SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended December 31, 2001.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________to _________.
Commission File Number
000-29815
ALLOS THERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 54-1655029
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11080 CIRCLEPOINT ROAD, SUITE 200
WESTMINSTER, COLORADO 80020
(303) 426-6262
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
7000 N. BROADWAY, SUITE 400
DENVER, COLORADO 80021
(303)-426-6262
(Former Name or Former Address,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.001 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.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) 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. [ ]
As of February 22, 2002, there were 23,140,197 shares of the Registrant's
common stock outstanding and the aggregate market value of such shares held by
nonaffiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on February 22, 2002) was approximately
$72,610,617. Shares of the Registrant's common stock held by each officer and
director and by each person who owns 10% or more of the outstanding common stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
report on Form 10-K to the extent stated therein.
Certain exhibits filed with the Registrant's Registration Statement on Form
S-1 (File No. 333-95439), Annual Report on Form 10-K (File No. 000-29815),
Registration Statement Form S-8 (File No. 333-60430), Quarterly Report on Form
10-Q (File No. 000-29815) and Registration Statement on Form S-8 (File No.
333-38696) are incorporated by reference into Part IV of this report on Form
10-K.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
PART I
ITEM 1. BUSINESS................................................................................ 1
ITEM 2. PROPERTIES.............................................................................. 19
ITEM 3. LEGAL PROCEEDINGS....................................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............... 20
ITEM 6. SELECTED FINANCIAL DATA................................................................. 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK................................. 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................. 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.... 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................... 26
ITEM 11. EXECUTIVE COMPENSATION.................................................................. 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................... 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K.................... 27
</Table>
PART I
Unless the context requires otherwise, references in this report to
"Allos," the "Company," "we," "us," and "our" refer to Allos Therapeutics, Inc.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
include, but are not limited to, statements concerning our plans to continue
development of our current product candidates; conduct clinical trials with
respect to our product candidates; seek regulatory approvals; address certain
markets; engage third-party manufacturers to supply our clinical trial and
commercial requirements; hire sales and marketing personnel; and evaluate
additional product candidates for subsequent clinical and commercial
development. In some cases, these statements may be identified by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms and other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements contained herein are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. These statements involve known and unknown risks and
uncertainties that may cause our or our industry's results, levels of activity,
performance or achievements to be materially different from those expressed or
implied by the forward-looking statements. Factors that may cause or contribute
to such differences include, among other things, those discussed under the
captions "Business," "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Forward-looking statements not
specifically described above also may be found in these and other sections of
this report.
ITEM 1. BUSINESS
OVERVIEW
We are a biopharmaceutical company focused on developing and
commercializing innovative small molecule drugs for improving cancer treatments.
Small molecule drugs, in general, are non-protein products produced by chemical
synthesis rather than biologic methods. Our lead compound, RSR13 (generic name:
efaproxiril sodium), is a synthetic small molecule that increases the release of
oxygen from hemoglobin, the oxygen-carrying protein contained within red blood
cells. The presence of oxygen in tumors is an essential element for the
effectiveness of radiation therapy and some chemotherapy agents in the treatment
of cancer. By increasing tumor oxygenation, RSR13 has the potential to enhance
the efficacy of standard radiation therapy and certain chemotherapeutic drugs.
Unlike chemotherapeutics or other radiosensitizers, RSR13 does not have to cross
the blood brain barrier and enter the tumor for efficacy. We believe RSR13 can
be used to improve existing cancer treatments and treat many diseases and
clinical conditions attributed to or aggravated by oxygen deprivation.
Deprivation of oxygen in the body is called hypoxia.
We have demonstrated in Phase II clinical trials that RSR13 significantly
improves the efficacy of radiation therapy for treating brain metastases, or
tumors that have spread to the brain, glioblastoma multiforme, or GBM, a highly
aggressive form of primary brain cancer, and non-small cell lung cancer, or
NSCLC. We are presently conducting a pivotal Phase III trial of RSR13 for the
treatment of brain metasteses. We believe that this trial, if positive, will
serve as the basis for seeking marketing approval for RSR13 from the FDA for
this indication. In November 2001, we announced median survival results from a
Phase II clinical trial evaluating the use of RSR13 in patients with locally
advanced, inoperable NSCLC receiving radiation therapy following induction
chemotherapy. We believe RSR13 could have application in many other tumor types
and clinical situations requiring radiation therapy, such as, cervical,
pancreatic, esophageal and head and neck cancers.
Our Business Strategies for Growth:
The key elements of our business strategy include:
o Focusing on developing and commercializing RSR13 to address the
large markets for the treatment of cancer. We are currently
focusing our efforts on the radiation sensitizer market and
commercializing RSR13 for the treatment of several tumor types.
1
o Expanding our oncology pipeline through in-licensing or acquiring
complementary products. We will continue to evaluate early-stage
compounds that enhance our oncology portfolio with the intent to
build a pipeline of compounds for development and
commercialization.
o Extending the RSR13 product line to other indications outside
oncology through collaborations. We believe RSR13 can be used to
treat many other diseases and clinical conditions. We are seeking
corporate partners to jointly develop RSR13 for treating the
hypoxic effects of acute blood loss and decreased blood flow
encountered in surgical procedures and also for improving the
effectiveness of treatments for cardiovascular disease and
stroke.
We were incorporated under the laws of the Commonwealth of Virginia in
September 1992 as Hemotech Sciences, Inc. In 1994, we relocated to Denver,
Colorado. We reincorporated in Delaware as Allos Therapeutics, Inc. in October
1996. In September 2001, we moved to Westminster, Colorado, a suburb of Denver.
Our current mailing address is 11080 CirclePoint Road, Westminster, Colorado
80020.
SCIENTIFIC BACKGROUND
Oxygen is indispensable to all human tissues. It is transported through the
body by hemoglobin, a protein contained within red blood cells, and is consumed
in the production of energy for sustaining life. Each hemoglobin protein can
bind up to four molecules of oxygen. After picking up oxygen in the lungs and
circulating to various tissues in the body, each hemoglobin protein, on average,
releases one of its four oxygen molecules and retains the other three in
reserve. Thus, approximately 75% of the oxygen carried by hemoglobin represents
an untapped reservoir of oxygen potentially available to the body. When
hemoglobin returns to the lungs, it replenishes its store of oxygen for its next
round trip through the body.
Although oxygen is ordinarily vital for life, in some instances, energized
forms of oxygen, called oxygen radicals, can be toxic to cells. For example,
during radiation therapy for a cancerous tumor, radiation-induced oxygen
radicals contribute to the death of cells in the tumor. Therapies that increase
oxygen levels in tumors at the time of radiation can therefore enhance the
cytotoxicity of radiation therapy.
Malignant tumors often have a poorly regulated blood supply caused by the
disorganized growth of new blood vessels into the tumor. This, in addition to
the rapid cell growth of malignant tumors, leads to the formation of hypoxic
regions within the tumor, a phenomenon known as tumor hypoxia. Research shows
that hypoxic regions within malignant tumors are substantially more resistant to
cell damage from radiation than oxygenated regions. Even small hypoxic regions
in a tumor may affect the overall response to radiation therapy and increase the
number of surviving tumor cells. Tumor cells that survive radiation therapy can
become resistant to therapy, and can cause the tumor to recur in the same
location and metastasize to distant sites, causing continued illness and death.
Tissue hypoxia is also a factor in many other diseases and clinical
conditions. For example, during cardiac and other types of surgery, tissue
hypoxia can occur from decreased oxygen carrying capacity caused by acute blood
loss or decreased blood flow to major organs, such as the brain, heart, liver
and kidneys. In addition, hypoxia caused by the acute blockage of a major blood
vessel can lead to conditions that cause significant morbidity and mortality,
such as acute angina, or chest pain caused by decreased blood flow to the heart,
myocardial infarction, or heart attack, and stroke.
The body has developed certain natural responses to mitigate or reverse the
damage of some forms of hypoxia. For example, when the body is suddenly
subjected to acute hypoxia, such as during acute blood loss, several highly
predictable responses occur. Initially, the body increases the rate of breathing
to more fully oxygenate the blood as it passes through the lungs. The body also
attempts to improve blood flow by increasing the rate and force of cardiac
contractions. Subsequently, the red blood cells produce increased amounts of
2,3-diphosphoglycerate, or 2,3-DPG a naturally occurring small molecule that
chemically decreases the oxygen binding affinity of hemoglobin. 2,3-DPG
essentially taps into hemoglobin's oxygen reservoir, and increases the average
unloading of oxygen from hemoglobin from 25% to approximately 35%. Finally, over
the next several weeks to months, the body produces a natural hormone known as
erythropoetin to stimulate production of new red blood cells.
Although production of 2,3-DPG is effective as a natural response
mechanism, it is not a viable candidate for therapeutic applications. 2,3-DPG is
produced inside the red blood cells and cannot by itself penetrate the red blood
cell membrane if medically administered to a patient. As a result, therapeutic
administration of 2,3-DPG cannot be used to oxygenate cancerous tumors to
enhance the effectiveness of radiation therapy. In addition, the natural
2
increase of 2,3-DPG levels during acute hypoxic episodes takes several hours to
days to reach a peak effect. 2,3-DPG, therefore, is not effective in treating or
preventing acute hypoxic conditions associated with surgical blood loss or
cardiovascular disease, conditions that require an immediate response.
THE ALLOS SOLUTION
In traditional approaches to drug development, a small molecule drug is
used to bind to the active site of a protein to modify the protein's function.
In some cases, the drug activates, and in others it inhibits, the protein's
function.
In contrast to traditional approaches, our core technology is based on
using small molecules to modify a protein's function by altering the protein's
three-dimensional structure. This is called allosteric modification. In
allosteric modification, a small molecule drug alters a protein's
three-dimensional structure by binding to the protein at a site different from
the protein's active site. This change in conformational structure affects the
binding affinity of the protein for the molecules that normally bind to its
active site. The ability of a drug to increase or decrease this affinity can
have important clinical implications. For example, an allosteric modifier that
decreases the oxygen-binding affinity of hemoglobin, and thereby stimulates the
release of oxygen into tissues, can be used to mitigate the adverse effects of
many forms of tissue hypoxia.
RSR13
Our lead product candidate, RSR13, is designed to mitigate the effects of
tissue hypoxia. RSR13 has been administered safely to over 500 patients in 14
studies, most of whom were cancer patients receiving concurrent radiation
therapy. We have completed six clinical trials of RSR13 in patients receiving
radiation therapy and have shown that RSR13 is generally well tolerated and has
an acceptable safety profile for use in cancer patients.
RSR13 has a well-defined mechanism of action and is the first synthetic
drug to emulate and amplify the action of 2,3-DPG, the naturally occurring
allosteric modifier of hemoglobin. Like 2,3-DPG, RSR13 binds to hemoglobin away
from the hemoglobin's oxygen-binding site and increases the unloading of oxygen
from hemoglobin, thus increasing the amount of oxygen deliverable to hypoxic
tissues. RSR13 has several distinguishing characteristics from 2,3-DPG that make
it particularly well suited for therapeutic applications:
o RSR13 is able to cross the red blood cell membrane when medically
administered to a patient;
o RSR13 has an immediate onset of action;
o on average, RSR13 increases the normal 25% unloading of oxygen from
hemoglobin to an estimated 50% by increasing oxygen release from the
large reservoir of unused hemoglobin-bound oxygen in the blood; and
o RSR13 remains in the bloodstream while oxygen naturally diffuses into
the surrounding tissue.
By emulating and amplifying the body's natural response to acute hypoxia,
RSR13 has the potential for treating a wide variety of diseases and clinical
conditions caused by tissue hypoxia. We believe that increasing oxygen levels in
hypoxic tumors can enhance the effects of radiation therapy. In addition, we
believe RSR13 could also be used to prevent complications associated with tissue
hypoxia that frequently occur during or after surgery. In the cardiovascular
area, we believe RSR13 can be used to help treat acute angina, myocardial
infarction and stroke, among other conditions.
3
PRODUCTS UNDER DEVELOPMENT
We currently retain exclusive, worldwide commercial rights for all of our
product candidates for all target indications. The table below summarizes our
current product candidates, their target indications and clinical program
status.
<Table>
<Caption>
PRODUCT CANDIDATE TARGET INDICATION CLINICAL PROGRAM STATUS
----------------- ----------------- -----------------------
RSR13
Radiation Enhancer Brain metastases Phase III
Non-small cell lung cancer Phase II complete
Glioblastoma multiforme Phase II complete
Cervical cancer Phase I/II
Other cancer types Phase II's planned
Chemotherapy Enhancer Recurrent glioblastoma multiforme Phase Ib/II
Surgical Hypoxia Cardiopulmonary bypass surgery Phase II
Cardiovascular Disease Angina Phase I complete
Myocardial infarction Preclinical
Stroke Preclinical
RSR46 Acute hypoxia Preclinical
JP7 Acute hypoxia Preclinical
PYRUVATE KINASE INHIBITORS Chronic hypoxia Research
</Table>
RSR13 for Treating Cancer
The worldwide oncology drug market was estimated at $19.4 billion in 2000.
Despite the enormous effort undertaken by the pharmaceutical industry to develop
oncology products, cancer remains the second-leading cause of death in the
United States and remains a largely unmet medical need. Over 1.2 million new
cases of cancer are diagnosed each year in the United States, and approximately
565,000 patients die each year of cancer.
The appropriate cancer therapy for each patient depends on the cancer type
and careful assessment of the size, location and extent to which the tumor has
spread. Therapy typically includes some combination of surgery, radiation
therapy or chemotherapy. Radiation therapy is used to cure certain cancers, to
control local tumor invasion and thus prolong life, and to treat symptomatic
problems in patients who are expected to die of their cancer. Chemotherapy is
used to cure certain cancers or prolong life in some patients with malignant
tumors.
RSR13 as a Radiation Enhancer.
Radiation therapy is the principal non-surgical means of treating malignant
tumors in patients with cancer. Each year in the United States, approximately
50% of all newly diagnosed cancer patients, or 600,000 patients, receive
radiation therapy as part of their primary treatment, in addition to 150,000
patients who receive radiation therapy for persistent or recurrent cancer. The
750,000 cancer patients who receive radiation therapy annually are approximately
twice the number of cancer patients who are treated with chemotherapy. A course
of radiation therapy can cost between $10,000 and $20,000 depending on the
complexity and duration of treatment. Although radiation therapy can be
effective in treating certain types of cancer, an unmet medical need exists for
products to increase the effectiveness of radiation therapy.
RSR13 is administered by a 30-minute intravenous infusion through a central
venous catheter commencing approximately one hour before scheduled radiation
therapy. Patients are also given supplemental oxygen, like that commonly
administered to individuals with chronic lung disease, to fully saturate
hemoglobin and increase the therapeutic potential of RSR13. RSR13 has an
immediate onset of action after administration and has a duration of action of
several hours.
Unlike existing drugs and other attempts to enhance the effects of
radiation therapy, the radioenhancement effect of RSR13 is not dependent on its
direct diffusion into the cancerous tumor. Instead, the beneficial effects of
RSR13 are the result of causing increased amounts of oxygen release from blood
flowing through the tumor. It is the
4
oxygen, and not the drug, which diffuses across the cancer cell membranes to
oxygenate the tumors. This is particularly important in the case of primary or
metastatic brain tumors, where the blood brain barrier acts to exclude or impede
the entry of most chemical agents into the brain tissue. The fact that RSR13
does not have to actually enter the cancer cell to increase radiosensitivity is
an important difference between RSR13 and other pharmacologic attempts to
improve the efficacy of radiation therapy.
We have completed six clinical trials of RSR13 in patients receiving
radiation therapy and have shown that RSR13 is generally well tolerated and has
an acceptable safety profile for use in cancer patients. The most common side
effects of RSR13 in cancer patients are dose and frequency related. These side
effects include low hemoglobin oxygen saturation (which is readily treated with
supplemental oxygen like that used in patients with chronic lung disease),
reversible kidney dysfunction (typically in patients who are also taking blood
pressure medications or common anti-inflammatory drugs), allergic rash and other
symptoms often seen in cancer patients receiving radiation therapy, such as
headache, nausea and vomiting.
RSR13 in the Treatment of Brain Metastases
We intend to seek FDA approval of RSR13 first for the treatment of patients
who are receiving radiation therapy for brain metastases. This condition occurs
in approximately one out of five cancer patients, most often in patients with
lung or breast cancer. Radiation therapy for treatment of brain metastases is
administered to approximately 170,000 patients per year in the United States and
is intended to prevent or reduce complications and increase survival. The median
survival of all patients with brain metastases is about four months and can vary
depending on various clinical factors such as age, general health, whether the
primary cancer is controlled, and the extent of cancer metastases to other
regions in the body. Approximately 30% to 50% of patients with brain metastases
will die from disease progression in the brain, and the remainder will die from
disease progression in other regions in the body.
We previously completed a 20-patient Phase Ib safety study in patients
receiving RSR13 in combination with radiation therapy that suggested a potential
role for RSR13 in treating patients with brain metastases. Based on this study,
we completed a 69-patient, multi-center, open-label, Phase II clinical trial to
evaluate the efficacy and safety of RSR13 in cancer patients receiving standard
radiation therapy for treatment of brain metastases. The primary efficacy
endpoint of this study was survival compared to historical data using the Brain
Metastases Database, or BMD, maintained by the Radiation Therapy Oncology Group,
or RTOG, of the American College of Radiology. The study results showed that
RSR13-treated patients demonstrated overall median survival time of 6.4 months
compared to 4.1 months for the BMD control group, representing a statistically
significant improvement in median survival of 56%. In addition, the
RSR13-treated group had one-year survival rates of 23%, compared to the one-year
survival rate of 15% for the BMD control group. In patients where the cause of
death was determined, death due to tumor progression in the brain was seen in
only 12% of the RSR13-treated patients compared to 37% of the BMD control group.
When case-match analysis was performed using patients in the BMD that most
closely paralleled the RSR13-treated patients, the median survival time of RSR13
treated patients was increased by 115% and one-year survival rates were
increased to 24%, compared to 8% for the BMD control group.
Based on this positive Phase II data, we received concurrence from the FDA
to proceed with a Phase III trial of RSR13 in patients with brain metastases. In
February 2000, we commenced an international, pivotal, Phase III, randomized
study called R.E.A.C.H. (Radiation Enhancing Allosteric Compound for Hypoxic
brain metastases) evaluating the safety and efficacy of RSR13 used in
combination with whole brain radiation therapy in treating patients with
metastatic brain cancer. Patients are randomly assigned to treatment with either
standard whole brain radiation therapy or treatment with standard whole brain
radiation therapy plus RSR13. The primary efficacy endpoint is survival. The
secondary endpoints are time to tumor progression in the brain, response rate in
the brain, cause of death and quality of life. Under the trial protocol, a 35%
improvement in median survival will be considered as satisfying the primary
endpoint of the trial, and may provide the basis for marketing approval of
RSR13. In May 2001, we amended the protocol to increase the number of patients
enrolled in this pivotal study in order to conduct an appropriately powered
subgroup analysis of patients primarily with breast and non-small cell lung
tumors. Recruitment of 501 patients is currently underway at over 70 sites
worldwide. We expect enrollment to be completed during the second half of 2002.
If the Phase III trial is positive, we will file a new drug application
with the FDA to obtain marketing approval for RSR13 for the treatment of
patients who are receiving radiation therapy for brain metastases. In October
2000,
5
the FDA designated RSR13 a Fast Track Product for the treatment of brain
metastases. Designation as a Fast Track Product, under the FDA Modernization Act
of 1997, means that the FDA will facilitate the development and expedite the
review of a drug if it is intended for the treatment of a serious or
life-threatening condition, and it demonstrates the potential to address unmet
medical needs for such a condition.
RSR13 in the Treatment of NSCLC
NSCLC is the most common type of lung cancer and occurs in approximately
169,500 patients per year in the United States. NSCLC accounts for almost 80% of
lung cancer cases. We are currently evaluating RSR13 as a radiation enhancer for
the treatment of patients with locally advanced, inoperable NSCLC, also known as
Stage III NSCLC. Radiation therapy for treatment of Stage III NSCLC is
administered to approximately 60,000 patients per year in the United States and
is intended to prevent or reduce complications and control local tumor growth in
the chest. The median survival time of patients with Stage III NSCLC is
approximately nine to twelve months. In addition to patients with Stage III
NSCLC, we believe RSR13 could also be used to treat approximately 70,000
patients with other stages of NSCLC who are treated with radiation therapy each
year in the United States.
At the May 2001 Annual Meeting of the American Society of Clinical Oncology
(ASCO), we presented positive results from a 52-patient, open-label,
multi-center, Phase II clinical trial of induction chemotherapy followed by
chest radiation therapy in combination with RSR13 for stage IIIA/IIIB NSCLC.
Analyzing the data from 47 evaluable patients receiving RSR13 plus radiation
therapy demonstrated an overall response rate of 89%, with 80% partial responses
and 9% complete responses. The objectives of this study were to evaluate overall
survival, progression-free interval in the chest, complete and partial response
rates in the chest (radiation portal) and time-to-disease progression outside of
the radiation portal. The patients received two courses of induction paclitaxel
and carboplatin chemotherapy followed by daily RSR13 combined with chest
radiation therapy for 32 doses. In November 2001, we presented updated positive
response rate and survival results for this trial at the 43rd Annual Meeting of
the American Society for Therapeutic Radiology and Oncology (ASTRO). The updated
results showed a median survival rate of 20.6 months, 1-year survival rate of 68
percent and an estimated 2-year survival rate of 43 percent. Median time to
first progression was 9.9 months. Median tumor progression free survival time in
the radiation portal was 24.8 months while median progression free survival time
outside the portal was 11.3 months. We are currently evaluating initiation of a
Phase III clinical study of RSR13 in patients with Stage III NSCLC.
RSR13 in the Treatment of GBM
GBM is a deadly form of primary brain cancer. This condition occurs in
approximately 11,000 patients per year in the United States. The median survival
time of patients with GBM is approximately nine to ten months. Radiation therapy
is administered to most patients with GBM and is intended to prevent or reduce
complications and improve survival time.
We have collaborated with the National Cancer Institute, or NCI, sponsored
New Approaches to Brain Tumor Therapy, or NABTT, Consortium to complete Phase Ib
and Phase II clinical trials of RSR13 in patients with GBM. Based on a
19-patient Phase Ib study, which showed RSR13 was safe and well tolerated, the
NABTT consortium conducted a 50-patient, multi-center, Phase II efficacy and
safety study of RSR13 combined with a standard six-week course of cranial
radiation therapy in newly diagnosed GBM patients. The primary efficacy endpoint
of the study was survival time. The Phase II study showed that RSR13-treated
patients demonstrated overall survival time of 12.3 months compared to 9.7
months for the NABTT historical control group. The survival rate of
RSR13-treated patients at 6 months, 12 months and 18 months were 86%, 54% and
22.2% versus 72.3%, 34.7% and 6.2% for the NABTT control group. With a median
follow-up time of 17.6 months, there was a very significant 258% improvement in
18-month survival. Based on these positive survival results, the NABTT
consortium has recommended that a Phase III trial be conducted with RSR13 in
patients with newly diagnosed GBM.
We have also completed a 67-patient, multi-center, Phase II companion trial
of RSR13 and cranial radiation therapy in newly diagnosed GBM patients. The
trial was comparable in design and methods to the NABTT Phase II trial. Per
protocol, the survival results were compared to historical data using the RTOG
GBM database instead of the NABTT database. The RTOG GBM database consists
primarily of older RTOG studies of patients who, for 75% of them, had received
treatment with aggressive BCNU (carmustine) chemotherapy in addition to cranial
radiation therapy, early in the course of treatment. Treatment with BCNU is
considered efficacious and is a FDA
6
approved therapy for the treatment of malignant glioma (high-grade brain cancer,
including GBM). BCNU therapy is an independent prognostic factor for survival in
the RTOG GBM database.
When compared to the RTOG GBM database, including BCNU treated patients,
the RSR13-treated patients demonstrated comparable overall survival. When
compared to a subset of patients from the RTOG GBM database that had not
received aggressive BCNU therapy, the RSR13-treated patients demonstrated a 29%
improvement in median survival. However, this result was not statistically
significant. The magnitude of survival improvement was quite comparable to that
observed in the statistically significant 50-patient NABTT sponsored study.
Additional follow-up is ongoing prior to final analysis.
We have concurrence from the FDA to proceed with a Phase III trial of RSR13
in patients receiving radiation therapy for the treatment of GBM and are
evaluating initiation of this trial.
RSR13 in the Treatment of Other Cancers
We believe that RSR13 eventually could be used in many other tumor types
and clinical situations requiring radiation therapy, such as pediatric brain,
head and neck, uterine cervix, prostate, rectal and breast cancers. We have been
asked by NCI-sponsored consortia to consider collaborating on Phase I/II
clinical trials in pediatric brain cancer. Similarly, various United States and
Canadian consortia have proposed conducting Phase II trials in head and neck and
uterine cervix cancers. We anticipate conducting one or more of these Phase II
trials in the future.
RSR13 as a Chemotherapy Enhancer
Chemotherapy is administered to more than 350,000 cancer patients each year
in the United States. Depending on the complexity and duration of treatment, a
course of chemotherapy can cost between $6,000 and $10,000. As with radiation
therapy, certain types of chemotherapy drugs require the presence of oxygen for
optimal cytotoxic effects on cancer cells. Thus, stimulating oxygen release from
hemoglobin to hypoxic tumor tissue, by the administration of RSR13, may also
enhance the beneficial effects of certain types of chemotherapy.
We have conducted preclinical studies with RSR13 as a chemotherapy enhancer
for use in conjunction with certain chemotherapy agents. Our preclinical studies
suggest that RSR13 increases the activity of certain chemotherapy agents in
animal tumor models and enhances tumor response. We believe this effect may be
related to increasing the oxygen level in the tumors and enhancing the effect of
specific chemotherapy agents.
In December 2000, we initiated a Phase I/II study evaluating the safety and
efficacy of RSR13 administered with BCNU (carmustine) chemotherapy for the
treatment of recurrent malignant glioma, a type of primary brain cancer. This
study is an ongoing, nonrandomized, open-label, multi-center study of escalating
doses of RSR13 given with a fixed dose of BCNU to patients with recurring
glioma. The study is being conducted by the NCI-sponsored NABTT Consortium. This
group previously completed two positive clinical studies of RSR13 combined with
whole brain radiation therapy for the treatment of newly diagnosed GBM.
RSR13 for Treating Surgical Hypoxia
Each year in the United States, approximately 600,000 people undergo
cardiopulmonary bypass surgery, or CPB, and approximately seven million patients
who have significant cardiovascular risk factors undergo non-cardiac surgery.
Over one million of these patients experience cardiovascular complications that
frequently result in death or permanent disability. In patients undergoing
non-cardiac surgery who have chronic medical conditions, such as coronary artery
disease, diabetes and hypertension, complications resulting from tissue hypoxia
can be as high as 20%. By inducing hemoglobin to release a greater amount of
oxygen during surgery, we believe RSR13 can help mitigate tissue hypoxia
resulting from decreased oxygen carrying capacity, decreased blood flow, and, in
the case of CPB, decreased body temperature.
Based on preclinical studies of RSR13 in CPB and a successful Phase Ib
study in elective surgery patients, we conducted a randomized 30-patient Phase
II clinical trial of RSR13 in patients undergoing CPB for first time coronary
artery bypass grafting. This study demonstrated that RSR13 can be safely given
during CPB and provided preliminary evidence of a protective effect on heart
function. Although the patients undergoing this surgery were
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generally healthy beyond having coronary artery disease, myocardial protective
effects from RSR13 were still observed. There was also a trend toward a lower
blood transfusion requirement in the RSR13-treated group.
Based on the results of the Phase Ib general surgery study and the Phase II
CPB study, an additional randomized 164-patient Phase II study was initiated.
The purpose of this trial was to assess the ability of RSR13 treatment to
decrease the morbidity and mortality associated with heart and brain hypoxia in
patients with moderate to high risk factors undergoing CPB. This study was
terminated when it was determined in an interim safety analysis of 62 patients,
32 of whom received RSR13 and 30 of whom received placebo, that there was a
significant imbalance of patients with high risk factors in the RSR13-treated
group compared to the placebo group. Based on these findings, we are considering
conducting a new Phase II trial designed to better account for stratification of
risk factors in the treatment groups and would perform this study in conjunction
with a corporate partner.
RSR13 for Treating Cardiovascular Disease and Stroke
There are approximately 1.7 million hospitalizations per year in the United
States for acute coronary syndrome, which includes unstable angina and
myocardial infarction. We believe that RSR13 could play a major role in the
treatment of patients with acute coronary syndrome. We currently anticipate
clinical development for this indication would be in cooperation with a
corporate partner.
We have demonstrated that increasing oxygen release from hemoglobin with
RSR13 results in a significant decrease in myocardial hypoxia experienced in
animals during reduced coronary artery blood flow. We have also shown that
treatment with RSR13 results in a decrease in the release of a biochemical
marker associated with heart damage in animal models of myocardial infarction.
Based on these findings, an initial Phase Ib safety study was performed on 24
patients with chronic angina taking multiple medications for treatment of their
heart disease. This study demonstrated that RSR13 was safe and well tolerated in
this patient population. In addition, a 10-patient Phase II clinical trial has
been completed to determine if RSR13 can improve the exercise tolerance of
patients with coronary artery disease. We are currently evaluating the results
of this trial.
Additionally, our preclinical studies have demonstrated that RSR13 may play
a beneficial role in the treatment of stroke.
Other Synthetic Allosteric Modifiers
We have evaluated over 250 other synthetic allosteric modifiers of
hemoglobin, which are analogues of RSR13. Two of these analogues, RSR46 and JP7,
are second-generation molecules to RSR13, and, based on preliminary animal
studies, are potential candidates for clinical development. In addition, through
our research collaborations, we have expanded our drug discovery efforts on the
development of synthetic allosteric modifiers for targets of therapeutic
interest other than hemoglobin. One such target is red blood cell pyruvate
kinase, an enzyme central to the control of red blood cell 2,3-DPG metabolism.
Red blood cell pyruvate kinase is an allosteric protein that is structurally
very similar to hemoglobin. Increasing red blood cell 2,3-DPG levels by
inhibiting red blood cell pyruvate kinase may lead to the development of orally
administered products for chronic hypoxic indications, such as peripheral
vascular disease, chronic angina and congestive heart failure.
MANUFACTURING
We have entered into arrangements with two third-party manufacturers for
the supply of RSR13 bulk drug substance and formulated drug product,
respectively. This enables us to focus on our clinical development strengths,
minimize fixed costs and capital expenditures, and gain access to advanced
manufacturing process capabilities and expertise.
Hovione Group, our supplier of RSR13 sodium salt, the bulk drug substance,
operates under current Good Manufacturing Practices using cost-effective and
readily available materials and reliable processes. Under the terms of our
contract, Hovione is committed to manufacture sufficient quantities to support
commercial scale manufacturing for the foreseeable future. Hovione is currently
manufacturing RSR13 sodium salt in commercial-scale batches.
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Pursuant to our agreement, Hovione will manufacture and deliver quantities
of the bulk drug substance as determined by us for both pre-commercialization
and post-commercialization phases of production. Prior to commercialization,
Hovione has agreed to complete several objectives, including: process scale-up
and validation, manufacture and delivery of independent validation batches,
which demonstrate successful validation, and successful characterization and
delivery of samples of final bulk drug substance. Process validation for the
bulk drug was completed in 2001. All bulk drug substance batches must meet
certain performance criteria and Hovione has assured us an uninterrupted supply
of the bulk drug substance. We have the exclusive right to sublicense
inventions, process improvements and analytical methods developed under this
agreement in return for certain payments to Hovione.
After manufacture, RSR13 sodium salt is formulated under contract for us
into the drug product under current Good Manufacturing Practice guidelines by
Akorn, Inc. (formerly known as Taylor Pharmaceuticals, Inc.), a company that
specializes in the manufacture of sterile injectable products. Under our
contract with Akorn, Akorn has agreed to manufacture stability batches, clinical
batches and placebo, and support full release and stability testing. In 2001,
the required exhibit batches were manufactured and stability testing has begun.
We anticipate that Akorn will be able to provide sufficient drug product to
complete our ongoing and currently planned clinical trials and early commercial
needs.
We are in the process of establishing a manufacturing agreement with an
additional supplier of RSR13 bulk drug substance. We may establish manufacturing
agreements with other parties for additional commercial scale manufacturing of
RSR13 bulk drug substance and formulated drug product. In January 2002, we
signed a term sheet for manufacturing and supply of bulk drug substance for
clinical and commercial use.
SALES AND MARKETING
We intend to market RSR13 directly to the approximately 9,400 radiation
therapists and medical oncologists in the United States through a specialty
sales force. We expect to begin hiring this sales force around the time we
submit a New Drug Application to the FDA for the use of RSR13 in an oncology
indication.
To penetrate the non-oncology markets in North America, and all markets
outside North America, we will seek to develop relationships with one or more
pharmaceutical companies with established distribution systems and direct sales
forces. We expect these relationships will help us achieve our sales objectives
for RSR13 in these markets while allowing us to focus on the oncology market in
the United States.
GOVERNMENT REGULATION
FDA Regulation and Product Approval
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our product candidates.
The process required by the FDA before our product candidates may be
marketed in the United States generally involves the following:
o preclinical laboratory and animal tests;
o submission to the FDA of an Investigational New Drug, or IND,
application which must become effective before clinical trials may
begin;
o adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed pharmaceutical in our intended
use; and
o submission to the FDA of a New Drug Application, or NDA, that must be
approved.
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The testing and approval process requires substantial time, effort and
financial resources, and we cannot be certain that any approval will be granted
on a timely basis, if at all.
Preclinical tests include laboratory evaluation of the product candidate,
its chemistry, formulation and stability, as well as animal studies to assess
its potential safety and efficacy. We then submit the results of the preclinical
tests, together with manufacturing information and analytical data, to the FDA
as part of an IND application, which must become effective before we may begin
human clinical trials. The IND automatically becomes effective 30 days after the
FDA acknowledges that the filing is complete, unless the FDA, within the 30-day
time period, raises concerns or questions about the conduct of the trials as
outlined in the IND. In such a case, the IND sponsor and the FDA must resolve
any outstanding concerns before clinical trials can begin. Further, an
independent Institutional Review Board at each medical center proposing to
conduct the clinical trials must review and approve any clinical study.
Human clinical trials are typically conducted in three sequential phases,
which may overlap:
o PHASE I: The drug is initially administered into healthy human
subjects or patients and tested for safety, dosage tolerance,
absorption, metabolism, distribution and excretion.
o PHASE II: The drug is administered to a limited patient population to
identify possible adverse effects and safety risks, to determine the
efficacy of the product for specific targeted diseases and to
determine dosage tolerance and optimal dosage.
o PHASE III: When Phase II evaluations demonstrate that a dosage range
of the drug is effective and has an acceptable safety profile, Phase
III trials are undertaken to further evaluate dosage, clinical
efficacy and to further test for safety in an expanded patient
population at geographically dispersed clinical study sites.
In the case of product candidates for severe or life-threatening diseases
such as cancer, the initial human testing is often conducted in patients rather
than in healthy volunteers. Since these patients already have the target
disease, these studies may provide initial evidence of efficacy traditionally
obtained in Phase II trials and thus these trials are frequently referred to as
Phase Ib trials.
We cannot be certain that we will successfully complete Phase I, Phase II
or Phase III testing of our product candidates within any specific time period,
if at all. Furthermore, the FDA or the Institutional Review Boards or the
sponsor may suspend clinical trials at any time on various grounds, including a
finding that the subjects or patients are being exposed to an unacceptable
health risk.
The results of product development, preclinical studies and clinical
studies are submitted to the FDA as part of a NDA for approval of the marketing
and commercial shipment of the product candidate. The FDA may deny a NDA if the
applicable regulatory criteria are not satisfied or may require additional
clinical data. Even if such data is submitted, the FDA may ultimately decide
that the NDA does not satisfy the criteria for approval. Once issued, the FDA
may withdraw product approval if compliance with regulatory standards is not
maintained or if problems occur after the product reaches the market. In
addition, the FDA may require testing and surveillance programs to monitor the
effect of approved products, which have been commercialized, and the agency has
the power to prevent or limit further marketing of a product based on the
results of these post-marketing programs.
In November 1997, the Food and Drug Administration Modernization Act was
signed into law. That act codified the FDA's policy of granting "Fast Track"
approval for cancer therapies and other therapies intended to treat severe or
life-threatening diseases. Previously, the FDA approved cancer therapies
primarily based on patient survival rates and/or data on improved quality of
life. This new policy is intended to facilitate the study of cancer therapies
and shorten the total time for marketing approvals; however, it is too early to
tell what effect, if any, these provisions may actually have on product
approvals. In November 2000, we announced that the FDA had designated RSR13 a
Fast Track Product for the treatment of brain metastases.
Satisfaction of the above FDA requirements or similar requirements of
state, local and foreign regulatory agencies typically takes several years and
the actual time required may vary substantially, based upon the type, complexity
and novelty of the pharmaceutical product candidate. Government regulation may
delay or prevent marketing of potential products for a considerable period of
time and impose costly procedures upon our activities.
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We cannot be certain that the FDA or any other regulatory agency will grant
approval for any of our product candidates on a timely basis, if at all. Success
in preclinical or early stage clinical trials does not assure success in later
stage clinical trials. Data obtained from preclinical and clinical activities is
not always conclusive and may be susceptible to varying interpretations, which
could delay, limit or prevent regulatory approval. Even if a product candidate
receives regulatory approval, the approval may be significantly limited to
specific indications. Further, even after regulatory approval is obtained, later
discovery of previously unknown problems with a product may result in
restrictions on the product or even complete withdrawal of the product from the
market. Delays in obtaining, or failures to obtain regulatory approvals would
have a material adverse effect on our business. Marketing our product candidates
abroad will require similar regulatory approvals and is subject to similar
risks. In addition, we cannot predict what adverse governmental regulations may
arise from future United States or foreign governmental action.
Any products manufactured or distributed by us pursuant to FDA clearances
or approvals are subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experiences with
the drug. Drug manufacturers and their subcontractors are required to register
their establishments with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for
compliance with current Good Manufacturing Practices, which impose certain
procedural and documentation requirements upon us and our third-party
manufacturers. We cannot be certain that we or our present or future suppliers
will be able to comply with the current Good Manufacturing Practices and other
FDA regulatory requirements.
The FDA regulates drug labeling and promotion activities. The FDA has
actively enforced regulations prohibiting the marketing of products for
unapproved uses. Under the Modernization Act of 1997, the FDA will permit the
promotion of a drug for an unapproved use in certain circumstances, but subject
to very stringent requirements.
We and our product candidates are also subject to a variety of state laws
and regulations in those states or localities where they are or will be
marketed. Any applicable state or local regulations may hinder our ability to
market our product candidates in those states or localities.
The FDA's policies may change and additional government regulations may be
enacted which could prevent or delay regulatory approval of our potential
products. Moreover, increased attention to the containment of health care costs
in the United States and in foreign markets could result in new government
regulations, which could have a material adverse effect on our business. We
cannot predict the likelihood, nature or extent of adverse governmental
regulation, which might arise from future legislative or administrative action,
either in the United States or abroad.
Foreign Regulation and Product Approval
Outside the United States, our ability to market a product candidate is
contingent upon receiving a marketing authorization from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. At present, foreign marketing authorizations are applied for
at a national level, although within the European Community, or EC, registration
procedures are available to companies wishing to market a product in more than
one EC member state. If the regulatory authority is satisfied that adequate
evidence of safety, quality and efficiency has been presented, a marketing
authorization will be granted. This foreign regulatory approval process involves
all of the risks associated with FDA clearance discussed above.
Other Regulations
We are also subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control, and disposal of hazardous or potentially
hazardous substances. We may incur significant costs to comply with such laws
and regulations now or in the future.
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INTELLECTUAL PROPERTY
We believe that patent protection and trade secret protection are important
to our business and that our future success will depend, in part, on our ability
to maintain our technology licenses, maintain trade secret protection, obtain
patents and operate without infringing the proprietary rights of others both in
the United States and abroad. We believe that obtaining patents in countries
other than the United States may, in some cases, be more difficult than
obtaining United States patents because of differences in patent laws. In
addition, the protection provided by non-U.S. patents may be weaker than that
provided by United States patents.
Under a 1994 agreement with the Center for Innovative Technology, or CIT,
we have obtained exclusive worldwide rights to 16 United States patents, a
European patent which has been validated in the United Kingdom, France, Italy,
and Germany, two pending patent applications which have been approved in Canada,
two pending patent applications which have been approved in Japan, and one
pending patent application in Europe. Pursuant to this agreement, we have agreed
to sponsor research at Virginia Commonwealth University, or VCU, relating to
allosteric hemoglobin modifier compounds, and are entitled to an exclusive
worldwide license of any technology developed in connection with such research.
We will be required to pay a quarterly royalty based on percentages, as defined
in the agreement, of either net revenues arising from sales of products produced
in Virginia or net revenues from sales of products produced outside Virginia.
This agreement was assigned by CIT to the Virginia Commonwealth University
Intellectual Property Foundation, or VCUIPF, in 1997. Under the agreement, we
have the right to grant sublicenses, for which we must also pay royalties to
VCUIPF for products produced by the sublicensees. VCUIPF has the primary
responsibility to file, prosecute, and maintain intellectual property
protection, but we have agreed to reimburse costs incurred by VCUIPF after July
1, 1993 related to obtaining and maintaining intellectual property protection.
Also, pursuant to the agreement, we will pay VCUIPF a running royalty of 1.25%
of our worldwide net revenue arising from the sale, lease or other
commercialization of the allosteric hemoglobin modifier compounds. This
agreement terminates on the date the last United States patent licensed to us
under the agreement expires, which is October 2016.
The licensed patents, which expire at various times between February 2010
and October 2016, contain claims covering methods of allosterically modifying
hemoglobin with RSR13 and other compounds, the site within hemoglobin where
RSR13 binds, and certain clinical applications of RSR13 and other allosteric
hemoglobin modifier compounds, including, among others:
o treating cancerous tumors;
o treating ischemia or oxygen deprivation;
o treating stroke or cerebral ischemia;
o treating surgical blood loss;
o performing cardiopulmonary bypass surgery; and
o treating hypoxia.
Under a separate agreement with VCUIPF, we have rights to acquire an
exclusive worldwide license to any technology which is developed using research
funding provided by us to VCU under a Sponsored Research Agreement. This
agreement allows us to access a drug discovery presence without having to
develop in-house research and development capabilities. We have the option to
acquire a license for six months from the date any developed technology is
disclosed to us. All that is required to exercise our option is to provide
notification to VCUIPF, and to assume responsibility for all legal expenses for
securing intellectual property protection for technology developed under the
Sponsored Research Agreement. We have the exclusive right to sublicense any
technology to third parties and affiliates. We are required to pay VCUIPF a
running royalty on our worldwide net revenue arising from commercialization of
the technology developed. We have exercised our option on one technology under
this agreement which pertains to allosteric inhibitors and activators of red
blood cell kinase. We may terminate this agreement without cause by giving
VCUIPF ninety days written notice. VCUIPF may terminate this agreement upon
certain payment and reporting breaches by us. Either party may terminate this
agreement for certain uncured breaches.
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In order to protect the confidentiality of our technology, including trade
secrets and know-how and other proprietary technical and business information,
we require all of our employees, consultants, advisors and collaborators to
enter into confidentiality agreements that prohibit the use or disclosure of
confidential information. The agreements also oblige our employees, consultants,
advisors and collaborators to assign to us ideas, developments, discoveries and
inventions made by such persons in connection with their work with us. We cannot
be sure that these agreements will maintain confidentiality, will prevent
disclosure, or will protect our proprietary information or intellectual
property, or that others will not independently develop substantially equivalent
proprietary information or intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with those being developed by us. Therefore, our product candidates may give
rise to claims that they infringe the patents or proprietary rights of other
parties now and in the future. Furthermore, to the extent that we, or our
consultants or research collaborators, use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions. An
adverse claim could subject us to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. A license
required under any such patents or proprietary rights may not be available to
us, or may not be available on acceptable terms. If we do not obtain such
licenses, we may encounter delays in product market introductions, or may find
that we are prevented from the development, manufacture or sale of products
requiring such licenses. In addition, we could incur substantial costs in
defending ourselves in legal proceedings instituted before the United States
Patent and Trademark Office or in a suit brought against us by a private party
based on such patents or proprietary rights, or in a suit by us asserting our
patent or proprietary rights against another party, even if the outcome is not
adverse to us.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving technology
and intense competition. Many companies of all sizes, including a number of
large pharmaceutical companies as well as several specialized biotechnology
companies, are developing cancer drugs similar to ours. There are products on
the market that will compete directly with the products that we are developing.
In addition, colleges, universities, governmental agencies and other public and
private research institutions will continue to conduct research and are becoming
more active in seeking patent protection and licensing arrangements to collect
license fees, milestone payments and royalties in exchange for license rights to
technologies that they have developed, some of which may directly compete with
our technologies. These companies and institutions also compete with us in
recruiting qualified scientific personnel. Many of our competitors have
substantially greater financial, research and development, human and other
resources than do we. Furthermore, large pharmaceutical companies have
significantly more experience than we do in preclinical testing, human clinical
trials and regulatory approval procedures.
Our competitors may:
o develop safer and more effective products;
o obtain patent protection or intellectual property rights that limit
our ability to commercialize products; or
o commercialize products earlier than us.
We expect technology developments in our industry to continue to occur at a
rapid pace. Commercial developments by our competitors may render some or all of
our potential products obsolete or non-competitive, which would materially harm
our business and financial condition.
HUMAN RESOURCES
As of December 31, 2001, we had a total of 58 full-time employees and three
part-time employees. Of those, 43 are engaged in research and development,
preclinical and clinical testing, manufacturing and regulatory affairs. The
remaining 18 are involved in marketing, finance, administration and operations.
We believe that we have good relationships with our employees. We have never had
a work stoppage, and none of our employees is represented under a collective
bargaining agreement.
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RISK FACTORS
Our business faces significant risks. These risks include those described
below and may include additional risks of which we are not currently aware or
which we currently do not believe are material. If any of the events or
circumstances described in the following risks actually occurs, our business,
financial condition or results of operations could be materially adversely
affected. These risks should be read in conjunction with the other information
set forth in this report.
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT, AND WE MAY NOT
ACHIEVE OR MAINTAIN REVENUE OR PROFITABILITY IN THE FUTURE.
We have experienced operating losses since we began operations in 1994. As
of December 31, 2001, we had an accumulated deficit of approximately $87
million. We expect to incur additional operating losses over the next several
years and expect cumulative losses to increase substantially as our research and
development, preclinical, clinical and manufacturing efforts expand. We have had
no revenue to date. Our ability to achieve revenue and profitability is
dependent on our ability, alone or with partners, to successfully complete the
development of our product candidates, conduct clinical trials, obtain the
necessary regulatory approvals, and manufacture and market our product
candidates. We cannot assure you that we will achieve revenue or profitability.
OUR PRODUCT CANDIDATES ARE IN THE EARLY STAGES OF DEVELOPMENT AND MAY NEVER BE
FULLY DEVELOPED IN A MANNER SUITABLE FOR COMMERCIALIZATION. IF WE DO NOT DEVELOP
COMMERCIALLY SUCCESSFUL PRODUCTS, OUR ABILITY TO GENERATE REVENUE WILL BE
LIMITED.
If we are unable to successfully commercialize our product candidates, we
will be unable to generate any meaningful amounts of revenue and will incur
continued losses. We may not be able to continue as a going concern if we are
unable to generate meaningful amounts of revenue to support our operations or
cannot otherwise raise the necessary funds to support our operations. We have no
products that have received regulatory approval for commercial sale. All of our
product candidates are in early stages of development, and significant research
and development, financial resources and personnel will be required to develop
commercially viable products and obtain regulatory approvals. Substantially all
of our efforts and expenditures over the next few years will be devoted to
RSR13. Accordingly, our future prospects are substantially dependent on
favorable results from clinical trials utilizing RSR13. None of our product
candidates, including RSR13, is expected to be commercially available until at
least 2004.
WE CANNOT PREDICT WHEN OR IF WE WILL OBTAIN REGULATORY APPROVAL TO COMMERCIALIZE
OUR PRODUCT CANDIDATES.
A pharmaceutical product cannot be marketed in the United States or most
other countries until it has completed a rigorous and extensive regulatory
approval process. If we fail to obtain regulatory approval to market our product
candidates, we will be unable to sell our products and generate revenue, which
would jeopardize our ability to continue operating our business. Satisfaction of
regulatory requirements typically takes many years, is dependent upon the type,
complexity and novelty of the product and requires the expenditure of
substantial resources. Of particular significance are the requirements covering
research and development, testing, manufacturing, quality control, labeling and
promotion of drugs for human use. We may not obtain regulatory approval for any
product candidates we develop, including RSR13, or we may not obtain regulatory
review of such product candidates in a timely manner. See "Business--Government
Regulation" for a detailed discussion of the regulatory approval process.
WE WILL NOT BE ABLE TO OBTAIN REGULATORY APPROVAL TO COMMERCIALIZE OUR PRODUCT
CANDIDATES IF WE FAIL TO ADEQUATELY DEMONSTRATE THEIR SAFETY AND EFFICACY.
Product candidates developed by us, alone or with others, may not prove to
be safe and efficacious in clinical trials and may not meet all of the
applicable regulatory requirements needed to receive regulatory approval. To
demonstrate safety and efficacy, we must conduct significant additional
research, animal testing, referred to as preclinical testing, and human testing,
referred to as clinical trials, for our product candidates. Preclinical testing
and clinical trials are long, expensive and uncertain processes. It may take us
several years to complete our testing, and failure can occur at any stage. We
have limited experience in conducting and managing clinical trials.
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Data obtained from preclinical and clinical activities are susceptible to
varying interpretations that could delay, limit or prevent regulatory
clearances, and the FDA can request that we conduct additional trials. For
example, we are currently planning to perform only one Phase III clinical trial
prior to seeking FDA approval for our first product candidate. We believe that
if the results of this Phase III clinical trial are consistent with our prior
Phase II clinical results, this Phase III clinical trial can serve as the basis
for obtaining FDA approval. However, if the results are inconclusive, a second
trial may be necessary. If we have to conduct further clinical trials, whether
for RSR13 or other product candidates we develop in the future, it would
significantly increase our expenses and delay marketing of our product
candidates. See "Business--Government Regulation" for a detailed discussion of
the regulatory approval process.
WE MAY EXPERIENCE DELAYS IN OUR CLINICAL TRIALS THAT COULD ADVERSELY AFFECT OUR
FINANCIAL POSITION AND OUR COMMERCIAL PROSPECTS.
We do not know whether planned clinical trials will begin on time or
whether any of our clinical trials will be completed on schedule or at all. Our
product development costs will increase if we have delays in testing or
approvals or if we need to perform more or larger clinical trials than planned.
If the delays are significant, our ability to generate revenue from product
sales will be correspondingly delayed, and we may have insufficient capital
resources to support our operations. Even if we do have sufficient capital
resources, our ability to become profitable will be delayed. We typically rely
on third-party clinical investigators at medical institutions to conduct our
clinical trials and we occasionally rely on other third-party organizations to
perform data collection and analysis. As a result, we may face additional
delaying factors outside our control.
WE MAY BE REQUIRED TO SUSPEND, REPEAT OR TERMINATE OUR CLINICAL TRIALS IF THEY
ARE NOT CONDUCTED IN ACCORDANCE WITH REGULATORY REQUIREMENTS, THE RESULTS ARE
NEGATIVE OR INCONCLUSIVE, OR THE TRIALS ARE NOT WELL DESIGNED.
Clinical trials must be conducted in accordance with the FDA's Good
Clinical Practices and are subject to oversight by the FDA and institutional
review boards at the medical institutions where the clinical trials are
conducted. In addition, clinical trials must be conducted with product
candidates produced under the FDA's Good Manufacturing Requirements, and may
require large numbers of test subjects. Clinical trials may be suspended by us
or the FDA at any time if it is believed that the subjects participating in
these trials are being exposed to unacceptable health risks or if the FDA finds
deficiencies in the conduct of these trials.
Even if we achieve positive interim results in clinical trials, these
results do not necessarily predict final results, and acceptable results in
early trials may not be repeated in later trials. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. Negative or inconclusive
results or adverse medical events during a clinical trial could cause a clinical
trial to be repeated or terminated. In addition, failure to construct clinical
trial protocols to screen patients for risk profile factors relevant to the
trial for purposes of segregating patients into the patient populations treated
with the drug being tested and the control group could result in either group
experiencing a disproportionate number of adverse events and could cause a
clinical trial to be repeated or terminated.
ACCEPTANCE OF OUR PRODUCTS IN THE MARKETPLACE IS UNCERTAIN, AND FAILURE TO
ACHIEVE MARKET ACCEPTANCE WILL LIMIT OUR ABILITY TO GENERATE REVENUE AND BECOME
PROFITABLE.
Even if approved for marketing, our products may not achieve market
acceptance. The degree of market acceptance will depend upon a number of
factors, including:
o the receipt of regulatory approval for the uses that we are studying;
o the establishment and demonstration in the medical community of the
safety and efficacy of our products and their potential advantages
over existing and newly developed therapeutic products;
o ease of use of our products;
o pricing and reimbursement policies of government and third-party
payors such as insurance companies, health maintenance organizations
and other plan administrators; and
15
o the effectiveness of our sales and marketing efforts.
Physicians, patients, payors or the medical community in general may be
unwilling to accept, utilize or recommend any of our products.
IF WE FAIL TO OBTAIN THE CAPITAL NECESSARY TO FUND OUR OPERATIONS, WE WILL BE
UNABLE TO SUCCESSFULLY DEVELOP OUR PRODUCT CANDIDATES.
We expect that significant additional financing will be required in the
future to continue our research and development efforts and to commercialize our
product candidates. If adequate funds are not available to us, we will be
required to delay, reduce the scope of or eliminate one or more of our
development programs and our business and future prospects for revenue and
profitability may be harmed. We do not know whether additional financing will be
available when needed, or that, if available, we will obtain financing on terms
favorable to our stockholders or us. We have consumed substantial amounts of
cash to date and expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure and preclinical and
clinical trial activities. We may raise this financing through public or private
equity offerings, debt financings or additional corporate collaboration and
licensing arrangements.
We believe that our existing cash and investment securities will be
sufficient to support our current operating plan through at least the end of
2003. We have based this estimate on assumptions that may prove to be wrong. Our
future capital requirements depend on many factors that affect our research,
development, collaboration and sales and marketing activities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
To the extent we raise additional capital by issuing equity securities, our
stockholders may experience substantial dilution. To the extent that we raise
additional funds through collaboration and licensing arrangements, we may be
required to relinquish some rights to our technologies or product candidates, or
grant licenses on terms that are not favorable to us.
IF WE ARE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY, WE WOULD BE
UNABLE TO PREVENT THIRD PARTIES FROM USING OUR TECHNOLOGY, WHICH WOULD IMPAIR
OUR COMPETITIVENESS AND ABILITY TO COMMERCIALIZE OUR PRODUCT CANDIDATES. IN
ADDITION, THE COST OF ENFORCING OUR PROPRIETARY RIGHTS MAY BE EXPENSIVE AND
RESULT IN INCREASED LOSSES.
Our success will depend in part on our ability to obtain and maintain
meaningful patent protection for our products, both in the United States and in
other countries. We rely on patents to protect a large part of our intellectual
property and our competitive position. We currently own or exclusively license
39 patents and patent applications (including pending applications, abandoned
applications, and U.S. provisional applications), both in the United States and
in other countries. Any patents issued to or licensed by us could be challenged,
invalidated, infringed, circumvented or held unenforceable. In addition, it is
possible that no patents will issue on any of our licensed patent applications.
It is possible that the claims in patents that have been issued or licensed to
us or that may be issued or licensed to us in the future will not be
sufficiently broad to protect our intellectual property or that the patents will
not provide protection against competitive products or otherwise be commercially
valuable. Failure to obtain and maintain adequate patent protection for our
intellectual property would impair our ability to be commercially competitive.
Our commercial success will also depend in part on our ability to
commercialize our product candidates without infringing patents or other
proprietary rights of others or breaching the licenses granted to us. We may not
be able to obtain a license to third-party technology that we may require to
conduct our business or, if obtainable, we may not be able to license such
technology at a reasonable cost. If we fail to obtain a license to any
technology that we may require to commercialize our technologies or product
candidates, or fail to obtain a license at a reasonable cost, we will be unable
to commercialize the affected product or to commercialize it at a price that
will allow us to become profitable.
In addition to patent protection, we also rely upon trade secrets,
proprietary know-how and technological advances which we seek to protect through
confidentiality agreements with our collaborators, employees and consultants.
Our employees and consultants are required to enter into confidentiality
agreements with us. We also
16
have entered into non-disclosure agreements, which are intended to protect our
confidential information delivered to third parties for research and other
purposes. However, these agreements could be breached and we may not have
adequate remedies for any breach, or our trade secrets and proprietary know-how
could otherwise become known or be independently discovered by others.
Furthermore, as with any pharmaceutical company, our patent and other
proprietary rights are subject to uncertainty. Our patent rights related to our
product candidates might conflict with current or future patents and other
proprietary rights of others. For the same reasons, the products of others could
infringe our patents or other proprietary rights. Litigation or patent
interference proceedings, either of which could result in substantial costs to
us, may be necessary to enforce any of our patents or other proprietary rights,
or to determine the scope and validity or enforceability of other parties'
proprietary rights. The defense and prosecution of patent and intellectual
property claims are both costly and time consuming, even if the outcome is
favorable to us. Any adverse outcome could subject us to significant liabilities
to third parties, require disputed rights to be licensed from third parties, or
require us to cease selling our future products. We are not currently a party to
any infringement claims.
IF OUR COMPETITORS DEVELOP AND MARKET PRODUCTS THAT ARE MORE EFFECTIVE THAN
OURS, OUR COMMERCIAL OPPORTUNITY WILL BE REDUCED OR ELIMINATED.
Even if we obtain the necessary governmental approvals to market RSR13 or
other product candidates, our commercial opportunity will be reduced or
eliminated if our competitors develop and market products that are more
effective, have fewer side effects or are less expensive than our product
candidates. Our potential competitors include large fully integrated
pharmaceutical companies and more established biotechnology companies, both of
which have significant resources and expertise in research and development,
manufacturing, testing, obtaining regulatory approvals and marketing. Academic
institutions, government agencies, and other public and private research
organizations conduct research, seek patent protection and establish
collaborative arrangements for research, development, manufacturing and
marketing. It is possible that competitors will succeed in developing
technologies that are more effective than those being developed by us or that
would render our technology obsolete or noncompetitive. We are not aware of any
products in research or development by any potential competitors, which address
allosteric regulation of proteins in the way being targeted by us. There are,
however, other companies addressing the same indications as we are.
WE RELY ON THIRD-PARTY COLLABORATORS TO CONDUCT OUR RESEARCH AND DEVELOPMENT
ACTIVITIES AND MANUFACTURE OUR PRODUCT CANDIDATES. IF OUR COLLABORATIVE PARTNERS
DO NOT PERFORM AS EXPECTED, WE MAY BE UNABLE TO DEVELOP AND COMMERCIALIZE OUR
PRODUCT CANDIDATES, WHICH WOULD LIMIT OUR ABILITY TO GENERATE REVENUE AND BECOME
PROFITABLE AND OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCT CANDIDATES
COULD BE SEVERELY LIMITED.
We do not have our own research or manufacturing facilities and currently
do not plan to establish such facilities. Instead, we depend upon academic,
research and non-profit institutions and commercial service and manufacturing
organizations for chemical synthesis and analysis, product formulation, assays,
preclinical and clinical testing, and manufacture of our product candidates. If
our collaborative partners do not perform these functions satisfactorily, our
ability to develop and commercialize our product candidates could be severely
limited which would limit our ability to sell our products or to sell them in
quantities sufficient to generate enough revenue to allow us to become
profitable.
Currently, we are supporting research with respect to allosteric
modification of proteins at Virginia Commonwealth University in the laboratories
of Dr. Donald Abraham, a founder, stockholder and director. In addition, our
manufacturing is currently performed by a limited number of third-party
manufacturers with whom we have contracts. Any failure by our third-party
manufacturers to supply our requirements for clinical trial materials, including
RSR13 bulk drug substance or fomulated drug product, would jeopardize the
completion of such trials and our ultimate ability to commercialize RSR13. Prior
to regulatory approval of RSR13, we may seek to establish supply agreements with
additional sources of supply for bulk drug substance and formulated drug
product. However, only a limited number of contract manufacturers are both
capable of manufacturing our product candidates and complying with current
federal and state good manufacturing practice regulations. Accordingly, we may
not be able to enter into supply agreements on commercially acceptable terms
and, even if we do, any manufacturers with which we contract may not be able to
deliver supplies in appropriate quantity.
17
If conflicts arise between us and our academic collaborators, scientific
advisors, manufacturers or other suppliers, including Dr. Abraham, the other
party may act in its self-interest and not in the interest of our stockholders.
We generally do not have control over the resources or degree of effort that any
of our existing collaborative partners may devote to our collaborations. If our
collaborators breach or terminate their agreements with us or otherwise fail to
conduct their collaborative activities successfully and in accordance with
agreed upon schedules, our ability to develop, commercialize and sell products
would be limited. In addition, our collaborative partners could cease operations
or offer, design, manufacture or promote competing products. Any of these
occurrences could materially limit our potential revenue and profitability.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
PRODUCT CANDIDATES.
The testing and marketing of pharmaceutical products entail an inherent
risk of product liability. Product liability claims might be brought against us
by consumers, health care providers or by pharmaceutical companies or others
selling our future products. If we cannot successfully defend ourselves against
such claims, we may incur substantial liabilities or be required to limit the
commercialization of our product candidates. We have obtained limited product
liability insurance coverage for our human clinical trials. However, insurance
coverage is becoming increasingly expensive, and no assurance can be given that
we will be able to maintain insurance coverage at a reasonable cost or in
sufficient amounts to protect us against losses due to liability. A successful
product liability claim in excess of our insurance coverage could have a
material adverse effect on our business, financial condition and results of
operations. We may not be able to obtain commercially reasonable product
liability insurance for any products approved for marketing.
OUR OPERATING RESULTS MAY FLUCTUATE, AND ANY FAILURE TO MEET FINANCIAL
EXPECTATIONS MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A
DECLINE IN OUR STOCK PRICE, CAUSING INVESTOR LOSSES.
Our results of operations have fluctuated in the past and are likely to do
so in the future. These fluctuations could cause our stock price to decline.
Some of the factors that could cause our results of operations to fluctuate
include:
o the status of development of our various product candidates;
o the time at which we enter into research and license agreements with
corporate partners, if any, that provide for payments to us, and the
timing and accounting treatment of payments to us under those
agreements;
o whether or not we achieve specified research or commercialization
milestones;
o timely payment by our corporate partners, if any, of amounts payable
to us;
o the addition or termination of research programs or funding support;
and
o variations in the level of expenses related to our proprietary product
candidates during any given period.
We believe that period-to-period comparisons of our results of operations
are not necessarily meaningful and should not be relied upon as an indication of
future performance. It is possible that in some future quarter or quarters, our
operating results will be below the expectations of securities analysts or
investors. In that case, our stock price could fluctuate significantly or
decline.
FAILURE TO ATTRACT, RETAIN AND MOTIVATE SKILLED PERSONNEL AND CULTIVATE KEY
ACADEMIC COLLABORATIONS WILL DELAY OUR PRODUCT DEVELOPMENT PROGRAMS AND OUR
RESEARCH AND DEVELOPMENT EFFORTS.
We are a small company with approximately 60 employees, and our success
depends on our continued ability to attract, retain and motivate highly
qualified management and scientific personnel and on our ability to develop and
maintain important relationships with leading academic institutions and
scientists. Competition for personnel and academic collaborations is intense. In
particular, our product development programs depend on our ability to attract
and retain highly skilled chemists and clinical development personnel. In
addition, we will need to hire additional personnel and develop additional
academic collaborations as we continue to expand our research and development
activities. We do not know if we will be able to attract, retain or motivate
personnel or maintain relationships. If we
18
fail to negotiate additional acceptable collaborations with academic
institutions and scientists, or if our existing academic collaborations were to
be unsuccessful, our product development programs may be delayed.
ITEM 2. PROPERTIES
Our corporate headquarters facility consists of approximately 31,228 square
feet in Westminster, Colorado. We lease our corporate headquarters facility
pursuant to a lease agreement that expires in November 2008. We believe that our
leased facilities are adequate to meet our needs for the next 3 years. We also
lease approximately 1,800 square feet of office and laboratory space in
Richmond, Virginia. We lease this space under a renewable operating lease, which
expires in October 2004.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter of 2001.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"ALTH." Trading of our common stock commenced on March 28, 2000, following
completion of our initial public offering. The following table sets forth, for
the periods indicated, the high and low sales prices for our common stock as
reported by the Nasdaq National Market:
<Table>
<Caption>
Year Ended December 31, 2000 HIGH LOW
------ ------
First Quarter (from March 28) .......... $16.00 $12.75
Second Quarter ......................... $15.06 $ 8.50
Third Quarter .......................... $15.06 $ 8.38
Fourth Quarter ......................... $11.25 $ 4.75
</Table>
<Table>
<Caption>
Year Ended December 31, 2001 HIGH LOW
------ ------
First Quarter ..................... $ 8.88 $ 4.28
Second Quarter .................... $ 7.63 $ 4.41
Third Quarter ..................... $ 5.66 $ 4.25
Fourth Quarter .................... $ 7.60 $ 4.40
</Table>
On February 22, 2002, the last reported sale price of our common stock on
the Nasdaq National Market was $5.95 per share. On February 22, 2002, we had
approximately 115 holders of record of our common stock.
We have never paid any cash dividends on our capital stock and do not
intend to pay any such dividends in the foreseeable future.
On March 27, 2000, we commenced our initial public offering, which
consisted of 5,000,000 shares of our common stock at $18.00 per share pursuant
to a registration statement (No. 333-95439) declared effective by the Securities
and Exchange Commission. The offering has been completed and all shares have
been sold. The managing underwriters for the initial public offering were SG
Cowen, Prudential Vector Healthcare and U.S. Bancorp Piper Jaffray. Aggregate
gross proceeds from the offering were $90,000,000.
We incurred the following expenses in connection with the offering:
underwriters' discounts and commissions of $6.3 million and approximately $0.9
million in other expenses, for total expenses of approximately $7.2 million.
After deducting expenses of the offering, we received net offering proceeds of
approximately $82.8 million. As of December 31, 2000, the entire net proceeds
from the offering were invested in short-term and long-term financial
instruments.
No payments constituted direct or indirect payments to any of our
directors, officers or general partners or their associates, to persons owning
10% or more of any class of our equity securities or to any of our affiliates.
20
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our financial statements and the related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included in this
report. The statement of operations data for the years ended December 31, 1999,
2000 and 2001, and the balance sheet data as of December 31, 2000 and 2001, are
derived from, and qualified by reference to, our audited financial statements
included elsewhere in this report. The statement of operations data for the
years ended December 31, 1997 and 1998, and the balance sheet data as of
December 31, 1997, 1998 and 1999, are derived from our audited financial
statements that do not appear in this report. The historical results are not
necessarily indicative of the operating results to be expected in the future.
<Table>
<Caption>
CUMULATIVE
PERIOD FROM
SEPTEMBER 1,
1992 (DATE OF
INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------------------------------------------------------ DECEMBER 31,
1997 1998 1999 2000 2001 2001
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Research and development ............. $ 3,865 $ 5,941 $ 7,836 $ 10,737 $ 12,660 $ 46,343
Clinical manufacturing ............... 1,564 1,768 1,382 3,200 3,143 11,508
General and administrative ........... 1,262 1,486 2,379 13,775 9,277 30,223
------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses ...... 6,691 9,195 11,597 27,712 25,080 88,074
Loss from operations ................... (6,691) (9,195) (11,597) (27,712) (25,080) (88,074)
Interest and other income, net ......... 178 621 309 4,351 4,936 10,833
------------ ------------ ------------ ------------ ------------ ------------
Net loss ............................... (6,513) (8,574) (11,288) (23,361) (20,144) (77,241)
Dividend related to beneficial
conversion feature of preferred
stock ................................ -- -- (9,613) -- -- (9,613)
Net loss attributable to common
stockholders ......................... $ (6,513) $ (8,574) $ (20,901) $ (23,261) $ (20,144) $ (86,854)
Weighted-average basic and diluted
net loss per share ................... $ (3.52) $ (4.38) $ (10.48) $ (1.30) $ (0.88)
Weighted-average shares used in
computing basic and diluted net
loss per share ....................... 1,848,208 1,959,071 1,994,764 18,058,802 22,970,974
</Table>
<Table>
<Caption>
AS OF DECEMBER 31,
------------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments ..... $ 479 $ 9,582 $ 9,475 $ 61,777 $ 59,769
Long-term marketable securities ....................... -- -- -- 23,906 9,843
Working capital (deficiency) .......................... (1,149) 8,146 8,784 59,170 55,650
Total assets .......................................... 830 10,480 10,206 86,259 72,174
Long-term obligations, less current portion ........... 89 147 69 8 --
Convertible preferred stock ........................... 12,804 30,751 49,899 -- --
Common stock .......................................... 204 207 7,022 156,625 156,948
Accumulated deficit ................................... (13,874) (22,447) (43,348) (66,710) (86,854)
Total stockholders' equity (deficit) .................. (1,005) 8,371 8,991 83,411 67,151
</Table>
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a biopharmaceutical company focused on developing and
commercializing innovative small molecule drugs for improving cancer treatments.
Small molecule drugs, in general, are non-protein products produced by chemical
synthesis rather than biologic methods. Our lead compound, RSR13 (generic name:
efaproxiril sodium), is a synthetic small molecule that increases the release of
oxygen from hemoglobin, the oxygen-carrying protein contained within red blood
cells. The presence of oxygen in tumors is an essential element for the
effectiveness of radiation therapy and some chemotherapy agents in the treatment
of cancer. By increasing tumor oxygenation, RSR13 has the potential to enhance
the efficacy of standard radiation therapy and certain chemotherapeutic drugs.
Unlike chemotherapeutics or other radiosensitizers, RSR13 does not have to cross
the blood brain barrier and enter the tumor for efficacy. We believe RSR13 can
be used to improve existing cancer treatments and treat many diseases and
clinical conditions attributed to or aggravated by oxygen deprivation.
Deprivation of oxygen in the body is called hypoxia.
We have devoted substantially all of our resources to research and clinical
development. We have not derived any commercial revenues from product sales, and
we do not expect to receive product revenues until at least 2004. We have
incurred significant operating losses since our inception in 1992 and, as of
December 31, 2001, had an accumulated deficit of $86,853,945. There can be no
assurance if or when we will become profitable. We expect to continue to incur
significant operating losses over the next several years as we continue to incur
increasing research and development costs, in addition to costs related to
clinical trials and manufacturing activities. We expect that losses will
fluctuate from quarter to quarter and that such fluctuations may be substantial.
Our achieving profitability depends upon our ability, alone or with others, to
successfully complete the development of our product candidates, and obtain
required regulatory clearances and successfully manufacture and market our
future products.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Expenses
Research and Development. Research and development expenses were
$12,659,000 for the year ended December 31, 2001, compared to $10,737,000 for
the year ended December 31, 2000 and $7,836,000 for the year ended December 31,
1999. Excluding the impact of non-cash charges comprising amortization of
deferred compensation and stock expense (see "Non-cash Charges" below), research
and development expenses were $11,426,000 for the year ended December 31, 2001,
compared to $6,215,000 and $6,144,000 for the years ended December 31, 2000 and
1999, respectively. The $5,211,000, or 84%, increase from 2000 to 2001 was due
primarily to increased clinical trial costs associated with our first Phase III
clinical trial of RSR13 and the additional headcount required to support this
trial. We expect research and development expenses to increase in 2002 as we
continue our Phase III study and begin several additional Phase II clinical
trials of RSR13. The $71,000, or 1%, increase in research and development
spending from 1999 to 2000 was due primarily to additional headcount and
administration costs to complete several Phase II clinical trials.
Clinical Manufacturing. Clinical manufacturing expenses include the cost of
manufacturing RSR13 for use in clinical trials and costs associated with the
scale-up of manufacturing to support commercial requirements. Clinical
manufacturing expenses for the years ended December 31, 2001, 2000 and 1999 were
$3,143,000, $3,201,000 and $1,382,000, respectively. The $58,000, or 2%,
decrease in 2001 compared to 2000 primarily resulted from decreased consulting
and formulation expenses. The $1,819,000, or 132%, increase in 2000 compared to
1999 primarily resulted from increased costs incurred in manufacturing more bulk
drug substance and drug product for our clinical trials.
General and Administrative. General and administrative expenses for the
years ended December 31, 2001, 2000 and 1999 were $9,277,000, $13,775,000 and
$2,379,000, respectively. Excluding the impact of non-cash charges comprising
amortization of deferred compensation and stock compensation expense, (see
"Non-cash Charges" below), general and administrative expenses were $6,917,000,
$3,610,000 and $1,703,000 for the years ended
22
December 31, 2001, 2000 and 1999, respectively. The $3,307,000, or 92%, increase
for 2001 compared to 2000 and the $1,907,000 or 1,120% increase in 2000 compared
to 1999, are both primarily the result of additional costs associated with being
a public company, increased personnel costs and increased facility costs.
Non-cash Charges. We have recorded compensation charges resulting from
certain options granted to employees prior to our March 2000 initial public
offering with exercise prices below the fair market value of our common stock on
their respective grant dates. For the years ended December 31, 2001, 2000 and
1999, we recorded amortization of deferred stock compensation of $3,462,000,
$7,181,000 and $1,554,000, respectively. Of the $3,462,000 recorded for the year
ended December 31, 2001, $2,287,000 related to general and administrative,
$1,023,000 related to research and development and the remaining $152,000
related to clinical manufacturing. Of the $7,181,000 recorded for the year ended
December 31, 2000, $4,663,000 related to general and administrative, $2,287,000
related to research and development and the remaining $231,000 related to
clinical manufacturing. Of the $1,554,000 recorded for the year ended December
31, 1999, $1,533,000 related to research and development and the remaining
$21,000 related to general and administrative. At December 31, 2001, the Company
had $2,944,000 of deferred compensation remaining to be amortized.
For the year ended December 31, 2001, we recorded stock compensation
expense of $283,000 due to changes to the original terms of various grant
agreements. Of this amount, $73,000 related to general and administrative and
the remaining $210,000 related to research and development.
For the year ended December 31, 2000, we recorded $7,617,000 in stock
compensation expense in connection with the forgiveness of the 1996 Notes (as
defined below). Of this amount, $5,417,000 related to general and administrative
and the remaining $2,200,000 related to research and development. This
compensation charge was a result of obtaining recourse notes receivable in March
1996 (the "1996 Notes") from two officers in the amount of $90,000 upon the
officers' exercise of 558,000 stock options. The 1996 Notes accrued interest at
8% annually with interest and principal originally due March 1998. In December
1997, the maturity dates for the 1996 Notes were extended by two years and
extended by an additional year in January 2000. Upon forgiveness of the notes in
March 2000, we recorded stock compensation expense based upon the difference
between the fair market value of the underlying common stock and option exercise
price. In addition, we recorded $120,000 of compensation expense due to the
extinguishment of the notes. Of this amount, $35,000 related to research and
development and the remaining $85,000 related to general and administrative.
For the year ended December 31, 1999, we recorded $814,000 in stock
compensation expense in connection with the extension of the 1997 Notes (as
defined below). Of this amount, $655,000 related to general and administrative
and the remaining $159,000 related to research and development. This
compensation charge was a result of obtaining recourse notes receivable in
December 1997 (the "1997 Notes") from two officers in the amount of $50,000 upon
the officers' exercise of 123,000 stock options. The 1997 Notes accrued interest
at 6% annually with interest and principal originally due December 1999. In
January 2000, the maturity dates for the 1997 Notes were extended by one year
and later paid in full. We recorded stock compensation expense based upon the
difference between the fair market value of the underlying common stock and
option exercise price.
Interest and Other Income, Net
Interest income, net of interest expense, was $4,935,000, $4,351,000 and
$310,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The
$584,000 increase in 2001 as compared to 2000 and the $4,041,000 increase in
2000 as compared to 1999 were attributable to increased average investment
balances from the proceeds of our initial public offering and higher yields on
U.S. government securities, high-grade commercial paper and corporate notes and
money market funds held by us.
Income Taxes
As of December 31, 2001, we had net operating loss carryforwards and
research and development credit carryforwards of $52,846,000 and $3,746,000,
respectively, available to offset future regular and alternative taxable income.
These net operating loss carryforwards expire between 2009 and 2016. The
research and development credit carryforwards will expire between 2009 and 2016.
The utilization of the loss carryforwards to reduce future income taxes will
depend on our ability to generate sufficient taxable income prior to the
expiration of the net operating loss
23
carryforwards and research and development credit carryforwards. In addition,
the maximum annual use of the net operating loss carryforwards is limited in
certain situations where changes occur in our stock ownership.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
placements of preferred stock and a public equity financing, which have resulted
in net proceeds to us of $123,300,000 through December 31, 2001. Since
inception, we have used $52,634,000 of cash for operating activities. Cash, cash
equivalents and marketable securities were $69,612,000 at December 31, 2001,
compared with $85,683,000 at December 31, 2000 and $9,475,000 at December 31,
1999. Working capital at December 31, 2001 was $55,650,000, as compared to
$59,170,000 at December 31, 2000, and $8,784,000 at December 31, 1999. Long-term
debt was $8,000 and $69,000 for the years ending December 31, 2000 and 1999,
respectively. There was no long-term debt at December 31, 2001, which previously
consisted primarily of capital equipment lease obligations.
Net cash used in operating activities was $14,283,000, $7,861,000 and
$9,502,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Uses of cash in operating activities were primarily to fund net losses,
excluding non-cash charges.
Net cash provided by investing activities was $15,943,000 for the year
ended December 31, 2001 and consisted primarily of proceeds from the maturities
of short-term investments, partially offset by the purchase of short-term
investments and property and equipment. Net cash used in investing activities
was $75,936,000 for the year ended December 31, 2000 and consisted primarily of
net purchases of investments and property and equipment. Net cash provided by
investing activities was $1,024,000 for the year ended December 31, 1999 and
consisted primarily of proceeds from the maturities of short-term investments,
partially offset by the purchase of short-term investments and property and
equipment.
Net cash used in financing activities was $480,000 for the year ended
December 31, 2001 and consisted primarily of pledging collateral for the line of
credit. Net cash provided by financing activities was $82,764,000 for the year
ended December 31, 2000 and consisted primarily of proceeds from our initial
public offering. Net cash provided by financing activities for the year ended
December 31, 1999 was $9,420,000, and consisted primarily of proceeds from the
sale of preferred stock.
Based upon the current status of our product development and
commercialization plans, we believe that our existing cash, cash equivalents and
investments, will be adequate to satisfy our capital needs through at least the
calendar year 2003. However, our actual capital requirements will depend on many
factors, including the status of product development; the time and cost involved
in conducting clinical trials and obtaining regulatory approvals; filing,
prosecuting and enforcing patent claims; competing technological and market
developments; and our ability to market and distribute our future products and
establish new collaborative and licensing arrangements. We may seek to raise any
necessary additional funds through equity or debt financing, collaborative
arrangements with corporate partners or other sources which may be dilutive to
existing stockholders. In addition, in the event that additional funds are
obtained through arrangements with collaborative partners or other sources, such
arrangements may require us to relinquish rights to some of our technologies,
product candidates or products under development that we would otherwise seek to
develop or commercialize ourselves.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK
We own financial instruments that are sensitive to market risks as part of
our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations. All of these market-risk
sensitive instruments are classified as held-to-maturity. We do not own
derivative financial instruments in our investment portfolio. Our investment
portfolio contains instruments that are subject to the risk of a decline in
interest rates. We maintain a non-trading investment portfolio of investment
grade, liquid debt securities that limits the amount of credit exposure to any
one issue, issuer or type of instrument. Due to the short duration and
conservative nature of these instruments, we do not believe that we have a
material exposure to interest rate risk.
We prepared sensitivity analyses of our interest rate exposures and our
exposure from anticipated investment for fiscal 2002 to assess the impact of
hypothetical changes in interest rates. Based on the results of these analyses,
a 10% adverse change in interest rates from the 2001 fiscal year-end rates would
not have a material adverse effect on
24
the fair value of investments and would not materially impact our results of
operations, cash flows, or financial condition for the next twelve months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required pursuant to this item are included in
Item 14 of this report and are presented beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the Company's directors is
incorporated by reference to the information set forth in the sections entitled
"Proposal 1 - Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement for the 2002
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended December 31, 2001 (the "Proxy
Statement"). The information required by this Item concerning the executive
officers of the Company is incorporated by reference to the information set
forth in the section of the Proxy Statement entitled "Executive Officers and Key
Employees."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item regarding executive compensation is
incorporated by reference to the information set forth in the section of the
Proxy Statement entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section of the Proxy Statement entitled "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section of the Proxy Statement entitled "Certain Transactions."
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are being filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Financial Statements of Allos
Therapeutics, Inc. appearing on page F-1 of this report.
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are
not applicable or not required or because the information is included
elsewhere in the Financial Statements or the Notes thereto.
(b) Reports on Form 8-K:
1. On December 20, 2001, the Company filed a current report on Form 8-K,
dated December 17, 2001, regarding the appointment of Michael E. Hart as its
President and Chief Executive Officer.
2. On October 3, 2001, the Company filed a current report on Form 8-K,
dated September 24, 2001, regarding Michael J. Gerber's resignation as its
Senior Vice President, Clinical Development/Regulatory Affairs.
(c) Exhibits:
EXHIBIT NO. DESCRIPTION
3.01(1) Amended and Restated Certificate of Incorporation.
3.02(1) Bylaws.
10.01(1) Form of Indemnification Agreement between the Registrant
and each of its directors and officers.
10.02(1) Hemotech and CIT Amended and Restated Allosteric Modifiers
of Hemoglobin Agreement with Center for Innovative
Technology dated January 12, 1994.
10.03(1) Amendment to Allos Therapeutics, Inc. and CIT Amended and
Restated Allosteric Modifiers of Hemoglobin Agreement with
Center for Innovative Technology dated January 17, 1995.
10.04(1) Amendment to Allos Therapeutics, Inc. and CIT Amended and
Restated Allosteric Modifiers of Hemoglobin Agreement with
Center for Innovative Technology dated March 12, 1996.
10.05(1) Assignment and Assumption Agreement with Amendment with
Center for Innovative Technology and Virginia Commonwealth
University Intellectual Property Foundation dated July 28,
1997.
10.06(1) Exercise of Option to Nonheme Protein License Agreement
with VCU-Intellectual Property Foundation dated March 23,
1998.
10.07(1) Warrant Agreement to purchase shares of Series B Preferred
Stock with Comdisco, Inc. dated April 15, 1996.
10.08(1) Warrant Agreement to purchase shares of Series C Preferred
Stock with Comdisco, Inc. dated May 5, 1998.
10.09(1) Allos Therapeutics, Inc. Fourth Amended and Restated
Stockholder Rights Agreement dated October 4, 1999.
10.10(1)(*) Allos Therapeutics, Inc. 1995 Stock Option Plan, as amended
to date.
10.11(1) Lease Agreement with Virginia Biotechnology Research Park
Authority dated July 28, 1999.
10.12(1) Term Sheet for Contract API Supply between Allos and
Hovione dated March 25, 1999.
10.13(1) Confirmatory letter agreement with Hovione Inter Limited
dated January 13, 2000.
10.14(1) Development and Investigational Supply Proposal between
Taylor Pharmaceuticals and Allos Therapeutics, Inc. dated
December 30, 1998.
27
10.15(2)(*) Employment Agreement between Dr. Hoffman and Allos
Therapeutics, Inc. dated January 17, 2001.
10.16(*) Employment Agreement between Michael E. Hart and Allos
Therapeutics, Inc. dated December 17, 2001.
10.17(2)(*) Allos Therapeutics, Inc. Severance Benefit Plan, effective
January 16, 2001, and related benefit schedule thereto.
10.18(3)(*) Allos Therapeutics, Inc. 2001 Employee Stock Purchase Plan
and form of Offering.
10.19(4) Office Lease with Catellus Development Corporation dated
April, 2001.
10.20(*) Separation Agreement between Dr. Gerber and Allos
Therapeutics, Inc., dated September 24, 2001.
10.21(5)(*) 2000 Stock Incentive Compensation Plan
10.22(6)(*) 2002 Broad Based Equity Incentive Plan
23.01 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24.01 Power of Attorney (see page 29 herein)
- ----------
(*) Indicates Management Contract or Compensatory Plan or Arrangement.
(1) Incorporated by reference to our Registration Statement on Form S-1 (File
No. 333-95439) and amendments thereto, declared effective March 27, 2000.
(2) Incorporated by reference to our Annual Report on Form 10-K (File No.
000-29815), as filed with the Commission on March 7, 2001.
(3) Incorporated by reference to our Registration Statement on Form S-8 (File
No. 333-60430), as filed with the Commission on May 8, 2001.
(4) Incorporated by reference to our Quarterly Report on Form 10-Q (File No.
000-29815), as filed with the Commission on August 14, 2001.
(5) Incorporated by reference to our Registration Statement on Form S-8 (File
No. 333-38696), as filed with the Commission on June 6, 2000.
(6) Incorporated by reference to our Registration Statement on Form S-8 (File
No. 333-76804), as filed with the Commission on January 16, 2002.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALLOS THERAPEUTICS, INC.
Date: March 12, 2002 By: /s/ Michael E. Hart
--------------------------------------
Michael E. Hart
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Stephen J. Hoffman and Michael E. Hart,
and each of them, his true and lawful attorneys-in-fact and agents with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Form 10-K, and to file the
same, with all exhibits thereto and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT ON MARCH 1, 2002, AND IN THE CAPACITIES INDICATED:
<Table>
<Caption>
NAME TITLE
- ---- -----
/s/ Stephen J. Hoffman Chairman, Board of Directors
- ----------------------------------
Stephen J. Hoffman
/s/ Michael E. Hart President and Chief Executive Officer
- ---------------------------------- (Principal Executive Officer)
Michael E. Hart
/s/ Donald J. Abraham Director
- ----------------------------------
Donald J. Abraham
/s/ Stephen K. Carter Director
- ----------------------------------
Stephen K. Carter
/s/ Mark G. Edwards Director
- ----------------------------------
Mark G. Edwards
/s/ Marvin E. Jaffe Director
- ----------------------------------
Marvin E. Jaffe
</Table>
29
ALLOS THERAPEUTICS, INC.
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
Page
----
Report of Independent Accountants...................................................................... F-2
Balance Sheets......................................................................................... F-3
Statements of Operations............................................................................... F-4
Statements of Changes in Stockholders' Equity (Deficit)................................................ F-5
Statements of Cash Flows............................................................................... F-7
Notes to Financial Statements.......................................................................... F-8
</Table>
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Allos Therapeutics, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Allos
Therapeutics, Inc. (a company in the development stage) at December 31, 2000 and
2001, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001 and the cumulative period from
September 1, 1992 (date of inception) through December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Denver, Colorado
February 1, 2002, except for Note 11,
as to which the date is March 11, 2002
F-2
ALLOS THERAPEUTICS, INC.
BALANCE SHEETS
<Table>
<Caption>
ASSETS
DECEMBER 31,
--------------------------------
2000 2001
-------------- --------------
Current assets:
Cash and cash equivalents ................................................................. $ 1,565,693 $ 2,745,151
Restricted cash ........................................................................... -- 550,000
Short-term investments .................................................................... 60,211,791 56,473,499
Prepaid expenses-- research ............................................................... 134,777 787,627
Prepaid expenses-- other .................................................................. 95,040 90,866
Other assets .............................................................................. 3,294 25,956
-------------- --------------
Total current assets ............................................................... 62,010,595 60,673,099
-------------- --------------
Long-term marketable securities ............................................................. 23,905,763 9,843,198
Property and equipment (net of accumulated depreciation of $444,408 and
$443,917, respectively) ................................................................... 326,266 1,653,588
Other assets ................................................................................ 16,530 4,364
-------------- --------------
Total assets ....................................................................... $ 86,259,154 $ 72,174,249
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-- related parties ........................................................ $ 97,889 $ 82,631
Accounts payable-- research ............................................................... 2,043,246 3,440,895
Accrued expenses-- trade .................................................................. 212,015 359,552
Accrued compensation and employee benefits ................................................ 426,052 1,140,275
Current portion of capital lease obligations .............................................. 61,506 --
-------------- --------------
Total current liabilities .......................................................... 2,840,708 5,023,353
Long-term portion of capital lease obligations .............................................. 7,814 --
-------------- --------------
Total liabilities .................................................................. 2,848,522 5,023,353
Commitments (Note 8)
Preferred stock, $0.001 par value; 10,000,000 shares authorized at
December 31, 2000 and 2001 respectively, no shares issues or outstanding ................ -- --
Common stock, $0.001 par value; 75,000,000 shares authorized at
December 31, 2000 and 2001; 22,954,876 and 23,139,197 shares issued and outstanding
at December 31, 2000 and 2001, respectively ............................................. 22,955 23,139
Additional paid-in capital common stock ..................................................... 156,602,391 156,925,292
Accumulated deficit ......................................................................... (66,709,620) (86,853,945)
Deferred compensation related to grant of options ........................................... (6,505,094) (2,943,590)
-------------- --------------
Total stockholders' equity ......................................................... 83,410,632 67,150,896
-------------- --------------
Total liabilities and stockholders' equity ......................................... $ 86,259,154 $ 72,174,249
============== ==============
</Table>
The accompanying notes are an integral part of these financial statements.
F-3
ALLOS THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
<Table>
<Caption>
CUMULATIVE
PERIOD FROM
SEPTEMBER 1,
1992 (DATE OF
INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
-------------------------------------------- DECEMBER 31,
1999 2000 2001 2001
------------ ------------ ------------ ------------
Operating expenses:
Research and development ....................... $ 7,836,281 $ 10,736,503 $ 12,659,419 $ 46,341,809
Clinical manufacturing ......................... 1,381,722 3,200,548 3,143,332 11,508,713
General and administrative ..................... 2,379,435 13,775,248 9,277,047 30,223,028
------------ ------------ ------------ ------------
Total operating expenses ............... 11,597,438 27,712,299 25,079,798 88,073,550
Loss from operations ............................. (11,597,438) (27,712,299) (25,079,798) (88,073,550)
Interest and other income, net ................... 309,698 4,350,824 4,935,473 10,832,580
------------ ------------ ------------ ------------
Net loss ............................... (11,287,740) (23,361,475) (20,144,325) (77,240,970)
Dividend related to beneficial conversion
feature of preferred stock ..................... (9,612,975) -- -- (9,612,975)
------------ ------------ ------------ ------------
Net loss attributable to common
stockholders ................................... $(20,900,715) $(23,361,475) $(20,144,325) $(86,853,945)
============ ============ ============ ============
Net loss per share:
Basic and diluted .............................. $ (10.48) $ (1.29) $ (0.88)
============ ============ ============
Weighted average shares-- basic and
diluted ..................................... 1,994,764 18,058,802 22,970,974
============ ============ ============
</Table>
The accompanying notes are an integral part of these financial statements.
F-4
ALLOS THERAPEUTICS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<Table>
<Caption>
CONVERTIBLE NOTES
COMMON STOCK PREFERRED STOCK ADDITIONAL RECEIVABLE
----------------- ------------------ PAID-IN FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT
--------- ------ ---------- ------ ---------- ------------ -----------
Subscription receivable
for common stock
at $1.61 per share .................... -- $ 90 -- $ -- $ -- $ -- $ --
--------- ------ ---------- ------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1992 ........... -- 90 -- -- -- -- --
Subscription receivable for
common stock at $1.61
per share ........................... -- 10 -- -- -- -- --
Issuance of common stock for
subscription receivable ............. 992,000 892 -- -- (892) -- --
Net loss .............................. -- -- -- -- -- -- (24,784)
--------- ------ ---------- ------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1993 ........... 992,000 992 -- -- (892) -- (24,784)
Issuance of $.001 par value
common stock in exchange for
license agreement ................... 248,000 248 -- -- 39,752 -- --
Issuance of Series A convertible
preferred stock ($.001 par
value) together with Series A
and Series B stock warrants
at $1.00 per share .................. -- -- 700,000 704 529,023 -- --
Issuance of Series A convertible
preferred stock upon exercise of
Series A warrants at $1.00 per
share ............................... -- -- 1,300,000 1,300 1,298,700 -- --
Accretion to redemption value of
preferred stock ..................... -- -- -- -- 58,839 -- (58,839)
Net loss .............................. -- -- -- -- -- -- (898,929)
--------- ------ ---------- ------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1994 ........... 1,240,000 1,240 2,000,000 2,004 1,925,422 -- (982,552)
Issuance of Series A convertible
preferred stock at $1.00
per share ........................... -- -- 3,000,000 3,000 2,973,454 -- --
Accretion to redemption value of
preferred stock ..................... -- -- -- -- 229,837 -- (229,837)
Net loss .............................. -- -- -- -- -- -- (2,384,176)
--------- ------ ---------- ------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1995 ........... 1,240,000 1,240 5,000,000 5,004 5,128,713 -- (3,596,565)
Issuance of Series B convertible
preferred stock at $1.60
per share, net of issuance
costs ............................... -- -- 5,032,500 5,033 7,992,705 -- --
Cancellation of Series B warrants
previously issued with Series A ..... -- -- -- (4) 4 -- --
Cancellation of Series A
redemption rights ................... -- -- -- -- (288,676) -- 288,676
Issuance of common stock upon
exercise of stock options
for cash of $4,024 and notes
receivable of $90,000 at
$0.16 per share ..................... 582,950 583 -- -- 93,441 (90,000) --
Net loss .............................. -- -- -- -- -- -- (4,053,027)
--------- ------ ---------- ------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1996 ........... 1,822,950 1,823 10,032,500 10,033 12,926,187 (90,000) (7,360,916)
Issuance of common stock
upon exercise of stock options
for cash of $20,288 and notes
receivable of $49,687 at
$0.16-$0.40 per share ............... 175,770 176 -- -- 69,799 (49,687) --
Net loss .............................. -- -- -- -- -- -- (6,512,591)
--------- ------ ---------- ------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1997 ........... 1,998,720 1,999 10,032,500 10,033 12,995,986 (139,687) (13,873,507)
Issuance of Series C convertible
preferred stock at $1.81
per share, net of issuance
costs ............................... -- -- 9,944,750 9,945 17,937,102 -- --
Issuance of common stock
upon exercise of stock options
for cash of $3,464 at
$0.16-$0.40 per share ............... 13,239 13 -- -- 3,451 -- --
Net loss .............................. -- -- -- -- -- -- (8,573,923)
--------- ------ ---------- ------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1998 ........... 2,011,959 2,012 19,977,250 19,978 30,936,539 (139,687) (22,447,430)
Issuance of Series C convertible
preferred stock at $1.81
per share, net of issuance
costs ............................... -- -- 5,311,036 5,311 9,529,532 -- --
Issuance of common stock upon
exercise of stock options for
cash of $3,695 at $0.16-$0.56
per share ........................... 10,179 10 -- -- 3,685 -- --
Deferred compensation related to
options ............................. -- -- -- -- 6,811,055 -- --
Beneficial conversion feature
related to issuance of
preferred stock ..................... -- -- -- -- 9,612,975 -- (9,612,975)
Net loss .............................. -- -- -- -- -- -- (11,287,740)
--------- ------ ---------- ------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1999 ........... 2,022,138 2,022 25,288,286 25,289 56,893,786 (139,687) (43,348,145)
</Table>
<Table>
<Caption>
TOTAL
STOCKHOLDERS'
DEFERRED EQUITY
COMPENSATION (DEFICIT)
------------ -------------
Subscription receivable
for common stock
at $1.61 per share .................... $ -- $ 90
------------ -------------
BALANCE AT DECEMBER 31, 1992 ........... -- 90
Subscription receivable for
common stock at $1.61
per share ........................... -- 10
Issuance of common stock for
subscription receivable ............. -- --
Net loss .............................. -- (24,784)
------------ -------------
BALANCE AT DECEMBER 31, 1993 ........... -- (24,684)
Issuance of $.001 par value
common stock in exchange for
license agreement ................... -- 40,000
Issuance of Series A convertible
preferred stock ($.001 par
value) together with Series A
and Series B stock warrants
at $1.00 per share .................. -- 529,727
Issuance of Series A convertible
preferred stock upon exercise of
Series A warrants at $1.00 per
share ............................... -- 1,300,000
Accretion to redemption value of
preferred stock ..................... -- --
Net loss .............................. -- (898,929)
------------ -------------
BALANCE AT DECEMBER 31, 1994 ........... -- 946,114
Issuance of Series A convertible
preferred stock at $1.00
per share ........................... -- 2,976,454
Accretion to redemption value of
preferred stock ..................... -- --
Net loss .............................. -- (2,384,176)
------------ -------------
BALANCE AT DECEMBER 31, 1995 ........... -- 1,538,392
Issuance of Series B convertible
preferred stock at $1.60
per share, net of issuance
costs ............................... -- 7,997,738
Cancellation of Series B warrants
previously issued with Series A ..... -- --
Cancellation of Series A
redemption rights ................... -- --
Issuance of common stock upon
exercise of stock options
for cash of $4,024 and notes
receivable of $90,000 at
$0.16 per share ..................... -- 4,024
Net loss .............................. -- (4,053,027)
------------ -------------
BALANCE AT DECEMBER 31, 1996 ........... -- 5,487,127
Issuance of common stock
upon exercise of stock options
for cash of $20,288 and notes
receivable of $49,687 at
$0.16-$0.40 per share ............... -- 20,288
Net loss .............................. -- (6,512,591)
------------ -------------
BALANCE AT DECEMBER 31, 1997 ........... -- (1,005,176)
Issuance of Series C convertible
preferred stock at $1.81
per share, net of issuance
costs ............................... -- 17,947,047
Issuance of common stock
upon exercise of stock options
for cash of $3,464 at
$0.16-$0.40 per share ............... -- 3,464
Net loss .............................. -- (8,573,923)
------------ -------------
BALANCE AT DECEMBER 31, 1998 ........... -- 8,371,412
Issuance of Series C convertible
preferred stock at $1.81
per share, net of issuance
costs ............................... -- 9,534,843
Issuance of common stock upon
exercise of stock options for
cash of $3,695 at $0.16-$0.56
per share ........................... -- 3,695
Deferred compensation related to
options ............................. (4,442,294) 2,368,761
Beneficial conversion feature
related to issuance of
preferred stock ..................... -- --
Net loss .............................. -- (11,287,740)
------------ -------------
BALANCE AT DECEMBER 31, 1999 ........... (4,442,294) 8,990,971
</Table>
F-5
ALLOS THERAPEUTICS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<Table>
<Caption>
CONVERTIBLE NOTES
COMMON STOCK PREFERRED STOCK ADDITIONAL RECEIVABLE
------------------- ---------------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT
---------- ------- ----------- -------- ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 .... 2,022,138 2,022 25,288,286 25,289 56,893,786 (139,687) (43,348,145)
Issuance of 5,000,000
shares of common stock,
net of issuance costs ........ 5,000,000 5,000 -- -- 82,764,396 -- --
Conversion of preferred
stock to common
stock upon IPO ............... 15,678,737 15,679 (25,288,286) (25,289) 9,610 -- --
Extinguishment of notes
receivable ................... -- -- -- -- -- 139,687 --
Issuance of common stock
upon exercise of stock
options for cash of
$76,358 at $0.16 - $0.56
per share .................... 254,001 254 -- -- 73,601 -- --
Deferred compensation
related to options ........... -- -- -- -- 16,860,998 -- --
Net loss ....................... -- -- -- -- -- -- (23,361,475)
---------- ------- ----------- -------- ------------ --------- ------------
BALANCE AT DECEMBER 31, 2000 .... 22,954,876 22,955 -- -- 156,602,391 -- (66,709,620)
Issuance of common stock
upon exercise of stock
options for cash of
$103,831 at $0.40 - $2.42
per share .................... 175,096 175 -- -- 103,656 -- --
Issuance of common stock
upon exercise of
purchase rights at an
exercise price of
$3.84 per share .............. 9,225 9 -- -- 35,433 -- --
Stock compensation expense ...... -- -- -- -- 283,512 -- --
Deferred compensation
related to options ........... -- -- -- -- (99,700) -- --
Net loss ....................... -- -- -- -- -- -- (20,144,325)
---------- ------- ----------- -------- ------------ --------- ------------
BALANCE AT DECEMBER 31, 2001 .... 23,139,197 $23,139 -- $ -- $156,925,292 $ -- $(86,853,945)
========== ======= =========== ======== ============ ========= ============
</Table>
<Table>
<Caption>
TOTAL
STOCKHOLDERS'
DEFERRED EQUITY
COMPENSATION (DEFICIT)
------------ ------------
BALANCE AT DECEMBER 31, 1999 .... (4,442,294) 8,990,971
Issuance of 5,000,000
shares of common stock,
net of issuance costs ........ -- 82,769,396
Conversion of preferred
stock to common
stock upon IPO ............... -- --
Extinguishment of notes
receivable ................... -- 139,687
Issuance of common stock
upon exercise of stock
options for cash of
$76,358 at $0.16 - $0.56
per share .................... -- 73,855
Deferred compensation
related to options ........... (2,062,800) 14,798,198
Net loss ....................... -- (23,361,475)
----------- ------------
BALANCE AT DECEMBER 31, 2000 .... (6,505,094) 83,410,632
Issuance of common stock
upon exercise of stock
options for cash of
$103,831 at $0.40 - $2.42
per share .................... -- 103,831
Issuance of common stock
upon exercise of
purchase rights at an
exercise price of
$3.84 per share .............. -- 35,442
Stock compensation expense ...... -- 283,512
Deferred compensation
related to options ........... 3,561,504 3,461,804
Net loss ....................... -- (20,144,325)
----------- ------------
BALANCE AT DECEMBER 31, 2001 .... $(2,943,590) $ 67,150,896
=========== ============
</Table>
The accompanying notes are an integral part of these financial statements.
F-6
ALLOS THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
CUMULATIVE
PERIOD FROM
SEPTEMBER 1,
1992
(DATE OF
INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------------------------ DECEMBER 31,
1999 2000 2001 2001
------------ ------------ ------------ ------------
Cash Flows From Operating Activities
Net loss ....................................................... $(11,287,740) $(23,361,475) $(20,144,325) $ (77,240,970)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................ 146,413 122,181 277,064 751,267
Stock-based compensation expense ............................. 2,368,761 14,888,198 3,745,316 21,002,275
Other ........................................................ -- -- 30,718 83,124
Changes in operating assets and liabilities:
Decrease (increase) in prepaids and other assets ........... 61,794 250,326 (659,173) (908,814)
(Increase) decrease in interest receivable on investments .. (13,810) (1,472,798) 222,907 (1,344,383)
Increase (decrease) in accounts payable-- research ......... (737,018) 1,274,655 (15,258) 82,631
Increase (decrease) in accounts payable-- related parties .. (108,929) 89,802 1,397,649 3,440,896
Increase (decrease) in accounts payable-- trade ............ (45,523) 146,892 147,537 359,552
Increase (decrease) in accrued compensation and employee
benefits ................................................ 113,664 201,673 714,223 1,140,275
------------ ------------ ------------ -------------
Net cash used in operating activities ................... (9,502,388) (7,860,546) (14,283,342) (52,634,147)
------------ ------------ ------------ -------------
Cash Flows From Investing Activities
Acquisition of property and equipment .......................... (37,901) (218,087) (1,635,104) (2,146,383)
Purchases of marketable securities ............................. (11,713,177) (97,994,487) (45,994,641) (191,926,306)
Proceeds from marketable securities ............................ 12,774,672 22,227,033 63,572,592 126,953,992
Payments received on notes receivable .......................... -- 49,687 -- 49,687
------------ ------------ ------------ -------------
Net cash provided by (used in) investing activities ..... 1,023,594 (75,935,854) 15,942,847 (67,069,010)
------------ ------------ ------------ -------------
Cash Flows From Financing Activities
Principal payments under capital leases ........................ (118,406) (79,042) (69,320) (422,088)
Proceeds from sale leaseback ................................... -- -- -- 120,492
Proceeds from stockholder loan ................................. -- -- -- 12,000
Repayment of stockholder loan .................................. -- -- -- (12,000)
Pledging restricted cash ....................................... -- -- (550,000) (550,000)
Proceeds from issuance of convertible preferred
stock, net of issuance costs ................................. 9,534,843 -- -- 40,285,809
Proceeds from issuance of common stock, net of issuance costs .. 3,695 82,843,251 139,273 83,014,095
------------ ------------ ------------ -------------
Net cash provided by (used in) financing activities ..... 9,420,132 82,764,209 (480,047) 122,448,308
------------ ------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents ............. 941,338 (1,032,191) 1,179,458 2,745,151
Cash and cash equivalents, beginning of period ................... 1,656,546 2,597,884 1,565,693 --
------------ ------------ ------------ -------------
Cash and cash equivalents, end of period ......................... $ 2,597,884 $ 1,565,693 $ 2,745,151 $ 2,745,151
============ ============ ============ =============
Supplemental Schedule of Noncash Operating and Financing
Activities:
Cash paid for interest ......................................... -- 170,172 694,641 874,813
Issuance of stock in exchange for license agreement ............ -- -- -- 40,000
Capital lease obligations incurred for acquisition of
property and equipment........................................ 2,105 -- -- 422,088
Issuance of stock in exchange for notes receivable ............. -- -- -- 139,687
</Table>
The accompanying notes are an integral part of these financial statements.
F-7
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY
Allos Therapeutics, Inc. (the "Company") is a biopharmaceutical company
focused on developing and commercializing innovative small molecule drugs,
initially for improving cancer treatments.
The Company was incorporated in the Commonwealth of Virginia on September
1, 1992 as HemoTech Sciences, Inc. and filed amended Articles of Incorporation
to change its name to Allos Therapeutics, Inc. on October 19, 1994. The Company
reincorporated in Delaware on October 28, 1996.
The Company's lead product candidate (RSR13) is a synthetic small molecule
that increases the release of oxygen from hemoglobin, the oxygen carrying
protein contained within red blood cells. The Company is currently conducting
clinical trials for RSR13. Prior to commercial sales of the product, the Company
must complete the clinical trials and receive the necessary Food and Drug
Administration ("FDA") approval. Should the Company be unable to obtain the
necessary FDA approvals, there could be a materially adverse effect on the
Company's financial condition, operating results and cash flows.
To date, the Company has devoted substantially all of its resources to
research and clinical development. The Company has not derived any commercial
revenues from product sales, and does not expect to receive product revenues for
at least the next several years. The Company has incurred significant operating
losses since its inception in 1992. The Company expects to continue to incur
significant operating losses over the next several years as it continues to
incur increasing research and development costs, in addition to costs related to
clinical trials and manufacturing activities. There can be no assurance if or
when the Company will become profitable. The Company's achieving profitability
depends upon its ability, alone or with others, to successfully complete the
development of its products, and obtain required regulatory clearances and
successfully manufacture and market its products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company has not generated any revenue to date and its activities have
consisted primarily of developing products, raising capital and recruiting
personnel. Accordingly, the Company is considered to be in the development stage
at December 31, 2001 as defined in Statement of Financial Accounting Standards
("SFAS") No. 7, Accounting and Reporting by Development Stage Enterprises.
Certain amounts in the prior years have been reclassified to be consistent
with current year presentation. These changes had no impact on previously
reported results of operations or stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of expenses during the reporting period.
Actual results could differ materially from these estimates.
Cash and Cash Equivalents and Marketable Securities
All highly liquid investments with a maturity of three months or less are
considered to be cash equivalents. The carrying values of the Company's cash
equivalents and short-term and long-term marketable securities approximate their
market values based on quoted market prices. The Company accounts for marketable
securities in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Short-term and long-term marketable securities
are classified as held to maturity and are carried at cost plus accrued interest
and consist of
F-8
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
commercial paper, government obligations and corporate notes having maturities
of longer than three months, held at financial institutions.
Prepaid Expenses -- Research
In accordance with various research and development contracts, the Company
is obligated to pay a portion of the fee upon execution. The asset balance is
expensed as milestones within the contract are reached. In the event milestones
within the contract are not reached, the Company evaluates whether events and
circumstances have occurred that indicate impairment of remaining prepaid
research expenses may be appropriate.
Property and Equipment
The components of property and equipment are as follows:
<Table>
<Caption>
DECEMBER 31,
---------------------------- ESTIMATED
2000 2001 LIVES
------------ ------------ ------------
Office furniture and equipment ............................. $ 70,305 $ 1,052,810 5 years
Office furniture and equipment under capital leases ........ 185,503 -- 3.5 years
Computer hardware and software ............................. 225,915 587,263 3 years
Computer hardware under capital leases ..................... 199,411 -- 3.5 years
Lab equipment owned ........................................ 45,396 103,224 5 years
Lab equipment under capital leases ......................... 23,217 -- 3.5 years
Leasehold improvements ..................................... 20,927 354,208 7 years
------------ ------------
770,674 2,097,505
Less accumulated depreciation and amortization ............. (444,408) (443,917)
------------ ------------
$ 326,266 $ 1,653,588
============ ============
</Table>
Property and equipment is recorded at cost and is depreciated using the
straight-line method over estimated useful lives. Property and equipment
acquired under capital lease agreements are amortized using the straight-line
method over the shorter of the estimated useful life or the related lease term.
The assets related to the lease agreements were purchased by the Company in
August 2001 at their current fair market value. Accumulated amortization for
leased equipment was $341,000 at December 31, 2000.
Long-lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate revision to the remaining useful life or impairment of remaining
balances of long-lived assets may be appropriate. Such events and circumstances
include, but are not limited to, change in business strategy or change in
current and long-term projected operating performance. The carrying value of
long-lived assets is considered impaired when the anticipated undiscounted cash
flows from the lowest level of assets for which there are identifiable cash
flows is less than the carrying value. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair value of the
long-lived assets. Fair value is determined using the anticipated cash flows
discounted at a rate commensurate with the risk involved.
Bonus Plan
The Annual Bonus Program of the Company (the "Bonus Program") was adopted
by the Board of Directors on September 15, 1998, and amended by the Board of
Directors on July 27, 2000. The Company's bonus plan is intended to promote both
individual productivity and employee retention. The bonuses paid under the Bonus
Plan are based on a number of criteria including, but not limited to, terms of
employee agreements, that participant's individual performance and the results
of Corporate Goals established annually by the Board of Directors. Bonuses are
paid in cash.
F-9
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation
The Company accounts for grants of stock options according to Accounting
Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees and related Interpretations. Proforma net loss information, as
required by SFAS No. 123, Accounting for Stock-Based Compensation, is included
in Note 4. Any deferred stock compensation calculated according to APB No. 25 is
amortized over the vesting period of the individual options, generally four
years, in accordance with FASB Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option and Award Plans.
In March 2000, the FASB issued Interpretation (FIN) No. 44 "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of APB No.
25. FIN No. 44 clarifies the application of APB No. 25 for: (a) the definition
of the employee for purposes of applying APB No. 25; (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan; (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award; and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 became effective July
1, 2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 15, 2000. The adoption of the provisions of FIN
No. 44 did not have a material impact on the Company's financial position or
results of operations.
Research and Development
Research and development expenditures are charged to operations as
incurred.
Income Taxes
Income taxes are accounted for under SFAS No. 109, Accounting for Income
Taxes. Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities at each year end and their
respective tax bases using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount more
likely than not to be realized.
Concentration of Credit
The Company's cash and cash equivalents and marketable securities at
December 31, 2000 and 2001 are maintained in two financial institutions in
amount that, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk in this area. It is the Company's practice to place its
investments in high-quality securities.
Net Loss Per Share
Net loss per share is calculated in accordance with SFAS No. 128, Earnings
Per Share. Under the provisions of SFAS 128, basic net loss per common share is
computed by dividing the net loss for the period by the weighted average number
of vested common shares outstanding during the period. Diluted net loss per
common share is computed giving effect to all dilutive potential common stock,
including options, non-vested common stock, convertible preferred stock and
convertible preferred stock warrants. Diluted net loss per share for the years
ended December 31, 1999, 2000 and 2001 is the same as basic net loss per share
because potential common shares were anti-dilutive.
F-10
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Anti-dilutive securities as of December 31, 1999, 2000 and 2001 not
included in the diluted net loss per share calculations, are as follows:
<Table>
<Caption>
1999 2000 2001
---------- ---------- ----------
Non-vested common stock ................ 8,680 171 --
Common stock options ................... 822,120 1,859,903 2,442,301
Common stock warrants .................. -- 14,275 14,275
Convertible preferred stock ............ 15,678,737 -- --
Convertible preferred stock warrants ... 31,402 -- --
---------- ---------- ----------
16,540,939 1,874,349 2,456,576
========== ========== ==========
</Table>
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income includes all changes in equity during a period from
non-owner sources. During each of the three years ended December 31, 2001 and
for the cumulative period from inception, the Company has not had any
significant transactions that are required to be reported as adjustments to
determine comprehensive income.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
short-term investments, long-term marketable securities, prepaid expenses,
accounts payable and accrued liabilities. The carrying amounts of financial
instruments approximate their fair value due to their short maturities.
Additionally, based upon the borrowing rates available to the Company for debt
agreements with similar terms and average maturities, management believes the
carrying amount of capital lease obligations approximates their fair value.
Recent accounting pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations ("SFAS 141"), which supercedes Accounting Principles Board
Opinion No. 16, Business Combinations. SFAS 141 requires all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method. In addition, SFAS 141 establishes criteria for the recognition of
intangible assets separately from goodwill. The Company is required to adopt
SFAS 141 for all business combinations accounted for using the purchase method
for which the date of acquisition is July 1, 2002 or later. The adoption of SFAS
141 has had no material impact on the Company's results of operations, financial
position or cash flows.
Also in June 2001, the Financial Accounting Standards Board issued SFAS No.
142, Goodwill and Other Intangible Assets ("SFAS 142"). This pronouncement
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) at acquisition. This Statement also addresses financial
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. The Company is required to adopt SFAS 142 at the beginning of
the fiscal year ended December 31, 2002. The Company does not expect that the
adoption of SFAS 142 will have a material impact on the Company's results of
operations, financial position or cash flows.
Also in June 2001, the Financial Accounting Standards Board issued SFAS No.
143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 requires
that obligations associated with the retirement of tangible long-lived assets be
recorded as liabilities when those obligations are incurred, with the amount of
the liability initially measured at fair value. Upon initially recognizing a
liability for an asset retirement obligation, an entity must capitalize the cost
by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, this liability is accreted to its present value, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or
F-11
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
incurs a gain or loss. The Company is required to adopt SFAS 143 at the
beginning of the fiscal year ended December 31, 2003. The Company does not
expect that the adoption of SFAS 143 will have a material impact on the
Company's results of operations, financial position or cash flows.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"), which supercedes SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. SFAS 144 applies to all
long-lived assets, including discontinued operations, and consequently amends
Accounting Principles Board Opinion No. 30, Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS
144 develops one accounting model for long-lived assets to be disposed of by
sale, as well as addresses the principle implementation issues. The
pronouncement requires that long-lived assets that are to be disposed of by sale
be measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (i) can be distinguished from
the rest of the entity and (ii) will be eliminated from the ongoing operations
of the entity in a disposal transaction. The Company is required to adopt SFAS
144 at the beginning of the fiscal year ended December 31, 2002. The Company
does not expect that the adoption of SFAS 144 will have a material impact on the
Company's results of operations, financial position or cash flows.
3. RESTRICTED CASH
On May 24, 2001, $550,000 of cash was pledged as collateral on a letter of
credit related to a building lease and was classified as restricted cash on the
balance sheet.
4. MARKETABLE SECURITIES
In accordance with SFAS No. 115, investments that the Company has the
positive intent and ability to hold to maturity are reported at amortized cost,
which approximates fair market value, and are classified as held-to-maturity.
The investments that the Company has deemed to be held-to-maturity include
securities held in high grade commercial paper and corporate notes with
maturities ranging from three months to two years, which total approximately
$84,117,554 and $66,316,697 at December 31, 2000 and 2001, respectively.
5. STOCKHOLDERS' EQUITY
COMMON STOCK
On March 27, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, the Company
completed an Initial Public Offering ("IPO") of 5,000,000 shares of its common
stock at an IPO price of $18.00 per share (the "Offering"). Proceeds to the
Company from the Offering, after calculation of the underwriters' discount and
commission, totaled approximately $82.8 million, net of offering costs of
approximately $1 million. Concurrent with the closing of the IPO, all
outstanding shares of the Company's convertible preferred stock were
automatically converted into 15,678,737 shares of common stock.
At December 31, 2001, the Company has reserved shares of common stock for
future issuance as follows:
<Table>
1995 Stock Option Plan .......... 1,525,022
2000 Stock Option Plan .......... 1,128,019
2001 Employee Stock Purchase Plan 1,490,775
Warrants ........................ 14,275
---------
Total ........................... 4,158,091
=========
</Table>
Concurrent with the close of the Company's initial public offering, the
Company's articles of incorporation were amended to authorize 10,000,000 shares
of undesignated preferred stock, none of which are issued or
F-12
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
outstanding. The Company's Board of Directors is authorized to fix the
designation, powers, preferences, and rights of any such series. The Company's
articles of incorporation were also amended to increase the authorized number of
shares of common stock to 75,000,000 shares.
WARRANTS
In April 1996, the Company issued warrants to purchase 17,500 shares of the
Company's Series B convertible preferred stock in conjunction with an equipment
lease line at an exercise price of $1.60 per share that expire at the later of
April 15, 2006, or five years from the effective date of an initial public
offering. In May 1998, the Company issued warrants to purchase 5,524 shares of
the Company's Series C convertible preferred stock in conjunction with an
equipment lease with an exercise price of $1.81 per share that expire at the
later of May 5, 2008, or five years from the effective date of an initial public
offering. Upon completing the IPO, the Series B and Series C warrants were
converted to purchase 10,850 shares at $2.58 and 3,425 shares at $2.92,
respectively, of the Company's common stock.
STOCK OPTIONS
During 1995, the Board of Directors terminated the 1992 Stock Plan (the
"1992 Plan") and adopted the 1995 Stock Option Plan (the "1995 Plan"). The 1995
Plan was amended and restated in 1997. Termination of the 1992 Plan had no
effect on the options outstanding under that plan, as they were assumed under
the 1995 Plan. Under the 1995 Plan, the Company may grant fixed and
performance-based stock options and stock appreciation rights to officers,
employees, consultants and directors. The stock options are intended to qualify
as "incentive stock options" under Section 422 of the Internal Revenue Code,
unless specifically designated as non-qualifying stock options or unless
exceeding the applicable statutory limit.
During 2000, concurrent with the Company's IPO, the Board suspended the
1995 option plan and adopted the 2000 Incentive Compensation Plan (the "2000
Plan"). The 2000 Plan provides for the granting of stock options similar to the
terms of the 1995 Plan as described above. Any shares remaining for future
option grants and any future cancellations of options from our 1995 Plan will be
available for future grant under the 2000 Plan. Suspension of the 1995 Plan had
no effect on the options outstanding under that plan.
As of December 31, 2001, the Company had 210,740 shares of common stock
available for grant under the 2000 Plan. The 1995 and 2000 Plans provide for
appropriate adjustments in the number of shares reserved and granted options in
the event of certain changes to the Company's outstanding common stock by reason
of merger, recapitalization, stock split or other similar events. Options
granted under the Plans may be exercised for a period of not more than ten years
from the date of grant or any shorter period as determined by the Board of
Directors. Options vest as determined by the Board of Directors, generally over
a period of two to four years, subject to acceleration under certain events. The
exercise price of any incentive stock option shall equal or exceed the fair
market value per share on the date of grant, or 110% of the fair market value
per share in the case of a 10% or greater stockholder.
The Company has granted to selected officers and other key employees stock
option awards whose vesting is contingent upon achieving specific criteria. The
options will vest based upon meeting certain clinical milestones, a finalizing a
corporate partnership and/or co-licensing of an additional compound for
development. If such criteria are not met, these options will become fully
vested after 7 years from the date of grant. For the options described above,
deferred stock-based compensation was recorded at the date of grant,
representing the difference between the exercise price and the fair value of the
Company's common stock on the date these options were granted, as both the
number of shares and the option price were fixed. Deferred stock-based
compensation is amortized over the predefined vesting period until it becomes
probable that the performance goals will be met; at that time, the amortization
of the remaining deferred stock-based compensation will be accelerated so as to
be amortized over the period to the date the performance goal is expected to be
reached.
F-13
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During the years ended December 31, 1999 and 2000, in connection with the
grant of certain stock options to employees, the Company recorded deferred
stock-based compensation of $9,272,011 representing the difference between the
exercise price and the deemed fair value of the Company's common stock on the
date these stock options were granted. Deferred compensation is included as a
reduction of stockholders' equity and is being amortized in accordance with the
accelerated method as described in FASB Interpretation No. 28 over the vesting
periods of the related options, which is generally four years. During the year
ended December 31, 2001, the Company recorded amortization of deferred stock
compensation expense of $3,461,803 of which $1,023,160 related to research and
development personnel, $2,286,611 related to general and administrative
personnel and $152,032 related to clinical manufacturing personnel. At December
31, 2001, the Company had $2,943,590 of deferred stock-based compensation
remaining to be amortized.
A summary of the Company's stock option activity, and related information
follows:
<Table>
<Caption>
INCENTIVE AND NON-INCENTIVE
STOCK OPTIONS
----------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
OUTSTANDING AT DECEMBER 31, 1998 ....... 708,660 $ .39
Granted .............................. 584,833 .56
Exercised ............................ (10,178) .37
Canceled ............................. (58,145) .39
---------- ----------
OUTSTANDING AT DECEMBER 31, 1999 ....... 1,225,170 .48
Granted .............................. 898,171 4.14
Exercised ............................ (254,002) .34
Canceled ............................. (9,436) 3.90
---------- ----------
OUTSTANDING AT DECEMBER 31, 2000 ....... 1,859,903 2.25
Granted .............................. 860,379 5.66
Exercised ............................ (175,096) .59
Canceled ............................. (102,885) 8.45
---------- ----------
OUTSTANDING AT DECEMBER 31, 2001 ....... 2,442,301 $ 3.31
---------- ----------
VESTED OPTIONS AT DECEMBER 31, 2001 .... 1,538,894 $ 1.80
========== ==========
</Table>
For the year ended December 31, 1999, options exercisable and weighted
average exercise price are equal to options outstanding. As of December 31,
1998, 1999, 2000 and 2001 options vested were, 249,371, 592,206, 599,134, and
1,538,894 respectively.
An analysis of options outstanding at December 31, 2001 follows:
<Table>
<Caption>
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AS OF WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE EXERCISE
EXERCISE PRICE 2001 LIFE EXERCISE PRICE 2001 PRICE
- -------------- -------------- ----------- -------------- ----------------- ----------------
$0.00-$ 1.38 794,141 6.7 $ 0.51 794,141 $ 0.51
$1.39-$ 5.50 1,016,360 8.4 3.15 662,681 2.42
$5.51-$ 9.62 584,500 9.2 6.70 68,534 8.68
$9.63-$13.75 47,300 8.5 11.87 13,538 12.12
-------------- ----------- -------------- ----------------- ----------------
2,442,301 8.1 $ 3.31 1,538,894 $ 1.80
============== =========== ============== ================= ================
</Table>
F-14
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
On February 28, 2001 the Board of Directors approved the Allos
Therapeutics, Inc. 2001 Employee Stock Purchase Plan ("Purchase Plan") which was
also approved by the Company's stockholders on April 17, 2001. Under the
Purchase Plan, the Company is authorized to issue up to 2,500,000 shares of
common stock to qualified employees. Qualified employees can choose each
offering to have up to 10 percent of their annual base earnings withheld to
purchase the Company's common stock. The purchase price of the stock is 85
percent of the lower of the fair market value of a share of common stock on the
first day of the offering or the fair market value of a share of common stock on
the last day of the purchase period. The Company sold 9,225 shares to employees
in 2001 and had 1, 490,775 shares available for sale at December 31, 2001. The
Purchase Plan will terminate on February 27, 2011.
PRO FORMA DISCLOSURE
The weighted average estimated grant date fair value, as defined by SFAS
123, for options granted under the company's stock option plans during fiscal
1999, 2000 and 2001 was $6.77, $6.76 and $3.47 per share, respectively. The
weighted average estimated grant date fair value of purchase awards under the
Company's Purchase Plan during fiscal 2001 was $1.55. The estimated grant date
fair values were calculated applying the minimum value method using the
Black-Scholes option pricing model.
The following assumptions are included in the estimated grant date fair
value calculations for the Company's stock option and purchase awards:
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
-------------------------------------------
1999 2000 2001
------------ ------------ ------------
Stock option plans:
Expected dividend yield .............. 0% 0% 0%
Expected stock price volatility ...... 0% 73%-90% 49%-83%
Risk free interest rate .............. 5.14%-11.88% 5.63%-6.5% 3.5%-12.38%
Expected life (years) ................ 7.2 8.5 8.1
</Table>
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
------------------------------------------
1999 2000 2001
------------ ------------ ------------
Stock purchase plan:
Expected dividend yield .............. -- -- 0%
Expected stock price volatility ...... -- -- 53%
Risk free interest rate .............. -- -- 3.49%
Expected life (years) ................ -- -- 2.0
</Table>
Had the Company recorded stock compensation expense based on the estimated
grant date fair value, as defined by SFAS 123, for awards granted under its
stock options plans and stock purchase plan, the Company's net loss and net loss
per share would have been increased to the pro forma amounts below:
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
Net loss attributable to common stockholders:
As reported .................................... $(20,900,715) $(23,361,475) $(20,144,325)
------------ ------------ ------------
Pro forma ...................................... $(20,925,607) $(24,008,494) $(21,614,847)
============ ============ ============
</Table>
F-15
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
Net loss per share:
As reported ........... $ (10.48) $ (1.29) $ (0.88)
============ ============ ============
Pro forma ............. $ (10.49) $ (1.33) $ (0.94)
============ ============ ============
</Table>
Such pro forma disclosures may not be representative of the pro forma
effect in future years because options vest over several years and additional
grants may be made each year.
6. INCOME TAXES
Income taxes computed using the federal statutory income tax rate differs
from the Company's effective tax primarily due to the following:
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
Federal income tax benefit at 35% ................ $ (3,837,800) $ (8,176,500) $ (7,050,500)
State income tax, net of federal benefit ......... (451,500) (254,400) (525,300)
Stock-based compensation amortization expense .... 923,800 4,966,000 1,075,200
Research and development credits ................. (587,400) (685,300) (1,121,100)
Change in valuation allowance .................... 3,644,900 4,674,800 7,167,700
Other ............................................ 308,000 (524,600) 454,000
------------ ------------ ------------
Benefit for income taxes ............... $ -- $ -- $ --
============ ============ ============
</Table>
F-16
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The components of the Company's deferred tax assets under SFAS 109 are as
follows:
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
----------------------------
2000 2001
------------ ------------
Deferred tax assets:
Temporary differences ............................. $ 299,600 $ 416,300
Research and development credit carryforwards ..... 2,625,000 3,746,100
Net operating loss carryforwards .................. 14,194,000 20,123,900
------------ ------------
Total deferred tax assets ....... 17,118,600 24,286,300
Valuation allowance ............................... (17,118,600) (24,286,300)
------------ ------------
Net deferred tax assets ......... $ -- $ --
============ ============
</Table>
The Company's deferred tax assets represent an unrecognized future tax
benefit. A valuation allowance has been established for the entire tax benefit
as the Company believes that it is more likely than not that such assets will
not be realized.
At December 31, 2001, the Company has approximately $53 million of net
operating loss ("NOL") carryforwards and approximately $4 million of research
and development ("R&D") credit carryforwards. These carryforwards will expire
beginning 2009. The Internal Revenue Code of 1986, as amended, contains
provisions that may limit the NOL and R&D credit carryforwards available for use
in any given year upon the occurrence of certain events, including significant
changes in ownership interest. A greater than 50% change in ownership of a
company within a three-year period results in an annual limitation on the
Company's ability to utilize its NOL and R&D credit carryforwards from tax
periods prior to the ownership change. The Company's NOL and R&D credit
carryforwards as of December 31, 2001 are subject to annual limitation due to
changes in ownership. Future ownership changes could further limit the
utilization of the Company's NOL and R&D credit carryforwards.
7. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan covering substantially
all employees under Section 401(k) of the Internal Revenue Code. The Company
amended the plan documents on January 1, 1999 to provide a 50% match of
employees' contributions up to $2,000 per employee per year. During 2001, the
Company made total contributions of $93,601.
8. COMMITMENTS
The Company leases offices, research and development facilities, as well as
certain office and lab equipment under agreements that expire at various dates
through 2008. Total rent expense in 1999, 2000 and 2001 and the cumulative
period from inception was $179,792, $207,389, $388,993 and $1,108,454,
respectively.
The Company entered into an equipment lease line in 1996, which provided
for additional draws through September 30, 1997. The original lease line was
$350,000, and the Company utilized $222,650 of the line before the funding
period expired. In May 1998, the Company entered into another equipment lease
line with a term of 42 months. This lease line provided for draws through
September 30, 1999. The original lease line was $250,000 of which $199,439 had
been utilized before the financing period expired. Under the terms of both
master lease agreements, the Company purchased the leased equipment at its fair
market value in August, 2001, thus ending the lease obligations.
F-17
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The aggregate future minimum rental commitments as of December 31, 2001,
for capital and noncancelable operating leases with initial or remaining terms
in excess of one year are as follows:
<Table>
<Caption>
OPERATING
LEASES
----------
Year Ending December 31:
2002 ....................... $ 655,938
2003 ....................... 577,911
2004 ....................... 605,201
2005 ....................... 557,568
2006 ....................... 551,137
Thereafter ................. 1,068,421
----------
Minimum lease payments ....... $4,016,176
==========
</Table>
9. ROYALTY AND LICENSE FEE COMMITMENTS
On January 14, 1994, the Company entered into a license agreement with the
Center for Innovative Technology ("CIT"), under which CIT grants to the Company
an exclusive, worldwide license to practice, develop and use its technology and
licensed patent rights to develop and market the Company's products. In exchange
for the license agreement, the Company paid CIT $50,000 in cash and issued
248,000 shares of its common stock valued at $0.16 per share. This agreement was
assigned by CIT to the Virginia Commonwealth University Intellectual Property
Foundation, or VCUIP on June 30, 1997. Under the agreement, the Company has the
right to grant sublicenses, for which it must also pay royalties to VCUIPF for
products produced by the sublicensees. VCUIPF has the primary responsibility to
file, prosecute, and maintain intellectual property protection, but the Company
has agreed to reimburse costs incurred by VCUIPF after July 1, 1993 related to
obtaining and maintaining intellectual property protection. Also, pursuant to
the agreement, the Company will pay VCUIPF a running royalty of 1.25% of our
worldwide net revenue arising from the sale, lease or other commercialization of
the allosteric hemoglobin modifier compounds. This agreement terminates on the
date the last United States patent licensed to the Company under the agreement
expires, which is October, 2016. Quarterly royalty payments are due within 60
days from the end of each calendar quarter. As of December 31, 2001, no royalty
payments have been incurred.
In addition, the CIT license agreement requires the Company to sponsor
research at Virginia Commonwealth University ("VCU"). As of December 31, 2001,
the Company entered into sponsored research agreements with VCU which extend
through June 30, 2002. The Company has an aggregate commitment under the
agreement to pay VCU $425,614.
10. RELATED PARTY TRANSACTIONS
In December 1994, the Company renegotiated a consulting agreement for
scientific advisory services with Dr. Marvin Jaffe, a director of the Company.
Under the agreement, which is renewable annually upon mutual consent, the
Company will pay Dr. Jaffe consulting fees at $2,000 per month. For 1999, 2000
and 2001 and the cumulative period from inception, the Company paid Dr. Jaffe
consulting fees of $24,000, $24,000, $24,000 and $209,017, respectively. Of
these amounts, $2,000 was included in accounts payable at December 31, 1999 and
2000, and $4,000 was included in accounts payable at December 31, 2001. In
addition, the Company granted Dr. Jaffe stock options to purchase a total of
65,800 shares of the Company's common stock at $0.16 to $6.73 per share under
its Stock Option Plans in 1994, 1995, 1997, 2000 and 2001.
In July 1997, the Company entered into a consulting agreement for
scientific advisory services with Dr. Stephen K. Carter, a director of the
Company. Under the three-year agreement, which is renewable annually upon mutual
consent, the Company will pay Dr. Carter consulting fees at $2,000 per month.
For 1999, 2000 and 2001 and the cumulative period from inception, the Company
paid Dr. Carter consulting fees of $24,000, $24,000, $44,000 and $118,000,
respectively. Of these amounts, $2,000 and $4,000 was included in accounts
payable at December 31, 1999 and 2001, respectively. In addition, the Company
granted Dr. Carter stock options to purchase a total of 44,100
F-18
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
shares of the Company's common stock at $0.40 to $6.73 per share under its Stock
Option Plans in 1997, 2000, and 2001.
In January 2001, the Company entered into a consulting agreement for
scientific advisory services with Dr. Donald Abraham, a director of the Company.
Under the one-year agreement, which is renewable upon mutual consent, the
Company will pay Dr. Abraham consulting fees at $2,000 per month. For 2001, the
Company paid Dr. Abraham consulting fees of $42,000. In addition, the Company
granted Dr. Abraham stock options to purchase a total of 10,000 shares of the
Company's common stock at $6.73 per share under its Stock Option Plans in 2001.
The Company entered into several research and development contracts during
1996. Under these contracts, Donald J. Abraham, Ph.D., director, acted as
Principal Investigator for the contracts with VCU. During 1999 and 2000,
services provided under these contracts totaled $498,335 and $487,557
respectively, of which $95,889 was included in accounts payable at December 31,
2000. During 2001, services provided under these contracts totaled $457,474, of
which $74,631 was included in accounts payable at December 31, 2001.
In March 1996, the Company obtained recourse notes receivable (the "1996
Notes") from two officers in the amount of $90,000 upon the officers' exercise
of 558,000 stock options. The notes accrued interest at 8% annually with
interest and principal originally due March 1998. In December 1997, the maturity
dates for the 1996 Notes were extended by two years and extended by an
additional year in January 2000. In March 2000, the 1996 Notes were forgiven. In
connection therewith, the Company recorded $7,617,000 in stock compensation
expense for the quarter ended March 31, 2000 based on the difference between the
fair market value of the underlying common stock and option exercise prices.
This expense was allocated as $2,200,000 related to research and development and
$5,417,000 related to general and administrative.
In December 1997, the Company obtained additional notes receivable (the
"1997 Notes") from these officers in the amount of $49,687 upon the officers'
exercise of stock options to acquire 123,225 shares. These notes accrued
interest at 6% annually with interest and principal originally due December
1999. The maturity dates for the 1997 Notes were extended by one year in January
2000. The Company treated the underlying stock options as variable awards and
recorded $815,000 of stock compensation expense during 1999 based on the
difference between the fair market value of the underlying common stock and
option exercise prices. The 1997 Notes were repaid during the fourth quarter of
2000.
11. SUBSEQUENT EVENTS
In January 2002, the Board of Directors approved the Allos Therapeutics,
Inc. 2002 Broad Based Equity Incentive Plan. Under this plan, the Company is
authorized to issue up to 1,000,000 shares of common stock to employees,
consultants and members of the Board of Directors. Under the terms of the plan,
the aggregate number of shares underlying stock awards to officers and directors
once employed by the Company cannot exceed 49 percent of the number of shares
underlying all stock awards granted determined on specific dates. This plan will
terminate on January 7, 2012.
In January 2002, the Company signed a term sheet for manufacturing and
supply of bulk drug substance for clinical and commercial use. This contract
represents approximately $2,000,000 of development work to be completed prior to
finalizing a contract.
In March 2002, the Company entered into an agreement under which the
Company obtained an exclusive U.S. license to intellectual property covering a
novel, small molecule cytoprotective compound. The Company will have the right
to develop and market the product in the field of oncology and certain
cardiovascular conditions. Under the terms of the agreement, the Company made an
upfront equity investment in the licensor, and may also make a subsequent equity
investment upon the achievement of certain development milestones, as well as a
cash payment based on issuance of certain product related patents. In addition,
the Company will pay the licensor a royalty based on a percentage of net
revenues arising from sales of the product in the U.S. if and when such sales
occur.
F-19
ALLOS THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY INFORMATION (UNAUDITED)
The results of operations on a quarterly basis were as follows:
<Table>
<Caption>
December 31, September 30, June 30, March 31, December 31, September 30,
2001 2001 2001 2001 2000 2000
------------ -------------- ------------ ------------ ------------ --------------
Operating Expenses:
Research and development $ 3,468,702 $ 3,344,297 $ 3,064,636 $ 2,781,784 $ 2,832,232 $ 2,024,245
Clinical manufacturing 297,477 640,348 1,190,679 1,014,829 1,095,178 958,526
General and administrative 2,469,851 2,412,052 2,259,710 2,135,434 2,310,592 2,103,630
------------ -------------- ------------ ------------ ------------ --------------
Total operating expenses 6,236,030 6,396,697 6,515,025 5,932,047 6,238,002 5,086,401
Loss from operations (6,236,030) (6,396,697) (6,515,025) (5,932,047) (6,238,002) (5,086,401)
Interest and other income, net 857,931 1,268,233 1,256,154 1,553,155 1,286,354 1,482,687
------------ -------------- ------------ ------------ ------------ --------------
Net loss attributable to common
Stockholders (5,378,099) (5,128,464) (5,258,871) (4,378,892) (4,951,648) (3,603,714)
============ ============== ============ ============ ============ ==============
Net loss per share:
Basic and diluted $ (0.23) $ (0.22) $ (0.23) $ (0.19) $ (0.22) $ (0.16)
============ ============== ============ ============ ============ ==============
Weighted average shares - basic
and diluted 23,007,206 22,961,185 22,958,087 22,959,975 22,950,446 22,871,795
============ ============== ============ ============ ============ ==============
</Table>
<Table>
<Caption>
June 30, March 31,
2000 2000
------------ ------------
Operating Expenses:
Research and development $ 2,033,409 $ 3,846,617
Clinical manufacturing 801,866 344,978
General and administrative 1,960,520 7,400,506
------------ ------------
Total operating expenses 4,795,795 11,592,101
Loss from operations (4,795,795) (11,592,101)
Interest and other income, net 1,466,430 115,353
------------ ------------
Net loss attributable to common
Stockholders (3,329,365) (11,476,748)
============ ============
Net loss per share:
Basic and diluted $ (0.15) $ (3.51)
============ ============
Weighted average shares - basic
and diluted 22,837,154 3,270,720
============ ============
</Table>
F-20
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.01(1) Amended and Restated Certificate of Incorporation.
3.02(1) Bylaws.
10.01(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.02(1) Hemotech and CIT Amended and Restated Allosteric Modifiers of
Hemoglobin Agreement with Center for Innovative Technology
dated January 12, 1994.
10.03(1) Amendment to Allos Therapeutics, Inc. and CIT Amended and
Restated Allosteric Modifiers of Hemoglobin Agreement with
Center for Innovative Technology dated January 17, 1995.
10.04(1) Amendment to Allos Therapeutics, Inc. and CIT Amended and
Restated Allosteric Modifiers of Hemoglobin Agreement with
Center for Innovative Technology dated March 12, 1996.
10.05(1) Assignment and Assumption Agreement with Amendment with
Center for Innovative Technology and Virginia Commonwealth
University Intellectual Property Foundation dated July 28,
1997.
10.06(1) Exercise of Option to Nonheme Protein License Agreement with
VCU-Intellectual Property Foundation dated March 23, 1998.
10.07(1) Warrant Agreement to purchase shares of Series B Preferred
Stock with Comdisco, Inc. dated April 15, 1996.
10.08(1) Warrant Agreement to purchase shares of Series C Preferred
Stock with Comdisco, Inc. dated May 5, 1998.
10.09(1) Allos Therapeutics, Inc. Fourth Amended and Restated
Stockholder Rights Agreement dated October 4, 1999.
10.10(1)(*) Allos Therapeutics, Inc. 1995 Stock Option Plan, as amended
to date.
10.11(1) Lease Agreement with Virginia Biotechnology Research Park
Authority dated July 28, 1999.
10.12(1) Term Sheet for Contract API Supply between Allos and Hovione
dated March 25, 1999.
10.13(1) Confirmatory letter agreement with Hovione Inter Limited
dated January 13, 2000.
10.14(1) Development and Investigational Supply Proposal between
Taylor Pharmaceuticals and Allos Therapeutics, Inc. dated
December 30, 1998.
10.15(2)(*) Employment Agreement between Dr. Hoffman and Allos
Therapeutics, Inc. dated January 17, 2001.
10.16(*) Employment Agreement between Michael E. Hart and Allos
Therapeutics, Inc. dated December 17, 2001.
10.17(2)(*) Allos Therapeutics, Inc. Severance Benefit Plan, effective
January 16, 2001, and related benefit schedule thereto.
10.18(3)(*) Allos Therapeutics, Inc. 2001 Employee Stock Purchase Plan
and form of Offering.
10.19(4) Office Lease with Catellus Development Corporation dated May,
2001.
10.20(*) Separation Agreement between Dr. Gerber and Allos
Therapeutics, Inc., dated September 24, 2001.
10.21(5)(*) 2000 Stock Incentive Compensation Plan
10.22(6)(*) 2002 Broad Based Equity Incentive Plan
23.01 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24.01 Power of Attorney (see page 29 herein)
</Table>
- ----------
(*) Indicates Management Contract or Compensatory Plan or Arrangement.
(1) Incorporated by reference to our Registration Statement on Form S-1 (File
No. 333-95439) and amendments thereto, declared effective March 27, 2000.
(2) Incorporated by reference to our Annual Report on Form 10-K (File No.
000-29815), as filed with the Commission on March 7, 2001.
(3) Incorporated by reference to our Registration Statement on Form S-8 (File
No. 333-60430), as filed with the Commission on May 8, 2001.
(4) Incorporated by reference to our Quarterly Report on Form 10Q (File No.
000-29815), as filed with the Commission on August 14, 2001.
(5) Incorporated by reference to our Registration Statement on Form S-8 (File
No. 333-38696), as filed with the Commission on June 6, 2000.
(6) Incorporated by reference to our Registration Statement on Form S-8 (File
No. 333-76804), as filed with the Commission on January 16, 2002.