UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File No. 0-20139
Diacrin, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3016912
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Building 96 13th Street, Charlestown Navy Yard,
Charlestown, MA 02129
(Address of principal
executive offices, including zip code)
(617) 242-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b)
of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class
Common Stock, $.01 par value
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. []
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant (based on the closing price of the Common Stock
on February 28, 2001) was $48,008,297.
As of February 28, 2001, 17,914,704 shares of the registrant's Common
Stock were outstanding.
Documents incorporated by reference: Proxy Statement for the 2001
Annual meeting of Stockholders - Part III.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 concerning
our business, operations and financial condition, including statements with
respect to planned timetables for the initiation and completion of various
clinical trials, development funding expected to be received in connection with
our joint venture and the expected sources of porcine cells used in our
products. All statements, other than statements of historical facts included in
this Annual Report on Form 10-K regarding our strategy, future operations,
timetables for product testing, financial position, costs, prospects, plans and
objectives of management are forward-looking statements. When used in this
Annual Report on Form 10-K, the words "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate" and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. Because these forward-looking statements involve risks
and uncertainties, actual results could differ materially from those expressed
or implied by these forward-looking statements for a number of important
reasons, including those discussed under "Certain Factors That May Affect Future
Results," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Annual Report on Form 10-K.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other
"forward-looking" information. You should be aware that the occurrence of any of
the events described in these risk factors and elsewhere in this Annual Report
on Form 10-K could substantially harm our business, results of operations and
financial condition and that upon the occurrence of any of these events, the
trading price of our common stock could decline.
We cannot guarantee any future results, levels of activity, performance or
achievements. The forward-looking statements contained in this Annual Report on
Form 10-K represent our expectations as of the date this Annual Report on Form
10-K was first filed with the Securities and Exchange Commission and should not
be relied upon as representing our expectation as of any other date. Subsequent
events and developments will cause our expectations to change. However, while we
may elect to update these forward-looking statements, we specifically disclaim
any obligation to do so even if our expectations change.
PART I
Item 1. Business
Overview
We are developing cell transplantation technology for treating human
diseases that are characterized by cell dysfunction or cell death and for which
current therapies are either inadequate or nonexistent. Our products under
development include:
- NeuroCell-PD for Parkinson's disease
- Porcine neural cells for stroke
- Porcine neural cells for focal epilepsy
- Porcine neural cells for chronic intractable pain
- Porcine spinal cord cells for spinal cord injury
- NeuroCell-HD for Huntington's disease
- Human liver cells for cirrhosis
- Porcine liver cells for acute liver failure
- Human muscle cells for cardiac disease
- Porcine retinal pigment epithelial cells,
or porcine RPE cells, for macular degeneration.
Although scientists have demonstrated the feasibility of cell
transplantation, an inadequate supply of human donor cells has hampered
widespread use of cell transplantation in clinical applications. To overcome
this constraint, we have pioneered the use of porcine (pig) cells for clinical
transplantation. Because porcine cells are functionally similar to human cells,
we believe that pigs will be a reliable source of a wide range of cell types
suitable for transplantation into humans. We have shown in preclinical studies
and clinical trials that transplanted porcine cells appear capable of
integrating into the surrounding tissue and addressing the functional deficits
caused by cell damage or cell death.
After receiving clearance from the United States Food and Drug
Administration, commonly referred to as the FDA, to conduct the first ever
clinical trial of transplanted porcine neural cells in humans, we completed a
three-year, twelve-patient, Phase 1 clinical trial to evaluate NeuroCell-PD for
the treatment of Parkinson's disease in 1999. Based on encouraging results from
this Phase 1 clinical trial, we initiated an 18-patient, pivotal, randomized,
double-blinded, placebo-controlled Phase 2/3 clinical trial of NeuroCell-PD in
1998. Treatment of patients in this Phase 2/3 clinical trial has been completed,
and the trial is expected to be unblinded in March 2001.
In recognition of its potential to address an important unmet medical need,
the FDA has designated NeuroCell-PD as a fast track product. Fast track status
expedites the regulatory review of new drugs which are intended for the
treatment of serious or life-threatening conditions and which demonstrate the
potential to address unmet medical needs. The FDA has also granted orphan drug
designation for NeuroCell-PD for advanced Parkinson's disease, which is an
incentive provided to manufacturers to undertake development and marketing of
products to treat relatively rare diseases. Under current law, the first
developer to receive FDA marketing approval for a designated orphan drug is
generally entitled to a seven-year exclusive marketing period in the United
States.
We are developing our lead product candidate, NeuroCell-PD, as well as our
NeuroCell-HD product candidate, in a joint venture with Genzyme Corporation,
which is called Diacrin/Genzyme LLC. As of December 31, 2000, Genzyme has
contributed $29.7 million and we have contributed $6.5 million to the joint
venture which has been used to develop these product candidates.
We are also conducting four separate six-patient, Phase 1 clinical trials
to evaluate fetal porcine neural cells for stroke recovery, fetal porcine neural
cells for the treatment of focal epilepsy, human liver cells for cirrhosis and
human muscle cells for cardiac disease. We have received FDA clearance to
initiate three six-patient Phase 1 clinical trials to evaluate fetal porcine
neural cells for chronic intractable pain, porcine spinal cord cells for spinal
cord injury
and porcine liver cells for the treatment of acute liver failure. We are
conducting preclinical studies to evaluate the use of fetal porcine RPE cells
for the treatment of macular degeneration.
We are also developing a proprietary technology designed to modulate the
human immune system in order to prevent rejection of transplanted cells without
the use of immunosuppressive drugs. This technology, which we refer to as our
immunomodulation technology, involves the selective treatment of cell
populations prior to transplantation to prevent the patient's immune system from
rejecting the transplanted cells. Our approach would eliminate the need for
long-term immunosuppressive drugs, which may leave the patient vulnerable to a
wide range of undesirable side effects, including increasing the patient's
susceptibility to infections and cancer. We have shown in preclinical and
clinical studies the ability of our immunomodulation technology to prevent
rejection of transplanted porcine cells without compromising the immune system
or causing undesirable side effects. We published scientific evidence in The
Journal of Immunology in June 1999 that describes how this technology might work
to allow survival of transplanted cells.
We were incorporated in October 1989. Our principal executive offices are
located at Building 96, 13th Street, Charlestown Navy Yard, Charlestown, MA
02129, and our telephone number at that location is (617) 242-9100.
Diacrin is our trademark. Neurocell is a trademark of our joint venture,
Diacrin/Genzyme LLC. All other trademarks and service marks used in this Annual
Report are the property of their respective owners.
Diacrin's Transplantation Technology
We have pioneered the use of fetal porcine cells for clinical
transplantation for the treatment of human disease. In March 1995, we received
the first FDA clearance to transplant porcine cells into humans. We have
developed critical technology relating to the production process for obtaining
and screening porcine cells. We are also developing technology to modulate the
human immune system to enable porcine cell transplantation into the body without
the use of immunosuppressive drugs.
Each step of our production process has been designed based on proposed FDA
guidelines and is controlled in order to obtain cells suitable for human
transplantation. We have developed procedures to screen pigs for infectious
agents and then quarantine qualified donor pigs at our biomedical animal
facilities. We harvest cells of appropriate age and type under current good
manufacturing procedures, commonly referred to as cGMP, at either our facilities
or those of our joint venture with Genzyme.
We perform our screening procedures in accordance with FDA guidelines
covering xenotransplantation. These guidelines have been designed to prevent
contamination of transplanted cellular products with infectious agents that have
the potential to affect human cells. The FDA requires all sponsors of human
clinical trials involving porcine tissue, including us, to test for the presence
of porcine endogenous retroviruses, commonly known as PERV, in patient blood
samples. To date, none of our patients have shown any sign of PERV.
Current transplantation technology generally requires that the patient's
immune system be suppressed in order to avoid rejection of transplanted cells. T
cells, the main cells involved in directing the body's immune response,
recognize and bind to cell surface proteins known as MHC class I proteins. When
T cells recognize foreign MHC class I proteins, a cascade of events is triggered
which ultimately results in destruction of the transplanted cells that display
these foreign proteins. Cyclosporine, a standard immunosuppressive drug,
prevents this rejection process. Using cyclosporine, we have demonstrated
survival of transplanted porcine cells in a variety of preclinical animal models
and have histologically documented survival of transplanted porcine fetal neural
cells in a deceased patient who had received NeuroCell-PD.
We are also developing proprietary technology to modulate the immune system
to avoid rejection of transplanted cells. We treat isolated cell populations
prior to transplantation with antibody fragments directed against MHC class I
proteins. This technology is designed to eliminate the need for long-term
immunosuppressive drugs. To date the use of our immunomodulation technology in
clinical trials has not resulted in any undesirable side effects. Our scientists
and academic collaborators have performed preclinical studies which show that
cells that have been pretreated using our immunomodulation technology prior to
transplantation survived in several animal models without immunosuppression. The
long-term survival of the transplanted cells seen in these studies suggests that
the recipient's immune system has "learned" to accept the transplant. Thus, we
believe that treatment of cells with antibody fragments prior to transplantation
will induce a state of graft-specific immunological tolerance, which would allow
continued survival of the transplanted cells.
In connection with our Phase 1 clinical trials, six Parkinson's disease
patients, six Huntington's disease patients, three focal epilepsy patients and
five stroke patients have been transplanted with antibody-pretreated porcine
neural cells, using no immunosuppressive drugs. Preliminary indications from the
Phase 1 NeuroCell-PD clinical trial suggest that the improvement in Parkinson's
disease symptoms that has occurred in patients transplanted with
antibody-treated NeuroCell-PD is comparable to the improvement shown in patients
transplanted with NeuroCell-PD with immunosuppressive drugs.
Product Development Programs
We are developing products to address human diseases characterized by cell
dysfunction or cell death which represent a broad-based application of our
technologies for cell production and transplantation. The following table
summarizes our product development programs in cell transplantation and each
product's stage of development:
Diacrin Product Development Programs
U.S. Targeted
Product Candidate Disease Indication Patient Population Status
NeuroCell-PD * Parkinson's disease 130,000 Phase 2/3
(accrual complete)
Porcine neural cells Stroke 3,100,000 Phase 1
Porcine neural cells Focal epilepsy 200,000 Phase 1
Porcine neural cells Chronic intractable pain 2,100,000 IND cleared
Porcine spinal cord cells Spinal cord injury 200,000 IND cleared
NeuroCell-HD * Huntington's disease 25,000 Phase 1
(accrual complete)
Human liver cells Cirrhosis 1,100,000 Phase 1
Porcine liver cells Acute liver failure 45,000 IND cleared
Human muscle cells Cardiac disease 200,000 Phase 1
Porcine RPE cells Macular degeneration 1,400,000 Preclinical
* Being developed by our joint venture with Genzyme.
NeuroCell-PD for Parkinson's Disease
Parkinson's disease is a neurodegenerative disease that results from the
loss of dopamine-producing neural cells within an area of the brain called the
substantia nigra, causing the loss of coordinated muscular activity. The disease
is generally characterized by progressively worsening physical conditions,
including difficulty in movement, muscular rigidity, tremors and postural
instability. In addition to a decreased quality of life, Parkinson's disease may
also result in premature death. In the United States, there are approximately
500,000 people afflicted with Parkinson's disease. The majority of Parkinson's
disease patients are first diagnosed between the ages of 45 and 65. NeuroCell-PD
will be directed to the treatment of patients with advanced Parkinson's disease,
which we estimate to be approximately 130,000 patients in the United States. We
expect the prevalence of Parkinson's disease to increase with the increasing
average age of the population.
Current therapies consist of administration of levodopa, commonly known as
L-dopa, a precursor of dopamine, and dopamine analogues. However, L-dopa is only
effective for a limited period of time, with most patients experiencing a
progressive reduction in drug efficacy over a 10 to 15 year period, due to the
cumulative loss of viable neural cells and tolerance to L-dopa. In addition,
L-dopa therapy can result in severe side-effects, including uncontrolled
movements, also known as dyskinesia, and hallucinations. No currently available
therapy prevents progression of the neurological deficits caused by Parkinson's
disease.
Clinical researchers have shown that transplantation of human fetal neural
cells into Parkinson's disease patients is effective in treating the disease.
For example, Swedish researchers have demonstrated survival and function of
transplanted human fetal neural cells in Parkinson's
disease patients in an ongoing study which commenced in 1989. This study has
shown long-term survival of cells and improvements in patients' conditions.
However, the lack of availability of human fetal neural cells and ethical
concerns regarding the use of human fetal tissue limit its widespread clinical
application. Moreover, even when available, the quality of human fetal neural
cells is variable, which may limit the clinical effectiveness of this treatment.
Our approach to the treatment of Parkinson's disease is to produce and
transplant NeuroCell-PD to replace the function of those neural cells damaged by
the disease. We and our collaborators have shown in animal models that
transplanted porcine fetal neural cells become integrated into the surrounding
brain tissue and correct functional deficits. While NeuroCell-PD is not a cure
for Parkinson's disease, the goal of this treatment is to significantly improve
the clinical condition of patients with severe Parkinson's disease in order to
allow them to function independently.
We harvest porcine fetal neural cells under cGMP for transplantation. We
have developed a specially qualified porcine fetal cell source in collaboration
with Tufts University School of Veterinary Medicine. The porcine fetal neural
cells, which are isolated from a specific region of the developing brain,
function the same as human fetal neural cells. These cells are isolated and
vialed in a suite of clean rooms designed to prevent contamination of the cells.
The vialed cells are then transported to a hospital where a neurosurgeon injects
them into a precise area of the patient's brain. This is accomplished using
standard stereotactic surgical equipment and techniques.
Our twelve-patient Phase 1 clinical trial of NeuroCell-PD, which completed
enrollment in October 1996, was the first FDA-authorized trial involving
transplantation of porcine cells into humans. Although the study was designed to
evaluate the safety of NeuroCell-PD, we also evaluated its effects on the
Parkinson's disease symptoms of the transplant recipients. Each of the twelve
patients in the study received approximately 12 million cells transplanted
unilaterally (one side of the brain). A histological study of one of the
patients, who died of causes unrelated to the transplant, published in the March
1997 issue of Nature Medicine, demonstrated that porcine fetal neural cells
survived and matured in his brain. This study marked the first published
documentation of the survival of cells transplanted from another species into
the human brain and the appropriate growth of the non-human neural cells in the
brain of a Parkinson's disease patient.
Our clinical evaluators observed clinical improvement in the Parkinson's
disease patients beginning approximately three months after transplantation. The
patients who have been followed demonstrated statistically significant clinical
improvement at one year, two years and three years post transplantation as
measured by the Unified Parkinson's Disease Rating Scale.
In 1999, our joint venture with Genzyme completed accrual of patients in an
18-patient pivotal, randomized, double-blinded, placebo-controlled Phase 2/3
clinical trial involving the transplantation of NeuroCell-PD in conjunction with
cyclosporine immunosuppression versus a control group. Each of the treated
patients in this trial received approximately 48 million cells transplanted
bilaterally (both sides of the brain). Treatment of patients in this Phase 2/3
clinical trial has been completed and the trial is expected to be unblinded in
March 2001.
In recognition of its potential to address an important unmet medical need,
the FDA has designated NeuroCell-PD a fast track product. The FDA has also
granted orphan drug designation for NeuroCell-PD for advanced Parkinson's
disease.
Porcine Neural Cells for Stroke
Stroke is the third leading cause of death in the United States, ranking
behind coronary artery disease and cancer. It is also the leading cause of
long-term disability in the United States. Approximately 600,000 people suffer a
stroke each year and there are 4.4 million people that have been disabled by
stroke in the United States. A stroke occurs when the blood supply to a part of
the brain is suddenly interrupted. When blood flow to the brain is interrupted,
some brain cells die immediately, while others will die days or weeks after the
stroke. The death of these brain cells creates a void which becomes a fluid
filled cavity in the brain.
Current therapies for stroke target the early events that occur at the time
of the stroke. Timely intervention with surgery or with non-invasive therapies
that restore blood flow can limit the cell death that occurs. Therapies include
surgical intervention to remove a clearly defined clot or anticoagulant therapy
to "break up" the clot formation. All current therapies are most effective when
administered as quickly as possible after the stroke, and there is a time
post-stroke (12-24 hours) after which therapeutic intervention is useless in
limiting brain cell death.
Our approach of using porcine fetal neural cell transplantation is based on
the premise that many patients who have survived but not fully recovered from a
stroke may benefit from the introduction of cells that may repair or replace the
damaged neural circuitry. We and others have demonstrated in numerous animal
studies the feasibility of repairing and restoring function to a stroke-damaged
brain. In an animal model of stroke, we have shown that transplanted porcine
fetal neural cells survive at high frequency. These cells not only survived in
the brain cavity, but formed solid grafts that integrated appropriately with the
normal brain tissue surrounding the cavity. We have observed extensive neural
outgrowth from the graft to the surrounding brain and behavioral improvements in
a rat model of stroke after transplantation of porcine fetal neural cells. The
transplanted cells have the capacity to form billions of new synaptic
connections as well as to release other chemicals that promote neural cell
growth.
We initiated a six-patient, Phase 1 clinical trial using porcine fetal
neural cells in stroke patients in Boston, Massachusetts at Beth Israel
Deaconess Medical Center and Brigham and Women's Hospital. In April 2000, this
Phase 1 clinical trial was suspended by the FDA to allow investigation of the
cause of two serious adverse events. At the time the trial was suspended we had
treated 5 patients. Both patients who suffered adverse events have recovered
from their adverse event. We have reviewed the scientific and clinical
information relating to these adverse events and concluded that they were most
likely associated with the surgical procedure used to implant the cells. This
conclusion has been supported by an independent group of experts convened by
Diacrin. We are now working with the FDA to obtain clearance to continue
recruiting patients in this trial, although there is no assurance that the FDA
will agree with our conclusions and allow us to resume the trial.
Porcine Neural Cells for Focal Epilepsy
Epilepsy is a chronic, recurrent disorder characterized by excessive
neuronal discharge in the brain, causing muscle spasms or convulsions. Epileptic
seizures are usually associated with some alteration of consciousness. Epilepsy
is one of the most common neurological disorders and is estimated to affect 1.8
million people in the United States. The only currently available treatments for
epilepsy are drug therapy and surgery. A number of anti-epileptic drugs are
available to treat seizures. However, these drugs fail to control seizure
activity in a significant number of patients and frequently cause side effects
that range in severity from minimal impairment of the central nervous system to
death from liver failure. By several estimates, approximately 200,000 patients
with complex partial epilepsy have seizures that are not well-controlled with
currently available drug therapy. The seizures are of many different types and
arise as a result of diverse pathologies. Other therapies available to these
patients are surgical removal of portions of the temporal or frontal lobe and
vagal nerve stimulation through an implantable device. We believe that
transplantation of porcine fetal neural cells will be preferable to removal of
brain tissue if the transplantation is shown to be safe and efficacious.
Our initial therapeutic focus in this area is in the treatment of patients
with complex partial seizures, which are characterized by a focal onset and a
loss of consciousness. Because focal epilepsy is characterized by excessive
electrical activity in a localized area of the brain and the spread of this
activity through the brain, our approach to therapy is to transplant porcine
fetal neural cells in order to exert an inhibitory effect on the hyperexcitable
brain region.
We have initiated a six-patient, Phase 1 clinical trial of porcine fetal
neural cells at Beth Israel Deaconess Medical Center and Brigham and Women's
Hospital in Boston. As of February 28, 2001, we had treated three patients in
this trial.
Porcine Neural Cells for Chronic Intractable Pain
Chronic intractable pain can be caused by neuropathologic processes in
tissues and organs, or by prolonged dysfunction of peripheral or central nervous
system pathways. Chronic intractable pain is characterized by the death of
inhibitory neural cells in the spinal cord and cannot be relieved even with pain
killers such as morphine. It is estimated that 500,000 individuals in the United
States suffer from unrelieved chronic pain as a result of these peripheral
neuropathies. Peripheral neuropathies can also be associated with diseases such
as HIV, diabetes and cancer. Many patients with malignant disease develop
chronic intractable pain, and the prevalence of severe pain in cancer patients
increases as the disease progresses to the advanced stages. There are an
estimated 1.6 million cancer patients who experience chronic intractable pain in
the United States.
We intend to use porcine fetal neural cells to alleviate chronic pain by
repopulating inhibitory neural cells to recover appropriate neurotransmission in
the spinal cord. We have demonstrated in animal studies a favorable safety
profile and survival of porcine fetal inhibitory neural cells transplanted into
the dorsal horn of the spinal cord. Our Investigational New Drug Application,
commonly referred to as IND, has been cleared by the FDA and we plan to initiate
a six-patient, Phase 1 clinical trial in 2001 at New England Medical Center in
Boston and at Washington University Medical Center in St. Louis, Missouri.
Porcine Spinal Cord Cells for Spinal Cord Injury
The prevalence of spinal cord injury, commonly known as SCI, in the United
States is approximately 200,000, with 13,000 additional SCIs annually. Nearly
80% of the injured patients are males in their late 20s to early 30s. Greater
than 95% of these SCIs are compression injuries, the remainder are cases in
which the cord is severed. The spinal cord in the neck is vulnerable to injury
because of its extreme mobility, and approximately 80% of SCIs occur in this
region. Loss of sensorimotor neuron function due to injury requires lengthy
hospitalization after the initial incident as well as extensive rehabilitative
care. Furthermore, all victims of SCI face a lifelong series of acute and
chronic non-neurological complications that can be life-threatening.
The primary objective of current therapies available for SCIs is to prevent
further injury by physically stabilizing the spine and by inhibiting the
inflammatory response that results from the injury. These strategies attempt to
establish optimal conditions for functional recovery and improve patients'
rehabilitative potential. Surgery is designed to protect the patient from
further injury through immobilization, spinal cord realignment and
stabilization, and decompression. To date, there is no drug therapy available
for SCIs except palliative therapies using the corticosteroid,
methylprednisolone, to reduce inflammation of the injured area, and standard
medical practice for complications arising from chronic denervation.
We believe that the transplantation of porcine fetal spinal cord cells into
the site of injury of a damaged human spinal cord may partially reestablish
neural pathways. The transplantation of these cells into a recently injured cord
may prevent secondary neural and muscular atrophy known to occur in these
patients. Partial or full recovery of limb movement, and other motor neural
pathways may reduce the overall time spent in the hospital, decrease the
secondary equipment required for care, and reduce severe and life threatening
complications arising from the injury.
The FDA has cleared our IND to conduct a six-patient Phase 1 clinical
trial. We hope to determine from this trial whether porcine fetal spinal cord
cells transplanted into the damaged spinal cord region will engraft and repair
the damage, leading to improved mobility and function. We plan to begin
recruitment of patients at Albany Medical Center in Albany, New York and at
Washington University Medical Center in St. Louis.
NeuroCell-HD for Huntington's Disease
Huntington's disease is a genetically transmitted disease caused by a loss
of neural cells in the striatum, a specific region of the brain. The loss of
these neural cells results in a progressive deterioration marked by discordant
movement, intellectual impairment and a spectrum of psychiatric and behavioral
disturbances. The clinical symptoms of Huntington's disease generally become
apparent between 40 and 50 years of age. There are approximately 25,000 people
diagnosed with Huntington's disease in the United States. Currently there is no
effective therapy for Huntington's disease. Treatment is palliative with
tranquilizers and anti-psychotic drugs being the only options.
Our approach to treating this disease consists of producing and
transplanting NeuroCell-HD to replace the function of neural cells damaged by
Huntington's disease. Porcine fetal neural cells are isolated from the area of
the pig's brain which develops into the striatum for transplantation into the
striatum of the human transplant recipient's brain.
We have treated twelve patients in a Phase 1 clinical trial in which
NeuroCell-HD was transplanted unilaterally. The Huntington's disease patients in
the clinical trial tolerated the procedure well and the preliminary clinical
data suggest that the product is safe. Of the twelve patients in this trial, the
Huntington's disease in some patients has not progressed, while the disease in
most of the patients has progressed as measured by total functional capacity
scores. Two of the patients have died from the continued progression of the
disease. Because Huntington's disease progresses over an extended period of
time, we intend to follow these patients for at least the next twelve months. We
currently have no plans to conduct a Phase 2 clinical trial until we gather
additional data.
Human Liver Cells for Cirrhosis
Cirrhosis of the liver is a common affliction in the United States,
affecting an estimated 1.5 million individuals and leading to approximately
50,000 deaths annually. In cirrhosis, liver tissue is progressively lost due to
accumulation of fibrous tissue and scarring, and liver function is compromised
due to the degenerative changes. The most common causes of cirrhosis are viral
hepatitis B and C infections and alcoholic liver disease. In the initial stages
of the disease, the patient may experience jaundice and disorientation as liver
function decreases. As the disease progresses, the patient will be hospitalized
with increasing central nervous system effects, known as encephalopathy, which
may lead to coma. The tremendous reserve of liver tissue allows the continued
function of the organ, despite loss of up to 90% of the normal complement of
liver cells. In advanced cirrhosis, little normal liver tissue remains.
The only effective therapy for advanced cirrhosis is liver transplantation.
However, the United Network of Organ Sharing has documented a national lack of
donor livers for transplantation, resulting in a waiting period of over two
years for the average patient. Over 5,000 individuals await liver transplants in
the United States and about 4,000 liver transplants are performed per year for
all indications. Recently, artificial extra-corporeal liver assist devices,
commonly known as ELAD, containing porcine or human liver cells attached to a
dialysis cartridge have been used in an attempt to treat liver failure in
advanced cirrhosis. Studies to date suggest that ELAD may improve some
biochemical parameters such as ammonia levels but the devices have not resulted
in increased survival. Human whole liver transplantation has also been used in
both acute and chronic liver failure. In pilot clinical trials by others,
transplantation of liver cells into either the liver or the spleen has been
shown to be both safe and potentially effective in humans as a bridge to whole
liver transplantation.
For chronic liver disease, we and others have shown in animal models that
liver cell integration is possible when liver cells are injected into the liver
or into the spleen. The spleen appears to be the preferred site due to the
fibrosis and loss of blood supply to the cirrhotic liver. In animal models,
transplantation of liver cells into the spleen is well described, and results in
populating parts of the spleen with functioning liver cells that perform normal
liver functions.
We have initiated a six-patient, Phase 1 clinical trial of human liver cell
transplantation for the treatment of cirrhosis in patients that have been listed
for organ transplantation but are likely to wait at least one year before
receiving a transplant. We believe these patients may benefit from the growth of
transplanted liver cells in their liver or spleen leading to an increase in
liver function. In addition, expansion of the cells may allow sufficient
improvement to render a liver transplant unnecessary, unlike the case with ELAD
which are used only as a bridge to
transplantation. As part of the clinical trial, conventional immunosuppression
will be compared to the use of our immunomodulation technology to determine
whether graft protection is achieved by this technique. We are conducting this
study in collaboration with Massachusetts General Hospital and New England
Medical Center and at the University of Nebraska Medical Center in Omaha,
Nebraska.
Porcine Liver Cells for Acute Liver Failure
Acute liver failure is a severe life-threatening disease that can result
from alcohol consumption, viral infections, such as hepatitis B and C, and drugs
or toxins that damage the liver. The clinical spectrum of acute liver disease
can vary from patients with severe liver failure to patients without symptoms.
The mortality from acute liver failure can be as high as 70%, with patients
dying from associated complications. Acute liver failure results in
approximately 63,000 deaths annually in the United States.
There is currently no therapy that is beneficial for all patients with
acute liver failure. The best available therapy is liver transplantation.
However, many patients are unable to qualify as candidates for liver
transplantation due to multi-organ failure or active alcohol consumption.
Current therapies attempt to treat complications arising from the acute
condition, such as swelling of the brain, infections, and circulatory collapse.
Our approach to the treatment of acute liver failure is to support the
patient by liver cell transplantation in order to provide liver function while
allowing the patient's own liver to recover. In extensive studies in animal
models, our scientists have shown that porcine liver cells can be isolated and
infused into the recipient liver where they continue to function. Long-term
survival and function of these cells has been demonstrated in these animal
models. We believe liver cell transplantation could become a viable alternative
to whole liver transplantation for the treatment of acute liver disease. We
believe this approach would be preferable to transplantation of a whole liver,
due to the difficulty of obtaining livers for transplantation as well as the
expense and invasiveness of the procedure.
Porcine liver cells will be infused into the spleen or liver of these
patients by minimally invasive procedures, thus avoiding a surgical procedure
for these critically ill patients. In addition to the high level of quality
control that can be maintained over the production of porcine liver cells, these
cells also have the advantage of being resistant to infection by human hepatitis
B and C viruses. Since many of the patients enrolled in this study are likely to
carry these viruses, we believe the resistance of the porcine liver cells to
infection may provide a further advantage over human liver transplantation in
which hepatitis B and C reinfect donor livers.
The FDA has cleared our IND application for a six-patient, Phase 1 clinical
trial to test transplantation of porcine liver cells for the treatment of acute
liver failure. Patients enrolled in this trial will not be candidates for liver
transplantation. We are currently recruiting patients for this clinical trial
which will be conducted at Massachusetts General Hospital, New England Medical
Center and University of Nebraska Medical Center.
Additional Liver Cell Applications
Successful delivery of liver cells to patients with alcoholic hepatitis or
cirrhosis may provide the possibility of applying this technology to a variety
of other diseases. The preparation of the cells and their delivery by minimally
invasive procedures should be the same in most of these applications, thus
providing a platform that may be used in multiple applications.
Additional applications include the use of liver cells for the treatment of
metabolic diseases resulting from genetic mutations. Familial
hypercholesterolemia is a disease caused by a defective receptor gene for low
density lipoprotein, commonly referred to as LDL, that leads to elevated levels
of LDL cholesterol and coronary disease at an early age. Familial
hypercholesterolemia afflicts approximately 500,000 patients in the United
States. Currently available drugs do not sufficiently lower circulating LDL
cholesterol levels in approximately 20% of these patients, who may thus benefit
from liver cell transplantation. Our scientists have shown through
transplantation of liver cells into a rabbit model of this disease that porcine
liver cells provide the animal with functional receptors that reduce serum LDL
levels. There is a range of additional metabolic disorders that may be
candidates for treatment by liver cell transplantation. Approximately 30,000
patients in the United States suffer from these metabolic disorders.
Human Muscle Cells for Cardiac Disease
Coronary heart disease is the leading cause of death in the United States,
responsible for approximately 1 of every 5 deaths, or approximately 500,000
deaths each year. According to the American Heart Association, approximately 1
million heart attacks occur annually in the United States. Of the 800,000
patients who survive, approximately 200,000 will die within a year. The disease
is caused by the accumulation of plaque, consisting of lipid deposits,
macrophages and fibrous tissue, on the walls of vessels supplying blood to the
heart muscle. Rupture of unstable plaques exposes substances that promote
platelet aggregation and clot formation. The clot is composed of platelets,
blood cells and fibrin that can block one or more of the coronary vessels,
resulting in an inadequate supply of oxygen to the heart muscle. This highly
active muscle is quickly damaged and the lesions are irreversible because heart
muscle cells are not capable of cell division. The end result is an infarct, a
damaged area of heart muscle in which scar tissue and fibrosis replace dead
heart muscles, lowering the ability of the heart to contract and function.
Treatments to prevent tissue damage after a heart attack include drugs that
break down fibrin clots and open up blocked arteries. These drugs have greatly
influenced morbidity and mortality, but must be administered within a short
interval after a heart attack to be effective. Even with current medical
management, over one third of acute heart attacks are fatal. Cardiac
catheterization and angioplasty to dislodge the clot and open the blocked vessel
have proved effective in restoring blood flow, but cannot reverse preexisting
tissue damage.
Our scientists have isolated and expanded muscle cells from human tissue
and are studying the use of these cells for transplantation into damaged heart
muscle. We believe that patients suffering from heart attacks would benefit if
these muscle cells could repair their damaged hearts. These cells would be
isolated from a muscle biopsy of a patient who had suffered a heart attack,
thereby allowing transplantation of a patient's own muscle cells into his or her
heart, which would avoid any rejection. In preclinical studies, we have
demonstrated that muscle cells integrate into rodent heart muscle. The cells
form stable grafts in a damaged heart.
In August 2000, we initiated a six-patient, Phase 1 clinical trial for
patients with damaged heart muscle at Temple University Hospital.
Porcine RPE Cells for Macular Degeneration
Age related macular degeneration, commonly referred to as AMD, is a disease
of the retina characterized by the loss of vision due to the atrophy of
photoreceptors in the central part of the retina. This is the most important
part of the eye for high resolution vision, such as that used in reading and
driving. Macular degeneration is a common disease, affecting 13 million people
in the United States. It is primarily a disease of the elderly, with
approximately 19% of 65-74 year olds and approximately 37% of individuals over
75 having vision loss. Approximately 85-90% of AMD patients have the "dry" form
of the disease in which the RPE cell layer degenerates without new blood vessel
growth and 10-15% have the "wet" form.
While laser surgery is available to treat the "wet" form of AMD, there are
currently no effective therapies for the "dry" form of AMD. In AMD, abnormal
accumulation of metabolic debris results from reduced activity of the RPE cells
and leads to gradual loss of photoreceptors. The RPE cells become dysfunctional
and metabolic by-products damage photoreceptors, thus compromising visual
acuity. As this layer of cells does not readily replicate in the adult, damage
to the RPE cells can be irreversible and lead to loss of photoreceptors with
associated decreased visual acuity.
RPE cells lie beneath the light-sensing cells responsible for vision and
provide support for the retinal photoreceptors. Our approach is to repopulate
the dysfunctional RPE cell layer by transplanting porcine RPE cells below the
retinal photoreceptors. This therapeutic approach has the potential to
reestablish function in the central part of the retina, prevent further loss of
vision and to improve visual acuity in patients with the "dry" form of the
disease. In patients with the "wet" form of AMD, this therapy could be used in
conjunction with surgery.
The idea of replacing defective RPE cells by transplantation is attractive
because of the key role RPE cells play in maintaining the integrity of the
photoreceptors and their lack of regenerative capacity. Human fetal RPE cells
have been successfully tested by others in preclinical studies and are currently
being evaluated in clinical trials. Our approach is to use porcine fetal RPE
cells. Our preclinical studies have demonstrated the efficacy of porcine fetal
RPE cells in rescuing the photoreceptor layer of the retina from damage that
results from experimental disruption of the RPE cell layer. We will also test
our proprietary immunomodulation technology to prevent rejection of the
transplant. Assuming successful completion of preclinical studies, we plan to
file an IND for a six-patient Phase 1 clinical trial in late 2001.
Genzyme Joint Venture
In September 1996, we formed Diacrin/Genzyme LLC with Genzyme, a joint
venture to develop and commercialize NeuroCell-PD and NeuroCell-HD. Under the
terms of the agreement, Genzyme has provided 100% of the first $10 million in
funding for the development and commercialization of these product candidates
incurred after October 1, 1996, and has agreed to provide 75% of the following
$40 million in funding. We agreed to provide the
remaining 25% of the following $40 million in funding. We will share all costs
incurred in excess of $50 million equally with Genzyme. We will also share any
profits of the joint venture equally with Genzyme. The joint venture agreement
provides that we and Genzyme will jointly develop NeuroCell-PD and NeuroCell-HD
and that Genzyme will market and sell these products on a cost reimbursement
basis on behalf of the joint venture. As of December 31, 2000, Genzyme had
provided $29.7 million to the joint venture and we had provided $6.5 million.
In connection with the joint venture agreement with Genzyme, we granted to
the joint venture the exclusive, worldwide, irrevocable (during the term of the
joint venture agreement), royalty-free right and license to develop and
commercialize NeuroCell-PD and NeuroCell-HD under our existing patent rights and
technology. The license we granted is limited to the treatment of Parkinson's
disease and Huntington's disease in humans using porcine fetal cells. In the
event that either we or Genzyme develop or acquire additional technology or
patent rights that are useful in this field, the party owning such technology or
patent rights is obligated to offer a license to the joint venture to such
technology or patent rights.
The joint venture is governed by a six-member steering committee comprised
of three persons from Genzyme and three persons from Diacrin. The steering
committee meets regularly and makes all of the decisions with respect to the
joint venture's work plans and budgets. The steering committee has appointed a
program manager from each organization to execute the agreed upon product
development work plans.
Manufacturing
The manufacture of most of our products will require the continuous
availability of porcine tissue harvested under cGMP from pigs tested to be free
of infectious agents. Our current source of pig facilities and services is
obtained under contracts from Tufts University School of Veterinary Medicine and
PharmServices, Inc., a division of Charles River Laboratories, Inc. We have also
qualified several pig producers to provide pigs for our production processes.
For the Phase 1 clinical trials of our products, we isolate and prepare
cell populations in our own clinical production facilities in Charlestown,
Massachusetts. We expanded our manufacturing capacity to include approximately
12,000 square feet of clinical production and support space in Framingham,
Massachusetts dedicated to the production of our joint venture products needed
in conjunction with planned clinical trials. We believe that the Framingham
facility is capable of satisfying projected initial demand for commercial
quantities of NeuroCell-PD. This will enable us to utilize our Charlestown
facility for the clinical supply of other product candidates and to postpone the
need for significant additional investment in such facilities.
We currently obtain the antibody fragments used in our immunomodulation
technology from a contract manufacturer. We will evaluate on an ongoing basis
the cost effectiveness and other relevant factors necessary to determine whether
we should continue to obtain the antibody fragment from a contract manufacturer
or produce them ourselves.
Our long-range plan is to expand our internal manufacturing capabilities,
including the facilities necessary to test, isolate and package an adequate
supply of finished cell products in order to meet our long-term clinical and
commercial manufacturing needs.
Patents and Licenses
We intend to aggressively seek patent protection for any products we
develop. We also intend to seek patent protection or rely upon trade secrets to
protect certain of our technologies which will be used in discovering and
evaluating new products. We have 11 issued U.S. patents and 24 patent
applications pending with the United States Patent and Trademark Office. We have
also filed foreign counterparts in the European Union and other selected
countries. These applications seek composition-of-matter and use protection for
the various products we have in development.
Massachusetts General Hospital has been awarded two patents in the United
States covering the basic immunomodulation technology we use. Foreign
counterparts of these patents have been filed in the European Union and other
selected countries. Under an agreement with MGH, we have an exclusive, worldwide
license to the technology and the inventions described in the patents, and all
foreign counterparts, including any continuations, reissues or substitutions as
well as any patents and equivalents which may mature from such patents, subject
to the payment of royalties. Unless sooner terminated, our rights will continue,
on a country by country basis, until the last to expire of the patents. We or
MGH may terminate the agreement, upon notice, in the event the other party
defaults in its material obligations and has failed to cure this default within
60 days of receipt of this notice.
To protect our trade secrets and other proprietary information, we require
all employees, consultants, advisors and collaborators to enter into
confidentiality agreements with us.
Sales and Marketing
Our joint venture agreement with Genzyme authorizes Genzyme, which has an
established sales force experienced in the sales and marketing of
biopharmaceutical and surgical products, to market and sell NeuroCell-PD and
NeuroCell-HD on an exclusive basis as agent of the joint venture on a cost
reimbursement basis.
We have not yet developed sales and marketing capabilities for our other
product candidates. We may form strategic alliances with established
pharmaceutical or biotechnology companies in order to finance the development of
certain of our products and, assuming successful development, to market such
products. These alliances may enable us to expand or accelerate our product
development efforts and also may provide us with access to established marketing
organizations. Alternatively, we may decide to market some of our products on
our own.
Government Regulation
Regulation by governmental authorities in the United States, the European
Union member states and other foreign countries is a significant factor in the
development, manufacture and marketing of our product candidates and in our
ongoing research and product development activities. All of our products will
require regulatory approval by governmental agencies prior to commercialization.
In particular, human therapeutic products are subject to rigorous testing and
approval procedures by the FDA and similar authorities in foreign countries.
Various statutes and regulations govern the preclinical and clinical testing,
manufacturing, labeling, distribution, advertising and sale of these products.
The process of obtaining these approvals and the subsequent compliance with
applicable statutes and regulations require the expenditure of substantial time
and financial and other resources.
Preclinical testing is generally conducted in the laboratory on animals to
evaluate the potential efficacy and the safety of a product. In the United
States the results of these studies are submitted to the FDA as part of an IND
application, which must receive FDA clearance before human clinical testing can
begin. Clinical trials are typically conducted in three phases which may
overlap. Generally, in phase 1, clinical trials are conducted with a small
number of human subjects to determine the early safety profile. In Phase 2,
clinical trials are conducted with groups of patients afflicted with the
specific disease in order to determine preliminary efficacy, optimal treatment
regimens and expanded evidence of safety. Where a product candidate is found to
have an effect at an optimal dose and to have an acceptable safety profile in
Phase 2, larger scale, multi-center, randomized and blinded Phase 3 clinical
trials are conducted with patients afflicted with the target disease to further
test for safety, to further evaluate clinical effectiveness and to obtain
additional information for labeling. In addition, the FDA may request
post-marketing (Phase 4) monitoring of the approved product, during which
clinical data are collected on selected groups of patients to monitor
longer-term safety.
Upon completion of Phase 3, for products regulated by the FDA's Center for
Biologic Evaluation and Research, commonly referred to as CBER, the results of
preclinical and clinical testing are submitted to the FDA in the form of a
Biologics License Application, commonly referred to as BLA, for approval to
manufacture and commence commercial sales. In responding to these applications,
the FDA may grant marketing approval, request additional information or deny the
application if it determined that the application does not satisfy the agency's
regulatory approval criteria. We expect that CBER will regulate NeuroCell-PD and
all of our other products.
The nature of the marketing claims we will be permitted to use for labeling
and advertising will be limited to those allowed in the FDA's approval. Claims
beyond those approved would constitute a violation of the Food, Drug & Cosmetic
Act or the FD&C Act. Noncompliance with the provisions of the FD&C Act or Public
Health Service Act can result in, among other things, loss of approval,
voluntary or mandatory product recall, seizure of products, fines, injunctions
and civil or crimial penalties. Our advertising is also subject to regulation by
the Federal Trade Commission under the FTC Act, which prohibits unfair methods
of competition and unfair or deceptive acts or practices in or affecting
commerce. Violation can result in a variety of enforcement actions including
fines, injunctions and other remedies.
In the European member states and other foreign countries, our ability to
market a product is contingent upon receiving marketing authorization from the
appropriate regulatory authorities. The requirements governing the conduct of
clinical trials, marketing authorization, pricing and reimbursement vary widely
from country to country. Generally, we intend to apply for foreign marketing
authorizations at a national level. However, within the European Union,
procedures are available to companies wishing to market a product in one or all
European Union member states. This centralized process is conducted through the
European Medicines Evaluation Agency, known as the EMEA. The EMEA coordinates
the regulatory process, while a body of experts drawn from member states
undertakes the scientific assessment of the product and recommends whether a
product satisfies the criteria of safety, quality and efficacy for approval. If
the authorities are satisfied that adequate evidence of safety, quality and
efficacy has been presented, a marketing authorization will be granted. This
foreign regulatory approval process includes all of the risks associated with
FDA approval set forth above. We may rely on licensees to obtain regulatory
approval for marketing certain of our products in certain European Union member
states or other foreign countries.
We are also subject to various federal, state and local laws, regulations
and recommendations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds, infectious disease agents and recombinant DNA materials used in
connection with our research work.
We intend to take advantage of the regulatory pathways which may provide
expedited review of our cell transplantation products and allow limited cost
recovery during the clinical research phase. These include: (1) expedited review
for more effective or better tolerated therapies for serious conditions,
commonly referred to as fast track designation, and (2) seeking approval for
limited cost recovery during clinical testing under treatment IND status. We
also intend to seek marketing exclusivity for products which qualify for orphan
drug status, where appropriate.
Fast Track Designation. In 1997, Congress enacted the Food and Drug
Administration Modernization Act, in part, to ensure the availability of safe
and effective drugs by expediting the FDA review process for new products. This
act establishes a statutory program for the approval of fast track products. A
fast track product is defined as a new drug intended for the treatment of a
serious or life-threatening condition, which demonstrates the potential to
address unmet medical needs. Under the fast track program, the sponsor of a new
drug may request the FDA to designate the drug as a fast track product at the
time of the IND submission or after. If a preliminary review of the clinical
data suggests that a fast track product may be effective, the FDA may initiate
review of sections of a marketing application for a fast track product before
the sponsor completes the application. NeuroCell-PD was granted fast track
designation in 1999.
Treatment IND. Treatment IND is a mechanism established by the FDA in 1987
which allows a company to distribute promising investigational therapies to
patients outside of the established clinical trials and to charge a reasonable
fee for such therapy. The disease must be serious or life-threatening and there
must not be satisfactory alternative treatments. Treatment IND status has been
applied to a variety of diseases including cancer, AIDS, Parkinson's disease,
Alzheimer's disease and multiple sclerosis and to several anti-infectives for
renal transplant patients. We intend to pursue this designation, where
appropriate.
Orphan Drug Status. The Orphan Drug Act generally provides incentives to
manufacturers to undertake development and marketing of products to treat
relatively rare diseases or diseases where fewer than 200,000 persons in the
United States would be likely to receive the treatment. A drug that receives
orphan drug designation by the FDA and is the first product to receive FDA
marketing approval for its product claim is entitled to a seven-year exclusive
marketing period in the United States for that product claim. The FDA may
terminate an orphan drug designation for many reasons, including if the
manufacturer of the orphan drug product cannot provide an adequate supply of the
product. Furthermore, a drug that the FDA considers to be different from a
particular orphan drug is not barred from sale in the United States during such
seven-year exclusive marketing period. Legislation to limit the marketing
exclusivity provided for certain orphan drugs has occasionally been introduced
in Congress. Although the outcome of that legislation is uncertain, future
legislation may limit the incentives currently afforded to the developers of
orphan drugs.
We have assigned to the joint venture the orphan drug designation we
received from the FDA for NeuroCell-PD and for NeuroCell-HD. Our porcine fetal
spinal cord cells for spinal cord injury product is also targeted to a
population of less than 200,000 and, therefore, we will pursue orphan drug
designation for this product candidate.
Competition
We believe that our ability to compete successfully will be based on our
ability to create and maintain scientifically advanced technology, develop
proprietary products and attract and retain qualified scientific personnel. In
addition, we have to obtain adequate financing, patents, orphan drug designation
or other protection for our products, and required regulatory approvals, and to
manufacture and successfully market our products both independently and through
collaborators.
The biopharmaceutical and pharmaceutical industries are characterized by
intense competition. We compete against numerous companies, many of which have
substantially greater financial and other resources than we do. Private and
public academic and research institutions also compete with us in the research
and development of human therapeutic products. In addition, many of our
competitors have significantly greater experience than we do in the testing of
pharmaceutical and other therapeutic products and obtaining FDA and other
regulatory approvals of products for use in health care. Accordingly, our
competitors may succeed in obtaining FDA approval for products more rapidly than
we do. If we commence significant commercial sales of our products, we will also
be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which we have limited or no experience.
Our products under development will compete with products and therapies
which are either currently available or currently under development. Competition
will be based, among other things, on efficacy, safety, reliability, price,
availability of reimbursement and patent position. We are aware of other
companies which are pursuing research and development of alternative products or
technologies addressing the same disease categories as our development programs.
Employees
As of February 28, 2001, we had 38 full-time employees, 30 of whom were
engaged in research, development, clinical and quality assurance/quality control
activities. None of our employees are represented by a labor union or covered by
a collective bargaining agreement.
Item 2. Properties
We lease a facility which contains approximately 28,000 square feet of
space in Charlestown, Massachusetts. The lease had a ten-year term ending in
2001, providing for a base rental rate of approximately $60,000 per month, plus
applicable property taxes and insurance. In October 2000, we exercised the first
of two options we have, each to extend the lease an additional five years. As a
result, our lease currently expires in 2006. The new base rental rate which will
begin in October 2001 will be determined in accordance with our lease agreement
which calls for us to pay 90% of the market value rate for similar space. Our
facilities are equipped with laboratory
and cell culture capabilities sufficient to satisfy our research and development
requirements for the foreseeable future and cell isolation capabilities
sufficient to satisfy the clinical production requirements of several of our
product candidates. To the extent that additional similar facilities may be
required, we will be required to secure additional facilities or seek outside
contractors to provide such capabilities.
Item 3. Legal Proceedings
We are currently not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders, through
solicitation of proxies or otherwise, during the last quarter of the fiscal year
ended December 31, 2000.
Executive Officers of the Registrant
The following table sets forth the names, ages and positions of the
directors, executive officers and other key employees of the Company:
Name Age Position
Thomas H. Fraser, Ph.D. (1) 52 President and Chief Executive Officer; Director
E. Michael Egan 47 Chief Operating Officer
Kevin Kerrigan 29 Controller
Albert S. B. Edge, Ph.D. 47 Senior Director of Molecular and Cellular Biology
Jonathan H. Dinsmore, Ph.D. 39 Senior Director of Cell Transplantation Research
Roger J. Gay, Ph.D. 47 Senior Director of Process Development
Abdellah Sentissi, Ph.D. 51 Senior Director of Quality Control and Quality Assurance
Douglas B. Jacoby, Ph.D. 40 Director of Research and Development
Zola P. Horovitz, Ph.D. (1) 66 Director
John W. Littlechild (2) 49 Director
Stelios Papadopoulos, Ph.D. (1) (2) 52 Director
Joshua Ruch 51 Director
Henri A. Termeer (2) 54 Director
----------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Thomas H. Fraser, Ph.D., has served as our President and Chief Executive
Officer and as a Director since 1990. Dr. Fraser was previously Executive Vice
President, Corporate Development, for Repligen Corporation, a biopharmaceutical
company. Dr. Fraser was the founding Vice President for Research and Development
at Repligen in 1981 and served as Executive Vice President from 1982 through
1990 as well as Chief Technical Officer from 1982 through 1988. Prior to joining
Repligen, Dr. Fraser headed the recombinant DNA research group in Pharmaceutical
Research and Development at The Upjohn Company, a pharmaceutical company. Dr.
Fraser received his Ph.D. in Biochemistry from the Massachusetts Institute of
Technology and was a Damon Runyon-Walter Winchell Cancer Fund Postdoctoral
Fellow at The University of Colorado.
E. Michael Egan was promoted to Chief Operating Officer in January 2001.
Prior to that, Mr Egan had served as our Senior Vice President, Corporate
Development, since 1993. Mr. Egan joined us from Repligen, where he was employed
from 1983 to 1993, and since 1989 had been Vice President of Business
Development. He was also a member of the Board of Directors of Repligen Clinical
Partners, L.P., and the Secretary/Treasurer of Repligen Sandoz Research
Corporation. Mr. Egan's previous positions at Repligen include Director of
Business Development and Manager of Business Development. Prior to joining
Repligen in 1983, Mr. Egan was a laboratory supervisor at Dana-Farber Cancer
Institute, Division of Medicine. He received a B.S. in biology from Boston
College and a Certificate of Special Studies in Administration and Management
from Harvard University in 1986.
Kevin Kerrigan has served as our Controller since November 1998. Mr.
Kerrigan joined us in 1997 as Accounting Manager. From 1993 to 1997 Mr. Kerrigan
was a member of the professional staff of Price Waterhouse LLP. Mr. Kerrigan
received a B.S. degree in accounting from Merrimack College and was awarded a
CPA certificate from the Commonwealth of Massachusetts in 1993.
Albert S. B. Edge, Ph.D., has been Senior Director of Molecular and
Cellular Biology since October 1994. He joined Diacrin in 1992 as Director of
Protein Chemistry and in 1993 became Director of Molecular and Cellular Biology.
Dr. Edge was previously Assistant Professor of Medicine at Harvard Medical
School and Investigator at the Joslin Diabetes Center. He has been Principal
Investigator on several grants from the NIH and was the recipient of a Career
Development Award from the Juvenile Diabetes Foundation from 1987 to 1990. He
was Mary K. Iacocca Fellow of the Joslin Diabetes Center in 1984 and after
appointment to the faculty was selected as Capps Scholar in Diabetes of Harvard
Medical School from 1985 to 1987. While a Postdoctoral Fellow in the Department
of Biological Chemistry at Harvard Medical School, Dr. Edge was awarded
Fellowships from the American Cancer Society and the NIH. He received his Ph.D.
in biochemistry from Albany Medical College where he was a Predoctoral Research
Fellow of the United States Public Health Service.
Jonathan H. Dinsmore, Ph.D., has been Senior Director of Cell
Transplantation Research since April 1999. He joined Diacrin in 1992 as a
Research Scientist and was subsequently promoted to Principal Investigator and
then Director of Cell Transplantation Research. Dr. Dinsmore was previously a
Postdoctoral Fellow of the American Cancer Society in the Biology department at
the Massachusetts Institute of Technology from 1988 to 1992. He received a Ph.D.
in biology from Dartmouth College, where he was a Presidential Scholar and
recipient of a Kramer Fellowship. Dr. Dinsmore has worked on National Science
Foundation-sponsored research projects at the Marine Biological Laboratories in
Woods Hole, Massachusetts and at a United States research base in Antarctica.
Roger J. Gay, Ph.D., has been Senior Director of Process Development since
February 2000. Dr. Gay was hired by Diacrin in 1993 as Director of Process
Development. From 1986 through 1993, he was Director of Product Development at
Organogenesis, Inc. Dr. Gay's previous positions were Manager of a Contract
Research and Cytotoxicity Testing Laboratory and Director of Product Development
at Bioassay Systems Research Corporation from 1982 to 1986. He received a B.A.
in chemistry from the College of the Holy Cross in 1975 and a Ph.D. in
biochemistry from the University of Rochester in 1981. From 1981 through 1983,
he was a postdoctoral research fellow in the Department of Microbiology and
Molecular Genetics at Harvard Medical School.
Abdellah Sentissi, Ph.D., has been Senior Director of Quality Control and
Quality Assurance since February 2000. Dr. Sentissi came to Diacrin in 1995 as
Director of Quality Control and Quality Assurance. Prior to joining Diacrin,
from 1992 to 1995, he served as the Director of QC/QA and Technical Affairs at
Endocon, Inc. From 1985 through 1992, he was the Chief of Quality Control at
Massachusetts Biologics Laboratories. He received a pharmacy degree in 1973 and
a biology degree in 1976 from the University of Paul Sabatier, Toulouse, France,
and a Ph.D. in biomedical sciences from Northeastern University in 1984. From
1984 through 1985, he was a postdoctoral research fellow in the Department of
Clinical Chemistry at Northeastern University. He has been a lecturer in
pharmaceutical biotechnology at the School of Pharmacy at Northeastern
University since 1990.
Douglas B. Jacoby, Ph.D., was appointed Director of Research in April 1999.
He joined Diacrin in 1993 as a Research Scientist and was subsequently promoted
to Principal Investigator. While a postdoctoral fellow in the Biochemistry
department at Brandeis University, Dr. Jacoby was awarded a fellowship from the
NIH. He received his Ph.D. in Biochemistry from the University of Minnesota with
awards from the NIH and a Doctoral Dissertation Fellowship. He was graduated
with an A.B. in Biology from Kenyon College.
Zola P. Horovitz, Ph.D., has served as a Director of Diacrin since 1994.
Dr. Horovitz was Vice President, Business Development and Planning at
Bristol-Myers Squibb Pharmaceutical Group from 1991 until 1994 and was Vice
President, Licensing from 1989 to 1991. Prior to 1989, Dr. Horovitz spent 30
years as a member of the Squibb Institute for Medical Research, most recently as
Vice President, Research Planning. Dr. Horovitz is also a director of Avigen,
Inc., BioCryst Pharmaceuticals, Magainin Pharmaceuticals, Paligent, Shire
Pharmaceuticals, Synaptic Pharmaceuticals, Inc. and Palatin Technologies. Dr.
Horovitz received his Ph.D. from the University of Pittsburgh.
John W. Littlechild has been a Director of Diacrin since 1992. Mr.
Littlechild is associated with several venture capital partnerships managed by
HealthCare Ventures LLC, including HealthCare Ventures II, L.P., HealthCare
Ventures III, L.P., and HealthCare Ventures IV, L.P. Mr. Littlechild currently
serves as Vice Chairman of HealthCare Ventures LLC. From 1984 to 1991, Mr.
Littlechild was a Senior Vice President of Advent International Corporation, a
venture capital company in Boston and London. Prior to working at Advent in
Boston, Mr. Littlechild was involved in establishing Advent in the United
Kingdom. From 1980 to 1982, Mr. Littlechild served as Assistant Vice President
for Citicorp Venture Corporation, a venture capital company, in London, prior to
which he worked with ICI Ltd., an agro-chemical company, and Rank Xerox, an
office equipment company, in marketing and financial management. Mr. Littlechild
holds a B.Sc. from the University of Manchester and an MBA from Manchester
Business School. Mr. Littlechild serves on the board of directors of various
health care and biotechnology companies, including Orthofix International N.V.,
a medical device company, and AVANT Immunotherapeutrics and Dyax, biotechnology
companies. Mr. Littlechild also serves on several Boards for the Harvard Medical
School including the Executive Committee of the Board of Fellows, the Science
and Technology Committee, and is Chairman of the Microbiology Department
Advisory Board. He is also a member of the Board of Visitors of the Beth Israel
Deaconess Center for Research and Education.
Stelios Papadopoulos, Ph.D., has been a Director of Diacrin since 1991. Dr.
Papadopoulos is a Managing Director in the investment banking division at SG
Cowen Securities Corporation focusing on the biotechnology and pharmaceutical
sectors. Prior to joining SG Cowen Securities Corporation in February 2000, he
spent 13 years as an investment banker at PaineWebber, where he was most
recently Chairman of PaineWebber Development Corp., a PaineWebber subsidiary.
Prior to becoming an investment banker he spent two years as a biotechnology
analyst, first at Donaldson, Lufkin & Jenrette and subsequently at Drexel
Burnham Lambert, where he was elected to the Institutional Investor 1987
All-American Research Team. Before coming to Wall Street in 1985, Dr.
Papadopoulos was on the faculty of the Department of Cell Biology at New York
University Medical Center. He continues his affiliation with NYU Medical Center
as an Adjunct Associate Professor of Cell Biology. Dr. Papadopoulos holds a
Ph.D. in biophysics and an MBA in finance, both from New York University. He is
a founder and Chairman of the Board of Exelixis, Inc., and sits on the board of
several private companies in the biotechnology sector.
Joshua Ruch has been a Director of Diacrin since March 1998. Mr. Ruch is
the Chairman and Chief Executive Officer of Rho Management Company, Inc., an
international investment management firm which he co-founded in 1981. Prior to
founding Rho, Mr. Ruch was employed in investment banking at Salomon Brothers
and Bache Halsey Stuart, Inc. Mr. Ruch received a B.S. degree in electrical
engineering from the Israel Institute of Technology (Technion) and an MBA from
the Harvard Business School.
Henri A. Termeer has been a Director of Diacrin since December 1996. Mr.
Termeer has served as President and Director of Genzyme Corporation since 1983,
as Chief Executive Officer since 1985 and as Chairman of the Board since 1988.
For ten years prior to joining Genzyme, Mr. Termeer held various management
positions at Baxter Travenol Laboratories, Inc., a manufacturer of human health
care products. Mr. Termeer also serves on the boards of directors of Abiomed,
Inc., AutoImmune, Inc., Genzyme Transgenics Corporation and is a trustee of
Hambrecht & Quist Healthcare Investors and Hambrecht & Quist Life Sciences
Investors.
Directors are elected annually by our stockholders and hold office until
the next annual meeting of stockholders or until their resignation or removal.
Each executive officer serves at the discretion of the board of directors and
holds office until his or her successor is elected and qualified or until his or
her earlier resignation or removal. There are no family relationships among any
of our directors or executive officers.
Scientific Advisory Board
Our scientific advisory board is a multi-disciplinary assemblage of
scientists and physicians in the fields of transplantation, immunology,
endocrinology, neurophysiology and neuromuscular physiology, transplantation
biology and surgery. The scientific advisory board meets regularly to review and
evaluate our research programs and advise us with respect to technical matters.
The members of the scientific advisory board are as follows:
Member
Name Since Position
Hugh Auchincloss, Jr., M.D. 1992 Professor of Surgery, Harvard
Medical School; Director, Kidney
Transplantation, Brigham and
Women's Hospital; Surgical
Director, Pancreas Transplantation
and Visiting Surgeon,
Massachusetts General Hospital
Jay A. Berzofsky, M.D., Ph.D. 1992 Chief, Molecular Immunogenetics
and Vaccine Research Section,
Metabolism Branch, National
Cancer Institute, National
Institutes of Health
Robert H. Brown, Jr., M.D., D.Phil. 1992 Director of Cecil B. Day
Laboratory for Neuromuscular
Research, Associate in Neurology,
Massachusetts General Hospital;
Professor of Neurology,
Harvard Medical School
Laurie H. Glimcher, M.D. 1993 Professor of Immunology,
Department of Immunology and
Infectious Diseases, Harvard
School of Public Health; Professor
of Medicine, Harvard Medical
School
Ronald D. McKay, Ph.D. 1998 Chief, Laboratory of Molecular
Biology, National Institute of
Neurological Disorders and Stroke,
National Institutes of Health
David H. Sachs, M.D. 1990 Director, Transplantation Biology
Research Center, Massachusetts
General Hospital; Paul S.
Russell/Warner-Lambert Professor
of Surgery (Immunology), Harvard
Medical School
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our common stock is traded on the NASDAQ National Market under the
symbol DCRN. The following table sets forth for the periods indicated the high
and low sale prices for the common stock during 1999 and 2000 as reported on the
Nasdaq National Market:
High Low
Fiscal Year 1999
First Quarter 6 3/4 4
Second Quarter 6 3/16 5
Third Quarter 6 1/8 4 1/2
Fourth Quarter 8 1/4 3 3/4
Fiscal Year 2000
First Quarter 19 11/16 5 3/4
Second Quarter 13 1/2 6 5/16
Third Quarter 9 5/8 6 1/4
Fourth Quarter 7 5/8 3 7/8
In connection with our initial public offering in February 1996, we issued
2,875,000 redeemable warrants to purchase our common stock at an exercise price
of $16 per share, subject to certain adjustments. The warrants were traded on
the NASDAQ National Market under the symbol DCRNW. On December 31, 2000, all
unexercised warrants expired.
As of February 20, 2001 there were approximately 110 record holders of our
common stock and approximately 3,900 beneficial owners of our common stock.
We have never declared or paid cash dividends on our capital stock. We
intend to retain earnings, if any, for use in our business and do not anticipate
declaring or paying any cash dividends in the foreseeable future.
We did not sell any equity securities during the quarter ended December 31,
2000 that were not registered under the Securities Act.
The following information updates and supplements the information regarding
use of proceeds originally filed by Diacrin on Form SR for the period ended May
12, 1996, as amended to date and relates to securities sold by the Company
pursuant to the Registration Statement on Form S-2 (Registration No: 33-80773)
which was declared effective on February 12, 1996: Through December 31, 2000, we
have used approximately $18,400,000 of the total net proceeds from our initial
public offering of $20,911,755. Of the $18,400,000 used, approximately $394,000
was used for the purchase of machinery and equipment; approximately $1.0 million
was used for repayment of indebtedness; and approximately $17,006,000 was used
for working capital. The unused proceeds of approximately $2,512,000 are in
temporary investments consisting of corporate notes and a money market mutual
fund. All proceeds used or invested were direct or indirect payments to others.
Item 6. Selected Financial Data
The selected financial data set forth below as of December 31, 1999 and
2000 and for each of the three years in the period ended December 31, 2000 are
derived from our financial statements which have been audited by Arthur Andersen
LLP, independent public accountants, and which are included elsewhere in this
Annual Report on Form 10-K. The selected financial data set forth below as of
December 31, 1996, 1997 and 1998 and for the years ended December 31, 1996 and
1997 are derived from our financial statements which have been audited by Arthur
Andersen LLP and are not included herein. The data set forth below should be
read in conjunction with our financial statements, related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
------------------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except share and per share data)
REVENUES:
Research and development $ 1,144 $ 4,763 $ 3,623 $ 2,971 $ 2,082
Interest income 1,100 1,302 1,576 1,323 3,125
--------- --------- ---------- --------- --------
Total revenues 2,244 6,065 5,199 4,294 5,207
--------- --------- ---------- --------- --------
OPERATING EXPENSES:
Research and development 5,767 6,863 7,372 5,921 5,997
General and administrative 1,304 1,460 1,484 1,398 1,348
Interest expense 158 93 89 47 30
--------- --------- ---------- --------- --------
Total operating expenses 7,229 8,416 8,945 7,366 7,375
--------- --------- ---------- --------- --------
Equity in operations of joint venture - - (1,084) (1,688) (1,369)
--------- --------- ---------- --------- --------
Net loss $ (4,985) $ (2,351) $ (4,830) $ (4,760) $ (3,537)
========= ========= ========== ========= ========
Net loss per common share
Basic and diluted $ (.44) $ (.18) $ (.34) $ (.33) $ (.21)
========= ========= ========== ========= ========
Weighted average shares
Basic and diluted 11,389,823 13,235,286 14,156,179 14,364,154 17,073,194
=========== ========== ========== ========== ==========
At December 31,
---------------------------------------------------------------------
Balance Sheet Data: 1996 1997 1998 1999 2000
-------- -------- -------- -------- ----
Cash, cash equivalents and investments $ 23,482 $ 21,347 $ 26,270 $ 21,420 $ 54,607
Working capital 12,413 9,551 21,812 17,133 32,502
Total assets 24,275 22,780 27,484 22,366 55,793
Long-term debt 370 672 392 249 119
Stockholders' equity 22,437 20,204 24,845 20,145 53,766
------------------
(1) Computed as described in Note 2 (d) of Notes to Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since our inception, we have principally focused our efforts and resources
on research and development of cell transplantation technology for treating
human diseases that are characterized by cell dysfunction or cell death and for
which current therapies are either inadequate or nonexistent. Our primary source
of working capital to fund those activities has been proceeds from the sale of
equity and debt securities. In addition, since October 1, 1996, we have received
funding from our joint venture with Genzyme in support of the NeuroCell-PD and
NeuroCell-HD product development programs. We have not received any revenues
from the sale of products to date and do not expect to generate product revenues
for the next several years. We have experienced fluctuating operating losses
since inception and expect that the additional activities required to develop
and commercialize our products will result in increasing operating losses for
the next several years. At December 31, 2000, we had an accumulated deficit of
$47.8 million.
In September 1996, we formed a joint venture with Genzyme to develop and
commercialize NeuroCell-PD and NeuroCell-HD. Under the joint venture agreement
Genzyme agreed to fund 100% of the first $10 million of development and
commercialization costs incurred after October 1, 1996, 75% of the next $40
million and 50% of all development and commercialization costs in excess of $50
million. After Genzyme funds the first $10 million, we are responsible for
funding 25% of the next $40 million and 50% of all development and
commercialization costs in excess of $50 million.
Through December 31, 1997, Genzyme made 100% of the total cash
contributions to the joint venture. During the first quarter of 1998, we began
making cash contributions to the joint venture equal to 25% of the joint
venture's funding requirements. As of December 31, 2000, approximately $29.7
million had been contributed to the joint venture by Genzyme and approximately
$6.5 million had been contributed by us. The joint venture's 2001 product
development plans, together with our continued funding of the joint venture, are
expected to significantly increase our net loss and our use of cash and
investments to fund the joint venture in 2001 as compared with 2000.
We record as research and development expense all costs related to
NeuroCell-PD and NeuroCell-HD incurred by us on behalf of the joint venture. We
then recognize research and development revenue equal to the amount of
reimbursement received by us from the joint venture out of funds contributed by
Genzyme. We do not recognize research and development revenue for amounts we
receive from the joint venture out of funds contributed by us. As Genzyme incurs
costs on behalf of the joint venture that we are obligated to fund, we recognize
an expense in our statement of operations captioned "Equity in operations of
joint venture."
Results of Operations
Year Ended December 31, 2000 Versus Year Ended December 31, 1999
Research and development revenues were approximately $2.1 million for the
year ended December 31, 2000 and $3.0 million for the year ended December 31,
1999. Revenues for both years were comprised entirely of revenue from the joint
venture. The decrease in revenues was primarily a result of a decrease in
clinical production activity related to our joint venture with Genzyme. The
joint venture completed accruing patients into its Phase 2/3 clinical trial for
NeuroCell-PD in 1999.
Interest income was $3.1 million for the year ended December 31, 2000
versus $1.3 million for the year ended December 31, 1999. The increase in 2000
was due to greater cash balances available for investment in the current year
period as a result of our public stock offering completed in March 2000.
Research and development expenses of $6.0 million for the year ended
December 31, 2000 and $5.9 million for the year ended December 31, 1999,
remained relatively unchanged between the periods.
General and administrative expenses of $1.3 million for the year ended
December 31, 2000 and $1.4 million for the year ended December 31, 1999,
remained relatively unchanged between the periods.
Interest expense was $30,000 for the year ended December 31, 2000 and
$47,000 for the year ended December 31, 1999. The decrease in 2000 was due to
the scheduled pay down of lease and loan debt outstanding.
For the year ended December 31, 2000, we recorded a $1.4 million charge
related to our equity in the operations of the joint venture compared to a $1.7
million charge for the year ended December 31, 1999. This expense related to
funds contributed by us to the joint venture that were used to fund expenses
incurred by Genzyme on behalf of the joint venture. The decreased charge in the
current year period was primarily due to a decrease in clinical activity
performed by Genzyme on behalf of the joint venture as the joint venture
completed recruiting patients into it Phase 2/3 clinical trial in 1999.
We incurred a net loss of approximately $3.5 million for the year ended
December 31, 2000 versus a net loss of approximately $4.8 million for the year
ended December 31, 1999.
Year Ended December 31, 1999 Versus Year Ended December 31, 1998
Research and development revenues were approximately $3.0 million for the
year ended December 31, 1999 versus $3.6 million for the year ended December 31,
1998. Revenues for both years were comprised entirely of revenue received from
Genzyme for reimbursement of our expenses for the joint venture. The reduction
in research and development revenues in 1999 was primarily attributable to the
reduction from 100% to 75% of the percentage of funding for the joint venture
provided by Genzyme. This reduction took effect in the first quarter of 1998.
Interest income was $1.3 million for the year ended December 31, 1999
versus $1.6 million for the year ended December 31, 1998. The 16% decrease in
1999 was primarily due to reduced interest income realized on lower cash
balances available for investment.
Research and development expenses were $5.9 million for the year ended
December 31, 1999 versus $7.4 million for the year ended December 31, 1998. The
20% decrease in 1999 was primarily due to a reduction in preclinical research as
several of our product candidates had begun clinical testing. The decrease was,
to a lesser extent, due to the additional production costs of clinical grade
antibody incurred during 1998 for use in our clinical trials and preclinical
research.
General and administrative expenses were $1.4 million for the year ended
December 31, 1999 and $1.5 million for the year ended December 31, 1998.
Interest expense was $47,000 for the year ended December 31, 1999 and
$89,000 for the year ended December 31, 1998. The decrease in 1999 was due to
the scheduled pay down of lease and loan debt outstanding.
We recorded a charge of $1.7 million for the year ended December 31, 1999
and $1.1 million for the year ended December 31, 1998 related to our equity in
the operations of the joint venture. The increased charge was primarily due to
the timing of the reduction in the percentage of funding from Genzyme from 100%
to 75% in accordance with the joint venture agreement.
We incurred a net loss of approximately $4.8 million for each of the two
years in the period ended December 31, 1999.
Liquidity and Capital Resources
We have financed our activities primarily with the net proceeds from the
sale of equity and debt securities aggregating $102.0 million and with interest
earned thereon. In addition, we have recorded approximately $14.5 million in
revenue from our joint venture since it commenced on October 1, 1996. At
December 31, 2000, we had cash and cash equivalents, short-term investments and
long-term investments aggregating approximately $54.6 million.
Net cash used in operating activities was $2.5 million for the year ended
December 31, 2000, $2.9 million for the year ended December 31, 1999 and $3.1
million for the year ended December 31, 1998. Cash used in operations for the
years ended December 31, 2000, 1999 and 1998 was primarily attributable to our
net loss, offset in part by our equity in operations of the joint venture.
Net cash used in investing activities was $25.6 million for the year ended
December 31, 2000. Net cash provided by investing activities was $344,000 for
the year ended December 31, 1999. Net cash used in investment activities was
$6.0 million for the year ended December 31, 1998. Net cash used in investing
activities for the year ended December 31, 2000, was primarily attributable to
an increase in short-term investments and long-term investments. The increase in
investments was due to our public offering of Common Stock in March 2000. Net
cash provided by investing activities for the year ended December 31, 1999 was
primarily attributable to a decrease in short-term investments and the return of
capital for services provided on behalf of our joint venture, offset in part by
our investment in our joint venture. Net cash used by investing activities for
the year ended December 31, 1998 was primarily attributable to an increase in
short-term investments and our investment in our joint venture, offset in part
by a decrease in long-term investments and to a lesser extent the return of
capital for services provided on behalf of our joint venture.
Net cash provided by financing activities was $37.0 million for the year
ended December 31, 2000. Net cash used in financing activities was $220,000 for
the year ended December 31, 1999. Net cash provided by financing activities was
$9.1 million for the year ended December 31, 1998. Net cash provided by
financing activities for the year ended December 31, 2000 was primarily
attributable to net proceeds from the sale of common stock in a public offering
in March 2000. Net cash used in financing activities for the year ended December
31, 1999 was primarily attributable to principal payments made towards long-term
debt. Net cash provided by financing activities for the year ended December 31,
1998 was primarily attributable to net proceeds from the sale of common stock in
a private placement in February 1998.
We have purchased approximately $2.4 million of capital equipment since
inception. In November 1997, we borrowed $650,000 at the prime rate plus 0.5%
(10.00% at December 31, 2000) under an unsecured five-year term loan with a bank
to finance our biomedical animal facility acquired during 1997. As of December
31, 2000, we owed $249,000 under this term loan. We had no material commitments
for capital expenditures as of December 31, 2000.
In accordance with the joint venture agreement, Genzyme agreed to make
financing available to us from and after the date that Genzyme provides the
initial $10 million of funding to the joint venture. Genzyme agreed to make
available an unsecured, subordinated line of credit of up to an aggregate amount
of $10 million. We may draw on this facility only in the event that our cash and
cash equivalents are insufficient to fund our budgeted operations for a
specified period of time, and we may use the funds only to fund capital
contributions to the joint venture. The facility will be available through the
date five years after the date we first draw on the facility, and all
outstanding principal and interest will be due on that fifth anniversary.
Advances will be interest-bearing, evidenced by a promissory note and subject to
other customary conditions. The aggregate amount of draws under the facility in
any calendar year may not exceed $5 million. We have not made any draws on the
facility as of December 31, 2000, and do not anticipate drawing on the facility
for the foreseeable future.
We believe that our existing funds, together with expected future funding
under the joint venture agreement with Genzyme, will be sufficient to fund our
operating expenses and capital requirements as currently planned for the
foreseeable future. However, our cash requirements may vary materially from
those now planned because of results of research and development, the scope and
results of preclinical and clinical testing, any termination of the joint
venture, relationships with future strategic partners, changes in the focus and
direction of our research and development programs, competitive and
technological advances, the FDA's regulatory process, the market acceptance of
any approved products and other factors.
We expect to incur substantial additional costs, including costs related to
ongoing research and development activities, preclinical studies, clinical
trials, expanding our cell production capabilities and the expansion of our
laboratory and administrative activities. Therefore, in order to achieve
commercialization of our potential products, we may need substantial additional
funds. We cannot assure you that we will be able to obtain the additional
funding that we may require on acceptable terms, if at all.
Diacrin/Genzyme LLC Financial Statements
For the years ended December 31, 2000 and 1999, our equity in operations of
the joint venture exceeded 20% of our net loss. Accordingly, pursuant to the
rules of the Securities and Exchange Commission, this Annual Report on Form 10-K
includes separate financial statements for the joint venture.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement (as amended by SFAS No. 137)
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS No. 133 (as amended by SFAS No. 138) establishes accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The Company does not expect adoption of
this statement to have a material impact on the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101, as amended, is effective for the fourth quarter of all fiscal
periods beginning after December 15, 1999. Adoption of SAB No. 101 did not have
a material impact on the Company's financial position or results of operations.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K or presented elsewhere by management from time
to time. The forward-looking statements contained in this Annual Report on Form
10-K represent our expectations as of the date this Annual Report on Form 10-K
was first filed with the SEC. Subsequent events will cause our expectations to
change. However, while we may elect to update these forward-looking statements,
we specifically disclaim any obligation to do so. See "Cautionary Note Regarding
Forward-Looking Statements."
Risks Related to Our Business, Industry and Strategy
We have not successfully commercialized any products to date and, if we do
not successfully commercialize any products, we will not be profitable
Neither we nor any other company has received regulatory approval to market
the types of products we are developing. The products that we are developing
will require additional research and development, clinical trials and regulatory
approval prior to any commercial sale. Other than our NeuroCell-PD product
candidate for the treatment of Parkinson's disease which is in Phase 2/3
clinical trials, the remainder of our product candidates are currently in early
phase clinical trials or in the preclinical stage of development. Our products
may not be effective in treating any of our targeted disorders or may prove to
have undesirable or unintended side effects, toxicities or other characteristics
that may prevent or limit their commercial use.
We currently have no products for sale and do not expect to have any
products available for sale for several years. If we are not successful in
developing and commercializing any products, we will never become profitable.
We are dependent on Genzyme Corporation to fund, develop and market our
lead product candidate, NeuroCell-PD, and if our joint venture with Genzyme
terminates, we may not be able to complete development or commercialization of
NeuroCell-PD
We have entered into a joint venture agreement with Genzyme relating to the
development and commercialization of NeuroCell-PD, our most advanced product
candidate. This agreement also covers our NeuroCell-HD product candidate. Under
this agreement, Genzyme has agreed to provide significant funding toward the
development and commercialization of these products and to market and sell the
products on behalf of the joint venture. Genzyme has the right to terminate the
agreement at any time upon 180 days notice to us. We cannot assure you that
Genzyme will not terminate this agreement, or that our economic and other
interests will coincide with those of Genzyme during the term of the agreement.
If Genzyme were to terminate this agreement, we:
- would lose a significant source of funding for the NeuroCell-PD and
NeuroCell-HD product development programs;
- would lose access to Genzyme's experienced development, sales and
marketing organizations and manufacturing facilities;
- would need to establish clinical production facilities for the production
of NeuroCell-PD and NeuroCell-HD; and
- may be unable to complete development or commercialization of
NeuroCell-PD and NeuroCell-HD.
In addition, Genzyme has the right to terminate the joint venture agreement
following an unremedied breach of any material term of the agreement by us. If
Genzyme terminates the agreement, Genzyme has the option to obtain an exclusive,
worldwide, royalty bearing license to some of our technology which is required
to manufacture and market NeuroCell-PD and NeuroCell-HD. If Genzyme exercises
this option, we would only be entitled to receive a royalty on the net sales of
NeuroCell-PD and NeuroCell-HD and this royalty would be significantly less than
the amounts we would be entitled to receive under the joint venture agreement.
Our cell transplantation technology is complex and novel and there are
uncertainties as to its effectiveness
We have concentrated our efforts and therapeutic product research on cell
transplantation technology, and our future success depends on the successful
development of this technology. Our principal approach is based upon
xenotransplantation, or the transplantation of cells, tissues or organs from one
species to another. Our product candidates generally involve the transplantation
of porcine (pig) neural cells into humans. Xenotransplantation is an emerging
technology with limited clinical experience. Neither the FDA nor any foreign
regulatory body has approved any xenotransplantation-based therapeutic product
for humans.
Our technological approaches may not enable us to successfully develop and
commercialize any products. If our approaches are not successful, we may be
required to change the scope and direction of our product development
activities. In that case, we may not be able to identify and implement
successfully an alternative product development strategy.
Xenotransplantation involves risks which have resulted in additional FDA
oversight and which in the future may result in additional regulation
Xenotransplantation poses a risk that viruses or other animal pathogens may
be unintentionally transmitted to a human patient. The FDA requires us to
perform tests to determine whether infectious agents, including PERV, are
present in patients who have received porcine cells. While PERV has not been
shown to cause any disease in pigs, it is not known what effect, if any, PERV
may have on humans. We have performed tests on patients who have received our
porcine cells. No PERV has been detected to date, but we cannot assure you that
we will not detect PERV or another infectuous agent in the future.
The FDA requires lifelong monitoring of porcine cell transplant recipients.
If PERV or any other virus or infectious agent is detected in tests or samples,
the FDA may require us to halt our clinical trials and perform additional tests
to assess the risk to patients of infection. This could result in additional
costs to us and delays in the trials of our porcine cell products. Furthermore,
even if patients who have received our porcine cells remain PERV-free, we could
be adversely affected if PERV is detected in patients who receive porcine cells
provided by others.
In January 2001, the FDA issued definitive regulatory guidelines for
xenotransplantation titled "PHS Guideline on Infectious Disease Issues in
Xenotransplantation." We cannot assure you that we will be able to comply with
these guidelines.
We face substantial competition, which may result in others discovering,
developing or commercializing products before or more successfully than we do
The products we are developing compete with existing and new products being
developed by pharmaceutical, biopharmaceutical and biotechnology companies, as
well as universities and other research institutions. Many of our competitors
are substantially larger than we are and have substantially greater capital
resources, research and development staffs and facilities than we have. Efforts
by other biotechnology or pharmaceutical companies could render our products
uneconomical or result in therapies for the disorders we are targeting that are
superior to any therapy we develop. Furthermore, many of our competitors are
more experienced in product development and commercialization, obtaining
regulatory approvals and product manufacturing. As a result, they may develop
competing products more rapidly and at a lower cost. These competitors may
discover, develop and commercialize products which render non-competitive or
obsolete the products that we are seeking to develop and commercialize.
If the market is not receptive to our products upon introduction, our
products may not achieve commercial success
The commercial success of any of our products will depend upon their
acceptance by patients, the medical community and third-party payors. Among the
factors that we believe will materially affect acceptance of our products are:
- the timing of receipt of marketing approvals and the countries in which
those approvals are obtained;
- the safety and efficacy of our products;
- the need for surgical administration of our products;
- problems encountered in the field of xenotransplantation;
- the success of physician education programs;
- the cost of our products which may be higher than conventional
therapeutic products because our products involve surgical
transplantation of living cells; and
- the availability of government and third-party payor reimbursement of our
products.
Risks Relating to Clinical and Regulatory Matters
The evaluation of the unblinded data from our Phase 2/3 clinical trial of
NeuroCell-PD may not support further development
We have completed treatment of patients in a Phase 2/3 trial for our
NeuroCell-PD product candidate, and the final patient in the trial reached the
eighteen-month post-transplantation endpoint in February 2001. The trial is
expected to be unblinded in March 2001. As is the case with the results of any
clinical trial, the results of the Phase 2/3 clinical trial may not show a
statistically significant difference between the treated patients and the
patients in the control group. If such an outcome were to occur, it is possible
that further clinical development of NeuroCell-PD would not be supported by
Genzyme, or that we may choose to discontinue development or modify the clinical
trial protocols, which could result in the termination of or significantly delay
the progress of the NeuroCell-PD development program.
If our clinical trials are not successful for any reason, we will not be
able to develop and commercialize any related products
In order to obtain regulatory approvals for the commercial sale of our
product candidates, we will be required to complete extensive clinical trials in
humans to demonstrate the safety and efficacy of the products. We have limited
experience in conducting clinical trials.
The submission of an IND may not result in FDA authorization to commence
clinical trials. If clinical trials begin, we may not complete testing
successfully within any specific time period, if at all, with respect to any of
our product candidates. Furthermore, we or the FDA may suspend clinical trials
at any time on various grounds, including a finding that the patients are being
exposed to unacceptable health risks. Clinical trials, if completed, may not
show any potential product to be safe or effective. Thus, the FDA and other
regulatory authorities may not approve any of our product candidates for any
disease indication.
The rate of completion of clinical trials depends in part upon the rate of
enrollment of patients. Patient enrollment is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study, the existence of
competitive clinical trials and the availability of alternative treatments. In
particular, the patient population for some of our potential products is small.
Delays in planned patient enrollment may result in increased costs and program
delays.
We rely on third-party clinical investigators to conduct our clinical
trials. As a result, we may encounter delays outside of our control.
We may not be able to reinitiate a clinical trial that has been suspended
by the FDA
Clinical trials are subject to ongoing review by the FDA. The FDA has the
authority to suspend a clinical trial for various reasons, as they did in April
2000 with respect to our clinical trial using porcine neural cells to treat
stroke patients. Because our products are novel and complex, getting the FDA to
lift a suspension could result in significant program delays and additional
costs to us. It is possible that we may not be able to obtain permission from
the FDA to continue a clinical trial that has been suspended. Cost increases and
ongoing delays as a result of an FDA suspension could result in our decision to
postpone pursuing certain product candidates.
The regulatory approval process is costly and lengthy and we may not be
able to successfully obtain all required regulatory approvals
We must obtain regulatory approval for each of our product candidates
before we can market or sell it. We may not receive regulatory approvals to
conduct clinical trials of our products or to manufacture or market our
products. In addition, regulatory agencies may not grant approvals on a timely
basis or may revoke previously granted approvals. Any delay in obtaining, or
failure to obtain, approvals could adversely affect the marketing of our
products and our ability to generate product revenue.
The process of obtaining FDA and other required regulatory approvals is
lengthy and expensive. The time required for FDA and other clearances or
approvals is uncertain and typically takes a number of years, depending on the
complexity and novelty of the product. We have only limited experience in filing
and prosecuting applications necessary to gain regulatory approvals.
Our analysis of data obtained from preclinical and clinical activities is
subject to confirmation and interpretation by regulatory authorities which could
delay, limit or prevent regulatory approval. Any regulatory approval to market a
product may be subject to limitations on the indicated uses for which we may
market the product. These limitations may limit the size of the market for the
product.
We also are subject to numerous foreign regulatory requirements governing
the design and conduct of the clinical trials and the manufacturing and
marketing of our future products. The approval procedure varies among countries.
The time required to obtain foreign approvals often differs from that required
to obtain FDA approvals. Moreover, approval by the FDA does not ensure approval
by regulatory authorities in other countries.
Even if we obtain marketing approval, our products will be subject to
ongoing regulatory oversight which may affect the success of our products
Any regulatory approvals that we receive for a product may be subject to
limitations on the indicated uses for which the product may be marketed or
contain requirements for costly post-marketing follow-up studies. After we
obtain marketing approval for any product, the manufacturer and the
manufacturing facilities for that product will be subject to continual review
and periodic inspections by the FDA and other regulatory authorities. The
subsequent discovery of previously unknown problems with the product, such as
the presence of PERV, or with the manufacturer or facility, may result in
restrictions on the product or manufacturer, including withdrawal of the product
from the market.
If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions, and criminal prosecution.
Risks Relating to Financing Our Business
We have incurred substantial losses, we expect to continue to incur losses
and we may never achieve profitability
We have incurred losses in each year since our founding in 1989. At
December 31, 2000, we had an accumulated deficit of $47.8 million. We expect to
incur substantial operating losses for the foreseeable future. We have no
material sources of revenue from product sales or license fees. We anticipate
that it will be a number of years, if ever, before we develop significant
revenue sources or become profitable, even if we are able to commercialize
products.
We expect to increase our spending significantly as we continue to expand
our research and development programs, expand our clinical trials, apply for
regulatory approvals and begin commercialization activities. In particular, we
intend to devote significant economic resources to funding our joint venture
with Genzyme and to its product development plans. Under the joint venture
agreement, we are currently required to provide 25% of the funding required for
the development and commercialization of NeuroCell-PD and NeuroCell-HD and in
the future will be required to provide 50% of the required funding.
We may require additional financing, which may be difficult to obtain and
may dilute our ownership interest
We will require substantial funds to conduct research and development,
including clinical trials of our product candidates, and to manufacture and
market any products that are approved for commercial sale. We believe that our
existing funds, together with expected future funding under the joint venture
agreement with Genzyme will be sufficient to fund our operating expenses and
capital requirements as currently planned for the foreseeable future. However,
our future capital requirements will depend on many factors, including the
following:
- continued progress in our research and development programs, as well as
the magnitude of these programs;
- the resources required to successfully complete our clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the cost of manufacturing and commercialization activities;
- the cost of any additional facilities requirements;
- the timing, receipt and amount of milestone and other payments from
future collaborative partners;
- the timing, receipt and amount of sales and royalties from our potential
products in the market; and
- the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs and the costs of obtaining any required licenses to
technologies.
We may seek additional funding through collaborative arrangements and
public or private financings. Additional financing may not be available to us on
acceptable terms or at all.
If we raise additional funds by issuing equity securities further dilution
to our then existing stockholders may result. In addition, the terms of the
financing may adversely affect the holdings or the rights of our stockholders.
If we are unable to obtain funding on a timely basis, we may be required to
significantly curtail one or more of our research or development programs.
We also could be required to seek funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, product candidates, or products which we would
otherwise pursue independently.
Risks Relating to Intellectual Property
We may not be able to obtain patent protection for our discoveries and we
may infringe patent rights of others
The patent positions of pharmaceutical and biotechnology companies,
including us, are generally uncertain and involve complex legal, scientific and
factual issues.
Our success depends significantly on our ability to:
- obtain patents;
- protect trade secrets;
- operate without infringing upon the proprietary rights of others; and
- prevent others from infringing on our proprietary rights.
Patents may not issue from any patent applications that we own or license.
If patents do issue, the claims allowed may not be sufficiently broad to protect
our technology. In addition, issued patents that we own or license may be
challenged, invalidated or circumvented. Our patents also may not afford us
protection against competitors with similar technology. Because patent
applications in the United States are maintained in secrecy until patents issue,
others may have filed or maintained patent applications for technology used by
us or covered by our pending patent applications without our being aware of
these applications.
We may not hold proprietary rights to some patents related to our proposed
products. In some cases, others may own or control these patents. As a result,
we or our collaborative partners may be required to obtain licenses under
third-party patents to market some of our proposed products. If licenses are not
available to us on acceptable terms, we will not be able to market these
affected products.
If we are not able to keep our trade secrets confidential, our technology
and information may be used by others to compete against us
We rely significantly upon unpatented proprietary technology, information,
processes and know how. We seek to protect this information by confidentiality
agreements with our employees, consultants and other third-party contractors as
well as through other security measures. These confidentiality agreements may be
breached, and we may not have adequate remedies for any such breach. In
addition, our trade secrets may otherwise become known or be independently
developed by competitors.
We may become involved in expensive patent litigation or other intellectual
property proceedings which could result in liability for damages or stop our
development and commercialization efforts
There has been substantial litigation and other proceedings regarding the
complex patent and other intellectual property rights in the pharmaceutical and
biotechnology industries. We may become a party to patent litigation or other
proceedings regarding intellectual property rights.
Other types of situations in which we may become involved in patent
litigation or other intellectual property proceedings include:
- we may initiate litigation or other proceedings against third parties to
enforce our patent rights;
- we may initiate litigation or other proceedings against third parties to
seek to invalidate the patents held by these third parties or to obtain a
judgment that our products or services do not infringe the third parties'
patents;
- if our competitors file patent applications that claim technology also
claimed by us, we may participate in interference or opposition
proceedings to determine the priority of invention; and
- if third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights, we
will need to defend against such claims.
The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our competitors may be able
to sustain the cost of such litigation or proceedings more effectively than we
can because of their substantially greater financial resources. If a patent
litigation or other intellectual property proceeding is resolved unfavorably to
us, we may be enjoined from manufacturing or selling our products and services
without a license from the other party and be held liable for significant
damages. We may not be able to obtain any required license on commercially
acceptable terms or at all.
Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse effect on our
ability to compete in the marketplace. Patent litigation and other proceedings
may also absorb significant management time.
If we breach any of the agreements under which we license technology from
others we could lose license rights that are important to our business
We are a party to technology in-licenses that are important to our business
and expect to enter into additional licenses in the future. In particular, our
immunomodulation technology and some of our product candidates are covered by
patents licensed from Massachusetts General Hospital, commonly referred to as
MGH. These licenses impose commercialization, sublicensing, royalty, insurance
and other obligations on us. If we fail to comply with these requirements, the
licensor will have the right to terminate the license.
Risks Relating to Product Manufacturing, Marketing and Sales
Since we have no sales and marketing experience or infrastructure, we must
rely on third parties
We have no sales, marketing and distribution experience or infrastructure.
We plan to rely significantly on sales, marketing and distribution arrangements
with third parties for the products that we are developing. For example, under
our joint venture agreement, we have granted to Genzyme (on behalf of the joint
venture) exclusive worldwide marketing rights to NeuroCell-PD and NeuroCell-HD.
We may have limited or no control over the sales, marketing and distribution
activities of Genzyme, the joint venture or any future collaborative partners.
Our future revenues will be materially dependent upon the success of the efforts
of these third parties.
If in the future we determine to perform sales, marketing and distribution
functions ourselves, we would face a number of additional risks, including:
- we may not be able to attract and build a significant marketing or sales
force;
- the cost of establishing a marketing or sales force may not be
justifiable in light of any product revenues; and
- our direct sales and marketing efforts may not be successful.
Delays in obtaining regulatory approval of our manufacturing facility and
disruptions in our manufacturing process may delay or disrupt our
commercialization efforts
Before we can begin commercially manufacturing our product candidates, we
must obtain regulatory approval of our manufacturing facility and process.
Manufacturing of our product candidates must comply with cGMP, and foreign
regulatory requirements. The cGMP requirements govern quality control and
documentation policies and procedures. In complying with cGMP and foreign
regulatory requirements, we will be obligated to expend time, money and effort
on production, recordkeeping and quality control to ensure that the product
meets applicable specifications and other requirements. If we fail to comply
with these requirements, we would be subject to possible regulatory action and
may be limited in the jurisdictions in which we are permitted to sell our
product candidates.
We and our joint venture are the only manufacturers of our product
candidates. For the next several years, we expect that we will conduct all of
our manufacturing in our facility in Charlestown, Massachusetts and at the joint
venture's facility in Framingham, Massachusetts. If these facilities or the
equipment in these facilities is significantly damaged or destroyed, we will not
be able to quickly or inexpensively replace our manufacturing capacity.
We have no experience manufacturing NeuroCell-PD in the volumes that will
be necessary to support large clinical trials or commercial sales. Our present
manufacturing process may not meet our initial expectations as to scheduling,
reproducibility, yield, purity, cost, potency or quality.
The manufacture of our products would be delayed by disruptions in our
supply of porcine tissue
The manufacture of our products requires the continuous availability of
porcine tissue harvested from pigs tested to be free of infectious agents and
quarantined in a qualified animal facility. Our main sources of these facilities
and services are Tufts University School of Veterinary Medicine and
PharmServices, Inc., a division of Charles River Laboratories, Inc. A disease
epidemic or other catastrophe in either of these facilities could destroy all or
a portion of our pig supply, which would interrupt or significantly delay the
research, development and commercialization of our products.
Risks Related to Ongoing Operations
If we fail to obtain an adequate level of reimbursement for our future
products by third party payors, there may be no commercially viable markets for
our products
Our products may be more expensive than conventional treatments because
they involve the surgical transplantation of living cells. The availability of
reimbursement by governmental and other third-party payors affects the market
for any pharmaceutical product. These third-party payors continually attempt to
contain or reduce the costs of health care by challenging the prices charged for
medical products. In some foreign countries, particularly the countries of the
European Union, the pricing of prescription pharmaceuticals is subject to
governmental control. We may not be able to sell our products profitably if
reimbursement is unavailable or limited in scope or amount.
In both the United States and some foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the health care system.
Further proposals are likely. The potential for adoption of these proposals may
affect our ability to raise capital, obtain additional collaborative partners
and market our products.
If we obtain marketing approval for our products, we expect to experience
pricing pressure due to the trend toward managed health care, the increasing
influence of health maintenance organizations and additional legislative
proposals.
We could be exposed to significant liability claims if we are unable to
obtain insurance at acceptable costs or otherwise to protect us against
potential product liability claims
We may be subjected to product liability claims that are inherent in the
testing, manufacturing, marketing and sale of human health care products. These
claims could expose us to significant liabilities that could prevent or
interfere with the development or commercialization of our products. Product
liability claims could require us to spend significant time and money in
litigation or to pay significant damages. Product liability insurance is
generally expensive for biopharmaceutical companies such as ours. Although we
maintain limited product liability insurance coverage for the clinical trials of
our products, it is possible that we will not be able to obtain further product
liability insurance on acceptable terms, if at all, and that our present
insurance levels and insurance subsequently obtained will not provide adequate
coverage against all potential claims.
Our growth could be limited if we are unable to attract and retain key
personnel and consultants
Our success depends substantially on our ability to attract and retain
qualified scientific and technical personnel for the research and development
activities we conduct or sponsor. If we lose one or more of the members of our
senior management or other key employees or consultants, our business and
operating results could be seriously harmed.
Our anticipated growth and expansion into areas and activities requiring
additional expertise, such as regulatory compliance, manufacturing and
marketing, will require the addition of new management personnel. The pool of
personnel with the skills that we require is limited. Competition to hire from
this limited pool is intense, and we may be unable to hire, train, retain or
motivate such additional personnel.
Risks Relating to our Common Stock
Our officers and directors may be able to control the outcome of most
corporate actions requiring stockholder approval
Our directors and officers and entities with which they are affiliated
control approximately 40% of our outstanding common stock. Due to this
concentration of ownership, this group may be able to prevail on all matters
requiring a stockholder vote, including:
- the election of directors;
- the amendment of our organizational documents; or
- the approval of a merger, sale of assets or other major corporate
transaction.
Our stock price could be volatile, which could cause you to lost part or
all of your investment
The market price of our common stock, like that of the common stock of many
other development stage biotechnology companies, may be highly volatile. In
addition, the stock market has experienced extreme price and volume
fluctuations. This volatility has significantly affected the market prices of
securities of many biotechnology and pharmaceutical companies for reasons
frequently unrelated to or disproportionate to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of our common stock. Prices for our common stock will be determined
in the market place and may be influenced by many factors, including variations
in our financial results and investors' perceptions of us, changes in
recommendations by securities analysts as well as their perceptions of general
economic, industry and market conditions.
We have antitakeover defenses that could delay or prevent an acquisition
and could adversely affect the price of our common stock
Provisions of our certificate of incorporation, our bylaws, and Delaware
law may have the effect of deterring unsolicited takeovers or delaying or
preventing changes in control of our management, including transactions in which
our stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interest.
Our certificate of incorporation permits our board of directors to issue
preferred stock without shareholder approval upon such terms as the board of
directors may determine. The rights of the holders of our common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of our outstanding common stock. The issuance of a
substantial number of preferred shares could adversely affect the price of our
common stock.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
We own financial instruments that are sensitive to market risks as part
of its investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations, including our research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. We do not own derivative financial instruments in our
investment portfolio. The investment portfolio contains instruments that are
subject to the risk of a decline in interest rates.
Our investment portfolio includes investment grade debt instruments.
These bonds are subject to interest rate risk, and could decline in value if
interest rates fluctuate. Due to the short duration and conservative nature of
these instruments, we do not believe that it has a material exposure to interest
rate risk.
Item 8. Financial Statements
The financial statements required to be filed hereunder are filed as an
exhibit hereto, are listed under item 14(a)(1) and are incorporated herein by
reference.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
There have been no disagreements on accounting and financial disclosure
matters.
PART III
Item 10 - 13.
The information required for Part III of this Annual Report on Form
10-K is hereby incorporated by reference from portions of our definitive proxy
statement relating to the 2001 annual meeting of stockholders, which statement
will be filed with the Commission not later than 120 days after the end of our
2000 fiscal year. Such information will be contained in the sections of such
proxy statement captioned "Election of Directors," "Meetings of Board of
Directors and Committees," "Executive Compensation," "Certain Relationships and
Related Transactions," "Section 16(a) Beneficial Ownership Reporting
Compliance," "Compensation Committee Interlocks and Insider Participation," and
"Principal Stockholders." Information regarding executive officers of the
Company is furnished in Part I of this Annual Report on Form 10-K under the
heading, "Executive Officers of the Registrant."
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a) (1) Index to Financial Statements
The following Financial Statements are included in this Annual Report on
Form 10-K.
Financial Statements: Page
(a.) Diacrin, Inc.
1. Report of Independent Public Accountants F-1
2. Balance Sheets as of December 31, 1999 and 2000 F-2
3. Statements of Operations for each of the three years in the period F-3
ended December 31, 2000
4. Statements of Stockholders' Equity (Deficit) for each of the three F-4
years in the period ended December 31, 2000
5. Statements of Cash Flow for each of the three years in the period F-5
ended December 31, 2000
6. Notes to Financial Statements F-6
(b.) Diacrin/Genzyme LLC (A Development Stage Enterprise)
1. Report of Independent Public Accountants F-17
2. Balance Sheets as of December 31, 1999 and 2000 F-18
3. Statements of Operations for the years ended December 31, 1999 and F-19
and 2000 and for the period from October 1, 1996 (date of inception)
to December 31, 2000
4. Statements of Cash Flows for the years ended December 31, 1999 and F-20
2000 and for the period from October 1, 1996 (date of inception)
to December 31, 2000
5. Statements of Change in Venturers' Capital (Deficit) for the period F-21
from October 1, 1996 (date of inception) to December 31, 2000
6. Notes to Financial Statements F-22
(2) Exhibits
The following is a list of exhibits filed as part of this Annual Report
on Form 10-K:
Exhibit No. Title Page
3.1 - Amended and Restated Certificate of Incorporation of Diacrin as
amended to date (5)
3.2 - Amended and Restated By-laws of Diacrin (4)
+10.1 - Employment Agreement dated February 6, 1990 by and between Diacrin
and Dr. Thomas H. Fraser (2)
10.2 - Rights Agreement dated July 29, 1991 by and among Diacrin and the
holders of the preferred stock as amended on September 27, 1991 (2)
10.2(a) - Consent and Agreement to Amend dated April 26, 1995 by and among Diacrin
and certain investors named herein (1)
10.2(b) - Consent and Agreement to Amend dated as of January 4, 1996 by and
among Diacrin and certain investors named herein (4)
+10.3 - 1990 Stock Option Plan, as amended (3)
10.4 - Sublease dated January 24, 1991 by and among Diacrin and Building 79
Associated Limited Partnership and Building 96 Associated Limited
Partnership (2)
+10.5 - 1994 Directors' Stock Option Plan, as amended (7)
10.6 - Registration Rights Agreements dated May 31, 1995 by and among
Diacrin and the investors listed on Schedule I and II attached thereto (1)
10.6(a) - Amendment No. 1 to Registration Rights Agreement dated as of January 4,
1996 by and among Diacrin and certain investors named therein (4)
10.7 - Collaboration Agreement among Diacrin, Inc., Genzyme Corporation and
Diacrin/Genzyme LLC dated as of October 1, 1996 (6)
10.8 - Operating Agreement of Diacrin/Genzyme LLC (6)
Exhibit No. Title Page
+10.9 - 1997 Stock Option Plan (8)
10.10 - $650,000 Promissory Note dated November 25, 1997 made by Diacrin
to the order of Fleet National Bank (9)
10.10(a) - Letter Agreement dated November 25, 1997 by and between Diacrin
and Fleet National Bank (9)
21 - Subsidiaries *
23.1 - Consent of Arthur Andersen LLP *
23.2 Consent of PricewaterhouseCoopers LLP *
(b) Reports on Form 8-K.
We did not file any current reports on Form 8-K during the last quarter of
the period covered by this report.
(c) Description of Exhibits.
See Item 14 (a)
(d) Description of Financial Statement Schedules.
None.
* Filed herewith
(1) Filed as an exhibit to our Quarterly Report on Form 10-Q (File No. 0-20139)
for the quarter ended June 30, 1995 and incorporated herein by reference.
(2) Filed as an exhibit to our Form 10, as amended (File No. 0-20139), on April
29, 1992, and incorporated herein by reference.
(3) Filed as an exhibit to our Quarterly Report on Form 10-Q (File No. 0-20139)
for the quarter ended September 30, 1994 and incorporated herein by
reference.
(4) Filed as an exhibit to our Registration Statement on Form S-2, as amended
(Registration No. 33-80773) on December 22, 1995, and incorporated herein
by reference.
(5) Filed as an exhibit to our Annual Report on Form 10-K (File No. 0-20139)
for the fiscal year ended December 31, 1995 and incorporated herein by
reference.
(6) Filed as an exhibit to our Quarterly Report on Form 10-Q, as amended on
Form 10-Q/A (File No. 0-20139) for the quarter ended September 30, 1996 and
incorporated herein by reference.
(7) Filed as an exhibit to our Annual Report on Form 10-K (File No. 0-20139)
for the fiscal year ended December 31, 1996 and incorporated herein by
reference.
(8) Filed as an exhibit to our Quarterly Report on Form 10-Q (File No. 0-20139)
for the quarter ended June 30, 1997 and incorporated herein by reference.
(9) Filed as an exhibit to our Annual Report on Form 10-K (File No. 0-20139)
for the fiscal year ended December 31, 1997 and incorporated herein by
reference.
+ Management contract or compensatory plan or arrangement filed as an exhibit
to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIACRIN, INC.
By: /s/ Thomas H. Fraser
-----------------------------
Thomas H. Fraser
President and Chief Executive Officer
Date:
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Date Title
/s/ Thomas H. Fraser March 9, 2001 President, Chief Executive
------------------------ Officer and Director
Thomas H. Fraser (Principal Executive Officer)
/s/ Kevin Kerrigan March 9, 2001 Controller
------------------------ (Principal Financial and
Kevin Kerrigan Accounting Officer)
/s/ Zola P. Horovitz March 9, 2001 Director
------------------------
Zola P. Horovitz
/s/ John W. Littlechild March 9, 2001 Director
-------------------------
John W. Littlechild
/s/ Stelios Papadopoulos March 9, 2001 Director
-------------------------
Stelios Papadopoulos
/s/ Henri A. Termeer March 9, 2001 Director
-------------------------
Henri A. Termeer
Director
-------------------------
Joshua Ruch
Report of Independent Public Accountants
To the Board of Directors of
Diacrin, Inc.:
We have audited the accompanying balance sheets of Diacrin, Inc. (a
Delaware corporation) as of December 31, 1999 and 2000 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Diacrin, Inc.'s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Diacrin, Inc. as of
December 31, 1999 and 2000 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 26, 2001
F-1
DIACRIN, INC.
Balance Sheets
At December 31,
---------------------------
1999 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 2,194,001 $ 11,143,116
Short-term investments 16,582,252 22,485,675
Interest receivable and other current assets 329,365 780,406
--------------- ---------------
Total current assets 19,105,618 34,409,197
--------------- ---------------
Property and equipment, at cost:
Laboratory and manufacturing equipment 1,569,224 1,655,064
Furniture and office equipment 303,436 320,106
Leasehold improvements 77,529 77,529
--------------- ---------------
1,950,189 2,052,699
Less - Accumulated depreciation and amortization 1,437,649 1,651,618
--------------- ---------------
512,540 401,081
--------------- ---------------
Long-term investments 2,644,084 20,977,940
Investment in joint venture 103,730 4,785
--------------- ---------------
Total other assets 2,747,814 20,982,725
--------------- ---------------
Total assets $ 22,365,972 $ 55,793,003
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 143,350 $ 130,000
Accounts payable 138,768 109,307
Accrued expenses 1,251,410 1,323,786
Deferred revenue from joint venture 438,727 344,468
--------------- --------------
Total current liabilities 1,972,255 1,907,561
--------------- --------------
Long-term debt, net of current portion 249,167 119,167
--------------- --------------
Commitments (Notes 4 and 10)
Stockholders' equity:
Preferred stock, $0.01 par value; authorized--5,000,000
none issued and outstanding - -
Common stock, $0.01 par value; authorized--30,000,000
issued and outstanding-- 14,386,183 and 17,914,704 shares at
December 31, 1999 and 2000, respectively 143,862 179,147
Additional paid-in capital 64,250,741 101,373,922
Accumulated deficit (44,250,053) (47,786,794)
--------------- -------------
Total stockholders' equity 20,144,550 53,766,275
--------------- -------------
Total liabilities and stockholders' equity $ 22,365,972 $ 55,793,003
=============== =============
The accompanying notes are an integral part of these financial statements.
F-2
DIACRIN, INC.
Statements of Operations
Year Ended December 31,
1998 1999 2000
REVENUES:
Research and development $ 3,623,249 $ 2,970,846 $ 2,081,795
Interest income 1,575,998 1,323,520 3,124,929
--------------- --------------- --------------
Total revenues 5,199,247 4,294,366 5,206,724
--------------- --------------- --------------
OPERATING EXPENSES:
Research and development 7,371,385 5,921,141 5,996,550
General and administrative 1,484,319 1,398,151 1,348,072
Interest expense 89,135 47,318 29,898
--------------- --------------- --------------
Total operating expenses 8,944,839 7,366,610 7,374,520
--------------- --------------- --------------
EQUITY IN OPERATIONS OF JOINT VENTURE (1,084,358) (1,688,071) (1,368,945)
--------------- --------------- --------------
NET LOSS $ (4,829,950) $ (4,760,315) $ (3,536,741)
=============== =============== ==============
NET LOSS PER COMMON SHARE:
Basic and diluted $ (.34) $ (.33) $ (.21)
============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic and diluted 14,156,179 14,364,154 17,073,194
=========== =========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
DIACRIN, INC.
Statements of Stockholders' Equity
Common Stock
-----------------------
Number $.01 Additional Total
of Par Paid-in Accumulated Stockholders'
Shares Value Capital Deficit Equity
BALANCE, December 31, 1997 13,268,256 $132,683 $54,730,773 $(34,659,788) $20,203,668
Proceeds from private placement of
stock, net of $58,080 financing costs 1,027,027 10,270 9,431,650 - 9,441,920
Exercise of stock options 31,935 319 28,652 - 28,971
Net loss - - - (4,829,950) (4,829,950)
---------- ------- ---------- ----------- ----------
BALANCE, December 31, 1998 14,327,218 143,272 64,191,075 (39,489,738) 24,844,609
Exercise of stock options 58,965 590 59,666 - 60,256
Net loss - - - (4,760,315) (4,760,315)
---------- ------- ---------- ----------- ----------
BALANCE, December 31, 1999 14,386,183 143,862 64,250,741 (44,250,053) 20,144,550
Proceeds from public offering of
common stock, net of $2,765,500
financing costs 3,450,000 34,500 36,875,000 - 36,909,500
Exercise of stock options and warrants 78,521 785 248,181 - 248,966
Net loss - - - (3,536,741) (3,536,741)
---------- -------- ------------ ------------ -----------
BALANCE, December 31, 2000 17,914,704 $179,147 $101,373,922 $(47,786,794) $53,766,275
========== ======== ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-4
DIACRIN, INC.
Statements of Cash Flows
Year Ended December 31,
1998 1999 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,829,950) $ (4,760,315) $ (3,536,741)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 345,762 237,976 213,969
Equity in operations of joint venture 1,084,358 1,688,071 1,368,945
Changes in current assets and liabilities-
Interest receivable and other current assets 44,343 65,048 (451,041)
Accounts payable 82,696 (129,234) (29,461)
Accrued expenses 185,322 (126,762) 55,866
Deferred revenue from joint venture (48,201) 99,872 (94,259)
---------- ----------- -----------
Net cash used in operating activities (3,135,670) (2,925,344) (2,472,722)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments (12,670,294) 2,088,140 (5,903,423)
Purchases of property and equipment, net (76,386) (26,019) (102,510)
Decrease (increase) in long-term investments 7,726,279 (39,074) (18,333,856)
Investment in joint venture (1,911,216) (2,669,384) (1,947,422)
Return of capital for services provided on behalf
of joint venture 912,843 990,282 693,932
---------- ----------- -----------
Net cash (used in) provided by investing (6,018,774) 343,945 (25,593,279)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 9,441,920 - 36,909,500
Net proceeds from the exercise of stock options
warrants 28,971 60,256 248,966
Principal payments on long-term debt (337,170) (279,910) (143,350)
---------- ---------- -----------
Net cash provided by (used in) financing 9,133,721 (219,654) 37,015,116
---------- ---------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (20,723) (2,801,053) 8,949,115
CASH AND CASH EQUIVALENTS, beginning of year 5,015,777 4,995,054 2,194,001
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 4,995,054 $ 2,194,001 $ 11,143,116
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 111,405 $ 49,743 $ 30,946
============ =========== ===========
The accompanying notes are integral part of these financial statements.
F-5
Diacrin, Inc.
Notes to Financial Statements
(1) Operations and Basis of Presentation
Diacrin, Inc. (the "Company") was incorporated on October 10, 1989 and
is developing cell transplantation technology for the treatment of human
diseases that are characterized by cell dysfunction or cell death and for which
current therapies are either inadequate or nonexistent.
(2) Summary of Significant Accounting Policies
(a) Depreciation and Amortization
The Company provides for depreciation using the straight-line method by
charges to operations in amounts estimated to allocate the cost of these assets
over a five-year life. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of the estimated useful life of the
asset or the lease term.
(b) Research and Development
Collaborative revenue under the joint venture agreement with Genzyme
Corporation ("Genzyme") (see Note 4) and revenues from research grants are
recognized as work is performed. Collaborative revenue under the joint venture
agreement is recognized as revenue to the extent that the Company's research and
development costs are funded by Genzyme through the joint venture. The Company
receives non-refundable monthly advances from the joint venture. Deferred
revenue represents amounts received prior to recognition of revenue. Research
and development costs are expensed as incurred.
(c) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. At
December 31, 2000, the Company has a net operating loss carryforward for federal
income tax purposes of approximately $49,750,000. The difference from losses
reported for financial reporting purposes relates primarily to expenses
reflected in the financial statements not yet deductible for tax purposes. The
net operating loss carryforwards expire commencing in the year 2006 and are
subject to review and possible adjustment by the Internal Revenue Service. Net
operating loss and tax credit carryforwards may be limited in the event of
certain changes in the ownership interests of significant shareholders. The
Company believes the issuance of the convertible notes payable in May 1995, as
well as the initial public offering in February 1996, caused a change in
ownership, as defined by the Tax Reform Act of 1986 (the "Act"). Additionally,
the Company's private placement in 1998 and secondary offering in 2000 may cause
a change in ownership, as defined by the Act. The Company does not believe that
such ownership changes will significantly impact the Company's ability to
utilize the net operating loss and tax credit carryforwards as of the date of
such ownership changes. Ownership changes in future periods may limit the
Company's ability to utilize net operating loss and tax credit carryforwards.
F-6
Diacrin, Inc.
Notes to Financial Statements - (Continued)
The components of the net deferred tax assets are approximately as follows:
1999 2000
---- ----
Loss carryforwards $ 16,403,000 $ 19,900,000
Credit carryforwards 3,815,000 4,900,000
Other temporary differences 10,000 13,500
----------------- -----------------
Total deferred tax assets 20,228,000 24,813,500
Less - valuation allowance (20,228,000) (24,813,500)
----------------- ------------------
Net deferred tax asset $ - $ -
================= ==================
A valuation allowance has been provided as it is uncertain if the
Company will realize the deferred tax assets. The change in the total valuation
allowance during the year ended December 31, 2000 was an increase of
approximately $4,585,500 and relates to the increase in the deferred tax asset
which is primarily due to the net operating loss and tax credits generated
during 2000.
(d) Net Loss per Common Share
In accordance with SFAS No. 128, Earnings per Share, basic and diluted net
loss per share is calculated by dividing the net loss by the weighted average
number of common shares outstanding for all periods presented. Diluted weighted
average shares outstanding for all periods presented exclude the potential
common shares from stock options and warrants of 4,000,738, 4,111,523 and
1,258,247 at December 31, 1998, 1999, and 2000, respectively, because to include
such shares would have been antidilutive.
(e) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ from those
estimates.
(f) Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
(g) Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. The Company adopted this statement for the year ended
December 31, 1998 with no impact on the Company's financial statements as there
are no material differences between the Company's reported income and
comprehensive income for all periods presented.
F-7
Diacrin, Inc.
Notes to Financial Statements - (Continued)
(h) Segment Reporting
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. The Company adopted this statement for the year
ended December 31, 1998. In accordance with SFAS 131, the Company believes that
it operates in one operating segment.
(i) Fair Value of Financial Instruments
Financial instruments consist mainly of cash and cash equivalents,
short-term investments, long-term investments, accounts payable, current portion
of long-term debt and long-term debt. The carrying amounts of these instruments
approximate their fair value.
(j) New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement (as amended by SFAS No. 137)
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS No. 133 (as amended by SFAS No. 138) establishes accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The Company does not expect adoption of
this statement to have a material impact on the Company's financial statements.
F-8
Diacrin, Inc.
Notes to Financial Statements - (Continued)
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101, as amended, is effective for the fourth quarter of all fiscal
periods beginning after December 15, 1999. Adoption of SAB No. 101 did not have
a material impact on the Company's financial position or results of operations.
(3) Sales of Common Stock
In February 1998, the Company completed a private placement of
1,027,027 shares of its common stock for $9.25 per share for net proceeds of
approximately $9.4 million.
In March 2000, the Company completed a public offering of 3,450,000
shares of its common stock for $11.50 per share for net proceeds of
approximately $36.9 million.
(4) Joint Venture Agreement
In September 1996, the Company and Genzyme Corporation formed a joint
venture to develop and commercialize the Company's NeuroCell-PD and NeuroCell-HD
products for transplantation into people with advanced Parkinson's disease and
Huntington's disease, respectively. Under the terms of the joint venture
agreement, which was effective October 1, 1996, Genzyme agreed to provide 100%
of the first $10 million in funding and 75% of the following $40 million in
funding for the two products. All costs incurred in excess of $50 million will
be shared equally between Genzyme and the Company in accordance with the terms
of the agreement. Any profits of the joint venture will be shared equally by the
two parties. As of December 31, 2000, Genzyme had provided $29.7 million to the
joint venture and the Company had provided $6.5 million.
The Company records as research and development expense all costs
related to NeuroCell-PD and NeuroCell-HD incurred by it on behalf of the joint
venture. The Company recognizes research and development revenue equal to the
amount of reimbursement received by it from the joint venture out of funds
contributed by Genzyme. The Company does not recognize research and development
revenue for amounts received from the joint venture out of funds it contributed.
As Genzyme incurs costs on behalf of the joint venture that the Company is
obligated to fund, it recognizes an expense in its statement of operations
captioned "Equity in operations of joint venture."
F-9
Diacrin, Inc.
Notes to Financial Statements - (Continued)
Genzyme agreed to make financing available to Diacrin from and after
the date that Genzyme provides the initial $10 million of funding to the joint
venture. Genzyme agreed to make available to Diacrin an unsecured, subordinated
line of credit of up to an aggregate amount of $10 million. Diacrin may draw on
the line only in the event that Diacrin's cash and cash equivalents are
insufficient to fund Diacrin's budgeted operations for a specified period of
time, and the funds may be used by Diacrin only to fund capital contributions to
the joint venture. The line will be available through the date five years after
the date Diacrin first draws on the line, and all outstanding principal and
interest will be due on that fifth anniversary. Advances will be
interest-bearing, evidenced by a promissory note and subject to other
considerations and the aggregate amount of draws in any calendar year may not
exceed $5 million. Diacrin did not make any draws on the line through December
31, 2000.
The Company accounts for its investment in the joint venture on the
equity method. The detail of the Company's investment in the joint venture is as
follows:
1998 1999 2000
Balance, beginning of year $ - $ 94,508 $ 103,730
Contributions to joint venture 1,911,216 2,669,384 1,947,422
Return of capital (912,843) (990,282) (693,932)
Funding of operations of joint venture (903,865) (1,669,880) (1,352,435)
------------ -------------- ------------
Balance, end of year $ 94,508 $ 103,730 $ 4,785
============ ============== ============
Contributions to the joint venture represent cash contributions. The return
of capital represents cash payments made to the Company by the joint venture for
research and development costs that are funded by the Company. Funding of
operations of the joint venture represents costs incurred by Genzyme on behalf
of the joint venture, which are funded by the Company.
A summary of the revenue and expenses from the joint venture are as
follows:
1998 1999 2000
Revenue recognized (see note 2b) $3,623,249 $2,970,846 $2,081,795
Research and development
expense (see note 2b) $4,536,089 $3,961,128 $2,775,727
Equity in operations of joint venture $1,084,358 $1,688,071 $1,368,945
Genzyme's President and Chief Executive Officer is a director of the
Company.
F-10
Diacrin, Inc.
Notes to Financial Statements - (Continued)
(5) Cash, Cash Equivalents and Investments
The Company's cash equivalents and investments are classified as
held-to-maturity and are carried at amortized cost, which approximates market
value. Cash equivalents, short-term investments and long-term investments have
maturities of less than three months, less than one year and greater than one
year, respectively. Cash and cash equivalents, short-term investments and
long-term investments at December 31, 1999 and 2000 consisted of the following:
1999 2000
Cash and cash equivalents-
Cash $ 738 $ 806
Corporate note - 1,006,519
Money market mutual fund 2,193,263 10,135,791
--------------- --------------
$ 2,194,001 $ 11,143,116
=============== ==============
Short-term investments-
Corporate notes (remaining avg. maturity of 6 mos. at December 31, 2000) $ 11,826,917 $ 22,485,675
Commercial paper 4,755,335 -
-------------- --------------
$ 16,582,252 $ 22,485,675
============== ==============
Long-term investments-
Corporate notes (remaining avg. maturity of 16 mos. at December 31, 2000) $ 2,644,084 $ 20,977,940
============== ==============
(6) Accrued Expenses
Accrued expenses consisted of the following at December 31, 1999 and
2000:
1999 2000
---- ----
Accrued clinical trials costs $ 607,561 $ 812,384
Accrued professional fees 298,891 159,999
Accrued payroll 158,584 114,899
Accrued contract research costs 43,244 54,862
Accrued other 143,130 181,642
------------- ------------
Total $ 1,251,410 $ 1,323,786
============= ============
(7) Long-term Debt and Obligations Under Capital Leases
(a) Term Loan
In November 1997, the Company entered into an unsecured term loan agreement
with a bank whereby the bank loaned the Company $650,000 to construct a pilot
manufacturing facility. Interest accrues at the prime rate plus one-half of one
percent (10.00% at December 31, 2000) and is payable monthly in arrears. The
loan is payable in 60 principal installments of $10,833 commencing December 1,
1997 and may be prepaid without penalty. The Company is required to maintain
certain covenants, including certain financial ratios and unencumbered cash
balances of not less than $1 million. As of December 31, 2000, the Company was
in compliance with all covenants. Principal payments on the loan for each of the
next two years will be $130,000 and $119,167, respectively.
F-11
Diacrin, Inc.
Notes to Financial Statements - (Continued)
(b) Capital Leases
The Company had entered into a capital lease for certain laboratory and
manufacturing equipment. As of December 31, 2000, all amounts under the capital
lease had been repaid.
(8) Stockholders' Equity
(a) Preferred Stock
The Company has authorized 5,000,000 shares of undesignated preferred
stock. The Company's Board of Directors is authorized, subject to any
limitations prescribed by law and without further stockholder approval, to issue
from time to time up to 5,000,000 shares of preferred stock in one or more
series. Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and rights or
privileges as shall be determined by the Board of Directors.
(b) Warrants
In February 1996, the Company issued redeemable warrants in connection
with the Company's initial public offering to purchase 2,875,000 shares of
common stock at an exercise price of $16 per share, subject to certain
adjustments. During 2000, 2,995 shares were issued upon exercise of warrants.
All unexercised warrants expired on December 31, 2000.
(9) Common Stock Options
The Company has adopted the 1990 Stock Option Plan (the "1990 Plan")
under which the Board of Directors is authorized to grant incentive stock
options, non-qualified stock options and stock appreciation rights to employees,
directors and consultants of the Company for up to 800,000 shares of the
Company's common stock. All options granted have 10-year terms, and the majority
vest in equal annual installments of 25% over four years of continued service
from the date of hire or grant. As of December 31, 2000, there were options to
purchase 98,545 shares of common stock available for future grant under the 1990
Plan.
In July 1994, the stockholders approved the 1994 Directors' Stock
Option Plan (the "Director Plan") which automatically grants an option to each
eligible outside director of the Company for the purchase of 7,500 shares of
common stock at an exercise price of the then fair market value. Each option
granted under the Director Plan has a 10-year term and may be exercised on a
cumulative basis as to 25% of the shares on the first anniversary of the date of
grant and an additional 25% at the end of each one-year period thereafter. In
December 1996, the Board of Directors amended the Director Plan to automatically
grant 15,000 options to each new eligible outside director. The Company has
reserved 30,000 shares for issuance under this plan. As of December 31, 2000,
there were 15,000 options outstanding under the Director Plan at a weighted
average exercise price of $9.50 per share. As of December 31, 2000, there were
F-12
Diacrin, Inc.
Notes to Financial Statements - (Continued)
options to purchase 13,125 shares of commons stock available for future grant
under the Director Plan.
In June 1997, the stockholders approved the 1997 Stock Option Plan (the
"1997 Plan") under which the Board of Directors is authorized to grant incentive
stock options and non-qualified stock options to employees, directors and
consultants of the Company for up to 1,200,000 shares of the Company's common
stock. All options granted have 10-year terms, and vest in equal annual
installments of 25% over four years of continued service from the date of hire
or grant. As of December 31, 2000, options to purchase 601,000 shares of common
stock were available for future grant under the 1997 Plan.
The following table summarizes incentive and non-qualified stock option
activity, exclusive of the warrants discussed in Note 8(b):
Number of Weighted average
options Exercise price
Balance, December 31, 1997 1,026,798 $ 4.69
Options granted 189,250 6.43
Options exercised (31,935) .91
Options canceled (58,375) 9.18
--------- --------
Balance, December 31, 1998 1,125,738 4.87
Options granted 183,500 5.97
Options exercised (58,965) 1.02
Options canceled (13,750) 11.20
--------- --------
Balance, December 31, 1999 1,236,523 5.14
Options granted 154,750 5.56
Options exercised (75,526) 2.66
Options canceled (57,500) 8.91
---------- --------
Balance, December 31, 2000 1,258,247 $ 5.15
========== ========
Exercisable, December 31, 2000 860,869 $ 4.68
========== ========
Exercisable, December 31, 1999 822,332 $ 4.15
========== ========
Exercisable, December 31, 1998 735,609 $ 3.31
========== ========
All options have been granted at the fair market value of the Company's
common stock on the date of grant.
F-13
Diacrin, Inc.
Notes to Financial Statements - (Continued)
The following table summarizes certain information about options
outstanding and exercisable at December 31, 2000:
Options outstanding
----------------------------------------------------------------------------------------------
Number outstanding at Weighted average Weighted average
Range of exercise prices December 31, 2000 remaining contractual life exercise price
$ 1.22 to $ 2.50 520,997 3.36 $ 2.08
$ 4.50 to $ 7.50 471,500 8.67 $ 5.75
$ 7.88 to $15.75 265,750 6.81 $ 10.12
-----------
1,258,247
===========
Options exercisable
--------------------------------------------------------------------------
Number exercisable Weighted average
Range of exercise prices at December 31, 2000 exercise price
$ 1.22 to $ 2.50 520,997 $ 2.08
$ 4.50 to $ 7.50 135,625 $ 6.18
$ 7.88 to $ 15.75 204,247 $ 10.33
------------
860,869
============
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company has continued to account
for employee stock options in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and has included the
proforma disclosure required by SFAS No. 123 for all periods presented.
Pro forma information regarding net income (loss) and earnings (loss)
per share is required by SFAS No. 123, and has been determined as if the Company
had accounted for its employee and director stock options under the fair value
method of SFAS No. 123. The fair-value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions for 1998, 1999 and 2000: risk-free interest rates of 5.5%, 6.0% and
6.0%, respectively; dividend yield of 0% for all years; volatility factor of the
expected market price of the Company's common stock of 70%, 95% and 95%,
respectively; and a weighted-average expected life of the options of 7.5 years
for all years. The weighted average fair value of options granted in 1998, 1999
and 2000 was $4.68, $4.97 and $4.71, respectively.
F-14
Diacrin, Inc.
Notes to Financial Statements - (Continued)
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The aggregate
fair value of options granted in 1998, 1999 and 2000 was approximately $886,000,
$912,000 and $729,000, respectively. The Company's pro forma information
follows:
1998 1999 2000
---- ---- ----
Net loss As reported $(4,829,950) $(4,760,315) $(3,536,741)
============ ============ ============
Pro forma (5,644,899) (5,796,810) (4,714,923)
=========== =========== ==========
Basic and diluted As reported (.34) (.33) (.21)
net loss ===== ===== =====
per share: Pro forma (.40) (.40) (.27)
===== ===== =====
(10) Facility Lease
During 1991, the Company entered into a 10 year operating lease for a
facility. In October 2000, the Company exercised its first of two options to
extend the lease an additional five-years. Minimum rental payments under the
lease are as follows:
Rental
Commitment
2001 $ 710,000
2002 710,000
2003 710,000
2004 710,000
2005 533,000
-----------
$ 3,373,000
===========
Total rent expense for the years ended December 31, 1998, 1999 and 2000
was approximately $771,000, $761,000 and $751,000, respectively.
(11) Employment Retirement / Savings Plan
The Company maintains an employee retirement / savings plan (the
"Plan") which permits participants to make tax deferred contributions by salary
reduction pursuant to section 401(k) of the Internal Revenue Code. All active
employees, 21 years of age or older, who have completed a calendar quarter of
service are eligible to participate in the Plan. The Company pays all
administrative costs of the Plan. There were no contributions made to the plan
by the Company in 1998 and 1999. During 2000, the Company made discretionary
contributions of $28,500 to the plan.
F-15
Diacrin, Inc.
Notes to Financial Statements - (Continued)
(12) Quarterly Results of Operations (Unaudited)
The following table presents a condensed summary of quarterly results
of operations for the years ended December 31, 2000 and 1999.
Year Ended December 31, 2000
First Second Third Fourth
Total revenue $ 863 $ 1,404 $ 1,543 $ 1,397
========== ========= ========= ========
Net loss $ (1,249) $ (808) $ (820) $ (660)
========== ========= ========= ========
Basic and diluted net loss per $ (.09) $ (.05) $ (.05) $ (.04)
========== ========= ========= ========
Year Ended December 31, 1999
First Second Third Fourth
Total revenue $ 1,156 $ 1,214 $ 1,032 $ 892
=========== ========= ========= ========
Net loss $ (1,265) $ (1,083) $ (1,174) $ (1,238)
=========== ========= ========= ========
Basic and diluted net loss per $ (.09) $ (.08) $ (.08) $ (.09)
========== ========= ========= ========
F-16
Report of Independent Accountants
To the Steering Committee of Diacrin/Genzyme LLC:
In our opinion, the accompanying balance sheets and the related statements of
operations, of cash flows and of changes in Venturers' capital (deficit) present
fairly, in all material respects, the financial position of Diacrin/Genzyme LLC
(a development stage enterprise) at December 31, 1999 and 2000, and the results
of its operations and its cash flows for the years then ended and for the period
from October 1, 1996 (date of inception) to December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Steering Committee of
the Joint Venture; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As more fully discussed in Note A, either Venturer may terminate the
Collaboration Agreement of the Joint Venture for any reason upon 180 days notice
to the other Venturer and such termination could lead to the discontinuation of
the Joint Venture.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 26, 2001
F-17
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Balance Sheets
December 31, 1999 and 2000
1999 2000
Assets
Current assets:
Cash $ 9,531 $ 1,032,170
Prepaid to Diacrin, Inc. (Note C) 433,712 365,245
Other current assets - 11,266
-------- ----------
Total current assets 443,243 1,408,681
Property and equipment, net (Note D) 192,054 156,176
------- ---------
Total assets $ 635,297 $ 1,564,857
======== =========
Liabilities and Venturers' Capital (Deficit)
Payabe to Genzyme Corporation (Note C) $ 948,088 $2,150,488
Accrued expenses 24,353 23,900
-------- ----------
Total liabilities 972,441 2,174,388
Commitments and contingencies (Note C)
Venturers' capital (deficit) (including deficit accumulated
during the development stage of $36,872,217):
Venturer's capital - Genzyme Corporation 513,949 444,140
Venturer's capital - Diacrin, Inc. 111,817 88,548
Unpaid Venturer's capital - Genzyme Corporation (764,682) (861,664)
Unpaid Venturer's capital - Diacrin, Inc. (198,228) (280,555)
---------- ----------
Total Venturers' capital (deficit) (337,144) (609,531)
--------- ----------
Total liabilities and Venturers' capital (deficit) $635,297 $ 1,564,857
========== ===========
The accompanying notes are an integral part of these financial statements
F-18
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Statements of Operations
For the period
from
October 1, 1996
For the year ended (date of inception)
December 31, to December 31,
1999 2000 2000
Operating costs and expenses:
Research and development-Genzyme Corporation $ 6,677,683 $ 5,394,335 $ 19,561,089
Research and development-Diacrin, Inc. 3,961,129 2,736,293 17,046,820
General and administrative 79,377 90,113 277,753
----------- ---------- -----------
Total operating costs and expenses 10,718,189 8,220,741 36,885,662
Interest income 4,778 8,667 13,445
----------- ---------- -----------
Net loss $ (10,713,411) $ (8,212,074) $(36,872,217)
============= =========== ============
The accompanying notes are an integral part of these financial statements
F-19
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Statements of Cash Flows
For the period
from
For the Year Ended October 1, 1996
December 31, (date of inception)
------------------------------ to December 31,
1999 2000 2000
Cash flows from operating activities:
Net loss $ (10,713,411) $ (8,212,074) $ (36,872,217)
Reconciliation of net loss to net cash used
by operating activites:
Depreciation 48,221 49,146 156,585
Increase (decrease) in cash from working
capital changes:
Prepaid to Diacrin, Inc. (86,787) 68,467 (365,245)
Payable to Genzyme Corporation 62,927 1,202,400 2,150,488
Other current assets 11,899 (11,266) (11,266)
Accrued expenses 24,353 (453) 23,900
---------- ---------- ---------
Net cash used by operating activities (10,652,798) (6,903,780) (34,917,755)
Cash flows from investing activities:
Acquisition of property and equipment (20,111) (13,268) (312,761)
Cash flows from financing activites:
Capital contributed by Genzyme Corporation 8,008,148 5,992,265 29,736,639
Capital contributed by Diacrin, Inc. 2,669,384 1,947,422 6,526,047
---------- ---------- ----------
Net cash provided by financing activites 10,677,532 7,939,687 36,262,686
---------- ---------- -----------
Increase in cash 4,623 1,022,639 1,032,170
Cash at beginning of period 4,908 9,531 -
---------- ---------- ----------
Cash at end of period $ 9,531 $ 1,032,170 $ 1,032,170
========== =========== ===========
The accompanying notes are an integral part of these financial statements
F-20
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Statements of Changes in Venturers' Capital (Deficit)
For the Period from October 1, 1996 (Date of Inception) to December 31, 2000
Unpaid Venturers' capital Total
--------------------------- Venturers'
Genzyme Genzyme capital
Corporation Diacrin, Inc. Corporation Diacrin, Inc. (deficit)
1996 capital contributions $ 1,911,968 $ - $ - $ - $ 1,911,968
1996 net loss (1,542,374) - - - (1,542,374)
----------- ----------- ---------- ----------- ------------
Balance at December 31, 1996 369,594 - - - 369,594
1997 capital contributions 6,819,536 - - - 6,819,536
1997 net loss (6,809,012) - - - (6,809,012)
----------- ----------- ---------- ----------- -------------
Balance at December 31, 1997 380,118 - - - 380,118
1998 capital contributions 7,709,137 2,085,079 (704,415) (175,838) 8,913,963
1998 net loss (7,608,663) (1,986,683) - - (9,595,346)
----------- ----------- ---------- ----------- ------------
Balance at December 31, 1998 480,592 98,396 (704,415) (175,838) (301,265)
1999 capital contributions 8,068,415 2,691,774 (60,267) (22,390) 10,677,532
1999 net loss (8,035,058) (2,678,353) - - (10,713,411)
---------- ----------- ---------- ----------- -----------
Balance at December 31, 1999 513,949 111,817 (764,682) (198,228) (337,144)
2000 capital contributions 6,089,247 2,029,749 (96,982) (82,327) 7,939,687
2000 net loss (6,159,056) (2,053,018) - - (8,212,074)
----------- ----------- ---------- ----------- -----------
Balance at December 31, 2000 $ 444,140 $ 88,548 $ (861,664) $ (280,555) $ (609,531)
=========== ========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
F-21
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Notes to Financial Statements
A. Nature of Business and Organization
On October 1, 1996, Diacrin/Genzyme LLC ("the Joint Venture") was
established as a joint venture between Genzyme Corporation ("Genzyme") and
Diacrin, Inc. ("Diacrin") (collectively, the "Venturers"), to develop and
commercialize products and processes for use in the treatment of Parkinson's
disease and Huntington's disease in humans using porcine fetal cells. Under the
terms of the Collaboration Agreement among Diacrin, Genzyme and the Joint
Venture (the "Collaboration Agreement"), all funding is provided by the
Venturers, and all payments for work performed are made to the Venturers.
Genzyme provided the initial $10.0 million of the funding requirements, and the
next $40.0 million of the funding requirements are to be provided 75% by Genzyme
and 25% by Diacrin. After $50.0 million has been funded, any additional funding
will be provided equally by the Venturers. Funding is provided on a monthly
basis. Profits and losses from the Joint Venture will be shared in proportion to
the then current capital contribution ratio of each Venturer. The Joint Venture
reimburses the Venturers for costs incurred based upon the dollar amount of
work, at a defined cost, that each Venturer performs an behalf of the Joint
Venture. All general and administrative expenses recorded on the statements of
operations are for costs incurred by and reimbursed to the Venturers. See also
Note C.
The Steering Committee of the Joint Venture is comprised of
representatives of each Venturer. The Steering Committee is responsible for
approving the budget of the Joint Venture, reviewing costs incurred by the
Venturers and monitoring the scientific progress of the Joint Venture.
The Joint Venture is subject to risks common to companies in the
biotechnology industry, including but not limited to, the results of clinical
trials, development by its competitors of new technological innovations,
protection of proprietary technology, health care cost containment initiatives,
product liability and compliance with government regulations, including those of
the United States Department of Health and Human Services and the United States
Food and Drug Administration.
In addition, eiher Venturer may terminate the Collaboration Agreement for
any reason upon 180 days notice to the other Venturer. During the 180-day
period, the obligations of the Venturers, including without limitation
obligations with respect to capital contributions, will continue in full force
and effect. A decision by one or both of the Venturers to discontinue the
Collaboration Agreement for any reason could lead to the discontinuation of the
Joint Venture.
F-22
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Notes to Financial Statements
The intangible assets and technological know-how contributed by Diacrin
to the Joint Venture are not included as an asset in these financial statements,
because generally accepted accounting principles require that the Joint Venture
record contributed assets at the book value of the Venturer, at the time of the
asset transfer the book value was $0.
B. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents, consisting principally of money market funds
and municipal notes purchased with initial maturities of three months or less,
are valued at cost plus accrued interest, which approximates market.
Property and Equipment
Depreciation expense is computed on a straight-line basis over the
useful life of the property and equipment (3 to 10 years), and over the lesser
of the life of the lease or the life of the leasehold improvement. When assets
are retired or otherwise disposed of, the assets and the related accumulated
depreciation are removed from the accounts and any resulting gains or losses are
included in the results of operations.
Research and Development Expenses
Research and development costs are expensed as incurred. The research
and development efforts are being conducted by the Venturers. The costs incurred
by these related parties, which are subject to an annual budget approved by the
Joint Venture's Steering Committee, are then charged to the Joint Venture, at a
defined cost, or at amounts agreed to by the Venturers.
Income Taxes
The Joint Venture is organized as a pass-through entity; accordingly,
the financial statements do not include a provision for income taxes. Taxes, if
any, are the liability of Genzyme and Diacrin, as Venturers.
Reclassification
Certain prior year data has been reclassified to conform to the 2000
presentation.
F-23
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
C. Agreements with Venturers
Funding
Genzyme agreed to make available to Diacrin an unsecured, subordinated
line of credit (the "Line") of up to an aggregate amount of $10.0 million after
the date that Genzyme provided the initial $10.0 million of funding to the Joint
Venture. Diacrin may draw on the Line only in the event that Diacrin's cash and
cash equivalents are insufficient to fund Diacrin's budgeted operations for a
specified period of time, and the funds may be used by Diacrin only to fund
capital contributions to the Joint Venture. The Line will be available through
the date five years after the date Diacrin first draws on the Line, and all
outstanding principal and interest will be due on that fifth anniversary.
Advances will be interest bearing, evidenced by a promissory note and subject to
other considerations; and the aggregate amount of draws in any calendar year may
not exceed $5.0 million. As of December 31, 2000, Diacrin had not made any draws
on the Line.
During the year ended December 31, 1998, Genzyme provided its initial
$10.0 million of funding to the Joint Venture. After the initial $10.0 million,
Genzyme and Diacrin provide 75% and 25%, respectively, of the next $40.0 million
of funding to the Joint Venture. Thereafter, all funding will be shared equally
by the two parties. As of December 31, 2000, Genzyme and Diacrin have funded
$29.7 million and $6.5 million, respectively.
Other Agreements
The payable to Genzyme Corporation will be settled by cash payment and
represents costs incurred by Genzyme that are reimbursable under the
Collaboration Agreement. The prepaid to Diacrin is an estimate of the
reimbursable costs Diacrin expects to incur on behalf of the Joint Venture in
the next month.
At December 31, 1999 and 2000, both Venturers had funded less than
their allocated losses which resulted in unpaid Venturer's capital and
represents receivables from the Venturers.
Genzyme charges the Joint Venture for use of certain research and
development facilities under a three-year agreement which commenced July 1,
1998. These charges amounted to $364,164 for each of the years ended December
31, 1999 and 2000 and $1,338,720 from inception through December 31, 2000 and
the Joint Venture expects to incur $182,082 in the year ending December 31,
2001.
F-24
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Notes to Financial Statements - (Continued)
D. Property and Equipment
Property and equipment is stated at cost. At December 31, 1999 and
2000, property and equipment consisted of the following:
1999 2000
Lab equipment $ 186,931 $ 200,199
Computer equipment 71,991 71,991
Leasehold improvements 27,608 27,608
Furniture and fixtures 12,963 12,963
---------- ----------
299,493 312,761
Less: accumulated depreciation (107,439) (156,585)
---------- ----------
Property and equipment, net $ 192,054 $ 156,176
========== ==========
Depreciation expense was $48,221 and $49,146 for the years ended
December 31, 1999 and 2000, respectively, and $156,585 from inception through
December 31, 2000.
F-25