Item 1. BUSINESS
GENERAL
Magainin Pharmaceuticals is a biopharmaceutical company with research and development efforts in anti-angiogenesis, respiratory genomics and infectious disease.
Anti-Angiogenesis Program
Squalamine is our lead product development candidate currently being evaluated in Phase II clinical studies for the treatment of solid tumors. Clinical studies are currently ongoing in non-small cell lung cancer, ovarian cancer and certain other solid tumors. Additional studies are expected to commence in pediatric neuroblastoma and prostate cancer. These studies will evaluate intravenously administered squalamine in combination with leading chemotherapeutics in each indication.
Originally discovered in the dogfish shark, squalamine is part of a class of naturally occurring, pharmacologically active small molecules known as aminosterols. Squalamine is an anti-angiogenic molecule with a unique mechanism of action and has shown broad application across several cancer types in preclinical testing.
Cancer includes many different types of uncontrolled cellular growth. Clusters of cancer cells, referred to as tumors, may invade and destroy surrounding organs, impair physiological function and lead to death. To survive, cancer cells require oxygen and nutrients, which are received from the body's blood supply. In order to access this blood supply, cancer cells initiate a biochemical mechanism that stimulates angiogenesis, which provides the blood supply that nourishes the tumor. As cancer cells grow and metastasize (spread from primary sites to secondary sites) they require continuous angiogenesis. Anti-angiogenic substances are intended to inhibit the growth of new blood vessels and thereby suppress tumor growth.
Squalamine may be of benefit in the treatment of solid tumors by inhibiting new blood vessel growth required for tumor nourishment. Squalamine has exhibited anti-angiogenic properties in a number of in vitro and in vivo assays, and in animal models. Squalamine is believed to inhibit the growth of primitive or embryonic capillaries associated with tumor growth. Squalamine has the potential to be used in combination with a number of cytotoxic drugs in the treatment of solid tumors, and we have observed synergies with certain such cytotoxic therapies in animal testing.
We also maintain a research program evaluating squalamine in eye disease. Collaborators at Georgetown University have recently received a grant from the Juvenile Diabetes Foundation to study squalamine in diabetic retinopathy, a leading cause of blindness caused by aberrant blood vessel growth in the eye.
Additionally, we expect to initiate clinical testing of squalamine in fibrodysplasia ossificans progressiva, a rare genetic disorder in which there is progressive immobility and disability.
Respiratory Genomics
In 1996, Magainin initiated a research program in the genomics of asthma. Genomics analyses in both humans and animals have generated substantial support for interluken-9 (IL9) as a major mediator of asthma. IL9 is a gene that varies in DNA structure and function in asthmatic and allergic humans and animals. We maintain a comprehensive research and development program to identify additional genes which may be implicated in respiratory disease. We investigate the role of these genes in the allergic inflammatory response, with the objective of utilizing the optimal biologic gene targets in the development of novel therapeutics for asthma and allergy.
We have three distinct areas of focus within the respiratory program:
Biologics Based Anti-IL9 Therapeutics
We believe an antibody to IL9 has significant promise as a therapy for asthma. In December 1998, we entered into a collaborative research and option agreement with Genentech, Inc. relating to the development of a protein therapeutic in asthma. We are currently in discussions with Genentech as to the continuation and expansion of this program.
Asthma Gene Database (Screening Program)
We employ functional genomics to discover additional therapeutic targets for respiratory disease. Numerous targets have been identified, validated and added to our Asthma Gene Database. These include genes and gene products that can be antagonized by biological therapeutics, such as proteins and traditional small molecules. Chemical libraries can be screened for activity against these targets using our proprietary high throughput screening programs.
Small Molecule Therapeutics
We have identified a number of small molecules which we believe to be excellent drug development candidates in respiratory disease. These include MSI-1432, which blocks T-cell adhesion and proliferation in response to antigens. Other small molecules have also been evaluated, including MSI-1953, an inhibitor of mucin production.
Infectious Disease
We have conducted research and development efforts in infectious diseases over many years. The magainin class of compounds, originally discovered in the frog, have been shown to have activity against a variety of pathogens, including bacteria, amoebae, fungi and parasites.
Antibiotic resistance, an increasing problem, is the process by which antibiotics lose their effectiveness over time as bacteria, through mutation, develop the means to produce enzymes capable of diminishing the utility of an antibiotic. We have not noted the development of antibiotic resistance to the magainins. We believe this is due to the unique mechanism of action of the magainins; magainins puncture the cell membrane and break down the integrity of the cell, killing bacteria differently than traditional antibiotics.
LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of infection in diabetic foot ulcers, had been our lead product development candidate. LOCILEX(TM) Cream did not obtain approval from the FDA in July 1999, and we have since refocused our near-term product development efforts on other programs.
Other Programs
We have engaged in extensive research and development efforts on compounds derived from the host-defense systems of animals. The host-defense system is the complex of natural processes and mechanisms used by animals and humans as protection against disease. Naturally occurring molecules, such as the magainins and aminosterols, provide a first line of defense against infection and other diseases. Our intent is to leverage off the many thousands of years in which these compounds have worked in animal systems, in evaluating the pharmacologic activity of such compounds in human disease.
Other Magainin Peptides
Magainin peptides have demonstrated in preclinical testing the potential for broad application in a number of indications:
Cancer/Tumorcidal: MSI-1857 is a chemically modified magainin peptide formulated for systemic delivery. In preclinical animal models, MSI-1857 enhanced the cellular uptake and activity of standard chemotherapeutics against tumors. MSI-1596 is a generic antibiotic peptide with similar activity to MSI- 1857. Preclinical testing of MSI-1596 in animal models is underway where demonstration of substantial anti-tumor activity may provide for a rapid clinical development program.
Other Topical Infections: Various magainin peptides have shown promise in a broad variety of applications including eye infections, acne, sexually transmitted diseases and yeast infections. There may also be potential use against viruses, including rhinoviruses that cause the common cold.
Systemic Infections: Magainin peptides are broad spectrum antibiotics that have shown no resistance or cross-resistance to other anti-infectives in testing to date. Preclinical data demonstrated activity against pathogens in various infectious disease models.
Agricultural Anti-Fungal: Ornamental plants genetically altered to express certain magainins have shown resistance to fungal and other crop diseases.
We are developing an E. coli-based recombinant manufacturing process. Recombinant methods would increase the availability, and decrease the cost, of magainin peptides for various applications.
Other Aminosterols
We have discovered a number of other aminosterol compounds in the shark, each differing from squalamine in chemical structure and interacting with a separate, specific receptor. These compounds affect the intracellular metabolism in a manner that disturbs the target cell responses to certain growth factors, hormones and other signals. Therapeutic opportunities for these compounds may include obesity, various malignancies, inflammatory diseases, and viral infections.
Defensins
In the process of researching animal host-defenses across different species, we have helped demonstrate that all species, including humans, utilize some form of local antimicrobial defense beyond their systemic immune systems. In humans, we have identified host-defense molecules (defensins) in the lungs, the GI tract and the skin. We have also identified several natural "inducers" of local antimicrobial defenses. Some of these compounds are found in nature, are generally regarded as safe (i.e., GRAS substances), and may possess novel nutritional, as well as, pharmaceutical immunostimulant applications.
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Since commencing operations, we have not generated any sales revenue. We have funded operations primarily from the proceeds of public and private placements of securities. We have incurred losses in each year since inception, and we expect to incur substantial additional losses for the next several years. We currently have no marketable products, and it may be several years, if ever, until marketable products are developed and approved.
RISK FACTORS RELATED TO OUR BUSINESS
Our disclosure and analysis in this report contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to present or anticipated scientific progress, development of potential pharmaceutical products, future revenues, capital expenditures, research and development expenditures, future financing and collaborations, personnel, manufacturing requirements and capabilities, and other statements regarding matters that are not historical facts or statements of current condition.
Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make, or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our filings with the SEC. Also note that we provide the following cautionary discussion of risks and uncertainties relevant to our business. These are factors that we think could cause our actual results to differ materially from expected results. Other unanticipated occurrences besides those listed here could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
If We Do Not Raise Additional Capital, We May Not Be Able to Continue Our Research and Development Programs and May Never Commercialize Any Products.
We maintained cash and investments of $10,600,000 at December 31, 1999. At December 31, 1999, we had current liabilities of $3,200,000. In the absence of raising additional funds or significantly reducing expenses, we do not have sufficient resources to sustain operations beyond 2000. We will need to raise substantial additional funds in the future to continue our research and development programs and to commercialize our potential products. If we are unable to raise such funds, we may be unable to complete our development activities for any of our proposed products.
We regularly explore alternative means of financing our operations and seek funding through various sources, including public and private securities offerings and collaborative arrangements with third parties. We currently do not have any commitments to obtain additional funds, and may be unable to obtain sufficient funding in the future on acceptable terms. If we cannot obtain funding, we will need to delay, scale back or eliminate research and development programs or enter into collaborations with third parties to commercialize potential products or technologies that we might otherwise seek to develop or commercialize ourselves, or seek other arrangements. If we engage in collaborations, we will receive lower consideration upon commercialization of such products than if we had not entered into such arrangements, or if we entered into such arrangements at later stages in the product development process.
We expect to evaluate all available strategic alternatives to finance our programs and technology, including broad-based alliances or mergers intended to create better-financed entities.
We Expect to Continue to Incur Substantial Losses.
To date, we have engaged primarily in the research and development of drug candidates. We have not generated any revenues from product sales and have incurred losses in each year since our inception. As of December 31, 1999, we had an accumulated deficit of approximately $145,100,000.
Our proposed products are in a relatively early developmental stage and will require significant research, development and testing. We must obtain regulatory approvals for all of our proposed products prior to commercialization of the product. Our operations are also subject to various competitive and regulatory risks. As a result, we are unable to predict when or if we will achieve any product revenues. We expect to experience substantial losses in the foreseeable future as we continue our research, development and testing efforts, which will cause us to have continued negative results of operations.
The FDA Has Deemed Our New Drug Application, NDA, for LOCILEX(TM) Cream to Be Not Approvable, Which Will Prevent Near-Term Commercialization of the Product.
We announced on July 26, 1999 that we received notification from the U.S. Food and Drug Administration, FDA, that our NDA for LOCILEX(TM) Cream had been deemed not approvable.
LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of infection in diabetic foot ulcers, had been our lead product development candidate. We had hoped to commercialize LOCILEX(TM) Cream in the near-term. However, with the FDA's decision, near-term commercialization of LOCILEX(TM) Cream will not occur, and we will generate no revenues from LOCILEX(TM) Cream in the near future.
In order to again seek approval of LOCILEX(TM) Cream, the FDA has indicated that we must conduct further development activities, including clinical and manufacturing activities. The specific nature of the clinical activities will be determined after consultations with the FDA. As a result of its review of manufacturing of the cream product, the FDA issued certain observations of deficiencies in compliance with good manufacturing procedures. In any additional clinical studies to be conducted, new batches of the cream product will need to be manufactured from the bulk drug substance, in compliance with good manufacturing procedures, and meeting strict product specifications. Further clinical and manufacturing development efforts may again not be successful. The time required to conduct such activities may be lengthy, and the costs considerable.
If We Do Not Obtain Required Regulatory Approvals, We Will Not Be Able to Commercialize Any of Our Product Candidates.
Numerous governmental authorities, including the FDA in the United States, regulate our business and activities. Federal, state and foreign governmental agencies impose rigorous preclinical and clinical testing and approval requirements on our product candidates. In general, the process of obtaining government approval is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug candidates. In addition, governmental authorities may enact new legislation or regulations that could limit or restrict our efforts. A delay or denial of regulatory approval for any of our drug candidates, such as that which has occurred for LOCILEX(TM) Cream, will materially affect our business. Even if we receive approval of a product candidate, it may be conditioned upon certain limitations and restrictions as to the drugs used and may be subject to continuous review. If we fail to comply with any applicable regulatory requirements, we could be subject to penalties, including:
. warning letters;
. fines;
. withdrawal of regulatory approval;
. product recalls;
. operating restrictions;
. injunctions; and
. criminal prosecution.
1. FDA Marketing Approval:
The primary regulatory agency overseeing all phases of our drug development and marketing programs is the FDA. In order to obtain approval from the FDA to market any drug, we must submit proof of safety, efficacy and quality for each of our proposed products for each indication, which requires extensive and time consuming preclinical and clinical testing. The results of preclinical studies are submitted to the FDA as part of an Investigational New Drug Application or IND. Once the IND is effective, human clinical trials may be conducted. The results of the clinical trials are submitted to the FDA as part of a NDA. Following review of the NDA, the FDA may:
. grant marketing approval;
. require additional testing or information; or
. deny the application.
2. FDA Manufacturing Approval:
Detailed manufacturing information is also required to be included in the NDA, for review and approval by the FDA. All manufacturing facilities and processes must comply with good manufacturing practices, or GMP, regulations prescribed by the FDA. All manufacturers must, among other things, pass manufacturing plant inspections and provide records of detailed manufacturing processes. Among other things, it must be demonstrated that:
. the drug product can be consistently manufactured at the same quality standard;
. the drug product is stable over time; and
. the level of chemical impurities in the drug product are under a designated level.
3. Ongoing FDA Oversight:
We will continue to be subject to regulation by the FDA even after our drug products have been approved and commercialized. Among other things, the FDA may:
. require additional submissions if there are any modifications to the drug product including, for example, any changes in manufacturing process, labeling, or manufacturing facility;
. require post-marketing testing and surveillance to monitor the effects of approved drug products; and
. enforce conditional approvals that restrict the commercial applications of a drug product.
Further, the FDA has numerous requirements governing labeling, promotional material, storage, record keeping and reporting.
The Prescription Drug User Fee Act of 1992 imposes substantial fees on a one-time basis for applications for approval, and on an annual basis for manufacturing and marketing of prescription drugs.
4. Other Regulatory Bodies:
We are also subject to regulation by other regulatory authorities, including the Occupational Safety and Health Administration, the Environmental Protection Agency, the Nuclear Regulatory Commission, the Drug Enforcement Agency and the United States Department of Agriculture, and to regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other regulatory statutes.
Drug product marketing outside the United States is subject to foreign regulatory requirements which may or may not be influenced by FDA approval. While the requirements vary widely from country to country, generally, the drug product must be approved by a foreign regulatory authority comparable to the FDA prior to marketing the product in those countries. The time required to obtain foreign approvals may be longer than that in the United States.
In the future, we may be subject to additional federal, state or local regulations or additional fees. Efforts are continually underway to reform federal regulation of drug products. Although some of these changes could streamline and otherwise benefit development, marketing and related requirements for drugs, others could increase regulatory requirements.
We Will Rely on Marketing and Development Partners and if They Do Not Perform as Expected, We May Not Successfully Commercialize Our Products.
We do not have our own sales and marketing staff. In order to successfully develop and market our products, we must enter into marketing and distribution arrangements with third parties. We also expect to delegate the responsibility for all, or a significant portion, of the development and regulatory approval for certain products to partners. If our partners do not develop an approvable or marketable product or do not market a product successfully, we may not achieve necessary product revenues. Additionally, we may be unable to enter into other successful arrangements.
We concluded a collaborative research agreement with Genentech, Inc. in the asthma area in December 1999. We are currently in discussions with Genentech as to the continuation and expansion of this program. Genentech may choose not to enter into an agreement, or we may not be able to agree upon terms for an agreement. We will need partners in the asthma area to assist us with commercializing our technology, and we may be unable to enter into a similar agreement or find as effective a partner as Genentech.
We also have a development, supply and distribution agreement with SmithKline Beecham for LOCILEX(TM) Cream. Future milestone payments and sales proceeds from SmithKline will occur only if LOCILEX(TM) Cream is eventually approved.
We do not have control over the amount and timing of resources to be devoted to our products by our collaborative partners. In the future, the interests of our collaborators may not be consistent with our interests. Collaborators may develop products independently or through third parties that could compete with our proposed products. For example, SmithKline maintains a significant presence in the antibiotic area and currently sells a topical antibiotic product indicated for the treatment of certain skin infections.
We may also decide to establish our own sales force to market and sell certain products. Although certain members of our management have limited experience in the marketing of pharmaceutical products, we have no
experience with respect to marketing our products. If we choose to pursue this alternative, we will need to spend significant additional funds and devote significant management resources and time to establish a successful sales force. Given our inexperience in establishing and managing a salesforce, this effort may not be successful. Given our financial resources, efforts in this area would likely be modest compared to our competitors.
If We Are Not Able to Innovate and Develop Products as Rapidly as Our Competitors, Our Products May Not Achieve Market Acceptance.
The pharmaceutical industry is characterized by intense competition. Many companies, research institutions and universities are conducting research and development activities in a number of areas similar to our fields of interest. We are aware that research on compounds derived from animal host-defense systems is being conducted by others. Many companies are also currently involved in research and development activities focused on the pathogenesis of disease, and the competition among companies attempting to find genes responsible for disease is intense. Most of these entities have substantially greater financial, technical, manufacturing, marketing, distribution and other resources. We may also face competition from companies using different or advanced techniques that could render our products obsolete.
We expect technological developments in the biopharmaceutical field to occur at a rapid rate and expect competition to intensify as advances in this field are made. Accordingly, we must continue to devote substantial resources and efforts to research and development activities in order to maintain a competitive position in this field. Our compounds, products or processes may become obsolete before we are able to recover a significant portion of our research and development expenses. We will be competing with companies that have significantly more experience in undertaking preclinical testing and human clinical trials of new or improved therapeutic products and obtaining regulatory approvals of such products. Some of these companies may be in advanced phases of clinical testing of various drugs that may be competitive with our proposed products.
Colleges, universities, governmental agencies and other public and private research organizations are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed, some of which may be directly competitive with our technology. In addition, these institutions, along with pharmaceutical and specialized biotechnology companies, can be expected to compete with us in recruiting highly qualified scientific personnel.
Even if eventually approved, LOCILEX(TM) Cream may not be successfully marketed against oral antibiotics for the treatment of infection in diabetic foot ulcers. These infections have historically been treated with systemically administered antibiotics, which may be perceived by some medical professionals as having certain advantages over LOCILEX(TM) Cream. In addition, we may be unable to manufacture LOCILEX(TM) Cream at a cost which will allow it to be sold at a competitive price relative to oral antibiotics or other topical antibiotics that may be used for this indication.
Many companies are working to develop and market products intended for the additional disease areas being targeted by us, including cancer and asthma. A number of major pharmaceutical companies have significant franchises in these disease areas, and can be expected to invest heavily to protect their interests. In the cancer field, anti-angiogenic agents are under development at a number of companies. In the asthma field, other biopharmaceutical companies have also reported the discovery of genes relating to asthma.
If We Do Not Develop and Maintain Relationships With Contract Manufacturers, We May Not Successfully Commercialize Our Products.
1. Contract Manufacturing:
We currently have neither the resources, facilities, nor the technical capabilities to manufacture any of our proposed products in the quantities and quality required for commercial sale. We have no plans to establish a
manufacturing facility. We depend upon contract manufacturers for commercial scale manufacturing of our proposed products in accordance with regulatory standards. This dependence may restrict our ability to develop and deliver products on a timely, profitable and competitive basis. Additionally, the number of companies capable of producing our proposed products is limited. We may be unable to maintain arrangements with qualified outside contractors to manufacture materials at costs which are affordable to us, if at all.
Contract manufacturers may utilize their own technology, our technology, or technology acquired or licensed from third parties in developing a manufacturing process. In order to engage another manufacturer, we may need to obtain a license or other technology transfer from the original contract manufacturer. Even if a license is available from the original contract manufacturer on acceptable terms, we may be unable to successfully effect the transfer of the technology to the new contract manufacturer. Any such technology transfer may also require the transfer of requisite data for regulatory purposes, including information contained in a proprietary drug master file held by a contract manufacturer. If we rely on a contract manufacturer that owns the drug master file, our ability to change contract manufacturers may be more limited.
We had an agreement with Abbott Laboratories providing for the purchase of approximately $10,000,000 of bulk drug substance for LOCILEX(TM) Cream. As FDA approval of LOCILEX(TM) Cream did not occur, we renegotiated this agreement with Abbott in 1999, paying Abbott $4,200,000 and receiving partial delivery of material. An additional $3,400,000 million is due to Abbott and payable if we receive in excess of $10,000,000 of additional funds in any year beginning in 2000, in which case 15% of such excess over $10,000,000 shall be payable to Abbott. We have no further purchase commitments to Abbott, and Abbott has no further supply requirements to us.
2. Alternative Production Processes:
The production of peptides, such as LOCILEX(TM) Cream and other magainin peptides, is expensive relative to the production of traditional antibiotics. We are pursuing alternative manufacturing sources, including recombinant manufacturing, in order to improve the gross margins available to us on any sales of these products. These programs, however, are at an early stage and will require significant expenditures over an extended period of time. Ultimately, we may be unable to develop a more cost-effective manufacturing process and, even if we develop a more cost-effective process, the FDA may not approve such a process.
We are also currently working with outside contractors for the chemical production of squalamine. Production of squalamine and other proposed products will also require significant expenditure.
3. Alternative Future Uses of LOCILEX(TM) Cream:
There are no currently identified alternative uses of bulk drug substance for LOCILEX(TM) Cream.
We Depend on Our Intellectual Property, and If We Are Unable to Protect Our Intellectual Property We May Not Realize Optimal Value from Our Technology.
1. Patents:
Our success depends, in part, on our ability to develop and maintain a strong patent position for our products and technologies, both in the United States and other countries. As with most biotechnology and pharmaceutical companies, our patent position is highly uncertain and involves complex legal and factual questions. Without patent and other protections, other companies could offer substantially identical products for sale without incurring the sizeable development and testing costs that we have incurred. Our ability to recoup these expenditures and realize profits upon commercialization could be diminished.
We cannot be certain that:
. patents will issue from any of our patent applications;
. our patent rights will be sufficient to protect our technology;
. our patents will not be successfully challenged or circumvented by our competitors; or
. our patent rights will provide us with any commercial advantages.
The process of obtaining patents can be time consuming and expensive. Even after significant expenditure, a patent may not issue. We can never be certain that we were the first to develop the technology or that we were the first to file a patent application for the particular technology because U.S. patent applications are maintained in secrecy until a patent issues and publications in the scientific or patent literature lag behind actual discoveries.
Even after we are issued patent rights, we cannot be certain that:
. others will not develop similar technologies or duplicate the technology;
. others will not design around the patented aspects of the technology;
. we will not be obliged to defend ourselves in court against allegations of infringement of third-party patents;
. our issued patents will be held valid in court; or
. an adverse outcome in a suit would not subject us to significant liabilities to third parties, require rights to be licensed from third parties, or require us to cease using such technology.
The cost of litigation can be substantial, regardless of the outcome.
2. Potential Ownership Disputes:
There may be disputes arising as to the ownership of our technology. Most of our research and development personnel previously worked at other biotechnology companies, pharmaceutical companies, universities, or research institutions. These entities may raise questions as to when technology was developed, and assert rights to the technology. These kind of disputes have occurred in the past. We may not prevail in any such disputes.
Similar technology ownership disputes may arise in the context of consultants, vendors or third parties, such as contract manufacturers. For example, our consultants are employed by or have consulting agreements with third parties. There may be disputes as to the capacity in which consultants are operating when they make certain discoveries. We may not prevail in any such disputes.
3. Other Intellectual Property:
In order to protect our proprietary technology and processes, we also rely on trade secrets and confidentiality agreements with our corporate partners, employees, consultants, outside scientific collaborators, and other advisors. We may find that these agreements will be breached, or that our trade secrets have otherwise become known or independently developed or discovered by our competitors.
Certain of our exclusive rights to patents and patent applications are governed by contract. Generally, such contracts require that we pay royalties on sales of any products which are covered by patent claims. If we are unable to pay the royalties we may lose our patent rights. Additionally, some of these agreements also require that we develop the licensed technology under certain timelines. If we do not adhere to an acceptable schedule of commercialization, we may lose our rights.
If We Cannot Recruit and Retain Qualified Management, We May Not Be Able to Successfully Develop and Commercialize Our Products.
We depend to a considerable degree on a limited number of key personnel. Many key responsibilities have been assigned to a relatively small number of individuals. We do not maintain "key man" insurance on any of our employees. The loss of certain management and technical personnel could adversely affect our ability to develop and commercialize products.
We are Subject to Potential Product Liability Claims, Which Could Result in Significant Expense if a Claim Arose.
We are subject to significant potential product liability risks inherent in the testing, manufacturing and marketing of human therapeutic products, including the risk that:
. our proposed products cause some undesirable side effects or injury during clinical trials;
. our products cause undesirable side effects or injury in the market; or
. third parties that we have agreed to indemnify incur liability.
While we carry insurance, this coverage is expensive and we may be unable to maintain adequate coverage on acceptable terms.
If We Do Not Receive Adequate Third-Party Reimbursement for Any of Our Drug Candidates, Some Patients May Be Unable to Afford Our Products and Sales Could Suffer.
In both the United States and elsewhere, the availability of reimbursement from third-party payers, such as government health administration authorities, private health insurers and other organizations, can impact prescription pharmaceutical sales. These organizations are increasingly challenging the prices charged for medical products and services, particularly where they believe that there is only an incremental therapeutic benefit which does not justify the additional cost. Coverage and reimbursement may not be available for our proposed products, or, if available, may not be adequate. Without insurance coverage, many patients may be unable to afford our products, and we may not reach optimal sales levels.
There has also been a trend toward government reforms intended to contain or reduce the cost of health care. In certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, there have been a number of federal and state proposals to implement similar government control.
We expect this trend to continue, but we cannot predict the nature or extent of any reform that results. It is possible that reform could impact pharmaceutical marketing and pricing. Not only would this affect possible future profit margins, it could adversely affect our ability to obtain financing for the continued development of our proposed products. Furthermore, reforms could have a broader impact by limiting overall growth of health care spending, such as Medicare and Medicaid spending, which could also adversely effect our business.
Our Stock Price Is Extremely Volatile Due to a Number of Factors.
The market prices and trading volumes for securities of biopharmaceutical and biotechnology companies, including ours, have historically been, and will likely continue to be, highly volatile. Future events affecting our business, or that of our competitors, may significantly impact our stock price, including:
. product testing results,
. technological innovations,
. new commercial products,
. government regulations,
. proprietary rights,
. regulatory actions, and
. litigation.
We May Be Unable to Maintain the Standards for Listing on the Nasdaq National Market, Which Could Make it More Difficult for Investors to Dispose of Our Common Stock and Could Subject Our Common Stock to the "Penny Stock" Rules.
Our common stock is listed on the Nasdaq National Market. Nasdaq requires listed companies to maintain standards for continued listing, including a minimum bid price for shares of a company's stock and a minimum tangible net worth. If we are unable to maintain these standards, our common stock could be delisted. Trading in our stock would then be conducted on the Nasdaq Small Cap Market unless we are unable to meet the requirements for inclusion therein. If we were unable to meet the requirements for inclusion in the Small Cap Market, our common stock would be traded on an electronic bulletin board established for securities that do not meet the Nasdaq listing requirements or in quotations published by the National Quotation Bureau, Inc. that are commonly referred to as the "pink sheets." As a result, it could be more difficult to sell, or obtain an accurate quotation as to the price of our common stock.
In addition, if our common stock were delisted, it would be subject to the so-called "penny stock" rules. The SEC has adopted regulations that define a "penny stock" to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions.
For transactions covered by the penny stock rules, a broker-dealer must make a special suitability determination for the purchaser and must have received the purchaser's written consent to the transaction prior to the sale. The penny stock rules also require broker-dealers to deliver monthly statements to penny stock investors disclosing recent price information for the penny stock held in the account, and information on the limited market in penny stocks. Prior to the transaction, a broker-dealer must provide a disclosure schedule relating to the penny stock market. In addition, the broker-dealer must disclose the following:
. commissions payable to the broker-dealer and the registered representative; and
. current quotations for the security as mandated by the applicable regulations.
If our common stock were delisted and determined to be a "penny stock," a broker-dealer may find it to be more difficult to trade our common stock, and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.
The Exercise of Options and Warrants and Other Issuances of Shares Could Have A Dilutive Effect on Our Stock Price.
As of December 31, 1999, there were outstanding options to purchase an aggregate of 3,662,000 shares of our common stock at prices ranging from $0.40 per share to $16.75 per share, of which approximately 2,141,000 were exercisable as of such date. Also outstanding at December 31, 1999 were warrants to purchase 229,739 shares of our common stock exercisable at $8.00 per share, and warrants to purchase an aggregate of 1,158,210 shares of our common stock, currently exercisable from $5.35-$7.37 per share, and subject to adjustment with future offerings. Exercise of options and warrants at prices below the market price of our common stock could adversely affect the
price of our common stock. Additional dilution may result from the issuance of shares in connection with collaborations or manufacturing arrangements, or in connection with other financing efforts.
Our Certificate of Incorporation and Delaware Law Contain Provisions that Could Discourage a Takeover.
Our certificate of incorporation provides our board of directors the power to issue shares of preferred stock without stockholder approval. This preferred stock could have voting rights, including voting rights that could be superior to that of our common stock, and the board of directors has the power to determine these voting rights. In addition, Section 203 of the Delaware General Corporation Law contains provisions which impose restrictions on stockholder action to acquire control of Magainin. The effect of these provisions of our certificate of incorporation and Delaware law provisions would likely discourage third parties from seeking to obtain control.
THE COMPANY
Background
Magainin Pharmaceuticals is a biopharmaceutical company with research and development efforts in anti-angiogenesis, respiratory genomics and infectious disease.
Anti-Angiogenesis Program
Squalamine is our lead product development candidate currently being evaluated in Phase II clinical studies for the treatment of solid tumors. Clinical studies are currently ongoing in non-small cell lung cancer, ovarian cancer and certain other solid tumors. Additional studies are expected to commence in pediatric neuroblastoma and prostate cancer. These studies will evaluate intravenously administered squalamine in combination with leading chemotherapeutics in each indication.
Originally discovered in the dogfish shark, squalamine is part of a class of naturally occurring, pharmacologically active small molecules known as aminosterols. Squalamine is an anti-angiogenic molecule with a unique mechanism of action and has shown broad application across several cancer types in preclinical testing.
Within the human body, a network of arteries, capillaries and veins, known as the vasculature, functions to transport blood throughout the body. The basic network of the vasculature is developed through angiogenesis, a fundamental process by which new blood vessels are formed. This growth process primarily occurs during the first three months of embryonic development. Once the general network of the blood vessels is complete, certain inhibitory factors balance and stabilize the stimulators of new blood vessel formation. Although angiogenesis occurs in human embryonic development, wound healing and in certain reproductive processes in women, angiogenesis is also associated with several diseases, including cancer, diabetic retinopathy and macular degeneration.
Cancer includes many different types of uncontrolled cellular growth. Clusters of cancer cells, referred to as tumors, may invade and destroy surrounding organs, impair physiological function and lead to death. To survive, cancer cells require oxygen and nutrients, which are received from the body's blood supply. In order to access this blood supply, cancer cells initiate a biochemical mechanism that stimulates angiogenesis, which provides the blood supply that nourishes the tumor. As cancer cells grow and metastasize (spread from primary sites to secondary sites) they require continuous angiogenesis. Anti-angiogenic substances are intended to inhibit the growth of new blood vessels and thereby suppress tumor growth.
Squalamine may be of benefit in the treatment of solid tumors by inhibiting new blood vessel growth required for tumor nourishment. Squalamine has exhibited anti-angiogenic properties in a number of in vitro and in vivo
assays, and in animal models. Squalamine is believed to inhibit the growth of primitive or embryonic capillaries associated with tumor growth. Squalamine has the potential to be used in combination with a number of cytotoxic drugs in the treatment of solid tumors, and we have observed synergies with certain such cytotoxic therapies in animal testing.
Cancer is the second most common cause of death in the Western world, exceeded only by coronary heart disease. Cancer patients are usually treated with a combination of surgery, radiation therapy and chemotherapy. Surgery and radiation therapy can be particularly effective in patients in which the disease has not yet spread to other tissue or organs. Chemotherapy is the principal treatment for tumors that have metastasized. Chemotherapy involves the administration of so-called cytotoxic drugs designed to kill cancer cells, or the administration of hormone analogues to either reduce the production of, or block the action of, certain hormones, such as estrogens and androgens, which affect the growth of tumors. Because chemotherapeutic agents generally attack rapidly dividing cells indiscriminately, damaging both normal and cancerous cells, chemotherapy patients often suffer serious side effects. Additionally, resistance to chemotherapy inevitably occurs over time.
We also maintain a research program evaluating squalamine in eye disease. Collaborators at Georgetown University have recently received a grant from the Juvenile Diabetes Foundation to study squalamine in diabetic retinopathy, a leading cause of blindness caused by aberrant blood vessel growth in the eye.
Additionally, we expect to initiate clinical testing of squalamine in fibrodysplasia ossificans progressiva, a rare genetic disorder in which there is progressive immobility and disability.
Respiratory Genomics
In 1996, Magainin initiated a research program in the genomics of asthma. Genomics analyses in both humans and animals have generated substantial support for interluken-9 (IL9) as a major mediator of asthma. IL9 is a gene that varies in DNA structure and function in asthmatic and allergic humans and animals. We maintain a comprehensive research and development program to identify additional genes which may be implicated in respiratory disease. We investigate the role of these genes in the allergic inflammatory response, with the objective of utilizing the optimal biologic gene targets in the development of novel therapeutics for asthma and allergy.
Asthma is a serious, chronic illness characterized by one or more symptoms, including episodic shortness of breath, wheezing, coughing and chest tightness, that appears to be increasing in prevalence and severity. The complex pathophysiology of asthma is under intensive scrutiny; however, its precise causes are not well understood. The recognition that specific genetic and environmental factors are important in the etiology of asthma has prompted an intensive search for genes that significantly influence susceptibility to this common disorder. While genetic susceptibility to bronchial hyperresponsiveness and asthma is likely due to multiple genes acting together, the identification of specific susceptibility genes provides valuable insight into the molecular pathways associated with this condition.
We have three distinct areas of focus within the respiratory program:
Biologics Based Anti-IL9 Therapeutics
We believe an antibody to IL9 has significant promise as a therapy for asthma. In December 1998, we entered into a collaborative research and option agreement with Genentech, Inc. relating to the development of a protein therapeutic in asthma. We are currently in discussions with Genentech as to the continuation and expansion of this program.
Asthma Gene Database (Screening Program)
We employ functional genomics to discover additional therapeutic targets for respiratory disease. Numerous targets have been identified, validated and added to our Asthma Gene Database. These include genes and gene products that can be antagonized by biological therapeutics, such as protein, and traditional small molecules. Chemical libraries can be screened for activity against these targets using our proprietary high throughput screening programs.
Small Molecule Therapeutics
We have identified a number of small molecules which we believe to be excellent drug development candidates in respiratory disease. These include MSI- 1432, which blocks T-cell adhesion and proliferation in response to antigens. Other small molecules have also been evaluated, including MSI-1953, an inhibitor of mucin production.
Infectious Disease
We have conducted research and development efforts in infectious diseases over many years. The magainin class of compounds, originally discovered in the frog, have been shown to have activity against a variety of pathogens, including bacteria, amoebae, fungi and parasites.
Antibiotic resistance, an increasing problem, is the process by which antibiotics lose their effectiveness over time as bacteria, through mutation, develop the means to produce enzymes capable of diminishing the utility of an antibiotic. We have not noted the development of antibiotic resistance to the magainins. We believe this is due to the unique mechanism of action of the magainins; magainins puncture the cell membrane and break down the integrity of the cell, killing bacteria differently than traditional antibiotics.
LOCILEX(TM) Cream, a topical cream antibiotic for the treatment of infection in diabetic foot ulcers, had been our lead product development candidate. LOCILEX(TM) Cream did not obtain approval from the FDA in July 1999, and we have since refocused our near-term product development efforts on other programs.
Other Programs
We have engaged in extensive research and development efforts on compounds derived from the host-defense systems of animals. The host-defense system is the complex of natural processes and mechanisms used by animals and humans as protection against disease. Naturally occurring molecules, such as the magainins and aminosterols, provide a first line of defense against infection and other diseases. Our intent is to leverage off the many thousands of years in which these compounds have worked in animal systems, in evaluating the pharmacologic activity of such compounds in human disease.
Other Magainin Peptides
Magainin peptides have demonstrated in preclinical testing the potential for broad application in a number of indications:
Cancer/Tumorcidal: MSI-1857 is a chemically modified magainin peptide formulated for systemic delivery. In preclinical animal models, MSI-1857 enhanced the cellular uptake and activity of standard chemotherapeutics against tumors. MSI-1596 is a generic antibiotic peptide with similar activity to MSI-1857. Preclinical testing of
MSI-1596 in animal models is underway where demonstration of substantial anti- tumor activity may provide for a rapid clinical development program.
Other Topical Infections: Various magainin peptides have shown promise in a broad variety of applications including eye infections, acne, sexually transmitted diseases and yeast infections. There may also be potential use against viruses, including rhinoviruses that cause the common cold.
Systemic Infections: Magainin peptides are broad spectrum antibiotics that have shown no resistance or cross-resistance to other anti-infectives in testing to date. Preclinical data demonstrated activity against pathogens in various infectious disease models.
Agricultural Anti-Fungal: Ornamental plants genetically altered to express certain magainins have shown resistance to fungal and other crop diseases.
We are developing an E.coli-based recombinant manufacturing process. Recombinant methods would increase the availability, and decrease the cost, of magainin peptides for various applications.
Other Aminosterols
We have discovered a number of other aminosterol compounds in the shark, each differing from squalamine in chemical structure and interacting with a separate, specific receptor. These compounds affect the intracellular metabolism in a manner that disturbs the target cell responses to certain growth factors, hormones and other signals. Therapeutic opportunities for these compounds may include obesity, various malignancies, inflammatory diseases, and viral infections.
Defensins
In the process of researching animal host-defenses across different species, we have helped demonstrate that all species, including humans, utilize some form of local antimicrobial defense beyond their systemic immune systems. In humans, we have identified host-defense molecules (defensins) in the lungs, the GI tract and skin. We have also identified several natural "inducers" of local antimicrobial defenses. Some of these compounds are found in nature, are generally regarded as safe (i.e., GRAS substances), and may possess novel nutritional, as well as, pharmaceutical immunostimulant applications.
Drug Discovery
Host-Defense Drug Discovery
Our approach to identifying pharmaceutically active compounds in the host- defense systems of animals involves the extraction of compounds from animal tissues. The extracts are assayed for activity against selected pathogens, such as bacteria, fungi, viruses and certain cancers. We then purify the active compounds and determine the precise chemical structure of the purified molecule. Once naturally occurring molecules have been isolated, we analyze the relationship between the molecular structure of the compound and its biological activity. In general, this requires that we identify the structures in the compound that are believed to have therapeutic effects and analyze how the compounds could be modified to improve the desired therapeutic effects. We then utilize our combinatorial chemistry capabilities to modify the molecules to alter biological activity or increase stability.
Magainins
While conducting genetic and molecular biological research at the National Institutes of Health in 1987, Dr. Michael A. Zasloff, presently our Vice Chairman and Executive Vice President, isolated the first magainins from the African frog Xenopus laevis. In connection with his research, Dr. Zasloff was performing surgery on African clawed frogs in his laboratory. After suturing the frogs and returning them to their aquarium tank, he noticed that the incisions healed without infection, inflammation or notable scarring, despite being exposed to the bacteria-filled aquarium water. Dr. Zasloff deduced that the frogs produced a substance that protected them against infection. Eventually, he isolated, from the frog's skin, two related peptides, which he called magainins, and which were later shown to kill a variety of pathogens, including bacteria, amoebae, fungi and parasites.
Magainins are peptides. A peptide is a chain of molecules, known as amino acids, that are considered to be one of the basic building blocks of the human body. Chains of 2 to 50 amino acids are generally referred to as peptides, while longer chains are referred to as proteins. We have modified natural peptides by rearranging the order and combination of amino acids and by substituting and deleting additional amino acids to produce magainins having a broader spectrum of therapeutic activity and improved potency.
In the presence of a cell membrane rich in acidic phospholipids and poor in cholesterol, such as bacterial membranes, magainins twist into two-sided, spiral shaped molecules (helices), with one side soluble in the fat-like substance that comprise cell membranes and the other side soluble in water. Individual magainin peptides then aggregate and form a channel in the membrane of a pathogen. Once formed, this aggregation of magainin peptides punctures the cell membrane, breaks down the integrity of the cell and kills the pathogen. By rupturing bacteria and targeting a fundamental difference in cell membrane composition, magainins target and kill bacterial differently than traditional antibiotics. In certain cases, cancer cells also exhibit sufficient acidic phospholipids on their external membranes to be lysed by magainin peptides.
Aminosterols
Squalamine was discovered in the body tissues of the dogfish shark. The shark was initially examined because of its known resistance to infection and cancer. The chemical structure of squalamine uniquely combines a steroid and a polyamine, two classes of systemic agents that are generally well tolerated in humans. Beyond squalamine, we have discovered several other aminosterol compounds in the shark. In preclinical testing, some of these compounds have demonstrated an ability to control cell growth, along with other pharmacologic properties. These properties may have application in the treatment of a number of disease indications characterized by cell proliferation, including cancer.
Respiratory Genomics and Drug Discovery
Advances in genetics and molecular biology have significantly enhanced the ability of scientists to clone and sequence genes and identify the causes of disease at the molecular level. Genomics, or the study of the genome, can be applied to the examination of the genetic influences on human disease. Functional genomics refers to the determination of the manner in which disease genes specifically impact the disease process. In contrast to traditional drug discovery and development, a genetic approach commences by identifying those genes that are responsible for the initiation or progression of disease. Analysis of DNA (deoxyribonucleic acid) helps characterize the specific role of genes in the disease process. The information stored in the DNA of a gene acts as a set of instructions to living cells of the organism. These instructions direct the cells to synthesize specific proteins, such as hormones or enzymes that perform the basic biochemical and physiological functions of the cells. Disease may occur when a defect (mutation) occurs in a gene or genes, resulting in incorrect instructions being sent to cells, and disrupting the normal balance or function of these essential proteins. The ability to detect such a mutation and to understand how the disruption of normal protein function contributes to the initiation and progression of the
resultant disease are potentially valuable aids to pharmaceutical discovery and development. To identify an appropriate molecular target for therapeutic intervention, it may also be necessary to characterize fully the biochemical pathway in which the disease gene functions.
We employ a functional genomics approach to understand the genetic basis of disease and to develop potential drug leads. Through these efforts we seek to identify appropriate targets for pharmaceutical intervention that aim to control the root cause of human disease. We believe that pharmaceuticals developed for use against these specific targets have the potential for greater effectiveness and fewer side effects than pharmaceuticals developed through more traditional processes.
Collaborative Arrangements
Development and Marketing Collaborations
Collaborations may allow us to leverage our scientific and financial resources and gain access to markets and technologies that would not otherwise be available to us. In the long term, development and marketing arrangements with established companies in the markets in which potential products will compete may allow our products more efficient access to intended markets and may, accordingly, conserve our resources. We expect that we will enter into development and marketing arrangements for most of the products we may develop. From time to time, we hold discussions with various potential partners.
In February 1997, we entered into a development, supply and distribution agreement in North America with SmithKline for LOCILEX(TM) Cream. SmithKline has paid us $10,000,000 under this agreement, which we received in 1997. We had hoped to commercialize LOCILEX(TM) Cream in the near-term. However, with the FDA's decision, near-term commercialization of LOCILEX(TM) Cream will not occur, and we will generate no revenues from LOCILEX(TM) Cream in the near future. The SmithKline Agreement also gives SmithKline rights to terminate the arrangement, and, under certain conditions, the right to negotiate for rights to another Magainin product development candidate.
In December 1998, we entered into a collaborative research and option agreement with Genentech relating to a protein therapeutic in asthma. Under this agreement, we jointly conducted a collaborative program to evaluate the utility of a blocking antibody to IL9 in suppressing the asthmatic response. Genentech made an initial equity investment of $2,000,000 in our company in 1998, and has an option to enter into a development and commercialization agreement with our company. Any such future development and commercialization agreement could provide for payments to us of up to $35,000,000, upon terms to be negotiated, and royalty payments on sales of products developed by Genentech in the field. We are currently in discussions with Genentech as to the continuation and expansion of this program. Genentech may choose not to enter into an agreement, or we may not be able to agree upon terms for an agreement.
Research and License Agreements
We have rights under license agreements to several patents and patent applications under which we expect to owe royalties on sales of any products that are covered by issued patent claims. Additionally, certain of these agreements also provide that if we elect not to pursue the commercial development of any licensed technology, or do not adhere to an acceptable schedule of commercialization, then our exclusive rights to such technology would terminate. We also fund research at certain institutions, and these relationships may provide us with an option to license any results of the research.
Manufacturing
We currently have neither the resources, facilities nor capabilities to manufacture any of our proposed products in the quantities and quality required for commercial sale. We have no current plans to establish a manufacturing
facility. We depend upon contract manufacturers for commercial scale manufacturing of our proposed products in accordance with regulatory standards. This dependence may restrict our ability to develop and deliver products on a timely, profitable and competitive basis. Additionally, the number of companies capable of producing our proposed products is limited. We may be unable to maintain arrangements with qualified outside contractors to manufacture materials at costs which are affordable to us, if at all.
Contract manufacturers may utilize their own technology, our technology, or technology acquired or licensed from third parties in developing a manufacturing process. In order to engage another manufacturer, we may need to obtain a license or other technology transfer from the original contract manufacturer. Even if a license is available from the original contract manufacturer on acceptable terms, we may be unable to successfully effect the transfer of the technology to the new contract manufacturer. Any such technology transfer may also require the transfer of requisite data for regulatory purposes, including information contained in a proprietary drug master file held by a contract manufacturer. If we rely on a contract manufacturer that owns the drug master file, our ability to change contract manufacturers may be more limited.
We had an agreement with Abbott providing for the purchase of approximately $10,000,000 of bulk drug substance for LOCILEX(TM) Cream. As FDA approval of LOCILEX(TM) Cream did not occur, we renegotiated this agreement with Abbott in 1999, paying Abbott $4,200,000 and receiving partial delivery of material. An additional $3,400,000 is due to Abbott and payable if we receive in excess of $10,000,000 of additional funds in any year beginning in 2000, in which case 15% of such excess over $10,000,000 shall be payable to Abbott. We have no further purchase commitments to Abbott, and Abbott has no further supply requirements to us.
Government Regulation
Numerous governmental authorities, including the FDA in the United States, regulate our business and activities. Federal, state and foreign governmental agencies impose rigorous preclinical and clinical testing and approval requirements on our product candidates. In general, the process of obtaining government approval is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug candidates. In addition, governmental authorities may enact new legislation or regulations that could limit or restrict our efforts. A delay or denial of regulatory approval for any of our drug candidates, such as that which has occurred for LOCILEX(TM) Cream, will materially affect our business. Even if we receive approval of a product candidate, it may be conditioned upon certain limitations and restrictions as to the drugs used and may be subject to continuous review. If we fail to comply with any applicable regulatory requirements, we could be subject to penalties, including:
. warning letters;
. fines;
. withdrawal of regulatory approval;
. product recalls;
. operating restrictions;
. injunctions; and
. criminal prosecution.
1. FDA Marketing Approval:
The primary regulatory agency overseeing all phases of our drug development and marketing programs is the FDA. In order to obtain approval from the FDA to market any drug, we must submit proof of safety, efficacy and quality for each of our proposed products for each indication, which requires extensive and time consuming preclinical and clinical testing. The results of preclinical studies are submitted to the FDA as part of an Investigational New Drug Application or IND. Once the IND is effective, human clinical trials may be conducted. The results of the clinical trials are submitted to the FDA as part of a NDA. Following review of the NDA, the FDA may:
. grant marketing approval;
. require additional testing or information; or
. deny the application.
2. FDA Manufacturing Approval:
Detailed manufacturing information is also required to be included in the NDA for review and approval by the FDA. All manufacturing facilities and processes must comply with good manufacturing practices, or GMP, regulations prescribed by the FDA. All manufacturers must, among other things, pass manufacturing plant inspections and provide records of detailed manufacturing processes. Among other things, it must be demonstrated that:
. the drug product can be consistently manufactured at the same quality standard;
. the drug product is stable over time; and
. the level of chemical impurities in the drug product are under a designated level.
3. Ongoing FDA Oversight:
We will continue to be subject to regulation by the FDA even after our drug products have been approved and commercialized. Among other things, the FDA may:
. require additional submissions if there are any modifications to the drug product including, for example, any changes in manufacturing process, labeling, or manufacturing facility;
. require post-marketing testing and surveillance to monitor the effects of approved drug products; and
. enforce conditional approvals that restrict the commercial applications of a drug product.
Further, the FDA has numerous requirements governing labeling, promotional material, storage, record keeping and reporting.
The Prescription Drug User Fee Act of 1992 imposes substantial fees on a one-time basis for applications for approval, and on an annual basis for manufacturing and marketing of prescription drugs.
4. Other Regulatory Bodies:
We are also subject to regulation by other regulatory authorities, including the Occupational Safety and Health Administration, the Environmental Protection Agency, the Nuclear Regulatory Commission, the Drug Enforcement Agency and the United States Department of Agriculture, and to regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other regulatory statutes.
Drug product marketing outside the United States is subject to foreign regulatory requirements which may or may not be influenced by FDA approval. While the requirements vary widely from country to country, generally, the drug product must be approved by a foreign regulatory authority comparable to the FDA prior to marketing the product in those countries. The time required to obtain foreign approvals may be longer than that in the United States.
In the future, we may be subject to additional federal, state or local regulations or additional fees. Efforts are continually underway to reform federal regulation of drug products. Although some of these changes could streamline and otherwise benefit development, marketing and related requirements for drugs, others could increase regulatory requirements.
Patent and Proprietary Rights; Licensed Technology
1. Patents:
Our success depends, in part, on our ability to develop and maintain a strong patent position for our products and technologies both in the United States and other countries. As with most biotechnology and pharmaceutical companies, our patent position is highly uncertain and involves complex legal and factual questions. Without patent and other protections, other companies could offer substantially identical products for sale without incurring the sizeable development and testing costs that we have incurred. Our ability to recoup these expenditures and realize profits upon commercialization could be diminished.
We cannot be certain that:
. patents will issue from any of our patent applications;
. our patent rights will be sufficient to protect our technology;
. our patents will not be successfully challenged or circumvented by our competitors; or
. our patent rights will provide us with any commercial advantages.
The process of obtaining patents can be time consuming and expensive. Even after significant expenditure, a patent may not issue. We can never be certain that we were the first to develop the technology or that we were the first to file a patent application for the particular technology because U.S. patent applications are maintained in secrecy until a patent issues and publications in the scientific or patent literature lag behind actual discoveries.
Even after we are issued patent rights, we cannot be certain that:
. others will not develop similar technologies or duplicate the technology;
. others will not design around the patented aspects of the technology;
. we will not be obliged to defend ourselves in court against allegations of infringement of third-party patents;
. our issued patents will be held valid in court; or
. an adverse outcome in a suit would not subject us to significant liabilities to third parties, require rights to be licensed from third parties, or require us to cease using such technology.
The cost of litigation can be substantial, regardless of the outcome.
2. Potential Ownership Disputes:
There may be disputes arising as to the ownership of our technology. Most of our research and development personnel previously worked at other biotechnology companies, pharmaceutical companies, universities, or research institutions. These entities may raise questions as to when technology was developed, and assert rights to the technology. These kind of disputes have occurred in the past. We may not prevail in any such disputes.
Similar technology ownership disputes may arise in the context of consultants, vendors or third parties, such as contract manufacturers. For example, our consultants are employed by or have consulting agreements with third parties. There may be disputes as to the capacity in which consultants are operating when they make certain discoveries. We may not prevail in any such disputes.
3. Other Intellectual Property:
In order to protect our proprietary technology and processes, we also rely on trade secrets and confidentiality agreements with our corporate partners, employees, consultants, outside scientific collaborators, and other advisors. We may find that these agreements will be breached, or that our trade secrets have otherwise become known or independently developed or discovered by our competitors.
Certain of our exclusive rights to patents and patent applications are governed by contract. Generally, such contracts require that we pay royalties on sales of any products which are covered by patent claims. If we are unable to pay the royalties we may lose our patent rights. Additionally, some of these agreements also require that we develop the licensed technology under certain timelines. If we do not adhere to an acceptable schedule of commercialization, we may lose our rights.
Competition
The pharmaceutical industry is characterized by intense competition. Many companies, research institutions and universities are conducting research and development activities in a number of areas similar to our fields of interest. We are aware that research on compounds derived from animal host-defense systems is being conducted by others. Many companies are also currently involved in research and development activities focused on the pathogenesis of disease, and the competition among companies attempting to find genes responsible for disease is intense. Most of these entities have substantially greater financial, technical, manufacturing, marketing, distribution and other resources. We may also face competition from companies using different or advanced techniques that could render our products obsolete.
We expect technological developments in the biopharmaceutical field to occur at a rapid rate and expect competition to intensify as advances in this field are made. Accordingly, we must continue to devote substantial resources and efforts to research and development activities in order to maintain a competitive position in this field. Our compounds, products or processes may become obsolete before we are able to recover a significant portion of our research and development expenses. We will be competing with companies that have significantly more experience in undertaking preclinical testing and human clinical trials of new or improved therapeutic products and obtaining regulatory approvals of such products. Some of these companies may be in advanced phases of clinical testing of various drugs that may be competitive with our proposed products.
Colleges, universities, governmental agencies and other public and private research organizations are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed, some of which may be directly competitive with our technology. In addition, these institutions, along with pharmaceutical and specialized biotechnology companies, can be expected to compete with us in recruiting highly qualified scientific personnel.
Even if eventually approved, LOCILEX(TM) Cream may not be successfully marketed against oral antibiotics for the treatment of infection in diabetic foot ulcers. These infections have historically been treated with systemically administered antibiotics, which may be perceived by some medical professionals as having certain advantages over LOCILEX(TM) Cream. In addition, we may be unable to manufacture LOCILEX(TM) Cream at a cost which will allow it
to be sold at a competitive price relative to oral antibiotics or other topical antibiotics that may be used for this indication.
Many companies are working to develop and market products intended for the additional disease areas being targeted by us, including cancer and asthma. A number of major pharmaceutical companies have significant franchises in these disease areas, and can be expected to invest heavily to protect their interests. In the cancer field, anti-angiogenic agents are under development at a number of companies. In the asthma field, other biopharmaceutical companies have also reported the discovery of genes relating to asthma.
OUR EXECUTIVE OFFICERS
Our current executive officers are as follows:
Mr. Dougherty has served as our President and Chief Executive Officer since August 1998. Mr. Dougherty served as Executive Vice President from March 1995 through August 1998, and as a Director since August 1997. From August 1993, when he joined us, until March 1995, Mr. Dougherty served as Senior Vice President. Mr. Dougherty has also served as our Chief Financial Officer since August 1993. Prior to joining us, Mr. Dougherty served in the following capacities at Centocor, Inc. (a biopharmaceutical company): Senior Vice President, Chief Financial Officer and Treasurer, from February 1992 to August 1993, Vice President Corporate Finance from May 1990 to February 1992 and Treasurer from June 1986 to May 1990.
Dr. Levitt has served as our Executive Vice President and Chief Operating Officer since August 1998. Dr. Levitt was appointed our head of Research and Development, and a Director in August 1997. Dr. Levitt has served as Executive Vice President since joining us on a full-time basis in January 1996. Prior to joining, Dr. Levitt served as a consultant to Magainin beginning in 1995. Dr. Levitt served as a faculty member at Johns Hopkins University in the Department of Anesthesiology and Critical Care Medicine, from 1986 to 1995, in Neurological Surgery from 1995 to 1996 and in the Department of Environmental Health Sciences in the Johns Hopkins School of Public Health and Hygiene from 1988 to 1996.
Dr. Zasloff has served as our Executive Vice President since July 1992. In July 1996, Dr. Zasloff was appointed Vice Chairman of the Board. From 1988 until Dr. Zasloff joined us on a full-time basis in July 1992, Dr. Zasloff was our Chief Scientific Advisor and served as the Charles E.H. Upham Professor, Department of Pediatrics and Genetics, University of Pennsylvania School of Medicine, and Chief, Division of Human Genetics and Molecular Biology, The Children's Hospital of Philadelphia. From 1982 until 1988, Dr. Zasloff was Chief, Human Genetics Branch, National Institutes of Child Health and Human Development, National Institutes of Health. Dr. Zasloff currently also serves as Adjunct Professor, Department of Human Genetics and Orthopedics, University of Pennsylvania School of Medicine.
Dr. Holroyd has served as Senior Vice President, Clinical Research and Regulatory Affairs since June 1998. Dr. Holroyd has held various positions, including Vice President of Respiratory Discovery Research, Product Development and Business Development, since joining us in February 1997. Prior to joining us, Dr. Holroyd was a faculty member and head of respiratory care services at Johns Hopkins University School of Medicine and Hospital in the Department of Anesthesiology and Critical Care Medicine. Dr. Holroyd earned his M.D. from Johns Hopkins in 1984 and completed his residency training at Johns Hopkins serving as chief resident of the Osler Medical Service and at the National Heart, Lung and Blood Institute.
Officers are elected or appointed by the Board of Directors to serve until the appointment or election and qualification of their successors or their earlier termination or resignation.
EMPLOYEES
As of December 31, 1999, we had 43 full-time employees. No employees are covered by collective bargaining agreements, and we consider relations with our employees to be good.
Item 2.
Item 2. PROPERTIES
We lease an aggregate of approximately 26,000 square feet of space in Plymouth Meeting, Pennsylvania for office and laboratory space. Our leases expire in 2001 and 2002, and provide for minimum annual payments of approximately $427,000 in 2000 and annual increases thereafter. We sublease approximately 5,000 square feet and expect offsetting minimum annual sub-lease payments of $119,000 in 2000.
Item 3.
Item 3. LEGAL PROCEEDINGS
We are not a party to any material litigation.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Magainin Pharmaceuticals Inc. common stock trades on The Nasdaq Stock Market(R) under the symbol MAGN. The quarterly range of high and low closing sales prices of our common stock, as reported on the Nasdaq National Market, are shown below.
Dividends
We have not paid any cash dividends since our inception, and we do not anticipate paying any cash dividends in the foreseeable future. It is the present policy of the Board of Directors to retain all earnings, if any, to finance the development of our business.
Number of Holders of Common Stock
At February 23, 1999, there were approximately 330 stockholders of record and approximately 5,600 beneficial owners of our common stock.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data. The selected financial data is derived from, and is qualified by reference to, our financial statements included herein.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Our disclosure and analysis in this report contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to present or anticipated scientific progress, development of potential pharmaceutical products, future revenues, capital expenditures, research and development expenditures, future financing and collaborations, personnel, manufacturing requirements and capabilities, and other statements regarding matters that are not historical facts or statements of current condition.
Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our filings with the SEC. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
GENERAL
We are a biopharmaceutical company with research and development efforts in anti-angiogenesis, respiratory genomics and infectious disease.
Since commencing operations in 1988, we have not generated any revenue from product sales, and we have funded operations primarily from the proceeds of public and private placements of securities. We have incurred a loss in each year since our inception, and we expect to incur substantial additional losses for at least the next several years. We expect that losses may fluctuate, and that such fluctuations may be substantial. At December 31, 1999, our accumulated deficit was approximately $145,100,000. We will need to raise additional funds in the future to continue our operations.
RESULTS OF OPERATIONS
Revenues
We have received no revenues from product sales. Revenues recorded to date have consisted principally of revenues recognized under collaborations with corporate partners. We recorded revenue of $10,000,000 in 1997 reflecting the receipt of payments under the SmithKline Agreement entered into in February 1997 for LOCILEX(TM) Cream. We had hoped to commercialize LOCILEX(TM) Cream in the near-term. However, with the FDA's decision not to approve LOCILEX(TM) Cream, near-term commercialization will not occur, and we will generate no revenues from LOCILEX(TM) Cream in the near future. We have no currently existing collaborations that will result in the realization of research and development revenues.
Research and Development Expenses
Research and development expenses decreased in the year ended December 31, 1999 as compared to the same period a year ago, due to reductions in manufacturing development, clinical and regulatory costs, and personnel expenses, principally due to decreased development activity relating to LOCILEX(TM) Cream. Research and development expenses decreased slightly in the year ended December 31, 1998 as compared to those in the year ended December 31, 1997, due principally to reductions in clinical and manufacturing expenses.
The level of research and development expenses in future periods will depend principally upon the progress of our research and development programs and our capital resources.
General and Administrative Expenses
General and administrative expenses consist principally of personnel costs and professional fees and have decreased in 1999 as compared to the prior year due principally to a reduction in personnel expenses. General and
administrative expenses in the year ended December 31, 1998 were comparable to those in the year ended December 31, 1997.
Other Income and Expense
Interest income decreased during the years ended December 31, 1999 and 1998 as compared to the prior years, due to lower investment balances. The increase in interest expense for the years ended December 31, 1999 and 1998, as compared to the prior years, is due to higher debt balances.
Net Loss
Our goal is to conduct significant research, pre-clinical development, clinical testing and manufacturing activities over the next several years. We expect that these activities, together with projected general and administrative expenses, will result in continued and significant losses.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Cash and investments were $10,644,000 at December 31, 1999 as compared to $22,871,000 at December 31, 1998. The primary use of cash was to finance our operations.
Since inception, we have funded our operations primarily from the proceeds of public and private placements of securities, including:
. $17,080,000 raised from our initial public offering in December 1991; . $21,469,000 raised from a public offering completed in February 1993; . $18,023,000 raised from a private placement completed in October 1993; . $32,627,000 raised from a public offering completed in August 1995; . $11,932,000 raised from a private placement completed in August 1996; . $19,172,000 raised from a public offering completed in December 1997; . $ 2,000,000 raised from a private placement completed in December 1998; and . $ 3,915,000 raised from a public offering completed in October 1999.
In addition to the above, we have funded our operations from contract and grant revenues, interest income and lease and debt financing.
Accounts payable and accrued expenses decreased $7,989,000 to $664,000 at December 31, 1999, due principally to payments of $4,200,000 to Abbott Laboratories and the reclassification to long-term of the $2,962,000 obligation described below. We had an agreement with Abbott providing for the purchase of approximately $10,000,000 of bulk drug substance for LOCILEX(TM) Cream. As FDA approval of LOCILEX(TM) Cream did not occur, we renegotiated this agreement with Abbott in 1999, paying Abbott $4,200,000 and receiving partial delivery of material. An additional $3,400,000 is due to Abbott and payable if we receive in excess of $10,000,000 of additional funds in any year beginning in 2000, in which case 15% of such excess over $10,000,000 shall be payable to Abbott. We have no further purchase commitments to Abbott, and Abbott has no further supply requirements to us.
Long-term liabilities increased by $2,962,000 at December 31, 1999 reflecting the present value of additional amounts due to Abbott under certain conditions related to the renegotiation of a our manufacturing agreement for LOCILEX(TM) Cream.
Under the terms of our $2,500,000 note payable, we make monthly interest- only payments at an annual rate of 7.375%, with principal due in June 2000. We maintain cash and investments of $2,770,000 as collateral for the note payable.
In October, 1999 we completed a public offering of 4,000,000 shares of common stock. Net proceeds from the offering totaled approximately $3.9 million.
In February 1997, we entered into a development, supply and distribution agreement in North America with SmithKline for LOCILEX(TM) Cream. SmithKline has paid us $10,000,000 under this agreement, which we received in 1997. We had hoped to commercialize LOCILEX(TM) Cream in the near-term. However, with the FDA's decision, near-term commercialization of LOCILEX(TM) Cream will not occur, and we will generate no revenues from LOCILEX(TM) Cream in the near future. The SmithKline Agreement also gives SmithKline rights to terminate the arrangement, and, under certain conditions, the right to negotiate for rights to another Magainin product development candidate.
In December 1998, we entered into a collaborative research and option agreement with Genentech relating to a protein therapeutic in asthma. Under this agreement, we jointly conducted a collaborative program to evaluate the utility of a blocking antibody to IL9 in suppressing the asthmatic response. Genentech made an initial equity investment of $2,000,000 in our company in 1998, and has an option to enter into a development and commercialization agreement with our company. Any such future development and commercialization agreement could provide for payments to us of up to $35,000,000, upon terms to be negotiated, and royalty payments on sales of products developed by Genentech in the field. We are currently in discussions with Genentech as to the continuation and expansion of this program. Genentech may choose not to enter into an agreement, or we may not be able to agree upon terms for an agreement.
We maintained cash and investments of $10,000,000 at December 31, 1999. At December 31, 1999, we had current liabilities of $3,200,000. In the absence of raising additional funds or significantly reducing expenses, we do not have sufficient resources to sustain operations beyond 2000. We will need to raise substantial additional funds in the future to continue our research and development programs and to commercialize our potential products. If we are unable to raise such funds, we may be unable to complete our development activities for any of our proposed products.
We regularly explore alternative means of financing our operations and seek funding through various sources, including public and private securities offerings and collaborative arrangements with third parties. We currently do not have any commitments to obtain additional funds, and may be unable to obtain sufficient funding in the future on acceptable terms. If we cannot obtain funding, we will need to delay, scale back or eliminate research and development programs or enter into collaborations with third parties to commercialize potential products or technologies that we might otherwise seek to develop or commercialize ourselves, or seek other arrangements. If we engage in collaborations, we will receive lower consideration upon commercialization of such products than if we had not entered into such arrangements, or if we entered into such arrangements at later stages in the product development process.
Our capital expenditure requirements will depend upon numerous factors, including the progress of our research and development programs, the time and cost required to obtain regulatory approvals, our ability to enter into additional collaborative arrangements, the demand for products based on our technology, if and when such products are approved, and possible acquisitions of products, technologies and companies. We had no significant capital commitments as of December 31, 1999.
Recently Issued Accounting Standards
In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, SAB 101. SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial statements, including the recognition of non-refundable fees received upon entering into arrangements. We are in the process of evaluating SAB 101 and its effects on our financial statements and current revenue recognition policies.
Year 2000
We experienced no interruptions relating to due to Year 2000 (Y2K) computer problems during 1999 or subsequently. We incurred less than $100,000 in costs to replace and upgrade certain computers and systems that were deemed potentially at risk to Year 2000 problems.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our available funds for investment. We do not currently have any significant direct foreign currency exchange rate risk.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth beginning on page hereof in the Table of Contents for Part II - Financial Information.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item concerning directors is incorporated herein by reference from our Proxy Statement for the 2000 Annual Meeting of Shareholders. Set forth in Part I - Item 1 is the information required by this item concerning executive officers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference from our Proxy Statement for the 2000 Annual Meeting of Shareholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated herein by reference from our Proxy Statement for the 2000 Annual Meeting of Shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The information required by this item is set forth in the Table of Contents to Financial Statements on page hereof.
Financial Statement Schedules
All schedules have been omitted because they are not applicable, or not required, or the information is shown in the Financial Statements or Notes thereto.
Reports on Form 8-K
None.
Exhibits
The following is a list of exhibits filed as part of this Annual Report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated parenthetically, together with a reference to the filing indicated by footnote.
Exhibit No. - ----------
3.1 Restated Certificate of Incorporation of the Registrant (Exhibit 3.1)(1)
3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Registrant (Exhibit 3.2)(11)
3.3 By-laws of the Registrant (Exhibit 3.2)(2)
3.4 * Amended and Restated By-laws of the Registrant
4.1 Specimen copy of stock certificate for shares of Common Stock of the Registrant (Exhibit 4.1)(3)
10.1 # 1990 Stock Option Plan of the Registrant (Exhibit 10.1)(2)
10.2 # 1992 Stock Option Plan of the Registrant, as amended (4)
10.3 # 1998 Equity Compensation Plan (13)
10.4 # Stock Option Agreement with Jay Moorin (Exhibit 10.24)(3)
10.5 # Amendment to Stock Option Agreement with Jay Moorin (Exhibit 10.4)(1)
10.6 # Form of Stock Option Agreement under Stock Option Plans (Exhibit 4.6)(2)
10.7 # Employment Agreement with Michael A. Zasloff, M.D., Ph.D. (Exhibit 10.23)(3)
10.8 # Amendment of Employment Agreement with Michael A. Zasloff, M.D., Ph.D. (Exhibit 10.9)(3)
10.9 # Employment Agreement with Michael R. Dougherty (Exhibit 10.26)(7)
10.10 # Employment Agreement with Roy C. Levitt, M.D. (Exhibit 10.24)(5)(8)
10.11 # Employment Agreement with Kenneth J. Holroyd, M.D. (Exhibit 10.12)(14)
10.12 #* Form and Schedule of Stock Awards to Executive Officers (Exhibit 10.36)(14)
10.13 Lease with respect to Plymouth Meeting, Pennsylvania offices and laboratories (Exhibit 10.16)(2)
10.14 Lease with respect to Plymouth Meeting, Pennsylvania office (Exhibit 10.13)(12)
10.15 Amendment to lease with respect to Plymouth Meeting, Pennsylvania offices and laboratories (Exhibit 10.16)(14)
10.16 Patent License Agreement and Sponsored Research Agreement with The Children's Hospital of Philadelphia (Exhibit 10.15)(2)
10.17 License Agreement with Multiple Peptide Systems, Inc. (Exhibit 10.12)(2)
10.18 Second Amendment to License Agreement with Multiple Peptide Systems, Inc. (Exhibit 10.30)(10)
10.19 Form of Credit Agreement, including form of Promissory Note and Warrant (Exhibit 10.22)(2)
10.20 Form of Amendment to Credit Agreement Warrant (Exhibit 10.18)(6)
10.21 Assignment Agreement between Magainin Pharmaceuticals Inc., Roy C. Levitt, M.D. and GeneQuest, Inc. (Exhibit 10.25)(5)(8)
Exhibit No. - ----------
10.22 Form of Purchase Agreement relating to the issuance by Magainin Pharmaceuticals Inc. of units consisting of shares of Magainin Pharmaceuticals Inc. Common Stock and warrants to purchase shares of Common Stock (Exhibit 10.1)(9)
10.23 Form of Warrant to purchase shares of Magainin Pharmaceuticals Inc. Common Stock (Exhibit 10.2)(8)
10.24 Development, Supply and Distribution Agreement, effective as of February 12, 1997 with SmithKline Beecham Corporation (Exhibit 10.29)(5)(11)
10.25 * Collaborative Research and Option Agreement with Genentech, Inc., effective as of December 30, 1998 (Exhibit 10.32)(15)
10.26 Stock Purchase Agreement between Magainin Pharmaceuticals Inc. and Genentech, Inc., dated December 30, 1998 (Exhibit 10.33)(15)
10.27 Settlement and Termination Agreement between Abbott Laboratories Inc. and Magainin Pharmaceuticals Inc., effective September 8, 1999 (Exhibit 99.1)(16)
23 * Consent of KPMG LLP
24 * Power of Attorney (included on signature page of this Annual Report on Form 10-K)
27 * Financial Data Schedule
____________________
Explanation of Footnotes to Listing of Exhibits
* Filed herewith.
# Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended June 30, 1992 filed with the Securities and Exchange Commission on September 24, 1992.
(2) Filed as an Exhibit to Registration Statement (No. 33-43579) on Form S-1 filed with the Securities and Exchange Commission on October 24, 1991.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration Statement (No. 33-43579) on Form S-1 filed with the Securities and Exchange Commission on November 27, 1991.
(4) Filed as Exhibit A to the Proxy Statement for the 1996 Annual Meeting of Stockholders.
(5) Portions of this Exhibit were omitted and filed separately with the Securities and Exchange Commission pursuant to an order granting confidential treatment.
(6) Filed as an Exhibit to the Transition Report on Form 10-K for the year ended December 31, 1993 filed with the Securities and Exchange Commission on March 9, 1994.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended December 31, 1994 filed with the Securities and Exchange Commission on March 31, 1995.
(8) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended December 31, 1995 filed with the Securities and Exchange Commission on March 29, 1996.
(9) Filed as an Exhibit to Registration Statement (No. 333-09927) on Form S-3 filed with the Securities and Exchange Commission on August 9, 1996.
(10) Filed as an Exhibit to the Form 10-Q for the quarter ended September 30, 1996 filed with the Securities and Exchange Commission on November 14, 1996.
(11) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended December 31, 1996 filed with the Securities and Exchange Commission on March 31, 1997.
(12) Filed as an Exhibit to the Annual Report on Form 10-K for the year ended December 31, 1997, filed with the Securities and Exchange Commission on March 13, 1998.
(13) Filed as Exhibit A to the Proxy Statement for the 1998 Annual Meeting of Stockholders.
(14) Filed as an Exhibit to the Annual Report on Form 10-K/A for the year ended December 31, 1998, filed with the Securities and Exchange Commission on March 19, 1999
(15) Filed as an Exhibit to the Annual Report on Form 10-K/A for the year ended December 31, 1998, filed with the Securities and Exchange Commission on August 6, 1999
(16) Filed as an Exhibit to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MAGAININ PHARMACEUTICALS INC.
By: /s/ Michael R. Dougherty -------------------------------- Michael R. Dougherty President, Chief Executive Officer, Chief Financial Officer and Director
Date: March 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Each person whose signature appears below in so signing also makes, constitutes and appoints Michael R. Dougherty, President, Chief Executive Officer and Chief Financial Officer his true and lawful attorney-in-fact, 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.
MAGAININ PHARMACEUTICALS INC.
PART II - Financial Information
Item 8. Financial Statements
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Magainin Pharmaceuticals Inc.:
We have audited the accompanying balance sheets of Magainin Pharmaceuticals Inc. as of December 31, 1999 and 1998, and the related statements of operations, changes in stockholders' equity and comprehensive loss and cash flows for each of the years in the three-year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Magainin Pharmaceuticals Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Princeton, New Jersey February 11, 2000
MAGAININ PHARMACEUTICALS INC.
BALANCE SHEETS (In thousands, except per share amounts)
See accompanying notes to financial statements.
MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year Ended December 31, --------------------------------- 1999 1998 1997 -------- -------- --------
Revenues........................... $ -- $ -- $ 10,088
Costs and Expenses: Research and development........ 9,876 21,456 22,875 General and administrative...... 2,870 3,292 3,246 -------- -------- -------- 12,746 24,748 26,121 -------- -------- -------- Loss from operations............... (12,746) (24,748) (16,033) Interest income.................... 755 1,640 1,770 Interest expense................... (225) (196) (118) -------- -------- -------- Net loss........................... $(12,216) $(23,304) $(14,381)
Net loss per share--basic and diluted............................ $ (0.52) $ (1.05) $ (0.73) ======== ======== ======== Weighted average shares outstanding..................... 23,706 22,235 19,679 ======== ======== ========
See accompanying notes to financial statements.
MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS (In thousands)
See accompanying notes to financial statements.
MAGAININ PHARMACEUTICALS INC.
STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes to financial statements.
MAGAININ PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
1. The Company
Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29, 1987. The Company is a biopharmaceutical company with research and development efforts in anti-agniogenesis, respiratory genomics and infectious disease. The Company is managed and operated as one business. The entire business is comprehensively managed by a single management team that reports to the Chief Executive Officer. Accordingly, the Company does not prepare discrete financial information with respect to separate product areas or by location, and does not have separately reportable segments as defined by SFAS No. 131.
2. Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid investment instruments purchased with a maturity of three months or less to be cash equivalents.
Investments - Investments purchased with a maturity of more than three months, and which mature less than twelve months from the balance sheet date, are classified as short-term investments. Long-term investments are those with maturities greater than twelve months from the balance sheet date. The Company generally holds investments to maturity, however, since the Company may, from time to time, sell securities to meet cash requirements, the Company classifies its investments as available-for-sale as defined by Statement of Financial Accounting Standards ("SFAS"), No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Available-for-sale securities are carried at market value with unrealized gains and losses reported as a separate component of stockholders' equity. Gross realized gains and losses on the sales of investment securities are determined on the specific identification method and are included in interest income.
Fixed Assets and Depreciation - Fixed assets are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets including: three (3) years for computers/software, five (5) years for laboratory and office equipment and seven (7) years for furniture and fixtures. Equipment under capital leases and leasehold improvements are amortized using the straight-line method over the term of the respective lease, or their estimated useful lives, whichever is shorter. Expenditures for maintenance and repairs are charged to expense as incurred.
Revenue Recognition - Any revenues from research and development arrangements are recognized pursuant to the terms of the related agreements, either as work is performed, or as milestones are achieved. In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, SAB 101. SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements, including the recognition of non-refundable fees received upon entering into arrangements. The Company is in the process of evaluating SAB 101 and its effects on the financial statements and current revenue recognition policies.
Research and Development - Research and development costs are expensed as incurred.
Patent Costs - Patent-related costs are expensed as incurred.
Lease Expense - Expense related to the facility lease is recorded on a straight-line basis over the lease term. The difference between rent expense incurred and the amount paid is recorded as deferred rent and is amortized over the lease term.
Stock Based Compensation - The Company accounts for stock-based employee compensation under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Effective January 1, 1996, the Company adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation".
Income Taxes - The Company accounts for income taxes using the asset and liability method as prescribed by SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits which are not expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period in which tax rate changes are enacted.
Loss Per Share - The Company calculates loss per share under the provisions of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires a dual presentation of "basic" and "diluted" loss per share on the face of the income statement. Basic loss per share is computed by dividing income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the dilutive effect, if any, from the potential exercise or conversion of securities, such as stock options and warrants, which would result in the issuance of shares of common stock. Basic and diluted loss per share amounts are the same because the Company reported a loss for all periods presented.
Comprehensive Income - SFAS No. 130, "Reporting Comprehensive Income" establishes standards for the reporting of comprehensive income and its components. Comprehensive income consists of reported net income or loss and "other comprehensive income" (i.e. other gains and losses affecting stockholders' equity that, under generally accepted accounting principals, are excluded from net income or loss as reported on the statement of operations). With regard to the Company, other comprehensive income consists of unrealized gains and losses on marketable securities. The adoption of SFAS No. 130 affects only the presentation of the Company's balance sheet, and does not affect the Company's reported results of operations or cash flows.
3. Investments
The Company invests in securities of the U.S. Treasury and U.S. government agencies. Excess cash is invested on a short-term basis in U.S. government based money market funds. The Company had an unrealized loss of $13,000, and an unrealized gain of $9,000 at December 31, 1999 and 1998 respectfully. The Company has not realized any losses on its investments.
4. Fixed Assets
Fixed assets are stated at cost and are summarized as follows (in thousands):
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in thousands):
Accrued manufacturing development costs consist primarily of amounts related to various third-party manufacturing agreements (See NOTE 12).
6. Note Payable
The Company refinanced its $2,500,000 note payable in the second quarter of 1999. Under the terms of this arrangement, the Company makes monthly interest-only payments at an annual rate of 7.375%, with principal due in June 2000. The Company maintains cash and investments of approximately $2,770,000 as collateral for the note payable. The Company's current intention is to refinance this loan prior to its maturity.
7. Stockholders' Equity
The Company's certificate of incorporation provides the board of directors the power to issue shares of preferred stock without stockholder approval. This preferred stock could have voting rights, including voting rights that could be superior to that of our common stock, and the board of directors has the power to determine these voting rights.
In December 1997, the Company consummated a public offering of 2,587,500 shares of common stock with proceeds to the Company (after underwriting discounts and offering expenses) of approximately $19,172,000.
In January 1998, pursuant to an arrangement with a contract manufacturer, the Company issued to such manufacturer 125,000 shares of common stock with a fair value of $6.125 per share. In connection therewith, the Company recorded a non-cash charge to earnings of $859,000.
In December 1998, pursuant to a collaboration, the Company sold 620,540 shares of common stock to Genentech, Inc. ("Genentech"), with proceeds to the Company of approximately $2,000,000.
In October 1999, the Company completed a public offering of 4,000,000 shares of its common stock with proceeds to the Company (after offering expenses) of approximately $3,915,000.
Warrants - Under a 1991 credit agreement with certain stockholders, the Company granted warrants to the lenders to purchase an aggregate of 250,000 shares of common stock at $8 per share. These warrants expire in 2001. At December 31, 1999, 229,739 of these warrants are outstanding.
In connection with its August 1996 private placement, the Company issued common stock, together with warrants to purchase 1,011,896 shares of the Company's common stock. The warrants contain provisions to decrease the exercise price, and increase shares, under certain circumstances. Such circumstances include the issuance of shares of common stock by the Company for a consideration per share less than the exercise price of the warrants, and the issuance by the Company of securities convertible into shares of common stock for which the
exercise or conversion price is less than the exercise price of the warrants. Warrants to purchase 1,158,210 shares of common stock at prices ranging from $5.35 to $7.37 per share are currently exercisable.
Stock option plans - In May 1991, the stockholders approved the 1990 Stock Option Plan (the "1990 Plan") which provides for the granting of options for the purchase of up to 160,000 shares of common stock. In May 1996, the stockholders approved the amended 1992 Stock Option Plan (the "1992 Plan") which provides for the granting of options for the purchase of up to 2,500,000 shares of common stock. In May 1998, the stockholders approved the 1998 Equity Compensation Plan (the "1998 Plan") which provides for the granting of options, and stock awards, of up to 1,500,000 shares of common stock.
The plans provide for the granting of incentive stock options and nonqualified stock options and are administered by a committee of the Board of Directors. The committee has the authority to determine the term during which an option may be exercised (provided that no option may have a term of more than 10 years), the exercise price of an option, and the rate at which options may be exercised. Incentive stock options may be granted only to employees of the Company. Nonqualified stock options may be granted to employees, directors or consultants of the Company. For nonqualified stock options under the 1992 and 1998 Plans and incentive stock options, the exercise price can not be less than the fair market value of the underlying common stock on the date of the grant.
In addition to the shares of common stock issuable upon exercise of options granted under the Company's stock option plans, 595,612 shares of common stock are issuable upon exercise of outstanding options granted pursuant to written agreements. The exercise price for these options was set by the Board of Directors, or a committee designated by the Board, based upon an evaluation of the fair market value of the Company's common stock on the date of grant.
A summary of the status of the Company's stock options as of December 31, 1999, 1998 and 1997, and changes during the years ended on those dates, is presented below (in thousands, except per share data):
The following table summarizes information about stock options outstanding and exercisable as of December 31, 1999 (in thousands, except per share data):
The Company applies APB Opinion 25 and related Interpretations in accounting for options. Accordingly, no compensation cost has been recognized for employee stock option grants. Had compensation cost for employee stock option grants been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below (in thousands, except per share data):
The resulting effect on pro forma loss and pro forma loss per share disclosed above is not likely to be representative of the effects on a pro forma basis in future years, because 1999, 1998 and 1997 pro forma results include the impact of only four, three and two years, respectively, of grants and related vesting, while subsequent years will include additional years of grants and vesting. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
The 1998 Plan also provides for the issuance of common stock awards, up to a maximum of 375,000 shares. Such awards shall be made subject to such performance requirements, vesting provisions, transfer restrictions or other restrictions and conditions as the Compensation Committee may determine. A total of 178,500 shares have been awarded under the 1998 Plan, vesting over a four year period from the award date. The cost of these awards will be recognized as expense over the vesting period. As of December 31, 1999, 31,500 shares have been issued under this program.
8. Income Taxes
As of December 31, 1999 the Company had approximately $75,700,000 of net operating loss ("NOL") carry-forwards for federal income tax purposes (expiring in years 2003 through 2019). In addition, the Company had NOL carryforwards for state income tax purposes of approximately $38,900,000 (expiring in years 2005 through 2009). Pennsylvania has a $2,000,000 annual limitation on the utilization of NOL carryforwards, thus the Company is not likely to utilize most of its state NOL carryforwards. The Company also had approximately $6,100,000 of research and development tax credits carryforwards available to offset future federal income tax liability (expiring in years 2005 through 2019). The NOL carryforward differs from the accumulated deficit principally due to differences in the recognition of certain expenses between financial and federal tax reporting.
Under the Tax Reform Act of 1986, the utilization of a corporation's NOL carryforward and research and development tax credits are limited following a change in ownership of greater than 50% within a three year period. Due to the Company's prior equity transactions, the Company's net operating loss and tax credit carryforwards may be subject to an annual limitation generally determined by multiplying the market value of the Company on the date of the ownership change by the federal long-term tax exempt rate. Any amount exceeding the annual limitation may be carried forward to future years for the balance of the NOL and tax credit carryforward period.
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of the Company's ability to realize the benefit of the deferred tax asset, the deferred tax assets are fully offset by a valuation allowance at December 31, 1999 and 1998. The net change in the valuation allowance for deferred tax assets at December 31, 1999 and 1998 was an increase of $8,400,000 and an increase of $12,000,000, respectively.
During 1999, the Company amended its prior year tax returns from 1995 through 1998 to capitalize research and development costs in order to extend the life of the net operating losses. The Company expects to continue to capitalize research and development costs in 1999 and future years. The effect of the amended returns is an increase in the deferred tax asset for research and development and a decrease in the deferred tax asset for net operating losses at December 31, 1999 compared to amounts reported at December 31, 1998.
Significant components of the net deferred tax assets as of December 31, 1999 and 1998 consists of the following (in thousands):
Deferred tax assets: 1999 1998 ---------- ---------- Net operating losses $ 30,371 $ 46,534 Research credits 6,132 7,395 Capitalized research and development 30,413 2,748 Accrued expenses and other 1,453 3,247 Depreciation 344 372 ---------- ---------- 68,713 60,296
Valuation allowance $ (68,713) $ (60,296) ---------- ---------- Deferred tax assets, net $ 0 $ 0 ========== ==========
9. Collaborative Agreements
In February 1997, the Company entered into a development, supply and distribution agreement (the "SmithKline Agreement") in North America with SmithKline Beecham ("SmithKline") for LOCILEX(TM) Cream. SmithKline has paid the Company $10,000,000 under this agreement. The Company had hoped to commercialize LOCILEX(TM) Cream in the near term. However, with the FDA's decision not to approve LOCILEX(TM) Cream, near term commercialization will not occur, and the Company will generate no revenues from LOCILEX(TM) Cream in the near future. The SmithKline Agreement also gives SmithKline rights to terminate the arrangement, and, under certain conditions, the right to negotiate for rights to another Magainin product development candidate.
In December 1998, the Company entered into a collaborative research and option agreement with Genentech Inc. ("Genentech") relating to a protein therapeutic in asthma. Under this agreement, the Company and Genentech conducted a collaborative program to evaluate the utility of a blocking antibody to IL9 in suppressing the asthmatic response. Genentech made an initial equity investment in the Company of $2,000,000 in 1998, and has an option to enter into a development and commercialization agreement with the Company. Any such development and commercialization agreement could provide for payments to the Company of up to $35,000,000 million, upon terms to be negotiated, and royalty payments on sales of products developed by Genentech in the field. The Company is currently in discussions with Genentech as to the continuation and expansion of this program. Genentech may choose not to enter into an agreement, or the Company and Genentech may not be able to agree upon terms for an agreement.
In August 1994, the Company entered into a collaboration in the nutritional field with Abbott Laboratories. The Company recorded revenue of $0, $0, $88,000 in the years ended December 31, 1999, 1998 and 1997, respectively, under this arrangement. This agreement has expired.
The Company has rights under license agreements to certain patents and patent applications under which the Company expects to owe royalties on sales of any products which are covered by issued patent claims. Additionally, certain of these agreements also provide that if the Company elects not to pursue the commercial development of any licensed technology, or does not adhere to an acceptable schedule of commercialization, then the Company's exclusive rights to such technology would terminate. The Company also funds research at certain institutions, and these relationships may provide the Company with an option to license any results of the research.
10. 401(K) Plan
The Company maintains a 401(k) retirement plan available to all full-time, eligible employees. Employee contributions are voluntary and are determined on an individual basis, limited to the maximum amount allowable under federal tax regulations. The Company, at its discretion, may make certain contributions to the plan. No such contributions have been made through December 31, 1999.
11. Fair Value of Financial Instruments
The following disclosures of estimated fair value were determined by management, using available market information and valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair market value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have an effect on the estimated fair value amounts.
Cash equivalents, accounts payable, accrued expenses and investments are carried at amounts which reasonably approximate their fair values due to the short term nature of these instruments. The estimated fair value of the Company's note payable is estimated to be approximately equal to its carrying value of $2,500,000 million at December 31, 1999.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1999. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for the purposes of these financial statements since December 31, 1999, and current estimates of fair value may differ from the amounts presented herein.
12. Commitments, Contingencies and Other Matters
Rent
The Company has entered into two operating leases for its laboratory and corporate office facilities. One facility is currently subleased to a third party. Minimum annual rent payments through 2002 are as follows (in thousands):
Year Ending December 31, ------------ 2000.................................... $ 427 2001................................... 327 2002................................... 299 ------ $1,053 ======
The leases provide for escalations relating to increases in real estate taxes and certain operating expenses. Under the Company's sub-lease, minimum annual lease payments are expected to be $119,000 and $10,000, for the years ended December 31, 2000 and 2001, respectively.
Rent expense was approximately $440,000, $394,000 and $295,000, for the years ended December 31, 1999, 1998 and 1997, respectively.
Manufacturing
The Company had an agreement with Abbott Laboratories providing for the purchase of approximately $10,000,000 of bulk drug substance for LOCILEX(TM) Cream. As FDA approval of LOCILEX(TM) Cream did not occur, the Company renegotiated this agreement with Abbott in 1999, paying Abbott $4,200,000 and receiving partial delivery of material. An additional $3,400,000 is due to Abbott and payable if Magainin receives in excess of $10,000,000 of additional funds in any year beginning in 2000, in which case 15% of such excess over $10,000,000 shall be payable to Abbott. The Company has accrued $3,000,000 as the present value of this conditional obligation as of December 31, 1999, assuming it would be payable in full in early 2001. The Company has no further purchase commitments to Abbott, and Abbott has no further supply requirements to Magainin.
Liquidity
The Company has not generated any revenues from product sales, and has funded operations primarily from the proceeds of public and private placements of securities. Substantial additional financing will be required by the Company in the near-term to fund its continuing research and development activities. No assurance can be given that any such financing will be available when needed or that the Company's research and development efforts will be successful.
In the absence of raising additional funds or significantly reducing expenses, the Company does not have sufficient resources to sustain operations beyond 2000. The Company regularly explores alternative means of financing its operations and seeks funding through various sources, including public and private securities offerings and collaborative arrangements with third parties. The Company currently does not have any commitments to obtain additional funds, and may be unable to obtain sufficient funding in the future on acceptable terms. If the Company cannot obtain funding, it will need to delay, scale back or eliminate research and development programs or enter into collaborations with third parties to commercialize potential products or technologies that it might otherwise seek to develop or commercialize independently, or seek other arrangements. If the Company engages in collaborations, it will receive lower consideration upon commercialization of such products than if it had not entered into such arrangements, or if it entered into such arrangements at later stages in the product development process.