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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 2000 or
[ ] 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 0-27718
NEOSE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3549286
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
102 Witmer Road
Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 441-5890
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Securities registered pursuant to Section 12(b) of the Act:
None None
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(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights
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(Title of class)
Common Stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K.[ ]
As of March 26, 2001, the aggregate market value of the Common Stock
held by non-affiliates of the registrant was approximately $293,250,272 based on
the last sale price of the Common Stock as reported by the The Nasdaq Stock
Market. For purposes of making this calculation only, the registrant has defined
affiliates as including all directors and executive officers of the Company.
As of March 26, 2001, there were 14,012,793 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement to be filed in connection
with solicitation of proxies for its Annual Meeting of Stockholders to be held
on June 20, 2001, is incorporated by reference into Part III of this Annual
Report on Form 10-K.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS...........................................................................................1
ITEM 2. PROPERTIES........................................................................................18
ITEM 3. LEGAL PROCEEDINGS.................................................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................19
ITEM 6. SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA...................................................20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.........................................23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..............24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY...................................................24
ITEM 11. EXECUTIVE COMPENSATION............................................................................24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................................25
NEOSE, GlycoAdvance, GlycoTherapeutics, and GlycoActives are trademarks of Neose
Technologies, Inc. This Form 10-K also includes trademarks and trade names of
other companies.
PART I
ITEM 1. BUSINESS.
Forward-Looking Statements
Some of the statements in this Annual Report on Form 10-K and the
Exhibits contain forward-looking statements within Section 21E of the Securities
Exchange Act of 1934. When used in this Form 10-K and the Exhibits, the words
"anticipate," "believe," "estimate," "may," "expect," and similar expressions
are generally intended to identify forward-looking statements. These
forward-looking statements include, among others, the statements in Management's
Discussion and Analysis of Financial Condition and Results of Operations about
our:
o expectations for increases in operating expenses;
o expectations for increases in research and development and general
and administrative expenses in order to develop new products and
manufacture commercial quantities of products;
o expectations for the development, manufacturing, and approval of new
products;
o expectations for incurring additional capital expenditures to expand
our manufacturing capabilities;
o expectations for generating revenue or becoming profitable on a
sustained basis;
o ability to enter into additional marketing agreements and the ability
of our existing marketing partners to commercialize products
incorporating our technologies;
o estimate of the sufficiency of our existing cash and cash equivalents
and investments to finance our operating and capital requirements;
o expected losses; and
o expectations for future capital requirements.
Our actual results could differ materially from those results expressed in,
or implied by, these forward-looking statements. Potential risks and
uncertainties that could affect our actual results include the following:
o our ability to commercialize any of our products or technologies;
o our ability to maintain our existing collaborative arrangements and
enter into new collaborative arrangements;
o unanticipated events affecting the willingness or ability of our
collaborators to incorporate our technologies into their products;
o our ability to develop commercial-scale manufacturing facilities;
o our ability to protect our proprietary products, know-how, and
manufacturing processes;
o unanticipated cash requirements to support current operations or
research and development;
o the timing and extent of funding requirements for the activities of
our joint venture with McNeil Specialty;
o our ability to attract and retain key personnel; and
o general economic conditions.
These and other risks and uncertainties that could affect our actual
results are discussed in greater detail in this Annual Report on Form 10-K.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance, or achievements. We do not assume responsibility for the
accuracy and completeness of the forward-looking statements.
We do not undertake any duty to update after the date of this Annual Report
on Form 10-K any of the forward-looking statements in this report to conform
them to actual results.
1
Risk Factors
You should carefully consider the risks and uncertainties. If any of the
following occur, our business, financial condition, or operating results could
be materially harmed. This could cause the trading price of our common stock to
decline, and you may lose all or part of your investment.
Risks Related to Our Business
We have not yet commercialized any products or technologies, and we may never
become profitable.
We have not yet commercialized any products or technologies and we may
never be able to do so. Since we began operations in 1990, we have not generated
any revenues, except for interest income and revenues from collaborative
agreements. Even if we or our collaborators commercialize one or more of our
technologies or any products that incorporate our technologies, we may not
become profitable. Our ability to achieve profitability is dependent on a number
of factors, including our ability to complete our development efforts and enter
into collaborative agreements with others to incorporate our technologies into
their products. Furthermore, our ability to achieve profitability is dependent
upon the willingness and ability of our collaborators to incorporate
successfully our technologies into, obtain regulatory approval for, and
commercialize successfully their product candidates.
We have a history of losses, and we may incur continued losses for some time.
We have incurred losses each year and, given our planned level of operating
expenses, we may continue to incur losses for some time. As of December 31,
2000, we had an accumulated deficit of approximately $68 million. We expect
additional losses for some time as we expand research and development efforts,
expand manufacturing scale-up activities, and begin sales and marketing
activities. We may continue to incur substantial losses even if our revenues
increase. As a result, we cannot predict the extent of future losses or the time
required for us to achieve profitability, if at all.
We have a 50% ownership interest in a joint venture with McNeil Specialty
Products Company, a division of Johnson & Johnson. The joint venture has
incurred losses since inception and we expect the joint venture to incur
additional losses for some time as it continues research and development
efforts, continues start-up efforts for its pilot manufacturing facility, and
begins sales and marketing activities. For the joint venture to become
profitable, its manufacturing capacity would have to be significantly expanded.
We cannot predict if additional manufacturing capacity will become available, or
if such capacity is available, whether the joint venture will be profitable.
Our technologies may prove to be ineffective, or it may be years, if ever,
before they lead to commercial products.
Our technologies involve new and unproven approaches. We are developing
manufacturing processes based on our enzymatic glycosylation technology
platform. We intend to use these processes to manufacture enzymes and sugar
nucleotides for use by our potential GlycoAdvance(TM) customers, as well as for
our own use in manufacturing complex carbohydrates for our GlycoTherapeutics(TM)
and GlycoActives(TM) programs. Most complex carbohydrates sold today are derived
from natural sources. There has been only very limited development and
commercialization of synthesized complex carbohydrates, in part because of
manufacturing limitations. We have limited experience in manufacturing enzymes,
sugar nucleotides, and complex carbohydrates. We may face obstacles and
difficulties unknown to us today. In addition, we may incur unexpected costs,
and the costs associated with manufacturing commercial quantities of these
compounds may make commercialization unprofitable. We may fail to overcome the
difficulties posed in manufacturing these compounds, or complete successfully
all the other activities required to commercialize any enzyme, sugar nucleotide,
or complex carbohydrate.
2
Our success depends upon collaborative relationships, which entail numerous
risks.
We intend to rely substantially on collaborative partners to commercialize
our broad technology platform. We may be unsuccessful in entering into
collaborative agreements for the development and commercialization of products
incorporating our technologies, we may not be successful in adapting our
technologies to the needs or our collaborative partners, and our collaborators
may not be successful in or remain committed to developing or commercializing
these products. Unanticipated events may affect the willingness or ability of
our collaborators to incorporate our technologies into their products. We cannot
be sure that our collaborators will share our perspective on the relative value
of our technologies, that they will commit sufficient resources to incorporating
our technologies into their programs, or that the use of our technologies will
advance as rapidly as it might if we retained complete control of all research,
development, regulatory, and commercialization decisions. Our collaborative
agreements are generally terminable by our partners on short notice. Suspension
or termination of collaborative agreements could have a material and adverse
impact on our business, financial conditions, and results of operations.
GlycoAdvance. To date, we have not entered into any major collaboration
agreements involving GlycoAdvance, the use of our technologies to address the
problem of incomplete or incorrect glycosylation encountered in the manufacture
of glycoproteins. Even if we enter into a collaboration agreement involving
GlycoAdvance, we may find that our technologies fail to remodel therapeutic
glycoproteins to include the proper human sugars. We may also find that our
technologies are not scaleable in commercial production processes. Either of
these would impede or prevent the pharmaceutical and biotechnology industries'
adoption of GlycoAdvance, causing our business, financial condition, and results
of operations to be materially and adversely affected. Regardless of the success
of our technologies, the success of GlycoAdvance will be dependent on the
priorities and actions of our collaborative partners, including their success in
obtaining regulatory approval and commercial acceptance of product candidates
incorporating our technologies.
GlycoTherapeutics. We have existing collaborative agreements for
GlycoTherapeutics with Neuronyx, Inc. and Bristol-Myers Squibb Company.
Under our agreement with Neuronyx, we are responsible for the synthesis and
manufacturing scale-up of targeted compounds, using our proprietary technologies
for carbohydrate synthesis. We may be unable to complete this development
successfully. Even if we successfully complete development of these processes
and fulfill all of our obligations under the agreement, Neuronyx may not obtain
regulatory approval to market any products. Further, even if Neuronyx obtains
regulatory approval to market any of these products, we cannot be sure that any
of the products will be commercially successful.
Our agreement with Bristol-Myers involves the development of proprietary
technologies that enable the manufacture of two gangliosides for use as the
active pharmaceutical ingredients in two cancer vaccines being developed by
Bristol-Myers. At Bristol-Myers' request, we have ceased our activities under
the agreement until they complete their review of data from a Phase III clinical
trial of GMK, one of the cancer vaccines. We do not expect any future payments
under this agreement unless Bristol-Myers advises us to resume our activities.
Even if Bristol-Myers elects to continue with the collaboration, and we
successfully complete development of these processes and fulfill all of our
obligations under the agreement, Bristol-Myers may not obtain regulatory
approval to market either of these vaccines. Further, even if Bristol-Myers
obtains regulatory approval to market either of these vaccines, we cannot be
sure that Bristol-Myers will enter into a manufacturing contract with us, that
the terms of a future contract with Bristol-Myers will be favorable to us, or
that either vaccine will be commercially successful.
GlycoActives. We have collaborative agreements with McNeil Specialty and
Wyeth-Ayerst International, a division of American Home Products Corporation. We
have committed significant resources and costs in the expectation that these
collaborations will become profitable in the future.
The success of our joint venture with McNeil Specialty is dependent upon
the joint venture's ability to develop, manufacture, sell, and market
successfully complex carbohydrates. If the joint venture is unsuccessful in
these efforts, it will not be profitable and our business, financial condition,
and results of operations may be materially and adversely affected.
Under our agreement with Wyeth-Ayerst, we are responsible for developing a
large-scale manufacturing process for a potential ingredient in infant formula.
We may be unable to complete this development successfully. Even if we
successfully develop a process and fulfill all of our obligations under the
agreement, Wyeth-Ayerst may fail to obtain regulatory approval to market the
ingredient. Even if Wyeth-Ayerst obtains regulatory approval for the ingredient,
Wyeth-Ayerst may elect not to add the ingredient to its products.
3
We have limited commercial manufacturing capability and experience, and we may
be unable to manufacture the compounds required to commercialize our
technologies.
Commercialization of our technologies requires the manufacture of enzymes,
sugar nucleotides, and complex carbohydrates. We intend to manufacture enzymes
and sugar nucleotides for use by our potential GlycoAdvance customers, as well
as for our own use in manufacturing complex carbohydrates for our
GlycoTherapeutics and GlycoActives programs. Our success depends on our ability
to manufacture these compounds on a commercial scale and in accordance with
current Good Manufacturing Practices, or cGMP, prescribed by the United States
Food and Drug Administration, or FDA. Our existing facility is not certified
cGMP by the FDA and is not adequate for large-scale, commercial manufacturing.
Therefore, we will need to develop commercial-scale manufacturing facilities
meeting cGMP, or depend on our collaborators, licensees, or contract
manufacturers.
We intend to expand our manufacturing capacity. This expansion will require
significant additional funds and personnel, and compliance with applicable
regulations. We intend to pursue this expansion without any assurance that we
will receive an adequate return on our investment. We may be unable to design,
build, or operate the required facilities. In addition to the normal scale-up
risks associated with any manufacturing process, we may face unanticipated
problems unique to manufacture of enzymes, sugar nucleotides, or complex
carbohydrates. If we are unable to develop commercial-scale manufacturing
capacity, we would seek collaborators, licensees, or contract manufacturers to
manufacture the compounds necessary to commercialize our technologies. We may
not be able to find parties willing to manufacture these compounds at acceptable
prices.
Any manufacturing facility must adhere to the FDA's regulations on cGMP,
which are enforced by the FDA through its facilities inspection program. These
facilities must pass a plant inspection before the FDA will grant marketing
approval for the product. The manufacture of product at these facilities will be
subject to strict quality control, testing, and record keeping requirements, and
continuing obligations regarding the submission of safety reports and other
post-market information. Ultimately, we or our contract manufacturers may be
unable to secure or maintain cGMP approvals. If we change the source or location
of supply or modify a manufacturing process, regulatory authorities will require
us to demonstrate that the product produced by the new source or from the
modified process is equivalent to the product used in any clinical trials that
we had conducted.
If we encounter delays or difficulties in connection with manufacturing,
commercialization of our technologies could be delayed, or we could breach our
obligations under our collaborative agreements.
The failure to obtain or maintain adequate patents, and other intellectual
property protection, could impact our ability to compete effectively.
Our success will depend in part on our ability to obtain commercially
valuable patent claims and to protect our intellectual property. Our patent
position is generally uncertain and involves complex legal and factual
questions. Legal standards relating to the validity and scope of claims in our
technology field are still evolving. Therefore, the degree of future protection
for our proprietary rights is uncertain. The risks and uncertainties that we
face with respect to our patents and other proprietary rights include the
following:
o the pending patent applications we have filed or to which we have
exclusive rights may not result in issued patents or may take longer
than we expect to result in issued patents;
o the claims of any patents that are issued may not provide meaningful
protection;
o we may not be able to develop additional proprietary technologies
that are patentable;
o the patents licensed or issued to us or our customers may not provide
a competitive advantage;
o other companies may challenge patents licensed or issued to us or our
customers;
o other companies may independently develop similar or alternative
technologies, or duplicate our technologies; and
o other companies may design around technologies we have licensed or
developed.
4
We own patents and patent applications, and have licensed patents and
patent applications from a number of institutions. If we commercialize any
products manufactured by use of technology licensed from another party, we will
be required to make payments as specified in the applicable license agreement.
Our business, financial condition, and results of operations may be materially
and adversely affected if any of these agreements is terminated.
We may incur substantial costs in asserting any patent rights and in
defending suits against us relating to intellectual property rights. Such
disputes could substantially delay our product development or commercialization
activities. The United States Patent and Trademark Office or a private party
could institute an interference proceeding relating to our patents or our patent
applications. An adverse decision in any such proceeding could result in the
loss of our intellectual property rights.
To facilitate development of our proprietary technology base, we may need
to obtain licenses to patents or other proprietary rights from other parties. If
we are unable to obtain such licenses, or obtain such licenses on what we
consider to be acceptable terms, our research and development efforts may be
delayed.
Some of our proprietary rights have been licensed to us under agreements
that have performance requirements or other contingencies. The failure to comply
with these provisions could lead to termination or modifications of our rights
to these licenses.
In addition to patents and patent applications, we depend upon trade
secrets and proprietary know-how to protect our proprietary technology. We
require all employees, consultants, advisors, and collaborators to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to any other parties. We require that our employees and consultants
disclose and assign to us their ideas, developments, discoveries, and
inventions. These agreements may not, however, provide adequate protection for
our trade secrets, know-how, or other proprietary information in the event of
any unauthorized use or disclosure.
International patent protection is uncertain.
Patent law outside the United States is uncertain and is currently
undergoing review and revision in many countries. Further, the laws of some
foreign countries may not protect our intellectual property rights to the same
extent as U.S. laws. We may participate in opposition proceedings to determine
the validity of our or our competitors' foreign patents, which could result in
substantial costs and diversion of our efforts. Finally, some of our patent
protection in the United States is not available to us in foreign countries due
to the laws of those countries.
We are exposed to intense competition from many sources. We operate in an
environment of rapid technological change, and we may fall behind our
competitors.
Some companies are producing by enzymatic and other means a limited variety
of complex carbohydrates. Although we do not believe any of these companies
currently has the ability to manufacture a wide variety of human carbohydrate
products in quantities sufficient for commercialization, any of these companies
may develop technologies superior to our technologies. In addition, some
companies are investigating novel methods of chemical synthesis, sometimes with
enzymatic steps, to produce commercial quantities of complex carbohydrates.
These and other efforts by potential competitors may be successful or other
methods of carbohydrate synthesis that compete with our technologies may be
developed.
Our potential competitors include nutritional products, pharmaceutical,
chemical, biotechnology, food, and consumer product companies. Many of these
companies have more:
o financial, scientific, and technical resources;
o manufacturing and marketing capabilities;
o experience conducting preclinical studies and clinical trials of new
products; and
o experience in obtaining regulatory approvals for products.
5
Competitors may succeed in developing products and technology that are more
effective and less costly than we may develop, or that would render our
technology or products, or both, obsolete or noncompetitive. Competitors also
may prove to be more successful in the manufacturing and marketing of products.
If we are unable to compete against our competitors, our commercial
opportunities will be reduced or diminished.
If we fail to retain members of our senior management, we may be unable to
achieve success in our research and product development programs.
We depend upon the efforts of our senior management, in particular Dr.
Stephen Roth, our Chief Executive Officer. Dr. Roth has entered into a
non-competition agreement, under which he has agreed not to compete with us
during his employment, and following his employment so long as we pay him
compensation to be mutually agreed upon at the time of his termination. If we
cannot reach an agreement with Dr. Roth at that time, and he competes with us,
we may be unable to achieve our development objectives.
We may be unable to retain key employees or recruit additional qualified
personnel.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical, and managerial personnel. There
is intense competition for qualified personnel in our business. Therefore, we
may not be able to attract and retain the qualified personnel necessary for the
development of our business. The loss of the services of existing personnel, as
well as the failure to recruit additional key scientific, technical, and
managerial personnel in a timely manner would harm our research and development
programs and our business.
We are exposed to product liability and related risks.
The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims even if our drugs or a
collaborator's drugs are not actually at fault for causing an injury.
Furthermore, the use of our technologies or products may cause, or may appear to
cause, adverse side effects or potentially dangerous drug interactions that we
may not learn about or understand fully until the drug is actually manufactured
and sold. Product liability claims can be expensive to defend, and may result in
large settlements of claims or judgments against us. Even if a product liability
claim is not successful, the adverse publicity, time, and expense involved in
defending such a claim may interfere with our business. We have no product
liability insurance coverage for clinical trials testing any compounds that
incorporate our technologies, and we may not be able to obtain insurance
coverage at a reasonable cost or in sufficient amounts to protect us against
losses.
Risks Related to Government Approvals
We are subject to extensive government regulation, and we or our collaborators
may not obtain necessary regulatory approvals.
The research, development, manufacture, marketing, and sale of product
candidates manufactured using our technology are subject to significant, but
varying, degrees of regulation by a number of government authorities in the
United States and other countries.
Regulation of Pharmaceutical Products
Pharmaceutical product candidates manufactured using our technology must
undergo an extensive regulatory approval process before commercialization. This
process is regulated by the FDA and by comparable agencies in other countries.
Our products, and products employing our technology, are regulated in the United
States in accordance with the federal Food, Drug and Cosmetic Act, the Public
Health Service Act, and other laws. If the product is regulated as a biologic,
the FDA Center for Biologics Evaluation and Research, or CBER, will require the
submission and approval of a Biologic License Application, or BLA, before
commercial marketing. The BLA process generally requires:
6
o expensive and time-consuming preclinical studies and clinical trials
to establish the safety, potency, purity, and effectiveness of each
compound to be submitted with the FDA;
o compliance with FDA good laboratory, clinical, and manufacturing
practices during testing and manufacturing; and
o continued FDA oversight of product and promotion after marketing
approval is obtained.
It may be many years, if ever, until regulatory approval is obtained and
regulatory oversight continues after marketing approval for the product is
received.
Each manufacturer of drugs or biologics must be registered with the FDA and
pass an inspection by the FDA prior to approval to manufacture products for
commercial distribution. Failure to pass the inspection results in not receiving
approval to market products. A collaborator's use of our GlycoAdvance
technologies in the production of their product candidate will require
submission of Drug Master Files with CBER. If we or our collaborators fail to
comply with all applicable regulatory requirements, the following delays or
regulatory action could result:
o warning letters;
o fines;
o product recalls or seizures;
o operating restrictions;
o refusal of the FDA to complete review of pending market approval
applications or supplements to approval applications;
o withdrawal of previously approved product approvals;
o civil penalties; and
o criminal prosecution.
We have not submitted, and we may never submit, any pharmaceutical product
candidates for marketing approval to the FDA, or any other regulatory authority.
In addition, no collaborator has submitted, and may never submit, any product
candidate incorporating our technologies for marketing approval to the FDA, or
any other regulatory authority.
If any product manufactured using our technology is submitted for
regulatory approval, it may not receive either the approvals necessary for
commercialization, the desired labeling claims, or coverage or adequate levels
of reimbursement under federal, state, or private healthcare insurance
providers. Any delay in receiving, or failure to receive, these approvals would
adversely affect our ability to generate product revenues or royalties. Even if
all requisite approvals were granted, these approvals may entail commercially
unacceptable limitations on the labeling claims. In addition, once an approval
is granted, both a marketed drug or compound and the manufacturer are subject to
continual review and inspection. Later discovery of previously unknown problems
with a product or manufacturer may result in restrictions or regulatory action
against the product or manufacturer, including withdrawal of the product from
the market. Additional governmental regulations may delay or alter regulatory
approval of any product candidate manufactured using our technology. We cannot
predict the impact of adverse governmental action that might arise from future
legislative and administrative action.
Regulation of Foods and Food Ingredients
We expect that the products of our joint venture with McNeil Specialty will
be regulated as food ingredients. Foods and food ingredients are subject to the
provisions of the federal Food, Drug and Cosmetic Act. Food ingredients are
broadly defined as any substances that may become a component, or otherwise
affect the characteristics, of food. Food ingredients or ingredients used in
animal feed are regulated either as substances generally recognized as safe, or
GRAS, or as food additives.
Food ingredients that are GRAS are excluded from the definition of food
additives. The FDA has affirmed by regulation a number of substances as GRAS,
although it is not required that a substance be affirmed as GRAS by regulation
of the FDA in order to be GRAS. A manufacturer may self-affirm a substance as
GRAS by making an independent determination that qualified experts would
generally agree that the substance is GRAS for a particular use. If the FDA
disagrees with a determination, the manufacturer must complete the food additive
petition process for the substance to be approved by the FDA. Affirmation of
GRAS status either by the manufacturer or regulation of the FDA would allow the
manufacturer to market and sell the additive or the food containing the
additive. Furthermore, a manufacturer's decision to rely on an independent
determination may limit the marketability of that manufacturer's products to
food manufacturers, many of whom require confirmation of GRAS status from the
FDA before they will purchase substances for use in foods from third parties.
7
Food ingredients that are not GRAS are regulated as food additives. All new
food additives require FDA approval prior to commercialization. Information
supporting the safety of a food additive is submitted to the FDA in the form of
a food additive petition. The food additive petition process is generally
expensive and lengthy. Commercialization of the food additive, if permitted by
the FDA, often occurs several years after the petition is submitted to the FDA.
The petition must establish with reasonable certainty that the food additive is
safe for its intended use at the level specified in the petition. The petition
is required to contain reports of safety investigations of the food additive and
details regarding its physical, chemical, and biological properties. Product
safety studies submitted to the FDA are typically conducted in accordance with
FDA good laboratory practices requirements. If a food additive petition is
submitted, the FDA may choose to reject the petition or deny any desired
labeling claims. Furthermore, the FDA may require the establishment of
regulations that necessitate costly and time-consuming compliance procedures.
Regulation of Infant Formula Additives
We are collaborating with Wyeth-Ayerst to develop a bioactive carbohydrate
as a potential nutritional additive to infant formula. The manufacture,
composition, and labeling of infant formulas are subject to the provisions of
the United States Infant Formula Act. Prior to commercializing any potential
infant formula additive, an infant formula manufacturer must demonstrate that
its potential additive:
o is GRAS by previous regulation of the FDA, or is self-affirmed as
GRAS by the infant formula manufacturer; or
o is the subject of an approved food additive petition.
Under the United States Infant Formula Act, infant formula manufacturers
are required to notify the FDA of any intent to revise, add, or substitute any
protein, fat, or carbohydrate in infant formula ninety days prior to the
intended date of commercial distribution. During that ninety-day period, the FDA
may request additional information, or deny marketing rights for the new
formula. Wyeth-Ayerst is responsible for all regulatory activities relating to
the infant formula additive. They have not yet made, and may never make, any
filings with the FDA to propose inclusion of an infant formula additive
manufactured using our technology. Furthermore, Wyeth-Ayerst may not self-affirm
GRAS status of the potential infant formula additive, impairing their efforts to
commercialize the infant formula additive.
Wyeth-Ayerst may market infant formula containing the additive in foreign
countries. Infant formula regulatory requirements vary widely from country to
country, and may be more or less stringent than the FDA requirements. The time
required to obtain clearances, if required, in foreign countries may be longer
or shorter than that required in the United States.
We use hazardous materials in our operations that may subject us to an
environmental claim or liability.
Our research and development processes involve the controlled use of
hazardous materials, chemicals, and radioactive compounds. The risk of
accidental injury or contamination from these materials cannot be entirely
eliminated. We do not maintain a separate insurance policy for these types of
risks. In the event of an accident or environmental discharge, we may be held
liable for any resulting damages, and any liability could exceed our resources.
We are subject to federal, state, and local laws and regulations governing the
use, storage, handling, and disposal of these materials and specified waste
products. The cost of compliance with these laws and regulations could be
significant.
8
BUSINESS
Overview
We develop proprietary technologies for the synthesis and manufacture of
complex carbohydrates. Our enzymatic glycosylation technology platform makes
feasible the synthesis and modification of a wide range of complex
carbohydrates, which are chains of simple sugar molecules that can be joined
together in many different combinations. Our methods can produce complex
carbohydrates that are attached to proteins, as in recombinant therapeutic
glycoproteins, are attached to lipids, as in therapeutic cancer vaccines, or are
solely carbohydrates, as found in human breast milk. Our technology is also
capable of correcting or completing the human carbohydrate patterns on
glycoproteins, potentially resulting in improved pharmacokinetic profile,
strengthened patent claims, and manufacturing efficiencies.
Our manufacturing methods offer an alternative to the traditional means of
producing complex carbohydrates. The traditional methods include isolating
complex carbohydrates from natural sources and chemical synthesis. Natural
sources can be unpredictable, scarce, or unacceptable to regulators. Chemical
synthesis of complex carbohydrates can be inefficient and expensive. We believe
our enzymatically produced complex carbohydrates are cleaner, more consistent,
and less expensive to produce, but are identical to the natural molecule. Our
proprietary enzymes, called glycosyltransferases, synthesize specific chemical
linkages among individual sugar molecules. We have developed recombinant methods
of producing the glycosyltransferases necessary to manufacture many naturally
occurring complex carbohydrates.
We are applying our broad technology platform in the following programs:
o GlycoAdvance - the use of our innovative technologies to address the
problems of incomplete or incorrect glycosylation encountered in the
manufacture of recombinant glycoproteins.
o GlycoTherapeutics - the use of our technology platform to develop and
produce novel carbohydrate-based therapeutics.
o GlycoActives - the use of our technology platform to develop and
produce novel carbohydrate-based food ingredients.
GlycoAdvance
GlycoAdvance is used to complete and correct critical portions of
therapeutic glycoproteins, which are proteins that include carbohydrate
structures. Many biotechnology drugs on the market or in development, including
monoclonal antibodies, are glycoproteins, and their associated carbohydrates are
often critical to the function of the protein. Glycoproteins are produced
primarily in Chinese hamster ovary (CHO) cell expression systems. Production in
these systems often results in incomplete or incorrect glycosylation.
Glycosylation refers both to the linkage pattern of carbohydrate molecules, and
to the process of creating or modifying these linkages. The impact of incomplete
or incorrect glycosylation can include reduced half-life, greater or more
frequent dosing, and increased side effects, of the drug. Incomplete
glycosylation can also result in production inefficiencies, including lower
production yields, higher manufacturing costs, and increased facilities and
equipment requirements. Conventional methods of solving the problems of
incomplete or incorrect glycosylation include choosing different cell types for
use in cell expression systems, re-engineering cells, optimizing cell culture
media, and purifying for final product only the most completely glycosylated
compounds. These approaches can be expensive and ineffective.
Our GlycoAdvance program uses our proprietary enzymes to remodel
therapeutic glycoproteins, after their production in CHO cell expression
systems, to include the proper human sugars. We believe that the use of
GlycoAdvance in the production of human therapeutic glycoproteins may result in
improved pharmacokinetic profiles, manufacturing efficiencies, and potentially
strengthened patent claims. We also believe that GlycoAdvance may permit the
continued development of some drugs by overcoming efficacy and side effect
problems related to incomplete carbohydrate structures. We have completed a
number of feasibility studies for pharmaceutical and biotechnology companies to
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demonstrate the utility of GlycoAdvance. We are seeking to enter into
collaborative agreements with these companies to use GlycoAdvance in the
clinical development and commercialization of their glycoproteins. In general,
these glycoproteins are being produced in CHO cell expression systems. In the
feasibility studies conducted to date, we have shown that GlycoAdvance can
improve the pharmacokinetics, and increase the production efficiency, of these
glycoproteins.
We are pursuing three different business strategies for GlycoAdvance:
o We are seeking to enter into collaborations with companies that are
developing glycoproteins to use GlycoAdvance in the clinical
development and commercialization of their glycoproteins. We
anticipate that GlycoAdvance collaborations would provide for us to
receive up-front license fees, annual license fees, milestone
payments, royalties, and revenues from the supply of enzymes and
sugar nucleotides.
o We are also working with developers of a number of protein production
systems other than CHO cell expression systems to enable the human
therapeutic use of glycoproteins that are expressed in those systems.
These systems, which include transgenic animals, insect cells, yeast,
fungi, bacteria, and plants, offer the promise of reduced production
costs for glycoproteins. We believe that without incorporating
GlycoAdvance into the manufacturing process, however, most human
proteins produced in these novel expression systems will have either
poor pharmacokinetic activity or will be immunogenic in humans.
o Finally, we are considering internal development of proprietary
glycoproteins enhanced with GlycoAdvance. We believe that novel
glycosylation, or the use of glycosylation in combination with other
molecules, may offer clinical and cost benefits over standard
glycoproteins.
GlycoTherapeutics
GlycoTherapeutics is the use of our core technologies to develop and
produce novel carbohydrate-based drugs. We are supporting a number of research
and development projects on promising, carbohydrate-based therapeutic
approaches. We do not intend to proceed beyond early stage clinical trials on
any pharmaceutical product without a suitable partner for late stage development
and commercialization. Our business strategy is to collaborate with others,
allowing us to leverage our proprietary technologies to participate in the
profits of successful drugs while assuming limited financial and clinical
development risk. If we successfully enter into collaborations with other
companies, we anticipate we will receive up-front license fees, annual license
fees, milestone payments, royalties, and revenues from the supply of compounds.
Due to the long development times inherent in developing pharmaceutical
compounds, we do not expect any significant revenues from our GlycoTherapeutics
program for at least three years.
Neuronyx, Inc.
We have a research and development collaboration with Neuronyx for the
discovery and development of drugs for treating Parkinson's disease and other
neurological diseases. We have also made an equity investment of $1.25 million
in Neuronyx. Currently, the collaboration is focusing on the modification of
certain compounds that have previously demonstrated clinical promise in
arresting the progression of Parkinson's disease symptoms. We are responsible
for the synthesis and manufacturing scale-up of targeted compounds, using our
proprietary technologies for carbohydrate synthesis. Neuronyx is responsible for
preclinical and clinical development of the compounds. Neose and Neuronyx will
each bear their own research and development costs under the collaboration. If
any drugs are commercialized under this collaboration, Neose will be responsible
for manufacturing the drug, and would receive a transfer payment and royalty
based on sales. Parkinson's disease is a progressive disorder of the central
nervous systems affecting approximately 1.5 million Americans. There is no known
prevention or cure for Parkinson's disease. Current treatments focus on
controlling symptoms of the disease, but do not slow the progression of the
disease.
Bristol-Myers
Under our agreement with Bristol-Myers, we are developing proprietary
technologies that enable cGMP processes for the manufacture of two gangliosides
for use as the active pharmaceutical ingredients in two cancer vaccines being
developed by Bristol-Myers. Both vaccine candidates have been licensed to
Bristol-Myers from Progenics Pharmaceuticals.
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The first of these vaccine candidates, GMK, is in Phase III clinical trials
for the treatment of malignant melanoma. In May 2000, Progenics announced that
the organization responsible for carrying out one of the Phase III clinical
trials for GMK terminated their participation in that trial. Following
Progenics' announcement, Bristol-Myers advised us to cease our activities under
the agreement until they completed their review of the available data from the
clinical trial. We do not expect any future revenues under this agreement unless
Bristol-Myers advises us to resume our activities.
Other GlycoTherapeutics Research Programs. We have other GlycoTherapeutics
research programs in the following areas:
o Synthetic heparins. We are exploring the use of our technologies to
synthesize enzymatically heparins. Heparins are a multi-billion
dollar carbohydrate drug category used to treat thrombosis and other
cardiovascular indications. Currently, all heparins are produced from
pig intestines, and we believe that there may be a future demand for
synthetically produced heparins.
o Immune system regulation. In conjunction with scientists at Harvard
University, we are investigating whether certain carbohydrates may be
useful as regulators of critical immune functions, in particular the
switching from Th1 to Th2 immune response, and the reverse. We are
exploring whether these carbohydrates may be used for the treatment
of various auto-immune conditions, including inflammatory bowel
disease, allergic asthma, and psoriasis.
GlycoActives
In our GlycoActives program, we are applying our technology platform to the
manufacture and development of carbohydrate-based food ingredients for large
nutritional and consumer product markets. Most of the carbohydrate-based food
ingredients on the market today are obtained from plants. Ingredients obtained
from agricultural sources in different locations will often have inconsistent
physical characteristics. We believe our technologies can be used to manufacture
products that are cleaner, more consistent, and less expensive than identical
products derived from agricultural sources. Our technologies may also enable the
commercial production of complex carbohydrates for which no other commercially
viable source exists today. Our business strategy is to enter into
collaborations with others for the use of our technologies for the development
of nutritional and consumer products.
Joint Venture with McNeil Specialty
In late 1999, we entered into a 50/50 joint venture with McNeil Specialty
Products Company, a division of Johnson & Johnson, to explore the inexpensive,
enzymatic production of fructooligosaccharides (FOS) and other complex
carbohydrates. McNeil Specialty's primary impetus for their prior research
collaboration with us in 1997 was the need for a healthful, attractively-priced
soluble fiber to be used in consumer products with sucralose, McNeil Specialty's
approved no-calorie sweetener. At that time, the leading candidate to be
developed as a bulking agent for sucralose was FOS, which is useful as a soluble
dietary fiber, and is obtained primarily from agricultural sources. The joint
venture constructed its pilot manufacturing facility for the manufacture of FOS.
The purpose of the pilot facility was to establish the feasibility of further
scale-up of the process to manufacture FOS, as well as to serve as a pilot
manufacturing facility for future compounds. Even if it sells all the FOS that
can be made at capacity in the initial facility, the joint venture does not
expect that it will be profitable. In order to become profitable, the joint
venture will require sales from an additional, significantly larger, commercial
manufacturing facility.
The joint venture completed construction of the pilot manufacturing
facility in July 2000, but it is not yet producing FOS in continuous operations
due to numerous difficulties related to the design of the facility. In order to
address the design problems of the facility to allow for continuous manufacture
of FOS, the joint venture would need to expend additional funds. Joint venture
authorization for the expenditure of these funds has not been sought. If such
authorization is sought, we cannot predict whether the joint venture will
authorize the expenditure of these funds.
In addition to producing compounds for sale to McNeil Specialty as a
bulking agent for sucralose, the joint venture anticipates selling FOS to food
and nutritional companies as a nutraceutical food ingredient, and possibly
developing FOS for use in animal and poultry feeds. These uses could have
significant health benefits. Currently, antibiotic supplements are routinely
added to poultry and animal feeds. Antibiotic resistance can be transferred to
humans who eat animals that have consumed feeds containing antibiotic
supplements. If FOS could be developed as a partial or full replacement of
antibiotic supplements in poultry and animal feeds, potential antibiotic
resistance in humans could be reduced.
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The joint venture has also conducted research on other complex
carbohydrates that can be produced using our novel technology. McNeil Specialty
is expected to select a potential bulking agent for sucralose from a group of
second-generation compounds. The joint venture is continuing research on these
second-generation compounds to provide the data necessary for McNeil Specialty
to make a selection.
Wyeth-Ayerst - Infant Formula Additive
We entered into an agreement in 1999 with Wyeth-Ayerst International, a
division of American Home Products Corporation, to develop a manufacturing
process for a bioactive carbohydrate to be used as an ingredient in
Wyeth-Ayerst's infant and pediatric nutritional formula products. We are
responsible for developing a large-scale manufacturing process for this
ingredient, and Wyeth-Ayerst plans the introduction of this proprietary
ingredient into its infant formula lines. We are receiving contract development
payments and will receive payments if we achieve the milestones specified in the
agreement. If Wyeth-Ayerst commercializes the ingredient under this agreement,
we will sell product to Wyeth-Ayerst at minimum specified transfer prices.
Wyeth-Ayerst is a leading global infant formula manufacturer with products
distributed in more than 90 countries.
Other Programs
Novazyme Pharmaceuticals, Inc.
We entered into collaboration agreements in 2000 with Novazyme
Pharmaceuticals, Inc. Novazyme is developing novel enzyme replacement therapies
for several lysosomal storage diseases, including Pompe and MPS-I diseases.
There are approximately 50 known lysosomal storage diseases that afflict humans.
These rare diseases are caused by the absence of certain enzymes that lead to
the accumulation of material in the lysosomes of the body's cells. This
accumulation causes lysosomes to enlarge leading eventually to cell
degeneration. This process results in accumulation of material in various
tissues and organs of the body causing these organs to function less
efficiently, resulting in progressive deterioration in physical and/or mental
condition, and eventually death. Under the agreements, we made an investment in
Novazyme, and we obtained the right to enter into a 50/50 joint venture for
Novazyme's novel enzyme replacement therapy for Pompe disease. In March 2001, we
restructured our collaborative agreements with Novazyme to relinquish our right
to enter into the joint venture, thereby eliminating the significant financial
and clinical risk we would have assumed in the joint venture. Under the amended
agreements, we received an additional equity interest in Novazyme, and we will
receive cash payments from Novazyme. In addition, if Novazyme commercializes any
of its drug candidates for lysosomal storage diseases we will receive royalties
based on sales.
Abbott Laboratories
Abbott Laboratories has a non-exclusive license to use our technology to
manufacture and commercialize, for nutritional purposes only, any complex
carbohydrate naturally found in human breast milk. If Abbott commercializes any
products manufactured using our technology, we will receive fees from Abbott
tied to commercial quantities.
Patents and Proprietary Rights
We solely own 23 issued U.S. patents, we co-own 2 issued U.S. patents, and
have licensed 50 issued U.S. patents from 8 institutions. In addition, we own or
have licensed over 48 patent applications pending in the United States. There
are a number of U.S. and foreign patent applications related to our owned and
licensed patents. We have licensed, or have an option to license, patents and
patent applications from the following institutions: University of California,
The Scripps Research Institute, University of Pennsylvania, Japan Tobacco, Inc.,
University of Michigan, Marukin Shoyu Co., Ltd., Celltech Therapeutics Limited,
University of Arkansas, University of British Columbia, Rockefeller University,
University of Alberta, Genencor International, National Research Council Canada,
Harvard University, University of Washington, Wayne State University, University
of Illinois, and University of Adelaide.
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Government Regulation
Products manufactured using our technologies, and our manufacturing and
research activities, will typically be subject to significant, but varying,
degrees of regulation by a number of government authorities in the United States
and other countries. The development, manufacture, marketing, and sale of
products manufactured using our technology will be subject to one of the
following regulatory review processes before commercialization:
o pharmaceutical - new drug application or biologic license
application;
o infant formula additive - new infant formula submission; or
o foods and food ingredients - either self-affirmed to be, or notified
as, GRAS (generally recognized as safe) or food additive petition
process.
Our products, systems, and processes are subject to continuing review
subsequent to marketing, and affirmative reporting requirements to the FDA and
other federal, state, or international agencies may be imposed upon us as a
condition of continued marketing approval. Generally, pharmaceuticals are
regulated more rigorously than foods and food ingredients. Infant formula
additives are special types of food ingredients that are regulated more
rigorously than most other types of food ingredients.
Our operations are also subject to regulation under the Occupational Safety
and Health Act, the Environmental Protection Act, the Toxic Substances Control
Act, the Resource Conservation and Recovery Act, and other similar federal,
state, and local laws, rules, and regulations governing laboratory activities,
waste disposal, handling dangerous materials, and other matters. We voluntarily
comply with the National Institutes of Health Guidelines for Research Involving
Recombinant DNA Technologies.
Regulation of Pharmaceutical Product Candidates
We intend to manufacture enzymes and sugar nucleotides for use by our
potential GlycoAdvance customers, as well as for our own use in manufacturing
complex carbohydrates for our GlycoTherapeutics and GlycoActives programs. Our
collaborators will be responsible for obtaining all required regulatory
approvals for pharmaceutical products incorporating our technologies. The
research and development activities regarding, and the future manufacturing and
marketing of, all pharmaceutical product candidates incorporating our
technologies are and will be subject to significant regulation by numerous
governmental authorities in the United States and other countries.
Pharmaceutical products intended for therapeutic use in humans are governed
principally by the federal Food, Drug and Cosmetic Act, Public Health Service
Act, and FDA regulations in the United States, and by comparable laws and
regulations in foreign countries. The federal Food, Drug and Cosmetic Act and
other federal statutes and regulations govern the testing, manufacture, safety,
effectiveness, marketing, labeling, storage, record keeping, approval,
advertising, and promotion of pharmaceutical products. The process of completing
preclinical and clinical testing and obtaining FDA approval for a new
pharmaceutical product requires a number of years and the expenditure of
substantial resources.
Following drug discovery, the steps required before a new pharmaceutical
product may be marketed in the United States include:
o preclinical laboratory and animal tests;
o the submission to the FDA of an Investigational New Drug application;
o adequate and well-controlled clinical trials, typically conducted in
three phases, to establish the safety and effectiveness of the
product;
o the submission of a New Drug Application or Biologic License
Application to the FDA; and
o FDA approval of the New Drug Application or Biologic License
Application prior to any promotion, commercial sale, or shipment of
the product.
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Preclinical trials, in vitro or in animals, must be conducted to evaluate
the safety of a compound for testing in humans. Various regulations govern such
testing including Good Laboratory Practices or similar international
regulations. Clinical trials, conducted according to Good Clinical Practices or
similar international regulations and subject to review by independent oversight
bodies (e.g. Institutional Review Boards), are typically conducted in three
sequential phases. Phase I clinical trials are primarily designed to determine
the metabolic and pharmacologic effects of the product in humans, and the side
effects associated with increasing doses. These studies generally involve a
small number of healthy volunteer subjects, but may be conducted on people with
the disease the product is intended to treat. Phase II studies are conducted to
evaluate the effectiveness of the product for a particular indication and thus
involve patients with the disease under study. These studies also provide
evidence of the short-term side effects and risks associated with the product.
Phase III studies are generally designed to assess the overall benefit-risk
relationship of the product. Phase III trials must demonstrate that substantial
evidence of safety and effectiveness of a product exists in order to obtain FDA
approval for marketing the product. Phase III trials often involve a substantial
number of patients in multiple study centers and include longer-term
administration of the product than in Phase II trials. A clinical trial may
combine the elements of more than one phase, and often at least two Phase III
studies demonstrating a product's safety and efficacy are required before
marketing approval is received. Typical estimates of the total time required for
completing such clinical testing vary between four and ten years. For marketing
outside the United States, foreign regulatory requirements govern human clinical
trials and marketing approval for products. The requirements relating to the
conduct of clinical trials, product licensing, pricing, and reimbursement vary
widely from country to country. Regulatory oversight continues after marketing
approval for the product is received. Regulatory bodies may require additional
clinical trials be performed as a condition of receiving marketing approval.
Affirmative reporting obligations are imposed as a condition of continued
marketing approval.
Third Party Reimbursement
Our ability and each of our collaborator's ability to commercialize
successfully drug products may depend in part on the extent to which coverage
and reimbursement for the cost of such products will be available from
government health administration authorities, private health insurers, and other
organizations. Significant uncertainty exists as to the reimbursement status of
new therapeutic products and we cannot be sure that third-party reimbursement
would be available for therapeutic products we or our collaborators might
develop. Health care reform especially as it relates to prescription drugs is an
area of increasing national attention and a priority of many governmental
officials. Certain reform proposals, if adopted, could impose limitations on the
prices we will be able to charge in the United States for our products or the
amount of reimbursement available for our products or the amount of
reimbursement available for our products from governmental agencies or
third-party payors.
Regulation of Foods and Food Ingredients
We expect that the products of our joint venture with McNeil Specialty will
be regulated as food ingredients. Foods and food ingredients are subject to the
provisions of the federal Food, Drug and Cosmetic Act. Food ingredients are
broadly defined as any substances that may become a component, or otherwise
affect the characteristics, of food. Food ingredients are regulated either as
GRAS substances or as food additives.
Food ingredients that are GRAS are excluded from the definition of food
additives, The FDA has affirmed by regulation a number of substances as GRAS,
although it is not required that a substance be affirmed as GRAS by regulation
of the FDA in order to be GRAS. Alternatively, under a new proposed regulatory
framework, a manufacturer may submit GRAS notification to the FDA claiming that
a food ingredient is GRAS. The FDA generally will respond to the notification
within approximately ninety days as to whether there is sufficient evidence to
support the notifier's conclusion that the substance is GRAS. A positive
response from the FDA indicates that it has no objection to the notifier's
conclusion that a substance is a GRAS. A manufacturer also may self-affirm a
substance as GRAS by making an independent determination that qualified experts
would generally agree that the substance is GRAS for a particular use. If the
FDA disagrees with the manufacturer's self-determination or GRAS notification,
the manufacturer generally must submit a food additive petition to obtain
approval to market the food ingredient. If the FDA disagrees with a
determination, the manufacturer must complete the food additive petition process
for the substance to be approved by the FDA. Affirmation of GRAS status either
by the manufacturer or regulation of the FDA would allow the manufacturer to
market and sell the additive or the food containing the additive. Furthermore, a
manufacturer's decision to rely on an independent determination may limit the
marketability of that manufacturer's products to food manufacturers, many of
whom require confirmation of GRAS status from the FDA before they will purchase
substances for use in foods from third parties.
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Food ingredients that are not GRAS are regulated as food additives. All new
food additives require FDA approval prior to commercialization. Information
supporting the safety of a food additive is submitted to the FDA in the form of
a food additive petition. The food additive petition process is generally
expensive and lengthy. Commercialization of the food additive, if permitted by
the FDA, often occurs several years after the petition is submitted to the FDA.
The petition must establish with reasonable certainty that the food additive is
safe for its intended use at the level specified in the petition. The petition
is required to contain reports of safety investigations of the food additive and
details regarding its physical, chemical, and biological properties. Product
safety studies submitted to the FDA are typically conducted in accordance with
FDA good laboratory practices requirements. If a food additive petition is
submitted, the FDA may choose to reject the petition or deny any desired
labeling claims. Furthermore, the FDA may require the establishment of
regulations that necessitate costly and time-consuming compliance procedures.
Regulation of Infant Formula Additives
We are collaborating with Wyeth-Ayerst to develop a bioactive carbohydrate
as a potential nutritional additive to infant formula. The manufacture,
composition, and labeling of infant formulas are subject to the provisions of
the United States Infant Formula Act. Prior to commercializing any potential
infant formula additive, an infant formula manufacturer must demonstrate that
its potential additive:
o is GRAS either by previous regulation of the FDA, or is self-affirmed
as GRAS by the infant formula manufacturer; or
o is the subject of an approved food additive petition.
Under the United States Infant Formula Act, infant formula manufacturers
are required to notify the FDA of any intent to revise, add, or substitute any
protein, fat, or carbohydrate in infant formula ninety days prior to the
intended date of commercial distribution. This new infant formula submission
must contain the quantitative formulation of the new infant formula, a
description of any reformulation or change in processing, and assurances that
the new infant formula will not be marketed without complying with the nutrient
and quality factor requirements and cGMP control requirements. Upon
notification, the FDA has a ninety-day period, in which to request additional
information, or deny marketing rights for the new formula. If no response is
received from the FDA within the ninety-day period, the manufacturer may proceed
with commercial sales of the newly formulated product. Under our agreement,
Wyeth-Ayerst is responsible for all regulatory activities relating to the infant
formula additive. Wyeth-Ayerst has not yet made, and may never make, any filings
with the FDA to propose inclusion of an infant formula additive manufactured
using our technology. Their efforts to commercialize any infant formula additive
may be materially and adversely affected if they do not self-affirm GRAS status
of this potential infant formula additive.
Wyeth-Ayerst may market infant formula containing this additive in foreign
countries. Infant formula regulatory requirements vary widely from country to
country, and may be more or less stringent than FDA requirements. The time
required to obtain clearances, if required, in foreign countries may be longer
or shorter than that required in the United States.
Competition
Some companies are producing by enzymatic and other means a limited variety
of complex carbohydrates. Although we do not believe any of these companies has
the ability currently to manufacture a wide variety of human carbohydrate
products in quantities sufficient for commercialization, any of these companies
may develop technologies superior to our technologies. In addition, some
companies are investigating novel methods of chemical synthesis, sometimes with
enzymatic steps, to produce commercial quantities of complex carbohydrates.
These and other efforts by potential competitors may be successful or other
methods of carbohydrate synthesis that compete with our technologies, may be
developed.
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Our GlycoAdvance program competes with several alternative technologies
that seek to improve therapeutic glycoproteins as drugs. A number of companies
are developing technologies that will compete with GlycoAdvance, to increase the
dosing level achievable without side effects and the half-life of these proteins
in humans, thus reducing the frequency of required injections. These competitive
technologies include microsphere encapsulation, polyethelyne glycol
modification, and human albumin fusion.
The products of our joint venture with McNeil Specialty may face
significant competition. FOS products that may be produced by the joint venture
for nutraceutical applications will face competition from existing FOS products.
Principal competitors in this area include a Japanese company, Meiji Seika
Kaisha, which sells FOS products under the brand name, Meioligo, a European
joint venture, Beghin-Meiji Industries, which sells its FOS products under the
brand name Actilight, and a European company, Orafti, which sells its FOS
products under the brand names Raftiline, and Raftilose. Another planned joint
venture product may be added to McNeil Specialty's sucralose sweetener as a
bulking agent. These products will in turn compete with other natural and
artificial sweeteners. The joint venture may also sell this bulking agent
directly to other users for use in such items as cake mixes, low-fat cookies, or
ice cream. There is significant competition from other bulking agents in this
market as well, and thus the ability to produce the bulking agent at an
attractive price and to offer other product features will be important.
Manufacturing
We intend to manufacture enzymes and sugar nucleotides for use by our
potential GlycoAdvance customers, as well as for our own use in manufacturing
complex carbohydrates for our current and potential GlycoTherapeutics and
GlycoActives customers. We will need to develop commercial-scale manufacturing
facilities meeting cGMP, or depend on our collaborators, licensees, or contract
manufacturers for the commercial manufacture of our potential products.
We anticipate making capital expenditures during 2001 of at least $10
million to provide additional cGMP manufacturing capacity in our Horsham,
Pennsylvania facility to support the initial requirements of our anticipated
GlycoAdvance customers. Even if we make these capital expenditures, we may not
be able to enter into collaborations with potential GlycoAdvance customers. In
addition, we anticipate in the next 12 to 24 months we will obtain, either
through lease or purchase, another facility of at least 70,000 square feet. We
plan to relocate all non-cGMP research laboratories and corporate office space
from our current facility in Horsham, Pennsylvania into the new facility,
leaving our current facility available for future expansion of our cGMP
manufacturing capacity.
We believe we have the capacity to develop scalable manufacturing processes
required for our collaboration with Wyeth-Ayerst in our existing facilities,
although we currently estimate that we will require additional facilities to
produce these ingredients at commercial scale.
Our joint venture with McNeil Specialty completed construction of its pilot
manufacturing facility in July 2000, but it is not yet producing FOS, the
intended product, in continuous operations due to numerous difficulties related
to the design of the facility. In order to address the remaining design problems
of the facility to allow for continuous manufacture of FOS, the joint venture
would need to expend additional funds. Joint venture authorization for the
expenditure of these funds has not been sought. If such authorization is sought,
we cannot predict whether the joint venture will authorize the expenditure of
these funds. We believe we have the capacity, in our current facility in
Horsham, Pennsylvania, to manufacture under cGMP conditions the quantities of
enzyme required to supply the joint venture's pilot manufacturing facility.
Marketing, Distribution, and Sales
We intend to rely substantially on collaborative partners to commercialize
our broad technology platform. Although we have three employees focused on
business development, we have limited experience and capability in marketing our
technologies to potential collaborators. We have no experience or capability in
marketing, distributing, or selling products. If we commercialize any products,
we will have to develop a sales force or rely on our collaborators, licensees,
or arrangements with others to provide marketing, distribution, and sales
support for these products. The marketing, advertising, and promotion of any
product would likely be subject to regulation by the FDA or other governmental
agency.
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Employees
As of December 31, 2000, we employed 87 individuals, consisting of 64
employees engaged in research and development activities and 23 employees
devoted to business development, finance, and administrative activities. Our
staff includes carbohydrate biochemists as well as scientists with expertise in
organic chemistry, analytic chemistry, molecular biology, microbiology, cell
biology, scale-up manufacture, and regulatory affairs. A significant number of
our employees have prior experience with pharmaceutical or biotechnology
companies, and in the food industry, and many have specialized training in
carbohydrate technology. None of our employees is covered by collective
bargaining agreements. We believe we have good relations with our employees.
Executive Officers of the Company
The name, age as of March 25, 2001, and position of each of our executive
officers are as follows:
Stephen A. Roth, Ph.D, 58, has served on our Board since 1989 and as
Chairman and Chief Executive Officer since August 1994. Dr. Roth co-founded
Neose, and from 1992 until August 1994, he served as Senior Vice President,
Research and Development and Chief Scientific Officer. Dr. Roth was on the
faculty of the University of Pennsylvania from 1980 to 1994, and was Chairman of
Biology from 1982 to 1987. Dr. Roth received his A.B. in biology from The Johns
Hopkins University, and his Ph.D. in developmental biology from the Case Western
Reserve University. He completed his post-doctorate training in carbohydrate
chemistry at The Johns Hopkins University.
P. Sherrill Neff, 49, has served on our Board since December 1994, as
President and Chief Financial Officer since December 1994, and as Chief
Operating Officer since April 2000. From 1993 to December 1994, Mr. Neff was
Senior Vice President, Corporate Development, at U.S. Healthcare, Inc., a
managed healthcare company. From 1984 to 1993, he worked at Alex. Brown & Sons
Incorporated, an investment banking firm, where he held a variety of positions,
most recently as Managing Director and Co-Head of the Financial Services Group.
Mr. Neff is a director of Resource America, Inc., a publicly-held specialty
financial services company. Mr. Neff is also on the board of directors of the
Pennsylvania Biotechnology Association, the University City Science Center, and
the Biotechnology Institute. Mr. Neff received his B.A. in religion from
Wesleyan University, and his J.D. from the University of Michigan Law School.
Edward J. McGuire, Ph.D., 63, has served as our Vice President,
Research and Development since 1990. Dr. McGuire was on the faculty of the
University of Pennsylvania from 1985 to 1990. From 1984 to 1985, Dr. McGuire
served as a Senior Researcher at Genetic Engineering, Inc., a biotechnology
company. Dr. McGuire received his B.A. in biology from Blackburn College, and
his Ph.D. in biochemistry/chemistry from the University of Illinois Medical
School.
Eric L. Sichel, M.D., 42, has served as our Vice President, Business
Strategy and Corporate Communications since November 2000. From December 1996 to
November 2000, Dr. Sichel provided biotechnology investment advisory services to
institutional investment funds, including Emerald Asset Management and Omega
Advisors. From 1995 to December 1996, Dr. Sichel served as Senior Biotechnology
Analyst at Alex. Brown and Sons. From 1989 to 1995, Dr. Sichel held a number of
positions at Sandoz Pharmaceutals, serving most recently as Associate Director,
New Product Management. Dr. Sichel received his M.D. from UMDNJ-New Jersey
Medical School, and his M.B.A. from Columbia Business School.
David A. Zopf, M.D., 58, has served as our Vice President, Drug
Development since 1992. From 1991 to 1992, we engaged Dr. Zopf as a consultant
on the biomedical applications of complex carbohydrates. From 1988 to 1991, Dr.
Zopf served as Vice President and Chief Operating Officer of BioCarb, Inc., a
biotechnology company and the U.S. subsidiary of BioCarb AB, where he managed
the research and development programs of novel carbohydrate-based diagnostics
and therapeutics. Dr. Zopf received his A.B. in zoology from Washington
University, and his M.D. from Washington University School of Medicine.
17
ITEM 2. PROPERTIES.
We own, subject to a mortgage, approximately 45,000 square feet of cGMP
manufacturing, laboratory, and corporate office space in Horsham, Pennsylvania.
Our lease of approximately 2,600 square feet of laboratory and office space in
San Diego, California expires in September 2001 and will not be renewed due to
our relocation, which is expected in June 2001, into approximately 10,000 square
feet of leased laboratory and office space in San Diego, California. Our new
lease expires in March 2006. We anticipate our expanded operations in San Diego
will allow us to increase our research and development efforts for our
GlycoAdvance program.
We anticipate making capital expenditures during 2001 of at least $10
million to provide additional cGMP manufacturing capacity in our Horsham,
Pennsylvania facility to support the initial requirements of our anticipated
GlycoAdvance customers. Even if we make these capital expenditures, we may not
be able to enter into collaborations with potential GlycoAdvance customers. In
addition, we anticipate we will obtain in the next 12 to 24 months, either
through lease or purchase, another facility of at least 70,000 square feet. We
plan to relocate all non-cGMP research laboratories and corporate office space
from our current facility in Horsham, Pennsylvania into the new facility,
leaving our current facility available for future expansion of our cGMP
manufacturing capacity.
We intend to manufacture enzymes and sugar nucleotides for use by our
potential GlycoAdvance customers, as well as for our own use in manufacturing
complex carbohydrates for our current and potential GlycoTherapeutics and
GlycoActives customers. We will need to develop commercial-scale manufacturing
facilities meeting cGMP, or depend on our collaborators, licensees, or contract
manufacturers for the commercial manufacture of our potential products. See
"Item 1-Business-Manufacturing."
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of security holders during the
fourth quarter of 2000.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on The Nasdaq Stock Market under the symbol
NTEC. We commenced trading on The Nasdaq Stock Market on February 15, 1996. The
following table sets forth the high and low sale prices of our common stock for
the periods indicated.
Common Stock Price
------------------
High Low
---- ---
Year Ended December 31, 1999
First Quarter....................................... $17.25 $10.75
Second Quarter...................................... 14.38 8.75
Third Quarter....................................... 15.00 8.56
Fourth Quarter...................................... 17.63 9.94
Year Ended December 31, 2000
First Quarter....................................... 60.13 13.00
Second Quarter...................................... 45.94 18.63
Third Quarter....................................... 51.82 33.00
Fourth Quarter...................................... 52.00 25.75
Year Ended December 31, 2001
First Quarter (through March 26, 2001).............. 44.38 24.88
As of March 26, 2001, there were approximately 200 record holders and 4,000
beneficial holders of our common stock. We have not paid any cash dividends on
our common stock and we do not anticipate paying any in the foreseeable future.
19
ITEM 6. SELECTED FINANCIAL DATA.
The following Statements of Operations Data for the years ended December
31, 1996, 1997, 1998, 1999, and 2000, and for the period from inception (January
17, 1989) through December 31, 2000, are derived from our consolidated financial
statements that have been audited by Arthur Andersen LLP, independent public
accountants. The financial data set forth below should be read in conjunction
with the sections of this Annual Report on Form 10-K entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements and notes included elsewhere in this Form 10-K.
Period from
inception
Year ended December 31, (January 17, 1989)
------------------------------------------------------------- to December 31,
1996 1997 1998 1999 2000 2000
--------------------------------------------------------------------------------
(in thousands, except per share data)
Statements of Operations Data:
Revenue from
collaborative agreements $ 1,383 $ 725 $ 390 $ 422 $ 4,600 $ 11,367
--------------------------------------------------------------------------------
Operating expenses:
Research and development 6,502 8,013 9,912 10,649 12,094 63,647
General and administrative 2,505 3,884 3,635 4,520 5,648 26,881
--------------------------------------------------------------------------------
Total expenses 9,007 11,897 13,547 15,169 17,742 90,528
--------------------------------------------------------------------------------
Interest income, net 1,483 2,108 1,250 1,429 4,642 10,849
--------------------------------------------------------------------------------
Net loss $(6,141) $ (9,064) $(11,907) $(13,318) $(8,500) $ (68,312)
================================================================================
Basic and diluted net loss per
share $ (0.82) $ (0.96) $ (1.25) $ (1.25) $ (0.63)
==========================================================
Basic and diluted weighted-average
shares outstanding 7,494 9,405 9,556 10,678 13,428
==========================================================
As of December 31,
-----------------------------------------------------------
1996 1997 1998 1999 2000
-----------------------------------------------------------
(in thousands)
Balance Sheet Data:
Cash and marketable securities $ 32,845 $ 43,303 $ 32,023 $ 33,235 $ 94,762
Total assets 37,118 58,886 46,265 52,239 114,768
Long-term debt 556 8,917 8,300 7,300 6,200
Deficit accumulated during
the development stage (25,523) (34,587) (46,494) (59,812) (68,312)
Total stockholders' equity 35,120 46,954 36,013 40,785 104,868
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with our
consolidated financial statements and related notes included in this Form 10-K.
Overview
Neose develops proprietary technologies for the synthesis and manufacture
of complex carbohydrates, which are chains of simple sugar molecules that can be
joined together in many different combinations. Our enzymatic glycosylation
technology platform makes feasible the synthesis of a wide range of complex
carbohydrates for pharmaceutical, biotechnology, nutritional, and consumer
product applications. Our GlycoAdvance program uses our technologies to enable
the completion and correction of glycosylation in recombinant glycoprotein
discovery, development, and manufacture. Our GlycoTherapeutics program uses our
technologies to develop and produce novel carbohydrate-based therapeutics, and
our GlycoActives program uses our technologies to develop and produce novel
carbohydrate-based food ingredients. We have incurred operating losses each
year. As of December 31, 2000, we had an accumulated deficit of approximately
$68 million. We expect additional losses for some time as we expand research and
development efforts, expand manufacturing scale-up activities, and begin sales
and marketing activities.
Results of Operations
Years Ended December 31, 2000 and 1999
Revenues from collaborative agreements increased to approximately $4.6
million in 2000 from approximately $0.4 million in 1999. Payments under our
agreement with Bristol-Myers accounted for approximately $3.3 million of our
collaborative revenues in 2000. We do not expect any future payments under this
agreement unless Bristol-Myers advises us to resume our activities.
Research and development expenses increased to $12.1 million in 2000 from
$10.6 million in 1999. The increase was primarily attributable to additional
services rendered under our current research and development agreement with
Bristol-Myers, and non-cash compensation expense associated with stock options
granted to non-employees. During the year ended December 31, 2000, our joint
venture with McNeil Specialty reimbursed Neose approximately $1.6 million for
the cost of research and development services and supplies provided to the joint
venture. This amount has been reflected as a reduction of research and
development expense in our Consolidated Statements of Operations.
General and administrative expenses increased to $5.6 million in 2000 from
$4.5 million in 1999. The increase was primarily attributable to the hiring of
additional business development and administrative personnel, and the non-cash
compensation expense associated with stock options granted to non-employees.
Interest income increased to $5.1 million in 2000 from $1.9 million in 1999
due to higher average cash and marketable securities balances during 2000
resulting from our public offering of 2.3 million shares of common stock in
March 2000. Interest expense increased to $469,000 in 2000 from $433,000 in 1999
due to higher average interest rates, and was partly offset by lower average
loan balances outstanding during 2000.
Years Ended December 31, 1999 and 1998
Revenues from collaborative agreements increased to $422,000 in 1999 from
$390,000 in 1998. Substantially all of our revenues during 1999 were payments
received by us under our collaborative agreements with Bristol-Myers and
Wyeth-Ayerst. Substantially all of our revenues during 1998 were payments
received by us under our collaborative agreement with Bristol-Myers.
Research and development expenses increased to $10.6 million in 1999 from
$9.9 million in 1998. The increase was primarily attributable to increased
funding of outside research, and the amortization of acquired technology from
Cytel Corporation.
21
General and administrative expenses increased to $4.5 million in 1999 from
$3.6 million in 1998. The increase was primarily attributable to increased
patent and general legal expenses associated with the intellectual property
acquired from Cytel Corporation, and increased business development expense.
Interest income increased to $1.9 million in 1999 from $1.8 million in 1998
due to higher average cash and marketable securities balances during 1999.
Interest expense decreased to $433,000 in 1999 from $534,000 in 1998 due to
lower average loan balances outstanding during 1999.
Liquidity and Capital Resources
We have incurred operating losses each year since our inception. As of
December 31, 2000, we had an accumulated deficit of approximately $68 million.
We have financed our operations through private and public offerings of our
securities, and revenues from our collaborative agreements. We had $94.8 million
in cash and marketable securities as of December 31, 2000, compared to $33.2
million in cash and marketable securities as of December 31, 1999. The increase
was primarily attributable to the proceeds from our public offering of 2.3
million shares of common stock in March 2000.
During 1998, 1999, and 2000, we purchased approximately $0.8 million, $1.2
million, and $1.7 million of property, equipment, and building improvements. We
anticipate making capital expenditures during 2001 of at least $10 million to
provide additional cGMP manufacturing capacity in our Horsham, Pennsylvania
facility to support the initial requirements of our anticipated GlycoAdvance
customers. Even if we make these capital expenditures, we may not be able to
enter into collaborations with potential GlycoAdvance customers. In addition, we
anticipate in the next 12 to 24 months we will obtain, either through lease or
purchase, another facility of at least 70,000 square feet. We plan to relocate
all non-cGMP research laboratories and corporate office space from our current
facility in Horsham, Pennsylvania into the new facility, leaving our current
facility available for future expansion of our cGMP manufacturing capacity.
We may be required to make additional investments in our joint venture with
McNeil Specialty to fund capital expenditures. If the joint venture builds
additional production facilities, and we wish to maintain our 50% ownership
interest in the joint venture, we are required to invest up to $8.85 million to
fund half of such expenditures. However, we may elect to fund as little as $1.85
million of the cost of the facilities, so long as our aggregate investments in
the joint venture are at least 15% of the joint venture's aggregate capital
expenditures. In this case, McNeil Specialty will fund the remainder of our half
of the joint venture's capital expenditures, and our ownership percentage will
be proportionately reduced. We have an option, expiring in September 2006, to
return to 50% ownership of the joint venture by reimbursing McNeil Specialty for
this amount.
In 1997, we issued, through the Montgomery County (Pennsylvania) Industrial
Development Authority, $9.4 million of taxable and tax-exempt bonds. The bonds
were issued to finance the purchase of our previously leased building and the
construction of a pilot-scale manufacturing facility within our building. The
bonds are supported by an AA-rated letter of credit, and a reimbursement
agreement between our bank and the letter of credit issuer. The interest rate on
the bonds will vary weekly, depending on market rates for AA-rated taxable and
tax-exempt obligations, respectively. During 2000, the weighted-average,
effective interest rate was 7.5% per year, including letter-of-credit and other
fees.The terms of the bond issuance provide for monthly, interest-only payments
and a single repayment of principal at the end of the twenty-year life of the
bonds. However, under our agreement with our bank, we are making monthly
payments to an escrow account to provide for an annual prepayment of principal.
As of December 31, 2000, we had restricted funds relating to the bonds of
$893,000, which consisted of our monthly payments to an escrow account plus
interest revenue on the balance of the escrow account.
To provide credit support for this arrangement, we have given a first
mortgage on the land, building, improvements, and certain machinery and
equipment to our bank. We have also agreed to a covenant, which was renegotiated
in May 2000, to maintain a minimum required cash and short-term investments
balance of at least two times the current loan balance. At December 31, 2000, we
were required to maintain a cash and short-term investments balance of $14.6
million, rather than $20 million as required under the original covenant. If we
fail to comply with this covenant, we are required to deposit with the lender
cash collateral up to, but not more than, the loan's unpaid balance, which was
$7.3 million as of December 31, 2000.
22
We expect that our existing cash and short-term investments will be
adequate to fund our operations through at least 2002, although changes in our
collaborative relationships or our business, whether or not initiated by us, may
cause us to deplete our cash and short-term investments sooner than the above
estimate. The timing and amount of our future capital requirements and the
adequacy of available funds will depend on many factors, including if or when
any products manufactured using our technology are commercialized.
Joint Venture with McNeil Specialty
Our joint venture with McNeil Specialty is owned equally by Neose and
McNeil Specialty. Each of Neose and McNeil Specialty contributed various
intellectual property to the joint venture. In addition, McNeil Specialty
contributed to the joint venture the pilot manufacturing facility, for which 50%
of the cost will be reimbursed by the joint venture. We account for our
investment in the joint venture under the equity method, under which we
recognize our share of the income and losses of the joint venture. In 1999, we
reduced the carrying value of our initial investment in the joint venture of
approximately $350,000 to zero to reflect our share of the joint venture's
losses. We recorded this amount as research and development expense in our
Consolidated Statements of Operations. We will record our share of post-1999
losses of the joint venture, however, only to the extent of our actual or
committed investment in the joint venture.
If the joint venture becomes profitable, we will recognize our share of the
joint venture's profits only after the amount of our capital contributions to
the joint venture is equivalent to our share of the joint venture's accumulated
losses. As of December 31, 2000, the joint venture had an accumulated loss since
inception of approximately $3.5 million, of which our 50% share is approximately
$1.75 million. Until the joint venture is profitable, McNeil Specialty is
required to fund, as a non-recourse, no-interest loan, all of the joint
venture's aggregate capital expenditures in excess of an agreed-upon amount, and
all of the joint venture's operating losses. The loan balance would be repayable
by the joint venture to McNeil Specialty over a seven-year period commencing on
the earlier of September 30, 2006 or the date on which Neose attains a 50%
ownership interest in the joint venture after having had a lesser ownership
interest. In the event of any dissolution of the joint venture, the loan balance
would be payable to McNeil Specialty before any distribution of assets to us. As
of December 31, 2000, the joint venture owed McNeil Specialty approximately $5.0
million.
Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). The bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be applied, and specifically
addresses revenue recognition for non-refundable technology access fees in the
biotechnology industry. We adopted SAB 101 in the fourth quarter of 2000,
effective for all of 2000. SAB 101 had no impact on our financial position or
results of operations as our revenue recognition policy was consistent with SAB
101.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We do not hold any investments in market risk sensitive instruments.
Accordingly, we believe that we are not subject to any material risks arising
from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(a) Financial Statements.
The Financial Statements required by this item are attached to this Annual
Report on Form 10-K beginning on page F-1.
23
(b) Supplementary Data.
Quarterly financial data (unaudited)
(in thousands, except per share data)
2000 Quarter Ended Dec. 31 Sept. 30 June 30 Mar. 31
- ------------------ --------- ---------- --------- ---------
Revenue from collaborative agreements $ 301 $ 583 $ 1,769 $ 1,947
Net loss (2,136) (2,478) (2,060) (1,826)
Basic and diluted net loss per share (0.15) (0.18) (0.15) (0.15)
1999 Quarter Ended Dec. 31 Sept. 30 June 30 Mar. 31
- ------------------ --------- ---------- --------- ---------
Revenue from collaborative agreements $ 205 $ 92 $ - $ 125
Net loss (3,445) (3,009) (3,792) (3,072)
Basic and diluted net loss per share (0.30) (0.26) (0.38) (0.31)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning our directors is incorporated herein by reference to
our definitive proxy statement to be filed in connection with solicitation of
proxies for our Annual Meeting of Stockholders to be held on June 20, 2001. For
information concerning our executive officers, see "Item 1. Business - Executive
Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference
to our definitive proxy statement to be filed in connection with solicitation of
proxies for our Annual Meeting of Stockholders to be held on June 20, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by reference
to our definitive proxy statement to be filed in connection with solicitation of
proxies for our Annual Meeting of Stockholders to be held on June 20, 2001.
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by reference
to our definitive proxy statement to be filed in connection with solicitation of
proxies for our Annual Meeting of Stockholders to be held on June 20, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The Consolidated Financial Statements filed as part of this Annual Report
on Form 10-K are listed on the Index to Consolidated Financial Statements on
page F-1.
2. Financial Statement Schedules.
All financial statement schedules have been omitted here because they are
not applicable, not required, or the information is shown in the Consolidated
Financial Statements or Notes thereto.
3. Exhibits. (See (c) below)
(b) Reports on Form 8-K.
None.
(c) Exhibits.
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. We are incorporating by reference to our previous SEC filings each
exhibit that contains a footnote. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parentheses.
Exhibit
Number Description
- ------- -----------
3.1 Second Amended and Restated Certificate of Incorporation. (Exhibit 3.1)(1)
3.2 Amended and Restated By-Laws. (Exhibit 3.3)(5)
3.3 Certificate of Designation establishing and designating the Series A Junior Participating Preferred Stock.
(Exhibit 3.2)(5)
4.1 See Exhibits 3.1, 3.2, and 3.3 for instruments defining rights of holders of common stock.
4.2 Representation pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. (Exhibit 4.1)(3)
4.3 Trust Indenture, dated as of March 1, 1997, between Montgomery County Industrial Development Authority and
Dauphin Deposit Bank and Trust Company. (Exhibit 4.2)(3)
4.4 Form of Montgomery County Industrial Development Authority Federally Taxable Variable Rate Demand Revenue
Bond (Neose Technologies, Inc. Project) Series B of 1997. (Exhibit 4.3)(3)
4.5 Amended and Restated Rights Agreement, dated as of December 3, 1998, between American Stock Transfer & Trust
Company, as Rights Agent, and Neose. (Exhibit 4.1)(6)
4.6 Amendment No. 1 dated November 14, 2000 to the Amended and Restated Rights Agreement dated as of December 3,
1998, between Neose Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
(Exhibit 4.1)(10)
10.1 Stock Purchase Agreement, dated as of August 28, 1990, between University of Pennsylvania and Neose.
(Exhibit 10.1)(1)
10.2 License Agreement, dated as of August 28, 1990, between University of Pennsylvania and Neose, as amended to
date. (Exhibit 10.2)(1)
25
10.3(a)+ Series D Preferred Stock Purchase Agreement, dated as of December 30, 1992, between Abbott Laboratories and
Neose. (Exhibit 10.8(a))(1)
10.3(b)+ Supply Agreement, dated as of December 30, 1992, between Abbott Laboratories and Neose. (Exhibit 10.8(b))(1)
10.3(c)+ Research and License Agreement, dated as of December 30, 1992, between Abbott Laboratories and Neose.
(Exhibit 10.8(c))(1)
10.3(d)+ Amendment to the Research and License Agreement, dated as of January 18, 1995, between Abbott Laboratories
and Neose. (Exhibit 10.8(d))(2)
10.4 Form of Series E Preferred Stock Investors' Rights Agreement. (Exhibit 10.9)(1)
10.5 Form of Series F Preferred Stock Investors' Rights Agreement. (Exhibit 10.10)(1)
10.6 Form of Warrant to Purchase Common Stock, dated as of February 23, 1991. (Exhibit 10.11)(1)
10.7 Form of Warrant to Purchase Common Stock, dated as of June 30, 1993. (Exhibit 10.12)(1)
10.8 Form of Warrant to Purchase Common Stock, dated as of February 16, 1994. (Exhibit 10.13)(1)
10.9 Form of Warrant to Purchase Series E Preferred Stock, dated as of July 29, 1994. (Exhibit 10.14)(1)
10.10 Warrant for the Purchase of Common Stock, dated as of June 30, 1995, between Financing for Science
International, Inc. and Neose. (Exhibit 10.15)(1)
10.11++ 1995 Stock Option/Stock Issuance Plan, as amended. (Exhibit 99.1)(4)
10.12++ Employee Stock Purchase Plan. (Exhibit 10.17)(1)
10.13++ Employment Agreement dated April 1, 1992, between David A. Zopf and Neose, as amended to date. (Exhibit
10.18)(1)
10.14++ Employment Agreement dated December 1, 1994, between P. Sherrill Neff and Neose. (Exhibit 10.19)(1)
10.15 Agreement for Purchase and Sale of Real Property, dated March 14, 1997, by and between Pennsylvania Business
Campus Delaware, Inc. and Neose. (Exhibit 2.1)(3)
10.16 Loan Agreement, dated as of March 1, 1997, between Montgomery County Industrial Development Authority and
Neose. (Exhibit 10.1)(3)
10.17 Participation and Reimbursement Agreement, dated as of March 1, 1997, between Jefferson Bank and CoreStates
Bank, N.A. (Exhibit 10.2)(3)
10.18 Form of CoreStates Bank, N.A. Irrevocable Letter of Credit. (Exhibit 10.3)(3)
10.19 Pledge, Security and Indemnification Agreement, dated as of March 1, 1997, by and among CoreStates Bank,
N.A., Jefferson Bank, and Neose. (Exhibit 10.4)(3)
10.20 Reimbursement Agreement, dated as of March 1, 1997, between Jefferson Bank and Neose. (Exhibit 10.5)(3)
10.21 Specimen of Note from Company to Jefferson Bank. (Exhibit 10.6)(3)
10.22 Mortgage, Assignment and Security Agreement, dated March 20, 1997, between Jefferson Bank and Neose.
(Exhibit 10.7)(3)
10.23 Security Agreement, dated as of March 1, 1997, by and between Jefferson Bank and Neose. (Exhibit 10.8)(3)
10.24 Assignment of Contract, dated as of March 20, 1997, between Jefferson Bank and Neose. (Exhibit 10.9)(3)
10.25 Custodial and Collateral Security Agreement, dated as of March 20, 1997, by and among Offitbank, Jefferson
Bank, and Neose. (Exhibit 10.10)(3)
10.26 Placement Agreement, dated March 20, 1997, among Montgomery County Industrial Development Authority,
CoreStates Capital Markets, and Neose. (Exhibit 10.11)(3)
10.27 Remarketing Agreement, dated as of March 1, 1997, between CoreStates Capital Markets and Neose. (Exhibit
10.12)(3)
10.28 Form of Purchase Agreement dated as of June 25, 1999, between Neose Technologies, Inc. and the purchasers
set forth on the signature pages thereto. (Exhibit 99.1)(7)
10.29 Form of Amended and Restated Purchase Agreement dated as of June 25, 1999, between Neose Technologies, Inc.
and the purchasers set forth on the signature pages thereto. (Exhibit 99.2)(7)
10.30 Research and Development Agreement, dated June 1, 1998, between Neose Technologies, Inc. and the
Pharmaceutical Research Institute of Bristol-Myers Squibb Company. (Exhibit 99.1)(8)
26
10.31 Operating Agreement of Magnolia Nutritionals LLC, dated October 12, 1999, between Neose Technologies, Inc.
and McNeil PPC, Inc. acting through its division McNeil Specialty Products Company. (Exhibit 99.2)(8)
10.32 Collaboration and License Agreement, dated November 3, 1999, between Neose Technologies, Inc. and American
Home Products Corporation. (Exhibit 99.3)(8)
10.33 Modification Agreement Relating To Reimbursement Agreements, dated as of May 1, 2000, between Hudson United
Bank, Jefferson Bank Division, successor to Jefferson Bank, and Neose. (Exhibit 10.1)(9)
10.34 Modification Agreement Relating to Custodial Bank Agreement dated as of May 1, 2000, by and among Offitbank,
Hudson United Bank, Jefferson Bank Division, successor to Jefferson Bank, and Neose. (Exhibit 10.2)(9)
10.35*++ Employment Offer Letter dated November 27, 2000, between Eric Sichel and Neose.
11* Statement re: Computation of Net Loss Per Common Share.
23.1* Consent of Arthur Andersen LLP.
24* Powers of Attorney (included as part of signature page hereof).
- ------------------
* Filed herewith
+ Portions of this Exhibit were omitted and filed separately with the
Secretary of the SEC pursuant to an order of the SEC granting our
application for confidential treatment filed pursuant to Rule 406 under the
Securities Act.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to our Registration Statement on Form S-1 (Registration
No. 33-80693) filed with the SEC on December 21, 1995, as amended.
(2) Filed as an Exhibit to our Registration Statement on Form S-1 (Registration
No. 333-19629) filed with the SEC on January 13, 1997.
(3) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997.
(4) Filed as an Exhibit to our Registration Statement on Form S-8 (Registration
No. 333-47718) filed with the SEC on October 11, 2000.
(5) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on
October 1, 1997.
(6) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on
January 8, 1999.
(7) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on
July 14, 1999.
(8) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on
February 2, 2000.
(9) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000.
(10) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on
November 15, 2000.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this report to be signed on our behalf
by the undersigned, thereunto duly authorized.
NEOSE TECHNOLOGIES, INC.
Date: March 30, 2001 By: /s/ Stephen A. Roth
---------------------------
Stephen A. Roth
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Neose
and in the capacities and on the dates indicated.
Each person, in so signing also makes, constitutes, and appoints
Stephen A. Roth, Chief Executive Officer of Neose, and P. Sherrill Neff,
President and Chief Financial Officer of Neose, and each of them acting alone,
as his true and lawful attorneys-in-fact, with full power of substitution, in
his name, place, and stead, to execute and cause to be filed with the Securities
and Exchange Commission any or all amendments to this report.
Name Capacity Date
- ---- -------- ----
/s/ Stephen A. Roth Chief Executive Officer and Chairman of the Board March 30, 2001
- ------------------------------------- (Principal Executive Officer)
Stephen A. Roth
/s/ P. Sherrill Neff President and Chief Financial Officer and March 30, 2001
- ------------------------------------- Director (Principal Financial and Accounting
P. Sherrill Neff Officer)
/s/ William F. Hamilton Director March 30, 2001
- -------------------------------------
William F. Hamilton
/s/ Douglas J. MacMaster, Jr. Director March 30, 2001
- -------------------------------------
Douglas J. MacMaster, Jr.
/s/ Mark H. Rachesky Director March 30, 2001
- -------------------------------------
Mark H. Rachesky
/s/ Lindsay A. Rosenwald Director March 30, 2001
- -------------------------------------
Lindsay A. Rosenwald
/s/ Lowell E. Sears Director March 30, 2001
- -------------------------------------
Lowell E. Sears
/s/ Jerry A. Weisbach Director March 30, 2001
- -------------------------------------
Jerry A. Weisbach
Index to Consolidated Financial Statements
Report of Independent Public Accountants .................................. F-2
Consolidated Balance Sheets ............................................... F-3
Consolidated Statements of Operations ..................................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Loss .... F-5
Consolidated Statements of Cash Flows ..................................... F-8
Notes to Consolidated Financial Statements ................................ F-9
F-1
Report of Independent Public Accountants
To Neose Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Neose
Technologies, Inc. (a Delaware corporation in the development stage) and
subsidiaries as of December 31, 1999 and 2000, and the related consolidated
statements of operations, stockholders' equity and comprehensive loss, and cash
flows for each of the three years in the period ended December 31, 2000, and for
the period from inception (January 17, 1989) to December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Neose Technologies,
Inc. and subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, and for the period from inception (January 17, 1989) to
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Philadelphia, Pennsylvania
January 23, 2001
F-2
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Balance Sheets
(in thousands, except per share amounts)
December 31,
-------------------------------
Assets 1999 2000
-------- ---------
Current assets:
Cash and cash equivalents $ 10,365 $ 66,989
Marketable securities 22,870 27,773
Restricted funds 2,285 893
Prepaid expenses and other current assets 118 583
-------- ---------
Total current assets 35,638 96,238
Property and equipment, net 13,366 13,577
Other assets, net 3,235 4,953
-------- ---------
Total assets $ 52,239 $ 114,768
======== =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,000 $ 1,100
Accounts payable 237 83
Accrued compensation 455 601
Accrued expenses 1,657 1,527
Deferred revenue 805 389
-------- ---------
Total current liabilities 4,154 3,700
Long-term debt 7,300 6,200
-------- ---------
Total liabilities 11,454 9,900
-------- ---------
Commitments (Note 11)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 30,000 shares
authorized; 11,434 and 13,992 shares issued and
outstanding 114 140
Additional paid-in capital 101,013 173,757
Deferred compensation (530) (717)
Deficit accumulated during the development stage (59,812) (68,312)
-------- ---------
Total stockholders' equity 40,785 104,868
-------- ---------
Total liabilities and stockholders' equity $ 52,239 $ 114,768
======== =========
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Operations
(in thousands, except per share amounts)
Period from
inception
(January 17,
Year Ended December 31, 1989) to
---------------------------------------- December 31,
1998 1999 2000 2000
------------- ------------ ------------ ---------------
Revenue from collaborative agreements $ 390 $ 422 $ 4,600 $ 11,367
--------- --------- -------- ---------
Operating expenses:
Research and development 9,912 10,649 12,094 63,647
General and administrative 3,635 4,520 5,648 26,881
--------- --------- -------- ---------
Total operating expenses 13,547 15,169 17,742 90,528
--------- --------- -------- ---------
Operating loss (13,157) (14,747) (13,142) (79,161)
Interest income 1,784 1,862 5,111 13,966
Interest expense (534) (433) (469) (3,117)
--------- --------- -------- ---------
Net loss $ (11,907) $ (13,318) $ (8,500) $ (68,312)
========= ========= ======== =========
Basic and diluted net loss per share $ (1.25) $ (1.25) $ (0.63)
========= ========= ========
Basic and diluted weighted-average
shares outstanding 9,556 10,678 13,428
========= ========= ========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(in thousands)
Comprehensive
Deficit loss
Convertible accumulated Unrealized accumulated
Preferred Stock Common Stock Additional during the gains on during the
----------------- ---------------- paid-in Deferred development marketable development
Shares Amount Shares Amount capital compensation stage securities stage
--------------------------------------------------------------------------------------------------
Balance, January 17, 1989
(inception) -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Initial issuance of common
stock -- -- 1,302 13 (3) -- -- -- --
Shares issued pursuant to
consulting, licensing, and
antidilutive agreements -- -- 329 3 (1) -- -- -- --
Sale of common stock -- -- 133 1 1 -- -- -- --
Net loss -- -- -- -- -- -- (460) -- (460)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1990 -- -- 1,764 17 (3) -- (460) -- (460)
Sale of stock 1,517 15 420 4 4,499 (7) -- -- --
Shares issued pursuant to
consulting and
antidilutive
agreements -- -- 145 1 -- -- -- -- --
Capital contributions -- -- -- -- 10 -- -- -- --
Dividends on preferred stock -- -- -- -- (18) -- -- -- --
Net loss -- -- -- -- -- -- (1,865) -- (1,865)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1991 1,517 15 2,329 22 4,488 (7) (2,325) -- (2,325)
Sale of stock 260 2 17 -- 2,344 -- -- -- --
Shares issued pursuant to
redemption of notes
payable -- -- 107 1 682 -- -- -- --
Exercise of stock options
and warrants -- -- 21 -- 51 -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- 5 -- -- --
Dividends on preferred stock -- -- -- -- (36) -- -- -- --
Net loss -- -- -- -- -- -- (3,355) -- (3,355)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1992 1,777 17 2,474 23 7,529 (2) (5,680) -- (5,680)
Sale of preferred stock 250 3 -- -- 1,997 -- -- -- --
Shares issued to licensor -- -- 3 -- -- -- -- -- --
Shares issued to preferred
stockholder in lieu of
cash dividends -- -- 1 -- 18 -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- 2 -- -- --
Dividends on preferred stock -- -- -- -- (36) -- -- -- --
Net loss -- -- -- -- -- -- (2,423) -- (2,423)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1993 2,027 20 2,478 23 9,508 -- (8,103) -- (8,103)
Sale of preferred stock 2,449 25 -- -- 11,040 -- -- -- --
Exercise of stock options -- -- 35 1 14 -- -- -- --
Shares issued to preferred
stockholder in lieu of
cash dividends -- -- 10 1 53 -- -- -- --
Dividends on preferred stock -- -- -- -- (18) -- -- -- --
Net loss -- -- -- -- -- -- (6,212) -- (6,212)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1994 4,476 $45 2,523 $25 $20,597 $ -- $(14,315) $-- $(14,315)
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(continued)
(in thousands)
Comprehensive
Deficit loss
Convertible accumulated Unrealized accumulated
Preferred Stock Common Stock Additional during the gains on during the
----------------- ---------------- paid-in Deferred development marketable development
Shares Amount Shares Amount capital compensation stage securities stage
--------------------------------------------------------------------------------------------------
Sale of preferred stock 2,721 $ 27 -- $ -- $10,065 $ -- $ -- $ -- $ --
Exercise of stock options
and warrants -- -- 116 1 329 -- -- -- --
Shares issued to employees
in lieu of cash compensation -- -- 8 -- 44 -- -- -- --
Deferred compensation
related to grant of stock
options -- -- -- -- 360 (360) -- -- --
Shares issued to stockholder
related to the initial
public offering -- -- 23 -- -- -- -- -- --
Shares issued to preferred
stockholder in lieu of
cash dividends -- -- 3 -- 18 -- -- -- --
Dividends on preferred stock -- -- -- -- (36) -- -- -- --
Conversion of preferred
stock into common stock (1,417) (14) 472 5 9 -- -- -- --
Net loss -- -- -- -- -- -- (5,067) -- (5,067)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1995 5,780 58 3,145 31 31,386 (360) (19,382) -- (19,382)
Dividends on preferred stock -- -- -- -- (18) -- -- -- --
Sale of common stock in
initial public offering -- -- 2,588 26 29,101 -- -- -- --
Conversion of preferred
stock into common stock (5,780) (58) 2,411 24 34 -- -- -- --
Exercise of stock options
and warrants -- -- 65 1 162 -- -- -- --
Shares issued pursuant to
employee stock purchase plan -- -- 6 -- 60 -- -- -- --
Deferred compensation
related to acceleration of
option vesting -- -- -- -- 106 -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- 90 -- -- --
Net loss -- -- -- -- -- -- (6,141) -- (6,141)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- -- 8,215 82 60,831 (270) (25,523) -- (25,523)
Sale of common stock in
public offering -- -- 1,250 13 20,326 -- -- -- --
Exercise of stock options and
warrants -- -- 42 -- 139 -- -- -- --
Shares issued pursuant to
employee stock purchase
plan -- -- 18 -- 189 -- -- -- --
Deferred compensation
related to grants of
stock options -- -- -- -- 322 (322) -- -- --
Amortization of deferred
compensation -- -- -- -- -- 231 -- -- --
Net loss -- -- -- -- -- -- (9,064) -- (9,064)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1997 -- $ -- 9,525 $ 95 $81,807 $ (361) $(34,587) $ -- $(34,587)
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(continued)
(in thousands)
Comprehensive
Deficit loss
Convertible accumulated Unrealized accumulated
Preferred Stock Common Stock Additional during the gains on during the
----------------- ---------------- paid-in Deferred development marketable development
Shares Amount Shares Amount capital compensation stage securities stage
--------------------------------------------------------------------------------------------------
Exercise of stock options -- $ -- 49 $ 1 $ 261 $ -- $ -- $ -- $ --
Shares issued pursuant to
employee stock purchase
plan -- -- 15 -- 171 -- -- -- --
Deferred compensation
related to grants of
stock options -- -- -- -- 161 (161) -- -- --
Amortization of deferred
compensation -- -- -- -- -- 311 -- -- --
Unrealized gains on
marketable securities -- -- -- -- -- -- -- 222 222
Net loss -- -- -- -- -- -- (11,907) -- (11,907)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1998 -- -- 9,589 96 82,400 (211) (46,494) 222 (46,272)
Sales of common stock in
private placements -- -- 1,786 18 17,398 -- -- -- --
Exercise of stock options
and warrants -- -- 43 -- 263 -- -- -- --
Shares issued pursuant to
employee stock purchase
plan -- -- 16 -- 156 -- -- -- --
Deferred compensation
related to grants of
stock options -- -- -- -- 796 (796) -- -- --
Amortization of deferred
compensation -- -- -- -- -- 477 -- -- --
Unrealized gains on
marketable securities -- -- -- -- -- -- -- (222) (222)
Net loss -- -- -- -- -- -- (13,318) -- (13,318)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1999 -- -- 11,434 114 101,013 (530) (59,812) -- (59,812)
Sales of common stock in
public offering -- -- 2,300 23 68,582 -- -- -- --
Exercise of stock options
and warrants -- -- 247 3 2,735 -- -- -- --
Shares issued pursuant to
employee stock purchase -- -- 11 -- 157 -- -- -- --
plan
Deferred compensation
related to grants of -- -- -- -- 1,270 (1,270) -- -- --
stock options
Amortization of deferred
compensation -- -- -- -- -- 1,083 -- -- --
Net loss -- -- -- -- -- -- (8,500) -- (8,500)
--------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- $ -- 13,992 $ 140 $ 173,757 $ (717) $ (68,312) $ -- $ (68,312)
==================================================================================================
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Cash Flows
(in thousands)
Period from
inception
(January 17,
Year ended December 31, 1989) to
----------------------------------------- December 31,
1998 1999 2000 2000
--------- --------- --------- -------------
Cash flows from operating activities:
Net loss $ (11,907) $ (13,318) $ (8,500) $ (68,312)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,838 1,695 2,051 8,312
Non-cash compensation 311 477 1,083 2,199
Common stock issued for non-cash and other charges - - - 35
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 282 117 (465) (583)
Accounts payable (302) 192 (154) 83
Accrued compensation (11) 125 146 601
Accrued expenses (327) 697 (130) 845
Deferred revenue - 805 (416) 389
--------- --------- -------- ---------
Net cash used in operating activities (10,116) (9,210) (6,385) (56,431)
--------- --------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment (761) (1,207) (1,730) (19,461)
Proceeds from sale-leaseback of equipment - - - 1,382
Purchases of marketable securities (24,315) (88,662) (81,077) (220,862)
Proceeds from sales of marketable securities 1,982 8,882 - 11,467
Proceeds from maturities of and other changes in marketable
securities 26,221 79,227 76,174 181,622
Purchase of acquired technology - (3,550) (1,000) (4,550)
Purchase of preferred stock - - (1,250) (1,250)
Restricted cash related to acquired technology - (1,500) 1,500 -
--------- --------- -------- ---------
Net cash provided by (used in) investing activities 3,127 (6,810) (7,383) (51,652)
--------- --------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt - - - 11,955
Repayment of debt (1,040) (617) (1,000) (5,952)
Restricted cash related to debt (18) (317) (108) (822)
Proceeds from issuance of preferred stock, net - - - 29,497
Proceeds from issuance of common stock, net 171 17,572 - 18,277
Proceeds from public offerings, net - - 68,605 118,071
Proceeds from exercise of stock options and warrants 262 263 2,895 4,118
Dividends paid - - - (72)
--------- --------- -------- ---------
Net cash provided by (used in) financing activities (625) 16,901 70,392 175,072
--------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents (7,614) 881 56,624 66,989
Cash and cash equivalents, beginning of period 17,098 9,484 10,365 -
--------- --------- -------- ---------
Cash and cash equivalents, end of period $ 9,484 $ 10,365 $ 66,989 $ 66,989
========= ========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 548 $ 429 $ 481 $ 3,019
========= ========= ======== =========
Non-cash financing activities:
Issuance of common stock for dividends $ - $ - $ - $ 90
========= ========= ======== =========
Issuance of common stock to employees in lieu of
cash compensation $ - $ - $ - $ 44
========= ========= ======== =========
The accompanying notes are an integral part
of these consolidated financial statements
F-8
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
Note 1. Background
Neose develops proprietary technologies for the synthesis and
manufacture of complex carbohydrates, which are chains of simple sugar molecules
that can be joined together in many different combinations. Our enzymatic
glycosylation technology platform makes feasible the synthesis of a wide range
of complex carbohydrates for pharmaceutical, biotechnology, nutritional, and
consumer product applications. Our GlycoAdvance program uses our technologies to
enable the completion and correction of glycosylation in recombinant
glycoprotein discovery, development, and manufacture. Our GlycoTherapeutics
program uses our technologies to develop and produce novel carbohydrate-based
therapeutics, and our GlycoActives program uses our technologies to develop and
produce novel carbohydrate-based food ingredients.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Neose
Technologies, Inc. and its wholly-owned subsidiaries, and reflect the
elimination of all significant intercompany accounts and transactions.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three
months or less on the date of purchase to be cash equivalents.
Marketable Securities
We determine the appropriate classification of our debt securities at
the time of purchase and re-evaluate such designation as of each balance sheet
date. Marketable securities that we have the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and recorded at
amortized cost. Our other marketable securities are classified as
available-for-sale securities and are carried at fair value, based on quoted
market prices, with unrealized gains and losses reported as a separate component
of stockholders' equity. All realized gains and losses on our available-for-sale
securities, computed using specific identification, and any declines in value
determined to be permanent are recognized in the Consolidated Statements of
Operations. As of December 31, 2000, all marketable securities were classified
as "held-to-maturity" securities.
Marketable securities consist of investments that have a maturity of
more than three months on the date of purchase. To maintain the safety and
liquidity of our marketable securities, we have established guidelines for the
concentration, maturities, and credit ratings of our investments.
Comprehensive Loss
Our comprehensive loss for the years ended December 31, 1999 and 2000
was approximately $13.5 million and $8.5 million, respectively. Comprehensive
loss is comprised of net loss and other comprehensive income or loss. Our only
source of other comprehensive income or loss is unrealized gains and losses on
our marketable securities that are classified as available-for-sale.
F-9
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
Property and Equipment
Property and equipment are stated at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the lease term. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the related assets or the lease term, whichever is shorter. We use depreciable
lives of three to seven years for computer, office, research, and manufacturing
equipment, and seventeen to twenty years for building and improvements.
Impairment of Long-Lived Assets
As required by Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," we assess the recoverability of any long-lived assets for which
an indicator of impairment exists. Specifically, we calculate, and recognize,
any impairment losses by comparing the carrying value of these assets to our
estimate of the undiscounted future operating cash flows. Although our current
and historical operating and cash flows are indicators of impairment, we believe
the future cash flows to be received from our long-lived assets will exceed the
assets' carrying value. Accordingly, we have not recognized any impairment
losses through December 31, 2000.
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The objective of
this pronouncement is to recognize and measure, using enacted tax laws, the
amount of current and deferred income taxes payable or refundable at the date of
the financial statements as a result of all events that have been recognized in
the financial statements.
Revenue Recognition
In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). The bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be applied, and specifically
addresses revenue recognition for non-refundable technology access fees in the
biotechnology industry. We adopted SAB 101 in the fourth quarter of 2000,
effective for all of 2000. SAB 101 had no impact on our financial position or
results of operations as our revenue recognition policy was consistent with SAB
101.
Net Loss Per Share
Basic loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding for the period. Diluted
loss per share reflects the potential dilution from the exercise or conversion
of securities into common stock. For the years ended December 31, 1998, 1999,
and 2000, the effects of the exercise of outstanding stock options and warrants
were antidilutive; accordingly, they were excluded from the calculation of
diluted earnings per share.
F-10
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments
As of December 31, 2000, the carrying values of cash, cash equivalents,
marketable securities, accounts payable, accrued expenses, and accrued
compensation approximate their respective fair values. In addition, the carrying
value of our debt instrument, which does not have a readily ascertainable market
value, approximates its fair value.
Reclassification
Certain prior year amounts have been reclassified to conform to our
current year presentation.
Note 3. Collaborative Agreements
Agreement with McNeil Specialty
During 1999, we entered into a joint venture with McNeil Specialty
Products Company, a division of Johnson & Johnson, to explore the inexpensive,
enzymatic production of fructooligosaccharides and other complex carbohydrates.
Neose and McNeil Specialty own the joint venture equally. Each of Neose and
McNeil Specialty contributed various intellectual property to the joint venture.
In addition, McNeil Specialty contributed to the joint venture the pilot
manufacturing facility, for which 50% of the cost will be reimbursed by the
joint venture. McNeil Specialty has the exclusive right to purchase the joint
venture's bulking agent for use in specified consumer product applications at a
constant mark-up over the joint venture's cost of production.
We account for our investment in the joint venture under the equity
method, under which we recognize our share of the income and losses of the joint
venture. In 1999, we reduced the carrying value of our initial investment in the
joint venture of approximately $350,000 to zero to reflect our share of the
joint venture's losses. We recorded this amount as research and development
expense in our Consolidated Statements of Operations. We will record our share
of post-1999 losses of the joint venture, however, only to the extent of our
actual or committed investment in the joint venture.
If the joint venture becomes profitable, we will recognize our share of
the joint venture's profits only after the amount of our capital contributions
to the joint venture is equivalent to our share of the joint venture's
accumulated loss. As of December 31, 2000, the joint venture had accumulated
losses since inception of approximately $3.5 million, of which our 50% share is
approximately $1.75 million.
Until the joint venture is profitable, McNeil Specialty is required to
fund, as a non-recourse, no-interest loan, all of the joint venture's aggregate
capital expenditures in excess of an agreed-upon amount, and all of the joint
venture's operating losses. The loan balance would be repayable by the joint
venture to McNeil Specialty over a seven-year period commencing on the earlier
of September 30, 2006 or the date on which Neose attains a 50% ownership
interest in the joint venture after having had a lesser ownership interest. In
the event of any dissolution of the joint venture, the loan balance would be
payable to McNeil Specialty before any distribution of assets to us. As of
December 31, 2000, the joint venture owed McNeil Specialty approximately $5.0
million.
During the year ended December 31, 2000, the joint venture reimbursed
Neose approximately $1.6 million for the cost of research and development
services and supplies provided to the joint venture. This amount has been
reflected as a reduction of research and development expense in our Consolidated
Statements of Operations.
We may be required to make additional investments in the joint venture
to fund capital expenditures. If the joint venture builds additional production
facilities, and we wish to maintain our 50% ownership interest in the joint
venture, we are required to invest up to $8.85 million to fund half of such
expenditures. However, we may elect to fund as little as $1.85 million of the
F-11
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
cost of the facilities, so long as our aggregate investments in the joint
venture are at least 15% of the joint venture's aggregate capital expenditures.
In this case, McNeil Specialty will fund the remainder of our half of the joint
venture's capital expenditures, and our ownership percentage will be
proportionately reduced. We have an option, expiring in September 2006, to
return to 50% ownership of the joint venture by reimbursing McNeil Specialty for
this amount.
The success of our joint venture with McNeil Specialty is dependent
upon the joint venture's ability to develop, manufacture, sell, and market
successfully complex carbohydrates. If the joint venture is unsuccessful in
these efforts, it will not be profitable and our business, financial condition,
and results of operations may be materially and adversely affected.
Agreement with Bristol-Myers
In 1998, we entered into an agreement with Bristol-Myers Squibb Company
to develop proprietary technologies that enable cGMP processes for the
manufacture of two gangliosides for use as the active pharmaceutical ingredients
in two cancer vaccines being developed by Bristol-Myers. Both vaccine candidates
have been licensed to Bristol-Myers from Progenics Pharmaceuticals, Inc. During
the years ended December 31, 1999 and 2000, we recorded revenues of $205,000 and
$3,320,000, respectively, from Bristol-Myers.
The first of these vaccine candidates, GMK, is in Phase III clinical
trials for the treatment of malignant melanoma. In May 2000, Progenics announced
that the organization responsible for carrying out one of the Phase III clinical
trials for GMK terminated their participation in that trial. Following
Progenics' announcement, Bristol-Myers advised us to cease our activities under
the agreement until they completed their review of the available data from the
clinical trial. We do not expect any future revenues under this agreement unless
Bristol-Myers advises us to resume our activities.
Bristol-Myers may terminate the development agreement on 90 days' prior
notice. Even if we successfully complete development of these processes, and
fulfill all of our obligations under the agreement, Bristol-Myers may not obtain
regulatory approval to market either of these vaccines. Further, even if
Bristol-Myers obtains regulatory approval to market either of these vaccines, we
cannot be sure that Bristol-Myers will enter into a contract with us for the
manufacture of complex carbohydrates for the vaccines, or that the terms of a
future contract with Bristol-Myers will be favorable to us.
Agreement with Wyeth-Ayerst International
We entered into an agreement in 1999 with Wyeth-Ayerst International, a
division of American Home Products, to develop a manufacturing process for a
bioactive carbohydrate to be used as an ingredient in Wyeth-Ayerst' infant and
pediatric nutritional formula products. We are responsible for developing a
large-scale manufacturing process for this ingredient, and Wyeth-Ayerst plans
the introduction of this proprietary ingredient into its infant formula lines.
We are receiving contract development payments and will receive payments as we
achieve milestones specified in the agreement. If Wyeth-Ayerst commercializes an
ingredient under this agreement, we will sell product to Wyeth-Ayerst at minimum
specified transfer prices.
In 1999, we received from Wyeth-Ayerst a non-refundable, up-front
license fee of $500,000, which we are recognizing as revenue ratably over the
three-year development program. During the years ended December 31, 1999 and
2000, we recorded revenues of $194,000 and $1,167,000, respectively, from
Wyeth-Ayerst.
We may fail to develop a large-scale manufacturing process successfully
or in a cost-effective or efficient manner. Even if we successfully develop a
process, and fulfill all of our obligations under the agreement, Wyeth-Ayerst
F-12
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
may fail to obtain regulatory approval to market the ingredient. Moreover, even
if Wyeth-Ayerst obtains regulatory approval for the ingredient, Wyeth-Ayerst may
determine the incremental cost of adding the ingredient to infant formula
exceeds the benefit to Wyeth-Ayerst.
Note 4. Marketable Securities
As of December 31, 1999 and 2000, marketable securities consisted of
securities and obligations of either the U.S. Treasury or U.S. government
agencies. The following summary contains additional information about our
marketable securities (in thousands):
December 31, 1999 2000
- --------------------------------------------------------------------------------
Available-for-sale securities
Cost $ 9,483 $ 65,085
Gross unrealized gains -- --
Amortized discount 52 410
-------- --------
Fair value of available-for-sale securities 9,535 65,495
Less amounts classified as cash equivalents (9,535) (65,495)
-------- --------
Total available-for-sale securities -- --
Held-to-maturity securities (at amortized cost) 22,870 27,773
-------- --------
$ 22,870 $ 27,773
======== ========
The weighted-average maturity of our marketable securities as of
December 31, 2000 was 3 months. During the years ended December 31, 1998 and
1999, we received proceeds from the sales of marketable securities of
approximately $1,982,000 and $8,882,000, respectively. Realized gains on these
sales for the years ended December 31, 1998 and 1999 were approximately $74,000
and $796,000, respectively. We had no sales of marketable securities, or
associated realized gains, during the year ended December 31, 2000.
Note 5. Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31, 1999 2000
- --------------------------------------------------------------------------------
Building and improvements $ 13,524 $ 13,904
Research equipment 3,068 4,060
Manufacturing equipment 1,178 1,350
Computer and office equipment 528 702
-------- --------
18,298 20,016
Less accumulated depreciation and amortization (5,632) (7,139)
-------- --------
12,666 12,877
Land 700 700
-------- --------
$ 13,366 $ 13,577
======== ========
Depreciation and amortization expense was approximately $1,838,000,
$1,380,000, and $1,519,000 for the years ended December 31, 1998, 1999, and
2000, respectively.
F-13
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
Note 6. Other Assets
Acquired Technology
In March 1999, we acquired the carbohydrate manufacturing patents,
licenses, and other intellectual property of Cytel Corporation for aggregate
consideration of $4.75 million, of which $1.25 million was paid after March 1999
to Epimmune, Inc., Cytel's successor corporation, as it satisfied certain
milestones relating to the acquired patents and licenses. We charged $200,000 of
the $4.75 million to research and development expense in our Consolidated
Statements of Operations in 1998. Because the acquired intellectual property
consists of core technology with alternative future uses, we have capitalized
the remaining $4.55 million as Acquired Technology, which is included in other
assets on the accompanying Consolidated Balance Sheets.
The Acquired Technology balance will be amortized to research and
development expense in our Consolidated Statements of Operations over eight
years, which we estimate to be the useful life of the technology. Amortization
expense relating to the acquired technology for the years ended December 31,
1999 and 2000 was approximately $315,000 and $532,000, respectively.
Investment in Convertible Preferred Stock
In June 2000, we made an investment of $1.25 million in convertible
preferred stock of Neuronyx, Inc., and entered into a research and development
collaboration with Neuronyx for the discovery and development of drugs for
treating Parkinson's disease and other neurological diseases. The collaboration
agreement provides for each of Neose and Neuronyx to perform and fund specific
tasks, and to share in any financial benefits of the collaboration. Our
investment, which represents an ownership interest of approximately 4%, was made
on the same terms as other unaffiliated investors. Accordingly, we have stated
the investment at cost. We will continue to evaluate the realizability of this
investment and record, if necessary, appropriate impairments in value. No such
impairments have occurred as of December 31, 2000.
Note 7. Long-Term Debt
In 1997, we issued, through the Montgomery County (Pennsylvania)
Industrial Development Authority, $9.4 million of taxable and tax-exempt bonds.
The bonds were issued to finance the purchase of our previously leased building
and the construction of a pilot-scale manufacturing facility within our
building. The bonds are supported by an AA-rated letter of credit, and a
reimbursement agreement between our bank and the letter of credit issuer. The
interest rate on the bonds will vary weekly, depending on market rates for
AA-rated taxable and tax-exempt obligations, respectively. During 2000, the
weighted-average, effective interest rate was 7.5% per year, including
letter-of-credit and other fees.
The terms of the bond issuance provide for monthly, interest-only
payments and a single repayment of principal at the end of the twenty-year life
of the bonds. However, under our agreement with our bank, we are making monthly
payments to an escrow account to provide for an annual prepayment of principal.
As of December 31, 2000, we had restricted funds relating to the bonds of
$893,000, which consisted of our monthly payments to an escrow account plus
interest revenue on the balance of the escrow account.
To provide credit support for this arrangement, we have given a first
mortgage on the land, building, improvements, and certain machinery and
equipment to our bank. We have also agreed to a covenant, which was renegotiated
in May 2000, to maintain a minimum required cash and short-term investments
balance of at least two times the current loan balance. At December 31, 2000, we
were required to maintain a cash and short-term investments balance of $14.6
million, rather than $20 million as required under the original covenant. If we
F-14
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
fail to comply with this covenant, we are required to deposit with the lender
cash collateral up to, but not more than, the loan's unpaid balance, which was
$7.3 million as of December 31, 2000.
Minimum principal repayments of long-term debt as of December 31, 2000
were as follows (in thousands): 2001--$1,100; 2002--$1,100; 2003--$1,200;
2004--$1,200; and thereafter--$2,700 (2005--$100; 2006--$200; 2007--$100; 2008
through 2011--$200; 2012--$300; 2013--$200; 2014--$300; 2015--$200; 2016--$300;
and 2017--$200).
Note 8. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31, 1999 2000
- --------------------------------------------------------------------------------
Accrued outside research expenses $ 123 $ 400
Accrued professional fees 348 360
Accrued fixed assets 55 275
Amount due to Magnolia Nutritionals LLC 345 --
Accrued acquired technology 250 --
Accrued other expenses 536 492
--------- --------
$ 1,657 $ 1,527
========= ========
Note 9. Stockholders' Equity
Common Stock
In March 2000, we offered and sold 2.3 million shares of our common
stock at a public offering price of $32.00 per share. Our net proceeds from the
offering after the payment of underwriting fees and offering expenses were
approximately $68.6 million.
In June 1999, we sold 1.5 million shares of common stock in a private
placement to a group of institutional and individual investors at a price of
$9.50 per share, generating net proceeds of approximately $13.4 million. In
January 1999, we sold 286,097 shares of common stock to Johnson & Johnson
Development Corporation at a price of $13.98 per share, generating net proceeds
of $4 million.
In January 1997, we sold 1,250,000 shares of common stock in a public
offering at a price of $17.50 per share. Our net proceeds from this offering
after the payment of placement fees and offering expenses were approximately
$20.3 million.
Our initial public offering closed in February 1996. We sold 2,587,500
shares of common stock, which included the exercise of the underwriters'
over-allotment option in March 1996, at a price of $12.50 per share. Our net
proceeds from this offering after the underwriting discount and payment of
offering expenses were approximately $29.1 million. In connection with this
offering, all outstanding shares of Series A, C, D, E, and F Convertible
Preferred Stock converted into 2,410,702 shares of common stock. Some of these
common shares have registration rights.
From 1991 through 1995, we sold 7,196,884 shares of Series A, B, C, D,
E, and F Convertible Preferred Stock. On December 7, 1995, all outstanding
shares of Series B Convertible Preferred Stock converted into 472,249 shares of
F-15
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
common stock. As discussed above, in connection with the initial public
offering, all outstanding shares of Series A, C, D, E, and F converted into
2,410,702 shares of common stock.
Warrant
In June 1995, we granted a warrant to an equipment finance company to
purchase 10,527 shares of common stock at $14.25 per share. The stock warrant,
which expires on June 30, 2002, remained outstanding as of December 31, 2000.
Shareholder Rights Plan
In September 1997, we adopted a Shareholder Rights Plan. Under this
plan, which was amended in December 1998, holders of common stock are entitled
to receive one right for each share of common stock held. Separate rights
certificates would be issued and become exercisable if any acquiring party
either accumulates or announces an offer to acquire at least 15% of our common
stock. Each right will entitle any holder who owns less than 15% of our common
stock to buy one one-hundredth share of the Series A Junior Participating
Preferred Stock at an exercise price of $150. Each one one-hundredth share of
the Series A Junior Participating Preferred Stock is essentially equivalent to
one share of our common stock. If an acquiring party accumulates at least 15% of
our common stock, each right entitles any holder who owns less than 15% of our
common stock to purchase for $150 either $300 worth of our common stock or $300
worth of the 15% acquiror's common stock. The rights expire in September 2007
and may be redeemed by us at a price of $.01 per right at any time up to ten
days after they become exercisable.
Note 10. Employee Benefit Plans
Stock Option Plans
We have three stock option plans, the 1991, 1992, and 1995 Stock Option
Plans, under which a total of 3,201,666 shares of common stock have been
reserved. The 1995 Stock Option Plan, which incorporates the two predecessor
plans, provides for the granting of both incentive stock options and
nonqualified stock options to our employees, officers, directors, and
consultants. In addition, the plan allows us to issue shares of common stock
directly either through the immediate purchase of shares or as a bonus tied to
either an individual's performance or our attainment of prescribed milestones.
Incentive stock options may not be granted at an exercise price less than the
fair market value on the date of grant. In addition, the plan includes stock
appreciation rights to be granted at our discretion. The stock options are
exercisable over a period, which may not exceed ten years from the date of
grant, determined by our board of directors.
We have elected to adopt the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," or SFAS 123. Accordingly, we apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for our stock-based compensation plans. We record deferred
compensation for option grants to employees for the amount, if any, the market
price per share exceeds the exercise price per share. In addition, we record
deferred compensation for option grants to non-employees in the amount of the
fair value per share, as computed using the Black-Scholes option-pricing model
and variable plan accounting. We amortize deferred compensation amounts over the
vesting periods of each option. We recognized compensation expense of
approximately $311,000, $477,000, and $1,083,000 for the years ended December
31, 1998, 1999, and 2000, respectively.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model. We used the following
weighted-average assumptions for 1998, 1999, and 2000 grants, respectively:
F-16
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
risk-free interest rate of 4.6%, 5.9%, and 4.7%; an expected life of 5.1, 5.2,
and 4.3 years; volatility of 60%, 60%, and 75%; and a dividend yield of zero. If
we had elected to record compensation cost for our stock-based compensation
plans consistent with SFAS 123, our net loss and basic and diluted net loss per
share would have been increased to the pro forma amounts indicated below (in
thousands, except per share data):
1998 1999 2000
-----------------------------------------------------
Net loss - as reported $ (11,907) $ (13,318) $ (8,500)
Net loss - pro forma $ (14,756) $ (15,853) $ (12,182)
Basic and diluted net loss per share - as reported $ (1.25) $ (1.25) $ (.63)
Basic and diluted net loss per share - pro forma $ (1.54) $ (1.48) $ (.91)
A summary of the status of our stock option plans as of December 31,
1998, 1999, 2000 and changes during each of the years then ended, is presented
below:
1998 1999 2000
-------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
Outstanding Per Share Outstanding Per Share Outstanding Per Share
-------------------------------------------------------------------------------------------
Balance at January 1 1,564,176 $ 11.73 1,785,489 $ 12.15 2,152,037 $ 12.41
Granted 312,212 13.38 443,626 13.22 616,140 28.94
Exercised (50,320) 5.40 (35,663) 7.41 (247,501) 11.06
Canceled (40,579) 13.69 (41,415) 14.15 (13,775) 12.89
-------------------------------------------------------------------------------------------
Balance at
December 31 1,785,489 $ 12.15 2,152,037 $ 12.41 2,506,901 $ 16.61
===========================================================================================
Options exercisable
at December 31 930,954 $ 9.82 1,242,583 $ 11.07 1,412,499 $ 12.29
===========================================================================================
The following table summarizes information about stock options
outstanding as of December 31, 2000:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------- ----------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- --------------------------- --------------- ------------------ ----------------- -- -------------- -------------------
$ 0.90 - $13.50 1,020,313 5.9 $ 9.56 758,586 $ 8.67
$ 13.63 - $ 20.00 843,640 7.1 15.51 598,915 15.59
$ 21.00 - $ 41.13 642,948 9.7 29.25 54,998 26.24
--------- ---------
$ 0.90 - $ 41.13 2,506,901 7.3 $ 16.61 1,412,499 $ 12.29
========= =========
F-17
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
A summary of options granted at exercise prices equal to, greater than,
and less than the market price on the date of grant is presented below:
Year Ended December 31, 1998 1999 2000
- --------------------------------------------------------------------------------
Price = Market Value
Options granted 306,165 397,366 608,900
Weighted-average
exercise price $ 13.55 $ 12.17 $ 29.27
Weighted-average
fair value $ 7.48 $ 6.89 $ 17.56
Price > Market Value
Options granted -- 40,000 --
Weighted-average
exercise price $ -- $ 25.00 $ --
Weighted-average
fair value $ -- $ 5.50 $ --
Price < Market Value
Options granted 6,047 6,260 7,240
Weighted-average
exercise price $ 4.92 $ 4.75 $ 4.83
Weighted-average
fair value $ 11.40 $ 11.01 $ 11.54
The weighted-average fair value of employee purchase rights granted
under our employee stock purchase plan (see below) in 1998, 1999, and 2000 was
$6.05, $6.25, and $8.45, respectively. The fair value of the purchase rights was
estimated using the Black-Scholes model with the following weighted-average
assumptions for 1998, 1999, and 2000, respectively: risk-free interest rate of
4.6%, 6.5, and 5.0%; an expected life of seventeen, eighteen, and fourteen
months; volatility of 60%, 60%, and 70%; and a dividend yield of zero.
Employee Stock Purchase Plan
We maintain an employee stock purchase plan, or ESPP, that allows any
eligible employee the opportunity to purchase shares of our common stock through
payroll deductions at the end of semiannual purchase periods. Any employee who
is expected to work at least 20 hours per week for at least five months per
calendar year is eligible to participate. The ESPP, which became effective in
February 1996, provides for successive, two-year offering periods, each of which
is contemplated to have four semiannual purchase periods. Pursuant to the ESPP,
100,000 shares of common stock were reserved for issuance. The purchase price is
85% of the lower of the market price per share on the employee's entry date into
the offering period or the market price per share on the purchase date. Any
employee who owns less than 5% of our common stock may purchase up to the lesser
of:
o 10% of his or her eligible compensation;
o 1,000 shares per purchase; or
o the number of shares per year that does not exceed the quotient of
$25,000 divided by the market price per share on the employee's
entry date into the offering period.
F-18
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
A total of 61,632, 46,092, and 35,102 shares of common stock remained
available for issuance under the ESPP at December 31, 1998, 1999, and 2000,
respectively. The total purchases of common stock under the ESPP during the
years ended December 31, 1998, 1999, and 2000, were 15,080 shares at a total
purchase price of approximately $171,000, 15,540 shares at a total purchase
price of approximately $156,000, and 10,990 shares at a total purchase price of
approximately $157,000, respectively. We have not recorded any compensation
expense for the ESPP.
Note 11. Commitments
Leases
In October 1999, we entered into a two-year lease agreement for
laboratory and office space in California. Our rental expense for the years
ended December 31, 1999 and 2000 was approximately $19,000 and $77,000,
respectively. As of December 31, 2000, our future minimum payments under this
lease are approximately $58,000.
License Agreements
We have entered into agreements with various entities under which we
have been granted licenses to use patent rights and technology. Typically, these
agreements will terminate upon the expiration of the applicable patent rights,
and require us to reimburse the licensor for fees related to the acquisition and
maintenance of the patents licensed to us. In addition, we usually are required
to pay royalties to the licensor based either on sales of applicable products by
us or specified license fees, milestone fees, and royalties received by us from
sublicensees, or both.
Note 12. Income Taxes
As of December 31, 2000, we had net operating loss carryforwards for
federal and state income tax purposes of approximately $9,624,000 and
$4,985,000, respectively. In addition, we had federal research and development
credit carryforwards of approximately $2,129,000. These carryforwards begin to
expire in 2004. Due to the uncertainty surrounding the realization of the tax
benefit associated with these carryforwards, we have provided a full valuation
allowance against this tax benefit. In addition, pursuant to the Tax Reform Act
of 1986, the annual utilization of our net operating loss carryforwards will be
limited. We do not believe that these limitations will have a material adverse
impact on the utilization of our net operating loss carryforwards.
F-19
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
The approximate income tax effect of each type of temporary difference
and carryforward is as follows (in thousands):
December 31, 1999 2000
- --------------------------------------------------------------------------------
Benefit of net operating loss carryforwards $ 3,159 $ 3,760
Research and development credit carryforwards 1,497 2,129
Capitalized research and development 10,615 11,890
Start-up costs 7,204 9,411
Nondeductible depreciation and amortization 2,414 3,242
Deferred compensation 493 905
Accrued expenses not currently deductible 352 209
Deferred revenue 192 124
Tax benefit of option exercises (303) (2,139)
Other (165) 4
------------------------
25,458 29,535
Valuation allowance (25,458) (29,535)
------------------------
$ -- $ --
========================
Note 13. Related-Party Transactions
Paramount Capital, Inc., of which the sole shareholder is a member of
our Board of Directors, acted as a finder for our private placement of common
stock in June 1999 (see Note 9). We paid Paramount Capital $783,750 for its
assistance in completing the private placement. Entities affiliated with
Paramount Capital purchased 110,000 shares of common stock in the private
placement.
In 1997, we entered into a consulting agreement with an employee of
Paramount Capital. Under the agreement, which may be terminated by either party
upon sixty days prior notice, we are obligated to pay the consultant an annual
amount of $50,000. During 1999, we granted the consultant an option to purchase
30,000 shares of common stock at an exercise price of $10.38, the market price
on the date of grant. The option vests in equal, annual amounts in 2002 and
2003.
F-20
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Second Amended and Restated Certificate of Incorporation.
(Exhibit 3.1)(1)
3.2 Amended and Restated By-Laws. (Exhibit 3.3)(5)
3.3 Certificate of Designation establishing and designating the
Series A Junior Participating Preferred Stock.
(Exhibit 3.2)(5)
4.2 See Exhibits 3.1, 3.2, and 3.3 for instruments defining rights
of holders of common stock.
4.2 Representation pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K. (Exhibit 4.1)(3)
4.3 Trust Indenture, dated as of March 1, 1997, between Montgomery
County Industrial Development Authority and Dauphin Deposit
Bank and Trust Company. (Exhibit 4.2)(3)
4.4 Form of Montgomery County Industrial Development Authority
Federally Taxable Variable Rate Demand Revenue Bond (Neose
Technologies, Inc. Project) Series B of 1997. (Exhibit 4.3)(3)
4.5 Amended and Restated Rights Agreement, dated as of December 3,
1998, between American Stock Transfer & Trust Company, as
Rights Agent, and Neose. (Exhibit 4.1)(6)
4.6 Amendment No. 1 dated November 14, 2000 to the Amended and
Restated Rights Agreement dated as of December 3, 1998,
between Neose Technologies, Inc. and American Stock Transfer &
Trust Company, as Rights Agent. (Exhibit 4.1)(10)
10.1 Stock Purchase Agreement, dated as of August 28, 1990, between
University of Pennsylvania and Neose. (Exhibit 10.1)(1)
10.2 License Agreement, dated as of August 28, 1990, between
University of Pennsylvania and Neose, as amended to date.
(Exhibit 10.2)(1)
10.3(a)+ Series D Preferred Stock Purchase Agreement, dated as of
December 30, 1992, between Abbott Laboratories and Neose.
(Exhibit 10.8(a))(1)
10.3(b)+ Supply Agreement, dated as of December 30, 1992, between
Abbott Laboratories and Neose. (Exhibit 10.8(b))(1)
10.3(c)+ Research and License Agreement, dated as of December 30, 1992,
between Abbott Laboratories and Neose. (Exhibit 10.8(c))(1)
10.3(d)+ Amendment to the Research and License Agreement, dated as of
January 18, 1995, between Abbott Laboratories and Neose.
(Exhibit 10.8(d))(2)
10.4 Form of Series E Preferred Stock Investors' Rights Agreement.
(Exhibit 10.9)(1)
10.5 Form of Series F Preferred Stock Investors' Rights Agreement.
(Exhibit 10.10)(1)
10.6 Form of Warrant to Purchase Common Stock, dated as of February
23, 1991. (Exhibit 10.11)(1)
10.7 Form of Warrant to Purchase Common Stock, dated as of June 30,
1993. (Exhibit 10.12)(1)
10.8 Form of Warrant to Purchase Common Stock, dated as of February
16, 1994. (Exhibit 10.13)(1)
10.9 Form of Warrant to Purchase Series E Preferred Stock, dated as
of July 29, 1994. (Exhibit 10.14)(1)
10.10 Warrant for the Purchase of Common Stock, dated as of June 30,
1995, between Financing for Science International, Inc. and
Neose. (Exhibit 10.15)(1)
10.11++ 1995 Stock Option/Stock Issuance Plan, as amended.
(Exhibit 99.1)(4)
10.12++ Employee Stock Purchase Plan. (Exhibit 10.17)(1)
10.13++ Employment Agreement dated April 1, 1992, between David A.
Zopf and Neose, as amended to date. (Exhibit 10.18)(1)
10.14++ Employment Agreement dated December 1, 1994, between P.
Sherrill Neff and Neose. (Exhibit 10.19)(1)
10.15 Agreement for Purchase and Sale of Real Property, dated March
14, 1997, by and between Pennsylvania Business Campus
Delaware, Inc. and Neose. (Exhibit 2.1)(3)
10.16 Loan Agreement, dated as of March 1, 1997, between Montgomery
County Industrial Development Authority and Neose.
(Exhibit 10.1)(3)
10.17 Participation and Reimbursement Agreement, dated as of March
1, 1997, between Jefferson Bank and CoreStates Bank, N.A.
(Exhibit 10.2)(3)
10.18 Form of CoreStates Bank, N.A. Irrevocable Letter of Credit.
(Exhibit 10.3)(3)
10.19 Pledge, Security and Indemnification Agreement, dated as of
March 1, 1997, by and among CoreStates Bank, N.A., Jefferson
Bank, and Neose. (Exhibit 10.4)(3)
10.20 Reimbursement Agreement, dated as of March 1, 1997, between
Jefferson Bank and Neose. (Exhibit 10.5)(3)
10.21 Specimen of Note from Company to Jefferson Bank.
(Exhibit 10.6)(3)
10.22 Mortgage, Assignment and Security Agreement, dated March 20,
1997, between Jefferson Bank and Neose. (Exhibit 10.7)(3)
10.23 Security Agreement, dated as of March 1, 1997, by and between
Jefferson Bank and Neose. (Exhibit 10.8)(3)
10.24 Assignment of Contract, dated as of March 20, 1997, between
Jefferson Bank and Neose. (Exhibit 10.9)(3)
10.25 Custodial and Collateral Security Agreement, dated as of March
20, 1997, by and among Offitbank, Jefferson Bank, and Neose.
(Exhibit 10.10)(3)
10.26 Placement Agreement, dated March 20, 1997, among Montgomery
County Industrial Development Authority, CoreStates Capital
Markets, and Neose. (Exhibit 10.11)(3)
10.27 Remarketing Agreement, dated as of March 1, 1997, between
CoreStates Capital Markets and Neose. (Exhibit 10.12)(3)
10.28 Form of Purchase Agreement dated as of June 25, 1999, between
Neose Technologies, Inc. and the purchasers set forth on the
signature pages thereto. (Exhibit 99.1)(7)
10.29 Form of Amended and Restated Purchase Agreement dated as of
June 25, 1999, between Neose Technologies, Inc. and the
purchasers set forth on the signature pages thereto.
(Exhibit 99.2)(7)
10.30 Research and Development Agreement, dated June 1, 1998,
between Neose Technologies, Inc. and the Pharmaceutical
Research Institute of Bristol-Myers Squibb Company.
(Exhibit 99.1)(8)
10.31 Operating Agreement of Magnolia Nutritionals LLC, dated
October 12, 1999, between Neose Technologies, Inc. and McNeil
PPC, Inc. acting through its division McNeil Specialty
Products Company. (Exhibit 99.2)(8)
10.32 Collaboration and License Agreement, dated November 3, 1999,
between Neose Technologies, Inc. and American Home Products
Corporation. (Exhibit 99.3)(8)
10.33 Modification Agreement Relating To Reimbursement Agreements,
dated as of May 1, 2000, between Hudson United Bank, Jefferson
Bank Division, successor to Jefferson Bank, and Neose.
(Exhibit 10.1)(9)
10.34 Modification Agreement Relating to Custodial Bank Agreement
dated as of May 1, 2000, by and among Offitbank, Hudson United
Bank, Jefferson Bank Division, successor to Jefferson Bank,
and Neose. (Exhibit 10.2)(9)
10.35*++ Employment Offer Letter dated November 27, 2000, between Eric
Sichel and Neose.
11* Statement re: Computation of Net Loss Per Common Share.
23.1* Consent of Arthur Andersen LLP.
24* Powers of Attorney (included as part of signature page hereof).
- ------------------
* Filed herewith
+ Portions of this Exhibit were omitted and filed separately with the
Secretary of the SEC pursuant to an order of the SEC granting our
application for confidential treatment filed pursuant to Rule 406 under the
Securities Act.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to our Registration Statement on Form S-1 (Registration
No. 33-80693) filed with the SEC on December 21, 1995, as amended.
(2) Filed as an Exhibit to our Registration Statement on Form S-1 (Registration
No. 333-19629) filed with the SEC on January 13, 1997.
(3) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997.
(4) Filed as an Exhibit to our Registration Statement on Form S-8 (Registration
No. 333-47718) filed with the SEC on October 11, 2000.
(5) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on
October 1, 1997.
(6) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on
January 8, 1999.
(7) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on
July 14, 1999.
(8) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on
February 2, 2000.
(9) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000.
(10) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on
November 15, 2000.