SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM______________TO___________________
Commission file number 001-16043
ALTEON INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3304550
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6 CAMPUS DRIVE, PARSIPPANY, NEW JERSEY 07054
--------------------------------------------
(Address of principal executive offices)
(Zip Code)
(201) 934-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
On August 2, 2004, 48,472,898 shares of the registrant's Common Stock were
outstanding.
ALTEON INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of June 30, 2004 and
December 31, 2003............................................................... 3
Statements of Operations for the three and
six months ended June 30, 2004 and 2003......................................... 4
Statements of Cash Flows for the six months
ended June 30, 2004 and 2003.................................................... 5
Notes to Financial Statements..................................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 9
Item 3. Qualitative and Quantitative Disclosures about Market Risk........................ 17
Item 4. Controls and Procedures........................................................... 17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................... 18
Item 6. Exhibits and Reports on Form 8-K.................................................. 18
SIGNATURES ................................................................................ 19
INDEX TO EXHIBITS ......................................................................... 20
2
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
ALTEON INC.
BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2004 2003
-------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 9,569,472 $ 16,678,582
Other current assets......................................... 644,382 225,439
-------------- -------------
Total current assets....................................... 10,213,854 16,904,021
Property and equipment, net.................................. 141,506 100,964
Restricted cash.............................................. 250,000 250,000
-------------- -------------
Total assets.................................................... $ 10,605,360 $ 17,254,985
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................. $ 561,233 $ 470,841
Accrued expenses............................................. 1,882,306 1,399,712
-------------- -------------
Total current liabilities.................................. 2,443,539 1,870,553
-------------- -------------
Stockholders' Equity:
Preferred Stock, $0.01 par value,
1,993,329 shares authorized, and 1,224 and 1,174 shares
of Series G and 3,676 and 3,525 shares of Series H
issued and outstanding, as of June 30, 2004 and
December 31, 2003, respectively............................ 49 47
Common Stock, $0.01 par value,
100,000,000 shares authorized, and 40,472,898 and
40,467,148 shares issued and outstanding, as of
June 30, 2004 and December 31, 2003, respectively.......... 404,729 404,671
Additional paid-in capital .................................. 204,625,507 202,598,573
Accumulated deficit.......................................... (196,868,464) (187,618,859)
-------------- -------------
Total stockholders' equity................................. 8,161,821 15,384,432
-------------- -------------
Total liabilities and stockholders' equity...................... $ 10,605,360 $ 17,254,985
============== =============
The accompanying notes are an integral part of these unaudited financial
statements.
3
ALTEON INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Income:
Investment income .................................. $ 29,051 $ 55,176 $ 66,417 $ 103,898
Other income ....................................... 100,000 --- 151,821 ---
------------ ------------ ------------ ------------
Total income ................................... $ 129,051 $ 55,176 $ 218,238 $ 103,898
------------ ------------ ------------ ------------
Expenses:
Research and development
(which includes non-cash variable
stock compensation expense of
$0 and $21,669 for the three months
ended June 30, 2004 and 2003,
respectively, and $0 and $83,639,
for the six months ended June 30, 2004
and 2003, respectively) ........................... 2,445,563 3,260,095 5,129,698 6,164,938
General and administrative (which
includes non-cash variable stock
compensation expense of $0 and $509,988
for the three months ended June 30,
2004 and 2003, respectively, and $0
and $1,475,917 for the six months ended
June 30, 2004 and 2003, respectively) ............. 1,185,290 1,856,555 2,325,335 4,223,491
------------ ------------ ------------ ------------
Total expenses ................................. 3,630,853 5,116,650 7,455,033 10,388,429
------------ ------------ ------------ ------------
Net loss .............................................. (3,501,802) (5,061,474) (7,236,795) (10,284,531)
------------ ------------ ------------ ------------
Preferred stock dividends ......................... 1,016,957 934,707 2,012,810 1,840,164
------------ ------------ ------------ ------------
Net loss applicable to common stockholders ............ $ (4,518,759) $ (5,996,181) $ (9,249,605) $(12,124,695)
============ ============ ============ ============
Basic/diluted net loss per share
applicable to common stockholders .................. $ (0.11) $ (0.17) $ (0.23) $ (0.35)
============ ============ ============ ============
Weighted average common shares used
in computing basic/diluted net loss per share ...... 40,472,898 35,907,764 40,472,123 34,773,382
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
4
ALTEON INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months
Ended June 30,
----------------------------
2004 2003
------------ ------------
Cash Flows from Operating Activities:
Net loss .................................................................... $ (7,236,795) $(10,284,531)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 37,949 322,686
Amortization of deferred compensation ....................................... 9,099 46,659
Non-cash compensation expense related to
variable plan employee stock options ...................................... --- 1,559,556
Changes in operating assets and liabilities:
Other assets ................................................................ (418,943) (454,489)
Accounts payable and accrued expenses ....................................... 572,986 (381,676)
------------ ------------
Net cash used in operating activities ..................................... (7,035,704) (9,191,795)
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures ........................................................ (78,491) (50,941)
Purchases of marketable securities .......................................... --- (3,001,574)
Maturities of marketable securities ......................................... --- 3,000,000
------------ ------------
Net cash used in investing activities ..................................... (78,491) (52,515)
------------ ------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock .................................. --- 7,657,355
Net proceeds from exercise of employee stock options ........................ 5,085 10,630
------------ ------------
Net cash provided by financing activities ................................. 5,085 7,667,985
------------ ------------
Net decrease in cash and cash equivalents ...................................... (7,109,110) (1,576,325)
Cash and cash equivalents, beginning of period ................................. 16,678,582 14,452,413
------------ ------------
Cash and cash equivalents, end of period ....................................... $ 9,569,472 $ 12,876,088
============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
5
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 2004, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. For further information, refer
to the financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003, filed with the
Securities and Exchange Commission.
NOTE 2 - LIQUIDITY
The Company has devoted substantially all of its resources to research,
drug discovery and development programs. To date, it has not generated any
revenues from the sale of products and does not expect to generate any such
revenues for a number of years, if at all. As a result, Alteon has incurred an
accumulated deficit of $196,868,464 as of June 30, 2004, and expects to incur
operating losses, potentially greater than losses in prior years, for a number
of years.
The Company has financed its operations through proceeds from the sale
of common and preferred equity securities, revenue from collaborative
relationships, reimbursement of certain of its research and development expenses
by its collaborative partners, investment income earned on cash balances and
short-term investments and the sale of a portion of its New Jersey net operating
loss carryforwards.
As of June 30, 2004, the Company had working capital of $7,770,315,
including $9,569,472 of cash and cash equivalents. The Company's net cash used
in operations for the six months ended June 30, 2004, was $7,035,704 and for the
year ended December 31, 2003 was $15,906,230.
In July 2004, Alteon completed a public offering of 8,000,000 shares of
common stock at $1.00 per share, which provided net proceeds of approximately
$7,600,000. The Stock Purchase Agreement provides that the Company will sell up
to a total of 3,200,000 additional shares of common stock at $1.50 per share for
$4,800,000 in gross proceeds to the investors who elect to purchase shares by no
later than December 31, 2004. The investors are not obligated and at their
discretion may elect not to purchase additional shares.
The Company expects to utilize cash and cash equivalents to fund its
operations, including the new Phase 2 SPECTRA (Systolic Pressure EffiCacy and
Safety TRial of Alagebrium) and PEDESTAL (Patients with Impaired Ejection
Fraction and Diastolic Dysfunction: Efficacy and Safety Trial of ALagebrium)
trials. Based on the projected spending levels for the Company, including these
trials, which are expected to continue into 2005, the Company does not currently
have adequate cash and cash equivalents to complete the trials and therefore
will require additional funding. After receipt of the July 2004 offering
proceeds, the Company believes that its existing cash and cash equivalents will
be adequate to satisfy its working capital requirements for its current
operations into the first quarter of 2005. As a result, the Company will monitor
its liquidity position and the status of its clinical trials and will continue
actively to pursue fund-raising possibilities through the sale of its equity
securities. If the Company is unsuccessful in its efforts to raise additional
funds through the sale of its equity securities, Alteon will be required to
significantly reduce or curtail its research and product development activities,
including the number of patients enrolled in the trials, and other operations if
its level of cash and cash equivalents falls below pre-determined levels. The
Company has the intent and ability to quickly and significantly reduce the cash
burn rate, if necessary, as it has limited fixed commitments. The Company
believes that such curtailment actions, if needed, will enable Alteon to fund
its operations beyond early 2005.
The Company will require, over the long-term, substantial new funding
to pursue development and commercialization of alagebrium and its other product
candidates and continue its operations. The Company believes that satisfying
these capital requirements over the long-term will require successful
commercialization of its product candidates. However, it is uncertain whether
any products will be approved or will be commercially successful. The amount of
the Company's future capital requirements will depend on numerous factors,
including the progress of its research and development programs, the conduct of
pre-clinical tests and clinical trials, the development of regulatory
submissions, the costs associated with protecting patents and other proprietary
rights, the development of marketing and sales capabilities and the availability
of third-party funding.
6
Because of Alteon's short-term and long-term capital requirements, the
Company, as stated above, may seek access to the public or private equity
markets. This may have the effect of materially diluting the current holders of
the Company's outstanding common stock. The Company may also seek additional
funding through corporate collaborations and other financing vehicles,
potentially including off-balance sheet financing through limited partnerships
or corporations. There can be no assurance that such funding will be available
at all or on terms acceptable to Alteon. If Alteon obtains funds through
arrangements with collaborative partners or others, the Company may be required
to relinquish rights to certain of its technologies or product candidates. If
the Company is unable to obtain the necessary funding, it may need to cease
operations.
NOTE 3 - STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation and awards
issued to non-employee directors under Accounting Principles Board Opinion No.
25 ("APB Opinion No. 25"), "Accounting for Stock Issued to Employees," and
related interpretations, under which no compensation cost (excluding those
options granted below fair value) has been recognized. Stock option awards
issued to consultants and contractors are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments that are Issued To Other Than Employees for
Acquiring or In Conjunction with Selling Goods or Services." In March 2000, the
Financial Accounting Standards Board ("FASB") released Interpretation No. 44
("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation,
An Interpretation of APB Opinion No. 25." The interpretation became effective on
July 1, 2000, but in some circumstances applies to transactions that occurred
prior to the effective date. Under the interpretation, stock options that are
repriced must be accounted for as variable-plan arrangements until the options
are exercised, forfeited or expire. This requirement applies to any options
repriced after December 15, 1998.
On February 2, 1999, the Company repriced certain stock options. The
total non-cash stock compensation expense resulting from the 1999 repricing for
the three months ended June 30, 2003, is $531,657 and for the six months ended
June 30, 2003, is $1,559,556. There was no expense/(benefit) in 2004. As of June
30, 2004, there were 548,409 repriced options outstanding, which expire on
various dates through January 2008.
If the Company had applied the fair value recognition provisions of
SFAS No. 123 to its employee and director option grants, the Company's pro forma
net loss and net loss per share applicable to common stockholders for the three
and six months ended June 30, 2004 and 2003, would be as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss, as reported .................. $ (3,501,802) $ (5,061,474) $ (7,236,795) $(10,284,531)
Add: Variable non-cash employee
and director stock
compensation expense
recognized in the
Statements of Operations ......... --- 531,657 --- 1,559,556
Less: Total stock-based employee
and director compensation
expense determined under fair
value method ..................... (355,588) (313,716) (728,645) (642,943)
------------ ------------ ------------ ------------
Pro forma net loss ..................... (3,857,390) (4,843,533) (7,965,440) (9,367,918)
Preferred stock dividends .............. 1,016,957 934,707 2,012,810 1,840,164
------------ ------------ ------------ ------------
Pro forma net loss applicable to
common stockholders .................. $ (4,874,347) $ (5,778,240) $ (9,978,250) $(11,208,082)
============ ============ ============ ============
Earnings per share applicable to
common stockholders:
Basic/diluted, as reported ..... $ (0.11) $ (0.17) $ (0.23) $ (0.35)
Basic/diluted, pro forma ....... $ (0.12) $ (0.16) $ (0.25) $ (0.32)
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments,
which have a maturity of less than three months at the time of purchase.
7
NOTE 5 - NET LOSS PER SHARE APPLICABLE TO COMMON STOCKHOLDERS
Basic net loss per share is computed by dividing net loss applicable to
common stockholders by the weighted average number of shares outstanding during
the period. Diluted net loss per share is the same as basic net loss per share
applicable to common stockholders, since the assumed exercise of stock options
and warrants and the conversion of preferred stock would be antidilutive. The
amount of common stock equivalents excluded from the calculation as of June 30,
2004 and 2003, was 47,456,373 and 15,902,268, respectively.
NOTE 6 - COMPREHENSIVE LOSS
The following sets forth comprehensive loss for the three and six
months ended June 30, 2004 and 2003:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Loss ..................... $ (3,501,802) $ (5,061,474) $ (7,236,795) $(10,284,531)
Net Unrealized Gain on
Short-Term Investments .... --- 1,576 --- 826
------------ ------------ ------------ ------------
Comprehensive Loss ........... $ (3,501,802) $ (5,059,898) $ (7,236,795) $(10,283,705)
============ ============ ============ ============
NOTE 7 - STOCKHOLDERS' EQUITY
Series G Preferred Stock and Series H Preferred Stock dividends are
payable quarterly in shares of preferred stock at a rate of 8.5% of the
accumulated balance. Each share of Series G Preferred Stock and Series H
Preferred Stock is convertible, upon 70 days' prior written notice, into the
number of shares of common stock determined by dividing $10,000 by the average
of the closing sales price of the common stock, as reported on the American
Stock Exchange, for the 20 business days immediately preceding the date of
conversion. For the three months ended June 30, 2004 and 2003, preferred stock
dividends were $1,016,957 and $934,707, respectively, and for the six months
ended June 30, 2004 and 2003, preferred stock dividends were $2,012,810 and
$1,840,164, respectively.
NOTE 8 - SUBSEQUENT EVENT
In July 2004, Alteon completed a public offering of 8,000,000 shares of
common stock at $1.00 per share, which provided net proceeds of approximately
$7,600,000. The Stock Purchase Agreement provides that the Company will sell up
to a total of 3,200,000 additional shares of common stock at $1.50 per share for
$4,800,000 in gross proceeds to the investors who elect to purchase shares by no
later than December 31, 2004. The investors are not obligated and at their
discretion may elect not to purchase additional shares.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are a product-based biopharmaceutical company engaged in the
discovery and development of small molecule drugs to reverse or slow down
diseases of aging and complications of diabetes. Our product candidates
represent novel approaches to some of the largest pharmaceutical markets. Our
lead compound is in clinical development; several others are in earlier
development stages. These pharmaceutical candidates were developed as a result
of our research on the Advanced Glycation End-Products ("A.G.E.") pathway, a
fundamental pathological process and inevitable consequence of aging that causes
or contributes to many medical disorders, including cardiovascular, kidney and
eye diseases.
Alagebrium chloride (formerly ALT-711) is our lead product candidate
and we believe the only A.G.E. Crosslink Breaker in advanced human testing. In
February 2004, the United States Adopted Name (USAN) Council approved alagebrium
chloride as the generic name of the chemical compound formerly known as ALT-711.
We believe that alagebrium works through a unique mechanism of action
that directly reverses the stiffening of the vasculature that leads to systolic
hypertension and heart failure, two cardiovascular indications for which there
are clear, unmet medical needs. Several Phase 2 clinical trials of alagebrium
have been completed in heart failure and systolic hypertension: the DIAMOND
(Distensibility Improvement And Remodeling in Diastolic Heart Failure) trial in
diastolic heart failure ("DHF"); the SAPPHIRE (Systolic And Pulse Pressure
Hemodynamic Improvement by Restoring Elasticity) and SILVER (Systolic
Hypertension Interaction with Left VEntricular Remodeling) trial in systolic
hypertension; and a trial in cardiovascular compliance. Based on evidence of
alagebrium's demonstrated efficacy and biological activity in these Phase 2
clinical trials, as well as a strong and consistent safety profile, Alteon is
proceeding with further Phase 2 development of alagebrium in systolic
hypertension and heart failure. SPECTRA (Systolic Pressure EffiCacy and Safety
TRial of Alagebrium), the first of these Phase 2 trials, was initiated in March
2004, and the second, PEDESTAL (Patients with Impaired Ejection Fraction and
Diastolic Dysfunction: Efficacy and Safety Trial of ALagebrium), was initiated
in April 2004.
Our primary priorities are to continue the clinical development of
alagebrium in systolic hypertension and in heart failure and to ensure that we
have the funding and personnel necessary to accomplish this objective.
As we continue clinical development of alagebrium, we will determine if
it is appropriate to retain development and marketing rights for one or several
indications in North America, while at the same time continuing to evaluate
potential corporate partnerships for the further development and ultimate
marketing of the compound in other territories throughout the world. We believe
that alagebrium may address the cardiovascular, diabetes and primary care
physician markets.
We plan to continue to explore the use of topical A.G.E. Crosslink
Breakers in skin and photoaging, as a result of our recent evaluation of
ALT-744, a prototype compound that demonstrated positive effects on the skin. We
will focus efforts on bringing forward other crosslink breaker compounds with
more attractive formulation characteristics than those of ALT-744 to address the
pharmaceutical market for skin and photoaging.
Since our inception in October 1986, we have devoted substantially all
of our resources to research, drug discovery and development programs. To date,
we have not generated any revenues from the sale of products and do not expect
to generate any such revenues for a number of years, if at all. We have incurred
an accumulated deficit of $196,868,464 as of June 30, 2004, and expect to incur
operating losses, potentially greater than losses in prior years, for a number
of years.
We have financed our operations through proceeds from an initial public
offering of common stock in 1991, subsequent public offerings of common stock,
private placements of common and preferred equity securities, revenue from
collaborative relationships, reimbursement of certain of our research and
development expenses by our collaborative partners, investment income earned on
cash balances and short-term investments and the sale of a portion of our New
Jersey net operating loss carryforwards.
Our business is subject to significant risks, which are described in
this Report, including under the heading "Forward-Looking Statements and
Cautionary Statements."
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
Total income for the three months ended June 30, 2004 and 2003, was
$129,051 and $55,176, respectively. The income consisted of interest earned on
cash and cash equivalents, which decreased in the three months ended June 30,
2004 compared to the same period in the prior year due to lower investment
balances and a decrease in short-term interest rates. In 2004, income also
included a reimbursement of $100,000 for improvements made to our former Ramsey
facility.
Our total expenses were $3,630,853 for the three months ended June 30,
2004, compared to $5,116,650 for the three months ended June 30, 2003, and in
each period consisted primarily of research and development expenses. Research
and development expenses includes third-party expenses associated with
pre-clinical and clinical studies, manufacturing costs, including the
development and preparation of clinical supplies, personnel and
personnel-related expenses and facility expenses. Research and development
expenses were $2,445,563 for the three months ended June 30, 2004, as compared
to $3,260,095 for the same period in 2003. In 2004, they primarily consisted of
$967,851 in personnel and personnel-related expenses, $717,005 in clinical trial
expenses, including $597,528 related to SPECTRA, $495,127 related to
manufacturing (tableting and packaging), process development and drug stability
studies. In 2003, they primarily consisted of $1,298,008 in personnel and
personnel-related expenses, $857,554 in clinical trial expenses, including
$504,724 related to the Phase 2b SAPPHIRE/SILVER trial, $288,356 related to
manufacturing (tableting and API production) and drug stability studies,
$176,359 in pre-clinical expenses and non-cash variable stock compensation
expense of $21,669.
Research and development expenses decreased by $814,532, or 25.0%, as
compared to the three months ended June 30, 2003. The decrease was primarily
attributed to lower costs in the three months ended June 30, 2004 associated
with the Phase 2 trials, SPECTRA and PEDESTAL, as compared to the completion of
the SAPPHIRE/SILVER trial for the same period in 2003, which included higher
personnel and personnel-related costs, including temporary help related to
accumulating and assessing the data of the SAPPHIRE/SILVER trial. This decrease
was partially offset by higher manufacturing costs associated with tableting and
packaging for SPECTRA.
General and administrative expenses decreased to $1,185,290 for the
three months ended June 30, 2004, compared to $1,856,555 for the same period in
2003, which included a non-cash variable stock compensation expense of $509,988.
Non-cash variable stock compensation expense/(benefit) is directly related to
changes in our stock price (see Note 3). General and administrative expenses in
2003 included an increase in business development and marketing research costs
associated with the unblinding of the SAPPHIRE/SILVER trial.
Our net loss applicable to common stockholders was $4,518,759 for the
three months ended June 30, 2004, compared to $5,996,181 in the same period in
2003, a decrease of 24.6%, primarily related to decreased clinical trial
expenses, including personnel and personnel-related expenses, and variable
non-cash stock compensation. Included in the net loss applicable to common
stockholders are preferred stock dividends of $1,016,957 and $934,707 for the
three months ended June 30, 2004 and 2003, respectively.
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Total income for the six months ended June 30, 2004 and 2003, was
$218,238 and $103,898, respectively. The income consisted of interest earned on
cash and cash equivalents, which decreased in the six months ended June 30, 2004
compared to the same period in the prior year due to lower investment balances
and a decrease in short-term interest rates. In 2004, income also included
approximately $52,000 in other income derived from the sale of fully depreciated
laboratory equipment and supplies, and a reimbursement of $100,000 for
improvements made to our former Ramsey facility.
Our total expenses were $7,455,033 for the six months ended June 30,
2004 compared to $10,388,429 for the six months ended June 30, 2003, and in each
year consisted primarily of research and development expenses. Research and
development expenses for the six months ended June 30, 2004 were $5,129,698, and
included $1,789,060 in personnel and personnel-related expenses, $1,480,604 in
clinical trial expenses, of which $1,149,722 related to SPECTRA, $1,028,803
related to manufacturing (tableting and packaging), $274,304 of facility and
other overhead related costs and $201,985 in third-party consulting. Research
and development expenses for the six months ended June 30, 2003 were $6,164,938
and included $2,329,106 in personnel and personnel-related expenses, $1,325,150
in clinical trial expenses related to the Phase 2b SAPPHIRE/SILVER trial,
$483,058 in pre-clinical expenses, manufacturing costs of $432,606, primarily
related to tablet manufacturing and drug stability studies, and a non-cash
variable stock compensation expense of $83,639.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Research and development expenses decreased by $1,035,240 or 16.8%, as
compared to the six months ended June 30, 2003. The decrease was primarily
attributed to lower costs, including personnel and personnel-related expenses,
in the six months ended June 30, 2004 associated with the Phase 2 trials,
SPECTRA and PEDESTAL, as compared to the completion of the SAPPHIRE/SILVER trial
for the same period in 2003.
General and administrative expenses decreased to $2,325,335 for the six
months ended June 30, 2004, compared to $4,223,491 for the same period in 2003
and includes a non-cash variable stock compensation expense of $1,475,917 in
2003. General and administrative expenses in 2003 included an increase in
business development and marketing research costs associated with the unblinding
of the SAPPHIRE/SILVER trial.
Our net loss applicable to common stockholders decreased to $9,249,605
for the six months ended June 30, 2004, compared to $12,124,695 in the same
period in 2003, a decrease of 23.7%. This was primarily a result of decreased
research and development expenses due to completion of the Phase 2b
SAPPHIRE/SILVER clinical trial in 2003 and no non-cash variable stock
compensation expense in 2004. Included in the net loss applicable to common
stockholders are preferred stock dividends of $2,012,810 and $1,840,164 for the
six months ended June 30, 2004 and 2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents at June 30, 2004, of $9,569,472,
compared to $16,678,582 at December 31, 2003. This is a decrease in cash and
cash equivalents of $7,109,110 and is attributed to $7,035,704 of cash used in
operations consisting primarily of research and development expenses, personnel
related costs and facility expenses, $78,491 of capital expenditures and $5,085
of cash provided by financing activities related to the exercise of employee
stock options. At June 30, 2004, we had working capital of $7,770,315.
In July 2004, Alteon completed a public offering of 8,000,000 shares of
common stock at $1.00 per share, which provided net proceeds of approximately
$7,600,000. The Stock Purchase Agreement provides that the Company will sell up
to a total of 3,200,000 additional shares of common stock at $1.50 per share for
$4,800,000 in gross proceeds to the investors who elect to purchase shares by no
later than December 31, 2004. The investors are not obligated and at their
discretion may elect not to purchase additional shares.
We do not have any approved products and currently derive cash from
sales of our equity securities, sales of our New Jersey operating loss
carryforwards and interest on cash and cash equivalents. We are highly
susceptible to conditions in the global financial markets and in the
pharmaceutical industry. Positive and negative movement in those markets will
continue to pose opportunities and challenges to us. Previous downturns in the
market valuations of biotechnology companies and of the equity markets more
generally have restricted our ability to raise additional capital on favorable
terms.
We expect to utilize cash and cash equivalents to fund our operations,
including the new Phase 2 trials. The remaining cost of these trials, exclusive
of our internal cost, is currently estimated to be approximately $7,300,000 for
both the systolic hypertension trial and the first phase of the heart failure
trial. The cost includes executed, but cancelable agreements with outside
organizations. Based on the projected spending levels for the Company, including
these trials which are expected to continue into 2005, we do not currently have
adequate cash and cash equivalents to complete the trials and therefore will
require additional funding. After receipt of the July offering proceeds, we
believe that our existing cash and cash equivalents will be adequate to satisfy
our working capital requirements for our current operations into the first
quarter of 2005. As a result, we will monitor our liquidity position and the
status of our clinical trials and will continue actively to pursue fund-raising
possibilities through the sale of our equity securities. In light of the number
of shares of common stock we are required to reserve for issuance upon the
conversion of our outstanding Series G Preferred Stock and Series H Preferred
Stock, we may not have sufficient authorized common stock to meet our financing
needs. Accordingly, we will hold a special meeting of the stockholders on
September 15, 2004 to consider and vote on a proposal to amend our certificate
of incorporation to increase the number of authorized shares of common stock,
$0.01 par value per share, from 100,000,000 to 175,000,000. If this proposal is
not approved, or if we are unsuccessful in our efforts to raise additional funds
through the sale of additional equity securities, we will be required to
significantly reduce or curtail our research and product development activities,
including the number of patients enrolled in the trials, and other operations if
our level of cash and cash equivalents falls below pre-determined levels. We
have the intent and ability to quickly and significantly reduce the cash burn
rate, if necessary, as we have limited fixed commitments, which include
executed, but cancelable, agreements with outside organizations for the newly
initiated trials. We believe that such curtailment actions, if needed, will
enable us to fund our operations beyond early 2005.
We will require, over the long-term, substantial new funding to pursue
development and commercialization of alagebrium and our other product candidates
and continue our operations. We believe that satisfying these capital
requirements over the long-term will require successful commercialization of our
product candidates. However, it is uncertain whether any products will be
approved or will be commercially successful. The amount of our future capital
requirements will depend on numerous factors, including the progress of our
research and development programs, the
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
conduct of pre-clinical tests and clinical trials, the development of regulatory
submissions, the costs associated with protecting patents and other proprietary
rights, the development of marketing and sales capabilities and the availability
of third-party funding.
Because of our short-term and long-term capital requirements, we, as
stated above, may seek access to the public or private equity markets. This may
have the effect of materially diluting the current holders of our outstanding
stock. We may also seek additional funding through corporate collaborations and
other financing vehicles, potentially including off-balance sheet financing
through limited partnerships or corporations. There can be no assurance that
such funding will be available at all or on terms acceptable to us. If we obtain
funds through arrangements with collaborative partners or others, we may be
required to relinquish rights to certain of our technologies or product
candidates. If we are unable to obtain the necessary funding, we may need to
cease operations.
Our current priorities and the focus of our resources are the
evaluation and continued development of alagebrium and determining the optimal
course for the development of other compounds in our patent estate. As we
continue clinical development of alagebrium, we will determine if it is
appropriate to retain development and marketing rights for one or several
indications in North America, while at the same time, continuing to evaluate
potential corporate partnerships for the further development and ultimate
marketing of the compound throughout the world. As described above, we believe
that additional development of this compound and other product candidates will
require us to obtain additional funding.
CRITICAL ACCOUNTING POLICIES
In December 2001, the United States Securities and Exchange Commission
issued a statement concerning certain views of the Commission regarding the
appropriate amount of disclosure by publicly held companies with respect to
their critical accounting policies. In particular, the Commission expressed its
view that in order to enhance investor understanding of financial statements,
companies should explain the effects of critical accounting policies as they are
applied, the judgments made in the application of these policies and the
likelihood of materially different reported results if different assumptions or
conditions were to prevail. We have since carefully reviewed the disclosures
included in our filings with the Commission, including, without limitation, our
Annual Report on Form 10-K for the year ended December 31, 2003, and the
accompanying audited financial statements and related notes thereto. We believe
the effect of the following accounting policy is significant to our results of
operations and financial condition.
We account for options granted to employees and directors in accordance
with APB Opinion No. 25, and related interpretations. As such, compensation
expense is recorded on fixed stock grants only if the current fair value of the
underlying stock exceeds the exercise price of the option at the date of grant
and it is recognized on a straight-line basis over the vesting period. Based on
the performance of our stock, we repriced certain employee stock options on
February 2, 1999. As a result of this repricing, options to purchase 1.06
million shares of stock were repriced and certain vesting periods related to
these options were modified or extended. Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, An Interpretation of APB
Opinion No. 25," requires us to record compensation expense or benefit, which is
adjusted every quarter, for increases or decreases in the fair value of the
repriced options based on changes in our stock price from the value at July 1,
2000, until the repriced options are exercised, forfeited or expire. As a
result, net loss applicable to common stockholders and net loss per share to
common stockholders may be subject to volatility. Had we accounted for repricing
of stock option grants in accordance with SFAS No. 123, the expense related to
the vested options would have been recorded at the repricing date, and the
expense related to non-vested options would have been recorded over the vesting
period. As of June 30, 2004, there were 548,409 repriced options outstanding,
which expire on various dates through January 2008.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS
Statements in this Form 10-Q that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking
statements made by us or our representatives are based on a number of
assumptions. The words "believe," "expect," "anticipate," "intend," "estimate"
or other expressions, which are predictions of or indicate future events and
trends and which do not relate to historical matters, identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, as they involve risks and uncertainties, and actual
results could differ materially from those currently anticipated due to a number
of factors, including those set forth in this section and elsewhere in this Form
10-Q. These factors include, but are not limited to, the risks set forth below.
The forward-looking statements represent our judgment and expectations
as of the date of this Report. We assume no obligation to update any such
forward-looking statements.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR NEEDS, WE MAY HAVE
TO CURTAIL OR DISCONTINUE THE RESEARCH, PRODUCT DEVELOPMENT, PRE-CLINICAL
TESTING AND CLINICAL TRIALS OF SOME OR ALL OF OUR PRODUCT CANDIDATES.
As of June 30, 2004, we had working capital of $7,770,315, including
$9,569,472 of cash and cash equivalents. Our cash used in operations for the six
months ended June 30, 2004 was $7,035,704. We believe that our lead compound,
alagebrium chloride (formerly ALT-711), is the only A.G.E. Crosslink Breaker in
advanced human testing. Several Phase 2 clinical trials have been completed: the
DIAMOND trial in diastolic dysfunction in heart failure, the SAPPHIRE/SILVER
trial in systolic hypertension and a trial in cardiovascular compliance. Based
on evidence of alagebrium's demonstrated efficacy and biological activity in
these Phase 2 trials, as well as a strong and consistent safety profile, we are
proceeding with Phase 2 development of alagebrium in two major cardiovascular
indications, systolic hypertension and heart failure.
We expect to utilize cash and cash equivalents to fund our operations,
including the new Phase 2 trials of our lead compound, alagebrium chloride
(formerly ALT-711). The first of these Phase 2 trials was initiated in March
2004, SPECTRA (Systolic Pressure Efficacy and Safety Trial of Alagebrium) and
the second, PEDESTAL (Patients with Impaired Ejection Fraction and Diastolic
Dysfunction: Efficacy and Safety Trial of ALagebrium), was initiated in April
2004. We expect to have sufficient funding to complete the 2004 fiscal year but
will require additional funding to complete the trials, which are expected to
continue into 2005. After receipt of the July offering proceeds, we believe that
our existing cash and cash equivalents will be adequate to satisfy our working
capital requirements for our current operations into the first quarter of 2005.
As a result, we will monitor our liquidity position and the status of our
clinical trials and will continue actively to pursue fund-raising possibilities
through the sale of our equity securities. If we are unsuccessful in our efforts
to raise additional funds through the sale of additional equity securities, we
will be required to significantly reduce or curtail our research and product
development activities, including the number of patients enrolled in our trials,
and other operations if our level of cash and cash equivalents falls below
pre-determined levels. We have the intent and ability to quickly and
significantly reduce the cash burn rate, if necessary, as we have limited fixed
commitments. We believe that such curtailment actions, if needed, will enable us
to fund our operations beyond early 2005.
The amount and timing of our future capital requirements will depend on
numerous factors, including the progress of our research and development
programs, the conduct of pre-clinical tests and clinical trials, the status and
timelines of regulatory submissions, the costs associated with protecting
patents and other proprietary rights, the development of marketing and sales
capabilities and the availability of third-party funding.
We will require, over the long-term, substantial new funding to pursue
development and commercialization of alagebrium and our other product candidates
and to continue our operations. We believe that satisfying these capital
requirements over the long-term will require successful commercialization of our
product candidates, particularly alagebrium. However, it is uncertain whether
any products will be approved or will be commercially successful.
Because of our short-term and long-term capital requirements, we will
seek access to the public or private equity markets whenever conditions are
favorable. This may have the effect of materially diluting the current holders
of our outstanding stock. We may also seek additional funding through corporate
collaborations and other financing vehicles, potentially including off-balance
sheet financing through limited partnerships or corporations. There can be no
assurance that such funding will be available at all or on terms acceptable to
us. If adequate funds are not available, we may be required to curtail
significantly one or more of our research or development programs. If we obtain
funds through arrangements with collaborative partners or others, we may be
required to relinquish rights to certain of our technologies or product
candidates. If we are unable to obtain the necessary funding, we may need to
cease operations.
IF WE DO NOT SUCCESSFULLY DEVELOP ANY PRODUCTS, OR ARE UNABLE TO DERIVE REVENUES
FROM PRODUCT SALES, WE MAY NEVER BE PROFITABLE.
All of our revenues to date have been generated from collaborative
research agreements and interest income. We have not received any revenues from
product sales. We may not realize product revenues on a timely basis, if at all,
and there can be no assurance that we will ever be profitable.
At June 30, 2004, we had an accumulated deficit of $196,868,464. We
anticipate that we will incur substantial, potentially greater, losses in the
future as we continue our research, development and clinical trials. We have not
yet requested or received regulatory approval for any product from the FDA or
any other regulatory body. All of our product candidates, including our lead
candidate, alagebrium, are still in research or clinical development. We may not
succeed in the development and marketing of any therapeutic or diagnostic
product. We do not have any product other than alagebrium in active clinical
development, and there can be no assurance that we will be able
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
to bring any other compound into clinical development. To achieve profitable
operations, we must, alone or with others, successfully identify, develop,
introduce and market proprietary products. Such products will require
significant additional investment, development and pre-clinical and clinical
testing prior to potential regulatory approval and commercialization.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Potential products may be found ineffective or cause harmful side
effects during pre-clinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. We may not be able to
undertake additional clinical trials. In addition, our product development
efforts may not be successfully completed, we may not obtain regulatory
approvals, and our products, if introduced, may not be successfully marketed or
achieve customer acceptance. We do not expect any of our products, including
alagebrium, to be commercially available for a number of years, if at all.
CLINICAL TRIALS REQUIRED FOR OUR PRODUCT CANDIDATES ARE TIME-CONSUMING, AND
THEIR OUTCOME IS UNCERTAIN.
Before obtaining regulatory approvals for the commercial sale of any of
our products under development, we must demonstrate through pre-clinical studies
and clinical trials that the product is safe and effective for use in each
target indication. The length of time necessary to complete clinical trials
varies significantly and may be difficult to predict. Factors which can cause
delay or termination of our clinical trials include: (i) slower than expected
patient enrollment due to the nature of the protocol, the proximity of patients
to clinical sites, the eligibility criteria for the study, competition with
clinical trials for other drug candidates or other factors; (ii) lower than
expected retention rates of patients in a clinical trial; (iii) inadequately
trained or insufficient personnel at the study site to assist in overseeing and
monitoring clinical trials; (iv) delays in approvals from a study site's review
board; (v) longer treatment time required to demonstrate effectiveness or
determine the appropriate product dose; (vi) lack of sufficient supplies of the
product candidate; (vii) adverse medical events or side effects in treated
patients; (viii) lack of effectiveness of the product candidate being tested,
and (ix) regulatory changes.
Even if we obtain positive results from pre-clinical or clinical trials
for a particular product, we may not achieve the same success in future trials
of that product. In addition, some or all of the clinical trials we undertake
may not demonstrate sufficient safety and efficacy to obtain the requisite
regulatory approvals, which could prevent the creation of marketable products.
Our product development costs will increase if we have delays in testing or
approvals, if we need to perform more or larger clinical trials than planned or
if our trials are not successful. Delays in our clinical trials may harm our
financial results and the commercial prospects for our products.
PRIOR STOCK OPTION REPRICING MAY HAVE AN ADVERSE EFFECT ON OUR FUTURE FINANCIAL
PERFORMANCE.
Based on the performance of our stock and in order to bolster employee
retention, we repriced certain employee stock options on February 2, 1999. As a
result of this repricing, options to purchase 1.06 million shares of stock were
repriced and certain vesting periods related to these options were modified or
extended. This repricing may have a material adverse impact on future financial
performance based on the Financial Accounting Standards Board ("FASB")
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, An Interpretation of APB Opinion No. 25." This
interpretation requires us to record compensation expense or benefit, which is
adjusted every quarter, for increases or decreases in the fair value of the
repriced options based on changes in our stock price from the value at July 1,
2000, until the repriced options are exercised, forfeited or expire. The options
expire at various dates through January 2008.
IF WE ARE UNABLE TO FORM THE COLLABORATIVE RELATIONSHIPS THAT OUR BUSINESS
STRATEGY REQUIRES, THEN OUR PROGRAMS WILL SUFFER AND WE MAY NOT BE ABLE TO
DEVELOP PRODUCTS.
Our strategy for developing and deriving revenues from our products
depends, in large part, upon entering into arrangements with research
collaborators, corporate partners and others. We are seeking to establish these
relationships to provide the funding necessary for continuation of our product
development, but if such efforts are not be successful, our programs may suffer
and we may be unable to develop products.
IF WE ARE ABLE TO FORM COLLABORATIVE RELATIONSHIPS, BUT ARE UNABLE TO MAINTAIN
THEM, OUR PRODUCT DEVELOPMENT MAY BE DELAYED AND DISPUTES OVER RIGHTS TO
TECHNOLOGY MAY RESULT.
We may form collaborative relationships that, in some cases, will make
us dependent upon outside partners to conduct pre-clinical testing and clinical
trials and to provide adequate funding for our development programs. Such
corporate partners, if any, may have all or a significant portion of the
development and regulatory approval responsibilities. Failure of the corporate
partners to develop marketable products or to gain the appropriate
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
regulatory approvals on a timely basis, if at all, would have a material adverse
effect on our business, financial condition and results of operations.
In most cases, we will not be able to control the amount and timing of
resources that our corporate partners devote to our programs or potential
products. If any of our corporate partners breached or terminated its agreement
with us or otherwise failed to conduct its collaborative activities in a timely
manner, the pre-clinical or clinical development or commercialization of product
candidates or research programs could be delayed, and we would be required to
devote additional resources to product development and commercialization or
terminate certain development programs.
Disputes may arise in the future with respect to the ownership of
rights to any technology we develop with third parties. These and other possible
disagreements between us and collaborators could lead to delays in the
collaborative research, development or commercialization of product candidates,
or could require or result in litigation or arbitration, which would be
time-consuming and expensive and would have a material adverse effect on our
business, financial condition and results of operations.
Any corporate partners we have may develop, either alone or with
others, products that compete with the development and marketing of our
products. Competing products, either developed by the corporate partners or to
which the corporate partners have rights, may result in their withdrawal of
support with respect to all or a portion of our technology, which would have a
material adverse effect on our business, financial condition and results of
operations.
IF WE CANNOT SUCCESSFULLY DEVELOP A MARKETING AND SALES FORCE OR MAINTAIN
SUITABLE ARRANGEMENTS WITH THIRD PARTIES TO MARKET AND SELL OUR PRODUCTS, OUR
ABILITY TO DELIVER PRODUCTS MAY BE IMPAIRED.
We currently have no experience in marketing or selling pharmaceutical
products. In order to achieve commercial success for any approved product, we
must either develop a marketing and sales force or, where appropriate or
permissible, enter into arrangements with third parties to market and sell our
products. We might not be successful in developing marketing and sales
capabilities. Further, we may not be able to enter into marketing and sales
agreements with others on acceptable terms, and any such arrangements, if
entered into, may be terminated. If we develop our own marketing and sales
capability, it will compete with other companies that currently have
experienced, well funded and larger marketing and sales operations. To the
extent that we enter into co-promotion or other sales and marketing arrangements
with other companies, revenues will depend on the efforts of others, which may
not be successful.
IF WE CANNOT SUCCESSFULLY FORM AND MAINTAIN SUITABLE ARRANGEMENTS WITH THIRD
PARTIES FOR THE MANUFACTURING OF THE PRODUCTS WE MAY DEVELOP, OUR ABILITY TO
DEVELOP OR DELIVER PRODUCTS MAY BE IMPAIRED.
We have no experience in manufacturing products and do not have
manufacturing facilities. Consequently, we are dependent on contract
manufacturers for the production of products for development and commercial
purposes. The manufacture of our products for clinical trials and commercial
purposes is subject to cGMP regulations promulgated by the FDA. In the event
that we are unable to obtain or retain third-party manufacturing for our
products, we will not be able to commercialize such products as planned. We may
not be able to enter into agreements for the manufacture of future products with
manufacturers whose facilities and procedures comply with cGMP and other
regulatory requirements. Our current dependence upon others for the manufacture
of our products may adversely affect our profit margin, if any, on the sale of
future products and our ability to develop and deliver such products on a timely
and competitive basis.
IF WE ARE NOT ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO OUR
SUCCESS, THE DEVELOPMENT AND ANY POSSIBLE SALES OF OUR PRODUCT CANDIDATES COULD
SUFFER AND COMPETITORS COULD FORCE OUR PRODUCTS COMPLETELY OUT OF THE MARKET.
Our success will depend on our ability to obtain patent protection for
our products, preserve our trade secrets, prevent third parties from infringing
upon our proprietary rights and operate without infringing upon the proprietary
rights of others, both in the United States and abroad.
The degree of patent protection afforded to pharmaceutical inventions
is uncertain and our potential products are subject to this uncertainty.
Competitors may develop competitive products outside the protection that may be
afforded by the claims of our patents. We are aware that other parties have been
issued patents and have filed patent applications in the United States and
foreign countries with respect to other agents that have an effect on A.G.E.s.
or the formation of A.G.E. crosslinks. In addition, although we have several
patent applications pending to protect proprietary technology and potential
products, these patents may not be issued, and the claims of any patents, which
do issue, may not provide significant protection of our technology or products.
In addition, we may not enjoy any patent protection beyond the expiration dates
of our currently issued patents.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to maintain, develop and expand
our competitive position, which we seek to protect, in part, by confidentiality
agreements with our corporate partners, collaborators, employees and
consultants. We also have invention or patent assignment agreements with our
employees and certain, but not all, corporate partners and consultants. Relevant
inventions may be developed by a person not bound by an invention assignment
agreement. Binding agreements may be breached, and we may not have adequate
remedies for such breach. In addition, our trade secrets may become known to or
be independently discovered by competitors.
IF WE FAIL TO OBTAIN REGULATORY APPROVALS FOR OUR PRODUCTS, THE COMMERCIAL USE
OF OUR PRODUCTS WILL BE LIMITED.
Our research, pre-clinical testing and clinical trials of our product
candidates are, and the manufacturing and marketing of our products will be,
subject to extensive and rigorous regulation by numerous governmental
authorities in the United States and in other countries where we intend to test
and market our product candidates.
Prior to marketing, any product we develop must undergo an extensive
regulatory approval process. This regulatory process, which includes
pre-clinical testing and clinical trials and may include post-marketing
surveillance of each compound to establish its safety and efficacy, can take
many years and can require the expenditure of substantial resources. Data
obtained from pre-clinical and clinical activities is susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. In
addition, we may encounter delays or rejections based upon changes in FDA policy
for drug approval during the period of product development and FDA regulatory
review of each submitted NDA. We may encounter similar delays in foreign
countries. We may not obtain regulatory approval for the drugs we develop.
Moreover, regulatory approval may entail limitations on the indicated uses of
the drug. Further, even if we obtain regulatory approval, a marketed drug and
its manufacturer are subject to continuing review and discovery of previously
unknown problems with a product or manufacturer which may have adverse effects
on our business, financial condition and results of operations, including
withdrawal of the product from the market. Violations of regulatory requirements
at any stage, including pre-clinical testing, clinical trials, the approval
process or post-approval, may result in various adverse consequences, including
the FDA's delay in approving, or its refusal to approve a product, withdrawal of
an approved product from the market and the imposition of criminal penalties
against the manufacturer and NDA holder. None of our products has been approved
for commercialization in the United States or elsewhere. We may not be able to
obtain FDA approval for any products. Failure to obtain requisite governmental
approvals or failure to obtain approvals of the scope requested will delay or
preclude our licensees or marketing partners from marketing our products or
limit the commercial use of such products and will have a material adverse
effect on our business, financial condition and results of operations.
IF WE ARE NOT ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE
DEVELOPMENT AND MARKETING OF CURES AND THERAPIES FOR CARDIOVASCULAR DISEASES,
DIABETES AND THE OTHER CONDITIONS FOR WHICH WE SEEK TO DEVELOP PRODUCTS, WE MAY
NOT BE ABLE TO CONTINUE OUR OPERATIONS.
We are engaged in pharmaceutical fields characterized by extensive
research efforts and rapid technological progress. Many established
pharmaceutical and biotechnology companies with resources greater than ours are
attempting to develop products that would be competitive with our products.
Other companies may succeed in developing products that are safer, more
efficacious or less costly than any we may develop and may also be more
successful than us in production and marketing. Rapid technological development
by others may result in our products becoming obsolete before we recover a
significant portion of the research, development or commercialization expenses
incurred with respect to those products.
Certain technologies under development by other pharmaceutical
companies could result in better treatments for cardiovascular disease, or
diabetes and its related complications. Several large companies have initiated
or expanded research, development and licensing efforts to build pharmaceutical
franchises focusing on these medical conditions. It is possible that one or more
of these initiatives may reduce or eliminate the market for some of our
products. In addition, other companies have initiated research in the inhibition
or crosslink breaking of A.G.E.s.
IF GOVERNMENTS AND THIRD-PARTY PAYERS CONTINUE THEIR EFFORTS TO CONTAIN OR
DECREASE THE COSTS OF HEALTHCARE, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR
PRODUCTS SUCCESSFULLY.
In certain foreign markets, pricing and/or profitability of
prescription pharmaceuticals are subject to government control. In the United
States, we expect that there will continue to be federal and state initiatives
to control and/or reduce pharmaceutical expenditures. In addition, increasing
emphasis on managed care in the United States will continue to put pressure on
pharmaceutical pricing. Cost control initiatives could decrease the price that
we receive for any products we may develop and sell in the future and have a
material adverse effect on our business, financial condition and results of
operations. Further, to the extent that cost control initiatives have a material
adverse effect on our corporate partners, our ability to commercialize our
products may be adversely affected. Our ability to commercialize pharmaceutical
products may depend, in part, on the extent to which
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
reimbursement for the products will be available from government health
administration authorities, private health insurers and other third-party
payers. Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products, and third-party payers, including Medicare, are
increasingly challenging the prices charged for medical products and services.
Third-party insurance coverage may not be available to patients for any products
developed by us. Government and other third-party payers are attempting to
contain healthcare costs by limiting both coverage and the level of
reimbursement for new therapeutic products and by refusing in some cases to
provide coverage for uses of approved products for disease indications for which
the FDA has not granted labeling approval. If adequate coverage and
reimbursement levels are not provided by government and other third-party payers
for our products, the market acceptance of these products would be adversely
affected.
IF THE USERS OF THE PRODUCTS WE DEVELOP CLAIM THAT OUR PRODUCTS HAVE HARMED
THEM, WE MAY BE SUBJECT TO COSTLY AND DAMAGING PRODUCT LIABILITY LITIGATION,
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS.
The use of any of our potential products in clinical trials and the
sale of any approved products, including the testing and commercialization of
alagebrium or other compounds, expose us to liability claims resulting from the
use of products or product candidates. Claims could be made directly by
participants in our clinical trials, consumers, pharmaceutical companies or
others. We maintain product liability insurance coverage for claims arising from
the use of our products in clinical trials. However, coverage is becoming
increasingly expensive, and we may not be able to maintain or acquire insurance
at a reasonable cost or in sufficient amounts to protect us against losses due
to liability that could have a material adverse effect on our business,
financial conditions and results of operations. We may not be able to obtain
commercially reasonable product liability insurance for any product approved for
marketing in the future, and insurance coverage and our resources may not be
sufficient to satisfy any liability resulting from product liability claims. A
successful product liability claim or series of claims brought against us could
have a material adverse effect on our business, financial condition and results
of operations.
IF WE ARE UNABLE TO ATTRACT AND RETAIN THE KEY PERSONNEL ON WHOM OUR SUCCESS
DEPENDS, OUR PRODUCT DEVELOPMENT, MARKETING AND COMMERCIALIZATION PLANS COULD
SUFFER.
We are highly dependent on the principal members of our management and
scientific staff. The loss of services of any of these personnel could impede
the achievement of our development objectives. Furthermore, recruiting and
retaining qualified scientific personnel to perform research and development
work in the future will also be critical to our success. We may not be able to
attract and retain personnel on acceptable terms given the competition between
pharmaceutical and healthcare companies, universities and non-profit research
institutions for experienced scientists. In addition, we rely on consultants to
assist us in formulating our research and development strategy. All of our
consultants are employed outside of us and may have commitments to or consulting
or advisory contracts with other entities that may limit their availability to
us.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash and cash equivalents are invested primarily in money market
accounts. We do not use derivative financial instruments. Accordingly, we
believe we have limited exposure to market risk for changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Our Chief
Executive Officer and our Vice President, Finance, evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based
upon that evaluation, the Chief Executive Officer and the Vice President,
Finance, have concluded that as of the end of such fiscal quarter, our current
disclosure controls and procedures are adequate and effective to ensure that
information required to be disclosed in the reports we file under the Exchange
Act is recorded, processed, summarized and reported on a timely basis.
b) Changes in Internal Controls. There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) during the fiscal quarter covered by this Quarterly Report on Form
10-Q that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Annual Meeting of Stockholders of Alteon (the "Meeting") was held
on June 2, 2004. The following matters were voted upon at the Meeting: (i) the
election of three directors, (ii) the ratification of the appointment of KPMG
LLP as independent public accountants for the fiscal year ending December 31,
2004, and (iii) a proposal to amend our Restated Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 80,000,000 to
100,000,000.
(i) The following table sets forth the names of the nominees who were
elected to serve as directors and the number of votes cast for or withheld from
the election of such nominee:
Name Votes For Votes Withheld
---- --------- --------------
Marilyn G. Breslow 33,517,465 1,267,834
Alan J. Dalby 33,515,765 1,269,534
Thomas A. Moore 33,517,565 1,267,834
(ii) The number of votes cast for, against and abstaining from the
ratification of the appointment of KPMG LLP as independent public accountants
for the fiscal year ending December 31, 2004, were as follows:
Votes For Votes Against Abstentions
--------- ------------- -----------
34,655,508 82,840 46,951
(iii) The number of votes cast for, against and abstaining from the
proposal to amend our Restated Certificate of Incorporation, were as follows:
Votes For Votes Against Abstentions
--------- ------------- -----------
33,111,604 1,615,982 57,713
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See Exhibit Index on page 20 for Exhibits filed with this
Quarterly Report on Form 10-Q.
b) The following reports on Form 8-K were filed during the
quarter ended June 30, 2004:
On June 28, 2004, we filed a current report on Form 8-K, dated
June 25, 2004, which reported that the Company had raised up to $12.8
million through the sale of common stock to a group of institutional
investors.
On April 23, 2004, we filed a current report on Form 8-K,
dated April 20, 2004, announcing the initiation of PEDESTAL, a trial of
alagebrium chloride (ALT-711) in patients with diastolic dysfunction.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 9, 2004
ALTEON INC.
By: /s/Kenneth I. Moch
--------------------------------------------
Kenneth I. Moch
President and Chief Executive Officer
(principal executive officer)
By: /s/Elizabeth A. O'Dell
--------------------------------------------
Elizabeth A. O'Dell
Vice President, Finance
Secretary and Treasurer
(principal accounting officer)
19
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
------- ----------------------
3.1 Restated Certificate of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 to the Company's Report on Form 10-Q filed
on November 10, 1999, S.E.C. File Number 000-19529.)
3.2 Certificate of the Voting Powers, Designations, Preference and
Relative Participating, Optional and Other Special Rights and
Qualifications, Limitations or Restrictions of Series F Preferred
Stock Alteon Inc. (Incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000, S.E.C. File Number 001-16043.)
3.3 Certificate of Retirement dated September 10, 2000, of Alteon Inc.
(Incorporated by reference to Exhibit 3.1 to the Company's Report on
Form 10-Q filed on November 10, 1999, S.E.C. File Number 000-19529.)
3.4 Certificate of Designations of Series G Preferred Stock of Alteon
Inc. (Incorporated by reference to Exhibit 3.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
S.E.C. File Number 000-19529.)
3.5 Certificate of Amendment of Certificate of Designations of Series G
Preferred Stock of Alteon Inc. (Incorporated by reference to Exhibit
3.4 to the Company's Report on Form 10-Q filed on August 14, 1998,
S.E.C. File Number 000-19529.)
3.6 Certificate of Designations of Series H Preferred Stock of Alteon
Inc. (Incorporated by reference to Exhibit 3.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
S.E.C. File Number 000-19529.)
3.7 Amended Certificate of Designations of Series H Preferred Stock of
Alteon Inc. (Incorporated by reference to Exhibit 3.6 to the
Company's Report on Form 10-Q filed on August 14, 1998, S.E.C. File
Number 000-19529.)
3.8 Certificate of Retirement dated November 20, 2000, of Alteon Inc.
(Incorporated by reference to Exhibit 3.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, S.E.C.
File Number 001-16043.)
3.9 Certificate of Amendment to Restated Certificate of Incorporation of
Alteon Inc., dated June 7, 2001. (Incorporated by reference to
Exhibit 3.8 to the Company's Report on Form 10-Q filed on August 14,
2001, S.E.C. File Number 001-16043.)
3.10 By-laws, as amended. (Incorporated by reference to Exhibit 3.10 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2002, S.E.C. File Number 001-16043.)
4.1 Stockholders' Rights Agreement dated as of July 27, 1995, between
Alteon Inc. and Registrar and Transfer Company, as Rights Agent.
(Incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, S.E.C.
File Number 001-16043.)
4.2 Amendment to Stockholders' Rights Agreement dated as of April 24,
1997, between Alteon Inc. and Registrar and Transfer Company, as
Rights Agent. (Incorporated by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K filed on May 9, 1997, S.E.C.
File Number 000-19529.)
4.3 Registration Rights Agreement dated as of April 24, 1997, between
Alteon Inc. and the investors named on the signature page thereof.
(Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on May 9, 1997, S.E.C. File Number
000-19529.)
4.4 Form of Common Stock Purchase Warrant. (Incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K filed on May
9, 1997, S.E.C. File Number 000-19529.)
4.5 Amendment to Stockholders' Rights Agreement dated as of December 1,
1997, between Alteon Inc. and Registrar and Transfer Company, as
Rights Agent. (Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on December 10, 1997,
S.E.C. File Number 000-19529.)
4.6 Registration Rights Agreement dated September 29, 2000.
(Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on October 5, 2000, S.E.C. File Number
001-16043.)
20
4.7 Form of Series 1 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form 8-K
filed on October 5, 2000, S.E.C. File Number 001-16043.)
4.8 Form of Series 2 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.3 to the Company's Current Report on Form 8-K
filed on October 5, 2000, S.E.C. File Number 001-16043.)
4.9 Notice of Appointment, dated August 29, 2002, of The American Stock
Transfer & Trust Company as successor Rights Agent, pursuant to
Stockholders' Rights Agreement dated as of July 27, 1995.
(Incorporated by reference to Exhibit 4.4 of the Company's Report on
Form 10-Q filed on November 13, 2002, S.E.C. File Number 001-16043.)
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
21