Pain Program
The Company estimates that more than 1,200,000 patients in the United
States suffer unrelieved severe, chronic pain. Chronic, intractable pain often
accompanies or is the result of a number of serious diseases, procedures and
conditions including cancer, infection, nerve damage, back surgery, arthritis,
amputation, fractures and other conditions. Even where therapies exist, they
often have limits to their effectiveness in treating severe, chronic pain.
Patients may become intolerant of or unresponsive to narcotics such as morphine,
and may experience undesirable side effects. Narcotics must also be carefully
monitored to prevent overdosage. Surgical intervention to relieve severe,
chronic pain is often irreversible, can have severe side effects and does not
always provide relief.
The Company believes that its technologies can be used to treat chronic
pain by implanting encapsulated cells which release naturally occurring
analgesic substances such as catecholamines and opioid peptides. The Company,
together with certain of its academic collaborators, has developed methods for
the encapsulation of bovine adrenal chromaffin cells for implantation into the
lumbar region of the spinal column for the treatment of chronic pain. The
Company believes that encapsulating properly chosen cell types may provide more
effective pain relief than traditional approaches and/or may allow treatment of
patients who experience little relief with today's therapies.
During 1993 and 1994, the Company collaborated on a pilot clinical study of
its chronic pain implant technology with Dr. Patrick Aebischer, a founding
scientist of the Company, at Centre Hospitalier Universitaire Vaudois in
Switzerland. The study included nine seriously or terminally ill patients
experiencing severe, intractable pain for whom narcotics, such as morphine,
provided inadequate relief or could not be tolerated. The implant procedure was
performed safely in all nine patients and viable implants containing cells were
retrieved from eight of the nine patients upon the death of the patient or at or
beyond the end of the intended trial period.
In May 1995, the Company commenced its first Company-sponsored
Investigational New Drug ("IND") trial in the United States. The Phase I trial
was an open label study which included 15 terminally ill cancer patients
experiencing severe, intractable pain and having a life expectancy of less than
five months. The protocol called for patient treatment to extend for the
remaining life of the patient. By February 26, 1997, all 15 patients had
completed the study.
In February 1996, the Company initiated an extension of the Phase I trial.
In this extension, four patients received a device containing approximately
three times the number of cells used in the devices implanted in the first 15
patients. By February 28, 1997, two of the four patients had completed the
study. The two patients that remain in the study have each had a device in place
for nearly one year without any related significant safety issues.
Based upon the safety profile obtained in the Phase I study, the Company
and Astra have elected to move forward into Phase IIA and IIB studies.
After extensive discussions of draft submissions with FDA, in February
1997, the Company submitted two protocols to conduct additional trials under the
current Company-sponsored IND in the United States. The first proposed study is
a clinical trial in neuropathic pain patients who are opioid unresponsive. This
study will serve as the starting point of an expanded Phase II program, provided
that it demonstrates safety and retrievability of a modified device. The second
proposed study is a Phase II clinical trial in patients suffering from cancer or
cancer-related pain.
The Company expects to conduct a further clinical trial of its pain implant
in neuropathic pain patients following completion of the Phase II study
described above.
All trials are being run in collaboration with Astra Pain Control, the
Company's partner.
The Company is also working to develop a second-generation implant for the
treatment of chronic pain based on a cell line. The cell line is expected to
secrete a number of known analgesic substances.
There can be no assurance that the Company will timely receive the
regulatory approvals necessary to commence such clinical trials or that such
clinical trials will be successfully completed or that, if successfully
completed, will lead to the commercialization of such product.
In March 1995, the Company entered into a Collaborative Research and
Development Agreement with Astra AB for the development and marketing of certain
encapsulated cell products to treat pain. See "Corporate Collaborations -- Astra
AB."
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Parkinson's Disease Program
Parkinson's disease ("PD") is a progressively debilitating neurological
disorder characterized by tremor, rigidity and slowness of spontaneous movement.
The symptoms of PD result from low levels of the neurotransmitter dopamine in
the striatum (a portion of the brain) due to the death of dopamine-producing
cells in the substantia nigra, a related area of the brain. The causes of the
disease are unknown. There is no known cure for PD nor is there any known method
for arresting or reversing the fundamental neurodegenerative process that
results in the death of dopamine-producing cells.
PD affects approximately 500,000 individuals in the United States, and it
is estimated that one in 500 people over 50 years of age will develop this
disorder. It is thought that approximately 50,000 new cases are diagnosed
annually in the United States, and this number is expected to increase as the
population ages. The Company's proposed product will initially be targeted for
use by the estimated 300,000 mid-to-late-stage PD patients in the United States.
Currently approved therapies for PD include the systemic oral
administration of drugs such as L-dopa (a dopamine precursor), compounds that
stimulate the cellular receptors activated by dopamine (receptor agonists),
deprenyl (an inhibitor of a dopamine degradative enzyme), and related
medications. These agents generally provide adequate treatment of the disease
for a limited period. As the disease progresses, however, patients become
increasingly resistant to the benefits of the medications while concurrently
becoming susceptible to a variety of motor and cognitive side effects. Under
these circumstances, they often require extensive supportive care.
The Company is developing an implant to treat PD. The goal of this program
is to slow or prevent progression of the underlying degeneration of dopaminergic
neurons by delivering neurotrophic factors to the brain. The initial focus of
the program is the delivery of Neurturin, a neurotrophic factor with partial
homology to GDNF, a factor which has shown promise in preclinical models of PD.
The Company believes that, if successfully developed, its implants will be
capable of delivering effective, low doses of Neurturin to the areas of the
brain where they are required.
The Company has entered into an agreement with Genentech for the
development of implants releasing neurotrophic factor(s) to treat PD. See
"Corporate Collaborations - Genentech, Inc."
ALS Program
Amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig's disease, is
characterized by progressive loss of motor control and death due to degeneration
of neurons in the motor system. The Company estimates that approximately 25,000
patients have ALS in the United States. The cause of ALS is unknown in most
cases. There is no known cure for the disease.
The Company is sponsoring research to evaluate the feasibility and
tolerability of using encapsulated cells to deliver neurotrophic factors into
the CNS to treat ALS. Dr. Aebischer and his colleagues have conducted
preclinical studies that showed that encapsulated cells delivering CNTF, a
neurotrophic factor, slowed the degeneration of the motor neurons affected in
ALS.
In March 1995, Dr. Aebischer began an investigator-sponsored pilot (or
feasibility) trial of CNTF-releasing, encapsulated cells in ALS patients. The
trial, which enrolled 10 patients, was intended to show that these devices could
be safely implanted in patients, that devices could safely deliver a recombinant
protein (CNTF) directly into the cerebral spinal fluid ("CSF") for a period of
three months or longer and that no significant side effects would be
experienced. In November 1995, the Company reported that all of these objectives
had been achieved. The Company believes that this was the first demonstration
that genetically engineered xenogeneic cells can deliver a neurotrophic factor
in the CSF for up to three months. There have been no significant safety issues
in these patients; however, the membrane/cell combination chosen did lead to
some signs of immune recognition to the xenogeneic cells in some patients. In
December 1996, Dr. Aebischer initiated a second ALS trial to test modifications
of the implant used in the initial pilot study. The results of such trial are
not yet available.
Two other companies have conducted clinical trials of systemic rather than
direct CNS administration of CNTF to treat ALS. Both such trials have been
halted, reportedly because of side effects or lack of efficacy. A third company
conducted clinical trials of systemically administered BDNF, another
neurotrophic factor, to treat ALS. This trial was considered unsuccessful,
reportedly due to lack of efficacy.
The Company believes that administration of growth factors directly to the
CNS is preferable to the systemic administration that was utilized in prior
clinical trials and that its encapsulation approach may diminish or eliminate
the significant side effects reported in other trials while achieving
therapeutic levels of growth factors within the CNS. Recently published research
suggests that delivery of multiple neurotrophic factors may be required for
effective treatment of ALS. The Company believes its technology may be a
particularly promising way to deliver multiple neurotrophic factors.
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In November 1996, the Company signed a license agreement with Genentech,
Inc., that licensed to the Company rights to develop encapsulated cell delivery
of NT4/5 and CT-1 to treat ALS (see "Corporate Collaborations - Genentech,
Inc."). CT-1 is related CNTF and the Company believes CT-1 could be a promising
factor for the treatment of ALS. In addition, both CT-1 and NT4/5 have shown
promise in promoting growth and survival of motor neurons in preclinical
research experiments, and evidence suggests that the combined effects of these
factors, when administered together, are greater than effects of the factors
administered alone. If preclinical experiments continue to be encouraging, the
Company expects to shift from clinical trials of CNTF to trials of the
combination of NT4/5 and CT-1 to treat ALS. See "Patents, Proprietary Rights and
Licenses."
Huntington's Research
Huntington's disease ("HD") is an autosomal dominant, progressive
neurodegenerative disease resulting in movement disorders, psychiatric
disturbances, and death. The symptoms of HD are caused primarily by the death of
striatal neurons. In 1993, there were approximately 25,000 patients with
symptomatic HD in the United States. The genetic abnormalities that cause HD
have been identified, allowing definitive diagnosis of the disorder and
identification of at-risk individuals. The manner in which these genetic
abnormalities cause HD is unknown. There is no known cure or treatment for the
disease.
The Company has conducted studies demonstrating the ability of
neurotrophic-factor releasing, encapsulated cells to slow or halt neuronal death
in certain animal models of HD. In these models, the Company has shown that
implants releasing NGF or CNTF have the ability to reduce the neuronal death
implicated in HD and that dysfunction normally associated with striatal neuronal
damage could be significantly attenuated. A pilot clinical trial, scheduled to
begin in 1997 in Europe, will evaluate the feasibility and tolerability of
implanting encapsulated cells that produce CNTF into the CNS of HD patients.
In November 1996, CytoTherapeutics entered into an agreement with
Genentech, Inc. for the development and marketing of implants that release CT-1
to treat HD (see "Corporate Collaborations - Genentech, Inc."). CT-1, also known
as cardiotropin, is a recently identified member of the cytokine family of
growth factors with shared similarities in receptor binding to CNTF. Members of
this family have, in preclinical studies, demonstrated direct protective actions
on motor-neuron populations affected in ALS. The Company believes that CT-1's
activity will be similar to that observed previously with CNTF. If the results
of additional experiments and the planned European safety trial are encouraging,
the Company intends to test the possibility of using CT-1 to treat HD.
Ophthalmology Program
Many diseases of the eye are presently ineffectively treated, frequently
leading to blindness. Certain diseases of the eye, e.g., glaucoma and anterior
segment inflammation, can be treated today with topical preparations, although
the efficacy of these treatments is variable. These disorders are treatable
largely because some or all of the disease processes occur in the anterior
portion of the eye, which is accessible to topical drugs. Other serious
diseases, such as diabetic retinopathy and age-related macular degeneration, are
not treatable because they occur in the posterior portion of the eye, an area
that is essentially unreachable with current treatment methods.
Many of these untreatable diseases affect the retina, a posterior part of
the eye critical to sight. The retina is part of the CNS, and the Company
believes that its encapsulated cell implant technologies can be applied to
bypass the blood retina barrier of the eye using the same approach as bypassing
the blood brain barrier in the rest of the CNS. If these implants are
successfully developed, the Company believes this delivery platform could allow
treatment of serious sight-threatening disorders.
The Company is designing its ocular implants to release a number of
different factors depending on the disease being treated. Thus, the Company is
evaluating neurotrophic factors for neurodegenerative diseases (e.g., glaucoma
and retinitis pigmentosa), antiangiogenics for treatment of excessive
neovascularization (e.g., macular degeneration and diabetic retinopathy), and
anti-inflammatories for ocular inflammation (e.g., uveitis). The complicated
nature of the underlying disease processes make it likely that multiple factors
may be required for effective treatment. The Company is evaluating the various
eye diseases to determine which to address first and to choose and obtain access
to the most appropriate factor(s). As part of its assessment, the Company is
considering both existing products with known therapeutic action and novel
factors, such as neurotrophic factors whose activities and therapeutic utility
in humans are promising, but unproven at the present time. The Company does not
have rights to any such factors for the ophthalmologic use at present. See
"Patents, Proprietary Rights and Licenses."
CytoTherapeutics has begun constructing implants adapted for use in the eye
and has started preclinical testing. The Company expects to undertake
preclinical animal tests to evaluate the safety and potential efficacy of these
implants in 1997.
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OTHER AREAS OF RESEARCH AND EVALUATION
Neurotrophic Factors
An important recent advance in neurobiology has been the identification and
production of a number of neurotrophic factors; these factors are natural
proteins essential for the development, survival and function of a number of
critical neuronal cells. Neurotrophic factors may be significant because
neurons, the basic functional cells of the nervous system, do not regenerate if
lost or damaged. The survival of these neurons in certain stressful conditions
may be dependent on the presence of these factors.
Specifically, the progressive death of neurons is characteristic of a
number of neurodegenerative disorders, including Parkinson's disease,
Huntington's disease, ALS and Alzheimer's disease, and is also characteristic of
several important eye diseases. It is generally believed that application of
appropriate neurotrophic factors to the neurons associated with these diseases
could slow or halt their degeneration and/or death and hence slow disease
progression.
A number of biotechnology companies have developed techniques for producing
naturally occurring neurotrophic factors by genetically engineering cells to
produce these factors. Neurotrophic factors, however, do not easily cross the
blood brain barrier or blood retina barrier. This obstacle, among others, has so
far hindered the practical use of neurotrophic factors as treatments for
neurodegenerative diseases of the CNS.
The Company believes that its technology may represent a practical means of
delivering neurotrophic factors across the blood brain barrier or the blood
retina barrier. The Company is developing implants which encapsulate cells
secreting neurotrophic factors for application to a number of neurodegenerative
diseases. The ability to deliver a combination of neurotrophic factors singly or
in combination may be important, because no single neurotrophic factor has been
shown to protect all classes of neurons, and the Company believes certain
neurotrophic factors may act jointly to provide increased biological activity.
The Company is exploring the development of a number of implants based on
cells which could secrete various neurotrophic factors. The Company believes its
technology may be the best way to deliver these factors, both alone and in
combination. All of the cell lines under investigation by the Company for
inclusion in these implants are subject to issued patents or patent claims held
by third parties and, with the exception of its agreements with Genentech, the
Company currently has no rights under patent or patent applications of third
parties to use these cell lines in a commercial product. There can be no
assurance that the Company will be able to obtain licenses for these cell lines.
See "Patents, Proprietary Rights and Licenses" and "Corporate Collaborations."
Conopeptides
CytoTherapeutics is also investigating a series of very potent compounds,
called conopeptides, derived from hunting snails. These molecules appear to be
highly specific for certain CNS receptors and channels. The Company believes
these compounds may represent novel ways to address certain CNS disorders when
provided using the Company's technology. The Company's efforts in this area are
undertaken as part of its collaboration with Cognetix, Inc. See "Corporate
Collaborations - Cognetix, Inc."
Neural Stem Cells
The Company is investigating use of neural stem cells for two distinct
purposes. First, since these cells are native to the CNS, they could represent
an ideally adapted cell for encapsulated use in the CNS environment. These
cells, though not transformed, may be genetically manipulated and subsequently
expanded in large numbers.
In addition, these stem cells may be useful for direct grafting into the
CNS. Preliminary experiments indicate, that at least in some cases, these cells
may be able to repopulate depleted glial cell populations such as those lost in
multiple sclerosis. Thus, these cells, which can be differentiated into the
major neuronal and glial cells of the CNS, might form the basis for replacement
of cells lost in certain neurodegenerative diseases.
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In 1994, the Company entered into a contract research and license agreement
with NeuroSpheres, Ltd. for the development of therapeutic products involving
the implantation of neural stem cells. See "Corporate Collaborations -
NeuroSpheres, Ltd." The Company's neural stem cell program is at an early stage
and there can be no assurance that it will result in any commercial product or
that its license from NeuroSpheres will have commercial value. The Company is
arbitrating a dispute under the agreement. See "Corporate Collaborations -
NeuroSpheres, Ltd" and "Item 3 - Legal Proceedings."
Gene Therapy
Developments in biotechnology have opened the new field of genetic therapy
in which cells are transformed with specific DNA sequences to produce substances
that may be useful in treating human disease. However, commercialization of such
genetic constructs to treat diseases faces a number of hurdles. Among the more
significant of these hurdles is the general inability to sustain or control the
dose of the protein introduced into the patient by such a genetic construct or
to reverse therapy when it is no longer needed or wanted. In addition, although
the risk may be small, the disabled viruses most commonly used in gene therapy
may, in rare instances, become competent to release viral particles, thereby
providing a chance for the infection of the host.
Under certain circumstances, the Company's technology may be preferred to
unencapsulated, autologous cell gene therapy, such as when site-specific,
sustained output is important or reversibility is valuable. The Company's
encapsulation techniques, if successfully developed and applied in conjunction
with gene therapy, should allow cells placed into the body to be removed when
desired or necessary. The Company is continuing to investigate the use of its
technology for gene therapy.
FURTHER DEVELOPMENT OF CORE TECHNOLOGY
Core Technology Development
The Company continues to develop and extend its core technology. Through
its cell biology program, the Company is developing genetically engineered cell
lines that will function optimally when encapsulated. The encapsulating membrane
must typically be customized for each cell line selected and for each intended
therapeutic application. Similarly, the medium (which bathes the cells with
required nutrients) and, when appropriate, the matrix (materials within the
membrane which provide a framework for cell growth and viability) must also be
selected for each cell line.
The Company is developing cell lines which may represent important
components in second-generation products (e.g., an engineered cell line
secreting analgesics in its pain program) or new products (such as a single
device delivering multiple therapeutic substances). It is also conducting
research to improve cell line expression levels, as well as regulation and
consistency of output. While to date the cells used in the Company's programs
have been derived from animals (xenotransplants), in recognition of the
international concern focused on the risks of xenotransplantation as well as to
optimize the function of implants, the Company is investigating the use of human
cell lines. There can be no assurance such development will be successful or of
regulatory benefit.
The Company continues to evaluate new and modified forms of membranes for
use in its implants. These evaluations are focused on developing membranes with
increased strength, better handling characteristics, better transport qualities
and greater biocompatibility. These efforts are undertaken internally as well as
externally with Akzo Nobel Faser AG. See "Corporate Collaborations - Akzo Nobel
Faser AG."
The Company is expanding the range of matrices it evaluates for use in its
implants. The Company's goals in this area are to develop matrices with longer
life, greater stability and enhanced effects in controlling cell viability
and/or productivity.
The Company believes that its growing knowledge of how effectively to
combine diverse cell lines, media, matrices and membranes and how to utilize
diverse sites for implantation represent important aspects of its proprietary
base technology, and this knowledge may allow the Company to develop a variety
of products capable of producing a wide range of substances that may be useful
for the treatment of a number of diseases.
The Company is also assessing and developing distribution, handling and
insertion systems that will facilitate the distribution of its implants to
clinicians and enable clinicians both to surgically implant these devices into
patients and to retrieve and replace them, as necessary. The Company views the
proprietary techniques it is developing to sustain the living cells contained
within its implants through the manufacturing process and their subsequent
distribution to and surgical implantation by clinicians as an additional,
important element of its evolving core technology. See "Manufacturing."
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Modex Therapeutiques S.A.
In July 1996, CytoTherapeutics established Modex Therapeutiques S.A. as a
50%-owned, Swiss biotherapeutics company to pursue extensions of
CytoTherapeutics' broad-based, encapsulated-cell technology for applications
outside the central nervous system. Modex, headquartered in Lausanne,
Switzerland, was formed to integrate technologies developed at three
universities located in Lausanne - the University of Lausanne, the Centre
Hospitalier Universitaire Vaudois (CHUV), and the Ecole Polytechnique Federale
de Lausanne - as well as from the Albert Einstein College of Medicine of Yeshiva
University in New York City and CytoTherapeutics - to develop products to treat
non-CNS diseases such as diabetes, obesity and anemia.
CytoTherapeutics has invested $2 million in Modex, with a commitment to
invest Sfr 2.4 million on the second anniversary of the agreement if Modex has,
prior to that time, achieved one or more specified scientific milestones, in
exchange for a 50% stake in Modex. An investment fund managed by Lombard Odier &
Cie, a Swiss private bank, invested $2 million in Modex, with a commitment to
invest Sfr 1.2 million on the second anniversary of the agreement, in exchange
for a 15% stake in Modex. The balance of the Company is held by the scientific
founders.
CytoTherapeutics has granted to Modex an exclusive, royalty-bearing license
to CytoTherapeutics' proprietary encapsulated-cell technology for three
applications outside the central nervous system (diabetes, obesity and anemia).
Modex has granted to CTI an exclusive royalty-bearing license to any technology
developed or obtained by Modex for application to diseases, conditions and
disorders which affect the central nervous system. In addition to its royalty
obligations, CTI is also obligated under this agreement to issue to Modex up to
300,000 shares of CTI Common Stock on the achievement by Modex of certain
scientific milestones. Substantially all of these shares are expected to be
awarded by Modex as incentive compensation to Modex's founding scientists and
other researchers upon the achievement of such milestones.
During the first two years following closing, the Company has the right to
acquire the fund's interest in Modex for the greater of a 30% annual return or
Sfr 3.6 million. Following this two-year period, CytoTherapeutics has the right
to purchase the fund's interest in Modex at 110% of fair market value. Following
the second anniversary of the agreement and prior to the tenth anniversary of
the agreement, if no public market exists for the Common Stock of Modex, the
fund has the right to require CytoTherapeutics to purchase the fund's interest
in Modex for 90% of the fair market value of such interest. Any purchase made by
CytoTherapeutics under any of the circumstances described in this paragraph may
be made, at CytoTherapeutics' option, in cash or shares of CytoTherapeutics
Common Stock valued at the market price at the time of purchase.
The scientific founders of Modex are Patrick Aebischer, M.D., Ph.D.,
Professor of Surgery and Director of Surgical Research and the Gene Therapy
Center at the CHUV; Max Wilhelm, Ph.D., who serves as Modex's Chief Executive
Officer and was previously Director of Pharmaceutical Research and Development
at Ciba-Geigy Corporation where he was responsible for worldwide research and
development operations; Bernard Thorens, Ph.D., Professor at the Institute of
Pharmacology at the University of Lausanne; and Shimon Efrat, Ph.D., Associate
Professor at the Department of Molecular Pharmacology at Albert Einstein College
of Medicine at Yeshiva University. Dr. Aebischer is Chairman of Modex and also a
scientific founder of CytoTherapeutics and a member of its Board of Directors.
Under the terms of the agreement between CytoTherapeutics and the
scientific founders of Modex, CytoTherapeutics has the right to acquire, and the
founders have the right to require CytoTherapeutics to acquire, the founders'
initial equity interest in Modex in exchange for the issuance of an aggregate of
approximately 92,000 shares of CytoTherapeutics Common Stock.
CORPORATE COLLABORATIONS
Astra AB
In March 1995, the Company signed a collaborative research and development
agreement with Astra for the development and marketing of certain encapsulated
cell products to treat pain. Astra made an initial, nonrefundable payment of
$5,000,000 and may make up to $16,000,000 in additional payments subject to the
achievement of certain development milestones. Under the agreement, the Company
is obligated to conduct certain research and development pursuant to a four-year
research plan agreed upon by the parties. Over the term of the research plan,
the Company expects to receive annual research payments from Astra of $5
million-$7 million, which the Company expects should approximate the research
and development costs incurred by the Company under the plan. Approximately
$18,865,000 has been received by the Company through December 31, 1996. Subject
to the successful development of potential products and obtaining necessary
regulatory approvals, Astra is obligated to conduct clinical trials of such
products arising from the collaboration and to seek approval for their sale and
use. Astra has the exclusive worldwide right to market products covered by the
agreement. Until the later of either the last to expire of all patents included
in the licensed technology or a specified fixed term, the Company is entitled to
a royalty on the worldwide net sales of such products in return for the license
granted to Astra and the Company's obligation to manufacture and supply
products. Astra has the right to terminate the agreement after April 1, 1998.
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Genentech, Inc.
On November 25, 1996 the Company entered into three agreements with
Genentech, Inc. ("Genentech") to develop treatments for Parkinson's disease,
Huntington's disease and amyotrophic lateral sclerosis ("ALS"). Under the
agreements the Company and Genentech will pursue treatments for these diseases
that utilize the Company's encapsulated cell technology to deliver several of
Genentech's growth factors, potentially including neurotrophin-4/5 ("NT-4/5"),
cardiotrophin-1 ("CT-1") and Neurturin. These agreements supersede the
Development Collaboration and License Agreement between the Company and
Genentech entered into in March 1994 which related in part to the development of
a product for the treatment of Alzheimer's disease using NGF.
The following is a brief overview of each of the agreements:
Parkinson's Agreement
The initial focus of the research under the Development Collaboration and
License Agreement relating to Parkinson's disease (the "Parkinson's Agreement")
is the development of a treatment for Parkinson's disease using Neurturin. Under
the Parkinson's Agreement, the Company is obligated to perform certain
preclinical studies and a pilot Phase I clinical study using Neurturin (unless
another growth factor is agreed upon by the parties). Genentech purchased $8.3
million of the Company's Common Stock (829,171 shares at $10.01 per share) to
fund the Company's expenses associated with such preclinical and pilot clinical
studies. If the parties agree that additional funds are required to complete
such studies, Genentech will purchase additional shares of the Company's Common
Stock (at the then current market price of the Company's Common Stock) to
provide the Company the additional required funding.
Genentech has the right to terminate development under the Parkinson's
Agreement after the completion of each of (i) the preclinical studies, (ii) the
pilot Phase I clinical trial and (iii) a specified Phase II clinical trial.
Should Genentech decide to proceed to Phase II clinical trials, Genentech will
purchase additional shares of the Company's Common Stock (at the then current
market price of the Company's Common Stock) to fund such study. If following
completion of the preclinical studies, the pilot clinical study or the Phase II
study, Genentech decides to terminate further development under the Parkinson's
Agreement or if Genentech terminates the Parkinson's Agreement as a result of a
breach of the Parkinson's Agreement by the Company, and the funds the Company
received from the sale of stock to Genentech pursuant to the Parkinson's
Agreement exceed the expenses incurred by the Company in connection with such
studies by more than $1 million, Genentech has the right to require the Company
to repurchase from Genentech shares of Company Common Stock having a value equal
to the amount of overfunding (based on the per share price at which Genentech
purchased such shares of Common Stock from the Company). The Company is
obligated to use reasonable efforts to complete its development obligations
under the Parkinson's Agreement within a prescribed period.
In the event Genentech decides to continue with Phase III clinical trials,
Genentech and the Company will share the cost of United States Phase III
clinical trials and Genentech will pay for any clinical testing required to sell
products developed under the Parkinson's Agreement outside the United States.
Genentech will extend the Company a line of credit to provide the Company cash
to fund the Company's share of the expenses of the Phase III trials in the
United States. The line of credit, together with interest thereon, is repayable,
at the option of the Company, in either cash or through the issuance of shares
of the Company's Common Stock having a value (based on the then current market
price of the Company's Common Stock) equal to the outstanding amount of the
loan.
Upon commercialization, Genentech and the Company will share profits in the
United States at an agreed-upon percentage, and Genentech will pay the Company a
royalty based on sales outside the United States. The Company will retain
manufacturing rights and will be paid manufacturing costs for products sold. In
the event the Parkinson's Agreement is terminated because of the Company's
default or bankruptcy, the Company is required to grant Genentech a license to
the Company's cell encapsulation technology and transfer to Genentech related
technology for use solely with the products developed under the Parkinson's
Agreement.
Under the Parkinson's Agreement, the Company has granted Genentech an
exclusive license to use the Company's cell encapsulation technology, with
certain of Genentech's growth factors for the treatment of Parkinson's disease.
Under the Parkinson's Agreement, the Company is also prohibited from entering
into certain agreements relating to the development of treatments for
Parkinson's disease using certain compounds.
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ALS Agreement
Pursuant to the License Agreement Between the Company and Genentech
relating to Treatment of Amyotrophic Lateral Sclerosis (the "ALS Agreement")
Genentech has granted the Company a license to CT-1 and NT-4/5 to develop
products for the treatment of ALS using the Company's cell encapsulation
technology. Subject to certain limitations discussed below, the Company is
responsible for all expenses associated with the preclinical and clinical
development under the ALS Agreement and is obligated to pay Genentech royalties
on net sales of products developed under the ALS Agreement. The Company's
license to CT-1 and NT-4/5 is dependent upon the Company using reasonable
efforts to achieve certain development milestones within prescribed periods.
The Company has the right to commercialize the product(s) outside the
United States. Upon the successful completion of a specified Phase II clinical
trial, Genentech has the option to obtain exclusive rights to sell products
developed under the ALS Agreement in the United States by agreeing to pay an
agreed upon percentage of the expenses of United States Phase III clinical
development of such products. If Genentech makes such an election, the parties
will share profits on sales of such products in the United States. In all
events, the Company would continue to have the exclusive right to sell products
developed under the ALS Agreement outside the United States, subject to a
royalty payable to Genentech. In the event the ALS Agreement is terminated
because of the Company's default or bankruptcy, the Company is required to grant
Genentech a license to the Company's cell encapsulation technology and transfer
to Genentech related technology for use solely with the products developed under
the ALS Agreement.
Huntington's Agreement
Under the License Agreement Relating to Treatment of Huntington's Disease
(the "Huntington's Agreement"), Genentech has granted the Company an exclusive
license to CT-1 to develop, make, use and sell products for the treatment of
Huntington's disease that utilize CT-1 and the Company's cell encapsulation
technology. The Company is responsible for all preclinical and clinical
development under the Huntington's Agreement, including all expenses associated
with such development. The Company will pay Genentech a royalty based on net
sales of any products developed under the Huntington's Agreement. The Company's
license to CT-1 is dependent upon the Company using reasonable efforts to
achieve certain development milestones within prescribed periods.
Upon the earlier of (i) the Company declining to grant a third-party
sublicense under the Huntington's Agreement, and (ii) the successful completion
of the specified Phase II trial on a product developed under the Huntington's
Agreement, Genentech has the option to require the Company to negotiate
exclusively with Genentech for a limited period regarding Genentech codeveloping
and comarketing products developed under the Huntington's Agreement. In the
event the parties are unable to reach an agreement, the Company would have the
right to sublicense its rights under the Huntington's Agreement to a third
party, provided such third-party offers the Company terms more favorable to the
Company than the terms of Genentech's last offer. In the event the Huntington's
Agreement is terminated because of the Company's default or bankruptcy, the
Company is required to grant Genentech a license to the Company's cell
encapsulation technology and transfer to Genentech related technology for use
solely with products developed under the Huntington's Agreement.
Akzo Nobel Faser AG
To develop additional new membranes to be used in the Company's products
and to obtain access to membrane expertise from one of the world's leading
membrane companies, the Company entered into a Development and Supply Agreement
with Akzo Nobel Faser AG ("Akzo") dated December 1, 1993. Akzo is the world's
largest supplier of medical grade membranes. Under the terms of the agreement,
Akzo and the Company are evaluating Akzo's existing membranes to determine if
the membranes can be used in connection with the Company's proposed products. In
addition, Akzo has begun development of improved membranes for use by the
Company. The Company has agreed to reimburse Akzo for a portion of Akzo's costs
incurred in the development. In the event the Company determines to use
membranes developed by Akzo in the Company's products, Akzo will supply
membranes to the Company at Akzo's cost plus a certain profit. Akzo will also be
entitled to a royalty on sales of the Company's products utilizing Akzo's
membranes. Akzo has agreed not to supply membranes to any other third party for
encapsulation of cells for IN VIVO therapeutic applications. Either Akzo or the
Company can terminate the Agreement in the event Akzo is unable or unwilling to
supply sufficient quantity of membranes to meet the Company's needs. In such
event, Akzo would license the technology necessary to manufacture the membranes
to CytoTherapeutics.
The Company has the right to utilize membranes from other manufacturers in
its products provided the Company pays a small royalty to Akzo on the sales of
such products. The Company will also continue its internal membrane development
efforts, and may utilize internally developed membranes in its products without
obligation to Akzo.
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For the years ending December 31, 1996, 1995 and 1994, the Company paid
Akzo under the terms of the agreement $294,545, $118,000 and $146,000,
respectively.
NeuroSpheres, Ltd.
In March 1994, the Company entered into a Contract Research and License
Agreement with NeuroSpheres, Ltd. Under the agreement, the Company obtained from
NeuroSpheres an exclusive worldwide royalty-bearing license for the commercial
development and use of certain neural stem cells for transplantation to treat
human disease. The Company is exploring use of these cells both as sources of
differentiated neuronal cells and as genetically engineered cells that secrete
selected therapeutic substances.
Upon the execution of the agreement, the Company paid $310,000 to
NeuroSpheres. In addition, the Company is required to provide research funding
to NeuroSpheres totaling $875,000 through February 1998, of which $625,000 had
been paid through December 31, 1996. Upon the achievement of certain milestones,
the Company is obligated to make payments to NeuroSpheres totaling a maximum of
$3,750,000, payable at NeuroSpheres' option in cash or in shares of the
Company's Common Stock, at a price of $12.50 per share. Upon commercial sale of
a product utilizing the licensed technology, the Company is obligated to pay a
range of royalties based on product revenues and market share, subject to
certain minimum royalties. In order to maintain exclusivity, the Company is also
obligated to expend an additional amount to support research related to
development of products under the agreement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
The Company has filed for arbitration of a dispute that has arisen between
it and NeuroSpheres, Ltd under the agreement. NeuroSpheres has sued
CytoTherapeutics in Alberta, Canada, seeking to add arbitration issues.
CytoTherapeutics has also filed suit in Rhode Island to prevent NeuroSpheres
from licensing rights to third parties which have been exclusively licensed to
the Company. The Company believes that position taken by NeuroSpheres is without
merit. See "Item 3. Legal Proceedings."
Cognetix, Inc.
In February 1997, CytoTherapeutics, Inc. and Cognetix, Inc. entered into a
Collaboration and Development agreement to screen selected peptides isolated by
Cognetix for possible development into therapeutic products aimed at a broad
range of human disease states using CytoTherapeutics' cell-based delivery
technology.
Cognetix is developing proprietary conopeptides and similar compounds that
are believed to act on specific target receptors in the CNS. Under the
agreement, CytoTherapeutics will have access to these proprietary compounds and
Cognetix's ongoing research for the purpose of selecting therapeutic molecules
that could be produced with genetically modified cells and delivered to the CNS
through gene therapy approaches including the use of the Company's encapsulation
technology.
Under the agreement, CytoTherapeutics expects to invest approximately
$1,750,000 over the next 12 months to acquire approximately a 19.9% ownership
position in Cognetix. Cognetix has agreed to work exclusively with
CytoTherapeutics in regard to the delivery of its proprietary peptides through
the transplantation of genetically engineered cells and CytoTherapeutics has
agreed to work exclusively with Cognetix in regard to such delivery of such
peptides.
In the collaboration, CytoTherapeutics and Cognetix expect initially to
focus on several conopeptides that are believed to act in a highly specific way
as calcium, sodium and potassium channel blockers. Additionally, the companies
plan to target a subfamily of conopeptides known as conantokins, which are
believed to function as potent NMDA receptor antagonists. The Companies believe
that, because of their high potency and selectivity for specific receptors, the
conantokins and other selected conopeptides represent attractive therapeutic
candidates for a broad range of neurological disorders, such as epilepsy,
Parkinson's disease, chronic pain, stroke and spinal ischemia as well as
ophthalmologic diseases.
Based on in vitro data, a screening committee comprised of an equal number
of representatives from each of CTI and Cognetix will determine which compounds
to select for IN VIVO studies and possible clinical trials. The Companies will
generally share expenses associated with the development of any specific product
candidate and any resulting revenues, except as otherwise determined on a
product-by-product basis.
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Neocrin Company
In December 1993, the Company transferred substantially all of the assets
of its program for the treatment of Type I diabetes by primary cells to Neocrin
Company. In exchange for such assets, the Company received preferred stock
representing a 10% ownership interest in Neocrin at the time of the transaction,
and Neocrin assumed certain liabilities related to the transferred assets.
The Company has retained rights to its proprietary membrane technology,
which were not included in the agreement with Neocrin. The Company also agreed
not to compete with Neocrin through the use or licensing of its membrane
technology for the treatment of diabetes through the encapsulation of primary
islet cells. In February 1995, CytoTherapeutics purchased warrants and shares of
Neocrin's preferred stock for $500,000 as required in its agreement with
Neocrin.
In December 1995, Neocrin completed an equity offering, in which the
Company did not participate, at a valuation substantially lower than prior
financings. As a result, the Company determined that the carrying value in its
investment had been permanently impaired and provided a $2,331,000 valuation
reserve to reduce the investment value to $200,000.
OTHER ARRANGEMENTS
The Company has expended and expects to continue to expend substantial sums
to support academic research programs. To date, the Company's principal academic
collaborations have been with Brown University and Dr. Patrick Aebischer at the
Centre Hospitalier Universitaire Vaudois in Switzerland. Research and
development expenses paid in connection with these collaborations aggregated
approximately $1,337,000, $1,008,000 and $864,000 for the years ended December
31, 1996, 1995 and 1994, respectively. The Company also has a number of
collaborative relationships with other academic institutions and academic
researchers.
In 1989, the Company entered into an agreement with the State of Rhode
Island pursuant to which an agency of the State reimbursed the Company
$1,172,000 for certain research activities the Company funded at Brown. Under
the terms of this grant, the Company is obligated to pay royalties ranging from
three to five percent of revenues from products developed under the agreement,
to a maximum of $1,758,000.
MANUFACTURING
The Company believes the ability to manufacture encapsulated cell products
which are safe and effective will be a key source of competitive advantage.
Thus, the Company intends to manufacture its proposed products and maintain
control of this important proprietary element of its business wherever possible.
The manufacturing process for the Company's lead product (its chronic pain
implant) is comprised of five modules: (i) manufacture of the fiber membrane;
(ii) assembly of implants; (iii) acquisition and culturing of the cells; (iv)
placement of the cells within the implant; and (v) packaging of the cell-loaded
implants for shipping to the clinical site. The Company is employing this
process, using current Good Manufacturing Practices ("cGMP"), for manufacturing
its pain implants for use in clinical trials. Quality control tests are
performed on each batch of the finished pain devices to assess sterility and
potency. Only batches meeting all specifications are released for use in
clinical trials. Critical equipment and processes have been validated to assure
manufacturing consistency and control. A 21,000-square-foot laboratory and pilot
manufacturing facility are now in operation.
Implants for clinical trials are currently made in small quantities. The
commercial scale manufacture of these products is expected to require
specialized automated or semiautomated equipment. The Company's current
manufacturing process has been designed to facilitate the incorporation of
additional automation over time. Over the last year, modifications of the
process have been introduced to allow manufacture at greater volume to support
pivotal efficacy trials.
The facilities and equipment required to manufacture the Company's
encapsulated cell implants are different from those required to manufacture
potentially competitive biopharmaceutical products.
The Company's pilot manufacturing plant, without additional expansion or
increasing staffing, may not have sufficient capacity to permit the Company to
produce all of the products necessary to complete clinical trials in all
indications the Company may wish to develop. In addition, the Company has not
yet developed the capability to manufacture any of its proposed products on a
commercial scale and is unaware of any other company which has manufactured any
membrane encapsulated cell product on a commercial scale. Manufacture of the
Company's proposed products is expected to require specialized, automated
equipment capable of forming complex polymer membranes into implants which
combine media, matrices and living cells, and this process must be carried out
on a precisely controlled basis, under sterile conditions in a clean-room
environment. Failure to achieve commercial scale manufacturing capability or to
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demonstrate consistent results using manufactured prototypes in preclinical
animal studies or clinical trials could prevent or delay submission of products
for regulatory approval and initiation of new development programs, which could
have a materially adverse effect on the Company. There can be no assurance that
the Company will be able to develop the capability of manufacturing any of its
proposed products, or to identify and contract with manufacturers to produce
such products, at a cost, consistency or in the quantities necessary to make a
commercially viable product.
MARKETING
The Company expects to market and sell its products primarily through
co-marketing, licensing or other arrangements with third parties. The Company
does not have experience in sales, marketing or distribution and does not expect
to develop such capabilities in the near future. Generally, the Company in its
commercial arrangements with third parties intends to have the marketing of its
products undertaken by its partners, although the Company will seek to retain
limited marketing rights in specific markets, particularly where the product may
be addressed by a limited, directed sales force.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company believes that proprietary protection of its inventions will be
of major importance to its future business. The Company has a program of
vigorously seeking and protecting intellectual property it believes may be
useful in connection with its products; the Company believes that its know-how
will also provide a significant competitive advantage and intends to continue to
develop and protect its know-how. The Company may also, from time to time, seek
to acquire licenses to important externally developed technologies.
The Company has exclusive or nonexclusive rights to a portfolio of patents
and patent applications related to the encapsulation of cells and related
technologies. In general, these patents and patent applications pertain to the
release of neurotransmitters from encapsulated cells, use of various cell types,
encapsulation devices and their manufacture, encapsulation methods and various
aspects of the therapeutic use of capsules in the treatment of various diseases.
Currently, the Company's U.S. patent portfolio includes rights to 21 issued
patents and a number of pending patent applications.
The patent positions of pharmaceutical and biotechnology companies,
including those of the Company, are uncertain and involve complex and evolving
legal and factual questions. The coverage sought in a patent application can be
denied or significantly reduced before or after the patent is issued.
Consequently, the Company does not know whether any of its pending applications
will result in the issuance of patents, or if any existing or future patents
will provide significant protection or commercial advantage or will be
circumvented by others. Since patent applications are secret until patents are
issued in the United States or the applications are published in foreign
countries, and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first to make the inventions covered by each of its pending
patent applications or that it was the first to file patent applications for
such inventions. There can be no assurance that patents will issue from the
Company's pending or future patent applications or, if issued, that such patents
will be of commercial benefit to the Company, afford the Company adequate
protection from competing products or not be challenged or declared invalid.
In the event that a third party has also filed a patent application
relating to inventions claimed in Company patent applications, the Company may
have to participate in interference proceedings declared by the United States
Patent and Trademark Office to determine priority of invention, which could
result in substantial uncertainties and cost for the Company, even if the
eventual outcome is favorable to the Company. There can be no assurance that the
Company's patents, if issued, would be held valid by a court of competent
jurisdiction.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have been issued
patents relating to cell therapy and encapsulation and other technologies
potentially relevant to or required by the Company's expected products. In
particular, a third party has informed the Company that it will receive a U.S.
patent which such third party asserts relates to cells for alleviating chronic
pain in humans. The Company cannot predict which, if any, of such applications
will issue as patents or the claims which might be allowed. The Company is aware
that a number of companies have filed applications relating to cell
encapsulation. The Company is also aware of a number of patent applications and
patents relating to cell encapsulation or claiming use of genetically modified
cells to treat disease, disorder or injury. The Company also cannot predict the
impact of the application of existing patent applications and patents on future
unencapsulated products. The Company is aware of one issued patent to a
competitor claiming certain methods for treating defective, diseased or damaged
cells in the mammalian CNS by grafting genetically modified donor cells from the
same mammalian species. The Company is also aware of third-party patents and
patent applications claiming rights to the neurotrophic factors (such as CNTF,
NT 4/5, Neurturin, and CT-1) which the Company hopes to deliver with its
technology, and to the production of these factors through the use of
genetically modified cells. The Company expects to use genetically modified
cells to produce these factors for use in its products.
16
17
The Company may also be required to seek licenses in regard to other cell
lines, the techniques used in creating or obtaining such cell lines, the
materials used in the manufacture of its implants or otherwise. If third-party
patents or patent applications contain claims infringed by the Company's
technology and such claims or claims in issued patents are ultimately determined
to be valid, there can be no assurance that the Company would be able to obtain
licenses to these patents at a reasonable cost, if at all, or be able to develop
or obtain alternative technology. If the Company is unable to obtain such
licenses at a reasonable cost, it may be adversely affected. There can be no
assurance that the Company will not be obliged to defend itself in court against
allegations of infringement of third-party patents. Patent litigation is very
expensive and could consume substantial resources and create significant
uncertainties. An adverse outcome in such a suit could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease using such technology.
The Company also relies upon trade secret protection for its confidential
and proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques, gain access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its trade secrets.
The Company's policy is to require its employees, consultants, significant
scientific collaborators and sponsored researchers to execute confidentiality
agreements upon the commencement of an employment or consulting relationship
with the Company. These agreements generally provide that all confidential
information developed or made known to the individual by the Company during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees and consultants, the agreements
generally provide that all inventions conceived by the individual in the course
of rendering services to the Company shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company in the event of
unauthorized use, transfer or disclosure of such information or inventions.
The Company has obtained rights from universities and research institutions
to technologies, processes and compounds that it believes may be important to
the development of its products. These agreements typically require the Company
to pay license fees, meet certain diligence obligations and, upon commercial
introduction of certain products, pay royalties. These include exclusive license
agreements with Brown University, Genentech, Inc. and NeuroSpheres, Ltd. to
certain patents and know-how regarding present and certain future developments
in encapsulation technology and neural stem cells, respectively. The Company's
licenses may be canceled or converted to nonexclusive licenses if the Company
fails to use the relevant technology or the Company breaches its agreement. Loss
of such licenses could expose the Company to the risks of third-party patents
and/or technology. There can be no assurance that any of these licenses will
provide effective protection against the Company's competitors.
COMPETITION
The Company's initial products are expected to compete with a variety of
therapeutic products and procedures. Major pharmaceutical companies currently
offer a number of pharmaceutical products to treat chronic pain, Parkinson's
disease, ALS and other diseases for which the Company's technology may be
applicable, and several companies are developing methods to deliver products
into the CNS. The Company believes that its products, if successfully developed,
will compete with these products principally on the basis of improved and
extended efficacy and safety and the overall economic benefit to the health care
system offered by such products. However, many pharmaceutical and biotechnology
companies are investigating new drugs and therapeutic approaches to treat
neurodegenerative diseases, which may achieve new and better efficacy profiles,
extend the therapeutic window, alter the prognosis of these diseases or prevent
their onset.
The market for therapeutic products that address such diseases is large,
and competition is intense and is expected to increase. The Company's most
significant competitors are expected to be fully integrated pharmaceutical
companies and more established biotechnology companies. Such competitors have
significant resources and expertise in research and development, manufacturing,
testing, obtaining regulatory approvals and marketing and also have
significantly greater capital resources. Smaller companies may also prove to be
significant competitors, particularly through collaborative arrangements with
large pharmaceutical or biotechnology companies. Many of these competitors have
significant products approved or in development which could be competitive with
the Company's potential products, and also operate large, well-funded research
and development programs. In addition, the Company competes with other companies
and institutions for highly qualified scientific and management personnel.
The Company's products to treat chronic pain, if successfully developed,
may experience competition from epidural and intrathecal opiates, such as
morphine and its analogs, and from adjuvant analgesics, antidepressants and
anticonvulsants, as well as from new therapeutics under development such as SNX
111, a conopeptide. New delivery and dose control methods for traditional pain
treatments, such as morphine pumps, may also compete with the Company's
products.
17
18
The Company's products to treat Parkinson's disease, if successfully
developed, may compete with orally administered drugs which contain L-dopa, cell
transplantation, ablative and stimulation procedures and new drugs under
development. Neurotrophic factors delivered to the patient other than with the
Company's encapsulation technology, such as by gene therapy, also represent
potential products that may compete with the Company's products. In addition,
certain companies are attempting to develop gene therapies including products
(which may or may not involve neurotrophic factors) for the treatment of a
number of neurodegenerative diseases, including Parkinson's disease.
The FDA has recently approved a drug to treat ALS and applications for
approval of other products are pending. CytoTherapeutics believes that the only
approved drug for ALS, Riluzole, will not represent significant competition for
any product that demonstrates reasonable efficacy.
There can be no assurance that the Company's competitors will not succeed
in developing technologies and products that are more effective than those being
developed by the Company or that would render the Company's technology obsolete
or noncompetitive. The Company may also face competition from companies which
have filed patent applications relating to cell encapsulation and the use of
genetically modified cells to treat disease, disorder or injury. The Company may
be required to seek licenses from these competitors in order to commercialize
certain of its proposed products and there can be no assurance that the Company
will be able to obtain such licenses at a reasonable cost, if at all.
Any product that the Company succeeds in developing and for which it gains
regulatory approval must then compete for market acceptance and market share.
For certain of the Company's potential products, an important competitive factor
will be the timing of market introduction of competitive products. Accordingly,
the Company expects that an important competitive factor will be the relative
speed with which the Company and its competitors can develop products, complete
the clinical testing and approval processes and supply commercial quantities of
a product to market. With respect to clinical testing, competition may delay
progress by limiting the number of clinical investigators and patients available
to test the Company's potential products.
Competition for the Company's products is also expected to be based on
product efficacy, safety, the timing and scope of regulatory approvals
including, in certain instances, obtaining marketing exclusivity under the
Orphan Drug Act, availability of supply, marketing and sales capability,
reimbursement coverage, price and patent and technology position. There can be
no assurance that the Company's technology, if fully developed, will become
commercially viable.
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's potential products and its
research and development activities are and will continue to be subject to
regulation for safety and efficacy by numerous governmental authorities in the
United States and other countries. In the United States, pharmaceuticals,
biologicals and medical devices are subject to rigorous FDA regulation. The
Federal Food, Drug and Cosmetic Act, as amended, and the Public Health Service
Act, as amended, the regulations promulgated thereunder, and other federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, export, record keeping,
approval, marketing, advertising and promotion of the Company's potential
products. Product development and approval within this regulatory framework
takes a number of years and involves substantial uncertainty combined with the
expenditure of substantial resources.
Three branches of the FDA, the Center for Drug Evaluation and Research, the
Center for Biologics Evaluation and Research and the Center for Devices and
Radiological Health, review and approve drugs, biologics and devices,
respectively. The FDA has indicated to the Company that the Center for Biologics
Evaluation and Research will have primary jurisdiction for premarket review of
the Company's potential products that utilize the Company's encapsulated cell
technology. However, the FDA has also indicated that the Center for Drug
Evaluation and Research and the Center for Devices and Radiological Health will
play a role in the agency's review of the Company's potential products. In
addition, the FDA has published certain guidelines regarding living cells and
their transplantation and has begun to develop guidelines for the regulation of
xenotransplantation of cells and organs.
The steps required before the Company's potential products may be marketed
in the United States include (i) preclinical laboratory and animal tests, (ii)
the submission to the FDA of an application for an Investigational New Drug
Exemption ("IND"), which must become effective before U.S. human clinical trials
may commence, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the product, (iv) the submission to the FDA
of a marketing authorization application(s) and (v) FDA approval of the
application(s) prior to any commercial sale or shipment of the drug. Biologic
product manufacturing establishments located in certain states also may be
subject to separate regulatory and licensing requirements.
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19
Preclinical tests include laboratory evaluation of the product and animal
studies to assess the potential safety and efficacy of the product and its
formulation as well as the quality and consistency of the manufacturing process.
The results of the preclinical tests are submitted to the FDA as part of an IND,
and the IND becomes effective 30 days following its receipt by the FDA, absent
questions, requests for delay or objections from the FDA.
Clinical trials involve the evaluation of the product in healthy volunteers
or in patients under the supervision of a qualified principal physician.
Clinical trials are conducted in accordance with protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Any product administered in a U.S. clinical
trial must be manufactured in accordance with cGMP. Each protocol is submitted
to the FDA as part of the IND. The protocol for each clinical study must be
approved by an independent Institutional Review Board ("IRB") at the institution
at which the study is conducted and the informed consent of all participants
must be obtained. The IRB will consider, among other things, the existing
information on the product, ethical factors, the safety of human subjects, the
potential benefits of therapy and the possible liability of the institution.
Clinical development is traditionally conducted in three sequential phases.
The phases may overlap, however. In Phase I, products are typically introduced
into healthy human subjects or into selected patient populations to test for
safety (adverse reactions), dosage tolerance, absorption and distribution,
metabolism, excretion and clinical pharmacology. Phase II involves studies in a
limited patient population to (i) determine the efficacy of the product for
specific targeted indications and populations, (ii) determine optimal dosage and
dosage tolerance and (iii) identify possible adverse effects and safety risks.
When a dose is chosen and a candidate product is found to be effective and to
have an acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to conclusively demonstrate clinical efficacy and to test further for
safety within an expanded patient population, generally at multiple study sites.
In certain instances, as may be the case with the Company's potential products,
the FDA permits Phase I clinical trials to be conducted using a small number of
patients instead of healthy volunteers. The FDA continually reviews the clinical
trial plans and results and may suggest changes or may require discontinuance of
the trials at any time if significant safety issues arise. The results of the
preclinical studies and clinical studies are submitted to the FDA in the form of
a marketing approval authorization application.
The testing and approval process is likely to require substantial time,
effort and expense, and there can be no assurance that any FDA approval will be
granted on a timely basis, if at all. The time to approval is affected by a
number of factors, including relative risks and benefits demonstrated in
clinical trials, the availability of alternative treatments and the severity of
the disease. Additional animal studies or clinical trials may be requested
during the FDA review period and may delay marketing approval. After FDA
approval for the initial indications and requisite approval of the manufacturing
facility, further clinical trials may be necessary to gain approval for the use
of the product for additional indications. The FDA may also require
postmarketing testing and surveillance to monitor for adverse effects, which can
involve significant expense or grant only conditional approvals.
Among the conditions for product licensure is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMP. Even after product licensure approval, the manufacturer must comply
with cGMP on a continuing basis, and what constitutes cGMP may change as the
state of the art of manufacturing changes. Domestic manufacturing facilities are
subject to regular FDA inspections for cGMP compliance (normally at least every
two years), and foreign manufacturing facilities are subject to periodic FDA
inspections or inspections by the foreign regulatory authorities with reciprocal
inspection agreements with the FDA. Domestic manufacturing facilities may also
be subject to inspection by foreign authorities.
The Orphan Drug Act provides incentives to drug manufacturers to develop
and manufacture drugs for the treatment of diseases or conditions that affect
fewer than 200,000 individuals in the United States. Orphan drug status can also
be sought for treatments for diseases or conditions that affect more than
200,000 individuals in the United States if the sponsor does not realistically
anticipate its product becoming profitable from sales in the United States. The
Company expects to apply for orphan drug status for certain of its therapies.
Under the Orphan Drug Act, a manufacturer of a designated orphan product can
seek tax benefits, and the holder of the first FDA approval of a designated
orphan product will be granted a seven-year period of marketing exclusivity in
the United States for that product for the orphan indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same compound for the same indication, it would not
prevent other types of products from being approved for the same use including
in some cases, slight variations on the originally designated orphan product.
Legislation has been introduced in the U.S. Congress in the past, and is likely
to be introduced again in the future, that would restrict the extent and
duration of the market exclusivity of an orphan drug, and there can be no
assurance that the benefits of the existing statute will remain in effect.
Export of the Company's investigational products is governed by laws and
regulations administered by the FDA. The Company has sought and received FDA
clearance for export of finished products for clinical trials outside the United
States. However, both the Company's past and future export practices could be
subject to FDA challenge and there can be no assurance that the FDA would agree
that such practices are in compliance with applicable law and regulations or
that such exports would be allowed.
19
20
Proposed regulations of the FDA and other governmental agencies would place
restrictions, including disclosure requirements, on researchers who have a
financial interest in the outcome of their research. Under the proposed
regulations, the FDA could also apply heightened scrutiny to, or exclude the
results of, studies conducted by such researchers when reviewing applications to
the FDA which contain such research. Certain of the Company's collaborators have
stock options or other equity interests in the Company that could subject such
collaborators and the Company to the proposed regulations.
There has been significant concern by regulatory agencies about the risks
of cell transplantation. For example, the United Kingdom has adopted a
moratorium on xenotransplantation pending further research and discussion and
the EC Commission has introduced a ban in the Member Countries of the European
Union on the use of "high risk material" from cattle and sheep in the
manufacture of pharmaceuticals (this ban would apparently include the cells used
in the Company's pain program). The FDA has also recently published proposed
guidelines which impose significant constraints on the conduct of clinical
trials utilizing xenotransplantation. These actions have been taken pursuant to
the expressed need to protect against the spread of diseases from nonhuman cells
to humans. In addition, the FDA has published a "Proposed Approach to Regulation
of Cellular and Tissue-Based Products" in which the FDA proposes a plan for
regulating certain products based on human cells. The Company cannot presently
determine the effect of such actions nor what other actions may be taken;
restrictions on the testing or use of cells (whether nonhuman or human) as human
therapeutics could adversely affect the Company's product development programs
and the Company.
In addition to safety regulations enforced by the FDA, the Company is also
subject to regulations under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act and other present
and potential future supranational, foreign, federal, state and local
regulations.
Outside the United States, the Company will be subject to regulations which
govern the import of drug and device products from the United States or other
manufacturing sites and foreign regulatory requirements governing human clinical
trials and marketing approval for its products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursements vary
widely from country to country. In particular, the European Union ("EU") is
revising its regulatory approach to high-tech products and representatives from
the United States, Japan and the EU in the process or harmonizing and making
more uniform the regulations for the registration of pharmaceutical products in
these three markets. Although certain of such proposals have been adopted, the
Company cannot anticipate what effect the adoption of the final forms of this
harmonization or the changes to the EU high-tech procedure may have.
REIMBURSEMENT AND HEALTHCARE COST CONTROL
The Company's ability to commercialize products successfully may depend in
part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and others both in the United States and
abroad. Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products. Reimbursement limitations or prohibitions with
respect to any product developed by the Company could adversely affect the
Company's ability to establish and maintain price levels sufficient for
realization of an appropriate return on its investment in developing new
therapies. Government and other third-party payers are increasingly attempting
to contain healthcare costs by limiting both coverage and the level of
reimbursement for new therapeutic products approved for marketing by the FDA and
by refusing, in some cases, to provide any coverage for uses of approved
products for disease indications for which the FDA has not granted marketing
approval. If adequate coverage and reimbursement levels are not provided by
third-party payers for uses of the Company's therapeutic products, the market
acceptance of these products would be adversely affected.
The revenues and profitability of healthcare-related companies may be
affected by the continuing efforts of governmental and third-party payers to
contain or reduce the cost of healthcare through various means. For example, in
certain foreign markets pricing or profitability of prescription pharmaceuticals
is subject to government control. In the United States, there have been, and the
Company expects that there will continue to be, a number of federal and state
proposals to implement government control over healthcare costs. Efforts at
healthcare reform are likely to continue in future legislative sessions. It is
uncertain what legislative proposals will be adopted or what actions federal,
state or private payers for healthcare goods and services may take in response
to healthcare reform proposals of legislation. The Company cannot predict the
effect healthcare reforms may have on its business. Any such reforms as well as
the uncertainty their proposal has engendered could have a material adverse
effect on the Company.
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EMPLOYEES
As of March 10, 1997, the Company had 127 full-time employees,
including 27 employees with Ph.D. or M.D. degrees. Approximately 100 employees
work in research and development, regulatory affairs, prototype manufacturing,
quality assurance and control and laboratory support services. A number of the
Company's employees have held positions with other biotechnology or
pharmaceutical companies or have worked in university research programs. No
employees are covered by collective bargaining agreements.
SCIENTIFIC ADVISORY BOARD
Members of the Company's Scientific Advisory Board provide the Company with
strategic guidance in regard to its research and product development programs,
as well as assistance in recruiting employees and collaborators. Each Scientific
Advisory Board member has entered into a consulting agreement with the Company.
These consulting agreements typically specify the compensation to be paid to the
consultant and require that all information about the Company's products and
technology be kept confidential. All of the Scientific Advisory Board members
are employed by employers other than the Company and may have commitments to or
consulting or advising agreements with other entities which may limit their
availability to the Company. The Scientific Advisory Board members have
generally agreed, however, for so long as they serve as consultants to the
Company, not to provide any services to any other entities which would conflict
with the services the member provides to the Company. Members of the Scientific
Advisory Board offer consultation on specific issues encountered by the Company
as well as general advice on the directions of appropriate scientific inquiry
for the Company. In addition, certain Scientific Advisory Board members assist
the Company in assessing the appropriateness of moving the Company's projects to
more advanced stages. The following persons are members of the Company's
Scientific Advisory Board:
Patrick Aebischer, M.D., Ph.D., is the Director of the Gene Therapy Center
at the Centre Hospitalier Universitaire Vaudois, Lausanne, Switzerland, and
Professor of Biomaterials, Brown University. He is also Professor of the Swiss
Polytechnical School in Lausanne. Dr. Aebischer is a founding scientist of the
Company and a member of its Board of Directors and Chairman of the Board of
Modex Therapeutiques S.A.
James M. Anderson, M.D., Ph.D., Professor of Pathology, Institute of
Pathology, Case Western Reserve University, Cleveland, Ohio.
Donald B. Calne, Ph.D., Professor of Neurology, University of Vancouver,
Vancouver, Canada.
Constance L. Cepko, Ph.D., Professor, Department of Genetics, Harvard
Medical School, Boston, Massachusetts.
William F. Hickey, M.D., Chairman of Pathology, Dartmouth-Hitchcock Medical
Center, Lebanon, New Hampshire.
Rakesh K. Jain, Ph.D., Professor of Health Science & Technology, Harvard
Medical School, Massachusetts General Hospital and Massachusetts Institute of
Technology, Boston, Massachusetts.
Alan Michaels, Sc.D., Distinguished University Professor, Emeritus, North
Carolina State University, Durham, North Carolina.
Peter Morris, Ph.D., Department of Surgery, Oxford University, Oxford,
England.
Richard Penn, M.D., Professor of Neurosurgery, Rush Presbyterian, Chicago,
Illinois.
David A. Tirrell, Ph.D., Professor of Polymer Science, University of
Massachusetts, Amherst, Massachusetts.
Tony L. Yaksh, Ph.D., Professor and Vice Chairman for Research, Department
of Anesthesiology, University of California, San Diego, California.
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ITEM 2.
PROPERTIES
The Company's research laboratories and administrative offices are located
in two adjacent leased facilities in Providence, Rhode Island, where it occupies
approximately 33,000 s.f. The facilities are leased pursuant to agreements which
the Company may terminate upon nine months' notice. In addition, the Company has
leased a 21,000 s.f. pilot manufacturing facility and a 3,000 s.f. cell
processing facility for its pain program in Lincoln, Rhode Island. This facility
was financed by bonds issued by the Rhode Island Industrial Facilities
Corporation. The Company has also leased additional space near its pilot plant
for expanded research and development.
Due to an anticipated increase in the number of employees, the Company's
current facilities may not be sufficient to accommodate the Company's needs past
the end of 1997.
As a result of the need for more space, the Company has purchased land and
a building in Lincoln, Rhode Island, near its pilot plant facility and has begun
renovation of the purchased building and construction of a second building to
provide 63,000 square feet of new space. The Company expects the new facilities
to be ready for occupancy in the fourth quarter of 1997. The renovation and
construction are being financed under a bank loan. The Company expects that the
new facilities will provide sufficient space for at least the next two years.
ITEM 3.
LEGAL PROCEEDINGS
The Company has filed an arbitration proceeding with the International
Chamber of Commerce in Toronto, Canada, against NeuroSpheres, Ltd. pursuant to
the dispute settlement provisions of the Research Agreement between the Company
and NeuroSpheres. The Company is seeking a determination of the particular kinds
of cells CytoTherapeutics has licensed under the agreement. There is a court
proceeding brought by NeuroSpheres to add claims to the arbitration in the Court
of Queen's bench, Calgary, Alberta. In addition, the Company has filed a
complaint and request for injunctive relief to prevent NeuroSpheres from
licensing to third parties' rights NeuroSpheres has licensed exclusively to
CytoTherapeutics. This action was filed in the U.S. District Court for the
District of Rhode Island.
CytoTherapeutics believes that NeuroSpheres' proposed interpretation of the
definition of the cells that are licensed to the Company under the Research
Agreement, which is the basis of the dispute, is legally and scientifically
without merit.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock is listed on the NASDAQ National Market under
the Symbol "CTII". The following table sets forth, for the periods indicated,
the high and low sales price as reported by the NASDAQ National Market for the
Company's Common Stock.
High Low
------------------------
1997
Quarter Ended
March 31, 1997 (through March 10, 1997) .................... $10 7\8 $ 8 7\8
- -------------------------------------------------------------------------------------------------------
1996
Quarter Ended
December 31, 1996 .......................................... $11 $ 7 5\8
September 30, 1996 ......................................... 12 5\8 7 1\8
June 30, 1996 .............................................. 15 1\2 10 5\8
March 31, 1996 ............................................. 18 3\4 12 3\4
- -------------------------------------------------------------------------------------------------------
1995
Quarter Ended
December 31, 1995 .......................................... $18 1\4 $ 8 1\4
September 30, 1995 ......................................... 11 3\8 6 1\4
June 30, 1995 7 5\8 5 3\4
March 31, 1995 ............................................. 7 1\8 3 1\4
- -------------------------------------------------------------------------------------------------------
As of March 10, 1997, there were approximately 226 holders of record of the
Common Stock. The Company estimates that there are approximately 3,800
beneficial holders of the Company's Common Stock.
On December 11, 1996, the Company sold 829,171 shares of Common Stock to
Genentech in connection with the Company's collaboration agreement with
Genentech for $10.01 per share. The shares were issued in a transaction exempt
from registration pursuant to Section 4(2) of the Securities Act.
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ITEM 6.
SELECTED FINANCIAL DATA
Year Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenue from collaborative agreements .................. $ 7,104 $11,761 $ 1,250 $ 190 $ 325
Research and development expenses ...................... 17,130 14,730 13,514 11,807 8,204
Loss on other investment ............................... -- (2,331) -- -- --
Gain on sale of technology ............................. -- -- -- 1,780 --
Net loss ............................................... (13,759) (8,891) (16,461) (12,544) (9,975)
Net loss per share (1) ................................. (0.89) (0.69) (1.52) (1.47) (1.33)
Shares used in computing net loss per share (1) ........ 15,430 12,799 10,833 8,541 7,474
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
(in thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Cash, cash equivalents and marketable securities ....... $ 42,607 $44,192 $ 19,138 $30,855 $27,208
Total assets ........................................... 58,397 56,808 32,194 40,996 35,239
Long-term debt, including capitalized leases ........... 8,223 5,441 5,641 3,428 3,896
Redeemable common stock ................................ 8,159 -- -- -- --
Stockholders' equity ................................... 34,747 45,391 22,637 34,509 29,203
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) See Note 2 to consolidated financial statements.
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ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of CytoTherapeutics, Inc. should be read in conjunction with the
accompanying consolidated financial statements and the related footnotes
thereto.
OVERVIEW
Since its inception in August 1988, the Company has been primarily
engaged in research and development of human therapeutic products. No revenues
have been derived from the sale of any products, and the Company does not expect
to receive revenues from product sales for at least several years. The Company
expects that its research and development expenditures will increase
substantially in future years as research and product development efforts
accelerate and clinical trials are initiated or broadened. The Company has
incurred annual operating losses since inception and expects to incur
substantial operating losses in the future. As a result, the Company is
dependent upon external financing from equity and debt offerings and revenues
from collaborative research arrangements with corporate sponsors to finance its
operations. The Company's results of operations have varied significantly from
year to year and quarter to quarter and may vary significantly in the future due
to the occurrence of material, nonrecurring events, including without
limitation, the receipt of one-time, nonrecurring licensing payments.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Revenues from collaborative agreements totaled $7,104,000, $11,761,000 and
$1,250,000 for the years ending December 31, 1996, 1995 and 1994, respectively.
Revenues in 1996 and 1995 were earned solely from a Development, Marketing and
License Agreement with Astra AB, which was signed in March 1995. Included in the
1995 revenue was a one-time licensing fee from Astra of $5,000,000. During 1994,
the Company derived research revenue from an agreement with Genentech, Inc.
Research and development expenses totaled $17,130,000 in 1996, as compared
to $14,730,000 in 1995 and $13,514,000 in 1994. The increase of $2,400,000, or
16%, from 1995 to 1996 was primarily attributable to increases in the number of
research, development and production staff, spending for company-sponsored
research at academic and other institutions and scientific consulting. The
increase of $1,216,000, or 9%, from 1994 to 1995 was principally due to an
increase in the number of research and development staff, as well as increased
occupancy costs related to the expansion of pilot manufacturing and research
facilities.
General and administrative expenses were $5,679,000 for the year ended
December 31, 1996, compared with $4,620,000 in 1995 and $4,723,000 in 1994. The
increase of $1,059,000, or 23%, from 1995 to 1996 was principally due to
increases in the number of administrative personnel, one-time hiring bonuses, as
well as, consulting costs attributable to the establishment of Modex
Therapeutiques S.A., a 50%-owned Swiss subsidiary. The decrease of $103,000, or
2%, from 1994 to 1995 was primarily attributable to the absence of a one-time
expense of $275,000 incurred in 1994 related to the exercise of a release from
the Company's further obligations in connection with its collaboration with
Medtronic, partially offset by legal expenses incurred in 1995 in connection
with the closing of the collaborative agreement with Astra.
Interest income for the years ended December 31, 1996, 1995 and 1994
totaled $2,260,000, $1,714,000 and $963,000, respectively. The average cash and
investment balances were $37,600,000, $26,907,000 and $24,537,000 in 1996, 1995
and 1994, respectively. The increase in interest income from 1995 to 1996 was
principally due to higher average balances. The increase in interest income from
1995 to 1994 was attributable to significantly higher interest rates, as well as
higher average balances.
In 1996, interest expense was $618,000, compared with $685,000 in 1995 and
$437,000 in 1994. The decrease in 1995 to 1996 is principally due to decreasing
balances of capitalized lease obligations only partially offset by additional
collateralized loan obligations. The increases in 1995 and 1994 were primarily
attributable to additional facility and equipment financings related to the
construction and expansion of the Company's pilot manufacturing facilities
through capitalized leases, collateralized loans and direct financing
transactions.
In December 1995, the Company recognized a loss on its investment in
Neocrin Company of $2,330,848, as it determined that the carrying value in its
investment had been permanently impaired. The valuation reserve of $2,330,848
reduced the valuation of the investment to $200,000.
25
26
The net loss in 1996, 1995 and 1994 was $13,759,000, $8,891,000 and
$16,461,000, respectively. The loss per share was $0.89, $0.69 and $1.52 in
1996, 1995 and 1994, respectively. The decreased loss in 1996 and 1995 is
principally due to revenue earned for research funding under the Company's
agreement with Astra. The 1995 loss also contains revenue for the nonrecurring
licensing payment of $5,000,000 from Astra.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through the
sale of common and preferred stock, the issuance of long-term debt and
capitalized lease obligations, revenues from collaborative agreements, research
grants and interest income.
The Company had unrestricted cash, cash equivalents and marketable
securities totaling $42,607,000 at December 31, 1996. Cash equivalents and
marketable securities are invested in agencies of the United States government,
investment grade corporate bonds and money market funds.
The Company currently occupies all of its laboratory and administrative
office space, other than that at its pilot manufacturing site, under the terms
of operating leases subject to termination upon nine months' notice by the
Company. As a result of an anticipated increase in the number of employees, the
Company's current facilities will not be sufficient to accommodate the Company's
needs past the end of 1997. The Company has purchased land and a building and
began construction of a new headquarters and laboratory facility in the fourth
quarter of 1996. The total cost of the project is estimated to be $7,600,000.
In October 1996, the Company obtained financing of $5,500,000 from a bank,
secured by a mortgage on the new facility. The Company had borrowed $1,450,000
under this agreement as of December 31, 1996. Any unused commitment expires
October 31, 1997. Quarterly principal payments of 1/40 of the loan balance
commence September 30, 1997 with the balance due at maturity, October 2001. The
loan agreement requires the Company provide cash collateral in the amount of 25%
of the obligation if the Company's unencumbered cash balance falls below
$25,000,000, 50% cash collateral if the Company's unencumbered cash balance
falls below $20,000,000 and full cash collateral if the Company's unencumbered
cash balance falls below $15,000,000. The Company expects to pay the remaining
costs from its funds.
In May 1996, the Company secured an equipment loan facility with a bank in
the amount of $2,000,000. The Company has borrowed $741,000 under this agreement
as of December 31, 1996. The loan requires interest payments only for the first
year; principal payments are payable over a three-year period beginning August
1997. Any unused commitment expires on May 15, 1997. The loan is secured by
equipment purchased with the proceeds of the credit facility.
In February 1997, CytoTherapeutics and Cognetix, Inc. entered into a
Collaboration and Development Agreement to screen selected peptides isolated by
Cognetix for possible development into therapeutic products aimed at a broad
range of human disease states using CytoTherapeutics' cell-based delivery
technology. Based on IN VITRO data, a screening committee comprised of an equal
number of representatives from each of CytoTherapeutics and Cognetix will
determine which compounds to select for IN VIVO studies and possible clinical
trials. The companies will generally share expenses associated with the
development of any specific product candidate and any resulting revenues, except
as otherwise determined on a product-by-product basis. As part of the agreement
with Cognetix, CytoTherapeutics has purchased $250,000 of Cognetix preferred
stock and subject to certain milestones, is obligated to purchase a total of
$1,750,000 of Cognetix stock over the next year.
In November 1996, the Company signed collaborative development and
licensing agreements with Genentech, Inc. relating to the development of
products using the Company's technology to deliver certain of Genentech's
proprietary growth factors to treat Parkinson's disease, Huntington's disease
and amyotrophic lateral sclerosis ("ALS").
Under the terms of the agreement for Parkinson's disease, Genentech
purchased 829,171 shares of common stock for $8,300,000 to fund development of
products to treat Parkinson's disease. Additional equity purchases and other
funding by Genentech is available for future clinical development as determined
by the parties. If the Parkinson's program is terminated and the funds the
Company received from the sale of stock to Genentech pursuant to the Parkinson's
agreement exceed the expenses incurred by the Company in connection with such
studies by more than $1 million, Genentech has the right to require the Company
to repurchase from Genentech shares of Company Common Stock having a value equal
to the amount of the overfunding, based upon the share price paid by Genentech.
As such, the Common Stock purchased by Genentech is classified as Redeemable
Common Stock until such time as the related funds are expended on the program.
Upon commercialization, Genentech and the Company will share profits in the
United States at an agreed-upon percentage, and Genentech will pay the Company a
royalty based upon deals outside the United States. The Company retains
manufacturing rights and will be paid manufacturing costs for products sold.
26
27
The Company also licensed certain growth factors for the treatment of both
Huntington's disease and amyotrophic lateral sclerosis ("ALS"). Under the terms
of the agreements, the Company is responsible for conducting and funding all
preclinical and clinical development, subject to specified rights of Genentech
to participate in the development and marketing of the proposed products. Should
Genentech share in the development cost of the proposed products, the companies
will share profits at a negotiated percentage upon commercialization. Should
Genentech elect not to participate in the development, upon commercialization,
the Company will pay Genentech an agreed-upon royalty based upon sales. These
agreements supersede the Development Collaboration and License Agreement between
the Company and Genentech entered into in March 1994.
In July 1996, the Company invested $2 million in Modex, a 50%-owned Swiss
subsidiary, to pursue extensions of the Company's encapsulated-cell technology
for specific applications outside the central nervous system, with a commitment
to invest Sfr 2.4 million on the second anniversary of the agreement if Modex
has, prior to that time, achieved one or more specified scientific milestones.
An investment fund, managed by a Swiss private bank, has invested $2 million in
Modex, with a commitment to invest Sfr 1.2 million on the second anniversary of
the agreement, in exchange for a 15% stake in the company. The remaining 35% of
Modex is owned by the scientific founders of Modex. The Company has granted to
Modex an exclusive, royalty-bearing license to the Company's proprietary
encapsulated-cell technology for three applications outside the central nervous
system: diabetes, obesity and anemia. Modex granted the Company an exclusive
royalty-bearing license to any technology developed or obtained by Modex for
application to diseases, conditions and disorders which affect the central
nervous system. In addition to its royalty obligations, the Company is also
obligated to issue to Modex up to 300,000 shares of the Company's Common Stock
on the achievement by Modex of certain scientific milestones. Substantially all
of these shares are expected to be awarded by Modex as incentive compensation to
Modex's founding scientists and other researchers upon achievement of such
milestones.
Under the terms of its agreement with the investment fund, during the first
two years following closing, the Company has the right to acquire the fund's
interest in Modex for the greater of a 30% annual return or Sfr 3.6 million.
Following this two-year period, the Company has the right to purchase the fund's
interest at 110% of fair market value. Following the second anniversary of the
agreement and prior to the tenth anniversary of the agreement, if no public
market exists for the common stock of Modex, the fund has the right to require
the Company to purchase the fund's interest in Modex for 90% of the fair market
value of such interest. Any purchase made by the Company under any of the
circumstances described in this paragraph may be made at the Company's option in
cash or shares of the Company's Common Stock valued at the market price at the
time of purchase. The Company also has the right to acquire, and the founders
have the right to require the Company to acquire, the founders' initial equity
interest in Modex in exchange for the issuance of an aggregate of approximately
92,000 shares of the Company's Common Stock.
In March 1995, the Company signed a collaborative research and development
agreement with Astra for the development and marketing of certain
encapsulated-cell products to treat pain. Astra made an initial, nonrefundable
payment of $5,000,000 and may make up to $16,000,000 in additional payments
subject to the achievement of certain development milestones. Under the
agreement, the Company is obligated to conduct certain research and development
pursuant to a four-year research plan agreed upon by the parties. Over the term
of the research plan, the Company expects to receive annual research payments
from Astra of $5 million to $7 million, which the Company expects should
approximate the research and development costs incurred by the Company under the
plan. Subject to the successful development of such products and obtaining
necessary regulatory approvals, Astra is obligated to conduct all clinical
trials of products arising from the collaboration and to seek approval for their
sale and use. Astra has the exclusive worldwide right to market products covered
by the agreement. Until the later of either the last to expire of all patents
included in the licensed technology or a specified fixed term, the Company is
entitled to a royalty on the worldwide net sales of such products in return for
the license granted to Astra and the Company's obligation to manufacture and
supply products. Astra has the right to terminate the agreement after April 1,
1998.
In March 1994, the Company entered into a contract research and license
agreement with NeuroSpheres, Ltd. Under the agreement, the Company obtained from
NeuroSpheres an exclusive worldwide royalty-bearing license for the commercial
development and use of certain neural stem cells for transplantation to treat
human disease. Terms of the agreement provide future research funding of up to
$250,000 through February 1998 based upon performance of certain obligations by
NeuroSpheres. Upon the achievement of certain milestones, the Company will make
payments to NeuroSpheres totaling a maximum of $3,750,000, payable at
NeuroSpheres' option, in cash or in shares of the Company's common stock at a
price of $12.50 per share. Upon commercial sale of a product utilizing the
licensed technology, the Company is obligated to pay a range of royalties based
on product revenues and market share, subject to certain minimum royalties. In
order to maintain exclusivity, the Company is also obligated to expend
additional amounts to support research related to development of products under
the agreement.
27
28
The Company has instituted an arbitration proceeding in Alberta, Canada,
against NeuroSpheres, Ltd. pursuant to the dispute settlement provisions of the
research agreement between the Company and NeuroSpheres. The Company is seeking
a determination of the definition of the cells to which CytoTherapeutics has
rights under the agreement. In addition, the Company has filed a complaint and
request for injunctive relief to prevent NeuroSpheres from licensing to third
parties rights it has licensed exclusively to CytoTherapeutics. This action was
filed in the United States District Court for the District of Rhode Island.
CytoTherapeutics believes that NeuroSpheres proposed interpretation of the
definition of the cells licensed is legally and scientifically without merit.
Substantial additional funds will be required to support the Company's
research and development programs, for acquisition of technologies and
intellectual property rights, for preclinical and clinical testing of its
anticipated products, pursuit of regulatory approvals, acquisition of capital
equipment, expansion of laboratory and office facilities, establishment of
production capabilities and for general and administrative expenses. Until the
Company's operations generate significant revenues from product sales, cash
reserves and proceeds from equity and debt offerings, and funding from
collaborative arrangements will be used to fund operations.
The Company intends to pursue opportunities to obtain additional financing
in the future through equity and debt financings, lease agreements related to
capital equipment, grants and collaborative research arrangements. The source,
timing and availability of any future financing will depend principally upon
equity market conditions, interest rates and, more specifically, on the
Company's continued progress in its exploratory, preclinical and clinical
development programs. There can be no assurance that such funds will be
available on favorable terms, if at all.
The Company expects that its existing capital resources, revenues from
collaborative agreements and income earned on invested capital will be
sufficient to fund its operations into the second half of 1998. The Company's
cash requirements may vary, however, depending on numerous factors. Lack of
necessary funds may require the Company to delay, scale back or eliminate some
or all of its research and product development programs or to license its
potential products or technologies to third parties.
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
A number of factors have affected and in the future could affect the
Company's results and could cause actual results and needs of the Company to
vary materially from forward-looking statements made in this Annual Report by
the Company on the basis of management's current expectations. The business in
which the Company is engaged is rapidly changing, extremely competitive and
involves a high degree of risk, and accuracy with respect to forward-looking
projections is difficult.
There can be no assurance that the substantial funding required by the
Company will be available (whether from new or existing corporate partnerships,
equity offerings or otherwise) when needed, if at all, or on terms acceptable to
the Company. None of the Company's products or proposed products has been
approved for commercial sale or entered Phase II or III clinical trials. Even if
the Company's proposed products appear to be promising at an early stage of
research or development, such products may later prove to be ineffective, have
adverse side effects, fail to receive necessary regulatory approvals, be
difficult or uneconomical to manufacture or market on a commercial scale, be
adversely affected by government price controls or limitations on reimbursement,
be precluded from commercialization by proprietary rights of third parties, be
subject to significant competition from other products or suffer delays in
development that could adversely affect their value. Cell transplantation is
subject to increasing regulation which may adversely affect the Company; in
particular, the use of xenogeneic cells has come under much more restrictive
regulation recently. Patent protection for the Company's products is important,
but highly uncertain. In addition, there can be no assurance that the Company
will be able to obtain the intellectual property needed to commercialize its
proposed products. For further information, see Exhibit 99 to the Company's
Annual Report on Form 10-K.
28
29
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
CytoTherapeutics, Inc.
We have audited the accompanying consolidated balance sheets of
CytoTherapeutics, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in redeemable stock and
stockholders' equity and cash flows for each of the three years in the
period ended 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of CytoTherapeutics, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/Ernst + Young LLP
Boston, Massachusetts
February 6, 1997, except for Note 17, as
to which the date is February 13, 1997
29
30
CytoTherapeutics, Inc.
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
---------------------------------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 19,921,584 $ 9,548,579
Marketable securities ............................................. 22,685,855 34,643,160
Accrued interest receivable ....................................... 653,190 793,215
Other current assets .............................................. 491,582 678,070
---------------------------------
Total current assets .................................................. 43,752,211 45,663,024
Property, plant and equipment, net .................................... 10,732,102 7,892,763
Other assets, net ..................................................... 3,912,430 3,251,718
---------------------------------
Total assets $ 58,396,743 $ 56,807,505
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 1,850,925 $ 623,968
Accrued expenses .................................................. 2,308,844 2,458,451
Deferred revenue .................................................. 1,859,092 1,750,000
Current maturities of capitalized lease obligations ............... 553,557 668,325
Current maturities of long-term debt .............................. 695,570 474,245
---------------------------------
Total current liabilities ............................................. 7,267,988 5,974,989
Capitalized lease obligations, less current maturities ................ 3,971,594 4,498,957
Long-term debt, less current maturities ............................... 4,251,008 942,181
Commitments and contingencies
Redeemable common stock, $.01 par value;
815,065 shares issued and outstanding at December 31, 1996 ....... 8,158,798 --
Stockholders' equity:
Convertible preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding ...................... -- --
Common stock, $.01 par value; 45,000,000 shares authorized;
15,614,333 and 15,176,997 shares issued and outstanding
at December 31, 1996 and 1995, respectively ....................... 156,144 151,770
Additional paid-in capital ........................................ 107,649,659 104,271,658
Accumulated deficit ............................................... (72,922,674) (59,163,536)
Unrealized gains on marketable securities ......................... 14,760 131,486
Cumulative translation adjustment ................................. (60,416) --
Deferred compensation ............................................. (90,118) --
---------------------------------
Total stockholders' equity ............................................ 34,747,355 45,391,378
---------------------------------
Total liabilities and stockholders' equity ............................ $ 58,396,743 $ 56,807,505
=================================
See accompanying notes to consolidated financial statements.
30
31
CytoTherapeutics, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1996 1995 1994
-----------------------------------------------------
Revenue from collaborative agreements ............... $ 7,104,284 $11,760,666 $ 1,250,000
Operating expenses:
Research and development ........................ 17,130,392 14,729,703 13,513,685
General and administrative ...................... 5,678,783 4,619,733 4,722,597
-----------------------------------------------------
22,809,175 19,349,436 18,236,282
-----------------------------------------------------
Loss from operations ................................ (15,704,891) (7,588,770) (16,986,282)
Other income (expense):
Interest income ................................. 2,259,886 1,713,849 962,942
Interest expense ................................ (618,213) (685,470) (437,345)
Other income .................................... 404,128 -- --
Currency exchange loss .......................... (100,048) -- --
Loss on other investment ........................ -- (2,330,848) --
-----------------------------------------------------
1,945,753 (1,302,469) 525,597
-----------------------------------------------------
Net loss ............................................ $(13,759,138) $(8,891,239) $(16,460,685)
=====================================================
Net loss per share .................................. $ (.89) $ (.69) $ (1.52)
=====================================================
Shares used in computing net loss per share ......... 15,429,564 12,799,008 10,833,008
=====================================================
See accompanying notes to consolidated financial statements.
31
32
CytoTherapeutics, Inc.
Consolidated Statements of Changes
in Redeemable Common Stock and Stockholders' Equity
Redeemable
Common Stock Common Stock Additional
------------------ ------------------ Paid-in Accumulated '
Shares Amount Shares Amount Capital Deficit
- ------------------------------------------------------- -------------------------------------------------------
Balances, January 1, 1994 -- $ -- 10,467,553 $104,676 $ 68,861,427 $(33,811,612)
Issuance of common stock -- -- 375,873 3,759 3,706,274 --
Exercise of stock options -- -- 160,142 1,601 441,257 --
Amortization of deferred
compensation -- -- -- -- -- --
Change in unrealized losses
on marketable securities -- -- -- -- -- --
Net loss -- -- -- -- -- (16,460,685)
- ------------------------------------------------------- -------------------------------------------------------
Balances,
December 31, 1994 -- -- 11,003,568 110,036 73,008,958 (50,272,297)
Issuance of common stock -- -- 4,070,598 40,706 30,797,086 --
Exercise of stock options -- -- 102,831 1,028 465,614 --
Amortization of deferred
compensation -- -- -- -- -- --
Change in unrealized
gains on marketable
securities -- -- -- -- -- --
Net loss -- -- -- -- -- (8,891,239)
- ------------------------------------------------------- -------------------------------------------------------
Balances,
December 31, 1995 -- -- 15,176,997 151,770 104,271,658 (59,163,536)
Issuance of common stock -- -- 168,260 1,683 1,526,118 --
Issuance of common stock
under the stock
purchase plan -- -- 18,338 184 140,557 --
Exercise of warrants -- -- 6,128 61 (61) --
Issuance of common stock
to consultants and employees -- -- 48,700 487 429,079 --
Common stock issued
pursuant to employee
benefit plan -- -- 13,719 137 162,231 --
Issuance of redeemable
common stock 829,171 8,300,000 -- -- -- --
Redeemable common stock lapses (14,106) (141,202) 14,106 141 141,061 --
Exercise of stock options -- -- 168,085 1,681 979,016 --
Amortization of deferred
compensation -- -- -- -- -- --
Change in unrealized gains
on marketable securities -- -- -- -- -- --
Change in cumulative
translation adjustment -- -- -- -- -- --
Net loss -- -- -- -- -- (13,759,138)
- ------------------------------------------------------- -------------------------------------------------------
Balances,
December 31, 1996 815,065 $8,158,798 15,614,333 $156,144 $107,649,659 $(72,922,674)
======================================================= =======================================================
32
33
Unrealized
Gains (Losses) Cumulative Total
on Marketable Translation Deferred Stockholders
Securities Adjustments Compensation Equity
- -------------------------------------------------------------------------------------------
Balances, January 1, 1994 $ -- $ -- $(645,291) $ 34,509,200
Issuance of common stock -- -- -- 3,710,033
Exercise of stock options -- -- -- 442,858
Amortization of deferred
compensation -- -- 536,020 536,020
Change in unrealized losses
on marketable securities (100,356) -- -- (100,356)
Net loss -- -- -- (16,460,685)
- -------------------------------------------------------------------------------------------
Balances,
December 31, 1994 (100,356) -- (109,271) 22,637,070
Issuance of common stock -- -- -- 30,837,792
Exercise of stock options -- -- -- 466,642
Amortization of deferred
compensation -- -- 109,271 109,271
Change in unrealized
gains on marketable
securities 231,842 -- -- 231,842
Net loss -- -- -- (8,891,239)
- -------------------------------------------------------------------------------------------
Balances,
December 31, 1995 131,486 -- -- 45,391,378
Issuance of common stock -- -- -- 1,527,801
Issuance of common stock
under the stock
purchase plan -- -- -- 140,741
Exercise of warrants -- -- -- --
Issuance of common stock
to consultants and employees -- -- (185,201) 244,365
Common stock issued
pursuant to employee
benefit plan -- -- -- 162,368
Issuance of redeemable
common stock -- -- -- --
Redeemable common stock lapses -- -- -- 141,202
Exercise of stock options -- -- -- 980,697
Amortization of deferred
compensation -- -- 95,083 95,083
Change in unrealized gains
on marketable securities (116,726) -- -- (116,726)
Change in cumulative
translation adjustment -- (60,416) -- (60,416)
Net loss -- -- -- (13,759,138)
- -------------------------------------------------------------------------------------------
Balances,
December 31, 1996 $ 14,760 $(60,416) $ (90,118) $ 34,747,355
===========================================================================================
See accompanying notes to consolidated financial statements.
32
CytoTherapeutics, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $(13,759,138) $ (8,891,239) $(16,460,685)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization .......................... 1,671,068 1,465,351 1,821,746
Amortization of deferred compensation .................. 95,083 109,271 536,020
Common stock issued as compensation .................... 406,733 -- --
Loss on other investment ............................... -- 2,330,848 --
Loss on sale of fixed assets ........................... 871 -- --
Changes in operating assets and liabilities:
Accrued interest receivable .......................... 140,025 (606,395) 158,018
Other current assets ................................. 220,688 (293,909) (31,814)
Accounts payable and accrued expenses ................ 1,077,350 183,680 567,681
Deferred revenue ..................................... 109,092 1,750,000 --
------------------------------------------------------------
Net cash used in operating activities ...................... (10,038,228) (3,952,393) (13,409,034)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ......................... (3,083,621) (48,127,842) (11,967,992)
Proceeds from sales of marketable securities ............... 14,924,200 24,139,057 24,005,704
Purchase of property, plant and equipment .................. (4,412,190) (1,405,522) (3,729,500)
Proceeds on sale of fixed assets ........................... 3,000 -- --
Purchase of other investment ............................... -- (500,100) --
Acquisition of other assets ................................ (811,305) (550,116) (1,133,018)
------------------------------------------------------------
Net cash provided by (used in) investing activities 6,620,084 (26,444,523) 7,175,194
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable common stock .......... 8,300,000 -- --
Proceeds from issuance of common stock ..................... 1,668,542 30,837,792 3,710,033
Proceeds from the exercise of stock options and warrants ... 980,697 466,642 442,858
Proceeds from debt financings .............................. 4,059,947 859,832 3,318,455
Repayments of debt and lease obligations ................... (1,171,926) (934,661) (815,531)
------------------------------------------------------------
Net cash provided by financing activities .................. 13,837,260 31,229,605 6,655,815
Effect of exchange rate on cash and cash equivalents ....... (46,111) -- --
------------------------------------------------------------
Increase in cash and cash equivalents ...................... 10,373,005 832,689 421,975
Cash and cash equivalents, January 1 ....................... 9,548,579 8,715,890 8,293,915
------------------------------------------------------------
Cash and cash equivalents, December 31 ..................... $ 19,921,584 $ 9,548,579 $ 8,715,890
============================================================
Supplemental disclosure of cash flow information:
Interest paid .................................. $ 616,671 $ 700,806 $ 412,020
See accompanying notes to consolidated financial statements.
33
34
CytoTherapeutics, Inc.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. NATURE OF BUSINESS
CytoTherapeutics, Inc. (the "Company") is a biopharmaceutical company
engaged in the development of proprietary products and technology designed to
deliver therapeutic substances to the central nervous system.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and
Modex Therapeutiques S.A., a 50%-owned subsidiary. Significant intercompany
accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the 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, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents include funds held in investments with original
maturities of three months or less. The Company's policy regarding selection of
investments, pending their use, is to insure safety, liquidity and capital
preservation while obtaining a reasonable rate of return. Marketable securities
consist of investments in agencies of the U.S. government, investment grade
corporate notes and money market funds. The fair values for marketable
securities are based on quoted market prices.
The Company determines the appropriate classification of cash equivalents
and marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company has classified such
holdings as available-for-sale securities, which are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including that held under capitalized lease
obligations, is stated at cost and depreciated using the straight-line method
over the estimated life of the respective asset, as follows:
Building and improvements 1 - 15 years
Machinery and equipment 4 - 10 years
Furniture and fixtures 3 - 10 years
PATENT COSTS
The Company capitalizes certain patent costs related to patent
applications. Accumulated costs are amortized over the estimated economic life
of the patents, not to exceed 17 years, using the straight-line method,
commencing at the time the patent is issued. Costs related to patent
applications are written off to expense at the time such patents are deemed to
have no continuing value. At December 31, 1996 and 1995, total costs capitalized
were $2,887,000 and $2,184,000 and the related accumulated amortization was
$126,000 and $64,000, respectively. Patent expense totaled $249,000, $195,000
and $193,000 in 1996, 1995 and 1994, respectively.
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35
STOCK-BASED COMPENSATION
The Company grants qualified stock options for a fixed number of shares to
employees with an exercise price equal to the fair market value of the shares at
the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees, and,
accordingly, recognizes no compensation expense for qualified stock option
grants.
For certain nonqualified stock options granted, the Company recognizes as
compensation expense the excess of the deemed fair value of the common stock
issuable upon exercise of such options over the aggregate exercise price of such
options. The compensation is amortized over the vesting period of each option or
the recipient's term of employment, if shorter.
INCOME TAXES
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities as well as net
operating loss carryforwards and are measured using the enacted tax rates and
laws that are expected to be in effect when the differences reverse. Deferred
tax assets may be reduced by a valuation allowance to reflect the uncertainty
associated with their ultimate realization.
REVENUE FROM COLLABORATIVE AGREEMENTS
Revenues from collaborative agreements are recognized as earned upon either
the incurrence of reimbursable expenses or the achievement of certain
milestones. Payments received in advance of research performed are designated as
deferred revenue.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of operations outside the United States are
translated into United States dollars using current exchange rates; revenue and
expense items are translated into United States dollars using a weighted average
exchange rate for the period. The gains and losses resulting from such
translation are accumulated as a separate component of shareholders' equity,
whereas gains and losses resulting from foreign currency transactions generally
are included in results of operations.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded, as their effect is antidilutive.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1996, the Company has adopted 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 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption of Statement 121 had no
impact on the financial position or results of operations of the Company as no
indications of impairment currently exist.
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior-year balances to
the current year presentation.
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36
3. SWISS SUBSIDIARY
On July 10, 1996, the Company established Modex Therapeutiques S.A.
("Modex") in Lausanne, Switzerland, to pursue extensions of the Company's
technology for certain applications outside the central nervous system. In
exchange for 50% of the then outstanding common shares of Modex, the Company
provided Sfr 2,400,000 (approximately $2,000,000) of debt and equity financing
and, subject to Modex achieving specified scientific milestones, committed to
invest an additional Sfr 2,400,000 in July 1998. The Company has granted Modex
an exclusive license to its technology for three applications, diabetes, obesity
and anemia, in return for royalty payments and the obligation to issue to Modex
up to 300,000 shares of the Company's Common Stock upon the achievement by Modex
of certain scientific milestones. Substantially all of these shares are expected
to be awarded by Modex as incentive compensation to Modex's founding scientists
and other researchers upon achievement of such milestones. In return, Modex
granted the Company an exclusive, royalty-bearing license to any technology
developed or obtained by Modex for application to diseases, conditions and
disorders which affect the central nervous system.
In addition to the founders of Modex, who own 35% of the common equity and
include a member of the Company's Board of Directors, the other principal
investor, a private Swiss bank, provided cash and a convertible subordinated
note for Sfr 2,400,000 (approximately $2,000,000) for the remaining 15% equity
interest and are committed to invest an additional Sfr 1,200,000 in July 1998.
The note is due on the earlier of an initial public offering of the Modex common
stock or July 2006 and may be converted into the underlying 15% equity interest
at any time. The convertible subordinated note is non-interest bearing. So long
as there is no public market for Modex stock, the holder can require the Company
to purchase the note and equity in Modex for 90% of the fair value of the
underlying equity interest after July 1998, but before July 2006. Conversely, at
any time after July 1998, the Company may purchase the note and equity in Modex
for 110% of such fair value. Prior to July 1998, the Company may purchase the
note for the greater of Sfr 3,600,000 or Sfr 2,400,000 and 30% simple interest
thereon.
At any time, the Company also has the right to acquire, and the Modex
founders have the right to sell to the Company, the founders' 35% equity
interest in exchange for the issuance of approximately 92,000 shares of the
Company's common stock.
Any purchase made by the Company under any of the circumstances described
above may be made at the Company's option in cash or shares of the Company's
Common Stock valued at the quoted market price at the time of purchase. The
Company has included the operating results of Modex in the accompanying
consolidated financial statements since its inception and the resulting minority
interest has not been material.
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37
4. MARKETABLE 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. government securities .............................. $ 2,007,823 $ -- $(14,023) $ 1,993,800
U.S. corporate securities ............................... 21,651,507 28,784 -- 21,680,291
------------------------------------------------------------------------
Total debt securities ................................... $23,659,330 $28,784 $(14,023) 23,674,091
Debt securities included in cash ==================================================
and cash equivalents ........................................................................................ (988,236)
Debt securities included in -----------
marketable securities ....................................................................................... $22,685,855
===========
December 31, 1995
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------------------------------------------------------------------
U.S. government securities .............................. $ 2,011,235 $ -- $(18,535) $ 1,992,700
U.S. corporate securities ............................... 33,499,056 150,021 -- 33,649,077
------------------------------------------------------------------------
Total debt securities ................................... $35,510,291 $150,021 $(18,535) 35,641,777
Debt securities included in cash =================================================
and cash equivalents ........................................................................................ (998,617)
Debt securities included in -----------
marketable securities ....................................................................................... $34,643,160
===========
Maturities of marketable securities held at December 31, 1996, are as follows:
Less than one year .............................................................................................. $21,680,291
One through five years .......................................................................................... 1,993,800
-----------
$23,674,091
===========
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5. OTHER INVESTMENT
In December 1993, the Company sold substantially all of the assets of its
primary cell diabetes product development program, including related equipment,
and licensed related intellectual property to Neocrin Company in exchange for
preferred stock representing a then 10% ownership interest with a fair market
value of $2,030,748. The transaction resulted in a gain before closing expenses
of $1,957,913 and a net gain of $1,780,209. In February 1995, the Company
purchased an additional $500,100 of Neocrin's preferred stock at the current
market value, as required under the original purchase agreement.
In December 1995, Neocrin completed an equity offering, in which the
Company did not participate, at a valuation substantially lower than prior
financings. As a result, the Company determined that the carrying value in its
investment had been permanently impaired and provided a $2,330,848 valuation
reserve to reduce the investment value to $200,000.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31,
1996 1995
---------------------------
Land .............................................. $ 278,774 $ --
Building and improvements ......................... 6,207,679 6,434,043
Machinery and equipment ........................... 7,554,825 5,941,521
Furniture and fixtures ............................ 1,424,907 1,224,122
Construction in progress .......................... 2,214,318 --
---------------------------
17,680,503 13,599,686
Less accumulated depreciation and amortization .... 6,948,401 5,706,923
---------------------------
$10,732,102 $ 7,892,763
===========================
Depreciation and amortization expense was $1,564,000, $1,431,000 and
$1,578,000 for the years ending December 31, 1996, 1995 and 1994, respectively.
Certain property, plant and equipment have been acquired under capitalized
lease obligations. These assets totaled $8,910,000, with related accumulated
amortization of $3,947,000 and $3,027,000 at December 31, 1996 and 1995,
respectively.
In connection with the Company's new facility, the Company capitalized
$42,000 of interest costs in 1996.
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7. OTHER ASSETS
Other assets are as follows:
December 31,
1996 1995
-----------------------------
Patents, net .................................... $2,760,593 $2,119,965
Restricted cash ................................. 497,956 784,632
Deferred financing costs, net ................... 297,698 147,121
Organizational costs, net ....................... 156,183 --
Other investments ............................... 200,000 200,000
-----------------------------
$3,912,430 $3,251,718
=============================
8. ACCRUED EXPENSES
Accrued expenses are as follows:
December 31,
1996 1995
-------------------------------
Employee compensation ......................... $ 824,910 $ 761,650
External services ............................. 537,605 776,995
Collaborative research ........................ 413,497 367,772
Other ......................................... 532,832 552,034
-------------------------------
$2,308,844 $2,458,451
===============================
9. LEASES
The Company has undertaken direct financing transactions with the State of
Rhode Island and received proceeds from the issuance of industrial revenue bonds
totaling $5,000,000 to finance the construction of its pilot manufacturing
facility. The related leases are structured such that lease payments will fully
fund all semiannual interest payments and annual principal payments through
maturity in August 2014. Fixed interest rates vary with the respective bonds'
maturities, ranging from 5.1% to 9.5%. The bonds contain certain restrictive
covenants which limit, among other things, the payment of cash dividends and the
sale of assets. In addition, the Company is required to maintain a debt service
reserve, which totals $478,000, until December 1999.
39
40
The Company leases various office and research facilities and certain
equipment under noncancelable operating and capitalized leases. However, leases
relating to the majority of its office and research facilities are subject to
termination upon nine months' notification by the Company.
Future minimum capitalized lease obligations with noncancelable terms in excess
of one year at December 31, 1996, are as follows:
1997 ............................................................. $ 938,707
1998 ............................................................. 753,788
1999 ............................................................. 624,030
2000 ............................................................. 607,518
2001 ............................................................. 589,634
Thereafter ....................................................... 4,079,005
----------
Total minimum lease payments ..................................... 7,592,682
Less amounts representing interest ............................... 3,067,531
----------
Present value of minimum lease payments .......................... 4,525,151
Less current maturities .......................................... 553,557
----------
Capitalized lease obligations, less current maturities ........... $3,971,594
==========
Rent expense for the years ended December 31, 1996, 1995 and 1994, was $495,000,
$463,000 and $425,000, respectively.
10. LONG-TERM DEBT
Long-term debt is as follows:
December 31,
1996 1995
---------------------------------
Convertible subordinated note (Sfr 2,400,000) .................................................. $1,788,775 $ --
Facilities term note payable, interest at the prime rate plus 1/2% (8 3/4% at
December 31, 1996), due in 16 consecutive equal quarterly installments of 1/40
of total amount of loan commencing September 1997, with remaining balance due
October 2001; secured by the related facility and real estate .................................. 1,450,000 --
Term note payable, interest at the prime rate plus 1/2% (83 /4% at December 31,
1996), due ratably through December 1998; secured by certain equipment ......................... 867,227 1,263,458
Term note payable, interest at the prime rate plus 1/2% (8 3/4% at December 31,
1996), principal payments commence in August 1997, due ratably through May 2000;
secured by certain equipment ................................................................... 740,700 --
Other .......................................................................................... 99,876 152,968
---------------------------------
4,946,578 1,416,426
Current maturities of long-term debt ........................................................... 695,570 474,245
---------------------------------
Long-term debt, less current maturities ........................................................ $4,251,008 $ 942,181
=================================
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41
The non-interest bearing, convertible subordinated note is due in July 2006
and is convertible into a 15% ownership interest in Modex Therapeutiques S.A.,
the Company's 50%-owned Swiss subsidiary. So long as there is no public market
for Modex stock, the holder can require the Company to purchase the note for 90%
of the fair value of the underlying equity interest after July 1998, but before
July 2006. Conversely, at any time after July 1998, the Company may purchase the
note for 110% of such fair value. Prior to July 1998, the Company may purchase
the note for the greater of (i) Sfr 3,600,000 or (ii) Sfr 2,400,000 and 30%
simple interest thereon.
The facilities term note payable provides for borrowings up to $5.5 million
to finance the construction of the Company's new research and development
facility. Should the Company's unrestricted cash balances fall below specified
levels, the Company is required to provide cash collateral for up to 100% of the
outstanding loan balance.
Both term note agreements include certain restrictive covenants that limit,
among other things, the payment of dividends, sale of assets and the incurrence
of additional indebtedness.
Maturities of long-term debt for the years ending December 31 are as follows:
1997 .............................................................. $ 695,570
1998 .............................................................. 859,383
1999 .............................................................. 391,900
2000 .............................................................. 268,450
2001 .............................................................. 942,500
Thereafter ........................................................ 1,788,775
----------
$4,946,578
==========
The carrying amount of the notes payable approximate their fair value. The
fair market value of the convertible subordinated note cannot be determined.
11. REDEEMABLE COMMON STOCK
Under a research agreement to fund development of products to treat
Parkinson's disease (see Note 13), Genentech purchased 829,171 shares of common
stock for $8.3 million in December 1996. If the agreement is terminated and the
funds received from the sale of common stock exceed by more than $1 million the
expenses incurred by the Company in connection with such development, Genentech
has the right to require the Company to repurchase shares of common stock having
a value equal to the amount of overfunding, at the share price paid by
Genentech. Accordingly, the common stock is classified as redeemable common
stock until such time as the related funds are expended. At December 31, 1996,
$141,000 had been spent on the collaboration with Genentech and, accordingly,
the Company has reclassified those common shares and related value to
stockholders' equity.
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42
12. STOCKHOLDERS' EQUITY
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has adopted several stock plans which provide for the issuance
of incentive and nonqualified stock options, performance awards and stock
appreciation rights, at prices to be determined by the Board of Directors, as
well as the purchase of Common Stock under an employee stock purchase plan at a
discount to the market price. In the case of incentive stock options, such price
will not be less than the fair market value on the date of grant. Options
generally vest ratably over four years and are exercisable for ten years from
the date of grant or within three months of termination. At December 31, 1996,
the Company had reserved 3,086,388 shares of common stock for the exercise of
stock options.
The following table presents the combined activity of its stock option plans for
the years ended December 31, as follows:
1996 1995 1994
----------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
----------------------------------------------------------------------------------------
Outstanding at
January 1 .............................. 1,921,284 $7.72 1,480,844 $7.21 1,245,700 $6.56
Granted .................................. 852,160 9.48 678,604 8.35 632,665 8.86
Exercised ................................ (168,085) 5.83 (102,831) 4.54 (160,143) 9.78
Canceled ................................. (182,334) 9.42 (135,333) 7.77 (237,378) 8.73
----------------------------------------------------------------------------------------
Outstanding at
December 31 ............................ 2,423,025 $8.34 1,921,284 $7.72 1,480,844 $7.21
========================================================================================
Options exercisable
at December 31 ......................... 1,105,251 $7.11 839,260 $6.33 662,763 $5.36
========================================================================================
FAS 123 DISCLOSURES
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("FAS 123") and will continue to account for its stock option plans in
accordance with the provisions of APB 25, Accounting for Stock Issued to
Employees.
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1996:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price
- ---------------------------------------------- ----------------------------------------------------------------------------------
Less than $5.00 .............................. 348,608 5.93 $ 2.03 287,138 $ 1.54
$5.01 - $10.00 ............................... 1,374,358 8.94 8.05 479,507 7.32
Greater than $10.00 .......................... 700,059 7.97 12.03 338,606 11.53
--------- ---------
2,423,025 1,105,251
========= =========
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Pursuant to the requirements of FAS 123, the following are the pro forma
net loss and net loss per share for 1996 and 1995, as if the compensation cost
for the option plans and the stock purchase plan had been determined based on
the fair value at the grant date for grants in 1996 and 1995, consistent with
the provisions of FAS 123:
1996 1995
--------------------------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma
--------------------------------------------------------------------------------------
Net loss .................................. $(13,759,138) $(14,931,000) $(8,891,239) $(9,161,000)
Net loss per share ........................ $ (.89) $ (.97) $ (.69) $ (.72)
The weighted average fair value per share of options granted during 1996
and 1995 was $5.67 and $4.84, respectively. The fair value of options and shares
issued pursuant to the stock purchase plan at the date of grant were estimated
using the Black-Scholes model with the following weighted average assumptions:
Options Stock Purchase Plan
--------------------------------------------------
1996 1995 1996 1995
--------------------------------------------------
Expected life (years) ........ 5 5 .5 .5
Interest rate ................ 6.5% 5.8% 5.4% 5.1%
Volatility ................... 63.0% 62.0% 63.0% 62.0%
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
The effects on the 1996 and 1995 pro forma net loss and net loss per share
of expensing the estimated fair value of stock options and shares issued
pursuant to the stock purchase plan are not necessarily representative of the
effects on reporting the results of operations for future years as the period
presented includes only one and two years, respectively, of option grants under
the Company's plans. As required by FAS 123, the Company has used the
Black-Scholes model for option valuation, which method may not accurately value
the options described.
STOCK WARRANTS
In conjunction with various equipment leasing agreements, the Company has
outstanding warrants to purchase 31,545 shares of common stock at prices ranging
from $4.00 to $9.00 per share. The warrants expire through October 2000.
In connection with a public offering of common stock in April 1995, the
Company issued warrants to purchase 434,500 shares of common stock at $8 per
share. The warrants are nontransferable and expire in April 2000, subject to
certain required exercise provisions. In addition to the foregoing rights, the
holder of such warrants has the right, in the event the Company issues
additional shares of common stock or other securities convertible into common
stock, to purchase at the then market price of such common stock, sufficient
additional shares of common stock to maintain the warrant holder's percentage
ownership of the Company's common stock at 15%. This right, subject to certain
conditions and limitations, expires in April 2000.
COMMON STOCK RESERVED
The Company has reserved 5,776,500 shares of common stock for the exercise
of options, warrants and other contingent issuances of common stock.
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13. RESEARCH AND DEVELOPMENT AGREEMENTS
In November 1996, the Company signed collaborative development and
licensing agreements with Genentech, Inc. relating to the development of
products using the Company's technology to deliver certain of Genentech's
proprietary growth factors to treat certain diseases of the central nervous
system. Under the terms of the Parkinson's Agreement, Genentech purchased
829,171 shares of redeemable common stock for $8.3 million to fund development
of products to treat Parkinson's disease. Additional equity purchases and other
funding by Genentech may be available for future clinical development if agreed
by the parties. Upon commercialization, Genentech and the Company will share
profits from product sales in the United States at an agreed-upon percentage and
Genentech will pay the Company a royalty for product sales outside the United
States. The Company retained manufacturing rights for all products sold.
The Company also licensed growth factors for the treatment of Huntington's
disease and for amyotrophic lateral sclerosis (ALS). Under the terms of the
agreements, the Company is responsible for conducting and funding all
preclinical and clinical development, subject to specified rights of Genentech
to participate in the development and marketing of the proposed products. Should
Genentech share in the development costs of the proposed products, the companies
will share profits from certain territories at negotiated percentages. Where
Genentech does not participate in the development, upon commercialization, the
Company will pay Genentech an agreed-upon royalty based on sales. These three
agreements supersede the 1994 Genentech collaboration in its entirety.
In March 1995, the Company signed a collaborative research and development
agreement with Astra AB for the development and marketing of encapsulated-cell
products to treat pain. Astra made an initial, nonrefundable payment of
$5,000,000, included in revenue from collaborative agreements in 1995, and may
remit up to an additional $16,000,000 subject to the achievement of certain
development milestones. Under the agreement, the Company is obligated to conduct
certain research and development pursuant to a four-year research plan agreed
upon by the parties. Over the term of the research plan, the Company expects to
receive annual payments of $5 million to $7 million from Astra which should
approximate the research and development costs incurred by the Company under the
Plan. Subject to successful product development and obtaining necessary
regulatory approvals, Astra is obligated to conduct all clinical trials of
products arising from the collaboration and to seek approval for their sale.
Astra has the exclusive worldwide right to market products covered by the
agreement. Until the later of either expiration of all patents included in the
licensed technology or a specified term, the Company is entitled to a royalty on
the worldwide net sales of such products in return for the marketing license
granted to Astra and the Company's obligation to manufacture and supply
products. Astra has the right to terminate the agreement after April 1, 1998.
In March 1994, the Company entered into a contract research and license
agreement with NeuroSpheres, Ltd. Under the agreement, the Company obtained from
NeuroSpheres an exclusive worldwide royalty-bearing license for the commercial
development and use of certain neural stem cells for transplantation to treat
human disease. Terms of the agreement required the Company to make an initial
payment of $310,000 and provide NeuroSpheres additional research funding through
February 1998 based upon performance of certain obligations by NeuroSpheres.
Research expense under this agreement amounted to $291,667, $233,333 and
$125,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Upon the achievement of certain milestones, the Company must make payments to
NeuroSpheres totaling a maximum of $3,750,000, payable, at NeuroSpheres' option,
in cash or in shares of the Company's common stock at a price of $12.50 per
share. Upon commercial sale of a product utilizing the licensed technology, the
Company is obligated to pay a range of royalties, based on product revenues and
market share, plus certain minimum royalties. In order to maintain exclusivity,
the Company is also obligated to expend additional amounts to support research
related to dev elopment of products under the agreement. The Company and
NeuroSpheres are currently involved in arbitration proceedings intended to
resolve a dispute between the parties regarding the determination of stem cells
subject to exclusive license.
The Company has entered into other collaborative research agreements whereby the
Company funds specific research programs. Pursuant to such agreements, the
Company is typically granted rights to the related intellectual property or an
option to obtain such rights on terms to be agreed, in exchange for research
funding and specified royalties on any resulting product revenue. To date, the
Company's principal academic collaborations have been with Brown University and
Dr. Aebischer and Centre Hospitalier Universitaire Vaudois in Switzerland.
Research and development expenses incurred under these collaborations amounted
to approximately $1,337,000, $1,008,000 and $864,000, for the years ended
December 31, 1996, 1995 and 1994, respectively.
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14. INCOME TAXES
Due to net losses incurred by the Company in each year since inception, no
provision for income taxes has been recorded. At December 31, 1996, the Company
had tax net operating loss carryforwards of $21,621,000 and research and
development tax credit carryforwards of $2,251,000 which expire at various times
through 2011. Due to the "change in ownership" provisions of the Tax Reform Act
of 1986, the Company's utilization of its net operating loss carryforwards and
tax credits may be subject to annual limitation in future periods.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31,
1996 1995
-------------------------------
Deferred tax assets:
Capitalized research and development costs ... $ 21,286,000 $ 17,562,000
Net operating losses ......................... 8,648,000 6,020,000
Research and development credits ............. 2,251,000 1,921,000
Other ........................................ 316,000 419,000
-------------------------------
32,501,000 25,922,000
Deferred tax liabilities:
Patents ...................................... 1,096,000 694,000
-------------------------------
31,405,000 25,228,000
Valuation allowance .......................... (31,405,000) (25,228,000)
-------------------------------
Net deferred tax assets ........................ $ -- $ --
===============================
Since there is uncertainty relating to the ultimate use of the loss
carryforwards and tax credits, a valuation allowance has been recognized at
December 31, 1996 and 1995 to fully offset the Company's deferred tax assets.
The valuation allowance increased $6,177,000 in 1996, due primarily to the
increases in capitalized research and development costs, net operating loss
carryforwards and tax credits.
15. EMPLOYEE RETIREMENT PLAN
The Company has a qualified defined contribution plan covering
substantially all employees. Participants are allowed to contribute a fixed
percentage of their annual compensation to the plan and the Company may match a
percentage of that contribution. The Company matches 50% of employee
contributions, up to 6% of employee compensation, with the Company's common
stock. The related expense was $162,000, $131,000 and $114,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
16. CONTINGENCIES
The Company is routinely involved in arbitration, litigation and other
matters as part of the ordinary course of its business. While the resolution of
any matter may have an impact on the Company's financial results for a
particular reporting period, management believes the ultimate disposition of
these matters will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
17. SUBSEQUENT EVENT
In February 1997, the Company entered into a collaboration and development
agreement with Cognetix, Inc. to screen selected peptides for possible
development of therapeutic products using the Company's cell-based delivery
technology. Under the agreement, the Company expects to invest approximately
$1,750,000 over the next twelve months to acquire approximately a 19.9%
ownership position in Cognetix. The companies will generally share expenses
associated with the development of any specific product candidate and any
resulting revenues, except as otherwise determined on a product-by-product
basis.
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ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, PROMOTERS AND CONTROL
PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The sections entitled "Election of Directors" and "Executive Officers" in
the Company's definitive proxy statement for its 1997 Annual Meeting of
Shareholders are hereby incorporated by reference.
ITEM 11.
Executive Compensation
The section entitled "Executive Compensation" in the Company's definitive
proxy statement for its 1997 Annual Meeting of Shareholders is hereby
incorporated by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Share Ownership" in the Company's definitive proxy
statement for its 1997 Annual Meeting of Shareholders is hereby incorporated by
reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions" in
the Company's definitive proxy statement for its 1997 Annual Meeting of
Shareholders is hereby incorporated by reference.
46
47
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS FORM 10-K.
(1) Financial Statement Schedules:
Item Location
---------------------------------------------------------------------
Schedule II Valuation and Qualifying Accounts S-1
Schedules not included herein are omitted because they are not applicable
or the required information appears in the Financial Statements or Notes
thereto.
(2) Exhibits.
Exhibit No. Title or Description
3.1* Restated Certificate of Incorporation of the Registrant.
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of the
Registrant's Common Stock in April 1995.
10.4* Amendment to Registration Rights dated as of February 14, 1992
among the Registrant and certain of its stockholders.
10.5* ** Research Agreement dated March 1, 1989 between the Registrant and
Brown University as amended by Modification No. 1 dated December
21, 1990, Modification No. 2 dated February 22, 1991 and
Modification No. 3 dated November 1, 1991.
10.5A* Letter Agreement dated March 4, 1992 between the Registrant and
Brown University.
10.6* License Agreement dated March 16, 1989 between the Registrant and
Brown University, as amended by Amendment Agreement dated May 2,
1991.
10.7* Research Agreement dated March 16, 1989 between Registrant and
Washington University.
10.7A* Letter Agreement dated March 19, 1992 between Registrant and
Washington University.
10.8* License Agreement dated March 16, 1989 between the Registrant and
Washington University.
10.12* Employment Agreement dated January 3, 1991 between the Registrant
and Dr. Seth A. Rudnick.
10.15* Form of at-will Employment Agreement between the Registrant and
most of its employees.
10.16* Agreement for Consulting Services dated March 16, 1989 between
the Registrant and Dr. Patrick Aebischer.
10.17* Agreement for Consulting Services dated March 16, 1989 between
the Registrant and Dr. Pierre Galletti.
10.18* Agreement for Consulting Services dated March 16, 1989 between
the Registrant and Dr. Paul Lacy.
10.20* Form of Agreement for Consulting Services between the Registrant
and members of its Scientific Advisory Board.
10.21* Form of Nondisclosure Agreement between the Registrant and its
Contractors.
10.22* Funding Agreement dated June 22, 1989 between the Registrant and
the Rhode Island Partnership for Science and Technology.
47
48
10.23* Agreement dated June 28, 1991 between the Registrant and TSI
Mason Laboratories, Inc.
10.24* Agreement dated December 5, 1991 between the Registrant and TSI
Corporation.
10.25* Agreement of Lease dated September 11, 1989 between the
Registrant and Harold I. Schein, as amended by a Rider dated June
8, 1990, a Rider dated November 13, 1990, a Rider dated October
8, 1991, and a Rider dated October 10, 1991.
10.26* Purchase and Sale Agreement between the Registrant and Guy
Gregory for purchase of property and building at 6 Court Drive,
Lincoln, Rhode Island.
10.28* Master Lease and Warrant Agreement dated April 23, 1991 between
the Registrant and PacifiCorp Credit, Inc.
10.29* 1988 Stock Option Plan.
10.30* 1992 Equity Incentive Plan.
10.31* 1992 Stock Option Plan for Non-Employee Directors.
10.32* 1992 Employee Stock Purchase Plan.
10.35# Consulting Agreement dated as of September 1, 1992 between Edwin
C. Cadman and the Registrant.
10.36**# Letter Agreement between Registrant and Dr. Patrick Aebischer
dated October 13, 1992 as amended by a letter agreement dated
December 23, 1993.
10.37+ Employment Agreement dated September 9, 1992 between Registrant
and Frederic A. Eustis, III.
10.41** Development and Supply Agreement dated December 1993, between
Registrant and AKZO Faser A.G.
10.42** Asset Transfer Agreement dated as of December 23, 1994, between
Registrant and Neocrin Company.
10.43*##** Research Agreement dated as of February 1, 1994 between
Genentech, Inc. and Registrant.
10.44*##** Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.46++ Termination Agreement dated as of August 4, 1994 between
Registrant and Medtronic, Inc.
10.47++ Term Loan Agreement dated as of September 30, 1994 between the
First National Bank of Boston and Registrant.
10.48++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1, 1992.
10.49++ First Amendment to Lease Agreement between Registrant and The
Rhode Island Industrial Facilities Corporation dated as of
September 15, 1994.
10.50++ Supplementary Agreement dated as of July 1, 1994 between Akzo
Nobel Faser AG and the Registrant.
10.51**++++ Development, Marketing and License Agreement, dated as of March
30, 1995, between Registrant and Astra AB.
10.52++++ Form of Unit Purchase Agreement to be executed by the purchasers
of the Common Stock and Warrants offered in April 1995.
10.53+++ Form of Common Stock Purchase Agreement to be executed among the
Registrant and certain purchasers of the Registrant's Common
Stock.
10.54!** Research and Commercialization Agreement dated as of September 4,
1995 among the Company, Dr. Patrick Aebischer and Canton of Vaud,
Switzerland.
10.55!! Employment agreement dated as of July 2, 1996 between Sandra
Nusinoff Lehrman, M.D. and Registrant.
10.56!! Consulting agreement dated as of September 1, 1996 between Dr.
Edwin C. Cadman and the Registrant.
10.57!! Convertible loan agreement dated as of July 10, 1996 between the
Company and Modex Therapeutiques S.A.
48
49
10.58!!** Cross License agreement dated as of July 10, 1996 between the
Company and Modex Therapeutiques S.A.
10.59!! Modex Therapeutiques S.A. stockholders voting agreement dated at
of July 10, 1996 among Modex, the Company, the Societe Financiere
Valoria S.A. and the other stockholders listed therein.
10.60!! CTI individual stockholders option agreement dated as of July 10,
1996 among the Company and the individuals listed therein.
10.61!! CTI - Valoria option agreement dated of July 10, 1996 between the
Company and the Societe Financiere Valoria S.A.
10.62** Development Collaboration and License Agreement Relating to
Parkinson's Disease dated as of November 22, 1996 between
Genentech, Inc. and Registrant.
10.63 Consulting Agreement dated as of December 1, 1996 between Peter
Simon and the Registrant.
10.64 Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and Registrant.
23.1 Consent of Ernst & Young LLP.
99 Cautionary Factors Relevant to Forward-looking Information.
++ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Registration Statement on Form S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Registration Statement on Form S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Registration Statement on Form S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, Registration Statement on
Form S-1, File No. 33-45739.
# Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's Annual
Report on Form 10-K for fiscal year 1992 and filed March 30,
1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "*" as used throughout the
indicated Exhibits mean that material has been omitted and
separately filed with the Commission.
## Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994 and
filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993
and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to, and
incorporated by reference to, the Registrant's Quarterly Report
on Form 10-Q for the quarter ending March 31, 1996.
!! Previously filed with the Commission as an Exhibit to, and
incorporated by reference to, the Registrant's Quarterly Report
on Form 10-Q for the quarter ending September 30, 1996.
(B) CURRENT REPORTS ON FORM 8-K.
On December 20, 1996, the Company filed a Report on Form 8-K with the
Securities and Exchange Commission describing the Genentech, Inc. arrangements.
See "Corporate Collaborations - Genentech, Inc."
49
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
CYTOTHERAPEUTICS, INC.
By: /s/ Seth A. Rudnick, M.D.
-------------------------------------
Seth A. Rudnick, M.D.
Chairman and Chief Executive Officer
Dated: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Seth A. Rudnick, M.D. Chairman, Chief Executive Officer, March 28, 1997
- ------------------------------ and Director (principal executive officer)
Seth A. Rudnick, M.D.
/s/ Frederic A. Eustis, III Acting Chief Financial Officer and Treasurer March 28, 1997
- ------------------------------ (principal financial officer), Vice President,
Frederic A. Eustis, III General Counsel and Secretary
/s/ Suzanne L. Fleming Controller (principal accounting officer) March 28, 1997
- ------------------------------
Suzanne L. Fleming
/s/ Patrick Aebischer, M.D. Director March 28, 1997
- ------------------------------
Patrick Aebischer, M.D.
/s/ Edwin C. Cadman, M.D. Director March 28, 1997
- ------------------------------
Edwin C. Cadman, M.D.
s/s Donald R. Conklin Director March 28, 1997
- ------------------------------
Donald R. Conklin
/s/ Sandra Nusinoff Lehrman Chief Operating Officer, President March 28, 1997
- ------------------------------ and Director
Sandra Nusinoff Lehrman
/s/ Mark J. Levin
- ------------------------------ Director March 28, 1997
Mark J. Levin
/s/ Richard J. Ramsden Director March 28, 1997
- ------------------------------
Richard J. Ramsden
/s/ Peter Simon Director March 28, 1997
- ------------------------------
Peter Simon
50
51
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
------------------------------------------------------
Additions
------------
Balance at Charged to Charged to
beginning of costs and other Balance at
year expenses accounts Deductions end of year
- ---------------------------------------------------------------------------------------------------------
Year Ended Dec. 31, 1996:
Other investments, net......... $2,330,848 0 0 0 $2,330,848
Year Ended Dec. 31, 1995:
Other investments, net......... 0 $2,330,848 0 0 $2,330,848
S-1