FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-16043
ALTEON INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3304550
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
170 WILLIAMS DRIVE, RAMSEY, NEW JERSEY 07446
--------------------------------------------
(Address of principal executive offices)
(Zip Code)
(201) 934-5000
---------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
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
On November 4, 2002, 31,884,556 shares of Registrant's Common Stock were
outstanding.
Page 1 of 24 pages
The Exhibit Index is on page 23
ALTEON INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of September 30, 2002 and
December 31, 2001 ............................................. 3
Statements of Operations for the three and
nine months ended September 30, 2002 and 2001 ................. 4
Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001 ............................. 5
Notes to Financial Statements ..................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 17
Item 4. Controls and Procedures ........................................... 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 19
Item 6. Exhibits and Reports on Form 8-K .................................. 19
SIGNATURES ................................................................. 20
CERTIFICATIONS ............................................................. 21
INDEX TO EXHIBITS .......................................................... 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALTEON INC.
BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, December 31,
2002 2001
Current Assets:
Cash and cash equivalents .................................................. $ 11,877,693 $ 4,249,439
Short-term investments ..................................................... 5,983,500 6,476,384
Other current assets ....................................................... 409,397 1,394,765
------------- -------------
Total current assets ................................................... 18,270,590 12,120,588
Property and equipment, net ................................................ 669,804 1,109,676
Deposits and other assets .................................................. -- 2,815
------------- -------------
Total assets ................................................................... $ 18,940,394 $ 13,233,079
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................................... $ 755,462 $ 307,153
Accrued expenses ........................................................... 3,784,486 2,054,980
------------- -------------
Total current liabilities .............................................. 4,539,948 2,362,133
------------- -------------
Commitments and Contingencies .................................................. -- --
Stockholders' Equity:
Preferred Stock, $0.01 par value, 1,993,329 shares authorized, and 1,057 and
992 of Series G and 3,173 and 2,980 of Series H shares issued and
outstanding, as of September 30, 2002 and
December 31, 2001, respectively ........................................ 42 40
Common Stock, $0.01 par value,
80,000,000 shares authorized, and 31,878,525 and
27,314,846 shares issued and outstanding, as of
September 30, 2002 and December 31, 2001, respectively ................. 318,785 273,148
Additional paid-in capital ................................................. 179,467,084 159,596,934
Accumulated deficit ........................................................ (165,386,371) (149,008,641)
Accumulated other comprehensive income ..................................... 906 9,465
------------- -------------
Total stockholders' equity ............................................. 14,400,446 10,870,946
------------- -------------
Total liabilities and stockholders' equity ..................................... $ 18,940,394 $ 13,233,079
============= =============
The accompanying notes are an integral part of these unaudited statements.
3
ALTEON INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Investment income ........................... $ 93,376 $ 107,404 $ 346,020 $ 360,050
------------ ------------ ------------ ------------
Expenses:
Research and development (which includes
non-cash variable stock compensation
(benefit)/expense of $0 and $(52,676)
for the three months ended September 30,
2002 and 2001, respectively, and
$(93,516) and $83,479 for the nine
months ended September 30, 2002 and
2001, respectively) ..................... 4,330,899 1,824,239 11,982,313 6,025,419
General and administrative (which
includes non-cash variable stock
compensation (benefit)/expense of $0 and
$(401,344) for the three months ended
September 30, 2002 and 2001,
respectively, and $(1,315,635) and
$(328,055) for the nine months ended
September 30, 2002 and 2001,
respectively) ........................... 975,540 497,236 2,162,560 2,883,220
------------ ------------ ------------ ------------
Total expenses ..................... 5,306,439 2,321,475 14,144,873 8,908,639
------------ ------------ ------------ ------------
Net loss ........................................ $ (5,213,063) $ (2,214,071) $(13,798,853) $ (8,548,589)
Preferred stock dividends ................. 887,158 815,591 2,578,877 2,370,841
Common stock warrant deemed dividend ...... -- 209,528 -- 209,528
------------ ------------ ------------ ------------
Net loss applicable to
common stockholders ......................... $ (6,100,221) $ (3,239,190) $(16,377,730) $(11,128,958)
============ ============ ============ ============
Basic/diluted net loss per share
applicable to common stockholders ........... $ (0.19) $ (0.13) $ (0.52) $ (0.47)
============ ============ ============ ============
Weighted average common shares used
in computing basic/diluted net loss per share 31,878,525 25,791,322 31,731,160 23,639,120
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited statements.
4
ALTEON INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months
Ended September 30,
-------------------
2002 2001
---- ----
Cash Flows from Operating Activities:
Net loss .......................................................... $(13,798,853) $ (8,548,589)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization ..................................... 477,261 479,185
Amortization of deferred compensation ............................. 20,332 91,038
Non-cash compensation (benefit)/expense related to
variable plan employee stock options .......................... (1,409,151) (244,576)
Changes in operating assets and liabilities:
Other assets ...................................................... 988,183 1,260,730
Accounts payable and accrued expenses ............................. 2,177,815 299,447
------------ ------------
Net cash used in operating activities ......................... (11,544,413) (6,662,765)
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures .............................................. (37,389) (49,595)
Purchases of marketable securities ................................... (15,018,675) (14,198,112)
Maturities of marketable securities .................................. 15,503,000 12,022,000
------------ ------------
Net cash provided by/(used in) investing activities ........... 446,936 (2,225,707)
------------ ------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock ........................ 18,725,731 9,836,936
------------ ------------
Net increase in cash and cash equivalents ............................. 7,628,254 948,464
Cash and cash equivalents, beginning of period ........................ 4,249,439 3,600,328
------------ ------------
Cash and cash equivalents, end of period .............................. $ 11,877,693 $ 4,548,792
============ ============
Non-cash transactions:
Preferred stock dividends ......................................... $ 2,578,877 $ 2,370,841
Common stock warrant deemed dividend .............................. -- 209,528
The accompanying notes are an integral part of these unaudited statements.
5
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
Management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001, filed with the Securities and Exchange
Commission.
The Company's business is subject to significant risks including,
but not limited to, (i) our ability to obtain funding, (ii) the risks inherent
in our research and development efforts, including clinical trials, (iii)
uncertainties associated with obtaining and enforcing our patents and with the
patent rights of others, (iv) the lengthy, expensive and uncertain process of
seeking regulatory approvals, (v) uncertainties regarding government reforms and
product pricing and reimbursement levels, (vi) technological change and
competition, (vii) manufacturing uncertainties and (viii) dependence on
collaborative partners and other third parties. Even if our product candidates
appear promising at an early stage of development, they may not reach the market
for numerous reasons. Such reasons include the possibilities that the products
will prove ineffective or unsafe during clinical trials, will fail to receive
necessary regulatory approvals, will be difficult to manufacture on a large
scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties.
NOTE 2 - LIQUIDITY
Alteon has incurred an accumulated deficit of $165,386,000 as of
September 30, 2002, and expects to incur operating losses, potentially greater
than losses in prior years, for a number of years. The Company has devoted
substantially all of its resources to research, drug discovery and development
programs. To date, it has not generated any revenues from the sale of products
and does not expect to generate any such revenues for a number of years, if at
all.
The Company has financed its operations through proceeds from the
sale of common and preferred equity securities, revenue from present and former
collaborative relationships, reimbursement of certain of our research and
development expenses by its collaborative partners, investment income earned on
cash balances and short-term investments and the sale of a portion of our New
Jersey net operating loss carryforwards.
As of September 30, 2002, the Company has working capital of
$13,731,000, including $17,861,000 of cash, cash equivalents and short-term
investments. The Company's cash used in operations for the nine months ended
September 30, 2002, and for the year ended December 31, 2001, was $11,544,000
and $8,211,000, respectively. The Company anticipates that at its current
spending level, its existing available cash and cash equivalents and short-term
investments will be adequate to satisfy its working capital requirements for its
current operations through the second quarter of 2003. If it becomes necessary,
the Company has the ability to reduce the cash burn rate, as it has limited
fixed commitments. If the Company is unable to obtain additional funding prior
to the completion of the DIAMOND, SAPPHIRE and SILVER trials, it expects to
devote all of its resources to these trials. This will require Alteon to
significantly curtail its other research and product development activities.
Following completion of the trials, the Company will require substantial new
funding to pursue development of ALT-711 and continue its operations.
The amount of the Company's future capital requirements will depend
on numerous factors, including the progress of its research and development
programs, the conduct of pre-clinical tests and clinical trials, the development
of regulatory submissions, the costs associated with protecting patents and
other proprietary rights, the development of marketing and sales capabilities
and the availability of third-party funding.
Because of Alteon's long-term capital requirements, the Company may
seek access to the public or private equity markets whenever conditions are
favorable. The Company may also seek additional funding through corporate
collaborations and other financing vehicles, potentially including off-balance
sheet financing through limited partnerships or corporations. There can be no
assurance that such funding will be available at all or on terms acceptable to
Alteon. If adequate funds are not available, the Company may be required to
curtail significantly one or more of its research or development programs. If
Alteon obtains funds through arrangements with collaborative partners or others,
the Company may be required to relinquish rights to certain of its technologies
or product candidates.
6
NOTE 3 - CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include cash and highly liquid
investments, which have a maturity of less than three months at the time of
purchase. Short-term investments are considered available-for-sale and are
recorded at fair value, as determined by quoted market value, with changes in
fair value recorded as a component of accumulated other comprehensive income. As
of September 30, 2002 and December 31, 2001, short-term investments were
invested in debt instruments of the U.S. government, government agencies,
financial institutions and corporations with strong credit ratings. They consist
of the following:
September 30, December 31,
2002 2001
---- ----
U.S. government agency funds $5,983,500 $5,479,434
Corporate obligations ...... -- 996,950
---------- ----------
$5,983,500 $6,476,384
========== ==========
NOTE 4 - NET LOSS PER SHARE
Basic loss per share is based on the weighted average number of
shares outstanding during the period. Diluted loss per share is the same as
basic loss per share, since the assumed exercise of stock options and warrants
and the conversion of preferred stock would be antidilutive. The amount of
common stock equivalents excluded from the calculation as of September 30, 2002
and 2001, was 29,427,492 and 19,633,637, respectively.
NOTE 5 - COMPREHENSIVE LOSS
The following sets forth comprehensive income/(loss) for the three
and nine months ended September 30, 2002 and 2001:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Loss ..................... $(5,213,063) $(2,214,071) $(13,798,853) $(8,548,589)
Net Unrealized Gain/(Loss)
on Short-Term Investments (2,073) 17,498 (8,559) 22,049
----------- ----------- ------------ -----------
Comprehensive Loss ........... $(5,215,136) $(2,196,573) $(13,807,412) $(8,526,540)
=========== =========== ============ ===========
NOTE 6 - STOCK COMPENSATION
In March 2000, the Financial Accounting Standards Board ("FASB")
released Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, An Interpretation of APB Opinion No. 25." The interpretation
became effective on July 1, 2000, but in some circumstances applies to
transactions that occurred prior to the effective date. Under the
interpretation, stock options that are repriced must be accounted for as
variable-plan arrangements. This interpretation requires the Company to record
compensation expense or benefit, which is adjusted every quarter, for increases
or decreases in the fair value of the repriced options based on changes in our
stock price from the value at July 1, 2000, until the options are exercised,
forfeited or expire. This requirement applies to any options repriced after
December 15, 1998. On February 2, 1999, the Company repriced certain stock
options. The total non-cash stock compensation (benefit)/expense resulting from
the repricing for the three months ended September 30, 2002 and September 30,
2001, is $0 and $(454,020), respectively, and for the nine months ended
September 30, 2002 and September 30, 2001, is $(1,409,151) and $(244,576),
respectively. No stock compensation (benefit)/expense resulting from the
repricing was incurred for the three months ended September 30, 2002, as the
Company's stock price was below the value at July 1, 2000.
NOTE 7 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of commitment to an exit or disposal plan. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
NOTE 8 - STOCKHOLDERS' EQUITY
In January 2002, Alteon completed a public offering of 4,450,000
shares of common stock at $4.25 per share, which provided net proceeds of
$18,610,521.
7
Series G Preferred Stock and Series H Preferred Stock dividends are
payable quarterly in shares of preferred stock. For the three months ended
September 30, 2002 and September 30, 2001, preferred stock dividends were
$887,158 and $815,591, respectively, and for the nine months ended September 30,
2002 and September 30, 2001, preferred stock dividends were $2,578,877 and
$2,370,841, respectively.
In July 2001, the Company completed a public offering of 4,500,000
shares of Common Stock, which provided net proceeds of approximately $9.4
million. In connection with the offering, certain previously issued warrants
were repriced pursuant to antidilution provisions contained in the warrants.
This resulted in a one-time, deemed dividend in the quarter of $209,528.
NOTE 9 - SUBSEQUENT EVENT
On November 6, 2002, Alteon and The Picower Institute for Medical
Research ("Picower") entered into an agreement which terminated, effective
April 15, 2002, their license agreement dated as of September 5, 1991.
Pursuant to this termination agreement, Picower assigned to Alteon all of its
patents, patent applications and other technology related to AGE's and Alteon
agreed to prosecute and maintain the patents and patent applications. Alteon
will pay Picower royalties on any sales of products falling within the claims
of these patents and patent applications until they expire or are allowed to
lapse.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OVERVIEW
We are a product-based biopharmaceutical company primarily engaged
in the discovery and development of oral drugs to reverse or slow down diseases
of aging and complications of diabetes. Our product candidates represent novel
approaches to some of the largest pharmaceutical markets. Two of our compounds
are in clinical development; several others are in early development. These
pharmaceutical candidates were developed as a result of our research on the
A.G.E. pathway, a fundamental pathological process and inevitable consequence of
aging that causes or contributes to many medical disorders, including
cardiovascular, kidney and eye diseases.
Our lead compound, ALT-711, is being developed initially for
cardiovascular indications, including systolic hypertension and diastolic heart
failure ("DHF"). We have completed a Phase IIa trial to evaluate the effect of
ALT-711 on cardiovascular compliance. Based on positive results that
demonstrated the ability of ALT-711 to decrease pulse pressure and increase the
elasticity of the cardiovascular system, we have initiated two Phase IIb
efficacy trials of ALT-711, the SAPPHIRE (Systolic And Pulse Pressure
Hemodynamic Improvement by Restoring Elasticity) and SILVER (Systolic
Hypertension Interaction with Left VEntricular Remodeling) trials in patients
with systolic hypertension and systolic hypertension with left ventricular
hypertrophy. The compound is also being evaluated in a Phase IIa trial in DHF,
the DIAMOND (Distensibility Improvement And ReMOdeliNg in Diastolic Heart
Failure) trial, as well as a Phase I program in end-stage renal disease patients
undergoing peritoneal dialysis.
We recently announced that we have reached the targeted enrollment
of 450 patients in our Phase IIb SAPPHIRE trial of ALT-711 in systolic
hypertension, and that we have also completed enrollment in our companion Phase
IIb SILVER trial in patients with both systolic hypertension and left
ventricular hypertrophy, substantially exceeding the minimum enrollment of 180
patients. A total of approximately 750 patients are now enrolled in the
SAPPHIRE/SILVER program and data is expected to be released concurrently
mid-year 2003. Additionally, we announced the completion of enrollment in our
Phase IIa DIAMOND clinical trial in diastolic heart failure (DHF). Data from the
DIAMOND study is expected during the first quarter of 2003.
As we continue clinical development of ALT-711, we are evaluating
potential corporate partnerships for further development and ultimate marketing
of the compound in territories throughout the world. We plan to retain
development and marketing rights for one or several indications in the United
States.
A topical formulation of an A.G.E. Crosslink Breaker, ALT-744, is
being clinically evaluated in skin aging for cosmetic applications. We continue
to evaluate product development opportunities from among our A.G.E. Crosslink
Breaker compounds and other classes of compounds in our patent estate.
Since our inception in October 1986, we have devoted substantially
all of our resources to research, drug discovery and development programs. To
date, we have not generated any revenues from the sale of products and do not
expect to generate any such revenues for a number of years, if at all. We have
incurred an accumulated deficit of $165,386,000 as of September 30, 2002, and
expect to incur operating losses, potentially greater than losses in prior
years, for a number of years.
We have financed our operations through proceeds from an initial
public offering of common stock in 1991, public offerings of common stock,
private placements of common and preferred equity securities, revenue from
present and former collaborative relationships, reimbursement of certain of our
research and development expenses by our collaborative partners, investment
income earned on cash balances and short-term investments and the sale of a
portion of our New Jersey net operating loss carryforwards.
Our business is subject to significant risks including, but not
limited to, (i) our ability to obtain funding, (ii) the risks inherent in our
research and development efforts, including clinical trials, (iii) uncertainties
associated with obtaining and enforcing our patents and with the patent rights
of others, (iv) the lengthy, expensive and uncertain process of seeking
regulatory approvals, (v) uncertainties regarding government reforms and product
pricing and reimbursement levels, (vi) technological change and competition,
(vii) manufacturing uncertainties and (viii) dependence on collaborative
partners and other third parties. Even if our product candidates appear
promising at an early stage of development, they may not reach the market for
numerous reasons. Such reasons include the possibilities that the products will
prove ineffective or unsafe during clinical trials, will fail to receive
necessary regulatory approvals, will be difficult to manufacture on a large
scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties. These risks and others
are discussed under the heading "Forward-Looking Statements and Cautionary
Statements."
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Total revenues for the three months ended September 30, 2002 and
2001, were $93,000 and $107,000, respectively. Revenues were derived from
interest earned on cash and cash equivalents and short-term investments. The
13.0% decrease in income was attributable to the decrease in short-term interest
rates, partially offset by larger investment balances.
Our total expenses were $5,306,000 for the three months ended
September 30, 2002, compared to $2,321,000 for the three months ended September
30, 2001, and in each year consisted primarily of research and development
expenses. Research and development expenses included third-party expenses
associated with pre-clinical and clinical studies, manufacturing costs,
including the development and preparation of clinical supplies, personnel and
personnel-related expenses and facility expenses. Research and development
expenses were $4,331,000 for the three months ended September 30, 2002, and
primarily consisted of $2,204,000 in clinical trial expenses related to the
Phase IIb SAPPHIRE and SILVER trials, $411,000 related to manufacturing (process
development and packaging) and drug stability studies, $149,000 in pre-clinical
expenses and $868,000 in personnel and personnel-related expenses. Research and
development expenses for the three months ended September 30, 2001, were
$1,824,000, and primarily consisted of $569,000 in clinical trial expenses
related to the start-up of the Phase IIb SAPPHIRE trial, $326,000 of
manufacturing expenses (packaging of clinical trial supplies and process
development) and drug stability studies associated with the ALT-711 programs,
$508,000 in personnel and personnel-related expenses and a non-cash variable
stock compensation (benefit)/expense of $(53,000).
Excluding the non-cash variable stock compensation benefit in 2001,
research and development expenses increased by $2,454,000, or 130.8%, primarily
due to the Phase IIb SAPPHIRE and SILVER clinical trials. These trials were
initiated during the second half of 2001. We have reached our targeted
enrollment of 450 patients in the SAPPHIRE trial and have exceeded the targeted
enrollment of 180 patients in the SILVER trial. The release of data for these
trials is targeted for mid-year 2003.
The development and successful commercialization of ALT-711 are
subject to substantial risks described in this Report. See, for example,
"Forward-Looking Statements and Cautionary Statements -- If we do not
successfully develop any products, we may not derive any revenues."
General and administrative expenses increased to $976,000 for the
three months ended September 30, 2002, compared to $497,000 for the same period
in 2001, and included a non-cash variable stock compensation benefit of $401,000
in the 2001 period, which resulted from a decline in our stock price. Excluding
the non-cash variable stock compensation, general and administrative expenses
increased $77,000, or 8.6%, primarily due to increased personnel costs.
Our net loss applicable to common stockholders increased to
$6,100,000 for the three months ended September 30, 2002, compared to $3,239,000
in the same period in 2001, an increase of 88.3%. This was primarily a result of
increased clinical trial expenses due to the ongoing Phase IIb SAPPHIRE and
SILVER trials. Included in the net loss applicable to common stockholders are
preferred stock dividends of approximately $887,000 and $816,000 for the three
months ended September 30, 2002 and 2001, respectively, and common stock deemed
dividends of $210,000 in the 2001 period.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Total revenues for the nine months ended September 30, 2002, and
2001, were $346,000 and $360,000, respectively. Revenues were derived from
interest earned on cash and cash equivalents and short-term investments. Total
revenues decreased due to a significant decrease in short-term interest rates,
partially offset by larger investment balances.
Our total expenses were $14,145,000 for the nine months ended
September 30, 2002, compared to $8,909,000 for the nine months ended September
30, 2001, and in each year consisted primarily of research and development
expenses. Research and development expenses for the nine months ended September
30, 2002 were $11,982,000 and primarily consisted of $5,148,000 in clinical
trial expenses related to the Phase IIb SAPPHIRE and SILVER trials, $2,045,000
related to manufacturing (process development, tablet manufacturing and
packaging) and drug stability studies, $568,000 in pre-clinical expenses,
$2,417,000 in personnel and personnel-related expenses and a non-cash variable
stock compensation (benefit)/expense of $(94,000). Research and development
expenses for the nine months ended September 30, 2001, were $6,025,000 and
primarily consisted of $826,000 in clinical trial expenses related to the
start-up of the Phase IIb SAPPHIRE and SILVER trials and a Phase I
pharmacokinetic study of ALT-711, $1,618,000 of manufacturing expenses
(tableting, packaging and process development) and drug stability studies
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
associated with the ALT-711 programs, $1,843,000 in personnel and
personnel-related expenses and a non-cash variable stock compensation
(benefit)/expense of $83,000.
Excluding the non-cash variable stock compensation
(benefit)/expense), research and development expenses increased by $6,134,000,
or 103.2%, primarily due to the Phase IIb SAPPHIRE and SILVER clinical trials.
These trials were initiated during the second half of 2001. We have reached our
targeted enrollment of 450 patients in the SAPPHIRE trial and have exceeded the
targeted enrollment of 180 patients in the SILVER trial. The release of data for
these trials is targeted for mid-year 2003.
The development and successful commercialization of ALT-711 are
subject to substantial risks described in this Report. See, for example,
"Forward-Looking Statements and Cautionary Statements -- If we do not
successfully develop any products, we may not derive any revenues."
General and administrative expenses decreased to $2,163,000 for the
nine months ended September 30, 2002, compared to $2,883,000 for the same period
in 2001, and included a non-cash variable stock compensation (benefit)/expense
of $(1,316,000) and $(328,000), respectively. Excluding the non-cash variable
stock compensation (benefit)/expense, general and administrative expenses
increased $267,000, or 8.3%, primarily due to increased patent and recruiting
fees.
Our net loss applicable to common stockholders increased to
$16,378,000 for the nine months ended September 30, 2002, compared to
$11,129,000 in the same period in 2001, an increase of 47.2%. This was primarily
a result of increased research and development expenses due to increased
enrollment in the Phase IIb SAPPHIRE and SILVER clinical trials and increased
preferred stock dividends, offset by a non-cash stock compensation benefit.
Included in the net loss applicable to common stockholders are preferred stock
dividends of approximately $2,579,000 and $2,371,000 for the nine months ended
September 30, 2002 and 2001, respectively, and common stock deemed dividends of
$210,000 in the 2001 period.
LIQUIDITY AND CAPITAL RESOURCES
We had cash, cash equivalents and short-term investments at
September 30, 2002, of $17,861,000, compared to $10,726,000 at December 31,
2001. This is an increase in cash and cash equivalents and short-term
investments for the nine months ended September 30, 2002, of $7,135,000. This
consisted of $18,611,000 of net proceeds from a public offering of common stock
in January 2002, and $115,000 of proceeds from stock option exercises. This was
offset by $11,544,000 of net cash used in operations, and consisted primarily of
research and development expenses, personnel-related costs and facility expenses
and approximately $37,000 in capital expenditures.
At December 31, 2001, we had available federal net operating loss
carryforwards, which expire in various amounts from the years 2006 through 2020,
of approximately $135,500,000 and New Jersey net operating loss carryforwards,
which expire in the years 2002 through 2007, of approximately $85,100,000. In
addition, we had federal research and development tax credit carryforwards of
approximately $5,100,000 and New Jersey research and development tax credit
carryforwards of approximately $1,600,000 at December 31, 2001. The amount of
federal net operating loss and research and development tax credit carryforwards
which can be utilized in any one period may become limited by federal income tax
regulations if a cumulative change in ownership of more than 50% occurs within a
three-year period.
In December 2001, we sold $6,243,000 of our gross New Jersey net
operating loss carryforwards and $802,000 of our New Jersey research and
development tax credit carryforwards under the State of New Jersey's Technology
Business Tax Certificate Transfer Program (the "Program"). The Program allows
qualified technology and biotechnology businesses in New Jersey to sell unused
amounts of net operating loss carryforwards and defined research and development
tax credits for cash. The proceeds from the sale in 2001 were $1,187,000 and
were recorded as a tax benefit in the December 31, 2001 statement of operations.
The proceeds from the sale of the net operating loss carryforwards and the
research and development tax credit carryforwards sold in 2001 were received on
January 4, 2002. The State of New Jersey may renew the Program annually and
limits the aggregate proceeds to $10,000,000. We cannot be certain if we will be
able to sell any of the carryforwards in the future.
We anticipate that at our current spending level, our existing
available cash and cash equivalents and short-term investments will be adequate
to satisfy our working capital requirements for our current operations through
the second quarter of 2003. If it becomes necessary, we have the ability to
reduce the cash burn rate, as we have limited fixed commitments. If we are
unable to obtain additional funding prior to the completion of the DIAMOND,
SAPPHIRE and SILVER trials, we expect to devote all of our resources to these
trials. This will require us to significantly curtail our other research and
product development activities. Following completion of the trials, we will
require substantial new funding to pursue development of ALT-711 and continue
our operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The amount of our future capital requirements will depend on
numerous factors, including the progress of our discovery research programs, the
initiation of pre-clinical tests and clinical trials, the development of
regulatory submissions, the costs associated with protecting patents and other
proprietary rights, the development of marketing and sales capabilities and the
availability of third-party funding.
Because of our long-term capital requirements, we may seek access to
the public or private equity markets whenever conditions are favorable. We may
also seek additional funding through corporate collaborations and other
financing vehicles, potentially including off-balance sheet financing through
limited partnerships or corporations. There can be no assurance that such
funding will be available at all or on terms acceptable to us. If adequate funds
are not available, we may be required to curtail significantly one or more of
our research or development programs. If we obtain funds through arrangements
with collaborative partners or others, we may be required to relinquish rights
to certain of our technologies or product candidates.
Our current priorities are the evaluation and continued development
of ALT-711, our lead A.G.E. Crosslink Breaker candidate, and determining the
optimal course for the continued development of additional A.G.E. Crosslink
Breaker compounds and A.G.E.-Formation Inhibitors. We are focusing our resources
on the development of ALT-711. As we continue clinical development of ALT-711,
we are evaluating potential corporate partnerships for further development and
ultimate marketing of the compound in territories throughout the world. We plan
to retain development and marketing rights for one or several indications in the
United States. In addition, we are exploring partnering and regulatory pathways
for the continued development of pimagedine. As described above, we believe that
additional development of this compound and other product candidates will
require us to find additional sources of funding.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of commitment to an exit or disposal plan. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
CRITICAL ACCOUNTING POLICIES
In December 2001, the U.S. Securities and Exchange Commission issued
a statement concerning certain views of the Commission regarding the appropriate
amount of disclosure by publicly held companies with respect to their critical
accounting policies. In particular, the Commission expressed its view that in
order to enhance investor understanding of financial statements, companies
should explain the effects of critical accounting policies as they are applied,
the judgments made in the application of these policies and the likelihood of
materially different reported results if different assumptions or conditions
were to prevail. We have since carefully reviewed the disclosures included in
our filings with the Commission, including, without limitation, our Annual
Report on Form 10-K for the year ended December 31, 2001, and accompanying
audited financial statements and related notes thereto, as well as our
definitive proxy statement for the 2002 Annual Meeting. We believe the effect of
the following accounting policy is significant to our results of operations and
financial condition.
We account for options granted to employees and directors in
accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation expense is recorded on fixed stock grants only if the current fair
value of the underlying stock exceeds the exercise price of the option at the
date of grant and it is recognized on a straight-line basis over the vesting
period. Based on the performance of our stock, we repriced certain employee
stock options on February 2, 1999. As a result of this repricing, options to
purchase 1.06 million shares of stock were repriced and certain vesting periods
related to these options were modified or extended. Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation, An
Interpretation of APB Opinion No. 25," requires us to record compensation
expense or benefit, which is adjusted every quarter, for increases or decreases
in the fair value of the repriced options based on changes in our stock price
from the value at July 1, 2000, until the repriced options are exercised,
forfeited or expire. As a result, net income applicable to common stockholders
and net loss per share to common stockholders may be subject to volatility.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS
Statements in this Form 10-Q that are not statements or descriptions
of historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995 and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking
statements made by us or our representatives are based on a number of
assumptions. The words "believe," "expect," "anticipate," "intend," "estimate"
or other expressions, which are predictions of or indicate future
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
events and trends and which do not relate to historical matters, identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements as they involve risks and uncertainties, and
actual results could differ materially from those currently anticipated due to a
number of factors, including those set forth in this section and elsewhere in
this Form 10-Q. These factors include, but are not limited to, the risks set
forth below.
The forward-looking statements represent our judgment and
expectations as of the date of this Report. We assume no obligation to update
any such forward-looking statements.
IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR NEEDS, WE MAY HAVE
TO CURTAIL OR DISCONTINUE THE RESEARCH, PRODUCT DEVELOPMENT, PRE-CLINICAL
TESTING AND CLINICAL TRIALS OF SOME OR ALL OF OUR PRODUCT CANDIDATES.
We anticipate that at our current spending level, our existing
available cash and cash equivalents and short-term investments will be adequate
to satisfy our working capital requirements for our current operations through
the second quarter of 2003. If it becomes necessary, we have the ability to
reduce the cash burn rate, as we have limited fixed commitments. If we are
unable to obtain additional funding prior to the completion of the DIAMOND,
SAPPHIRE and SILVER trials, we expect to devote all of our resources to these
trials. This will require us to significantly curtail our other research and
product development activities. Following completion of the trials, we will
require substantial new funding to pursue development of ALT-711 and continue
our operations.
Our future capital requirements will depend on many factors,
including continued scientific progress in our discovery research, the size and
complexity of these programs, progress with pre-clinical testing and clinical
trials, the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the establishment of additional
collaborative arrangements, the cost of manufacturing arrangements,
commercialization activities and the cost of product in-licensing and strategic
acquisitions, if any. We may not be able to obtain sufficient funding to satisfy
our longer-term capital and operating requirements.
IF WE DO NOT SUCCESSFULLY DEVELOP ANY PRODUCTS, WE MAY NOT DERIVE ANY REVENUES.
We have not yet requested or received regulatory approval for any
product from the FDA or any other regulatory body. All of our product candidates
are still in research or clinical development. We may not succeed in the
development and marketing of any therapeutic or diagnostic product. To achieve
profitable operations, we must, alone or with others, successfully identify,
develop, introduce and market proprietary products. Such products will require
significant additional investment, development and pre-clinical and clinical
testing prior to potential regulatory approval and commercialization.
The development of new pharmaceutical products is highly uncertain
and subject to a number of significant risks. Potential products that appear to
be promising at early stages of development may not reach the market for a
number of reasons. Potential products may be found ineffective or cause harmful
side effects during pre-clinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. We may not be able to
undertake additional clinical trials. In addition, our product development
efforts may not be successfully completed, we may not obtain regulatory
approvals, and our products, if introduced, may not be successfully marketed or
achieve customer acceptance. We do not expect any of our products, including
ALT-711 and pimagedine, to be commercially available for a number of years, if
at all.
CLINICAL TRIALS REQUIRED FOR OUR PRODUCT CANDIDATES ARE EXPENSIVE AND
TIME-CONSUMING, AND THEIR OUTCOME IS UNCERTAIN.
Before obtaining regulatory approvals for the commercial sale of any
of our products under development, we must demonstrate through pre-clinical
studies and clinical trials that the product is safe and effective for use in
each target indication. The length of time necessary to complete clinical trials
varies significantly and may be difficult to predict. Factors which can cause
delay or termination of our clinical trials include: (i) slower than expected
patient enrollment due to the nature of the protocol, the proximity of patients
to clinical sites, the eligibility criteria for the study, competition with
clinical trials for other drug candidates or other factors; (ii) lower than
expected retention rates of patients in a clinical trial; (iii) inadequately
trained or insufficient personnel at the study site to assist in overseeing and
monitoring clinical trials; (iv) delays in approvals from a study site's review
board; (v) longer treatment time required to demonstrate effectiveness or
determine the appropriate product dose; (vi) lack of sufficient supplies of the
product candidate; (vii) adverse medical events or side effects in treated
patients; (viii) lack of effectiveness of the product candidate being tested;
and (ix) regulatory changes.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Even if we obtain positive results from pre-clinical or clinical
trials for a particular product, we may not achieve the same success in future
trials of that product. In addition, some or all of the clinical trials we
undertake may not demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals, which could prevent the creation of marketable
products. Our product development costs will increase if we have delays in
testing or approvals, if we need to perform more or larger clinical trials than
planned or if our trials are not successful. Delays in our clinical trials may
harm our financial results and the commercial prospects for our products.
IF WE ARE UNABLE TO DERIVE REVENUES FROM PRODUCT SALES, WE MAY NEVER BE
PROFITABLE.
All of our revenues to date have been generated from collaborative
research agreements and financing activities, or interest income earned on these
funds. We have not received any revenues from product sales. We may not realize
product revenues on a timely basis, if at all.
At September 30, 2002, we had an accumulated deficit of
$165,386,000. We anticipate that we will incur substantial, potentially greater,
losses in the future. Our products under development may not be successfully
developed and our products, if successfully developed, may not generate revenues
sufficient to enable us to earn a profit. We expect to incur substantial
additional operating expenses over the next several years as our research,
development and clinical trial activities increase. We do not expect to generate
revenues from the sale of products, if any, for a number of years. Our ability
to achieve profitability depends, in part, on our ability to enter into
agreements for product development, obtain regulatory approval for our products
and develop the capacity, or enter into agreements, for the manufacture,
marketing and sale of any products. We may not obtain required regulatory
approvals, or successfully develop, manufacture, commercialize and market
product candidates, and we may never achieve product revenues or profitability.
PRIOR STOCK OPTION REPRICING MAY HAVE AN ADVERSE EFFECT ON OUR FUTURE FINANCIAL
PERFORMANCE.
Based on the performance of our stock, we repriced certain employee
stock options on February 2, 1999, in order to bolster employee retention. As a
result of this repricing, options to purchase 1.06 million shares of stock were
repriced and certain vesting periods related to these options were modified or
extended. This repricing may have a material adverse impact on future financial
performance based on Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation, An Interpretation of APB Opinion No. 25." This
interpretation requires us to record compensation expense or benefit, which is
adjusted every quarter, for increases or decreases in the fair value of the
repriced options based on changes in our stock price from the value at July 1,
2000, until the repriced options are exercised, forfeited or expire.
IF WE ARE NOT ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT OUR
BUSINESS STRATEGY REQUIRES, THEN OUR PROGRAMS WILL SUFFER AND WE MAY NOT BE ABLE
TO DEVELOP PRODUCTS.
Our strategy for developing and deriving revenues from our products
depends, in large part, upon entering into arrangements with research
collaborators, corporate partners and others. We are seeking to establish these
relationships to provide the funding necessary for continuation of our product
development, but such efforts may not be successful. If we are unable to enter
into or manage additional collaborations, our programs may suffer and we may be
unable to develop products.
IF WE ARE UNABLE TO MAINTAIN OUR COLLABORATIVE RELATIONSHIPS, OUR PRODUCT
DEVELOPMENT MAY BE DELAYED AND DISPUTES OVER RIGHTS TO TECHNOLOGY MAY RESULT.
We will, in some cases, be dependent upon outside partners to
conduct pre-clinical testing and clinical trials and to provide adequate funding
for our development programs. Our corporate partners may have all or a
significant portion of the development and regulatory approval responsibilities.
Failure of the corporate partners to develop marketable products or to gain the
appropriate regulatory approvals on a timely basis, if at all, would have a
material adverse effect on our business, financial condition and results of
operations.
In most cases, we will not be able to control the amount and timing
of resources that our corporate partners devote to our programs or potential
products. If any of our corporate partners breached or terminated its agreements
with us or otherwise failed to conduct its collaborative activities in a timely
manner, the pre-clinical or clinical development or commercialization of product
candidates or research programs could be delayed, and we would be required to
devote additional resources to product development and commercialization or
terminate certain development programs.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Disputes may arise in the future with respect to the ownership of
rights to any technology we develop with third parties. These and other possible
disagreements between us and collaborators could lead to delays in the
collaborative research, development or commercialization of product candidates
or could require or result in litigation or arbitration, which would be
time-consuming and expensive and would have a material adverse effect on our
business, financial condition and results of operations.
Any corporate partners we have may develop, either alone or with
others, products that compete with the development and marketing of our
products. Competing products, either developed by the corporate partners or to
which the corporate partners have rights, may result in their withdrawal of
support with respect to all or a portion of our technology, which would have a
material adverse effect on our business, financial condition and results of
operations.
IF WE CANNOT SUCCESSFULLY DEVELOP A MARKETING AND SALES FORCE OR MAINTAIN
SUITABLE ARRANGEMENTS WITH THIRD PARTIES TO MARKET AND SELL OUR PRODUCTS, OUR
ABILITY TO DELIVER PRODUCTS MAY BE IMPAIRED.
For certain of our products, we have licensed exclusive marketing
rights to our corporate partners or formed collaborative marketing arrangements
within specified territories in return for royalties to be received on sales, a
share of profits or beneficial transfer pricing. These agreements are terminable
at the discretion of our partners upon as little as 90 days' prior written
notice. If the licensee or marketing partner terminates an agreement or fails to
market a product successfully, our business, financial condition and results of
operations may be adversely affected.
We currently have no experience in marketing or selling
pharmaceutical products. In order to achieve commercial success for any approved
product, we must either develop a marketing and sales force or, where
appropriate or permissible, enter into arrangements with third parties to market
and sell our products. We might not be successful in developing marketing and
sales capabilities. Further, we may not be able to enter into marketing and
sales agreements with others on acceptable terms, and any such arrangements, if
entered into, may be terminated. If we develop our own marketing and sales
capability, it will compete with other companies that currently have
experienced, well funded and larger marketing and sales operations. To the
extent that we enter into co-promotion or other sales and marketing arrangements
with other companies, revenues will depend on the efforts of others, which may
not be successful.
IF WE CANNOT SUCCESSFULLY FORM AND MAINTAIN SUITABLE ARRANGEMENTS WITH THIRD
PARTIES FOR THE MANUFACTURING OF THE PRODUCTS WE MAY DEVELOP, OUR ABILITY TO
DEVELOP OR DELIVER PRODUCTS MAY BE IMPAIRED.
We have no experience in manufacturing products for commercial
purposes and do not have manufacturing facilities. Consequently, we are
dependent on contract manufacturers for the production of products for
development and commercial purposes. The manufacture of our products for
clinical trials and commercial purposes is subject to cGMP regulations
promulgated by the FDA. In the event that we are unable to obtain or retain
third-party manufacturing for our products, we will not be able to commercialize
such products as planned. We may not be able to enter into agreements for the
manufacture of future products with manufacturers whose facilities and
procedures comply with cGMP and other regulatory requirements. Our current
dependence upon others for the manufacture of our products may adversely affect
our profit margin, if any, on the sale of future products and our ability to
develop and deliver such products on a timely and competitive basis.
IF WE ARE NOT ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO OUR
SUCCESS, THE DEVELOPMENT AND ANY POSSIBLE SALES OF OUR PRODUCT CANDIDATES COULD
SUFFER AND COMPETITORS COULD FORCE OUR PRODUCTS COMPLETELY OUT OF THE MARKET.
Our success will depend on our ability to obtain patent protection
for our products, preserve our trade secrets, prevent third parties from
infringing upon our proprietary rights and operate without infringing upon the
proprietary rights of others, both in the U.S. and abroad.
The degree of patent protection afforded to pharmaceutical
inventions is uncertain and our potential products are subject to this
uncertainty. Competitors may develop competitive products outside the protection
that may be afforded by the claims of our patents. We are aware that other
parties have been issued patents and have filed patent applications in the U.S.
and foreign countries with respect to other agents that have an effect on
A.G.E.s. or the formation of A.G.E. crosslinks. In addition, although we have
several patent applications pending to protect proprietary technology and
potential products, these patents may not be issued, and the claims of any
patents, which do issue, may not provide significant protection of our
technology or products. In addition, we may not enjoy any patent protection
beyond the expiration dates of our currently issued patents.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
We also rely upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to maintain, develop
and expand our competitive position, which we seek to protect, in part, by
confidentiality agreements with our corporate partners, collaborators, employees
and consultants. We also have invention or patent assignment agreements with our
employees and certain, but not all, corporate partners and consultants. Relevant
inventions may be developed by a person not bound by an invention assignment
agreement. Binding agreements may be breached, and we may not have adequate
remedies for such breach. In addition, our trade secrets may become known to or
be independently discovered by competitors.
IF WE FAIL TO OBTAIN REGULATORY APPROVALS FOR OUR PRODUCTS, THE COMMERCIAL USE
OF OUR PRODUCTS WILL BE LIMITED.
Our research, pre-clinical testing and clinical trials of our
product candidates are, and the manufacturing and marketing of our products will
be, subject to extensive and rigorous regulation by numerous governmental
authorities in the U.S. and in other countries where we intend to test and
market our product candidates.
Prior to marketing, any product we develop must undergo an extensive
regulatory approval process. This regulatory process, which includes
pre-clinical testing and clinical trials and may include post-marketing
surveillance of each compound to establish its safety and efficacy, can take
many years and can require the expenditure of substantial resources. Data
obtained from pre-clinical and clinical activities is susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. In
addition, we may encounter delays or rejections based upon changes in FDA policy
for drug approval during the period of product development and FDA regulatory
review of each submitted NDA. We may encounter similar delays in foreign
countries. We may not obtain regulatory approval for the drugs we develop.
Moreover, regulatory approval may entail limitations on the indicated uses of
the drug. Further, even if we obtain regulatory approval, a marketed drug and
its manufacturer are subject to continuing review and discovery of previously
unknown problems with a product or manufacturer which may have adverse effects
on our business, financial condition and results of operations, including
withdrawal of the product from the market. Violations of regulatory requirements
at any stage, including pre-clinical testing and clinical trials, the approval
process or post-approval, may result in various adverse consequences including
the FDA's delay in approving, or its refusal to approve, a product withdrawal of
an approved product from the market and the imposition of criminal penalties
against the manufacturer and NDA holder. None of our products has been approved
for commercialization in the U.S. or elsewhere. We may not be able to obtain FDA
approval for any products. Failure to obtain requisite governmental approvals or
failure to obtain approvals of the scope requested will delay or preclude our
licensees or marketing partners from marketing our products or limit the
commercial use of such products and will have a material adverse effect on our
business, financial condition and results of operations.
IF WE ARE NOT ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE
DEVELOPMENT AND MARKETING OF CURES AND THERAPIES FOR CARDIOVASCULAR DISEASES,
DIABETES AND THE OTHER CONDITIONS FOR WHICH WE SEEK TO DEVELOP PRODUCTS, WE MAY
NOT BE ABLE TO CONTINUE OUR OPERATIONS.
We are engaged in pharmaceutical fields characterized by extensive
research efforts and rapid technological progress. Many established
pharmaceutical and biotechnology companies with resources greater than ours are
attempting to develop products that would be competitive with our products.
Other companies may succeed in developing products that are safer, more
efficacious or less costly than any we may develop and may also be more
successful than us in production and marketing. Rapid technological development
by others may result in our products becoming obsolete before we recover a
significant portion of the research, development or commercialization expenses
incurred with respect to those products.
Certain technologies under development by other pharmaceutical
companies could result in better treatments for cardiovascular disease, or
diabetes and its related complications. Several large companies have initiated
or expanded research, development and licensing efforts to build pharmaceutical
franchises focusing on these medical conditions. It is possible that one or more
of these initiatives may reduce or eliminate the market for some of our
products. In addition, other companies have initiated research in the inhibition
or crosslink breaking of A.G.E.s.
IF GOVERNMENTS AND THIRD-PARTY PAYERS CONTINUE THEIR EFFORTS TO CONTAIN OR
DECREASE THE COSTS OF HEALTH CARE, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR
PRODUCTS SUCCESSFULLY.
In certain foreign markets, pricing and/or profitability of
prescription pharmaceuticals are subject to government control. In the U.S., we
expect that there will continue to be federal and state initiatives to control
and/or reduce pharmaceutical expenditures. In addition, increasing emphasis on
managed care in the U.S. will continue to put pressure on pharmaceutical
pricing. Cost control initiatives could decrease the price that we receive for
any products we may develop and sell in the future and have a material adverse
effect on our business, financial condition and results of operations. Further,
to the extent that cost control initiatives have a material adverse effect on
our corporate partners, our ability to commercialize our products may be
adversely affected.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Our ability to commercialize pharmaceutical products may depend, in
part, on the extent to which reimbursement for the products will be available
from government health administration authorities, private health insurers and
other third-party payers. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, and third-party payers, including
Medicare, are increasingly challenging the prices charged for medical products
and services. Third-party insurance coverage may not be available to patients
for any products developed by us. Government and other third-party payers are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new therapeutic products and by refusing in
some cases to provide coverage for uses of approved products for disease
indications for which the FDA has not granted labeling approval. If adequate
coverage and reimbursement levels are not provided by government and other
third-party payers for our products, the market acceptance of these products
would be adversely affected.
IF THE USERS OF THE PRODUCTS WE DEVELOP CLAIM THAT OUR PRODUCTS HAVE HARMED
THEM, WE MAY BE SUBJECT TO COSTLY AND DAMAGING PRODUCT LIABILITY LITIGATION,
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS.
The use of any of our potential products in clinical trials and the
sale of any approved products, including the testing and commercialization of
ALT-711 or other compounds, exposes us to liability claims resulting from the
use of products or product candidates. A claim, which was subsequently settled,
was made by a participant in one of our clinical trials, and additional claims
might be made directly by other such participants, consumers, pharmaceutical
companies or others. We maintain product liability insurance coverage for claims
arising from the use of our products in clinical trials. However, coverage is
becoming increasingly expensive, and we may not be able to maintain or acquire
insurance at a reasonable cost or in sufficient amounts to protect us against
losses due to liability that could have a material adverse effect on our
business, financial conditions and results of operations. We may not be able to
obtain commercially reasonable product liability insurance for any product
approved for marketing in the future and insurance coverage and our resources
may not be sufficient to satisfy any liability resulting from product liability
claims. A successful product liability claim or series of claims brought against
us could have a material adverse effect on our business, financial condition and
results of operations.
IF WE ARE UNABLE TO ATTRACT AND RETAIN THE KEY PERSONNEL ON WHOM OUR SUCCESS
DEPENDS, OUR PRODUCT DEVELOPMENT, MARKETING AND COMMERCIALIZATION PLANS COULD
SUFFER.
We are highly dependent on the principal members of our management
and scientific staff. The loss of services of any of these personnel could
impede the achievement of our development objectives. Furthermore, recruiting
and retaining qualified scientific personnel to perform research and development
work in the future will also be critical to our success. We may not be able to
attract and retain personnel on acceptable terms given the competition between
pharmaceutical and health care companies, universities and non-profit research
institutions for experienced scientists. In addition, we rely on consultants to
assist us in formulating our research and development strategy. All of our
consultants are employed outside of us and may have commitments to or consulting
or advisory contracts with other entities that may limit their availability to
us.
OUR OPERATIONS INVOLVE A RISK OF INJURY OR DAMAGE FROM HAZARDOUS MATERIALS, AND
IF AN ACCIDENT WERE TO OCCUR, WE COULD BE SUBJECT TO COSTLY AND DAMAGING
LIABILITY CLAIMS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our research and development activities involve the controlled use
of hazardous materials and chemicals. Although we believe that our safety
procedures for handling and disposing of hazardous materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of an accident, we could be held liable for any damages or fines that
result. Such liability could have a material adverse effect on our business,
financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to our investments in short-term marketable securities. We do not use
derivative financial instruments. Our investments consist primarily of debt
instruments of the U.S. government, government agencies, financial institutions
and corporations with strong credit ratings. We prepared a detailed market risk
disclosure of these investments in our 2001 Annual Report on Form 10-K. There
have been no material changes in our market risk position since December 31,
2001.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Within the 90
days prior to the filing date of this Quarterly Report on Form 10-Q, our Chief
Executive Officer and our Vice President, Finance, evaluated the effectiveness
of Alteon's disclosure controls and procedures as defined in Rule 13a-14(c)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Based upon that evaluation, the Chief Executive Officer and the Vice President,
Finance, have concluded that Alteon's current disclosure controls and procedures
are adequate and effective to ensure that information required to be disclosed
in the reports Alteon files under the Exchange Act is recorded, processed,
summarized and reported on a timely basis.
(b) Changes in internal controls. There have been no significant
changes in Alteon's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation by the Chief Executive Officer and the Vice President, Finance.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 20, 2000, Charles L. Grimes, one of our stockholders, and
his wife, Jane Gillespie Grimes, filed a complaint against us in the Court of
Chancery in Delaware, claiming breach of an alleged agreement with us which
would have purportedly entitled Mr. Grimes to purchase 10% of our private
placement of $6,235,000 of common stock and warrants in September 2000. We filed
a motion to dismiss stating that Mr. and Mrs. Grimes had failed to state a claim
as a matter of law. Pursuant to a decision and order of the Delaware Chancery
Court, the case was dismissed on April 12, 2001. Mr. and Mrs. Grimes filed a
notice of appeal to the Supreme Court of Delaware. On January 16, 2002, the
Supreme Court of Delaware heard oral argument on the appeal of Mr. and Mrs.
Grimes, and directed that oral argument on this appeal be heard en banc. On
April 23, 2002, the Supreme Court of Delaware heard the appeal, and on July 19,
2002, affirmed the judgment of the Court of Chancery, dismissing the action.
On August 5, 2002, Lisa Weller, a former Alteon employee, filed suit
against Alteon in the Superior Court of New Jersey asserting claims for alleged
pregnancy, sex and handicap discrimination, wrongful termination and intentional
infliction of emotional distress, all arising from the company's termination of
her employment as an executive assistant. Alteon removed the case to the United
States District Court for the District of New Jersey, where it is now pending as
Civil Action No. 02-4492. Alteon denies all allegations and is vigorously
defending the matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See Exhibit Index on page 23 for Exhibits filed with this Quarterly
Report on Form 10-Q.
b) The following report on Form 8-K was filed during the quarter ended
September 30, 2002:
On July 18, 2002, the Company filed a Current Report on Form 8-K,
dated July 16, 2002, announcing the initiation of a fourth human trial of
ALT-711, the DIAMOND trial.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2002
ALTEON INC.
By: /s/Kenneth I. Moch
--------------------------------------
Kenneth I. Moch
President and Chief Executive Officer
(principal executive officer)
By: /s/Elizabeth A. O'Dell
--------------------------------------
Elizabeth A. O'Dell
Vice President, Finance
Secretary and Treasurer
(principal accounting officer)
20
CERTIFICATIONS
I, Kenneth I. Moch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alteon Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all
material respects, the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant,
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made
known to us by others within the entity, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: November 13, 2002 /s/ Kenneth I. Moch
-------------------------------------
Kenneth I. Moch
President and Chief Executive Officer
21
CERTIFICATIONS
I, Elizabeth O'Dell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alteon Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all
material respects, the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant,
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made
known to us by others within the entity, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: November 13, 2002 /s/ Elizabeth O'Dell
-----------------------------
Elizabeth O'Dell
Vice President, Finance
Secretary and Treasurer
22
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
--- ----------------------
3.1 Restated Certificate of Incorporation, as amended.
(Incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q filed on November 10, 1999.)
3.2 Certificate of the Voting Powers, Designations, Preference
and Relative Participating, Optional and Other Special
Rights and Qualifications, Limitations or Restrictions of
Series F Preferred Stock of the Company. (Incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K filed for the year ended December 31, 2000.)
3.3 Certificate of Retirement dated September 10, 1999, of
Alteon Inc. (Incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q filed November 10,
1999.)
3.4 Certificate of Designations of Series G Preferred Stock of
Alteon Inc. (Incorporated by reference to Exhibit 3.4 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997.)
3.5 Certificate of Amendment of Certificate of Designations of
Series G Preferred Stock of Alteon Inc. (Incorporated by
reference to Exhibit 3.4 to the Company's Report on Form
10-Q filed on August 14, 1998.)
3.6 Certificate of Designations of Series H Preferred Stock of
Alteon Inc. (Incorporated by reference to Exhibit 3.5 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997.)
3.7 Amended Certificate of Designations of Series H Preferred
Stock of Alteon Inc. (Incorporated by reference to Exhibit
3.6 to the Company's Report on Form 10-Q filed on August 14,
1998.)
3.8 Certificate of Retirement dated November 20, 2000, of Alteon
Inc. (Incorporated by reference to Exhibit 3.8 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000.)
3.9 Certificate of Amendment to Restated Certificate of
Incorporation of Alteon Inc. dated June 7, 2002.
(Incorporated by reference to Exhibit 3.8 to the Company's
Quarterly Report on Form 10-Q filed on August 14, 2001.)
3.10 By-laws, as amended. (Incorporated by reference to Exhibit
3.7 to the Company's Report on Form 10-Q filed on May 12,
1999.)
4.1 Stockholders' Rights Agreement dated as of July 27, 1995,
between Alteon Inc. and Registrar and Transfer Company, as
Rights Agent. (Incorporated by reference to Exhibit 4.1 to
the Company's Annual Report on Form 10-K filed for the year
ended December 31, 2000.)
4.2 Amendment to Stockholders' Rights Agreement dated as of
April 24, 1997, between Alteon Inc. and Registrar and
Transfer Company, as Rights Agent. (Incorporated by
reference to Exhibit 4.4 to the Company's Current Report on
Form 8-K filed on May 9, 1997.)
4.3 Amendment to Stockholders' Rights Agreement dated as of
December 1, 1997, between Alteon Inc. and Registrar and
Transfer Company, as Rights Agent. (Incorporated by
reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K filed on December 10, 1997.)
4.4 Notice of appointment, dated August 29, 2002, of The
American Stock Transfer & Trust Company as successor Rights
Agent, pursuant to Stockholders' Rights Agreement dated as
of July 27, 1995.
4.5 Registration Rights Agreement dated September 29, 2000.
(Incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K filed on October 5, 2000.)
4.6 Form of Series 1 Common Stock Purchase Warrant.
(Incorporated by reference to Exhibit 4.2 to the Company's
Current Report on Form 8-K filed on October 5, 2000.)
4.7 Form of Series 2 Common Stock Purchase Warrant.
(Incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K filed on October 5, 2000.)
23
4.8 Registration Rights Agreement dated as of April 24, 1997,
between Alteon Inc. and the investors named on the signature
page thereof. (Incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K filed on May 9,
1997.)
4.9 Form of Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K filed on May 9, 1997.)
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
24